1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998, 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 July 31, 1998:
Common Stock, par value $.01 per share: 78,980,441
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1998
PAGE
NUMBER
------
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 32
Item 6. Exhibits and Reports on Form 8-K.................... 33
SIGNATURE................................................... 34
ii
3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results reflect E&P write-downs -- MCN experienced losses in the 1998 quarter,
six- and twelve-month periods of $210.1 million, $129.6 million and $78.1
million, respectively. Results for all 1998 periods were unfavorably affected by
two write-downs totaling $220.4 million, net of taxes, primarily to reflect the
impact of low oil and gas prices on its Exploration & Production (E&P) business
and the under-performance of certain oil and gas investments.
Excluding the write-downs, MCN's earnings increased $1.2 million or 13% for the
1998 second quarter and increased $23.1 million or 19% for the 1998 twelve-month
period, as compared to the corresponding 1997 periods. Earnings for the 1998
six-month period were relatively flat when compared to the prior year. Diluted
per share comparisons were affected by an increase in the average number of
shares outstanding reflecting the June 1997 issuance of 9,775,000 shares of new
common stock.
As discussed in the Diversified Energy and Gas Distribution sections that
follow, earnings (excluding the write-downs) for the 1998 second quarter were
sustained despite the impact of low energy prices and significantly warmer
weather.
QUARTER 6 MONTHS 12 MONTHS
----------------- ------------------ -------------------
1998 1997 1998 1997 1998 1997
------- ---- ------- ----- ------- ------
NET INCOME (LOSS) (in Millions)
Diversified Energy
Before E&P write-downs.............. $ 7.6 $7.9 $ 25.4 $25.8 $ 60.9 $ 44.8
E&P write-downs (Notes 3a and 3b)... (220.4) -- (220.4) -- (220.4) --
------- ---- ------- ----- ------- ------
(212.8) 7.9 (195.0) 25.8 (159.5) 44.8
------- ---- ------- ----- ------- ------
Gas Distribution...................... 2.7 1.2 65.4 65.0 81.4 74.4
------- ---- ------- ----- ------- ------
Total
Before E&P write-downs.............. 10.3 9.1 90.8 90.8 142.3 119.2
E&P write-downs (Notes 3a and 3b)... (220.4) -- (220.4) -- (220.4) --
------- ---- ------- ----- ------- ------
Net Income(Loss)...................... $(210.1) $9.1 $(129.6) $90.8 $ (78.1) $119.2
======= ==== ======= ===== ======= ======
DILUTED EARNINGS (LOSS) PER SHARE
Diversified Energy
Before E&P write-downs.............. $ .10 $.11 $ .33 $ .39 $ .78 $ .67
E&P write-downs (Notes 3a and 3b)... (2.80) -- (2.81) -- (2.82) --
------- ---- ------- ----- ------- ------
(2.70) .11 (2.48) .39 (2.04) .67
------- ---- ------- ----- ------- ------
Gas Distribution...................... .03 .02 .83 .91 1.04 1.07
------- ---- ------- ----- ------- ------
Total
Before E&P write-downs.............. .13 .13 1.16 1.30 1.82 1.74
E&P write-downs (Notes 3a and 3b)... (2.80) -- (2.81) -- (2.82) --
------- ---- ------- ----- ------- ------
Diluted Earnings (Loss) Per Share..... $ (2.67) $.13 $ (1.65) $1.30 $ (1.00) $ 1.74
======= ==== ======= ===== ======= ======
Strategic direction -- MCN's objective is to achieve superior, long-term returns
for its shareholders. MCN has been pursuing an aggressive growth strategy,
investing in a diverse portfolio of domestic and international energy-related
projects. Inherent to this portfolio-management strategy is the frequent review
of internal and external factors affecting the company's investments. Therefore,
the pace of new investments and the disposition of existing assets are subject
to constant change. Reflecting this strategy, a review of the E&P unit during
the 1998 second quarter led to MCN's
1
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
decision to exit the exploration portion of the business and focus on lower-risk
development drilling activities. MCN is reviewing and will continue to review
the overall mix of its existing portfolio and the level of new investments.
DIVERSIFIED ENERGY
Results impacted by write-downs, low energy prices, and higher gas and electric
sales -- The Diversified Energy group reported losses in all three 1998 periods
due to write-downs totaling $220.4 million, net of taxes. The charges reflect
the write-down of certain E&P properties and an investment in an E&P company.
Diversified Energy's earnings for the 1998 quarter and six-month period,
excluding the write-downs, declined slightly from the corresponding 1997
periods. These results reflect the effect of lower oil prices and higher
production-related expenses on operating and joint venture income as well as
higher financing costs. Earnings for the 1998 twelve-month period, excluding the
write-downs, increased by $16.1 million or 36% over the comparable 1997 period.
This increase in the current twelve-month period was driven by higher operating
and joint venture income posted by the Pipelines & Processing and Energy
Marketing, Gas Storage & Electric Power businesses, partially offset by higher
financing costs. Earnings for the 1998 six- and twelve-month periods were also
affected by gains from the strategic sale of certain assets.
QUARTER 6 MONTHS 12 MONTHS
------------------- ------------------- --------------------
1998 1997 1998 1997 1998 1997
------- ------ ------- ------ -------- ------
DIVERSIFIED ENERGY OPERATIONS (in
Millions)
Operating Revenues*..................... $ 233.2 $177.1 $ 505.1 $437.3 $1,019.1 $782.7
------- ------ ------- ------ -------- ------
Operating Expenses*
Write-down of E&P properties (Note
3a)................................ 333.0 -- 333.0 -- 333.0 --
Other................................. 223.1 164.4 487.4 407.4 971.7 726.7
------- ------ ------- ------ -------- ------
556.1 164.4 820.4 407.4 1,304.7 726.7
------- ------ ------- ------ -------- ------
Operating Income (Loss)................. (322.9) 12.7 (315.3) 29.9 (285.6) 56.0
------- ------ ------- ------ -------- ------
Equity in Earnings of Joint Ventures.... 11.8 9.4 28.2 22.9 58.3 31.2
------- ------ ------- ------ -------- ------
Other Income & (Deductions)*
Interest income....................... 1.1 1.0 4.4 2.0 9.1 3.2
Interest expense...................... (11.8) (9.5) (21.7) (19.6) (34.3) (32.9)
Dividends on preferred securities of
subsidiaries....................... (9.2) (7.4) (19.0) (11.6) (38.5) (19.3)
Loss on E&P investment (Note 3b)...... (6.1) -- (6.1) -- (6.1) --
Other................................. .3 (.1) 13.0 2.7 20.6 5.5
------- ------ ------- ------ -------- ------
(25.7) (16.0) (29.4) (26.5) (49.2) (43.5)
------- ------ ------- ------ -------- ------
Income (Loss) Before Income Taxes....... (336.8) 6.1 (316.5) 26.3 (276.5) 43.7
------- ------ ------- ------ -------- ------
Income Taxes
Current and deferred provision
(benefit).......................... (119.5) 2.3 (113.0) 8.7 (98.9) 15.1
Federal tax credits................... (4.5) (4.1) (8.5) (8.2) (18.1) (16.2)
------- ------ ------- ------ -------- ------
(124.0) (1.8) (121.5) .5 (117.0) (1.1)
------- ------ ------- ------ -------- ------
Net Income (Loss)
Before E&P write-downs................ 7.6 7.9 25.4 25.8 60.9 44.8
Write-down of E&P properties and
investment (Notes 3a and 3b)....... (220.4) -- (220.4) -- (220.4) --
------- ------ ------- ------ -------- ------
Net Income (Loss)....................... $(212.8) $ 7.9 $(195.0) $ 25.8 $ (159.5) $ 44.8
======= ====== ======= ====== ======== ======
*Includes intercompany transactions.
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1998 quarter and six-month period,
excluding the write-down, declined by $.2 million and $6.9 million,
respectively. Operating and joint venture income for the 1998 twelve-month
period increased by $18.5 million over the comparable 1997 period. These results
reflect the continued growth within the Energy Marketing, Gas Storage & Electric
Power business and reduced contributions from the E&P business. The 1998 six-
and twelve-month periods were also impacted by increased income from the
Pipelines & Processing business. Additionally, all 1998 periods were affected by
increased Corporate & Other expenses.
QUARTER 6 MONTHS 12 MONTHS
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
------- ----- ------- ----- ------- -----
OPERATING AND JOINT VENTURE INCOME (LOSS)
(in Millions)
Exploration & Production
Before write-down of E&P properties.... $ 8.2 $12.9 $ 16.9 $31.0 $ 44.0 $51.0
Write-down of E&P properties (Note
3a)................................. (333.0) -- (333.0) -- (333.0) --
------- ----- ------- ----- ------- -----
(324.8) 12.9 (316.1) 31.0 (289.0) 51.0
Pipelines & Processing................... 6.1 6.1 15.6 13.3 31.4 19.7
Energy Marketing, Gas Storage & Electric
Power.................................. 10.5 3.7 19.1 10.7 38.1 20.0
Corporate & Other........................ (2.9) (.6) (5.7) (2.2) (7.8) (3.5)
------- ----- ------- ----- ------- -----
Total
Before write-down of E&P properties.... 21.9 22.1 45.9 52.8 105.7 87.2
Write-down of E&P properties (Note
3a)................................. (333.0) -- (333.0) -- (333.0) --
------- ----- ------- ----- ------- -----
$(311.1) $22.1 $(287.1) $52.8 $(227.3) $87.2
======= ===== ======= ===== ======= =====
EXPLORATION & PRODUCTION operating and joint venture results reflect a $333.0
million pre-tax write-down in the 1998 second quarter. The E&P business
recognized the write-down of its gas and oil properties under the full cost
method of accounting to reflect lower gas and oil prices and the under-
performance of certain exploration properties. Under the full cost method of
accounting prescribed by the Securities and Exchange Commission, E&P's
capitalized exploration and production costs at June 30, 1998 exceeded the full
cost "ceiling," resulting in the excess being written off to income. The ceiling
is the sum of discounted future net cash flows from the production of proved gas
and oil reserves and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects. Future net cash flows are
required to be estimated based on end-of-quarter prices and costs, unless
contractual arrangements exist, even if any price decline is temporary. A
significant portion of the write-down is due to lower-than-expected exploratory
drilling results in the Midcontinent/Gulf Coast region. MCN is refocusing its
E&P strategy and will exit the higher-risk exploratory part of the E&P business
while continuing to invest in lower-risk projects such as Antrim shale, coalbed
methane, tight gas sands, and conventional development and exploitation
drilling.
Excluding the write-down, operating and joint venture income for the 1998
quarter, six- and twelve-month periods decreased by $4.7 million, $14.1 million
and $7.0 million, respectively. These results reflect a plunge in oil prices,
increased production-related expenses, and gains recorded in 1997 from the
strategic sale of certain E&P properties. Earnings for the 1998 periods were
impacted by a slight
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
increase in the average gas sales price per thousand cubic feet (Mcf), and a
sharp decline in the average oil sales price. Oil prices declined by $4.64 per
barrel (Bbl) or 27% in the 1998 quarter, $4.90 per Bbl or 27% in the current
six-month period and $4.40 per Bbl or 23% in the current twelve-month period.
The impact of fluctuations in natural gas and oil sales prices on E&P operating
and joint venture income was mitigated by hedging with swap and futures
agreements, as discussed in the "Risk Management Strategy" section that follows.
QUARTER 6 MONTHS 12 MONTHS
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf)...................... 20.6 19.5 41.1 38.2 81.1 69.7
Oil Production (million Bbl).............. .8 .8 1.6 1.3 3.7 2.0
Gas and Oil Production (Bcf equivalent)... 25.2 24.0 50.9 46.0 103.1 81.9
Average Gas Selling Price (per Mcf)....... $ 2.07 $ 1.93 $ 2.09 $ 2.31 $ 2.23 $ 2.31
Effect of Hedging (per Mcf)............... (.07) (.04) (.06) (.34) (.25) (.36)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per
Mcf).................................... $ 2.00 $ 1.89 $ 2.03 $ 1.97 $ 1.98 $ 1.95
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl)......... $10.49 $17.54 $11.83 $18.99 $14.07 $19.57
Effect of Hedging (per Bbl)............... 2.34 (.07) 1.34 (.92) .73 (.37)
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per
Bbl).................................... $12.83 $17.47 $13.17 $18.07 $14.80 $19.20
====== ====== ====== ====== ====== ======
E&P operating and joint venture income for all 1998 periods reflects higher
production-related expenses which in total increased per Mcf equivalent by $.23,
$.21 and $.11 for the 1998 quarter, six- and twelve-month periods, respectively.
Additionally, earnings comparisons for the six- and twelve-month periods were
affected by a $4.7 million pre-tax gain that was recorded in the first quarter
of 1997 from the sale of undeveloped properties.
Partially offsetting the reduced 1998 results were contributions from increases
in gas and oil production due to the acquisition and development of properties
over the past several years. Overall gas and oil production increased by 1.2
billion cubic feet (Bcf) equivalent, 4.9 Bcf equivalent and 21.2 Bcf equivalent
in the current quarter, six- and twelve-month periods, respectively. Also
impacting the earnings comparisons was the sale of proved producing properties
during mid-1997, which tempered the increase in gas and oil production during
1998.
PIPELINES & PROCESSING operating and joint venture income was flat at $6.1
million for the 1998 quarter, but increased $2.3 million and $11.7 million for
the 1998 six- and twelve-month periods, respectively. The 1998 quarter was
impacted by earnings from an increase in transportation volumes due to new gas
gathering ventures and the expansion of existing pipeline projects in 1997 which
was offset by lower earnings from the 50%-owned methanol production business.
Results for the 1998 six- and twelve-month periods also reflect a significant
increase in transportation volumes resulting from the acquisition and expansion
of various pipeline facilities. Volumes transported during the 1998 quarter
increased by 12.9 Bcf or 44%, and increased for the 1998 six- and twelve-month
periods by 35.9 Bcf or 74% and 57.4 Bcf or 61%, respectively. Pipelines &
Processing results for the 1998 six- and twelve-month periods also reflect
contributions from the methanol production business, which was acquired in
December 1996. Earnings from the methanol production business benefited from
strong methanol prices during 1997, but average prices declined 45% for the 1998
4
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
quarter, 34% for the 1998 six-month period and 14% for the 1998 twelve-month
period. Although methanol prices have declined, Pipelines & Processing
contributions from the methanol business for the current twelve-month period
have increased because they include a full twelve months of operations.
Pipelines & Processing results for the 1998 quarter and twelve-month period were
also impacted by a decline in the level of volumes treated through gas
processing plants. Although gas processing volumes declined, earnings were not
significantly affected because gas processing services have low profit margins.
QUARTER 6 MONTHS 12 MONTHS
-------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
----- ----- ------- ----- ------- -----
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)............................ 11.2 13.4 23.5 23.2 43.1 48.7
Methanol Produced (million gallons)............ 14.8 14.6 30.3 29.9 61.2 40.4
Transportation (Bcf)........................... 42.3 29.4 84.2 48.3 151.8 94.4
* Includes MCN's share of joint ventures
ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER operating and joint venture
income for the 1998 quarter, six- and twelve-month periods increased by $6.8
million, $8.4 million and $18.1 million, respectively. The increase in earnings
for all 1998 periods reflects contributions from the second quarter 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. MCN acquired an additional 5% interest in MCV during June
1998. Also contributing to the favorable 1998 results were higher earnings from
MCN's 50%-owned, 123 MW Michigan Power cogeneration facility and contributions
from the March 1997 acquisition of a 40% interest in an Indian joint venture.
Improved earnings from the Michigan Power facility are due to a higher
electricity sales rate under its long-term sales contract. The Indian joint
venture holds minority interests in electric distribution companies and power
generation facilities in the state of Gujarat, India. As a result of these
investments, Electric Power earnings reflect a significantly higher level of
electricity sales.
QUARTER 6 MONTHS 12 MONTHS
------------- --------------- ---------------
1998 1997 1998 1997 1998 1997
----- ----- ------- ----- ------- -----
ENERGY MARKETING STATISTICS (BCF)*
Gas Sales...................................... 103.3 72.4 218.5 160.6 401.7 266.0
Exchange Deliveries............................ .2 1.3 6.8 10.0 11.9 18.3
----- ----- ------- ----- ------- -----
103.5 73.7 225.3 170.6 413.6 284.3
===== ===== ======= ===== ======= =====
Electricity Sales (thousands of megawatt
hours)....................................... 879.9 395.3 1,741.6 575.8 3,009.1 933.2
===== ===== ======= ===== ======= =====
* Includes MCN's share of joint ventures
Energy Marketing's operating results also reflect an increase in total gas sales
and exchange deliveries of 40%, 32% and 46% during the 1998 quarter, six-and
twelve-month periods, respectively. The increase in Energy Marketing's gas sales
volumes resulted from the expansion of its market base in the Midwest and
Northeast United States and Eastern Canada. Additionally, Energy Marketing's
share of joint venture gas sales volumes also increased, reflecting growth of
its markets in the Great Lakes and Gulf Coast regions.
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its
portfolio of gas and oil supply and sales agreements. MCN has hedged a
significant portion of its gas production not covered by long-term, fixed-price
sales obligations. MCN's Energy Marketing business coordinates all of MCN's
hedging activities to ensure compliance with risk management policies that are
periodically reviewed by MCN's Board of Directors. Certain hedging gains or
losses related to gas and oil production are recorded by MCN's E&P operations.
Gains and losses on gas and oil production-related hedging transactions that are
not recorded by MCN's E&P group are recorded by Energy Marketing.
CORPORATE & OTHER operating and joint venture losses are due mainly to the
increased proportion of administrative expenses associated with corporate
management activities charged to Diversified Energy reflecting its growing
percentage of MCN's business.
OTHER INCOME AND DEDUCTIONS
The 1998 periods reflect higher dividends resulting from the issuance of $132
million of preferred securities in March 1997 and $200 million of preferred
securities in June 1997. The 1998 periods also reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, MCN recognized a $6.1 million pre-tax loss from the
write-down of an investment in the common stock of an E&P company. The loss is
due to a decline in the fair value of the securities which is not considered
temporary (Note 3b).
Partially offsetting the higher dividends and interest costs for the 1998
six-and twelve-month periods was increased interest income resulting from a $46
million advance made to a Philippine independent power producer (Note 2a). Other
income and deductions comparisons for the 1998 six-and twelve-month periods were
affected by $9.9 million of pre-tax gains recorded in the 1998 first quarter
from the sale of certain gas sales contracts and a 50% interest in the 30 MW Ada
cogeneration facility. The 1998 twelve-month period also reflects a $3.2 million
pre-tax gain from the December 1997 sale of Diversified Energy's 25% interest in
the 46 Bcf Blue Lake storage project. Other income and deductions for the 1998
and 1997 twelve-month periods were affected by pre-tax gains of $2.4 million and
$2.9 million, respectively, related to Dauphin Island Gathering Partners (DIGP).
In a series of transactions during 1996, MCN sold interests in the DIGP
partnership generating gains, of which a portion was deferred until the third
quarter of 1997 when a related option agreement expired unexercised (Note 2c).
INCOME TAXES
The variations in the current and deferred income tax provision for the 1998
periods reflect fluctuations in pre-tax results. Also impacting income taxes is
an increase in the level of gas production tax credits generated from E&P
projects.
OUTLOOK
MCN intends to continue the growth of its business by investing in
energy-related projects that generate attractive returns. However, MCN has
slowed its 1998 E&P drilling program as a result of lower oil prices and
lower-than-expected exploratory drilling results in the Midcontinent/Gulf Coast
region. Additionally, MCN will strategically exit the higher-risk exploration
part of the E&P business.
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN formed partnerships
in 1997 to construct six plants to produce coal briquettes from waste particles
of coal. The economic viability of the coal fines venture is dependent upon
qualifying for synthetic fuel tax credits. In June 1998, MCN placed all six coal
fines plants into operation. The success of MCN's Pipelines & Processing
business will depend in part on an expected increase in production of coal
briquettes from its coal fines venture.
MCN will focus on expanding its Energy Marketing coverage within existing
markets as well as entering new markets through strategic alliances with other
energy providers. MCN intends to expand its Electric Power business, including
in international markets where MCN is currently negotiating investments in
several projects. In addition, MCN will continue to pursue opportunities to sell
properties in order to optimize its portfolio.
MCN has minority interests in electric distribution companies and power
generation facilities and is pursuing the development of several other projects
in India. The United States and several other countries have imposed economic
sanctions on India as a result of its nuclear testing program. MCN has evaluated
the impact of such sanctions and does not expect them to have a material adverse
effect on its financial statements.
7
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
Results reflect warmer weather and cost-saving initiatives -- The Gas
Distribution group reported an increase in earnings of $1.5 million for the 1998
quarter, and an increase of $.4 million and $7.0 million for the 1998 six- and
twelve-month periods, respectively. Earnings reflect significantly lower
operating expenses as well as the continued growth in revenues from intermediate
transportation services. These improvements more than offset lower gross margins
resulting from reduced gas sales and end user transportation deliveries which
were caused by warmer weather.
QUARTER 6 MONTHS 12 MONTHS
------------------ ---------------------- ----------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
GAS DISTRIBUTION OPERATIONS (in
Millions)
Operating Revenues*
Gas sales..................... $126.0 $168.3 $ 499.0 $ 649.9 $ 929.1 $1,079.5
End user transportation....... 18.3 19.4 43.3 45.4 82.7 82.7
Intermediate transportation... 15.9 13.3 33.8 28.1 60.9 53.9
Other......................... 15.1 12.0 34.6 23.9 61.9 43.6
------ ------ -------- -------- -------- --------
175.3 213.0 610.7 747.3 1,134.6 1,259.7
Cost of Gas..................... 58.8 84.7 279.5 391.7 529.8 634.3
------ ------ -------- -------- -------- --------
Gross Margin.................... 116.5 128.3 331.2 355.6 604.8 625.4
------ ------ -------- -------- -------- --------
Other Operating Expenses*
Operation and maintenance..... 62.8 70.6 125.9 145.8 266.8 302.0
Depreciation, depletion and
amortization............... 23.6 26.6 46.3 52.3 98.4 101.6
Property and other taxes...... 14.1 16.2 31.6 34.1 58.8 62.6
------ ------ -------- -------- -------- --------
100.5 113.4 203.8 232.2 424.0 466.2
------ ------ -------- -------- -------- --------
Operating Income................ 16.0 14.9 127.4 123.4 180.8 159.2
------ ------ -------- -------- -------- --------
Equity in Earnings of Joint
Ventures...................... (.1) .9 .4 1.9 1.0 2.6
------ ------ -------- -------- -------- --------
Other Income and (Deductions)*
Interest income............... 1.0 1.3 2.0 2.5 4.2 5.3
Interest expense.............. (12.6) (13.8) (28.0) (28.0) (55.0) (53.1)
Minority interest............. (.5) (.6) (1.2) (.9) (2.2) (1.2)
Other......................... .6 (.1) .7 .5 1.2 (1.0)
------ ------ -------- -------- -------- --------
(11.5) (13.2) (26.5) (25.9) (51.8) (50.0)
------ ------ -------- -------- -------- --------
Income Before Income Taxes...... 4.4 2.6 101.3 99.4 130.0 111.8
Income Taxes.................... 1.7 1.4 35.9 34.4 48.6 37.4
------ ------ -------- -------- -------- --------
Net Income...................... $ 2.7 $ 1.2 $ 65.4 $ 65.0 $ 81.4 $ 74.4
====== ====== ======== ======== ======== ========
* Includes intercompany transactions
8
11
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) decreased
$11.8 million, $24.4 million and $20.6 million for the 1998 quarter, six- and
twelve-month periods, respectively, reflecting lower gas sales and end user
transportation deliveries caused by significantly warmer weather. These declines
were partially offset by increased revenues from the continued growth in
intermediate transportation and other gas-related services.
QUARTER 6 MONTHS 12 MONTHS
--------------- -------------- --------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percentage Colder (Warmer) Than
Normal................................ (24.8)% 21.9% (20.1)% 1.9% (12.9)% 2.0%
Increase (Decrease) From Normal in:
Gas markets (in Bcf).................. (6.1) 4.6 (25.3) 1.5 (26.2) 3.8
Net income (in Millions).............. $ (5.3) $ 4.1 $(22.0) $1.3 $(22.8) $3.4
Diluted Earnings per share............ $ (.07) $ .06 $ (.28) $.02 $ (.29) $.05
GAS SALES AND END USER TRANSPORTATION revenues in total decreased by $43.4
million, $153.0 million and $150.4 million in the 1998 quarter, six- and
twelve-month periods, respectively. Revenues were affected by lower gas sales
and end user transportation deliveries due to considerably warmer weather in all
1998 periods as compared to the 1997 periods. Weather for the 1998 quarter was
over 40% warmer than the equivalent 1997 period. Partially offsetting the
decrease in the 1998 quarter was an increase in the gas sales rates required to
recover higher gas costs. The decreases in the 1998 six- and twelve-month
periods reflect lower gas sales rates required to recover gas costs. Although
end user transportation deliveries declined in the 1998 twelve-month period,
revenues remained unchanged in such period because of a slight increase in the
average transportation rate.
QUARTER 6 MONTHS 12 MONTHS
-------------- -------------- --------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................. 24.7 35.3 104.7 129.9 183.9 212.7
End User Transportation................... 31.1 32.7 73.6 77.1 141.5 144.5
----- ----- ----- ----- ----- -----
55.8 68.0 178.3 207.0 325.4 357.2
Intermediate Transportation*.............. 148.4 141.6 296.8 282.2 601.2 551.4
----- ----- ----- ----- ----- -----
204.2 209.6 475.1 489.2 926.6 908.6
===== ===== ===== ===== ===== =====
*Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues increased by $2.6 million, $5.7 million and
$7.0 million in the 1998 quarter, six- and twelve-month periods, respectively,
due to increased deliveries and increased fees generated from the transfer of
gas title among and between intermediate transportation service users and
various gas owners. The increase in intermediate transportation deliveries for
all three periods reflects additional Antrim gas volumes transported for
Michigan gas producers and brokers.
9
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In December 1997, MichCon purchased a pipeline to expand the transportation
capacity of its northern Michigan gathering system. This expansion made possible
an increase of 16.6 Bcf in volumes transported through June 1998. Although
intermediate transportation volumes have increased significantly, profit margins
on this service are considerably less than margins on gas sales or end user
transportation services.
OTHER OPERATING REVENUES increased in all 1998 periods due in part to an
increase in gas-related services. Also affecting the comparisons are unfavorable
adjustments for energy conservation revenues in the 1997 periods resulting from
the discontinuance of MichCon's energy conservation programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of purchased gas
as well as related transportation costs. Under the existing Gas Cost Recovery
(GCR) mechanism, MichCon's sales rates are set to recover all of its reasonably
and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold
had little effect on gross margins.
Cost of gas sold decreased in all 1998 periods due primarily to lower gas sales
volumes resulting from warmer weather. The decrease in the current quarter was
partially offset by higher market prices paid of $.19 or 8% per Mcf sold.
Additionally, cost of gas sold decreased in the 1998 six- and twelve-month
periods due to reductions in market prices paid of $.30 or 10% and $.06 or 2%
per Mcf of gas sold, respectively.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses decreased for all 1998 periods, reflecting
lower uncollectible gas accounts expense and lower benefit costs, primarily
pension and retiree healthcare costs. MichCon implemented an early retirement
program in the first quarter of 1998 that reduced its net workforce by
approximately 150 employees or 5%. The cost of the program and the related
savings will not have a material impact on 1998 net income. However, it is
expected that the results of the program will contribute to lower operating
costs in future years.
As discussed in MCN's 1997 Annual Report on Form 10-K, MichCon receives a
significant amount of its heating assistance funding through Michigan Home
Heating Credits, which are funded almost exclusively by the federal Low Income
Home Energy Assistance Program (LIHEAP). While Congress increased LIHEAP funding
to $1.1 billion for the fiscal year ending September 30, 1998, the U.S. House of
Representatives' Appropriations Committee voted in July 1998 to eliminate
funding for the program for the 1999 fiscal year which begins October 1, 1998.
The full House is expected to consider the Labor - Health & Human Services -
Education funding bill in the third quarter of 1998. In contrast to the House
Appropriations Committee, the U.S. Senate Labor and Human Resources Committee
unanimously voted to reauthorize LIHEAP funding through 2004 at a level of $2.0
billion annually. In recent years, proposed reductions to LIHEAP funding have
been repeatedly defeated. MichCon is working with legislators and others to
maintain the funding and is optimistic that it will ultimately be continued. If
funding levels are significantly reduced, MichCon will take steps to minimize
the impact on its customers and its earnings. A portion of any future decreases
or increases in funding may impact MichCon's uncollectible gas accounts expense.
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DEPRECIATION AND DEPLETION decreased by $3.0 million, $6.0 million and $3.2
million in the 1998 quarter, six- and twelve-month periods, respectively,
resulting from lower depreciation rates for MichCon's utility property, plant
and equipment that became effective January 1, 1998. Depreciation on higher
plant balances partially offset the effect of lower rates.
PROPERTY AND OTHER TAXES decreased in the 1998 periods reflecting lower property
taxes based on MichCon's pending appeals of its personal property tax
assessments as discussed in MCN's 1997 Annual Report on Form 10-K. The decrease
in the 1998 twelve-month period was partially offset by higher Michigan single
business taxes.
OTHER INCOME AND DEDUCTIONS decreased in the 1998 quarter due primarily to an
increase in the allowance for funds used during construction and a gain recorded
from the sale of land. The increase in the 1998 twelve-month period is due
primarily to additional interest expense on long-term debt required to finance
capital investments.
INCOME TAXES
The increase in income taxes for all 1998 periods results from higher pre-tax
earnings. Income tax comparisons for the six- and twelve-month periods were also
affected by a 1998 provision for tax issues, and by amounts recorded in the 1997
periods for the favorable resolution of prior years' tax issues and tax credits.
OUTLOOK
Gas Distribution's strategy is to aggressively expand its role as the preferred
provider of natural gas and high-value energy services within Michigan.
Accordingly, Gas Distribution's objectives are to increase revenues and reduce
its costs in order to maintain strong returns and provide customers with
high-quality service at competitive prices.
Gas Distribution plans to capitalize on opportunities resulting from the gas
industry restructuring by implementing MichCon's Regulatory Reform Plan which
was approved by the Michigan Public Service Commission (MPSC) in April 1998. The
plan includes a comprehensive experimental three-year customer choice program
that is designed to offer expanded availability and transportation options to
all sales customers, subject to annual caps on the level of participation.
Beginning April 1, 1999, customers will have the option of purchasing natural
gas from suppliers other than MichCon. However, MichCon will continue to
transport and deliver the gas to the customers' premises at prices that maintain
its existing sales margins.
The plan also suspends the GCR mechanism for customers who continue to purchase
gas from MichCon and fixes the gas cost component of MichCon's sales rates for
the three-year period beginning on January 1, 1999. Currently MichCon does not
generate earnings on the gas supply portion of its operations; however, under
this plan, changes in cost of gas will directly impact gross margins and
earnings. As part of its gas acquisition strategy, MichCon will implement steps
to mitigate risks from price and volume fluctuations.
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Also beginning in 1999, an income sharing mechanism will allow customers to
share in profits when actual utility return on equity exceeds predetermined
thresholds. Although the Regulatory Reform Plan increases MichCon's risk
associated with generating margins that cover its gas costs, management believes
this program will have a favorable impact on future earnings. Various interested
parties have requested a rehearing of the plan before the MPSC, or its review in
the courts. However, management believes the order will be upheld.
CAPITAL RESOURCES AND LIQUIDITY
SIX MONTHS
ENDED JUNE 30,
-----------------
1998 1997
------- ----
CASH AND CASH EQUIVALENTS (in Millions)
Cash Flow Provided From (Used For):
Operating activities...................................... $ 275.2 $ 325.0
Financing activities...................................... 62.1 156.3
Investing activities...................................... (295.8) (361.7)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 41.5 $ 119.6
======= =======
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $49.8 million during the
1998 six-month period as compared to the same 1997 period. The decrease was due
primarily to an increase in working capital requirements.
FINANCING ACTIVITIES
MCN's cash flow from financing activities decreased $94.2 million during the
1998 six-month period as compared to the same 1997 period. The decrease reflects
the issuance of more debt and equity securities, net of retirements, in the 1997
period than in 1998. A summary of MCN's significant financing activities and
financing plans during 1998 follows.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. MCN anticipates that
during 1998 the issuance of new shares of common stock pursuant to these plans
will generate approximately $20 million. During the first six months of 1998,
issuances under these plans generated proceeds of $10.4 million.
During June 1998, MCN retired early the $100 million of 6.31% Private
Institutional Trust Securities because it determined other forms of financing
provide greater flexibility. Management anticipates the issuance of $100 million
of preferred securities in the third quarter of 1998.
DIVERSIFIED ENERGY
In March 1998, Diversified Energy issued MandatOry Par Put Remarketed
Securities(SM) (MOPPRS(SM)) generating net proceeds of $204.6 million. In April
1998, Diversified Energy also issued REset Put Securities (REPS(SM)) generating
net proceeds of $101.1 million (Note 5a). Proceeds from these issuances were
used to reduce short-term debt incurred by the Diversified Energy group to fund
capital investments and for general corporate purposes.
12
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During April 1998, MCNIC Oil & Gas Company, a subsidiary of MCNIC, retired early
a $100 million five-year term loan because it determined that other forms of
debt financing provide greater flexibility and lower costs.
In July 1998, MCNIC renewed its credit lines, which now allow for borrowings of
up to $200 million under a 364-day revolving credit facility and up to $200
million under a three-year revolving credit facility. 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 six months of 1998, MCNIC issued
$185.1 million of commercial paper, leaving a balance of $332.4 million
outstanding as of June 30, 1998 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. In July 1998, MichCon renewed its credit lines
that allow for borrowings of up to $150 million under a 364-day revolving credit
facility and up to $150 million under a three-year revolving credit facility.
During the first six months of 1998, MichCon repaid $239.2 million of commercial
paper, leaving no borrowings outstanding under this program at June 30, 1998.
In June 1998, MichCon issued Extendable MOPPRS(SM) and Resetable MAndatory
Putable/ remarketable Securities (MAPS(SM)) generating net proceeds of $153.1
million (Note 5a). Proceeds from these issuances were used to retire first
mortgage bonds, fund capital expenditures and for general corporate purposes.
During the 1998 quarter, MichCon redeemed through a tender offer $89.7 million
of long-term debt (Note 5b), and repaid $20 million of first mortgage bonds on
its stated maturity date.
INVESTING ACTIVITIES
MCN's cash used for investing activities decreased by $65.9 million in the 1998
six-month period as compared to the same 1997 period. The decrease was due
primarily to the strategic sale of E&P properties, joint venture interests and
gas production tax credits. Additionally, more acquisitions occurred during 1997
as compared to 1998.
13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital investments equaled $443.7 million in the 1998 six-month period compared
to $426.9 million for the same period in 1997. The 1998 investments include
significantly higher levels of investments in Pipelines & Processing properties,
as well as increased investments in domestic and international power generation
projects.
6 MONTHS
----------------
1998 1997
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $202.5 $173.9
Gas Distribution.......................................... 75.2 59.1
------ ------
277.7 233.0
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 94.3 42.8
Energy Marketing, Gas Storage & Electric Power............ 11.9 2.4
Other..................................................... .5 1.6
------ ------
106.7 46.8
------ ------
Acquisitions*............................................... 59.3 147.1
------ ------
Total Capital Investments................................... $443.7 $426.9
====== ======
*Includes MCN's share of GTEC debt existing at the date of acquisition (Note 2b)
During the 1998 six-month period, MCN received repayment of a $46 million
advance made to a Philippine power producer (Note 2a).
Also in the current six-month period, MCN invested a total of $96.6 million in
several Pipelines & Processing and Electric Power ventures. During 1998, MCN
received $71.7 million from the sale of certain E&P properties and a 50%
interest in the Ada Cogeneration Limited Partnership, as well as from the
monetization of gas production tax credits.
OUTLOOK
1998 capital investments budget reduced -- MCN's strategic direction is to grow
by investing in a portfolio of energy-related projects. However, as a result of
MCN's refocused strategy to exit the exploration part of the E&P business,
management has reduced its 1998 capital investments budget to approximately $900
million. For 1998, MCN anticipates investing approximately $200 million in Gas
Distribution and the remaining balance in Diversified Energy.
The proposed level of investment for 1998 increases capital requirements
materially in excess of internally generated funds and requires the issuance of
additional debt and equity securities. MCN's actual capital requirements and
general market conditions will dictate the timing and amount of future
issuances. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
14
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
NEW ACCOUNTING PRONOUNCEMENTS
COMPUTER SOFTWARE -- In March 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of
internal-use software and specifically identifies which costs should be
capitalized and which costs should be expensed. The statement is effective for
fiscal years beginning after December 15, 1998. Management does not expect the
SOP to have a material impact on MCN's financial statements.
START-UP ACTIVITIES -- In April 1998, the AcSEC issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." SOP 98-5 requires start-up and organizational
costs to be expensed as incurred and is effective for fiscal years beginning
after December 15, 1998. Management is currently evaluating the effects of
adopting this statement.
DERIVATIVE AND HEDGING ACTIVITIES -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 1999. SFAS No. 133 requires all
derivatives to be recognized in the balance sheet as either assets or
liabilities measured at their fair value and sets forth conditions in which a
derivative instrument may be designated as a hedge. The Statement requires that
changes in the fair value of derivatives be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to be recorded to other
comprehensive income or to offset related results on the hedged item in
earnings.
MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Accordingly, management cannot quantify the effects of
adopting SFAS No. 133.
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 risk and uncertainties as set forth in MCN's 1997
Annual Report on Form 10-K.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and other
interested parties: the Annual Report; the Form 10-K Annual Report; the Form
10-Q Quarterly Reports and the Annual and Quarterly Statistical Supplements. To
request these publications, shareholders and other interested parties are
instructed to contact: MCN Investor Relations, 500 Griswold Street, Detroit,
Michigan 48226, (800) 548-4655. Information is also available on MCN's website
at http://www.mcnenergy.com.
15
18
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
------------------------ ------------
1998 1997 1997
(in Thousands) ---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 80,999 $ 150,084 $ 39,495
Accounts receivable, less allowance for doubtful accounts
of $14,682, $24,186 and $15,711, respectively........... 318,620 286,364 404,448
Accrued unbilled revenues................................. 15,725 16,369 93,010
Gas in inventory (Note 7)................................. 114,071 62,896 56,777
Property taxes assessed applicable to future periods...... 44,526 39,228 67,879
Accrued gas cost recovery revenues........................ -- 14,072 12,862
Other..................................................... 76,972 53,082 54,089
---------- ---------- ----------
650,913 622,095 728,560
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities (Notes 2a and
3b)..................................................... 48,967 34,161 97,521
Deferred swap losses and receivables (Note 8)............. 63,123 47,071 51,023
Deferred postretirement benefit costs..................... 630 2,559 651
Deferred environmental costs.............................. 30,468 30,680 30,234
Prepaid benefit costs..................................... 88,081 59,223 80,242
Other..................................................... 91,037 73,557 85,530
---------- ---------- ----------
322,306 247,251 345,201
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing.................................... 429,846 215,122 323,597
Energy Marketing, Gas Storage & Electric Power............ 239,521 167,544 205,286
Gas Distribution.......................................... 8,822 8,069 8,841
Other..................................................... 19,029 19,702 19,252
---------- ---------- ----------
697,218 410,437 556,976
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Exploration & Production (Note 3a)........................ 1,066,673 1,144,628 1,299,301
Pipelines & Processing.................................... 112,138 28,618 47,037
Gas Distribution.......................................... 2,867,494 2,729,303 2,813,434
Other..................................................... 32,875 20,307 27,002
---------- ---------- ----------
4,079,180 3,922,856 4,186,774
Less -- Accumulated depreciation and depletion.............. 1,562,383 1,409,089 1,488,050
---------- ---------- ----------
2,516,797 2,513,767 2,698,724
---------- ---------- ----------
$4,187,234 $3,793,550 $4,329,461
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
16
19
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
------------------------ ------------
1998 1997 1997
(in Thousands) ---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 298,912 $ 199,422 $ 326,756
Notes payable............................................. 149,697 2,452 401,726
Current portion of long-term debt and capital lease
obligations............................................. 269,690 30,429 36,878
Gas inventory equalization (Note 7)....................... 15,490 66,679 --
Federal income, property and other taxes payable.......... 86,496 66,948 91,712
Deferred gas cost recovery revenues....................... 29,139 -- --
Gas payable............................................... 40,277 3,053 8,317
Customer deposits......................................... 14,924 12,005 16,382
Other..................................................... 67,107 75,555 101,630
---------- ---------- ----------
971,732 456,543 983,401
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................... 43,176 177,412 153,159
Unamortized investment tax credit......................... 32,109 33,982 33,046
Tax benefits amortizable to customers..................... 123,444 115,634 123,365
Deferred swap gains and payables (Note 8)................. 50,014 35,696 41,717
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 19,166 18,308 19,188
Other..................................................... 115,498 67,501 69,889
---------- ---------- ----------
418,407 483,533 475,364
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations (Note
5)........................................................ 1,405,252 1,219,141 1,212,564
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN (Note 5b)... 405,428 504,993 505,104
---------- ---------- ----------
CONTINGENCIES (Note 9)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................. 789 779 782
Additional paid-in capital................................ 816,286 788,082 806,997
Retained earnings......................................... 203,776 362,570 374,807
Accumulated other comprehensive income (Note 10).......... (12,148) (56) (7,519)
Yield enhancement, contract and issuance costs............ (22,288) (22,035) (22,039)
---------- ---------- ----------
986,415 1,129,340 1,153,028
---------- ---------- ----------
$4,187,234 $3,793,550 $4,329,461
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
17
20
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
-------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
(in Thousands, Except Per Share Amounts) --------- -------- ---------- ---------- ---------- ----------
OPERATING REVENUES............................... $ 406,214 $387,925 $1,107,674 $1,176,686 $2,138,855 $2,028,852
--------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas.................................... 224,368 200,020 646,160 699,565 1,267,665 1,181,646
Operation and maintenance...................... 91,629 95,265 186,503 193,686 386,158 391,234
Depreciation, depletion and amortization....... 46,458 45,484 91,247 88,941 183,918 164,613
Property and other taxes....................... 17,838 19,756 38,713 41,228 72,976 76,239
Write-down of E&P properties (Note 3a)......... 333,022 -- 333,022 -- 333,022 --
--------- -------- ---------- ---------- ---------- ----------
713,315 360,525 1,295,645 1,023,420 2,243,739 1,813,732
--------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................... (307,101) 27,400 (187,971) 153,266 (104,884) 215,120
--------- -------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES............. 11,837 10,470 28,598 24,831 59,426 33,813
--------- -------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 1,815 2,164 6,163 4,376 12,953 8,461
Interest on long-term debt..................... (19,424) (21,069) (37,953) (40,051) (73,072) (74,043)
Other interest expense......................... (4,822) (1,894) (11,663) (6,624) (16,322) (11,053)
Dividends on preferred securities of
subsidiaries................................. (9,230) (7,329) (18,984) (11,558) (38,516) (19,225)
Loss on investment in E&P company (Note 3b).... (6,135) -- (6,135) -- (6,135) --
Gains related to DIGP (Note 2c)................ -- -- -- -- 2,398 2,896
Other.......................................... 637 (1,055) 12,716 1,613 17,500 (335)
--------- -------- ---------- ---------- ---------- ----------
(37,159) (29,183) (55,856) (52,244) (101,194) (93,299)
--------- -------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (332,423) 8,687 (215,229) 125,853 (146,652) 155,634
INCOME TAX PROVISION (BENEFIT)................... (122,323) (389) (85,639) 35,008 (68,523) 36,481
--------- -------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................................ $(210,100) $ 9,076 $ (129,590) $ 90,845 $ (78,129) $ 119,153
========= ======== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE (Note 4)
Basic.......................................... $ (2.67) $ .13 $ (1.65) $ 1.34 $ (1.00) $ 1.77
========= ======== ========== ========== ========== ==========
Diluted........................................ $ (2.67) $ .13 $ (1.65) $ 1.30 $ (1.00) $ 1.74
========= ======== ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
Basic.......................................... 78,758 68,179 78,563 67,865 78,303 67,507
========= ======== ========== ========== ========== ==========
Diluted........................................ 78,758 69,104 78,563 71,324 78,303 69,672
========= ======== ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................... $ .2550 $ .2425 $ .5100 $ .4850 $ 1.0075 $ .9600
========= ======== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
-------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
(in Thousands) --------- -------- ---------- ---------- ---------- ----------
BALANCE -- BEGINNING OF PERIOD................... $ 434,862 $370,361 $ 374,807 $ 305,352 $ 362,570 $ 309,467
ADD -- NET INCOME (LOSS)......................... (210,100) 9,076 (129,590) 90,845 (78,129) 119,153
--------- -------- ---------- ---------- ---------- ----------
224,762 379,437 245,217 396,197 284,441 428,620
DEDUCT -- CASH DIVIDENDS DECLARED ON COMMON
STOCK.......................................... 20,986 16,499 41,178 32,832 81,196 64,717
OTHER................................... -- 368 263 795 (531) 1,333
--------- -------- ---------- ---------- ---------- ----------
BALANCE -- END OF PERIOD......................... $ 203,776 $362,570 $ 203,776 $ 362,570 $ 203,776 $ 362,570
========= ======== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of these
statements.
18
21
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
(in Thousands) --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(129,590) $ 90,845
Adjustments to reconcile net income (loss) to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 91,247 88,941
Charged to other accounts............................. 4,020 3,756
Loss on E&P properties and investments, net of taxes
(Note 3)............................................... 220,452 --
Deferred income taxes -- current........................ (11,994) (18,552)
Deferred income taxes and investment tax credit, net.... 10,356 25,775
Equity in earnings of joint ventures, net of
distributions.......................................... (17,715) (4,127)
Other................................................... (4,798) (971)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 113,242 139,294
--------- ---------
Net cash provided from operating activities........... 275,220 324,961
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (161,672) (331,274)
Dividends paid............................................ (41,178) (32,832)
Issuance of common stock.................................. 10,374 286,018
Issuance of preferred securities.......................... -- 326,521
Issuance of long-term debt (Note 5a)...................... 460,161 273,241
Long-term commercial paper, net........................... 109,643 (261,822)
Retirement of long-term debt and preferred securities
(Note 5b)............................................... (323,454) (102,969)
Other..................................................... 8,243 (532)
--------- ---------
Net cash provided from financing activities........... 62,117 156,351
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (277,655) (232,764)
Acquisitions (Note 2)..................................... (36,731) (105,133)
Investment in debt and equity securities, net (Note 2a)... 44,241 1,421
Investment in joint ventures.............................. (96,647) (40,758)
Sale of property, joint venture interests and tax
credits................................................. 81,026 --
Return of investment in joint ventures.................... 4,801 4,000
Other..................................................... (14,868) 11,544
--------- ---------
Net cash used for investing activities................ (295,833) (361,690)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 41,504 119,622
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 39,495 30,462
--------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30.......................... $ 80,999 $ 150,084
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 74,008 $ 74,606
Accrued unbilled revenues................................. 77,285 92,140
Accrued/deferred gas cost recovery revenues............... 42,001 13,600
Gas in inventory.......................................... (57,294) 16,265
Accounts payable.......................................... (36,295) (118,500)
Federal income, property and other taxes payable.......... (5,188) (30,698)
Gas inventory equalization................................ 15,490 66,679
Prepaid/accrued benefit costs............................. (7,818) 3,025
Other current assets and liabilities...................... 20,943 21,315
Deferred assets and liabilities........................... (9,890) 862
--------- ---------
$ 113,242 $ 139,294
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 47,166 $ 40,966
Federal income taxes.................................... 11,700 22,500
- --------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
19
22
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 1997 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1998
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments 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, INVESTMENTS AND DISPOSITIONS
A. PHILIPPINE INVESTMENT
In 1997, MCN advanced approximately $46,000,000 to an independent power
producer to fund power generation projects under development in the
Philippines. This investment was originally structured as an
interest-bearing loan with the possibility of being converted into an
equity interest in the independent power producer. Contract negotiations
were concluded in March 1998 when MCN received the total amount of its
advance, plus accrued interest.
B. TORRENT POWER LIMITED
In 1997, MCN acquired a 40% interest in the common equity of Torrent Power
Limited (TPL), an Indian joint venture that holds minority interests in
electric distribution companies and power generation facilities located in
the state of Gujarat, India. In March 1998, MCN paid approximately
$5,600,000 representing the remaining amount due on its initial acquisition
commitment. Also in March 1998, MCN acquired preference shares in TPL for
approximately $7,600,000 to fund TPL's additional 4.7% investment in
Gujarat Torrent Energy Corporation (GTEC). GTEC is a company formed to
build, own and operate a 655 MW dual-fuel facility that has begun
generating electricity and is scheduled to be fully operational later in
1998.
C. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN sold 64% of its
99% interest in Dauphin Island Gathering Partners (DIGP) in a series of
transactions during 1996. The transactions resulted in pre-tax gains
totaling $8,782,000, of which $2,398,000 was deferred until 1997 when a
related option agreement expired unexercised. DIGP is a general partnership
that owns a natural gas gathering system in the Gulf of Mexico.
3. LOSS ON EXPLORATION & PRODUCTION (E&P) PROPERTIES AND INVESTMENTS
A. WRITE-DOWN OF E&P PROPERTIES
During the second quarter of 1998, MCN recognized a $333,022,000 pre-tax
($216,465,000 net of taxes), write-down of its gas and oil properties under
the full cost method of accounting, due primarily to lower gas and oil
prices and the under-performance of certain exploration properties. Gas and
oil prices have historically been impacted by temporary declines in such
prices. Under the full cost method of accounting as prescribed by the
Securities and Exchange Commission, MCN's capitalized exploration and
production costs at June 30, 1998 exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum
20
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of discounted future net cash flows from the production of proved gas and
oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects. Future net cash flows are
required to be estimated based on end-of-quarter prices and costs, unless
contractual arrangements exist, even if any price decline is temporary. A
significant portion of the write-down is due to lower-than-expected
exploratory drilling results.
B. LOSS ON INVESTMENT IN E&P COMPANY
During the second quarter of 1998, MCN recognized a $6,135,000 pre-tax
($3,987,000 net of taxes), loss from the write-down of an investment in the
common stock of an E&P company. The loss is due to a decline in the fair
value of the securities which is not considered temporary.
4. EARNINGS PER SHARE COMPUTATION
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" which requires the
presentation of basic earnings per share (EPS) and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
assumes the issuance of potential dilutive common shares outstanding during the
period and adjusts for changes in income and the repurchase of common shares
that would have occurred from the assumed issuance. A reconciliation of both
calculations follows:
WEIGHTED
AVERAGE EARNINGS
COMMON (LOSS)
NET INCOME (LOSS) SHARES PER SHARE
---------------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997
--------- --------- ------ ------ ------ -----
(in Thousands, Except Per Share
Amounts)
THREE MONTHS ENDED JUNE 30
Basic EPS............................ $(210,100) $ 9,076 78,758 68,179 $(2.67) $ .13
------ -----
Effect of Dilutive Securities:
FELINE PRIDES..................... -- -- -- --
Enhanced PRIDES................... -- 57 -- 250
Stock-based compensation plans.... -- -- -- 675
--------- --------- ------ ------
Diluted EPS.......................... $(210,100) $ 9,133 78,758 69,104 $(2.67) $ .13
========= ========= ====== ====== ------ -----
SIX MONTHS ENDED JUNE 30
Basic EPS............................ $(129,590) $ 90,845 78,563 67,865 $(1.65) $1.34
------ -----
Effect of Dilutive Securities:
FELINE PRIDES..................... -- 1,675 -- 2,395
Enhanced PRIDES................... -- 123 -- 348
Stock-based compensation plans.... -- -- -- 716
--------- --------- ------ ------
Diluted EPS.......................... $(129,590) $ 92,643 78,563 71,324 $(1.65) $1.30
========= ========= ====== ====== ------ -----
TWELVE MONTHS ENDED JUNE 30
Basic EPS............................ $ (78,129) $ 119,153 78,303 67,507 $(1.00) $1.77
------ -----
Effect of Dilutive Securities:
FELINE PRIDES..................... -- 1,675 -- 1,197
Enhanced PRIDES................... -- 196 -- 215
Stock-based compensation plans.... -- -- -- 753
--------- --------- ------ ------
Diluted EPS.......................... $ (78,129) $ 121,024 78,303 69,672 $(1.00) $1.74
========= ========= ====== ====== ------ -----
21
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. CAPITALIZATION
A. ISSUANCES OF LONG-TERM DEBT
Diversified Energy -- In 1998, MCN Investment Corporation (MCNIC) issued
$100,000,000 of 6.3% MandatOry Par Put Remarketed Securities(SM)
(MOPPRS(SM)) due April 2011 (2011 MOPPRS), and $100,000,000 of 6.35% MOPPRS
due April 2012 (2012 MOPPRS). Also in 1998, MCNIC issued $100,000,000 of
6.375% REset Put Securities (REPS(SM)) due April 2008. The securities are
senior unsecured obligations of MCNIC and are subject to a support
agreement between MCN and MCNIC, under which MCN will provide funds to
MCNIC to make payments of interest and principal in the event of default by
MCNIC.
The 2011 MOPPRS, 2012 MOPPRS and REPS are structured such that at a
specified future remarketing date the remarketing agents may elect to
remarket the securities whereby the annual interest rate will be reset.
MCNIC received option premiums in return for the remarketing options. If
the remarketing agents elect not to remarket the securities, MCNIC will be
required to repurchase the securities at their principal amounts. The
option premiums received, net of financing costs incurred, totaled
$5,709,000, and are being amortized to income over the life of the debt.
The remarketing date is April 2, 2001 for the 2011 MOPPRS, April 2, 2002
for the 2012 MOPPRS and April 1, 2003 for the REPS.
Gas Distribution -- In June 1998, MichCon issued $75,000,000 of 6.2%
Resetable MAndatory Putable/remarketable Securities(SM) (MAPS(SM)) due June
2038, and $75,000,000 of 6.45% Extendable MOPPRS due June 2038 (2038
MOPPRS). The MAPS and 2038 MOPPRS are "fall-away mortgage" debt, and as
such, are secured debt as long as MichCon's current first mortgage bonds
are outstanding and become senior unsecured debt thereafter.
The MAPS and 2038 MOPPRS are structured such that the interest rates of the
issues can be reset at various remarketing dates over the life of the debt.
The initial remarketing date is June 30, 2003 for the MAPS and June 30,
2008 for the 2038 MOPPRS. MichCon received option premiums in return for
granting options to the underwriters to reset the interest rate for a
period of ten years at the initial remarketing date. The option premiums
received for the MAPS and 2038 MOPPRS, net of financing costs incurred,
totaled $3,052,000. The option premiums are being amortized to income over
the initial interest and corresponding option periods. If the underwriters
elect not to exercise their reset option, the MAPS and 2038 MOPPRS become
subject to a remarketing feature. If MichCon and the remarketing agent
cannot agree on an interest rate or the remarketing agent is unable to
remarket the securities, MichCon will be required to repurchase the MAPS
and 2038 MOPPRS at their principal amounts.
B. REDEMPTIONS OF PREFERRED SECURITIES AND LONG-TERM DEBT
In June 1998, MCN Financing V, a wholly owned business trust of MCN,
redeemed $100,000,000 of 6.3% Private Institutional Trust Securities.
During April 1998, MCNIC Oil & Gas Company, a subsidiary of MCNIC, retired
early a $100,000,000 five-year term loan. During the second quarter of
1998, MichCon redeemed through a tender offer $37,000,000 of the
outstanding $55,000,000 balance of 9.125% first mortgage bonds due 2004,
and $52,686,000 of the outstanding $70,000,000 balance of 8% first mortgage
bonds due 2002.
22
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LINES OF CREDIT
As discussed in MCN's 1997 Annual Report on Form 10-K, MCNIC and MichCon
maintain credit lines totaling $700,000,000 to support their commercial paper
programs. In July 1998, MCNIC renewed its credit lines that now allow for
borrowings of up to $200,000,000 under a 364-day revolving credit facility and
up to $200,000,000 under a three-year revolving credit facility. Also in July
1998, MichCon renewed its credit lines that allow for borrowings of up to
$150,000,000 under a 364-day revolving credit facility and up to $150,000,000
under a three-year revolving credit facility.
7. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation
that interim inventory reductions will be replaced prior to year end, the cost
of gas for net withdrawals from inventory is generally recorded at the estimated
average purchase rate for the calendar year. The excess of these changes over
the LIFO cost is credited to the gas inventory equalization account. During
interim periods when there are net injections to inventory, the equalization
account is reversed. Approximately 90.7 billion cubic feet (Bcf) and 51.2 Bcf of
gas was in inventory at June 30, 1998 and 1997, respectively.
8. COMMODITY SWAP AGREEMENTS
MCN's Diversified Energy and Gas Distribution groups manage commodity price risk
through the use of various derivative instruments and predominately limit 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, gas purchase
commitments 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 or the cost of purchased gas. 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:
JUNE 30, DECEMBER 31,
-------------------- ------------
1998 1997 1997
(in Thousands) ------- ------- ------------
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses...................................... $55,042 $24,890 $34,736
Receivables............................................ 8,786 22,181 16,683
------- ------- -------
63,828 47,071 51,419
Less -- Current portion................................ 705 -- 396
------- ------- -------
$63,123 $47,071 $51,023
======= ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains....................................... $ 5,626 $18,504 $15,005
Payables............................................... 62,545 33,420 41,164
------- ------- -------
68,171 51,924 56,169
Less -- Current portion................................ 18,157 16,228 14,452
------- ------- -------
$50,014 $35,696 $41,717
======= ======= =======
23
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CONTINGENCIES
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.
10. COMPREHENSIVE INCOME
MCN has adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income. Comprehensive income is defined as the change in common
shareholder's equity during a period from transactions and events from nonowner
sources, including net income. Other items of comprehensive income include
revenues, expenses, gains and losses that are excluded from net income. Total
comprehensive income for the applicable periods is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
(in Thousands) --------- ------ --------- ------- -------- --------
Net income (loss)................ $(210,100) $9,076 $(129,590) $90,845 $(78,129) $119,153
--------- ------ --------- ------- -------- --------
Other comprehensive income
(loss), net of taxes:
Foreign currency translation
adjustment.................. (5,314) 5 (5,813) (13) (12,092) (22)
--------- ------ --------- ------- -------- --------
Unrealized losses on
securities:
Unrealized losses during
period.................... (1,736) -- (2,803) -- (3,987) --
Less: Reclassification for
losses recognized in net
income.................... 3,987 -- 3,987 -- 3,987 --
--------- ------ --------- ------- -------- --------
2,251 -- 1,184 -- -- --
--------- ------ --------- ------- -------- --------
Total other comprehensive income
(loss), net of taxes........... (3,063) 5 (4,629) (13) (12,092) (22)
--------- ------ --------- ------- -------- --------
Total comprehensive income
(loss)......................... $(213,163) $9,081 $(134,219) $90,832 $(90,221) $119,131
========= ====== ========= ======= ======== ========
11. 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 $764,255,000 at June 30, 1998.
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, MCN Michigan Limited Partnership, MCN Financing I, MCN Financing
III, MCN Financing V, MCN Financing VI, and Blue Lake Holdings, Inc. (until
December 31, 1997).
24
27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
THREE MONTHS ENDED JUNE 30, 1998
(in Thousands) -----------------------------------------------------------------
OPERATING REVENUES................................ $ 2,487 $ 233,228 $172,787 $ (2,288) $ 406,214
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of gas..................................... 1,322 167,074 57,512 (1,540) 224,368
Operation and maintenance....................... 100 30,409 61,868 (748) 91,629
Depreciation, depletion and amortization........ 693 22,273 23,492 -- 46,458
Property and other taxes........................ 538 3,347 13,953 -- 17,838
Write-down of E&P properties.................... -- 333,022 -- -- 333,022
--------- --------- -------- -------- ---------
2,653 556,125 156,825 (2,288) 713,315
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS)........................... (166) (322,897) 15,962 -- (307,101)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES.................................... (209,940) 11,859 361 209,557 11,837
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 9,527 971 822 (9,505) 1,815
Interest on long-term debt...................... 162 (9,073) (10,513) -- (19,424)
Other interest expense.......................... (210) (12,163) (1,891) 9,442 (4,822)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (9,230) (9,230)
Loss on investment in E&P company............... -- (6,135) -- -- (6,135)
Other........................................... (541) 991 187 -- 637
--------- --------- -------- -------- ---------
8,938 (25,409) (11,395) (9,293) (37,159)
--------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................. (201,168) (336,447) 4,928 200,264 (332,423)
INCOME TAX PROVISION (BENEFIT).................... (360) (123,877) 1,914 -- (122,323)
--------- --------- -------- -------- ---------
NET INCOME (LOSS)................................. (200,808) (212,570) 3,014 200,264 (210,100)
DIVIDENDS ON PREFERRED SECURITIES................. 9,230 -- -- (9,230) --
--------- --------- -------- -------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK...... $(210,038) $(212,570) $ 3,014 $209,494 $(210,100)
========= ========= ======== ======== =========
THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------
OPERATING REVENUES................................ $ 3,153 $ 177,187 $209,800 $ (2,215) $ 387,925
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of gas..................................... 1,616 117,061 83,031 (1,688) 200,020
Operation and maintenance....................... 602 25,796 69,394 (527) 95,265
Depreciation, depletion and amortization........ 575 18,485 26,424 -- 45,484
Property and other taxes........................ 331 3,284 16,141 -- 19,756
--------- --------- -------- -------- ---------
3,124 164,626 194,990 (2,215) 360,525
--------- --------- -------- -------- ---------
OPERATING INCOME.................................. 29 12,561 14,810 -- 27,400
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................... 10,335 9,324 331 (9,520) 10,470
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 7,574 845 1,277 (7,532) 2,164
Interest on long-term debt...................... 71 (9,566) (11,574) -- (21,069)
Other interest expense.......................... (268) (7,300) (1,858) 7,532 (1,894)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (7,329) (7,329)
Other........................................... 29 (185) (899) -- (1,055)
--------- --------- -------- -------- ---------
7,406 (16,206) (13,054) (7,329) (29,183)
--------- --------- -------- -------- ---------
INCOME BEFORE INCOME TAXES........................ 17,770 5,679 2,087 (16,849) 8,687
INCOME TAX PROVISION (BENEFIT).................... 624 (2,169) 1,156 -- (389)
--------- --------- -------- -------- ---------
NET INCOME........................................ 17,146 7,848 931 (16,849) 9,076
DIVIDENDS ON PREFERRED SECURITIES................. 7,329 -- -- (7,329) --
--------- --------- -------- -------- ---------
NET INCOME AVAILABLE FOR COMMON STOCK............. $ 9,817 $ 7,848 $ 931 $ (9,520) $ 9,076
========= ========= ======== ======== =========
25
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SIX MONTHS ENDED JUNE 30, 1998
(in Thousands) -----------------------------------------------------------------
OPERATING REVENUES..................................... $ 8,669 $ 505,082 $602,014 $ (8,091) $1,107,674
--------- --------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas.......................................... 4,443 371,351 275,101 (4,735) 646,160
Operation and maintenance............................ 240 65,529 124,090 (3,356) 186,503
Depreciation, depletion and amortization............. 1,339 43,971 45,937 -- 91,247
Property and other taxes............................. 1,171 6,287 31,255 -- 38,713
Write-down of E&P properties......................... -- 333,022 -- -- 333,022
--------- --------- -------- --------- ----------
7,193 820,160 476,383 (8,091) 1,295,645
--------- --------- -------- --------- ----------
OPERATING INCOME (LOSS)................................ 1,476 (315,078) 125,631 -- (187,971)
--------- --------- -------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES......................................... (130,687) 28,166 950 130,169 28,598
--------- --------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income...................................... 19,572 4,165 1,934 (19,508) 6,163
Interest on long-term debt........................... 403 (15,637) (22,719) -- (37,953)
Other interest expense............................... (659) (25,403) (5,148) 19,547 (11,663)
Dividends on preferred securities of subsidiaries.... -- -- -- (18,984) (18,984)
Loss on investment in E&P company.................... -- (6,135) (6,135)
Other................................................ (507) 13,660 (437) -- 12,716
--------- --------- -------- --------- ----------
18,809 (29,350) (26,370) (18,945) (55,856)
--------- --------- -------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... (110,402) (316,262) 100,211 111,224 (215,229)
INCOME TAX PROVISION (BENEFIT)......................... 244 (121,416) 35,533 -- (85,639)
--------- --------- -------- --------- ----------
NET INCOME (LOSS)...................................... (110,646) (194,846) 64,678 111,224 (129,590)
DIVIDENDS ON PREFERRED SECURITIES...................... 18,984 -- -- (18,984) --
--------- --------- -------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK........... $(129,630) $(194,846) $ 64,678 $ 130,208 $ (129,590)
========= ========= ======== ========= ==========
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------
OPERATING REVENUES..................................... $ 10,090 $ 437,341 $737,245 $ (7,990) $1,176,686
--------- --------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas.......................................... 5,429 313,378 386,304 (5,546) 699,565
Operation and maintenance............................ 656 51,975 143,499 (2,444) 193,686
Depreciation, depletion and amortization............. 1,127 35,889 51,925 -- 88,941
Property and other taxes............................. 1,029 6,264 33,935 -- 41,228
--------- --------- -------- --------- ----------
8,241 407,506 615,663 (7,990) 1,023,420
--------- --------- -------- --------- ----------
OPERATING INCOME....................................... 1,849 29,835 121,582 -- 153,266
--------- --------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES......................................... 91,982 22,484 641 (90,276) 24,831
--------- --------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income...................................... 11,922 1,814 2,486 (11,846) 4,376
Interest on long-term debt........................... 212 (17,949) (22,314) -- (40,051)
Other interest expense............................... (498) (13,223) (4,749) 11,846 (6,624)
Dividends on preferred securities of subsidiaries.... -- -- -- (11,558) (11,558)
Other................................................ (27) 2,676 (1,036) -- 1,613
--------- --------- -------- --------- ----------
11,609 (26,682) (25,613) (11,558) (52,244)
--------- --------- -------- --------- ----------
INCOME BEFORE INCOME TAXES............................. 105,440 25,637 96,610 (101,834) 125,853
INCOME TAX PROVISION (BENEFIT)......................... 1,566 (44) 33,486 -- 35,008
--------- --------- -------- --------- ----------
NET INCOME............................................. 103,874 25,681 63,124 (101,834) 90,845
DIVIDENDS ON PREFERRED SECURITIES...................... 11,558 -- -- (11,558) --
--------- --------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK.................. $ 92,316 $ 25,681 $ 63,124 $ (90,276) $ 90,845
========= ========= ======== ========= ==========
26
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
TWELVE MONTHS ENDED JUNE 30, 1998
(in Thousands) --------------------------------------------------------------------
OPERATING REVENUES..................................... $ 16,186 $1,019,010 $1,118,448 $ (14,789) $2,138,855
-------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.......................................... 8,763 747,155 521,026 (9,279) 1,267,665
Operation and maintenance............................ 1,865 126,572 263,231 (5,510) 386,158
Depreciation, depletion and amortization............. 2,491 83,712 97,715 -- 183,918
Property and other taxes............................. 1,821 13,091 58,064 -- 72,976
Write-down of E&P properties......................... -- 333,022 -- -- 333,022
-------- ---------- ---------- --------- ----------
14,940 1,303,552 940,036 (14,789) 2,243,739
-------- ---------- ---------- --------- ----------
OPERATING INCOME (LOSS)................................ 1,246 (284,542) 178,412 -- (104,884)
-------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES......................................... (77,835) 58,038 1,508 77,715 59,426
-------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income...................................... 40,507 8,729 4,107 (40,390) 12,953
Interest on long-term debt........................... 599 (27,740) (45,931) -- (73,072)
Other interest expense............................... (1,414) (46,562) (9,063) 40,717 (16,322)
Dividends on preferred securities of subsidiaries.... -- -- -- (38,516) (38,516)
Loss on investment in E&P company.................... -- (6,135) -- -- (6,135)
Gains related to DIGP................................ -- 2,398 -- -- 2,398
Other................................................ (406) 18,653 (747) -- 17,500
-------- ---------- ---------- --------- ----------
39,286 (50,657) (51,634) (38,189) (101,194)
-------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... (37,303) (277,161) 128,286 39,526 (146,652)
INCOME TAX PROVISION (BENEFIT)......................... 1,251 (117,486) 47,712 -- (68,523)
-------- ---------- ---------- --------- ----------
NET INCOME (LOSS)...................................... (38,554) (159,675) 80,574 39,526 (78,129)
DIVIDENDS ON PREFERRED SECURITIES...................... 38,516 -- -- (38,516) --
-------- ---------- ---------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK........... $(77,070) $ (159,675) $ 80,574 $ 78,042 $ (78,129)
======== ========== ========== ========= ==========
TWELVE MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------
OPERATING REVENUES..................................... $ 17,413 $ 782,770 $1,242,311 $ (13,642) $2,028,852
-------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.......................................... 9,773 557,190 624,501 (9,818) 1,181,646
Operation and maintenance............................ 627 96,633 297,797 (3,823) 391,234
Depreciation, depletion and amortization............. 2,119 61,555 100,939 -- 164,613
Property and other taxes............................. 2,300 11,854 62,085 -- 76,239
-------- ---------- ---------- --------- ----------
14,819 727,232 1,085,322 (13,641) 1,813,732
-------- ---------- ---------- --------- ----------
OPERATING INCOME....................................... 2,594 55,538 156,989 (1) 215,120
-------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES......................................... 121,698 30,493 1,032 (119,410) 33,813
-------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income...................................... 19,804 3,158 5,167 (19,668) 8,461
Interest on long-term debt........................... 345 (31,363) (43,092) 67 (74,043)
Other interest expense............................... (1,606) (20,129) (8,986) 19,668 (11,053)
Dividends on preferred securities of subsidiaries.... -- -- -- (19,225) (19,225)
Gains related to DIGP................................ -- 2,896 -- -- 2,896
Other................................................ 353 2,208 (2,829) (67) (335)
-------- ---------- ---------- --------- ----------
18,896 (43,230) (49,740) (19,225) (93,299)
-------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES............................. 143,188 42,801 108,281 (138,636) 155,634
INCOME TAX PROVISION (BENEFIT)......................... 2,071 (1,796) 36,206 -- 36,481
-------- ---------- ---------- --------- ----------
NET INCOME............................................. 141,117 44,597 72,075 (138,636) 119,153
DIVIDENDS ON PREFERRED SECURITIES...................... 19,225 -- -- (19,225) --
-------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK.................. $121,892 $ 44,597 $ 72,075 $(119,411) $ 119,153
======== ========== ========== ========= ==========
27
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
JUNE 30, 1998
(in Thousands) --------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............. $ 53 $ 60,914 $ 20,032 $ -- $ 80,999
Accounts receivable............................ 16,343 184,601 150,380 (18,022) 333,302
Less -- Allowance for doubtful accounts...... 97 453 14,132 -- 14,682
---------- ---------- ---------- ----------- ----------
Accounts receivable, net....................... 16,246 184,148 136,248 (18,022) 318,620
Accrued unbilled revenues...................... 225 -- 15,500 -- 15,725
Gas in inventory............................... -- 78,454 35,617 -- 114,071
Property taxes assessed applicable to future
periods...................................... 98 1,276 43,152 -- 44,526
Other.......................................... 2,815 45,819 28,408 (70) 76,972
---------- ---------- ---------- ----------- ----------
19,437 370,611 278,957 (18,092) 650,913
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities...... -- 12,084 36,532 351 48,967
Deferred swap losses and receivables........... -- 63,123 -- -- 63,123
Deferred postretirement benefit costs.......... 630 -- -- -- 630
Deferred environmental costs................... 2,534 -- 27,934 -- 30,468
Prepaid benefit costs.......................... -- -- 95,008 (6,927) 88,081
Other.......................................... 8,956 32,424 52,612 (2,955) 91,037
---------- ---------- ---------- ----------- ----------
12,120 107,631 212,086 (9,531) 322,306
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES................................... 1,374,445 667,961 20,436 (1,365,624) 697,218
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost........... 42,928 1,192,544 2,843,708 -- 4,079,180
Less -- Accumulated depreciation and
depletion.................................. 14,274 191,267 1,356,842 -- 1,562,383
---------- ---------- ---------- ----------- ----------
28,654 1,001,277 1,486,866 -- 2,516,797
---------- ---------- ---------- ----------- ----------
$1,434,656 $2,147,480 $1,998,345 $(1,393,247) $4,187,234
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................... $ 6,752 $ 221,263 $ 89,329 $ (18,432) $ 298,912
Notes payable.................................. -- 147,822 4,067 (2,192) 149,697
Current portion of long-term debt and capital
lease obligations............................ -- 211,486 58,204 -- 269,690
Gas inventory equalization..................... -- 12 15,478 -- 15,490
Federal income, property and other taxes
payable...................................... 543 5,022 80,931 -- 86,496
Deferred gas cost recovery revenues............ -- -- 29,139 -- 29,139
Gas payable.................................... -- 13,279 26,998 -- 40,277
Customer deposits.............................. 24 -- 14,900 -- 14,924
Other.......................................... 7,546 22,349 37,241 (29) 67,107
---------- ---------- ---------- ----------- ----------
14,865 621,233 356,287 (20,653) 971,732
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes.............. (4,549) (41,824) 89,549 -- 43,176
Unamortized investment tax credit.............. 286 -- 31,823 -- 32,109
Tax benefits amortizable to customers.......... -- -- 123,444 -- 123,444
Deferred swap gains and payables............... -- 50,014 -- -- 50,014
Accrued environmental costs.................... 3,000 -- 32,000 -- 35,000
Minority interest.............................. -- 2,565 16,600 1 19,166
Other.......................................... 17,063 61,438 43,926 (6,929) 115,498
---------- ---------- ---------- ----------- ----------
15,800 72,193 337,342 (6,928) 418,407
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................... -- 781,238 624,014 -- 1,405,252
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................... 405,428 -- -- -- 405,428
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................... 789 5 10,300 (10,305) 789
Additional paid-in capital..................... 816,285 697,823 230,399 (928,221) 816,286
Retained earnings.............................. 203,777 (12,864) 440,003 (427,140) 203,776
Accumulated other comprehensive income......... -- (12,148) -- -- (12,148)
Yield enhancement, contract and issuance
costs........................................ (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
998,563 672,816 680,702 (1,365,666) 986,415
---------- ---------- ---------- ----------- ----------
$1,434,656 $2,147,480 $1,998,345 $(1,393,247) $4,187,234
========== ========== ========== =========== ==========
28
31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
JUNE 30, 1997
(in Thousands) ------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 34,834 $ 130,108 $ 18,355 $ (33,213) $ 150,084
Accounts receivable.......................... 9,497 117,845 196,815 (13,607) 310,550
Less -- Allowance for doubtful accounts.... 71 673 23,442 -- 24,186
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 9,426 117,172 173,373 (13,607) 286,364
Accrued unbilled revenues.................... 211 -- 16,158 -- 16,369
Gas in inventory............................. -- 26,397 36,499 -- 62,896
Property taxes assessed applicable to future
periods.................................... 87 1,256 37,885 -- 39,228
Accrued gas cost recovery revenues........... -- -- 14,072 -- 14,072
Other........................................ 3,733 29,314 29,344 (9,309) 53,082
---------- ---------- ---------- ----------- ----------
48,291 304,247 325,686 (56,129) 622,095
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 14,483 3,737 15,941 34,161
Deferred swap losses and receivables......... -- 47,071 -- -- 47,071
Deferred postretirement benefit costs........ 673 -- 1,886 -- 2,559
Deferred environmental costs................. 3,000 -- 27,680 -- 30,680
Prepaid benefit costs........................ (3,607) -- 64,737 (1,907) 59,223
Other........................................ 7,758 34,048 50,587 (18,836) 73,557
---------- ---------- ---------- ----------- ----------
7,824 95,602 148,627 (4,802) 247,251
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,599,396 380,038 19,731 (1,588,728) 410,437
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 34,778 1,181,156 2,706,922 -- 3,922,856
Less -- Accumulated depreciation and
depletion.................................. 12,016 115,016 1,282,057 -- 1,409,089
---------- ---------- ---------- ----------- ----------
22,762 1,066,140 1,424,865 -- 2,513,767
---------- ---------- ---------- ----------- ----------
$1,678,273 $1,846,027 $1,918,909 $(1,649,659) $3,793,550
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 2,720 $ 104,157 $ 105,822 $ (13,277) $ 199,422
Notes payable................................ 1 600 38,366 (36,515) 2,452
Current portion of long-term debt and capital
lease obligations.......................... 420 1,497 28,512 -- 30,429
Gas inventory equalization................... -- (6) 66,685 -- 66,679
Federal income, property and other taxes
payable.................................... 955 1,439 73,638 (9,084) 66,948
Gas payable.................................. -- 3,053 -- -- 3,053
Customer deposits............................ 20 -- 11,985 -- 12,005
Other........................................ 11,081 18,858 45,842 (226) 75,555
---------- ---------- ---------- ----------- ----------
15,197 129,598 370,850 (59,102) 456,543
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes............ (2,453) 101,144 78,701 20 177,412
Unamortized investment tax credit............ 316 -- 33,666 -- 33,982
Tax benefits amortizable to customers........ 202 -- 115,432 -- 115,634
Deferred swap gains and payables............. -- 35,696 -- -- 35,696
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 238 18,070 -- 18,308
Other........................................ 11,933 16,897 40,578 (1,907) 67,501
---------- ---------- ---------- ----------- ----------
12,998 153,975 318,447 (1,887) 483,533
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 589,656 629,484 1 1,219,141
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 504,993 -- -- -- 504,993
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 780 5 10,300 (10,306) 779
Additional paid-in capital................... 790,717 826,038 230,399 (1,059,072) 788,082
Retained earnings............................ 375,623 146,811 359,429 (519,293) 362,570
Accumulated other comprehensive income....... -- (56) -- -- (56)
Yield enhancement, contract and issuance
costs...................................... (22,035) -- -- -- (22,035)
---------- ---------- ---------- ----------- ----------
1,145,085 972,798 600,128 (1,588,671) 1,129,340
---------- ---------- ---------- ----------- ----------
$1,678,273 $1,846,027 $1,918,909 $(1,649,659) $3,793,550
========== ========== ========== =========== ==========
29
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
DECEMBER 31, 1997
(in Thousands) ------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable.......................... 15,525 240,867 210,677 (46,910) 420,159
Less -- Allowance for doubtful accounts.... 75 621 15,015 -- 15,711
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 15,450 240,246 195,662 (46,910) 404,448
Accrued unbilled revenues.................... 1,114 -- 91,896 -- 93,010
Gas in inventory............................. -- 16,576 40,201 -- 56,777
Property taxes assessed applicable to future
periods.................................... 217 2,835 64,827 -- 67,879
Accrued gas cost recovery revenues........... -- -- 12,862 -- 12,862
Other........................................ 3,745 17,612 33,361 (629) 54,089
---------- ---------- ---------- ----------- ----------
20,549 302,388 453,162 (47,539) 728,560
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 62,060 35,110 351 97,521
Deferred swap losses and receivables......... -- 51,023 -- -- 51,023
Deferred postretirement benefit costs........ 651 -- -- -- 651
Deferred environmental costs................. 2,535 -- 27,699 -- 30,234
Prepaid benefit costs........................ (3,418) -- 85,790 (2,130) 80,242
Other........................................ 7,610 34,287 46,972 (3,339) 85,530
---------- ---------- ---------- ----------- ----------
7,378 147,370 195,571 (5,118) 345,201
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,641,421 528,492 19,643 (1,632,580) 556,976
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 37,918 1,358,504 2,790,352 -- 4,186,774
Less -- Accumulated depreciation and
depletion.................................. 12,951 152,707 1,322,392 -- 1,488,050
---------- ---------- ---------- ----------- ----------
24,967 1,205,797 1,467,960 -- 2,698,724
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 4,385 $ 238,952 $ 130,267 $ (46,848) $ 326,756
Notes payable................................ -- 163,113 241,691 (3,078) 401,726
Current portion of long-term debt and capital
lease obligations.......................... 365 1,557 34,956 -- 36,878
Federal income, property and other taxes
payable.................................... 401 12,681 78,630 -- 91,712
Gas payable.................................. -- 6,254 2,063 -- 8,317
Customer deposits............................ 19 -- 16,363 -- 16,382
Other........................................ 13,599 22,944 65,717 (630) 101,630
---------- ---------- ---------- ----------- ----------
18,769 445,501 569,687 (50,556) 983,401
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes............ (4,642) 73,874 83,905 22 153,159
Unamortized investment tax credit............ 301 -- 32,745 -- 33,046
Tax benefits amortizable to customers........ 443 -- 122,922 -- 123,365
Deferred swap gains and payables............. -- 41,717 -- -- 41,717
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 1,905 17,283 -- 19,188
Other........................................ 10,792 16,586 44,663 (2,152) 69,889
---------- ---------- ---------- ----------- ----------
9,894 134,082 333,518 (2,130) 475,364
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 595,457 617,107 -- 1,212,564
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 505,104 -- -- -- 505,104
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 782 5 10,300 (10,305) 782
Additional paid-in capital................... 806,998 834,539 230,399 (1,064,939) 806,997
Retained earnings............................ 374,807 181,982 375,325 (557,307) 374,807
Accumulated other comprehensive income....... -- (7,519) -- -- (7,519)
Yield enhancement, contract and issuance
costs...................................... (22,039) -- -- -- (22,039)
---------- ---------- ---------- ----------- ----------
1,160,548 1,009,007 616,024 (1,632,551) 1,153,028
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
30
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ --------- --------- ------------ ------------
SIX MONTHS ENDED JUNE 30, 1998
(in Thousands) ------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES........... $ 19,014 $ (11,058) $ 286,618 $ (19,354) $ 275,220
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.............................. -- 75,066 (237,624) 886 (161,672)
Capital distributions paid to affiliates, net... -- (136,716) -- 136,716 --
Dividends paid.................................. (41,178) -- -- -- (41,178)
Preferred securities dividends paid............. (18,984) -- -- 18,984 --
Issuance of common stock........................ 10,374 -- -- -- 10,374
Issuance of long-term debt...................... -- 307,109 153,052 -- 460,161
Long-term commercial paper, net................. -- 109,643 -- -- 109,643
Retirement of long-term debt and preferred
securities.................................... (100,365) (100,826) (122,263) -- (323,454)
Other........................................... -- 8,243 -- -- 8,243
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. (150,153) 262,519 (206,835) 156,586 62,117
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................ (5,164) (197,988) (74,503) -- (277,655)
Acquisitions.................................... -- (36,731) -- -- (36,731)
Investment in debt and equity securities, net... -- 45,663 (1,422) -- 44,241
Investment in joint ventures and subsidiaries... 136,216 (96,161) 12 (136,714) (96,647)
Sale of property, joint venture interests and
tax credits................................... -- 81,026 -- -- 81,026
Return of investment in joint ventures.......... -- 4,801 -- -- 4,801
Other........................................... 117 (16,276) 1,809 (518) (14,868)
--------- --------- --------- --------- ---------
Net cash provided from (used for) investing
activities.................................. 131,169 (215,666) (74,104) (137,232) (295,833)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 30 35,795 5,679 -- 41,504
CASH AND CASH EQUIVALENTS, JANUARY 1.............. 23 25,119 14,353 -- 39,495
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30................ $ 53 $ 60,914 $ 20,032 $ -- $ 80,999
========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES........... $ 65,486 $ 34,994 $ 273,766 $ (49,285) $ 324,961
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.............................. 1 (68,000) (226,760) (36,515) (331,274)
Capital contributions received from
(distributions paid to) affiliates, net....... (1,058) 594,607 -- (593,549) --
Dividends paid.................................. (32,832) -- (40,000) 40,000 (32,832)
Preferred securities dividends paid............. (11,558) -- -- 11,558 --
Issuance of common stock........................ 286,018 -- -- -- 286,018
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.................... -- (30,740) (72,229) -- (102,969)
Other........................................... (532) -- -- -- (532)
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. 566,560 383,235 (214,938) (578,506) 156,351
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................ (3,050) (172,290) (57,423) (1) (232,764)
Acquisitions.................................... -- (105,133) -- -- (105,133)
Investment in debt and equity securities........ -- 320 17,043 (15,942) 1,421
Investment in joint ventures and subsidiaries... (595,107) (40,514) (184) 595,047 (40,758)
Return of investment in joint ventures.......... -- 4,468 -- (468) 4,000
Other........................................... 101 5,420 (9,919) 15,942 11,544
--------- --------- --------- --------- ---------
Net cash used for investing activities........ (598,056) (307,729) (50,483) 594,578 (361,690)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 33,990 110,500 8,345 (33,213) 119,622
CASH AND CASH EQUIVALENTS, JANUARY 1.............. 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30................ $ 34,834 $ 130,108 $ 18,355 $ (33,213) $ 150,084
========= ========= ========= ========= =========
31
34
OTHER INFORMATION
LEGAL PROCEEDINGS
As discussed most recently on page 20 in MCN's 1997 Annual Report on Form
10-K, in December 1994, a suit was filed against MichCon in Wayne County
Michigan Circuit Court by certain customers who had participated in one of three
energy conservation programs sponsored by MichCon. Under these programs, which
had been approved by the MPSC and operated from 1990 to 1996, MichCon offered
low-interest loans, rebates and other arrangements to assist approximately
46,000 qualified residential customers in purchasing high-efficiency furnaces.
MichCon did not manufacture, sell or install any of the furnaces. The complaint
alleged that MichCon induced the purchase of these furnaces through its
conservation programs and that it had a duty to, but failed to, warn its
customers that harmful levels of carbon monoxide could backdraft if a chimney
was not properly sized and a chimney liner installed. Plaintiffs sought
injunctive relief, unspecified monetary damages and class action certification.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. The trial court denied
such certification on two separate occasions but granted a third motion to
certify the class.
While MichCon's appeal of the trial court decision granting class action
certification was pending in the Michigan Court of Appeals, the matter was
settled. On July 24, 1998, the Wayne County Circuit Court approved the
settlement. Under the terms of the settlement, 46,000 conservation loan
participants have until October 9, 1998 (75 days) to submit a claim form to be
reimbursed for a portion of the costs of installing a chimney liner or making
repairs to their chimney. In addition, customers will be eligible to purchase a
carbon monoxide detector from MichCon at a discounted price. MichCon will seek
indemnification and coverage of its attorney's fees from some of the contractors
and contribution from the other installers. It is management's belief, after
discussion with legal counsel, that the ultimate resolution of this proceeding
will not have a material effect on MichCon's financial statements.
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EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation
27-1 Financial Data Schedule -- 2nd Quarter 1998
27-2 Financial Data Schedule -- 3rd Quarter 1997
27-3 Financial Data Schedule -- 2nd Quarter 1997
27-4 Financial Data Schedule -- 1st Quarter 1997
27-5 Financial Data Schedule -- Fiscal Year-End 1996
27-6 Financial Data Schedule -- Fiscal Year-End 1995
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated June 2, 1998, under Item 5, with
respect to an update of its coal fines project and earnings expectations.
MCN filed an additional report on Form 8-K dated June 24, 1998, under Item
5, with respect to the appointment of a new President and CEO of MCNIC, a
second-quarter charge to earnings, a refocus of E&P strategy and an update
of earnings expectations.
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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: August 14, 1998 By: /s/ HAROLD GARDNER
--------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
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