-----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, U8lQBSmkBovgDA0+eVcU80GDFihwMDBbOGN8gdmFBvhQ8YnPutigYA1T6eYfY72y c493ItHPygTfGNwVlPPG8A== 0000950124-99-003375.txt : 19990518 0000950124-99-003375.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950124-99-003375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627326 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999, 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 April 30, 1999: Common Stock, par value $1.00 per share: 10,300,000 ================================================================================ 2 INDEX TO FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 PAGE NUMBER ------ COVER................................................................ i INDEX................................................................ ii PART I - FINANCIAL INFORMATION Item 1. Financial Statements........................................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 1 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 13 SIGNATURE............................................................ 14 3 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Results reflect earnings from new gas sales program and more favorable weather - MichCon's earnings were $84.0 million for the 1999 first quarter, an increase of $22.3 million from the comparable 1998 period. Earnings for the 1999 twelve-month period were $99.3 million, which included an $11.2 million write-down (net of taxes and minority interest) of a gas gathering pipeline (Note 3). Excluding the write-down, earnings for the 1999 twelve-month period were $110.5 million, an increase of $32.0 million over the corresponding 1998 period. The earnings improvement for the 1999 first quarter reflects contributions from the new gas sales program, the impact of more favorable weather and an increase in other operating revenues. The increase in earnings for the 1999 twelve-month period reflects the impact of the gas sales program, an increase in other operating revenues, as well as significantly lower operating expenses. These improvements for the 1999 twelve-month period more than offset the lower gross margins resulting from reduced gas sales and end user transportation deliveries which were caused by warmer weather. - -------------------------------------------------------------------------------- EARNINGS COMPONENTS (DOLLARS IN MILLIONS) COMPARING 1999 TO 1998
QUARTER TWELVE MONTHS ---------------------------- ---------------------------- $ CHANGE % CHANGE $ CHANGE % CHANGE ------------- ------------- ------------- ------------- Operating Revenue............................ 68.9 16.0 (52.9) (4.6) Cost of Gas.................................. 30.8 14.1 (64.3) (11.8) Gross Margin................................. 38.1 18.0 11.3 1.9 Operation and Maintenance.................... 5.3 8.6 (13.0) (4.8) Depreciation and Depletion................... 2.2 9.6 (5.6) (5.6) Property and Other Taxes..................... 1.2 6.7 (3.7) (6.1) Write-down of Gathering Property (Note 3).... - - 24.8 - Other Income and Deductions.................. (2.4) (16.8) (10.4) (20.1) Income Tax Provision......................... 9.6 28.4 (1.6) (3.4) Net Income................................... 22.3 36.2 20.8 26.5 - ------------------------------------------------------------------------------------------------------------
GROSS MARGIN Gross margin (operating revenues less cost of gas) increased $38.1 million and $11.3 million in the 1999 first quarter and twelve-month period, respectively, due primarily to approximately $22.5 million of margins generated in the current quarter under MichCon's new three-year gas sales program that began in January 1999 (Note 2a). Under the gas sales program, MichCon's gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. This strategy is likely to produce favorable margins in each of the three years. Gross margins for the 1999 first quarter also reflect higher gas sales resulting from colder weather compared to the same 1998 period. Gross margins for the current twelve-month period reflect lower gas sales due to significantly warmer weather. Additionally, gross margins for both 1999 periods reflect revenues from the continued growth in other gas-related services. 1 4 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) MichCon's operations are very seasonal, with gross margins and earnings concentrated in the first and fourth quarters of each calendar year. By the end of the first quarter, the heating season is largely over, and MichCon typically incurs substantially reduced gross margins and earnings in the second quarter and losses in the third quarter. The seasonal nature of MichCon's operations is expected to be more pronounced as a result of its new gas sales program. EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS ---------------------------------------------
QUARTER TWELVE MONTHS ---------------------------------- ---------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Percentage Colder (Warmer) than Normal....................... (4.3)% (18.8)% (12.0)% (6.9)% Increase (Decrease) from Normal in: Gas Markets (Bcf)............. (5.1) (19.2) (26.2) (15.5) Net Income (Millions)........ $ (5.1) $ (16.7) $ (23.7) $ (13.5)
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $70.5 million for the 1999 first quarter and decreased by $62.1 million for the 1999 twelve-month period. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that increased 12.3 billion cubic feet (Bcf) in the current quarter and decreased by 12.9 Bcf in the 1999 twelve-month period. The fluctuations in gas sales and end user transportation deliveries were due primarily to weather, which was 14.5% colder in the 1999 first quarter and 5.1% warmer in the current twelve-month period compared to the corresponding 1998 periods. Revenues were also impacted by variations in the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCon's new gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCon's sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCon's sales increased $.18 per Mcf (6%) for the 1999 first quarter and decreased $.10 per Mcf (3%) for the 1999 twelve-month period.
- ------------------------------------------------------------------------------------------------------------ QUARTER TWELVE MONTHS 1999 1998 1999 1998 ------------- ----------- ------------ ----------- GAS MARKETS (IN MILLIONS) Gas Sales.............................. $ 435.7 $ 366.9 $ 892.6 $ 954.8 End User Transportation................ 26.7 25.0 83.7 83.6 Intermediate Transportation............ 14.7 18.0 59.9 58.4 Other.................................. 21.0 19.3 66.3 58.7 ------------- ----------- ------------ ----------- $ 498.1 $ 429.2 $ 1,102.5 $ 1,155.5 ============= =========== ============ =========== GAS MARKETS (IN BCF) Gas Sales.............................. 91.0 78.7 181.2 191.1 End User Transportation................ 42.4 42.4 140.1 143.1 ------------- ----------- ------------ ----------- 133.4 121.1 321.3 334.2 Intermediate Transportation............ 127.4 148.4 516.5 594.3 ------------- ----------- ------------ ----------- 260.8 269.5 837.8 928.5 ============= =========== ============ =========== - ------------------------------------------------------------------------------------------------------------
INTERMEDIATE TRANSPORTATION revenues decreased $3.3 million in the 1999 first quarter and increased $1.5 million in the 1999 twelve-month period. Intermediate transportation revenues reflect lower off-system 2 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) volumes of 21.0 Bcf and 77.8 Bcf in the 1999 first quarter and twelve-month period, respectively. A significant portion of the volume decrease was for customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected. The increase in intermediate transportation revenues for the 1999 twelve-month period is due in part to increased fees generated from tracking the transfer of gas title on MichCon's transportation system. OTHER OPERATING REVENUES increased $1.7 million in the 1999 first quarter and $7.6 million in the 1999 twelve-month period. The improvements are due to an increase in appliance maintenance services and other gas-related services. COST OF GAS Cost of gas is affected by variations in sales volumes and cost of purchased gas as well as related transportation costs. Under the Gas Cost Recovery (GCR) mechanism that was in effect through December 1998 (Note 2b), MichCon's sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon's new gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings. Cost of gas sold increased $30.8 million in the 1999 first quarter and decreased $64.3 million in the 1999 twelve-month period, primarily due to variations in weather-driven sales volumes. Cost of gas sold was also impacted by a decrease in prices paid of $.06 per Mcf (2%) in the 1999 first quarter and $.22 per Mcf (8%) in the current twelve-month period. OPERATION AND MAINTENANCE Operation and maintenance expenses increased $5.3 million in the 1999 first quarter and decreased $13.0 million in the 1999 twelve-month period. The increase in the 1999 quarter is due in part to additional computer system costs and advertising costs associated with MichCon's new gas sales program, partially offset by lower uncollectible gas accounts expense. The decrease in the 1999 twelve-month period reflects lower employee benefit costs, primarily pension and retiree healthcare costs, as well as lower uncollectible gas accounts expense. Additionally, both 1998 periods benefited from an interstate pipeline company refund. DEPRECIATION AND DEPLETION Depreciation and depletion increased $2.2 million in the 1999 first quarter and decreased $5.6 million in the 1999 twelve-month period. Depreciation on higher plant balances impacted both 1999 periods. Additionally, the twelve-month period comparison reflects the effect of lower depreciation rates for MichCon's utility property, plant and equipment that became effective in January 1998. PROPERTY AND OTHER TAXES Property and other taxes increased $1.2 million in the 1999 first quarter and decreased $3.7 million in the 1999 twelve-month period. The current quarter increase reflects higher Michigan Single Business Tax resulting from an increase in taxable income as well as higher property taxes due to an increase in plant balances. The decrease in the 1999 twelve-month period is attributable to lower Michigan Single Business Tax. 3 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) WRITE-DOWN OF GATHERING PROPERTY The property write-down of $24.8 million in the 1999 twelve-month period reflects the impairment of a Michigan gas gathering system (Note 3). OTHER INCOME AND DEDUCTIONS Other income and deductions decreased $2.4 million in the 1999 first quarter and $10.4 million in the current twelve-month period. Both 1999 periods were impacted by lower interest costs primarily due to a decrease in the average interest rate on borrowings. Other income and deductions in the 1999 twelve-month period also reflect a change in minority interest reflecting the joint venture partners' share of the write-down of the gas gathering properties (Note 3). INCOME TAXES Income taxes for both 1999 periods were impacted by an increase in pre-tax earnings. Income tax comparisons were also affected by the favorable resolution of prior years' tax issues in the 1999 first quarter. Additionally, stock-related tax benefits were recorded in 1998 as well as a provision for tax issues. CAPITAL RESOURCES AND LIQUIDITY
QUARTER --------------------------------- CASH AND CASH EQUIVALENTS (in Millions) 1999 1998 ------------- ------------ Cash Flow Provided From (Used For): Operating activities.............................................. $ 179.7 $ 170.1 Financing activities.............................................. (136.7) (129.4) Investing activities.............................................. (26.1) (38.0) ------------ ------------ Net Increase in Cash and Cash Equivalents............................ $ 16.9 $ 2.7 ============ ============
OPERATING ACTIVITIES MichCon's cash flow from operating activities increased $9.6 million during the 1999 first quarter as compared to the same 1998 period. The increase was due primarily to higher earnings, after adjusting for non-cash items (depreciation and deferred taxes), partially offset by changes in working capital requirements. FINANCING ACTIVITIES MichCon maintains a relatively consistent amount of cash and cash equivalents through the use of short-term borrowings. Short-term borrowings are normally reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the latter part of the year, MichCon's short-term borrowings normally increase as funds are used to finance increases in gas inventories and customer accounts receivable. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper that is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings of up to $150 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility. During the first three months of 1999, MichCon repaid $113.3 million of commercial paper, leaving borrowings of $106.6 million outstanding under this program at March 31, 1999. During the 1999 second quarter, MichCon anticipates issuing approximately $110 million of debt. MichCon repaid $20 million of first mortgage bonds that matured in May 1999 and anticipates repaying $30 million of first mortgage bonds that mature in June 1999. 4 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) INVESTING ACTIVITIES MichCon's cash used for investing activities decreased $11.9 million in the 1999 first quarter as compared to the same 1998 period. The decrease was due primarily to lower capital expenditures, primarily related to the 1998 period including the purchase of an office building previously leased. Capital expenditures primarily represent 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. 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 control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices. MichCon has begun and plans to continue capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently implementing its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program that is designed to offer all sales customers added choices and greater price certainty. Beginning April 1, 1999, a limited number of customers 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 previously existing sales margins. The Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon and fixed the gas commodity component of MichCon's sales rates at $2.95 per Mcf for the three-year period that began in January 1999. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. Also beginning in 1999, an income sharing mechanism allows customers to share in profits when actual return on equity from utility operations exceed predetermined thresholds. YEAR 2000 As discussed in MichCon's 1998 Annual Report on Form 10-K, MichCon has implemented a corporate-wide, four-phase Year 2000 approach consisting of: i) inventory - identification of the components of MichCon's systems, equipment and facilities; ii) assessment - assessing Year 2000 readiness and prioritizing the risks of items identified in the inventory phase; iii) remediation-upgrading, repairing and replacing non-compliant systems, equipment and facilities; and iv) testing verifying items remediated. MichCon is generally on schedule to have its mission critical business systems, and measurement and control systems (including embedded microprocessors) Year 2000 ready as detailed below. The extension of the program to September 1999 reflects MichCon's determination that additional testing and remediation is appropriate for some critical business and control systems for both MichCon and its vendors. The estimated completion status of these systems and the projected status for the future follows:
Inventory Assessment Remediation Testing ------------- ------------- --------------- ----------- Business Systems: March 31, 1999...................... 100% 100% 80% 45% June 30, 1999....................... 100% 100% 95% 85% September 30, 1999.................. 100% 100% 100% 100%
5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Measurement and Control Systems: March 31, 1999...................... 98% 98% 93% 88% June 30, 1999....................... 100% 100% 98% 98% September 30, 1999.................. 100% 100% 100% 100%
Costs associated with the Year 2000 issue are not expected to have a material adverse effect on MichCon's results of operation, liquidity and financial condition. The total costs are estimated to be between $3 million and $4 million of which approximately $2.5 million was incurred through March 1999. 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 ready. 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 anticipates a smooth transition to the Year 2000. However, the failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain business activities and operations. Such interruptions or failures could have a material adverse effect on MichCon's results of operations, liquidity and financial condition. Due to the uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of key operators, suppliers and government agencies, MichCon cannot certify that it will be unaffected by Year 2000 complications. In order to reduce its Year 2000 risk, MichCon is developing contingency plans for mission-critical processes in the event of a Year 2000 complication. Contingency plans for several essential gas transmission facilities continue to be tested under a "power outage" scenario and have achieved excellent results. Contingency plans will continue to be refined throughout 1999 as MichCon works with operators, suppliers and governmental agencies. MARKET RISK INFORMATION As discussed in MichCon's 1998 Annual Report on Form 10-K, MichCon's primary market risk arises from fluctuations in natural gas prices and interest rates. MichCon manages natural gas price and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. NATURAL GAS PRICE RISK MichCon closely monitors and manages its exposure to natural gas price risk through a variety of risk management techniques. Natural gas swap agreements are used to manage MichCon's exposure to the risk of market price fluctuations on natural gas purchase contracts. During the 1999 first quarter, there were no material changes to MichCon's natural gas price risk. 6 9 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONCLUDED) INTEREST RATE RISK MichCon is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to manage interest costs and risk, MichCon uses interest rate swap agreements to exchange fixed and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. During the 1999 first quarter, there were no material changes to MichCon's interest rate risk. NEW ACCOUNTING PRONOUNCEMENTS 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 at this time. 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 1998 Annual Report on Form 10-K. The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act. Therefore, MichCon claims the full protections established by the act. 7 10 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED TWELVE MONTHS ENDED MARCH 31, MARCH 31, ------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ------------- ------------- OPERATING REVENUES............................. $ 498,090 $ 429,227 $ 1,102,521 $ 1,155,461 ----------- ----------- ------------- ------------- OPERATING EXPENSES Cost of gas.................................. 248,351 217,589 482,291 546,545 Operation and maintenance.................... 67,546 62,222 257,721 270,757 Depreciation and depletion................... 24,608 22,445 95,046 100,647 Property and other taxes..................... 18,462 17,302 56,598 60,252 Write-down of gathering properties (Note 3).................................... - - 24,800 - ----------- ----------- ------------- ------------- Total operating expenses................... 358,967 319,558 916,456 978,201 ----------- ----------- ------------- ------------- OPERATING INCOME 139,123 109,669 186,065 177,260 ----------- ----------- ------------- ------------- OTHER INCOME AND (DEDUCTIONS) Interest income.............................. 999 1,112 5,575 4,562 Interest on long-term debt................... (10,966) (12,206) (43,644) (46,992) Other interest expense....................... (2,655) (3,257) (11,511) (9,030) Minority interest............................ (257) (745) 6,215 (2,289) Equity in earnings of joint ventures......... 441 589 1,798 1,478 Other........................................ 464 121 161 456 ----------- ----------- ------------- ------------- Total other income and (deductions)........ (11,974) (14,386) (41,406) (51,815) ----------- ----------- ------------- ------------- INCOME BEFORE INCOME TAXES..................... 127,149 95,283 144,659 125,445 INCOME TAX PROVISION........................... 43,176 33,619 45,374 46,954 ----------- ----------- ------------- ------------- NET INCOME..................................... $ 83,973 $ 61,664 $ 99,285 $ 78,491 =========== =========== ============= =============
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED TWELVE MONTHS ENDED March 31, March 31, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ------------ ------------ ------------ BALANCE - BEGINNING OF PERIOD................. $ 406,144 $ 375,325 $ 436,989 $ 383,498 Add - Net income............................ 83,973 61,664 99,285 78,491 ----------- ------------ ------------ ------------ 490,117 436,989 536,274 461,989 Deduct - Cash dividends declared: Common Stock............................. 17,677 - 63,834 25,000 ----------- ------------ ------------ ------------ BALANCE - END OF PERIOD....................... $ 472,440 $ 436,989 $ 472,440 $ 436,989 =========== ============ ============ ============
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 FINANCIAL POSITION (UNAUDITED) (THOUSANDS OF DOLLARS)
MARCH 31, December 31, ------------------------------- -------------- 1999 1998 1998 -------------- ------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents........................................ $ 23,512 $ 17,083 $ 6,603 Accounts receivable, less allowance for doubtful accounts of $11,545, $18,123 and $8,928, respectively....................... 214,693 262,768 142,818 Accrued unbilled revenues........................................ 76,431 63,400 86,767 Gas in inventory (Note 4)........................................ 24,485 20,188 56,969 Property taxes assessed applicable to future periods............. 59,255 54,765 71,165 Other............................................................ 32,990 28,348 30,169 -------------- ------------- -------------- 431,366 446,552 394,491 -------------- ------------- -------------- DEFERRED CHARGES AND OTHER ASSETS Investment in and advances to joint ventures..................... 19,808 20,078 19,343 Long-term investments............................................ 66,110 35,538 65,556 Deferred environmental costs..................................... 28,286 27,816 28,169 Prepaid benefit costs............................................ 124,235 85,817 113,879 Other............................................................ 61,250 47,232 59,007 -------------- ------------- -------------- 299,689 216,481 285,954 -------------- ------------- -------------- Property, Plant and Equipment...................................... 2,911,368 2,809,342 2,889,020 Less - Accumulated depreciation and depletion.................... 1,420,513 1,334,813 1,396,940 -------------- ------------- -------------- 1,490,855 1,474,529 1,492,080 -------------- ------------- -------------- $ 2,221,910 $ 2,137,562 $ 2,172,525 ============== ============= ============== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable................................................. $ 96,390 $ 90,568 $ 98,891 Notes payable.................................................... 107,900 117,094 221,169 Current portion of long-term debt and capital lease obligations.................................................... 58,211 27,616 58,288 Gas inventory equalization (Note 4).............................. 79,559 70,894 - Federal income, property and other taxes payable................. 103,464 100,257 61,059 Deferred gas cost recovery revenues (Note 2b).................... - 18,937 14,980 Exchange gas payable............................................. 25,835 18,027 25,337 Customer deposits................................................ 17,459 15,323 18,769 Other............................................................ 58,935 49,724 67,222 -------------- ------------- -------------- 547,753 508,440 565,715 -------------- ------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes............................................ 96,353 84,839 88,567 Unamortized investment tax credit................................ 29,303 32,284 29,784 Tax benefits amortizable to customers............................ 129,494 123,189 130,120 Accrued environmental costs...................................... 31,888 32,000 32,000 Minority interest................................................ 8,175 17,954 8,201 Other............................................................ 51,860 48,963 51,460 -------------- ------------- -------------- 347,073 339,229 340,132 -------------- ------------- -------------- LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS 613,945 612,205 619,835 -------------- ------------- -------------- 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................................................ 472,440 436,989 406,144 -------------- ------------- -------------- 713,139 677,688 646,843 -------------- ------------- -------------- $ 2,221,910 $ 2,137,562 $ 2,172,525 ============== ============= ==============
The notes to the consolidated financial statements are an integral part of this statement. 9 12 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 ---------- ---------- CASH FLOW FROM OPERATING ACTIVITIES Net income................................................................. $ 83,973 $ 61,664 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income.............................................. 24,608 22,445 Charged to other accounts............................................ 2,162 2,043 Deferred income taxes - current........................................ (5,309) (9,131) Deferred income taxes and investment tax credit - net.................. 6,679 740 Other.................................................................. (1,211) (250) Changes in assets and liabilities, exclusive of changes shown separately..................................................... 68,811 92,608 ---------- ---------- Net cash provided from operating activities........................ 179,713 170,119 ---------- ---------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable - net........................................................ (113,269) (124,597) Cash dividend paid applicable to common stock.............................. (17,500) - Retirement of long-term debt............................................... (5,934) (4,772) ---------- ---------- Net cash used for financing activities............................. (136,703) (129,369) ---------- ---------- CASH FLOW FROM INVESTING ACTIVITIES Notes receivable - affiliate - net......................................... (1,201) - Capital expenditures....................................................... (24,209) (38,282) Other - net................................................................ (691) 262 ---------- ---------- Net cash used for investing activities............................. (26,101) (38,020) ---------- ---------- Net Increase in Cash and Cash Equivalents.................................... 16,909 2,730 Cash and Cash Equivalents, January 1......................................... 6,603 14,353 ---------- ---------- Cash and Cash Equivalents, March 31.......................................... $ 23,512 $ 17,083 ========== ========== CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Accounts receivable - net................................................ $ (72,560) $ (67,555) Gas inventory equalization............................................... 79,559 70,894 Accrued/deferred gas cost recovery revenues.............................. (15,153) 31,799 Accrued unbilled revenues................................................ 10,336 28,496 Gas in inventory......................................................... 32,484 20,013 Property taxes assessed applicable to future periods..................... 11,910 10,062 Accounts payable......................................................... (2,501) (39,699) Federal income, property and other taxes payable......................... 42,405 21,627 Other current assets and liabilities..................................... (5,350) 13,075 Prepaid benefit costs.................................................... (10,356) (27) Deferred assets and liabilities.......................................... (1,963) 3,923 ---------- ---------- $ 68,811 $ 92,608 ========== ========== SUPPLEMENTAL DISCLOSURES Cash paid (received) for: Interest, net of amounts capitalized.................................... $ 13,447 $ 13,089 ========== ========== Federal income taxes.................................................... $ (5,133) $ (5,497) ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 10 13 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The accompanying consolidated financial statements should be read in conjunction with MichCon's 1998 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year's financial statements to conform with the 1999 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented. Because of seasonal and other factors, revenues, expenses and net income for the interim periods should not be construed as representative of revenues, expenses and net income for all or any part of the balance of the current year or succeeding periods. 2. REGULATORY MATTERS A. REGULATORY REFORM PLAN As discussed in MichCon's 1998 Annual Report on Form 10-K, MichCon implemented its Regulatory Reform Plan in January 1999. The plan includes a new three-year gas sales program under which MichCon's gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts, at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, when approximately 70,000 customers chose to purchase natural gas from suppliers other than MichCon. Plan years begin April 1 of each year, and the number of customers allowed to participate in the plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume limitation on commercial and industrial participants. The volume limitation for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the gas to the customers' premises at prices that maintain its previously existing sales margins. Various parties have appealed the Michigan Public Service Commission's (MPSC) approval of the plan. While management believes the plan will be upheld on appeal, there can be no assurance as to the outcome. B. GAS COST RECOVERY PROCEEDINGS Prior to January 1999, the Gas Cost Recovery (GCR) process allowed MichCon to recover its cost of gas sold if the MPSC determined that such costs were reasonable and prudent. An annual GCR reconciliation proceeding provided a review of gas costs incurred during the previous year and determined whether gas costs had been overcollected or undercollected, and as a result, whether a refund or surcharge, including interest, was required to be returned to or collected from GCR customers. The GCR process was suspended with the implementation of MichCon's Regulatory Reform Plan in January 1999. In February 1999, MichCon filed its final GCR reconciliation case covering gas costs incurred during 1998 which indicates an overrecovery of $18,000,000, including interest. Management believes 11 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) that 1998 gas costs were reasonable and prudent and that the MPSC will approve the gas costs incurred. However, management cannot predict the outcome of this proceeding. During the first quarter of 1999, MichCon refunded the overrecovery to customers as a reduction in gas sale rates. 3. PROPERTY WRITE-DOWN As discussed in MichCon's 1998 Annual Report on Form 10-K, MichCon recognized a $24,800,000 pre-tax loss ($11,200,000 net of taxes and minority interest) from the write-down of a gas gathering pipeline system in the third quarter of 1998. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the system's carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value. 4. 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 30.0 Bcf and 32.9 Bcf of gas was included in inventory at March 31, 1999 and 1998, respectively. 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. These proceedings include certain contract disputes between MichCon and gas producers. 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. 12 15 OTHER INFORMATION EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- 12-1 Computation of Ratio of Earnings to Fixed Charges 27-1 Financial Data Schedule (b) Reports on Form 8-K None 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: May 17, 1999 By: /s/ Harold Gardner ---------------------------------- Harold Gardner Vice President and Chief Accounting Officer 14 17 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 12.1 Michigan Consolidated Gas Company and Subsidiaries Computation of Ratio of Earnings to fixed charges 27 Financial Data Schedule EX-12.1 2 SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12-1 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
Twelve Months Ended Twelve Months Ended Twelve Months Ended March 31, 1999 December 31, 1998 December 31, 1997 ------------------- ------------------- ------------------- EARNINGS AS DEFINED (1) Net Income................................................ $146,502 $114,619 $125,630 Fixed charges............................................. 59,622 61,304 57,905 -------- -------- -------- Earnings as defined..................................... $206,124 $175,923 $183,535 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt................................ $ 46,021 $ 47,091 $ 47,024 Interest on other borrowed funds.......................... 11,511 12,113 8,664 Amortization of debt discounts, premium and expense............................................. 929 955 1,032 Interest implicit in rentals (2).......................... 1,161 1,145 1,185 -------- -------- -------- Fixed charges as defined................................ $ 59,622 $ 61,304 $ 57,905 ======== ======== ======== Ratio of Earnings to Fixed Charges..............................3.46 2.87 3.17 ==== ==== ====
- --------------- 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 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Statement of Income and the Consolidated Statement of Financial Position and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 23,512 0 226,238 11,545 24,485 431,366 2,911,368 1,420,513 2,221,910 547,753 613,945 0 0 10,300 702,839 2,221,910 0 498,090 0 358,967 (464) 5,291 13,621 127,149 43,176 83,973 0 0 0 83,973 0 0
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