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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 SEPTEMBER 30, 1996, 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 CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 1996:
Common Stock, par value $.01 per share: 67,197,241
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INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
PAGE
NUMBER
------
COVER.................................................................... i
INDEX.................................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 1
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................. 26
SIGNATURE................................................................ 27
ii
MCN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
MCN reports quarterly seasonal loss -- MCN's loss from continuing operations
was $13.4 million ($.20 per share) during the 1996 quarter, which was a $3.9
million ($.06 per share) larger loss than the same 1995 quarter. Earnings from
continuing operations for the 1996 nine-month and twelve-month periods
increased $18.2 million ($.24 per share) and $39.0 million ($.52 per share),
respectively, over the comparable 1995 periods.
MCN's earnings for the nine- and twelve-month periods were increased by income
from discontinued operations, including a one-time gain of $36.2 million ($.54
per share) from the sale of The Genix Group, Inc. (Genix), MCN's computer
operations services subsidiary. As discussed in the "Discontinued Operations"
section that follows, MCN sold Genix during the second quarter of 1996.
A summary of financial performance follows:
QUARTER 9 MONTHS 12 MONTHS
--------------- ------------ ------------
1996 1995 1996 1995 1996 1995
------- ------ ------ ----- ------ -----
NET INCOME (LOSS) (in Millions)
Continuing Operations:
Gas Distribution................... $ (18.9) $(12.9) $ 53.1 $41.5 $ 87.2 $58.4
Diversified Energy................. 5.5 3.4 17.7 11.1 24.2 14.0
------- ------ ------ ----- ------ -----
(13.4) (9.5) 70.8 52.6 111.4 72.4
------- ------ ------ ----- ------ -----
Discontinued Operations:
Income From Operations............. -- .9 1.6 2.7 2.5 3.6
Gain on Sale....................... -- -- 36.2 -- 36.2 --
------- ------ ------ ----- ------ -----
-- .9 37.8 2.7 38.7 3.6
------- ------ ------ ----- ------ -----
$ (13.4) $(8.6) $108.6 $55.3 $150.1 $76.0
======= ====== ====== ===== ====== =====
EARNINGS (LOSS) PER SHARE
Continuing Operations:
Gas Distribution................... $ (.28) $ (.20) $ .79 $ .65 $ 1.31 $ .93
Diversified Energy................. .08 .06 .27 .17 .36 .22
------- ------ ------ ----- ------ -----
(.20) (.14) 1.06 .82 1.67 1.15
------- ------ ------ ----- ------ -----
Discontinued Operations:
Income From Operations............. -- .01 .03 .04 .04 .06
Gain on Sale....................... -- -- .54 -- .54 --
------- ------ ------ ----- ------ -----
-- .01 .57 .04 .58 .06
------- ------ ------ ----- ------ -----
$ (.20) $ (.13) $ 1.63 $ .86 $ 2.25 $1.21
======= ====== ====== ===== ====== =====
- -------------------------------------------------------------------------------
Strategic direction -- MCN's objective is to achieve superior, long-term
returns for its shareholders. To accomplish this, MCN will aggressively invest
in a diverse portfolio of domestic and international energy-related projects.
The success of this strategy will be demonstrated by the growth of MCN's
earnings and the total return to its shareholders over time.
GAS DISTRIBUTION
Quarterly results are down -- Given the seasonal nature of its business, Gas
Distribution generally experiences a loss during the third quarter when the
weather is warm and less gas is delivered to customers. However, Gas
Distribution's loss of $18.9 million ($.28 per share) during the 1996 quarter
was $6.0 million ($.08 per share) higher than the third quarter of 1995. These
results were due mainly to increased operating expenses. Earnings for the 1996
nine- and twelve-month periods increased $11.6 million ($.14 per share) and
$28.8 million ($.38 per share), respectively, from the same periods in 1995.
The increases are due primarily to higher gas deliveries resulting from colder
weather.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
QUARTER 9 MONTHS 12 MONTHS
---------- ----------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ----- ----- ------
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percentage Colder (Warmer) than
Normal.............................. N/A N/A 6.2% (3.8)% 6.8% (8.5)%
Increase (Decrease) from Normal in:
Gas Markets (in Bcf)................ (.2) .5 8.4 (4.3) 14.2 (14.2)
Net Income (in Millions)............ $(.2) $ .4 $7.6 $(3.7) $12.7 $(12.7)
Earnings Per Share.................. $ -- $.01 $.11 $(.06) $ .19 $ (.20)
GROSS MARGIN
Gross margin decreases -- Gas Distribution gross margin (operating revenues
less cost of gas) decreased $1.6 million for the 1996 quarter due to higher
lost gas costs, as discussed in the "Cost of Gas" section, partially offset by
increased gas sales and transportation deliveries. Gross margin increased
$23.9 million and $56.7 million for the 1996 nine- and twelve-month periods,
respectively, due to increased gas sales and transportation deliveries.
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- ------------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ -------- --------
GAS DISTRIBUTION
OPERATIONS (in Millions)
Operating Revenues*....... $119.0 $112.1 $882.8 $732.8 $1,257.6 $1,037.8
Cost of Gas............... 30.1 21.6 433.8 307.7 617.5 454.4
------ ------ ------ ------ -------- --------
Gross Margin............. 88.9 90.5 449.0 425.1 640.1 583.4
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation & Maintenance.. 69.8 62.0 211.9 214.7 297.0 302.6
Depreciation & Depletion. 25.0 22.7 74.5 68.6 97.2 89.6
Property & Other Taxes... 13.3 13.2 47.2 44.8 61.2 57.1
------ ------ ------ ------ -------- --------
108.1 97.9 333.6 328.1 455.4 449.3
------ ------ ------ ------ -------- --------
Operating Income (Loss)... (19.2) (7.4) 115.4 97.0 184.7 134.1
------ ------ ------ ------ -------- --------
Equity in Earnings of
Joint Ventures........... .1 .3 .7 .9 1.1 1.2
------ ------ ------ ------ -------- --------
Other Income &
(Deductions)*
Interest Income.......... 1.5 1.3 2.7 3.5 3.6 4.6
Interest Expense......... (12.2) (10.8) (36.0) (32.0) (48.5) (43.6)
Minority Interest........ (.4) (.6) (1.1) (1.8) (1.7) (2.5)
Other.................... .7 (1.4) .5 (2.9) (2.2) (5.7)
------ ------ ------ ------ -------- --------
(10.4) (11.5) (33.9) (33.2) (48.8) (47.2)
------ ------ ------ ------ -------- --------
Income (Loss) Before
Income Taxes............. (29.5) (18.6) 82.2 64.7 137.0 88.1
Income Taxes.............. (10.6) (5.7) 29.1 23.2 49.8 29.7
------ ------ ------ ------ -------- --------
Net Income (Loss)......... $(18.9) $(12.9) $ 53.1 $ 41.5 $ 87.2 $ 58.4
====== ====== ====== ====== ======== ========
*Includes intercompany transactions.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
GAS SALES AND END USER TRANSPORTATION deliveries in total increased .9 billion
cubic feet (Bcf) in the 1996 quarter, and 20.2 Bcf and 42.6 Bcf in the nine-
and twelve-month periods, respectively. The increase in the 1996 quarter is
due primarily to market expansion and increased customer consumption. The
increases in the nine- and twelve-month periods are due primarily to colder
weather, as well as market expansion and increased consumption. End user
transportation deliveries reflect transportation to the Michigan Power
project, a 123 megawatt cogeneration plant in which MCN has a 50% interest.
Deliveries to the project, which became operational in October 1995, are
approximately 9 Bcf annually.
QUARTER 9 MONTHS 12 MONTHS
----------- ----------- -----------
1996 1995 1996 1995 1996 1995
----- ----- ----- ----- ----- -----
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................... 14.5 14.4 152.6 136.8 225.7 193.0
End User Transportation..................... 28.6 27.8 108.1 103.7 150.1 140.2
----- ----- ----- ----- ----- -----
43.1 42.2 260.7 240.5 375.8 333.2
Intermediate Transportation*................ 148.7 75.8 407.1 260.3 521.2 337.1
----- ----- ----- ----- ----- -----
191.8 118.0 667.8 500.8 897.0 670.3
===== ===== ===== ===== ===== =====
*Includes intercompany volumes.
INTERMEDIATE TRANSPORTATION deliveries in the 1996 periods increased due to
additional volumes transported for two major fixed-fee customers and increased
transportation of Antrim gas for Michigan gas producers and brokers. In order
to meet the growing demand for the transportation of Antrim gas, MichCon
recently completed the expansion of the transportation capacity of its
northern Michigan gathering system. The expansion enabled MichCon to transport
an additional 31.7 Bcf, 91.6 Bcf and 107.8 Bcf in the 1996 quarter, nine- and
twelve-month periods, respectively. Profit margins on intermediate
transportation services are considerably less than margins on gas sales or for
end user transportation markets.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the Gas Cost Recovery (GCR) mechanism, MichCon is allowed timely
recovery of 100% of its prudently and reasonably incurred cost of gas sold.
Therefore, fluctuations in cost of gas sold have little or no effect on gross
margins.
Cost of gas sold increased in all 1996 periods due to higher sales volumes and
higher prices paid for natural gas in the spot market. The increase in market
prices paid for gas resulted in an increase in the cost of gas per thousand
cubic feet of $.58 (34%), $.59 (26%) and $.41(17%) for the quarter, nine- and
twelve-month periods, respectively.
As discussed in MCN's 1995 Annual Report on Form 10-K, MichCon's gas sales
rates are set to recover lost gas costs using an averaging method based on
historical lost gas experience. An adjustment for the difference between the
historical average lost gas amount and the actual lost gas amount is recorded
to income at the end of the seasonal cycle ended August 31 of each year. The
lost gas adjustment for the 1996 cycle, compared with the adjustment for the
1995 cycle, resulted in a $4.6 million decrease in gross margin for the
quarter.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses were higher in the 1996 quarter due
primarily to increased uncollectible gas accounts that were driven higher by
last winter's colder temperatures and rising gas prices, which significantly
increased customers' heating bills. The impact of higher heating bills was
worsened by a reduction in home heating assistance funding obtained by low-
income customers. Operation and maintenance expenses decreased for 1996 nine-
and twelve-month periods due to lower employee benefit costs, primarily
pension and retiree healthcare costs. The reductions in the 1996 nine- and
twelve-month periods were partially offset by increased uncollectibles
expense. Management's continuing efforts to reduce operating costs also
contributed to the decreases.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
As discussed in MCN's 1995 Annual Report on Form 10-K, MichCon receives a
significant amount of its heating assistance funding from the Low-Income Home
Energy Assistance Program (LIHEAP). During 1995, Congress reduced a
substantial portion of the program's funding for the 1996 fiscal year and
there were proposals to eliminate all funding in future years. Michigan's
share of LIHEAP funds was reduced from $78 million in fiscal year 1995 to
$47.5 million in 1996. During October 1996, President Clinton signed an
Omnibus Spending Bill passed by Congress that provided for $1 billion in
LIHEAP funding, which increases 1997 funding by $100 million over 1996 levels.
DEPRECIATION AND DEPLETION increased in all 1996 periods due to higher plant
balances, reflecting capital expenditures of $396.1 million over the past two
calendar years.
PROPERTY AND OTHER TAXES for all 1996 periods increased due to higher property
balances.
OTHER INCOME & DEDUCTIONS
Other income & deductions for all 1996 periods was affected by higher interest
costs on increased borrowings required to finance capital investments in the
Gas Distribution group. For the 1996 quarter, this increase in interest costs
was more than offset by other income, which included higher allowances for
funds used during construction due to increased construction during 1996.
INCOME TAXES
Income tax expense over the past two years has been affected by the favorable
resolution of a number of tax issues. The favorable effect of those
resolutions on income tax expense was $.7 million and $.4 million greater in
the 1996 quarter and nine-month periods, respectively, when compared to the
same 1995 periods. The favorable effect in the twelve-month period was $2.6
million less in 1996 than in 1995.
OUTLOOK
Gas Distribution's strategy is to grow revenues and reduce its costs in order
to maintain strong returns and provide customers with quality service at
competitive prices. Revenue growth will be achieved primarily through the
expansion of Gas Distribution's base of 1.2 million residential, commercial
and industrial customers. Gas Distribution will continue initiatives to
increase productivity and improve customer services in order to strengthen its
competitive position in the gas industry.
DIVERSIFIED ENERGY
Diversified Energy earnings continue to rise -- The Diversified Energy group
reported quarterly earnings of $5.5 million ($.08 per share), an increase of
$2.1 million ($.02 per share) from the comparable 1995 period. Earnings for
the 1996 nine- and twelve-month periods increased $6.6 million ($.10 per
share) and $10.2 million ($.14 per share), respectively. Reflecting the
success of MCN's strategy to invest in various segments of the natural gas
industry, earnings growth was achieved in all lines of business. The increased
earnings were driven primarily by increased gas sales and levels of natural
gas production. Results were also affected by increased financing costs in all
periods as a result of additional capital needed to fund investments.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
QUARTER 9 MONTHS 12 MONTHS
------------- -------------- --------------
1996 1995 1996 1995 1996 1995
------ ----- ------ ------ ------ ------
DIVERSIFIED ENERGY OPERATIONS
(in Millions)
Operating Revenues*............ $127.9 $79.8 $522.0 $254.9 $667.1 $344.3
------ ----- ------ ------ ------ ------
Operating Expenses*............ 118.8 75.4 495.0 239.8 633.3 322.9
------ ----- ------ ------ ------ ------
Operating Income (Loss)
Gas Services
Exploration & Production..... 6.1 5.0 19.2 11.9 25.8 18.2
Gas Gathering & Processing... 1.3 .1 3.7 .3 3.8 .4
Gas Marketing & Cogeneration. 2.5 (.2) 5.8 4.7 6.9 5.1
------ ----- ------ ------ ------ ------
9.9 4.9 28.7 16.9 36.5 23.7
Corporate & Other............. (.8) (.5) (1.7) (1.8) (2.7) (2.3)
------ ----- ------ ------ ------ ------
9.1 4.4 27.0 15.1 33.8 21.4
------ ----- ------ ------ ------ ------
Equity in Earnings of Joint
Ventures....................... 2.2 1.5 7.4 2.9 8.4 3.3
------ ----- ------ ------ ------ ------
Other Income & (Deductions)*
Interest Income............... .6 .5 2.4 2.5 3.5 3.6
Interest Expense.............. (5.5) (2.8) (20.9) (8.8) (25.4) (12.5)
Dividends on Preferred
Securities................... (3.6) (2.3) (8.3) (7.0) (10.7) (8.5)
Other......................... (.1) -- 2.5 1.1 3.7 .5
------ ----- ------ ------ ------ ------
(8.6) (4.6) (24.3) (12.2) (28.9) (16.9)
------ ----- ------ ------ ------ ------
Income Before Income Taxes..... 2.7 1.3 10.1 5.8 13.3 7.8
------ ----- ------ ------ ------ ------
Income Taxes
Current and Deferred
Provision.................... 1.2 .5 4.3 2.1 4.8 3.3
Gas Production Tax Credits.... (4.0) (2.6) (11.9) (7.4) (15.7) (9.5)
------ ----- ------ ------ ------ ------
(2.8) (2.1) (7.6) (5.3) (10.9) (6.2)
------ ----- ------ ------ ------ ------
Net Income..................... $ 5.5 $ 3.4 $ 17.7 $ 11.1 $ 24.2 $ 14.0
====== ===== ====== ====== ====== ======
*Includes intercompany transactions.
GAS SERVICES
EXPLORATION & PRODUCTION (E&P) operating income increased $1.1 million for the
1996 quarter, and $7.3 million and $7.6 million for the nine- and twelve-month
periods, respectively. The results reflect a significantly higher level of gas
and oil produced from properties that have been acquired since mid-1994 and
the development of other new projects. Gas production was 15.1 Bcf and oil
production was 255,000 barrels in the quarter, substantial increases over 1995
production levels of 8.6 Bcf of gas and 101,000 barrels of oil. Additionally,
E&P operations have increased Diversified Energy's earnings through the
generation of an increasing amount of federal gas production tax credits.
E&P operating results were impacted by the average natural gas sales rate per
Mcf, which increased $.10 to $1.84 in the 1996 quarter. For the nine- and
twelve-month periods, the average natural gas sales rate increased $.08 to
$1.94 and $.10 to $2.01, respectively. The average sales rates include the
effect of hedging with natural gas swap and futures agreements, which are used
to limit Diversified Energy's exposure to the risk of market price
fluctuations. As a result of strong gas prices in the marketplace, hedging had
the effect of reducing the average sales rate for the 1996 quarter, nine- and
twelve-month periods by $.17, $.26 and $.09 per Mcf, respectively. Conversely,
hedging increased the average sales rates for the 1995 quarter, nine- and
twelve-month periods by $.36, $.46 and $.37 per Mcf, respectively. E&P
operating results also reflect an increase in the average oil sales rate per
barrel of $3.86, $2.85 and $2.46 for the 1996 quarter, nine- and twelve-month
periods, respectively. Partially offsetting the improved results were
increases in the average production cost per Mcf equivalent.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
MCN expects continued growth in E&P earnings through an increasing level of
natural gas and oil production resulting from its focused efforts to acquire
and develop reserves that generate favorable rates of return. At year end 1995,
MCN had a proved reserve base of 858 Bcf of natural gas and 4.7 million barrels
of oil, or the equivalent of another 28 Bcf of natural gas. More than $240
million has been invested to acquire and develop reserves during the first
three quarters of 1996, with an additional $100 million expected by year end
1996. MCN expects ongoing increases in production levels as it acquires new
reserves, completes additional developmental drilling and obtains the full
benefits from previous acquisitions. Natural gas and oil production levels are
estimated to exceed 60 Bcf equivalent (Bcfe) in 1996, almost double 1995
production levels of 33.7 Bcfe. Likewise, E&P operating income for 1996 is
expected to be significantly above the $18.5 million generated in 1995.
GAS GATHERING & PROCESSING operating income increased $1.2 million for the 1996
quarter, and $3.4 million for both the nine- and twelve-month periods. The
increases reflect income from the first quarter 1996 acquisition of a 99%
interest in Dauphin Island Gathering Partners (DIGP), a general partnership
that owns a 90-mile gas gathering system in the Mobile Bay area of offshore
Alabama. MCN subsequently sold a 40% interest in the partnership to PanEnergy
Dauphin Island Company (Note 2). MCN expects to enhance its opportunities to
further develop and expand the DIGP gathering system in one of the fastest
growing production areas of the country. Earnings were favorably affected by
increased volumes of gas processed during the quarter, nine- and twelve-month
periods of 8.4 Bcf, 19.3 Bcf and 22.4 Bcf, respectively.
GAS MARKETING & COGENERATION operating income increased to $2.5 million in the
1996 quarter compared to an operating loss of $.2 million in the 1995 quarter.
Operating income increased $1.1 million for the nine-month period, and $1.8
million for the twelve-month period. Operating results for all periods were
affected by a significant increase in sales volumes driven by additional sales
to customers in the midwest and northeast United States, including the Michigan
Power project. Operating results for the nine- and twelve-month periods were
also favorably affected by increased sales to customers in eastern Canada.
Operating income was further enhanced by improved gas sales margins, reflecting
an increase in the average gas sales rate of $.66, $.88 and $.70 for the
quarter, nine- and twelve-month periods, respectively.
QUARTER 9 MONTHS 12 MONTHS
--------- ----------- -----------
1996 1995 1996 1995 1996 1995
---- ---- ----- ----- ----- -----
DIVERSIFIED ENERGY GAS STATISTICS* (in Bcf)
Gas Sales....................................
Gas Marketing & Cogeneration................ 42.3 37.9 155.8 114.0 212.5 151.9
Exploration & Production**.................. 8.6 4.5 25.8 10.8 31.2 13.7
Transportation............................... 16.8 -- 47.6 .6 48.1 .8
---- ---- ----- ----- ----- -----
67.7 42.4 229.2 125.4 291.8 166.4
==== ==== ===== ===== ===== =====
Gas Production............................... 15.1 8.6 40.7 21.7 50.4 27.3
==== ==== ===== ===== ===== =====
Gas Processed................................ 12.7 4.3 30.5 11.2 35.6 13.2
==== ==== ===== ===== ===== =====
*Includes intercompany volumes.
**Represents gas sales made directly to third parties by E&P operations. Other
E&P production is sold to affiliated companies for marketing.
RISK MANAGEMENT STRATEGY -- Risks associated with significant future E&P
activities will be minimized by diversifying investments along the lines of
geography, geology, risk profile and technology, as well as by partnering with
operators who bring capital and expertise. MCN manages price risk by attempting
to maintain a balanced portfolio of gas supply and gas sales agreements. MCN
uses natural gas futures, options and swap contracts to manage its price risk
by offsetting a large portion of its open positions. MCN has hedged most of its
gas and oil production over the next ten years which is not covered by long-
term fixed-price sales contracts.
CORPORATE & OTHER
Corporate & other reflects administrative expenses associated with corporate
management activities.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures increased $.7 million, $4.5 million and $5.1
million for the 1996 quarter, nine- and twelve-month periods, respectively. The
increases are primarily due to earnings from Gas Gathering & Processing
ventures, reflecting income from the December 1995 acquisition of a 50%
interest in a 40-mile gas gathering line in Virginia. Additionally, the
improved earnings from other joint ventures for the nine- and twelve-month
periods include $1.7 million from the sale of joint venture property.
QUARTER 9 MONTHS 12 MONTHS
---------- ---------- ----------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
EQUITY IN EARNINGS OF JOINT VENTURES (in
Millions)
Gas Storage............................... $ .9 $1.1 $2.8 $3.4 $3.6 $3.8
Gas Gathering & Processing................ 1.2 .1 3.1 .2 3.5 .6
Gas Marketing & Cogeneration.............. (.2) (.3) (.6) (.9) (.6) (1.2)
Other..................................... .3 .6 2.1 .2 1.9 .1
---- ---- ---- ---- ---- ----
$2.2 $1.5 $7.4 $2.9 $8.4 $3.3
==== ==== ==== ==== ==== ====
OTHER INCOME & DEDUCTIONS
Other income & deductions for all 1996 periods reflects higher interest costs
on increased borrowings required to finance capital investments in the
Diversified Energy group. Additionally, all 1996 periods reflect dividends on
$80 million of preferred securities issued in July 1996 (Note 3c). The current
twelve-month period also reflects higher dividends paid on $100 million of
preferred securities issued in November 1994. Partially offsetting the
increased interest and dividend costs was other income which includes pre-tax
gains from the sale of a 40% interest in DIGP (Note 2).
INCOME TAXES
Income taxes for all 1996 periods were favorably impacted by increased federal
gas production tax credits related to E&P projects, partially offset by
increased federal taxes on improved pre-tax earnings.
OUTLOOK
MCN plans to continue aggressively growing its E&P reserve base, primarily in
areas that generate attractive returns. The development of reserves will
contribute toward a reliable long-term supply to meet the increased sales
requirements of MCN's Gas Marketing & Cogeneration business as it expands into
areas beyond Michigan's borders. Additionally, MCN expects oil to become a
significantly larger portion of total proved reserves, creating a more diverse
portfolio. MCN also plans to invest in gas gathering facilities, targeting
areas that contain gas marketing or E&P opportunities.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc. for an initial sales price of
$137.5 million, resulting in an after-tax gain of $36.2 million. In October
1996, the initial sales price was decreased by $4.6 million to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $40 million depending upon the occurrence of certain
contingencies that include, among other things, retention of certain customers
through mid-1998 and tax-related matters. Although Genix had experienced
significant growth in revenues and operating income over the past several
years, MCN's focused strategy is to invest in energy-related projects that
generate higher rates of return. Summary statements and other information on
discontinued computer operations can be found in Note 5 to the consolidated
financial statements.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $47.1 million during the
1996 nine-month period compared to the same 1995 period. The decrease was due
primarily to an increase in working capital requirements, partially offset by
higher income, after adjusting for depreciation, deferred taxes and the gain on
the sale of Genix and DIGP interests.
FINANCING ACTIVITIES
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plans and various employee benefit plans. During 1996, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating proceeds of approximately $18 million. During the first nine months
of 1996, issuances under these plans generated proceeds of $13.4 million.
In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (PRIDES), yielding 8 3/4% (Note 3b). The PRIDES are
convertible securities that consist of a contract under which MCN is obligated
to sell, and the PRIDES holders are obligated to purchase, approximately $135
million in MCN common stock in April 1999. The PRIDES are currently rated the
equivalent of "BBB+" by the major rating agencies and enhance MCN's
creditworthiness.
In July 1996, MCN issued through a wholly-owned trust 3,200,000 shares of 8
5/8% Trust Originated Preferred Securities (TOPrS) for $80 million (Note 3c).
Proceeds from the issuance were invested by MCN in its Diversified Energy group
which used such proceeds to reduce debt incurred to fund capital expenditures,
working capital requirements and for general corporate purposes. The TOPrS are
currently rated the equivalent of "BBB+" or "baa2" by the major rating
agencies.
GAS DISTRIBUTION
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. Short-term debt is normally reduced in the first part of each year
as gas inventories are depleted and funds are received from winter heating
sales. To meet its seasonal short-term borrowing needs, MichCon normally issues
commercial paper which is backed by credit lines with several banks. MichCon
has established credit lines to allow for borrowings of up to $100 million
under a 364-day revolving credit facility and up to $150 million under a three-
year revolving credit facility. Commercial paper of $192.1 million was
outstanding as of September 30, 1996 under these lines.
In May 1996, MichCon issued first mortgage bonds totaling $70 million under its
existing shelf registration. The proceeds were used to repay short-term
obligations, finance capital expenditures and for general corporate purposes.
MichCon is planning on filing a shelf registration with the Securities and
Exchange Commission in the fourth quarter of 1996 that will allow it to issue,
in conjunction with an existing shelf registration, up to $300 million of debt
securities over the next several years. MichCon's capital requirements and
general market conditions will affect the timing and amount of future
issuances.
DIVERSIFIED ENERGY
MCNIC has established credit lines to allow for borrowings of up to $100
million under a 364-day revolving credit facility and up to $300 million under
a three-year revolving credit facility. The facilities support MCNIC's $400
million commercial paper program, which is used to finance capital investments
of the Diversified Energy group and working capital requirements of its gas
marketing operations. During the first nine months of 1996, MCNIC repaid $273
million of commercial paper, leaving a balance of $101 million outstanding
under this program as of September 30, 1996.
In January and May 1996, MCNIC issued $200 million and $130 million,
respectively, of medium-term notes, using the proceeds to repay commercial
paper balances and for general corporate purposes.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONCLUDED)
INVESTING ACTIVITIES
Capital investments equaled $492.6 million in the 1996 nine-month period
compared to $388.4 million for the same period in 1995. The increase was due to
higher Diversified Energy investments, primarily for E&P expenditures, as well
as the DIGP acquisition. Gas Distribution capital expenditures were incurred
for the construction of transportation pipelines and new distribution lines to
reach communities not previously served by MichCon and to make improvements to
existing systems.
MCN completed the sale of Genix (Note 5) and an interest in DIGP (Note 2) in
1996 resulting in proceeds of $173.5 million. Proceeds from these sales were
used to reduce debt incurred to fund Diversified Energy's capital investments.
9 MONTHS
--------------
1996 1995
------ -------
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Gas Distribution............................................... $148.2 $ 159.9
Diversified Energy............................................. 253.6 169.0
Discontinued Operations........................................ 6.5 6.0
------ -------
408.3 334.9
------ -------
MCN's Share of Joint Venture Capital Expenditures:
Cogeneration................................................... 1.0 32.8
Other.......................................................... 4.7 10.3
------ -------
5.7 43.1
------ -------
Acquisition (Note 2)............................................ 78.6 10.5
------ -------
Minority Partners' Share of Consolidated Capital Expenditures... -- (.1)
------ -------
Total Capital Investments....................................... $492.6 $ 388.4
====== =======
OUTLOOK
Capital investments in 1996 expected to reach $750 million -- MCN's strategic
direction is to grow significantly by investing in a portfolio of energy-
related projects. For 1996, MCN anticipates investing approximately $225
million in Gas Distribution and approximately $525 million in Diversified
Energy. Capital investments in Gas Distribution will be made to add new gas
sales customers, develop new gas transportation markets and make improvements
to existing systems. This includes construction of a 59-mile loop of MichCon's
existing Milford-to-Belle River Pipeline which will improve the overall
reliability and efficiency of MichCon's gas storage and transmission system.
The pipeline is anticipated to be completed in early 1997 at a cost of
approximately $80 million. Within Diversified Energy, approximately $350
million will be invested in E&P projects for drilling operations and to acquire
reserves in the Michigan, Appalachian, Midcontinent, Gulf Coast and Rocky
Mountain regions. Diversified Energy will invest the remaining $175 million in
gas gathering, gas processing and power generation projects. It is management's
opinion that MCN and its subsidiaries will have sufficient capital resources,
both internal and external, to meet anticipated capital requirements.
9
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
1996 1995 1995
---------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost
(which approximates market value)...... $ 35,910 $ 16,825 $ 19,259
Accounts receivable, less allowance for
doubtful accounts of $14,699, $13,325
and $13,765, respectively.............. 211,868 157,702 317,945
Accrued unbilled revenues............... 22,429 19,081 92,410
Accrued gas cost recovery revenues...... 33,585 -- --
Gas in inventory........................ 153,610 154,987 71,763
Property taxes assessed applicable to
future periods......................... 24,455 22,702 60,633
Other................................... 37,685 36,914 53,486
---------- ---------- ----------
519,542 408,211 615,496
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint
ventures............................... 138,663 81,227 129,026
Deferred swap losses and receivables
(Note 6)............................... 47,364 40,336 54,807
Deferred postretirement benefit costs... 7,809 15,363 13,112
Deferred environmental costs (Note 7a).. 31,016 -- 35,000
Prepaid benefit costs................... 49,161 19,270 23,827
Other................................... 97,334 91,268 90,626
---------- ---------- ----------
371,347 247,464 346,398
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Gas Distribution........................ 2,629,067 2,357,248 2,496,711
Exploration & Production................ 819,806 432,124 576,810
Gas Gathering & Processing.............. 106,290 79,460 22,324
Other................................... 16,907 59,304 64,709
---------- ---------- ----------
3,572,070 2,928,136 3,160,554
Less--Accumulated depreciation and
depletion.............................. 1,301,317 1,196,535 1,223,808
---------- ---------- ----------
2,270,753 1,731,601 1,936,746
---------- ---------- ----------
$3,161,642 $2,387,276 $2,898,640
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................ $ 216,520 $ 130,069 $ 217,184
Notes payable........................... 227,093 150,820 245,635
Current portion of long-term debt,
capital lease obligations and
redeemable cumulative preferred
securities............................. 84,704 7,226 7,000
Federal income, property and other taxes
payable................................ 44,221 55,941 83,384
Customer deposits....................... 10,805 10,294 11,550
Other................................... 90,444 85,285 87,575
---------- ---------- ----------
673,787 439,635 652,328
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes....... 152,103 103,137 125,896
Unamortized investment tax credit....... 35,389 37,270 36,797
Tax benefits amortizable to customers... 113,112 112,257 114,668
Deferred swap gains and payables (Note
6)..................................... 41,244 35,574 51,923
Accrued postretirement benefit costs.... -- 17,721 15,551
Accrued environmental costs (Note 7a)... 35,000 -- 35,000
Minority interest (Note 2).............. 52,002 17,911 18,375
Other................................... 99,232 80,784 93,470
---------- ---------- ----------
528,082 404,654 491,680
---------- ---------- ----------
LONG-TERM DEBT, including capital lease
obligations (Note 3a)................... 1,054,144 811,546 993,407
---------- ---------- ----------
REDEEMABLE CUMULATIVE PREFERRED
SECURITIES OF SUBSIDIARY................ 96,542 96,422 96,449
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF MCN FINANCING
HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF MCN (Note 3c)............. 77,218 -- --
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 3b
and 7)
COMMON SHAREHOLDERS' EQUITY
Common stock............................ 672 662 664
Additional paid-in capital.............. 465,776 442,460 446,055
Retained earnings....................... 280,478 192,353 218,425
PRIDES yield enhancement and issuance
costs (Note 3b)........................ (14,524) -- --
Unearned compensation................... (533) (456) (368)
---------- ---------- ----------
731,869 635,019 664,776
---------- ---------- ----------
$3,161,642 $2,387,276 $2,898,640
========== ========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
10
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------- ----------------------
1996 1995 1996 1995 1996 1995
--------- --------- ---------- -------- ---------- ----------
OPERATING REVENUES...... $ 245,502 $ 190,691 $1,395,650 $979,122 $1,911,760 $1,370,232
--------- --------- ---------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas............ 111,674 79,067 823,171 492,342 1,117,022 710,434
Operation and
maintenance........... 89,206 72,487 264,333 243,014 363,840 334,553
Depreciation, depletion
and amortization...... 38,316 27,736 109,913 83,301 141,197 107,948
Property and other
taxes................. 16,371 14,368 55,787 48,311 71,180 61,768
--------- --------- ---------- -------- ---------- ----------
255,567 193,658 1,253,204 866,968 1,693,239 1,214,703
--------- --------- ---------- -------- ---------- ----------
OPERATING INCOME (LOSS). (10,065) (2,967) 142,446 112,154 218,521 155,529
--------- --------- ---------- -------- ---------- ----------
EQUITY IN EARNINGS OF
JOINT VENTURES......... 2,347 1,822 8,176 3,889 9,532 4,490
--------- --------- ---------- -------- ---------- ----------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 2,018 1,782 5,167 6,096 6,812 8,204
Interest on long-term
debt.................. (15,999) (11,828) (49,861) (32,974) (62,513) (44,503)
Other interest expense. (1,761) (2,181) (7,244) (7,993) (11,300) (11,638)
Dividends on preferred
securities of
subsidiaries.......... (3,579) (2,398) (8,286) (7,213) (10,683) (8,865)
Minority interest...... (736) (661) (1,503) (1,829) (2,165) (2,521)
Other.................. 956 (926) 3,449 (1,598) 2,107 (4,824)
--------- --------- ---------- -------- ---------- ----------
(19,101) (16,212) (58,278) (45,511) (77,742) (64,147)
--------- --------- ---------- -------- ---------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.... (26,819) (17,357) 92,344 70,532 150,311 95,872
INCOME TAX PROVISION
(BENEFIT).............. (13,416) (7,804) 21,486 17,919 38,897 23,492
--------- --------- ---------- -------- ---------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. (13,403) (9,553) 70,858 52,613 111,414 72,380
--------- --------- ---------- -------- ---------- ----------
DISCONTINUED OPERATIONS,
NET OF TAXES (Note 5)
Income from operations. -- 926 1,595 2,662 2,520 3,634
Gain on sale........... -- -- 36,176 -- 36,176 --
--------- --------- ---------- -------- ---------- ----------
-- 926 37,771 2,662 38,696 3,634
--------- --------- ---------- -------- ---------- ----------
NET INCOME (LOSS)....... $ (13,403) $ (8,627) $ 108,629 $ 55,275 $ 150,110 $ 76,014
========= ========= ========== ======== ========== ==========
EARNINGS (LOSS) PER
SHARE
Continuing Operations.. $ (.20) $ (.14) $ 1.06 $ .82 $ 1.67 $ 1.15
--------- --------- ---------- -------- ---------- ----------
Discontinued Operations
(Note 5)
Income from operations. -- .01 .03 .04 .04 .06
Gain on sale........... -- -- .54 -- .54 --
--------- --------- ---------- -------- ---------- ----------
-- .01 .57 .04 .58 .06
--------- --------- ---------- -------- ---------- ----------
$ (.20) $ (.13) $ 1.63 $ .86 $ 2.25 $ 1.21
========= ========= ========== ======== ========== ==========
AVERAGE COMMON SHARES
OUTSTANDING............ 67,073 66,103 66,845 64,214 66,711 63,075
========= ========= ========== ======== ========== ==========
DIVIDENDS DECLARED PER
SHARE.................. $ .2325 $ .2225 $ .6975 $ .6675 $ .9300 $ .8900
========= ========= ========== ======== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------- ----------------------
1996 1995 1996 1995 1996 1995
--------- --------- ---------- -------- ---------- ----------
BALANCE -- Beginning of
period................. $ 309,467 $ 215,801 $ 218,425 $179,862 $ 192,353 $ 172,395
ADD -- Net income
(loss)................. (13,403) (8,627) 108,629 55,275 150,110 76,014
--------- --------- ---------- -------- ---------- ----------
296,064 207,174 327,054 235,137 342,463 248,409
DEDUCT -- Cash dividends
declared on common
stock.................. 15,586 14,821 46,576 42,784 61,985 56,056
--------- --------- ---------- -------- ---------- ----------
BALANCE -- End of
period................. $ 280,478 $ 192,353 $ 280,478 $192,353 $ 280,478 $ 192,353
========= ========= ========== ======== ========== ==========
The notes to the consolidated financial statements are an integral part of
these statements.
11
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income.............................................. $ 108,629 $ 55,275
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income................................ 109,913 83,301
Charged to other accounts and discontinued operations.. 9,103 10,565
Deferred income taxes, current.......................... (5,863) (5,343)
Deferred income taxes and investment tax credit, net.... 23,243 5,587
Gain on sale of Genix and DIGP (Notes 2 and 5).......... (38,767) --
Other................................................... (1,629) 2,936
Changes in assets and liabilities, exclusive of changes
shown separately....................................... (9,793) 89,652
--------- ---------
Net cash provided from operating activities........... 194,836 241,973
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net...................................... (18,542) (77,987)
Common stock dividends paid............................. (46,576) (42,784)
Issuance of common stock................................ 13,408 110,772
Issuance of preferred securities (Note 3c).............. 77,218 --
Issuance of long-term debt (Note 3a).................... 398,540 168,764
Long-term commercial paper and credit facilities, net... (256,630) (39,398)
Retirement of long-term debt and preferred stock........ (6,839) (6,987)
Other................................................... (6,281) (1,290)
--------- ---------
Net cash provided from financing activities........... 154,298 111,090
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.................................... (401,518) (330,349)
Sale of Genix (Note 5).................................. 137,500 --
Acquisition of DIGP (Note 2)............................ (78,620) --
Sale of interest in DIGP (Note 2)....................... 36,000 --
Investment in joint ventures............................ (9,942) (24,119)
Sale of investment in joint ventures.................... -- 10,803
Other................................................... (15,903) (4,120)
--------- ---------
Net cash used for investing activities................ (332,483) (347,785)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 16,651 5,278
CASH AND CASH EQUIVALENTS, JANUARY 1..................... 19,259 11,547
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.................. $ 35,910 $ 16,825
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net................................ $ 82,606 $ 55,504
Accrued unbilled revenues............................... 69,981 63,972
Gas in inventory........................................ (81,847) (23,338)
Property taxes assessed applicable to future periods.... 36,178 32,026
Accrued/deferred gas cost recovery revenues............. (34,163) (17,653)
Accounts payable........................................ 7,464 (12,905)
Federal income, property and other taxes payable........ (72,172) (31,031)
Other current assets and liabilities.................... 7,444 29,260
Deferred assets and liabilities......................... (25,284) (6,183)
--------- ---------
$ (9,793) $ 89,652
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 53,152 $ 33,428
========= =========
Federal income taxes.................................... $ 18,434 $ 9,366
========= =========
Noncash investing activities:
Property purchased under capital leases................. $ 6,765 $ 3,087
========= =========
Land acquired in exchange for note receivable........... $ -- $ 1,480
========= =========
The notes to the consolidated financial statements are an integral part of this
statement.
12
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements should be read in
conjunction with MCN's 1995 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1996 presentation. In the opinion of management, the
unaudited information furnished herein reflects all adjustments (consisting of
only recurring adjustments or accruals) necessary for a fair presentation of
the financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for
all or any part of the balance of the current year or succeeding periods.
2. ACQUISITION AND DISPOSITION
During the first quarter of 1996, MCN acquired a 99% interest in Dauphin
Island Gathering Partners, a general partnership that owns a 90-mile gas
gathering system in the Mobile Bay area of offshore Alabama. The total cost of
the acquisition was $78,620,000 and was accounted for under the purchase
method. In June 1996, MCN sold a 35% interest in the partnership to PanEnergy
Dauphin Island Company (PanEnergy) for $31,500,000. The sale resulted in an
after-tax gain of $2,267,000. In July 1996, MCN sold an additional 5% interest
in the partnership to PanEnergy for $4,500,000, generating an additional
after-tax gain of $324,000.
3. CAPITALIZATION
A. LONG-TERM DEBT
The following long-term debt totaling $400,000,000 was issued during 1996:
ISSUE DATE DESCRIPTION AMOUNT ISSUED
---------------------------------------------------------------------------------
January 1996 MCNIC Medium-Term Notes
5.84%, due February 1999 $ 80,000,000
6.03%, due February 2001 $ 60,000,000
6.32%, due February 2003 $ 60,000,000
---------------------------------------------------------------------------------
May 1996 MichCon First Mortgage Bonds
6.51%, due June 1999 $ 30,000,000
7.15%, due May 2006 $ 40,000,000
MCNIC Medium-Term Notes
6.82%, due May 1999 $130,000,000
---------------------------------------------------------------------------------
B. PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES (PRIDES)
In April 1996, MCN issued 5,865,000 PRIDES yielding 8 3/4% with a stated
amount of $23.00 per security. Each security represents a contract to
purchase MCN common stock in April 1999 (or earlier under certain
circumstances). Proceeds from the issuance totaling approximately
$135,000,000 were used to acquire 6.5% U.S. Treasury Notes underlying the
security as subsequently discussed. Accordingly, MCN received no cash from
issuing the PRIDES.
Under each security, MCN is obligated to sell and the PRIDES holder is
obligated to purchase for $23.00, between .8333 of a share and one share of
MCN common stock. The exact number of MCN common shares to be sold is
dependent on the market value of a share in April 1999. However, the total
number to be sold will not be less than 4,887,500 shares or more than
5,865,000 shares.
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MCN is also obligated to pay the PRIDES holders a semi-annual yield
enhancement payment at an annual rate of 2 1/4% of the stated amount. MCN
has recorded the present value of the yield enhancement payments totaling
$8,243,000 as a liability and a reduction to Common Shareholders' Equity on
MCN's Consolidated Statement of Financial Position. The liability is
reduced when the yield enhancement payments are paid. MCN has the right to
defer the yield enhancement payments, in which case MCN cannot declare
dividends on its common stock until the yield enhancement payments have
been made. In addition, MCN has incurred costs of $6,281,000 in conjunction
with the issuance of PRIDES and similarly has recorded them as a reduction
to Common Shareholders' Equity.
The Treasury Notes underlying the securities are pledged as collateral to
secure the PRIDES holders' obligation to purchase MCN common stock under
the stock purchase contract. At maturity in April 1999, the principal
received from the U.S. Treasury Notes will be used to satisfy the PRIDES
holders' obligation in full. Neither the PRIDES nor the U.S. Treasury Notes
are included on MCN's Consolidated Statement of Financial Position.
However, the issuance of common stock will be reflected when cash proceeds
totaling approximately $135,000,000 are received by MCN in April 1999.
C. TRUST ORIGINATED PREFERRED SECURITIES (TOPrS)
In July 1996, MCN Financing I (MCN Financing), a business trust wholly
owned by MCN, issued 3,200,000 shares of 8 5/8% TOPrS, at the liquidation
preference value of $25 per share. The trust was formed for the sole
purpose of issuing the preferred securities and lending the gross proceeds
thereof to MCN. Holders of the preferred securities are entitled to receive
cumulative dividends at an annual rate of 8 5/8% of the liquidation
preference value. Dividends are payable quarterly and in substance are tax
deductible by MCN. Gross proceeds of the issuance totaled $80,000,000 and
were invested in an equivalent amount of 8 5/8% Junior Subordinated
Debentures of MCN due 2036. MCN has the right to extend interest payment
periods on the debentures for up to 20 consecutive quarters, and as a
consequence, quarterly dividend payments on the preferred securities can be
deferred by MCN Financing during any such interest payment period. In the
event that MCN exercises this right, MCN may not declare dividends on its
common stock. With MCN's consent, the preferred securities are redeemable
at the option of MCN Financing, in whole or in part, during or after July
2001. In addition, upon final maturity of the debentures, MCN Financing is
required to redeem the preferred securities.
In the event of default, holders of the preferred securities will be
entitled to exercise and enforce MCN Financing's creditor rights against
MCN, which may include acceleration of the principal amount due on the
debentures. MCN has issued a guarantee with respect to the preferred
securities, and when taken together with MCN's obligations under the
debentures, the related indenture, and the trust documents, provides a full
and unconditional guarantee of MCN Financing's obligations under the TOPrS.
In October 1996, MCN entered into a five-year variable interest rate swap
agreement with a notional amount of $80,000,000. The swap agreement
effectively converts the TOPrS fixed dividend rate into a variable rate
through October 2001.
4. LINES OF CREDIT
As discussed in MCN's 1995 Annual Report on Form 10-K, MichCon and MCNIC
maintain credit lines that allow for borrowings of up to $200,000,000 under
364-day revolving credit facilities and up to $450,000,000 under three-year
revolving credit facilities. These credit lines totaling $650,000,000 support
their commercial paper programs. Commercial paper of $293,165,000 was
outstanding as of September 30, 1996, of which $225,138,000 is classified as
short-term. In July 1996, the 364-day revolving credit facilities were
renewed.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DISCONTINUED OPERATIONS
On June 21, 1996, MCN completed the sale of its computer operations
subsidiary, The Genix Group, Inc. (Genix), to Affiliated Computer Services,
Inc. (ACS) for an initial sales price of $137,500,000, resulting in an after-
tax gain of $36,176,000. Accordingly, Genix's results of operations after June
21, 1996 are not reflected in the Consolidated Statement of Income. In October
1996, the initial sales price was decreased by $4,600,000 to reflect the
reduction in Genix's working capital between the effective and closing dates
of the transaction. The sales price of Genix could be further adjusted
downward by as much as $40,000,000 depending upon the occurrence of certain
contingencies, which include, among other things, retention of certain
customers through mid-1998 and tax-related matters. The following financial
information summarizes Genix's operations:
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------ --------------------------
1996 1995 1996 1995 1996 1995
(in Thousands) ---------- ---------- ---------- ------------ ------------ ------------
OPERATING REVENUES
Non-affiliates......... $ -- $ 22,559 $ 48,054 $ 65,303 $ 72,658 $ 86,224
Affiliates............. -- 3,967 6,826 11,560 10,520 15,672
---------- ---------- ---------- ------------ ------------ ------------
-- 26,526 54,880 76,863 83,178 101,896
---------- ---------- ---------- ------------ ------------ ------------
OPERATING EXPENSES...... -- 24,434 50,765 70,680 77,250 93,566
---------- ---------- ---------- ------------ ------------ ------------
OPERATING INCOME........ -- 2,092 4,115 6,183 5,928 8,330
---------- ---------- ---------- ------------ ------------ ------------
OTHER INCOME AND
(DEDUCTIONS)
Interest expense--
affiliate............. -- (596) (1,110) (1,577) (1,621) (2,023)
Other.................. -- 166 (336) 251 (286) 384
---------- ---------- ---------- ------------ ------------ ------------
-- (430) (1,446) (1,326) (1,907) (1,639)
---------- ---------- ---------- ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES.................. -- 1,662 2,669 4,857 4,021 6,691
INCOME TAX PROVISION.... -- 736 1,074 2,195 1,501 3,057
---------- ---------- ---------- ------------ ------------ ------------
NET INCOME.............. $ -- $ 926 $ 1,595 $ 2,662 $ 2,520 $ 3,634
========== ========== ========== ============ ============ ============
JUNE 21, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
(in Thousands) ------------ ------------- ------------
ASSETS
Accounts receivable, net............... $ 24,006 $ 23,671 $ 21,723
Property, plant and equipment, net..... 33,216 29,427 30,717
Other.................................. 18,335 14,262 15,486
------------ ------------ ------------
$ 75,557 $ 67,360 $ 67,926
============ ============ ============
LIABILITIES
Accounts payable....................... $ 9,823 $ 7,850 $ 7,639
Notes payable--affiliate............... 27,522 28,179 29,386
Other.................................. 15,578 9,198 9,926
------------ ------------ ------------
$ 52,923 $ 45,227 $ 46,951
============ ============ ============
Related party transactions between Genix and other MCN companies are included
in the individual captions of the Consolidated Statement of Income as
components of both continuing and discontinued operations.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTING FOR COMMODITY SWAP AGREEMENTS
As discussed in MCN's 1995 Annual Report on Form 10-K, MCN manages commodity
price risk through the use of various derivative instruments and limits the
use of such instruments to hedging activities. If MCN did not use derivative
instruments, its exposure to such risk would be higher. Although this strategy
reduces risk, it also limits potential gains from favorable changes in
commodity prices. Natural gas and oil swap agreements are used to manage
exposure to the risk of market price fluctuations on gas sale contracts, and
gas and oil production. Market value changes of swap contracts are recorded as
deferred gains or losses until the hedged transactions are completed, at which
time the realized gains or losses are included as adjustments to revenues. The
offsets to the unrealized losses are recorded as deferred payables and the
offsets to the unrealized gains are recorded as deferred receivables.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position:
SEPTEMBER 30, DECEMBER 31,
--------------------- ------------
(in Thousands) 1996 1995 1995
---------- ---------- ----------
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses........................... $ 13,642 $ 22,856 $ 18,084
Deferred receivables........................ 33,722 17,807 37,345
---------- ---------- ----------
47,364 40,663 55,429
Less--Current portion....................... -- 327 622
---------- ---------- ----------
$ 47,364 $ 40,336 $ 54,807
========== ========== ==========
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains............................ $ 29,822 $ 15,768 $ 35,514
Deferred payables........................... 22,778 30,642 25,532
---------- ---------- ----------
52,600 46,410 61,046
Less--Current portion....................... 11,356 10,836 9,123
---------- ---------- ----------
$ 41,244 $ 35,574 $ 51,923
========== ========== ==========
7. COMMITMENTS AND CONTINGENCIES
A. ENVIRONMENTAL MATTERS
As discussed in MCN's 1995 Annual Report on Form 10-K, MCN accrued an
additional environmental remediation liability and corresponding regulatory
asset of $35,000,000 in the fourth quarter of 1995. MCN has notified
current and former insurance carriers of the environmental conditions and
is pursuing its claims against these carriers. In 1996, MCN received
payments from certain insurance carriers and expects additional insurance
recoveries over the next several years. At September 30, 1996, the reserve
balance is approximately $38,200,000, of which $3,200,000 is classified as
current.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. GUARANTIES
In 1990, MCN issued a guarantee, expiring no later than 2010, in
conjunction with a Genix building lease. The lease agreement does not allow
MCN to transfer its obligation under the guarantee to ACS, who acquired
Genix in June 1996 (Note 5). However, ACS is obligated to reimburse MCN for
any payments made as a result of this guarantee. Obligations under the
guarantee approximated $15,300,000 at September 30, 1996.
C. OTHER
MCN is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. Management cannot predict the final
disposition of such proceedings, but believes that adequate provision has
been made for probable losses. It is management's belief, after discussion
with legal counsel, that the ultimate resolution of those proceedings still
pending will not have a material adverse effect on MCN's financial
statements.
8. ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" in
October 1995. The statement requires certain disclosures about stock-based
employee compensation and encourages, but does not require, a fair-value-based
method of accounting for such compensation. MCN is currently evaluating whether
to adopt the fair-value-based method of accounting.
9. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCNIC's securities. The carrying value of MCN's assets
on an unconsolidated basis, primarily investments in its subsidiaries other
than MichCon, is $391,211,000 at September 30, 1996.
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, Blue Lake Holdings, Inc., MCN Michigan Limited Partnership and
MCN Financing.
17
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ------------ ------------ ----------------- ------------
SEPTEMBER 30, 1996
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash
equivalents, at cost.. $ -- $ 17,627 $ 18,282 $ 1 $ 35,910
Accounts receivable.... 5,163 96,026 133,899 (8,521) 226,567
Less -- Allowance for
doubtful accounts..... 67 520 14,112 -- 14,699
------------ ------------ ------------ ------------ ------------
Accounts receivable,
net................... 5,096 95,506 119,787 (8,521) 211,868
Accrued unbilled
revenue............... 232 -- 22,197 -- 22,429
Accrued gas cost
recovery revenues..... -- -- 33,585 -- 33,585
Gas in inventory....... -- 51,868 101,742 -- 153,610
Property taxes assessed
applicable to future
periods............... 107 892 23,456 -- 24,455
Other.................. 1,726 15,554 22,602 (2,197) 37,685
------------ ------------ ------------ ------------ ------------
7,161 181,447 341,651 (10,717) 519,542
------------ ------------ ------------ ------------ ------------
DEFERRED CHARGES AND
OTHER ASSETS
Investments in and
advances to joint
ventures and
subsidiaries.......... 925,538 109,928 20,357 (917,160) 138,663
Deferred swap losses
and receivables....... -- 47,364 -- -- 47,364
Deferred postretirement
benefit costs......... 706 -- 7,103 -- 7,809
Deferred environmental
costs................. 3,000 -- 28,016 -- 31,016
Prepaid benefit costs.. -- -- 54,103 (4,942) 49,161
Other.................. 8,321 39,839 48,660 514 97,334
------------ ------------ ------------ ------------ ------------
937,565 197,131 158,239 (921,588) 371,347
------------ ------------ ------------ ------------ ------------
PROPERTY, PLANT AND
EQUIPMENT, at cost..... 30,404 932,571 2,609,095 -- 3,572,070
Less--Accumulated
depreciation and
depletion............. 10,476 69,832 1,221,009 -- 1,301,317
------------ ------------ ------------ ------------ ------------
19,928 862,739 1,388,086 -- 2,270,753
------------ ------------ ------------ ------------ ------------
$ 964,654 $ 1,241,317 $ 1,887,976 $ (932,305) $ 3,161,642
============ ============ ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....... $ 7,892 $ 117,440 $ 99,223 $ (8,035) $ 216,520
Notes payable.......... -- 33,080 194,013 -- 227,093
Current portion of
long-term debt,
capital lease
obligations and
redeemable cumulative
preferred securities.. 55 31,436 53,213 -- 84,704
Federal income,
property and other
taxes payable......... (3,559) 14,539 33,241 -- 44,221
Customer deposits...... 18 -- 10,787 -- 10,805
Other.................. 6,758 34,997 50,885 (2,196) 90,444
------------ ------------ ------------ ------------ ------------
11,164 231,492 441,362 (10,231) 673,787
------------ ------------ ------------ ------------ ------------
DEFERRED CREDITS AND
OTHER LIABILITIES
Accumulated deferred
income taxes.......... (1,285) 70,228 83,160 -- 152,103
Unamortized investment
tax credit............ 339 -- 35,050 -- 35,389
Tax benefits
amortizable to
customers............. 182 -- 112,930 -- 113,112
Deferred swap gains and
payables.............. -- 41,244 -- -- 41,244
Accrued environmental
costs................. 3,000 -- 32,000 -- 35,000
Minority interest...... -- 33,499 18,503 -- 52,002
Other.................. 28,474 15,862 59,838 (4,942) 99,232
------------ ------------ ------------ ------------ ------------
30,710 160,833 341,481 (4,942) 528,082
------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT,
including capital lease
obligations............ 365 502,525 551,254 -- 1,054,144
------------ ------------ ------------ ------------ ------------
REDEEMABLE CUMULATIVE
PREFERRED SECURITIES OF
SUBSIDIARY............. 96,542 -- -- -- 96,542
------------ ------------ ------------ ------------ ------------
MCN-OBLIGATED
MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF
MCN FINANCING.......... 77,218 -- -- -- 77,218
------------ ------------ ------------ ------------ ------------
COMMON SHAREHOLDERS'
EQUITY
Common Stock........... 672 5 10,300 (10,305) 672
Additional paid-in
capital............... 471,868 238,721 230,399 (475,212) 465,776
Retained earnings...... 291,172 107,741 313,180 (431,615) 280,478
PRIDES yield
enhancement and
issuance costs........ (14,524) -- -- -- (14,524)
Unearned compensation.. (533) -- -- -- (533)
------------ ------------ ------------ ------------ ------------
748,655 346,467 553,879 (917,132) 731,869
------------ ------------ ------------ ------------ ------------
$ 964,654 $ 1,241,317 $ 1,887,976 $ (932,305) $ 3,161,642
============ ============ ============ ============ ============
18
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ------------ ------------ ----------------- ------------
SEPTEMBER 30, 1995
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash
equivalents, at cost.. $ 36 $ 12,135 $ 3,213 $ 1,441 $ 16,825
Accounts receivable.... 2,742 71,869 104,159 (7,743) 171,027
Less -- Allowance for
doubtful accounts..... 80 520 12,725 -- 13,325
------------ ------------ ------------ ------------ ------------
Accounts receivable,
net................... 2,662 71,349 91,434 (7,743) 157,702
Accrued unbilled
revenue............... 266 -- 18,815 -- 19,081
Gas in inventory....... -- 62,479 92,508 -- 154,987
Property taxes assessed
applicable to future
periods............... 91 993 21,618 -- 22,702
Other.................. 801 7,002 28,338 773 36,914
------------ ------------ ------------ ------------ ------------
3,856 153,958 255,926 (5,529) 408,211
------------ ------------ ------------ ------------ ------------
DEFERRED CHARGES AND
OTHER ASSETS
Investments in and
advances to joint
ventures and
subsidiaries.......... 738,410 49,306 19,742 (726,231) 81,227
Deferred swap losses
and receivables....... -- 40,336 -- -- 40,336
Deferred postretirement
benefit costs......... 750 -- 14,613 -- 15,363
Prepaid benefit costs.. -- -- 20,770 (1,500) 19,270
Other.................. 7,370 41,819 41,448 631 91,268
------------ ------------ ------------ ------------ ------------
746,530 131,461 96,573 (727,100) 247,464
------------ ------------ ------------ ------------ ------------
PROPERTY, PLANT AND
EQUIPMENT, at cost..... 26,021 563,141 2,338,974 -- 2,928,136
Less -- Accumulated
depreciation and
depletion............. 9,298 52,213 1,135,024 -- 1,196,535
------------ ------------ ------------ ------------ ------------
16,723 510,928 1,203,950 -- 1,731,601
------------ ------------ ------------ ------------ ------------
$767,109 $ 796,347 $ 1,556,449 $ (732,629) $ 2,387,276
============ ============ ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....... $ 1,979 $ 63,339 $ 69,691 $ (4,940) $ 130,069
Notes payable.......... -- 39,000 111,820 -- 150,820
Current portion of
long-term debt,
capital lease
obligations and
redeemable cumulative
preferred securities.. 485 2,805 3,936 -- 7,226
Federal income,
property and other
taxes payable......... (2,447) 13,202 45,186 -- 55,941
Customer deposits...... 17 -- 10,277 -- 10,294
Other.................. 3,711 24,462 57,107 5 85,285
------------ ------------ ------------ ------------ ------------
3,745 142,808 298,017 (4,935) 439,635
------------ ------------ ------------ ------------ ------------
DEFERRED CREDITS AND
OTHER LIABILITIES
Accumulated deferred
income taxes.......... (685) 42,886 60,863 73 103,137
Unamortized investment
tax credit............ 368 -- 36,902 -- 37,270
Tax benefits
amortizable to
customers............. 172 -- 112,085 -- 112,257
Deferred swap gains and
payables.............. -- 35,574 -- -- 35,574
Accrued postretirement
benefit costs......... 2,125 1,059 14,537 -- 17,721
Minority interest...... -- 17,911 -- -- 17,911
Other.................. 14,457 7,801 60,025 (1,499) 80,784
------------ ------------ ------------ ------------ ------------
16,437 105,231 284,412 (1,426) 404,654
------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT,
including capital lease
obligations............ 425 294,086 517,035 -- 811,546
------------ ------------ ------------ ------------ ------------
REDEEMABLE CUMULATIVE
PREFERRED SECURITIES OF
SUBSIDIARY............. 96,422 -- -- -- 96,422
------------ ------------ ------------ ------------ ------------
COMMON SHAREHOLDERS'
EQUITY
Common Stock........... 662 5 10,300 (10,305) 662
Additional paid-in
capital............... 449,352 210,122 211,777 (428,791) 442,460
Retained earnings...... 200,522 44,095 234,908 (287,172) 192,353
Unearned compensation.. (456) -- -- -- (456)
------------ ------------ ------------ ------------ ------------
650,080 254,222 456,985 (726,268) 635,019
------------ ------------ ------------ ------------ ------------
$ 767,109 $ 796,347 $ 1,556,449 $ (732,629) $ 2,387,276
============ ============ ============ ============ ============
19
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
DECEMBER 31, 1995
--------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash
equivalents, at cost.. $ 168 $ 10,622 $ 8,469 $ -- $ 19,259
Accounts receivable.... 4,934 147,510 188,353 (9,087) 331,710
Less -- Allowance for
doubtful accounts..... 70 445 13,250 -- 13,765
---------- ---------- ---------- ---------- ----------
Accounts receivable,
net................... 4,864 147,065 175,103 (9,087) 317,945
Accrued unbilled
revenue............... 1,276 -- 91,134 -- 92,410
Gas in inventory....... -- 31,572 40,191 -- 71,763
Property taxes assessed
applicable to future
periods............... 176 3,508 56,949 -- 60,633
Other.................. 596 30,417 32,498 (10,025) 53,486
---------- ---------- ---------- ---------- ----------
7,080 223,184 404,344 (19,112) 615,496
---------- ---------- ---------- ---------- ----------
DEFERRED CHARGES AND
OTHER ASSETS
Investments in and
advances to joint
ventures and
subsidiaries.......... 773,344 100,483 20,318 (765,119) 129,026
Deferred swap losses
and receivables....... -- 54,807 -- -- 54,807
Deferred postretirement
benefit costs......... 740 -- 12,372 -- 13,112
Deferred environmental
costs................. 3,000 -- 32,000 -- 35,000
Prepaid benefit costs.. -- -- 25,438 (1,611) 23,827
Other.................. 7,501 39,949 42,061 1,115 90,626
---------- ---------- ---------- ---------- ----------
784,585 195,239 132,189 (765,615) 346,398
---------- ---------- ---------- ---------- ----------
PROPERTY, PLANT AND
EQUIPMENT, at cost..... 27,784 719,650 2,413,120 -- 3,160,554
Less -- Accumulated
depreciation and
depletion............. 9,732 62,916 1,151,160 -- 1,223,808
---------- ---------- ---------- ---------- ----------
18,052 656,734 1,261,960 -- 1,936,746
---------- ---------- ---------- ---------- ----------
$ 809,717 $1,075,157 $1,798,493 $ (784,727) $2,898,640
========== ========== ========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....... $ 4,489 $ 112,630 $ 108,208 $ (8,143) $ 217,184
Notes payable.......... -- 49,000 196,635 -- 245,635
Current portion of
long-term debt,
capital lease
obligations and
redeemable cumulative
preferred securities.. 55 2,976 3,969 -- 7,000
Federal income,
property and other
taxes payable......... 1,372 6,180 85,195 (9,363) 83,384
Customer deposits...... 19 -- 11,531 -- 11,550
Other.................. 2,935 20,715 64,587 (662) 87,575
---------- ---------- ---------- ---------- ----------
8,870 191,501 470,125 (18,168) 652,328
---------- ---------- ---------- ---------- ----------
DEFERRED CREDITS AND
OTHER LIABILITIES
Accumulated deferred
income taxes.......... (590) 65,341 61,146 (1) 125,896
Unamortized investment
tax credit............ 360 -- 36,437 -- 36,797
Tax benefits
amortizable to
customers............. 181 -- 114,487 -- 114,668
Deferred swap gains and
payables.............. -- 51,923 -- -- 51,923
Accrued postretirement
benefit costs......... 2,177 713 12,661 -- 15,551
Accrued environmental
costs................. 3,000 -- 32,000 -- 35,000
Minority interest...... -- 18,375 -- -- 18,375
Other.................. 18,175 11,546 65,252 (1,503) 93,470
---------- ---------- ---------- ---------- ----------
23,303 147,898 321,983 (1,504) 491,680
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT,
including capital lease
obligations............ 420 476,424 516,564 (1) 993,407
---------- ---------- ---------- ---------- ----------
REDEEMABLE CUMULATIVE
PREFERRED SECURITIES OF
SUBSIDIARY............. 96,449 -- -- -- 96,449
---------- ---------- ---------- ---------- ----------
COMMON SHAREHOLDERS'
EQUITY
Common Stock........... 664 5 10,300 (10,305) 664
Additional paid-in
capital............... 453,220 207,103 211,777 (426,045) 446,055
Retained earnings...... 227,159 52,226 267,744 (328,704) 218,425
Unearned compensation.. (368) -- -- -- (368)
---------- ---------- ---------- ---------- ----------
680,675 259,334 489,821 (765,054) 664,776
---------- ---------- ---------- ---------- ----------
$ 809,717 $1,075,157 $1,798,493 $ (784,727) $2,898,640
========== ========== ========== ========== ==========
20
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------
OPERATING REVENUES...... $ 1,726 $127,904 $117,251 $ (1,379) $ 245,502
-------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas............ 964 82,474 29,163 (927) 111,674
Operation and
maintenance........... 416 20,514 68,727 (451) 89,206
Depreciation, depletion
and amortization...... 488 12,998 24,830 -- 38,316
Property and other
taxes................. 418 2,792 13,161 -- 16,371
-------- -------- -------- -------- --------
2,286 118,778 135,881 (1,378) 255,567
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS). (560) 9,126 (18,630) (1) (10,065)
-------- -------- -------- -------- --------
EQUITY IN EARNINGS
(LOSS) OF JOINT
VENTURES AND
SUBSIDIARIES........... (12,166) 2,055 203 12,255 2,347
-------- -------- -------- -------- --------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 3,689 582 1,401 (3,654) 2,018
Interest on long-term
debt.................. (1) (4,985) (11,013) -- (15,999)
Other interest expense. (136) (4,061) (1,217) 3,653 (1,761)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (3,579) (3,579)
Minority interest...... -- (405) (332) 1 (736)
Other.................. 15 277 664 -- 956
-------- -------- -------- -------- --------
3,567 (8,592) (10,497) (3,579) (19,101)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.... (9,159) 2,589 (28,924) 8,675 (26,819)
INCOME TAX PROVISION
(BENEFIT).............. 9 (2,938) (10,487) -- (13,416)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. (9,168) 5,527 (18,437) 8,675 (13,403)
-------- -------- -------- -------- --------
DISCONTINUED OPERATIONS,
NET OF TAXES
Income from operations. -- -- -- -- --
Gain on sale........... -- -- -- -- --
-------- -------- -------- -------- --------
-- -- -- -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS)....... (9,168) 5,527 (18,437) 8,675 (13,403)
DIVIDENDS ON PREFERRED
SECURITIES............. 3,579 -- -- (3,579) --
-------- -------- -------- -------- --------
NET INCOME (LOSS)
AVAILABLE FOR COMMON
STOCK.................. $ (12,747) $ 5,527 $(18,437) $ 12,254 $ (13,403)
======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
OPERATING REVENUES...... $ 1,472 $ 82,870 $107,522 $ (1,173) $ 190,691
-------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas............ 639 58,127 20,963 (662) 79,067
Operation and
maintenance........... 517 11,731 60,750 (511) 72,487
Depreciation, depletion
and amortization...... 424 5,205 22,107 -- 27,736
Property and other
taxes................. 262 1,308 12,798 -- 14,368
-------- -------- -------- -------- --------
1,842 76,371 116,618 (1,173) 193,658
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS). (370) 6,499 (9,096) -- (2,967)
-------- -------- -------- -------- --------
EQUITY IN EARNINGS
(LOSS) OF JOINT
VENTURES AND
SUBSIDIARIES........... (7,583) 1,431 123 7,851 1,822
-------- -------- -------- -------- --------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 2,398 861 765 (2,242) 1,782
Interest on long-term
debt.................. (20) (2,083) (9,726) 1 (11,828)
Other interest expense. (15) (3,761) (774) 2,369 (2,181)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (2,398) (2,398)
Minority interest...... -- (660) -- (1) (661)
Other.................. (67) 26 (758) (127) (926)
-------- -------- -------- -------- --------
2,296 (5,617) (10,493) (2,398) (16,212)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.... (5,657) 2,313 (19,466) 5,453 (17,357)
INCOME TAX PROVISION
(BENEFIT).............. 130 (1,797) (6,138) 1 (7,804)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. (5,787) 4,110 (13,328) 5,452 (9,553)
DISCONTINUED OPERATIONS,
NET OF TAXES........... -- 926 -- -- 926
-------- -------- -------- -------- --------
NET INCOME (LOSS)....... (5,787) 5,036 (13,328) 5,452 (8,627)
DIVIDENDS ON PREFERRED
SECURITIES............. 2,344 -- 54 (2,398) --
-------- -------- -------- -------- --------
NET INCOME (LOSS)
AVAILABLE FOR COMMON
STOCK.................. $ (8,131) $ 5,036 $(13,382) $ 7,850 $ (8,627)
======== ======== ======== ======== ========
21
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------
OPERATING REVENUES...... $ 11,872 $521,962 $870,970 $ (9,154) $1,395,650
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas............ 6,275 396,002 427,560 (6,666) 823,171
Operation and
maintenance........... 1,230 56,881 208,710 (2,488) 264,333
Depreciation, depletion
and amortization...... 1,436 34,514 73,963 -- 109,913
Property and other
taxes................. 1,281 7,733 46,773 -- 55,787
-------- -------- -------- --------- ----------
10,222 495,130 757,006 (9,154) 1,253,204
-------- -------- -------- --------- ----------
OPERATING INCOME........ 1,650 26,832 113,964 -- 142,446
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF
JOINT VENTURES AND
SUBSIDIARIES........... 110,486 6,905 698 (109,913) 8,176
-------- -------- -------- --------- ----------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 8,482 2,458 2,620 (8,393) 5,167
Interest on long-term
debt.................. (20) (18,836) (31,005) -- (49,861)
Other interest expense. (246) (10,398) (4,992) 8,392 (7,244)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (8,286) (8,286)
Minority interest...... -- (470) (1,034) 1 (1,503)
Other.................. (175) 3,142 482 -- 3,449
-------- -------- -------- --------- ----------
8,041 (24,104) (33,929) (8,286) (58,278)
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 120,177 9,633 80,733 (118,199) 92,344
INCOME TAX PROVISION
(BENEFIT).............. 1,318 (8,111) 28,279 -- 21,486
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS............. 118,859 17,744 52,454 (118,199) 70,858
-------- -------- -------- --------- ----------
DISCONTINUED OPERATIONS,
NET OF TAXES
Income from operations. -- 1,595 -- -- 1,595
Gain on sale........... -- 36,176 -- -- 36,176
-------- -------- -------- --------- ----------
-- 37,771 -- -- 37,771
-------- -------- -------- --------- ----------
NET INCOME.............. 118,859 55,515 52,454 (118,199) 108,629
DIVIDENDS ON PREFERRED
SECURITIES............. 8,268 -- 18 (8,286) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR
COMMON STOCK........... $ 110,591 $ 55,515 $ 52,436 $(109,913) $ 108,629
======== ======== ======== ========= ==========
NINE MONTHS ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
OPERATING REVENUES...... $ 9,953 $263,483 $714,302 $ (8,616) $ 979,122
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas............ 4,522 189,253 303,130 (4,563) 492,342
Operation and
maintenance........... 3,388 32,926 210,753 (4,053) 243,014
Depreciation, depletion
and amortization...... 1,236 15,077 66,988 -- 83,301
Property and other
taxes................. 1,031 3,793 43,487 -- 48,311
-------- -------- -------- --------- ----------
10,177 241,049 624,358 (8,616) 866,968
-------- -------- -------- --------- ----------
OPERATING INCOME (LOSS). (224) 22,434 89,944 -- 112,154
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF
JOINT VENTURES AND
SUBSIDIARIES........... 56,908 2,495 499 (56,013) 3,889
-------- -------- -------- --------- ----------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 7,287 2,706 2,764 (6,661) 6,096
Interest on long-term
debt.................. (63) (6,502) (26,410) 1 (32,974)
Other interest expense. (39) (10,637) (4,425) 7,108 (7,993)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (7,213) (7,213)
Minority interest...... -- (1,829) -- -- (1,829)
Other.................. 1,524 (336) (2,337) (449) (1,598)
-------- -------- -------- --------- ----------
8,709 (16,598) (30,408) (7,214) (45,511)
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 65,393 8,331 60,035 (63,227) 70,532
INCOME TAX PROVISION
(BENEFIT).............. 1,425 (4,708) 21,201 1 17,919
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS............. 63,968 13,039 38,834 (63,228) 52,613
DISCONTINUED OPERATIONS,
NET OF TAXES........... -- 2,662 -- -- 2,662
-------- -------- -------- --------- ----------
NET INCOME.............. 63,968 15,701 38,834 (63,228) 55,275
DIVIDENDS ON PREFERRED
SECURITIES............. 7,031 -- 182 (7,213) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR
COMMON STOCK........... $ 56,937 $ 15,701 $ 38,652 $ (56,015) $ 55,275
======== ======== ======== ========= ==========
22
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- ---------- ----------------- ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------------------------------
OPERATING REVENUES...... $ 17,081 $670,178 $1,237,481 $ (12,980) $1,911,760
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas............ 9,204 509,022 608,392 (9,596) 1,117,022
Operation and
maintenance........... 1,869 72,974 292,381 (3,384) 363,840
Depreciation, depletion
and amortization...... 1,871 43,223 96,103 -- 141,197
Property and other
taxes................. 1,580 9,302 60,298 -- 71,180
-------- -------- ---------- --------- ----------
14,524 634,521 1,057,174 (12,980) 1,693,239
-------- -------- ---------- --------- ----------
OPERATING INCOME........ 2,557 35,657 180,307 -- 218,521
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF
JOINT VENTURES AND
SUBSIDIARIES........... 152,329 7,710 938 (151,445) 9,532
-------- -------- ---------- --------- ----------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 10,880 3,303 3,839 (11,210) 6,812
Interest on long-term
debt.................. (33) (22,064) (40,415) (1) (62,513)
Other interest expense. (260) (14,182) (7,620) 10,762 (11,300)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (10,683) (10,683)
Minority interest...... -- (1,132) (1,034) 1 (2,165)
Other.................. (216) 4,464 (2,590) 449 2,107
-------- -------- ---------- --------- ----------
10,371 (29,611) (47,820) (10,682) (77,742)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 165,257 13,756 133,425 (162,127) 150,311
INCOME TAX PROVISION
(BENEFIT).............. 2,011 (11,195) 48,082 (1) 38,897
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS............. 163,246 24,951 85,343 (162,126) 111,414
-------- -------- ---------- --------- ----------
DISCONTINUED OPERATIONS,
NET OF TAXES
Income from operations. -- 2,520 -- -- 2,520
Gain on sale........... -- 36,176 -- -- 36,176
-------- -------- ---------- --------- ----------
-- 38,696 -- -- 38,696
-------- -------- ---------- --------- ----------
NET INCOME.............. 163,246 63,647 85,343 (162,126) 150,110
DIVIDENDS ON PREFERRED
SECURITIES............. 10,612 -- 71 (10,683) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR
COMMON STOCK........... $ 152,634 $ 63,647 $ 85,272 $(151,443) $ 150,110
======== ======== ========== ========= ==========
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------------------------------------
OPERATING REVENUES...... $ 13,984 $355,459 $1,012,478 $ (11,689) $1,370,232
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas............ 6,316 262,291 448,016 (6,189) 710,434
Operation and
maintenance........... 2,609 39,810 297,688 (5,554) 334,553
Depreciation, depletion
and amortization...... 1,590 18,877 87,481 -- 107,948
Property and other
taxes................. 1,298 5,008 55,462 -- 61,768
-------- -------- ---------- --------- ----------
11,813 325,986 888,647 (11,743) 1,214,703
-------- -------- ---------- --------- ----------
OPERATING INCOME........ 2,171 29,473 123,831 54 155,529
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF
JOINT VENTURES AND
SUBSIDIARIES........... 77,786 2,733 554 (76,583) 4,490
-------- -------- ---------- --------- ----------
OTHER INCOME AND
(DEDUCTIONS)
Interest income........ 8,864 3,794 3,761 (8,215) 8,204
Interest on long-term
debt.................. (123) (9,716) (34,665) 1 (44,503)
Other interest expense. (66) (12,866) (7,368) 8,662 (11,638)
Dividends on preferred
securities of
subsidiaries.......... -- -- -- (8,865) (8,865)
Minority interest...... -- (2,521) -- -- (2,521)
Other.................. 234 263 (4,816) (505) (4,824)
-------- -------- ---------- --------- ----------
8,909 (21,046) (43,088) (8,922) (64,147)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 88,866 11,160 81,297 (85,451) 95,872
INCOME TAX PROVISION
(BENEFIT).............. 2,065 (5,459) 26,885 1 23,492
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING
OPERATIONS............. 86,801 16,619 54,412 (85,452) 72,380
DISCONTINUED OPERATIONS,
NET OF TAXES........... -- 3,634 -- -- 3,634
-------- -------- ---------- --------- ----------
NET INCOME.............. 86,801 20,253 54,412 (85,452) 76,014
DIVIDENDS ON PREFERRED
SECURITIES............. 8,568 -- 297 (8,865) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR
COMMON STOCK........... $ 78,233 $ 20,253 $ 54,115 $ (76,587) $ 76,014
======== ======== ========== ========= ==========
23
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------
NET CASH FLOW FROM
OPERATING ACTIVITIES... $ 24,837 $ 75,068 $111,297 $(16,366) $ 194,836
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING
ACTIVITIES
Notes payable, net..... -- (15,920) (2,622) -- (18,542)
Capital contributions
received from
(distributions
paid to) affiliates,
net................... (964) 48,516 1,614 (49,166) --
Common stock dividends
paid.................. (46,576) -- (7,000) 7,000 (46,576)
Preferred securities
dividends paid........ (8,268) -- (54) 8,322 --
Issuance of common
stock................. 13,408 -- -- -- 13,408
Issuance of preferred
securities............ 77,218 -- -- -- 77,218
Issuance of long-term
debt.................. -- 328,895 69,645 -- 398,540
Long-term commercial
paper and credit
facilities, net....... -- (256,630) -- -- (256,630)
Retirement of long-term
debt and preferred
securities............ (55) (1,350) (5,435) 1 (6,839)
Other.................. (6,281) -- -- -- (6,281)
-------- -------- -------- -------- --------
Net cash provided from
financing activities.. 28,482 103,511 56,148 (33,843) 154,298
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING
ACTIVITIES
Capital expenditures... (3,823) (251,419) (146,277) 1 (401,518)
Sale of Genix.......... -- 137,500 -- -- 137,500
Acquisition............ -- (78,620) -- -- (78,620)
Sale of an interest in
DIGP.................. -- 36,000 -- -- 36,000
Investment in joint
ventures and
subsidiaries.......... (50,130) (10,052) (33) 50,273 (9,942)
Other.................. 466 (4,983) (11,322) (64) (15,903)
-------- -------- -------- -------- --------
Net cash used for
investing activities.. (53,487) (171,574) (157,632) 50,210 (332,483)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (168) 7,005 9,813 1 16,651
CASH AND CASH
EQUIVALENTS, JANUARY 1. 168 10,622 8,469 -- 19,259
-------- -------- -------- -------- --------
CASH AND CASH
EQUIVALENTS, SEPTEMBER
30..................... $ -- $ 17,627 $ 18,282 $ 1 $ 35,910
======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
NET CASH FLOW FROM
OPERATING ACTIVITIES... $ 20,789 $ 83,790 $150,837 $(13,443) $ 241,973
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING
ACTIVITIES
Notes payable, net..... -- (21,350) (56,637) -- (77,987)
Capital contributions
received from
(distributions paid
to) affiliates, net... (3,216) 56,327 7,000 (60,111) --
Common stock dividends
paid.................. (42,784) -- (6,500) 6,500 (42,784)
Preferred securities
dividends paid........ (7,031) -- (223) 7,254 --
Issuance of common
stock................. 110,772 -- -- -- 110,772
Issuance of long-term
debt.................. -- 100,000 68,764 -- 168,764
Long-term commercial
paper and credit
facilities, net....... -- (39,398) -- -- (39,398)
Retirement of long-term
debt and preferred
securities............ (50) (2,647) (4,290) -- (6,987)
Other.................. -- -- -- (1,290) (1,290)
-------- -------- -------- -------- --------
Net cash provided from
financing activities.. 57,691 92,932 8,114 (47,647) 111,090
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING
ACTIVITIES
Capital expenditures... (3,241) (172,390) (154,718) -- (330,349)
Investment in joint
ventures and
subsidiaries.......... (75,262) (13,530) (308) 64,981 (24,119)
Sale of investment in
joint ventures........ -- 10,803 -- -- 10,803
Other.................. 30 317 (2,017) (2,450) (4,120)
-------- -------- -------- -------- --------
Net cash used for
investing activities.. (78,473) (174,800) (157,043) 62,531 (347,785)
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 7 1,922 1,908 1,441 5,278
CASH AND CASH
EQUIVALENTS, JANUARY 1. 29 10,213 1,305 -- 11,547
-------- -------- -------- -------- --------
CASH AND CASH
EQUIVALENTS, SEPTEMBER
30..................... $ 36 $ 12,135 $ 3,213 $ 1,441 $ 16,825
======== ======== ======== ======== ========
24
OTHER INFORMATION
LEGAL PROCEEDINGS
ENVIRONMENTAL: In 1994, MichCon received a general notice of liability
letter from the U.S. Environmental Protection Agency (USEPA) stating that it
was one of two potentially responsible parties at the Lower Ecorse Creek
Superfund site in Wyandotte, Michigan. USEPA requested that MichCon conduct a
remedial investigation and feasibility study at that site. MichCon
investigated its prior activities in the area and USEPA's bases for its
conclusion, and concluded that it was not responsible for contamination
discovered at that site. MichCon informed USEPA of this belief and did not
undertake the requested activities.
In September 1996, USEPA sent MichCon a second general notice of liability
letter for the site and demanded reimbursement of approximately $2.3 million
in past costs, plus interest. USEPA then issued MichCon and the other
potentially responsible party a unilateral administrative order under section
106 of the Comprehensive Environmental Response Compensation and Liability Act
to implement the remedy. USEPA estimates the cost of the remedy to be
approximately $650,000. MichCon again reviewed USEPA's bases for determining
that it is a potentially responsible party and concluded again that it was not
responsible for contamination discovered at that site and informed USEPA of
its decision. USEPA may sue MichCon to force compliance with the order or may
implement the remedy and then sue MichCon for recovery of all incurred costs.
If USEPA institutes and prevails in such a suit and if the court determines
that MichCon did not have sufficient cause not to comply with the order, the
court may impose civil penalties and punitive damages. Management believes
that MichCon was not responsible for contamination at the site and has
sufficient cause not to comply with this order and that the resolution of this
matter will not have a material adverse effect on MCN's financial statements.
ENERGY CONSERVATION PROGRAM: In December 1994, a suit was filed against
MichCon in Wayne County, Michigan Circuit Court by six customers who had
participated in one of three energy conservation programs sponsored by
MichCon. Under these programs, which had been approved by the MPSC, MichCon
offered low interest loans, rebates and other arrangements to assist qualified
residential customers in purchasing high efficiency furnaces. MichCon did not
manufacture, sell or install any of the furnaces. The complaint alleged that
MichCon induced the purchase of these furnaces through its conservation
programs and that it had a duty to, but failed to, warn its customers that
harmful levels of carbon monoxide could backdraft if a chimney was not
properly sized and a chimney liner installed. No personal injuries were
claimed. Plaintiffs sought injunctive relief, unspecified monetary damages and
class action certification. The trial court denied such certification on two
separate occasions; the Michigan Court of Appeals denied plaintiffs' request
for an appeal of those rulings.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. On September 13, 1996,
the plaintiffs' motions were granted to certify as a class the approximately
46,000 customers who had participated in MichCon's conservation programs from
1990 to the present. MichCon believes that plaintiffs' allegations are without
merit and will continue to defend the case vigorously.
25
EXHIBITS
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10-1 MCN Executive Deferred Compensation Plan, as amended.
10-2 MCN Supplemental Death Benefit and Retirement Income Plan.
10-3 MichCon Supplemental Retirement Plan.
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN Corporation.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN Investment Corporation.
27-1 Financial Data Schedule.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN CORPORATION
/s/ Harold Gardner
Date: November 7, 1996 By: _________________________________
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
27