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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994, 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)
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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)
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Registrant's telephone number, including area code 313-965-2430
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Redeemable Cumulative Preferred Stock, $2.05 Series New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Items 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
All of the registrant's 10,300,000 outstanding shares of common stock, par
value $1 per share, are owned by MCN Corporation. The aggregate market value
of the Redeemable Cumulative Preferred Stock held by non-affiliates as of
February 21, 1995 was $2.6 million based on 104,732 outstanding shares and the
closing price on that day (New York Stock Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of MichCon's March 1995 definitive Proxy Statement are
incorporated by reference in Part III, Items 10, 11, 12 and 13.
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KEY TO ABBREVIATED TERMS
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ANG ........................................ Adsorbed Natural Gas; a technology which uses an
adsorbent material to store natural gas in tanks or
containers at considerably lower pressures (300 to
500 pounds per square inch) than traditional methods
of natural gas storage, such as compressed natural
gas.
Antrim Gas.................................. Natural gas produced from shallow wells in the
Devonian (Antrim) shale formations.
Base Pressure............................... Pressure at which measurements of a volume of
gas are measured. MichCon's common base pressure
is 14.65 pound per square inch absolute.
Bcf......................................... One billion cubic feet, which is a unit of
measurement of gas volume. 1 Bcf = 1,000 MMcf.
BTU......................................... British Thermal Unit; the amount of heat required to
raise the temperature of one pound of water one
degree Fahrenheit. One cubic foot of natural gas
contains approximately 1,000 BTUs.
Capital Investments......................... MichCon's consolidated capital expenditures plus
acquisitions and MichCon's share of capital
expenditures of joint ventures, less the minority
partners' share of consolidated capital expenditures.
Degree Days................................. A measure of the coldness of the weather based on
how much the average daily temperature is below 65
degrees Fahrenheit.
End User Transportation..................... A gas delivery service provided to large-volume
commercial and industrial customers who purchase
natural gas directly from producers or brokerage
companies for the customers own use.
FERC........................................ Federal Energy Regulatory Commission; a federal
agency that determines the rates and regulations
of interstate pipelines.
Gas Markets................................. Gas sales, end user transportation and intermediate
transportation deliveries.
Gas Storage................................. The process of injecting and withdrawing natural gas
from a depleted underground natural gas field or salt
cavern.
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KEY TO ABBREVIATED TERMS
(concluded)
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GCR......................................... Gas Cost Recovery; a process by which MichCon,
through annual gas cost proceedings before the
Michigan Public Service Commission, can recover
the prudent and reasonable cost of gas sold.
Intermediate Transportation................. A gas delivery service provided to gas producers, gas
brokers and other gas companies that own the natural
gas, but are not the ultimate consumers.
Mcf......................................... One thousand cubic feet, which is a unit of
measurement of gas volume.
MCN......................................... MCN Corporation and subsidiaries.
MichCon..................................... Michigan Consolidated Gas Company; a wholly-
owned natural gas distribution and intrastate
transmission subsidiary of MCN.
MMcf........................................ One million cubic feet, which is a unit of
measurement of gas volume. 1 MMcf = 1,000 Mcf.
MPSC........................................ Michigan Public Service Commission; the regulator
of intrastate aspects of the natural gas industry within
the State of Michigan.
Normal Weather.............................. The average daily temperature within MichCon's
service area during a recent 30-year period, as
measured and published by the National Weather
Service.
Order No. 636............................... An order issued in 1992 by the FERC, and subsequent
related orders, which require interstate pipeline
companies to separate or unbundle their various
pipeline services.
Spot Market................................. The buying and selling of natural gas on a short-term
basis, typically monthly.
Supply Realignment Plan..................... MichCon's plan, approved by the MPSC, to use
additional underground storage capacity to provide
reliable and lower-priced service by purchasing
natural gas during periods of low demand.
Trading Company............................. MichCon Trading Company; a former subsidiary of
MichCon that was sold to subsidiaries of MCN in the
second quarter of 1993.
Transition Costs............................ Costs incurred by interstate pipeline companies under
FERC Order No. 636 to reduce or eliminate gas
supply related obligations.
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TABLE OF CONTENTS
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PAGE
CONTENTS NUMBER
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Part I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 11
Item 3. Legal Proceedings............................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......................... 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 12
Item 6. Selected Financial Data...................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 14
Item 8. Financial Statements and Supplementary Data.................................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 45
Part III
Item 10. Directors and Executive Officers of the Registrant.......................... 45
Compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended.................................................................. 45
Item 11. Executive Compensation...................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 46
Item 13. Certain Relationships and Related Transactions.............................. 46
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............. 47
Signatures ............................................................................ 49
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PART I
ITEM 1. BUSINESS
GENERAL
MichCon is a Michigan corporation that was organized in 1898 and, with
its predecessors, has been in business for nearly 150 years. MichCon is a
public utility engaged in the distribution and transmission of natural gas in
the state of Michigan. MichCon, a wholly-owned subsidiary of MCN, is
one of the largest natural gas distributors in the United States and the
largest in Michigan.
At December 31, 1994, MichCon and its subsidiaries employed 3,273
persons. Of this amount, approximately 44% are covered by five collective
bargaining agreements. In December of 1994, settlement was reached on two of
the collective bargaining agreements. The remaining three agreements will
expire in June 1995.
GAS MARKETS & TRANSPORTATION
MichCon serves more than 1.1 million customers in the Detroit, Grand
Rapids, Ann Arbor, Traverse City and Muskegon metropolitan areas and in
various other communities throughout the state of Michigan. The following
services are provided by MichCon:
- Gas Sales - Includes the marketing and delivery of natural
gas to residential, commercial and industrial customers.
- End User Transportation - Through this service, large volume
customers that purchase gas directly from producers or
marketers utilize the Company's gas distribution network to
transport the gas to their facilities.
- Intermediate Transportation - Through this service, MichCon
provides transportation service to pipelines, gas marketers,
Michigan producers and other local distribution companies in
the United States and Canada that own the gas, but are not the
ultimate consumer.
The following table sets forth revenues earned by gas sales, end user
transportation, intermediate transportation and other revenues for the years
1992-1994.
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Revenue (In millions of dollars)
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1994 1993 1992
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Gas Sales.............................................. $954.8 $1,075.9 $1,214.4
End User Transportation................................ 76.2 71.4 69.9
Intermediate Transportation............................ 28.7 19.6 17.8
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Total Sales and Transportation .................. 1,059.7 1,166.9 1,302.1
-------- -------- -------
Conservation Programs, Storage
Services and other.................................. 52.0 56.6 55.7
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Total Operating Revenues......................... $1,111.7 $1,223.5 $1,357.8
======== ======== ========
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The following table sets forth MichCon's gas sales and transportation delivery
volumes for the years 1992-1994.
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1994 1993 1992
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Gas Markets (Bcf)
Gas Sales
MichCon ............................................... 201.4 201.8 199.9
Trading Company ....................................... - 48.7 109.3
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Total Sales.......................................... 201.4 250.5 309.2
End User Transportation.................................. 139.8 128.4 129.5
Intermediate Transportation ............................. 303.6 281.1 184.0
------- ------- -------
Total Sales and Transportation.......................... 644.8 660.0 622.7
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NOTE:During the second quarter of 1993, MichCon sold the businesses of
Trading Company to subsidiaries of MCN. As a result of the sale,
total gas sales have decreased in 1993, as well as the cost
associated with those sales. See Note 3 of the consolidated
financial statements for details.
Effect of Weather: MichCon's sales and end user transportation
volumes, revenues and net income are impacted by the weather. Given the
seasonal nature of the business, revenues and net income tend to be higher in
the first and fourth quarters of the calendar year. Warmer than normal weather
in the last three years caused total sales and transportation volumes to be
lower by 4.4 Bcf in 1994, 4.3 Bcf in 1993 and 10.2 Bcf in 1992. As a result,
weather reduced net income by $4.0 million in 1994, $3.7 million in 1993 and
$8.7 million in 1992.
GAS SALES: This market represents 31% of total deliveries and produced
approximately 80% of MichCon's gross profit margin from sales and
transportation services. The average margin per Mcf from gas sales in 1994
was $2.11. Lower consumption per customer, primarily related to installation
of more energy efficient equipment, offset sales to new customers.
Competition in the gas sales market from alternative energy sources is
minimal, coming primarily from sources such as electricity, propane, and to a
lesser degree, oil and wood. Natural gas continues to be the preferred fuel
for Michigan residences and businesses. Once the switch to natural gas is
made, the customer rarely switches back to the alternate fuel. Nearly every
residential and commercial developer in MichCon's service territories selects
natural gas in new construction because of the convenience, cleanliness and
price advantage of natural gas compared to propane, fuel oil and other
alternative fuels. Service and price are the primary factors affecting this
market.
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MichCon continues to take steps to remain competitive, including
broadening the scope of services provided. For example, MichCon offers the
financing of distribution lines and gas appliances to encourage potential
customers to switch to natural gas. MichCon continues its commitment to
maintain low gas costs. During 1994, MichCon's annual average cost of gas rate
of $2.68 per Mcf is at the lowest level since 1980, meeting its objective of
being in the lowest quartile for costs of gas in Michigan as well as
neighboring states. In addition, MichCon is continuously striving to reduce
the cost of operating the business. In 1994, MichCon aligned its operations
along core business processes to make the company more efficient, competitive
and customer focused.
MichCon has an Area Expansion Program (AEP) in place to meet demand for
natural gas in areas currently not served. The program is primarily directed
toward the residential and small commercial markets. By financing the cost of
conversions, this program makes it easier for users of other fuels,
primarily propane and fuel oil, to use natural gas for space heat and other
appliances. The AEP has contributed to the 12,047, 11,478 and 5,142 net
increases in customers in 1994, 1993 and 1992, respectively. In 1994, 23 new
areas were served by MichCon, bringing to 100 the total number of new areas
added since 1984. From time to time in reaching new areas, MichCon will
request a franchise in competition with others wanting to serve the area.
END USER TRANSPORTATION: In 1994, this market accounted for 22% of total
gas deliveries and produced approximately 14% of MichCon's gross profit
margin from sales and transportation services. The average revenue per Mcf
from end user transportation in 1994 was $.55. End user transportation
deliveries increased in 1994 due to a higher level of usage by large-volume
commercial and industrial customers driven by improved business activity in
Michigan. The addition of new customers also contributed to the increased
deliveries.
At December 31, 1994, MichCon had end user transportation agreements
representing annual volumes of 133 Bcf. Approximately 75% of these volumes are
under contracts that extend to 1996 or beyond and include virtually all of the
large and most price competitive customers. The contracts for the remaining
volumes are typically one-year contracts that expire at various times during
1995 and relate to a large number of low volume users with relatively low
price sensitivity. Negotiations have commenced with customers whose contracts
expire in 1995.
Through technical and financial assistance, customers have been
encouraged to increase the use of natural gas in their industrial and
commercial facilities. Gas-fueled cogeneration and air conditioning have been
two expanding markets for natural gas. In 1994, these markets accounted for
approximately 16 Bcf of gas deliveries. Air compressors and other small
engines in certain commercial applications also provide possibilities for
conversion to natural gas-powered equipment. The efficiencies and price
competitiveness of natural gas can significantly reduce operating costs for
customers, even though a higher initial outlay may be required.
The primary focus of competition in this market is total cost of fuel.
While some large commercial and industrial customers have the capability
to switch to alternative fuel sources including coal, electricity, oil and
steam, the vast majority of these customers are under long-term contracts. In
addition, some of these customers could bypass MichCon's distribution system
and obtain service directly from a pipeline company. However, cost
differentials must be sufficient to offset the substantial investment costs
and risk associated with fuel switching or bypass. MichCon competes against
alternative fuel sources by providing competitive pricing, reliability of
supply through use of the company's extensive storage capacity and multiple
supply sources. Almost all significant customers that
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are in proximity to pipeline facilities are under long-term contracts.
In the past several years, MichCon has been successful in converting many
customers' facilities to natural gas from alternative fuels and in retaining
those customers after conversion. In 1994, approximately 28 Bcf of MichCon's
transportation deliveries were to customers who displaced coal with natural
gas.
End user transportation will expand further in 1995 with the completion
of the Michigan Power Project. During the third quarter of 1994, MCN and
Destec Energy began construction of a 123 megawatt cogeneration plant in
Ludington, Michigan. MichCon will provide end user transportation of the
natural gas needed to fuel the plant, approximately nine Bcf annually. A
12-mile pipeline extension, costing $15 million, is being constructed for this
purpose.
INTERMEDIATE TRANSPORTATION: This service accounts for 47% of total gas
volumes, but, due to the lower rate charged for the service, represents only
5% of MichCon's gross profit margin from sales and transportation services.
The average revenue per Mcf from intermediate transportation in 1994 was $.09.
MichCon's extensive transmission pipeline system has enabled it to
increase the volumes transported in 1994 and 1993 for Michigan gas producers,
ANR Pipeline Company (ANR) and other shippers. MichCon operates in a pivotal
geographic location with links to major interstate pipelines that reach
markets elsewhere in the Midwest, the eastern United States and eastern
Canada. Transportation volumes increased due to the start-up of the Blue Lake
gas storage project, in which MichCon began transporting gas for ANR under a
firm, long-term contract. Profit margins on intermediate transportation
services are considerably less than margins on gas sales or for end user
transportation markets.
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. Intermediate transportation
deliveries have nearly tripled since 1991, and have resulted from time to time
in capacity constraints on MichCon's northern Michigan pipeline system.
MichCon currently has a proposal before the MPSC to build facilities to expand
capacity. This proposal, as well as other competing proposals, are being
reviewed by the MPSC and a decision is expected early in 1995. The cost of
this project could be approximately $40 million over the 1995-1996 period.
MichCon currently has a proposal before the MPSC to construct the
Milford-Belle River Loop. This pipeline could be placed in service for the
1995-1996 heating season, and will enable MichCon to expand its intermediate
transportation services.
ENERGY ASSISTANCE AND CONSERVATION PROGRAMS
Energy assistance programs funded by the federal government and the state
of Michigan, including the Home Heating Credit for low-income customers and
the Department of Social Services' (DSS) Heating Assistance Program, continue
to be critical to MichCon's ability to control its uncollectible expenses.
MichCon has historically obtained favorable regulatory treatment of its
uncollectible costs, including those related to these energy assistance
programs.
The Low-Income Home Energy Assistance Program (LIHEAP) currently provides
approximately $78 million in heating assistance to 385,000 Michigan households
through the DSS, with approximately 40% of the funds going to MichCon
customers. Congress has approved $1.3 billion for the 1995 fiscal year,
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which is a reduction of $.1 billion. In November 1994, however, officials
indicated that all federal programs, including LIHEAP, would be reviewed for
cuts or elimination. MichCon is working to maintain this funding.
MichCon also offers a number of energy conservation programs for its
residential and commercial customers, the costs of which are recovered through
customer charges and MPSC-approved surcharges on gas sales. The MPSC has
consistently provided for recovery of program costs. In September 1994,
MichCon filed a proposal with the MPSC in connection with a Demand Side
Management Plan. This plan is a comprehensive and cost effective energy
conservation plan that includes natural gas conservation programs with an
emphasis on low income users, and other programs intended to reduce energy
costs for all MichCon's customers, including incentives to promote the use of
natural gas rather than other less efficient fuels. Over the three-year period
ending June 30, 1998, the plan is intended to generate a net annual reduction
in natural gas demand of .4 Bcf, about 0.2% of MichCon's annual sales volume.
If approved by the MPSC, MichCon would spend up to $26 million over the
three-year period, which would be recovered through surcharges on gas sales.
An MPSC order on the case is expected in late 1995.
GAS SUPPLY
MichCon obtains its natural gas supply from various sources in different
geographic areas under agreements that vary in both pricing and terms. This
geographic and contractual diversity of supply ensures that MichCon will be
able to meet the requirements of its present and future customers with
reliable supplies of natural gas at competitive, market responsive prices. The
company's objective is to be in the lowest quartile for cost of gas in
Michigan as well as neighboring states. As a result of MichCon's efforts to
lower its cost of gas, including extensive contract renegotiations, increased
use of spot market-priced purchases and the use of available storage, its gas
cost declined to $2.68 per Mcf in 1994, the lowest among a group of 22
utilities in Michigan and neighboring states. MichCon's gas costs have
decreased 34% in the last ten years.
The following table summarizes MichCon's gas supply purchases for the years
1992-1994.
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1994 1993 1992
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Gas Supply Purchases (Bcf)
Michigan Producers...................................... 85.9 92.7 100.0
Interstate Suppliers.................................... 64.3 80.4 71.4
Canadian Suppliers...................................... 29.4 15.4 12.1
Spot Market ............................................ 34.3 9.5 8.0
------- ------ ------
213.9 198.0 191.5
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MichCon purchased 46% of its 1994 supply from producers in the southern
and midcontinent regions of the United States, 40% from Michigan producers and
14% from Canadian producers. The supplies are complemented by 130 Bcf of
working storage capacity from storage fields owned and operated in Michigan.
The 1994 increase in volume associated with Spot Market is due to the
subsequent discontinuance of MichCon purchases of gas from ANR as a result of
FERC Order No. 636, as discussed below.
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As a result of ANR's FERC Order No. 636 restructuring, its
long-term relationship with MichCon changed significantly. MichCon no longer
purchases natural gas supply directly from ANR, but instead utilizes ANR
solely as a transporter of gas. MichCon purchases gas directly from producers
and marketers with access to natural gas supplies in Texas, Oklahoma,
Louisiana and Canada. Although MichCon had been purchasing gas directly from
others during the last several years to supplement its purchases from ANR,
effective November 1, 1993, MichCon completely eliminated its reliance on
pipeline suppliers for the purchase of gas supply.
FERC ORDER NO. 636: In 1992, the FERC issued Order No. 636 which
required interstate pipelines to separate their pipeline sales service into
its various service components and to price each component separately. The
order also permitted interstate pipelines to recover 100% of their prudently
incurred transition costs including costs incurred by interstate pipelines to
assign and/or renegotiate their gas supply related obligations.
In November 1993, ANR, MichCon's primary interstate natural gas
transporter, implemented its FERC Order No. 636 service restructuring. ANR
discontinued its merchant function and modified its rates to reflect the
Straight Fixed/Variable rate design (SFV) mandated by Order No. 636. Under
SFV, pipelines recover fixed costs through monthly demand charges based upon
capacity entitlement and recover only variable costs through volume-sensitive
commodity charges. SFV significantly increases costs to many weather-sensitive
local distribution companies who do not have on-system storage capacity. In
contrast, through the use of its extensive underground storage facilities,
MichCon has been able to lower its pipeline capacity entitlement thereby
minimizing pipeline fixed charges.
During 1994, ANR filed several requests for recovery of these
transition costs, and MichCon accrued its portion totaling $5.4 million, of
which $3.9 million is reflected in cost of gas. The MPSC has held that these
transition costs are recoverable through the GCR mechanism and therefore, an
asset has been recorded for their future recovery. As periodic filings are
made by ANR, MichCon will accrue its allocated portion. It is management's
belief that these costs will have no effect on earnings.
GENERAL SUPPLY: To ensure continuous, uninterrupted service to
customers, MichCon has in place long-term firm transportation agreements with
ANR and Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR is
obligated to transport approximately 375 MMcf per day of supply for MichCon,
while Great Lakes is obligated to transport 30 MMcf per day. These
transportation contracts expire on various dates between 1999 and 2011.
MichCon also has contracts with independent Michigan producers that
expire on various dates through 2009. A portion of these contracts expire in
1995. MichCon has begun discussions with several producers concerning gas
purchases after 1995. MichCon has reached agreement with the majority of its
intrastate suppliers to limit the unit price of gas through 1995 to a price
indexed to the natural gas spot market. This will ensure that the price of
intrastate supplies remains competitive with the prices available on the
interstate market.
In 1993, Panhandle Eastern Pipe Line Company (Panhandle) refunded to
MichCon the costs of certain direct billings totaling $5.4 million plus
interest of $4.4 million in compliance with a FERC order. During late 1994
and early 1995, the FERC issued rehearing orders permitting Panhandle to seek
reimbursement of the $4.4 million in interest from MichCon. MichCon intends to
contest Panhandle's claim in the appropriate courts. Should MichCon ultimately
be unsuccessful in defeating Panhandle's claim, it is anticipated that these
costs will be recoverable through the GCR mechanism. Accordingly, an asset has
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been recorded for their future recovery.
At December 31, 1994, MichCon owned and operated five natural gas
storage fields in Michigan with a working storage capacity of approximately
130 Bcf. MichCon uses its storage capacity to supplement its supply during the
winter months, replacing the gas in April through October when demand is at
its lowest. The use of this storage capacity also allows MichCon to lower its
peak day entitlement, thereby reducing interstate pipeline costs. During 1994,
MichCon's maximum one-day sendout exceeded 2.7 Bcf, of which approximately 70%
came from its underground storage fields. MichCon sells a portion of its
natural gas storage capacity to an affiliated company and third parties.
In 1994, MichCon proposed the construction of the Milford-Belle River
Loop. This 59-mile pipeline would parallel an existing portion of MichCon's
pipeline which is the major link between MichCon's gas storage facilities and
major markets in southeast Michigan. The proposed pipeline is estimated to
cost $80 million and will provide necessary backup and more reliable service
during peak demand to customers in southeast Michigan as well as enable
MichCon to expand its intermediate transportation services. If regulatory
approval is received this spring, this pipeline could be in service for the
1995-1996 heating season.
REGULATION AND RATES
MichCon is subject to the jurisdiction of the MPSC as to various
phases of its operations, including gas sales rates, service, accounting and
the issuance of securities. MichCon is also subject to the requirements of
other regulatory agencies with respect to safety, the environment and health.
Michigan offers an environment of progressive and reasonable rate
regulation. This is reflected in the approval of flexible rates in the
large-volume transportation market, the recovery of postretirement health care
costs, the deferral and future recovery of costs associated with the clean-up
of former gas manufacturing sites and recovery of take-or-pay and gas pipeline
transition costs.
GENERAL RATE PROCEEDINGS: In October 1993, MichCon received approval
from the MPSC in its general rate case to increase rates $15.7 million
beginning in January 1994. The higher rates include $28.7 million for retiree
health care benefits recognized under new accounting requirements and $8.1
million for higher depreciation rates. Additionally, the MPSC's decision
lowered MichCon's allowed rate of return on common equity to 11.5% This was
consistent with other rate of return percentages being authorized for local
distribution companies in the United States during 1993.
In addition, MichCon received authorization to defer manufactured gas
plant (MGP) investigation and remediation costs in excess of the $11.7 million
previously reserved by MichCon. The costs are to be amortized over a 10-year
period beginning in the year subsequent to the year environmental
investigation and remediation costs are paid. The recovery of any remediation
costs incurred and any carrying charges will be reviewed in a future rate
case. Any carrying charges accrued will be based on MichCon's pre-tax
authorized rate of return.
In June 1994, the MPSC approved the property tax stipulation and
settlement agreement which addresses the treatment of reduced state property
tax and increased state sales tax and federal income tax. The estimated net
decrease in MichCon's operating expense was approximately $4.0 million for
1994 and $6.2 million annually thereafter. The agreement allows MichCon to
accelerate the amortization of its 1993 deferred costs associated with the
implementation of Statement of Financial Accounting Standards
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No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pension," by the net decreased tax expense.
In 1993 and 1992, MichCon operated under a comprehensive agreement
which provided for annual rate adjustments to recover the effects of inflation
on operation and maintenance expenses. MichCon received an inflation-related
increase in rates of $4.9 million, effective January 1992. The agreement also
contained a provision to adjust rates if weather-normalized earnings were
above or below a specified range of return on common equity. Increased gas
markets enabled MichCon to earn returns above the specified range in 1992
which resulted in a portion of these higher earnings being shared with
customers.
GAS COST RECOVERY: The GCR process allows MichCon to recover its cost
of gas sold if the MPSC determines that such costs are reasonable and prudent.
This determination includes an annual Gas Supply and Cost Review, in which the
MPSC approves maximum monthly GCR factors. A subsequent annual GCR
reconciliation proceeding provides a review of gas costs incurred during the
year, determines whether approved gas costs have been overcollected or
undercollected and, as a result, whether a refund or surcharge, including
interest, is required.
In June 1993, the MPSC issued an order in the 1992 GCR reconciliation
case approving a partial settlement that also consolidated refunds from other
cases. The order allowed MichCon to refund to customers $8.4 million during
the July billing cycle. In August 1993, the MPSC issued its final order
approving MichCon's 1992 purchased gas costs and providing final resolution
for previously unrefunded balances of approximately $1 million.
In May 1994, the MPSC issued an order in MichCon's 1993 GCR
reconciliation case approving a partial settlement allowing MichCon to refund
$11.6 million to its natural gas customers on their June 1994 bills. The
refund consisted primarily of supply realignment overcollections and excess
transportation and storage revenues, partially offset by 1993 GCR
undercollections. In September 1994, the MPSC approved the final settlement,
which provides for additional refunds of $350,000 applicable to GCR sales
customers and $100,000 applicable to transportation customers.
In July 1994, MichCon filed its 1995 GCR plan case. An MPSC order is
expected in the first half of 1995. In February 1995, MichCon filed its 1994
GCR reconciliation case indicating an overrecovery of $19 million, including
interest, which will be returned to GCR customers using the new rolled-in
prospective refunding methodology approved by the MPSC on June 30, 1994.
GAS TECHNOLOGY
MichCon continues to develop technologies that may lead to new
markets for natural gas. One focus of this effort is adsorbed natural gas
(ANG), a technology that permits natural gas to be stored in containers at
pressures one-sixth to one-tenth that of conventional methods. ANG technology
has been used on a fleet of golf carts at The Orchards Golf Club, located
approximately 30 miles north of Detroit. Since that golf course opened in
1993, this showcase project has interested others elsewhere in the United
States to begin exploring ANG use in golf carts. In addition, preparations
began for extensive field testing of natural gas forklifts utilizing ANG
technology. MichCon also renewed its efforts to market ANG technology for
brazing and cutting torches.
MichCon believes this technology offers opportunities to expand the
use of natural gas, grow its markets and eventually generate profits.
MichCon's current investment in technology is minimal. MichCon will
continually assess the potential of the technology to determine whether
the potential returns justify the continuing investment.
8
<PAGE>
ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANTS: Prior to the construction of natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon owns or previously owned sixteen former
manufactured gas plant (MGP) sites.
During the mid-1980s, MichCon conducted preliminary environmental
investigations at former MGP sites, and some contamination related to the
byproducts of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Natural Resources (MDNR). None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency (USEPA).
MichCon is not involved in any administrative proceedings regarding
these former MGP sites, but is currently negotiating a remedial action plan
for one site with the MDNR and is conducting more extensive investigations at
three other sites. MichCon is involved, however, in a suit with an adjacent
property owner regarding one site. Management believes that the property
owner's claims have no merit and MichCon is vigorously defending this suit.
In 1984, MichCon established an $11.7 million reserve for
environmental investigation and remediation. During 1994, MichCon spent $.6
million investigating former MGP sites and the balance in the reserve at
December 31, 1994 was $5.5 million.
During 1993, MichCon received MPSC approval of a cost deferral and
rate recovery mechanism for investigation and remediation costs incurred at
former MGP sites in excess of the original $11.7 million reserve. In addition,
MichCon notified more than 40 current and former insurance carriers of the
environmental conditions at its former MGP sites and claimed insurance
coverage for costs associated with the investigation and remediation of these
sites. MichCon is pursuing any claims it may have against these carriers.
MichCon is currently unable to estimate the future costs to be
incurred in the investigation and remediation of their former MGP sites.
Management believes, however, that insurance coverage and the cost deferral
and rate recovery mechanism will prevent environmental costs from having a
material adverse impact on MichCon's financial results.
HARBORTOWN: MichCon Development Company, a 100% owned subsidiary of
MichCon, has a 33% to 50% interest in four partnerships that are developing
Harbortown. Harbortown is a residential development that is being constructed
on a 50 acre parcel along the Detroit River. Environmental and other approvals
were received in 1984, prior to construction. In 1991, the partnerships
undertook additional environmental testing at Harbortown to assess whether
there was any potential public health risk from the presence of metals
detected in certain past soil samples. In 1992, the MDNR accepted the results
of this risk assessment and agreed that there was no health risk to residents
due to lead in Harbortown surface soils.
During 1994, the partnerships completed additional environmental
testing and submitted a remedial action plan for Harbortown to the MDNR. The
remedy includes meeting certain landscaping requirements, and, during future
development, excavation controls consistent with occupational safety and
health regulations. The MDNR supported the proposed remedy at a public meeting
in early 1995. Management expects approval of the proposed remedy and believes
that its implementation will not have
9
<PAGE>
a material adverse impact on future development opportunities at Harbortown or
the financial statements of MichCon.
OTHER: In 1993, MichCon received a general notice of liability letter
from the USEPA stating that MichCon is one of two potentially responsible
parties at a suspected dump site in Wyandotte, Michigan. The USEPA requested
that MichCon undertake a remedial investigation and feasibility study at the
site. MichCon has investigated its prior activities in the area, as well as
the USEPA's basis for its conclusion, and does not believe that it is
responsible for any contamination that may exist at the site. In early 1994,
MichCon informed the USEPA of this belief and declined to undertake the
requested activities at the site. MichCon has not received any additional
requests from the USEPA.
FRANCHISES
MichCon operates in numerous cities, villages, and townships under
franchises or permits that typically are revocable at will and have a 30 year
maximum duration. In Detroit, Grand Rapids and a number of other
municipalities where a substantial part of MichCon's service is furnished,
MichCon's operations originated under franchises that have since expired (in
1923 in the case of Detroit). In 1993, MichCon began renewing or
re-establishing formal franchises in those municipalities in order to avoid
uncertainty with regards to MichCon's ability to continue and expand service
in those areas. Regarding the franchises which have not been renewed,
MichCon's gas distribution systems are rightfully occupying the streets with
the consent or acquiescence of the municipalities. While MichCon could be
ordered by any municipality in which its franchise has expired to remove its
property, it could be deprived of ownership only by its consent and the payment
of an agreed price, or by condemnation and the payment of the fair value of
such property. Should any of these municipalities seek to terminate MichCon's
operations therein and substitute another gas utility operation, publicly or
privately owned, the municipality must either (i) acquire and operate
MichCon's system, (ii) construct a new system or (iii) grant a franchise to
another privately owned utility to construct or acquire its own distribution
system.
During 1994, MichCon gained six franchises with aggregate gas sales
volumes of approximately 486,000 Mcf annually. Approximately 53 major
franchises have been renewed in 1994.
Public utility franchises in Michigan are non-exclusive. Construction
under a second franchise granted to another public utility requires
authorization by the MPSC which must consider, among other things, the service
rendered by the existing utility, the investment by such utility, and the
benefit, if any, to the public of having a second utility serve in the area.
In one township where MichCon formerly served approximately 450 residential
customers (representing 78,400 Mcf) under an expired franchise, and upon the
suit of a competing utility with a franchise overlapping the area, a local
circuit judge entered an order to enjoin MichCon from expanding its service in
that township. This matter is presently pending before the Michigan Court of
Appeals. On October 1, 1994, MichCon sold its distribution facilities in that
township to the competing utility. Management expects that issues involving
franchise rights will continue to be actively pursued in judicial and
regulatory proceedings.
10
<PAGE>
ITEM 2. PROPERTIES
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1994, MichCon's
distribution system included 15,252 miles of distribution mains, 1,035,542
service lines and 1,157,567 active meters. MichCon owns 2,506 miles of
transmission and production lines which deliver natural gas to the
distribution districts and interconnect its storage fields with the sources of
supply and the market areas. MichCon also owns properties relating to five
underground storage fields with an aggregate storage capacity of approximately
130 Bcf. Additionally, MichCon owns district office buildings, service
buildings and gas receiving and metering stations. MichCon occupies its
principal office buildings, located in Detroit and Grand Rapids, Michigan
under long-term leases. Portions of these buildings are subleased to
affiliates and others.
Most of MichCon's properties are held in fee, by easement, or under
lease agreements expiring at various dates to 2006, with renewal options
extending beyond that date. The principal plants and properties of MichCon are
held subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust
under which MichCon's First Mortgage Bonds are issued. Some existing
properties are being fully utilized and new properties are being added to meet
the requirements of expansion into new areas. MichCon's capital expenditures
for 1994 totaled $145.4 million and could reach $250 million in 1995.
ITEM 3. LEGAL PROCEEDINGS
In addition to the regulatory proceedings and other matters described
in Item 1, "Business", MichCon is also involved in a number of lawsuits and
administrative proceedings in the ordinary course of business with respect to
taxes, environmental matters, personal injury, property damage claims and
other matters.
On December 27, 1994, a class action complaint was filed against
MichCon in Wayne County Circuit Court, Detroit, Michigan, by six residential
customers of the Company on behalf of themselves and others who purchased and
installed high efficiency furnaces financed through one of the Company's
energy conservation programs approved by the MPSC. These furnaces were
installed by independent licensed contractors. Plaintiffs allege, among other
things, that MichCon failed to warn them that unsafe conditions could result
from improper installation and venting of gas appliances, failed to take
corrective action to remedy such conditions, and made false representations
and/or omissions in connection therewith. Plaintiffs seek injunctive relief
requiring MichCon to (a) warn its customers of unsafe conditions created by
the installation of high efficiency furnaces, and (b) to reline all chimneys
or install hot water heaters that vent to the outside. Plaintiffs also seek
unspecified money damages among other things for diminution in the value of
their homes, damage to homes, cost of repairs, exemplary damages, attorneys
fees and costs. On February 3, 1995, immediately following a hearing on
plaintiffs' motion to certify the class of customers, the Wayne County Circuit
Court issued an order that denied plaintiffs' motion without prejudice. While
plaintiffs could refile the motion, the judge stated on the record that before
he would reconsider plaintiffs' motion, plaintiffs must be able to establish a
more clearly defined plaintiff class and damages. Management believes
plaintiffs' allegations are without merit and intends to vigorously defend
this action.
11
<PAGE>
The management of MichCon believes that the resolution of these
matters will not have a material adverse effect on the financial statements of
MichCon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the 10,300,000 issued and outstanding shares of common stock of
MichCon, par value $1 per share, are owned by MCN and constitute more than 98
percent of the voting securities of MichCon. Therefore, no market exits for
MichCon's common stock.
MichCon paid cash dividends of $8.5 million in 1994 and $75 million in
1993 on its common stock. In 1992, MichCon did not declare a dividend on
common stock.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA 1994 1993 1992 1991 1990
- ------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK...................... $ 59,387 $ 61,649 $ 49,848 $ 36,082 $ 30,239
========== ========== ========== ========== ==========
CASH DIVIDENDS DECLARED ON COMMON STOCK................ $ 8,500 $ 75,000 $ - $ 12,900 $ 41,000
========== ========== ========== ========== ==========
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY.......... 15.2% 16.6% 14.6% 12.3% 10.5%
========== ========== ========== ========== ==========
PROPERTY, PLANT AND EQUIPMENT.......................... $2,189,150 $2,084,516 $1,966,009 $1,851,721 $1,740,091
Less - Accumulated depreciation and depletion.......... 1,071,588 1,024,009 965,661 906,694 849,103
---------- ---------- ---------- ---------- ----------
Net Property, Plant and Equipment...................... $1,117,562 $1,060,507 $1,000,348 $ 945,027 $ 890,988
========== ========== ========== ========== ==========
TOTAL ASSETS........................................... $1,571,910 $1,509,120 $1,475,439 $1,381,495 $1,374,022
========== ========== ========== ========== ==========
CAPITAL EXPENDITURES................................... $ 145,421 $ 141,279 $ 128,849 $ 117,852 $ 100,035
========== ========== ========== ========== ==========
CAPITALIZATION
Long-term debt......................................... $ 431,870 $ 353,214 $ 306,573 $ 275,393 $ 262,387
Long-term capital lease obligations.................... 16,459 17,625 18,253 19,190 20,036
Redeemable cumulative preferred stock.................. 2,618 5,618 9,000 12,000 15,000
Common shareholder's equity............................ 417,833 365,785 379,136 304,288 281,106
---------- ---------- ---------- ---------- ----------
Total Capitalization................................... $ 868,780 $ 742,242 $ 712,962 $ 610,871 $ 578,529
========== ========== ========== ========== ==========
SOURCES OF OPERATING REVENUES
Gas sales.............................................. $ 954,537 $1,079,020 $1,170,567 $1,075,519 $1,032,836
Application of (provision for) refunds-net............. 223 (3,164) 43,792 (15,799) 12,203
End user transportation................................ 76,228 71,412 69,889 63,039 58,261
Intermediate transportation............................ 28,745 19,638 17,824 7,866 4,148
Storage services....................................... 8,054 9,084 7,438 13,826 23,417
Conservation and other assistance programs............. 18,716 23,935 27,677 30,803 15,550
Other.................................................. 25,175 23,590 20,598 14,862 14,205
---------- ---------- ---------- ---------- ----------
Total operating revenues............................... $1,111,678 $1,223,515 $1,357,785 $1,190,116 $1,160,620
========== ========== ========== ========== ==========
DISPOSITION OF GAS (MMCF)
Gas Sales.............................................. 201,423 250,510 309,162 272,648 253,978
End user transportation................................ 139,800 128,409 129,504 119,639 111,296
Intermediate transportation............................ 303,617 281,116 183,978 105,496 73,330
---------- ---------- ---------- ---------- ----------
644,840 660,035 622,644 497,783 438,604
Company use and lost gas............................... 2,239 3,828 3,748 1,061 1,939
---------- ---------- ---------- ---------- ----------
Total disposition of gas............................... 647,079 663,863 626,392 498,844 440,543
========== ========== ========== ========== ==========
DEGREE DAYS
For calendar period.................................... 6,489 6,675 6,607 6,092 5,967
Percent colder (warmer) than normal.................... (4.2)% (2.2)% (3.7)% (10.7)% (12.5)%
UTILITY CUSTOMERS
Residential............................................ 1,061,300 1,050,188 1,039,378 1,034,637 1,027,503
Total.................................................. 1,141,463 1,129,416 1,117,938 1,112,796 1,105,160
EMPLOYEES.............................................. 3,273 3,364 3,564 3,517 3,434
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings for 1994 were $59.4 million, a decrease of $2.3 million compared
to 1993. The drop in earnings reflects the lower return on equity authorized
in the rate order which went into effect in January 1994. Although earnings
have been maintained, results have been lowered by significantly warmer than
normal weather over the past three years. Earnings for 1993 increased by $11.8
million over 1992 earnings due primarily to lower operating costs, which
reflect a more focused effort to control costs and higher gas sales as a
result of colder weather.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Percentage Colder (Warmer) than Normal .. (4.2)% (2.2)% (3.7)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf) ..................... (4.4) (4.3) (10.2)
Net Income (in millions) .............. $(4.0) $(3.7) $ (8.7)
</TABLE>
EARNINGS COMPONENTS (IN MILLIONS)
<TABLE>
<CAPTION>
Percentage Change
-------------------
1994 1993 1992 1994 1993
-------- -------- -------- ------ ------
<C> <C> <C> <S> <C> <C>
$1,111.7 $1,223.6 $1,357.8 Operating Revenues (9.1)% (9.9)%
529.4 685.7 833.8 Cost of Gas (22.8) (17.8)
-------- -------- --------
582.3 537.9 524.0 Gross Margin 8.3 2.7
313.6 280.2 287.9 Operation and Maintenance 11.9 (2.7)
84.2 73.9 69.8 Depreciation and Depletion 14.0 5.9
58.1 58.2 58.7 Property and Other Taxes (0.1) (0.9)
1.0 1.8 n/a Equity in Earnings of Joint Ventures (42.9) n/a
(37.7) (34.1) (30.3) Other Income and (Deductions) 10.4 12.6
29.8 30.9 25.8 Income Tax Provision (3.6) 19.9
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Gross Margin
Gross Margin (operating revenues less cost of gas) increased in 1994 and
1993 due to higher sales rates. The 1993 increase also reflects colder weather
than in 1992.
Gas Markets
<TABLE>
<CAPTION>
1994 1993 1992
- ------------------------------------------------------
Gas Markets (Bcf)
<S> <C> <C> <C>
Gas Sales .................... 201.4 250.5 309.2
End User Transportation ...... 139.8 128.4 129.5
Intermediate Transportation .. 303.6 281.1 184.0
----- ----- -----
644.8 660.0 622.7
===== ===== =====
</TABLE>
Gas markets were impacted by the loss of brokering operations due to the
sale of Trading Company. As discussed in Note 3 to the consolidated financial
statements, in June 1993, MichCon sold the businesses of Trading Company to
subsidiaries of MCN. Gas sales in 1993 were lower than in 1992 due to lower
sales volumes in gas brokering operations, partially offset by colder weather.
End user transportation deliveries increased in 1994 due to higher usage.
During the third quarter of 1994, MCN and Destec Energy began
construction of a 123-megawatt cogeneration plant in Ludington, Michigan.
MichCon will provide end user transportation of the natural gas needed to fuel
the plant, approximately nine Bcf annually, upon its completion in late 1995.
The increases in intermediate transportation in 1994 and 1993 are due to
additional volumes transported for ANR Pipeline Company (ANR), Michigan gas
producers and other shippers. In connection with the April 1993 start-up of
the Blue Lake gas storage project, MichCon began transporting gas for ANR
under a firm, long-term contract. Profit margins on intermediate
transportation services are considerably less than margins on gas sales or for
end user transportation markets.
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. Intermediate transportation
deliveries have nearly tripled since 1991 and have resulted from time to time
in capacity constraints on MichCon's northern Michigan pipeline system.
MichCon currently has a proposal before the Michigan Public Service Commission
(MPSC) to construct facilities to expand transportation capacity. This
proposal, as well as other competing proposals, are being reviewed by the MPSC
and a decision is expected early in 1995.
Rate Matters
MichCon has implemented a number of rate increases since 1991 to recover
higher operating costs and costs relating to low income customer assistance
programs.
In October 1993, MichCon received approval from the MPSC in its general
rate case to increase rates $15.7 million, beginning in January 1994. The
higher rates include $28.7 million for retiree health care benefits recognized
under new accounting requirements and $8.1 million for higher depreciation
rates. Additionally, the MPSC's decision lowered MichCon's allowed rate of
return on common equity to 11.5%.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
During 1993 and 1992, MichCon operated under a comprehensive agreement
which provided for an operating incentive plan that allowed for annual rate
adjustments to recover the effects of inflation on operation and maintenance
expenses based on changes in the Consumer Price Index. MichCon received an
inflation related increase in rates of $4.9 million, effective January 1992.
The comprehensive agreement also contained a performance incentive provision
designed to adjust rates if weather-normalized earnings were above or below a
specified range of return on common equity. Increased gas markets enabled
MichCon to earn returns above the specified range in 1992 which resulted in a
portion of these higher earnings being shared with customers. A provision for
this sharing of earnings with customers was recorded in the fourth quarter of
1992, which reduced net income by $5.9 million.
MichCon received MPSC approval to increase rates from March 1992 through
February 1993 by $6.8 million to recover costs relating to the Michigan
Department of Social Services (DSS) Heating Assistance Program. This program
was extended through February 1994 with the MPSC approving new rates of $10.5
million, effective February 1993. MichCon also received MPSC approval to
extend $6 million of rates related to DSS uncollectible gas accounts for 1993.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the GCR mechanism, MichCon's rates are set to recover 100% of
prudently and reasonably incurred gas costs. Therefore, significant
fluctuations in total gas costs have little effect on gross margins or
earnings.
Cost of gas sold decreased in 1994 as a result of lower gas sales volumes
and significantly lower market prices for natural gas. For 1993, cost of gas
sold decreased as a result of lower gas sales volumes, partially offset by
higher spot market prices. In addition, lower fixed costs under a gas purchase
contract with ANR reduced the 1993 cost of gas. The cost of gas sold per
thousand cubic feet decreased by $.12 (4%) during 1994 and increased by $.07
(3%) during 1993.
As discussed in the Summary of Accounting Policies, MichCon's rates are
set to recover its lost gas costs using an averaging method based on
historical lost gas experience. For the seasonal cycle ended August 1994, the
actual lost gas experienced was lower than the historical average lost gas
amount, which resulted in a $6.2 million reduction in cost of gas during 1994.
No significant adjustment occurred during 1993.
The FERC issued Order No. 636 in 1992 which required interstate pipelines
to separate their pipeline sales service into its various service components.
The order also allows interstate pipelines to recover their prudently incurred
transition costs resulting from restructuring. ANR, MichCon's primary
interstate natural gas transporter, implemented its Order No. 636
restructuring in November 1993. During 1994, ANR filed several transition cost
recovery requests. MichCon accrued its portion of these costs totaling $5.4
million, of which $3.9 million is reflected in cost of gas. These transition
costs are recoverable through the GCR mechanism, and therefore, an asset has
been recorded for the unrecovered costs. As periodic filings are made by ANR,
MichCon will accrue its allocated portion. It is management's belief that
there will be no effect on earnings.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
In 1993, the FERC issued an order which required Panhandle Eastern Pipe
Line Company (Panhandle) to refund to MichCon the costs of certain direct
billings totaling $5.4 million plus interest of $4.4 million. During 1994, the
FERC issued an order permitting Panhandle to seek reimbursement of the $4.4
million in interest from MichCon. MichCon is currently seeking rehearing of
the FERC order. Should MichCon be ultimately unsuccessful in defeating the
FERC order, it is anticipated that these costs will be recoverable through the
GCR mechanism and therefore, an asset has been recorded for their future
recovery.
OPERATION AND MAINTENANCE
Operation and maintenance expenses increased due to higher postretirement
benefit costs of $29.8 million in 1994 being recognized as a result of the new
accounting requirements under Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions."
These costs are being recovered in rates that became effective in January
1994. Management's efforts to reduce operating costs resulted in a decrease in
operation and maintenance expenses in 1993, and helped moderate the 1994
increase. Management is continually assessing ways to improve cost
competitiveness and quality of customer service. MichCon recently reorganized
along "core business processes," which has streamlined its organizational
structure.
Operation and maintenance expenses in future years may be affected by
investigation and remediation costs associated with several environmentally
contaminated sites, as discussed in detail in the "Environmental Matters"
section that follows. Management anticipates that these costs will not
materially affect earnings as such amounts are expected to be recoverable in
rates.
In February 1994, President Clinton submitted a proposed federal budget
for the 1995 fiscal year reflecting a 50% reduction in funding for the
Low-Income Home Energy Assistance Program (LIHEAP). This proposed reduction
was defeated by Congress in October 1994, and $1.3 billion was approved for
the 1995 fiscal year, which is a reduction of $.1 billion. In November 1994,
however, officials indicated that all federal programs, including LIHEAP,
would be reviewed for cuts or elimination. MichCon is working to maintain this
funding. LIHEAP funding currently provides approximately $78 million in
heating assistance to 385,000 Michigan households through the DSS, with
approximately 40% of the funds going to MichCon customers.
DEPRECIATION AND DEPLETION
The increases in depreciation and depletion in 1994 and 1993 are due to
higher plant balances, reflecting capital expenditures of $416 million over
the past three years. In addition, higher depreciation rates implemented in
January 1994 contributed to the 1994 increase. The higher costs do not
materially affect earnings because these costs are reflected in the January
1994 rate increase. Depreciation and depletion expenses are expected to
increase in future years due to higher planned capital investments.
PROPERTY AND OTHER TAXES
Property and other taxes decreased slightly in 1994 as a result from
recently enacted Michigan legislation which lowered property taxes offset by
increased taxes due to higher property balances and higher Michigan single
business tax. Although the tax reduction will lower property taxes in future
years, it is not expected to significantly affect earnings because the MPSC
has approved the acceleration of amortization of the deferred 1993
postretirement costs to offset these tax savings (Note 8b).
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
EQUITY IN EARNINGS OF JOINT VENTURES
The 1994 decrease in earnings from joint ventures was due primarily to
higher operating and interest expenses from MichCon's 25% interest in the Blue
Lake gas storage project. The 1993 increase in earnings from joint ventures
reflects earnings from the storage project which began operations in April
1993.
OTHER INCOME AND DEDUCTIONS
Interest income decreased in 1993 due to interest received in 1992 on a
refund of windfall profit taxes as well as a 1992 interest adjustment on
MichCon's energy conservation programs.
Interest on long-term debt increased in 1994 due to issuing $80 million
in first mortgage bonds in September 1994 and $120 million in September 1993.
The decrease in 1993 reflects lower financing costs resulting from the
refinancing of $160.1 million of first mortgage bonds since September 1992.
Other interest expense in 1994 and 1993 reflects interest on varying
levels of pending customer refunds during the periods.
Other income and deductions for 1994 and 1993 reflect higher charitable
contributions. Other income and deductions for 1993 also reflect the write-off
of certain assets.
INCOME TAXES
Income taxes decreased in 1994 and increased in 1993 as a result of
changes in earnings. Additionally, 1993 reflects The Omnibus Budget
Reconciliation Act of 1993 which increased the corporate tax rate to 35%
effective January 1993. Income taxes were reduced by $3.9 million, $1.2
million and $1.3 million during 1994, 1993 and 1992, respectively, due to
the favorable resolution of prior years' tax issues.
ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil.
MichCon owns or previously owned sixteen such former manufactured gas plant
(MGP) sites.
During the mid-1980's, MichCon conducted preliminary environmental
investigations at these former MGP sites, and some contamination related to
the byproducts of gas manufacturing was discovered at each site. The existence
of these sites and the results of the environmental investigations have been
reported to the Michigan Department of Natural Resources (MDNR). None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency (USEPA).
MichCon is not involved in any administrative proceedings regarding these
former MGP sites, but is currently negotiating a remedial action plan for one
site with the MDNR and is conducting more extensive investigations at three
other sites. MichCon is, however, involved in a suit with an adjacent property
owner regarding one site. Management believes that the property owner's claims
have no merit and MichCon is vigorously defending this suit.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1994, MichCon spent $.6 million
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
investigating its former MGP sites and the balance in the reserve at
December 31, 1994 was $5.5 million.
During 1993, MichCon received MPSC approval of a cost deferral and rate
recovery mechanism for investigation and remediation costs incurred at former
MGP sites in excess of the reserve. In addition, MichCon notified more than 40
current and former insurance carriers of the environmental conditions at its
former MGP sites and requested insurance coverage for costs associated with
the investigation and remediation of these sites. MichCon is pursuing any
claims it may have against these carriers.
MichCon is currently unable to estimate the future costs to be incurred
in the investigation and remediation of its former MGP sites. Management
believes, however, that the cost deferral and rate recovery mechanism approved
by the MPSC will prevent environmental costs from having a material adverse
impact on MichCon's financial results.
MichCon Development Company, a 100 percent owned subsidiary of MichCon,
has a 33% to 50% interest in four partnerships that are developing Harbortown.
Harbortown is a residential and small commercial development that is being
constructed on a 50 acre parcel along the Detroit River. Environmental and
other approvals were received in 1984, prior to construction. In 1991, the
partnerships undertook additional environmental testing at Harbortown to
assess whether there was any potential public health risk from the presence of
metals detected in certain past soil samples. In 1992, the MDNR accepted the
results of this risk assessment and agreed that there was no health risk to
residents due to lead in Harbortown surface soils.
During 1994, the partnerships completed additional environmental testing
and submitted a remedial action plan for Harbortown to the MDNR. The remedy
includes meeting certain landscaping requirements and, during future
development, excavation controls consistent with occupational safety and
health regulations. The MDNR supported the proposed remedy at a public meeting
in early 1995. Management expects approval of the proposed remedy and believes
that its implementation will not have a material adverse impact on future
development opportunities at Harbortown or the financial statements of
MichCon.
In 1993, MichCon received a general notice of liability letter from the
USEPA stating that it is one of two potentially responsible parties at a
suspected dump site in Wyandotte, Michigan. The USEPA requested that MichCon
undertake a remedial investigation and feasibility study at the site. MichCon
has investigated its prior activities in the area, as well as the USEPA's
bases for its conclusion, and does not believe that it is responsible for any
contamination that may exist at the site. In early 1994, MichCon informed the
USEPA of this belief and declined to undertake the requested activities at the
site. MichCon has not received any additional requests from the USEPA.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities totaled $174.2 million in
1994, increasing $27.8 million compared to 1993. The increase is due primarily
to lower working capital requirements. Operating cash flows were sufficient
for the payment of cash dividends on common and preferred stock and a portion
of capital investments. Cash flow from operating activities in 1993 increased
$94.5 million compared to 1992 due to higher income and lower working capital
requirements.
FINANCING ACTIVITIES
During the latter part of each year, short-term debt is generally
incurred to finance increases in gas inventories and customer accounts
receivable. The short-term debt is normally reduced in the first part of each
year as gas inventories are depleted and funds are received from winter
heating sales. To meet its seasonal short-term borrowing needs, MichCon
normally issues commercial paper which is backed by credit lines with several
banks. MichCon has established credit lines of up to $250 million through
March 1995 which decrease to $109 million through August 1995. Commercial
paper of $143.5 million was outstanding at December 31, 1994 under these
lines. MichCon's commercial paper is currently rated "A-1" or its equivalent
by the major rating agencies.
In July 1994, MichCon began a Trust Demand Note program which allows
MichCon to borrow up to $25 million through April 1995. At December 31, 1994,
borrowings of $25 million were outstanding under this program.
In September 1994, MichCon issued first mortgage bonds totaling $80
million under its existing shelf registration. The proceeds were used to repay
short-term obligations and for general corporate purposes. Capital
requirements for 1995 are anticipated to be between $200 million and $250
million for capital investments. In anticipation of future permanent capital
requirements, MichCon filed an application with the MPSC in November 1994
requesting authority to issue and sell securities and enter into additional
long-term financing arrangements of up to $150 million. MichCon's current
shelf registrations allow for the issuance of up to an additional $30 million
of first mortgage bonds. MichCon's capital requirements and general financial
market conditions will affect the timing and amount of future debt issuances.
MichCon's capitalization objective is to maintain a ratio of approximately 50%
debt and 50% equity. Future long-term debt offerings are expected to carry
MichCon's current debt rating of "A."
MichCon issued $120 million of first mortgage bonds in both 1993 and
1992. The 1993 proceeds were used to redeem approximately $74.9 million of its
outstanding first mortgage bonds and for general corporate purposes. These
redemptions allowed MichCon to lower its interest costs. The 1992 proceeds
were used to finance capital expenditures, permanent working capital
requirements and scheduled maturities and sinking fund requirements of
long-term debt. A portion of the proceeds was used to redeem $85.2 million of
long-term debt in 1992.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Concluded)
INVESTING ACTIVITIES
MichCon's capital expenditures for 1994 totaled $145.4 million. This
amount represents an increase of $4.1 million compared to 1993. Capital
expenditures in 1993 increased by $12.4 million over 1992 due primarily to
construction of new distribution lines to reach communities not previously
served by MichCon.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
EFFECTS OF INFLATION AND PENDING ACCOUNTING PRONOUNCEMENTS
MichCon's operations are subject to inflationary pressures. Such
inflationary pressures exist because the Company's ability to adjust its rates
to recover increases in operating costs is dependent upon obtaining approval
from the MPSC. The effects of inflation on operating results, however, are
mitigated to the extent that assets are financed with debt that will be repaid
with dollars of less purchasing power.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statement of Income..................................... 23
Consolidated Statement of Financial Position......................... 24
Consolidated Statement of Capitalization............................. 25
Consolidated Statement of Cash Flows................................. 26
Summary of Accounting Policies....................................... 27
Notes to the Consolidated Financial Statements....................... 29
Independent Auditors' Report......................................... 42
Supplementary Financial Information - Quarterly Operating Results
(Unaudited)......................................................... 43
Financial Statement Schedule for each of the three years in the
period ended December 31, 1994, unless otherwise noted-
Schedule II - Valuation and Qualifying Accounts.................. 44
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 1994 1993 1992
- -------------------------------------------------------- ---------- ---------- -------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales............................................... 6,10 $ 954,760 $1,075,856 $1,214,359
Transportation and storage services..................... 6a 113,027 100,134 95,151
Other................................................... 43,891 47,525 48,275
---------- ---------- ----------
Total operating revenues................................ 1,111,678 1,223,515 1,357,785
---------- ---------- ----------
OPERATING EXPENSES
Cost of gas............................................. 10 529,426 685,679 833,805
Operation and maintenance .............................. 10 313,575 280,182 287,867
Depreciation and depletion.............................. 84,230 73,866 69,773
Property and other taxes................................ 58,129 58,177 58,705
---------- ---------- ----------
Total operating expenses................................ 985,360 1,097,904 1,250,150
---------- ---------- ----------
Operating Income........................................ 126,318 125,611 107,635
---------- ---------- ----------
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES............. 1,043 1,826 (728)
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income......................................... 4,064 4,205 6,278
Interest on long-term debt.............................. (27,948) (25,594) (27,927)
Other interest expense.................................. (9,093) (7,961) (8,044)
Other................................................... (4,677) (4,772) (599)
---------- ---------- ----------
Total other income and (deductions)..................... (37,654) (34,122) (30,292)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 89,707 93,315 76,615
INCOME TAX PROVISION.................................... 11 29,839 30,939 25,794
---------- ---------- ----------
NET INCOME.............................................. 59,868 62,376 50,821
DIVIDENDS ON PREFERRED STOCK............................ 481 727 973
---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................... $ 59,387 $ 61,649 $ 49,848
========== ========== ==========
<FN>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31 1994 1993
- -------------------------------------------------------------------- ---------- -------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments, at cost (which approximates
market value)..................................................... $ 1,305 $ 2,423
Accounts receivable, less allowance for doubtful accounts of
$15,322 and $18,776, respectively................................. 134,980 163,659
Accrued unbilled revenues........................................... 82,233 100,216
Gas in inventory.................................................... 1 77,843 35,099
Property taxes assessed applicable to future periods................ 52,163 49,860
Other............................................................... 23,102 25,239
---------- ----------
371,626 376,496
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures........................ 20,791 18,784
Deferred postretirement benefit..................................... 8b 19,887 25,190
Other............................................................... 5d 42,044 28,143
---------- ----------
82,722 72,117
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost.............................. 7 2,189,150 2,084,516
Less - Accumulated depreciation and depletion....................... 1,071,588 1,024,009
---------- ----------
1,117,562 1,060,507
---------- ----------
$1,571,910 $1,509,120
========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable.................................................... $ 80,671 $ 92,751
Notes payable....................................................... 4 168,457 260,304
Current portion of long-term debt, capital lease obligations
and redeemable cumulative preferred stock......................... 2b,7 4,225 4,112
Federal income, property and other taxes payable.................... 85,806 60,543
Refunds payable to customers........................................ 6b 19,559 10,793
Customer deposits................................................... 11,563 13,249
Deferred income taxes - current..................................... 11 - 15,239
Other............................................................... 5b 50,670 52,036
---------- ----------
420,951 509,027
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................................... 11 144,407 143,244
Unamortized investment tax credit................................... 38,294 40,151
Tax benefits amortizable to customers............................... 22,895 30,996
Accrued postretirement benefit...................................... 8b 23,507 2,087
Other............................................................... 5d 53,076 41,373
---------- ----------
282,179 257,851
---------- ----------
COMMITMENTS AND CONTINGENCIES....................................... 5,7
CAPITALIZATION (SEE ACCOMPANYING STATEMENT)
Long-term debt, including capital lease obligations................. 2a,7 448,329 370,839
Redeemable cumulative preferred stock............................... 2b 2,618 5,618
Common shareholder's equity......................................... 417,833 365,785
---------- ----------
868,780 742,242
---------- ----------
$1,571,910 $1,509,120
========== ==========
<FN>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
Year Ended December 31 1994 1993 1992
- ---------------------------------------------------------------------- -------- -------- ------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
LONG-TERM DEBT, EXCLUDING CURRENT REQUIREMENTS 2a
First Mortgage Bonds
9-1/4% series due 1996.............................................. $ - $ - $ 6,000
6-1/4% series due 1997.............................................. 50,000 50,000 50,000
8-5/8% series due 1997.............................................. - - 7,069
5-3/4% series due 2001.............................................. 60,000 60,000 -
8% series due 2002.................................................. 70,000 70,000 70,000
9-1/8% series due 2004.............................................. 55,000 55,000 55,000
8-1/4% series due 2014.............................................. 80,000 - -
9-1/8% series due 2017.............................................. - - 60,000
9-1/2% series due 2019.............................................. 5,000 5,000 5,000
9-1/2% series due 2021.............................................. 40,000 40,000 40,000
6-3/4% series due 2023.............................................. 19,109 20,000 -
7% series due 2025.................................................. 40,000 40,000 -
Unamortized premium and (discount) - net............................ (1,508) (920) (549)
Unsecured Notes - 9-3/4% series due 2000.............................. 12,000 12,000 12,000
Long-term capital lease obligations................................... 7 16,459 17,625 18,253
Other long-term debt.................................................. 2,269 2,134 2,053
-------- -------- --------
Total ................................................................ 448,329 370,839 324,826
-------- -------- --------
PREFERENCE STOCK, par value $1 per share - authorized 4,000,000 shares,
outstanding - none
REDEEMABLE CUMULATIVE PREFERRED STOCK, EXCLUDING CURRENT REQUIREMENTS, par
value $1 per share - authorized 7,000,000 shares, outstanding
104,732, 224,732, and 360,000 shares, respectively, $2.05 Series.... 2b 2,618 5,618 9,000
-------- -------- --------
COMMON SHAREHOLDER'S EQUITY
COMMON STOCK, par value $1 per share - authorized, for
all periods, 15,100,000 shares; issued 10,300,000 shares............ 10,300 10,300 10,300
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of period......................................... 203,616 203,616 178,616
Equity investment..................................................... 2c - - 25,000
Other................................................................. 1,161 - -
------- -------- --------
Balance - end of period............................................... 204,777 203,616 203,616
-------- -------- --------
RETAINED EARNINGS
Balance - beginning of period......................................... 151,869 165,220 115,372
Net income............................................................ 59,868 62,376 50,821
Cash dividends declared
Common stock........................................................ (8,500) (75,000) -
Preferred stock..................................................... (481) (727) (973)
-------- -------- --------
Balance - end of period............................................... 202,756 151,869 165,220
-------- -------- --------
Total common shareholder's equity..................................... 417,833 365,785 379,136
-------- -------- --------
Total capitalization.................................................. $868,780 $742,242 $712,962
======== ======== ========
<FN>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 1994 1993 1992
- --------------------------------------------------------------------- --------- --------- ------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income........................................................... $ 59,868 $ 62,376 $ 50,821
Adjustments to reconcile net income to net cash provided from
operating activities
Depreciation and depletion
Per consolidated statement of income........................... 84,230 73,866 69,773
Charged to other accounts...................................... 7,229 6,451 6,384
Deferred income taxes - current.................................. (16,599) 6,814 13,987
Deferred income taxes and investment tax credit - net............ 11 (8,795) 13,805 3,412
Other............................................................ (297) (3,350) 1,220
--------- ---------- ---------
125,636 159,962 145,597
Changes in assets and liabilities, exclusive of changes shown
separately..................................................... 48,532 (13,599) (93,726)
--------- --------- ---------
Net cash provided from operating activities.......................... 174,168 146,363 51,871
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net.................................................. 4 (91,847) 19,083 60,831
Additional paid-in capital........................................... 1,161 - -
Cash dividends paid
Common stock....................................................... (8,500) (75,000) -
Preferred stock.................................................... (522) (768) (1,014)
Issuance of long-term debt........................................... 2a 78,620 118,129 118,724
Retirement of long-term debt and preferred stock..................... 2a,2b (4,809) (84,160) (115,542)
Equity investment.................................................... 2c - - 25,000
--------- --------- ---------
Net cash provided from (used for) financing activities............... (25,897) (22,716) 87,999
--------- ---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures................................................. (145,421) (141,279) (128,849)
Investment in joint ventures......................................... (1,992) (2,802) (12,505)
Sale of unconsolidated entities of Trading Company................... 3 - 19,898 -
Advances to joint ventures........................................... - - 2,436
Other................................................................ (1,976) 981 (1,876)
--------- -------- ---------
Net cash used for investing activities............................... (149,389) (123,202) (140,794)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS....... (1,118) 445 (924)
CASH AND TEMPORARY CASH INVESTMENTS, JANUARY 1....................... 2,423 1,978 2,902
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, DECEMBER 31..................... $ 1,305 $ 2,423 $ 1,978
========= ========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN
SEPARATELY
Accounts receivable - net............................................ $ 27,936 $ 27,015 $ (6,119)
Accrued unbilled revenues............................................ 17,983 (9,831) (41,022)
Gas in inventory..................................................... (42,744) 12,748 11,830
Accounts payable..................................................... (12,080) (18,666) 9,082
Federal income, property and other taxes payable..................... 25,263 (23,347) (15,546)
Refunds payable to customers......................................... 8,766 7,493 (39,678)
Deferred assets and liabilities...................................... 25,225 (20,170) (9,362)
Other current assets and liabilities................................. (1,817) 11,159 (3,929)
Take-or-pay - net.................................................... - - 1,018
--------- --------- ---------
$ 48,532 $ (13,599) $ (93,726)
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized............................... $ 34,863 $ 33,839 $ 41,461
========= ========= =========
Federal income taxes............................................... $ 41,786 $ 18,087 $ 25,869
========= ========= =========
<FN>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
</TABLE>
26
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
The principal accounting policies of MichCon and its subsidiaries are set
forth below. MichCon is subject to the accounting requirements of and rate
regulation by the MPSC with respect to the distribution and intrastate
transportation of natural gas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MichCon and
all of its subsidiaries. Investments in 50% or less owned entities have been
accounted for under the equity method because MichCon has significant but not
controlling influence over these entities. Certain reclassifications have been
made to prior years' statements to conform with the 1994 presentation.
REVENUES AND COST OF GAS
MichCon accrues revenues for gas service provided but unbilled at month
end equal to the recoverable cost of gas sold. Annual gas cost proceedings
before the MPSC permit MichCon to recover the prudent and reasonable cost of
gas sold. Any overcollection or undercollection of costs, including interest,
will be refunded or billed to customers.
MichCon's rates are set to recover its lost gas costs using an averaging
method based on historical lost gas experience. Prior to 1993, MichCon
deferred or accrued revenues for differences between historical average lost
gas amounts and the actual amount experienced during the seasonal cycles ended
August 31 of each year. However, as a result of an October 1993 General Rate
Case order, MichCon no longer defers or accrues revenues for these differences
in lost gas amounts. The amounts previously deferred or accrued are being
amortized to income over the subsequent five years.
FINANCIAL INSTRUMENTS
In order to manage interest rate exposure, MichCon engages in interest
rate swap agreements that exchange fixed and variable rate interest payment
obligations over the life of the agreements without the exchange of the
underlying principal amounts. The principal amounts of such agreements are
used solely to measure interest to be paid or received. Interest rate swaps
are subject to market risk as interest rates fluctuate. The difference to be
paid or received on these swaps is accrued and recorded as an adjustment to
interest expense over the life of the agreements.
The fair values of financial instruments are estimated based on quotes
from brokers or current rates offered for instruments with similar
characteristics.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and includes amounts for
labor, materials, overhead and an allowance for funds used during
construction. Upon retirement, the cost of property, plant and equipment and
net removal costs are charged to accumulated depreciation.
27
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (Concluded)
DEPRECIATION AND DEPLETION
MichCon provides depreciation for a major portion of its property, plant
and equipment on the basis of straight-line rates prescribed by the MPSC. Unit
of production depreciation and depletion is used for certain production and
transmission property. Depreciation rates vary by class of property. The ratio
of the provision for depreciation to the average cost of depreciable property
was 4.5%, 4.2% and 4.2% in 1994, 1993 and 1992, respectively.
INCOME TAXES AND INVESTMENT TAX CREDIT
Effective January 1993, MichCon adopted SFAS No. 109, "Accounting for
Income Taxes," which requires the use of the liability method of accounting
for deferred income taxes.
Due to current tax rates being lower than the tax rates in effect when
the original deferred taxes were recorded, net excess deferred taxes on
existing utility plant in service are included in a Tax Benefits Amortizable
to Customers account. Also included in this account is the reduction in income
taxes that will result from the amortization of accumulated investment tax
credits. These tax benefits are being amortized to customers through reduced
rates over the life of the related plant.
In accordance with MPSC requirements, investment tax credits relating to
utility property placed into service were deferred and are being credited to
income over the life of the related property.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
MichCon capitalizes an allowance for both debt and equity funds used
during construction in the cost of major additions to utility plant. MichCon's
subsidiaries also capitalize an allowance for debt funds used during
construction. The total amount capitalized was $839,000, $1,997,000 and
$1,439,000 in 1994, 1993 and 1992, respectively.
DEFERRED DEBT COSTS
In accordance with MPSC regulations, MichCon defers reacquisition and
unamortized issuance costs of reacquired long-term debt when such debt is
refinanced. These costs are amortized over the term of the replacement debt.
REFUNDS PAYABLE TO CUSTOMERS
MichCon accrues amounts to be paid to customers in accordance with
various refund requirements. These requirements relate to pipeline supplier
refunds received, gas cost overcollections, supply realignment cost
overcollections, and the gross margin from gas storage, transportation and
sales to certain customers when the total margin exceeds that assumed in rate
orders.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of this statement, MichCon considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
28
<PAGE>
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. At December
31, 1994, the replacement cost exceeded the $77,843,000 LIFO cost by
$128,338,000 and at December 31, 1993, the replacement cost exceeded the
$35,099,000 LIFO cost by $168,569,000. MichCon's current GCR tariff provisions
prevent MichCon from retaining any benefits from a lower cost of gas sold
resulting from liquidating quantities of LIFO inventory.
2. CAPITALIZATION
a. LONG-TERM DEBT
The following long-term debt was issued during 1994 and 1993:
<TABLE>
<CAPTION>
Amount
Issue Date Description Issued
--------------- ---------------------------- -----------
<S> <C> <C>
September 1994 First Mortgage Bonds, $80,000,000
8-1/4%, due May 2014
September 1993 First Mortgage Bonds, $60,000,000
5-3/4%, due May 2001
First Mortgage Bonds, $20,000,000
6-3/4%, due November 2023
First Mortgage Bonds, $40,000,000
7%, due May 2025
</TABLE>
The proceeds received from the September 1993 debt issuances were
used in part to redeem three existing series of first mortgage bonds
totaling approximately $74,900,000. Substantially all of the properties
of MichCon are pledged as security for the payment of outstanding first
mortgage bonds.
MichCon has a variable interest rate swap agreement through April
2000 on $12,000,000 of unsecured notes which has effectively reduced the
cost of this debt from 9.8% to 4.6% for the year ended December 31, 1994.
Maturities and sinking fund requirements during the next five years
for long-term debt outstanding at December 31, 1994 are $58,000 in 1995,
$60,000 in 1996, $50,061,000 in 1997, $63,000 in 1998, and $20,065,000 in
1999.
29
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
b. REDEEMABLE CUMULATIVE PREFERRED STOCK
At MichCon's option, all or part of the Cumulative Preferred Stock,
$2.05 Series, is redeemable, at prices progressively decreasing to $25
per share. Sinking fund provisions require that 60,000 shares be retired
annually and also provide for a noncumulative option to retire an
additional 60,000 shares each year. Holders are entitled to vote with
MichCon's common shareholder. MichCon redeemed 120,000 shares at the
sinking fund redemption price of $25 per share in January 1995.
c. ADDITIONAL CAPITAL
During 1992, MCN Corporation invested $25,000,000 in MichCon as an
additional equity investment. These funds were used to finance MichCon's
capital expenditures, repay existing debt and for general corporate
purposes.
3. SALE OF SUBSIDIARY
On June 30, 1993, MichCon discontinued the businesses of its gas
marketing subsidiary, Trading Company, and sold the net assets to subsidiaries
of MCN Corporation, its parent company. MichCon accounted for the transaction
as a sale of part of a line of business. The final sales price of the
transaction equaled the book value of Trading Company's net assets of
approximately $42,000,000. As a result of the independent evaluation performed
in the fourth quarter of 1993, no further price adjustment was required.
Trading Company's contribution to MichCon's consolidated net income was
approximately $579,000 and $2,001,000 for the years ended 1993 and 1992,
respectively.
MichCon received approximately $42,000,000 as payment for the sale.
Consistent with MichCon's objective to maintain a balanced capital structure,
MichCon then paid a $21,000,000 special dividend to MCN in July 1993.
4. NOTES PAYABLE
During 1994, MichCon renewed its annual bank lines of credit allowing it
to borrow up to $250,000,000 through March 1995 decreasing to $109,000,000
through August 1995. These lines are at interest rates generally less than the
prevailing prime rate. MichCon usually issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper
outstanding at December 31, 1994 and 1993, totaled $143,457,000 and
$260,304,000, respectively, at weighted average interest rates of 5.8% and
3.4%, respectively. Fees are paid to compensate banks for lines of credit.
During 1994, MichCon began a Trust Demand Note program which allows
MichCon to borrow up to $25,000,000 through April 1995. At December 31, 1994,
borrowings of $25,000,000 were outstanding under this program at an interest
rate of 6.1%.
30
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. COMMITMENTS AND CONTINGENCIES
a. GUARANTY
A subsidiary of MichCon and an unaffiliated corporation have formed a
series of partnerships which are engaged in the construction and
development of a residential community on the Detroit riverfront
(Harbortown). One of the partnerships obtained $12,000,000 of tax-exempt
financing through the Michigan State Housing Development Authority due
June 2004. The interest rate on this note was 4.4%, and 2.5% at December
31, 1994 and 1993, respectively. Both partners and their parent
corporations have issued guaranties for the full amount of this financing
and each parent corporation has agreed to reimburse the other for 50% of
any payments made as a result of these guaranties.
b. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for
heating and other uses was manufactured from processes involving coal,
coke or oil. MichCon owns or previously owned sixteen such former
manufactured gas plant (MGP) sites.
During the mid-1980's, MichCon conducted preliminary environmental
investigations at these former MGP sites, and some contamination related
to the byproducts of gas manufacturing was discovered at each site. The
existence of these sites and the results of the environmental
investigations have been reported to the Michigan Department of Natural
Resources (MDNR). None of these former MGP sites are on the National
Priorities List prepared by the U.S. Environmental Protection Agency
(USEPA).
MichCon is not involved in any administrative proceedings regarding
these former MGP sites, but is currently negotiating a remedial action
plan for one site with the MDNR and is conducting more extensive
investigations at three other sites. MichCon is, however, involved in a
suit with an adjacent property owner regarding one site. Management
believes that the property owner's claims have no merit and MichCon is
vigorously defending this suit.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1994, MichCon spent $600,000
investigating these former MGP sites and the balance in the reserve at
December 31, 1994 was $5,500,000.
During 1993, MichCon received MPSC approval of a cost deferral and
rate recovery mechanism for investigation and remediation costs incurred
at former MGP sites in excess of the reserve. In addition, MichCon
notified more than 40 current and former insurance carriers of the
environmental conditions at these former MGP sites and requested
insurance coverage for costs associated with the investigation and
remediation of these sites. MichCon is pursuing any claims it may have
against these carriers.
MichCon is currently unable to estimate the future costs to be
incurred in the investigation and remediation of the former MGP sites.
Management believes, however, that insurance coverage and the cost
deferral and rate recovery mechanism approved by the MPSC will prevent
environmental costs from having a material adverse impact on MichCon's
financial results.
31
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MichCon Development Company, a 100% owned subsidiary of MichCon, has
a 33% to 50% interest in four partnerships that are developing
Harbortown. Harbortown is a residential and small commercial development
that is being constructed on a 50 acre parcel along the Detroit River.
Environmental and other approvals were received in 1984, prior to
construction. In 1991, the partnerships undertook additional
environmental testing at Harbortown to assess whether there was any
potential public health risk from the presence of metals detected in
certain past soil samples. In 1992, the MDNR accepted the results of this
risk assessment and agreed that there was no health risk to residents due
to lead in Harbortown surface soils.
During 1994, the partnerships completed additional environmental
testing and submitted a remedial action plan for Harbortown to the MDNR.
The remedy includes meeting certain landscaping requirements and, during
future development, excavation controls consistent with occupational
safety and health regulations. The MDNR supported the proposed remedy at
a public meeting in early 1995. Management expects approval of the
proposed remedy and believes that its implementation will not have a
material adverse impact on future development opportunities at Harbortown
or the financial statements of MichCon.
In 1993, MichCon received a general notice of liability letter from
the USEPA stating that MichCon is one of two potentially responsible
parties at a suspected dump site in Wyandotte, Michigan. The USEPA
requested that MichCon undertake a remedial investigation and feasibility
study at the site. MichCon has investigated its prior activities in the
area, as well as the USEPA's bases for its conclusion, and does not
believe that it is responsible for any contamination that may exist at
the site. In early 1994, MichCon informed the USEPA of this belief and
declined to undertake the requested activities at the site. MichCon has
not received any additional requests from the USEPA.
c. COMMITMENTS
To ensure a reliable supply of natural gas at competitive prices,
MichCon has entered into long-term purchase and transportation contracts
with various suppliers and producers. In general, purchase prices under
these contracts are determined by formulas based on market prices. In
1995, MichCon has firm purchase commitments for approximately 125 Bcf of
gas. This annual commitment declines each year, through the year 2005.
The Company expects that sales will exceed its minimum purchase
commitments. The Company is also committed to pay demand charges of
$67,389,000 during 1995 related to firm purchase and transportation
agreements. These demand charges are recoverable through the GCR
mechanism.
Capital investments for 1995 are estimated to be between $200,000,000
and $250,000,000 and certain commitments have been made in connection
therewith.
d. INTERSTATE PIPELINE RESTRUCTURING
The FERC issued Order No. 636 in 1992 which required interstate
pipelines to separate their pipeline sales service into its various
service components. The order also allows interstate pipelines to recover
their prudently incurred transition costs resulting from the
restructuring.
32
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ANR, MichCon's primary interstate natural gas transporter,
implemented its Order No. 636 restructuring in November 1993. During
1994, ANR filed several requests for recovery of these transition costs.
MichCon accrued its portion totaling $5,400,000, of which $3,900,000 is
reflected in cost of gas. The MPSC has held that these transition costs
are recoverable through the Gas Cost Recovery (GCR) mechanism, and
therefore, an asset has been recorded for the unrecovered costs. As
periodic filings are made by ANR, MichCon will accrue its allocated
portion. It is management's belief that these costs will have no effect
on earnings.
In 1993, the Federal Energy Regulatory Commission (FERC) issued an
order in which Panhandle refunded to MichCon the costs of certain direct
billings totaling $5,400,000 plus interest of $4,400,000. During 1994,
the FERC issued an order permitting Panhandle to seek reimbursement of
the $4,400,000 in interest from MichCon. MichCon is currently seeking
rehearing of the FERC order. Should MichCon be ultimately unsuccessful in
defeating the FERC order, it is anticipated that these costs will be
recoverable through the GCR mechanism, and therefore, an asset has been
recorded for their future recovery.
e. 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 the
Company's financial statements.
6. RATE MATTERS
a. GENERAL RATE PROCEEDINGS
In October 1993, MichCon received approval from the MPSC in its
general rate case to increase rates $15,700,000, beginning in January
1994. The higher rates include $28,700,000 for retiree health care
benefits recognized under new accounting requirements and $8,100,000 for
higher depreciation rates. Additionally, the MPSC's decision lowered
MichCon's allowed rate of return on common equity to 11.5%.
During 1993 and 1992, MichCon had been operating under a
comprehensive agreement which provided for an operating incentive plan
that allowed for annual rate adjustments to recover the effects of
inflation on operation and maintenance expenses based on changes in the
Consumer Price Index. MichCon received an inflation-related increase in
rates of $4,900,000 effective January 1992.
The comprehensive agreement also contained a performance incentive
provision designed to adjust rates if weather-normalized earnings were
above or below a specified range of return on common equity. Increased
gas markets enabled MichCon to earn returns above the specified range in
1992 which resulted in a portion of these higher earnings being shared
with customers. A provision for this sharing of earnings with customers
was recorded in 1992, which reduced net income by $5,900,000.
33
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MichCon received MPSC approval to increase rates from March 1992
through February 1993 by $6,800,000 to recover its costs relating to the
DSS Heating Assistance Plan. This program was extended through February
1994 with the MPSC approving rates of $10,500,000, effective February
1993. MichCon also received MPSC approval to extend $6,000,000 of rates
to recover its costs related to DSS uncollectible gas accounts for 1993.
The MPSC approved MichCon's requests for a rate increase of
$19,900,000, effective September 1991, and $3,900,000 effective November
1992, in order to implement MichCon's Supply Realignment Plan. The
increased rates were needed to recover the costs of maintaining a higher
level of gas in inventory, to replace the reduction in storage revenue
resulting from using MichCon's storage capacity for the benefit of gas
sales customers, and to cover transportation costs incurred to integrate
gas supply to certain gas markets serviced by MichCon.
b. GAS COST RECOVERY AND REFUNDS
At December 31, 1994, refunds payable to customers totaled
$19,600,000 consisting primarily of 1994 GCR overcollections.
At December 31, 1993, refunds payable to customers totaled
$10,800,000 consisting primarily of $7,500,000 of supply realignment
overcollections and $5,800,000 of excess transportation and storage
revenues. These amounts are partially offset by $4,600,000 of 1993 GCR
undercollections.
7. CAPITAL AND OPERATING LEASES
MichCon leases certain property (principally an office building, a
warehouse and a parking structure) under lease arrangements expiring at
various dates to 2006, with renewal options extending beyond that date.
Portions of the office building and parking structure are subleased to various
tenants.
The gross amount of assets recorded under capital leases and the related
accumulated depreciation at December 31, 1994 are $26,887,000 and $9,261,000,
respectively. The gross amount of assets and related accumulated depreciation
at December 31, 1993 were $26,887,000 and $8,206,000, respectively.
34
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minimum rental commitments under noncancelable capital leases at December
31, 1994 are as follows:
<TABLE>
<CAPTION>
Year
- ------------------------------------------
(Thousands of Dollars)
<S> <C>
1995 ..................................... $ 2,908
1996 ..................................... 2,908
1997 ..................................... 2,908
1998 ..................................... 2,908
1999 ..................................... 2,908
2000 and thereafter ...................... 13,378
--------
Total minimum lease payments ............. 27,918
Less: Amount representing interest ...... 10,292
--------
Present value of minimum lease payments .. 17,626
Less: Current portion ................... 1,167
--------
Long-term obligations .................... $ 16,459
========
</TABLE>
Total minimum lease payments for capital leases have not been reduced by
future minimum sublease receipts of $10,200,000 under noncancelable subleases.
Capital and operating lease payments for the years ended December 31
consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
- ----------------------------------------- ------ ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITAL LEASE EXPENSE:
Depreciation expense .................... $ 1,056 $ 941 $ 847
Interest expense ........................ 1,853 1,923 2,003
------- ------- -------
Total capital lease expense ............. $ 2,909 $ 2,864 $ 2,850
======= ======= =======
OPERATING LEASE EXPENSE ................. $ 2,400 $ 2,400 $ 1,800
======= ======= =======
</TABLE>
8. RETIREMENT BENEFITS
a. PENSION PLAN BENEFITS
MichCon maintains separate defined benefit retirement plans for union
and nonunion employees. The plans are noncontributory, cover
substantially all employees and provide for normal retirement at age 65,
but with the option to retire earlier or later under certain conditions.
The plans provide pension benefits that are based on the employee's
compensation and years of credited service. MichCon's funding policy is
to fund each year's actuarially determined funding requirements of the
plans, subject to regulations issued by the Internal Revenue Service.
Currently, these plans meet the full funding limitations of the Internal
Revenue Code. Accordingly, no contributions for the 1994, 1993 or 1992
plan years were made and none will be made for the 1995 plan year.
35
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1994 1993 1992
- ----------------------------------------------------- -------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost - benefits earned during the period..... $ 12,267 $ 10,579 $ 9,890
Interest cost on projected benefit obligations....... 29,742 29,393 28,316
Actual (return) loss on plan assets.................. 15,101 (105,373) (40,188)
Net amortization and deferral........................ (59,427) 64,016 853
--------- --------- --------
Pension credit....................................... $ (2,317) $ (1,385) $ (1,129)
======== ========= ========
</TABLE>
The following table sets forth a reconciliation of the funded status of
the plans and the amounts recorded as prepaid pension cost in the Consolidated
Statement of Financial Position:
<TABLE>
<CAPTION>
1994 1993
- --------------------------------------------------------- --------- --------
(Thousands of Dollars)
Measurement date......................................... October 31 October 31
<S> <C> <C>
Actuarial present value
Accumulated vested benefit obligations................ $317,409 $360,645
Accumulated nonvested benefit obligations............. 23,344 25,920
-------- --------
Total accumulated benefit obligations................. $340,753 $386,565
======== ========
Projected benefit obligations for service
rendered to date.................................... $389,076 $457,568
Plan assets at measurement date.......................... 561,592 598,903
-------- --------
Plan assets in excess of projected benefit obligations... 172,516 141,335
Less: Unrecognized net asset at transition............... 49,688 54,681
Unrecognized prior service cost.................... 3,004 3,233
Unrecognized net gain.............................. 111,526 77,440
--------- --------
Prepaid pension cost recognized in the
Consolidated Statement of Financial Position........... $ 8,298 $ 5,981
========= =========
</TABLE>
In determining the actuarial present value of the projected benefit
obligations, the weighted average discount rate was 8.0% for 1994 and 6.5% for
1993. The rate of increase in future compensation levels used was 5.0% for
1994 and 1993. The expected long-term rate of return on plan assets, which are
invested primarily in equity and fixed income securities, was 7.5% for 1994
and 1993.
Following the conclusion of union negotiations in December 1994, these
pension plans were amended to enhance certain benefits to participants,
effective January 1995. The amendments are estimated to increase the projected
benefit obligation by $5,700,000 and the annual service and interest costs by
$600,000. The impact of the amendments is not reflected in the retirement
amounts as of December 31, 1994.
MichCon also sponsors several defined contribution pension plans.
Participation in one of these plans is available to substantially all union
and non-union employees. Company contributions to these plans are based upon
salary and the matching of employee contributions up to certain predefined
limits. The cost of these plans was $5,100,000 in 1994, $4,900,000 in 1993,
and $4,900,000 in 1992.
36
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
b. OTHER POSTRETIREMENT BENEFITS
MichCon provides certain health care and life insurance benefits for
retired employees. Substantially all of MichCon's employees may become
eligible for these benefits if they reach retirement age while working for the
Company. Cash costs paid out for claims totaled $11,100,000, $10,600,000 and
$10,700,000 for the years 1994, 1993 and 1992, respectively.
Effective January 1993, MichCon adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
the use of accrual accounting for postretirement benefits. Consistent with a
December 1992 MPSC order, MichCon deferred its 1993 postretirement benefit
costs in excess of claims paid (including the amortization of the initial
transition obligation) until January 1994 when new rates to recover such costs
became effective.
The deferred 1993 costs were initially being amortized over a period of
19 years. However, in June 1994, the MPSC approved a settlement agreement
allowing MichCon to offset the impact of a net reduction in property and other
taxes, resulting from federal and Michigan legislative changes, against its
deferred 1993 postretirement costs. This will accelerate the amortization of
the deferred postretirement cost from 19 years to approximately four years.
In December 1993, MichCon established a policy of funding its
postretirement benefit costs in which these costs are funded to the extent
such amounts are recoverable in rates. During 1993, MichCon established
separate qualified Voluntary Employees' Beneficiary Association (VEBA) trusts
for its union and nonunion employees. In December 1993, MichCon initiated
funding to the VEBA trusts totaling $28,700,000. Additional contributions of
$8,307,000 and $21,900,000 were made in December 1994 and January 1995,
respectively. The expected weighted average long-term rate of return on plan
assets, which are invested in life insurance policies, equity securities and
fixed income securities, was 7.4% for 1994.
Net postretirement cost for the years ended December 31, includes the
following components:
<TABLE>
<CAPTION>
1994 1993
- -------------------------------------------------------- -------- -------
(Thousands of Dollars)
<S> <C> <C>
Service cost - benefits earned during the period........ $ 7,464 $ 7,334
Interest cost on accumulated benefit obligation......... 21,139 19,890
Actual loss on assets................................... 489 -
Amortization of transition obligation................... 14,207 14,207
Deferred loss on assets................................. (2,607) -
------- -------
Total postretirement cost............................... 40,692 41,431
Regulatory adjustment................................... 5,303 (25,190)
------- -------
Net postretirement cost................................. $45,995 $16,241
======= =======
</TABLE>
37
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth a reconciliation of the funded status of
the plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------- ---------- ---------
(Thousands of Dollars)
Measurement date................................................. October 31 October 31
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees...................................................... $152,748 $188,414
Fully eligible active participants............................ 30,207 44,963
Participants with less than 30 years of service............... 68,874 91,847
-------- --------
Total accumulated postretirement benefit obligation.............. $251,829 $325,224
======== ========
Plan assets at measurement date.................................. $ 28,211 $ -
Less: Unrecognized transition obligation......................... 255,726 269,933
Unrealized net (gain) loss................................. (63,922) 24,504
Contributions made after measurement date.................. 8,307 28,700
--------- ---------
Accrued postretirement liability recognized in the
Consolidated Statement of Financial Position................... $ 23,507 $ 2,087
========= ========
</TABLE>
The rate at which health care costs are assumed to increase is the
most significant factor in establishing MichCon's postretirement benefit
obligation. MichCon used a rate of 15% for 1993, 14% for 1994, and a rate
that gradually declines each year until it stabilizes at 5% in 2003. A
one percentage point increase in the assumed rate would increase the
accumulated postretirement benefit obligation at December 31, 1994 by
13.5% and increase the sum of the service cost and interest cost by 15.9%
for the year then ended. The discount rate used in determining the
accumulated postretirement benefit obligation was 8.0% and 6.5% for 1994
and 1993, respectively.
MichCon has amended certain provisions of its retiree health care
benefit plans which go into effect January 1995. The amendments are
estimated to reduce the accumulated postretirement benefit obligation by
$12,800,000 and the annual service and interest costs by $1,700,000.
These reductions are not reflected in the accrued postretirement
obligation as of December 31, 1994.
9. FINANCIAL INSTRUMENTS
MichCon has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgement is required in developing the estimates of fair value
presented herein and therefore, the values are not necessarily indicative of
the amounts that MichCon could realize in a current market exchange. The
carrying amounts of certain financial instruments such as notes payable and
customer deposits are assumed to approximate the fair value due to the
short-term nature of these items.
38
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amount and the estimated fair value of other financial
instruments consist of the following:
<TABLE>
<CAPTION>
1994 1993
---------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------ --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
ASSETS:
Notes receivable and advances................... $ 1,436 $ 1,436 $ 1,436 $ 1,436
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt, excluding capital
lease obligations............................. 431,870 412,532 353,214 378,451
Redeemable cumulative preferred
stock, including current portion.............. 5,618 5,658 8,618 8,955
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreement.................... 693 2,468
</TABLE>
The estimated fair values are determined based on the following:
Notes receivable and advances - interest rates currently available to
MichCon for investments with similar maturities and credit quality
assumptions.
Long-term debt - interest rates currently available to MichCon for
issuance of debt with similar terms and remaining maturities.
Redeemable cumulative preferred stock - quoted market price.
Interest rate swap agreements - the estimated amount that MichCon would
receive or pay to terminate the swap agreements, taking into account
current interest rates and the creditworthiness of the swap
counterparties.
Guaranty - management is unable to practicably estimate the fair value of
the Harbortown guaranty (Note 5a) due to the nature of the related party
transaction and the fact that there is no similar market for the
instrument.
The fair value estimates presented herein are based on information
available to management as of December 31, 1994 and 1993. Management is not
aware of any subsequent factors that would significantly affect the estimated
fair value amounts.
39
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. RELATED PARTY TRANSACTIONS
MichCon enters into transactions with affiliated companies to sell and
purchase natural gas and to purchase computer operations services. The
following is a summary of transactions with the affiliated companies:
<TABLE>
<CAPTION>
1994 1993 1992
- ------------------------------------------------------- --------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Gas, storage and transportation sales.................. $ 4,300 $ 14,200 $ 19,900
======== ======== ========
Gas purchases.......................................... $ - $ 12,900 $ 2,900
======== ======== ========
Purchase of computer operations services............... $ 15,700 $ 15,300 $ 15,600
======== ======== ========
</TABLE>
11. SUMMARY OF INCOME TAXES
Effective January 1993, MichCon adopted SFAS No. 109, "Accounting for
Income Taxes," which supersedes SFAS No. 96. No cumulative adjustment was
necessary for the adoption of this standard because its provisions are not
materially different than those applied under the previous standard which
MichCon adopted in 1987.
<TABLE>
<CAPTION>
1994 1993 1992
- ------------------------------------------------------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
EFFECTIVE FEDERAL INCOME TAX RATE...................... 33.3% 33.9% 33.2%
======= ======= =======
INCOME TAXES CONSIST OF:
Current provision...................................... $55,560 $10,075 $ 8,981
Deferred provision..................................... (23,864) 22,757 18,757
Investment tax credit - net............................ (1,857) (1,893) (1,944)
------- ------- -------
Total Income Taxes..................................... $29,839 $30,939 $25,794
======= ======= =======
RECONCILIATION BETWEEN STATUTORY AND ACTUAL INCOME TAXES:
Statutory federal income taxes at a rate of 35%,
35%, and 34%, respectively........................... $31,397 $32,660 $26,049
Adjustments to federal tax expense:
Excess of book over tax depreciation, allowed........ 6,119 4,302 4,279
Adjustments to federal income taxes provided in
prior periods...................................... (3,888) (1,187) (1,320)
Amortization of investment tax credit................ (1,857) (1,893) (1,944)
Other - net.......................................... (1,932) (2,943) (1,270)
------- ------- -------
Total Income Taxes..................................... $29,839 $30,939 $25,794
======= ======= =======
</TABLE>
40
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
Deferred tax assets and liabilities are recognized for the estimated
future tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to
the classification of the related assets or liabilities. The tax effect of
temporary differences that gave rise to MichCon's deferred tax assets and
liabilities consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993
- --------------------------------------------------------------------- -------- --------
(Thousands of Dollars)
<S> <C> <C>
DEFERRED TAX ASSETS:
Uncollectibles..................................................... $ 5,293 $ 6,502
Deferred lost gas cost............................................. 295 2,266
Vacation accrual................................................... 3,101 1,952
Refunds payable.................................................... 6,284 -
Other.............................................................. 3,300 2,090
-------- --------
Total deferred tax assets........................................ $ 18,273 $ 12,810
-------- --------
DEFERRED TAX LIABILITIES:
Depreciation and other property related
basis differences, net.......................................... $141,570 $129,543
Property taxes..................................................... 12,183 17,442
Postretirement benefit costs, net.................................. 366 10,045
Receivable from GCR customers...................................... - 6,524
Other.............................................................. 7,201 7,739
-------- --------
Total deferred tax liabilities................................... 161,320 171,293
-------- --------
Net deferred tax liability........................................... 143,047 158,483
Less: Net deferred tax (asset) liability - current.................. (1,360) 15,239
-------- --------
Net deferred tax liability - noncurrent.............................. $144,407 $143,244
======== ========
</TABLE>
The Omnibus Budget Reconciliation Act of 1993, which was enacted in
August 1993, increased the corporate income tax rate from 34% to 35%,
effective January 1993.
MichCon is part of the consolidated federal income tax return of MCN. The
federal income tax expense for MichCon and its subsidiaries is determined on
an individual company basis with no allocation of tax benefits or expenses
from other affiliates of MCN.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of financial
position of Michigan Consolidated Gas Company and subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of income, cash
flows and capitalization for each of the three years in the period ended
December 31, 1994. Our audits also included the consolidated financial
statement schedule listed in Item 8. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michigan
Consolidated Gas Company and subsidiaries as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information shown therein.
As discussed in Note 8 to the consolidated financial statements, the
Company changed its method of accounting for postretirement benefits other
than pensions effective January 1, 1993, to conform with Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Deloitte & Touche LLP
Detroit, Michigan
February 6, 1995
42
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY OPERATING RESULTS (UNAUDITED)
Due to the seasonal nature of MichCon's business, revenues and net income tend
to be higher in the first and fourth quarters of the calendar year.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1994
Operating Reveunes ............ $ 534,356 $ 171,857 $ 107,289 $ 298,176
Operating Income (loss) ....... $ 107,753 $ 5,594 $ (20,916) $ 33,887
Net Income (loss) ............. $ 64,962 $ (1,576) $ (19,096) $ 15,578
Net Income (loss) applicable
to common stock ............. $ 64,826 $ (1,691) $ (19,211) $ 15,463
1993
Operating Revenues ............ $ 524,281 $ 243,428 $ 111,428 $ 344,378
Operating Income (loss) ....... $ 86,737 $ 7,940 $ (12,024) $ 42,958
Net Income (loss) ............. $ 52,188 $ 2,473 $ (12,528) $ 20,243
Net Income (loss) applicable
to common stock ............. $ 51,991 $ 2,296 $ (12,705) $ 20,067
</TABLE>
43
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
DEDUCTIONS
ADDITIONS FOR PURPOSES
BALANCE AT PROVISIONS CHARGED TO FOR WHICH THE BALANCE
BEGINNING UTILITY RESERVES WERE AT END
DESCRIPTION OF PERIOD INCOME PLANT PROVIDED OF PERIOD
- -------------------------------------------------- ---------- ------ ------- ------------- ---------
Year Ended December 31, 1994
-----------------------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts............... $18,776 $19,938 $ - $23,392 $15,322
======= ======= ==== ======= =======
Reserve included in Current Liabilities - Other in
Consolidated Statement of
Financial Position:
Environmental testing (1)..................... $ 6,179 $ - $ - $ 639 $ 5,540
======= ======= ==== ======= =======
Reserve included in Deferred Credits and Other
Liabilities - Other in Consolidated Statement
of Financial Position:
Injuries and damages.......................... $ 9,090 $ 1,656 $387 $ 2,731 $ 8,402
======= ======= ==== ======= =======
<CAPTION>
Year Ended December 31, 1993
-----------------------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts............... $24,554 $20,865 $ - $26,643 $18,776
======= ======= ==== ======= =======
Reserve included in Current Liabilities - Other in
Consolidated Statement of
Financial Position:
Environmental testing (1)..................... $ 1,677 $ - $ - $(4,502) $ 6,179
======= ======= ==== ======= =======
Reserve included in Deferred Credits and Other
Liabilities - Other in Consolidated Statement
of Financial Position:
Injuries and damages.......................... $10,105 $ 1,895 $372 $ 3,282 $ 9,090
Environmental testing (1)..................... 6,575 - - 6,575 -
------- ------- ---- ------- -------
$16,680 $ 1,895 $372 $ 9,857 $ 9,090
======= ======= ==== ======= =======
<CAPTION>
Year Ended December 31, 1992
-----------------------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts............... $30,745 $20,075 $ - $26,266 $24,554
======= ======= ==== ======= =======
Reserve included in Current Liabilities - Other in
Consolidated Statement of
Financial Position:
Environmental testing (1)..................... $ 458 $ - $ - $(1,219) $ 1,677
======= ======= ==== ======= =======
Reserves included in Deferred Credits and Other
Liabilities - Other in Consolidated Statement
of Financial Position:
Injuries and damages.......................... $11,893 $ 629 $243 $ 2,660 $10,105
Environmental testing (1)..................... 8,575 - - 2,000 6,575
------- ------- ---- ------- -------
$20,468 $ 629 $243 $ 4,660 $16,680
======= ======= ==== ======= =======
<FN>
NOTES:
(1) Reference is made to Note 5b to the Consolidated Financial Statements,
page 31. During the year ended December 31, 1993, $6,575,000 was
transferred from Deferred Credits and Other Liabilities -- Other to
Current Liabilities -- Other. Similarly, $2,000,000 was transferred
during the year ended December 31, 1992. Actual expenditures deducted
against the reserve in 1993 and 1992 were $2,073,000 and $781,000,
respectively.
</TABLE>
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section entitled "Election of
Directors" in MichCon's March 1995 definitive Proxy Statement is incorporated
by reference herein.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MichCon, as of
February 21, 1995, is set forth below. Such officers are appointed by the
Board of Directors for terms expiring at the next organizational meeting to be
held in 1995.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
<S> <C> <C>
Alfred R. Glancy III......... 57 Chairman, President, Chief Executive Officer of MCN; President since
Chairman and Director September 1992; Chairman, Chief Executive Officer and a Director of MCN
since August 1988; Chairman of MichCon since 1984 and a Director of MichCon
since 1981; Chief Executive Officer of MichCon from 1984 to September 1992.
Stephen E. Ewing............. 51 Present position since September 1992; President and Chief Operating Officer
President, Chief Executive of MCN from August 1988 to September 1992; Director of MCN since August 1988;
Officer and Director President of MichCon since 1985 and a Director of MichCon since 1984; Chief
Operating Officer of MichCon from 1985 to September 1992.
Carl J. Croskey.............. 43 Present position since August 1993; Vice President of Facility Planning at
Senior Vice President, ANR Pipeline Company from May 1989 to August 1993; Director of Facility
Gas Operations and Director Planning from November 1985 to May 1989 at ANR Pipeline Company.
John E. vonRosen............. 51 Present position since April 1994 and a Director of MichCon since January
Senior Vice President, 1989; Senior Vice President, Customer Operations from November 1991 to April
Corporate Resources and 1994; Senior Vice President, Customer Service from March 1987 to November
Director 1991 and Vice President, Customer Service from 1984 to March 1987.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
All reports concerning ownership of MichCon equity securities required to
be filed by MichCon's directors and executive officers pursuant to Section 16
of the Securities Exchange Act of 1934, as amended, were filed on a timely
basis with the Securities and Exchange Commission.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections entitled "Directors'
Compensation", "Executive Compensation", "Change of Control Employment
Agreements", "Retirement Plans" and the "Report of the Compensation
Committee of the Board of Directors on Executive Compensation", in
MichCon's March 1995 definitive Proxy Statement is incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth in the table entitled "Beneficial
Security Ownership of Directors, Nominees and Executive Officers" in
MichCon's March 1995 definitive Proxy Statement is incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the table entitled "Aggregated Option
Exercises in Last Fiscal Year" included in the "Executive Compensation"
section in MichCon's March 1995 definitive Proxy Statement is incorporated
by reference herein.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. For a list of financial statements included herein, see the section
entitled "Financial Statements and Supplementary Data", page 22 in Part II,
Item 8 of this Report.
2. For a list of the financial statement schedule included herein, see
the section entitled "Financial Statements and Supplementary Data", page 22
in Part II, Item 8 of this Report.
Schedules other than those referred to above are omitted as not
applicable or not required, or the required information is shown in the
financial statements or notes thereto.
3. Exhibits, including those incorporated by reference.
EXHIBIT
NO. DESCRIPTION
- ------ -----------
3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31,
1993 Form 10-Q).
3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).
MORTGAGE AND SUPPLEMENTAL INDENTURES
4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944
(Exhibit 7-D to Registration Statement No. 2-5252); Supplemental
Indenture dated March 1, 1944 (Exhibit 7-E to Registration Statement No.
2-5252); Second Supplemental Indenture dated March 1, 1947 (Exhibit 7-C
to Registration Statement No. 2-7434); Third Supplemental Indenture
dated March 1, 1948 (Exhibit 7-D to Registration Statement No. 2-7434);
Fourth Supplemental Indenture dated November 1, 1950 (Exhibit 7-G to
Registration Statement No. 2-8641); Fifth Supplemental Indenture August
1, 1951 (Exhibit 7-G to Registration Statement No. 2-9089); Sixth
Supplemental Indenture dated January 15, 1954 (Exhibit 4-H to
Registration Statement No. 2-10282); Seventh Supplemental Indenture
dated November 15, 1955 (Exhibit 4-9**); Eighth Supplemental Indenture
dated December 2, 1955 (Exhibit 4-10**); Ninth Supplemental Indenture
dated December 5, 1956 Exhibit 4-1 to 1984 Form 10-K); Tenth
Supplemental Indenture dated June 15, 1957 (Exhibit 4-12**); Eleventh
Supplemental Indenture dated May 15, 1961 (Exhibit 4-13**); Twelfth
Supplemental Indenture dated January 15, 1962 (Exhibit 4-14**);
Thirteenth Supplemental Indenture dated March 15, 1963 (Exhibit 4-15**);
Fourteenth Supplemental Indenture dated May 15, 1964 (Exhibit 4-16**);
Fifteenth Supplemental Indenture dated May 15, 1966 (Exhibit 4-17**);
Sixteenth Supplemental Indenture dated May 15, 1967 (Exhibit 4- 18**);
Seventeenth Supplemental Indenture dated September 1, 1968 (Exhibit
4-19**); Eighteenth Supplemental Indenture dated November 15, 1968
(Exhibit 4-20**); Nineteenth Supplemental Indenture dated June 1, 1970
(Exhibit 4-21**); Twentieth Supplemental Indenture dated July 1, 1972
(Exhibit 4-21 to Registration Statement No. 2-81665); Twenty-first
47
<PAGE>
Supplemental Indenture dated July 1, 1973 (Exhibit 4-1 to 1984 Form
10-K); Twenty-second Supplemental Indenture dated July 15, 1974 (Exhibit
4-1 to 1984 Form 10-K); Twenty-third Supplemental Indenture dated April
15, 1975 (Exhibit 4-1 to 1984 Form 10-K); Twenty-fourth Supplemental
Indenture dated September 15, 1976 (Exhibit 4-1 to 1984 Form 10-K);
Twenty-fifth Supplemental Indenture dated November 15, 1977 (Exhibit
20-10**); Twenty-sixth Supplemental Indenture dated November 15, 1981
(Exhibit 4-27 to Registration Statement No. 2-74580); Twentyseventh
Supplemental Indenture dated February 15, 1983 (Exhibit 29 to Form 8-A
dated February 10, 1983); Twenty-eighth Supplemental Indenture dated
February 1, 1987 (Exhibit 4-1 to 1986 Form 10- K); Twenty-ninth
Supplemental Indenture dated July 15, 1989 (Exhibit 4-1 to Form 8-K
dated July 27, 1989); Thirtieth Supplemental Indenture dated as of
September 1, 1991 (Exhibit 4-1 to Form 8-K dated September 27, 1991);
and Thirty-first Supplemental Indenture (Exhibit 4-1 to Form 8-K dated
February 28, 1992); Thirty-second Supplemental Indenture (Exhibit 4-1 to
1992 Form 10-K).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration
Statement No. 33-21930-99).
10-2 Executive Deferred Compensation Plan (Exhibit 10-4 to MCN's 1989 Form
10-K).
10-3 MCN Corporation Stock Incentive Plan (Exhibit 10-5 to MCN's 1989 Form
10-K).
10-4 Form of Employment Agreement (Exhibit 10-1 to MCN's March 31, 1990 Form
10-Q).
10-5 MCN Corporation Annual Management Performance Plan (Exhibit 10-6 to
MCN's 1992 Form 10-K).
10-6 MCN Mandatory Deferred Compensation Plan (Exhibit l0-8 to MCN's 1994
Form 10-K).
23-1 Independent Auditors' Consent - Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1
to 1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit 28-2 to
1989 Form 10-K).
(B) REPORTS ON FORM 8-K:
None.
*Indicates document filed herewith.
**Exhibit number reference to MichCon's 1980 Annual Report on
Form 10-K.
References are to MichCon (File No. 1-7310) for documents incorporate by
reference. References are to MCN (File No. 1-10070) for MCN documents
incorporated by reference.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MICHIGAN CONSOLIDATED GAS COMPANY
(Registrant)
By: /s/ David R. Nowakowski
-----------------------
David R. Nowakowski
Controller, Treasurer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
TITLE DATE
<S> <C> <C>
* Director and Chairman February 28, 1995
- ---------------------------------
Alfred R. Glancy III
* Director, President and Chief February 28, 1995
- --------------------------------- Executive Officer
Stephen E. Ewing
/s/ David R. Nowakowski Controller, Treasurer and Chief February 28, 1995
- ------------------------ Accounting Officer
David R. Nowakowski
* Director, Senior Vice President February 28, 1995
- --------------------------------- Gas Operations
Carl J. Croskey
* Director February 28, 1995
- ---------------------------------
William K. McCrackin
* Director February 28, 1995
- ---------------------------------
Daniel L. Schiffer
* Director, Senior Vice President February 28, 1995
- --------------------------------- Corporate Resources
John E. vonRosen
</TABLE>
* By: /s/ David R. Nowakowski
-----------------------
David R. Nowakowski
Attorney-in-Fact
49
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------ -----------------------
3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31,
1993 Form 10-Q).
3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).
MORTGAGE AND SUPPLEMENTAL INDENTURES
4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944
(Exhibit 7-D to Registration Statement No. 2-5252); Supplemental
Indenture dated March 1, 1944 (Exhibit 7-E to Registration Statement No.
2-5252); Second Supplemental Indenture dated March 1, 1947 (Exhibit 7-C
to Registration Statement No. 2-7434); Third Supplemental Indenture
dated March 1, 1948 (Exhibit 7-D to Registration Statement No. 2-7434);
Fourth Supplemental Indenture dated November 1, 1950 (Exhibit 7-G to
Registration Statement No. 2-8641); Fifth Supplemental Indenture August
1, 1951 (Exhibit 7-G to Registration Statement No. 2-9089); Sixth
Supplemental Indenture dated January 15, 1954 (Exhibit 4-H to
Registration Statement No. 2-10282); Seventh Supplemental Indenture
dated November 15, 1955 (Exhibit 4-9**); Eighth Supplemental Indenture
dated December 2, 1955 (Exhibit 4-10**); Ninth Supplemental Indenture
dated December 5, 1956 Exhibit 4-1 to 1984 Form 10-K); Tenth
Supplemental Indenture dated June 15, 1957 (Exhibit 4-12**); Eleventh
Supplemental Indenture dated May 15, 1961 (Exhibit 4-13**); Twelfth
Supplemental Indenture dated January 15, 1962 (Exhibit 4-14**);
Thirteenth Supplemental Indenture dated March 15, 1963 (Exhibit 4-15**);
Fourteenth Supplemental Indenture dated May 15, 1964 (Exhibit 4-16**);
Fifteenth Supplemental Indenture dated May 15, 1966 (Exhibit 4-17**);
Sixteenth Supplemental Indenture dated May 15, 1967 (Exhibit 4- 18**);
Seventeenth Supplemental Indenture dated September 1, 1968 (Exhibit
4-19**); Eighteenth Supplemental Indenture dated November 15, 1968
(Exhibit 4-20**); Nineteenth Supplemental Indenture dated June 1, 1970
(Exhibit 4-21**); Twentieth Supplemental Indenture dated July 1, 1972
(Exhibit 4-21 to Registration Statement No. 2-81665); Twenty-first
Supplemental Indenture dated July 1, 1973 (Exhibit 4-1 to 1984 Form
10-K); Twenty-second Supplemental Indenture dated July 15, 1974 (Exhibit
4-1 to 1984 Form 10-K); Twenty-third Supplemental Indenture dated April
15, 1975 (Exhibit 4-1 to 1984 Form 10-K); Twenty-fourth Supplemental
Indenture dated September 15, 1976 (Exhibit 4-1 to 1984 Form 10-K);
Twenty-fifth Supplemental Indenture dated November 15, 1977 (Exhibit
20-10**); Twenty-sixth Supplemental Indenture dated November 15, 1981
(Exhibit 4-27 to Registration Statement No. 2-74580); Twentyseventh
Supplemental Indenture dated February 15, 1983 (Exhibit 29 to Form 8-A
dated February 10, 1983); Twenty-eighth Supplemental Indenture dated
February 1, 1987 (Exhibit 4-1 to 1986 Form 10- K); Twenty-ninth
Supplemental Indenture dated July 15, 1989 (Exhibit 4-1 to Form 8-K
dated July 27, 1989); Thirtieth Supplemental Indenture dated as of
September 1, 1991 (Exhibit 4-1 to Form 8-K dated September 27, 1991);
and Thirty-first Supplemental Indenture (Exhibit 4-1 to Form 8-K dated
February 28, 1992); Thirty-second Supplemental Indenture (Exhibit 4-1 to
1992 Form 10-K).
50
<PAGE>
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration
Statement No. 33-21930-99).
10-2 Executive Deferred Compensation Plan (Exhibit 10-4 to MCN's 1989 Form
10-K).
10-3 MCN Corporation Stock Incentive Plan (Exhibit 10-5 to MCN's 1989 Form
10-K).
10-4 Form of Employment Agreement (Exhibit 10-1 to MCN's March 31, 1990 Form
10-Q).
10-5 MCN Corporation Annual Management Performance Plan (Exhibit 10-6 to
MCN's 1992 Form 10-K).
10-6 MCN Mandatory Deferred Compensation Plan (Exhibit l0-8 to MCN's 1994
Form 10-K).
23-1 Independent Auditors' Consent - Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1
to 1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit 28-2 to
1989 Form 10-K).
*Indicates documents filed herewith.
**Exhibit number reference to MichCon's 1980 Annual Report on
Form 10-K.
References are to MichCon (File No. 1-7310) for documents incorporated by
reference. References are to MCN (File No. 1-10070) for MCN documents
incorporated by reference.
51
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 33-49281 and 33-44592 of Michigan Consolidated Gas
Company on Form S-3 of our report dated February 6, 1995 appearing
in this Annual Report on Form 10-K of Michigan Consolidated Gas
Company for the year ended December 31, 1994.
February 28, 1995
Deloitte & Touche LLP
Detroit, Michigan
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Stephen
E. Ewing and David R. Nowakowski, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the other) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February,1995.
/s/ Alfred R. Glancy III
---------------------
Alfred R. Glancy III
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III and David R. Nowakowski, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the other) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February, 1995.
/s/ Stephen E. Ewing
-----------------
Stephen E. Ewing
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February, 1995.
/s/ William K. McCrackin
---------------------
William K. McCrackin
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III and Stephen E. Ewing, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the other) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd
day of February, 1995.
/s/ David R. Nowakowski
--------------------
David R. Nowakowski
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February, 1995.
/s/ Carl J. Croskey
----------------
Carl J. Croskey
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February, 1995.
/s/ Daniel L. Schiffer
-------------------
Daniel L. Schiffer
<PAGE>
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of February, 1995.
/s/ John E. vonRosen
-----------------
John E. vonRosen
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,305
<SECURITIES> 0
<RECEIVABLES> 150,302
<ALLOWANCES> 15,322
<INVENTORY> 77,843
<CURRENT-ASSETS> 371,626
<PP&E> 2,189,150
<DEPRECIATION> 1,071,588
<TOTAL-ASSETS> 1,571,910
<CURRENT-LIABILITIES> 420,951
<BONDS> 448,329
2,618
0
<COMMON> 10,300
<OTHER-SE> 407,553
<TOTAL-LIABILITY-AND-EQUITY> 1,571,910
<SALES> 954,760
<TOTAL-REVENUES> 1,111,678
<CGS> 529,426
<TOTAL-COSTS> 985,360
<OTHER-EXPENSES> 36,611
<LOSS-PROVISION> 19,938
<INTEREST-EXPENSE> 37,041
<INCOME-PRETAX> 89,707
<INCOME-TAX> 29,839
<INCOME-CONTINUING> 59,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,387
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
