-----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, COX2T4qQIw9SjX2wFZkae8XvrwH1OOvPajyDt0mofSF1wPhpQgTvyBlaIrlZQSlJ 1KaBzyyRc2WPHRM5oROOyw== 0000950124-98-004491.txt : 19980817 0000950124-98-004491.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950124-98-004491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHIGAN CONSOLIDATED GAS CO /MI/ CENTRAL INDEX KEY: 0000065632 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 380478040 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07310 FILM NUMBER: 98688548 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-Q 1 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM______________ TO _______________ COMMISSION FILE NUMBER 1-7310 MICHIGAN CONSOLIDATED GAS COMPANY (Exact name of registrant as specified in its charter) MICHIGAN 38-0478040 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 GRISWOLD STREET, DETROIT, MICHIGAN 48226 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 313-965-2430 NO CHANGES (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of each of the registrant's classes of common stock, as of July 31, 1998: Common Stock, par value $.01 per share: 10,300,000 ================================================================================ 2 INDEX TO FORM 10-Q FOR QUARTER ENDED JUNE 30, 1998 PAGE NUMBER ------ COVER........................................................... i INDEX........................................................... ii PART I - FINANCIAL INFORMATION Item 1. Financial Statements................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 1 PART II - OTHER INFORMATION Item 1. Legal Proceedings...................................... 12 Item 6. Exhibits and Reports on Form 8-K....................... 12 SIGNATURE....................................................... 14 3 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Earnings increased $2.1 million, $1.6 million and $8.5 million for the 1998 quarter, six- and twelve-month periods, respectively. Earnings reflect significantly lower operating costs as well as continued growth in intermediate transportation revenues. These improvements more than offset lower gross margins resulting from reduced gas sales and end user transportation deliveries, which were due to warmer weather.
- ------------------------------------------------------------------------------------------------------ EARNINGS COMPONENTS (IN MILLIONS) COMPARING 1998 TO 1997 Quarter Six Months Twelve Months ------- ---------- ------------- $ Change % Change $ Change % Change $ Change % Change -------- -------- -------- -------- -------- -------- Operating Revenue .............. $ (37.0) (17.6) $(135.2) (18.3) $ (123.9) (10.0) Cost of Gas .................... (25.5) (30.7) (111.2) (28.8) (103.5) (16.6) Gross Margin ................... (11.5) (9.1) (24.0) (6.9) (20.4) (3.3) Operation and Maintenance ...... (7.5) (10.9) (19.4) (13.5) (34.6) (11.6) Depreciation and Depletion ..... (2.9) (11.1) (6.0) (11.5) (3.2) (3.2) Property and Other Taxes ....... (2.2) (13.6) (2.7) (7.9) (4.0) (6.5) Other Income and Deductions .... (1.7) (13.3) 0.5 1.8 1.4 2.9 Income Tax Provision ........... 0.8 65.6 2.0 6.1 11.5 31.8 Net Income ..................... 2.1 223.7 1.6 2.5 8.5 11.8 - ------------------------------------------------------------------------------------------------------
GROSS MARGIN Gross margin (operating revenues less cost of gas) decreased in the 1998 quarter, six- and twelve-month periods, reflecting lower gas deliveries resulting from significantly warmer weather. These declines were partially offset by increased revenues from intermediate transportation and gas-related services. EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Quarter Six Months Twelve Months ------- ---------- ------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- Percentage Colder (Warmer) than Normal ................... (24.8)% 21.9% (20.1)% 1.9% (12.9)% 2.0% Increase (Decrease) from Normal in: Gas Markets (Bcf) ......... (6.1) 4.6 (25.3) 1.5 (26.2) 3.8 Net Income (Millions) .... $(5.3) $4.1 $(22.0) $1.3 $(22.8) $3.4 - ------------------------------------------------------------------------------------------------------
1 4 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gas sales and end user transportation revenues in total decreased $42.7 million, $151.5 million and $149.2 million in the 1998 quarter, six- and twelve-month periods, respectively. The decrease in revenues for the 1998 quarter is due primarily to reduced gas sales as a result of warmer weather, partially offset by higher prices to recover gas costs. Weather for the 1998 quarter was over 40% warmer than the equivalent 1997 period. The decrease in revenues for the 1998 six- and twelve-month periods is due primarily to reduced gas sales as a result of warmer weather, as well as lower prices required to recover gas costs. End user transportation deliveries also declined in all three 1998 periods; however, revenues remained flat in the twelve-month period as a result of a slight increase in the average transportation rate.
- --------------------------------------------------------------------------------------------------------------------------- Quarter Six Months Twelve Months ------- ---------- ------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- GAS MARKETS ($ MILLIONS) Gas Sales .......................... $ 123.6 $ 165.2 $ 490.5 $ 640.0 $ 913.2 $ 1,062.4 End User Transportation ............ 18.2 19.3 43.2 45.2 82.5 82.5 Intermediate Transportation ........ 15.9 13.3 33.8 28.1 60.9 53.9 Other .............................. 15.1 12.0 34.5 23.9 61.8 43.5 --------- --------- --------- ---------- ---------- ---------- $ 172.8 $ 209.8 $ 602.0 $ 737.2 $ 1,118.4 $ 1,242.3 --------- --------- --------- ---------- ---------- ---------- GAS MARKETS (IN BCF) Gas Sales ......................... 24.2 34.7 102.8 128.0 180.6 209.4 End User Transportation ........... 31.0 32.7 73.4 77.0 141.4 144.3 Intermediate Transportation ....... 148.4 141.6 296.9 282.2 601.1 551.3 --------- --------- --------- ---------- ---------- ---------- 203.6 209.0 473.1 487.2 923.1 905.0 --------- --------- --------- ---------- ---------- ---------- - ---------------------------------------------------------------------------------------------------------------------------
Intermediate transportation revenues increased for the 1998 quarter, six- and twelve-month periods by $2.6 million, $5.7 million and $7.0 million, respectively, due in part to increased deliveries and increased fees generated from the transfer of gas title among and between intermediate transportation service users and various gas owners. The increase in intermediate transportation deliveries for all three periods reflects additional Antrim gas volumes transported for Michigan gas producers and brokers. In December 1997, MichCon purchased a pipeline to expand the transportation capacity of its northern Michigan gathering system. This expansion made possible an increase of 16.6 Bcf in volumes transported through June 1998. Although volumes have increased significantly, profit margins on intermediate transportation services are considerably less than margins on gas sales or end user transportation services. Other operating revenues increased for all three 1998 periods due in part to an increase in gas-related services. Also affecting the comparison to the 1997 periods are unfavorable adjustments for energy conservation revenues in the 1997 periods resulting from the discontinuance of MichCon's energy conservation programs. COST OF GAS Cost of gas is affected by variations in sales volumes and cost of purchased gas as well as related transportation costs. Under the existing 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 had little effect on gross margins. 2 5 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cost of gas sold decreased in all three 1998 periods due primarily to lower sales volumes resulting from warmer weather. The decrease in the 1998 quarter was partially offset by higher market prices paid of $.19 (7.56%) per thousand cubic feet of gas sold. Additionally, cost of gas sold decreased in the 1998 six- and twelve-month periods due to reductions in the market prices paid of $.31 (9.9%) and $.07 (2.2%) per thousand cubic feet of gas sold, respectively. OPERATION AND MAINTENANCE Operation and maintenance expenses decreased in all 1998 periods, reflecting lower uncollectible gas accounts expense and lower benefit costs, primarily pension and retiree healthcare costs. MichCon implemented an early retirement program in the first quarter of 1998 which reduced its net workforce by approximately 150 employees (5%). The cost of the program and the related savings will not have a material impact on 1998 net income. However, it is expected that the results of the program will contribute to lower operating costs in future years. As discussed in MichCon's 1997 Annual Report on Form 10-K, MichCon receives a significant amount of its heating assistance funding through Michigan Home Heating Credits, which are funded almost exclusively by the federal Low Income Home Energy Assistance Program (LIHEAP). While Congress increased LIHEAP funding to $1.1 billion for the fiscal year ending September 30, 1998, the U.S. House of Representatives' Appropriations Committee in July 1998, voted to eliminate funding for the program for the 1999 fiscal year, which begins October 1, 1998. The full House is expected to consider the Labor-Health & Human Services-Education funding bill in the third quarter of 1998. In contrast to the House Appropriations Committee, the U.S. Senate Labor and Human Resources Committee unanimously voted to reauthorize LIHEAP through 2004 at a funding level of $2.0 billion annually. In recent years, proposed reductions to LIHEAP funding have been repeatedly defeated. The Company is working with legislators and others to maintain the LIHEAP funding and is optimistic that it will ultimately be continued. If funding levels are significantly reduced, the Company will take steps to minimize the impact on its customers and its earnings. Any future changes in funding levels may impact MichCon's uncollectible gas accounts expense. DEPRECIATION AND DEPLETION The decrease in depreciation and depletion for all three 1998 periods reflects lower depreciation rates for MichCon's utility property, plant and equipment, which became effective January 1, 1998. Depreciation on higher plant balances partially offset the effect of the lower rates. PROPERTY AND OTHER TAXES Property and other taxes decreased in the 1998 periods reflecting lower property taxes based on the Company's pending appeals of its personal property tax assessments as discussed in MichCon's 1997 Annual Report on Form 10-K. The decrease in the 1998 twelve-month period was partially offset by higher Michigan single business taxes. OTHER INCOME AND DEDUCTIONS Other income and deductions decreased in the 1998 quarter due primarily to an increase in the allowance for funds used during construction and a gain from the sale of land. The increase in the six-and twelve-month periods is due primarily to additional interest expense on long-term debt required to finance capital investments. 3 6 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAXES Income taxes increased for the 1998 quarter, six- and twelve months periods as a result of higher pre-tax earnings. Income tax comparisons for the six- and twelve-month periods were also affected by a 1998 provision for tax issues and by amounts recorded in the 1997 periods for the favorable resolution of prior years' tax issues and tax credits. CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES MichCon's cash flow from operating activities totaled $286.6 million for the 1998 six-month period, increasing $12.9 million from the comparable 1997 period. The increase was due primarily to lower working capital requirements resulting from the effects of warmer weather in 1998. Operating cash flows were sufficient for the payment of all capital expenditures. FINANCING ACTIVITIES Cash and cash equivalents increased $5.7 million during the 1998 six-month period. Cash and cash equivalents normally increase and short-term debt is reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the latter part of the year, cash and cash equivalents normally decrease as funds are used to finance increases in gas inventories and customer accounts receivable. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper that is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings of up to $150 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility, both of which were renewed in July 1998. During the first six months of 1998, MichCon repaid $239.2 million of commercial paper, leaving no borrowings outstanding under this program at June 30, 1998. In June 1998, MichCon issued long term debt generating net proceeds of $153.1 million. The proceeds were used to retire first mortgage bonds, fund future capital expenditures and for general corporate purposes. During the 1998 quarter, MichCon redeemed through a tender offer $89.7 million of long-term debt and repaid $20 million of a first mortgage bond on its stated maturity date. During June 1998, MichCon filed a new shelf registration statement with the Securities and Exchange Commission allowing for the issuance of an additional $185 million in long term debt. As of June 30, 1998, MichCon's capacity under its shelf registration totaled $250 million. INVESTING ACTIVITIES MichCon's capital expenditures totaled $74.5 million during the 1998 six-month period and are anticipated to be approximately $200 million for the year. Capital expenditures primarily represent the construction of transportation pipelines, the construction of new distribution lines to attach new customers, new computer systems and improvements to existing storage, distribution, and transmission systems. It is management's opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. 4 7 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OUTLOOK MichCon's strategy is to aggressively expand its role as the preferred 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. MichCon plans to capitalize on the opportunities resulting from the gas industry restructuring by implementing its Regulatory Reform Plan, which was approved by the Michigan Public Service Commission (MPSC) in April 1998. The plan includes a comprehensive experimental three-year customer choice program that is designed to offer expanded availability and transportation options to all sales customers, subject to annual caps on the level of participation. Beginning April 1, 1999, customers will have the option of purchasing natural gas from suppliers other than MichCon. However, MichCon will continue to transport and deliver the gas to the customers' premises at prices that maintain its existing sales margins. The plan also suspends the GCR mechanism for customers who continue to purchase gas from MichCon and fixes the gas cost component of MichCon's sales rates for the three-year period beginning on January 1, 1999. Currently, MichCon does not generate earnings on the gas-supply portion of its operations; however under this plan, changes in cost of gas will directly impact gross margins and earnings. As part of its gas acquisition strategy, MichCon will implement steps to mitigate risks from price and volume fluctuations. Also beginning in 1999, an income sharing mechanism will allow customers to share in profits when actual utility return on equity exceeds predetermined thresholds. Although the Regulatory Reform Plan increases MichCon's risk associated with generating margins that cover its gas costs, management believes this program will have a favorable impact on future earnings. Various interested parties have requested a rehearing before the MPSC, or a review in the court; however, management believes the order will be upheld. NEW ACCOUNTING PRONOUNCEMENTS COMPUTER SOFTWARE In March 1998, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of internal-use software and specifically identifies which costs should be capitalized and which costs should be expensed. The statement is effective for fiscal years beginning after December 15, 1998. Management does not expect the SOP to have a material impact on MichCon's financial statements. START-UP ACTIVITIES In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 requires organizational and start-up costs to be expensed as incurred and is effective for fiscal years beginning after December 15, 1998. Management does not expect the SOP to have a material impact on MichCon's financial statements. 5 8 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED) DERIVATIVE AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be recognized in the balance sheet as either assets or liabilities measured at their fair value, and sets forth conditions in which a derivative instrument may be designated as a hedge. The Statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings. MichCon manages gas price risk and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. The effects of SFAS No. 133 on MichCon's financial statements are subject to fluctuations in the market value of hedging contracts, which are, in turn, affected by variations in gas prices and in interest rates. Accordingly, management cannot quantify the effects of adopting SFAS No. 133. FORWARD LOOKING STATEMENTS The Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties as set forth in MichCon's 1997 Annual Report on Form 10-K. 6 9 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, ------------------------- ----------------------- --------------------------- 1998 1997 1998 1997 1998 1997 ------------ ----------- ---------- ---------- ---------- ------------ OPERATING REVENUES...................... $ 172,787 $ 209,800 $ 602,014 $ 737,245 $1,118,448 $ 1,242,311 ----------- ----------- ---------- ---------- ---------- ------------ OPERATING EXPENSES Cost of gas........................... 57,512 83,031 275,101 386,304 521,026 624,501 Operation and maintenance............. 61,868 69,394 124,090 143,499 263,231 297,797 Depreciation and depletion............ 23,492 26,424 45,937 51,925 97,715 100,939 Property and other taxes.............. 13,953 16,141 31,255 33,935 58,064 62,085 ----------- ----------- ---------- ---------- ---------- ------------ Total operating expenses............ 156,825 194,990 476,383 615,663 940,036 1,085,322 ----------- ----------- ---------- ---------- ---------- ------------ OPERATING INCOME........................ 15,962 14,810 125,631 121,582 178,412 156,989 ----------- ----------- ---------- ---------- ---------- ------------ OTHER INCOME AND (DEDUCTIONS) Interest income....................... 822 1,277 1,934 2,486 4,107 5,167 Interest on long-term debt............ (10,513) (11,574) (22,719) (22,314) (45,931) (43,092) Other interest expense................ (1,891) (1,858) (5,148) (4,749) (9,063) (8,986) Minority interest..................... (398) (595) (1,143) (933) (2,092) (1,219) Equity in Earnings of Joint Ventures.. 361 331 950 641 1,508 1,032 Other................................. 585 (304) 706 (103) 1,345 (1,610) ----------- ----------- ---------- ---------- ---------- ------------ Total other income and (deductions). (11,034) (12,723) (25,420) (24,972) (50,126) (48,708) ----------- ----------- ---------- ---------- ---------- ------------ INCOME BEFORE INCOME TAXES.............. 4,928 2,087 100,211 96,610 128,286 108,281 INCOME TAX PROVISION.................... 1,914 1,156 35,533 33,486 47,712 36,206 ----------- ----------- ---------- ---------- ---------- ------------ NET INCOME AVAILABLE FOR COMMON STOCK... $ 3,014 $ 931 $ 64,678 $ 63,124 $ 80,574 $ 72,075 =========== =========== ========== ========== ========== ============
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, ------------------------- ----------------------- --------------------------- 1998 1997 1998 1997 1998 1997 ------------ ----------- ---------- ---------- ---------- ------------ BALANCE - BEGINNING OF PERIOD........... $ 436,989 $ 383,498 $ 375,325 $ 336,305 $ 359,429 $ 331,617 Add - Net income...................... 3,014 931 64,678 63,124 80,574 72,075 ----------- ----------- ---------- ---------- ---------- ------------ 440,003 384,429 440,003 399,429 440,003 403,692 Deduct - Cash dividends declared: Common Stock....................... - 25,000 - 40,000 - 44,263 ----------- ----------- ---------- ---------- ---------- ------------ BALANCE - END OF PERIOD................. $ 440,003 $ 359,429 $ 440,003 $ 359,429 $ 440,003 $ 359,429 =========== =========== ========== ========== ========== ============
The notes to the consolidated financial statements are an integral part of these statements. 7 10 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) (THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31, ------------------------------------- ------------ 1998 1997 1997 --------------- ---------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents.......................................... $ 20,032 $ 18,355 $ 14,353 Accounts receivable, less allowance for doubtful accounts of $14,132, $23,442 and $15,015, respectively........................ 136,248 173,373 195,662 Accrued unbilled revenues.......................................... 15,500 16,158 91,896 Gas in inventory................................................... 35,617 36,499 40,201 Property taxes assessed applicable to future periods............... 43,152 37,885 64,827 Accrued gas cost recovery revenues................................. - 14,072 12,862 Other.............................................................. 28,408 29,344 33,361 --------------- ---------------- ------------ 278,957 325,686 453,162 --------------- ---------------- ------------ DEFERRED CHARGES AND OTHER ASSETS Investment in and advances to joint ventures....................... 20,436 19,731 19,643 Long term investments.............................................. 36,532 3,737 35,110 Deferred postretirement benefit costs.............................. - 1,886 - Deferred environmental costs....................................... 27,934 27,680 27,699 Prepaid benefit costs.............................................. 95,008 64,737 85,790 Other.............................................................. 52,612 50,587 46,972 --------------- ---------------- ------------ 232,522 168,358 215,214 --------------- ---------------- ------------ Property, Plant and Equipment........................................ 2,843,708 2,706,922 2,790,352 Less - Accumulated depreciation and depletion ..................... 1,356,842 1,282,057 1,322,392 --------------- ---------------- ------------ 1,486,866 1,424,865 1,467,960 --------------- ---------------- ------------ $ 1,998,345 $ 1,918,909 $ 2,136,336 =============== ================ ============ LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable................................................... $ 89,329 $ 105,822 $ 130,267 Notes payable...................................................... 4,067 38,366 241,691 Current portion of long-term debt and capital lease obligations.... 58,204 28,512 34,956 Gas inventory equalization (Note 1)................................ 15,478 66,685 - Federal income, property and other taxes payable................... 80,931 73,638 78,630 Deferred gas cost recovery revenues................................ 29,139 - - Exchange gas payable............................................... 26,998 - 2,063 Customer deposits.................................................. 14,900 11,985 16,363 Other.............................................................. 37,241 45,842 65,717 --------------- ---------------- ------------ 356,287 370,850 569,687 --------------- ---------------- ------------ DEFERRED CREDITS AND OTHER LIABILITIES Accumulated deferred income taxes.................................. 89,549 78,701 83,905 Unamortized investment tax credit.................................. 31,823 33,666 32,745 Tax benefits amortizable to customers.............................. 123,444 115,432 122,922 Accrued environmental costs........................................ 32,000 32,000 32,000 Minority interest.................................................. 16,600 18,070 17,283 Other.............................................................. 43,926 40,578 44,663 --------------- ---------------- ------------ 337,342 318,447 333,518 --------------- ---------------- ------------ LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (NOTE 2). 624,014 629,484 617,107 --------------- ---------------- ------------ CONTINGENCIES (NOTE 5) COMMON SHAREHOLDER'S EQUITY Common stock....................................................... 10,300 10,300 10,300 Additional paid-in capital......................................... 230,399 230,399 230,399 Retained earnings.................................................. 440,003 359,429 375,325 --------------- ---------------- ------------ 680,702 600,128 616,024 --------------- ---------------- ------------ $ 1,998,345 $ 1,918,909 $ 2,136,336 =============== ================ ============
The notes to the consolidated financial statements are an integral part of this statement. 8 11 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS)
SIX MONTHS ENDED JUNE 30, --------------------- 1998 1997 ---------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net income................................................ $ 64,678 $ 63,124 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income............................. 45,937 51,925 Charged to other accounts........................... 3,991 3,724 Deferred income taxes - current....................... (12,096) (13,122) Deferred income taxes and investment tax credit - net. 5,244 375 Other................................................. (3,045) (544) Changes in assets and liabilities, exclusive of changes shown separately.................................... 181,909 168,284 ---------- -------- Net cash provided from operating activities....... 286,618 273,766 ---------- -------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable - net....................................... (237,624) (226,760) Issuance of long-term debt................................ 153,052 124,051 Cash dividend paid applicable to common stock............. - (40,000) Retirement of long-term debt.............................. (122,263) (72,229) ---------- -------- Net cash used for financing activities............ (206,835) (214,938) ---------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures...................................... (74,503) (57,423) Other - net............................................... 399 6,940 ---------- -------- Net cash used for investing activities............ (74,104) (50,483) ---------- -------- Net Increase in Cash and Cash Equivalents................... 5,679 8,345 Cash and Cash Equivalents, January 1........................ 14,353 10,010 ---------- -------- Cash and Cash Equivalents, June 30.......................... $ 20,032 $ 18,355 ========== ======== CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Accounts receivable - net............................... $ 57,377 $ (7,915) Gas inventory equalization.............................. 15,478 66,685 Accrued/deferred gas cost recovery revenues............. 42,001 13,600 Accrued unbilled revenues............................... 76,396 91,219 Gas in inventory........................................ 4,584 31,411 Property taxes assessed applicable to future periods.... 21,675 22,707 Accounts payable........................................ (40,928) (24,903) Federal income, property and other taxes payable........ 2,301 (11,150) Exchange gas............................................ 24,935 (7,572) Other current assets and liabilities.................... (12,890) (3,664) Deferred and prepaid benefit costs...................... (9,218) 2,547 Deferred assets and liabilities......................... 198 (4,681) ---------- -------- $ 181,909 $168,284 ========== ======== SUPPLEMENTAL DISCLOSURES Cash paid for: Interest, net of amounts capitalized.................... $ 29,174 $ 27,883 ========== ======== Federal income taxes.................................... $ 12,541 $ 29,299 ========== ========
The notes to the consolidated financial statements are an integral part of this statement. 9 12 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GAS IN INVENTORY Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation that interim inventory reductions will be replaced prior to year end, the cost of gas for net withdrawals from inventory is recorded at the estimated average purchase rate for the calendar year. The excess of these charges over the LIFO cost is credited to the gas inventory equalization account. During interim periods when there are net injections to inventory, the equalization account is reversed. Approximately 57.8 billion cubic feet (Bcf) and 39.8 Bcf of gas was included in inventory at June 30, 1998 and 1997, respectively. 2. CAPITALIZATION A. LONG-TERM DEBT ISSUANCE In June 1998, MichCon issued $75,000,000 of 6.2% and $75,000,000 of 6.45% remarketable debt securities, both of which have stated maturities of June 2038. These securities are "fall-away mortgage" debt and as such, are secured debt as long as MichCon's current first mortgage bonds are outstanding and become senior unsecured debt thereafter. The securities are structured such that the interest rates of the issues can be reset at various remarketing dates over the life of the debt. The initial remarketing date is June 30, 2003 for the 6.2% debt and June 30, 2008 for the 6.45% debt. MichCon received a premium in return for granting options to the underwriters to reset the interest rate for a period of ten years at the initial remarketing date. The option premiums received for these securities, net of financing costs incurred, totaled $3,052,000. The option premium portions are being amortized to income over the intial interest and corresponding option periods. If the underwriters elect not to excercise their reset options, the securities become subject to the remarketing feature. If MichCon and the remarketing agent cannot agree on an interest rate or the remarketing agent is unable to remarket the securities, MichCon will be required to repurchase the securities at their principal amounts. B. LONG-TERM DEBT REDEMPTION In the second quarter of 1998, MichCon redeemed through a tender offer $37,000,000 of the outstanding $55,000,000 balance of 9.125% first mortgage bonds, due 2004 and $52,686,000 of the outstanding $70,000,000 balance of 8% first mortgage bonds, due 2002. 3. LINES OF CREDIT MichCon has established credit lines that allow for borrowings of up to $150,000,000 under a 364-day revolving credit facility and up to $150,000,000 under a three-year revolving credit facility. These credit lines totaling $300,000,000 support its commercial paper program. No borrowings were outstanding under these lines as of June 30, 1998. Both the 364-day revolving and three-year revolving credit facilities were renewed in July 1998. 10 13 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED) 4. GAS PURCHASE SWAP AGREEMENTS MichCon has entered into gas swap agreements that are intended to hedge MichCon's gas purchase commitments and effectively fix the commodity rate portion of certain gas purchase agreements. The swap reduces MichCon's price risk; however, it limits potential gains from favorable changes in gas purchase prices. Changes in the market value of the swap contracts are deferred and included in inventory costs until the hedged transaction is completed, at which time the realized gain or loss in included in the cost of purchased gas. As of June 30, 1998 MichCon's deferred gain from such swap contracts is $214,800. 5. CONTINGENCIES MichCon is involved in certain legal and administrative proceedings before various courts and governmental agencies concerning claims arising in the ordinary course of business. Management cannot predict the final disposition of such proceedings, but believes that adequate provision has been made for probable losses. It is management's belief, after discussion with legal counsel, that the ultimate resolution of those proceedings still pending will not have a material adverse effect on MichCon's financial statements. 6. GENERAL The accompanying consolidated financial statements should be read in conjuction with MichCon's 1997 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year's financial statements to conform with the 1998 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented. Because of seasonal and other factors, revenues, expenses and net income for the interim periods should not be construed as representative of revenues, expenses and net income for all or any part of the balance of the current year or succeeding periods. 11 14 OTHER INFORMATION LEGAL PROCEEDINGS As discussed most recently on page 10 in MichCon's 1997 Annual Report on Form 10-K, in December 1994, a suit was filed against MichCon in Wayne County Michigan Circuit Court by certain 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. Plaintiffs sought injunctive relief, unspecified monetary damages and class action certification. MichCon impleaded, as third-party defendants, all of the manufacturers, contractors and installers of the plaintiffs' furnaces. The trial court denied such certification on two separate occasions but granted a third motion to certify the class. While MichCon's appeal of the trial court decision granting class action certification was pending in the Michigan Court of Appeals, the matter was settled. On July 24, 1998, the Wayne County Circuit Court approved the settlement. Under the terms of the settlement, 46,000 conservation loan participants have until October 9, 1998 (75 days) to submit a claim form to be reimbursed for a portion of the costs of installing a chimney liner or making repairs to their chimney. In addition, customers will be eligible to purchase a carbon monoxide detector from MichCon at a discounted price. MichCon will seek indemnification and coverage of its attorney's fees from some of the contractors and contribution from the other installers. It is management's belief, after discussion with legal counsel, that the ultimate resolution of this proceeding will not have a material effect on MichCon's financial statements. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 12-1 Computation of Ratio of Earnings to Fixed Charges 27-1 Financial Data Schedule (b) Reports on Form 8-K MichCon filed a report on Form 8-K dated June 2, 1998, under Item 5, with respect to MCN Energy Group Inc.'s update of its coal fines project and earnings expectations. 12 15 MichCon also filed a report on Form 8-K dated June 18, 1998, under Item 5, with respect to its offering of 6.20% Resetable MAndatory Putable/remarketable Securities ("MAPS(SM)") due June 30, 2038 and its 6.45% Extendable MandatOry Par Put Remarketed Securities(SM) ("MOPPRS(SM)") due June 30, 2038 pursuant to its registration statement on Form S-3 (No. 333-56333) filed with the Securities and Exchange Commission under the Securities Act of 1933. The following documents were filed as Exhibits thereto: - Purchase Agreement dated June 18, 1998 with respect to the MAPS(SM). - Purchase Agreement dated June 18, 1998 with respect to the MOPPRS(SM). - First Supplemental Indenture dated as of June 18, 1998 to the Senior Debt Securities Indenture dated as of June 1, 1998 between Michigan Consolidated Gas Company and Citibank, N.A. - Thirty-fifth Supplemental Indenture dated as of June 18, 1998 to the Indenture of Mortgage and Deed of Trust dated as of March 1, 1944 between Michigan Consolidated Gas Company and Citibank, N.A. and Robert T. Kirchner, Trustees. - Reset Remarketing Agreement dated as of June 23, 1998, by and between Michigan Consolidated Gas Company and Salomon Brothers Inc. - Reset Remarketing Agreement dated as of June 23, 1998, by and between Michigan Consolidated Gas Company and Merrill Lynch & Co./Merrill Lynch, Pierce, Fenner & Smith Incorporated. 13 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHIGAN CONSOLIDATED GAS COMPANY Date: August 14, 1998 By: /s/ Howard L. Dow III ------------------------------ Howard L. Dow III Senior Vice President and Chief Financial Officer 14 EX-12.1 2 EX-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 ------------------- ------------------- ------------------- June 30, 1998 December 31, 1997 December 31, 1996 ------------- ----------------- ----------------- EARNINGS AS DEFINED (1) Net Income ..................................... $128,267 $125,630 $122,239 Fixed charges .................................. 59,197 57,905 53,831 -------- -------- -------- Earnings as defined .......................... $187,464 $183,535 $176,070 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt ..................... $ 47,586 $ 47,024 $ 43,163 Interest on other borrowed funds ............... 9,063 8,664 8,012 Amortization of debt discounts, premium and expense .................................. 1,003 1,032 1,081 Interest implicit in rentals (2) ............... 1,545 1,185 1,575 -------- -------- -------- Fixed charges as defined ..................... $ 59,197 $ 57,905 $ 53,831 ======== ======== ======== Ratio of Earnings to Fixed Charges ............. 3.17 3.17 3.27 ======== ======== ========
Notes: (1) Earnings and fixed charges are defined and computed in accordance with Item 503 of Regulation S-K. (2) This amount is estimated to be a reasonable approximation of the interest portion of rentals. MichCon is a guarantor of certain other debt. Fixed charges related to such debt are deemed to be immaterial and therefore have been excluded from the above ratios. EX-27.1 3 EX-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. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 20,032 0 150,380 14,132 35,617 278,957 2,843,708 1,356,842 1,998,345 356,287 624,014 0 0 10,300 670,402 1,998,345 0 602,014 0 476,383 437 7,146 27,867 100,211 35,533 64,678 0 0 0 64,678 0 0
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