1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 1997:
Common Stock, par value $.01 per share: 78,153,645
================================================================================
2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
PAGE
NUMBER
------
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........... 29
Item 6. Exhibits and Reports on Form 8-K.................... 29
SIGNATURE................................................... 30
ii
3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third quarter earnings set new record -- MCN's 1997 third quarter earnings from
continuing operations were $1.2 million compared to a loss of $13.4 million in
1996. These results represent MCN's first ever third quarter profit as the
Diversified Energy group more than offset the seasonal loss historically
reported by the Gas Distribution group. Earnings from continuing operations for
the 1997 nine- and twelve-month periods increased $21.3 million and $22.4
million, respectively, over the comparable 1996 periods. As subsequently
discussed, this performance primarily reflects the continued growth of the
Diversified Energy group.
MCN's earnings comparisons for the nine- and twelve-month periods were 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 9 MONTHS 12 MONTHS
---------------- --------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ----- ------ ------ ------
NET INCOME (LOSS)(in Millions)
Continuing Operations:
Diversified Energy......................... $ 17.8 $ 5.5 $43.6 $ 17.7 $ 57.0 $ 24.2
Gas Distribution........................... (16.6) (18.9) 48.5 53.1 76.8 87.2
------ ------ ----- ------ ------ ------
1.2 (13.4) 92.1 70.8 133.8 111.4
------ ------ ----- ------ ------ ------
Discontinued Operations:
Income from operations..................... -- -- -- 1.6 -- 2.5
Gain on sale............................... -- -- -- 36.2 -- 36.2
------ ------ ----- ------ ------ ------
-- -- -- 37.8 -- 38.7
------ ------ ----- ------ ------ ------
$ 1.2 $(13.4) $92.1 $108.6 $133.8 $150.1
====== ====== ===== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Continuing Operations:
Diversified Energy......................... $ .23 $ .08 $ .61 $ .27 $ .81 $ .36
Gas Distribution........................... (.21) (.28) .68 .79 1.09 1.31
------ ------ ----- ------ ------ ------
.02 (.20) 1.29 1.06 1.90 1.67
------ ------ ----- ------ ------ ------
Discontinued Operations:
Income from operations..................... -- -- -- .03 -- .04
Gain on sale............................... -- -- -- .54 -- .54
------ ------ ----- ------ ------ ------
-- -- -- .57 -- .58
------ ------ ----- ------ ------ ------
$ .02 $ (.20) $1.29 $ 1.63 $ 1.90 $ 2.25
====== ====== ===== ====== ====== ======
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 more than triple, sustaining record growth -- The Diversified Energy
group reported third quarter earnings of $17.8 million, an increase of $12.3
million over the comparable 1996 period. Earnings for the 1997 nine- and
twelve-month periods increased $25.9 million and $32.8 million, respectively.
Increased earnings were driven primarily by significantly higher levels of
operating and joint venture income, partially offset by increased financing
costs associated with additional capital needed to fund investments. Diversified
Energy continues to provide an increasing portion of MCN's earnings,
contributing 43% for the twelve months ended September 30, 1997, double the
contribution in the comparable 1996 period.
QUARTER 9 MONTHS 12 MONTHS
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*......................... $208.7 $125.7 $646.0 $514.7 $865.7 $659.9
Operating Expenses*......................... 195.9 117.4 603.3 491.6 805.3 630.0
------ ------ ------ ------ ------ ------
Operating Income............................ 12.8 8.3 42.7 23.1 60.4 29.9
------ ------ ------ ------ ------ ------
Equity in Earnings of Joint Ventures........ 17.1 2.7 40.0 11.0 45.7 12.0
------ ------ ------ ------ ------ ------
Other Income & (Deductions)*
Interest income........................... 2.6 .6 4.6 2.4 5.2 3.5
Interest expense.......................... (7.2) (5.5) (26.8) (20.9) (34.6) (25.4)
Dividends on preferred securities of
subsidiaries........................... (9.8) (3.6) (21.3) (8.3) (25.4) (10.7)
Other..................................... 4.5 .2 7.2 2.8 9.7 4.0
------ ------ ------ ------ ------ ------
(9.9) (8.3) (36.3) (24.0) (45.1) (28.6)
------ ------ ------ ------ ------ ------
Income Before Income Taxes.................. 20.0 2.7 46.4 10.1 61.0 13.3
------ ------ ------ ------ ------ ------
Income Taxes
Current and deferred provision............ 7.2 1.2 16.0 4.3 21.2 4.8
Federal tax credits....................... (5.0) (4.0) (13.2) (11.9) (17.2) (15.7)
------ ------ ------ ------ ------ ------
2.2 (2.8) 2.8 (7.6) 4.0 (10.9)
------ ------ ------ ------ ------ ------
Net Income.................................. $ 17.8 $ 5.5 $ 43.6 $ 17.7 $ 57.0 $ 24.2
====== ====== ====== ====== ====== ======
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income increased $18.9 million for the 1997 quarter
and $48.6 million and $64.2 million for the nine- and twelve-month periods,
respectively. The increases reflect improved contributions from all the
Diversified Energy operating businesses, particularly Exploration & Production
(E&P).
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- ---------------
1997 1996 1997 1996 1997 1996
----- ----- ----- ----- ------ -----
OPERATING AND JOINT VENTURE INCOME (LOSS) (in
Millions)
Exploration & Production......................... $16.0 $ 6.1 $46.9 $19.2 $ 60.9 $25.8
Pipelines & Processing........................... 7.8 2.1 21.1 6.5 25.4 6.9
Energy Marketing, Gas Storage & Power
Generation..................................... 8.1 3.3 18.9 8.0 24.9 9.9
Corporate & Other................................ (2.0) (.5) (4.2) .4 (5.1) (.7)
----- ----- ----- ----- ------ -----
$29.9 $11.0 $82.7 $34.1 $106.1 $41.9
===== ===== ===== ===== ====== =====
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EXPLORATION & PRODUCTION operating and joint venture income increased $9.9
million for the 1997 quarter and $27.7 million and $35.1 million for the nine-
and twelve-month periods, respectively. The results reflect a significant
increase in the level of gas and oil produced due to the development and
acquisition of interests in properties over the past several years. Gas and oil
production increased 9.0 billion cubic feet (Bcf) equivalent (54%) in the
quarter, and increased 27.2 Bcf equivalent (61%) and 35.9 Bcf equivalent (65%)
in the nine-and twelve-month periods, respectively. This double-digit growth in
production is primarily attributable to successful acquisitions and drilling
efforts in the Western U.S. MCN continues to add oil to its production mix to
further diversify its portfolio. Oil accounted for 24% of production in the
quarter and 20% and 19% in the 1997 nine- and twelve-month periods,
respectively, compared to less than 10% of the production in the comparable 1996
periods. MCN's E&P joint venture sold certain undeveloped properties generating
gains of $1.6 million in the 1997 quarter and gains of $6.3 million in the 1997
nine- and twelve-month periods.
QUARTER 9 MONTHS 12 MONTHS
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf).................... 19.4 15.1 57.6 40.7 74.1 50.4
Oil Production (Mmbbl).................. 1.0 .3 2.3 .6 2.8 .8
Gas and Oil Production (Bcf
equivalent)........................... 25.6 16.6 71.6 44.4 90.9 55.0
Average Gas Selling Price (per Mcf)..... $ 2.02 $ 2.01 $ 2.21 $ 2.20 $ 2.30 $ 2.10
Effect of Hedging (per Mcf)............. (.16) (.17) (.28) (.26) (.35) (.09)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per
Mcf).................................. $ 1.86 $ 1.84 $ 1.93 $ 1.94 $ 1.95 $ 2.01
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl)....... $15.65 $21.01 $17.52 $20.01 $18.00 $19.39
Effect of Hedging (per Bbl)............. .63 (.96) (.24) (1.14) .05 (.93)
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per
Bbl).................................. $16.28 $20.05 $17.28 $18.87 $18.05 18.46
====== ====== ====== ====== ====== ======
E&P operating and joint venture results were also affected by fluctuations in
natural gas and oil sales prices, which were mitigated by hedging with swap and
futures agreements. These hedging agreements are used to manage Diversified
Energy's exposure to the risk of market price fluctuations as discussed in the
"Risk Management Strategy" section that follows. Additionally, E&P's operating
results were affected by lower average production costs per thousand cubic feet
(Mcf) equivalent.
PIPELINES & PROCESSING operating and joint venture income increased $5.7 million
for the 1997 quarter and increased $14.6 million and $18.5 million for the nine-
and twelve-month periods, respectively. These increases primarily reflect income
from the December 1996 acquisition of a 25% interest in Lyondell Methanol
Company, L.P. (Lyondell), a limited partnership that owns and operates a 248
million gallon per year methanol production plant in Texas. Earnings from
Lyondell have benefited from strong methanol prices during 1997.
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- ---------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ----- ----
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)................................ 11.6 12.1 34.8 30.7 50.4 35.3
Methanol Produced (million gallons)................ 15.9 -- 45.8 -- 56.4 --
Transportation (Bcf)............................... 32.6 19.7 80.9 60.0 107.3 63.2
* Includes MCN's share of joint ventures
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Pipeline & Processing results also reflect increases in transportation
deliveries as well as varying levels of volumes treated through gas processing
plants. Pipeline transportation volumes rose 12.9 Bcf (65%) in the quarter and
20.9 Bcf (35%) and 44.1 Bcf (70%) in the 1997 nine- and twelve-month periods,
respectively, due to new and expanded gas gathering ventures. The increases in
transportation volumes were partially offset by reduced volumes resulting from
the sale of a portion of MCN's interest in Dauphin Island Gathering Partners
(DIGP) during 1996 (Note 2d). Gas processing volumes decreased slightly for the
quarter, but increased by 4.1 Bcf (13%) and 15.1 Bcf (43%) for the 1997 nine-
and twelve-month periods, respectively, due to new processing plants added
during mid-1996.
ENERGY MARKETING, GAS STORAGE & POWER GENERATION operating and joint venture
income increased $4.8 million for the 1997 quarter and increased $10.9 million
and $15.0 million for the nine- and twelve-month periods, respectively. The
increase in earnings for all periods primarily resulted from the April 1997
acquisition of an 18% interest in Midland Cogeneration Venture L.P. (MCV), a
limited partnership that owns a gas-fired cogeneration facility capable of
producing up to 1,370 megawatts (MW) of electricity and 1.35 million pounds per
hour of process steam (Note 2c). Earnings from MCV for the 1997 periods include
a favorable $2.8 million adjustment for a change in accounting for property
taxes. Also contributing to the favorable results were higher earnings from
MCN's investment in the 50%-owned, 123 MW Michigan Power cogeneration facility
due to an increase in plant availability and a higher electricity sales rate
under its long-term sales contract. Earnings from the 30 MW Ada cogeneration
facility increased as a result of the acquisition of the 1% general partnership
interest in the fourth quarter of 1996.
Energy Marketing's earnings were favorably affected by an increase in gas sales
and exchange deliveries in total of 34.8 Bcf (76%) in the quarter and 77.6 Bcf
(45%) and 82.4 Bcf (35%) in the 1997 nine- and twelve-month periods,
respectively. However, the effect on earnings of these higher volumes during the
1997 quarter and nine-month period was more than offset by reduced margins when
compared to the same 1996 periods.
QUARTER 9 MONTHS 12 MONTHS
------------ -------------- --------------
1997 1996 1997 1996 1997 1996
---- ---- ----- ----- ----- -----
ENERGY MARKETING STATISTICS (BCF)*
Gas Sales........................................... 80.4 42.3 241.0 155.8 304.1 212.5
Exchange Deliveries................................. -- 3.3 10.0 17.6 15.1 24.3
---- ---- ----- ----- ----- -----
80.4 45.6 251.0 173.4 319.2 236.8
==== ==== ===== ===== ===== =====
* Includes MCN's share of joint ventures
In February 1997, Diversified Energy signed an agreement to sell its 25%
interest in Blue Lake Gas Storage Company effective December 1997. Diversified
Energy anticipates recognizing a gain from such sale in the fourth quarter of
1997.
4
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RISK MANAGEMENT STRATEGY -- MCN 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 a significant portion 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 1996 nine- and twelve-month periods include 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, nine- and twelve-month periods 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 issued in July 1996, $132 million of preferred
securities issued in March 1997 and $200 million of preferred securities issued
in June 1997.
The other income and deductions comparison was affected by gains related to DIGP
(Note 2d) as well as gains in 1997 from the sale of pipeline assets. In a series
of transactions during 1996, MCN sold 64% of its 99% interest in the DIGP
partnership, resulting in pre-tax gains totaling $8.8 million, of which $2.4
million was deferred until the third quarter of 1997 when a related option
agreement expired unexercised.
INCOME TAXES
The current and deferred income tax provisions for all periods reflect increases
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 intends to continue its aggressive program of investing in attractive
energy-related projects. MCN plans to expand its E&P reserve base in known
producing areas, generating attractive returns and developing reliable,
long-term gas supplies. It 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. MCN will expand
its Energy Marketing coverage within existing markets as well as entering new
markets through strategic alliances with other energy providers. MCN expects to
make significant investments in international power projects over the next
several years as evidenced by its acquisition of a 40% interest in a joint
venture in India (Note 2b). MCN is also currently evaluating various other
projects that could add significantly to its international portfolio.
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
Improved seasonal results -- The Gas Distribution group reported a loss of $16.6
million for the 1997 third quarter, improving $2.3 million over the comparable
1996 quarter. The Gas Distribution group typically records third quarter losses
due to seasonally lower demand for natural gas during the summer months. Items
favorably impacting the quarter comparison were improved gross margins and lower
operation and maintenance expenses. Earnings decreased $4.6 million and $10.4
million for the 1997 nine- and twelve-month periods, respectively, reflecting
reduced gross margins due to warmer weather as well as higher depreciation and
financing costs.
QUARTER 9 MONTHS 12 MONTHS
---------------- ---------------- --------------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ -------- --------
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
Gas sales.............................. $ 79.5 $ 82.6 $729.5 $756.0 $1,076.4 $1,080.7
End user transportation................ 16.3 16.2 61.6 61.3 82.8 84.0
Intermediate transportation............ 12.9 12.4 41.0 35.2 54.4 47.0
Other.................................. 12.3 7.8 36.2 30.3 48.1 45.9
------ ------ ------ ------ -------- --------
121.0 119.0 868.3 882.8 1,261.7 1,257.6
Cost of Gas.............................. 28.9 30.1 420.6 433.8 633.0 617.5
------ ------ ------ ------ -------- --------
Gross Margin............................. 92.1 88.9 447.7 449.0 628.7 640.1
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.............. 64.8 69.9 210.6 211.9 297.1 297.0
Depreciation, depletion and
amortization........................ 26.3 25.0 78.7 74.5 103.0 97.2
Property and other taxes............... 12.9 13.3 47.0 47.2 62.1 61.2
------ ------ ------ ------ -------- --------
104.0 108.2 336.3 333.6 462.2 455.4
------ ------ ------ ------ -------- --------
Operating Income (Loss).................. (11.9) (19.3) 111.4 115.4 166.5 184.7
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures..... .2 .2 2.2 .8 2.6 1.1
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................ 1.2 1.5 3.7 2.7 5.0 3.6
Interest expense....................... (12.0) (12.2) (40.0) (36.0) (52.9) (48.5)
Minority interest...................... (.6) (.4) (1.5) (1.1) (1.4) (1.7)
Other.................................. .1 .7 .7 .4 (1.4) (2.2)
------ ------ ------ ------ -------- --------
(11.3) (10.4) (37.1) (34.0) (50.7) (48.8)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes........ (23.0) (29.5) 76.5 82.2 118.4 137.0
Income Taxes............................. (6.4) (10.6) 28.0 29.1 41.6 49.8
------ ------ ------ ------ -------- --------
Net Income (Loss)........................ $(16.6) $(18.9) $ 48.5 $ 53.1 $ 76.8 $ 87.2
====== ====== ====== ====== ======== ========
* Includes intercompany transactions
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GROSS MARGIN
Gas Distribution gross margin (operating revenues less cost of gas) increased
$3.2 million for the 1997 quarter and decreased $1.3 million and $11.4 million
for the nine- and twelve-month periods, respectively. Gross margin for all 1997
periods was affected by increased other operating revenues reflecting
initiatives of the Gas Distribution group to grow revenues by providing
gas-related services. The favorable quarter results also reflect higher
intermediate transportation services, partially offset by lower gas sales. The
decrease in gross margin for the 1997 nine- and twelve-month periods was
primarily due to lower gas sales and end user transportation deliveries caused
by warmer weather, partially offset by the continued growth in intermediate
transportation services.
QUARTER 9 MONTHS 12 MONTHS
---------------- -------------- ---------------
1997 1996 1997 1996 1997 1996
----- ----- ---- ---- ---- -----
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder than Normal................. N/M N/M 1.7% 6.2% 2.5% 6.8%
Increase (Decrease) from Normal in:
Gas markets (in Bcf)........................ (.3) (.2) 1.2 8.4 3.7 14.2
Net income (in Millions).................... $(.2) $(.2) $1.1 $7.6 $3.3 $12.7
Earnings per share.......................... $ -- $ -- $.01 $.11 $.05 $ .19
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $3.0 million
in the quarter and $26.2 million and $5.5 million in the 1997 nine- and
twelve-month periods, respectively. The decrease in revenues for the quarter is
due to lower gas costs which are recovered in gas sales rates as subsequently
discussed in the "Cost of Gas" section. The quarter was further impacted by a
slight decrease in gas sales volumes. The decrease in revenues for the 1997
nine-month period is due to reduced gas sales and end user transportation
deliveries as a result of warmer weather and lower gas costs. The twelve-month
period decrease in revenues was affected by reduced gas sales and end user
transportation deliveries as a result of warmer weather, partially offset by
higher gas costs.
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1997 1996 1997 1996 1997 1996
----- ----- ----- ----- ----- -----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales.................................... 14.1 14.5 144.0 152.6 212.3 225.7
End User Transportation...................... 28.6 28.6 105.8 108.1 144.6 150.1
----- ----- ----- ----- ----- -----
42.7 43.1 249.8 260.7 356.9 375.8
Intermediate Transportation*................. 164.9 148.7 447.0 407.1 567.5 521.2
----- ----- ----- ----- ----- -----
207.6 191.8 696.8 667.8 924.4 897.0
===== ===== ===== ===== ===== =====
* Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues increased $.5 million in the quarter and
$5.8 million and $7.4 million in the 1997 nine- and twelve-month periods,
respectively, due to increased deliveries. The higher revenues are due to
increased volumes transported resulting from the recent expansion of MichCon's
northern Michigan gathering system. This system enabled MichCon to transport an
additional 22.7 Bcf, 55.6 Bcf and 81.2 Bcf in the 1997 quarter, nine- and
twelve-month periods, respectively. Intermediate transportation volumes for all
1997 periods were impacted by lower deliveries to major customers. Although
volumes associated with these fixed-fee customers have varied, the related
revenues were not significantly affected.
7
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OTHER OPERATING REVENUES increased $4.5 million, $5.9 million, and $2.2 million
in the 1997 quarter, nine- and twelve-month periods, respectively, due in part
to increased merchandise sales and gas-related services. Also affecting the
quarter comparison is an unfavorable adjustment for conservation revenues in the
1996 quarter resulting from the discontinuance of MichCon's energy conservation
programs. The increase in other operating revenues for the 1997 twelve-month
period also includes increased gas processing revenues from the northern
Michigan gathering system partially offset by a decrease in conservation
revenue.
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 cost of gas sold. Therefore,
fluctuations in total gas costs have little or no effect on gross margins.
Cost of gas sold decreased in the 1997 quarter and nine-month period and
increased in the 1997 twelve-month period. Cost of gas for all 1997 periods was
affected by lower gas sales volumes, primarily due to the warmer weather, as
well as supplier refunds. The decrease in the quarter also reflects a $.03 (1%)
per Mcf decline in the average unit cost of gas sold substantially offset by
increased lost gas costs. Partially offsetting the decrease in the 1997
nine-month period was higher market prices resulting in a $.12 (4%) increase in
the average unit cost of gas sold. The increase in cost of gas in the 1997
twelve-month period reflects a $.24 (9%) per Mcf increase in the average unit
cost of gas sold.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses decreased for the 1997 quarter and nine-month
period and increased slightly for the 1997 twelve-month period. Operation and
maintenance expenses were affected in all periods by lower benefit costs,
primarily pension and retiree healthcare costs. The 1997 quarter and nine-month
period further benefited from a decrease in uncollectible gas accounts expense.
Partially offsetting the decrease in the 1997 nine-month period were higher
conservation program expenses and operating expenses related to increased
intermediate transportation volumes. The 1997 twelve-month period increase was
primarily due to higher uncollectible gas accounts expense and increased
operating expenses related to intermediate transportation services. The
discontinuance of MichCon's energy conservation programs reduced expenses in the
1997 twelve-month period.
DEPRECIATION AND DEPLETION for the 1997 quarter, nine- and twelve-month periods
increased due to higher plant balances reflecting capital expenditures of $215.3
million in the 1996 calendar year. Depreciation and depletion expenses are
expected to increase in future years due to additional capital investments.
MichCon filed an application with the Michigan Public Service Commission in
October 1996 to lower its depreciation rates, which could partially offset the
anticipated increase in depreciation expense in future years.
PROPERTY AND OTHER TAXES decreased in the 1997 quarter and nine-month period and
increased for the 1997 twelve-month period when compared to the same 1996
periods. All 1997 periods reflect a decrease in property taxes based on pending
appeals of MichCon's personal property tax assessments. A favorable resolution
of the appeals is expected in 1999. All 1997 periods were also impacted by an
increase in Michigan single business taxes relating to prior years.
OTHER INCOME AND DEDUCTIONS
The 1997 nine- and twelve-month periods primarily reflect higher interest costs
on increased long-term debt required to finance capital investments, partially
offset by reduced interest on lower outstanding commercial paper.
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
INCOME TAXES
Income taxes changed primarily as a result of variations in earnings. The
increase in income taxes for the 1997 quarter was additionally impacted by the
amounts recorded in the 1996 quarter for the favorable resolution of prior
years' tax issues. The decreases in income taxes for the 1997 nine- and
twelve-month periods were also positively impacted by tax credits, partially
offset by the favorable resolution of prior years' tax issues recorded in the
1996 periods.
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. Gas Distribution is
concentrating on adding new customers in current service areas, including
increased penetration of previous expansion areas. 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, 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 $92.8 million during the
1997 nine-month period from the comparable 1996 period. The increase was due
primarily to lower working capital requirements and higher income, after
adjusting for depreciation, deferred taxes and the gains on sale of Genix and
DIGP interests (Notes 2d and 2e). The lower working capital requirements
resulted principally from lower balances in accounts receivable, unbilled
revenues and gas cost recovery revenues.
FINANCING ACTIVITIES
In June 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 3d). Proceeds from this issuance
were used to fund capital expenditures, to repay short-term obligations and for
general corporate purposes.
In June 1997, MCN issued, through wholly owned trusts, 100,000 Private
Institutional Trust Securities and 100,000 Single Point Remarketed Reset Capital
Securities (Note 3c). Net proceeds of $199.1 million from these issuances were
invested by MCN in its Diversified Energy group and were used to reduce
short-term debt incurred to fund capital investments. The securities are
currently rated the equivalent of "A-"or "baa1" by the major rating agencies.
In March 1997, MCN issued 2,645,000 FELINE PRIDES, 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.
9
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. For the nine months ended September 1997,
issuances under these plans generated proceeds of $14 million.
DIVERSIFIED ENERGY
In June 1997, MCNIC repaid $30 million of senior debt on its stated maturity
date.
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 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, both of which expire in July 1998. These 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 nine months of
1997, MCNIC repaid $329.8 million of commercial paper. At September 30, 1997,
there were no borrowings outstanding under this program.
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
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 that 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, both of
which expire in July 1998. During the first nine months of 1997, MichCon repaid
$176.7 million of commercial paper. At September 30, 1997, commercial paper of
$61.6 million was outstanding under this program.
During May 1997, MichCon issued $85 million of first mortgage bonds under its
existing shelf registrations. The funds from this issuance were used to retire
first mortgage bonds, fund capital expenditures and for general corporate
purposes.
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 the northern Michigan gathering system.
During the second quarter of 1997, MichCon redeemed $17 million of long-term
debt prior to maturity. MichCon also repaid $50 million of first mortgage bonds
on its stated maturity date in May 1997.
INVESTING ACTIVITIES
Capital investments increased $121 million (25%) in the 1997 nine-month period
over the same period in 1996. The 1997 investments include higher levels of
investments in E&P properties and joint venture pipeline facilities, as well as
the acquisition of an interest in Indian power generation projects and a
domestic cogeneration facility. The 1996 investments include the DIGP
acquisition (Note 2d).
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In the 1997 nine-month period, MCN sold E&P assets for approximately $38.6
million. In the 1996 nine-month period, MCN completed the sale of Genix and an
interest in DIGP, resulting in proceeds of $173.5 million (Notes 2d and 2e).
Proceeds from these sales were used to reduce debt incurred to fund Diversified
Energy's capital investments.
9 MONTHS
---------------
1997 1996
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $261.5 $253.6
Gas Distribution.......................................... 99.1 148.2
Discontinued Operations................................... -- 6.5
------ ------
360.6 408.3
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 70.3 .9
Energy Marketing, Gas Storage & Power Generation.......... 10.0 1.2
Other..................................................... 2.5 3.6
------ ------
82.8 5.7
------ ------
Acquisitions (Note 2)*...................................... 170.2 78.6
------ ------
Total Capital Investments................................... $613.6 $492.6
====== ======
* Includes MCN's share of GTEC debt existing at the date of acquisition (Note
2b)
OUTLOOK
Capital investments in 1997 are expected to approximate $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 $400 million will be invested in E&P projects
for drilling operations and the acquisition of additional oil and gas
properties. Diversified Energy will invest the remaining $500 million in gas
gathering, gas processing and power generation projects.
As MCN continues to pursue its strategy of diversifying through a portfolio of
energy-related projects, it will routinely evaluate the value and strategic
benefits of selling its assets. MCN is negotiating the sale of certain
Diversified Energy assets to unlock their appreciated value. Proceeds from any
sale will be used to acquire or develop other energy-related assets and
therefore capital investments would be increased accordingly.
The proposed level of investments for the remainder of 1997, and over the next
several years, increases capital requirements materially in excess of internally
generated funds and will require 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.
In August 1997, President Clinton signed a law that will reduce taxes collected
by the United States over the next five years. Although the law is not expected
to significantly change MCN's tax expense, it will have an impact on the timing
of tax payments. It is anticipated that beginning in the year 2000 MCN will
realize an increasing benefit in cash flows from a deferral in taxes paid as a
result of this legislation.
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosure of Information about Capital Structure,"
which are effective for MCN's year-end 1997 financial statements. SFAS No. 128
simplifies the standards for computing earnings per share (EPS), replaces
primary EPS with a newly defined basic EPS and modifies the computation of
diluted EPS. SFAS No. 129 continues previous requirements to disclose certain
information about an entity's capital structure. MCN does not expect the
application of these statements to have a material effect on its financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which are effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting information about operating segments in annual and
interim financial statements. MCN is evaluating the effect of applying these
statements.
In 1996, the Emerging Issues Task Force of the FASB reached a consensus that the
cost associated with modifying internal use software for the year 2000 should be
expensed as incurred. MCN has established processes for evaluating and managing
the risks and costs associated with this issue on the financial position and
results of operations of MCN and its subsidiaries. MCN is assessing the extent
of necessary modifications to its computer software, as well as that of its
partners, suppliers and operators.
FORWARD LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve certain risks and uncertainties that may cause actual future
results to differ materially from those contemplated, projected, estimated or
budgeted in such forward-looking statements. Factors that may impact
forward-looking statements include, but are not limited to, the following: (i)
the effects of weather and other natural phenomena; (ii) increased competition
from other energy suppliers as well as alternative forms of energy; (iii) the
capital intensive nature of MCN's business; (iv) economic climate and growth in
the geographic areas in which MCN does business; (v) the uncertainty of gas and
oil reserve estimates; (vi) the timing and extent of changes in commodity prices
for natural gas, electricity and crude oil; (vii) the nature, availability and
projected profitability of potential projects and other investments available to
MCN; (viii) conditions of capital markets and equity markets; (ix) changes in
the economic and political climate and currencies of foreign countries where MCN
has invested or may invest in the future and (x) the effects of changes in
governmental policies and regulatory actions, including income taxes,
environmental compliance and authorized rates.
12
15
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
-------- -------- ---------- ---------- ---------- ----------
OPERATING REVENUES............................ $327,817 $243,311 $1,504,503 $1,388,413 $2,113,358 $1,904,523
-------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas................................. 174,141 111,674 873,706 823,171 1,244,113 1,117,022
Operation and maintenance................... 90,678 88,703 284,364 263,135 393,209 362,642
Depreciation, depletion and amortization.... 45,904 37,676 134,845 107,994 172,841 139,278
Property and other taxes.................... 16,241 16,224 57,469 55,640 76,256 71,033
-------- -------- ---------- ---------- ---------- ----------
326,964 254,277 1,350,384 1,249,940 1,886,419 1,689,975
-------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)....................... 853 (10,966) 154,119 138,473 226,939 214,548
-------- -------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES.......... 17,349 2,903 42,180 11,788 48,259 13,144
-------- -------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................. 2,313 2,018 6,689 5,167 8,756 6,812
Interest on long-term debt.................. (18,128) (17,336) (58,179) (49,861) (74,835) (62,513)
Other interest expense...................... (332) (465) (6,956) (7,300) (10,920) (11,356)
Dividends on preferred securities of
subsidiaries.............................. (9,778) (3,579) (21,336) (8,286) (25,424) (10,683)
Gains related to DIGP (Note 2d)............. 2,398 498 2,398 3,986 4,796 3,986
Minority interest........................... (547) (350) (1,514) (1,086) (1,487) (1,748)
Other....................................... 2,836 458 5,416 (537) 3,333 (1,879)
-------- -------- ---------- ---------- ---------- ----------
(21,238) (18,756) (73,482) (57,917) (95,781) (77,381)
-------- -------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES......................... (3,036) (26,819) 122,817 92,344 179,417 150,311
INCOME TAX PROVISION (BENEFIT)................ (4,255) (13,416) 30,753 21,486 45,642 38,897
-------- -------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS...... 1,219 (13,403) 92,064 70,858 133,775 111,414
-------- -------- ---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES (Note
2e)
Income from operations...................... -- -- -- 1,595 -- 2,520
Gain on sale................................ -- -- -- 36,176 -- 36,176
-------- -------- ---------- ---------- ---------- ----------
-- -- -- 37,771 -- 38,696
-------- -------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)............................. $ 1,219 $(13,403) $ 92,064 $ 108,629 $ 133,775 $ 150,110
======== ======== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE
Continuing operations....................... $ .02 $ (.20) $ 1.29 $ 1.06 $ 1.90 $ 1.67
-------- -------- ---------- ---------- ---------- ----------
Discontinued operations (Note 2e)
Income from operations.................... -- -- -- .03 -- .04
Gain on sale.............................. -- -- -- .54 -- .54
-------- -------- ---------- ---------- ---------- ----------
-- -- -- .57 -- .58
-------- -------- ---------- ---------- ---------- ----------
$ .02 $ (.20) $ 1.29 $ 1.63 $ 1.90 $ 2.25
======== ======== ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING............. 78,026 67,073 71,289 66,845 70,268 66,711
======== ======== ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE.................. $ .2425 $ .2325 $ .7275 $ .6975 $ .9700 $ .9300
======== ======== ========== ========== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
BALANCE -- Beginning of period................ $362,570 $309,467 $305,352 $218,425 $280,478 $192,353
ADD -- Net income (loss)...................... 1,219 (13,403) 92,064 108,629 133,775 150,110
-------- -------- -------- -------- -------- --------
363,789 296,064 397,416 327,054 414,253 342,463
DEDUCT -- Cash dividends...................... 19,300 15,586 52,927 46,576 69,764 61,985
-------- -------- -------- -------- -------- --------
BALANCE -- End of period...................... $344,489 $280,478 $344,489 $280,478 $344,489 $280,478
======== ======== ======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
13
16
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1997 1996 1996
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 41,251 $ 33,682 $ 30,462
Accounts receivable, less allowance for doubtful accounts
of $16,819, $14,699 and $18,487, respectively........... 261,774 210,370 362,596
Accrued unbilled revenues................................. 22,258 22,429 108,509
Accrued gas cost recovery revenues........................ -- 33,585 27,672
Gas in inventory.......................................... 124,097 153,610 79,161
Property taxes assessed applicable to future periods...... 27,712 24,455 62,966
Gas receivable............................................ 7,622 14,687 18,062
Other..................................................... 41,573 22,731 34,800
---------- ---------- ----------
526,287 515,549 724,228
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............. 450,011 186,446 265,388
Deferred swap losses and receivables (Note 5)............. 45,888 47,364 65,051
Deferred postretirement benefit costs..................... 662 7,809 5,559
Deferred environmental costs.............................. 30,134 31,016 31,233
Prepaid benefit costs..................................... 65,708 49,161 59,248
Other..................................................... 101,533 94,804 100,341
---------- ---------- ----------
693,936 416,600 526,820
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Exploration & Production.................................. 1,198,996 819,806 981,901
Pipelines & Processing.................................... 29,180 26,860 27,895
Gas Distribution.......................................... 2,764,762 2,629,067 2,689,039
Other..................................................... 19,921 16,907 18,722
---------- ---------- ----------
4,012,859 3,492,640 3,717,557
Less -- Accumulated depreciation and depletion............ 1,449,830 1,299,398 1,335,201
---------- ---------- ----------
2,563,029 2,193,242 2,382,356
---------- ---------- ----------
$3,783,252 $3,125,391 $3,633,404
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 203,023 $ 213,702 $ 317,922
Notes payable (Note 4).................................... 75,797 227,093 336,126
Current portion of long-term debt and capital lease
obligations............................................. 29,961 84,704 84,747
Federal income, property and other taxes payable.......... 44,165 43,999 97,646
Customer deposits......................................... 14,045 10,805 12,881
Other..................................................... 90,566 90,444 97,873
---------- ---------- ----------
457,557 670,747 947,195
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................... 161,697 152,103 149,838
Unamortized investment tax credit......................... 33,514 35,389 34,919
Tax benefits amortizable to customers..................... 123,746 113,112 116,496
Deferred swap gains and payables (Note 5)................. 42,824 41,244 48,365
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 17,532 18,791 17,911
Other..................................................... 66,811 99,232 73,263
---------- ---------- ----------
481,124 494,871 475,792
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations (Note
3a)....................................................... 1,220,394 1,054,144 1,252,040
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN (Notes 3b
and 3c)................................................... 505,048 173,760 173,809
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
COMMON SHAREHOLDERS' EQUITY (Note 3d)
Common stock.............................................. 781 672 673
Additional paid-in capital................................ 795,923 465,776 493,469
Retained earnings......................................... 344,489 280,478 305,352
Yield enhancement, contract and issuance costs (Note
3b)..................................................... (22,036) (14,524) (14,492)
Unearned compensation..................................... (28) (533) (434)
---------- ---------- ----------
1,119,129 731,869 784,568
---------- ---------- ----------
$3,783,252 $3,125,391 $3,633,404
========== ========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
14
17
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 92,064 $ 108,629
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 134,845 107,994
Charged to other accounts............................. 5,695 9,103
Deferred income taxes -- current........................ (27,410) (5,863)
Deferred income taxes and investment tax credit, net.... 17,704 23,243
Gains related to DIGP and Genix, net of taxes (Notes 2d
and 2e)................................................ (1,560) (38,767)
Equity in earnings of joint ventures, net of
distributions.......................................... (12,054) (2,206)
Other................................................... (1,897) (987)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 78,036 (8,538)
--------- ---------
Net cash provided from operating activities........ 285,423 192,608
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (257,929) (18,542)
Common stock dividends paid............................... (52,927) (46,576)
Issuance of common stock (Note 3d)........................ 290,626 13,408
Issuance of preferred securities (Notes 3b and 3c)........ 326,521 77,218
Issuance of long-term debt (Note 3a)...................... 273,241 398,540
Long-term commercial paper, net........................... (261,822) (256,630)
Retirement of long-term debt.............................. (106,073) (6,839)
Other..................................................... -- (6,281)
--------- ---------
Net cash provided from financing activities........ 211,637 154,298
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (359,023) (401,518)
Acquisitions (Notes 2b, 2c and 2d)........................ (128,206) (78,620)
Sale of Genix (Note 2e)................................... -- 137,500
Investment in joint ventures.............................. (67,352) (9,942)
Sale of investment in joint ventures (Note 2d)............ -- 36,000
Return of investment in joint ventures.................... 8,939 --
Sale of E&P property and equipment........................ 38,604 621
Other..................................................... 20,767 (16,524)
--------- ---------
Net cash used for investing activities............. (486,271) (332,483)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 10,789 14,423
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 30,462 19,259
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30..................... $ 41,251 $ 33,682
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 99,357 $ 84,104
Accrued unbilled revenues................................. 86,251 69,981
Accrued/deferred gas cost recovery revenues............... 28,318 (34,163)
Gas in inventory.......................................... (44,936) (81,847)
Accounts payable.......................................... (114,899) 4,646
Federal income, property and other taxes payable.......... (53,481) (72,394)
Other current assets and liabilities...................... 58,928 43,889
Deferred assets and liabilities........................... 18,498 (22,754)
--------- ---------
$ 78,036 $ (8,538)
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 82,470 $ 53,152
Federal income taxes.................................... 22,500 18,434
Noncash investing activities:
Property purchased under capital leases................. $ 1,616 $ 6,765
The notes to the consolidated financial statements are an integral part of this
statement.
15
18
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. PHILIPPINE INVESTMENT
In October 1997, MCN reached an agreement in principle to acquire a
minority interest in an independent power producer based in the
Philippines. MCN advanced approximately $46,000,000 to the independent
power producer pending negotiation of the final terms of the purchase
agreement.
B. TORRENT POWER PRIVATE LIMITED
In March 1997, MCN acquired a 40% interest in Torrent Power Private Limited
(TPPL), 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 was approximately $57,000,000, of
which $50,400,000 was paid through June 1997. The remainder is expected to
be paid in early 1998. Specifically, at the acquisition date, the joint
venture had 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 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 became operational
in October 1997, and the entire facility is expected to be 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 existing interest will be approximately
$60,000,000.
In June 1997, MCN entered into an agreement to purchase preference shares
in TPPL to meet TPPL's cash requirements to acquire additional interests in
AEC and GTEC. In August 1997, TPPL acquired an additional 10% interest in
AEC for $21,000,000. In October 1997, TPPL acquired an additional 5%
interest in AEC for approximately $10,800,000 as well as an additional 12%
interest in GTEC for approximately $24,100,000. TPPL is currently
negotiating to acquire further interests in AEC and GTEC.
C. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
During the second quarter of 1997, MCN purchased an 18% 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, as well
as 1.35 million pounds per hour of process steam. The investment totaled
$54,750,000 and is accounted for under the equity method. In September
1997, MCV changed its method of accounting for property taxes. As a result,
MCN's pre-tax income from MCV was favorably impacted by $2,800,000.
16
19
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN acquired in the
first quarter of 1996 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 June of 1996, MCN sold a 35%
interest in DIGP for a pre-tax gain of $3,488,000. An additional 5%
interest was sold in the third quarter of 1996, generating a pre-tax gain
of $498,000. In December 1996, a 41% interest in the partnership was sold
to three additional partners resulting in a pre-tax gain of $4,796,000, of
which $2,398,000 was deferred until the third quarter of 1997 when the
related option agreement expired unexercised.
E. 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, resulting in an after-tax
gain of $36,176,000.
3. CAPITALIZATION
A. LONG-TERM DEBT
The following long-term debt was issued during the first nine months 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
----------------------------------------------------------
May 1997 MichCon First Mortgage Bonds
7.21%, due May 2007 $30,000
7.06%, due May 2012 $40,000
7.60%, due May 2017 $15,000
----------------------------------------------------------
During April 1997, MichCon subsidiaries borrowed $40,000,000 under a
nonrecourse credit agreement. Under the terms of the agreement, certain
alternative variable interest rates are available at the borrowers' option
during the life of the agreement. Quarterly principal payments commenced 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. MichCon may be required to provide limited support
under the credit agreement in certain circumstances. As of September 30,
1997, $37,600,000 was outstanding at a weighted average interest rate of
6.34%.
MichCon entered into variable interest rate swap agreements with notional
principal amounts aggregating $80,000,000 in connection with the first
mortgage bonds issued in May 1997. Swap agreements of $40,000,000 through
May 2002 have reduced the average cost of debt from 7.31% to 6.32% for the
five months ended September 30, 1997. Swap agreements of $40,000,000
through May 2005 have reduced the average cost of debt from 7.06% to 5.91%
for the five months ended September 30, 1997.
In the second quarter of 1997, MichCon redeemed early $5,000,000 of 9.5%
first mortgage bonds and $12,000,000 of 9.75% unsecured notes. As discussed
in MCN's 1996 Annual Report on Form 10-K, MichCon had a variable interest
rate swap through April 2000 on the $12,000,000 unsecured notes. This
agreement reduced the cost of debt of the fixed-rate unsecured notes from
9.75% to 5.77% for the nine months ended September 30, 1997. This swap has
been redesignated as a hedge of other outstanding first mortgage bonds.
17
20
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 is
reduced as 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, 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 through 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.
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.
18
21
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
C. PREFERRED SECURITIES
In 1997, MCN Financing V and MCN Financing VI, business trusts wholly owned
by MCN, were formed for the sole purpose of issuing preferred securities
and lending the gross proceeds thereof to MCN. In June 1997, MCN Financing
V issued 100,000 Private Institutional Trust Securities (PRINTS) and MCN
Financing VI issued 100,000 Single Point Remarketed Reset Capital
Securities (SPRRCS), both at their liquidation preference value of $1,000
per security. The trusts invested the $200,000,000 of gross proceeds from
the issuances of the preferred securities, as well as $6,186,000 of
proceeds from the issuances of common securities to MCN, in an equivalent
amount of senior debentures of MCN. The $206,186,000 of senior debentures
are due 2037, are on terms substantially the same as the preferred
securities and are the sole assets of the trusts.
The preferred securities are structured such that at a specified future
date, the rate reset date, the securities may be remarketed with a new
liquidation preference value of $25 per security. The annual dividend
payment rate will be reset to reflect the lowest rate, less than or equal
to a maximum rate, at which the securities can be remarketed at a price
equal to their liquidation preference value. On the rate reset date, the
terms of an equivalent amount of the MCN senior debentures will change to
reflect the new terms of the remarketed preferred securities. The
debentures will thereafter be subordinated and junior in right of payment
to all senior obligations of MCN. The rate reset dates for the PRINTS and
SPRRCS are anticipated to be June 1, 1998 and October 28, 1999,
respectively.
Prior to the rate reset date, holders of the PRINTS and SPRRCS are entitled
to receive cumulative dividends at annual rates of 6.31% and 6.85% of the
liquidation preference value, respectively. Dividends are in substance tax
deductible by MCN and are payable semi-annually until the rate reset date,
after which they will become payable quarterly. Financing costs were
deferred and reflected as a reduction in the carrying value of the
preferred securities. These costs are being amortized using the
straight-line method over 40 years.
Subsequent to the rate reset date, MCN has the right to extend interest
payment periods on the debentures for up to 20 consecutive quarters through
the June 2037 maturity date. As a consequence, dividend payments on the
preferred securities can be deferred by the trusts during any such interest
payment period. In the event that MCN exercises this right, MCN may not
declare dividends on its common stock. With MCN's consent, the preferred
securities are redeemable at the option of the trusts, in whole or in part,
on the rate reset date or at any time after the fifth anniversary of the
rate reset date. In addition, upon maturity of the debentures, the trusts
are required to redeem the preferred securities.
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 guaranties with respect to payments on the
preferred securities. These guaranties, when taken together with MCN's
obligations under the debentures, the related indenture, and the trust
documents, provide full and unconditional guaranties of the trusts'
obligations under the preferred securities to the extent the trust has
funds available therefor.
In June 1997, MCN entered into a one-year variable interest rate swap
agreement with a notional amount of $100,000,000. The swap agreement
effectively reduced the PRINTS fixed dividend rate from 6.31% to 5.94%
through September 30, 1997.
19
22
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
In June 1997, MCN sold 9,775,000 shares of new common stock in a public
offering, generating net proceeds of $276,600,000.
Under the MCN Shareholders' Rights Plan, one preferred share purchase right
is attached to each outstanding share of common stock. In July 1997, the
MCN Board of Directors amended the Plan which, among other changes,
extended the expiration of the rights to July 2007. The rights, which
cannot be traded separately from MCN's common stock, are designed to
protect shareholders from coercive or unfair tactics and are therefore
exercisable only upon certain triggering events.
4. LINES OF CREDIT
As discussed in MCN's 1996 Annual Report on Form 10-K, MichCon and MCNIC
maintain credit lines that allow for borrowings of up to $250,000,000 under
364-day revolving credit facilities and up to $450,000,000 under three-year
revolving credit facilities, both of which expire in July 1998. These credit
lines, totaling $700,000,000, support their commercial paper programs.
Commercial paper of $61,571,000 was outstanding under these lines as of
September 30, 1997.
5. 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:
SEPTEMBER 30, DECEMBER 31,
------------------ ------------
(in Thousands) 1997 1996 1996
------- ------- -------
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses......................................... $33,539 $13,642 $53,166
Receivables............................................... 12,349 33,722 11,885
------- ------- -------
$45,888 $47,364 $65,051
======= ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains.......................................... $ 8,501 $29,822 $ 5,519
Payables.................................................. 49,317 22,778 64,641
------- ------- -------
57,818 52,600 70,160
Less -- Current portion................................... 14,994 11,356 21,795
------- ------- -------
$42,824 $41,244 $48,365
======= ======= =======
20
23
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. COMMITMENTS AND CONTINGENCIES
In July 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership
(W-10), entered into a leveraged lease transaction to finance the conversion of
a depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000 to
develop. MCN has entered into a contract with W-10 to market 100% of the
capacity of the storage field through 2029. Under the terms of the marketing
contract, MCN is obligated to generate sufficient revenues to cover W-10's lease
payments and certain operating costs, which average approximately $16,000,000
annually. As of September 30, 1997, MCN has long-term contracts in place for
approximately 40% of the field's capacity thereby reducing its commitments under
the marketing contract. A significant portion of the remaining capacity is
expected to be contracted by MCN's Energy Marketing operations, thereby
enhancing its ability to offer a reliable gas supply during peak winter months.
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 $1,089,411,000 at September 30, 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, MCN Financing III, MCN Financing V and MCN Financing VI.
21
24
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 SEPTEMBER 30, 1997
--------------------------------------------------------------------------
OPERATING REVENUES.............................. $ 1,853 $208,649 $119,114 $ (1,799) $327,817
-------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................... 1,050 146,284 27,848 (1,041) 174,141
Operation and maintenance..................... 1,217 26,410 63,809 (758) 90,678
Depreciation, depletion and amortization...... 578 19,167 26,159 -- 45,904
Property and other taxes...................... 321 3,253 12,667 -- 16,241
-------- -------- -------- -------- --------
3,166 195,114 130,483 (1,799) 326,964
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......................... (1,313) 13,535 (11,369) -- 853
-------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 2,463 16,960 212 (2,286) 17,349
-------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 10,819 1,460 1,144 (11,110) 2,313
Interest on long-term debt.................... 88 (6,557) (11,659) -- (18,128)
Other interest expense........................ (252) (10,190) (1,033) 11,143 (332)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (9,778) (9,778)
Gains related to DIGP......................... -- 2,398 -- -- 2,398
Minority interest............................. -- (24) (523) -- (547)
Other......................................... 28 2,042 766 -- 2,836
-------- -------- -------- -------- --------
10,683 (10,871) (11,305) (9,745) (21,238)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES............... 11,833 19,624 (22,462) (12,031) (3,036)
INCOME TAX PROVISION (BENEFIT).................. 163 2,008 (6,426) -- (4,255)
-------- -------- -------- -------- --------
NET INCOME (LOSS)............................... 11,670 17,616 (16,036) (12,031) 1,219
DIVIDENDS ON PREFERRED SECURITIES............... 9,778 -- -- (9,778) --
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK.... $ 1,892 $ 17,616 $(16,036) $ (2,253) $ 1,219
======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------
OPERATING REVENUES.............................. $ 1,726 $125,713 $117,251 $ (1,379) $243,311
-------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................... 964 82,474 29,163 (927) 111,674
Operation and maintenance..................... 416 20,011 68,727 (451) 88,703
Depreciation, depletion and amortization...... 488 12,358 24,830 -- 37,676
Property and other taxes...................... 418 2,645 13,161 -- 16,224
-------- -------- -------- -------- --------
2,286 117,488 135,881 (1,378) 254,277
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......................... (560) 8,225 (18,630) (1) (10,966)
-------- -------- -------- -------- --------
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES AND
SUBSIDIARIES.................................. (12,166) 2,611 203 12,255 2,903
-------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 3,689 582 1,401 (3,654) 2,018
Interest on long-term debt.................... (1) (6,322) (10,313) (700) (17,336)
Other interest expense........................ (136) (2,765) (1,217) 3,653 (465)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (3,579) (3,579)
Gains related to DIGP......................... -- 498 -- -- 498
Minority interest............................. -- (19) (332) 1 (350)
Other......................................... 15 (221) (36) 700 458
-------- -------- -------- -------- --------
3,567 (8,247) (10,497) (3,579) (18,756)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES............... (9,159) 2,589 (28,924) 8,675 (26,819)
INCOME TAX PROVISION (BENEFIT).................. 9 (2,938) (10,487) -- (13,416)
-------- -------- -------- -------- --------
NET INCOME (LOSS)............................... (9,168) 5,527 (18,437) 8,675 (13,403)
DIVIDENDS ON PREFERRED SECURITIES............... 3,579 -- -- (3,579) --
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK.... $(12,747) $ 5,527 $(18,437) $ 12,254 $(13,403)
======== ======== ======== ======== ========
22
25
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
------------ -------- -------- ----------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------
OPERATING REVENUES.................................. $ 11,943 $645,990 $856,359 $ (9,789) $1,504,503
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 6,479 459,662 414,152 (6,587) 873,706
Operation and maintenance......................... 1,873 78,385 207,308 (3,202) 284,364
Depreciation, depletion and amortization.......... 1,705 55,056 78,084 -- 134,845
Property and other taxes.......................... 1,350 9,517 46,602 -- 57,469
-------- -------- -------- --------- ----------
11,407 602,620 746,146 (9,789) 1,350,384
-------- -------- -------- --------- ----------
OPERATING INCOME.................................... 536 43,370 110,213 -- 154,119
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 94,445 39,444 853 (92,562) 42,180
-------- -------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 22,741 3,274 3,630 (22,956) 6,689
Interest on long-term debt........................ 300 (24,506) (33,973) -- (58,179)
Other interest expense............................ (750) (23,413) (5,782) 22,989 (6,956)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (21,336) (21,336)
Gains related to DIGP............................. -- 2,398 -- -- 2,398
Minority interest................................. -- (58) (1,456) -- (1,514)
Other............................................. 1 4,752 663 -- 5,416
-------- -------- -------- --------- ----------
22,292 (37,553) (36,918) (21,303) (73,482)
-------- -------- -------- --------- ----------
INCOME BEFORE INCOME TAXES.......................... 117,273 45,261 74,148 (113,865) 122,817
INCOME TAX PROVISION................................ 1,729 1,964 27,060 -- 30,753
-------- -------- -------- --------- ----------
NET INCOME.......................................... 115,544 43,297 47,088 (113,865) 92,064
DIVIDENDS ON PREFERRED SECURITIES................... 21,336 -- -- (21,336) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $ 94,208 $ 43,297 $47,088 $ (92,529) $ 92,064
======== ======== ======== ========= ==========
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------
OPERATING REVENUES.................................. $ 11,872 $514,725 $870,970 $ (9,154) $1,388,413
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 6,275 396,002 427,560 (6,666) 823,171
Operation and maintenance......................... 1,230 55,683 208,710 (2,488) 263,135
Depreciation, depletion and amortization.......... 1,436 32,595 73,963 -- 107,994
Property and other taxes.......................... 1,281 7,586 46,773 -- 55,640
-------- -------- -------- --------- ----------
10,222 491,866 757,006 (9,154) 1,249,940
-------- -------- -------- --------- ----------
OPERATING INCOME.................................... 1,650 22,859 113,964 -- 138,473
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 110,486 10,517 698 (109,913) 11,788
-------- -------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 8,482 2,458 2,620 (8,393) 5,167
Interest on long-term debt........................ (20) (18,836) (30,238) (767) (49,861)
Other interest expense............................ (246) (10,454) (4,992) 8,392 (7,300)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (8,286) (8,286)
Gains related to DIGP............................. -- 3,986 -- -- 3,986
Minority interest................................. -- (53) (1,034) 1 (1,086)
Other............................................. (175) (844) (285) 767 (537)
-------- -------- -------- --------- ----------
8,041 (23,743) (33,929) (8,286) (57,917)
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES...................................... 120,177 9,633 80,733 (118,199) 92,344
INCOME TAX PROVISION (BENEFIT)...................... 1,318 (8,111) 28,279 -- 21,486
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING OPERATIONS................... 118,859 17,744 52,454 (118,199) 70,858
-------- -------- -------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations............................ -- 1,595 -- -- 1,595
Gain on sale...................................... -- 36,176 -- -- 36,176
-------- -------- -------- --------- ----------
-- 37,771 -- -- 37,771
-------- -------- -------- --------- ----------
NET INCOME.......................................... 118,859 55,515 52,454 (118,199) 108,629
DIVIDENDS ON PREFERRED SECURITIES................... 8,268 -- 18 (8,286) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $110,591 $ 55,515 $52,436 $(109,913) $ 108,629
======== ======== ======== ========= ==========
23
26
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
------------ -------- ---------- ----------------- ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------
OPERATING REVENUES.............................. $ 17,540 $865,706 $1,244,174 $ (14,062) $2,113,358
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas................................... 9,859 621,000 623,186 (9,932) 1,244,113
Operation and maintenance..................... 1,428 103,032 292,879 (4,130) 393,209
Depreciation, depletion and amortization...... 2,209 68,364 102,268 -- 172,841
Property and other taxes...................... 2,203 12,462 61,591 -- 76,256
-------- -------- ---------- --------- ----------
15,699 804,858 1,079,924 (14,062) 1,886,419
-------- -------- ---------- --------- ----------
OPERATING INCOME................................ 1,841 60,848 164,250 -- 226,939
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 136,327 44,842 1,041 (133,951) 48,259
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 26,934 4,036 4,910 (27,124) 8,756
Interest on long-term debt.................... 434 (31,598) (44,438) 767 (74,835)
Other interest expense........................ (1,722) (27,554) (8,802) 27,158 (10,920)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (25,424) (25,424)
Gains related to DIGP......................... -- 4,796 -- -- 4,796
Minority interest............................. -- (76) (1,410) (1) (1,487)
Other......................................... 366 4,542 (808) (767) 3,333
-------- -------- ---------- --------- ----------
26,012 (45,854) (50,548) (25,391) (95,781)
-------- -------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES...................... 164,180 59,836 114,743 (159,342) 179,417
INCOME TAX PROVISION............................ 2,225 3,150 40,267 -- 45,642
-------- -------- ---------- --------- ----------
NET INCOME...................................... 161,955 56,686 74,476 (159,342) 133,775
DIVIDENDS ON PREFERRED SECURITIES............... 25,424 -- -- (25,424) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK........... $136,531 $ 56,686 $ 74,476 $(133,918) $ 133,775
======== ======== ========== ========= ==========
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------------
OPERATING REVENUES.............................. $ 17,081 $662,941 $1,237,481 $ (12,980) $1,904,523
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas................................... 9,204 509,022 608,392 (9,596) 1,117,022
Operation and maintenance..................... 1,869 71,776 292,381 (3,384) 362,642
Depreciation, depletion and amortization...... 1,871 41,304 96,103 -- 139,278
Property and other taxes...................... 1,580 9,155 60,298 -- 71,033
-------- -------- ---------- --------- ----------
14,524 631,257 1,057,174 (12,980) 1,689,975
-------- -------- ---------- --------- ----------
OPERATING INCOME................................ 2,557 31,684 180,307 -- 214,548
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 152,329 11,322 938 (151,445) 13,144
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 10,880 3,303 3,839 (11,210) 6,812
Interest on long-term debt.................... (33) (22,064) (39,921) (495) (62,513)
Other interest expense........................ (260) (14,238) (7,620) 10,762 (11,356)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (10,683) (10,683)
Gains related to DIGP......................... -- 3,986 -- -- 3,986
Minority interest............................. -- (715) (1,034) 1 (1,748)
Other......................................... (216) 478 (3,084) 943 (1,879)
-------- -------- ---------- --------- ----------
10,371 (29,250) (47,820) (10,682) (77,381)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.................................. 165,257 13,756 133,425 (162,127) 150,311
INCOME TAX PROVISION (BENEFIT).................. 2,011 (11,195) 48,082 (1) 38,897
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS............... 163,246 24,951 85,343 (162,126) 111,414
-------- -------- ---------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations........................ -- 2,520 -- -- 2,520
Gain on sale.................................. -- 36,176 -- -- 36,176
-------- -------- ---------- --------- ----------
-- 38,696 -- -- 38,696
-------- -------- ---------- --------- ----------
NET INCOME...................................... 163,246 63,647 85,343 (162,126) 150,110
DIVIDENDS ON PREFERRED SECURITIES............... 10,612 -- 71 (10,683) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK........... $152,634 $ 63,647 $ 85,272 $(151,443) $ 150,110
======== ======== ========== ========= ==========
24
27
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
------------ ---------- ---------- ----------------- ------------
SEPTEMBER 30, 1997
-------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost................ $ 75,064 $ 28,037 $ 12,148 $ (73,998) $ 41,251
Accounts receivable............................... 8,020 161,255 120,322 (11,004) 278,593
Less -- Allowance for doubtful accounts......... 70 645 16,104 -- 16,819
---------- ---------- ---------- ----------- ----------
Accounts receivable, net.......................... 7,950 160,610 104,218 (11,004) 261,774
Accrued unbilled revenue.......................... 286 -- 21,972 -- 22,258
Gas in inventory.................................. -- 27,564 96,533 -- 124,097
Property taxes assessed applicable to future
periods......................................... 113 729 26,870 -- 27,712
Gas receivable.................................... -- 7,622 -- 7,622
Other............................................. 7,264 2,197 32,375 (263) 41,573
---------- ---------- ---------- ----------- ----------
90,677 226,759 294,116 (85,265) 526,287
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures and
subsidiaries.................................... 1,552,926 418,359 19,229 (1,540,503) 450,011
Deferred swap losses and receivables.............. -- 45,888 -- -- 45,888
Deferred postretirement benefit costs............. 662 -- -- -- 662
Deferred environmental costs...................... 2,534 -- 27,600 -- 30,134
Prepaid benefit costs............................. (3,645) -- 71,345 (1,992) 65,708
Other............................................. 10,397 39,063 55,209 (3,136) 101,533
---------- ---------- ---------- ----------- ----------
1,562,874 503,310 173,383 (1,545,631) 693,936
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost.............. 36,279 1,234,927 2,741,653 -- 4,012,859
Less -- Accumulated depreciation and depletion.... 12,505 133,484 1,303,841 -- 1,449,830
---------- ---------- ---------- ----------- ----------
23,774 1,101,443 1,437,812 -- 2,563,029
---------- ---------- ---------- ----------- ----------
$1,677,325 $1,831,512 $1,905,311 $(1,630,896) $3,783,252
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 4,142 $ 118,352 $ 92,051 $ (11,522) $ 203,023
Notes payable..................................... -- 12,353 140,022 (76,578) 75,797
Current portion of long-term debt and capital
lease obligations............................... 365 1,497 28,099 -- 29,961
Federal income, property and other taxes
payable......................................... 1,628 1,935 40,602 -- 44,165
Customer deposits................................. 18 -- 14,026 1 14,045
Other............................................. 19,046 14,946 56,921 (347) 90,566
---------- ---------- ---------- ----------- ----------
25,199 149,083 371,721 (88,446) 457,557
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................. (2,684) 85,088 79,273 20 161,697
Unamortized investment tax credit................. 309 -- 33,206 (1) 33,514
Tax benefits amortizable to customers............. 206 -- 123,540 -- 123,746
Deferred swap gains and payables.................. -- 42,824 -- -- 42,824
Accrued environmental costs....................... 3,000 -- 32,000 -- 35,000
Minority interest................................. -- 605 16,927 -- 17,532
Other............................................. 11,353 18,916 38,553 (2,011) 66,811
---------- ---------- ---------- ----------- ----------
12,184 147,433 323,499 (1,992) 481,124
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations....................................... -- 594,396 625,999 (1) 1,220,394
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES..... 505,048 -- -- -- 505,048
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock...................................... 782 5 10,300 (10,306) 781
Additional paid-in capital........................ 797,938 776,167 230,399 (1,008,581) 795,923
Retained earnings................................. 358,238 164,428 343,393 (521,570) 344,489
Yield enhancement, contract and issuance costs.... (22,036) -- -- -- (22,036)
Unearned compensation............................. (28) -- -- -- (28)
---------- ---------- ---------- ----------- ----------
1,134,894 940,600 584,092 (1,540,457) 1,119,129
---------- ---------- ---------- ----------- ----------
$1,677,325 $1,831,512 $1,905,311 $(1,630,896) $3,783,252
========== ========== ========== =========== ==========
25
28
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
------------ ---------- ---------- ----------------- ------------
SEPTEMBER 30, 1996
-------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost................ $ -- $ 15,399 $ 18,282 $ 1 $ 33,682
Accounts receivable............................... 5,163 94,528 133,899 (8,521) 225,069
Less -- Allowance for doubtful accounts......... 67 520 14,112 -- 14,699
-------- ---------- ---------- --------- ----------
Accounts receivable, net.......................... 5,096 94,008 119,787 (8,521) 210,370
Accrued unbilled revenue.......................... 232 -- 22,197 -- 22,429
Accrued gas cost recovery revenues................ -- -- 33,585 -- 33,585
Gas in inventory.................................. -- 51,868 101,742 -- 153,610
Property taxes assessed applicable to future
periods......................................... 107 892 23,456 -- 24,455
Gas receivable.................................... -- 12,699 1,987 1 14,687
Other............................................. 1,726 2,588 20,615 (2,198) 22,731
-------- ---------- ---------- --------- ----------
7,161 177,454 341,651 (10,717) 515,549
-------- ---------- ---------- --------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures and
subsidiaries.................................... 925,538 157,711 20,357 (917,160) 186,446
Deferred swap losses and receivables.............. -- 47,364 -- -- 47,364
Deferred postretirement benefit costs............. 706 -- 7,103 -- 7,809
Deferred environmental costs...................... 3,000 -- 28,016 -- 31,016
Prepaid benefit costs............................. -- -- 54,103 (4,942) 49,161
Other............................................. 8,321 37,309 48,660 514 94,804
-------- ---------- ---------- --------- ----------
937,565 242,384 158,239 (921,588) 416,600
-------- ---------- ---------- --------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost.............. 30,404 853,141 2,609,095 -- 3,492,640
Less -- Accumulated depreciation and depletion.... 10,476 67,913 1,221,009 -- 1,299,398
-------- ---------- ---------- --------- ----------
19,928 785,228 1,388,086 -- 2,193,242
-------- ---------- ---------- --------- ----------
$964,654 $1,205,066 $1,887,976 $(932,305) $3,125,391
======== ========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 7,892 $ 114,622 $ 99,223 $ (8,035) $ 213,702
Notes payable..................................... -- 33,080 194,013 -- 227,093
Current portion of long-term debt and capital
lease obligations............................... 55 31,436 53,213 -- 84,704
Federal income, property and other taxes
payable......................................... (3,559) 14,317 33,241 -- 43,999
Customer deposits................................. 18 -- 10,787 -- 10,805
Other............................................. 6,758 34,997 50,885 (2,196) 90,444
-------- ---------- ---------- --------- ----------
11,164 228,452 441,362 (10,231) 670,747
-------- ---------- ---------- --------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................. (1,285) 70,228 83,160 -- 152,103
Unamortized investment tax credit................. 339 -- 35,050 -- 35,389
Tax benefits amortizable to customers............. 182 -- 112,930 -- 113,112
Deferred swap gains and payables.................. -- 41,244 -- -- 41,244
Accrued environmental costs....................... 3,000 -- 32,000 -- 35,000
Minority interest................................. -- 288 18,503 -- 18,791
Other............................................. 28,474 15,862 59,838 (4,942) 99,232
-------- ---------- ---------- --------- ----------
30,710 127,622 341,481 (4,942) 494,871
-------- ---------- ---------- --------- ----------
LONG-TERM DEBT, including capital lease
obligations....................................... 365 502,525 551,254 -- 1,054,144
-------- ---------- ---------- --------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES..... 173,760 -- -- -- 173,760
-------- ---------- ---------- --------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock...................................... 672 5 10,300 (10,305) 672
Additional paid-in capital........................ 471,868 238,721 230,399 (475,212) 465,776
Retained earnings................................. 291,172 107,741 313,180 (431,615) 280,478
Yield enhancement, contract and issuance costs.... (14,524) -- -- -- (14,524)
Unearned compensation............................. (533) -- -- -- (533)
-------- ---------- ---------- --------- ----------
748,655 346,467 553,879 (917,132) 731,869
-------- ---------- ---------- --------- ----------
$964,654 $1,205,066 $1,887,976 $(932,305) $3,125,391
======== ========== ========== ========= ==========
26
29
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
------------ ---------- ---------- ----------------- ------------
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
========== ========== ========== ========= ==========
27
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ --------- --------- ----------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.... $ 84,498 $ 52,087 $ 209,947 $ (61,109) $ 285,423
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net....................... -- (56,247) (125,104) (76,578) (257,929)
Capital contributions received from
(distributions paid to) affiliates,
net.................................... (2,488) 545,546 -- (543,058) --
Common stock dividends paid.............. (52,927) -- (40,000) 40,000 (52,927)
Preferred securities dividends paid...... (21,336) -- -- 21,336 --
Issuance of common stock................. 290,626 -- -- -- 290,626
Issuance of preferred securities......... 326,521 -- -- -- 326,521
Issuance of long-term debt............... -- 149,190 124,051 -- 273,241
Long-term commercial paper, net.......... -- (261,822) -- -- (261,822)
Retirement of long-term debt............. (56) (31,225) (74,792) -- (106,073)
--------- --------- --------- --------- ---------
Net cash provided from (used for)
financing activities................. 540,340 345,442 (115,845) (558,300) 211,637
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures..................... (4,451) (257,530) (97,042) -- (359,023)
Acquisitions............................. -- (128,206) -- -- (128,206)
Investment in joint ventures and
subsidiaries........................... (546,046) (67,156) (776) 546,626 (67,352)
Return of investment in joint ventures... -- 8,939 -- -- 8,939
Sale of E&P property and equipment....... -- 38,604 -- -- 38,604
Other.................................... (121) 16,249 5,854 (1,215) 20,767
--------- --------- --------- --------- ---------
Net cash used for investing
activities........................... (550,618) (389,100) (91,964) 545,411 (486,271)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 74,220 8,429 2,138 (73,998) 10,789
CASH AND CASH EQUIVALENTS, JANUARY 1....... 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.... $ 75,064 $ 28,037 $ 12,148 $ (73,998) $ 41,251
========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.... $ 24,837 $ 72,840 $ 111,297 $ (16,366) $ 192,608
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net....................... -- (15,920) (2,622) -- (18,542)
Capital contributions received from
(distributions paid to) affiliates,
net.................................... (964) 48,516 1,614 (49,166) --
Common stock dividends paid.............. (46,576) -- (7,000) 7,000 (46,576)
Preferred securities dividends paid...... (8,268) -- (54) 8,322 --
Issuance of common stock................. 13,408 -- -- -- 13,408
Issuance of preferred securities......... 77,218 -- -- -- 77,218
Issuance of long-term debt............... -- 328,895 69,645 -- 398,540
Long-term commercial paper, net.......... -- (256,630) -- -- (256,630)
Retirement of long-term debt............. (55) (1,350) (5,435) 1 (6,839)
Other.................................... (6,281) -- -- -- (6,281)
--------- --------- --------- --------- ---------
Net cash provided from financing
activities........................... 28,482 103,511 56,148 (33,843) 154,298
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures..................... (3,823) (251,419) (146,277) 1 (401,518)
Acquisitions............................. -- (78,620) -- -- (78,620)
Sale of Genix............................ -- 137,500 -- -- 137,500
Investment in joint ventures and
subsidiaries........................... (50,130) (10,052) (33) 50,273 (9,942)
Sale of investment in joint ventures..... -- 36,000 -- -- 36,000
Sale of E&P property and equipment....... -- 621 -- -- 621
Other.................................... 466 (5,604) (11,322) (64) (16,524)
--------- --------- --------- --------- ---------
Net cash used for investing
activities........................... (53,487) (171,574) (157,632) 50,210 (332,483)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................... (168) 4,777 9,813 1 14,423
CASH AND CASH EQUIVALENTS, JANUARY 1....... 168 10,622 8,469 -- 19,259
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.... $ -- $ 15,399 $ 18,282 $ 1 $ 33,682
========= ========= ========= ========= =========
28
31
OTHER INFORMATION
CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 6, 1997, MCN Financing V and MCN Financing VI, business trusts
wholly-owned by MCN (the Trusts), respectively issued 100,000 Private
Institutional Trust Securities (PRINTS) and 100,000 Single Point Remarketed
Reset Capital Securities (SPRRCS) (collectively, the Securities). The PRINTS and
SPRRCS were sold to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith
Barney Inc. (Initial Purchasers). The Initial Purchasers agreed that they would
offer to sell the PRINTS and SPRRCS only to persons they believed to be
Qualified Institutional Buyers (as defined in Rule 144A of the Securities Act of
1933). Therefore, the Company and Trusts relied on the exemption from
registration provided by Rule 144A of the Securities Act of 1933. Gross proceeds
for each security were $100,000,000 and the commissions paid to the Initial
Purchasers were $250,000 for the PRINTS and $350,000 for the SPRRCS.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
12-1 Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Interest for MCN Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Interest for MCN Investment Corporation.
27-1 Financial Data Schedule.
(b) Reports on Form 8-K
None
29
32
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: November 7, 1997 By: /s/ Harold Gardner
------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
30
33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
12.1 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Interest for MCN Energy Group Inc.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Interest for MCN Investment
Corporation.
27.1 Financial Data Schedule