1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999, 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
(State or other jurisdiction of
incorporation or organization)
500 GRISWOLD STREET, DETROIT, MICHIGAN
(Address of principal executive offices)
38-2820658
(I.R.S. Employer
Identification No.)
48226
(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 [ ] No [X]
Number of shares outstanding of each of the registrant's classes of common
stock, as of May 28, 1999:
Common Stock, par value $.01 per share: 85,655,381
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
PAGE
NUMBER
------
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 38
Item 6. Exhibits and Reports on Form 8-K.................... 39
SIGNATURE................................................... 40
ii
3
MCN ENERGY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Special investigation results in restatement -- As discussed in MCN's 1998
Annual Report on Form 10-K/A, subsequent to the issuance of MCN's December 31,
1998 financial statements, certain matters came to management's attention and
resulted in a special investigation of prior years' operations of CoEnergy
Trading Company (CTC), MCN's non-utility energy marketing subsidiary. As a
result of the investigation, MCN identified that its internal controls had been
overridden and that certain transactions had not been properly accounted for.
Specifically, the investigation concluded that CTC had entered into gas supply
contracts and agreed to pay significantly less than market prices in one period
in return for above-market prices to be paid in subsequent periods through March
2000. The effect of these transactions was to improperly delay the accrual of
cost of gas expenses, resulting in the understatement of net income for the 1998
first quarter by $.9 million and the overstatement of net income for the 1998
twelve-month period by $5.5 million.
Additionally, the investigation identified that CTC had entered into certain
unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly accounting for these
transactions was the overstatement of net income for the 1998 first quarter by
$2.5 million and the overstatement of net income for the 1998 twelve-month
period by $3.2 million. However, net income of $.9 million and $2.7 million was
realized and recorded in connection with these trading activities in the 1998
quarter and twelve-month period, respectively, resulting in a net loss of $1.6
million in the 1998 first quarter and $.5 million in the 1998 twelve-month
period from such activities. From the inception of these trading activities in
March 1997 through March 1999, $5.7 million of net income was realized and
recorded in connection with these trading activities. However, marking these
contracts to market, as required, results in a previously unrecorded net
unrealized loss of $8.4 million through March 1999, indicating a net loss of
$2.7 million from such activities.
Other items identified during the investigation resulted in the overstatement of
net income for the 1998 first quarter by $.02 million and the overstatement of
net income for the 1998 twelve-month period by $.1 million.
As described in Note 2 to the Consolidated Financial Statements, the
accompanying consolidated financial statements have been restated from those
originally reported to properly account for the transactions identified,
resulting in a decrease in net income of $1.6 million or $.02 per diluted share
for the 1998 first quarter and $8.8 million or $.11 per diluted share for the
1998 twelve-month period. The corrections did not have an impact on the
liquidity or cash flows of MCN. The financial information contained in
Management's Discussion and Analysis herein has been revised to reflect the
impact of such restatement.
Results from first quarter rise -- MCN's earnings for the 1999 first quarter
increased to $85.5 million or $1.02 per diluted share compared with earnings of
$78.9 million or $.95 per diluted share in the 1998 quarter. MCN experienced a
loss in the 1999 twelve-month period of $279.8 million or $3.49 per diluted
share compared with earnings of $132.2 million or $1.70 per diluted share in the
same 1998 period. As subsequently discussed, the comparability of earnings was
affected by the impact of non-recurring items consisting of an accounting
change, discontinued operations and several unusual charges.
1
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Excluding the non-recurring items, MCN's earnings from continuing operations
increased $11.4 million for the 1999 first quarter and $2.3 million for the 1999
twelve-month period, as compared to the corresponding 1998 periods. The earnings
comparisons reflect increased contributions from the Gas Distribution segment
resulting from its new gas sales program and the favorable impact of weather.
Also affecting the comparability were gains recorded by the Diversified Energy
group in the 1998 periods from the sale of certain assets.
QUARTER 12 MONTHS
---------------- -------------------
1999 1998 1999 1998
----- ----- ------- ------
(in Millions)
NET INCOME (LOSS)
Diversified Energy:
Before unusual charges................................... $ 4.1 $14.3 $ 2.3 $ 30.2
Unusual charges (Note 5)................................. -- -- (97.9) --
----- ----- ------- ------
4.1 14.3 (95.6) 30.2
----- ----- ------- ------
Gas Distribution:
Before unusual charges................................... 84.3 62.7 110.1 79.9
Unusual charges (Note 5)................................. -- -- (16.7) --
----- ----- ------- ------
84.3 62.7 93.4 79.9
----- ----- ------- ------
Total From Continuing Operations:
Before unusual charges................................... 88.4 77.0 112.4 110.1
Unusual charges (Note 5)................................. -- -- (114.6) --
----- ----- ------- ------
88.4 77.0 (2.2) 110.1
Discontinued Operations (Note 6)........................... -- 1.9 (274.7) 22.1
Cumulative Effect of Accounting Change, Net of Taxes
(Note 3)................................................. (2.9) -- (2.9) --
----- ----- ------- ------
$85.5 $78.9 $(279.8) $132.2
===== ===== ======= ======
DILUTED EARNINGS (LOSS) PER SHARE
Diversified Energy:
Before unusual charges................................... $ .07 $ .19 $ .03 $ .45
Unusual charges (Note 5)................................. -- -- (1.22) --
----- ----- ------- ------
.07 .19 (1.19) .45
----- ----- ------- ------
Gas Distribution:
Before unusual charges................................... .99 .74 1.37 .98
Unusual charges (Note 5)................................. -- -- (.21) --
----- ----- ------- ------
.99 .74 1.16 .98
----- ----- ------- ------
Total From Continuing Operations:
Before unusual charges................................... 1.06 .93 1.40 1.43
Unusual charges (Note 5)................................. -- -- (1.43) --
----- ----- ------- ------
1.06 .93 (.03) 1.43
Discontinued Operations (Note 6)........................... -- .02 (3.42) .27
Cumulative Effect of Accounting Change (Note 3)............ (.04) -- (.04) --
----- ----- ------- ------
$1.02 $ .95 $ (3.49) $ 1.70
===== ===== ======= ======
STRATEGIC DIRECTION -- MCN's objective is to achieve competitive, long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in 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
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
the disposition of existing assets are subject to change. Reflecting this
strategy, MCN has decided to: sell its Exploration & Production (E&P) oil and
gas properties in whole or part; and reduce planned capital investment levels to
approximately $600 million to $750 million annually, which will be invested
primarily in North America. MCN will continue to review the overall mix of its
existing portfolio and the level of new investments.
UNUSUAL CHARGES -- As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN
recorded several unusual charges in the 1998 second and third quarters,
consisting of property write-downs, investment losses and restructuring charges.
The unusual charges reduced earnings for the 1999 twelve-month period by $114.6
million or $1.43 per diluted share (Note 5).
TWELVE MONTHS
ENDED
MARCH 31, 1999
------------------
NET DILUTED
INCOME EPS
------- -------
(in Millions, Except Per Share Amounts)
UNUSUAL CHARGES
Diversified Energy:
Pipelines & Processing.................................... $ (89.5) $(1.12)
Electric Power............................................ (1.6) (.02)
Corporate & Other......................................... (6.8) (.08)
------- ------
(97.9) (1.22)
Gas Distribution............................................ (16.7) (.21)
------- ------
$(114.6) $(1.43)
======= ======
DIVERSIFIED ENERGY
Results reflect lower methanol prices and production, higher financing costs and
1998 gains -- The Diversified Energy group's earnings were $4.1 million for the
1999 first quarter compared to $14.3 million for the same 1998 period.
Diversified Energy had losses of $95.6 million in the 1999 twelve-month period
compared to earnings of $30.2 million in the same 1998 period due to the
property write-downs, investment loss and restructuring charges, as previously
discussed. Excluding these unusual charges, Diversified Energy's earnings for
the 1999 twelve-month period declined by $27.9 million from the corresponding
1998 period. The results for both 1999 periods reflect the impact of lower
methanol prices and methanol production on operating and joint venture income as
well as higher financing costs. The earnings comparisons were also affected by
gains recorded in the 1998 periods from the sale of certain assets.
Additionally, Diversified Energy's results for the 1999 twelve-month period
reflect operating costs related to its coal fines project. Partially offsetting
the decreases in the 1999 first quarter and twelve-month period were increased
operating and joint venture income posted by the Electric Power and Energy
Marketing segments.
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
QUARTER 12 MONTHS
---------------- ------------------
1999 1998 1999 1998
------ ------ -------- ------
(in Millions)
DIVERSIFIED ENERGY OPERATIONS
Operating Revenues*........................................ $264.7 $229.0 $ 878.0 $811.0
------ ------ -------- ------
Operating Expenses*
Property write-downs and restructuring charges (Note
5).................................................... -- -- 150.6 --
Other.................................................... 258.8 232.6 894.4 821.7
------ ------ -------- ------
258.8 232.6 1,045.0 821.7
------ ------ -------- ------
Operating Income (Loss).................................... 5.9 (3.6) (167.0) (10.7)
------ ------ -------- ------
Equity in Earnings of Joint Ventures....................... 12.0 16.3 56.9 54.2
------ ------ -------- ------
Other Income & (Deductions)*
Interest income.......................................... .4 3.2 2.0 8.6
Interest expense......................................... (8.3) (2.8) (27.4) (10.1)
Dividends on preferred securities of subsidiaries........ (5.0) (5.2) (17.4) (17.9)
Other.................................................... .9 12.8 .2 20.1
------ ------ -------- ------
(12.0) 8.0 (42.6) .7
------ ------ -------- ------
Income (Loss) Before Income Taxes.......................... 5.9 20.7 (152.7) 44.2
Income Tax Provision (Benefit)............................. 1.8 6.4 (57.1) 14.0
------ ------ -------- ------
Net Income (Loss)
Before unusual charges................................... 4.1 14.3 2.3 30.2
Unusual charges (Note 5)................................. -- -- (97.9) --
------ ------ -------- ------
$ 4.1 $ 14.3 $ (95.6) $ 30.2
====== ====== ======== ======
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1999 first quarter increased by $5.2
million, and for the 1999 twelve-month period, excluding the unusual charges,
declined by $3.0 million. Results for both 1999 periods reflect reduced
contributions from the Pipelines & Processing segment, increased earnings from
the Electric Power and Energy Marketing segments and lower Corporate & Other
expenses.
QUARTER 12 MONTHS
-------------- ----------------
1999 1998 1999 1998
----- ----- ------- -----
(in Millions)
OPERATING AND JOINT VENTURE INCOME (LOSS)
Before Unusual Charges:
Pipelines & Processing.................................... $ 4.9 $ 9.4 $ 16.9 $31.3
Electric Power............................................ 7.5 5.6 27.9 21.5
Energy Marketing.......................................... 5.2 0.5 1.0 (3.7)
Corporate & Other......................................... .3 (2.8) (5.3) (5.6)
----- ----- ------- -----
17.9 12.7 40.5 43.5
Unusual Charges (Note 5).................................... -- -- (150.6) --
----- ----- ------- -----
$17.9 $12.7 $(110.1) $43.5
===== ===== ======= =====
PIPELINES & PROCESSING operating and joint venture results, excluding the
write-offs, decreased by $4.5 million and $14.4 million for the 1999 first
quarter and twelve-month period, respectively. The
4
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
1999 periods reflect reduced earnings from MCN's 25%-owned methanol production
business resulting from lower methanol prices as well as lower volumes produced.
Earnings from the methanol production business benefited from strong methanol
prices during 1997 and early 1998, but prices have weakened since. Pipelines &
Processing's average methanol sales prices declined 40% for the current quarter
and 44% for the 1999 twelve-month period. Methanol production declined 7.4
million gallons for the 1999 first quarter and 8.1 million gallons for the 1999
twelve-month period due to the shutdown of the methanol plant for scheduled
maintenance in March 1999. Additionally, Pipelines & Processing results for the
1999 twelve-month period were impacted by $4.4 million of operating losses
related to the start-up of the coal fines plants.
Pipelines & Processing operating and joint venture income was also affected by
an increase in transportation volumes for the 1999 periods due to new gas
gathering ventures and the expansion of existing pipeline projects. Volumes
transported increased for the 1999 first quarter and twelve-month period by 6.2
billion cubic feet (Bcf) and 42.8 Bcf, respectively. Pipelines & Processing
results were also impacted in the 1999 first quarter by a decrease in gas
processed to remove natural gas liquids (NGLs) as well as lower processing
margins. The decrease was due to the bypassing of NGL plants as a result of
weaker NGL prices. The increase in gas processed to remove NGLs in the 1999
twelve-month period reflects volumes associated with the acquisition of
additional processing facilities in late 1997. The volume of carbon dioxide
(CO2) treated increased .5 Bcf and 4.2 Bcf in the 1999 first quarter and
twelve-month period, respectively. However, earnings were not significantly
affected since under the terms of Pipelines & Processing's CO2 processing
contracts, revenues are not volume sensitive. Start-up expenses associated with
new projects also unfavorably affected Pipelines & Processing 1999 results.
QUARTER 12 MONTHS
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (Thousand Gallons)...................... 8.1 15.5 53.0 61.1
Transportation (Bcf)...................................... 48.1 41.9 181.7 138.9
Gas Processed (Bcf):
Carbon Dioxide Treatment................................ 12.8 12.3 49.4 45.3
Natural Gas Liquids Removal............................. 8.9 10.3 43.6 28.7
---- ---- ----- -----
21.7 22.6 93.0 74.0
---- ---- ----- -----
* Includes MCN's share of joint ventures
ELECTRIC POWER operating and joint venture results, excluding the restructuring
charges, increased by $1.9 million and $6.4 million for the 1999 first quarter
and twelve-month period, respectively. The improvement in earnings for both
periods reflects increased contributions from the 1,370 megawatt (MW) Midland
Cogeneration Venture (MCV) facility, as a result of an increase in MCN's
interest in the MCV partnership from 18% to 23% in June 1998. Earnings from the
MCV partnership for the 1999 periods also include a favorable $2.1 million
pre-tax adjustment for the resolution of a number of contract issues with the
electricity purchaser. Also contributing to the favorable 1999 results were
higher earnings from MCN's 50%-owned, 123 MW Michigan Power cogeneration
facility due to higher electricity capacity payments received under its
long-term sales contract.
The increase in Electric Power operating and joint venture income resulting from
the MCV and Michigan Power partnerships was partially offset by reduced
contributions from MCN's
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
international power investments, specifically its interest in the Torrent Power
Limited (TPL) venture. MCN has a 40% interest in TPL, an Indian joint venture
that holds minority interests in electric distribution companies and power
generation facilities in the state of Gujarat, India. In February 1999, MCN
reached an agreement to sell its interest in TPL for approximately $130 million,
subject to certain regulatory approvals. Earnings from TPL for 1999 have been
deferred due to the pending sale that is expected to be completed in the third
quarter of 1999.
QUARTER 12 MONTHS
------------- -----------------
1999 1998 1999 1998
----- ----- ------- -------
ELECTRIC POWER (THOUSANDS OF MWH)*
Electricity Sales -- Domestic............................. 700.8 622.9 2,594.5 2,285.0
Electricity Sales -- International........................ -- 238.8 1,049.5 239.5
----- ----- ------- -------
700.8 861.7 3,644.0 2,524.5
===== ===== ======= =======
* Includes MCN's share of joint ventures
ENERGY MARKETING operating and joint venture results increased $4.7 million for
both the 1999 first quarter and for the 1999 twelve-month period. Results were
impacted by an increase in total gas sales and exchange deliveries of 21.8 Bcf
and 103.9 Bcf during the 1999 first quarter and twelve-month period,
respectively. Higher costs for storage capacity as well as higher uncollectible
expense impacted both 1999 periods. The 1999 first quarter and twelve-month
period were also affected by unrealized losses associated with trading
activities (Note 2). Additionally, the current twelve-month period comparison
was impacted by the sale of Energy Marketing's 25% interest in a gas storage
project in December 1997. The storage project contributed $1.6 million of joint
venture income in the 1998 twelve-month period.
QUARTER 12 MONTHS
------------- -------------
1999 1998 1999 1998
----- ----- ----- -----
ENERGY MARKETING (BCF)*
Gas Sales................................................. 138.1 115.3 477.5 370.8
Exchange Gas Deliveries................................... 5.5 6.5 10.1 12.9
----- ----- ----- -----
143.6 121.8 487.6 383.7
===== ===== ===== =====
* Includes MCN's share of joint ventures
As discussed in Note 2 to the Consolidated Financial Statements, MCN's
non-utility energy marketing subsidiary entered into unauthorized gas purchase
and sale contracts for trading purposes. MCN is exposed to natural gas price
risk on such contracts that have not been effectively closed, which totaled 11
Bcf at March 31, 1999. Although not likely to be significant, gains and losses
from these open contracts could impact Energy Marketing's earnings.
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. In late 1998, MCN began
entering into offsetting positions for existing hedges of gas and oil production
from properties that are expected to be sold in 1999. MCN's risk management
strategy is being revised to reflect the change in its business that will result
from its refocused strategic direction. Additionally, as a result of the special
investigation, MCN is taking steps to ensure compliance with risk
management policies that are periodically reviewed by the Board of Directors.
CORPORATE & OTHER operating and joint venture results, excluding the
restructuring charges, improved $3.1 million and $.3 million for the 1999 first
quarter and twelve-month period, respectively. These improvements reflect
adjustments that reduce or eliminate accruals for employee incentive awards that
are based on MCN's operating or stock-price performance.
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OTHER INCOME AND DEDUCTIONS
Other income and deductions for the 1999 first quarter and twelve-month period
reflect unfavorable changes of $20.0 million and $43.3 million, respectively.
The results for both 1999 periods reflect lower interest income, higher interest
expense and lower other income items. The reduction in interest income is due to
the collection in March 1998 of a $46 million advance made to a Philippine
independent power producer. The increase in interest expense is due to higher
borrowings primarily required to finance capital investments in the Diversified
Energy group. Other income includes $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. Other income for 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 a gas storage project.
INCOME TAXES
The variations in income taxes for both 1999 periods reflect fluctuations in
pre-tax results. Income tax comparisons were also affected by tax credits and
stock-related tax benefits recorded in 1998, as well as the generation of
foreign income in 1998 that was not subject to U.S. or foreign tax provisions.
OUTLOOK
MCN's refocused strategic direction emphasizes growth through projects that
offer more predictable, long-term income streams. MCN plans to continue
investing in natural gas and gas liquid gathering, processing and transmission
facilities near areas of rapid reserve development or growing consumer markets.
MCN also intends to expand its Electric Power business, primarily in projects in
North America. Additionally, MCN will focus on expanding its Energy Marketing
coverage within existing markets as well as entering new markets through
strategic alliances with other energy providers. MCN will continue to pursue
opportunities to sell properties in order to optimize its portfolio.
Reflecting this strategy, MCN completed or advanced a number of projects during
the 1999 first quarter. These projects include the following:
Pipelines & Processing:
- - The Portland Natural Gas Transmission System, in which MCN owns a 21.4%
interest, was placed in service. This transmission system is capable of
transporting up to 360 million cubic feet per day (MMcf/d) of gas from
Canadian pipeline systems to New England markets.
- - The Dauphin Island Gathering Partners (DIGP) partnership, in which MCN owns a
35% interest, placed the second phase of its expansion into service, raising
the system's throughput capacity over 60% to 1,100 MMcf/d. At the DIGP
system's onshore terminus in Alabama, MCN's Mobile Bay Processing Partners
joint venture, in which MCN owns a 43% interest, concurrently placed into
service its 600 MMcf/d gas processing plant.
- - The Blue Dolphin gathering venture, in which MCN holds a 33% interest,
acquired the 75-mile offshore Black Marlin Pipeline located near Galveston,
Texas that is capable of transporting up to 160 MMcf/d of gas and gas liquids.
7
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
- - The Vector Pipeline project, in which MCN holds a 25% interest, and the
Millennium Pipeline project, in which it holds a 10.5% interest, both
progressed toward obtaining the required regulatory approvals before beginning
construction. The Vector Pipeline project would provide a transportation link
for up to 1,000 MMcf/d of natural gas from the Chicago supply hub to Dawn,
Ontario. The Millennium project would complement the Vector project by
transporting up to 700 MMcf/d of gas from Dawn to New York.
- - The Volunteer Pipeline project, of which MCN owns a 33% interest, was
announced, and an open season commenced in April 1999 offering an initial 250
MMcf/d of transportation capacity.
- - The KCI Compression Company L.P. was formed to provide a full range of natural
gas compression services. MCN owns a 43% interest in the partnership, which
complements its diverse energy-related businesses.
Electric Power:
- - The Mobile Bay cogeneration project was placed into service concurrently with
the Mobile Bay Processing plant. The 40 MW cogeneration project, in which MCN
owns a 43% interest, provides electricity and thermal energy to the processing
facility.
- - The Bhote Koshi hydroelectric plant in Nepal and the Cobisa-Person power
project in Albuquerque, N.M. proceeded with construction and are expected to
be in service in 2000. MCN has a 65% interest in the 36 MW hydroelectric plant
and a 95% interest in the 140 MW Cobisa-Person project.
Energy Marketing:
- - Two acquisitions were completed in April 1999 that significantly increase
Energy Marketing's level of sales to large commercial and industrial customers
in the Midwest. In total, the acquisitions add approximately 110 Bcf or over
20% to Energy Marketing's 1998 gas sales and exchange gas deliveries base of
466 Bcf.
- - The Washington 10 storage project, for which MCN markets 100% of the 42 Bcf of
storage capacity, neared completion and began injecting gas into storage. The
storage field is expected to be fully operational in time for the 1999-2000
winter heating season.
GAS DISTRIBUTION
Results reflect earnings from new gas sales program and more favorable
weather -- The Gas Distribution segment's earnings were $84.3 million for the
1999 first quarter, an increase of $21.6 million from the comparable 1998
period. Earnings for the 1999 twelve-month period were $93.4 million, which
included $16.7 million of unusual charges. Excluding the unusual charges,
earnings for the 1999 twelve-month period were $110.1 million, an increase of
$30.2 million over the corresponding 1998 period. The earnings improvement for
the 1999 first quarter reflects contributions from the new gas sales program,
the impact of more favorable weather and an increase in other operating
revenues. The increase in earnings for the 1999 twelve-month period reflects the
impact of the gas sales program, an increase in other operating revenues, as
well as significantly lower operating expenses. These improvements for the 1999
twelve-month period more than offset
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
the lower gross margins resulting from reduced gas sales and end user
transportation deliveries which were caused by warmer weather.
QUARTER 12 MONTHS
---------------- ------------------
1999 1998 1999 1998
------ ------ -------- ------
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
Gas sales............................................ $443.0 $372.9 $ 909.0 $ 971.3
End user transportation.............................. 26.9 25.1 84.1 83.8
Intermediate transportation.......................... 14.7 18.0 60.0 58.4
Other................................................ 25.1 19.4 73.0 58.8
------ ------ -------- ------
509.7 435.4 1,126.1 1,172.3
Cost of Gas............................................ 255.7 220.7 497.1 555.6
------ ------ -------- ------
Gross Margin........................................... 254.0 214.7 629.0 616.7
------ ------ -------- ------
Other Operating Expenses*
Operation and maintenance............................ 70.5 63.1 264.0 274.6
Depreciation, depletion and amortization............. 24.9 22.7 96.0 101.4
Property and other taxes............................. 18.6 17.5 57.1 61.0
Property write-down (Note 5)......................... -- -- 24.8 --
------ ------ -------- ------
114.0 103.3 441.9 437.0
------ ------ -------- ------
Operating Income....................................... 140.0 111.4 187.1 179.7
------ ------ -------- ------
Equity in Earnings of Joint Ventures................... .4 .5 .9 2.0
------ ------ -------- ------
Other Income and (Deductions)*
Interest income...................................... 1.0 1.0 5.7 4.5
Interest expense..................................... (13.8) (15.4) (55.9) (56.2)
Investment loss (Note 5)............................. -- -- (8.5) --
Minority interest.................................... (.3) (.7) 6.1 (2.3)
Other................................................ .4 .1 .2 .4
------ ------ -------- ------
(12.7) (15.0) (52.4) (53.6)
------ ------ -------- ------
Income Before Income Taxes............................. 127.7 96.9 135.6 128.1
Income Taxes........................................... 43.4 34.2 42.2 48.3
------ ------ -------- ------
Net Income
Before unusual charges............................... 84.3 62.7 110.1 79.8
Unusual charges (Note 5)............................. -- -- (16.7) --
------ ------ -------- ------
$ 84.3 $ 62.7 $ 93.4 $ 79.8
====== ====== ======== ======
* Includes intercompany transactions
GROSS MARGIN
Gas Distribution gross margin (operating revenues less cost of gas) increased
$39.3 million and $12.3 million in the 1999 first quarter and twelve-month
period, respectively, due primarily to approximately $22.5 million of margins
generated in the current quarter under MichCon's new three-year gas sales
program that began in January 1999 (Note 4a). Under the gas sales program,
MichCon's gas sales rates include a gas commodity component that is fixed at
$2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy,
MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for
a substantial portion of its expected gas supply requirements through 2001. This
strategy is likely to produce favorable margins in each of the three years.
9
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross margins for the 1999 first quarter also reflect higher gas sales resulting
from colder weather compared to the same 1998 period. Gross margins for the
current twelve-month period reflect lower gas sales due to significantly warmer
weather. Additionally, gross margins for both 1999 periods reflect revenues from
the continued growth in other gas-related services as well as revenues from the
three heating and cooling firms acquired in October 1998.
Gas Distribution's operations are very seasonal, with gross margins and earnings
concentrated in the first and fourth quarters of each calendar year. By the end
of the first quarter, the heating season is largely over, and Gas Distribution
typically incurs substantially reduced gross margins and earnings in the second
quarter and losses in the third quarter. The seasonal nature of Gas
Distribution's operations is expected to be more pronounced as a result of
MichCon's new gas sales program.
QUARTER 12 MONTHS
--------------- ----------------
1999 1998 1999 1998
----- ------ ------ ------
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percent Colder (Warmer) Than Normal..................... (4.3)% (18.8)% (12.0)% (6.9)%
Increase (Decrease) From Normal in:
Gas Markets (Bcf).................................... (5.1) (19.2) (26.2) (15.5)
Net Income (in Millions)............................. $(5.1) $(16.7) $(23.7) $(13.5)
Diluted Earnings Per Share........................... $(.06) $ (.20) $ (.30) $ (.17)
Gas sales and end user transportation revenues in total increased by $71.9
million for the 1999 first quarter and decreased by $62.0 million for the 1999
twelve-month period. Revenues were affected by fluctuations in gas sales and end
user transportation deliveries that increased 12.6 Bcf in the current quarter
and decreased by 12.3 Bcf in the 1999 twelve-month period. The fluctuations in
gas sales and end user transportation deliveries were due primarily to weather,
which was 14.5% colder in the 1999 first quarter and 5.1% warmer in the current
twelve-month period compared to the corresponding 1998 periods. Revenues were
also impacted by variations in the cost of the gas commodity component of gas
sales rates. As previously discussed, this gas commodity component was fixed
under MichCon's new gas sales program at $2.95 per Mcf beginning in January
1999. Prior to 1999, MichCon's sales rates were set to recover all of its
reasonably and prudently incurred gas costs. The gas commodity component of
MichCon's sales increased $.18 per Mcf (6%) for the 1999 first quarter and
decreased $.10 per Mcf (3%) for the 1999 twelve-month period.
QUARTER 12 MONTHS
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................................ 92.6 80.0 184.7 194.3
End User Transportation.................................. 42.5 42.5 140.4 143.2
----- ----- ----- -----
135.1 122.5 325.1 337.5
Intermediate Transportation*............................. 127.4 148.4 516.5 594.3
----- ----- ----- -----
262.5 270.9 841.6 931.8
===== ===== ===== =====
* Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues decreased $3.3 million in the 1999 first
quarter and increased $1.6 million in the 1999 twelve-month period. Intermediate
transportation revenues reflect lower off-system volumes of 21.0 Bcf and 77.8
Bcf in the 1999 first quarter and twelve-month period, respectively. A
significant portion of the volume decrease was for customers who pay a fixed fee
for intermediate transportation capacity regardless of actual usage. Although
volumes associated with
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
these fixed-fee customers may vary, the related revenues are not affected. The
increase in intermediate transportation revenues for the 1999 twelve-month
period is due in part to increased fees generated from tracking the transfer of
gas title on MichCon's transportation system.
OTHER OPERATING REVENUES increased $5.7 million and $14.2 million in the 1999
first quarter and twelve-month period, respectively. The improvements are due to
an increase in appliance maintenance services and other gas-related services.
Additionally, both 1999 periods reflect revenues from the acquisition of three
heating and cooling firms in October 1998.
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 Gas Cost Recovery (GCR)
mechanism that was in effect through December 1998 (Note 4b), MichCon's sales
rates were 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. Under MichCon's new gas sales program, the gas commodity component of
its sales rates is fixed. Accordingly, beginning in January 1999, changes in
cost of gas sold directly impact gross margins and earnings.
Cost of gas sold increased $35.0 million in the 1999 first quarter and decreased
$58.5 million in the 1999 twelve-month period, primarily due to variations in
weather-driven sales volumes. Cost of gas sold was also impacted by a decrease
in prices paid of $.06 per Mcf (2%) in the 1999 first quarter and $.22 per Mcf
(8%) in the current twelve-month period.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses increased $7.4 million in the 1999 first
quarter and decreased $10.6 million in the 1999 twelve-month period. The
increase in the 1999 quarter is due in part to additional computer system costs
as well as advertising costs associated with MichCon's new gas sales program,
partially offset by lower uncollectible gas accounts expense. The decrease in
the 1999 twelve-month period reflects lower employee benefit costs, primarily
pension and retiree healthcare costs, as well as lower uncollectible gas
accounts expense. Additionally, both 1998 periods benefited from an interstate
pipeline company refund.
DEPRECIATION AND DEPLETION increased $2.2 million in the 1999 first quarter and
decreased $5.4 million in the 1999 twelve-month period. Depreciation on higher
plant balances impacted both 1999 periods. Additionally, the twelve-month period
comparison reflects the effect of lower depreciation rates for MichCon's utility
property, plant and equipment that became effective in January 1998.
PROPERTY AND OTHER TAXES increased $1.1 million in the 1999 first quarter and
decreased $3.9 million in the 1999 twelve-month period. The current quarter
increase reflects higher Michigan Single Business Tax resulting from an increase
in taxable income as well as higher property taxes due to an increase in plant
balances. The decrease in the 1999 twelve-month period is attributable to lower
Michigan Single Business Tax.
PROPERTY WRITE-DOWN of $24.8 million in the 1999 twelve-month period reflects
the impairment of a Michigan gas gathering system (Note 5).
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EQUITY IN EARNINGS OF JOINT VENTURES
Equity in earnings of joint ventures decreased $1.1 million in the 1999
twelve-month period due to increased losses from Gas Distribution's 47.5%
interest in a Missouri gas distribution company that is expected to be sold in
1999.
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $2.3 million in the 1999 first quarter and
$1.2 million in the current twelve-month period. Both 1999 periods were impacted
by lower interest costs primarily due to a decrease in the average interest rate
on borrowings. Other income and deductions in the 1999 twelve-month period also
reflect an unusual charge to write down the investment in a small natural-gas
distribution company located in Missouri. Also impacting other income and
deductions in the 1999 twelve-month period was a change in minority interest
reflecting the joint venture partners' share of the write-down of certain
Michigan gas gathering properties (Note 5).
INCOME TAXES
Income taxes for both 1999 periods were impacted by an increase in pre-tax
earnings. Income tax comparisons were also affected by the favorable resolution
of prior years' tax issues in the 1999 first quarter. Additionally,
stock-related tax benefits were recorded in 1998 as well as a provision for tax
issues.
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 control
costs in order to deliver strong shareholder returns and provide customers with
high-quality service at competitive prices.
Gas Distribution has begun and plans to continue capitalizing on opportunities
resulting from the gas industry restructuring. MichCon is currently implementing
its Regulatory Reform Plan, which includes a comprehensive experimental
three-year customer choice program that is designed to offer all sales customers
added choices and greater price certainty. Beginning April 1, 1999, a limited
number of customers 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 previously existing
sales margins. The Plan also suspended the GCR mechanism for customers who
continue to purchase gas from MichCon and fixed the gas commodity component of
MichCon's sales rates at $2.95 per Mcf for the three-year period that began in
January 1999. The suspension of the GCR mechanism allows MichCon to profit from
its ability to purchase gas at less than $2.95 per Mcf. Also beginning in 1999,
an income sharing mechanism allows customers to share in profits when actual
return on equity from utility operations exceeds predetermined thresholds.
Gas Distribution also plans to grow revenues and earnings by offering a variety
of energy-related services, which include appliance maintenance. Growth in
revenues is expected from the three heating and cooling firms acquired in
October 1998 that have been integrated under MichCon Home Services, which is
expanding its customer base and range of services.
12
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DISCONTINUED OPERATIONS
As part of its refocused strategic direction announced in late 1998, MCN decided
to sell its E&P properties and has classified this segment as a discontinued
operation. MCN completed the sale of the western U.S. portion of its E&P
properties in April 1999 for approximately $165 million. In May 1999, MCN
reached an agreement to sell its Midcontinent/Gulf Coast properties. Bids on all
remaining properties have been received and the properties are expected to be
sold in mid-1999. E&P operating results for 1999 will be deferred until the
sales of such properties have been completed. E&P had losses of $274.7 million
in the 1999 twelve-month period and income of $1.9 million and $22.0 million in
the 1998 first quarter and twelve-month period, respectively. The 1999
twelve-month period included a total of $275.0 million of write-downs (Note 5).
CHANGES IN ACCOUNTING
In the 1999 first quarter, MCN adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants. SOP 98-5 requires start-up and organizational costs to be expensed
as incurred. This change in accounting principle resulted in the write-off of
start-up and organization costs capitalized as of December 31, 1998. The
cumulative effect of the change was to decrease earnings by $2.9 million for the
1999 first quarter and twelve-month period.
In the 1999 first quarter, MCN adopted the Emerging Issues Task Force consensus
on Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their fair value, with changes in fair value recognized in earnings. Adoption of
EITF 98-10 did not have a material impact on MCN's financial statements.
CAPITAL RESOURCES AND LIQUIDITY
QUARTER
------------------
1999 1998
------- -------
CASH AND CASH EQUIVALENTS (in Millions)
Cash Flow Provided From (Used For):
Operating activities...................................... $ 202.9 $ 155.2
Financing activities...................................... (100.2) (40.8)
Investing activities...................................... (84.9) (114.2)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 17.8 $ .2
======= =======
OPERATING ACTIVITIES
MCN's cash flow from operating activities increased $47.7 million during the
1999 first quarter as compared to the same 1998 period. The increase was due
primarily to higher earnings, after adjusting for non-cash items (depreciation,
change in accounting and deferred taxes).
FINANCING ACTIVITIES
MCN's cash flow used for financing activities increased $59.4 million during the
1999 first quarter. The change primarily reflects lower debt and equity
issuances, net of debt repayments, in the 1999 quarter compared to the same 1998
period. Proceeds from the expected sale of MCN's E&P properties in mid-1999 will
be used to repay commercial paper and bank borrowings. A summary of MCN's
significant financing activities and financing plans during 1999 follows.
13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Prior to mid-February 1999, MCN issued new shares of common stock pursuant to
its Dividend Reinvestment and Stock Purchase Plan and various employee benefit
plans. MCN generated $.2 million in the 1999 first quarter and $5.6 million in
the 1998 first quarter from common stock issuances under these plans. Beginning
in mid-February 1999, shares issued under these plans are being acquired by MCN
through open market purchases.
MCN's 5,865,000 of Preferred Redeemable Increased Dividend Equity Securities
(Enhanced PRIDES) matured in April 1999. Each security represented a contract to
purchase one share of MCN common stock. Upon conversion of the Enhanced PRIDES,
MCN received cash proceeds totaling approximately $135.0 million. The proceeds
were used to repay a $130.0 million medium-term note of Diversified Energy that
came due in May 1999.
In March 1999, MCN entered into a $150 million revolving credit agreement that
expires in October 1999. Borrowings under the credit agreement will be used to
fund capital investments and for general corporate purposes. There were no
amounts outstanding under this credit agreement as of March 31, 1999.
DIVERSIFIED ENERGY
The Diversified Energy group maintains credit lines that 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
Diversified Energy's commercial paper program, which is used to finance capital
investments and to finance Energy Marketing's working capital requirements.
During the first three months of 1999, Diversified Energy's commercial paper and
bank borrowings outstanding increased by $143.5 million, leaving borrowings of
$368.8 million outstanding under this program at March 31, 1999.
MCN received approximately $165 million in April 1999 from the sale of its
western E&P properties. Proceeds from the sale were used to repay outstanding
debt at the MCN Corporate and Diversified Energy levels. Proceeds from the sale
of additional E&P properties are expected in mid-1999 and will be used to repay
outstanding borrowings and for general corporate purposes.
MCN repaid $80 million of medium-term notes and $130 million of medium-term
notes that came due in February 1999 and May 1999, respectively.
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced in
the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon normally issues commercial paper that is backed by
credit lines with several banks. MichCon has established credit lines 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 three months of 1999, MichCon repaid $113.3 million of commercial paper,
leaving borrowings of $106.6 million outstanding under this program at March 31,
1999.
During the 1999 second quarter, MichCon anticipates issuing approximately $110
million of debt. MichCon repaid $20 million of first mortgage bonds that matured
in May 1999 and $30 million of first mortgage bonds that matured in June 1999.
14
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
INVESTING ACTIVITIES
MCN's cash used for investing activities decreased $29.3 million in the 1999
first quarter as compared to the same 1998 period. The decrease was due
primarily to lower capital investments and proceeds from the sale of property
and investments.
Capital investments equaled $132.9 million in the 1999 first quarter compared to
$194.1 million for the same period in 1998. The 1999 investments include
significantly lower levels of investments in E&P properties and gas distribution
facilities.
QUARTER
---------------
1999 1998
------ ------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $ 17.7 $ 17.1
Gas Distribution.......................................... 24.4 38.5
Discontinued Operations................................... 39.2 64.9
------ ------
81.3 120.5
------ ------
MCN's Share of Joint Venture Capital Expenditures:*
Pipelines & Processing.................................... 39.8 37.0
Energy Marketing, Gas Storage & Electric Power............ 6.8 1.5
Other..................................................... -- .2
------ ------
46.6 38.7
------ ------
Acquisitions................................................ 5.0 34.9
------ ------
Total Capital Investments................................... $132.9 $194.1
====== ======
* A portion of joint venture capital expenditures is financed with joint venture
debt
Total capital investments were partially funded from the sale of certain E&P
properties and joint venture investments that totaled $29.0 million in the 1999
first quarter.
OUTLOOK
1999 capital investments to range between $650 million and $750 million -- MCN's
strategic direction is to grow by investing in a diverse portfolio of
energy-related projects. For 1999, MCN anticipates investing between $650
million and $750 million, of which 80% is expected to be within the Diversified
Energy group.
The proposed level of investments for 1999 and future years could increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. MCN's external
capital requirements will also depend on proceeds received from the sale of
assets. General market conditions will also 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 and operating requirements.
YEAR 2000
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN has implemented a
corporate-wide, four-phase Year 2000 approach consisting of: i)
inventory -- identification of the components of MCN's systems, equipment and
facilities; ii) assessment -- assessing Year 2000 readiness and prioritizing the
risks of items identified in the inventory phase; iii) remediation --
15
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
upgrading, repairing and replacing non-compliant systems, equipment and
facilities; and iv) testing -- verifying items remediated. MCN is generally on
schedule to have its mission critical business systems, and measurement and
control systems (including embedded microprocessors) Year 2000 ready as detailed
below. The extension of the program to September 1999 reflects MCN's
determination that additional testing and remediation is appropriate for some
critical business and control systems for both MCN and its partners and vendors.
The estimated completion status of these systems and the projected status for
the future follows:
Inventory Assessment Remediation Testing
--------- ---------- ----------- -------
Business Systems:
March 31, 1999............................... 100% 100% 80% 45%
June 30, 1999................................ 100% 100% 95% 85%
September 30, 1999........................... 100% 100% 100% 100%
Measurement and Control Systems:
March 31, 1999............................... 98% 98% 93% 88%
June 30, 1999................................ 100% 100% 98% 98%
September 30, 1999........................... 100% 100% 100% 100%
Costs associated with the Year 2000 issue are not expected to have a material
adverse effect on MCN results of operation, liquidity and financial condition.
The total costs are estimated to be between $5 million and $6 million of which
approximately $3.9 million was incurred through March 1999. This estimate does
not include MCN's share of Year 2000 costs that may be incurred by partnerships
and joint ventures. The anticipated costs are not higher due in part to the
ongoing replacement of significant old systems. New systems in process of being
installed, as well as those installed over the past few years, are Year 2000
ready. These systems were necessary to maintain a high level of customer
satisfaction and to respond to changes in regulation and increased competition
within the energy industry.
MCN anticipates a smooth transition to the Year 2000. However, the failure to
correct a material Year 2000 problem could result in an interruption in or a
failure of certain business activities and operations. Such interruptions or
failures could have a material adverse effect on MCN's results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
key partners, operators, suppliers and government agencies, MCN cannot certify
that it will be unaffected by Year 2000 complications.
In order to reduce its Year 2000 risk, MCN is developing contingency plans for
mission-critical processes in the event of a Year 2000 complication. Contingency
plans for several essential gas transmission facilities continue to be tested
under a "power outage" scenario and have achieved excellent results. Contingency
plans will continue to be refined throughout 1999 as MCN works with partners,
operators, suppliers and governmental agencies.
MARKET RISK INFORMATION
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN manages commodity
price and interest rate risk through the use of various derivative instruments
and limits the use of such instruments to hedging activities. A discussion and
analysis of the events and factors that have changed MCN's commodity price,
interest rate and foreign currency risk during the 1999 first quarter follows.
16
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
COMMODITY PRICE RISK
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts, gas and oil production and gas inventories. MCN is
entering into offsetting positions for existing hedges of E&P's gas and oil
production from properties that are expected to be sold in 1999. As a result of
entering into the offsetting positions, as well as changes in commodity prices
that occurred during the 1999 first quarter, there have been material changes in
the outcome of the sensitivity analysis performed for commodity price risk at
March 31, 1999 as compared to December 31, 1998.
As discussed in MCN's 1998 Annual Report on Form 10-K/A, a sensitivity analysis
calculates the change in fair values of MCN's natural gas and oil futures and
swap agreements given a hypothetical 10% increase or decrease in commodity
prices utilizing applicable forward commodity rates in effect at the end of the
reporting period.
The results of the sensitivity analysis calculations follow:
March 31, 1999 December 31, 1998
-------------------------- --------------------------
Assuming Assuming Assuming Assuming
a 10% a 10% a 10% a 10%
Increase in Decrease in Increase in Decrease in
Commodity Commodity Commodity Commodity
Prices Prices Prices Prices
(in Millions) ----------- ----------- ----------- -----------
Commodity Price Sensitive:*
Swaps: Pay fixed/receive variable......... $ 77.5 $(77.5) $ 53.6 $(53.6)
Pay variable/receive fixed........ $(67.0) $ 67.0 $(54.0) $ 54.0
Futures: Longs............................ $ .5 $ (.5) $ 1.9 $ (1.9)
Shorts........................... $ (8.1) $ 8.1 $ (.1) $ .1
* Includes only the risk related to the derivative instruments that serve as
hedges and does not include the related underlying hedged item.
As discussed in Note 2 to the Consolidated Financial Statements, MCN's
non-utility energy marketing subsidiary entered into unauthorized gas purchase
and sale contracts for trading purposes. MCN is exposed to natural gas price
risk on such contracts that have not been effectively closed that totaled 11 Bcf
at March 31, 1999 and 44 Bcf at December 31, 1998. A 10% unfavorable change in
basis would have reduced the fair value of such open contracts by $.2 million at
March 31, 1999 and by $1.2 million at December 31, 1998. A 10% favorable change
in basis would have increased the fair value of such contracts by corresponding
amounts for the March 31, 1999 and December 31, 1998 periods.
INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of variable
and fixed-rate debt and preferred securities. In order to manage interest costs
and risk, MCN uses interest rate swap agreements to exchange fixed and
variable-rate interest payment obligations over the life of the agreements
without exchange of the underlying principal amounts. During the 1999 first
quarter, there have not been any events or factors that have caused any material
changes to MCN's interest rate risk.
17
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are primarily located in India. During the 1999
first quarter, MCN reached an agreement to sell its interest in TPL for
approximately $130 million. The sale is subject to certain regulatory approvals
and is expected to be completed in the third quarter of 1999. This sale will
significantly reduce MCN's foreign currency risk.
NEW ACCOUNTING PRONOUNCEMENTS
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 at this time.
FORWARD-LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve certain risks and uncertainties as set forth in MCN's 1998
Annual Report on Form 10-K/A.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act. Therefore, MCN claims the full
protections established by the Act.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and other
interested parties: the Form 10-K/A 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.
18
21
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -----------------------
1998 1998
(Restated) (Restated)
1999 Note 2 1999 Note 2
(in Thousands, Except Per Share Amounts) -------- ---------- ---------- ----------
OPERATING REVENUES.......................................... $767,672 $658,584 $1,989,282 $1,968,690
-------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas................................................ 494,019 437,032 1,319,359 1,326,395
Operation and maintenance.................................. 82,241 71,353 312,849 305,080
Depreciation, depletion and amortization................... 26,319 23,754 101,479 104,991
Property and other taxes................................... 19,226 18,552 60,177 63,035
Property write-downs and restructuring charges (Note 5).... -- -- 175,341 --
-------- -------- ---------- ----------
621,805 550,691 1,969,205 1,799,501
-------- -------- ---------- ----------
OPERATING INCOME............................................ 145,867 107,893 20,077 169,189
-------- -------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........................ 12,458 16,761 57,922 56,159
-------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................................ 1,375 4,210 7,632 13,019
Interest on long-term debt................................. (16,505) (13,160) (63,988) (55,977)
Other interest expense..................................... (5,591) (5,063) (19,334) (10,244)
Dividends on preferred securities of subsidiaries.......... (4,972) (5,209) (17,376) (17,993)
Investment loss (Note 5)................................... -- -- (8,500) --
Minority interest.......................................... (319) (610) 6,283 (2,221)
Other...................................................... 1,320 12,696 222 20,473
-------- -------- ---------- ----------
(24,692) (7,136) (95,061) (52,943)
-------- -------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES...................................................... 133,633 117,518 (17,062) 172,405
INCOME TAX PROVISION (BENEFIT).............................. 45,218 40,578 (14,860) 62,280
-------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................... 88,415 76,940 (2,202) 110,125
DISCONTINUED OPERATIONS, NET OF TAXES (Note 6).............. -- 1,942 (274,733) 22,067
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE..................................................... 88,415 78,882 (276,935) 132,192
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES (NOTE
3)......................................................... (2,872) -- (2,872) --
-------- -------- ---------- ----------
NET INCOME (LOSS)........................................... $ 85,543 $ 78,882 $ (279,807) $ 132,192
======== ======== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE (Note 10)
Continuing operations...................................... $ 1.11 $ .98 $ (.03) $ 1.46
Discontinued operations (Note 6)........................... -- .03 (3.47) .29
Cumulative effect of accounting change (Note 3)............ (.04) -- (.04) --
-------- -------- ---------- ----------
$ 1.07 $ 1.01 $ (3.54) $ 1.75
======== ======== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 10)
Continuing operations...................................... $ 1.06 $ .93 $ (.03) $ 1.43
Discontinued operations (Note 6)........................... -- .02 (3.42) .27
Cumulative effect of accounting change (Note 3)............ (.04) -- (.04) --
-------- -------- ---------- ----------
$ 1.02 $ .95 $ (3.49) $ 1.70
======== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
Basic...................................................... 79,413 78,365 79,081 75,658
======== ======== ========== ==========
Diluted.................................................... 85,064 84,504 80,194 81,439
======== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE................................ $ .2550 $ .2550 $ 1.0200 $ .9950
======== ======== ========== ==========
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ----------------------
1998 1998
(Restated) (Restated)
1999 Note 2 1999 Note 2
(in Thousands) -------- ---------- --------- ----------
BALANCE -- BEGINNING OF PERIOD.............................. $ (2,977) $ 365,730 $ 424,157 $368,511
ADD -- NET INCOME (LOSS).................................... 85,543 78,882 (279,807) 132,192
-------- --------- --------- --------
82,566 444,612 144,350 500,703
DEDUCT -- CASH DIVIDENDS DECLARED........................... 19,791 20,455 81,575 76,546
-------- --------- --------- --------
BALANCE -- END OF PERIOD.................................... $ 62,775 $ 424,157 $ 62,775 $424,157
======== ========= ========= ========
- ------------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of these
statements.
19
22
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
------------------------ ------------
1998 1998
(Restated) (Restated)
1999 Note 2 Note 2
(in Thousands) ---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 34,833 $ 39,713 $ 17,039
Accounts receivable, less allowance for doubtful accounts
of $13,411, $18,661 and $9,655, respectively............ 431,783 434,541 400,120
Accrued unbilled revenues................................. 77,335 64,246 87,888
Gas in inventory (Note 7)................................. 90,122 65,112 147,387
Property taxes assessed applicable to future periods...... 63,064 56,726 72,551
Other..................................................... 50,062 62,675 42,472
---------- --------- ----------
747,199 723,013 767,457
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes..................................... 29,054 -- 50,547
Investments in debt and equity securities................. 68,920 49,986 69,705
Deferred swap losses and receivables (Note 13)............ 48,510 67,053 63,147
Deferred environmental costs.............................. 31,056 30,351 30,773
Prepaid benefit costs..................................... 122,061 79,869 111,775
Other..................................................... 107,511 82,307 98,940
---------- --------- ----------
407,112 309,566 424,887
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing.................................... 543,709 359,051 521,711
Electric Power............................................ 242,491 195,441 231,668
Energy Marketing.......................................... 29,888 23,441 29,435
Gas Distribution (Note 5)................................. 1,628 8,906 1,478
Other..................................................... 18,632 18,916 18,939
---------- --------- ----------
836,348 605,755 803,231
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Pipelines & Processing (Note 5)........................... 45,771 61,670 48,706
Gas Distribution (Note 5)................................. 2,938,831 2,832,622 2,916,540
Exploration & Production (Note 6)......................... 1,051,512 1,363,663 1,040,047
Other..................................................... 49,446 29,304 36,124
---------- ---------- ----------
4,085,560 4,287,259 4,041,417
Less -- Accumulated depreciation and depletion.............. 1,688,538 1,520,994 1,644,094
---------- ---------- ----------
2,397,022 2,766,265 2,397,323
---------- ---------- ----------
$4,387,681 $4,404,599 $4,392,898
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
20
23
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
------------------------ ------------
1998 1998
(Restated) (Restated)
1999 Note 2 Note 2
(in Thousands) ---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 258,366 $ 283,600 $ 304,349
Notes payable............................................. 534,639 172,751 618,851
Current portion of long-term debt and capital lease
obligations............................................. 188,427 29,538 269,721
Gas inventory equalization (Note 7)....................... 79,559 70,900 --
Federal income, property and other taxes payable.......... 89,734 90,090 69,465
Deferred gas cost recovery revenues (Note 4b)............. -- 18,937 14,980
Gas payable............................................... 37,515 21,232 42,669
Customer deposits......................................... 17,476 15,343 18,791
Other..................................................... 98,450 79,496 108,310
---------- --------- ----------
1,304,166 781,887 1,447,136
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes..................................... -- 163,686 --
Unamortized investment tax credit......................... 29,569 32,577 30,056
Tax benefits amortizable to customers..................... 129,494 123,189 130,120
Deferred swap gains and payables (Note 13)................ 51,605 49,216 62,956
Accrued environmental costs............................... 34,888 35,000 35,000
Minority interest......................................... 10,405 20,276 10,898
Other..................................................... 77,623 69,105 75,439
---------- ---------- ----------
333,584 493,049 344,469
---------- ---------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS
(NOTE 9).................................................. 1,392,850 1,415,494 1,307,168
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN............. 502,157 504,869 502,203
---------- ---------- ----------
CONTINGENCIES (Note 12)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................. 798 788 797
Additional paid-in capital................................ 830,450 815,364 832,966
Retained earnings......................................... 62,775 424,157 (2,977)
Accumulated other comprehensive loss (Note 11)............ (16,811) (9,085) (16,576)
Yield enhancement, contract and issuance costs............ (22,288) (21,924) (22,288)
---------- ---------- ----------
854,924 1,209,300 791,922
---------- ---------- ----------
$4,387,681 $4,404,599 $4,392,898
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
21
24
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1998
(Restated)
1999 Note 2
(in Thousands) --------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 85,543 $ 78,882
Adjustments to reconcile net income to net cash provided
from operating activities Depreciation, depletion and
amortization
Per statement of operations........................... 26,319 23,754
Charged to discontinued operations and other
accounts............................................. 21,035 23,090
Cumulative effect of accounting change (Note 3)......... 2,872 --
Deferred income taxes -- current........................ (5,489) (8,822)
Deferred income taxes and investment tax credit, net.... 22,495 10,151
Equity in earnings of joint ventures, net of
distributions.......................................... (3,390) (8,670)
Other................................................... (1,138) 622
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 54,622 36,217
--------- ---------
Net cash provided from operating activities........... 202,869 155,224
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (84,212) (138,618)
Dividends paid............................................ (19,791) (20,455)
Issuance of common stock.................................. 226 5,584
Reacquisition of common stock............................. (977) --
Issuance of long-term debt................................ -- 204,609
Long-term commercial paper and bank borrowings............ 92,344 (90,357)
Retirement of long-term debt and preferred securities
(Note 9)................................................ (87,781) (5,181)
Other..................................................... -- 3,634
--------- ---------
Net cash used for financing activities................ (100,191) (40,784)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (81,320) (120,503)
Acquisitions.............................................. (1,602) (13,232)
Investment in debt and equity securities, net............. (12) 46,468
Investment in joint ventures.............................. (27,648) (37,810)
Sale of property and joint venture interests.............. 28,986 9,147
Return of investment in joint ventures.................... 1,136 2,591
Other..................................................... (4,424) (883)
--------- ---------
Net cash used for investing activities................ (84,884) (114,222)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 17,794 218
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 17,039 39,495
--------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31......................... $ 34,833 $ 39,713
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ (32,348) $ (30,077)
Accrued unbilled revenues................................. 10,553 28,764
Accrued/deferred gas cost recovery revenues, net.......... (14,980) 31,799
Gas in inventory.......................................... 57,265 (8,335)
Accounts payable.......................................... (41,183) (58,595)
Federal income, property and other taxes payable.......... 20,269 3,264
Gas payable............................................... (5,154) 12,915
Gas inventory equalization................................ 79,559 70,900
Prepaid/accrued benefit costs, net........................ (9,678) 1,024
Other current assets and liabilities, net................. (5,402) (11,784)
Deferred assets and liabilities, net...................... (4,279) (3,658)
--------- ---------
$ 54,622 $ 36,217
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 34,673 $ 37,344
Federal income taxes.................................... $ -- $ 1,500
- --------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
22
25
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 1998 Annual Report on Form 10-K/A. Certain reclassifications have
been made to the prior year's financial statements to conform with the 1999
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. RESTATEMENT
As discussed in MCN's 1998 Annual Report on Form 10-K/A, subsequent to the
issuance of MCN's December 31, 1998 financial statements, certain matters came
to management's attention and resulted in a special investigation of prior
years' operations of CoEnergy Trading Company (CTC), MCN's non-utility energy
marketing subsidiary. As a result of the investigation, MCN identified that its
internal controls had been overridden and that certain transactions had not been
properly accounted for. Specifically, the investigation concluded that CTC had
entered into gas supply contracts and agreed to pay significantly less than
market prices in one period in return for above-market prices to be paid in
subsequent periods through March 2000. The effect of these transactions was to
improperly delay the accrual of cost of gas expenses, resulting in the
understatement of net income for the 1998 first quarter by $870,000 and the
overstatement of net income for the 1998 twelve-month period by $5,533,000.
Additionally, the investigation identified that CTC had entered into certain
unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly accounting for these
transactions was the overstatement of net income for the 1998 first quarter by
$2,476,000 and the overstatement of net income for the 1998 twelve-month period
by $3,235,000. However, net income of $911,000 and $2,735,000 was realized and
recorded in connection with these trading activities in the 1998 quarter and
twelve-month period, respectively, resulting in a net loss of $1,565,000 in the
1998 first quarter and $500,000 in the 1998 twelve-month period from such
activities. From the inception of these trading activities in March 1997 through
March 1999, $5,721,000 of net income was realized and recorded in connection
with these trading activities. However, marking these contracts to market, as
required, results in a previously unrecorded net unrealized loss of $8,435,000
through March 1999, indicating a net loss of $2,714,000 from such activities.
Other items identified during the investigation resulted in the overstatement of
net income for the 1998 first quarter by $22,000 and the overstatement of net
income for the 1998 twelve-month period by $87,000.
23
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1998 information in the accompanying consolidated financial statements has
been restated from amounts originally reported to properly account for the
transactions identified. A summary of the significant effects of the restatement
on MCN's March 31, 1998 financial statements is as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1998
---------------------- ------------------------
Previously Previously
Reported* Restated Reported* Restated
---------- -------- ---------- ----------
(in Thousands , Except Per Share Amounts)
CONSOLIDATED STATEMENT OF OPERATIONS
Cost of Gas................................... $434,528 $437,032 $1,312,774 $1,326,395
Income From Continuing Operations Before
Income Taxes............................... $120,022 $117,518 $ 186,026 $ 172,405
Income Tax Provision.......................... $ 41,454 $ 40,578 $ 67,046 $ 62,280
Income From Continuing Operations............. $ 78,568 $ 76,940 $ 118,980 $ 110,125
Net Income.................................... $ 80,510 $ 78,882 $ 141,047 $ 132,192
Basic Earnings Per Share
Continuing Operations...................... $ 1.00 $ .98 1.57 $ 1.46
Continuing and Discontinued Operations..... $ 1.03 $ 1.01 $ 1.86 $ 1.75
Diluted Earnings Per Share
Continuing Operations...................... $ .95 $ .93 1.54 $ 1.43
Continuing and Discontinued Operations..... $ .97 $ .95 1.81 $ 1.70
MARCH 31, 1998
------------------------
Previously
Reported Restated
---------- ----------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Accounts Receivable........................... $ 434,004 $ 434,541
Accounts Payable.............................. $ 266,596 $ 283,600
Federal Income, Property and Other Taxes
Payable.................................... $ 95,852 $ 90,090
Common Shareholders' Equity................... $1,220,005 $1,209,300
* Amounts reflect the reclassification of MCN's Exploration & Production (E&P)
segment as a discontinued operation (Note 6).
3. ACCOUNTING FOR START-UP ACTIVITIES
In January 1999, MCN adopted Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-up Activities," issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants. SOP 98-5
requires start-up and organizational costs to be expensed as incurred. This
change in accounting principle resulted in the write-off of start-up and
organization costs capitalized as of December 31, 1998. The cumulative effect of
the change was to decrease earnings by $4,418,000 pre-tax ($2,872,000 net of
taxes) for the three-and twelve-month periods ended March 31, 1999.
4. REGULATORY MATTERS
A. REGULATORY REFORM PLAN
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MichCon
implemented its Regulatory Reform Plan in January 1999. The plan includes a
new three-year gas sales program under which MichCon's gas sales rates
include a gas commodity component that is fixed at
24
27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2.95 per thousand cubic feet (Mcf). As part of its gas acquisition
strategy, MichCon has entered into fixed-price contracts at costs below
$2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001.
The plan also includes a comprehensive experimental three-year customer
choice program, which is subject to annual caps on the level of
participation. The customer choice program began in April 1999, when
approximately 70,000 customers chose to purchase natural gas from suppliers
other than MichCon. Plan years begin April 1 of each year, and the number
of customers allowed to participate in the plan is limited to 75,000 in
1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume
limitation on commercial and industrial participants. The volume limitation
for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in
2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the
gas to the customers' premises at prices that maintain its previously
existing sales margins. Various parties have appealed the Michigan Public
Service Commission's (MPSC) approval of the plan. While management believes
the plan will be upheld on appeal, there can be no assurance as to the
outcome.
B. GAS COST RECOVERY PROCEEDINGS
Prior to January 1999, the Gas Cost Recovery (GCR) process allowed MichCon
to recover its cost of gas sold if the MPSC determined that such costs were
reasonable and prudent. An annual GCR reconciliation proceeding provided a
review of gas costs incurred during the previous year and determined
whether gas costs had been overcollected or undercollected, and as a
result, whether a refund or surcharge, including interest, was required to
be returned to or collected from GCR customers. The GCR process was
suspended with the implementation of MichCon's Regulatory Reform Plan in
January 1999.
In February 1999, MichCon filed its final GCR reconciliation case covering
gas costs incurred during 1998 which indicates an overrecovery of
$18,000,000, including interest. Management believes that 1998 gas costs
were reasonable and prudent and that the MPSC will approve the gas costs
incurred. However, management cannot predict the outcome of this
proceeding. During the first quarter of 1999, MichCon refunded the
overrecovery to customers as a reduction in gas sale rates.
5. PROPERTY WRITE-DOWNS, INVESTMENT LOSS AND RESTRUCTURING CHARGES
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN recorded several
unusual charges in 1998, consisting of property write-downs, an investment loss
and restructuring charges, which reduced MCN's earnings for the 1999
twelve-month period by $183,841,000 pre-tax ($114,578,000 net of taxes and
minority interest). A discussion of each unusual charge by segment follows:
Pipelines & Processing recorded a $133,782,000 pre-tax ($86,959,000 net of
taxes) write-off of its coal fines project equal to the carrying value of the
plants, reflecting the likely inability to recover such costs. MCN is seeking to
maximize the value of its investment in the coal fines project, but is unable to
predict the outcome of such efforts.
MCN also recorded an impairment loss of $3,899,000 pre-tax ($2,534,000 net of
taxes) relating to an acquired out-of-service pipeline in Michigan. MCN reviewed
the business alternatives for this
25
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
asset and determined that its development is unlikely. Accordingly, MCN recorded
an impairment loss equal to the carrying value of this asset.
Electric Power recorded a $2,470,000 pre-tax ($1,605,000 net of taxes)
restructuring charge related to certain international power projects. The charge
was incurred as a result of refocusing MCN's strategic plan, particularly to
exit certain international power projects and to limit future capital
investments in developing countries to projects where it has existing
commitments.
Corporate & Other recorded a $10,390,000 pre-tax ($6,753,000 net of taxes)
restructuring charge related to the corporate realignment designed to improve
operating efficiencies through a more streamlined organizational structure. The
realignment includes cost saving initiatives expected to reduce future operating
expenses. As of March 31, 1999, payments of $1,530,000 have been charged against
the restructuring accruals relating to severance and termination benefits. These
benefits will continue to be paid through 2000. The remaining restructuring
costs, primarily for net lease expenses, are expected to be paid over the
related lease terms that expire through 2006.
Gas Distribution recorded a $24,800,000 pre-tax ($11,200,000 net of taxes and
minority interest) write-down of certain gas gathering properties. An analysis
revealed that projected cash flows from the gathering system were not sufficient
to cover the system's carrying value. Therefore, an impairment loss was recorded
representing the amount by which the carrying value of the system exceeded its
estimated fair value.
MCN also recorded an $8,500,000 pre-tax ($5,525,000 net of taxes) loss from the
write-down of an investment in a Missouri gas distribution company. As a result
of MCN's refocused strategic direction, MCN expects to sell this investment in
1999. The write-down represents the amount by which the carrying value exceeded
the estimated fair value of the investment.
6. DISCONTINUED OPERATIONS
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN has decided to sell
its E&P properties and accordingly has classified this segment as a discontinued
operation. MCN completed the sale of the western U.S. portion of its E&P
properties in April 1999 for approximately $165,000,000. In May 1999, MCN
reached an agreement to sell its Midcontinent/Gulf Coast properties. Bids on all
remaining properties have been received and the properties are expected to be
sold in mid-1999. E&P operating results for 1999 will be deferred until the
sales of such properties have been completed. MCN recognized $423,112,000
pre-tax ($275,022,000 net of taxes) of write-downs of its gas and oil properties
in the 1999 twelve-month period.
26
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following financial information summarizes E&P's operations:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
1999 1998 1999 1998
(in Thousands) -------- ------- --------- --------
Operating Revenues............................. $ -- $55,612 $ 151,490 $221,333
-------- ------- --------- --------
Operating Income (Loss)........................ $ -- $ 8,733 $(396,688) $ 46,807
-------- ------- --------- --------
Income (Loss) Before Income Taxes.............. $ -- $(2,828) $(433,931) $ 8,432
Income Tax Benefits............................ -- (4,770) (159,198) (13,635)
-------- ------- --------- --------
Net Income (Loss).............................. $ -- $ 1,942 $(274,733) $ 22,067
======== ======= ========= ========
MARCH 31, DEC. 31,
---------------------- --------
1999 1998 1998
(in Thousands) -------- ---------- --------
ASSETS
Accounts receivable, net................................ $ 49,617 $ 43,949 $ 74,273
Property, plant and equipment, net...................... 807,275 1,194,298 815,252
Noncurrent deferred income taxes........................ 89,320 -- 96,006
Other................................................... 14,593 36,687 2,670
-------- ---------- --------
$960,805 $1,274,934 $988,201
======== ========== ========
LIABILITIES
Accounts payable........................................ $ 24,078 $ 48,875 $ 59,063
Long-term debt and capital lease obligations............ 299 120,619 929
Noncurrent deferred income taxes........................ -- 66,561 --
Other................................................... 4,437 71 9,458
-------- ---------- --------
$ 28,814 $ 236,126 $ 69,450
======== ========== ========
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 57.7 Bcf and 53.5 Bcf of gas was in inventory
at March 31, 1999 and 1998, respectively.
8. CREDIT FACILITIES
In March 1999, MCN entered into a $150,000,000 revolving credit agreement that
expires in October 1999. Borrowings under the credit agreement are at variable
rates. As of March 31, 1999, there were no amounts outstanding under this
agreement.
9. ENHANCED PRIDES AND LONG-TERM DEBT
As discussed in MCN's 1998 Annual Report on Form 10-K/A, MCN issued 5,865,000 of
Preferred Redeemable Increased Dividend Equity Securities (Enhanced PRIDES) in
1996. Each security represented a contract to purchase one share of MCN common
stock. The Enhanced PRIDES were
27
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
converted into MCN common stock in April 1999, and as a result MCN received cash
proceeds totaling approximately $135,000,000. These proceeds were used to repay
a $130,000,000 medium-term note that came due in May 1999. Also in February
1999, MCN repaid an $80,000,000 medium-term note.
10. EARNINGS PER SHARE COMPUTATION
MCN reports both basic and diluted earnings per share. Basic EPS is computed by
dividing income from continuing operations 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
with proceeds from the assumed issuance. A reconciliation of both calculations
is shown below.
INCOME FROM WEIGHTED
CONTINUING AVERAGE EARNINGS
OPERATIONS COMMON SHARES PER SHARE
-------------------- ---------------- --------------
(in Thousands, Except Per Share 1999 1998 1999 1998 1999 1998
Amounts) ------- --------- ------ ------ ----- -----
THREE MONTHS ENDED MARCH 31
Basic EPS........................ $88,415 $ 76,940 79,413 78,365 $1.11 $ .98
----- -----
Effect of Dilutive Securities:
FELINE PRIDES................. 1,571 1,581 4,560 3,738
Enhanced PRIDES............... -- 40 -- 1,343
Stock-based compensation
plans....................... -- -- 1,091 1,058
------- --------- ------ ------
Diluted EPS...................... $89,986 $ 78,561 85,064 84,504 $1.06 $ .93
======= ========= ====== ====== ===== =====
TWELVE MONTHS ENDED MARCH 31
Basic EPS........................ $(2,202) $ 110,125 79,081 75,658 $(.03) $1.46
----- -----
Effect of Dilutive Securities:
FELINE PRIDES................. -- 6,323 -- 4,020
Enhanced PRIDES............... -- 196 -- 848
Stock-based compensation
plans....................... -- -- -- 913
------- --------- ------ ------
Diluted EPS...................... $(2,202) $ 116,644 79,081 81,439 $(.03) $1.43
======= ========= ====== ====== ===== =====
28
31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMPREHENSIVE INCOME
MCN reports comprehensive income, which is defined as the change in common
shareholder's equity during a period from transactions and events from non-owner
sources, including net income. Total comprehensive income for the applicable
periods is as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1999 1998 1999 1998
(in Thousands) ------- ------- --------- --------
COMPREHENSIVE INCOME (LOSS)
Net Income (Loss)............................ $85,543 $78,882 $(279,807) $132,192
------- ------- --------- --------
Other Comprehensive Income (Loss), Net of
Taxes:
Foreign currency translation adjustment... 282 (499) (5,773) (6,773)
------- ------- --------- --------
Unrealized loss on securities:
Unrealized losses during period......... (517) (1,067) (5,941) (2,251)
Less: Reclassification for losses
recognized in net income............. -- -- 3,987 --
------- ------- --------- --------
(517) (1,067) (1,954) (2,251)
------- ------- --------- --------
Total Other Comprehensive Loss, Net of
Taxes..................................... (235) (1,566) (7,727) (9,024)
------- ------- --------- --------
Total Comprehensive Income (Loss)............ $85,308 $77,316 $(287,534) $123,168
======= ======= ========= ========
12. 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. These proceedings include certain contract disputes between
Gas Distribution and gas producers. 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.
13. 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
29
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
activities. The following assets and liabilities related to the use of gas and
oil swap agreements are reflected in the Consolidated Statement of Financial
Position:
MARCH 31, DECEMBER 31,
-------------------- ------------
1999 1998 1998
(in Thousands) ------- ------- ------------
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses....................................... $36,120 $59,307 $48,700
Receivables............................................. 19,012 8,134 25,864
------- ------- -------
55,132 67,441 74,564
Less -- Current portion................................. 6,622 388 11,417
------- ------- -------
$48,510 $67,053 $63,147
======= ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains........................................ $17,809 $ 4,504 $24,126
Payables................................................ 41,283 67,407 54,525
------- ------- -------
59,092 71,911 78,651
Less -- Current portion................................. 7,487 22,695 15,695
------- ------- -------
$51,605 $49,216 $62,956
======= ======= =======
30
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION
MCN is a diversified energy holding company with natural gas markets and
investments primarily in North America. MCN is organized into two business
groups, Diversified Energy and Gas Distribution. The groups operate four major
business segments as is set forth in the following tables.
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
1999 1998 1999 1998
(in Thousands) -------- -------- ---------- ----------
Revenues From Unaffiliated Customers:
Pipelines & Processing................... $ 5,905 $ 2,233 $ 24,528 $ 7,240
Electric Power........................... 12,143 9,678 49,596 47,382
Energy Marketing......................... 242,612 214,513 795,167 751,510
Gas Distribution......................... 507,012 432,160 1,119,991 1,162,558
-------- -------- ---------- ----------
767,672 658,584 1,989,282 1,968,690
-------- -------- ---------- ----------
Revenues From Affiliated Customers:
Pipelines & Processing................... 174 174 345 396
Energy Marketing......................... 18,085 24,009 99,619 90,355
Gas Distribution......................... 2,668 3,250 6,053 9,757
-------- -------- ---------- ----------
20,927 27,433 106,017 100,508
-------- -------- ---------- ----------
Eliminations............................... (20,927) (27,433) (106,017) (100,508)
-------- -------- ---------- ----------
Consolidated Operating Revenues............ $767,672 $658,584 $1,989,282 $1,968,690
======== ======== ========== ==========
Net Income (Loss):
Pipelines & Processing................... $ 1,675 $ 4,454 $ (84,478) $ 16,690
Electric Power........................... 4,401 7,719 16,887 19,919
Energy Marketing......................... 2,355 3,411 (2,094) 1,786
Gas Distribution......................... 84,293 62,656 93,371 79,852
Corporate & Other........................ (4,309) (1,300) (25,888) (8,122)
-------- -------- ---------- ----------
88,415 76,940 (2,202) 110,125
Discontinued Operations.................. -- 1,942 (274,733) 22,067
Cumulative effect of accounting change... (2,872) -- (2,872) --
-------- -------- ---------- ----------
Consolidated Net Income (Loss)............. $ 85,543 $ 78,882 $ (279,807) $ 132,192
======== ======== ========== ==========
15. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCN Investment Corporation (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, which primarily
consists of investments in subsidiaries other than MichCon, is $954,823,000 at
March 31, 1999.
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, MichCon Enterprises, Inc. and Blue Lake
Holdings, Inc., until its sale on December 31, 1997.
31
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MichCon RECLASSES TOTAL
------------ ----- ------- ------------ ------------
(in Thousands) THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
OPERATING REVENUES................................. $11,664 $264,653 $498,090 $ (6,735) $767,672
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas...................................... 7,405 242,435 248,351 (4,172) 494,019
Operation and maintenance........................ (1,425) 18,657 67,546 (2,537) 82,241
Depreciation, depletion and amortization......... 834 877 24,608 -- 26,319
Property and other taxes......................... 388 370 18,462 6 19,226
------- -------- -------- -------- --------
7,202 262,339 358,967 (6,703) 621,805
------- -------- -------- -------- --------
OPERATING INCOME................................... 4,462 2,314 139,123 (32) 145,867
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... 84,053 12,017 441 (84,053) 12,458
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 5,293 396 999 (5,313) 1,375
Interest on long-term debt....................... 211 (5,750) (10,966) -- (16,505)
Other interest expense........................... (4,162) (4,085) (2,655) 5,311 (5,591)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (4,972) (4,972)
Minority interest................................ -- (62) (257) -- (319)
Other............................................ (131) 953 464 34 1,320
------- -------- -------- -------- --------
1,211 (8,548) (12,415) (4,940) (24,692)
------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES......................... 89,726 5,783 127,149 (89,025) 133,633
INCOME TAX PROVISION............................... 259 1,783 43,176 -- 45,218
------- -------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE........................................... 89,467 4,000 83,973 (89,025) 88,415
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES............................................ -- (2,872) -- -- (2,872)
------- -------- -------- -------- --------
NET INCOME......................................... 89,467 1,128 83,973 (89,025) 85,543
DIVIDENDS ON PREFERRED SECURITIES.................. 4,972 -- -- (4,972) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK.............. $84,495 $ 1,128 $ 83,973 $(84,053) $ 85,543
======= ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------------
OPERATING REVENUES................................. $ 6,182 $228,978 $429,227 $ (5,803) $658,584
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas...................................... 3,121 219,517 217,589 (3,195) 437,032
Operation and maintenance........................ 140 11,599 62,222 (2,608) 71,353
Depreciation, depletion and amortization......... 646 663 22,445 -- 23,754
Property and other taxes......................... 633 617 17,302 -- 18,552
------- -------- -------- -------- --------
4,540 232,396 319,558 (5,803) 550,691
------- -------- -------- -------- --------
OPERATING INCOME (LOSS)............................ 1,642 (3,418) 109,669 -- 107,893
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... 79,253 16,307 589 (79,388) 16,761
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 5,500 3,056 1,112 (5,458) 4,210
Interest on long-term debt....................... 241 (1,195) (12,206) -- (13,160)
Other interest expense........................... (449) (6,917) (3,257) 5,560 (5,063)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (5,209) (5,209)
Minority interest................................ -- 135 (745) -- (610)
Other............................................ 34 12,541 121 -- 12,696
------- -------- -------- -------- --------
5,326 7,620 (14,975) (5,107) (7,136)
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................ 86,221 20,509 95,283 (84,495) 117,518
INCOME TAX PROVISION............................... 604 6,355 33,619 -- 40,578
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS.................. 85,617 14,154 61,664 (84,495) 76,940
DISCONTINUED OPERATIONS, NET OF TAXES.............. -- 1,942 -- -- 1,942
------- -------- -------- -------- --------
NET INCOME......................................... 85,617 16,096 61,664 (84,495) 78,882
DIVIDENDS ON PREFERRED SECURITIES.................. 5,209 -- -- (5,209) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK.............. $80,408 $ 16,096 $61,664 $(79,286) $ 78,882
======= ======== ======== ======== ========
32
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MichCon RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) Twelve Months Ended March 31, 1999
------------------------------------------------------------
OPERATING REVENUES.................................. $ 23,744 $ 877,999 $1,102,521 $(14,982) $1,989,282
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of gas....................................... 14,990 831,723 482,291 (9,645) 1,319,359
Operation and maintenance......................... (11,772) 72,211 257,721 (5,311) 312,849
Depreciation, depletion and amortization.......... 3,394 3,039 95,046 -- 101,479
Property and other taxes.......................... 1,474 2,099 56,598 6 60,177
Property write-downs and restructuring charges.... 8,669 141,872 24,800 -- 175,341
--------- ---------- ---------- -------- ----------
16,755 1,050,944 916,456 (14,950) 1,969,205
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS)............................. 6,989 (172,945) 186,065 (32) 20,077
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES...................................... (269,971) 56,952 1,798 269,143 57,922
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 18,444 3,523 5,575 (19,910) 7,632
Interest on long-term debt........................ (671) (19,673) (43,644) -- (63,988)
Other interest expense............................ (6,187) (21,443) (11,511) 19,807 (19,334)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (17,376) (17,376)
Investment loss................................... (8,500) -- -- -- (8,500)
Minority interest................................. -- 68 6,215 -- 6,283
Other............................................. (770) 797 161 34 222
--------- ---------- ---------- -------- ----------
2,316 (36,728) (43,204) (17,445) (95,061)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES...................................... (260,666) (152,721) 144,659 251,666 (17,062)
INCOME TAX PROVISION (BENEFIT)...................... (3,174) (57,060) 45,374 -- (14,860)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS............ (257,492) (95,661) 99,285 251,666 (2,202)
DISCONTINUED OPERATIONS, NET OF TAXES............... -- (274,733) -- -- (274,733)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................................ (257,492) (370,394) 99,285 251,666 (276,935)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE.............. -- (2,872) -- -- (2,872)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................... (257,492) (373,266) 99,285 251,666 (279,807)
DIVIDENDS ON PREFERRED SECURITIES................... 17,376 -- -- (17,376) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK........ $(274,868) $ (373,266) $ 99,285 $269,042 $ (279,807)
========= ========== ========== ======== ==========
TWELVE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------
OPERATING REVENUES...................................... $16,852 $811,093 $1,155,461 $ (14,716) $1,968,690
------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas........................................... 9,057 780,220 546,545 (9,427) 1,326,395
Operation and maintenance............................. 2,367 37,245 270,757 (5,289) 305,080
Depreciation, depletion and amortization.............. 2,373 1,971 100,647 -- 104,991
Property and other taxes.............................. 1,614 1,169 60,252 -- 63,035
Property write-downs and restructuring charges........ -- -- -- -- --
------- -------- ---------- --------- ----------
15,411 820,605 978,201 (14,716) 1,799,501
------- -------- ---------- --------- ----------
OPERATING INCOME (LOSS)................................. 1,441 (9,512) 177,260 -- 169,189
------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES... 142,440 53,603 1,478 (141,362) 56,159
------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS) INTEREST INCOME........... 17,352 8,320 4,562 (17,215) 13,019
Interest on long-term debt............................ 507 (9,492) (46,992) -- (55,977)
Other interest expense................................ 1,108 (19,927) (9,030) 17,605 (10,244)
Dividends on preferred securities of subsidiaries..... -- -- -- (17,993) (17,993)
Minority interest..................................... -- 68 (2,289) -- (2,221)
Other................................................. 165 19,852 456 -- 20,473
------- -------- ---------- --------- ----------
19,132 (1,179) (53,293) (17,603) (52,943)
------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES... 163,013 42,912 125,445 (158,965) 172,405
INCOME TAX PROVISION.................................... 2,235 13,091 46,954 -- 62,280
------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS....................... 160,778 29,821 78,491 (158,965) 110,125
DISCONTINUED OPERATIONS, NET OF TAXES................... -- 22,067 -- -- 22,067
------- -------- ---------- --------- ----------
NET INCOME.............................................. 160,778 51,888 78,491 (158,965) 132,192
DIVIDENDS ON PREFERRED SECURITIES....................... 17,993 -- -- (17,993) --
------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................... $142,785 $ 51,888 $ 78,491 $(140,972) $ 132,192
======= ======== ========== ========= ==========
33
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MichCon RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) MARCH 31, 1999
------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 1,472 $ 9,849 $ 23,512 $ -- $ 34,833
Accounts receivable......................... 11,697 225,981 226,238 (18,722) 445,194
Less -- Allowance for doubtful accounts.... 93 1,773 11,545 -- 13,411
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 11,604 224,208 214,693 (18,722) 431,783
Accrued unbilled revenues.................... 904 -- 76,431 -- 77,335
Gas in inventory............................. -- 65,637 24,485 -- 90,122
Property taxes assessed applicable to future
periods.................................... 262 3,547 59,255 -- 63,064
Other........................................ 6,130 22,609 32,990 (11,667) 50,062
---------- ---------- ---------- ----------- ----------
20,372 325,850 431,366 (30,389) 747,199
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes........................ 324 115,025 -- (86,295) 29,054
Investments in debt and equity securities.... -- 2,209 66,110 601 68,920
Deferred swap losses and receivables......... -- 48,510 -- -- 48,510
Deferred environmental costs................. 2,770 -- 28,286 -- 31,056
Prepaid benefit costs........................ -- -- 124,235 (2,174) 122,061
Other........................................ 11,678 29,742 61,250 4,841 107,511
---------- ---------- ---------- ----------- ----------
14,772 195,486 279,881 (83,027) 407,112
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,589,031 814,912 19,808 (1,587,403) 836,348
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST......... 48,826 1,125,366 2,911,368 -- 4,085,560
Less -- Accumulated depreciation and
depletion.................................. 17,943 250,082 1,420,513 -- 1,688,538
---------- ---------- ---------- ----------- ----------
30,883 875,284 1,490,855 -- 2,397,022
---------- ---------- ---------- ----------- ----------
$1,655,058 $2,211,532 $2,221,910 $(1,700,819) $4,387,681
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 3,846 $ 175,097 $ 96,390 $ (16,967) $ 258,366
Notes payable................................ 237,762 188,828 107,900 149 534,639
Current portion of long-term debt and capital
lease obligations.......................... -- 130,216 58,211 -- 188,427
Gas inventory equalization................... -- -- 79,559 -- 79,559
Federal income, property and other taxes
payable.................................... (3,555) (4,312) 103,464 (5,863) 89,734
Deferred gas cost recovery revenues.......... -- -- -- -- --
Gas payable.................................. -- 11,680 25,835 -- 37,515
Customer deposits............................ 17 -- 17,459 -- 17,476
Other........................................ 21,504 20,602 58,935 (2,591) 98,450
---------- ---------- ---------- ----------- ----------
259,574 522,111 547,753 (25,272) 1,304,166
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (10,383) -- 96,353 (85,970) --
Unamortized investment tax credit............ 266 -- 29,303 -- 29,569
Tax benefits amortizable to customers........ -- -- 129,494 -- 129,494
Deferred swap gains and payables............. -- 51,605 -- -- 51,605
Accrued environmental costs.................. 3,000 -- 31,888 -- 34,888
Minority interest............................ -- 2,230 8,175 -- 10,405
Other........................................ 13,167 14,770 51,860 (2,174) 77,623
---------- ---------- ---------- ----------- ----------
6,050 68,605 347,073 (88,144) 333,584
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS.................................. -- 778,905 613,945 -- 1,392,850
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 502,157 -- -- -- 502,157
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 798 5 10,300 (10,305) 798
Additional paid-in capital................... 830,450 1,042,982 230,399 (1,273,381) 830,450
Retained earnings (deficit).................. 78,317 (184,265) 472,440 (303,717) 62,775
Accumulated other comprehensive loss......... -- (16,811) -- -- (16,811)
Yield enhancement, contract and issuance
costs...................................... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
887,277 841,911 713,139 (1,587,403) 854,924
---------- ---------- ---------- ----------- ----------
$1,655,058 $2,211,532 $2,221,910 $(1,700,819) $4,387,681
========== ========== ========== =========== ==========
34
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MichCon RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) MARCH 31, 1998
------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 8,349 $ 14,281 $ 17,083 $ -- $ 39,713
Accounts receivable.......................... 17,102 204,641 280,891 (49,432) 453,202
Less -- Allowance for doubtful accounts.... 85 453 18,123 -- 18,661
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 17,017 204,188 262,768 (49,432) 434,541
Accrued unbilled revenue..................... 846 -- 63,400 -- 64,246
Gas in inventory............................. -- 44,923 20,188 1 65,112
Property taxes assessed applicable to future
periods.................................... 178 1,783 54,765 -- 56,726
Other........................................ 6,092 35,334 28,348 (7,099) 62,675
---------- ---------- ---------- ----------- ----------
32,482 300,509 446,552 (56,530) 723,013
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 14,098 35,538 350 49,986
Deferred swap losses and receivables......... -- 67,053 -- -- 67,053
Deferred environmental costs................. 2,535 -- 27,816 -- 30,351
Prepaid benefit costs........................ 640 -- 85,817 (6,588) 79,869
Other........................................ 6,280 30,097 47,232 (1,302) 82,307
---------- ---------- ---------- ----------- ----------
9,455 111,248 196,403 (7,540) 309,566
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,703,787 576,771 20,078 (1,694,881) 605,755
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST......... 39,635 1,438,282 2,809,342 -- 4,287,259
Less -- Accumulated depreciation and
depletion.................................. 13,568 172,613 1,334,813 -- 1,520,994
---------- ---------- ---------- ----------- ----------
26,067 1,265,669 1,474,529 -- 2,766,265
---------- ---------- ---------- ----------- ----------
$1,771,791 $2,254,197 $2,137,562 $(1,758,951) $4,404,599
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 6,028 $ 228,015 $ 90,568 $ (41,011) $ 283,600
Notes payable................................ -- 65,048 117,094 (9,391) 172,751
Current portion of long-term debt and capital
lease obligations.......................... 365 1,557 27,616 -- 29,538
Gas inventory equalization................... -- 6 70,894 -- 70,900
Federal income, property and other taxes
payable.................................... 1,166 (4,243) 100,257 (7,090) 90,090
Deferred gas cost recovery revenues.......... -- -- 18,937 -- 18,937
Gas Payable.................................. -- 3,205 18,027 -- 21,232
Customer deposits............................ 20 -- 15,323 -- 15,343
Other........................................ 17,754 12,026 49,724 (8) 79,496
---------- ---------- ---------- ----------- ----------
25,333 305,614 508,440 (57,500) 781,887
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (4,290) 83,117 84,839 20 163,686
Unamortized investment tax credit............ 293 -- 32,284 -- 32,577
Tax benefits amortizable to customers........ -- -- 123,189 -- 123,189
Deferred swap gains and payables............. -- 49,216 -- -- 49,216
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 2,322 17,954 -- 20,276
Other........................................ 13,496 13,255 48,963 (6,609) 69,105
---------- ---------- ---------- ----------- ----------
12,499 147,910 339,229 (6,589) 493,049
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS.................................. -- 803,289 612,205 -- 1,415,494
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 504,869 -- -- -- 504,869
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 788 5 10,300 (10,305) 788
Additional paid-in capital................... 815,364 817,463 230,399 (1,047,862) 815,364
Retained earnings............................ 434,862 189,001 436,989 (636,695) 424,157
Accumulated other comprehensive income....... -- (9,085) -- -- (9,085)
Yield enhancement, contract and issuance
costs...................................... (21,924) -- -- -- (21,924)
---------- ---------- ---------- ----------- ----------
1,229,090 997,384 677,688 (1,694,862) 1,209,300
---------- ---------- ---------- ----------- ----------
$1,771,791 $2,254,197 $2,137,562 $(1,758,951) $4,404,599
========== ========== ========== =========== ==========
35
38
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, 1998
------------------------------------------------------------------------
(in Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 1,400 $ 9,036 $ 6,603 $ -- $ 17,039
Accounts receivable.......................... 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts.... 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues.................... 1,121 -- 86,767 -- 87,888
Gas in inventory............................. -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods.................................... 214 1,172 71,165 -- 72,551
Other........................................ 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes........................ 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities.... -- 3,548 65,556 601 69,705
Deferred swap losses and receivables......... -- 63,147 -- -- 63,147
Deferred environmental costs................. 2,604 -- 28,169 -- 30,773
Prepaid benefit costs........................ -- -- 113,879 (2,104) 111,775
Other........................................ 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,550,770 782,471 19,343 (1,549,353) 803,231
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 48,681 1,103,716 2,889,020 -- 4,041,417
Less -- Accumulated depreciation and
depletion.................................. 17,210 229,944 1,396,940 -- 1,644,094
---------- ---------- ---------- ----------- ----------
31,471 873,772 1,492,080 -- 2,397,323
---------- ---------- ---------- ----------- ----------
$1,615,384 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 4,123 $ 218,851 $ 98,891 $ (17,516) $ 304,349
Notes payable................................ 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations.......................... -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable.................................... 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues.......... -- -- 14,980 -- 14,980
Gas payable.................................. -- 17,332 25,337 -- 42,669
Customer deposits............................ 22 -- 18,769 -- 18,791
Other........................................ 18,337 25,276 67,222 (2,525) 108,310
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit............ 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers........ -- -- 130,120 -- 130,120
Deferred swap gains and payables............. -- 62,956 -- -- 62,956
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 2,697 8,201 -- 10,898
Other........................................ 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS.................................. -- 687,333 619,835 -- 1,307,168
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 502,203 -- -- -- 502,203
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 797 5 10,300 (10,305) 797
Additional paid-in capital................... 832,966 1,071,390 230,399 (1,301,789) 832,966
Retained earnings (deficit).................. 13,613 (185,393) 406,144 (237,341) (2,977)
Accumulated other comprehensive loss......... -- (16,576) -- -- (16,576)
Yield enhancement, contract and issuance
costs...................................... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
825,088 869,426 646,843 (1,549,435) 791,922
---------- ---------- ---------- ----------- ----------
$1,615,384 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
36
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MichCon RECLASSES TOTAL
------------ -------- --------- ------------ ------------
(in Thousands) THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.............. $ 20,753 $ 27,288 $ 179,713 $(24,885) $ 202,869
-------- -------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................. (23,009) 51,066 (113,269) 1,000 (84,212)
Capital paid to affiliates, net.................... -- (28,408) -- 28,408 --
Dividends paid..................................... (19,791) -- (17,500) 17,500 (19,791)
Preferred securities dividends paid................ (5,125) -- -- 5,125 --
Issuance of common stock........................... 226 -- -- -- 226
Reacquisition of common stock...................... (977) -- -- -- (977)
Long-term commercial paper and bank borrowings,
net.............................................. -- 92,344 -- -- 92,344
Retirement of long-term debt and preferred
securities....................................... -- (81,847) (5,934) -- (87,781)
-------- -------- --------- -------- ---------
Net cash provided from (used for) financing
activities..................................... (48,676) 33,155 (136,703) 52,033 (100,191)
-------- -------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................... (381) (56,730) (24,209) -- (81,320)
Acquisitions....................................... -- (1,602) -- -- (1,602)
Investment in debt and equity securities, net...... -- 542 -- (554) (12)
Investment in joint ventures and subsidiaries...... 28,258 (27,482) (16) (28,408) (27,648)
Sale of property and joint venture interests....... -- 29,560 -- (574) 28,986
Return of investment in joint ventures............. -- 1,136 -- -- 1,136
Other.............................................. 118 (5,054) (1,876) 2,388 (4,424)
-------- -------- --------- -------- ---------
Net cash provided from (used for) investing
activities..................................... 27,995 (59,630) (26,101) (27,148) (84,884)
-------- -------- --------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 72 813 16,909 -- 17,794
CASH AND CASH EQUIVALENTS, JANUARY 1................. 1,400 9,036 6,603 -- 17,039
-------- -------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31.................. $ 1,472 $ 9,849 $ 23,512 $ -- $ 34,833
======== ======== ========= ======== =========
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.............. $ 17,826 $(29,269) $ 170,119 $ (3,452) $ 155,224
-------- -------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................. -- (7,708) (124,597) (6,313) (138,618)
Capital contributions paid to affiliates, net...... -- (17,076) -- 17,076 --
Dividends paid..................................... (20,455) -- -- -- (20,455)
Preferred securities dividends paid................ (9,754) -- -- 9,754 --
Issuance of common stock........................... 5,584 -- -- -- 5,584
Issuance of long-term debt......................... -- 204,609 -- -- 204,609
Long-term commercial paper, net.................... -- (90,357) -- -- (90,357)
Retirement of long-term debt....................... -- (409) (4,772) -- (5,181)
Other.............................................. -- 3,634 -- -- 3,634
-------- -------- --------- -------- ---------
Net cash provided from (used for) financing
activities..................................... (24,625) 92,693 (129,369) 20,517 (40,784)
-------- -------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................... (1,765) (80,456) (38,282) -- (120,503)
Acquisitions....................................... -- (13,232) -- -- (13,232)
Investment in debt and equity securities........... -- 46,895 (427) -- 46,468
Investment in joint ventures and subsidiaries...... 16,876 (37,623) 12 (17,075) (37,810)
Sale of property and investment in joint
ventures......................................... -- 9,147 -- -- 9,147
Return of investment in joint ventures............. -- 2,591 -- -- 2,591
Other................................................ 14 (1,584) 677 10 (883)
-------- -------- --------- -------- ---------
Net cash provided from (used for) investing
activities..................................... 15,125 (74,262) (38,020) (17,065) (114,222)
-------- -------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 8,326 (10,838) 2,730 -- 218
CASH AND CASH EQUIVALENTS, JANUARY 1................. 23 25,119 14,353 -- 39,495
-------- -------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31.................. $ 8,349 $ 14,281 $ 17,083 $ -- $ 39,713
======== ======== ========= ======== =========
37
40
OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MCN held its Annual Meeting of Shareholders on April 28, 1999. As of March 1,
1999, the record date for determination of shareholders entitled to vote at the
Annual Meeting, there were 79,790,381 shares outstanding and entitled to vote.
Of these shares, 69,134,295 or 86.6%, were present in person or by proxy, and
10,656,086 shares were not voted.
At the Annual Meeting, shareholders voted:
1) To elect the following Directors to serve for three year terms:
NUMBER OF SHARES
DIRECTOR NUMBER OF SHARES WITHHOLDING
(THREE-YEAR TERMS) CONSENTING FOR CONSENT
------------------ ---------------- ----------------
Stephen E. Ewing................................ 67,434,652 1,699,643
Roger Fridholm.................................. 67,429,867 1,704,428
Helen O. Petrauskas............................. 67,411,783 1,722,512
James G. Berges, Alfred R. Glancy III, Frank M. Hennessey, Thomas H.
Jeffs II, Howard F. Sims and Bill M. Thompson did not have terms of
office expiring in 1999 and continue to serve as directors of the
corporation. William K. McCrackin retired from the MCN Board effective
with the 1999 Annual Meeting.
2) To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the year ending December 31, 1999, with 67,706,024 shares
voted for the ratification, 925,232 shares voted against, and
abstentions of 503,039 shares.
38
41
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 - 1998.
27-2 Financial Data Schedule - 1997.
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated May 17, 1999, under item 5, which
included a press release issued by MCN Energy Group Inc. on May 17, 1999
that announced it would delay the filing of its 1999 first quarter Form
10-Q with the Securities and Exchange Commission.
39
42
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: June 9, 1999 By: /s/ GERARD KABZINSKI
------------------------------------
Gerard Kabzinski
Vice President and Controller
40
43
INDEX TO EXHIBITS
EXHIBIT NO. 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 - 1998.
27-2 Financial Data Schedule - 1997.