<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 JUNE 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 July 31, 1997:
Common Stock, par value $.01 per share: 10,300,000
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<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED JUNE 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
Earnings increased $0.1 million for the 1997 quarter reflecting improved
gross margins resulting from higher gas sales and end user transportation
deliveries due to colder weather. Results for the 1997 quarter also reflect
lower operation and maintenance expenses, partially offset by higher
depreciation and financing costs. Earnings decreased $7.7 million and $18.3
million for the 1997 six- and twelve-month periods, respectively, reflecting
reduced gross margins due to warmer weather, as well as higher operating
expenses and financing costs.
EARNINGS COMPONENTS (IN MILLIONS)
COMPARING 1997 TO 1996
<TABLE>
<CAPTION>
Quarter Six Months Twelve Months
-------------------------- -------------------------- ------------------------
$ Change % Change $ Change % Change $ Change % Change
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue ......................... $(12.5) (5.6) $(16.5) (2.2) $ 14.6 1.2
Cost of Gas ............................... (16.6) (16.7) (12.1) (3.0) 24.3 4.1
Gross Margin .............................. 4.1 3.4 (4.4) (1.2) (9.7) (1.6)
Operation and Maintenance ................. (1.8) (2.6) 3.5 2.5 13.4 4.7
Depreciation and Depletion ................ 1.7 6.8 2.8 5.7 7.6 8.1
Property and Other Taxes .................. 1.1 7.6 0.3 1.0 2.2 3.6
Other Income and Deductions ............... 2.3 21.2 2.2 9.3 1.9 4.0
Income Tax Provision ...................... 0.8 251.4 (5.3) (13.6) (16.2) (31.0)
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased for the 1997
quarter but decreased for the six- and twelve-month periods, respectively.
These varying results are primarily due to fluctuations in gas sales and end
user transportation deliveries that were driven by the colder weather during
the 1997 quarter and the warmer weather in the 1997 six- and twelve-month
periods. All periods were affected by increased revenues as a result of
continued growth in intermediate transportation services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
Quarter Six Months Twelve Months
----------------------- ------------------------- -------------------------
1997 1996 1997 1996 1997 1996
---------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Percentage Colder (Warmer)
than Normal ......................... 21.9% 13.6% 1.9% 7.3% 2.0% 7.4%
Increase (Decrease) from
Normal in:
Gas Markets (Bcf) ................. 4.6 3.2 1.5 8.6 3.8 14.8
Net Income (Millions) ............. $ 4.1 $ 2.9 $1.3 $7.8 $3.4 $13.3
</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 $16.9
million and $23.2 million in the 1997 quarter and six-month period,
respectively and increased $4.2 million in the 1997 twelve-month period. The
decline in gas sales revenues for the 1997 quarter results primarily from a
reduction in gas sales rates required to recover lower gas costs, as discussed
below. The decrease in gas sales revenue was partially offset by increased
deliveries due to colder weather. The decrease in gas sales revenue for the
1997 six-month period reflects lower deliveries due to warmer weather,
partially offset by an increase in the gas cost recovery rate. The 1997
twelve-month period increase in revenues is primarily the result of a gas cost
recovery rate increase, substantially offset by lower volumes due to warmer
weather.
<TABLE>
<CAPTION>
Quarter Six Months Twelve Months
----------------- ----------------- ------------------
1997 1996 1997 1996 1997 1996
------- ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
GAS MARKETS (IN Bcf)
Gas Sales......................... 34.7 34.0 128.0 136.2 209.4 222.4
End User Transportation........... 32.7 32.0 77.0 79.4 144.3 149.0
Intermediate Transportation....... 141.6 110.3 282.2 258.3 551.3 429.2
----- ----- ----- ----- ----- -----
209.0 176.3 487.2 473.9 905.0 800.6
===== ===== ===== ===== ===== =====
</TABLE>
Intermediate transportation revenues increased for the 1997 quarter, six-
and twelve-month periods by $2.2 million, $5.3 million and $14.5 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 15.3 Bcf, 32.9 Bcf and 108.8 Bcf for the 1997 quarter,
six- and twelve-month periods. Intermediate transportation volumes for the
1997 quarter and twelve-month period were impacted by increased deliveries to
two major customers. Volumes transported in the six-month period for these two
customers reflected a decrease. Although volumes for these fixed-fee customers
may vary, the related revenues are not significantly affected.
Other operating revenues decreased by $4.2 million in the 1997
twelve-month period due primarily to a decrease in conservation revenue
resulting from the discontinuation of MichCon's conservation programs, which
also impacted the quarter and six-month period. As discussed in the "Operation
and Maintenance" section that follows, this decrease is offset by a
corresponding decrease in expenses related to the conservation programs. The
decrease in other operating revenues is partially offset by an increase in gas
processing revenues from the northern Michigan gathering system which was
transferred from MCN Energy Group Inc. (MCN) to MichCon at the beginning of
1996.
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, fluctuations in total gas costs have little or no effect on
gross margins and earnings.
Cost of gas sold decreased in the 1997 quarter and six-month period but
increased in the twelve-month period. The decrease in market prices paid for
gas resulted in a decrease in the cost of gas sold of $.50 (16%) in the 1997
quarter. The increase in market prices paid for gas resulted in an increase in
the cost of gas sold of $.15 (5%) and $.26 (9%) in the 1997 six- and twelve-
month periods, respectively. The
2
<PAGE> 5
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
rate increase in the 1997 six-month period was more than offset by lower
volumes due to warmer weather. The 1997 twelve-month period was partially
offset by lower volumes due to warmer weather.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased for the 1997 second quarter
and increased for the 1997 six- and twelve-month periods. Operation and
maintenance expenses were affected in all periods by lower benefit costs,
primarily pension and retiree health care costs. The 1997 quarter further
benefited from a decrease in uncollectibles expense which was partially offset
by an increase in operating expenses related to the increase in intermediate
transportation volumes as discussed above. For the 1997 six-month period, the
decrease in benefit costs was more than offset by an increase in operating
expenses related to the increase in intermediate transportation volumes. The
increase in the 1997 twelve-month period is due to higher uncollectibles
expense and the additional operating expense related to the increase in
intermediate transportation volumes. As previously discussed, the
discontinuance of the conservation programs reduced expenses in all 1997
periods. Management continues to evaluate company processes for potential
operating cost reductions.
DEPRECIATION AND DEPLETION
The increase in depreciation and depletion for the 1997 quarter, six- and
twelve-month periods is due to higher plant balances reflecting capital
expenditures of $448.4 million over the past two calendar years. Depreciation
and depletion expenses are expected to increase in future years due to
additional capital investments. MichCon filed an application with the MPSC to
lower its depreciation rates which could offset the anticipated increase in
depreciation expense in future years.
PROPERTY AND OTHER TAXES
Property and other taxes increased in the 1997 quarter due to an increase
in the Michigan single business tax relating to a prior year, partially offset
by a reduction in property taxes.
OTHER INCOME AND DEDUCTIONS
Other income and deductions increased in all the 1997 periods due to
additional interest expense resulting from increased long-term debt required to
finance capital investments. Other interest expense increased for all periods
due to a resolution of a Michigan single business tax issue from prior years
that resulted in additional interest expense. For the 1997 quarter and
six-month period, other interest expense was partially offset by a decrease in
interest expense due to a reduction in commercial paper outstanding.
INCOME TAX PROVISION
Income taxes changed primarily as a result of variations in earnings.
Income taxes also were affected by the favorable resolution of prior years' tax
issues.
3
<PAGE> 6
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT 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 $273.8 million for
the 1997 six-month period, increasing $110.2 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, 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 a portion of capital investments.
FINANCING ACTIVITIES
Cash and cash equivalents increased by $8.3 million during the 1997
six-month period. Cash and cash equivalents normally increase and short-term
debt is reduced in the first part of each year as gas inventories are depleted
and funds are received from heating sales. During the latter part of the year,
short-term debt is generally incurred to finance increases in gas inventories
and accounts receivable from customers. 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. During
the first six months of 1997, MichCon repaid $238.3 million of commercial
paper. At June 30, 1997, there were no borrowings outstanding under this
program.
During May 1997, MichCon issued $85 million of first mortgage bonds under
its 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
non-recourse credit agreement that matures in 2005. Proceeds were used to
finance the expansion of its northern Michigan gathering system.
During the 1997 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 has available a Trust Demand Note program which allows it to
borrow up to $25 million. As of June 30, 1997 there were no borrowings
outstanding under this program.
MichCon's capitalization objective is to maintain a ratio of approximately
50% debt and 50% equity. At June 30, 1997, the common equity ratio was 51.2% of
total capitalization.
INVESTING ACTIVITIES
MichCon's capital expenditures totaled $57.4 million during the 1997
six-month period and are anticipated to be approximately $160 million by the
end of the year. These investments will be made to add new customers, develop
new gas transportation markets, make improvements to existing storage and
transmission systems and to improve its information systems.
4
<PAGE> 7
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
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. In
1997, 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 FASB 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
Statements included throughout the Quarterly Report on Form 10-Q which are
not historical in nature are 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 and
(vii) conditions of capital markets and equity markets.
5
<PAGE> 8
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS eNDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES.......................... $ 209,800 $ 222,327 $ 737,245 $ 753,719
---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas............................... 83,031 99,681 386,304 398,397
Operation and maintenance................. 69,394 71,212 143,499 139,983
Depreciation and depletion................ 26,424 24,740 51,925 49,133
Property and other taxes.................. 16,141 15,004 33,935 33,612
---------- ---------- ---------- ----------
Total operating expenses................ 194,990 210,637 615,663 621,125
---------- ---------- ---------- ----------
OPERATING INCOME............................ 14,810 11,690 121,582 132,594
---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........ 331 260 641 495
---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income........................... 1,277 634 2,486 1,219
Interest on long-term debt................ (11,574) (10,269) (22,314) (19,925)
Other interest expense.................... (1,858) (940) (4,749) (3,775)
Minority interest......................... (595) (354) (933) (702)
Other..................................... (304) 159 (103) (249)
---------- ---------- ---------- ----------
Total other income and (deductions)..... (13,054) (10,770) (25,613) (23,432)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.................. 2,087 1,180 96,610 109,657
INCOME TAX PROVISION........................ 1,156 329 33,486 38,766
---------- ---------- ---------- ----------
NET INCOME.................................. 931 851 63,124 70,891
DIVIDENDS ON PREFERRED STOCK................ - - - 18
---------- ---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK....... $ 931 $ 851 $ 63,124 $ 70,873
========== ========== ========== ==========
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUES.......................... $1,242,311 $1,227,752
---------- ----------
OPERATING EXPENSES
Cost of gas............................... 624,501 600,192
Operation and maintenance................. 297,797 284,404
Depreciation and depletion................ 100,939 93,380
Property and other taxes.................. 62,085 59,935
---------- ----------
Total operating expenses................ 1,085,322 1,037,911
---------- ----------
OPERATING INCOME............................ 156,989 189,841
---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........ 1,032 858
---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income........................... 5,167 3,203
Interest on long-term debt................ (43,092) (39,606)
Other interest expense.................... (8,986) (7,177)
Minority interest......................... (1,219) (702)
Other..................................... (1,610) (3,534)
---------- ----------
Total other income and (deductions)..... (49,740) (47,816)
---------- ----------
INCOME BEFORE INCOME TAXES.................. 108,281 142,883
INCOME TAX PROVISION........................ 36,206 52,431
---------- ----------
NET INCOME.................................. 72,075 90,452
DIVIDENDS ON PREFERRED STOCK................ - 125
---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK....... $ 72,075 $ 90,327
========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF PERIOD............... $383,498 $330,766 $336,305 $267,744
Add - Net income.......................... 931 851 63,124 70,891
-------- -------- -------- --------
384,429 331,617 399,429 338,635
Deduct - Cash dividends declared:
Preferred stock......................... - - - 18
Common stock............................ 25,000 - 40,000 7,000
-------- -------- -------- --------
BALANCE - END OF PERIOD..................... $359,429 $331,617 $359,429 $331,617
======== ======== ======== ========
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
BALANCE - BEGINNING OF PERIOD............... $331,617 $248,290
Add - Net income.......................... 72,075 90,452
-------- --------
403,692 338,742
Deduct - Cash dividends declared:
Preferred stock......................... - 125
Common stock............................ 44,263 7,000
-------- --------
BALANCE - END OF PERIOD..................... $359,429 $331,617
======== ========
</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>
JUNE 30, DECEMBER 31,
---------------------- ------------
1997 1996 1996
---------------------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates market value)............. $ 18,355 $ 8,866 $ 10,010
Accounts receivable, less allowance for doubtful accounts of
$23,442, $18,222 and $17,707, respectively...................................... 173,373 192,849 169,436
Accrued unbilled revenues........................................................ 16,158 16,554 107,377
Gas in inventory (Note 1)........................................................ 36,499 25,238 67,910
Property taxes assessed applicable to future periods............................. 37,885 35,176 60,592
Accrued gas cost recovery revenues............................................... 14,072 42,026 27,672
Other............................................................................ 29,344 33,683 23,025
---------- ---------- ----------
325,686 354,392 466,022
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures..................................... 19,731 20,377 19,479
Deferred postretirement benefit costs............................................ 1,886 9,342 4,863
Deferred environmental costs..................................................... 27,680 28,016 28,233
Prepaid benefit costs............................................................ 64,737 50,640 64,307
Other............................................................................ 54,324 48,341 50,206
---------- ---------- ----------
168,358 156,716 167,088
---------- ---------- ----------
Property, Plant and Equipment, at cost............................................. 2,706,922 2,540,829 2,668,294
Less - Accumulated depreciation and depletion ................................... 1,282,057 1,199,871 1,243,060
---------- ---------- ----------
1,424,865 1,340,958 1,425,234
---------- ---------- ----------
$1,918,909 $1,852,066 $2,058,344
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable................................................................. $ 105,822 $ 94,102 $ 130,725
Notes payable.................................................................... 38,366 58,291 265,126
Current portion of long-term debt and capital lease obligations.................. 28,512 53,177 53,232
Gas inventory equalization (Note 1).............................................. 66,685 53,295 -
Federal income, property and other taxes payable................................. 73,638 64,715 84,788
Customer deposits................................................................ 11,985 9,845 12,860
Other............................................................................ 45,842 55,084 63,309
---------- ---------- ----------
370,850 388,509 610,040
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................................................ 78,701 82,872 76,523
Unamortized investment tax credit................................................ 33,666 35,512 34,588
Tax benefits amortizable to customers............................................ 115,432 113,449 116,313
Accrued environmental costs...................................................... 32,000 32,000 32,000
Minority interest................................................................ 18,070 18,171 17,604
Other............................................................................ 40,578 56,892 43,954
---------- ---------- ----------
318,447 338,896 320,982
---------- ---------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (NOTE 2) .................... 629,484 552,345 550,318
---------- ---------- ----------
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................................................................ 359,429 331,617 336,305
---------- ---------- ----------
600,128 572,316 577,004
---------- ---------- ----------
$1,918,909 $1,852,066 $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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income.................................................... $ 63,124 $ 70,891
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income................................. 51,925 49,133
Charged to other accounts............................... 3,724 3,755
Deferred income taxes - current........................... (13,122) 1,079
Deferred income taxes and investment tax credit - net... 375 11,408
Other..................................................... (544) (1,442)
Changes in assets and liabilities, exclusive of changes
shown separately........................................ 168,284 28,753
-------- --------
Net cash provided from operating activities........... 273,766 163,577
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net........................................... (226,760) (138,344)
Issuance of long-term debt.................................... 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.............. (72,229) (4,347)
-------- --------
Net cash used for financing activities................ (214,938) (78,486)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures.......................................... (57,423) (73,823)
Other - net................................................... 6,940 (10,871)
-------- --------
Net cash used for investing activities................ (50,483) (84,694)
-------- --------
Net Increase in Cash and Cash Equivalents....................... 8,345 397
Cash and Cash Equivalents, January 1............................ 10,010 8,469
-------- --------
Cash and Cash Equivalents, June 30.............................. $ 18,355 $ 8,866
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable - net................................... $ (7,915) $(14,315)
Gas inventory equalization.................................. 66,685 53,295
Accrued gas cost recovery revenues.......................... 13,600 (42,026)
Accrued unbilled revenues................................... 91,219 74,580
Gas in inventory............................................ 31,411 14,953
Property taxes assessed applicable to future periods...... 22,707 22,983
Accounts payable............................................ (24,903) (15,222)
Federal income, property and other taxes payable........... (11,150) (22,497)
Other current assets and liabilities........................ (11,236) (13,490)
Deferred and prepaid benefit costs.......................... 2,547 13,685
Deferred assets and liabilities............................. (4,681) (43,193)
-------- --------
$168,284 $ 28,753
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized........................ $ 15,446 $ 24,216
======== ========
Federal income taxes........................................ $ 29,299 $ 24,456
======== ========
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. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In
anticipation that interim inventory reductions will be replaced prior to year
end, the cost of gas for net withdrawals from inventory is recorded at the
estimated average purchase rate for the calendar year. The excess of these
charges over the LIFO cost is credited to the gas inventory equalization
account. During interim periods when there are net injections to inventory,
the equalization account is reversed. Approximately 39.8 billion cubic feet
(Bcf) and 40.6 Bcf of gas was included in inventory at June 30, 1997 and 1996,
respectively.
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
6.30% for the two months ended June 30, 1997. Swap agreements of
$40,000,000 through May 2005 have reduced the average cost of debt from
7.06% to 5.90% for the two months ended June 30, 1997.
During April 1997, MichCon subsidiaries borrowed $40,000,000 under a
non-recourse credit agreement at an average interest rate of 6.45%. 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.
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.
9
<PAGE> 12
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
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. No borrowings were
outstanding under these lines as of June 30, 1997. The 364-day revolving credit
facility was renewed in July 1997. The three-year revolving credit facility
expires 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.
5. 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.
10
<PAGE> 13
OTHER INFORMATION
EXHIBITS
(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
MichCon filed a report on Form 8-K dated May 14, 1997, under Item
5, with respect to the issuance of $40,000,000 of First Mortgage
Bonds Designated As 7.06% Secured Medium-Term Notes, Series B, due
May 1, 2012, and $30,000,000 of First Mortgage Bonds Designated As
7.21% Secured Medium-Term Notes, Series C, due May 1, 2007 and
$15,000,000 of First Mortgage Bonds Designated As 7.60% Secured
Medium-Term Notes, Series C, due May 1, 2017. Forms of Underwriting
Agreement for each bond were filed as Exhibits thereto.
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: August 8, 1997 By: /s/ Howard L. Dow III
-------------------------------
Howard L. Dow III
Vice President and
Chief Financial Officer
12
<PAGE> 15
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ------------
12-1 Computation of Ratio of Earnings
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
------------------- ------------------- -------------------
June 30, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Net Income .................................. $109,406 $122,239 $112,727
Fixed charges ............................... 57,100 53,831 45,637
-------- -------- --------
Earnings as defined ........................ $166,506 $176,070 $158,364
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt .................. $ 45,546 $ 43,163 $35,820
Interest on other borrowed funds ............ 8,986 8,012 7,053
Amortization of debt discounts, premium
and expense ................................ 1,085 1,081 996
Interest implicit in rentals (2) ............ 1,483 1,575 1,768
-------- -------- --------
Fixed charges as defined ................... $ 57,100 $ 53,831 $ 45,637
======== ======== ========
Ratio of Earnings to Fixed Charges .......... 2.92 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,355
<SECURITIES> 0
<RECEIVABLES> 196,815
<ALLOWANCES> 23,442
<INVENTORY> 36,499
<CURRENT-ASSETS> 325,686
<PP&E> 2,706,922
<DEPRECIATION> 1,282,057
<TOTAL-ASSETS> 1,918,909
<CURRENT-LIABILITIES> 370,850
<BONDS> 629,484
0
0
<COMMON> 10,300
<OTHER-SE> 589,828
<TOTAL-LIABILITY-AND-EQUITY> 1,918,909
<SALES> 0
<TOTAL-REVENUES> 737,245
<CGS> 0
<TOTAL-COSTS> 615,663
<OTHER-EXPENSES> 1,036
<LOSS-PROVISION> 13,240
<INTEREST-EXPENSE> 27,063
<INCOME-PRETAX> 96,610
<INCOME-TAX> 33,486
<INCOME-CONTINUING> 63,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,124
<EPS-PRIMARY> 0.0
<EPS-DILUTED> 0.0
</TABLE>
