SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000, 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 (State or other jurisdiction of incorporation or organization) |
38-0478040 (I.R.S. Employer Identification No.) |
|
500 Griswold Street, Detroit, Michigan (Address of principal executive offices) |
48226 (Zip Code) |
Registrants 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 registrants classes of common stock, as of May 12, 2000:
Common Stock, par value $1.00 per share: 10,300,000
Index To Form 10-Q | ||||||||
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Index To Form 10-Q
For Quarter Ended March 31, 2000
Page | ||||
Number | ||||
COVER | i | |||
INDEX | ii | |||
PART I FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | 8 | |||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 1 | |||
PART II OTHER INFORMATION | ||||
Item 6. Exhibits and Reports on Form 8-K | 15 | |||
SIGNATURE | 16 |
ii
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results reflect warmer weather and reduced contributions from gas sales program MichCons earnings were $66.9 million for the 2000 first quarter, a decrease of $17.1 million from the comparable 1999 period of $84.0 million. Earnings for the 2000 twelve-month period were $89.3 million, a decrease of $10.0 million from earnings for the 1999 twelve-month period of $99.3 million. As subsequently discussed, the 2000 twelve-month period includes costs associated with the merger between MichCons parent company, MCN Energy Group Inc. (MCN), and DTE Energy Company which reduced earnings by $16.8 million (Note 2). The 1999 twelve-month period includes the write-down of a gas gathering pipeline which reduced earnings by $11.2 million (Note 3). Excluding the merger costs and write-down, earnings for the 2000 twelve-month period decreased $4.4 million over the corresponding 1999 period. The earnings decline for the 2000 first quarter reflects the impact of warmer weather and reduced contributions from the gas sales program. The decrease in earnings for the 2000 twelve-month period reflects warmer weather and higher financing costs, partially offset by increased contributions from the gas sales program.
Earnings Components (Dollars in Millions)
Comparing 2000 to 1999
Quarter | Twelve Months | |||||||||||||||||||||||||||
$ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||
Operating Revenues | (55.3 | ) | (11.1 | )% | (22.1 | ) | (2.0 | )% | ||||||||||||||||||||
Cost of Gas | (31.8 | ) | (12.8 | ) | (30.2 | ) | (6.3 | ) | ||||||||||||||||||||
Gross Margin | (23.5 | ) | (9.4 | ) | 8.1 | 1.3 | ||||||||||||||||||||||
Operation and Maintenance | (3.5 | ) | (5.2 | ) | 4.9 | 1.9 | ||||||||||||||||||||||
Depreciation and Depletion | 1.3 | 5.4 | 5.2 | 5.4 | ||||||||||||||||||||||||
Property and Other Taxes | .5 | 2.9 | (10.8 | ) | (19.2 | ) | ||||||||||||||||||||||
Merger Costs (Note 2) | .3 | N/A | 25.8 | N/A | ||||||||||||||||||||||||
Property Write-down (Note 3) | | | (24.8 | ) | N/A | |||||||||||||||||||||||
Other Income and Deductions | 1.8 | 15.1 | 13.8 | 33.2 | ||||||||||||||||||||||||
Income Tax Provision | (7.0 | ) | (16.3 | ) | 4.1 | 9.0 | ||||||||||||||||||||||
Net Income | (17.1 | ) | (20.3 | ) | (10.0 | ) | (10.1 | ) |
Gross Margin
Gross margin (operating revenues less cost of gas) decreased $23.5 million in the 2000 first quarter and increased $8.1 million in the 2000 twelve-month period. Gross margins for the 2000 quarter reflect lower gas sales due to weather, which was 9.9% warmer in the current quarter compared to the same 1999 period. Additionally, the decline in the 2000 first quarter is due to lower margins generated under MichCons three-year gas sales program that began in January 1999 (Note 4a). Under the gas sales program, MichCons gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. However, gas sales margins in the 2000 first quarter were lower than the same 1999 period as a result of higher fixed-price supplies and the loss of
1
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
approximately 70,000 customers who chose to purchase their gas from other suppliers under MichCons customer choice program that began in April 1999. Although MichCon has lost gas sales margins from these customers, distribution margins are retained as MichCon continues to transport and deliver the gas to the customers premises. MichCons fixed-price supplies for the remainder of 2000 as well as 2001 are at prices higher than those paid in 1999. Accordingly, margins in future periods are expected to be lower than those generated in 1999.
The increase in gross margins for the 2000 twelve-month period reflects higher margins generated under the gas sales program. As a result of the gas sales program beginning in January 1999, the 2000 twelve-month period includes a full years contribution whereas the 1999 twelve-month period includes only three months of contributions. Gross margins for both the 2000 first quarter and the twelve-month period were also impacted by a decline in intermediate transportation revenues and revenues from other gas-related services.
Effect of Weather on Gas Markets and Earnings
Quarter | Twelve Months | ||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||
Percentage Colder (Warmer) Than Normal | (14.2 | )% | (4.3 | )% | (13.9 | )% | (12.0 | )% | |||||||||
Increase (Decrease) From Normal in: | |||||||||||||||||
Gas markets (in Bcf) | (16.1 | ) | (5.1 | ) | (29.7 | ) | (26.2 | ) | |||||||||
Net income (in Millions) | $ | (15.0 | ) | $ | (5.1 | ) | $ | (28.5 | ) | $ | (23.7 | ) | |||||
Gas sales and end user transportation revenues in total decreased $52.9 million for the 2000 first quarter and $18.1 million for the 2000 twelve-month period. Revenues reflect a decline in gas sales volumes, partially offset by higher end user transportation deliveries. Gas sales volumes decreased 14.3 billion cubic feet (Bcf) in the 2000 first quarter and 17.3 Bcf in the 2000 twelve-month period due primarily to the warmer weather and customers who chose to purchase their gas from other suppliers under MichCons customer choice program. End user transportation deliveries increased 9.2 Bcf in the 2000 first quarter and 20.8 Bcf in the 2000 twelve-month period. The improvement includes volumes associated with customers participating in the customer choice program who are reflected as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have decreased, partially offset by an increase in end user transportation revenues, resulting in a net decrease in total operating revenues due to the gas commodity component included in gas sales rates. Partially offsetting the increase in end user transportation volumes attributable to the customer choice program was the impact of warmer weather. | ||
The revenue comparison for the twelve-month period was also impacted by the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCons gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCons sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCons sales increased $.27 per Mcf (10%) for the 2000 twelve-month period. |
2
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
Quarter | Twelve Months | |||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||
Gas Markets (in Millions) | ||||||||||||||||
Gas Sales | $ | 370.7 | $ | 435.7 | $ | 842.5 | $ | 892.6 | ||||||||
End User Transportation | 38.8 | 26.7 | 115.7 | 83.7 | ||||||||||||
409.5 | 462.4 | 958.2 | 976.3 | |||||||||||||
Intermediate Transportation | 14.5 | 14.7 | 57.5 | 59.9 | ||||||||||||
Other | 18.8 | 21.0 | 64.7 | 66.3 | ||||||||||||
$ | 442.8 | $ | 498.1 | $ | 1,080.4 | $ | 1,102.5 | |||||||||
Gas Markets (in Bcf) | ||||||||||||||||
Gas Sales | 76.7 | 91.0 | 163.9 | 181.2 | ||||||||||||
End User Transportation | 51.6 | 42.4 | 160.9 | 140.1 | ||||||||||||
128.3 | 133.4 | 324.8 | 321.3 | |||||||||||||
Intermediate Transportation | 182.9 | 127.4 | 587.4 | 516.5 | ||||||||||||
311.2 | 260.8 | 912.2 | 837.8 | |||||||||||||
Intermediate transportation revenues decreased $.2 million in the 2000 first quarter and $2.4 million in the 2000 twelve-month period, whereas intermediate transportation deliveries increased 55.5 Bcf and 70.9 Bcf, respectively. A significant portion of the volume increase was for customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected. The decrease in intermediate transportation revenues is due to non-fixed fee customers shifting volumes from a higher rate to a lower rate transportation route.
Other operating revenues decreased $2.2 million in the 2000 first quarter and $1.6 million in the 2000 twelve-month period due to a decline in storage revenues, partially offset by an increase in late payment fees and revenues from providing appliance maintenance services.
Cost of Gas
Cost of gas is affected by variations in sales volumes and cost of purchased gas as well as related transportation costs. Under the Gas Cost Recovery (GCR) mechanism that was in effect through December 1998, MichCons sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCons gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.
Cost of gas sold decreased $31.8 million in the 2000 first quarter and $30.2 million in the 2000 twelve-month period, primarily due to a decline in sales volumes. As previously discussed, the decrease in sales volumes reflects the warmer weather and customers who have chosen to purchase gas from other suppliers under MichCons customer choice program. Partially offsetting the impact of lower sales volumes was an increase in the price paid for gas purchased of $.11 per Mcf (4%) in the 2000 first quarter and $.10 per Mcf (4%) in the 2000 twelve-month period.
3
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
Other Operating Expenses
Operation and maintenance expenses decreased $3.5 million in the 2000 first quarter and increased $4.9 million in the 2000 twelve-month period. The decrease in the current quarter is attributable to lower employee benefit costs, primarily pension and retiree healthcare costs, and the receipt of insurance proceeds resulting from the settlement of environmental claims with certain insurance carriers. As discussed in MichCons 1999 Annual Report on Form 10-K, the settlement has allowed MichCon to recover previously incurred costs and resolved the carriers liability for future costs of environmental investigation and remediation costs at former manufactured gas plant sites.
The increase in operation and maintenance expenses in the 2000 twelve-month period is due to additional computer system support costs associated with MichCons new customer information system and higher injuries and damages costs. Additionally, the increase reflects higher employee incentive payments. The higher costs of these items more than offset the benefits from lower pension and retiree healthcare costs and environmental insurance proceeds.
Depreciation and depletion increased $1.3 million in the 2000 first quarter and $5.2 million in the 2000 twelve-month period reflecting depreciation on higher plant balances.
Property and other taxes increased $.5 million in the 2000 first quarter and decreased $10.8 million in the 2000 twelve-month period. The current twelve-month period reflects a change in the calculation of the value of personal property subject to taxation by local governments (Note 6a).
Merger costs of $25.8 million in the 2000 twelve-month period include legal, consulting, accounting, employee benefit and other expenses associated with the pending merger between MCN and DTE Energy Company (Note 2).
Property write-down of $24.8 million in the 1999 twelve-month period reflects the impairment of certain gas gathering properties in northern Michigan (Note 3).
Other Income and Deductions
Other income and deductions increased $1.8 million in the 2000 first quarter and $13.8 million in the 2000 twelve-month period. Both 2000 periods were impacted by higher interest costs primarily due to an increase in long-term debt outstanding as well as a decline in interest capitalized relating to construction activities. Additionally, the other income and deductions increase in the 2000 twelve-month period is attributable to lower interest income resulting from the repayment of funds loaned to MCN.
Income Taxes
Income taxes for both 2000 periods were impacted by a decrease in pre-tax earnings. Income tax comparisons were also affected by the favorable resolution of prior years tax issues in the 1999 periods.
Outlook
MichCons strategy is to expand its role as the preferred provider of natural gas and high-value energy services within Michigan. Accordingly, MichCons objectives are to increase revenues and
4
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices.
MichCon has begun and plans to continue capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently operating under its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program that is designed to offer all sales customers added choices and greater price certainty. Year two of the customer choice program began April 1, 2000, and approximately 55,000 customers have chosen to purchase natural gas from suppliers other than MichCon. There are approximately 15,000 fewer customers participating in year two of the plan than in year one.
As discussed in MichCons 1999 Annual Report on Form 10-K, the Regulatory Reform Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon, and fixed the gas commodity component of MichCons sales rates at $2.95 per Mcf. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. As part of its gas acquisition strategy, MichCon entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. However, margins are expected to be lower in future periods as MichCons fixed-price supplies in 2000 and 2001 are at prices higher than those paid in 1999.
The plan increases MichCons risk associated with generating margins that cover its gas costs. The level of margins generated from selling gas will also be affected by differences between actual gas sales volumes and the volume of fixed-price gas supplies. Actual gas sales volumes will fluctuate as a result of changes in weather and the number of customers who ultimately choose to purchase gas from suppliers other than MichCon.
CAPITAL RESOURCES AND LIQUIDITY
Quarter | ||||||||||||||
2000 | 1999 | |||||||||||||
Cash and Cash Equivalents (in Millions) | ||||||||||||||
Cash Flow Provided From (Used For): | ||||||||||||||
Operating activities | $ | 199.2 | $ | 179.7 | ||||||||||
Financing activities | (176.3 | ) | (136.7 | ) | ||||||||||
Investing activities | (22.2 | ) | (26.1 | ) | ||||||||||
Net Increase in Cash and Cash Equivalents | $ | .7 | $ | 16.9 | ||||||||||
Operating Activities
Cash flow from operating activities increased $19.5 million during the 2000 first quarter as compared to the same 1999 period. The increase was due primarily to lower working capital requirements, partially offset by a decrease in earnings, after adjusting for non-cash items (depreciation and deferred taxes).
5
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
Financing Activities
Cash flow used for financing activities increased $39.6 million during the 2000 first quarter as compared to the 1999 first quarter. The increase is due to the repayment of more short- and long-term debt, partially offset by a reduction in dividends paid to MCN. A summary of MichCons financing strategies, as well as its significant financing activities follows.
MichCon maintains a relatively consistent amount of cash and cash equivalents through the use of short-term borrowings. Short-term borrowings are normally reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the latter part of the year, MichCons short-term borrowings normally increase as funds are used to finance increases in gas inventories and customer accounts receivable. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper that is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings of up to $150 million under a 364-day revolving credit facility, and up to $150 million under a three-year revolving credit facility. The 364-day facility expires in July 2000, and the three-year facility expires in July 2001. During the first three months of 2000, MichCon repaid $158.4 million of commercial paper, leaving borrowings of $78.2 million outstanding under this program at March 31, 2000.
In March 2000, MichCon repaid $12.3 million of term debt of a non-utility subsidiary that was scheduled to mature in 2006. Additionally, MichCon repaid $20 million of first mortgage bonds that matured in May 2000.
Investing Activities
MichCons cash used for investing activities decreased $3.9 million in the 2000 first quarter as compared to the same 1999 period. The decrease was due primarily to lower capital expenditures. Capital expenditures primarily represent the construction of distribution lines to attach new customers, new computer systems and improvements to existing storage, distribution, and transmission systems.
It is managements opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.
MARKET RISK INFORMATION
MichCon has market risk arising from fluctuations in natural gas prices. MichCon manages natural gas price risk by entering into fixed-price contracts for a substantial portion of its expected supply requirements. If MichCon did not enter into these fixed-price supply contracts, its exposure to such risk would be substantially higher. See the Outlook section for a further discussion of MichCon market risks.
As discussed in MichCons 1999 Annual Report on Form 10-K, MichCon also has market risk arising from fluctuations in interest rates. MichCon manages interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities.
MichCon is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to manage interest costs and risk, MichCon uses interest rate swap agreements to exchange fixed and variable-rate interest payment obligations over the life of the agreements without
6
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
exchange of the underlying principal amounts. During the 2000 first quarter, there were no material changes to MichCons interest rate risk.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
SFAS No. 133 requires all derivatives to be recognized in the balance sheet as either assets or liabilities measured at their fair value, and sets forth conditions in which a derivative instrument may be designated as a hedge. The Statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivatives gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings.
MichCon manages interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. The effects of SFAS No. 133 on MichCons financial statements are subject to fluctuations in the market value of hedging contracts, which are, in turn, affected by variations in interest rates. Accordingly, management cannot quantify the effects of adopting SFAS No. 133 at this time.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties as set forth in MichCons 1999 Annual Report on Form 10-K.
7
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended | Twelve Months Ended | |||||||||||||||||||||
March 31 | March 31 | |||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||||||
(in Thousands) | ||||||||||||||||||||||
Operating Revenues | $ | 442,747 | $ | 498,090 | $ | 1,080,396 | $ | 1,102,521 | ||||||||||||||
Operating Expenses | ||||||||||||||||||||||
Cost of gas | 216,520 | 248,351 | 452,094 | 482,291 | ||||||||||||||||||
Operation and maintenance | 64,063 | 67,546 | 262,621 | 257,721 | ||||||||||||||||||
Depreciation and depletion | 25,944 | 24,608 | 100,215 | 95,046 | ||||||||||||||||||
Property and other taxes | 18,990 | 18,462 | 45,758 | 56,598 | ||||||||||||||||||
Merger costs (Note 2) | 347 | | 25,776 | | ||||||||||||||||||
Property write-down (Note 3) | | | | 24,800 | ||||||||||||||||||
Total operating expenses | 325,864 | 358,967 | 886,464 | 916,456 | ||||||||||||||||||
Operating Income | 116,883 | 139,123 | 193,932 | 186,065 | ||||||||||||||||||
Other Income and (Deductions) | ||||||||||||||||||||||
Interest income | 726 | 999 | 2,331 | 5,575 | ||||||||||||||||||
Interest on long-term debt | (12,273 | ) | (10,966 | ) | (48,572 | ) | (43,644 | ) | ||||||||||||||
Other interest expense | (3,009 | ) | (2,655 | ) | (8,980 | ) | (11,511 | ) | ||||||||||||||
Minority interest (Note 3) | (139 | ) | (257 | ) | (902 | ) | 6,215 | |||||||||||||||
Equity in earnings of joint ventures | 587 | 441 | 2,122 | 1,798 | ||||||||||||||||||
Other | 320 | 464 | (1,160 | ) | 161 | |||||||||||||||||
Total other income and (deductions) | (13,788 | ) | (11,974 | ) | (55,161 | ) | (41,406 | ) | ||||||||||||||
Income Before Income Taxes | 103,095 | 127,149 | 138,771 | 144,659 | ||||||||||||||||||
Income Tax Provision | 36,155 | 43,176 | 49,468 | 45,374 | ||||||||||||||||||
Net Income | $ | 66,940 | $ | 83,973 | $ | 89,303 | $ | 99,285 | ||||||||||||||
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
Three Months Ended | Twelve Months Ended | ||||||||||||||||||||
March 31 | March 31 | ||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||||||
(in Thousands) | |||||||||||||||||||||
Balance Beginning of Period | $ | 494,803 | $ | 406,144 | $ | 472,440 | $ | 436,989 | |||||||||||||
Add Net income | 66,940 | 83,973 | 89,303 | 99,285 | |||||||||||||||||
561,743 | 490,117 | 561,743 | 536,274 | ||||||||||||||||||
Deduct Common stock dividends declared | | 17,677 | | 63,834 | |||||||||||||||||
Balance End of Period | $ | 561,743 | $ | 472,440 | $ | 561,743 | $ | 472,440 | |||||||||||||
The notes to the consolidated financial statements are an integral part of these statements.
8
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
March 31 | December 31 | |||||||||||||||||
2000 | 1999 | 1999 | ||||||||||||||||
(in Thousands) | ||||||||||||||||||
ASSETS | ||||||||||||||||||
Current Assets | ||||||||||||||||||
Cash and cash equivalents | $ | 10,366 | $ | 23,512 | $ | 9,705 | ||||||||||||
Accounts receivable, less allowance for doubtful accounts of $18,276, $11,545 and $17,777, respectively | 201,207 | 214,693 | 147,412 | |||||||||||||||
Accrued unbilled revenues | 67,744 | 76,431 | 98,866 | |||||||||||||||
Gas in inventory (Note 5) | 34,014 | 24,485 | 74,150 | |||||||||||||||
Property taxes assessed applicable to future periods | 49,525 | 59,255 | 60,589 | |||||||||||||||
Other | 31,742 | 32,990 | 31,594 | |||||||||||||||
394,598 | 431,366 | 422,316 | ||||||||||||||||
Deferred Charges and Other Assets | ||||||||||||||||||
Investment in and advances to joint ventures | 19,802 | 19,808 | 19,115 | |||||||||||||||
Long-term investments | 68,104 | 66,110 | 67,210 | |||||||||||||||
Deferred environmental costs | 26,067 | 28,286 | 28,639 | |||||||||||||||
Prepaid benefit costs | 170,563 | 124,235 | 156,290 | |||||||||||||||
Other | 58,138 | 61,250 | 64,546 | |||||||||||||||
342,674 | 299,689 | 335,800 | ||||||||||||||||
Property, Plant and Equipment, at cost | 3,004,736 | 2,911,368 | 2,988,318 | |||||||||||||||
Less Accumulated depreciation and depletion | 1,486,590 | 1,420,513 | 1,463,706 | |||||||||||||||
1,518,146 | 1,490,855 | 1,524,612 | ||||||||||||||||
$ | 2,255,418 | $ | 2,221,910 | $ | 2,282,728 | |||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||||||||||
Current Liabilities | ||||||||||||||||||
Accounts payable | $ | 81,071 | $ | 96,390 | $ | 93,549 | ||||||||||||
Notes payable | 79,416 | 107,900 | 237,785 | |||||||||||||||
Current portion of long-term debt and capital lease obligations | 26,150 | 58,211 | 27,984 | |||||||||||||||
Gas inventory equalization (Note 5) | 80,844 | 79,559 | | |||||||||||||||
Federal income, property and other taxes payable | 78,328 | 103,464 | 71,415 | |||||||||||||||
Exchange gas payable | 2,048 | 25,835 | 3,598 | |||||||||||||||
Customer deposits | 16,944 | 17,459 | 17,698 | |||||||||||||||
Other | 53,285 | 58,935 | 64,741 | |||||||||||||||
418,086 | 547,753 | 516,770 | ||||||||||||||||
Deferred Credits and Other Liabilities | ||||||||||||||||||
Deferred income taxes | 117,250 | 96,353 | 105,351 | |||||||||||||||
Unamortized investment tax credit | 27,300 | 29,303 | 27,778 | |||||||||||||||
Tax benefits amortizable to customers | 135,616 | 129,494 | 136,236 | |||||||||||||||
Accrued environmental costs | 24,711 | 31,888 | 25,068 | |||||||||||||||
Minority interest | 6,524 | 8,175 | 8,716 | |||||||||||||||
Other | 58,703 | 51,860 | 46,398 | |||||||||||||||
370,104 | 347,073 | 349,547 | ||||||||||||||||
Long-Term Debt, including capital lease obligations | 664,786 | 613,945 | 680,909 | |||||||||||||||
Commitments and Contingencies (Note 6) | ||||||||||||||||||
Common Shareholders Equity | ||||||||||||||||||
Common stock | 10,300 | 10,300 | 10,300 | |||||||||||||||
Additional paid-in capital | 230,399 | 230,399 | 230,399 | |||||||||||||||
Retained earnings | 561,743 | 472,440 | 494,803 | |||||||||||||||
802,442 | 713,139 | 735,502 | ||||||||||||||||
$ | 2,255,418 | $ | 2,221,910 | $ | 2,282,728 | |||||||||||||
The notes to the consolidated financial statements are an integral part of this statement.
9
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended | ||||||||||||||||
March 31 | ||||||||||||||||
2000 | 1999 | |||||||||||||||
(in Thousands) | ||||||||||||||||
Cash Flow From Operating Activities | ||||||||||||||||
Net income | $ | 66,940 | $ | 83,973 | ||||||||||||
Adjustments to reconcile net income to net cash flow provided from | ||||||||||||||||
operating activities | ||||||||||||||||
Depreciation and depletion | ||||||||||||||||
Per statement of income | 25,944 | 24,608 | ||||||||||||||
Charged to other accounts | 2,391 | 2,162 | ||||||||||||||
Deferred income taxes current | (4,266 | ) | (5,309 | ) | ||||||||||||
Deferred income taxes and investment tax credit, net | 10,801 | 6,679 | ||||||||||||||
Other | (3,002 | ) | (1,211 | ) | ||||||||||||
Changes in assets and liabilities, exclusive of changes shown separately | 100,413 | 68,811 | ||||||||||||||
Net cash provided from operating activities | 199,221 | 179,713 | ||||||||||||||
Cash Flow From Financing Activities | ||||||||||||||||
Notes payable, net | (158,369 | ) | (113,269 | ) | ||||||||||||
Retirement of long-term debt | (17,925 | ) | (5,934 | ) | ||||||||||||
Dividends paid | | (17,500 | ) | |||||||||||||
Net cash used for financing activities | (176,294 | ) | (136,703 | ) | ||||||||||||
Cash Flow From Investing Activities | ||||||||||||||||
Capital expenditures | (20,963 | ) | (24,209 | ) | ||||||||||||
Other | (1,303 | ) | (1,892 | ) | ||||||||||||
Net cash used for investing activities | (22,266 | ) | (26,101 | ) | ||||||||||||
Net Increase in Cash and Cash Equivalents | 661 | 16,909 | ||||||||||||||
Cash and Cash Equivalents, January 1 | 9,705 | 6,603 | ||||||||||||||
Cash and Cash Equivalents, March 31 | $ | 10,366 | $ | 23,512 | ||||||||||||
Changes in Assets and Liabilities, Exclusive of Changes | ||||||||||||||||
Shown Separately | ||||||||||||||||
Accounts receivable, net | $ | (53,909 | ) | $ | (72,560 | ) | ||||||||||
Gas inventory equalization | 80,844 | 79,559 | ||||||||||||||
Accrued unbilled revenues | 31,122 | 10,336 | ||||||||||||||
Accrued/deferred gas cost recovery revenues, net | | (15,153 | ) | |||||||||||||
Gas in inventory | 40,136 | 32,484 | ||||||||||||||
Property taxes assessed applicable to future periods | 11,064 | 11,910 | ||||||||||||||
Prepaid benefit costs, net | (14,273 | ) | (10,356 | ) | ||||||||||||
Accounts payable | (12,478 | ) | (2,501 | ) | ||||||||||||
Federal income, property and other taxes payable | 6,913 | 42,405 | ||||||||||||||
Exchange gas payable | (1,550 | ) | (498 | ) | ||||||||||||
Other current assets and liabilities, net | (8,384 | ) | (4,852 | ) | ||||||||||||
Other deferred assets and liabilities, net | 20,928 | (1,963 | ) | |||||||||||||
$ | 100,413 | $ | 68,811 | |||||||||||||
Supplemental Disclosures | ||||||||||||||||
Cash paid (received) for: | ||||||||||||||||
Interest, net of amounts capitalized | $ | 13,450 | $ | 13,447 | ||||||||||||
Federal income taxes | $ | (857 | ) | $ | (5,133 | ) | ||||||||||
The notes to the consolidated financial statements are an integral part of this statement.
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. | GENERAL |
The accompanying consolidated financial statements should be read in conjunction with MichCons 1999 Annual Report on Form 10-K. Certain reclassifications have been made to the prior years financial statements to conform to the 2000 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses 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.
2. | MCN MERGER AGREEMENT WITH DTE ENERGY COMPANY |
As discussed in MichCons 1999 Annual Report on Form 10-K, MCN Energy Group Inc. (MCN), parent company of MichCon, and DTE Energy Company (DTE) have signed a definitive merger agreement, dated October 4, 1999, under which DTE will acquire all outstanding shares of MCN common stock. The boards of directors and the shareholders of both companies have approved the proposed merger. The transaction is subject to regulatory approvals and other customary merger conditions. While it is still possible for the merger to close in mid- to late 2000, discussions continue with the Federal Trade Commission and a final closing date cannot be determined with certainty.
As a result of the pending merger, MCN incurred merger-related costs, a portion of which were allocated to MichCon. Additionally, MichCon incurred merger-related costs. The merger-related costs include legal, accounting, consulting, employee benefit and other expenses which had the effect of decreasing earnings by $347,000 pre-tax ($226,000 net of taxes) and $25,776,000 pre-tax ($16,754,000 net of taxes) for the three- and twelve-month periods ended March 31, 2000, respectively.
3. | PROPERTY WRITE-DOWN |
As discussed in MichCons 1999 Annual Report on Form 10-K, MichCon recorded a $24,800,000 pre-tax ($11,200,000 net of taxes and minority interest) write-down of certain gas gathering properties in the third quarter of 1998. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the systems carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value.
4. | REGULATORY MATTERS |
a. | Regulatory Reform Plan |
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, with approximately 70,000 customers choosing to purchase natural gas from suppliers other than MichCon. Year two of the plan began in April 2000 and the number of customers participating decreased to approximately 55,000. MichCon will continue to transport and deliver the gas to the customers premises at prices that generate favorable margins.
In addition, the plan encompasses an income sharing mechanism that allows customers to share profits when actual returns on equity exceed predetermined thresholds. MichCon filed its income sharing report with the Michigan Public Service Commission (MPSC) on March 31, 2000, using the MPSC approved formula, indicating that no income sharing was required for 1999. The MPSC staff has requested a hearing on this matter. Management believes that no income sharing is required.
b. | Gas Cost Recovery Proceedings |
5. | GAS IN INVENTORY |
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation that interim inventory reductions will be replaced prior to year end, the cost of gas for net withdrawals from inventory is 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.
6. | CONTINGENCIES |
a. | Personal Property Taxes |
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, MichCon and other Michigan utilities have asserted that Michigans valuation tables result in the substantial overvaluation of utility personal property. Valuation tables are used to estimate the reduction in value of personal property based on the propertys age. In November 1999, the Michigan State Tax Commission (STC) approved new valuation tables that more accurately recognize the value of utilities personal property. The new tables are effective in 2000, however several local governments have taken legal action to prevent the STC from implementing the new valuation tables. The Michigan Tax Tribunal has requested parties to submit briefs to determine what is the proper scope and standard for its review of the tables. It is managements belief that several local governments will not use the revised tables until the legal actions have been resolved. The legal action, along with possible additional appeals by local governments, could delay expected recoveries related to the new valuation tables until 2001.
Based on past practice, MichCon expects to ultimately settle pending tax appeals with local governments by applying the new tables retroactively, a solution supported in the past by the STC. MichCons future results of operations could be significantly affected if the valuation tables are not upheld in court or MichCon is unsuccessful in its appeals.
b. Legal and Administrative Proceedings
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 managements belief, after discussion with legal
counsel, that the ultimate resolution of those proceedings still pending will
not have a material adverse effect on MichCons financial statements.
13
INDEPENDENT ACCOUNTANTS REPORT
To the Board of Directors of
Michigan Consolidated Gas Company:
We have reviewed the accompanying condensed consolidated statements of financial position of Michigan Consolidated Gas Company and subsidiaries (the Company) as of March 31, 2000 and 1999, the related condensed consolidated statements of income and retained earnings for the three and twelve-month periods ended March 31, 2000 and 1999, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to the financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of the Company as of December 31, 1999, and the related consolidated statements of income, capitalization, and cash flows for the year then ended (not presented herein); and in our report dated March 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 11, 2000
14
OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
(a) | Exhibits | |||
Exhibit Number |
Description | |||
12-1 | Computation of Ratio of Earnings to Fixed Charges | |||
15-1 | Letter re unaudited interim financial information | |||
27-1 | Financial Data Schedule | |||
(b) | Reports on Form 8-K | |||
None. |
15
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: May 15, 2000 | By: | /s/ Robert Kaslik | |
Robert Kaslik | |||
Controller |
16
Exhibit Index
Exhibit No. | Description | |
12-1 | Computation of Ratio of Earnings to Fixed Charges | |
15-1 | Letter re unaudited interim financial information | |
27-1 | Financial Data Schedule |