-----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, FVCqAVVRx37nC/4FMwulL9NVU/rYSq8EgiKDqZ0tgL3K1XPA29GselZ3x9QOAFiG KSgjTMQTJA/mmsahurqK9w== 0000950124-98-001027.txt : 19980304 0000950124-98-001027.hdr.sgml : 19980304 ACCESSION NUMBER: 0000950124-98-001027 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980302 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-K405 SEC ACT: SEC FILE NUMBER: 001-07310 FILM NUMBER: 98553888 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-K405 1 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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, a Michigan corporation, meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is, therefore, filing this form with the reduced disclosure format. 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) 313-965-2430 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. X --- All of the registrant's 10,300,000 outstanding shares of common stock, par value $1 per share, are owned by MCN Energy Group Inc. Documents Incorporated by Reference: None ================================================================================ 2 KEY TO ABBREVIATED TERMS
Antrim Gas........................................... Natural gas produced from shallow wells in the Devonian (Antrim) shale formations. Degree Days.......................................... A measure of the coldness of the weather based on how much the average daily temperature is below 65 degrees Fahrenheit. End User Transportation.............................. A gas delivery service provided to large-volume commercial and industrial customers who purchase natural gas directly from producers or brokerage companies. FERC................................................. Federal Energy Regulatory Commission; a federal agency that determines the rates and regulations of interstate pipelines. Gas Markets.......................................... Gas sales, end user transportation and intermediate transportation deliveries. Gas Storage.......................................... The process of injecting, storing and withdrawing natural gas from a depleted underground natural gas field or salt cavern. GCR.................................................. Gas Cost Recovery; a process by which MichCon, through annual gas cost proceedings before the Michigan Public Service Commission, is allowed to recover its reasonable and prudent cost of gas sold. Intermediate Transportation.......................... A gas delivery service provided to gas producers, gas brokers and other gas companies that own the natural gas, but are not the ultimate consumers. MCN.................................................. MCN Energy Group Inc. and its subsidiaries. MichCon.............................................. Michigan Consolidated Gas Company; a wholly owned natural gas distribution and intrastate transmission subsidiary of MCN. MichCon Pipeline Co.................................. A wholly owned subsidiary of MichCon that engages in pipeline projects through its subsidiaries.
ii 3 KEY TO ABBREVIATED TERMS (concluded)
MPSC................................................. Michigan Public Service Commission; the regulator of intrastate aspects of the natural gas industry within the State of Michigan. Normal Weather....................................... The average daily temperature within MichCon's service area during a recent 30-year period. Spot Market.......................................... The buying and selling of natural gas on a short-term basis, typically month to month. Units of Measurement Bcf.................................................. One billion cubic feet of natural gas. Mcf.................................................. One thousand cubic feet of natural gas. MMcf................................................. One million cubic feet of natural gas. /d................................................... Added to MMcf or Bcf to denote average volumes per day.
iii 4 TABLE OF CONTENTS
CONTENTS PAGE - -------- NUMBER ------ Part I Item 1. Business..................................................................................... 1 Item 2. Properties................................................................................... 9 Item 3. Legal Proceedings............................................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 11 Item 6. Selected Financial Data...................................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 13 Item 8. Financial Statements and Supplementary Data.................................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................................... 44 Part III Item 10. Directors and Executive Officers of the Registrant........................................... 44 Item 11. Executive Compensation....................................................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 44 Item 13. Certain Relationships and Related Transactions............................................... 44 Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.............................. 45 Signatures ............................................................................................. 47
iv 5 Part I Item 1. Business MichCon is a Michigan corporation that was organized in 1898 and, with its predecessors, has been in business for nearly 150 years. MichCon is a natural gas utility primarily engaged in the distribution and transmission of natural gas in the state of Michigan. MichCon also has subsidiaries involved in the gathering and transmission of natural gas in northern Michigan. MichCon, a wholly-owned subsidiary of MCN, operates one of the largest natural gas distribution and transmission systems in the United States and the largest in Michigan. At December 31, 1997, MichCon and its subsidiaries employed 2,867 persons. Of that number, slightly less than half are covered by five collective bargaining agreements. In December 1997, MichCon successfully negotiated and signed two collective bargaining agreements. The remaining three agreements covering approximately 15% of the workforce will expire in June 1998. Gas Sales & Transportation MichCon serves 1.2 million customers in the Detroit, Grand Rapids, Ann Arbor, Traverse City and Muskegon metropolitan areas and in various other communities throughout the state of Michigan. The following services are provided by MichCon: Gas Sales - Includes the sale and delivery of natural gas to residential and small-volume commercial customers. End User Transportation - Through this service, large-volume commercial and industrial customers that purchase natural gas directly from producers or brokerage companies utilize the Company's network to transport the gas to their facilities. Intermediate Transportation - Provides transportation service through the Company's gathering and high pressure transmission system to producers, brokers and other local distribution companies that own the natural gas, but are not the ultimate consumer.
1997 1996 1995 --------------- ---------------- ----------------- REVENUE (In millions of dollars) Gas Sales................................................ $ 1,062.8. $ 1,085.8 $ 917.2 End User Transportation.................................. 84.5. 82.2 80.4 Intermediate Transportation.............................. 55.2. 48.6 31.9 -------------- --------------- ---------------- Total Sales and Transportation ...................... 1,202.5. 1,216.6 1,029.5 -------------- --------------- ---------------- Other ................................................... 51.2. 42.2 51.3 ============== =============== ================ Total Operating Revenues ............................ $ 1,253.7. $ 1,258.8 $ 1,080.8 ============== =============== ================ MARKETS (Bcf) Gas Sales................................................ 205.8 217.7 206.9 End User Transportation.................................. 145.0 146.7 145.3 Intermediate Transportation.............................. 586.4 527.5 341.6 ============== =============== ================ Total Sales and Transportation ...................... 937.2 891.9 693.8 ============== =============== ================
1 6 EFFECT OF WEATHER: MichCon's gas sales and end user transportation volumes, revenues and net income are impacted by weather. Given the seasonal nature of the business, revenues and net income tend to be higher in the first and fourth quarters of the calendar year. Effect of Weather on Gas Markets and Earnings - ---------------------------------------------
1997 1996 1995 ------- ------- ----- Percentage Colder Than Normal....................................... 0.8% 5.4% 0.3% Increase From Normal in: Gas Markets (in Bcf)............................................ 0.6 10.9 1.5 Net Income (in Millions)........................................ $ 0.5 $ 9.9 $ 1.4
GAS SALES: Revenues decreased $23.0 million in 1997 due primarily to reduced gas sales as a result of warmer weather, partially offset by higher prices to recover gas costs. This market represents 22% of total deliveries and produced approximately 75% of MichCon's gross profit margin from sales and transportation services (gross profit margin). The average margin per Mcf from gas sales was $2.09 in 1997 and $2.06 in 1996. Competition in the gas sales market comes primarily from alternative fuels such as electricity, propane and, to a lesser degree, oil and wood, and other natural gas providers in a few areas. Natural gas continues to be the preferred fuel for Michigan residences and businesses. Nearly every residential and commercial developer in MichCon's service territories selects natural gas in new construction because of the convenience, cleanliness and price advantage of natural gas compared to propane, fuel oil and other alternative fuels. Service and price are the primary factors affecting this market. MichCon continues to take steps to become the preferred provider of natural gas and high-value energy services within Michigan and to maintain financial results. To accomplish this, MichCon will increase penetration of existing markets by focusing on meeting the needs of customers and the marketplace, will increase efforts to reduce cost of gas and operating costs, and will take advantage of growth opportunities to expand to new geographic areas. MichCon's Market Expansion Program is intended to spur demand for natural gas in areas currently not served. The program is primarily targeted at residential and small-volume commercial markets. By financing the cost of main extensions, this program makes it easier for users of other higher-cost fuels, such as propane and fuel oil, to switch to natural gas for space heat and other applications. This program has contributed 15% of the 72,673 new customers added during the past 3 years. In 1997, 9 new areas of Michigan were served by MichCon, bringing the total number of new areas added since the program's inception in 1984 to 137. Cost of gas sold per Mcf for 1997 was $3.11, an increase of $.19 (6.5%) over 1996. MichCon still retained a significant cost advantage over competing fuels. Cost of gas sold per Mcf for 1996 increased from 1995 by $.56 (24%). END USER TRANSPORTATION: Deliveries decreased in 1997 as a result of warmer weather. In 1997, this market accounted for 15% of total gas deliveries and produced approximately 15% of MichCon's gross profit margin. 2 7 At December 31, 1997, MichCon had end user transportation agreements representing annual volumes of 151 Bcf. Approximately 56% of these volumes are under contracts that extend to 1999 or beyond and include the majority of the large, and most price-sensitive, customers. Contracts for the remaining volumes are typically one-year contracts that expire at various times during 1998 and relate to a large number of low volume users with relatively low price sensitivity. Through technical and financial assistance, industrial and commercial customers have been encouraged to increase the use of natural gas. The natural gas-fueled power generation market accounted for approximately 31 Bcf of gas deliveries in both 1996 and 1997. Air compressors and other small engines in certain commercial applications also provide possibilities for conversion to natural gas-powered equipment. The efficiencies and price competitiveness of natural gas can significantly reduce operating costs for customers, even though a higher initial outlay for gas-burning equipment may be required. The primary focus of competition in this market is total cost of fuel. Some large commercial and industrial customers have the capacity to switch to alternative fuel sources such as coal, electricity, oil and steam. In addition, some of these customers could bypass MichCon's distribution system and obtain gas directly from a pipeline company. However, cost differentials must be sufficient to offset the substantial investment costs and risks associated with fuel switching or bypass. MichCon competes against alternative fuel sources by providing competitive pricing and reliable supply through the use of the company's extensive storage capacity and multiple supply sources. Almost all significant customers that are in proximity to other company's pipeline facilities are under long-term contracts. In the past several years, MichCon has been successful in converting many customers' facilities to natural gas from alternative fuels and in retaining those customers after conversion. Also, in the past several years, MichCon has not experienced any significant fuel switching by its customers. In 1997, approximately 22 Bcf of MichCon's transportation deliveries were to customers who displaced coal with natural gas. Although the MPSC has approved a direct access program for the state's two largest electric utilities which will allow large electric users to directly purchase lower priced electricity, beginning in mid-1998, this program is not expected to materially impact the competitiveness of natural gas. INTERMEDIATE TRANSPORTATION: This service accounts for 63% of total gas volumes but, due to the lower rates applicable to this service, represents only 10% of MichCon's gross profit margin. The increases in intermediate transportation deliveries in 1997 and 1996 are due primarily to the sale of additional transportation services including increased transportation volumes of Michigan gas production. Volumes were also impacted by lower deliveries to major fixed-fee customers in 1997 compared to increased deliveries in 1996. Although volumes for these fixed-fee customers have varied, the related revenues were not significantly affected. MichCon's extensive transmission pipeline system has enabled it to increase the volumes transported for Michigan gas producers, marketers, distribution companies and other pipelines. MichCon operates in a pivotal geographic location with links to major interstate pipelines that reach markets elsewhere in the Midwest, the eastern United States and eastern Canada. In 1997, through efficient use of transmission and storage assets as well as upstream supply, MichCon sold significant short-term services resulting in increased revenues from 1996. 3 8 There has been a significant increase in Michigan Antrim gas production over the past several years, resulting in a growing demand by gas producers and brokers for intermediate transportation services. In order to meet the increased demand, MichCon expanded the transportation capacity of its northern Michigan gathering system, which is owned by MichCon Pipeline Company (MichCon Pipeline). This expansion contributed 128.5 Bcf in volumes transported during 1997 and 75 Bcf in 1996. MichCon Pipeline, a wholly-owned, non-utility subsidiary of MichCon, is involved in ventures that transport natural gas and natural gas liquids from northern and east-central Michigan gas fields to processing plants in the northern part of the state. In December 1997, MichCon Pipeline purchased a pipeline to expand the transportation capacity of its northern Michigan gathering system. The cost of the pipeline was approximately $13 million and is expected to transport approximately 44 Bcf of Antrim gas annually. During 1997, MichCon Pipeline transported an average of 646 MMcf/d of natural gas and related liquids. The transportation rate on the Saginaw Bay Pipeline, which was to decrease 40% in accordance with the terms of a contract that reduces the transportation rate for the last 10 years of the agreement was successfully renegotiated at the maximum MPSC approved rate during 1997. Moreover, Saginaw Bay was successful in restructuring all transportation contracts relating to the Saginaw Bay Pipeline to the maximum tariff rates. In January 1997, MichCon placed into service a 59-mile loop of its existing Milford to Belle River Pipeline at a cost of approximately $91 million. The pipeline has improved the overall reliability and efficiency of MichCon's gas storage and transmission system by mitigating the risk of disruption in the operation of the existing pipeline or other facilities used to supply gas to MichCon's customers. In addition, the pipeline provides significant off-system transportation opportunities as discussed below. With significant new supplies of western Canadian gas projected into the Chicago area beginning in November 1998, MichCon is in an excellent position to increase revenues through transportation to growing markets in eastern Canada and the Northeast U.S. In December 1997, MichCon entered into a long-term lease of capacity on its Milford to Belle River Pipeline with Vector Pipeline to effectuate transportation from Chicago supplies to Dawn, Ontario if and when Vector is constructed and placed in service, potentially in late 1999 or 2000. Additional opportunities for transportation services are being pursued which will further maximize the use of MichCon's existing transmission infrastructure. In 1998 MichCon expects to exercise its option to purchase a 50% interest in an additional pipeline under the St. Clair River to link MichCon's system with Consumers' Gas of Toronto's pipeline facilities. This project will further enhance MichCon's ability to transport gas bound for both Canadian and Northeast U.S. markets. ENERGY ASSISTANCE PROGRAMS Energy assistance programs funded by the federal government and the State of Michigan, including the Home Heating Credit for low-income customers and the Family Independence Agencys' State Emergency Relief Program, remain critical to MichCon's ability to control its uncollectible expenses. MichCon has historically obtained favorable regulatory treatment of its uncollectible costs, including those related to these energy assistance programs. MichCon receives a significant amount of its heating assistance funding from the federal Low-Income Home Energy Assistance Program (LIHEAP) which funds the State of Michigan's Home Heating Credit program. In 1997 Congress provided $1.0 billion for LIHEAP and supplemented it 4 9 with a $300 million emergency fund that could be tapped only upon order of the President. The State of Michigan received $64 million of the total $1.2 billion that was released in 1997. The bulk of this money was passed on to qualified taxpayers in the form of Michigan Home Heating Credits. MichCon received $12.7 million through this program in 1997. Home Heating Credits assisted 83,000 MichCon customers in 1997. Congress voted to continue LIHEAP in 1998 and 1999. For federal Fiscal Year 1998, which began October 1, 1997, Congress continued funding at the $1.0 billion level and again authorized a $300 million emergency fund. In addition, it appropriated $1.1 billion for federal Fiscal Year 1999 subject to revision as part of Congress' 1999 budget deliberations. MichCon is currently working with federal and state officials to identify other ways to obtain energy assistance for low-income customers, and is taking actions to minimize the impact a reduction in LIHEAP funds could have on MichCon's financial position. GAS SUPPLY MichCon obtains its natural gas supply from various sources in different geographic areas under agreements that vary in both pricing and terms. This geographic and contractual diversity of supply ensures that MichCon will be able to meet the requirements of its present and future customers with reliable supplies of natural gas at competitive, market responsive prices. The company's objective is to rank in the lowest quartile for cost of gas among comparable gas utilities in the Midwest. Although MichCon's gas costs rose 6.5% during the year to $3.11 per Mcf, they remained in the lowest quartile among a group of 22 utilities in the region, having decreased 15% over the last ten years. MichCon believes that its gas purchasing strategies will enable it to maintain its low cost position. Cost of gas sold decreased in 1997 as a result of lower sales volumes, due primarily to warmer weather as well as supplier refunds. Under its gas cost recovery mechanism, MichCon expects to continue to collect all of its cost of gas sold. Gas Supply Purchases(Bcf)
1997 1996 1995 --------------- ---------------- ----------------- Long-term Supply: Michigan Producers..................................... 66.0 86.3 90.9 Interstate Suppliers................................... 13.8 14.5 18.2 Canadian Suppliers..................................... 31.3 37.3 31.5 Spot Market............................................... 85.8 90.6 52.2 -------------- --------------- ---------------- 196.9 228.7 192.8 ============== =============== ================
MichCon purchased 34% of its 1997 supply from Michigan producers, 50% from producers in the southern and midcontinent regions of the United States and 16% from Canadian producers. These supplies are complemented by 130 Bcf of working storage capacity from storage fields owned and operated by MichCon in Michigan, of which 25 Bcf is leased to others. MichCon has long-term firm transportation agreements with ANR and Great Lakes Gas Transmission Limited Partnership (Great Lakes). Under these agreements, ANR is obligated to transport approximately 375 MMcf/d of supply during the summer months and 310 MMcf/d of supply during the winter months for MichCon, while Great Lakes is obligated to transport 30 MMcf/d. These transportation agreements expire on various dates between 1999 and 2011. 5 10 MichCon also has contracts with independent Michigan producers that expire on various dates through 2011. MichCon continues its supply strategy of purchasing gas under contracts that tie purchase prices to spot market prices. To mitigate price volatility related to spot market prices for sales customers, MichCon has been authorized by the MPSC to change its supply strategy to purchase up to one-third of its gas under fixed price contracts. MichCon has also developed a program for fixing the prices of individual forward months for a maximum of one-third of its supply. This program is based on an analysis of the historic price activity over the past five years, and would give MichCon the flexibility to take advantage of price dips below historical averages. This program was implemented in March 1997 and since that time small blocks of gas have been purchased at fixed prices for 1998. At December 31, 1997, MichCon owned and operated five natural gas storage fields in Michigan with a working storage capacity of approximately 130 Bcf. These facilities play an important role in providing reliable and cost-effective service. MichCon uses its storage capacity to supplement its supply during the winter months, replacing the gas in April through October when demand is at its lowest. The use of this storage capacity also allows MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline costs. During 1997, MichCon's maximum one-day sendout exceeded 2.3 Bcf, of which approximately 70% came from its underground storage fields. MichCon's gas distribution system has a maximum daily sendout capability of 2.8 Bcf, with approximately 70% coming from underground storage. MichCon also leases 25 Bcf of its natural gas storage capacity to an affiliated company and third parties. REGULATION AND RATES MichCon is subject to the jurisdiction of the MPSC as to various phases of its operations, including gas sales and transportation rates, service and accounting. MichCon is also subject to the requirements of other regulatory agencies with respect to safety, the environment and health. GENERAL RATE PROCEEDINGS: MichCon received authorization to defer manufactured gas plant (MGP) investigation and remediation costs in excess of the $11.7 million previously reserved by MichCon. The remaining balance of this initial reserve at December 31, 1997 is approximately $1.7 million. Any excess costs are to be amortized over a 10 year period beginning in the year subsequent to the year environmental investigation and remediation costs are paid. The recovery of any remediation costs incurred will be reviewed in a future rate case. MichCon filed an application with the MPSC in October 1996 requesting authority to decrease depreciation rates from the existing 4.09% to 3.44%. In December 1997 the MPSC issued an order approving a reduction in annual depreciation costs by more than $16 million. While the Michigan Attorney General has appealed the depreciation order, management believes the MPSC order approving the lower depreciation rates will be upheld. GAS COST RECOVERY: The GCR process allows MichCon to recover its cost of gas sold if the MPSC determines that such costs are reasonable and prudent. This determination includes an annual Gas Supply and Cost Review, in which the MPSC approves maximum monthly GCR factors. A subsequent annual GCR reconciliation proceeding provides a review of gas costs incurred during the year, determines whether approved gas costs have been overcollected or undercollected and, as a result, whether a refund or surcharge, including interest, is required to be returned to or collected from 6 11 GCR customers using the rolled-in prospective refunding methodology approved by the MPSC on June 30, 1994. In February 1996, MichCon filed its 1995 GCR reconciliation case indicating an under-recovery of less than $0.1 million, including interest, which will be collected from GCR customers using the new rolled-in prospective refunding methodology. In February 1997, the MPSC issued an order finding that all of MichCon's 1995 gas costs were reasonable and prudent. In February 1997, MichCon filed its 1996 GCR reconciliation case indicating a net under-recovery of approximately $28 million, including interest. The total 1996 underrecovery was rolled into MichCon's 1997 GCR cost recovery, pursuant to the prospective refunding methodology discussed above. In September 1997, the MPSC issued an order finding that all of MichCon's 1996 gas costs were reasonable and prudent, including $4.4 million in interest costs from Panhandle related to certain direct billings. In July 1997, MichCon filed its 1998 GCR Plan Case. An MPSC order is expected in May 1998. In February 1998, MichCon filed its 1997 GCR reconciliation case indicating a net under-recovery of approximately $13 million, including interest. An MPSC order is expected in late 1998. ENVIRONMENTAL MATTERS Prior to the 1940's when major natural gas pipelines became sufficient to meet MichCon's supply requirements, gas for heating and other uses was manufactured from processes involving coal, coke or oil. MichCon owns, or previously owned, 16 former manufactured gas plant (MGP) sites. During the mid-1980s, MichCon conducted preliminary environmental investigations at former MGP sites, and some contamination related to the by-products of gas manufacturing was discovered at each site. The existence of these sites and the results of the environmental investigations have been reported to the Michigan Department of Environmental Quality. None of these former MGP sites is on the National Priorities List prepared by the U.S. Environmental Protection Agency. MichCon is not involved in any administrative proceedings regarding these former MGP sites, but is currently remediating four of these sites and conducting more extensive investigations at four other former MGP sites. In 1984, MichCon established an $11.7 million reserve for environmental investigation and remediation. During 1993, MichCon received MPSC approval of a cost deferral and rate recovery mechanism for investigation and remediation costs incurred at former MGP sites in excess of this reserve. MichCon employed outside consultants to evaluate remediation alternatives for these sites, to assist in estimating its potential liabilities and to review its archived insurance polices. The findings of these investigations indicated that the estimated total expenditures for investigation and remediation activities for these sites could range from $30 million to $170 million based on undiscounted 1995 costs. As a result of these studies, MichCon accrued an additional liability and a corresponding regulatory asset of approximately $32 million during 1995. 7 12 MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon concluded settlement negotiations with certain carriers in 1996 and 1997 and has received payments from several carriers. In October 1997, MichCon filed suit against major nonsettling carriers seeking recovery of incurred costs and a declaratory judgment of the carriers' liability for future costs of environmental investigation and remediation costs at former MGP sites. During 1997, 1996 and 1995, MichCon spent $0.8 million, $0.9 million and $2.1 million, respectively, investigating and remediating these former MGP sites. At December 31, 1997, the reserve balance was $33.7 million, of which $1.7 million was classified as current. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and therefore have an effect on MichCon's financial position and cash flows. However, management believes 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 results of operations. FRANCHISES MichCon operates in over 530 cities, villages and townships under franchises or permits that typically are revocable at will and have a 30-year maximum duration. In 1993, MichCon began a structured process to renew or re-establish previously expired formal franchises in 233 municipalities. During the period between 1994 and 1997 an additional 168 franchises expired. To date, 381 franchises have been renewed, 11 of which were renewed in 1997 which account for gas sales volumes of approximately 40 Bcf annually. Additionally, two new franchises were acquired. There were no franchises lost. As for the 20 franchises that are currently expired, MichCon's gas distribution systems are rightfully occupying the streets with the consent or acquiescence of the municipalities. While MichCon could be ordered by any municipality in which its franchise has expired to remove its property, it could be deprived of ownership only by its consent and the payment of an agreed upon price, or by condemnation and the payment of the fair market value of such property. Should any of these municipalities seek to terminate MichCon's operations therein and substitute another gas utility operation, publicly or privately owned, the municipality must either (i) acquire and operate MichCon's system, (ii) construct a new system or (iii) grant a franchise to another privately owned utility to construct or acquire its own distribution system. Public utility franchises in Michigan are non-exclusive. Construction under a second franchise granted to another public utility requires authorization by the MPSC, which considers, among other things, the service rendered by the existing utility, the investment by such utility, and the benefit, if any, to the public of having a second utility serve in the area. In June 1996, a statutory amendment was adopted which provides that only irrevocable franchises need municipal voter confirmation. The amendment further clarified that franchises which are not voter confirmed are valid but revocable. In light of that amendment, the Michigan Supreme Court dismissed as moot an appeal involving MichCon concerning the status of utility franchises which had not received voter confirmation. 8 13 ITEM 2. PROPERTIES MichCon operates natural gas distribution, transmission and storage facilities in the state of Michigan. At December 31, 1997, MichCon's distribution system included 16,537 miles of distribution mains, 1,076,212 service lines and 1,190,314 active meters. MichCon owns 2,549 miles of transmission and production lines that deliver natural gas to the distribution districts and interconnect its storage fields with the sources of supply and the market areas. MichCon also owns properties relating to five underground storage fields with an aggregate storage capacity of approximately 130 Bcf. Additionally, MichCon owns district office buildings, service buildings and gas receiving and metering stations. In January 1998 MichCon purchased its principal office building in Detroit, The Guardian Building, ending its long-term capital lease obligation. MichCon occupies its principal office building in Grand Rapids under a long-term lease. Portions of these buildings are subleased to affiliates and others. Most of MichCon's properties are held in fee, by easement, or under lease agreements expiring at various dates to 2006, with renewal options extending beyond that date. The principal plants and properties of MichCon are held subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under which MichCon's First Mortgage Bonds are issued. Some existing properties are being fully utilized and new properties are being added to meet the requirements of expansion into new areas. MichCon's capital expenditures for 1997 totaled $155.2 million. MichCon's capital requirements for 1998 are anticipated to be approximately $200 million for capital investments. The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon Pipeline Co., owns a 66 2/3% interest in the Saginaw Bay Area Limited Partnership, which owns substantially all of the properties used in the conduct of its business, primarily a 126-mile major gathering line. The Saginaw Bay Lateral Company, a wholly owned subsidiary of MichCon Pipeline Co., owns a 46% interest in the Saginaw Bay Lateral Limited Partnership, which owns substantially all of the properties used in the conduct of its business, primarily lateral lines related to the Saginaw Bay major gathering line. Westside Pipeline Company, a wholly owned subsidiary of MichCon Pipeline Co., owns an 82.62% interest in Jordan Valley Pipeline, a 14-mile major gathering line and the Terra-Hayes Pipeline, a 18-mile major gathering line. MichCon Gathering Company, a wholly owned subsidiary of MichCon Pipeline Co., owns substantially all of the properties used in the conduct of its business, including 44.7-mile, 8.6-mile, 11-mile and 25.2 mile major gathering lines and a 2400 horsepower compressor station. Thunder Bay Gathering Company, a wholly owned subsidiary of MichCon Pipeline Co., owns substantially all of the properties used in the conduct of its business, including 44 miles of gathering lines. ITEM 3. LEGAL PROCEEDINGS In addition to the regulatory proceedings and other matters described in Item 1, "Business," MichCon is also involved in a number of lawsuits and administrative proceedings in the ordinary course of business with respect to taxes, environmental matters, contracts, personal injury, property damage claims and other matters. 9 14 ENVIRONMENTAL In 1994, MichCon received a general notice of liability letter from the U.S. Environmental Protection Agency (USEPA) stating that it was one of two potentially responsible parties at the Lower Ecorse Creek Superfund site in Wyandotte, Michigan. USEPA requested that MichCon conduct a remedial investigation and feasibility study at that site. MichCon investigated its prior activities in the area and USEPA's bases for its conclusion, and concluded that it was not responsible for contamination discovered at that site. MichCon informed USEPA of this belief and did not undertake the requested activities. In September 1996, USEPA sent MichCon a second general notice of liability letter for the site and demanded reimbursement of approximately $2.3 million in past costs, plus interest. USEPA then issued MichCon and the other potentially responsible party a unilateral administrative order under section 106 of the Comprehensive Environmental Response Compensation and Liability Act to implement the remedy. USEPA estimates the cost of the remedy to be approximately $650,000. MichCon again reviewed USEPA's bases for determining that it is a potentially responsible party and concluded again that it was not responsible for contamination discovered at that site and informed USEPA of its decision. USEPA has not taken any subsequent action against MichCon. USEPA may sue MichCon to force compliance with the order or may implement the remedy and then sue MichCon for recovery of all incurred costs. If USEPA institutes and prevails in such a suit and if the court determines that MichCon did not have sufficient cause not to comply with the order, the court may impose civil penalties and punitive damages. Management believes MichCon was not responsible for contamination at the site and has sufficient cause not to comply with this order and that the resolution of this matter will not have a material adverse effect on MichCon's financial statements. ENERGY CONSERVATION PROGRAMS In December 1994, a suit was filed against MichCon in Wayne County Michigan Circuit Court by six customers who had participated in one of three energy conservation programs sponsored by MichCon. Under these programs, which had been approved by the MPSC and operated from 1990 to 1996, MichCon offered low-interest loans, rebates and other arrangements to assist approximately 46,000 qualified residential customers in purchasing high-efficiency furnaces. MichCon did not manufacture, sell or install any of the furnaces. The complaint alleged that MichCon induced the purchase of these furnaces through its conservation programs and that it had a duty to, but failed to, warn its customers that harmful levels of carbon monoxide could backdraft if a chimney was not properly sized and a chimney liner installed. No personal injuries were claimed. Plaintiffs sought injunctive relief, unspecified monetary damages and class action certification. The trial court denied such certification on two separate occasions; the Michigan Court of Appeals denied plaintiffs' request for an appeal of those rulings. MichCon impleaded, as third-party defendants, all of the manufacturers, contractors and installers of the plaintiffs' furnaces. On September 13, 1996, plaintiffs' third motion to certify the lawsuit as a class action was granted. MichCon appealed the granting of certification and, on December 2, 1996, the Michigan Court of Appeals granted MichCon's Motion for Immediate Consideration and stayed all further proceedings until the Court issues its decision. MichCon believes that the plaintiffs' allegations are without merit and will continue to defend the case vigorously. 10 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the 10,300,000 issued and outstanding shares of common stock of MichCon, par value $1 per share, are owned by MCN and constitute 100% of the voting securities of MichCon. Therefore, no market exists for MichCon common stock. On January 31, 1996, MichCon called for redemption the remaining 104,732 shares of its redeemable cumulative preferred stock. MichCon paid cash dividends of $40.0 million in 1997, $11.3 million in 1996 and $6.5 million in 1995 on its common stock. 11 16 ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
Selected Financial Data 1997 1996 1995 1994 1993 - ------------------------------------------------- ---------- ------------ ------------- ------------ ----------- (Dollars in thousands) INCOME AVAILABLE FOR COMMON STOCK ............... $ 79,020 $ 79,824 $ 71,488 $ 59,387 $ 61,649 =========== =========== =========== =========== =========== Cash Dividends Declared on Common Stock ......... $ 40,000 $ 11,000 $ 6,500 $ 8,500 $ 75,000 =========== =========== =========== =========== =========== RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY.... 13.3% 14.7% 15.8% 15.2% 16.6% =========== =========== =========== =========== =========== PROPERTY, PLANT AND EQUIPMENT ................... $ 2,790,352 $ 2,668,294 $ 2,413,120 $ 2,189,150 $ 2,084,516 Less - accumulated depreciation and depletion.... 1,322,392 1,243,060 1,151,160 1,071,588 1,024,009 ----------- ----------- ----------- ----------- ----------- Net property, plant and equipment ............... $ 1,467,960 $ 1,425,234 $ 1,261,960 $ 1,117,562 $ 1,060,507 =========== =========== =========== =========== =========== TOTAL ASSETS .................................... $ 2,136,336 $ 2,058,344 $ 1,798,493 $ 1,571,910 $ 1,509,120 =========== =========== =========== =========== =========== CAPITAL EXPENDITURES ............................ $ 155,208 $ 212,668 $ 235,767 $ 145,421 $ 141,279 =========== =========== =========== =========== =========== CAPITALIZATION Long-term debt .................................. $ 611,763 $ 536,561 $ 501,396 $ 431,870 $ 353,214 Long-term capital lease obligations ............. 5,344 13,757 15,168 16,459 17,625 Redeemable cumulative preferred stock ........... -- -- -- 2,618 5,618 Common shareholder's equity ..................... 616,024 577,004 489,821 417,833 365,785 ----------- ----------- ----------- ----------- ----------- Total capitalization ............................ $ 1,233,131 $ 1,127,322 $ 1,006,385 $ 868,780 $ 742,242 =========== =========== =========== =========== =========== SOURCES OF OPERATING REVENUES Gas sales ....................................... $ 1,079,530 $ 1,058,499 $ 896,707 $ 954,537 $ 1,079,020 Application of (provision for) refunds-net ...... (16,736) 27,346 20,473 223 (3,164) End user transportation ......................... 84,516 82,210 80,360 76,228 71,412 Intermediate transportation ..................... 55,221 48,570 31,913 28,745 19,638 Storage services ................................ 7,630 6,956 8,857 8,054 9,084 Conservation and other assistance programs ...... (2,914) (2,483) 14,499 18,716 23,935 Other ........................................... 46,432 37,687 28,004 25,175 23,590 ----------- ----------- ----------- ----------- ----------- Total operating revenues ........................ $ 1,253,679 $ 1,258,785 $ 1,080,813 $ 1,111,678 $ 1,223,515 =========== =========== =========== =========== =========== DISPOSITION OF GAS (MMCF) Gas sales ....................................... 205,760 217,672 206,951 201,423 250,510 End user transportation ......................... 144,963 146,662 145,288 139,800 128,409 Intermediate transportation ..................... 586,496 527,510 341,550 303,617 281,116 ----------- ----------- ----------- ----------- ----------- 937,219 891,844 693,789 644,840 660,035 Company use and lost gas ........................ 3,896 5,746 2,990 2,239 3,828 ----------- ----------- ----------- ----------- ----------- Total disposition of gas ........................ 941,115 897,590 696,779 647,079 663,863 =========== =========== =========== =========== =========== DEGREE DAYS For calendar period ............................. 6,830 7,171 6,777 6,489 6,675 Percent colder (warmer) than normal ............. 0.8% 5.4% 0.3% (4.2)% (2.2)% UTILITY CUSTOMERS Residential ..................................... 1,092,334 1,087,450 1,077,668 1,061,300 1,050,188 Total ........................................... 1,178,543 1,169,690 1,159,140 1,141,463 1,129,416 EMPLOYEES ....................................... 2,867 3,062 3,128 3,273 3,364
12 17 ITEM 7. MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Earnings for 1997 were $79.0 million, a decrease of $0.8 million from 1996. The 1997 decrease is due primarily to lower gross margins caused by warmer weather, and higher depreciation and financing costs due to capital investments, partially offset by lower operation and maintenance expenses. Earnings for 1996 increased by $8.3 million over 1995 due primarily to increased gross margins resulting from higher gas sales and transportation deliveries due to colder weather.
EARNINGS COMPONENTS (IN MILLIONS) COMPARING 1997 TO 1996 COMPARING 1996 TO 1995 --------------------------------- ------------------------ DOLLAR PERCENTAGE DOLLAR PERCENTAGE CHANGE CHANGE CHANGE CHANGE ------ ------ ------ ------- Operating Revenues ................. $(5.1) (0.4)% $178.0 16.5% Cost of Gas ........................ (4.4) (0.7) 152.6 31.5 Gross Margin ....................... (0.7) (0.1) 25.4 4.3 Operation and Maintenance .......... (11.6) (4.0) (0.1) (0.1) Depreciation and Depletion ......... 5.6 5.7 9.0 10.1 Property and Other Taxes ........... (1.0) (1.7) 4.8 8.3 Other Income and Deductions ........ 3.3 7.0 3.3 7.4 Income Tax Provision ............... 4.2 10.1 0.5 1.2
GROSS MARGIN Gross margin (operating revenues less cost of gas) decreased in 1997 and increased in 1996, reflecting varying gas sales and end user transportation deliveries due primarily to significantly colder weather in 1996. Additionally, gross margins increased in both periods as a result of the continued growth in intermediate transportation services. Margins in 1997 were also impacted by increased other operating revenues resulting from initiatives to grow revenues by providing gas-related services. EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS ---------------------------------------------
1997 1996 1995 ---- ---- ----- Percentage Colder than Normal............................... 0.8% 5.4% 0.3% Increase from Normal in: Gas Markets (Bcf) ....................................... 0.6 10.9 1.5 Net Income (Millions) ................................... $0.5 $9.9 $1.4
13 18 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
1997 1996 1995 --------- ---------- ---------- Gas Markets ($ Millions) Gas Sales.......................................... $ 1,062.8 $ 1,085.8 $ 917.2 End User Transportation............................ 84.5 82.2 80.4 Intermediate Transportation........................ 55.2 48.6 31.9 Other ............................................. 51.2 42.2 51.3 --------- --------- ---------- $ 1,253.7 $ 1,258.8 $ 1,080.8 ========= ========= ========== Gas Markets (Bcf) Gas Sales.......................................... 205.8 217.7 206.9 End User Transportation ........................... 145.0 146.7 145.3 Intermediate Transportation ....................... 586.4 527.5 341.6 ----- ----- ----- 937.2 891.9 693.8 ===== ===== =====
Operating Revenues Gas sales and end user transportation revenues in total decreased $20.7 million in 1997 and increased $170.4 million in 1996. The decrease in revenues for 1997 is due primarily to reduced gas sales and end user transportation deliveries as a result of warmer weather, partially offset by higher prices to recover gas costs. The increase in 1996 gas sales and end user transportation revenues was due primarily to colder weather and higher prices to recover gas costs, as well as marketing initiatives that expanded gas markets. Gas sales and gross margins have also been affected by variations in revenues associated with lost gas costs. Gas sales rates are set to recover lost gas costs using an averaging method based on historical lost gas experience. Prior to 1993, MichCon deferred or accrued revenues for differences between historical average lost gas amounts and the actual amount experienced. However, as a result of an October 1993 order issued in MichCon's most recent general rate case, MichCon no longer defers or accrues revenues for these differences in lost gas amounts. Amortization of previously deferred amounts was completed in 1995 and increased revenues by $3.4 million in 1995. As discussed in the "Cost of Gas" section that follows, gross margins have also been impacted by variations in lost gas costs. The increases in intermediate transportation deliveries in 1997 and 1996 are due primarily to increased transportation of Antrim gas for Michigan gas producers and brokers. There has been a significant increase in Michigan Antrim gas production over the past several years, resulting in a growing demand by gas producers and brokers for intermediate transportation services. In order to meet the increased demand, MichCon expanded the transportation capacity of its northern Michigan gathering system. This expansion contributed 128.5 Bcf in volumes transported during 1997 and 75 Bcf in 1996. In December 1997, MichCon purchased a pipeline to expand the transportation capacity of its northern Michigan gathering system. The cost of the pipeline was approximately $13 million and is expected to transport approximately 44 Bcf of Antrim gas annually. In January 1996, MCN transferred its Michigan pipeline operations to MichCon in order to consolidate MCN's Michigan gathering pipeline activities within one business unit. The pipeline operation contributed 76.5 Bcf in volumes transported during 1997 and 63.3 Bcf in 1996. 14 19 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Other operating revenue increased $9.0 million in 1997 due primarily to increased merchandise sales and other gas-related services. The decrease of $9.2 million in the 1996 other operating revenue was due primarily to the discontinuance of MichCon's conservation program, partially offset by an increase in gas processing revenues generated from the Michigan pipeline operations which were transferred from MCN to MichCon at the beginning of 1996. 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 recovers all of its reasonably and prudently incurred cost of gas sold. As a result, fluctuations in cost of gas sold have little or no effect on gross margins. Cost of gas sold decreased in 1997 due to lower sales volumes, due primarily to warmer weather, as well as supplier refunds. Substantially offsetting this decrease was higher spot market prices resulting in a $.19 (6.5%) increase in the cost of good sold per Mcf. In 1996, cost of gas sold increased as a result of significantly higher spot market prices paid for natural gas purchased and higher gas sales volumes due to colder weather. Cost of gas sold for 1996 increased from 1995 by $.56 (24%) per Mcf. To mitigate price volatility related to spot market prices for sales customers, MichCon has been authorized by the Michigan Public Service Commission (MPSC) to change its supply strategy to purchase up to one-third of its gas under fixed price contracts. As previously discussed, cost of gas is affected by variations in lost gas amounts. Lost gas costs for 1997 decreased by $0.5 million and increased in 1996 by $6.6 million. OPERATION AND MAINTENANCE Operation and maintenance expenses decreased in 1997 due to decreased pension and retiree health care costs and uncollectible gas accounts expense. Partially offsetting the decrease in 1997 were higher operating expenses related to the increase in merchandise sales. Operation and maintenance expenses decreased slightly in 1996. This was a result of decreased benefit costs, primarily pension and retiree health care costs and a decrease in expenses related to the conservation program. This decrease was offset by increased uncollectible gas accounts expense and additional expenses related to the transfer of the Michigan pipeline operations from MCN to MichCon. Uncollectible gas accounts were driven higher by 1996's colder temperatures and rising gas prices which significantly increased customers' heating bills. The impact of higher heating bills was aggravated by a reduction and delay in the home heating assistance funding obtained by low-income customers. MichCon receives a significant amount of its heating assistance funding from the federal Low-Income Home Energy Assistance Program (LIHEAP). Congress increased the program's funding to $1 billion for the 1997 fiscal year. The State of Michigan's share of LIHEAP funds was increased from $47.5 million in fiscal year 1996 to $64 million in 1997. The bulk of this money was passed on to qualified taxpayers in the form of Michigan Home Heating Credits. MichCon received $12.7 million through this effort, $3.5 million more than in 1996. Home Heating Credits assisted 83,000 MichCon customers in 1997, compared to 74,000 in 1996. During 1997, Congress approved a budget which provides for federal LIHEAP funding at $1 billion and $1.1 billion for fiscal years 1998 and 1999, respectively. A portion of any future increase or decrease in funding may impact MichCon's uncollectible accounts. MichCon is currently working with federal and state officials to identify other ways to obtain energy assistance for low-income customers, and is taking actions to minimize the impact a reduction in LIHEAP funds could have on MichCon's financial position. 15 20 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) DEPRECIATION AND DEPLETION The increases in depreciation and depletion in both 1997 and 1996 were due to higher plant balances reflecting capital expenditures of $603.6 million over the past three years. The MPSC approved lower depreciation rates for MichCon effective January 1, 1998. In 1998, these new depreciation rates will largely offset the increase in depreciation expense resulting from additional capital expenditures. While the Michigan Attorney General has appealed the depreciation order, management believes the MPSC order approving the lower depreciation rates will be upheld. PROPERTY AND OTHER TAXES Property and other taxes decreased in 1997. The Company reduced its property taxes for 1997 based on pending appeals of personal property tax assessments. The Company has been assessed additional amounts which are being protested. The Company does not believe payments of these additional amounts is probable. Offsetting the reduction in 1997 property and other taxes was an increase in Michigan single business taxes. Property and other taxes increased in 1996 as a result of higher plant balances. OTHER INCOME AND DEDUCTIONS Other income and deductions increased in 1997 and 1996 due to additional interest expense on long-term debt required to finance capital investments. Other income and deductions for 1997 was partially offset by reduced interest on lower outstanding commercial paper. In 1996 other income and deductions was partially offset by an increase in the capitalization of the cost of funds used during construction resulting from higher construction balances. Interest on long-term debt increased in 1997 as a result of issuing first mortgage bonds in the aggregate of $85 million and MichCon's nonutility subsidiaries borrowing $40 million under a nonrecourse credit agreement. INCOME TAX PROVISION Income taxes for 1997 increased as a result of higher earnings. The increase in income taxes was also impacted by the amounts recorded in 1996 for the favorable resolution of prior years' tax issues and tax credits. Income taxes for 1996 remained consistent with 1995 despite the increase in earnings due to an increase resulting from the favorable resolution of prior year tax issues. ENVIRONMENTAL MATTERS Prior to the 1940's when major natural gas pipelines became sufficient to meet MichCon's supply requirements, gas for heating and other uses was manufactured from processes involving coal, coke or oil. MichCon owns or previously owned 16 such former manufactured gas plant (MGP) sites. During the mid-1980's, MichCon conducted preliminary environmental investigations at these former MGP sites, and some contamination related to the by-products of gas manufacturing was discovered at each site. The existence of these sites and the results of the environmental investigations have been reported to the Michigan Department of Environmental Quality. None of these former MGP sites is on the National Priorities List prepared by the U.S. Environmental Protection Agency. 16 21 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) MichCon is not involved in any administrative proceedings regarding these former MGP sites, but is currently remediating four of these sites and conducting more extensive investigations at four other former MGP sites. In 1984 MichCon established an $11.7 million reserve for environmental investigation and remediation. During 1993, MichCon received MPSC approval of a cost deferral and rate recovery mechanism for investigation and remediation costs incurred at former MGP sites in excess of this reserve. MichCon employed outside consultants to evaluate remediation alternatives for these sites, to assist in estimating its potential liabilities and to review its archived insurance policies. The findings of these investigations indicated that the estimated total expenditures for investigation and remediation activities for these sites could range from $30 million to $170 million based on undiscounted 1995 costs. As a result of these studies, MichCon accrued an additional liability and a corresponding regulatory asset of $32 million during 1995. MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon concluded settlement negotiations with certain carriers in 1996 and 1997 and has received payments from several carriers. In October 1997, MichCon filed suit against major nonsettling carriers seeking recovery of incurred costs and a declaratory judgment of the carriers' liability for future costs of environmental investigation and remediation costs at former MGP sites. During 1997, 1996 and 1995, MichCon spent $0.8 million, $0.9 million and $2.1 million, respectively, investigating and remediating these former MGP sites. At December 31, 1997, the reserve balance is $33.7 million, of which $1.7 million is classified as current. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial actions costs and therefore have an effect on MichCon's financial position and cash flows. However, 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 results of operations. CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES MichCon's cash flow from operating activities increased $85.6 million in 1997 from 1996 and decreased $56.5 million in 1996 compared to 1995. The 1997 increase was due primarily to lower working capital requirements reflecting a reduction in the gas cost recovery undercollection and gas in inventory, partially offset by lower net income after adjusting for depreciation and deferred taxes. The 1996 decrease in cash flow from operating activities was due primarily to higher working capital requirements, partially offset by higher net income, after adjusting for depreciation and deferred taxes. Operating cash flows were sufficient for the payment of cash dividends on common stock and a portion of capital investments. FINANCING ACTIVITIES During the latter part of the year, short-term debt is generally incurred 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 17 22 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Commercial paper of $236.7 million was outstanding as of December 31, 1997. During 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. The existing shelf registration will allow MichCon to issue up to $215 million of debt securities. MichCon's capital requirements and general market conditions will affect the timing and amount of future issuances. MichCon issued $70 million of first mortgage bonds in both 1996 and 1995. The 1996 and 1995 proceeds were used to repay short-term obligations, to finance capital expenditures and for general corporate purposes. During 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 $17 million of long-term debt. MichCon also repaid $50 million of first mortgage bonds on its stated maturity date in May 1997. MichCon repaid all amounts owing under its Trust Demand Note and did not renew this program which expired in March 1997 and allowed for borrowings of up to $25 million. The following table sets forth the ratings for securities issued by MichCon:
Standard Duff & & Poors Moody's Phelp's Fitch ------- ------- ------- ----- Commercial paper............... A1 P1 D1 F1 Long-term debt................. A A2 A+ A
These ratings are considered investment grade by each rating agency. Consistent with MichCon's capitalization objective, at December 31, 1997, the capitalization ratio was approximately 50% debt and 50% equity excluding nonrecourse debt. INVESTING ACTIVITIES MichCon's capital expenditures for 1997 totaled $155.2 million representing a decrease of $57.5 million compared to 1996. MichCon's capital requirements for 1998 are expected to approximate $200 million for capital investments. Capital expenditures primarily represent the construction of transportation pipelines, the construction of new distribution lines to reach communities not previously served by MichCon and improvements to existing storage, distribution, transmission and information systems. 18 23 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As described in Note 9 to the consolidated financial statements, in December 1997, MichCon invested $31.3 million in a Grantor Trust to meet future cash flow obligations related to certain postretirement health care costs. 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 aggressively expand its role as a major provider of natural gas and high-value energy services within Michigan. Accordingly, MichCon's objectives are to increase revenues and reduce its costs in order to maintain strong returns and provide customers with high-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 expects to provide natural gas to approximately 20,000 new customers in 1998. MichCon's market share for residential heating customers in the communities in which it serves is approximately 80%. While this saturation rate is high, significant opportunities exist through conversion of existing homes from other fuels as well as from new construction. MichCon continues to expand the industrial and commercial markets by aggressively facilitating the use of existing gas technologies and equipment as well as by developing new natural gas technologies. Management is continually assessing ways to improve cost competitiveness. Among other cost saving initiatives, MichCon has signed contracts with Detroit Edison and other utilities to share the cost of payment processing, meter reading and staking of underground facilities. MichCon is continuing to explore opportunities to share the cost of common, duplicative operating functions. In December 1997, MichCon announced an early retirement incentive program. This program is available to approximately 10% of MichCon's work force. Management does not believe that these costs will have a material impact on 1998 net income. However, it is expected to contribute to lower operating costs in future years. The challenges and opportunities resulting from increased competition in the natural gas industry have been a catalyst for MPSC action in the development of major reforms in utility regulation aimed at giving all customers added choices and more price certainty. The overall package of regulatory changes connected with the gas industry restructuring is expected to generate additional revenue and cost savings opportunities as the restructuring advances. MichCon is positioning itself to respond to changes in regulation and increased competition by reducing its cost of operations while maintaining a safe and reliable system for customers. MichCon remains focused on these goals in 1998 and beyond. As described in Note 7 to the consolidated financial statements, MichCon complies with the provisions of Statement of Financial Accounting Standards, No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation." Future regulatory changes or changes in the competitive environment could result in MichCon discontinuing the application of SFAS 71 for all or part if its business and requires the write-off of the portion of any regulatory asset or liability that is no longer probable of recovery or refund. If MichCon were to have discontinued the application of SFAS 71 for all of its operations as of December 31, 1997, it would have had an extraordinary, non-cash increase to net income of approximately $46 million. Criteria that give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts MichCon's ability to establish prices to recover specific costs, and (2) 19 24 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. Based on a current evaluation of the various factors and conditions that are expected to impact future regulation, MichCon believes that its regulatory assets are probable of future recovery. NEW ACCOUNTING PRONOUNCEMENTS In 1996 the Emerging Issues Task Force (EITF) 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. The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the year. Any programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause computer systems to perform inaccurate calculations. MichCon has established processes for evaluating and managing the risks and costs associated with the year 2000 issue. MichCon has conducted a review to identify computer systems that could be affected by the inability of these systems to properly recognize the digits for the year 2000. MichCon has developed a corrective plan and is currently implementing such plan. Based on the corrective plan, costs associated with the year 2000 issue are estimated to total approximately $3 million to $4 million over the next two years. The anticipated costs are not higher due in part to the ongoing replacement of significant old systems. New systems in process of being installed as well as those installed over the past few years are year 2000 compliant. These systems were necessary to maintain a high level of customer satisfaction and to respond to changes in regulation and increased competition within the energy industry. MichCon is working with its suppliers and operators to mitigate any adverse effects of their system failures on MichCon. As a result, management cannot quantify the impact to MichCon of other companies' system failures, but does not expect it to be material. In 1997 the EITF reached a consensus that the cost of business process re-engineering activities, whether done internally or by third parties, is to be expensed as incurred. This consensus also applies when the business process re-engineering activities are part of a project to acquire, develop or implement internal-use software. Management does not expect the financial impact of such activities to be material to MichCon's financial results or operations. FORWARD-LOOKING STATEMENTS The Annual Report on Form 10-K 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. 20 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Consolidated Statement of Income........................................................................... 22 Consolidated Statement of Financial Position............................................................... 23 Consolidated Statement of Capitalization................................................................... 24 Consolidated Statement of Cash Flows....................................................................... 25 Notes to the Consolidated Financial Statements............................................................. 26 Independent Auditors' Report............................................................................... 41 Supplementary Financial Information - Quarterly Operating Results (Unaudited).............................. 42 Financial Statement Schedule for each of the three years in the period ended December 31, 1997, unless otherwise noted- Schedule II - Valuation and Qualifying Accounts........................................................ 43
21 26 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1997 1996 1995 - ---------------------------------------------------- ------------- ------------- ------------- (Thousands of Dollars) Note(s) OPERATING REVENUES Gas Sales......................................... $ 1,062,794 $ 1,085,845 $ 917,180 Transportation and storage services............... 11 147,367 137,737 121,130 Other............................................. 43,518 35,203 42,503 ------------- ------------- ------------- Total Operating Revenues........................ 1,253,679 1,258,785 1,080,813 ------------- ------------- ------------- OPERATING EXPENSES Cost of gas....................................... 632,229 636,594 483,962 Operation and maintenance......................... 11 282,640 294,281 294,424 Depreciation and depletion........................ 103,703 98,147 89,128 Property and other taxes.......................... 60,744 61,762 57,012 ------------- ------------- ------------- Total operating expenses........................ 1,079,316 1,090,784 924,526 ------------- ------------- ------------- OPERATING INCOME.................................... 174,363 168,001 156,287 ------------- ------------- ------------- EQUITY IN EARNINGS OF JOINT VENTURES................ 1,199 886 739 ------------- ------------- ------------- OTHER INCOME AND (DEDUCTIONS) Interest income................................... 4,659 3,900 3,983 Interest on long-term debt........................ (45,526) (40,703) (35,047) Other interest expense............................ (8,664) (8,012) (7,053) Minority interest................................. 5 (1,882) (988) - Other............................................. 536 (1,756) (6,182) ------------- ------------- ------------- Total other income and (deductions)............. (50,877) (47,559) (44,299) ------------- ------------- ------------- INCOME BEFORE INCOME TAXES.......................... 124,685 121,328 112,727 INCOME TAX PROVISION................................ 12 45,665 41,486 41,004 ------------- ------------- ------------- NET INCOME.......................................... 79,020 79,842 71,723 DIVIDENDS ON PREFERRED STOCK........................ - 18 235 ------------- ------------- ------------- NET INCOME AVAILABLE FOR COMMON STOCK............... $ 79,020 $ 79,824 $ 71,488 ============= ============= =============
The notes to the consolidated financial statements are an integral part of this statement. 22 27 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31 1997 1996 - ----------------------------------------------------------------------------- ----------- ----------- (Thousands of Dollars) Note(s) ASSETS CURRENT ASSETS Cash and cash equivalents................................................ $ 14,353 $ 10,010 Accounts receivable, less allowance for doubtful accounts of $15,015 and $17,707 respectively....................................... 195,662 169,436 Accrued unbilled revenues................................................ 91,896 107,377 Gas in inventory......................................................... 2 40,201 67,910 Property taxes assessed applicable to future periods..................... 64,827 60,592 Accrued gas cost recovery revenues....................................... 7 12,862 27,672 Other.................................................................... 33,361 23,025 ----------- ----------- 453,162 466,022 ----------- ----------- DEFERRED CHARGES AND OTHER ASSETS Investment in and advances to joint ventures............................. 19,643 19,479 Long-term investments.................................................... 9c,10 35,110 3,735 Deferred postretirement benefit costs.................................... 7, 9b - 4,863 Deferred environmental costs............................................. 6b, 7 27,699 28,233 Prepaid benefit costs.................................................... 9 85,790 64,307 Other.................................................................... 46,972 46,471 ----------- ----------- 215,214 167,088 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost..................................... 8 2,790,352 2,668,294 Less - Accumulated depreciation and depletion............................ 1,322,392 1,243,060 ----------- ----------- 1,467,960 1,425,234 ----------- ----------- $ 2,136,336 $ 2,058,344 =========== =========== LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Accounts payable......................................................... $ 130,267 $ 130,725 Notes payable............................................................ 4 241,691 265,126 Current portion of long-term debt and capital lease obligations.......... 3a, 8 34,956 53,232 Federal income, property and other taxes payable......................... 78,630 84,788 Customer deposits........................................................ 16,363 12,860 Other.................................................................... 67,780 63,309 ----------- ----------- 569,687 610,040 ----------- ----------- DEFERRED CREDITS AND OTHER LIABILITIES Accumulated deferred income taxes........................................ 12 83,905 76,523 Unamortized investment tax credit........................................ 32,745 34,588 Tax benefits amortizable to customers.................................... 7 122,922 116,313 Accrued environmental costs.............................................. 6b 32,000 32,000 Minority interest........................................................ 5 17,283 17,604 Other.................................................................... 44,663 43,954 ----------- ----------- 333,518 320,982 ----------- ----------- COMMITMENTS AND CONTINGENCIES 6, 8 CAPITALIZATION (see accompanying statement) Long-term debt, including capital lease obligations...................... 3a, 8, 10 617,107 550,318 Common shareholder's equity.............................................. 616,024 577,004 ----------- ----------- 1,233,131 1,127,322 ----------- ----------- $ 2,136,336 $ 2,058,344 =========== ===========
The notes to the consolidated financial statements are an integral part of this statement. 23 28 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------- ---------- ---------- ---------- (Thousands of Dollars) Note(s) LONG-TERM DEBT, excluding current requirements 3a, 10 First Mortgage Bonds, interest payable semi-annually 6.25 % series due 1997................................................. $ - $ - $ 50,000 6.3 % series due 1998.................................................. - 20,000 20,000 6.51 % series due 1999................................................. 30,000 30,000 - 5.75 % series due 2001................................................. 60,000 60,000 60,000 8 % series due 2002.................................................... 70,000 70,000 70,000 6.72 % series due 2003................................................. 4,150 4,150 4,150 6.8 % series due 2003.................................................. 15,850 15,850 15,850 9.125 % series due 2004................................................ 55,000 55,000 55,000 7.15 % series due 2006................................................. 40,000 40,000 - 7.21 % series due 2007................................................. 30,000 - - 7.06 % series due 2012................................................. 40,000 - - 8.25 % series due 2014................................................. 80,000 80,000 80,000 7.6 % series due 2017.................................................. 14,990 - - 9.5 % series due 2019.................................................. - 5,000 5,000 7.5 % series due 2020.................................................. 29,641 29,812 30,000 9.5 % series due 2021.................................................. 40,000 40,000 40,000 6.75 % series due 2023................................................. 17,177 17,782 18,416 7 % series due 2025.................................................... 40,000 40,000 40,000 Unamortized discount .................................................. (1,235) (1,349) (1,390) Unsecured Notes - 9.750 % series due 2000 interest payable semi-annually......................................... - 12,000 12,000 Long-term capital lease obligations...................................... 8 5,344 13,757 15,168 Other long-term debt..................................................... 5 46,190 18,316 2,370 ---------- ---------- ---------- Total.................................................................... 617,107 550,318 516,564 ---------- ---------- ---------- COMMON SHAREHOLDER'S EQUITY COMMON STOCK, par value $1 per share - authorized, for all periods, 15,100,000 shares; outstanding 10,300,000 shares.......... 10,300 10,300 10,300 ---------- ---------- ---------- ADDITIONAL PAID-IN CAPITAL Balance - beginning of period.......................................... 230,399 211,777 204,777 Equity investment...................................................... 5 - 18,622 7,000 ---------- ---------- ---------- Balance - end of period................................................ 230,399 230,399 211,777 ---------- ---------- ---------- RETAINED EARNINGS Balance - beginning of period.......................................... 336,305 267,744 202,756 Net income............................................................. 79,020 79,842 71,723 Cash dividends declared: Common stock......................................................... (40,000) (11,263) (6,500) Preferred stock...................................................... 3b - (18) (235) ---------- ---------- ---------- Balance - end of period................................................ 375,325 336,305 267,744 ---------- ---------- ---------- Total common shareholder's equity.......................................... 616,024 577,004 489,821 ---------- ---------- ---------- Total capitalization....................................................... $1,233,131 $1,127,322 $1,006,385 ========== ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 24 29 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- ---------- ------- ------- (Thousands of Dollars) Note(s) CASH FLOW FROM OPERATING ACTIVITIES Net income ..................................................................... $ 79,020 $ 79,842 $ 71,723 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income .................................................. 103,703 98,147 89,128 Charged to other accounts ................................................ 7,663 7,579 7,318 Deferred income taxes - current ............................................ (3,130) 4,963 9,739 Deferred income taxes and investment tax credit - net....................... 12 10,853 6,999 6,474 Other ...................................................................... (679) (2,629) 878 Changes in assets and liabilities, exclusive of changes shown separately ......................................................... (10,167) (93,207) (27,033) --------- --------- --------- Net cash provided from operating activities ............................ 187,263 101,694 158,227 --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable - net.............................................................4 (23,435) 68,491 28,178 Issuance of long-term debt......................................................3a 124,051 69,645 68,764 Equity investment .............................................................. -- 1,614 7,000 Cash dividend paid: Common stock ................................................................. (40,000) (11,263) (6,500) Preferred stock .............................................................. -- (54) (276) Retirement of long-term debt and preferred stock................................3 (76,854) (6,384) (4,757) --------- --------- --------- Net cash (used for) provided from financing activities ................. (16,238) 122,049 92,409 --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures ........................................................... (155,208) (212,668) (235,767) Other - net .................................................................... (11,474) (9,534) (7,705) --------- --------- --------- Net cash used for investing activities ................................. (166,682) (222,202) (243,472) --------- --------- --------- Net Increase in Cash and Cash Equivalents ........................................ 4,343 1,541 7,164 Cash and Cash Equivalents, January 1 ............................................. 10,010 8,469 1,305 --------- --------- --------- Cash and Cash Equivalents, December 31 ........................................... $ 14,353 $ 10,010 $ 8,469 ========= ========= ========= CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Accounts receivable - net .................................................... $ (43,510) $ 7,807 $ (37,782) Accrued gas cost recovery revenues ........................................... 14,810 (28,250) (18,495) Accrued unbilled revenues .................................................... 15,481 (16,243) (8,901) Gas in inventory ............................................................. 28,008 (27,719) 37,652 Accounts payable ............................................................. (585) 21,401 27,537 Federal income, property and other taxes payable ............................. (6,228) (2,424) (611) Other current assets and liabilities ......................................... (4,525) 2,669 (11,059) Deferred and prepaid benefit costs ........................................... (16,620) (44,021) (20,471) Deferred assets and liabilities .............................................. 3,002 (6,427) 5,097 --------- --------- --------- $ (10,167) $ (93,207) $ (27,033) ========= ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest, net of amounts capitalized ......................................... $ 52,978 $ 45,896 $ 40,037 ========= ========= ========= Federal income taxes ......................................................... $ 46,984 $ 31,927 $ 30,874 ========= ========= ========= Noncash financing activities: Transfer of pipeline net assets from MCN......................................5 $ -- $ 17,008 $ -- ========= ========= =========
The notes to the consolidated financial statements are an integral part of this statement. 25 30 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES NATURE OF OPERATIONS MichCon is a public utility engaged in the distribution and transmission of natural gas in the state of Michigan. MichCon is subject to the accounting requirements of and rate regulation by the Michigan Public Service Commission (MPSC) with respect to the distribution and intrastate transportation of natural gas. The major services provided by MichCon are gas sales, end user transportation and intermediate transportation. MichCon serves more than 1.2 million residential, commercial and industrial customers. The Company is not dependent upon any one customer or group of customers. Its principal markets are located in the Detroit, Grand Rapids, Ann Arbor, Traverse City, and Muskegon metropolitan areas. MichCon's non-regulated operations are insignificant. MichCon is a wholly owned subsidiary of MCN Energy Group Inc. Less than half of MichCon's labor force is covered by collective bargaining agreements, with the earliest agreements set to expire in June 1998. Fifteen percent of the Company's labor force is covered under the agreements expiring in June 1998. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of MichCon and all of its subsidiaries. Investments in 50% or less owned entities have been accounted for under the equity method because MichCon has significant but not controlling influence over these entities. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior years' statements to conform with the 1997 presentation. REVENUES AND COST OF GAS MichCon accrues revenues for gas service provided but unbilled at month end. Annual gas cost recovery (GCR) proceedings before the MPSC permit MichCon to recover the prudent and reasonable cost of gas sold. Any overcollection or undercollection of costs, including interest, will be reflected in future rates. 26 31 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and includes amounts for labor, materials, overhead, non-depreciable base gas and an allowance for funds used during construction. Upon retirement, the cost of property, plant and equipment and net removal costs are charged to accumulated depreciation. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION MichCon capitalizes an allowance for both debt and equity funds used during construction in the cost of major additions to utility plant. The total amount capitalized was $3,188,000, $5,233,000 and $1,644,000 in 1997, 1996 and 1995, respectively. DEPRECIATION AND DEPLETION MichCon records depreciation for a major portion of its property, plant and equipment on the basis of straight-line rates prescribed by the MPSC. Unit of production depreciation and depletion is used for certain production and transmission property. Depreciation rates vary by class of property. The ratio of the provision for depreciation to the average cost of depreciable property was 4.1% in 1997 and 4.4% in 1996 and 1995. FINANCIAL INSTRUMENTS To manage interest rate exposure, MichCon and its subsidiaries engage in interest rate swaps that exchange fixed and variable rate interest payment obligations over the life of the agreements without the exchange of the underlying principal amounts. The difference to be paid or received on these swaps is accrued and recorded as an adjustment to interest expense over the life of the agreements. DEFERRED DEBT COSTS In accordance with MPSC regulations, MichCon defers reacquisition and unamortized issuance costs of reacquired long-term debt when such debt is refinanced. These costs are amortized over the term of the replacement debt. INCOME TAXES AND INVESTMENT TAX CREDIT Tax benefits amortizable to customers represents the net revenue equivalent of the difference in property-related accumulated deferred income taxes computed in accordance with SFAS No. 109, "Accounting for Income Taxes," as compared to the amounts previously reflected in setting utility rates. This amount is primarily due to current tax rates being lower than the rates in effect when the original deferred taxes were recorded and because of temporary differences, including accumulated investment tax credits, for which deferred income taxes were not previously recorded in setting utility rates. These net tax benefits are being amortized in accordance with the regulatory treatment over the life of the related plant, as the temporary differences reverse. Investment tax credits relating to property placed into service were deferred and are being credited to income over the life of the related property. 27 32 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONSOLIDATED STATEMENT OF CASH FLOWS MichCon considers all highly liquid investments, excluding restricted investments, purchased with a maturity of three months or less to be cash equivalents. 2. GAS IN INVENTORY Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31, 1997, the replacement cost exceeded the $40,201,000 LIFO cost by $170,240,000 and at December 31, 1996, the replacement cost exceeded the $67,910,000 LIFO cost by $240,442,000. MichCon's current GCR tariff provisions prevent MichCon from retaining any benefits from a lower cost of gas sold resulting from liquidating its LIFO inventory. MichCon's LIFO inventory balance was 64.8 Bcf and 73.6 Bcf as of December 31, 1997 and 1996, respectively. A portion of gas in underground storage used as a pressure base is included in "Property, Plant and Equipment" in the amount of $32,493,000 at December 31, 1997 and $32,792,000 at December 31, 1996. 3. CAPITALIZATION A. LONG-TERM DEBT MichCon issued long-term debt totaling $85,000,000 during 1997. Substantially all of the net utility properties of MichCon in the approximate amount of $1,200,000,000 are pledged as security for the payment of outstanding first mortgage bonds. During 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 December 31, 1997, $36,400,000 was outstanding at a weighted average interest rate 6.43%. In the second quarter of 1997, MichCon redeemed $5,000,000 of 9.50% first mortgage bonds and $12,000,000 of 9.75% unsecured notes. MichCon 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 for $12,000,000 of the outstanding $80,000,000 first mortgage bond due May 1, 2004. This redesignation reduced the cost of debt of this fixed rate bond from 8.25% to 7.73% for the six months ended December 31, 1997. 28 33 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) MichCon 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 year ended December 31, 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 year ended December 31, 1997. A subsidiary of MichCon has an interest rate swap agreement on the $15,840,000 outstanding balance of its project loan agreement at December 31, 1997, which effectively fixes the interest rate at 7.5% through February 2003. Maturities and sinking fund requirements during the next five years for long-term debt outstanding at December 31, 1997, are $26,560,000 in 1998, $57,360,000 in 1999, $26,960,000 in 2000, $26,560,000 in 2001, and $76,360,000 in 2002. B. CUMULATIVE PREFERRED AND PREFERENCE STOCK During January 1996, MichCon redeemed all of its outstanding Redeemable Cumulative Preferred Stock, $2.05 Series shares at the sinking fund redemption price of $25 per share. MichCon has 7,000,000 shares of $1 per share par value Redeemable Cumulative Preferred Stock authorized at December 31, 1997. MichCon has 4,000,000 shares of $1 per share par value Preference Stock authorized; however, no shares were outstanding at December 31, 1997. 4. CREDIT FACILITIES AND SHORT-TERM BORROWINGS MichCon maintains credit lines to 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. Both credit facilities expire in July 1998. MichCon usually issues commercial paper in lieu of an equivalent amount of borrowings under these lines of credit. Commercial paper outstanding at December 31, 1997 and 1996 totaled $236,740,000 and $238,251,000, respectively, at weighted average interest rates of 5.8% and 5.5%, respectively. This debt is classified as short-term based upon management's intent to repay it within one year. Fees are paid to compensate banks for lines of credit. During 1996, MichCon had a Trust Demand Note program which allowed MichCon to borrow up to $25,000,000 through March 1997. At December 31, 1996, borrowings of $25,000,000 were outstanding under this program at an interest rate of 5.9%. The Trust Demand Note program was not renewed in 1997. 5. TRANSFER OF SUBSIDIARIES In January 1996, MCN's Michigan pipeline operations were transferred, at book value, to MichCon in order to consolidate MCN's Michigan gathering pipeline activities within one business unit. Net assets transferred to MichCon totaled approximately $18,622,000 including cash of $1,614,000 and long-term debt of $17,600,000. The contribution from these pipeline operations to MichCon's consolidated net income was approximately $1,714,000 and $626,000 for the years ended 1997 and 1996, respectively. The pipeline operations have investments in certain partnerships. Outside partners have interests in these partnerships ranging from 17% to 54%. 29 34 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES A. GUARANTY A subsidiary of MichCon and an unaffiliated corporation have formed a series of partnerships engaged in the construction and development of a residential community on the Detroit riverfront (Harbortown). One of the partnerships obtained $12,000,000 of tax-exempt financing due June 2004 through the Michigan State Housing Development Authority. Both partners and their parent corporations have issued guaranties for the full amount of this financing and each parent corporation has agreed to reimburse the other for 50% of any payments made as a result of these guaranties. B. ENVIRONMENTAL MATTERS Prior to the 1940's when major natural gas pipelines became sufficient to meet MichCon's supply requirements, gas for heating and other uses was manufactured from processes involving coal, coke or oil. MichCon owns or previously owned 16 such former manufactured gas plant (MGP) sites. During the mid-1980's, MichCon conducted preliminary environmental investigations at these former MGP sites, and some contamination related to the by-products of gas manufacturing was discovered at each site. The existence of these sites and the results of the environmental investigations have been reported to the Michigan Department of Environmental Quality. None of these former MGP sites are on the National Priorities List prepared by the U.S. Environmental Protection Agency. MichCon is not involved in any administrative proceedings regarding these former MGP sites, but is currently remediating four of these sites. More extensive investigations are underway at four other former MGP sites. In 1984 MichCon established an $11,700,000 reserve for environmental investigation and remediation. During 1993, MichCon received MPSC approval of a cost deferral and rate recovery mechanism for investigation and remediation costs incurred at former MGP sites in excess of this reserve. MichCon employed outside consultants to evaluate remediation alternatives for these sites, to assist in estimating its potential liabilities and to review its archived insurance policies. The findings of these investigations indicate that the estimated total expenditures for investigation and remediation activities for these sites could range from $30,000,000 to $170,000,000 based on undiscounted 1995 costs. As a result of these studies, MichCon accrued an additional liability and a corresponding regulatory asset of $32,000,000 during 1995. MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon concluded settlement negotiations with certain carriers in 1996 and 1997 and has received payments from several carriers. In October 1997, MichCon filed suit against major nonsettling carriers seeking recovery of incurred costs and a declaratory judgment of the carriers' liability for future costs of environmental investigation and remediation costs at former MGP sites. 30 35 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During 1997, 1996, and 1995, MichCon spent $835,000, $900,000 and $2,100,000, respectively, investigating and remediating these former MGP sites. At December 31, 1997, the reserve balance is approximately $33,741,000, of which $1,741,000 is classified as current. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and, therefore, have an effect on MichCon's financial position and cash flows. However, 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 results of operations. C. COMMITMENTS MichCon has entered into long-term purchase and transportation contracts with various suppliers and producers. In general, prices under the purchase contracts are determined by formulas based on market prices. In 1998, MichCon has firm purchase commitments for approximately 124 Bcf of gas. The Company expects that sales will exceed its minimum purchase commitments. MichCon has long-term transportation contracts with various interstate pipeline companies which expire on various dates through the year 2011. The Company is committed to pay demand charges of approximately $53,000,000 during 1998 related to firm transportation agreements. These demand charges are recoverable through the GCR mechanism. Capital investments for 1998 are expected to approximate $200,000,000 and certain commitments have been made in connection therewith. D. OTHER MichCon receives a significant amount of heating assistance funding from the federal Low-Income Home Energy Assistance Program (LIHEAP). Congress increased the program's funding for the 1997 fiscal year to $1,000,000,000. The State of Michigan's share of LIHEAP funds was increased from $47,500,000 in fiscal year 1996 to $64,000,000 in 1997. During 1997, Congress approved a budget which provides for federal LIHEAP funding at $1,000,000,000 and $1,100,000,000 for fiscal years 1998 and 1999, respectively. A portion of any future increase or decrease in funding may impact MichCon's uncollectible accounts. 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. 31 36 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. REGULATORY MATTERS Regulatory Assets and Liabilities MichCon's operations are subject to the provisions SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result, several regulatory assets and liabilities are recorded in MichCon's financial statements. Regulatory assets represent costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent benefits which will flow through to customers as refunds or reduced rates. The following regulatory assets and liabilities were reflected in the Consolidated Statement of Financial Position as of December 31:
(Thousands of Dollars) 1997 1996 ------------------------------------------------------------------- ----------------- ------------------- Regulatory Assets: Deferred postretirement benefit costs (Note 9b)................ $ - $ 4,863 Unamortized loss on retirement of debt......................... 10,181 9,237 Accrued gas cost recovery revenues............................. 12,862 27,672 Environmental costs (Note 6b).................................. 27,699 28,233 Conservation program costs.................................... - 2,908 Other ......................................................... 986 1,681 --------------- -------------- $ 51,728 $ 74,594 =============== ============== Regulatory Liabilities: Tax benefits amortizable to customers.......................... $ 122,922 $ 116,313 Refunds payable................................................ - 405 --------------- -------------- $ 122,922 $ 116,718 =============== ==============
MichCon currently has regulatory precedents and orders in effect which provide for the probable recovery or refund of its regulatory assets and liabilities. Future regulatory changes or changes in the competitive environment could result in MichCon discontinuing the application of SFAS No. 71 for all or part of its business and require the write-off of the portion of any regulatory asset or liability which was no longer probable of recovery or refund. If MichCon were to have discontinued the application of SFAS No. 71 for all of its operations as of December 31, 1997, it would have had an extraordinary, noncash increase to net income of approximately $46,000,000. Management believes that evidence currently available supports the continued application of SFAS No. 71. 8. CAPITAL AND OPERATING LEASES MichCon leases certain property (principally an office building, a warehouse and a parking structure) under lease arrangements expiring at various dates to 2006, with renewal options extending beyond that date. Portions of the office building and parking structure are subleased to various tenants. 32 37 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The gross amount of assets recorded under capital leases and the related accumulated depreciation at December 31, 1997, are $26,887,000 and $13,146,000, respectively. The gross amount of assets and related accumulated depreciation at December 31, 1996, were $26,887,000 and $11,719,000, respectively. In January 1998 MichCon purchased the office building, ending its long-term capital lease obligation existing at December 31, 1997. As a result, the long-term lease obligation of $6,818,000 was reclassified as a current capital lease obligation at December 31, 1997; therefore, no future minimum lease payments associated with the building lease are disclosed. Operating lease payments for the years ended December 31, 1997, 1996, and 1995 consist of $2,015,000, $2,239,000 and $2,378,000, respectively. 9. RETIREMENT BENEFITS AND TRUSTEED ASSETS A. PENSION PLAN BENEFITS MichCon participates in separate defined benefit retirement plans for union and nonunion employees. The plans are noncontributory, cover substantially all employees and provide for normal retirement at age 65, but with the option to retire earlier or later under certain conditions. The plans provide pension benefits that are based on the employee's compensation and years of credited service. MichCon's funding policy is to fund each year's actuarially determined funding requirements of the plans, subject to regulations issued by the Internal Revenue Service. Currently, these plans meet the full funding limitations of the Internal Revenue Code. Accordingly, no contributions for the 1997, 1996 or 1995 plan years were made and none are expected to be made for the 1998 plan year. Net pension cost for these plans included the following components:
(Thousands of Dollars) 1997 1996 1995 ------------------------------------------------------ ------------- ------------- -------------- Service cost - benefits earned during the period...... $ 9,406 $ 10,400 $ 8,735 Interest cost on projected benefit obligation......... 34,408 33,262 31,197 Net amortization and deferral......................... 66,915 15,675 64,435 Actual return on plan assets.......................... (138,863) (78,260) (121,508) ------------- ------------- -------------- Net pension credit.................................... $ (28,134) $ (18,923) $ (17,141) ============= ============= ==============
MichCon settled a portion of its pension liabilities by paying lump sum amounts to employees who retired or otherwise terminated employment. A gain of $3,250,000 was recognized in 1997 related to the settlement of these liabilities. 33 38 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table sets forth a reconciliation of the funded status of the plans and the amounts recorded as prepaid pension cost in the Consolidated Statement of Financial Position:
(Thousands of Dollars) 1997 1996 ----------------------------------------------------------------- -------------- ------------ Measurement date................................................... OCTOBER 31 October 31 Actuarial present value of: Accumulated vested benefit obligation............................ $ 365,336 $ 349,809 Accumulated nonvested benefit obligation......................... 30,929 27,280 -------------- ------------ Total accumulated benefit obligation........................... $ 396,265 $ 377,089 ============== ============ Projected benefit obligation for service rendered to date.......... $ 465,098 $ 430,100 Plan assets at measurement date.................................... 814,548 707,987 -------------- ------------ Plan assets in excess of projected benefit obligation.............. 349,450 277,887 Unrecognized net asset at transition............................... (34,342) (39,702) Unrecognized prior service cost.................................... (1,439) (1,602) Unrecognized net gain............................................. (237,923) (192,221) -------------- ------------ Prepaid pension cost recognized in the Consolidated Statement of Financial Position.................................. $ 75,746 $ 44,362 ============== ============
In determining the actuarial present value of the projected benefit obligation, the weighted average discount rate was 7.5% for 1997 and 8.0% for 1996. The rate of increase in future compensation levels used was 5% for 1997 and 1996. The expected long-term rate of return on plan assets, which are invested primarily in equity and fixed income securities, was 9.25% for 1997 and 1996, and 9.0% for 1995. MichCon also sponsors several defined contribution pension plans. Participation in one of these plans is available to substantially all union and non-union employees. Company contributions to these plans are based upon salary and the matching of employee contributions up to certain limits. The cost of these plans was $5,200,000 in 1997, $5,300,000 in 1996, and $5,200,000 in 1995. B. OTHER POSTRETIREMENT BENEFITS MichCon provides certain health care and life insurance benefits for retired employees who may become eligible for these benefits if they reach retirement age while working for MichCon. Upon adoption in 1993 of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," MichCon deferred postretirement costs in excess of claims paid (including the amortization of the initial transition obligation) until January 1994 when new rates to recover such costs became effective. The deferred costs were amortized over 1994 through 1997. 34 39 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) MichCon's policy is to fund its postretirement benefit costs to the extent such amounts are recognized in rates. Separate qualified Voluntary Employees' Beneficiary Association (VEBA) trusts exist for union and nonunion employees. Funding to the VEBA trusts totaled $6,500,000, $41,600,000 and $27,300,000 in 1997, 1996 and 1995, respectively. The expected weighted average long-term rate of return on plan assets, which are invested in life insurance policies, equity securities and fixed income securities, was 9.1% for 1997 and 1996. Net postretirement cost for the years ended December 31, includes the following components:
(Thousands of Dollars) 1997 1996 1995 -------------------------------------------------------- ------------- ------------- ------------ Service cost - benefits earned during the period....... $ 4,094 $ 4,259 $ 5,017 Interest cost on accumulated benefit obligation........ 17,430 16,395 18,315 Amortization of transition obligation.................. 13,391 13,391 13,528 Net amortization and deferral.......................... 10,227 (1,915) 7,445 Actual (return) loss on plan assets ................... (26,125) (12,230) (15,634) ------------- ------------- ------------ 19,017 19,900 28,671 Regulatory adjustment.................................. 4,863 7,509 7,515 ------------- ------------- ------------ Net postretirement cost................................ $ 23,880 $ 27,409 $ 36,186 ============= ============= ============
The following table sets forth a reconciliation of the funded status of the plans and the amounts recorded as accrued postretirement cost in the Consolidated Statement of Financial Position:
(Thousands of Dollars) 1997 1996 ------------------------------------------------------------------- -------------- ------------- Measurement Date................................................... OCTOBER 31 October 31 Accumulated postretirement benefit obligation: Retirees......................................................... $ 131,576 $ 138,753 Fully eligible active participants............................... 30,343 25,346 Participants with less than 30 years of service.................. 61,205 53,784 ------------- ------------ 223,124 217,883 Plan assets at measurement date.................................... 151,645 126,282 ------------- ------------ Accumulated postretirement benefit obligation in excess of plan assets................................................... (71,479) (91,601) Unrecognized transition obligation................................. 200,728 214,119 Unrecognized net gain.............................................. (125,705) (109,625) Contributions and adjustments made after measurement date.......... 6,500 7,052 ------------- ------------ Accrued postretirement asset (liability) recognized in the Consolidated Statement of Financial Position..................... $ 10,044 $ 19,945 ============= ============
35 40 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The rate at which health care costs are assumed to increase is the most significant factor in establishing MichCon's postretirement benefit obligation. MichCon used a rate of 6.5% in 1997, and a rate that gradually declines each year until it stabilizes at 5% in 2003. A one percentage point increase in the assumed rate would increase the accumulated postretirement benefit obligation at December 31, 1997 by 12.2% and increase the sum of the service cost and interest cost by 14.7% for the year then ended. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 8% for 1997 and 1996, respectively. C. GRANTOR TRUST In December 1997, MichCon established a Grantor Trust and contributed $31,300,000 to the trust, which invested such proceeds in fixed income securities. By funding the Grantor Trust and the VEBA trusts (Note 9b), MichCon is complying with MPSC directives that it fund various trusts to the extent its postretirement benefit costs to are recognized in rates. Subject to MPSC notification, MichCon can revoke the Grantor Trust, and employees and retirees have no right, title or interest in the assets of the trust. MichCon classifies the Grantor Trust as available-for-sale and as such records it at fair value with changes in the fair value recorded in Common Shareholder's Equity. 10. FINANCIAL INSTRUMENTS MichCon has estimated the fair value of its financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in developing the estimates of fair value presented herein; therefore, the values are not necessarily indicative of the amounts that MichCon could realize in a current market exchange. The carrying amounts of certain financial instruments such as customer deposits, notes payable and notes receivable and advances are assumed to approximate the fair value due to the short-term nature of these items. The carrying amount and the estimated fair value of other financial instruments consist of the following:
(Thousands of Dollars) 1997 1996 - ------------------------------------------------- ------------------------------- ----------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value -------------- --------------- ------------- -------------- Assets: Grantor Trust.................................. 31,300 31,300 - - Liabilities and Shareholders' Equity: Long-term debt, excluding capital lease obligations.................................... 611,763 651,980 536,561 567,011 Derivative Financial Instruments: Interest rate swap agreements with unrealized gains........................ 4,048 1,154 with unrealized losses....................... 415 294
36 41 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The estimated fair values are determined based on the following: Grantor Trust - carrying amount is assumed to approximate market at December 31, 1997 as the investment was purchased on December 31, 1997. Long-term debt - interest rates available to MichCon for issuance of debt with similar terms and remaining maturities. Interest rate swaps - the estimated amount that MichCon would receive or pay to terminate the swap agreements, taking into account current interest rates and the creditworthiness of the swap counterparties and the fact that there is no similar market for the instruments. Guaranty - management is unable to practicably estimate the fair value of the Harbortown guaranty (Note 6a) due to the nature of the related party transaction and the fact there is no similar market for the instrument. Other long-term investments - management is unable to practicably estimate the fair value of the various other long-term investments because there is no readily determinable market for the investments. The fair value estimates presented herein are based on information available to management as of December 31, 1997 and 1996. Management is not aware of any subsequent factors that would significantly affect the estimated fair value amounts. 11. RELATED PARTY TRANSACTIONS MichCon enters into transactions with affiliated companies to sell transportation and storage services. MichCon purchased computer operations services from an affiliate that was sold in June 1996. Under a service agreement with its parent company, MichCon receives various tax, financial and legal services. The following is a summary of transactions with the affiliated companies:
(Thousands of Dollars) 1997 1996 1995 -------------------------------------------------------------- ------------- ------------- ------------- Storage and transportation sales............................. $ 14,744 $ 14,400 $ 11,100 Purchase of computer operations services..................... - 6,800 15,300 Corporate expenses........................................... 18,546 15,700 15,561
MichCon's accounts receivable from and accounts payable to affiliated companies were $20,990,000 and $25,863,000 at December 31, 1997, respectively. 37 42 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. SUMMARY OF INCOME TAXES
(Thousands of Dollars) 1997 1996 1995 ---------------------------------------------------------------- --------- --------- ----------- Effective Federal Income Tax Rate.............................. 36.4 % 33.8 % 36.4 % =========== =========== ============= Income taxes consist of: Current provision........................................... $ 37,901 $ 31,318 $ 22,873 Deferred provision.......................................... 9,607 12,018 19,988 Amortization of investment tax credits...................... (1,843) (1,850) (1,857) ----------- ----------- ------------- Total income taxes............................................. $ 45,665 $ 41,486 $ 41,004 =========== =========== ============= Reconciliation between statutory and actual income taxes: Statutory federal income taxes at a rate of 35%................ $ 43,640 $ 42,465 $ 39,454 Adjustments to federal tax expense: Excess of book over tax depreciation ....................... 5,301 6,367 7,365 Adjustments to taxes provided in prior periods.............. 300 (3,368) (1,343) Amortization of investment tax credits...................... (1,843) (1,850) (1,857) Other - net................................................. (1,733) (2,128) (2,615) ----------- ----------- ------------- Total income taxes............................................. $ 45,665 $ 41,486 $ 41,004 =========== =========== =============
38 43 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements. Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets or liabilities. The tax effect of temporary differences that gave rise to MichCon's deferred tax assets and liabilities consisted of the following:
(Thousands of Dollars) 1997 1996 ------------------------------------------------------------------- ---------------- ------------- Deferred tax assets: Employee Benefits............................................. $ 9,391 $ 9,323 Uncollectibles................................................ 4,671 6,130 Vacation Accrual.............................................. 3,442 3,355 Other......................................................... 2,283 5,613 ---------------- ------------- Total deferred tax assets........................................ 19,787 24,421 ---------------- ------------- Deferred tax liabilities: Depreciation and other property related basis differences, net........................................... 58,215 62,443 Pensions...................................................... 24,564 13,926 Property taxes................................................ 13,313 11,040 Gas cost recovery undercollection............................. 4,502 8,455 Postretirement benefit........................................ 3,515 9,186 Other......................................................... 9,795 9,236 ---------------- ------------- Total deferred tax liabilities................................... 113,904 114,286 ---------------- ------------- Net deferred tax liability....................................... 94,117 89,865 Less: Net deferred tax liability-current....................... 10,212 13,342 ---------------- ------------- Net deferred tax liability-noncurrent............................ $ 83,905 $ 76,523 ================ =============
MichCon is part of the consolidated federal income tax return of MCN. The federal income tax expense for MichCon and its subsidiaries is determined on an individual company basis with no allocation of tax benefits or expenses from other affiliates of MCN. 39 44 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED) 13. STOCK INCENTIVE PLAN MCN's Stock Incentive Plan authorizes the use of performance units, restricted stock or other stock-related awards to key employees, primarily management. MichCon's current policy is to issue performance units which encourage a strategic focus on long-term performance and have a high employee retention value. The performance units are denominated in shares of MCN common stock and issued to employees based on total shareholder return over a six year period, as compared to a group of peer companies. The initial number of performance units granted is based on total shareholder return during the previous three year period. Participants receive dividend equivalents on the units granted. The initial grants will be adjusted upward or downward based on total shareholder return for the subsequent three-year period. The final awards are then payable in shares of MCN common stock or deferred performance units. Participants must retain fifty percent of any common shares paid until certain stock ownership guidelines are met. The deferred units must be retained by the participants until their employment with MichCon ceases. During February 1997, MichCon granted 102,750 performance units with a weighted-average grant date fair value of $31.00 per unit. During February 1996 and 1995, MichCon granted 122,669 and 191,500 performance units, respectively. In May 1996, MichCon modified its 1995 performance units granted to allow limited acceleration in the vesting for a portion of the awards. As a result, the 1995 awards have been accounted for under the recognition provisions of SFAS No. 123 from the date of modification. The weighted average fair value at the modification date for 1995 awards was $24.875 per unit. Stock-based compensation cost recognized during 1997, 1996 and 1995 for all awards outstanding totaled $7,430,000, $6,885,000, and $7,919,000, respectively. At December 31, 1997, there were 2,530,148 MCN shares available to be issued under the Stock Incentive Plan. 40 45 INDEPENDENT AUDITORS' REPORT Michigan Consolidated Gas Company: We have audited the accompanying consolidated statements of financial position of Michigan Consolidated Gas Company and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and capitalization for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Michigan Consolidated Gas Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information shown therein. As discussed in Note 13 to the consolidated financial statements, in 1996 the Company adopted Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." DELOITTE & TOUCHE LLP Detroit, Michigan February 12, 1998 41 46 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES SUPPLEMENTARY FINANCIAL INFORMATION QUARTERLY OPERATING RESULTS (UNAUDITED) Due to the seasonal nature of MichCon's business, revenues and net income tend to be higher in the first and fourth quarters of the calendar year.
First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------- -------------- -------------- -------------- -------------- (Thousands of Dollars) 1997 Operating Revenue............................................. $527,445 $209,800 $119,114 $397,320 Operating Income (loss)....................................... 106,772 14,810 (11,369) 64,150 Net Income (loss)............................................. 62,193 931 (16,036) 31,932 Net Income (loss) applicable to common stock.................. 62,193 931 (16,036) 31,932 1996 Operating Revenues............................................ $531,392 $222,327 $117,251 $387,815 Operating Income (loss)....................................... 120,904 11,690 (18,630) 54,037 Net Income (loss)............................................. 70,040 851 (18,437) 27,388 Net Income (loss) applicable to common stock.................. 70,022 851 (18,437) 27,388
42 47 SCHEDULE II MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions ------------------------------ Provisions charged to Deductions ------------------------------ for Purposes Balance at Utility Plant/ for Which the Balance Beginning Regulatory Reserves Were at End Description of Period Income Asset Provided of Period - --------------------------------------------------- ---------------- ---------- ------------ --------------- --------- YEAR ENDED DECEMBER 31, 1997 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts ................ $17,707 $ 21,680 $ -- $24,372 $15,015 ======= ======== ======== ======= ======= Reserve included in Current Liabilities - Other and in Accrued Environmental Costs in Consolidated Statement of Financial Position: Environmental testing .......................... $34,576 $ -- $ -- $ 835 $33,741 ======= ======== ======== ======= ======= Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages ......................... $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838 ======= ======== ======== ======= ======= YEAR ENDED DECEMBER 31, 1996 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts ................ $13,250 $ 29,052 $ -- $24,595 $17,707 ======= ======== ======== ======= ======= Reserve included in Current Liabilities - Other in Consolidated Statement of Financial Position: Environmental testing .......................... $35,451 $ -- $ -- $ 875 $34,576 ======= ======== ======== ======= ======= Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages ......................... $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182 ======= ======== ======== ======= ======= YEAR ENDED DECEMBER 31, 1995 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts ................ $15,322 $ 15,367 $ -- $17,439 $13,250 ======= ======== ======== ======= ======= Reserve included in Current Liabilities - Other in Consolidated Statement of Financial Position: Environmental testing .......................... $ 5,540 $ -- $ 32,000 $ 2,089 $35,451 ======= ======== ======== ======= ======= Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages ......................... $ 8,402 $ 1,026 $ 686 $ 2,101 $ 8,013 ======= ======== ======== ======= =======
43 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 11. EXECUTIVE COMPENSATION Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). 44 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 10-K (A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT: 1. For a list of the financial statements included herein, see the section titled "Financial Statements and Supplementary Data", page 21 in Part II, Item 8 of this Report. 2. For the financial statement schedule included herein, see the section titled "Financial Statements and Supplementary Data", page 21 in Part II, Item 8 of this Report. Schedules other than those referred to above are omitted as not applicable or not required, or the required information is shown in the financial statements or notes thereto. 3. Exhibits, including those incorporated by reference:
Exhibit No. Description ------- ----------- 3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31, 1993 Form 10-Q). 3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q). 4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944 (Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form 8-K); Thirty-second Supplemental Indenture, dated January 1, 1993 (Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture, dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093); and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit 4-2 to Registration Statement No. 333-16285; Note - MichCon hereby agrees to furnish to the SEC, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by MichCon. 10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration Statement No. 33-21930-99). 10-2 Form of Employment Agreement (Exhibit 99-2 to MCN's June 30, 1997 Form 10-Q). 10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6 to MCN's 1993 Form 10-K). 10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to MCN's March 31, 1995 Form 10-Q). 10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to MCN's September 30, 1996 Form 10-Q).
45 50
Exhibit No. Description - ------- ----------- 10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to MCN's September 30, 1996 Form 10-Q). 10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30, 1996 Form 10-Q). 10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to MCN's 1996 Form 10-K). 10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's 1996 Form 10-K). 12-1 Computation of Ratio of Earnings to Fixed Charges.* 23-1 Independent Auditors' Consent - Deloitte & Touche LLP.* 24-1 Powers of Attorney.* 27-1 Financial Data Schedule.* 99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 99-1 to MCN's March 31, 1997 Form 10-Q). 99-2 MCN Energy Group Savings and Stock Ownership Plan, as amended (Exhibit 99-22 to MCN's March 31, 1997 Form 10-Q).
(B) REPORTS ON FORM 8-K: None. - -------------------------- * Indicates document filed herewith. References are to MichCon (File No. 1-7310) for MichCon documents incorporated by reference. References are to MCN (File No. 1-10070) for MCN documents incorporated by reference. 46 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHIGAN CONSOLIDATED GAS COMPANY (Registrant) By: /s/Howard L. Dow III --------------------------- Howard L. Dow III SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER FEBRUARY 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Title Date ----- ---- * Director and Chairman February 27, 1998 Alfred R. Glancy III * Director, President and Chief February 27, 1998 Stephen E. Ewing Executive Officer /s/Howard L. Dow III Director, Senior Vice President February 27, 1998 -------------------- and Chief Financial Officer Howard L. Dow III * Director, Senior Vice President, February 27, 1998 -------------------- Business Development Carl J. Croskey * Director February 27, 1998 -------------------- William K. McCrackin * Director February 27, 1998 -------------------- Daniel L. Schiffer * Director, Senior Vice President, February 27, 1998 -------------------- Process Development John E. vonRosen
*By: /s/ Howard L. Dow III --------------------- Howard L. Dow III Attorney-in-Fact 47 52 INDEX OF EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31, 1993 Form 10-Q). 3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q). 4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944 (Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirteith Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form 10-K); Thirty-third Supplemental Indenture, dated January 1, 1993 (Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture, dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093); and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit 4-2 to Registration Statement No. 333-16285; Note - MichCon hereby agrees to furnish to the SEC, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by MichCon. 10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration Statement No. 33-21930-99). 10-2 Form of Employment Agreement (Exhibit 99-2 to MCN's June 30, 1997 Form 10-Q). 10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6 to MCN's 1993 Form 10-K). 10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to MCN's March 31, 1995 Form 10-Q). 10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to MCN's September 30, 1996 Form 10-Q). 10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to MCN's September 30, 1996 Form 10-Q). 10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30, 1996 Form 10-Q). 10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to MCN's 1996 Form 10-K). 10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's 1996 Form 10-K). 12-1 Computation of Ratio of Earnings to Fixed Charges.* 23-1 Independent Auditors' Consent - Deloitte & Touche LLP.* 24-1 Powers of Attorney.* 27-1 Financial Data Schedule.* 99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 99-1 to MCN's March 31, 1997 Form 10-Q). 99-2 MCN Energy Group Savings and Stock Ownership Plan, as amended (Exhibit 99-22 to MCN's march 31, 1997 Form 10-Q). - ---------------- * Indicates document filed herewith. References are to MichCon (File No. 1-7310) for MichCon documents incorporated by reference. References are to MCN (File No. 1-10070) for MCN documents incorporated by refernece. EX-12.1 2 EXHIBIT 12.1 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 December 31, 1997 December 31, 1996 December 31, 1995 ------------------- ------------------- ------------------- EARNINGS AS DEFINED (1) Net Income ................................. $125,630 $122,239 $112,727 Fixed charges .............................. 57,905 53,831 45,637 -------- -------- -------- Earnings as defined ...................... $183,535 $176,070 $158,364 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt ................. $ 47,024 $ 43,163 $ 35,820 Interest on other borrowed funds ........... 8,664 8,012 7,053 Amortization of debt discounts, premium and expense .............................. 1,032 1,081 996 Interest implicit in rentals (2) ........... 1,185 1,575 1,768 -------- -------- -------- Fixed charges as defined ................. $ 57,905 $ 53,831 $ 45,637 ======== ======== ======== Ratio of Earnings to Fixed Charges ......... 3.17 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-23.1 3 EXHIBIT 23.1 1 EXHIBIT 23-1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-16285 on Form S-3 of Michigan Consolidated Gas Company (the "Company"), of our report dated February 12, 1998 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's adoption of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation"), appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Detroit, Michigan February 27, 1998 EX-24.1 4 EXHIBIT 24.1 1 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Stephen E. Ewing and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ Alfred R. Glancy III ------------------------ Alfred R. Glancy III 2 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ Stephen E. Ewing ------------------------ Stephen E. Ewing 3 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ William K. McCrackin ------------------------ William K. McCrackin 4 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy, III and Stephen E. Ewing, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ Howard L. Dow III ------------------------ Howard L. Dow III 5 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ Carl J. Croskey ------------------------ Carl J. Croskey 6 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ Daniel L. Schiffer ------------------------ Daniel L. Schiffer 7 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Howard L. Dow III, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1997, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day of February, 1998. /s/ John E. vonRosen ------------------------ John E. vonRosen EX-27.1 5 EXHIBIT 27.1
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. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 14,353 0 210,677 15,015 40,201 453,162 2,790,352 1,322,392 2,136,336 569,687 617,107 0 0 10,300 605,724 2,136,336 0 1,253,679 0 1,079,316 1,346 20,868 54,190 124,685 45,665 70,020 0 0 0 79,020 0 0
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