<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-7310
MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0478040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-965-2430
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 1996:
Common Stock, par value $.01 per share: 10,300,000
================================================================================
<PAGE>
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER........................................................ i
INDEX........................................................ ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 1
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................. 10
Item 6. Exhibits and Reports on Form 8-K................... 11
SIGNATURE.................................................... 12
</TABLE>
ii
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Given the seasonal nature of the gas distribution business, MichCon
generally experiences a loss during the third quarter when the weather is warm
and less gas is delivered to customers. MichCon's loss of $18.4 million
represents a decrease in earnings of $5.1 million from the third quarter of
1995, due mainly to increased operating expenses. Earnings for the 1996 nine-
and twelve-month periods increased $13.8 million and $31.2 million,
respectively, from the same periods in 1995. The increases are due primarily to
higher gas sales resulting from colder weather.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
---------------------------------------------
<TABLE>
<CAPTION>
Quarter Nine Months Twelve Months
------------- --------------- ----------------
1996 1995 1996 1995 1996 1995
------ ----- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Percentage Colder (Warmer)
than Normal N/A N/A 6.2% (3.8%) 6.8% (8.5%)
Increase (Decrease) from
Normal in:
Gas Markets (Bcf) (.2) 0.5 8.4 (4.3) 14.2 (14.2)
Net Income (Millions) $(.2) $0.4 $7.6 $(3.7) $12.7 $(12.7)
</TABLE>
EARNINGS COMPONENTS (IN MILLIONS)
---------------------------------
COMPARING 1996 TO 1995
----------------------
<TABLE>
<CAPTION>
Quarter Nine Months Twelve Months
-------------------- -------------------- --------------------
$ Change % Change $ Change % Change $ Change % Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 9.7 9.1% $156.7 21.9% $225.0 22.2%
Cost of Gas 8.2 39.1 124.4 41.1 160.4 35.8
Gross Margin 1.5 1.7 32.3 7.8 64.6 11.4
Operation and Maintenance 8.0 13.1 (2.0) (1.0) (5.3) (1.8)
Depreciation and Depletion 2.7 12.3 7.0 10.4 8.6 9.9
Property and Other Taxes 0.4 2.8 3.3 7.6 4.8 8.7
Other Income and Deductions - - 3.5 11.6 4.7 11.0
Income Tax Provision (4.3) (70.9) 7.1 33.4 21.2 78.8
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased for the
quarter, nine- and twelve-month periods, reflecting increased gas sales and
transportation deliveries. The increase in gross margin for the quarter was
partially offset by a 1995 decrease in lost gas of $4.6 million.
1
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
Gas sales volumes increased in the 1996 nine- and twelve-month periods as
compared to the 1995 periods due to colder weather and market expansion. End
user transportation deliveries in 1996 reflect transportation to the Michigan
Power project, a 123 megawatt cogeneration plant in which MCN has a 50%
interest. Deliveries to the project, which became operational in October 1995,
are approximately 9 Bcf per year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Quarter Nine Months Twelve Months
------- ----------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GAS MARKETS (IN BCF)
Gas Sales.................... 14.2 14.1 150.4 134.9 222.4 190.3
End User Transportation...... 28.6 27.8 107.9 103.4 149.9 139.8
Intermediate Transportation.. 148.7 67.2 407.1 237.8 510.8 309.0
----- ----- ----- ----- ----- -----
191.5 109.1 665.4 476.1 883.1 639.1
===== ===== ===== ===== ===== =====
- ------------------------------------------------------------------------------------------
</TABLE>
The increases in intermediate transportation deliveries in the 1996 periods
are due primarily to additional volumes transported for two major fixed-fee
customers and increased transportation of Antrim gas for Michigan gas producers
and brokers. MichCon recently completed expansion of the transportation capacity
of its northern Michigan gathering system. The expansion enabled MichCon to
transport an additional 31.7 Bcf, 91.6 Bcf and 107.8 Bcf in the 1996 quarter,
nine- and twelve-month periods, respectively.
In January 1996, MCN transferred its Michigan pipeline operations to
MichCon in order to consolidate MCN's Michigan gathering pipeline activities
within one business unit. The pipeline operation contributed 13.2 Bcf and 40.2
Bcf in volumes transported during the 1996 quarter and nine-month periods.
Profit margins on intermediate transportation services are considerably less
than margins on gas sales or for end user transportation markets.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon is allowed timely
recovery of 100% of its prudently and reasonably incurred cost of gas sold.
Therefore, significant fluctuations in total gas costs have little or no direct
effect on gross margins and earnings.
Cost of gas sold increased in the 1996 nine- and twelve-month periods due
to higher sales volumes resulting primarily from the colder weather, and in all
periods due to higher spot market prices paid for natural gas purchase. The
increase in market prices paid for gas resulted in an increase in the cost of
gas sold per thousand cubic feet of $.58 (34%), $.59 (26%) and $.43 (18%) in the
1996 quarter, nine- and twelve-month periods, respectively, from the comparable
1995 periods.
2
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
OPERATION AND MAINTENANCE
Operation and maintenance expenses were higher in the 1996 quarter due
primarily to increased uncollectible gas accounts that were driven higher by
last winter's colder temperatures and rising gas prices, which significantly
increased customers' heating bills. The impact of higher heating bills was
worsened by a reduction in home heating assistance funding obtained by low-
income customers. Operation and maintenance expenses decreased for 1996 nine-and
twelve-month periods due to lower employee benefit costs, primarily pension and
retiree healthcare costs. The reductions in the 1996 nine- and twelve-month
periods were partially offset by increased uncollectibles expense. Management's
continuing efforts to reduce operating costs also contributed to the decreases.
As discussed in MichCon's 1995 Annual Report on Form 10-K, MichCon receives
a significant amount of its heating assistance funding from the federal Low-
Income Home Energy Assistance Program (LIHEAP). During 1995, Congress reduced a
substantial portion of the program's funding for the 1996 fiscal year and had
proposed to eliminate all funding in future years. Michigan's share of LIHEAP
funds was reduced from $78 million in fiscal year 1995 to $47.5 million in 1996.
During October 1996, the President signed an Omnibus Spending Bill passed by
Congress that provided for $1 billion in LIHEAP funding which increases the 1997
funding by $100 million over 1996 levels.
DEPRECIATION AND DEPLETION
The increase in depreciation and depletion for all 1996 periods was due
mainly to higher plant balances.
PROPERTY AND OTHER TAXES
Property and other taxes for the 1996 periods reflect an increase in
property taxes due to higher property balances.
OTHER INCOME AND DEDUCTIONS
Interest expense for all 1996 periods has increased due to an increase in
the average amount of long-term debt outstanding. For the 1996 quarter, this
increase to other income and deductions is offset by an increase in the
allowance for funds used during construction due to increased construction
during 1996.
INCOME TAX PROVISION
Income taxes decreased for the 1996 quarter and increased for the nine- and
twelve-month periods due primarily to changes in earnings. Due to the favorable
resolution of prior years' tax issues in the 1996 and 1995 periods, income tax
expense was $.7 million and $.4 million lower in the quarter and nine-month 1996
periods and was $2.6 million higher in the 1996 twelve-month period.
OUTLOOK
MichCon's strategy is to grow revenues and reduce its costs in order to
maintain strong returns and provide customers with quality service at
competitive prices. Revenue growth will be achieved through the expansion of
MichCon's 1.2 million residential, commercial and industrial customer base.
MichCon will continue initiatives to increase productivity and improve customer
services in order to strengthen its competitive position in the gas industry.
3
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (Concluded)
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities totaled $111.3 million for
the 1996 nine-month period, decreasing $39.5 million from the comparable 1995
period. The decrease was due primarily to higher working capital requirements,
partially offset by higher net income, after adjusting for depreciation and
deferred taxes. MichCon anticipates that working capital requirements will be
greater throughout 1996 as compared to 1995 in order to fund the GCR
undercollection, which is $33.6 million as of September 1996.
FINANCING ACTIVITIES
During the latter part of the year, cash and cash equivalents normally
decrease as funds are used to finance increases in gas inventories and customer
accounts receivable. Short-term debt is normally reduced in the first part of
each year as gas inventories are depleted and funds are received from winter
heating sales. During the current nine-month period, cash increased due to the
timing of cash receipts. To meet its seasonal short-term borrowing needs,
MichCon normally issues commercial paper which is backed by credit lines with
several banks. MichCon has established credit lines to allow for borrowings of
up to $100 million under a 364-day revolving credit facility and up to
$150 million under a three-year revolving credit facility. Commercial paper of
$192.1 million was outstanding as of September 30, 1996 under these lines.
In May 1996, MichCon issued first mortgage bonds totaling $70 million under
its existing shelf registration. The proceeds were used to repay short-term
obligations, finance MichCon capital expenditures and for general corporate
purposes.
MichCon is planning on filing a shelf registration with the Securities and
Exchange Commission in the fourth quarter of 1996 which will allow it to issue,
in conjunction with an existing shelf registration, up to $300 million of debt
securities over the next several years. MichCon's capital requirements and
general market conditions will affect the timing and amount of future issuances.
INVESTING ACTIVITIES
MichCon's capital expenditures totaled $146.3 million during the 1996
nine-month period and are anticipated to be approximately $220 million by the
end of the year. These expenditures are used primarily for the construction of
transportation pipelines, the construction of new distribution lines to reach
communities not previously served by MichCon, and to make improvements to
existing storage and transmission systems.
In January 1996, MichCon began construction of a 59-mile loop of its
existing Milford to Belle River Pipeline. The pipeline is anticipated to be
completed in early 1997 at a cost of approximately $80 million. The pipeline
will improve the overall reliability and efficiency of MichCon's gas storage and
transmission system by serving as a back-up means of transportation in the event
of disruption in the operation of the existing pipeline or other facilities used
to supply gas to MichCon's system.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital requirements.
4
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
------------------------ ------------
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost (which approximates market value)......... $ 18,282 $ 3,213 $ 8,469
Accounts receivable, less allowance for doubtful accounts of
$14,112, $12,725 and $13,250, respectively.................................. 119,787 91,434 175,103
Accrued unbilled revenues.................................................... 22,197 18,815 91,134
Gas in inventory............................................................. 101,742 92,508 40,191
Property taxes assessed applicable to future periods......................... 23,456 21,618 56,949
Accrued gas cost recovery revenues........................................... 33,585 - -
Other........................................................................ 22,602 28,338 32,498
---------- ---------- ----------
341,651 255,926 404,344
---------- ---------- ----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures.................................. 20,357 19,742 20,318
Deferred postretirement benefit costs......................................... 7,103 14,613 12,372
Deferred environmental costs (Note 4a)........................................ 28,016 - 32,000
Prepaid benefit costs......................................................... 54,103 20,770 25,438
Other......................................................................... 48,660 41,448 42,061
---------- ---------- ----------
158,239 96,573 132,189
---------- ---------- ----------
Property, Plant and Equipment, at cost......................................... 2,609,095 2,338,974 2,413,120
Less - Accumulated depreciation and depletion................................. 1,221,009 1,135,024 1,151,160
---------- ---------- ----------
1,388,086 1,203,950 1,261,960
---------- ---------- ----------
$1,887,976 $1,556,449 $1,798,493
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable............................................................. $ 99,223 $ 69,691 $ 108,208
Notes payable (Note 2)....................................................... 194,013 111,820 196,635
Current portion of long-term debt, capital lease obligations
and redeemable cumulative preferred stock................................... 53,213 3,936 3,969
Federal income, property and other taxes payable............................. 33,241 45,186 85,195
Customer deposits............................................................ 10,787 10,277 11,531
Other........................................................................ 50,885 57,107 64,587
---------- ---------- ----------
441,362 298,017 470,125
---------- ---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes............................................. 83,160 60,863 61,146
Unamortized investment tax credit............................................. 35,050 36,902 36,437
Tax benefits amortizable to customers......................................... 112,930 112,085 114,487
Accrued postretirement benefit costs.......................................... - 14,537 12,661
Accrued environmental costs (Note 4a)......................................... 32,000 - 32,000
Minority interest (Note 3).................................................... 18,503 - -
Other......................................................................... 59,838 60,025 65,252
---------- ---------- ----------
341,481 284,412 321,983
---------- ---------- ----------
Long-Term Debt, including capital lease obligations (Note 1)................... 551,254 517,035 516,564
---------- ---------- ----------
Commitments and Contingencies (Note 4)
Common Shareholder's Equity
Common stock.................................................................. 10,300 10,300 10,300
Additional paid-in capital (Note 3)........................................... 230,399 211,777 211,777
Retained earnings............................................................. 313,180 234,908 267,744
---------- ---------- ----------
553,879 456,985 489,821
---------- ---------- ----------
$1,887,976 $1,556,449 $1,798,493
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
5
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
---------------------- --------------------- -----------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues............................ $117,251 $107,522 $870,970 $714,302 $1,237,481 $1,012,478
-------- -------- -------- -------- ---------- ----------
Operating Expenses
Cost of gas.................................. 29,163 20,963 427,560 303,130 608,392 448,016
Operation and maintenance.................... 68,727 60,750 208,710 210,753 292,381 297,688
Depreciation and depletion................... 24,830 22,107 73,963 66,988 96,103 87,481
Property and other taxes..................... 13,161 12,798 46,773 43,487 60,298 55,462
-------- -------- -------- -------- ---------- ----------
Total operating expenses.................... 135,881 116,618 757,006 624,358 1,057,174 888,647
-------- -------- -------- -------- ---------- ----------
Operating Income (Loss)....................... (18,630) (9,096) 113,964 89,944 180,307 123,831
-------- -------- -------- -------- ---------- ----------
Equity in Earnings of Joint Ventures.......... 203 123 698 499 938 554
-------- -------- -------- -------- ---------- ----------
Other Income and (Deductions)
Interest income.............................. 1,401 765 2,620 2,764 3,839 3,761
Interest on long-term debt................... (11,013) (9,726) (31,005) (26,410) (40,415) (34,665)
Other interest expense....................... (1,217) (774) (4,992) (4,425) (7,620) (7,368)
Minority interest............................ (332) - (1,034) - (1,034) -
Other........................................ 664 (758) 482 (2,337) (2,590) (4,816)
-------- -------- -------- -------- ---------- ----------
Total other income and (deductions)......... (10,497) (10,493) (33,929) (30,408) (47,820) (43,088)
-------- -------- -------- -------- ---------- ----------
Income (Loss) Before Income Taxes............. (28,924) (19,466) 80,733 60,035 133,425 81,297
Income Tax Provision (Benefit)................ (10,487) (6,138) 28,279 21,201 48,082 26,885
-------- -------- -------- -------- ---------- ----------
Net Income (Loss)............................. (18,437) (13,328) 52,454 38,834 85,343 54,412
Dividends on Preferred Stock.................. - 54 18 182 71 297
-------- -------- -------- -------- ---------- ----------
Net Income (Loss) Available for Common Stock.. $(18,437) $(13,382) $ 52,436 $ 38,652 $ 85,272 $ 54,115
======== ======== ======== ======== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
---------------------- --------------------- -----------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - Beginning of Period................. $331,617 $248,290 $267,744 $202,756 $234,908 $187,293
Add - Net income (loss)...................... (18,437) (13,328) 52,454 38,834 85,343 54,412
-------- -------- -------- -------- -------- --------
313,180 234,962 320,198 241,590 320,251 241,705
Deduct - Cash dividends declared:
Preferred stock............................. - 54 18 182 71 297
Common stock................................ - - 7,000 6,500 7,000 6,500
-------- -------- -------- -------- -------- --------
Balance - End of Period....................... $313,180 $234,908 $313,180 $234,908 $313,180 $234,908
======== ======== ======== ======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral
part of these statements.
6
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash Flow from Operating Activities
Net income.................................................................... $ 52,454 $ 38,834
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income.................................................... 73,963 66,988
Charged to other accounts.................................................. 5,667 5,446
Deferred income taxes - current............................................. (5,372) (5,323)
Deferred income taxes and investment tax credit - net....................... 10,715 4,254
Other....................................................................... (1,946) 992
Changes in assets and liabilities, exclusive of changes
shown separately........................................................... (24,184) 39,646
------------ -----------
Net cash provided from operating activities.............................. 111,297 150,837
------------ -----------
Cash Flow from Financing Activities
Notes payable - net........................................................... (2,622) (56,637)
Issuance of long-term debt.................................................... 69,645 68,764
Cash dividend paid:
Common stock................................................................. (7,000) (6,500)
Preferred stock.............................................................. (54) (223)
Retirement of long-term debt and preferred stock.............................. (5,435) (4,290)
Equity Investment............................................................. 1,614 7,000
------------ -----------
Net cash provided from financing activities.............................. 56,148 8,114
------------ -----------
Cash Flow from Investing Activities
Capital expenditures.......................................................... (146,277) (154,718)
Other - net................................................................... (11,355) (2,325)
------------ -----------
Net cash used for investing activities................................... (157,632) (157,043)
============ ===========
Net Increase in Cash and Cash Equivalents...................................... 9,813 1,908
Cash and Cash Equivalents, January 1........................................... 8,469 1,305
Cash and Cash Equivalents, September 30........................................ ------------ -----------
$ 18,282 $ 3,213
============ ===========
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable - net.................................................... $ 58,180 $ 41,913
Accrued/deferred gas cost recovery revenues.................................. (34,163) (17,653)
Accrued unbilled revenues.................................................... 68,937 63,418
Gas in inventory............................................................. (61,551) (14,665)
Property taxes assessed applicable to future periods......................... 34,703 30,545
Accounts payable............................................................. (10,101) (10,980)
Federal income, property and other taxes payable............................. (53,971) (40,620)
Other current assets and liabilities......................................... 1,363 3,373
Deferred assets and liabilities.............................................. (27,581) (15,685)
------------ -----------
$ (24,184) $ 39,646
============ ===========
Supplemental Disclosures
Cash paid for:
Interest, net of amounts capitalized......................................... $ 28,501 $ 24,084
============ ===========
Federal income taxes......................................................... $ 28,792 $ 23,111
============ ===========
Noncash financing activities:
Transfer of pipeline net assets to MichCon (Note 3).......................... $ 17,008 $ -
============ ===========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
7
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. CAPITALIZATION
During May 1996, First Mortgage Bonds in the amount of $30,000,000 were
issued at 6.51%, due June 1999 and $40,000,000 were issued at 7.15%, due May
2006.
2. LINES OF CREDIT
During 1995, MichCon established credit lines to allow for borrowings of up
to $100,000,000 under a 364 day revolving credit facility and up to $150,000,000
under a three year revolving credit facility. These credit lines totaling
$250,000,000 support its commercial paper program. In July 1996, the 364 day
revolving facility was renewed. Commercial paper of $192,138,000 was
outstanding as of September 30, 1996, under these lines.
3. TRANSFER OF SUBSIDIARIES
In January 1996, MCN Corporation (MCN), parent company of MichCon,
transferred its Michigan pipeline operations, at book value, to MichCon in order
to consolidate MCN's Michigan gathering pipeline activities within one business
unit. Net assets transferred to MichCon totaled approximately $18,622,000,
including cash of $1,614,000 and long-term debt of $17,600,000. Contributions
from these pipeline operations to MichCon's consolidated net income were
approximately $289,000 and $912,000 for the three- and nine-month periods ended
September 30, 1996.
4. COMMITMENTS AND CONTINGENCIES
a. ENVIRONMENTAL MATTERS
As described in MichCon's 1995 Annual Report on Form 10-K, MichCon
accrued an additional environmental remediation liability and corresponding
regulatory asset of $32,000,000 in the fourth quarter of 1995. MichCon has
notified current and former insurance carriers of the environmental
conditions and is pursuing claims against these carriers. In 1996, MichCon
received payments from certain insurance carriers and expects additional
insurance recoveries over the next several years. At September 30, 1996, the
reserve balance was approximately $35,165,000, of which $3,165,000 is
classified as current.
b. OTHER
MichCon is involved in certain legal and administrative proceedings
before various courts and governmental agencies concerning claims arising in
the ordinary course of business. Management cannot predict the final
disposition of such proceedings, but believes that adequate provision has
been made for probable losses. It is management's belief, after discussion
with legal counsel, that the ultimate resolution of those proceedings still
pending will not have a material adverse effect on MichCon's financial
statements.
8
<PAGE>
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
5. ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" in
October 1995. The statement requires certain disclosures about stock-based
employee compensation in the financial statements and encourages, but does not
require, a fair-value-based method of accounting for such compensation. MichCon
currently awards performance units to selected employees under its long term
incentive plan. Each performance unit is equivalent to a share of MCN common
stock. MCN is currently evaluating whether to adopt the fair-value-based method
of accounting and its impacts.
6. GENERAL
The accompanying consolidated financial statements should be read in
conjunction with MichCon's 1995 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1996 presentation.
The unaudited information furnished herein, in the opinion of management,
reflects all adjustments (consisting of only recurring adjustments or accruals)
necessary for a fair presentation of the results of operations during the
periods.
Because of seasonal and other factors, revenues, expenses and net income
for the interim periods should not be construed as representative of revenues,
expenses and net income for all or any part of the balance of the current year
or succeeding periods.
9
<PAGE>
OTHER INFORMATION
LEGAL PROCEEDINGS
ENVIRONMENTAL: In 1994, MichCon received a general notice of liability
letter from the U.S. Environmental Protection Agency (USEPA) stating that it was
one of two potentially responsible parties at the Lower Ecorse Creek Superfund
site in Wyandotte, Michigan. USEPA requested that MichCon conduct a remedial
investigation and feasibility study at that site. MichCon investigated its prior
activities in the area and USEPA's bases for its conclusion, and concluded that
it was not responsible for contamination discovered at that site. MichCon
informed USEPA of this belief and did not undertake the requested activities.
In September 1996, USEPA sent MichCon a second general notice of liability
letter for the site and demanded reimbursement of approximately $2.3 million in
past costs, plus interest. USEPA then issued MichCon and the other potentially
responsible party a unilateral administrative order under section 106 of the
Comprehensive Environmental Response Compensation and Liability Act to implement
the remedy. USEPA estimates the cost of the remedy to be approximately $650,000.
MichCon again reviewed USEPA's bases for determining that it is a potentially
responsible party and concluded again that it was not responsible for
contamination discovered at that site and informed USEPA of its decision. USEPA
may sue MichCon to force compliance with the order or may implement the remedy
and then sue MichCon for recovery of all incurred costs. If USEPA institutes and
prevails in such a suit and if the court determines that MichCon did not have
sufficient cause not to comply with the order, the court may impose civil
penalties and punitive damages. Management believes that MichCon was not
responsible for contamination at the site and has sufficient cause not to comply
with this order and that the resolution of this matter will not have a material
adverse effect on MichCon's financial statements.
ENERGY CONSERVATION PROGRAM: In December 1994, a suit was filed against
MichCon in Wayne County, Michigan Circuit Court by six customers who had
participated in one of three energy conservation programs sponsored by MichCon.
Under these programs, which had been approved by the MPSC, MichCon offered low
interest loans, rebates and other arrangements to assist qualified residential
customers in purchasing high efficiency furnaces. MichCon did not manufacture,
sell or install any of the furnaces. The complaint alleged that MichCon induced
the purchase of these furnaces through its conservation programs and that it had
a duty to, but failed to, warn its customers that harmful levels of carbon
monoxide could backdraft if a chimney was not properly sized and a chimney liner
installed. No personal injuries were claimed. Plaintiffs sought injunctive
relief, unspecified monetary damages and class action certification. The trial
court denied such certification on two separate occasions; the Michigan Court of
Appeals denied plaintiffs' request for an appeal of those rulings.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. On September 13, 1996,
the plaintiffs' motions were granted to certify as a class the approximately
46,000 customers who had participated in MichCon's conservation programs from
1990 to the present. MichCon believes that plaintiffs' allegations are without
merit and will continue to defend the case vigorously.
10
<PAGE>
EXHIBITS
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10-1 MCN Executive Deferred Compensation Plan, as
amended (Exhibit 10-1 to MCN's September 30, 1996
Form 10-Q).
10-2 MichCon Supplemental Death Benefit and Retirement
Income Plan (Attachment to Exhibit 10-2 to MCN's
September 30, 1996 Form 10-Q).
10-3 MichCon Supplemental Retirement Plan (Exhibit 10-3
to MCN's September 30, 1996 Form 10-Q).
12-1 Computation of Ratio of Earnings to Fixed Charges.
27-1 Financial Data Schedule.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICHIGAN CONSOLIDATED GAS COMPANY
Date: November 7, 1996 By: /s/ David R. Nowakowski
-------------------------------
David R. Nowakowski
Vice President, Controller,
Treasurer and
Chief Accounting Officer
12
<PAGE>
EXHIBIT 12-1
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended Twelve Months Ended
------------------- ------------------- -------------------
September 30, 1996 December 31, 1995 December 31, 1994
------------------- ------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Pre-tax Income (2)....................... $132,421 $112,727 $ 89,707
Fixed charges............................ 50,610 45,637 39,663
-------- -------- --------
Earnings as defined.................... $183,031 $158,364 $129,370
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt............... $ 40,415 $ 35,820 $ 27,948
Interest on other borrowed funds......... 7,620 7,053 9,093
Amortization of debt discounts, premium
and expense............................ 1,077 996 950
Interest implicit in rentals (3)......... 1,498 1,768 1,672
-------- -------- --------
Fixed charges as defined............... $ 50,610 $ 45,637 $ 39,663
======== ======== ========
Ratio of Earnings to Fixed Charges....... 3.62 3.47 3.26
======== ======== ========
- ----------------------------
</TABLE>
Notes:
- -----
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income of MichCon,
(b) MichCon's share of pre-tax income of its 50% owned companies and (c) any
income actually received from less than 50% owned companies.
(3) This amount is estimated to be a reasonable approximation of the interest
portion of rentals.
MichCon is a guarantor of certain other debt. Fixed charges related to such
debt are deemed to be immaterial and therefore have been excluded from the above
ratios.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,282
<SECURITIES> 0
<RECEIVABLES> 133,899
<ALLOWANCES> 14,112
<INVENTORY> 101,742
<CURRENT-ASSETS> 341,651
<PP&E> 2,609,095
<DEPRECIATION> 1,221,009
<TOTAL-ASSETS> 1,887,976
<CURRENT-LIABILITIES> 441,362
<BONDS> 551,254
<COMMON> 10,300
0
0
<OTHER-SE> 543,579
<TOTAL-LIABILITY-AND-EQUITY> 1,887,976
<SALES> 0
<TOTAL-REVENUES> 870,970
<CGS> 0
<TOTAL-COSTS> 757,006
<OTHER-EXPENSES> 552
<LOSS-PROVISION> 16,620
<INTEREST-EXPENSE> 35,997
<INCOME-PRETAX> 80,733
<INCOME-TAX> 28,279
<INCOME-CONTINUING> 52,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,436
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
