0000950009-95-000294.txt : 19950808
0000950009-95-000294.hdr.sgml : 19950808
ACCESSION NUMBER: 0000950009-95-000294
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19950630
FILED AS OF DATE: 19950807
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MICHIGAN CONSOLIDATED GAS CO /MI/
CENTRAL INDEX KEY: 0000065632
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]
IRS NUMBER: 380478040
STATE OF INCORPORATION: MI
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-07310
FILM NUMBER: 95559359
BUSINESS ADDRESS:
STREET 1: 500 GRISWOLD ST
CITY: DETROIT
STATE: MI
ZIP: 48226
BUSINESS PHONE: 3139652430
10-Q
1
MICHCON FORM 10-Q
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995, 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 1-7310
MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0478040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-965-2430
NO CHANGES
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 31, 1995:
Common Stock, par value $1 per share: 10,300,000
===============================================================================
INDEX TO FORM 10-Q
For Quarter Ended June 30, 1995
Page
Number
COVER................................................................. i
INDEX................................................................. ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 12
SIGNATURE............................................................. 13
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
June 30, December 31,
----------------------- ------------
1995 1994 1994
---------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents, at cost (which approximates market
value) .................................................... $ 33,588 $ 2,207 $ 1,305
Accounts receivable, less allowance for doubtful accounts of
$20,537, $24,671 and $15,322, respectively ................ 123,139 162,913 134,980
Accrued unbilled revenues ................................... 14,356 18,582 82,233
Gas in inventory (Note 1) ................................... 51,427 26,733 77,843
Property taxes assessed applicable to future periods ........ 31,537 28,246 52,163
Other ....................................................... 25,029 26,258 23,102
---------- ---------- ----------
279,076 264,939 371,626
---------- ---------- ----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures ................ 20,247 18,263 20,791
Deferred postretirement benefit ............................. 16,853 24,144 19,887
Other ....................................................... 60,573 38,110 42,044
---------- ---------- ----------
97,673 80,517 82,722
---------- ---------- ----------
Property, Plant and Equipment, at cost ........................ 2,257,745 2,129,144 2,189,150
Less - Accumulated depreciation and depletion ............... 1,113,687 1,063,128 1,071,588
---------- ---------- ----------
1,144,058 1,066,016 1,117,562
---------- ---------- ----------
$1,520,807 $1,411,472 $1,571,910
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................................ $ 84,779 $ 91,278 $ 80,671
Notes payable (Note 3) ...................................... 1,875 57,327 168,457
Current portion of long-term debt, capital lease obligations
and redeemable cumulative preferred stock ................. 3,904 4,167 4,225
Gas inventory equalization (Note 1) ......................... 36,605 34,156 --
Federal income, property and other taxes payable ............ 69,850 76,591 85,806
Refunds payable to customers ................................ 1,258 18,664 19,559
Customer deposits ........................................... 10,013 10,090 11,563
Other ....................................................... 41,679 48,242 50,670
---------- ---------- ----------
249,963 340,515 420,951
---------- ---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes ........................... 61,609 46,573 52,396
Unamortized investment tax credit ........................... 37,366 39,224 38,294
Tax benefits amortizable to customers ....................... 112,470 125,153 114,906
Accrued postretirement benefit .............................. 11,119 16,681 23,507
Other ....................................................... 61,585 48,774 53,076
---------- ---------- ----------
284,149 276,405 282,179
---------- ---------- ----------
Long-Term Debt, including capital lease obligations (Note 2) .. 516,328 370,353 448,329
---------- ---------- ----------
Redeemable Cumulative Preferred Stock, $2.05 Series ........... -- 2,618 2,618
---------- ---------- ----------
Commitments and Contingencies (Note 4)
Common Shareholder's Equity
Common stock ................................................ 10,300 10,300 10,300
Additional paid-in capital (Note 2) ......................... 211,777 204,777 204,777
Retained earnings ........................................... 248,290 206,504 202,756
---------- ---------- ----------
470,367 421,581 417,833
---------- ---------- ----------
$1,520,807 $1,411,472 $1,571,910
========== ========== ==========
The notes to the consolidated financial statements are an integral
part of this statement.
1
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(Thousands of Dollars)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
---------------------- ---------------------- --------------------------
1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- ----------- -----------
Operating Revenues ............................. $ 184,968 $ 171,857 $ 606,780 $ 706,213 $ 1,012,245 $ 1,162,019
--------- --------- --------- --------- ----------- -----------
Operating Expenses
Cost of gas .................................. 72,030 61,118 282,167 361,241 450,352 589,576
Operation and maintenance .................... 72,674 68,689 150,003 155,299 308,279 287,947
Depreciation and depletion ................... 22,730 21,393 44,881 42,583 86,528 79,383
Property and other taxes ..................... 14,187 15,063 30,689 33,743 55,075 60,832
--------- --------- --------- --------- ----------- -----------
Total operating expenses ................... 181,621 166,263 507,740 592,866 900,234 1,017,738
--------- --------- --------- --------- ----------- -----------
Operating Income ............................... 3,347 5,594 99,040 113,347 112,011 144,281
--------- --------- --------- --------- ----------- -----------
Equity in Earnings of Joint Ventures ........... 152 391 376 827 592 1,798
--------- --------- --------- --------- ----------- -----------
Other Income and (Deductions)
Interest income .............................. 1,061 658 1,999 2,050 4,013 3,478
Interest on long-term debt ................... (8,431) (6,565) (16,684) (13,106) (31,526) (25,949)
Other interest expense ....................... (679) (1,430) (3,651) (3,669) (9,075) (8,195)
Other ........................................ (841) (553) (1,579) (1,218) (5,038) (6,323)
--------- --------- --------- --------- ----------- -----------
Total other income and (deductions) ........ (8,890) (7,890) (19,915) (15,943) (41,626) (36,989)
--------- --------- --------- --------- ----------- -----------
Income (Loss) Before Income Taxes .............. (5,391) (1,905) 79,501 98,231 70,977 109,090
Income Tax Provision (Benefit) ................. (1,943) (329) 27,339 34,845 22,333 37,989
--------- --------- --------- --------- ----------- -----------
Net Income (Loss) .............................. (3,448) (1,576) 52,162 63,386 48,644 71,101
Dividends on Preferred Stock ................... 54 115 128 251 358 604
--------- --------- --------- --------- ----------- -----------
Net Income (Loss) Available for Common Stock ... $ (3,502) $ (1,691) $ 52,034 $ 63,135 $ 48,286 $ 70,497
========= ========= ========= ========= =========== ===========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
(Thousands of Dollars)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------------ --------------------- ---------------------
1995 1994 1995 1994 1995 1994
--------- --------- -------- -------- -------- --------
Balance - Beginning of period .................. $ 251,792 $ 208,195 $202,756 $151,869 $206,504 $190,407
Add - Net income (loss) ........................ (3,448) (1,576) 52,162 63,386 48,644 71,101
--------- --------- -------- -------- -------- --------
248,344 206,619 254,918 215,255 255,148 261,508
Deduct - Cash dividends declared
Preferred stock ...................... 54 115 128 251 358 604
Common stock ......................... -- -- 6,500 8,500 6,500 54,400
--------- --------- -------- -------- -------- --------
Balance - End of period ........................ $ 248,290 $ 206,504 $248,290 $206,504 $248,290 $206,504
========= ========= ======== ======== ======== ========
The notes to the consolidated financial statements are
an integral part of these statements.
2
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
------------------------
1995 1994
--------- ---------
Cash Flow from Operating Activities
Net income ............................................................. $ 52,162 $ 63,386
Adjustments to reconcile net income to net cash provided from
operating activities
Depreciation and depletion
Per statement of income ............................................ 44,881 42,583
Charged to other accounts .......................................... 3,564 3,524
Deferred income taxes - current .................................... (2,813) (15,239)
Deferred income taxes and investment tax credit - net .............. 5,849 (3,441)
Other .............................................................. 585 335
--------- ---------
104,228 91,148
Changes in assets and liabilities, exclusive of changes shown
separately ....................................................... 103,614 173,948
--------- ---------
Net cash provided from operating activities ...................... 207,842 265,096
--------- ---------
Cash Flow from Financing Activities
Notes payable - net .................................................... (166,582) (202,977)
Issuance of long-term debt ............................................. 68,764 --
Cash dividends paid
Common stock ......................................................... (6,500) (8,500)
Preferred stock ...................................................... (169) (292)
Retirement of long-term debt and preferred stock ....................... (3,763) (3,472)
Equity investment ...................................................... 7,000 1,161
--------- ---------
Net cash used for financing activities ........................... (101,250) (214,080)
--------- ---------
Cash Flow from Investing Activities
Capital expenditures ................................................... (75,891) (49,927)
Other .................................................................. 1,582 (1,305)
--------- ---------
Net cash used for investing activities ........................... (74,309) (51,232)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ..................... 32,283 (216)
Cash and Cash Equivalents, January 1 ..................................... 1,305 2,423
--------- ---------
Cash and Cash Equivalents, June 30 ....................................... $ 33,588 $ 2,207
========= =========
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accrued unbilled revenues .............................................. $ 67,877 $ 81,634
Gas in inventory ....................................................... 26,416 8,366
Property taxes assessed to applicable periods .......................... 20,626 21,614
Gas inventory equalization ............................................. 36,605 34,156
Federal income, property and other taxes payable ....................... (15,956) 16,048
Refunds payable to customers ........................................... (18,301) (10,551)
Other current assets and liabilities ................................... 5,721 9,607
Deferred assets and liabilities ........................................ (19,374) 13,074
--------- ---------
$ 103,614 $ 173,948
========= =========
Supplemental Disclosures
Cash paid for:
Interest, net of amounts capitalized ................................. $ 21,249 $ 18,031
========= =========
Federal income taxes ................................................. $ 16,469 $ 21,181
========= =========
The notes to the consolidated financial statements are
an integral part of this statement.
3
MICHIGAN CONSOLIDATED GAS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Gas in Inventory
Inventory is priced on a last-in, first-out (LIFO) basis. In
anticipation that interim inventory reductions will be replaced prior to
year end, the cost of gas for net withdrawals from inventory is recorded
at the estimated average purchase rate for the calendar year. The excess
of these charges over the LIFO cost is credited to the gas inventory
equalization account. During interim periods when there are net injections
to inventory, the equalization account is reversed. Approximately 52.0 Bcf
and 47.8 Bcf of gas was included in inventory at June 30, 1995 and 1994,
respectively.
2. Capitalization
The following debt was issued during 1995:
Issue Date Description Amount
---------- ------------------------- -----------
May 1995 First Mortgage Bonds,
7.50%, due May 2020 $30,000,000
June 1995 First Mortgage Bonds,
6.30%, due June 1998 $20,000,000
6.72%, due June 2003 $ 4,150,000
6.80%, due June 2003 $15,850,000
In addition, MCN Corporation invested $7,000,000 in MichCon as an
additional equity investment in May 1995.
3. Lines of Credit
At June 30, 1995, MichCon maintained credit lines of up to
$109,000,000, which supported its commercial paper program. No commercial
paper was outstanding as of June 30, 1995. In July 1995, new credit lines
were negotiated to allow for borrowings of up to $100,000,000 under a
364-day revolving credit facility and up to $150,000,000 under a three-year
revolving credit facility. MichCon anticipates issuing commercial paper in
lieu of an equivalent amount of borrowings under lines of credit.
4
MICHIGAN CONSOLIDATED GAS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
4. Contingencies
MichCon 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 MichCon's
financial statements.
5. General
There have been no changes in MichCon's principal accounting policies
from those set forth in MichCon's 1994 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements
to conform with the 1995 presentation.
The unaudited information furnished herein, in the opinion of
management, reflects all adjustments (consisting of only recurring
adjustments or accruals) necessary for a fair presentation of the results
of operations during the periods.
Because of seasonal and other factors, revenues, expenses and net
income for the interim periods should not be construed as representative
of revenues, expenses and net income for all or any part of the balance of
the current year or succeeding periods.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
MichCon experienced a loss of $3.5 million in the second quarter of 1995,
a decrease in earnings of $1.8 million from the second quarter of 1994. This
decrease was due mainly to the timing of certain operating expenses, primarily
uncollectibles expense, partially offset by the colder weather experienced
during the 1995 quarter. Earnings for the 1995 six- and twelve-month periods
decreased $11.1 million and $22.2 million, respectively, from the same periods
in 1994, reflecting decreased gas deliveries primarily resulting from warmer
weather.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Quarter Six Months Twelve Months
------------------ ------------------ -------------------
1995 1994 1995 1994 1995 1994
----- ------- ------- ----- -------- -----
Percentage Colder (Warmer)
than Normal 2.5% (9.1)% (4.1)% 4.2% (9.6)% 2.9%
Increase (Decrease) from
Normal in:
Gas Markets (Bcf) 0.5 (1.3) (4.7) 6.4 (15.5) 6.2
Net Income (Millions) $0.7 $(1.2) $(4.1) $5.9 $(13.9) $5.7
EARNINGS COMPONENTS (IN MILLIONS)
COMPARING 1995 TO 1994
Quarter Six Months Twelve Months
-------------------- --------------------- ----------------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Operating Revenues $13.1 7.6% $(99.4) (14.1)% $(149.8) (12.9)%
Cost of Gas 10.9 17.9 (79.1) (21.9) (139.2) (23.6)
----- ------ -------
Gross Margin 2.2 2.0 (20.3) 5.9 (10.6) (1.8)
Operation and Maintenance 4.0 5.8 (5.3) (3.4) 20.3 7.1
Depreciation and Depletion 1.3 6.3 2.3 5.4 7.1 9.0
Property and Other Taxes (0.9) (5.8) (3.1) (9.1) (5.7) (9.5)
Other Income and Deductions 1.0 12.7 4.0 24.9 4.6 12.5
Income Tax Provision (Benefit) (1.6) N/A (7.5) (21.5) (15.7) (41.2)
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased for the
quarter but decreased for the six- and twelve-month periods due to
fluctuations in gas deliveries resulting from the weather variations
previously discussed. In addition, the twelve-month period decrease was offset
by an increase in gas sales rates, reflecting a general rate increase of $15.7
million, effective January 1994.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Gas sales volumes and end user transportation deliveries in total were
also impacted by the weather, increasing in the 1995 quarter but decreasing in
the 1995 six- and twelve-month periods. Higher demand from large-volume
commercial and industrial customers also contributed to the increase in end
user transportation deliveries for all the 1995 periods.
Quarter Six Months Twelve Months
-------------- -------------- --------------
1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ----- -----
GAS MARKETS (IN BCF)
Gas Sales 31.5 28.0 120.8 132.6 189.7 212.7
End User Transportation 32.2 30.5 75.6 75.3 140.1 135.5
----- ----- ----- ----- ----- -----
63.7 58.5 196.4 207.9 329.8 348.2
Intermediate
Transportation 64.8 66.4 170.7 174.0 300.2 319.2
----- ----- ----- ----- ----- -----
128.5 124.9 367.1 381.9 630.0 667.4
===== ===== ===== ===== ===== =====
During 1994, MCN and Destec Energy, as limited partners, began
construction of a 123-megawatt cogeneration plant in Ludington, Michigan. Upon
its completion in the fourth quarter of 1995, MichCon will provide end user
transportation of the natural gas needed to fuel the plant, approximately nine
Bcf annually.
The decreases in intermediate transportation deliveries in the 1995
quarter, six- and twelve-month periods are primarily the result of reduced
volumes transported for Canadian customers, partially offset by increased
transportation of Antrim gas for Michigan gas producers and brokers. Profit
margins on intermediate transportation services are considerably less than
margins on gas sales or for end user transportation markets.
Due to the growing demand by gas producers and brokers for intermediate
transportation services resulting from the significant increase in Michigan
Antrim gas production, MichCon filed a proposal before the Michigan Public
Service Commission (MPSC) to construct facilities to expand transportation
capacity. In March 1995, the MPSC approved MichCon's proposal. The expansion
project will require approximately $40 million for additional pipeline and
related facilities. Construction began during the 1995 quarter and will be
completed in early 1996. The expanded system is expected to transport
approximately 135 Bcf of Antrim gas annually, generating new revenues of
approximately $8 million per year.
During the 1995 quarter, the MPSC approved MichCon's request to construct
and operate a 59-mile loop of the Milford to Belle River Pipeline for
approximately $80 million. The pipeline will improve the overall reliability
and efficiency of MichCon's gas storage and transmission system by serving as
a back-up means of transportation in the event of disruptions in the operation
of the existing pipeline or other facilities used to supply gas to MichCon's
system. Construction of the pipeline will begin in October 1995 and is
expected to be completed by June 1996.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set
to recover 100% of prudently and reasonably incurred gas costs. Therefore,
significant fluctuations in total gas costs have little or no effect on gross
margins and earnings.
Cost of gas sold increased in the 1995 quarter from the comparable 1994
quarter due to higher gas volumes sold resulting from the colder weather and
an increase of $.09 (4.4%) in the cost of gas sold per thousand cubic feet
from the 1994 quarter. Cost of gas sold decreased in the 1995 six- and
twelve-month periods due to lower sales volumes resulting from the warmer
weather as well as lower prices paid for natural gas in the spot market. The
decline in market prices paid for gas resulted in a decrease in the cost of
gas sold per thousand cubic feet of $.46 (16.4%) in the 1995 six- and twelve-
month periods from the comparable 1994 periods.
A majority of MichCon's interstate gas supply contracts are priced based
on natural gas spot indices. To mitigate price volatility associated with gas
purchases, MichCon has reserved the right to fix the prices it pays under some
of these contracts. In order to capture declining gas prices during 1994,
MichCon fixed the price on approximately 34 Bcf of gas in advance of the month
of purchase. There was a further decline in gas prices during 1994. Had
MichCon not fixed these prices, its cost of gas would have been approximately
$10.0 million (1.9%) lower in 1994.
MichCon filed its 1994 GCR reconciliation case with the MPSC in the first
quarter of 1995. In this case, the MPSC will decide whether MichCon's 1994 gas
costs were reasonable and prudent. In July 1995, an intervenor filed testimony
taking issue with some of MichCon's decisions. However, the MPSC Staff did not
file any testimony in this case. An order in this case is expected at the end
of 1995. MichCon believes that it acted reasonably and prudently by fixing the
gas prices based upon the information available at the time.
OPERATION AND MAINTENANCE
The timing of certain operating expenses, primarily uncollectibles
expense, resulted in higher operation and maintenance expenses in the 1995
quarter as compared to the same 1994 quarter. For the six-month period, these
expenses were more than offset by lower uncollectibles expense resulting from
the warmer than normal weather in the first quarter of 1995 and a reduction in
pension expense. Operation and maintenance expenses increased for the 1995
twelve-month period due to higher postretirement benefit costs being
recognized as a result of the new accounting requirements under Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" (SFAS No. 106). These costs are
being recovered in rates that became effective in January 1994. Management's
continuing efforts to reduce operating costs contributed to the decrease in
operation and maintenance expenses for the 1995 six-month period and partially
offset the increase for the 1995 quarter and twelve-month period.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
In March 1995, the U.S. House of Representatives voted to eliminate all
funding for the Low-Income Home Energy Assistance Program (LIHEAP). However,
several weeks later the U.S. Senate voted to restore the program's $1.3
billion appropriation. Delegates from the House and Senate later met and
agreed upon a LIHEAP target for 1996. The target, a decrease of more than $300
million from what had originally been proposed, was part of a package vetoed
by President Clinton.
During July 1995, the U.S. House Appropriations Committee adopted 1996
funding legislation that eliminates future energy assistance support. The
House is expected to support this funding bill. The Senate, which continues to
demonstrate strong bipartisan support for LIHEAP, is expected to take up the
1996 appropriations package in September. President Clinton has threatened to
veto the House proposal if not modified. MichCon continues its vigorous
efforts to maintain this funding. LIHEAP funding currently provides
approximately $78 million in heating assistance to 385,000 Michigan households
through the Department of Social Services, with approximately 35% of the funds
going to MichCon customers. A portion of any decreased funding may result in
increased uncollectibles expense.
DEPRECIATION AND DEPLETION
The increase in depreciation and depletion for all 1995 periods was due
mainly to higher plant balances, reflecting capital expenditures of $286.7
million over the past two calendar years. The 1995 twelve-month period also
reflects higher depreciation rates that were implemented in January 1994.
PROPERTY AND OTHER TAXES
Property and other taxes for the 1995 periods reflect a decrease in
Michigan single business taxes due primarily to lower earnings. In addition,
the 1995 periods also reflect lower property taxes due to changes in Michigan
legislation, partially offset by increased taxes due to higher property
balances.
OTHER INCOME AND DEDUCTIONS
The increase in other income and deductions for all 1995 periods reflects
additional interest expense relating to the issuances of first mortgage bonds
of $80 million in September 1994 and an aggregate of $70 million in the 1995
quarter.
INCOME TAX PROVISION
Income taxes decreased for the 1995 quarter, six- and twelve-month periods
due primarily to reduced earnings and the favorable resolution of prior years'
tax issues.
ENVIRONMENTAL MATTERS
As discussed in MichCon's 1994 Annual Report on Form 10-K, MichCon
previously submitted a remedial action plan for a former manufactured gas
plant site in Muskegon, Michigan. The remedy includes limited excavation and
disposal of soils, a new soil cover and, if necessary, a ground water capture
and treatment system. During the 1995 quarter, the Michigan Department of
Natural Resources (MDNR) approved that plan and MichCon began the limited
excavation and cover portion of the remedy.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Off site work and installation of the ground water system is contingent upon
execution of an agreement with the state of Michigan.
In addition, MichCon was involved in litigation with an adjacent property
owner regarding another site. During the 1995 quarter, that property owner
agreed to dismiss the litigation.
MichCon Development Company, a 100% owned subsidiary of MichCon, has a 33%
to 50% interest in four partnerships that are developing Harbortown, a
residential development that is being constructed on a 50 acre parcel along
the Detroit River. During the 1995 quarter, the MDNR approved a remediation
action plan that had been submitted by the Harbortown partnerships. The plan
includes certain landscaping requirements and, during future development,
excavation controls consistent with occupational safety and health
regulations. MichCon Development Company, along with the other general
partner, executed an agreement with the state of Michigan regarding
implementation of the plan. No further action will be taken by the MDNR.
Management believes that insurance coverage and the cost deferral and rate
recovery mechanism approved by the MPSC will prevent environmental costs from
having a material adverse impact on MichCon's financial results.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities totaled $207.8 million for
the 1995 six-month period, decreasing $57.3 million from the comparable 1994
period. The decrease was due primarily to lower income and higher working
capital requirements, partially offset by deferred taxes.
FINANCING ACTIVITIES
Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the 1995 six-month period, MichCon
repaid $166.6 million of commercial paper. During the latter part of the year,
cash and cash equivalents decrease as funds are used to finance increases in
gas inventories and customer accounts receivable. To meet its seasonal
short-term borrowing needs, MichCon normally issues commercial paper which is
backed by credit lines with several banks. As of June 30, 1995, MichCon
maintained credit lines of up to $109 million which supported its commercial
paper program. No commercial paper was outstanding as of June 30, 1995. In July
1995, new credit lines were negotiated 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. MichCon anticipates issuing
commercial paper in lieu of an equivalent amount of borrowings under lines of
credit. MichCon's commercial paper is currently rated "A-1" or its equivalent
by the major rating agencies.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Concluded)
In May 1995, MichCon filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $150 million of
first mortgage bonds. This filing, along with MichCon's existing shelf
registrations of $30 million, provided MichCon the ability to issue up to $180
million of first mortgage bonds. During the 1995 quarter, MichCon issued an
aggregate of $70 million of first mortgage bonds under shelf registration
statements. Also during the 1995 quarter, MCN Corporation invested $7 million
in MichCon as an additional equity investment. The proceeds from the debt
issuance and equity investment were used to repay short-term obligations and
will also be used to finance MichCon's capital expenditures and for general
corporate purposes. MichCon's capital requirements and general financial
market conditions will affect the timing and amount of future debt issuances.
MichCon's capitalization objective is to maintain a ratio of approximately 50%
debt and 50% equity. In June 1995, Duff & Phelps raised its "A" rating on
MichCon's first mortgage bonds to "A+." MichCon's first mortgage bonds carry
the equivalent of an "A" rating by the other major rating agencies.
In 1994, MichCon began a Trust Demand Note program which allows MichCon to
borrow up to $25 million. Borrowings under this program were repaid during the
second quarter of 1995.
INVESTING ACTIVITIES
MichCon's capital expenditures during the 1995 six-month period totaled
$75.9 million, an increase of $26.0 million from the comparable 1994 period
due primarily to colder weather precluding construction activity during the
1994 six-month period. Capital expenditures anticipated for 1995 continue to
be approximately $250 million.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
ACCOUNTING PRONOUNCEMENTS
During the 1995 quarter, MichCon adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets," which requires the impairment of property
and intangibles to be considered whenever evidence suggests a lack of
recoverability. The Statement also modifies existing practice and guidance
with respect to impairment of regulatory assets under SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation." SFAS No. 121 requires, among
other things, that regulatory assets recorded as a result of SFAS No. 71 must
continue to be probable of recovery in rates at all times, rather than only at
the time the regulatory asset is recorded. As such, regulatory assets
currently recorded may require adjustment in the future if recovery is no
longer probable. Under the current ratemaking process, adoption of this
statement had no impact on the Company's financial statements.
11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
12-1 Computation of Ratio of Earnings to Fixed Charges.
27-1 Financial Data Schedule.
(b) Reports on Form 8-K
MichCon filed a report on Form 8-K dated May 18, 1995,
under Item 5, with respect to the issuance of $10,000,000 of
First Mortgage Bonds, designated Secured Term Notes, Series A,
7-1/2% Bonds due May 1, 2020 and $20,000,000 of First Mortgage
Bonds, designated Secured Term Notes, Series B, 7-1/2% Bonds
due May 1, 2020. A Form of Underwriting Agreement and
Computation of Ratio of Earnings to Fixed Charges for the
twelve months ended December 31, in each year 1990 through 1994
and for the twelve months ended March 31, 1995 were filed as
Exhibits thereto.
MichCon filed a report on Form 8-K dated June 6, 1995,
under Item 5, with respect to $150,000,000 of First Mortgage
Bonds, designated Secured Medium-Term Notes, Series B. A Form
of Distribution Agreement was filed as an Exhibit thereto.
12
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.
MICHIGAN CONSOLIDATED GAS COMPANY
Date: August 7, 1995 By: /s/ David R. Nowakowski
------------------------------
David R. Nowakowski
Controller, Treasurer and
Chief Accounting Officer
13
EX-12.1
2
EXHIBIT 12-1
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Twelve Months Ended
June 30, 1995
--------------------
(Thousands of Dollars)
EARNINGS AS DEFINED(1)
Net Income................................................... $ 48,644
Federal and other income taxes............................... 22,333
Fixed charges................................................ 43,763
--------
Earnings as defined........................................ $114,740
========
FIXED CHARGES AS DEFINED(1)
Interest on long-term debt................................... $31,526
Interest on other borrowed funds............................. 9,075
Amortization of debt discounts, premium
and expense................................................ 935
Interest implicit in rentals(2).............................. 2,227
--------
Fixed charges as defined.................................... $43,763
========
Ratio of Earnings to Fixed Charges........................... 2.62
====
____________________
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with
instructions for Item 3 of Form S-3.
(2) This amount is estimated to be a reasonable approximation of the interest
portion of rentals.
MichCon is a guarantor of certain other debt. Fixed charges related to such debt
are deemed to be immaterial and therefore have been excluded from the above
ratios.
EX-27.1
3
MICHCON ART 5 FDS FOR 2ND QTR FORM 10-Q
5
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
33,588
0
143,676
20,537
51,427
279,076
2,257,745
1,113,687
1,520,807
249,963
516,328
0
0
10,300
460,067
1,520,807
0
606,780
0
507,740
1,579
9,087
20,335
79,501
27,339
52,162
0
0
0
52,034
0
0