<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997, 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, 1997:
Common Stock, par value $.01 per share: 10,300,000
================================================================================
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER .................................................................... i
INDEX .................................................................... ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 1
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 11
SIGNATURE ................................................................ 12
</TABLE>
ii
<PAGE> 3
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company reported a net loss of $16.0 million for the 1997 third
quarter, improving $2.4 million over the comparable 1996 quarter. 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. Items favorably impacting the quarter comparison were
improved gross margins and lower operation and maintenance expenses, partially
offset by higher depreciation and financing costs. Earnings decreased $5.3
million and $10.8 million for the 1997 nine- and twelve-month periods,
respectively, reflecting higher depreciation and financing costs, as well as
reduced gross margins due to warmer weather.
<TABLE>
<CAPTION>
EARNINGS COMPONENTS (IN MILLIONS)
---------------------------------
COMPARING 1997 TO 1996
----------------------
Quarter Nine Months Twelve Months
------- ------------ -------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue ....................... $ 1.9 1.6% $(14.6) (1.7)% $ 6.7 0.5%
Cost of Gas ............................. (1.3) (4.5) (13.4) (3.1) 14.8 2.4
Gross Margin ............................ 3.2 3.6 (1.2) (0.3) (8.1) (1.3)
Operation and Maintenance ............... (4.9) (7.2) (1.4) (0.7) 0.5 0.2
Depreciation and Depletion .............. 1.3 5.4 4.1 5.6 6.2 6.4
Property and Other Taxes ................ (0.5) (3.8) (0.2) (0.4) 1.3 2.1
Other Income and Deductions ............. 0.8 7.7 3.0 8.8 2.7 5.7
Income Tax Provision .................... 4.1 38.7 (1.2) (4.3) (7.8) (16.3)
Net Income............................... 2.4 13.0 (5.3) (10.2) (10.8) (12.7)
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased for the 1997
quarter and decreased for the nine- and twelve-month periods, respectively.
Gross margin for all 1997 periods was affected by increased other operating
revenues reflecting initiatives to grow revenues by providing gas-related
services. The favorable quarter results also reflect higher intermediate
transportation services, partially offset by lower gas sales. The decrease in
gross margin for the 1997 nine- and twelve-month periods was primarily due to
lower gas sales and end user transportation deliveries caused by warmer
weather, partially offset by the continued growth in intermediate
transportation services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
Quarter Nine Months Twelve Months
----------------- ------------------ -------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Percentage Colder
than Normal ................. N/M N/M 1.7% 6.2% 2.5% 6.8%
Increase (Decrease) from
Normal in:
Gas Markets (Bcf) .......... (0.3) (0.2) 1.2 8.4 3.7 14.2
Net Income (Millions) ...... $(0.2) $(0.2) $1.1 $7.6 $3.3 $12.7
</TABLE>
1
<PAGE> 4
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gas sales and end user transportation revenues in total decreased $3.1
million, $26.3 million and $5.9 million in the 1997 quarter, nine- and
twelve-month periods, respectively. The decrease in revenues for the quarter
is due to lower gas costs which are recovered in gas sales rates as
subsequently discussed in the "Cost of Gas" section. The quarter was further
impacted by a slight decrease in gas sales volumes. The decrease in revenues
for the 1997 nine-month period is due to reduced gas sales and end user
transportation deliveries as a result of warmer weather and lower gas costs.
The twelve-month period decrease in revenues was also affected by reduced gas
sales and end user transportation deliveries as a result of warmer weather,
partially offset by higher gas costs.
<TABLE>
<CAPTION>
Quarter Nine Months Twelve Months
------- ----------- -------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GAS MARKETS ($ MILLIONS)
Gas Sales................................ $ 77.7 $ 80.9 $717.7 $744.4 $1,059.2 $1,064.0
End User Transportation.................. 16.2 16.1 61.5 61.1 82.6 83.7
Intermediate Transportation.............. 12.9 12.4 41.0 35.2 54.4 44.4
Other.................................... 12.3 7.9 36.2 30.3 48.0 45.4
------ ------ ------ ------ -------- --------
$119.1 $117.3 $856.4 $871.0 $1,244.2 $1,237.5
====== ====== ====== ====== ======== ========
GAS MARKETS (IN BCF)
Gas Sales................................ 13.8 14.2 141.7 150.4 209.0 222.4
End User Transportation.................. 28.6 28.6 105.7 107.9 144.4 149.9
Intermediate Transportation.............. 164.9 148.7 447.1 407.1 567.5 510.8
------ ------ ------ ------ -------- --------
207.3 191.5 694.5 665.4 920.9 883.1
====== ====== ====== ====== ======== ========
</TABLE>
Intermediate transportation revenues increased for the 1997 quarter, nine-
and twelve-month periods by $0.5 million, $5.8 million and $10.0 million,
respectively, due to increased deliveries. The increase in intermediate
transportation deliveries for all periods reflects additional volumes
transported in connection with the recent expansion of the northern Michigan
gathering system. The northern Michigan gathering system enabled MichCon to
transport an additional 22.7 Bcf, 55.6 Bcf and 81.2 Bcf for the 1997 quarter,
nine- and twelve-month periods, respectively. Intermediate transportation
volumes for all 1997 periods were impacted by lower deliveries to major
customers. Although volumes for these fixed-fee customers have varied, the
related revenues were not significantly affected.
Other operating revenues increased in all periods due in part to increased
merchandise sales and gas related services. Also affecting the quarter
comparison is an unfavorable adjustment for energy conservation revenues in the
1996 quarter resulting from the discontinuance of MichCon's energy conservation
programs. Other operating revenue for the 1997 twelve-month period also
reflects an increase in gas processing revenues from the northern Michigan
gathering system, partially offset by a decrease in energy conservation
revenue.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery mechanism, MichCon is allowed timely
recovery of 100% of its prudently and reasonably incurred cost of gas sold.
Therefore, fluctuations in total gas costs have little or no effect on gross
margins.
2
<PAGE> 5
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cost of gas sold decreased in the 1997 quarter and nine-month period and
increased slightly for the 1997 twelve-month period. Cost of gas for all 1997
periods was affected by lower sales volumes, primarily due to warmer weather,
as well as supplier refunds. The 1997 quarter also reflects a reduction in the
market prices paid of $.03 (1%) per thousand cubic feet of gas sold,
substantially offset by increased lost gas costs. Partially offsetting the
decrease in the 1997 nine-month period was higher market prices resulting in a
$.12 (4%) increase in the average unit cost of gas sold. The increase in cost
of gas in the 1997 twelve-month period reflects a $.24 (9%) increase in the
average unit cost of gas sold.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased for the 1997 quarter and
nine-month period and increased slightly for the 1997 twelve-month period.
Operation and maintenance expenses were affected in all periods by lower
benefit costs, primarily pension and retiree healthcare costs. The 1997
quarter and nine-month period further benefited from a decrease in
uncollectibles expense. Partially offsetting the decrease in the 1997
nine-month period were higher engergy conservation program expenses and
operating expenses related to increased intermediate transportation volumes as
previously discussed. The increase in the 1997 twelve-month period is due
primarily to higher uncollectibles expense and the additional operating
expenses related to the increase in intermediate transportation volumes, that
were mitigated by reduced expenses from the discontinuance of the energy
conservation programs.
DEPRECIATION AND DEPLETION
The increase in depreciation and depletion for the 1997 quarter, nine- and
twelve-month periods is due to higher plant balances reflecting capital
expenditures of $212.7 million in the 1996 calendar year. Depreciation and
depletion expenses are expected to increase in future years due to additional
capital investments. MichCon filed an application with the Michigan Public
Service Commission in October 1996 to lower its depreciation rates which could
partially offset the anticipated increase in depreciation expense in future
years.
PROPERTY AND OTHER TAXES
Property and other taxes decreased in the 1997 quarter and nine-month
period and increased in the 1997 twelve-month period. The Company reduced its
property taxes for all 1997 periods based on pending appeals of its personal
property tax assessments. A favorable resolution of the appeals is expected in
1999. All 1997 periods were also impacted by an increase in Michigan single
business taxes relating to prior years.
OTHER INCOME AND DEDUCTIONS
Other income and deductions increased in all the 1997 periods primarily
due to additional interest expense resulting from increased long-term debt
required to finance capital investments, partially offset by reduced interest
on lower outstanding commercial paper.
3
<PAGE> 6
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX PROVISION
Income taxes changed primarily as a result of variations in earnings. The
increase in income taxes for the 1997 quarter was additionally impacted by the
amounts recorded in the 1996 quarter for the favorable resolution of prior
years' tax issues. The decreases in income taxes for the 1997 nine- and
twelve-month periods were also positively impacted by tax credits, partially
offset by the favorable resolution of prior years' tax issues recorded in the
1996 periods.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities totaled $209.9 million for
the 1997 nine-month period, increasing $98.7 million from the comparable 1996
period. The increase was due primarily to lower working capital requirements
reflecting a reduction in the gas cost recovery undercollection, partially
offset by lower net income after adjusting for depreciation and deferred taxes.
Operating cash flows were sufficient for the payment of cash dividends on
common stock and all capital investments.
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. 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
$150 million under a 364-day revolving credit facility and up to $150 million
under a three-year revolving credit facility both of which expire July 1998.
During the first nine months of 1997, MichCon repaid $176.7 million of
commercial paper. Commercial paper of $61.6 million was outstanding as of
September 30, 1997.
During May 1997, MichCon issued $85 million of first mortgage bonds under
its existing shelf registrations. The funds from this issuance were used to
retire first mortgage bonds, fund capital expenditures and for general
corporate purposes. MichCon's capital requirements and general market
conditions will affect the timing and amount of future issuances.
During April 1997, subsidiaries of MichCon borrowed $40 million under a
nonrecourse credit agreement that matures in 2005. Proceeds were used to
finance the expansion of its northern Michigan gathering system.
During the 1997 second quarter, MichCon redeemed early $17 million of
long-term debt. MichCon also repaid $50 million of first mortgage bonds on its
stated maturity date in May 1997.
MichCon's capitalization objective is to maintain a ratio of approximately
50% debt and 50% equity. At September 30, 1997, common equity was 50.2% of
total capitalization excluding nonrecourse debt.
INVESTING ACTIVITIES
MichCon's capital expenditures totaled $97 million during the 1997
nine-month period and are anticipated to be approximately $150 million by the
end of the year. These investments will be made to
4
<PAGE> 7
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
add new customers, develop new gas transportation markets, make improvements to
existing storage, distribution and transmission systems and to improve its
information systems.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
OUTLOOK
MichCon's strategy is to 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 is concentrating on adding new customers in current service areas
including increased penetration of previous expansion areas. MichCon will
continue initiatives to increase productivity and improve customer services in
order to strengthen its competitive position in the gas industry. Management
is continually assessing ways to improve cost competitiveness. Among the cost
savings initiatives, MichCon and other Michigan utilities are exploring
opportunities to share the cost of similar functions in order to obtain greater
efficiencies and increase customer value.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996 the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus that the costs associated with modifying
internal use software for the year 2000 should be expensed as incurred.
MichCon has established processes for evaluating and managing the risks and
costs associated with this issue. MichCon is assessing the extent of necessary
modifications to its computer software and the impact on the financial position
and results of operations.
FORWARD-LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve certain risks and uncertainties that may
cause actual future results to differ materially from those contemplated,
projected, estimated or budgeted in such forward-looking statements. Factors
that may impact forward-looking statements include, but are not limited to, the
following: (i) the effects of weather and other natural phenomenon; (ii)
increased competition from other energy suppliers as well as alternative forms
of energy; (iii) the capital intensive nature of MichCon's business; (iv)
economic climate and growth in the geographic areas in which MichCon does
business; (v) the uncertainty of gas reserve estimates; (vi) the timing and
extent of changes in commodity prices for natural gas, electricity and crude
oil; (vii) conditions of capital markets and equity markets and (viii) the
effects of changes in governmental policies and regulatory actions, including
income taxes, environmental compliance and authorized rates.
5
<PAGE> 8
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,
----------------------- ----------------------- ------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES............................. $ 119,114 $ 117,251 $ 856,359 $ 870,970 $1,244,174 $1,237,481
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas.................................. 27,848 29,163 414,152 427,560 623,186 608,392
Operation and maintenance.................... 63,809 68,727 207,308 208,710 292,879 292,381
Depreciation and depletion................... 26,159 24,830 78,084 73,963 102,268 96,103
Property and other taxes..................... 12,667 13,161 46,602 46,773 61,591 60,298
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses................... 130,483 135,881 746,146 757,006 1,079,924 1,057,174
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)........................ (11,369) (18,630) 110,213 113,964 164,250 180,307
---------- ---------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........... 212 203 853 698 1,041 938
---------- ---------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.............................. 1,144 1,401 3,630 2,620 4,910 3,839
Interest on long-term debt................... (11,659) (10,313) (33,973) (30,238) (44,438) (39,921)
Other interest expense....................... (1,033) (1,217) (5,782) (4,992) (8,802) (7,620)
Minority interest............................ (523) (332) (1,456) (1,034) (1,410) (1,034)
Other........................................ 766 (36) 663 (285) (808) (3,084)
---------- ---------- ---------- ---------- ---------- ----------
Total other income and (deductions)........ (11,305) (10,497) (36,918) (33,929) (50,548) (47,820)
---------- ---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.............. (22,462) (28,924) 74,148 80,733 114,743 133,425
INCOME TAX PROVISION........................... (6,426) (10,487) 27,060 28,279 40,267 48,082
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).............................. (16,036) (18,437) 47,088 52,454 74,476 85,343
DIVIDENDS ON PREFERRED STOCK................... - - - 18 - 71
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK... $ (16,036) $ (18,437) $ 47,088 $ 52,436 $ 74,476 $ 85,272
========== ========== ========== ========== ========== ==========
</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,
----------------------- ----------------------- ------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - BEGINNING OF PERIOD.................. $ 359,429 $ 331,617 $ 336,305 $ 267,744 $ 313,180 $ 234,908
Add - Net income (Loss)...................... (16,036) (18,437) 47,088 52,454 74,476 85,343
---------- ---------- ---------- ---------- ---------- ----------
343,393 313,180 383,393 320,198 387,656 320,251
Deduct - Cash dividends declared:
Preferred stock............................ - - - 18 - 71
Common stock............................... - - 40,000 7,000 44,263 7,000
---------- ---------- ---------- ---------- ---------- ----------
BALANCE - END OF PERIOD........................ $ 343,393 $ 313,180 $ 343,393 $ 313,180 $ 343,393 $ 313,180
========== ========== ========== ========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
6
<PAGE> 9
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------- ------------
1997 1996 1996
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS........................................................ $ 12,148 $ 18,282 $ 10,010
Accounts receivable, less allowance for doubtful accounts of
$16,104, $14,112 and $17,707, respectively...................................... 104,218 119,787 169,436
Accrued unbilled revenues........................................................ 21,972 22,197 107,377
Gas in inventory................................................................. 96,533 101,742 67,910
Property taxes assessed applicable to future periods............................. 26,870 23,456 60,592
Accrued gas cost recovery revenues............................................... - 33,585 27,672
Other............................................................................ 32,375 22,602 23,025
---------- ---------- ----------
294,116 341,651 466,022
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures..................................... 19,229 20,357 19,479
Deferred postretirement benefit costs............................................ - 7,103 4,863
Deferred environmental costs..................................................... 27,600 28,016 28,233
Prepaid benefit costs............................................................ 71,345 54,103 64,307
Other............................................................................ 55,209 48,660 50,206
---------- ---------- ----------
173,383 158,239 167,088
---------- ---------- ----------
Property, Plant and Equipment...................................................... 2,741,653 2,609,095 2,668,294
Less - Accumulated depreciation and depletion ................................... 1,303,841 1,221,009 1,243,060
---------- ---------- ----------
1,437,812 1,388,086 1,425,234
---------- ---------- ----------
$1,905,311 $1,887,976 $2,058,344
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable................................................................. $ 92,051 $ 99,223 $ 130,725
Notes payable.................................................................... 140,022 194,013 265,126
Current portion of long-term debt and capital lease obligations.................. 28,099 53,213 53,232
Federal income, property and other taxes payable................................. 40,602 33,241 84,788
Customer deposits................................................................ 14,026 10,787 12,860
Other............................................................................ 56,921 50,885 63,309
---------- ---------- ----------
371,721 441,362 610,040
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................................................ 79,273 83,160 76,523
Unamortized investment tax credit................................................ 33,206 35,050 34,588
Tax benefits amortizable to customers............................................ 123,540 112,930 116,313
Accrued environmental costs...................................................... 32,000 32,000 32,000
Minority interest................................................................ 16,927 18,503 17,604
Other............................................................................ 38,553 59,838 43,954
---------- ---------- ----------
323,499 341,481 320,982
---------- ---------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (NOTE 2) ...................... 625,999 551,254 550,318
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
COMMON SHAREHOLDER'S EQUITY
Common stock..................................................................... 10,300 10,300 10,300
Additional paid-in capital....................................................... 230,399 230,399 230,399
Retained earnings................................................................ 343,393 313,180 336,305
---------- ---------- ----------
584,092 553,879 577,004
---------- ---------- ----------
$1,905,311 $1,887,976 $2,058,344
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
7
<PAGE> 10
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income.................................................................... $ 47,088 $ 52,454
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income................................................. 78,084 73,963
Charged to other accounts............................................... 5,660 5,667
Deferred income taxes - current........................................... (25,229) (5,372)
Deferred income taxes and investment tax credit - net............ 8,595 10,715
Other..................................................................... (1,159) (1,946)
Changes in assets and liabilities, exclusive of changes
shown separately........................................................ 96,908 (24,184)
---------- ---------
Net cash provided from operating activities......................... 209,947 111,297
---------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net........................................................... (125,104) (2,622)
Issuance of long-term debt (Note 2)........................................... 124,051 69,645
Additional paid-in-capital.................................................... - 1,614
Cash dividend paid:
Common stock................................................................ (40,000) (7,000)
Preferred stock............................................................. - (54)
Retirement of long-term debt and preferred stock......................... (74,792) (5,435)
---------- ---------
Net cash (used for) provided from financing activities.......... (115,845) 56,148
---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.......................................................... (97,042) (146,277)
Other - net................................................................... 5,078 (11,355)
---------- ---------
Net cash used for investing activities................................ (91,964) (157,632)
---------- ---------
Net Increase in Cash and Cash Equivalents................................... 2,138 9,813
Cash and Cash Equivalents, January 1.......................................... 10,010 8,469
---------- ---------
Cash and Cash Equivalents, September 30.................................... $ 12,148 $ 18,282
========== =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable - net................................................... $ 61,679 $ 58,180
Accrued gas cost recovery revenues.......................................... 28,318 (34,163)
Accrued unbilled revenues................................................... 85,405 68,937
Gas in inventory............................................................ (28,623) (61,551)
Property taxes assessed applicable to future periods............... 33,722 34,703
Accounts payable............................................................ (38,674) (10,101)
Federal income, property and other taxes payable.................... (44,186) (53,971)
Other current assets and liabilities........................................ 8,953 1,363
Deferred and prepaid benefit costs.......................................... (2,175) (23,396)
Deferred assets and liabilities............................................. (7,511) (4,185)
---------- ---------
$ 96,908 $ (24,184)
========== =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized........................................ $ 37,073 $ 28,501
========== =========
Federal income taxes........................................................ $ 39,530 $ 28,792
========== =========
Noncash financing activities:
Transfer of pipeline net assets from MCN................................... $ - $ 17,008
========== =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
8
<PAGE> 11
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
There have been no changes in MichCon's principal accounting policies from
those set forth in MichCon's 1996 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1997 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.
2. CAPITALIZATION
A. LONG-TERM DEBT ISSUANCE
The following long-term debt totaling $85,000,000 was issued in
May 1997:
First Mortgage Bonds Amount Issued
-------------------- -------------
7.21%, due May 2007 $30,000,000
7.06%, due May 2012 $40,000,000
7.60%, due May 2017 $15,000,000
These funds were used to repay short-term debt used to retire first
mortgage bonds on May 1, 1997, fund capital expenditures and for general
corporate purposes.
MichCon has entered into variable interest rate swap agreements with
notional principal amounts aggregating $80,000,000 in connection with the
first mortgage bonds issued May 1997. Swap agreements of $40,000,000
through May 2002 have reduced the average cost of debt from 7.31% to 6.32%
for the five months ended September 30, 1997. Swap agreements of
$40,000,000 through May 2005 have reduced the average cost of debt from
7.06% to 5.91% for the five months ended September 30, 1997.
During April 1997, MichCon subsidiaries borrowed $40,000,000 under a
nonrecourse credit agreement. Under terms of the agreement, certain
alternative variable interest rates are available at the borrowers' option
during the life of the agreement. Quarterly principal payments commenced
in June 1997 with a final installment due November 2005. The loan is
secured by a pledge of stock of the borrowers and a security interest in
certain of their assets. MichCon may be required to support the credit
agreement through limited capital contributions to the subsidiaries if
certain cash flow and operating targets are not met. At September 30,
1997, $37,600,000 was outstanding at a weighted average interest rate
6.34%.
9
<PAGE> 12
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
2. CAPITALIZATION - (CONTINUED)
B. LONG-TERM DEBT REDEMPTION
In the second quarter of 1997, MichCon redeemed early $5,000,000 of
9.50% first mortgage bonds and $12,000,000 of 9.75% unsecured notes. As
noted in MichCon's 1996 Form 10-K, the company had a variable interest
rate swap agreement through April 2000 on the $12,000,000 unsecured notes.
This agreement reduced the cost of debt of the fixed-rate unsecured notes
from 9.75% to 5.77% for the six months ended June 30, 1997. This swap has
been redesignated as a hedge of other outstanding first mortgage bonds.
3. LINES OF CREDIT
MichCon has established credit lines that allow for borrowings of up to
$150,000,000 under a 364-day revolving credit facility and up to
$150,000,000 under a three-year revolving credit facility. These credit
lines totaling $300,000,000 support its commercial paper program. Commercial
paper of $61,571,000 was outstanding as of September 30,1997 under these lines.
The 364-day revolving credit facility was renewed in July 1997. Both revolving
credit facilities expire in July 1998.
4. COMMITMENTS AND CONTINGENCIES
MichCon is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. Management cannot predict the final disposition
of such proceedings, but believes that adequate provision has been made for
probable losses. It is management's belief, after discussion with legal
counsel, that the ultimate resolution of those proceedings still pending will
not have a material adverse effect on MichCon's financial statements.
10
<PAGE> 13
OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------
12-1 Computation of Ratio of Earnings to Fixed Charges.
27-1 Financial Data Schedule.
(b) Reports on Form 8-K
None
11
<PAGE> 14
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, 1997 By: /s/ Howard L. Dow III
-------------------------
Howard L. Dow III
Vice President and
Chief Financial Officer
12
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
12-1 Computation of Ratio Earning to Fixed Charges.
27-1 Financial Data Schedule
<PAGE> 1
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, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Net Income .......................................... $119,328 $122,239 $112,727
Fixed charges ....................................... 57,789 53,831 45,637
-------- -------- --------
Earnings as defined ................................ $177,117 $176,070 $158,364
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt .......................... $ 46,463 $ 43,163 $ 35,820
Interest on other borrowed funds .................... 8,802 8,012 7,053
Amortization of debt discounts, premium
and expense ........................................ 1,059 1,081 996
Interest implicit in rentals (2) .................... 1,465 1,575 1,768
-------- -------- --------
Fixed charges as defined ........................... $ 57,789 $ 53,831 $ 45,637
======== ======== ========
Ratio of Earnings to Fixed Charges .................. 3.07 3.27 3.47
======== ======== ========
</TABLE>
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with
Item 503 of Regulation S-K.
(2) This amount is estimated to be a reasonable approximation of the
interest portion of rentals.
MichCon is a guarantor of certain other debt. Fixed charges related to such
debt are deemed to be immaterial and therefore have
been excluded from the above ratios.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and the Consolidated Statement of Financial
Position and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,148
<SECURITIES> 0
<RECEIVABLES> 120,322
<ALLOWANCES> 16,104
<INVENTORY> 96,533
<CURRENT-ASSETS> 294,116
<PP&E> 2,741,653
<DEPRECIATION> 1,303,841
<TOTAL-ASSETS> 1,905,311
<CURRENT-LIABILITIES> 371,721
<BONDS> 625,999
0
0
<COMMON> 10,300
<OTHER-SE> 573,792
<TOTAL-LIABILITY-AND-EQUITY> 1,905,311
<SALES> 0
<TOTAL-REVENUES> 856,359
<CGS> 0
<TOTAL-COSTS> 746,146
<OTHER-EXPENSES> 793
<LOSS-PROVISION> 14,586
<INTEREST-EXPENSE> 39,755
<INCOME-PRETAX> 74,148
<INCOME-TAX> 27,060
<INCOME-CONTINUING> 47,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,088
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
