-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TifmBBMGCO05gkESDEGEWE3dPeNjPqf7rBwChW8lwuvv97FZGJ9JyFE2+SGPNbIm PlN0KCJnmeZg44tuSPmJEA== 0000950124-97-005730.txt : 19971110 0000950124-97-005730.hdr.sgml : 19971110 ACCESSION NUMBER: 0000950124-97-005730 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 SROS: NONE 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: SEC FILE NUMBER: 001-07310 FILM NUMBER: 97710032 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-Q 1 FORM 10-Q 1 ================================================================================ 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, 1997, 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 October 31, 1997: Common Stock, par value $.01 per share: 10,300,000 ================================================================================ 2 INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997
PAGE NUMBER ------ COVER .................................................................... i INDEX .................................................................... ii PART I - FINANCIAL INFORMATION Item 1. Financial Statements............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 1 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................. 11 SIGNATURE ................................................................ 12
ii 3 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The company reported a net loss of $16.0 million for the 1997 third quarter, improving $2.4 million over the comparable 1996 quarter. Given the seasonal nature of the gas distribution business, MichCon generally experiences a loss during the third quarter when the weather is warm and less gas is delivered to customers. Items favorably impacting the quarter comparison were improved gross margins and lower operation and maintenance expenses, partially offset by higher depreciation and financing costs. Earnings decreased $5.3 million and $10.8 million for the 1997 nine- and twelve-month periods, respectively, reflecting higher depreciation and financing costs, as well as reduced gross margins due to warmer weather.
EARNINGS COMPONENTS (IN MILLIONS) --------------------------------- COMPARING 1997 TO 1996 ---------------------- Quarter Nine Months Twelve Months ------- ------------ ------------- $ Change % Change $ Change % Change $ Change % Change -------- -------- -------- -------- -------- -------- Operating Revenue ....................... $ 1.9 1.6% $(14.6) (1.7)% $ 6.7 0.5% Cost of Gas ............................. (1.3) (4.5) (13.4) (3.1) 14.8 2.4 Gross Margin ............................ 3.2 3.6 (1.2) (0.3) (8.1) (1.3) Operation and Maintenance ............... (4.9) (7.2) (1.4) (0.7) 0.5 0.2 Depreciation and Depletion .............. 1.3 5.4 4.1 5.6 6.2 6.4 Property and Other Taxes ................ (0.5) (3.8) (0.2) (0.4) 1.3 2.1 Other Income and Deductions ............. 0.8 7.7 3.0 8.8 2.7 5.7 Income Tax Provision .................... 4.1 38.7 (1.2) (4.3) (7.8) (16.3) Net Income............................... 2.4 13.0 (5.3) (10.2) (10.8) (12.7)
GROSS MARGIN Gross margin (operating revenues less cost of gas) increased for the 1997 quarter and decreased for the nine- and twelve-month periods, respectively. Gross margin for all 1997 periods was affected by increased other operating revenues reflecting initiatives to grow revenues by providing gas-related services. The favorable quarter results also reflect higher intermediate transportation services, partially offset by lower gas sales. The decrease in gross margin for the 1997 nine- and twelve-month periods was primarily due to lower gas sales and end user transportation deliveries caused by warmer weather, partially offset by the continued growth in intermediate transportation services. EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Quarter Nine Months Twelve Months ----------------- ------------------ ------------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Percentage Colder than Normal ................. N/M N/M 1.7% 6.2% 2.5% 6.8% Increase (Decrease) from Normal in: Gas Markets (Bcf) .......... (0.3) (0.2) 1.2 8.4 3.7 14.2 Net Income (Millions) ...... $(0.2) $(0.2) $1.1 $7.6 $3.3 $12.7
1 4 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gas sales and end user transportation revenues in total decreased $3.1 million, $26.3 million and $5.9 million in the 1997 quarter, nine- and twelve-month periods, respectively. The decrease in revenues for the quarter is due to lower gas costs which are recovered in gas sales rates as subsequently discussed in the "Cost of Gas" section. The quarter was further impacted by a slight decrease in gas sales volumes. The decrease in revenues for the 1997 nine-month period is due to reduced gas sales and end user transportation deliveries as a result of warmer weather and lower gas costs. The twelve-month period decrease in revenues was also affected by reduced gas sales and end user transportation deliveries as a result of warmer weather, partially offset by higher gas costs.
Quarter Nine Months Twelve Months ------- ----------- ------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- GAS MARKETS ($ MILLIONS) Gas Sales................................ $ 77.7 $ 80.9 $717.7 $744.4 $1,059.2 $1,064.0 End User Transportation.................. 16.2 16.1 61.5 61.1 82.6 83.7 Intermediate Transportation.............. 12.9 12.4 41.0 35.2 54.4 44.4 Other.................................... 12.3 7.9 36.2 30.3 48.0 45.4 ------ ------ ------ ------ -------- -------- $119.1 $117.3 $856.4 $871.0 $1,244.2 $1,237.5 ====== ====== ====== ====== ======== ======== GAS MARKETS (IN BCF) Gas Sales................................ 13.8 14.2 141.7 150.4 209.0 222.4 End User Transportation.................. 28.6 28.6 105.7 107.9 144.4 149.9 Intermediate Transportation.............. 164.9 148.7 447.1 407.1 567.5 510.8 ------ ------ ------ ------ -------- -------- 207.3 191.5 694.5 665.4 920.9 883.1 ====== ====== ====== ====== ======== ========
Intermediate transportation revenues increased for the 1997 quarter, nine- and twelve-month periods by $0.5 million, $5.8 million and $10.0 million, respectively, due to increased deliveries. The increase in intermediate transportation deliveries for all periods reflects additional volumes transported in connection with the recent expansion of the northern Michigan gathering system. The northern Michigan gathering system enabled MichCon to transport an additional 22.7 Bcf, 55.6 Bcf and 81.2 Bcf for the 1997 quarter, nine- and twelve-month periods, respectively. Intermediate transportation volumes for all 1997 periods were impacted by lower deliveries to major customers. Although volumes for these fixed-fee customers have varied, the related revenues were not significantly affected. Other operating revenues increased in all periods due in part to increased merchandise sales and gas related services. Also affecting the quarter comparison is an unfavorable adjustment for energy conservation revenues in the 1996 quarter resulting from the discontinuance of MichCon's energy conservation programs. Other operating revenue for the 1997 twelve-month period also reflects an increase in gas processing revenues from the northern Michigan gathering system, partially offset by a decrease in energy conservation revenue. COST OF GAS Cost of gas is affected by variations in sales volumes and cost of gas rates. Through the Gas Cost Recovery mechanism, MichCon is allowed timely recovery of 100% of its prudently and reasonably incurred cost of gas sold. Therefore, fluctuations in total gas costs have little or no effect on gross margins. 2 5 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cost of gas sold decreased in the 1997 quarter and nine-month period and increased slightly for the 1997 twelve-month period. Cost of gas for all 1997 periods was affected by lower sales volumes, primarily due to warmer weather, as well as supplier refunds. The 1997 quarter also reflects a reduction in the market prices paid of $.03 (1%) per thousand cubic feet of gas sold, substantially offset by increased lost gas costs. Partially offsetting the decrease in the 1997 nine-month period was higher market prices resulting in a $.12 (4%) increase in the average unit cost of gas sold. The increase in cost of gas in the 1997 twelve-month period reflects a $.24 (9%) increase in the average unit cost of gas sold. OPERATION AND MAINTENANCE Operation and maintenance expenses decreased for the 1997 quarter and nine-month period and increased slightly for the 1997 twelve-month period. Operation and maintenance expenses were affected in all periods by lower benefit costs, primarily pension and retiree healthcare costs. The 1997 quarter and nine-month period further benefited from a decrease in uncollectibles expense. Partially offsetting the decrease in the 1997 nine-month period were higher engergy conservation program expenses and operating expenses related to increased intermediate transportation volumes as previously discussed. The increase in the 1997 twelve-month period is due primarily to higher uncollectibles expense and the additional operating expenses related to the increase in intermediate transportation volumes, that were mitigated by reduced expenses from the discontinuance of the energy conservation programs. DEPRECIATION AND DEPLETION The increase in depreciation and depletion for the 1997 quarter, nine- and twelve-month periods is due to higher plant balances reflecting capital expenditures of $212.7 million in the 1996 calendar year. Depreciation and depletion expenses are expected to increase in future years due to additional capital investments. MichCon filed an application with the Michigan Public Service Commission in October 1996 to lower its depreciation rates which could partially offset the anticipated increase in depreciation expense in future years. PROPERTY AND OTHER TAXES Property and other taxes decreased in the 1997 quarter and nine-month period and increased in the 1997 twelve-month period. The Company reduced its property taxes for all 1997 periods based on pending appeals of its personal property tax assessments. A favorable resolution of the appeals is expected in 1999. All 1997 periods were also impacted by an increase in Michigan single business taxes relating to prior years. OTHER INCOME AND DEDUCTIONS Other income and deductions increased in all the 1997 periods primarily due to additional interest expense resulting from increased long-term debt required to finance capital investments, partially offset by reduced interest on lower outstanding commercial paper. 3 6 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX PROVISION Income taxes changed primarily as a result of variations in earnings. The increase in income taxes for the 1997 quarter was additionally impacted by the amounts recorded in the 1996 quarter for the favorable resolution of prior years' tax issues. The decreases in income taxes for the 1997 nine- and twelve-month periods were also positively impacted by tax credits, partially offset by the favorable resolution of prior years' tax issues recorded in the 1996 periods. CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES MichCon's cash flow from operating activities totaled $209.9 million for the 1997 nine-month period, increasing $98.7 million from the comparable 1996 period. The increase was due primarily to lower working capital requirements reflecting a reduction in the gas cost recovery undercollection, partially offset by lower net income after adjusting for depreciation and deferred taxes. Operating cash flows were sufficient for the payment of cash dividends on common stock and all capital investments. FINANCING ACTIVITIES 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 $150 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility both of which expire July 1998. During the first nine months of 1997, MichCon repaid $176.7 million of commercial paper. Commercial paper of $61.6 million was outstanding as of September 30, 1997. During May 1997, MichCon issued $85 million of first mortgage bonds under its existing shelf registrations. The funds from this issuance were used to retire first mortgage bonds, fund capital expenditures and for general corporate purposes. MichCon's capital requirements and general market conditions will affect the timing and amount of future issuances. During April 1997, subsidiaries of MichCon borrowed $40 million under a nonrecourse credit agreement that matures in 2005. Proceeds were used to finance the expansion of its northern Michigan gathering system. During the 1997 second quarter, MichCon redeemed early $17 million of long-term debt. MichCon also repaid $50 million of first mortgage bonds on its stated maturity date in May 1997. MichCon's capitalization objective is to maintain a ratio of approximately 50% debt and 50% equity. At September 30, 1997, common equity was 50.2% of total capitalization excluding nonrecourse debt. INVESTING ACTIVITIES MichCon's capital expenditures totaled $97 million during the 1997 nine-month period and are anticipated to be approximately $150 million by the end of the year. These investments will be made to 4 7 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED) add new customers, develop new gas transportation markets, make improvements to existing storage, distribution and transmission systems and to improve its information systems. It is management's opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. OUTLOOK MichCon'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 through the expansion of MichCon's 1.2 million residential, commercial and industrial customer base. MichCon is concentrating on adding new customers in current service areas including increased penetration of previous expansion areas. MichCon will continue initiatives to increase productivity and improve customer services in order to strengthen its competitive position in the gas industry. Management is continually assessing ways to improve cost competitiveness. Among the cost savings initiatives, MichCon and other Michigan utilities are exploring opportunities to share the cost of similar functions in order to obtain greater efficiencies and increase customer value. NEW ACCOUNTING PRONOUNCEMENTS In 1996 the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus that the costs associated with modifying internal use software for the year 2000 should be expensed as incurred. MichCon has established processes for evaluating and managing the risks and costs associated with this issue. MichCon is assessing the extent of necessary modifications to its computer software and the impact on the financial position and results of operations. FORWARD-LOOKING STATEMENTS The Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: (i) the effects of weather and other natural phenomenon; (ii) increased competition from other energy suppliers as well as alternative forms of energy; (iii) the capital intensive nature of MichCon's business; (iv) economic climate and growth in the geographic areas in which MichCon does business; (v) the uncertainty of gas reserve estimates; (vi) the timing and extent of changes in commodity prices for natural gas, electricity and crude oil; (vii) conditions of capital markets and equity markets and (viii) the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance and authorized rates. 5 8 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- ------------------------ 1997 1996 1997 1996 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING REVENUES............................. $ 119,114 $ 117,251 $ 856,359 $ 870,970 $1,244,174 $1,237,481 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES Cost of gas.................................. 27,848 29,163 414,152 427,560 623,186 608,392 Operation and maintenance.................... 63,809 68,727 207,308 208,710 292,879 292,381 Depreciation and depletion................... 26,159 24,830 78,084 73,963 102,268 96,103 Property and other taxes..................... 12,667 13,161 46,602 46,773 61,591 60,298 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses................... 130,483 135,881 746,146 757,006 1,079,924 1,057,174 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS)........................ (11,369) (18,630) 110,213 113,964 164,250 180,307 ---------- ---------- ---------- ---------- ---------- ---------- EQUITY IN EARNINGS OF JOINT VENTURES........... 212 203 853 698 1,041 938 ---------- ---------- ---------- ---------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS) Interest income.............................. 1,144 1,401 3,630 2,620 4,910 3,839 Interest on long-term debt................... (11,659) (10,313) (33,973) (30,238) (44,438) (39,921) Other interest expense....................... (1,033) (1,217) (5,782) (4,992) (8,802) (7,620) Minority interest............................ (523) (332) (1,456) (1,034) (1,410) (1,034) Other........................................ 766 (36) 663 (285) (808) (3,084) ---------- ---------- ---------- ---------- ---------- ---------- Total other income and (deductions)........ (11,305) (10,497) (36,918) (33,929) (50,548) (47,820) ---------- ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES.............. (22,462) (28,924) 74,148 80,733 114,743 133,425 INCOME TAX PROVISION........................... (6,426) (10,487) 27,060 28,279 40,267 48,082 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS).............................. (16,036) (18,437) 47,088 52,454 74,476 85,343 DIVIDENDS ON PREFERRED STOCK................... - - - 18 - 71 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK... $ (16,036) $ (18,437) $ 47,088 $ 52,436 $ 74,476 $ 85,272 ========== ========== ========== ========== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- ------------------------ 1997 1996 1997 1996 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE - BEGINNING OF PERIOD.................. $ 359,429 $ 331,617 $ 336,305 $ 267,744 $ 313,180 $ 234,908 Add - Net income (Loss)...................... (16,036) (18,437) 47,088 52,454 74,476 85,343 ---------- ---------- ---------- ---------- ---------- ---------- 343,393 313,180 383,393 320,198 387,656 320,251 Deduct - Cash dividends declared: Preferred stock............................ - - - 18 - 71 Common stock............................... - - 40,000 7,000 44,263 7,000 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE - END OF PERIOD........................ $ 343,393 $ 313,180 $ 343,393 $ 313,180 $ 343,393 $ 313,180 ========== ========== ========== ========== ========== ==========
The notes to the consolidated financial statements are an integral part of these statements. 6 9 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) (THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, ----------------------- ------------ 1997 1996 1996 ---------- ---------- ------------ ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS........................................................ $ 12,148 $ 18,282 $ 10,010 Accounts receivable, less allowance for doubtful accounts of $16,104, $14,112 and $17,707, respectively...................................... 104,218 119,787 169,436 Accrued unbilled revenues........................................................ 21,972 22,197 107,377 Gas in inventory................................................................. 96,533 101,742 67,910 Property taxes assessed applicable to future periods............................. 26,870 23,456 60,592 Accrued gas cost recovery revenues............................................... - 33,585 27,672 Other............................................................................ 32,375 22,602 23,025 ---------- ---------- ---------- 294,116 341,651 466,022 ---------- ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS Investment in and advances to joint ventures..................................... 19,229 20,357 19,479 Deferred postretirement benefit costs............................................ - 7,103 4,863 Deferred environmental costs..................................................... 27,600 28,016 28,233 Prepaid benefit costs............................................................ 71,345 54,103 64,307 Other............................................................................ 55,209 48,660 50,206 ---------- ---------- ---------- 173,383 158,239 167,088 ---------- ---------- ---------- Property, Plant and Equipment...................................................... 2,741,653 2,609,095 2,668,294 Less - Accumulated depreciation and depletion ................................... 1,303,841 1,221,009 1,243,060 ---------- ---------- ---------- 1,437,812 1,388,086 1,425,234 ---------- ---------- ---------- $1,905,311 $1,887,976 $2,058,344 ========== ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable................................................................. $ 92,051 $ 99,223 $ 130,725 Notes payable.................................................................... 140,022 194,013 265,126 Current portion of long-term debt and capital lease obligations.................. 28,099 53,213 53,232 Federal income, property and other taxes payable................................. 40,602 33,241 84,788 Customer deposits................................................................ 14,026 10,787 12,860 Other............................................................................ 56,921 50,885 63,309 ---------- ---------- ---------- 371,721 441,362 610,040 ---------- ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES Accumulated deferred income taxes................................................ 79,273 83,160 76,523 Unamortized investment tax credit................................................ 33,206 35,050 34,588 Tax benefits amortizable to customers............................................ 123,540 112,930 116,313 Accrued environmental costs...................................................... 32,000 32,000 32,000 Minority interest................................................................ 16,927 18,503 17,604 Other............................................................................ 38,553 59,838 43,954 ---------- ---------- ---------- 323,499 341,481 320,982 ---------- ---------- ---------- LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (NOTE 2) ...................... 625,999 551,254 550,318 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 4) COMMON SHAREHOLDER'S EQUITY Common stock..................................................................... 10,300 10,300 10,300 Additional paid-in capital....................................................... 230,399 230,399 230,399 Retained earnings................................................................ 343,393 313,180 336,305 ---------- ---------- ---------- 584,092 553,879 577,004 ---------- ---------- ---------- $1,905,311 $1,887,976 $2,058,344 ========== ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 7 10 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 1997 1996 ---------- ---------- CASH FLOW FROM OPERATING ACTIVITIES Net income.................................................................... $ 47,088 $ 52,454 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income................................................. 78,084 73,963 Charged to other accounts............................................... 5,660 5,667 Deferred income taxes - current........................................... (25,229) (5,372) Deferred income taxes and investment tax credit - net............ 8,595 10,715 Other..................................................................... (1,159) (1,946) Changes in assets and liabilities, exclusive of changes shown separately........................................................ 96,908 (24,184) ---------- --------- Net cash provided from operating activities......................... 209,947 111,297 ---------- --------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable - net........................................................... (125,104) (2,622) Issuance of long-term debt (Note 2)........................................... 124,051 69,645 Additional paid-in-capital.................................................... - 1,614 Cash dividend paid: Common stock................................................................ (40,000) (7,000) Preferred stock............................................................. - (54) Retirement of long-term debt and preferred stock......................... (74,792) (5,435) ---------- --------- Net cash (used for) provided from financing activities.......... (115,845) 56,148 ---------- --------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures.......................................................... (97,042) (146,277) Other - net................................................................... 5,078 (11,355) ---------- --------- Net cash used for investing activities................................ (91,964) (157,632) ---------- --------- Net Increase in Cash and Cash Equivalents................................... 2,138 9,813 Cash and Cash Equivalents, January 1.......................................... 10,010 8,469 ---------- --------- Cash and Cash Equivalents, September 30.................................... $ 12,148 $ 18,282 ========== ========= CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Accounts receivable - net................................................... $ 61,679 $ 58,180 Accrued gas cost recovery revenues.......................................... 28,318 (34,163) Accrued unbilled revenues................................................... 85,405 68,937 Gas in inventory............................................................ (28,623) (61,551) Property taxes assessed applicable to future periods............... 33,722 34,703 Accounts payable............................................................ (38,674) (10,101) Federal income, property and other taxes payable.................... (44,186) (53,971) Other current assets and liabilities........................................ 8,953 1,363 Deferred and prepaid benefit costs.......................................... (2,175) (23,396) Deferred assets and liabilities............................................. (7,511) (4,185) ---------- --------- $ 96,908 $ (24,184) ========== ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest, net of amounts capitalized........................................ $ 37,073 $ 28,501 ========== ========= Federal income taxes........................................................ $ 39,530 $ 28,792 ========== ========= Noncash financing activities: Transfer of pipeline net assets from MCN................................... $ - $ 17,008 ========== =========
The notes to the consolidated financial statements are an integral part of this statement. 8 11 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL There have been no changes in MichCon's principal accounting policies from those set forth in MichCon's 1996 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year's financial statements to conform with the 1997 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. 2. CAPITALIZATION A. LONG-TERM DEBT ISSUANCE The following long-term debt totaling $85,000,000 was issued in May 1997: First Mortgage Bonds Amount Issued -------------------- ------------- 7.21%, due May 2007 $30,000,000 7.06%, due May 2012 $40,000,000 7.60%, due May 2017 $15,000,000 These funds were used to repay short-term debt used to retire first mortgage bonds on May 1, 1997, fund capital expenditures and for general corporate purposes. MichCon has entered into variable interest rate swap agreements with notional principal amounts aggregating $80,000,000 in connection with the first mortgage bonds issued May 1997. Swap agreements of $40,000,000 through May 2002 have reduced the average cost of debt from 7.31% to 6.32% for the five months ended September 30, 1997. Swap agreements of $40,000,000 through May 2005 have reduced the average cost of debt from 7.06% to 5.91% for the five months ended September 30, 1997. During April 1997, MichCon subsidiaries borrowed $40,000,000 under a nonrecourse credit agreement. Under terms of the agreement, certain alternative variable interest rates are available at the borrowers' option during the life of the agreement. Quarterly principal payments commenced in June 1997 with a final installment due November 2005. The loan is secured by a pledge of stock of the borrowers and a security interest in certain of their assets. MichCon may be required to support the credit agreement through limited capital contributions to the subsidiaries if certain cash flow and operating targets are not met. At September 30, 1997, $37,600,000 was outstanding at a weighted average interest rate 6.34%. 9 12 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED) 2. CAPITALIZATION - (CONTINUED) B. LONG-TERM DEBT REDEMPTION In the second quarter of 1997, MichCon redeemed early $5,000,000 of 9.50% first mortgage bonds and $12,000,000 of 9.75% unsecured notes. As noted in MichCon's 1996 Form 10-K, the company had a variable interest rate swap agreement through April 2000 on the $12,000,000 unsecured notes. This agreement reduced the cost of debt of the fixed-rate unsecured notes from 9.75% to 5.77% for the six months ended June 30, 1997. This swap has been redesignated as a hedge of other outstanding first mortgage bonds. 3. LINES OF CREDIT MichCon has established credit lines that allow for borrowings of up to $150,000,000 under a 364-day revolving credit facility and up to $150,000,000 under a three-year revolving credit facility. These credit lines totaling $300,000,000 support its commercial paper program. Commercial paper of $61,571,000 was outstanding as of September 30,1997 under these lines. The 364-day revolving credit facility was renewed in July 1997. Both revolving credit facilities expire in July 1998. 4. COMMITMENTS AND 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. 10 13 OTHER INFORMATION 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 None 11 14 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: November 7, 1997 By: /s/ Howard L. Dow III ------------------------- Howard L. Dow III Vice President and Chief Financial Officer 12 15 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 12-1 Computation of Ratio Earning to Fixed Charges. 27-1 Financial Data Schedule EX-12.1 2 COMPUTATION OF EARNINGS 1 EXHIBIT 12-1 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
Twelve Months Ended Twelve Months Ended Twelve Months Ended ------------------- ------------------- ------------------- September 30, 1997 December 31, 1996 December 31, 1995 ------------------- ------------------- ------------------- EARNINGS AS DEFINED (1) Net Income .......................................... $119,328 $122,239 $112,727 Fixed charges ....................................... 57,789 53,831 45,637 -------- -------- -------- Earnings as defined ................................ $177,117 $176,070 $158,364 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt .......................... $ 46,463 $ 43,163 $ 35,820 Interest on other borrowed funds .................... 8,802 8,012 7,053 Amortization of debt discounts, premium and expense ........................................ 1,059 1,081 996 Interest implicit in rentals (2) .................... 1,465 1,575 1,768 -------- -------- -------- Fixed charges as defined ........................... $ 57,789 $ 53,831 $ 45,637 ======== ======== ======== Ratio of Earnings to Fixed Charges .................. 3.07 3.27 3.47 ======== ======== ========
Notes: (1) Earnings and fixed charges are defined and computed in accordance with Item 503 of Regulation S-K. (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 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Statement of Income and the Consolidated Statement of Financial Position and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 12,148 0 120,322 16,104 96,533 294,116 2,741,653 1,303,841 1,905,311 371,721 625,999 0 0 10,300 573,792 1,905,311 0 856,359 0 746,146 793 14,586 39,755 74,148 27,060 47,088 0 0 0 47,088 0 0
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