-----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, Vf9XIRshGkvL6yk8N3ULav3RTTmziL6R0BXBTSVdud2fUVuiuZMpTCNice9WzJO4 xS7wlmrCeq9AfeR38Sk5eg== 0000950131-96-005540.txt : 19961108 0000950131-96-005540.hdr.sgml : 19961108 ACCESSION NUMBER: 0000950131-96-005540 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961107 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: 1934 Act SEC FILE NUMBER: 001-07310 FILM NUMBER: 96655901 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-7310 MICHIGAN CONSOLIDATED GAS COMPANY (Exact name of registrant as specified in its charter) MICHIGAN 38-0478040 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 GRISWOLD STREET, DETROIT, MICHIGAN 48226 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 313-965-2430 NO CHANGES (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares outstanding of each of the registrant's classes of common stock, as of October 31, 1996: Common Stock, par value $.01 per share: 10,300,000 ================================================================================ INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996
PAGE NUMBER ------ COVER........................................................ i INDEX........................................................ ii PART I - FINANCIAL INFORMATION Item 1. Financial Statements............................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 1 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................. 10 Item 6. Exhibits and Reports on Form 8-K................... 11 SIGNATURE.................................................... 12
ii MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Given the seasonal nature of the gas distribution business, MichCon generally experiences a loss during the third quarter when the weather is warm and less gas is delivered to customers. MichCon's loss of $18.4 million represents a decrease in earnings of $5.1 million from the third quarter of 1995, due mainly to increased operating expenses. Earnings for the 1996 nine- and twelve-month periods increased $13.8 million and $31.2 million, respectively, from the same periods in 1995. The increases are due primarily to higher gas sales resulting from colder weather. EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS ---------------------------------------------
Quarter Nine Months Twelve Months ------------- --------------- ---------------- 1996 1995 1996 1995 1996 1995 ------ ----- ------ ------- ------ -------- Percentage Colder (Warmer) than Normal N/A N/A 6.2% (3.8%) 6.8% (8.5%) Increase (Decrease) from Normal in: Gas Markets (Bcf) (.2) 0.5 8.4 (4.3) 14.2 (14.2) Net Income (Millions) $(.2) $0.4 $7.6 $(3.7) $12.7 $(12.7)
EARNINGS COMPONENTS (IN MILLIONS) --------------------------------- COMPARING 1996 TO 1995 ----------------------
Quarter Nine Months Twelve Months -------------------- -------------------- -------------------- $ Change % Change $ Change % Change $ Change % Change --------- --------- --------- --------- --------- --------- Operating Revenues $ 9.7 9.1% $156.7 21.9% $225.0 22.2% Cost of Gas 8.2 39.1 124.4 41.1 160.4 35.8 Gross Margin 1.5 1.7 32.3 7.8 64.6 11.4 Operation and Maintenance 8.0 13.1 (2.0) (1.0) (5.3) (1.8) Depreciation and Depletion 2.7 12.3 7.0 10.4 8.6 9.9 Property and Other Taxes 0.4 2.8 3.3 7.6 4.8 8.7 Other Income and Deductions - - 3.5 11.6 4.7 11.0 Income Tax Provision (4.3) (70.9) 7.1 33.4 21.2 78.8
GROSS MARGIN Gross margin (operating revenues less cost of gas) increased for the quarter, nine- and twelve-month periods, reflecting increased gas sales and transportation deliveries. The increase in gross margin for the quarter was partially offset by a 1995 decrease in lost gas of $4.6 million. 1 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Gas sales volumes increased in the 1996 nine- and twelve-month periods as compared to the 1995 periods due to colder weather and market expansion. End user transportation deliveries in 1996 reflect transportation to the Michigan Power project, a 123 megawatt cogeneration plant in which MCN has a 50% interest. Deliveries to the project, which became operational in October 1995, are approximately 9 Bcf per year.
- ------------------------------------------------------------------------------------------ Quarter Nine Months Twelve Months ------- ----------- ------------- 1996 1995 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- GAS MARKETS (IN BCF) Gas Sales.................... 14.2 14.1 150.4 134.9 222.4 190.3 End User Transportation...... 28.6 27.8 107.9 103.4 149.9 139.8 Intermediate Transportation.. 148.7 67.2 407.1 237.8 510.8 309.0 ----- ----- ----- ----- ----- ----- 191.5 109.1 665.4 476.1 883.1 639.1 ===== ===== ===== ===== ===== ===== - ------------------------------------------------------------------------------------------
The increases in intermediate transportation deliveries in the 1996 periods are due primarily to additional volumes transported for two major fixed-fee customers and increased transportation of Antrim gas for Michigan gas producers and brokers. MichCon recently completed expansion of the transportation capacity of its northern Michigan gathering system. The expansion enabled MichCon to transport an additional 31.7 Bcf, 91.6 Bcf and 107.8 Bcf in the 1996 quarter, nine- and twelve-month periods, respectively. 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 13.2 Bcf and 40.2 Bcf in volumes transported during the 1996 quarter and nine-month periods. Profit margins on intermediate transportation services are considerably less than margins on gas sales or for end user transportation markets. 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 is allowed timely recovery of 100% of its prudently and reasonably incurred cost of gas sold. Therefore, significant fluctuations in total gas costs have little or no direct effect on gross margins and earnings. Cost of gas sold increased in the 1996 nine- and twelve-month periods due to higher sales volumes resulting primarily from the colder weather, and in all periods due to higher spot market prices paid for natural gas purchase. The increase in market prices paid for gas resulted in an increase in the cost of gas sold per thousand cubic feet of $.58 (34%), $.59 (26%) and $.43 (18%) in the 1996 quarter, nine- and twelve-month periods, respectively, from the comparable 1995 periods. 2 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (Continued) OPERATION AND MAINTENANCE Operation and maintenance expenses were higher in the 1996 quarter due primarily to increased uncollectible gas accounts that were driven higher by last winter's colder temperatures and rising gas prices, which significantly increased customers' heating bills. The impact of higher heating bills was worsened by a reduction in home heating assistance funding obtained by low- income customers. Operation and maintenance expenses decreased for 1996 nine-and twelve-month periods due to lower employee benefit costs, primarily pension and retiree healthcare costs. The reductions in the 1996 nine- and twelve-month periods were partially offset by increased uncollectibles expense. Management's continuing efforts to reduce operating costs also contributed to the decreases. As discussed in MichCon's 1995 Annual Report on Form 10-K, MichCon receives a significant amount of its heating assistance funding from the federal Low- Income Home Energy Assistance Program (LIHEAP). During 1995, Congress reduced a substantial portion of the program's funding for the 1996 fiscal year and had proposed to eliminate all funding in future years. Michigan's share of LIHEAP funds was reduced from $78 million in fiscal year 1995 to $47.5 million in 1996. During October 1996, the President signed an Omnibus Spending Bill passed by Congress that provided for $1 billion in LIHEAP funding which increases the 1997 funding by $100 million over 1996 levels. DEPRECIATION AND DEPLETION The increase in depreciation and depletion for all 1996 periods was due mainly to higher plant balances. PROPERTY AND OTHER TAXES Property and other taxes for the 1996 periods reflect an increase in property taxes due to higher property balances. OTHER INCOME AND DEDUCTIONS Interest expense for all 1996 periods has increased due to an increase in the average amount of long-term debt outstanding. For the 1996 quarter, this increase to other income and deductions is offset by an increase in the allowance for funds used during construction due to increased construction during 1996. INCOME TAX PROVISION Income taxes decreased for the 1996 quarter and increased for the nine- and twelve-month periods due primarily to changes in earnings. Due to the favorable resolution of prior years' tax issues in the 1996 and 1995 periods, income tax expense was $.7 million and $.4 million lower in the quarter and nine-month 1996 periods and was $2.6 million higher in the 1996 twelve-month period. OUTLOOK MichCon's strategy is to grow revenues and reduce its costs in order to maintain strong returns and provide customers with quality service at competitive prices. Revenue growth will be achieved through the expansion of MichCon's 1.2 million residential, commercial and industrial customer base. MichCon will continue initiatives to increase productivity and improve customer services in order to strengthen its competitive position in the gas industry. 3 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (Concluded) CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES MichCon's cash flow from operating activities totaled $111.3 million for the 1996 nine-month period, decreasing $39.5 million from the comparable 1995 period. The decrease was due primarily to higher working capital requirements, partially offset by higher net income, after adjusting for depreciation and deferred taxes. MichCon anticipates that working capital requirements will be greater throughout 1996 as compared to 1995 in order to fund the GCR undercollection, which is $33.6 million as of September 1996. FINANCING ACTIVITIES During the latter part of the year, cash and cash equivalents normally decrease as funds are used to finance increases in gas inventories and customer accounts receivable. Short-term debt is normally reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the current nine-month period, cash increased due to the timing of cash receipts. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper which is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings of up to $100 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility. Commercial paper of $192.1 million was outstanding as of September 30, 1996 under these lines. In May 1996, MichCon issued first mortgage bonds totaling $70 million under its existing shelf registration. The proceeds were used to repay short-term obligations, finance MichCon capital expenditures and for general corporate purposes. MichCon is planning on filing a shelf registration with the Securities and Exchange Commission in the fourth quarter of 1996 which will allow it to issue, in conjunction with an existing shelf registration, up to $300 million of debt securities over the next several years. MichCon's capital requirements and general market conditions will affect the timing and amount of future issuances. INVESTING ACTIVITIES MichCon's capital expenditures totaled $146.3 million during the 1996 nine-month period and are anticipated to be approximately $220 million by the end of the year. These expenditures are used primarily for the construction of transportation pipelines, the construction of new distribution lines to reach communities not previously served by MichCon, and to make improvements to existing storage and transmission systems. In January 1996, MichCon began construction of a 59-mile loop of its existing Milford to Belle River Pipeline. The pipeline is anticipated to be completed in early 1997 at a cost of approximately $80 million. The pipeline will improve the overall reliability and efficiency of MichCon's gas storage and transmission system by serving as a back-up means of transportation in the event of disruption in the operation of the existing pipeline or other facilities used to supply gas to MichCon's system. It is management's opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. 4 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION(Unaudited) (Thousands of Dollars)
September 30, December 31, ------------------------ ------------ 1996 1995 1995 ---------- ---------- ------------ ASSETS Current Assets Cash and cash equivalents, at cost (which approximates market value)......... $ 18,282 $ 3,213 $ 8,469 Accounts receivable, less allowance for doubtful accounts of $14,112, $12,725 and $13,250, respectively.................................. 119,787 91,434 175,103 Accrued unbilled revenues.................................................... 22,197 18,815 91,134 Gas in inventory............................................................. 101,742 92,508 40,191 Property taxes assessed applicable to future periods......................... 23,456 21,618 56,949 Accrued gas cost recovery revenues........................................... 33,585 - - Other........................................................................ 22,602 28,338 32,498 ---------- ---------- ---------- 341,651 255,926 404,344 ---------- ---------- ---------- Deferred Charges and Other Assets Investment in and advances to joint ventures.................................. 20,357 19,742 20,318 Deferred postretirement benefit costs......................................... 7,103 14,613 12,372 Deferred environmental costs (Note 4a)........................................ 28,016 - 32,000 Prepaid benefit costs......................................................... 54,103 20,770 25,438 Other......................................................................... 48,660 41,448 42,061 ---------- ---------- ---------- 158,239 96,573 132,189 ---------- ---------- ---------- Property, Plant and Equipment, at cost......................................... 2,609,095 2,338,974 2,413,120 Less - Accumulated depreciation and depletion................................. 1,221,009 1,135,024 1,151,160 ---------- ---------- ---------- 1,388,086 1,203,950 1,261,960 ---------- ---------- ---------- $1,887,976 $1,556,449 $1,798,493 ========== ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities Accounts payable............................................................. $ 99,223 $ 69,691 $ 108,208 Notes payable (Note 2)....................................................... 194,013 111,820 196,635 Current portion of long-term debt, capital lease obligations and redeemable cumulative preferred stock................................... 53,213 3,936 3,969 Federal income, property and other taxes payable............................. 33,241 45,186 85,195 Customer deposits............................................................ 10,787 10,277 11,531 Other........................................................................ 50,885 57,107 64,587 ---------- ---------- ---------- 441,362 298,017 470,125 ---------- ---------- ---------- Deferred Credits and Other Liabilities Accumulated deferred income taxes............................................. 83,160 60,863 61,146 Unamortized investment tax credit............................................. 35,050 36,902 36,437 Tax benefits amortizable to customers......................................... 112,930 112,085 114,487 Accrued postretirement benefit costs.......................................... - 14,537 12,661 Accrued environmental costs (Note 4a)......................................... 32,000 - 32,000 Minority interest (Note 3).................................................... 18,503 - - Other......................................................................... 59,838 60,025 65,252 ---------- ---------- ---------- 341,481 284,412 321,983 ---------- ---------- ---------- Long-Term Debt, including capital lease obligations (Note 1)................... 551,254 517,035 516,564 ---------- ---------- ---------- Commitments and Contingencies (Note 4) Common Shareholder's Equity Common stock.................................................................. 10,300 10,300 10,300 Additional paid-in capital (Note 3)........................................... 230,399 211,777 211,777 Retained earnings............................................................. 313,180 234,908 267,744 ---------- ---------- ---------- 553,879 456,985 489,821 ---------- ---------- ---------- $1,887,976 $1,556,449 $1,798,493 ========== ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 5 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended Twelve Months Ended September 30, September 30, September 30, ---------------------- --------------------- ----------------------- 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- ---------- ---------- Operating Revenues............................ $117,251 $107,522 $870,970 $714,302 $1,237,481 $1,012,478 -------- -------- -------- -------- ---------- ---------- Operating Expenses Cost of gas.................................. 29,163 20,963 427,560 303,130 608,392 448,016 Operation and maintenance.................... 68,727 60,750 208,710 210,753 292,381 297,688 Depreciation and depletion................... 24,830 22,107 73,963 66,988 96,103 87,481 Property and other taxes..................... 13,161 12,798 46,773 43,487 60,298 55,462 -------- -------- -------- -------- ---------- ---------- Total operating expenses.................... 135,881 116,618 757,006 624,358 1,057,174 888,647 -------- -------- -------- -------- ---------- ---------- Operating Income (Loss)....................... (18,630) (9,096) 113,964 89,944 180,307 123,831 -------- -------- -------- -------- ---------- ---------- Equity in Earnings of Joint Ventures.......... 203 123 698 499 938 554 -------- -------- -------- -------- ---------- ---------- Other Income and (Deductions) Interest income.............................. 1,401 765 2,620 2,764 3,839 3,761 Interest on long-term debt................... (11,013) (9,726) (31,005) (26,410) (40,415) (34,665) Other interest expense....................... (1,217) (774) (4,992) (4,425) (7,620) (7,368) Minority interest............................ (332) - (1,034) - (1,034) - Other........................................ 664 (758) 482 (2,337) (2,590) (4,816) -------- -------- -------- -------- ---------- ---------- Total other income and (deductions)......... (10,497) (10,493) (33,929) (30,408) (47,820) (43,088) -------- -------- -------- -------- ---------- ---------- Income (Loss) Before Income Taxes............. (28,924) (19,466) 80,733 60,035 133,425 81,297 Income Tax Provision (Benefit)................ (10,487) (6,138) 28,279 21,201 48,082 26,885 -------- -------- -------- -------- ---------- ---------- Net Income (Loss)............................. (18,437) (13,328) 52,454 38,834 85,343 54,412 Dividends on Preferred Stock.................. - 54 18 182 71 297 -------- -------- -------- -------- ---------- ---------- Net Income (Loss) Available for Common Stock.. $(18,437) $(13,382) $ 52,436 $ 38,652 $ 85,272 $ 54,115 ======== ======== ======== ======== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) (THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended Twelve Months Ended September 30, September 30, September 30, ---------------------- --------------------- ----------------------- 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- Balance - Beginning of Period................. $331,617 $248,290 $267,744 $202,756 $234,908 $187,293 Add - Net income (loss)...................... (18,437) (13,328) 52,454 38,834 85,343 54,412 -------- -------- -------- -------- -------- -------- 313,180 234,962 320,198 241,590 320,251 241,705 Deduct - Cash dividends declared: Preferred stock............................. - 54 18 182 71 297 Common stock................................ - - 7,000 6,500 7,000 6,500 -------- -------- -------- -------- -------- -------- Balance - End of Period....................... $313,180 $234,908 $313,180 $234,908 $313,180 $234,908 ======== ======== ======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of these statements. 6 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Thousands of Dollars)
Nine Months Ended September 30, -------------------------------- 1996 1995 ------------ ----------- Cash Flow from Operating Activities Net income.................................................................... $ 52,454 $ 38,834 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income.................................................... 73,963 66,988 Charged to other accounts.................................................. 5,667 5,446 Deferred income taxes - current............................................. (5,372) (5,323) Deferred income taxes and investment tax credit - net....................... 10,715 4,254 Other....................................................................... (1,946) 992 Changes in assets and liabilities, exclusive of changes shown separately........................................................... (24,184) 39,646 ------------ ----------- Net cash provided from operating activities.............................. 111,297 150,837 ------------ ----------- Cash Flow from Financing Activities Notes payable - net........................................................... (2,622) (56,637) Issuance of long-term debt.................................................... 69,645 68,764 Cash dividend paid: Common stock................................................................. (7,000) (6,500) Preferred stock.............................................................. (54) (223) Retirement of long-term debt and preferred stock.............................. (5,435) (4,290) Equity Investment............................................................. 1,614 7,000 ------------ ----------- Net cash provided from financing activities.............................. 56,148 8,114 ------------ ----------- Cash Flow from Investing Activities Capital expenditures.......................................................... (146,277) (154,718) Other - net................................................................... (11,355) (2,325) ------------ ----------- Net cash used for investing activities................................... (157,632) (157,043) ============ =========== Net Increase in Cash and Cash Equivalents...................................... 9,813 1,908 Cash and Cash Equivalents, January 1........................................... 8,469 1,305 Cash and Cash Equivalents, September 30........................................ ------------ ----------- $ 18,282 $ 3,213 ============ =========== Changes in Assets and Liabilities, Exclusive of Changes Shown Separately Accounts receivable - net.................................................... $ 58,180 $ 41,913 Accrued/deferred gas cost recovery revenues.................................. (34,163) (17,653) Accrued unbilled revenues.................................................... 68,937 63,418 Gas in inventory............................................................. (61,551) (14,665) Property taxes assessed applicable to future periods......................... 34,703 30,545 Accounts payable............................................................. (10,101) (10,980) Federal income, property and other taxes payable............................. (53,971) (40,620) Other current assets and liabilities......................................... 1,363 3,373 Deferred assets and liabilities.............................................. (27,581) (15,685) ------------ ----------- $ (24,184) $ 39,646 ============ =========== Supplemental Disclosures Cash paid for: Interest, net of amounts capitalized......................................... $ 28,501 $ 24,084 ============ =========== Federal income taxes......................................................... $ 28,792 $ 23,111 ============ =========== Noncash financing activities: Transfer of pipeline net assets to MichCon (Note 3).......................... $ 17,008 $ - ============ ===========
The notes to the consolidated financial statements are an integral part of this statement. 7 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. CAPITALIZATION During May 1996, First Mortgage Bonds in the amount of $30,000,000 were issued at 6.51%, due June 1999 and $40,000,000 were issued at 7.15%, due May 2006. 2. LINES OF CREDIT During 1995, MichCon established credit lines to allow for borrowings of up to $100,000,000 under a 364 day revolving credit facility and up to $150,000,000 under a three year revolving credit facility. These credit lines totaling $250,000,000 support its commercial paper program. In July 1996, the 364 day revolving facility was renewed. Commercial paper of $192,138,000 was outstanding as of September 30, 1996, under these lines. 3. TRANSFER OF SUBSIDIARIES In January 1996, MCN Corporation (MCN), parent company of MichCon, transferred its Michigan pipeline operations, 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. Contributions from these pipeline operations to MichCon's consolidated net income were approximately $289,000 and $912,000 for the three- and nine-month periods ended September 30, 1996. 4. COMMITMENTS AND CONTINGENCIES a. ENVIRONMENTAL MATTERS As described in MichCon's 1995 Annual Report on Form 10-K, MichCon accrued an additional environmental remediation liability and corresponding regulatory asset of $32,000,000 in the fourth quarter of 1995. MichCon has notified current and former insurance carriers of the environmental conditions and is pursuing claims against these carriers. In 1996, MichCon received payments from certain insurance carriers and expects additional insurance recoveries over the next several years. At September 30, 1996, the reserve balance was approximately $35,165,000, of which $3,165,000 is classified as current. b. OTHER 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. 8 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Concluded) 5. ACCOUNTING PRONOUNCEMENT The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" in October 1995. The statement requires certain disclosures about stock-based employee compensation in the financial statements and encourages, but does not require, a fair-value-based method of accounting for such compensation. MichCon currently awards performance units to selected employees under its long term incentive plan. Each performance unit is equivalent to a share of MCN common stock. MCN is currently evaluating whether to adopt the fair-value-based method of accounting and its impacts. 6. GENERAL The accompanying consolidated financial statements should be read in conjunction with MichCon's 1995 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year's financial statements to conform with the 1996 presentation. The unaudited information furnished herein, in the opinion of management, reflects all adjustments (consisting of only recurring adjustments or accruals) necessary for a fair presentation of the results of operations during the periods. Because of seasonal and other factors, revenues, expenses and net income for the interim periods should not be construed as representative of revenues, expenses and net income for all or any part of the balance of the current year or succeeding periods. 9 OTHER INFORMATION LEGAL PROCEEDINGS 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 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 that 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 PROGRAM: 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, MichCon offered low interest loans, rebates and other arrangements to assist 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, the plaintiffs' motions were granted to certify as a class the approximately 46,000 customers who had participated in MichCon's conservation programs from 1990 to the present. MichCon believes that plaintiffs' allegations are without merit and will continue to defend the case vigorously. 10 EXHIBITS (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- 10-1 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to MCN's September 30, 1996 Form 10-Q). 10-2 MichCon Supplemental Death Benefit and Retirement Income Plan (Attachment to Exhibit 10-2 to MCN's September 30, 1996 Form 10-Q). 10-3 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30, 1996 Form 10-Q). 12-1 Computation of Ratio of Earnings to Fixed Charges. 27-1 Financial Data Schedule. 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHIGAN CONSOLIDATED GAS COMPANY Date: November 7, 1996 By: /s/ David R. Nowakowski ------------------------------- David R. Nowakowski Vice President, Controller, Treasurer and Chief Accounting Officer 12 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12-1 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
Twelve Months Ended Twelve Months Ended Twelve Months Ended ------------------- ------------------- ------------------- September 30, 1996 December 31, 1995 December 31, 1994 ------------------- ------------------- ------------------- EARNINGS AS DEFINED (1) Pre-tax Income (2)....................... $132,421 $112,727 $ 89,707 Fixed charges............................ 50,610 45,637 39,663 -------- -------- -------- Earnings as defined.................... $183,031 $158,364 $129,370 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt............... $ 40,415 $ 35,820 $ 27,948 Interest on other borrowed funds......... 7,620 7,053 9,093 Amortization of debt discounts, premium and expense............................ 1,077 996 950 Interest implicit in rentals (3)......... 1,498 1,768 1,672 -------- -------- -------- Fixed charges as defined............... $ 50,610 $ 45,637 $ 39,663 ======== ======== ======== Ratio of Earnings to Fixed Charges....... 3.62 3.47 3.26 ======== ======== ======== - ----------------------------
Notes: - ----- (1) Earnings and fixed charges are defined and computed in accordance with Item 503 of Regulation S-K. (2) This amount represents the aggregate of (a) the pre-tax income of MichCon, (b) MichCon's share of pre-tax income of its 50% owned companies and (c) any income actually received from less than 50% owned companies. (3) 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 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 18,282 0 133,899 14,112 101,742 341,651 2,609,095 1,221,009 1,887,976 441,362 551,254 10,300 0 0 543,579 1,887,976 0 870,970 0 757,006 552 16,620 35,997 80,733 28,279 52,454 0 0 0 52,436 0 0
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