<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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, A MICHIGAN CORPORATION, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND (b) OF FORM 10-K AND
IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
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)
313-965-2430
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. X
-----
All of the registrant's 10,300,000 outstanding shares of common stock, par
value $1 per share, are owned by MCN Corporation.
DOCUMENTS INCORPORATED BY REFERENCE: None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
KEY TO ABBREVIATED TERMS
Antrim Gas ................... Natural gas produced from shallow wells in the
Devonian (Antrim) shale formations.
Degree Days .................. A measure of the coldness of the weather based
on how much the average daily temperature is
below 65 degrees Fahrenheit.
End User Transportation ...... A gas delivery service provided to large-volume
commercial and industrial customers who
purchase natural gas directly from producers or
brokerage companies.
FERC ......................... Federal Energy Regulatory Commission; a federal
agency that determines the rates and
regulations of interstate pipelines.
Gas Markets .................. Gas sales, end user transportation and
intermediate transportation deliveries.
Gas Storage .................. The process of injecting, storing and
withdrawing natural gas from a depleted
underground natural gas field or salt cavern.
GCR .......................... Gas Cost Recovery; a process by which MichCon,
through annual gas cost proceedings before the
Michigan Public Service Commission, can recover
the reasonable and prudent cost of gas sold.
Intermediate Transportation .. A gas delivery service provided to gas
producers, gas brokers and other gas companies
that own the natural gas, but are not the
ultimate consumers.
MCN .......................... MCN Corporation, doing business as MCN Energy
Group Inc., and subsidiaries.
MichCon ...................... Michigan Consolidated Gas Company; a wholly
owned natural gas distribution and intrastate
transmission subsidiary of MCN.
MichCon Pipeline Co. ......... MichCon Pipeline Co; a wholly owned subsidiary
of MichCon that engages in pipeline projects
through its subsidiaries.
ii
<PAGE> 3
KEY TO ABBREVIATED TERMS
(concluded)
MPSC ............... Michigan Public Service Commission; the regulator of
intrastate aspects of the natural gas industry within the
State of Michigan.
Normal Weather ..... The average daily temperature within MichCon's service
area during a recent 30-year period.
Spot Market ........ The buying and selling of natural gas on a short-term
basis, typically month to month.
Units of Measurement
- --------------------
Bcf ................ One billion cubic feet of natural gas.
Mcf ................ One thousand cubic feet of natural gas.
MMcf ............... One million cubic feet of natural gas.
/d ................. Added to MMcf or Bcf to denote average volumes per day.
iii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
PAGE
CONTENTS NUMBER
- -------- ------
<S> <C> <C>
Part I
Item 1. Business ............................................................... 1
Item 2. Properties ............................................................. 9
Item 3. Legal Proceedings ...................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .................... 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .. 11
Item 6. Selected Financial Data ................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 13
Item 8. Financial Statements and Supplementary Data ............................ 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 45
Part III
Item 10. Directors and Executive Officers of the Registrant ..................... 45
Item 11. Executive Compensation ................................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 45
Item 13. Certain Relationships and Related Transactions ......................... 45
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ........ 46
Signatures ......................................................................... 48
</TABLE>
iv
<PAGE> 5
PART I
ITEM 1. BUSINESS
MichCon is a Michigan corporation that was organized in 1898 and, with its
predecessors, has been in business for nearly 150 years. MichCon is a public
utility engaged in the distribution and transmission of natural gas in the
state of Michigan. MichCon, a wholly-owned subsidiary of MCN, operates one of
the largest natural gas distribution and transmission systems in the United
States and the largest in Michigan.
At December 31, 1996, MichCon and its subsidiaries employed 3,062 persons.
Of this amount, 46% are covered by five collective bargaining agreements. Two
of the agreements expire in December 1997, while the remaining three agreements
will expire in June 1998.
GAS SALES & TRANSPORTATION
MichCon serves 1.2 million customers in the Detroit, Grand Rapids, Ann
Arbor, Traverse City and Muskegon metropolitan areas and in various other
communities throughout the state of Michigan. The following services are
provided by MichCon:
- Gas Sales - Includes the marketing and delivery of natural gas to
residential and small-volume commercial customers.
- End User Transportation - Through this service, large-volume
commercial and industrial customers that purchase natural gas directly
from producers or brokerage companies utilize the Company's gas
distribution network to transport the gas to their facilities.
- Intermediate Transportation - Provides transportation service to
producers, brokers and other local distribution companies that own the
natural gas, but are not the ultimate consumer.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUE (In millions of dollars)
Gas Sales.....................................................$ 1,085.8 $ 917.2 $ 954.8
End User Transportation....................................... 82.2 80.4 76.2
Intermediate Transportation................................... 48.6 31.9 28.7
-------------- -------------- --------------
Total Sales and Transportation................................ 1,216.6 1,029.5 1,059.7
-------------- -------------- --------------
Other......................................................... 42.2 51.3 52.0
-------------- -------------- --------------
Total Operating Revenues......................................$ 1,258.8 $ 1,080.8 $ 1,111.7
============== ============== ==============
MARKETS (Bcf)
Gas Sales..................................................... 217.7 206.9 201.4
End User Transportation....................................... 146.7 145.3 139.8
Intermediate Transportation................................... 527.5 341.6 303.6
-------------- -------------- --------------
Total Sales and Transportation................................ 891.9 693.8 644.8
============== ============== ==============
</TABLE>
1
<PAGE> 6
EFFECT OF WEATHER: MichCon's gas sales and end user transportation
volumes, revenues and net income are impacted by weather. Given the seasonal
nature of the business, revenues and net income tend to be higher in the first
and fourth quarters of the calendar year.
Effect of Weather on Gas Markets and Earnings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Percentage Colder (Warmer) Than Normal 5.4% 0.3% (4.2)%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf).................. 10.9 1.5 (4.4)
Net Income (in Millions).............. $ 9.9 $ 1.4 $ (4.0)
</TABLE>
GAS SALES: Revenues increased $168.6 million in 1996 primarily due to
higher gas costs, colder weather and market expansion. This market represents
24% of total deliveries and produced approximately 78% of MichCon's gross
profit margin from sales and transportation services (Gross Profit Margin). The
average margin per Mcf from gas sales was $2.06 in 1996 and $2.09 in 1995.
Competition in the gas sales market comes primarily from alternative fuels
such as electricity, propane, and to a lesser degree, oil and wood, and in a
few areas from other natural gas providers. Natural gas continues to be the
preferred fuel for Michigan residences and businesses. Nearly every
residential and commercial developer in MichCon's service territories selects
natural gas in new construction because of the convenience, cleanliness and
price advantage of natural gas compared to propane, fuel oil and other
alternative fuels. Service and price are the primary factors affecting this
market.
MichCon continues to focus on challenges and opportunities resulting from
increased competition with other natural gas distribution companies and other
energy providers. The MPSC is reviewing various plans to reform Michigan's gas
utility regulatory process to give all customers added choices and to increase
competition. MichCon and other Michigan gas utilities will implement pilot
transportation service programs in 1997 for small-volume commercial and
residential customers. Under MichCon's two-year program, 47,000 customers in
the pilot territory will have the opportunity to select alternative natural gas
suppliers beginning in April 1997. This option has been available to MichCon's
larger commercial and industrial customers for several years. MichCon
currently generates no earnings on the gas supply portion of operations.
Therefore, a customer's selection of an alternative supplier is generally
expected to be income-neutral. The overall package of regulatory changes
connected with the gas industry restructuring is expected to result in
lighter-handed regulation and the potential to improve earnings. MichCon is
positioning itself to respond to changes in regulation and increased
competition by reducing its cost of operations while maintaining a high level
of customer satisfaction. MichCon remains focused on these goals in 1997 and
beyond.
MichCon continues to take steps to become the preferred provider of
natural gas and high-value energy services within Michigan and to maintain
strong returns. To accomplish this, MichCon will increase penetration of
existing markets by focusing on meeting the needs of customers and the
marketplace, will increase efforts to reduce cost of gas and operating costs,
and will take advantage of growth opportunities to expand to new geographic
areas.
MichCon is continually assessing ways to improve cost competitiveness.
Among other cost saving initiatives, MichCon and The Detroit Edison Company are
exploring opportunities to share the cost of common, duplicative functions,
including billing, meter reading, payment processing and excavation.
2
<PAGE> 7
Significant cost savings could be achieved, given that approximately 60% of
MichCon's 1.2 million customers are also customers of Detroit Edison.
Cost of gas sold increased in 1996 as a result of significantly higher
spot market prices paid for natural gas purchases and higher gas sales volumes
due to colder weather. Cost of gas sold per Mcf for 1996 was $2.92, an
increase of $.56 (24%). MichCon still retained a significant cost advantage
over competing fuels. Lower natural gas prices, partially offset by higher gas
sales volumes, resulted in the 1995 decrease in cost of gas sold. Cost of gas
sold per Mcf for 1995 decreased from 1994 by $.31 (12%).
MichCon's Market Expansion Program is intended to spur demand for natural
gas in areas currently not served. The program is primarily targeted at
residential and small-volume commercial markets. By financing the cost of main
extensions, this program makes it easier for users of other, higher-cost fuels,
such as propane and fuel oil, to consider using natural gas for space heat and
other applications. The Market Expansion Program, which reaches rural and
developing areas not currently using natural gas, has contributed to the
10,532, 17,677 and 12,047 net increases in customers in 1996, 1995 and 1994,
respectively. In 1996, 11 new areas of Michigan were served by MichCon,
bringing to 128 the total number of new areas added since 1984.
MichCon's market share for residential heating customers in the
communities in which it serves is approximately 85%. While this saturation
rate is high, significant growth opportunities exist through conversion of
existing homes as well as from new construction. MichCon also promotes
expanded natural gas usage through programs designed to increase non-heating
applications, including gas ranges, clothes dryers, grills, fireplace logs and
lighting. MichCon continues to expand the industrial and commercial markets by
aggressively facilitating the use of existing gas technologies and equipment.
END USER TRANSPORTATION: End user transportation deliveries increased in
1996 due to a higher level of usage by large-volume commercial and industrial
customers. Additional deliveries to gas cogeneration facilities and colder
weather also contributed to the increased deliveries. In 1996, this market
accounted for 16% of total gas deliveries and produced approximately 14% of
MichCon's Gross Profit Margin.
At December 31, 1996, MichCon had end user transportation agreements
representing annual volumes of 146 Bcf. Approximately 65% of these volumes are
under contracts that extend to 1998 or beyond and include the majority of the
large, and most price-sensitive, customers. Contracts for the remaining
volumes are typically one-year contracts that expire at various times during
1997 and relate to a large number of low volume users with relatively low price
sensitivity. Negotiations have commenced with customers whose contracts expire
in 1997.
Through technical and financial assistance, customers have been encouraged
to increase the use of natural gas in their industrial and commercial
facilities. Gas-fueled power generation has been an expanding market for
natural gas. In 1996, this market accounted for approximately 31 Bcf of gas
deliveries. Air compressors and other small engines in certain commercial
applications also provide possibilities for conversion to natural gas-powered
equipment. The efficiencies and price competitiveness of natural gas can
significantly reduce operating costs for customers, even though a higher
initial outlay for gas-burning equipment may be required.
The primary focus of competition in this market is total cost of fuel.
Some large commercial and industrial customers have the capacity to switch to
alternative fuel sources including coal, electricity, oil and steam. In
addition, some of these customers could bypass MichCon's distribution system
and obtain
3
<PAGE> 8
service directly from a pipeline company. However, cost differentials must be
sufficient to offset the substantial investment costs and risks associated with
fuel switching or bypass. MichCon competes against alternative fuel sources by
providing competitive pricing and reliable supply through the use of the
company's extensive storage capacity and multiple supply sources. Almost all
significant customers that are in proximity to pipeline facilities are under
long-term contracts.
In the past several years, MichCon has been successful in converting many
customers' facilities to natural gas from alternative fuels and in retaining
those customers after conversion. Also, in the past several years, MichCon has
not experienced fuel switching of any significance by its customers. In 1996,
approximately 22 Bcf of MichCon's transportation deliveries were to customers
who displaced coal with natural gas.
INTERMEDIATE TRANSPORTATION: This service accounts for 59% of total gas
volumes, but, due to the lower rate charged for the service, represents only 8%
of MichCon's Gross Profit Margin. The increases in intermediate transportation
deliveries in 1996 and 1995 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's extensive transmission pipeline system has enabled it to
increase the volumes transported for Michigan gas producers, ANR Pipeline
Company (ANR) and other shippers. MichCon operates in a pivotal geographic
location with links to major interstate pipelines that reach markets elsewhere
in the Midwest, the eastern United States and eastern Canada.
MichCon, through its subsidiary MichCon Pipeline Company (MichCon
Pipeline), is involved in ventures that transport natural gas and natural gas
liquids from east-central Michigan gas fields to processing plants in the
northern part of the state. During 1996, MichCon Pipeline transported an
average of 551 MMcf/d of natural gas and related liquids. In January 1996, the
transportation rate of one customer on the Saginaw Bay Pipeline decreased 40%
in accordance with the terms of a 15-year contract that reduces the
transportation rate for the last 10 years of the agreement. However, in
December 1996, the contract was renegotiated, thus eliminating the 40%
decrease. This contract expires in December 1997. Negotiations are currently
underway to extend this contract. Moreover, all transportation contracts
relating to the Saginaw Bay Pipeline are being negotiated to raise the
transportation rate to the maximum authorized rate. MichCon will continue to
look at new sources of volume and revenue to increase the profitability of this
asset.
There has been a significant increase in Michigan Antrim gas production
over the past several years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. In order to meet the
increased demand, MichCon expanded the transportation capacity of its northern
Michigan gathering system in 1996. The expansion enabled MichCon to transport
an additional 75 Bcf in 1996.
In January 1997, MichCon completed construction of a 59-mile loop of its
existing Milford to Belle River Pipeline at a cost of approximately $85
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.
In 1997, MichCon will exercise its option to purchase a 50% interest in an
additional pipeline under the St. Clair River to link MichCon's system with
Consumers Gas of Toronto's pipeline. When placed
4
<PAGE> 9
into service during 1997, this project will enhance MichCon's ability to
transport gas bound for both Canadian and Northeast U.S. markets.
ENERGY ASSISTANCE AND CONSERVATION PROGRAMS
Energy assistance programs funded by the federal government and the State
of Michigan, including the Home Heating Credit for low-income customers and the
Department of Social Services' (DSS) Heating Assistance Program, remain
critical to MichCon's ability to control its uncollectible expenses. MichCon
has historically obtained favorable regulatory treatment of its uncollectible
costs, including those related to these energy assistance programs.
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. The state of Michigan's share of federal LIHEAP funds was
reduced from $78 million in fiscal year 1995 to $47.5 million in 1996.
Uncollectible gas accounts were further impacted by the late receipt of fiscal
year 1996 funding by the state of Michigan. Due to this delay, many of
MichCon's customers who were eligible for assistance did not file to receive
such funds. During 1996 and 1995, $10.1 million and $27.3 million in federal
LIHEAP funds assisted approximately 74,000 and 112,000 MichCon customers,
respectively, in making their gas payments. During October 1996, President
Clinton signed an Omnibus Spending Bill passed by Congress that provided for $1
billion in federal LIHEAP funding for 1997, an increase of $100 million over
1996 levels. During February 1997, the President released his proposed budget
which provides for federal LIHEAP funding at $1 billion annually through fiscal
year 2002. Receipt of this funding is not expected to be delayed in 1997. A
portion of any future increase or decrease in funding may impact uncollectible
gas accounts.
GAS SUPPLY
MichCon obtains its natural gas supply from various sources in different
geographic areas under agreements that vary in both pricing and terms. This
geographic and contractual diversity of supply ensures that MichCon will be
able to meet the requirements of its present and future customers with reliable
supplies of natural gas at competitive, market responsive prices. The
company's objective is to rank in the lowest quartile for cost of gas in
Michigan as well as neighboring states. Although MichCon's gas costs rose 24%
during the year to $2.92 per Mcf, they remained in the lowest quartile among a
group of 22 utilities in the region, having decreased 32% over the last 10
years. Under its gas cost recovery mechanism, MichCon expects to continue to
collect all of its prudently incurred gas costs.
Gas Supply Purchases(Bcf)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Firm Suppliers:
Michigan Producers..... 86.3 90.9 85.9
Interstate Suppliers... 14.5 18.2 64.3
Canadian Suppliers..... 37.3 31.5 29.4
Spot Market............... 90.6 52.2 34.3
----- ----- -----
228.7 192.8 213.9
===== ===== =====
</TABLE>
MichCon purchased 38% of its 1996 supply from Michigan producers, 46% from
producers in the southern and midcontinent regions of the United States and 16%
from Canadian producers. These
5
<PAGE> 10
supplies are complemented by 130 Bcf of working storage capacity from storage
fields owned and operated in Michigan.
MichCon has in place long-term firm transportation agreements with ANR and
Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR is
obligated to transport approximately 375 MMcf/d of supply during the summer
months and 310 MMcf/d of supply during the winter months for MichCon under
these agreements, while Great Lakes is obligated to transport 30 MMcf/d. These
transportation contracts expire on various dates between 1999 and 2011.
MichCon also has contracts with independent Michigan producers that expire
on various dates through 2011. MichCon continues its supply strategy of
purchasing gas under contracts that tie purchase prices to spot market prices.
To mitigate risk related to spot market prices, MichCon has filed a proposal
with the MPSC to change its supply strategy to purchase approximately
two-thirds of its gas under contracts that tie purchase prices to spot market
prices and to acquire the remainder under fixed price contracts. MichCon
expects approval of this proposal during the second quarter of 1997.
In 1993, Panhandle Eastern Pipe Line Company (Panhandle) refunded to
MichCon the costs of certain direct billings totaling $5.4 million plus
interest of $4.4 million in compliance with a FERC order. During 1994, the FERC
issued an order permitting Panhandle to seek reimbursement of the $4.4 million
in interest from MichCon. MichCon's request for rehearing of the 1994 order
was denied. MichCon appealed the issue to the District of Columbia (D.C.)
Circuit Court. In February 1996, the U.S. District Court Eastern District of
Michigan ruled that the FERC orders were final for purposes of requiring
MichCon to pay Panhandle's invoice for the $4.4 million in interest. MichCon
satisfied the judgment. In September 1996, the D.C. Circuit Court upheld the
FERC's previous orders. MichCon has filed for recovery of these costs through
its 1996 GCR reconciliation case.
At December 31, 1996, MichCon owned and operated five natural gas storage
fields in Michigan with a working storage capacity of approximately 130 Bcf.
These facilities play an important role in providing reliable and
cost-effective service. MichCon uses its storage capacity to supplement its
supply during the winter months, replacing the gas in April through October
when demand is at its lowest. The use of this storage capacity also allows
MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline
costs. During 1996, MichCon's maximum one-day sendout exceeded 2.4 Bcf, of
which approximately 70% came from its underground storage fields. MichCon's
gas distribution system has a maximum daily sendout capability of 2.8 Bcf, with
approximately 70% coming from underground storage. MichCon also sells a portion
of its natural gas storage capacity to an affiliated company and third parties.
REGULATION AND RATES
MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales rates, service and accounting. MichCon is
also subject to the requirements of other regulatory agencies with respect to
safety, the environment and health.
Michigan offers an environment of progressive and reasonable rate
regulation. This is evident by the efforts underway to change the current form
of regulation. The MPSC is reviewing various plans to reform Michigan's gas
utility regulatory process to give all customers added choices and to increase
competition. One such plan is MichCon's Pilot Transportation Program being
offered to 47,000 small-volume residential and commercial customers, discussed
previously. MichCon is positioning itself to respond to changes in regulation
and increased competition by successfully reducing its cost of operations while
maintaining a high level of customer satisfaction. As the MPSC evaluates
expanded competition for the electric and natural gas industries within the
state, MichCon will continue its active involvement.
6
<PAGE> 11
GENERAL RATE PROCEEDINGS: MichCon received authorization to defer
manufactured gas plant (MGP) investigation and remediation costs in excess of
the $11.7 million previously reserved by MichCon. The remaining balance of
this initial reserve at December 31, 1996 is approximately $2.6 million. Any
excess costs are to be amortized over a 10 year period beginning in the year
subsequent to the year environmental investigation and remediation costs are
paid. The recovery of any remediation costs incurred will be reviewed in a
future rate case.
In June 1994, the MPSC approved the property tax stipulation and
settlement agreement, which addresses the treatment of reduced state property
tax and increased state sales tax and federal income tax. The estimated net
decrease in MichCon's operating expense was approximately $4.0 million for 1994
and $6.2 million annually thereafter. The agreement allows MichCon to
accelerate the amortization of its 1993 deferred costs associated with the
implementation of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," by the
net decreased tax expense.
MichCon filed an application with the MPSC in October requesting authority
to decrease depreciation rates from the existing 4.09% to 3.44%. Based on
December 1996 plant balances, depreciation expense would have effectively
decreased by approximately $11.2 million. The final determination of MichCon's
depreciation rate reduction is subject to an MPSC order. An MPSC order is
expected by December 1997.
GAS COST RECOVERY: The GCR process allows MichCon to recover its cost of
gas sold if the MPSC determines that such costs are reasonable and prudent.
This determination includes an annual Gas Supply and Cost Review, in which the
MPSC approves maximum monthly GCR factors. A subsequent annual GCR
reconciliation proceeding provides a review of gas costs incurred during the
year, determines whether approved gas costs have been overcollected or
undercollected and, as a result, whether a refund or surcharge, including
interest, is required to be returned to or collected from GCR customers using
the rolled-in prospective refunding methodology approved by the MPSC on June
30, 1994.
In February 1995, MichCon filed its 1994 GCR reconciliation case
indicating an over-recovery of $19 million, including interest. In February
1996, the MPSC issued an order finding that all of MichCon's 1994 gas costs
were reasonable and prudent, and made no disallowance of gas costs as a result
of MichCon fixing gas prices on a portion of its gas purchases.
In February 1996, MichCon filed its 1995 GCR reconciliation case
indicating an under-recovery of less than $0.1 million, including interest,
which will be collected from GCR customers using the new rolled-in prospective
refunding methodology. In February 1997, the MPSC issued an order finding that
all of MichCon's 1995 gas costs were reasonable and prudent.
In February 1997, MichCon filed its 1996 GCR reconciliation case
indicating a net under-recovery of approximately $28 million, including
interest. An MPSC order is expected in December 1997. In July 1996, MichCon
filed its 1997 GCR plan case. An MPSC order is expected in May 1997.
7
<PAGE> 12
ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANTS: Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon owns, or previously owned, 16 former
manufactured gas plant (MGP) sites.
During the mid-1980s, MichCon conducted preliminary environmental
investigations at former MGP sites, and some contamination related to the
byproducts of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Environmental Quality. None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency.
MichCon is not involved in any administrative proceedings regarding these
former MGP sites but is currently remediating one of these sites. The remedy
consists of limited excavation and disposal of soils, a new soil cover and
long-term groundwater monitoring. More extensive investigations are under way
at seven other sites.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of
a cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MichCon employed outside consultants to evaluate remediation alternatives
for these sites, to assist in estimating its potential liabilities and to
review its archived insurance polices. MichCon notified more than 40 current
and former insurance carriers of the environmental conditions at these former
MGP sites. In 1996, MichCon received payments from certain carriers and expects
additional insurance recoveries over the next several years. The findings of
these investigations indicate that the estimated total expenditures for
investigation and remediation activities for these sites could range from $30
million to $170 million based on undiscounted 1995 costs. As a result of these
studies, MichCon accrued an additional liability and a corresponding regulatory
asset of approximately $32 million during 1995.
During 1996, 1995 and 1994, MichCon spent $0.9 million, $2.1 million and
$0.6 million, respectively, investigating these former MGP sites. At December
31, 1996, the reserve balance was $34.6 million, of which $2.6 million was
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and, therefore, have an effect on MichCon's financial position and cash flows.
However, management believes insurance coverage and the cost deferral and rate
recovery mechanism approved by the MPSC will prevent environmental costs from
having a material adverse impact on MichCon's results of operations.
FRANCHISES
MichCon operates in numerous cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year
maximum duration. In Grand Rapids and a number of other municipalities where a
significant part of MichCon's service is furnished, MichCon's operations
originated under franchises that have since expired. In 1993, MichCon began
renewing or re-establishing formal franchises in those municipalities in order
to avoid uncertainty with regard to MichCon's ability to continue and expand
service in those areas. Regarding the franchises that have not been renewed,
MichCon's gas distribution systems are rightfully occupying the streets with
the consent or acquiescence of the municipalities. While MichCon could be
ordered by any municipality in which its franchise has
8
<PAGE> 13
expired to remove its property, it could be deprived of ownership only by its
consent and the payment of an agreed upon price, or by condemnation and the
payment of the fair value of such property. Should any of these municipalities
seek to terminate MichCon's operations therein and substitute another gas
utility operation, publicly or privately owned, the municipality must either
(i) acquire and operate MichCon's system, (ii) construct a new system or (iii)
grant a franchise to another privately owned utility to construct or acquire
its own distribution system.
During 1996, MichCon gained six franchises with aggregate gas sales
volumes of approximately 0.4 Bcf annually. Approximately 40 major franchises
have been renewed in 1996, which account for gas sales volumes of approximately
18 Bcf annually.
Public utility franchises in Michigan are non-exclusive. Construction
under a second franchise granted to another public utility requires
authorization by the MPSC, which must consider, among other things, the service
rendered by the existing utility, the investment by such utility, and the
benefit, if any, to the public of having a second utility serve in the area.
In one township where MichCon formerly served approximately 450 residential
customers (representing 78,400 Mcf annually) under an expired franchise, and
upon the suit of a competing utility with a franchise overlapping the area, a
local circuit judge entered an order to enjoin MichCon from expanding its
service in that township. However, the Michigan Court of Appeals reversed that
decision. This matter is pending before the Michigan Supreme Court. On
October 1, 1994, MichCon sold its distribution facilities in that township to
the competing utility. Management expects that issues involving franchise
rights will continue to be actively pursued in judicial and regulatory
proceedings but are not expected to have a significant impact on its business.
ITEM 2. PROPERTIES
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1996, MichCon's
distribution system included 16,257 miles of distribution mains, 1,065,233
service lines and 1,185,445 active meters. MichCon owns 2,509 miles of
transmission and production lines that deliver natural gas to the distribution
districts and interconnect its storage fields with the sources of supply and
the market areas. MichCon also owns properties relating to five underground
storage fields with an aggregate storage capacity of approximately 130 Bcf.
Additionally, MichCon owns district office buildings, service buildings and gas
receiving and metering stations. MichCon occupies its principal office
buildings, located in Detroit and Grand Rapids, under long-term leases.
Portions of these buildings are subleased to affiliates and others.
Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending
beyond that date. The principal plants and properties of MichCon are held
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under
which MichCon's First Mortgage Bonds are issued. Some existing properties are
being fully utilized and new properties are being added to meet the
requirements of expansion into new areas. MichCon's capital expenditures for
1996 totaled $212.7 million. MichCon's capital requirements for 1997 are
anticipated to be approximately $175 million for capital investments.
The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline Co., owns a 66 2/3% interest in the Saginaw Bay Area Limited
Partnership, which owns substantially all of the properties used in the conduct
of its business, primarily a 126-mile major gathering line. The Saginaw Bay
Lateral Company, a wholly owned subsidiary of MichCon Pipeline Co., owns a 46%
interest in the Saginaw Bay Lateral Limited Partnership, which owns
substantially all of the properties used in the conduct of its business,
primarily lateral lines related to the Saginaw Bay major gathering line.
Westside
9
<PAGE> 14
Pipeline Company, a wholly owned subsidiary of MichCon Pipeline Co., owns an
82.62% interest in Jordan Valley Pipeline, an 14-mile major gathering line and
the Terra-Hayes Pipeline, a 18-mile major gathering line.
MichCon Gathering Company, a wholly owned subsidiary of MichCon Pipeline
Co., owns substantially all of the properties used in the conduct of its
business, including 44.7-mile, 8.6-mile and 11-mile major gathering lines and a
2400 horsepower compressor station.
ITEM 3. LEGAL PROCEEDINGS
In addition to the regulatory proceedings and other matters described in
Item 1, "Business," MichCon is also involved in a number of lawsuits and
administrative proceedings in the ordinary course of business with respect to
taxes, environmental matters, contracts, personal injury, property damage
claims and other matters.
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 has not subsequently contacted MichCon about this response.
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 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 PROGRAMS
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 and operated from 1990 to 1996, MichCon offered
low-interest loans, rebates and other arrangements to assist approximately
46,000 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
10
<PAGE> 15
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,
plaintiffs' third motion to certify the lawsuit as a class action was granted.
MichCon appealed the granting of certification and on December 2, 1996, the
Michigan Court of Appeals granted MichCon's Motion for Immediate Consideration
and stayed all further proceedings until the Court issues its decision.
MichCon believes that the plaintiffs' allegations are without merit and will
continue to defend the case vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned
subsidiaries (reduced disclosure format).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the 10,300,000 issued and outstanding shares of common stock of
MichCon, par value $1 per share, are owned by MCN and constitute 100% of the
voting securities of MichCon. Therefore, no market exists for MichCon common
stock. On January 31, 1996, MichCon called for redemption the remaining
104,732 shares of its redeemable cumulative preferred stock.
MichCon paid cash dividends of $11.3 million in 1996, $6.5 million in 1995
and $8.5 million in 1994 on its common stock.
11
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Selected Financial Data 1996 1995 1994 1993 1992
- ----------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK.......................... $ 79,824 $ 71,488 $ 59,387 $ 61,649 $ 49,848
========== ========== ========== ========== ==========
Cash Dividends Declared on Common Stock $ 11,000 $ 6,500 $ 8,500 $ 75,000 $ -
========== ========== ========== ========== ==========
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY.............. 14.7% 15.8% 15.2% 16.6% 14.6%
========== ========== ========== ========== ==========
PROPERTY, PLANT AND EQUIPMENT.............................. $2,668,294 $2,413,120 $2,189,150 $2,084,516 $1,966,009
Less - accumulated depreciation and depletion 1,243,060 1,151,160 1,071,588 1,024,009 965,661
---------- ---------- ---------- ---------- ----------
Net property, plant and equipment $1,425,234 $1,261,960 $1,117,562 $1,060,507 $1,000,348
========== ========== ========== ========== ==========
TOTAL ASSETS............................................... $2,058,613 $1,798,493 $1,571,910 $1,509,120 $1,475,439
========== ========== ========== ========== ==========
CAPITAL EXPENDITURES....................................... $ 212,668 $ 235,767 $ 145,421 $ 141,279 $ 128,849
========== ========== ========== ========== ==========
CAPITALIZATION
Long-term debt............................................. $ 536,561 $ 501,396 $ 431,870 $ 353,214 $ 306,573
Long-term capital lease obligations........................ 13,757 15,168 16,459 17,625 18,253
Redeemable cumulative preferred stock...................... - - 2,618 5,618 9,000
Common shareholder's equity................................ 577,004 489,821 417,833 365,785 379,136
---------- ---------- ---------- ---------- ----------
Total capitalization....................................... $1,127,322 $1,006,385 $ 868,780 $ 742,242 $ 712,962
========== ========== ========== ========== ==========
SOURCES OF OPERATING REVENUES
Gas sales.................................................. $1,058,499 $ 896,707 $ 954,537 $1,079,020 $1,170,567
Application of (provision for) refunds-net................. 27,346 20,473 223 (3,164) 43,792
End user transportation.................................... 82,210 80,360 76,228 71,412 69,889
Intermediate transportation................................ 48,570 31,913 28,745 19,638 17,824
Storage services........................................... 6,956 8,857 8,054 9,084 7,438
Conservation and other assistance programs................. (2,483) 14,499 18,716 23,935 27,677
Other...................................................... 37,687 28,004 25,175 23,590 20,598
---------- ---------- ---------- ---------- ----------
Total operating revenues................................... $1,258,785 $1,080,813 $1,111,678 $1,223,515 $1,357,785
========== ========== ========== ========== ==========
DISPOSITION OF GAS (MMcf)
Gas sales.................................................. 217,672 206,951 201,423 250,510 309,162
End user transportation.................................... 146,662 145,288 139,800 128,409 129,504
Intermediate transportation................................ 527,510 341,550 303,617 281,116 183,978
---------- ---------- ---------- ---------- ----------
891,844 693,789 644,840 660,035 622,644
Company use and lost gas................................... 5,746 2,990 2,239 3,828 3,748
---------- ---------- ---------- ---------- ----------
Total disposition of gas................................... 897,590 696,779 647,079 663,863 626,392
========== ========== ========== ========== ==========
DEGREE DAYS
For calendar period........................................ 7,171 6,777 6,489 6,675 6,607
Percent colder (warmer) than normal........................ 5.4% 0.3% (4.2)% (2.2)% (3.7)%
UTILITY CUSTOMERS
Residential................................................ 1,087,450 1,077,668 1,061,300 1,050,188 1,039,378
Total...................................................... 1,169,690 1,159,140 1,141,463 1,129,416 1,117,938
EMPLOYEES.................................................. 3,062 3,128 3,273 3,364 3,564
</TABLE>
12
<PAGE> 17
ITEM 7. MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings for 1996 were $79.8 million, an increase of $8.3 million over
1995. Similarly, earnings for 1995 increased by $12.1 million over 1994.
These improvements are due primarily to increased gross margins resulting from
higher gas sales and transportation deliveries.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
EARNINGS COMPONENTS (IN MILLIONS)
COMPARING 1996 TO 1995 Comparing 1995 to 1994
---------------------- ----------------------
DOLLAR PERCENTAGE Dollar Percentage
CHANGE CHANGE Change Change
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Operating Revenues . . . . . . . . . $178.0 16.5% $(30.9) (2.8)%
Cost of Gas . . . . . . . . . . . . 152.6 31.5 (45.5) (8.6)
Gross Margin . . . . . . . . . . . . 25.4 4.3 14.6 2.5
Operation and Maintenance. . . . . . (0.1) (0.1) (19.2) (6.1)
Depreciation and Depletion . . . . . 9.0 10.1 4.9 5.8
Property and Other Taxes . . . . . . 4.8 8.3 (1.1) (1.9)
Other Income and Deductions. . . . . 3.3 7.4 6.6 17.7
Income Tax Provision . . . . . . . . 0.5 1.2 11.2 37.4
- -----------------------------------------------------------------------------------------------------------
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased in 1996 and
1995 reflecting higher gas sales and end user transportation due primarily to
colder weather. Additionally, gross margins were favorably affected by the
continued growth in intermediate transportation services.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Percentage Colder (Warmer) than Normal. . . . . . . . . . . . . . . . . . . . . 5.4% 0.3% (4.2)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 1.5 (4.4)
Net Income (Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.9 $1.4 $(4.0)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 18
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating Revenues
1996 1995 1994
---- ---- ----
Gas Markets (Bcf)
Gas Sales ........................... 217.7 206.9 201.4
End User Transportation ............. 146.7 145.3 139.8
Intermediate Transportation.......... 527.5 341.6 303.6
----- ----- -----
891.9 693.8 644.8
===== ===== =====
Gas sales and end user transportation revenues increased $170.5 million in
1996 and decreased $33.4 million in 1995. Revenues were affected by increases
in gas sales and end user transportation deliveries which increased 12.2 Bcf
and 11 Bcf in 1996 and 1995 respectively. The increases were due primarily to
colder weather as well as marketing initiatives that expanded gas markets. The
decline in gas sales revenues during 1995 reflects lower gas costs as
subsequently discussed. MichCon continues to enter into multi-year
competitively priced transportation agreements with large-volume users, thereby
maintaining these gas markets over the long term.
Gas sales and gross margins have also been affected by variations in
revenues associated with lost gas costs. Gas sales rates are set to recover
lost gas costs using an averaging method based on historical lost gas
experience. Prior to 1993, MichCon deferred or accrued revenues for differences
between historical average lost gas amounts and the actual amount experienced.
However, as a result of an October 1993 order issued in MichCon's last general
rate case, MichCon no longer defers or accrues revenues for these differences
in lost gas amounts. Amortization of previously deferred amounts was completed
in 1995 and increased revenues by $3.4 million and $3.1 million in 1995 and
1994 respectively. As discussed in the "Cost of Gas" section that follows,
gross margins have also been impacted by variations in lost gas costs.
The increases in intermediate transportation deliveries in both 1996 and
1995 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. There has been a significant increase in Michigan
Antrim production over the past several years, resulting in a growing demand by
gas producers and brokers for intermediate transportation services. In order
to meet the increased demand, MichCon expanded the transportation capacity of
its northern Michigan gathering system. The expansion enabled MichCon to
transport an additional 75 Bcf during 1996.
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 54.5 Bcf in
volumes transported during 1996. Profit margins on intermediate transportation
services are considerably less than margins on gas sales or for end user
transportation markets.
Other operating revenue decreased primarily due to a $16.1 million
decrease in conservation revenue resulting from the discontinuation of
MichCon's conservation programs. As discussed in the "Operation and
Maintenance" section that follows, this decrease in revenue is offset by a
corresponding decrease in expenses related to the conservation programs. This
decrease is offset by a $5.5 million increase in gas processing revenues
generated from the Michigan pipeline operations which were transferred from MCN
to MichCon at the beginning of 1996.
14
<PAGE> 19
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 reasonably and prudently incurred cost of gas
sold. Therefore, fluctuations in cost of gas sold have little or no effect on
gross margins.
Cost of gas sold increased in 1996 as a result of significantly higher
spot market prices paid for natural gas purchased and higher gas sales volumes
due to colder weather. Cost of gas sold per thousand cubic feet for 1996 was
$2.92, an increase of $.56 (24%). Lower natural gas prices, partially offset
by higher gas sales volumes, resulted in the 1995 decrease in cost of gas sold.
Cost of gas sold per thousand cubic feet for 1995 decreased from 1994 by $.31
(12%). MichCon continues its supply strategy of purchasing gas under contracts
that tie purchase prices to spot market prices. To mitigate risk related to
spot market prices, MichCon has filed a proposal with the MPSC to change its
supply strategy to purchase approximately two-thirds of its gas under contracts
that tie purchase prices to spot market prices and to purchase the remainder
under fixed price contracts. MichCon expects approval of this proposal during
the second quarter of 1997.
As previously discussed, cost of gas is affected by variations in lost gas
amounts. Lost gas costs for 1996 and 1995 increased by $6.6 million and $8.5
million respectively.
OPERATION AND MAINTENANCE
Operation and maintenance expenses for 1996 declined slightly from 1995.
Increased uncollectible gas accounts expense of $13.6 million combined with
additional expenses related to the transfer of the Michigan pipeline operations
from MCN to MichCon were offset by decreased benefit costs, primarily pension
and retiree health care costs, of $6.8 million and a decrease of $16.1 million
in expense related to the conservation program, which was discontinued as noted
above in "Other Operating Revenues." Uncollectible gas accounts 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 and delay in the home heating assistance
funding obtained by low-income customers. Operation and maintenance expenses
decreased during 1995 due to lower benefit costs, primarily pension and retiree
health care costs, combined with management's efforts to reduce operating
costs.
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.
The State of Michigan's share of LIHEAP funds was reduced from $78 million in
fiscal year 1995 to $47.5 million in 1996. The problem was further impacted by
the late receipt of funding by the State of Michigan. Due to this delay, many
of MichCon's customers who would have been eligible for assistance did not
file. During 1996 and 1995, $10.1 million and $27.3 million in LIHEAP funds
assisted approximately 74,000 and 112,000 MichCon customers, respectively.
During October 1996, the President signed an Omnibus Spending Bill passed by
Congress that provided for $1 billion in federal LIHEAP funding for 1997, an
increase of $100 million over 1996 levels. During February 1997, the President
released his proposed budget which provides for federal LIHEAP funding at $1
billion annually through fiscal year 2002. A portion of any future increase or
decrease in funding may impact MichCon's uncollectible accounts. MichCon is
currently working with federal and state officials to identify ways to obtain
energy assistance for low-income customers from other venues, and is taking
actions to minimize the impact a reduction in LIHEAP funds would have on
MichCon's financial statements.
15
<PAGE> 20
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND DEPLETION
The increases in depreciation and depletion in both 1996 and 1995 are due
to higher plant balances reflecting capital expenditures of $593.9 million over
the past three years. Depreciation and depletion expenses are expected to
increase in future years due to additional capital investments. MichCon has
filed an application with the MPSC to lower its depreciation rates which could
partially offset the anticipated increase in depreciation expense in 1997 and
future years.
PROPERTY AND OTHER TAXES
Property and other taxes increased in 1996 reflecting an increase in
property taxes due to higher property balances. The decrease in 1995 was due
mainly to a decrease in Michigan single business taxes, resulting from
favorable amendments to the Michigan tax law.
OTHER INCOME AND DEDUCTIONS
Interest on long-term debt increased in 1996 and 1995 as a result of the
average amount of long-term debt outstanding increasing $72.6 million and $95.7
million respectively. The increase in interest on long-term debt in 1996 was
offset by a slight decrease in the weighted average interest rate. The
increases in long-term debt outstanding were the result of issuing first
mortgage bonds in the aggregate of $70 million in both 1996 and 1995, and $80
million in 1994.
The decrease in 1996 other deductions is primarily due to an increase in
the capitalization of the cost of funds used during construction resulting
from higher construction balances.
INCOME TAX PROVISION
Income taxes for 1996 remained consistent with 1995 despite the increase
in earnings due to a decrease in excess book depreciation over tax depreciation
and an increase in the favorable resolution of prior year tax issues. Income
taxes increased in 1995 primarily as a result of earnings. In addition, excess
book depreciation over tax depreciation rose in 1995 contributing to the
increase in 1995 income taxes. Income taxes were reduced by $3.4 million, $1.3
million and $3.9 million during 1996, 1995 and 1994, respectively, due to the
favorable resolution of prior years' tax issues.
ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil.
MichCon owns or previously owned 16 such former manufactured gas plant (MGP)
sites.
During the mid-1980's, MichCon conducted preliminary environmental
investigations at these former MGP sites, and some contamination related to the
byproducts of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Environmental Quality. None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency.
16
<PAGE> 21
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MichCon is not involved in any administrative proceedings regarding these
former MGP sites, but is currently remediating one of these sites. The remedy
consists of limited excavation and disposal of soils, a new soil cover and
long-term ground water monitoring. More extensive investigations are underway
at seven sites.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of
a cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MichCon employed outside consultants to evaluate remediation alternatives
for these sites, to assist in estimating its potential liabilities and to
review its archived insurance policies. MichCon has notified more than 40
current and former insurance carriers of the environmental conditions at these
former MGP sites, and is pursuing its claims against these carriers. In 1996,
MichCon received payments from certain insurance carriers and expects
additional insurance recoveries over the next several years. The findings of
these investigations indicate that the estimated total expenditures for
investigation and remedial activities at all 16 former MGP sites will be
between $30 million and $170 million based on undiscounted 1995 costs. As a
result of these studies, MichCon accrued an additional liability and a
corresponding regulatory asset of $32 million during 1995.
During 1996, 1995 and 1994, MichCon spent $0.9 million, $2.1 million and
$0.6 million, respectively, investigating these former MGP sites. At December
31 1996, the reserve balance is $34.6 million, of which $2.6 million is
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial actions costs and,
therefore, have an effect on MichCon's financial position and cash flows.
However, management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MichCon's results of operations.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities decreased $56.5 million in
1996 from 1995 and decreased $15.9 million in 1995 compared to 1994. These
decreases were due primarily to higher working capital requirements, partially
offset by higher net income, after adjusting for depreciation and deferred
taxes. Operating cash flows were sufficient for the payment of cash dividends
on common and preferred stock and a portion of capital investments.
FINANCING ACTIVITIES
During the latter part of the year, short-term debt is generally incurred
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. Commercial paper of $238.3 million was
outstanding as of December 31, 1996.
17
<PAGE> 22
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. During the fourth quarter of 1996, MichCon filed a shelf
registration with the Securities and Exchange Commission for the issuance of up
to $260 million which will allow it to issue, in conjunction with its remaining
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.
MichCon issued $70 million and $80 million of first mortgage bonds in 1995
and 1994, respectively. The 1995 proceeds were used to repay short-term
obligations, to finance capital expenditures and for general corporate
purposes. The 1994 proceeds were used to repay short-term obligations and for
general corporate purposes.
During 1996, MichCon renewed its Trust Demand Note program which allows it
to borrow up to $25 million through March 1997. Borrowings of $25 million were
outstanding as of December 31, 1996.
The following table sets forth the ratings for securities issued by
MichCon:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard Duff &
& Poors Moody's Phelp's Fitch
-------- ------- ------- -----
<S> <C> <C> <C> <C>
Commercial paper .............. A1 P1 D1 F1
Long-term debt .................. A A2 A+ A
- --------------------------------------------------------------------------------
</TABLE>
These ratings are considered investment grade by each rating agency.
MichCon's capitalization objective is to maintain a ratio of approximately
50% debt and 50% equity. At December 31, 1996, the common equity ratio was
51.2% of total capitalization.
INVESTING ACTIVITIES
MichCon's capital expenditures for 1996 totaled $212.7 million. This
amount represents a decrease of $23.1 million compared to 1995. Capital
expenditures in 1995 increased by $90.4 million over 1994. Capital expenditures
primarily represent the construction of transportation pipelines, the
construction of new distribution lines to reach communities not previously
served by MichCon, and improvements to existing storage and transmission
systems.
MichCon's capital requirements for 1997 are anticipated to be
approximately $175 million for capital investments. 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. These capital requirements and general financial market
conditions will affect the timing and amount of future debt issuances.
In January 1996, MichCon began construction of a 59-mile loop of its
existing Milford to Belle River Pipeline. The pipeline was completed in
January 1997 at a cost of approximately $85 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.
18
<PAGE> 23
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
OUTLOOK
The statements contained in this Outlook are based on current
expectations. These statements are forward looking, and actual results may
differ materially.
MichCon's strategy is to become the dominant provider of natural gas and
high-value energy services within Michigan. Accordingly, MichCon's objectives
are to increase revenues and reduce its costs in order to maintain strong
returns and provide customers with high-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 expects to
provide natural gas to approximately 23,000 new customers in 1997. MichCon's
market share for residential heating customers in the communities in which it
serves is approximately 85%. While this saturation rate is high, significant
opportunities exist through conversion of existing homes as well as from new
construction. MichCon continues to expand the industrial and commercial
markets by aggressively facilitating the use of existing gas technologies and
equipment as well as by developing new natural gas technologies.
Management is continually assessing ways to improve cost competitiveness.
Among other cost saving initiatives, MichCon and The Detroit Edison Company are
exploring opportunities to share the cost of common, duplicative functions,
including billing, meter reading, payment processing and underground facilities
locating.
MichCon continues to focus on challenges and opportunities resulting from
increased competition with other natural gas distribution companies and other
energy providers. The MPSC is reviewing various plans which outline major
reforms to Michigan's utility regulatory process aimed at giving all customers
added choices and thereby increasing competition. MichCon and other Michigan
gas utilities will implement pilot transportation service programs in 1997 for
small commercial and residential customers. Under MichCon's two-year program,
47,000 customers in the pilot territory will have the opportunity to select
alternative natural gas suppliers beginning in April 1997. This option has
been available to MichCon's larger commercial customers for several years.
MichCon currently generates its earnings on delivery related services, and
generally generates no earnings on the gas-supply portion of operations.
Therefore, a customer's selection of an alternative supplier is expected to be
essentially earnings-neutral. However, the overall package of regulatory
changes connected with the gas industry restructuring will not be
earnings-neutral, but is expected to generate additional revenue opportunities
as the restructuring advances. MichCon is positioning itself to respond to
changes in regulation and increased competition by reducing its cost of
operations while maintaining a high level of customer satisfaction. MichCon
remains focused on these goals in 1997 and beyond.
As described in Note 7 to the consolidated financial statements, MichCon
complies with the provisions of Statement of Financial Accounting Standards,
No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation."
In the event MichCon determines it no longer meets the criteria for following
SFAS No. 71, the accounting impact would be an extraordinary, non-cash increase
to net income of approximately $50 million. Criteria that give rise to the
discontinuance of SFAS 71 include (1) increasing competition that restricts
MichCon's ability to establish prices to recover specific costs, and (2) a
significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. MichCon periodically
reviews these criteria to ensure that the continuing
19
<PAGE> 24
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
application of SFAS No. 71 is appropriate. Based on a current evaluation of the
various factors and conditions that are expected to impact future cost recovery,
MichCon believes that its regulatory assets are probable of future recovery.
NEW ACCOUNTING PRONOUNCEMENTS
During 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Although certain aspects of SFAS 125 have been delayed, the
effective date for most of its provisions remains January 1, 1997. MichCon has
analyzed the impacts of adopting SFAS 125 and expects that it will have no
impact on MichCon's financial statements.
During 1996 the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" which
provides guidance on the issues present in the recognition, measurement,
display and disclosure of environmental remediation liabilities. MichCon does
not expect the 1997 adoption of this pronouncement to have a material impact on
MichCon's financial statements.
20
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statement of Income ............................................... 22
Consolidated Statement of Financial Position ................................... 23
Consolidated Statement of Capitalization ....................................... 24
Consolidated Statement of Cash Flows ........................................... 25
Notes to the Consolidated Financial Statements ................................. 26
Independent Auditors' Report ................................................... 42
Supplementary Financial Information - Quarterly Operating Results (Unaudited) .. 43
Financial Statement Schedule for each of the three years in the period ended
December 31, 1996, unless otherwise noted-
Schedule II - Valuation and Qualifying Accounts .............................. 44
</TABLE>
21
<PAGE> 26
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------------------------------- ---------- ---------- ---------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
Operating Revenues
Gas Sales . . . . . . . . . . . . . . . . . . $1,085,845 $ 917,180 $ 954,760
Transportation and storage services . . . . . 11 137,737 121,130 113,027
Other . . . . . . . . . . . . . . . . . . . . 35,203 42,503 43,891
---------- --------- ---------
Total Operating Revenues . . . . . . . . . 1,258,785 1,080,813 1,111,678
---------- --------- ---------
Operating Expenses
Cost of gas . . . . . . . . . . . . . . . . . 636,594 483,962 529,426
Operation and maintenance . . . . . . . . . . 11 294,281 294,424 313,575
Depreciation and depletion . . . . . . . . . 98,147 89,128 84,230
Property and other taxes . . . . . . . . . . 61,762 57,012 58,129
---------- --------- ---------
Total operating expenses . . . . . . . . . 1,090,784 924,526 985,360
---------- --------- ---------
Operating Income . . . . . . . . . . . . . . . 168,001 156,287 126,318
---------- --------- ---------
Equity in Earnings of Joint Ventures . . . . . 886 739 1,043
---------- --------- ---------
Other Income and (Deductions)
Interest income . . . . . . . . . . . . . . . 3,900 3,983 4,064
Interest on long-term debt . . . . . . . . . (40,703) (35,047) (27,554)
Other interest expense . . . . . . . . . . . (8,012) (7,053) (9,093)
Minority interest . . . . . . . . . . . . . . 5 (988) - -
Other . . . . . . . . . . . . . . . . . . . . (1,756) (6,182) (5,071)
---------- --------- ---------
Total other income and (deductions) . . . . (47,559) (44,299) (37,654)
---------- --------- ---------
Income Before Income Taxes . . . . . . . . . . . 121,328 112,727 89,707
Income Tax Provision . . . . . . . . . . . . . . 12 41,486 41,004 29,839
---------- --------- ---------
Net Income . . . . . . . . . . . . . . . . . . . 79,842 71,723 59,868
Dividends on Preferred Stock . . . . . . . . . . 18 235 481
---------- --------- ---------
Net Income Available for Common Stock . . . . . $ 79,824 $ 71,488 $ 59,387
========== ========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
22
<PAGE> 27
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31 1996 1995
- ------------------------------------------------------- --------- ---------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 10,010 $ 8,469
Accounts receivable, less allowance for doubtful accounts of
$17,707 and $13,250, respectively . . . . . . . . . . . . . . . . 169,436 175,103
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . 107,377 91,134
Gas in inventory . . . . . . . . . . . . . . . . . . . . . . . . . 2 67,910 40,191
Property taxes assessed applicable to future periods 60,592 56,949
Accrued gas cost recovery revenues . . . . . . . . . . . . . . . . 7 27,672 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,025 32,498
---------- ----------
466,022 404,344
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures. . . . . . . . . . . . 19,479 20,318
Deferred postretirement benefit costs . . . . . . . . . . . . . . . 7, 9b 4,863 12,372
Deferred environmental costs . . . . . . . . . . . . . . . . . . . 6b, 7 28,233 32,000
Prepaid benefit costs . . . . . . . . . . . . . . . . . . . . . . . 9 64,307 25,438
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,206 42,061
---------- ----------
167,088 132,189
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost . . . . . . . . . . . . . . 8 2,668,294 2,413,120
Less - Accumulated depreciation and depletion. . . . . . . . . . . . 1,243,060 1,151,160
---------- ----------
1,425,234 1,261,960
---------- ----------
$2,058,344 $1,798,493
========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,725 $ 108,208
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 265,126 196,635
Current portion of long-term debt, capital lease obligations
and redeemable cumulative preferred stock . . . . . . . . . . . . 3b, 8 53,232 3,969
Federal income, property and other taxes payable. . . . . . . . . . 84,788 85,195
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . 12,860 11,531
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,309 64,587
---------- ----------
610,040 470,125
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . 12 76,523 61,146
Unamortized investment tax credit . . . . . . . . . . . . . . . . . 7 34,588 36,437
Tax benefits amortizable to customers . . . . . . . . . . . . . . . 7 116,313 114,487
Accrued postretirement benefit costs . . . . . . . . . . . . . . . 9b - 12,661
Accrued environmental costs . . . . . . . . . . . . . . . . . . . . 6b 32,000 32,000
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . 5 17,604 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,954 65,252
---------- ----------
320,982 321,983
---------- ----------
COMMITMENTS AND CONTINGENCIES 6, 8
CAPITALIZATION (see accompanying statement)
Long-term debt, including capital lease obligations 3a, 8, 10 550,318 516,564
Common shareholder's equity . . . . . . . . . . . . . . . . . . . 577,004 489,821
---------- ----------
1,127,322 1,006,385
---------- ----------
$2,058,344 $1,798,493
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part
of this statement.
23
<PAGE> 28
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------- ---------- ---------- ----------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
LONG-TERM DEBT, excluding current requirements 3a, 10
First Mortgage Bonds, interest payable semi-annually
6.25 % series due 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 50,000 $ 50,000
6.3 % series due 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 20,000 -
6.51 % series due 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 - -
5.75 % series due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000
8 % series due 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 70,000 70,000
6.72 % series due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,150 4,150 -
6.8 % series due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,850 15,850 -
9.125 % series due 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 55,000 55,000
7.15 % series due 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 - -
8.25 % series due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 80,000 80,000
9.5 % series due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000 5,000
7.5 % series due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,812 30,000 -
9.5 % series due 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 40,000
6.75 % series due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,782 18,416 19,109
7 % series due 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 40,000
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,349) (1,390) (1,508)
Unsecured Notes - 9.750 % series due 2000
interest payable semi-annually . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,000 12,000
Long-term capital lease obligations. . . . . . . . . . . . . . . . . . . . . . 8 13,757 15,168 16,459
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 18,316 2,370 2,269
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,318 516,564 448,329
---------- ---------- ----------
PREFERENCE STOCK, par value $1 per share -
authorized 4,000,000 shares, outstanding - none
REDEEMABLE CUMULATIVE PREFERRED STOCK, excluding current requirements,
par value $1 per share - authorized 7,000,000 shares, outstanding none,
104,732 and 224,732 shares, respectively, $2.05 Series . . . . . . . . . . . 3b - - 2,618
---------- ---------- ----------
COMMON SHAREHOLDER'S EQUITY
Common Stock, par value $1 per share - authorized, for
all periods, 15,100,000 shares; issued 10,300,000 shares . . . . . . . . . . 10,300 10,300 10,300
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of period . . . . . . . . . . . . . . . . . . . . . . . 211,777 204,777 203,616
Equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3c, 5 18,622 7,000 1,161
---------- ---------- ----------
Balance - end of period . . . . . . . . . . . . . . . . . . . . . . . . . . 230,399 211,777 204,777
---------- ---------- ----------
RETAINED EARNINGS
Balance - beginning of period . . . . . . . . . . . . . . . . . . . . . . . 267,744 202,756 151,869
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,842 71,723 59,868
Cash dividends declared:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,263) (6,500) (8,500)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (235) (481)
---------- ---------- ----------
Balance - end of period . . . . . . . . . . . . . . . . . . . . . . . . . . 336,305 267,744 202,756
---------- ---------- ----------
Total common shareholder's equity . . . . . . . . . . . . . . . . . . . . . . . 577,004 489,821 417,833
---------- ---------- ----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,127,322 $1,006,385 $ 868,780
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
24
<PAGE> 29
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------ ----- ------ ------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net income . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . $ 79,842 $ 71,723 $ 59,868
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income . . . . . . . . . . . . . . . . . . . . . . . . . 98,147 89,128 84,230
Charged to other accounts. . . . . . . . . . . . . . . . . . . . . . . . . 7,579 7,318 7,229
Deferred income taxes - current . . . . . . . . . . . . . . . . . . . . . . 4,963 9,739 (16,599)
Deferred income taxes and investment tax credit - net . . . . . . . . . . . 12 6,999 6,474 (8,795)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,629) 878 (297)
Changes in assets and liabilities, exclusive of changes
shown separately . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,207) (27,033) 48,532
--------- --------- ---------
Net cash provided from operating activities . . . . . . . . . . . . . . 101,694 158,227 174,168
--------- --------- ---------
Cash Flow from Financing Activities
Notes payable - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 68,491 28,178 (91,847)
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 3a 69,645 68,764 78,620
Cash dividend paid:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,263) (6,500) (8,500)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (276) (522)
Retirement of long-term debt and preferred stock . . . . . . . . . . . . . . . . 3b (6,384) (4,757) (4,809)
Equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,614 7,000 1,161
--------- --------- ---------
Net cash provided from (used for) financing activities . . . . . . . . . 122,049 92,409 (25,897)
--------- --------- ---------
Cash Flow from Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (212,668) (235,767) (145,421)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,534) (7,705) (3,968)
--------- --------- ---------
Net cash used for investing activities . . . . . . . . . . . . . . . . . (222,202) (243,472) (149,389)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . 1,541 7,164 (1,118)
Cash and Cash Equivalents, January 1 . . . . . . . . . . . . . . . . . . . . . . . 8,469 1,305 2,423
--------- --------- ---------
Cash and Cash Equivalents, December 31 . . . . . . . . . . . . . . . . . . . . . . $ 10,010 $ 8,469 $ 1,305
========= ========= =========
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable - net. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,807 $ (37,782) $ 27,936
Accrued/deferred gas cost recovery revenues. . . . . . . . . . . . . . . . . . (28,250) (18,495) 23,696
Accrued unbilled revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . (16,243) (8,901) 17,983
Gas in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,719) 37,652 (42,744)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,401 27,537 (12,080)
Federal income, property and other taxes payable . . . . . . . . . . . . . . . (2,424) (611) 25,263
Other current assets and liabilities . . . . . . . . . . . . . . . . . . . . . 2,669 (11,059) (16,747)
Deferred and prepaid benefit costs . . . . . . . . . . . . . . . . . . . . . . (44,021) (20,471) 24,406
Other deferred assets and liabilities. . . . . . . . . . . . . . . . . . . . . (6,427) 5,097 819
--------- --------- ---------
$ (93,207) $ (27,033) $ 48,532
========= ========= =========
Supplemental Disclosures
Cash paid for:
Interest, net of amounts capitalized . . . . . . . . . . . . . . . . . . . . . $ 45,896 $ 40,037 $ 34,863
========= ========= =========
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,927 $ 30,874 $ 41,786
========= ========= =========
Noncash financing activities:
Transfer of pipeline net assets from MCN . . . . . . . . . . . . . . . . . . . 5 $ 17,008 $ - $ -
========= ========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
25
<PAGE> 30
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
MichCon is a public utility engaged in the distribution and
transmission of natural gas in the state of Michigan. MichCon is subject to
the accounting requirements of and rate regulation by the Michigan Public
Service Commission (MPSC) with respect to the distribution and intrastate
transportation of natural gas. The major services provided by MichCon are
gas sales, end user transportation, and intermediate transportation.
MichCon serves more than 1.2 million residential, commercial and industrial
customers. The Company is not dependent upon any one customer or group of
customers. Its principle markets are located in the Detroit, Grand Rapids,
Ann Arbor, Traverse City, and Muskegon metropolitan areas. MichCon's
non-utility operations are insignificant.
Forty-six percent of MichCon's labor force is covered by collective
bargaining agreements, with the earliest agreements set to expire in
December 1997. Twenty-eight percent of the Company's labor force is covered
under the earlier agreements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MichCon
and all of its subsidiaries. Investments in 50% or less owned entities have
been accounted for under the equity method because MichCon has significant
but not controlling influence over these entities.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior years' statements to
conform with the 1996 presentation.
REVENUES AND COST OF GAS
MichCon accrues revenues for gas service provided but unbilled at month
end. Annual gas cost recovery (GCR) proceedings before the MPSC permit
MichCon to recover the prudent and reasonable cost of gas sold. Any
overcollection or undercollection of costs, including interest, will be
reflected in future rates.
26
<PAGE> 31
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and includes amounts
for labor, materials, overhead and an allowance for funds used during
construction. Upon retirement, the cost of property, plant and equipment
and net removal costs are charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
MichCon capitalizes an allowance for both debt and equity funds used
during construction in the cost of major additions to utility plant. The
total amount capitalized was $5,233,000, $1,644,000 and $839,000 in 1996,
1995 and 1994, respectively.
DEPRECIATION AND DEPLETION
MichCon provides depreciation for a major portion of its property,
plant and equipment on the basis of straight-line rates prescribed by the
MPSC. Unit of production depreciation and depletion is used for certain
production and transmission property. Depreciation rates vary by class of
property. The ratio of the provision for depreciation to the average cost of
depreciable property was 4.4% in 1996 and 1995, and 4.5% in 1994.
FINANCIAL INSTRUMENTS
In order to manage interest rate exposure, MichCon and its subsidiaries
engage in interest rate swap agreements that exchange fixed and variable
rate interest payment obligations over the life of the agreements without
the exchange of the underlying principal amounts. The difference to be paid
or received on these swaps is accrued and recorded as an adjustment to
interest expense over the life of the agreements.
DEFERRED DEBT COSTS
In accordance with MPSC regulations, MichCon defers reacquisition and
unamortized issuance costs of reacquired long-term debt when such debt is
refinanced. These costs are amortized over the term of the replacement
debt.
INCOME TAXES AND INVESTMENT TAX CREDIT
Tax benefits amortizable to customers represents the net revenue
equivalent of the difference in property-related accumulated deferred income
taxes computed in accordance with SFAS No. 109, "Accounting for Income
Taxes," as compared to the amounts previously reflected in setting utility
rates. This amount is primarily due to current tax rates being lower than
the rates in effect when the original deferred taxes were recorded and
because of temporary differences, including accumulated investment tax
credits, for which deferred income taxes were not previously recorded in
setting utility rates. These net tax benefits are being amortized in
accordance with the regulatory treatment over the life of the related plant,
as the temporary differences reverse.
27
<PAGE> 32
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
MichCon considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation." This statement requires expanded disclosures
about stock-based employee compensation and encourages a fair value based
method of accounting for such compensation for fiscal years beginning after
December 15, 1995. The statement supersedes Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," but
allows continued application of the intrinsic value based method of
accounting prescribed by APB 25. During the fourth quarter of 1996, MichCon
adopted the recommended fair value based method of accounting for its
stock-based compensation plans, effective January 1, 1996. Due to the
immaterial effect of adoption, prior periods have not been restated.
2. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December
31, 1996, the replacement cost exceeded the $67,910,000 LIFO cost by
$240,442,000 and at December 31, 1995, the replacement cost exceeded the
$40,191,000 LIFO cost by $135,635,000. MichCon's current GCR tariff provisions
prevent MichCon from retaining any benefits from a lower cost of gas sold
resulting from liquidating its LIFO inventory. MichCon's LIFO inventory balance
was 73.6 Bcf and 64.2 Bcf as of December 31, 1996 and 1995, respectively.
A portion of gas in underground storage used as a pressure base is
included in "Property, Plant and Equipment" in the amount of $32,792,000 at
December 31, 1996 and 1995.
3. CAPITALIZATION
A. LONG-TERM DEBT
Substantially all of the net properties of MichCon in the approximate
amount of $1,100,000,000 are pledged as security for the payment of
outstanding first mortgage bonds.
MichCon has a variable interest rate swap agreement through April 2000
on $12,000,000 of unsecured notes which has effectively reduced the cost of
this debt from 9.8% to 5.7% for the year ended December 31, 1996. A
subsidiary of MichCon has an interest rate swap agreement on the
$17,600,000 outstanding balance of its project loan agreement at December
31, 1996, which effectively fixes the interest rate at 7.5% through
February 2003.
28
<PAGE> 33
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1996, are $51,821,000 in 1997,
$21,823,000 in 1998, $51,825,000 in 1999, $33,827,000 in 2000, and
$21,829,000 in 2001.
B. REDEEMABLE CUMULATIVE PREFERRED STOCK
At December 31, 1995, 104,732 shares of Redeemable Cumulative Preferred
Stock, $2.05 Series were outstanding. During January 1996, MichCon redeemed
all outstanding shares at the sinking fund redemption price of $25 per
share.
C. ADDITIONAL CAPITAL
During 1995, MCN Corporation, doing business as MCN Energy Group Inc.
(MCN), invested $7,000,000 in MichCon as a capital contribution.
4. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
During 1996, MichCon increased its credit lines by $50,000,000 to 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. MichCon
usually issues commercial paper in lieu of an equivalent amount of borrowings
under these lines of credit. Commercial paper outstanding at December 31, 1996
and 1995, totaled $238,251,000 and $194,760,000, respectively, at weighted
average interest rates of 5.5% and 5.7%, respectively. This debt is classified
as short-term based upon management's intent to repay it within one year. Fees
are paid to compensate banks for lines of credit.
During 1996, MichCon renewed its Trust Demand Note program which allows
MichCon to borrow up to $25,000,000 through March 1997. At December 31, 1996,
borrowings of $25,000,000 were outstanding under this program at an interest
rate of 5.9%. No borrowings were outstanding at December 31, 1995.
5. TRANSFER OF SUBSIDIARIES
In January 1996, MCN's Michigan pipeline operations were transferred, 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. The contribution from these pipeline operations
to MichCon's consolidated net income was approximately $626,000 for the year
ended 1996. The pipeline operations have investments in certain partnerships.
Outside partners have interests in these partnerships ranging from 17% to 54%.
29
<PAGE> 34
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
A. GUARANTY
A subsidiary of MichCon and an unaffiliated corporation have formed a
series of partnerships which are engaged in the construction and development
of a residential community on the Detroit riverfront (Harbortown). One of
the partnerships obtained $12,000,000 of tax-exempt financing due June 2004
through the Michigan State Housing Development Authority. Both partners and
their parent corporations have issued guaranties for the full amount of this
financing and each parent corporation has agreed to reimburse the other for
50% of any payments made as a result of these guaranties.
B. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for
heating and other uses was manufactured from processes involving coal, coke
or oil. MichCon owns or previously owned 16 such former manufactured gas
plant (MGP) sites.
During the mid-1980's, MichCon conducted preliminary environmental
investigations at these former MGP sites, and some contamination related to
the byproducts of gas manufacturing was discovered at each site. The
existence of these sites and the results of the environmental investigations
have been reported to the Michigan Department of Environmental Quality.
None of these former MGP sites are on the National Priorities List prepared
by the U.S. Environmental Protection Agency.
MichCon is not involved in any administrative proceedings regarding
these former MGP sites, but is currently remediating one of these sites.
The remedy consists of limited excavation and disposal of soils, a new soil
cover and long-term ground water monitoring. More extensive investigations
are underway at seven sites.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval
of a cost deferral and rate recovery mechanism for investigation and
remediation costs incurred at former MGP sites in excess of this reserve.
MichCon employed outside consultants to evaluate remediation
alternatives for these sites, to assist in estimating its potential
liabilities and to review its archived insurance policies. MichCon notified
more than 40 current and former insurance carriers of the environmental
conditions at these former MGP sites and is pursuing its claims against
these carriers. In 1996, MichCon received payments from certain insurance
carriers and expects additional insurance recoveries over the next several
years. The findings of these investigations indicate that the estimated
total expenditures for investigation and remedial activities at all 16
former MGP sites will be between $30,000,000 to $170,000,000 based on
undiscounted 1995 costs. As a result of these studies, MichCon accrued an
additional liability and a corresponding regulatory asset of $32,000,000
during 1995.
30
<PAGE> 35
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 1996, 1995, and 1994, MichCon spent $900,000, $2,100,000 and
$600,000, respectively, investigating and remediating these former MGP
sites. At December 31, 1996, the reserve balance is approximately
$34,576,000, of which $2,576,000 is classified as current. Any significant
change in assumptions, such as remediation techniques, nature and extent of
contamination and regulatory requirements, could impact the estimate of
remedial action costs for the sites and, therefore, have an effect on
MichCon's financial position and cash flows. However, management believes
that insurance coverage and the cost deferral and rate recovery mechanism
approved by the MPSC will prevent environmental costs from having a material
adverse impact on MichCon's results of operations.
C. COMMITMENTS
MichCon has entered into long-term purchase and transportation
contracts with various suppliers and producers. In general, purchase prices
under these contracts are determined by formulas based on market prices. In
1997, MichCon has firm purchase commitments for approximately 132 Bcf of
gas. The Company expects that sales will exceed its minimum purchase
commitments. To ensure that there is sufficient flexibility to obtain the
lowest cost natural gas supplies in the future, MichCon continues its policy
of reducing the length of its gas purchase contracts to no more than one
year. This will ensure that MichCon's supply portfolio is compatible with
the market at any point in time. MichCon has long-term transportation
contracts with various interstate pipeline companies which expire on various
dates through the year 2011. The Company is committed to pay demand charges
of approximately $56,000,000 during 1997 related to firm purchase and
transportation agreements. These demand charges are recoverable through the
GCR mechanism.
Capital investments for 1997 are estimated to be $175,000,000 and
certain commitments have been made in connection therewith.
D. OTHER
MichCon receives a significant amount of 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. The State of Michigan's share of LIHEAP funds was reduced from
$78,000,000 in fiscal year 1995 to $47,500,000 in 1996. During October
1996, the President signed an Omnibus Spending Bill passed by Congress that
provided for $1,000,000,000 in federal LIHEAP funding for 1997, an increase
of $100,000,000 over 1996 levels. During February 1997, the President
released his proposed budget which provides for federal LIHEAP funding at
$1,000,000,000 annually through fiscal year 2002. A portion of any future
increase or decrease in funding may impact MichCon's uncollectible accounts.
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.
31
<PAGE> 36
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. REGULATORY MATTERS
REGULATORY ASSETS AND LIABILITIES
MichCon's operations are subject to the provisions SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result,
several regulatory assets and liabilities are recorded in MichCon's
financial statements. Regulatory assets represent costs which will be
recovered from customers through the ratemaking process. Regulatory
liabilities represent benefits which will flow through to customers as
refunds or reduced rates. The following regulatory assets and liabilities
were reflected in the Consolidated Statement of Financial Position as of
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Thousands of Dollars) 1996 1995
- ---------------------- -------- ------------
<S> <C> <C>
Regulatory Assets:
Deferred postretirement benefit costs (Note 9).. $ 4,863 $ 12,372
Unamortized loss on retirement of debt.......... 9,237 9,773
Accrued gas cost recovery revenues.............. 27,672 -
Environmental costs (Note 6b)................... 28,233 32,000
Conservation program costs...................... 2,908 7,792
Other........................................... 1,681 6,242
-------- ----------
$ 74,594 $ 68,179
======== ==========
Regulatory Liabilities:
Unamortized investment tax credit............... $ 34,588 $ 36,437
Tax benefits amortizable to customers........... 116,313 114,487
Refunds Payable................................. 405 728
-------- ----------
$151,306 $ 151,652
======== ==========
- --------------------------------------------------------------------------------
</TABLE>
MichCon currently has regulatory precedents and orders in effect which
provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or changes in the competitive
environment could result in MichCon discontinuing the application of SFAS No.
71 for all or part of its business and require the write-off of the portion of
any regulatory asset or liability which was no longer probable of recovery or
refund. If MichCon were to have discontinued the application of SFAS No. 71 as
of December 31, 1996, it would have had an extraordinary, non-cash increase to
net income of approximately $50,000,000. Management believes that evidence
currently available supports the continued application of SFAS No. 71.
32
<PAGE> 37
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. CAPITAL AND OPERATING LEASES
MichCon leases certain property (principally an office building, a
warehouse and a parking structure) under lease arrangements expiring at various
dates to 2006, with renewal options extending beyond that date. Portions of
the office building and parking structure are subleased to various tenants.
The gross amount of assets recorded under capital leases and the related
accumulated depreciation at December 31, 1996, are $26,887,000 and $11,719,000,
respectively. The gross amount of assets and related accumulated depreciation
at December 31, 1995, were $26,887,000 and $10,429,000, respectively.
Minimum rental commitments under noncancelable leases at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(Thousands of Dollars) Leases Leases
- ---------------------- --------- ------------
<S> <C> <C>
1997................................... $ 2,908 $ 1,526
1998................................... 2,908 1,526
1999................................... 2,908 1,522
2000................................... 2,908 1,470
2001................................... 2,911 1,470
2002 and thereafter.................... 7,560 1,048
--------- --------
Total minimum lease payments........... $ 22,103 $ 8,562
========
Less: Amount representing interest.... 6,935
---------
Present value of minimum lease payments $ 15,168
Less: Current portion................. 1,411
---------
Long-term obligations.................. $ 13,757
=========
</TABLE>
Total minimum lease payments for capital and operating leases have not
been reduced by future minimum sublease receipts of $8,793,000 under
noncancelable subleases.
33
<PAGE> 38
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Capital and operating lease payments for the years ended December 31
consist of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995 1994
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Capital lease expense:
Depreciation expense....... $ 1,290 $ 1,167 $ 1,056
Interest expense........... 1,618 1,741 1,853
-------- -------- --------
Total capital
lease expense........... $ 2,908 $ 2,908 $ 2,909
======== ======== ========
Operating lease expense.. $ 3,102 $ 3,241 $ 2,400
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
9. RETIREMENT BENEFITS
A. PENSION PLAN BENEFITS
MichCon participates in separate defined benefit retirement plans for
union and nonunion employees. The plans are noncontributory, cover
substantially all employees and provide for normal retirement at age 65, but
with the option to retire earlier or later under certain conditions. The
plans provide pension benefits that are based on the employee's compensation
and years of credited service. MichCon's funding policy is to fund each
year's actuarially determined funding requirements of the plans, subject to
regulations issued by the Internal Revenue Service. Currently, these plans
meet the full funding limitations of the Internal Revenue Code.
Accordingly, no contributions for the 1996, 1995 or 1994 plan years were
made and none are expected to be made for the 1997 plan year.
Net pension cost for these plans included the following components:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995 1994
- ---------------------- ----------- ------------ -----------
<C> <C> <C> <C>
Service cost - benefits earned during the period $ 10,400 $ 8,735 $ 12,267
Interest cost on projected benefit obligation... 33,262 31,197 29,742
Net amortization and deferral................... 15,675 64,435 (59,427)
Actual (return) loss on plan assets............. (78,260) (121,508) 15,101
------- ----------- ----------
Net pension credit.............................. $ (18,923) $ (17,141) $ (2,317)
========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE> 39
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth a reconciliation of the funded status of
the plans and the amounts recorded as prepaid pension cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995
- ---------------------- ------------ --------------
<S> <C> <C>
Measurement date......................................... OCTOBER 31 October 31
Actuarial present value of:
Accumulated vested benefit obligation................... $ 349,809 $ 350,657
Accumulated nonvested benefit obligation................ 27,280 31,914
----------- -----------
Total accumulated benefit obligation................... $ 377,089 $ 382,571
=========== ===========
Projected benefit obligation for service rendered to date $ 430,100 $ 443,490
Plan assets at measurement date.......................... 707,987 657,044
----------- -----------
Plan assets in excess of projected benefit obligation.... 277,887 213,554
Unrecognized net asset at transition..................... (39,702) (44,695)
Unrecognized prior service cost.......................... (1,602) (1,765)
Unrecognized net gain.................................... (192,221) (141,656)
----------- -----------
Prepaid pension cost recognized in the Consolidated
Statement of Financial Position......................... $ 44,362 $ 25,438
=========== ===========
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 8.0% for 1996 and 7.5%
for 1995. The rate of increase in future compensation levels used was 5.0%
for 1996 and 1995. The expected long-term rate of return on plan assets,
which are invested primarily in equity and fixed income securities, was
9.25%, 9.0% and 7.5% for 1996, 1995 and 1994, respectively.
MichCon also sponsors several defined contribution pension plans.
Participation in one of these plans is available to substantially all union
and non-union employees. Company contributions to these plans are based
upon salary and the matching of employee contributions up to certain
predefined limits. The cost of these plans was $5,300,000 in 1996,
$5,200,000 in 1995, and $5,100,000 in 1994.
B. OTHER POSTRETIREMENT BENEFITS
MichCon provides certain health care and life insurance benefits for
retired employees who may become eligible for these benefits if they reach
retirement age while working for MichCon. Upon adoption in 1993 of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," MichCon deferred postretirement costs in excess of claims paid
(including the amortization of the initial transition obligation) until
January 1994 when new rates to recover such costs became effective. The
deferred costs are being amortized over 1994 through 1997.
MichCon's policy is to fund its postretirement benefit costs to the
extent such amounts are recoverable in rates. Separate qualified Voluntary
Employees' Beneficiary Association (VEBA)
35
<PAGE> 40
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
trusts exist for union and nonunion employees. Funding to the VEBA trusts
totaled $41,600,000, $27,300,000 and $8,300,000 in 1996, 1995 and 1994,
respectively. The expected weighted average long-term rate of return on
plan assets, which are invested in life insurance policies, equity
securities and fixed income securities, was 9.1% for 1996 and 8.9% for 1995.
Net postretirement cost for the years ended December 31, includes the
following components:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995 1994
- ---------------------- ---------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 4,259 $ 5,017 $ 7,464
Interest cost on accumulated benefit obligation. 16,395 18,315 21,139
Amortization of transition obligation........... 13,391 13,528 14,207
Net amortization and deferral................... (1,915) 7,445 (2,607)
Actual (return) loss on plan assets (12,230) (15,634) 489
---------- -------- ---------
19,900 28,671 40,692
Regulatory adjustment........................... 7,509 7,515 5,303
---------- -------- ---------
Net postretirement cost......................... $ 27,409 $ 36,186 $ 45,995
========== ======== =========
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE> 41
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth a reconciliation of the funded status of
the plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995
- ---------------------- ----------- ------------
<S> <C> <C>
Measurement Date............................................. OCTOBER 31 October 31
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 138,753 $ 154,967
Fully eligible active participants.......................... 25,346 27,516
Participants with less than 30 years of service............. 53,784 63,084
----------- -----------
217,883 245,567
Plan assets at measurement date.............................. 126,282 74,052
----------- -----------
Accumulated postretirement benefit obligation in excess
of plan assets.............................................. (91,601) (171,515)
Unrecognized transition obligation........................... 214,119 227,510
Unrecognized net gain........................................ (109,625) (74,752)
Contributions and adjustments made after measurement date.... 7,052 6,096
----------- -----------
Accrued postretirement asset (liability) recognized in the
Consolidated Statement of Financial Position................ $ 19,945 $ (12,661)
=========== ===========
</TABLE>
The rate at which health care costs are assumed to increase is the most
significant factor in establishing MichCon's postretirement benefit obligation.
MichCon used a rate of 7% in 1996, and a rate that gradually declines each
year until it stabilizes at 5% in 2003. A one percentage point increase in the
assumed rate would increase the accumulated postretirement benefit obligation
at December 31, 1996 by 9% and increase the sum of the service cost and
interest cost by 8% for the year then ended. The discount rate used in
determining the accumulated postretirement benefit obligation was 8% and 7.5%
for 1996 and 1995, respectively.
10. FINANCIAL INSTRUMENTS
MichCon has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in developing the estimates of fair value
presented herein; therefore, the values are not necessarily indicative of the
amounts that MichCon could realize in a current market exchange. The carrying
amounts of certain financial instruments such as customer deposits, notes
payable and notes receivable and advances are assumed to approximate the fair
value due to the short-term nature of these items.
37
<PAGE> 42
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The carrying amount and the estimated fair value of other financial
instruments consist of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995
- ---------------------- ----------------------------- -----------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Liabilities and Shareholders' Equity:
Long-term debt, excluding capital
lease obligations........................ 536,561 567,011 501,396 543,642
Redeemable cumulative preferred stock,
including current portion................ - - 2,618 2,684
Derivative Financial Instruments:
Interest rate swap agreements
with unrealized gains.................... 1,154 1,778
with unrealized losses................... 294 -
</TABLE>
- --------------------------------------------------------------------------------
The estimated fair values are determined based on the following:
Long-term debt - interest rates available to MichCon for issuance of debt
with similar terms and remaining maturities.
Redeemable cumulative preferred stock - quoted market price on the New York
Stock Exchange.
Interest rate swap - the estimated amount that MichCon would receive or pay
to terminate the swap agreements, taking into account current interest rates
and the creditworthiness of the swap counterparties and the fact that there
is no similar market for the instrument.
Guaranty - management is unable to practicably estimate the fair value of
the Harbortown guaranty (Note 6a) due to the nature of the related party
transaction and the fact there is no similar market for the instrument.
The fair value estimates presented herein are based on information
available to management as of December 31, 1996 and 1995. Management is not
aware of any subsequent factors that would significantly affect the estimated
fair value amounts.
38
<PAGE> 43
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. RELATED PARTY TRANSACTIONS
MichCon enters into transactions with affiliated companies to sell
transportation and storage services. MichCon purchased computer operations
services from Genix, which was an affiliate until it was sold in June 1996.
Under a service agreement with its parent company, MichCon receives various
tax, financial and legal services. The following is a summary of transactions
with the affiliated companies:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995 1994
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Storage and transportation sales........ $14,400 $11,100 $ 7,700
Purchase of computer operations services 6,800 15,300 15,700
Corporate expenses...................... 15,700 15,561 14,098
</TABLE>
- --------------------------------------------------------------------------------
12. SUMMARY OF INCOME TAXES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995 1994
- ---------------------- ------ ------- -------
<S> <C> <C> <C>
Effective Federal Income Tax Rate................. 33.8% 36.4% 33.3%
========= ======= ==========
Income taxes consist of:
Current provision................................ $ 31,318 $22,873 $ 55,560
Deferred provision............................... 12,018 19,988 (23,864)
Investment tax credits........................... (1,850) (1,857) (1,857)
--------- ------- ----------
Total income taxes................................ $ 41,486 $41,004 $ 29,839
========= ======= ==========
Reconciliation between statutory and actual
income taxes:
Statutory federal income taxes at a rate of 35%... $ 42,465 $39,454 $ 31,397
Adjustments to federal tax expense:
Excess of book over tax depreciation............. 6,367 7,365 6,119
Adjustments to federal income taxes provided in
prior periods................................... (3,368) (1,343) (3,888)
Amortization of investment tax credit............ (1,850) (1,857) (1,857)
Other - net...................................... (2,128) (2,615) (1,932)
--------- ------- ----------
Total income taxes................................ $ 41,486 $41,004 $ 29,839
========= ======= ==========
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE> 44
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities are recognized for the estimated
future tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The tax effect of
temporary differences that gave rise to MichCon's deferred tax assets and
liabilities consisted of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Thousands of Dollars) 1996 1995
- ---------------------- -------- -------
<S> <C> <C>
Deferred tax assets:
Uncollectibles.................................. $ 6,130 $ 4,570
Vacation accrual................................ 3,355 3,150
Other........................................... 1,010 2,003
-------- -------
Total deferred tax assets....................... 10,495 9,723
-------- -------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net................................ 62,443 54,340
Property taxes.................................. 11,040 13,333
Postretirement benefit.......................... 9,186 2,783
Gas cost recovery undercollection............... 8,455 1,785
Other........................................... 9,236 7,007
-------- -------
Total deferred tax liabilities.................. 100,360 79,248
-------- -------
Net deferred tax liability...................... 89,865 69,525
Less: Net deferred tax liability-current...... 13,342 8,379
-------- -------
Net deferred tax liability-noncurrent........... $ 76,523 $61,146
======== =======
</TABLE>
- --------------------------------------------------------------------------------
MichCon is part of the consolidated federal income tax return of MCN. The
federal income tax expense for MichCon and its subsidiaries is determined on an
individual company basis with no allocation of tax benefits or expenses from
other affiliates of MCN.
13. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units,
restricted stock or other stock-related awards to key employees, primarily
management. MichCon's current policy is to issue performance units which
encourage a strategic focus on long-term performance and have a high employee
retention value. The performance units are denominated in shares of MCN common
stock and issued to employees based on total shareholder return over a six year
period, as compared to a group of peer companies. The initial number of
performance units granted is based on total shareholder return during the
previous three year period. Participants receive dividend equivalents on the
units granted. The initial grants will be adjusted upward or downward based on
total shareholder return for the subsequent three-year period. The final
awards are then payable in shares of MCN common stock, 50% of which must be
retained by the recipient while employed by MichCon.
40
<PAGE> 45
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
During February 1996, MichCon granted 122,669 performance units with a
weighted-average grant date fair value of $24.625 per unit. During February
1995 and 1994, MichCon granted 191,500 and 94,700 performance units,
respectively. In May 1996, MichCon modified its 1995 and 1994 performance
units granted to allow limited acceleration in the vesting for a portion of the
awards. As a result, the 1995 and 1994 awards also have been accounted for
under the recognition provisions of SFAS No. 123 from the date of modification.
The weighted average modification date fair value for both 1995 and 1994
awards was $24.875 per unit. Stock-based compensation cost recognized during
1996, 1995 and 1994 for all awards outstanding totaled $6,885,000, $7,919,000,
and $4,101,000, respectively. At December 31, 1996, there were 2,773,788 MCN
shares available to be issued under the Stock Incentive Plan.
41
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
Michigan Consolidated Gas Company:
We have audited the accompanying consolidated statements of financial position
of Michigan Consolidated Gas Company and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of income,
cash flows and capitalization for each of the three years in the period ended
December 31, 1996. Our audits also included the consolidated financial
statement schedule listed in Item 8. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Michigan
Consolidated Gas Company and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information shown therein.
As discussed in Note 13 to the consolidated financial statements, in 1996 the
Company adopted Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation."
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 7, 1997
42
<PAGE> 47
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDARIES
SUPPLEMENTARY FINANCIAL INFORMATION
Quarterly Operating Results (Unaudited)
Due to the seasonal nature of MichCon's business, revenues and net income
tend to be higher in the first and fourth quarters of the calendar year.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Operating Revenue $531,392 $222,327 $117,251 $387,815
Operating Income (loss) 120,904 11,690 (18,630) 54,037
Net Income (loss) 70,040 851 (18,437) 27,388
Net Income (loss) applicable
to common stock 70,022 851 (18,437) 27,388
1995
Operating Revenues $421,812 $184,968 $107,522 $366,511
Operating Income (loss) 95,693 3,347 (9,096) 66,343
Net Income (loss) 55,610 (3,448) (13,328) 32,889
Net Income (loss) applicable
to common stock 55,536 (3,502) (13,382) 32,836
</TABLE>
43
<PAGE> 48
SCHEDULE II
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Column A Column B Column C
Additions
------------------------------------
Provisions charged to
------------------------------------
Balance at Utility Plant/
Beginning Regulatory
Description of Period Income Asset
- ---------------------------------------------------- ------------ ------------ ------------------
<S> <C> <C> <C>
Year Ended December 31, 1996
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 13,250 $ 29,052 $ -
========= ========= ==========
Reserve included in Current Liabilities - Other
and in Accrued Environmental Costs
in Consolidated Statement of Financial Position:
Environmental testing $ 35,451 $ - $ -
========= ========= ==========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 8,013 $ 3,052 $ 674
========= ========= ==========
Year Ended December 31, 1995
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 15,322 $ 15,367 $ -
========= ========= ==========
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing $ 5,540 $ - $ 32,000
========= ========= ==========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 8,402 $ 1,026 $ 686
========= ========= ==========
Year Ended December 31, 1994
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 18,776 $ 19,938 $ -
========= ========= ==========
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing $ 6,179 $ - $ -
========= ========= ==========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 9,090 $ 1,656 $ 387
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Column A Column D Column E
Deductions
for Purposes
for Which the Balance
Reserves Were at End
Description Provided of Period
- ---------------------------------------------------- -------------- --------------
<S> <C> <C>
Year Ended December 31, 1996
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 24,595 $ 17,707
========= =========
Reserve included in Current Liabilities - Other
and in Accrued Environmental Costs
in Consolidated Statement of Financial Position:
Environmental testing $ 875 $ 34,576
========= =========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 2,557 $ 9,182
========= =========
Year Ended December 31, 1995
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 17,439 $ 13,250
========= =========
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing $ 2,089 $ 35,451
========= =========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 2,101 $ 8,013
========= =========
Year Ended December 31, 1994
Reserve deducted from Assets
in Consolidated Statement of Financial Position:
Allowance for doubtful accounts $ 23,392 $ 15,322
========= =========
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing $ 639 $ 5,540
========= =========
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages $ 2,731 $ 8,402
========= =========
</TABLE>
44
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned
subsidiaries (reduced disclosure format).
ITEM 11. EXECUTIVE COMPENSATION
Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned
subsidiaries (reduced disclosure format).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned
subsidiaries (reduced disclosure format).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned
subsidiaries (reduced disclosure format).
45
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 10-K
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. For a list of the financial statements included herein, see the section
titled "Financial Statements and Supplementary Data", page 21 in Part
II, Item 8 of this Report.
2. For the financial statement schedule included herein, see the section
titled "Financial Statements and Supplementary Data", page 21 in Part
II, Item 8 of this Report.
Schedules other than those referred to above are omitted as not
applicable or not required, or the required information is shown in the
financial statements or notes thereto.
3. Exhibits, including those incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31,
1993 Form 10-Q).
3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).
4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944
(Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth
Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989
Form 8-K); Thirtieth Supplemental Indenture, dated September 1, 1991
(Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form
8-K); Thirty second Supplemental Indenture, dated January 1, 1993
(Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture,
dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093);
and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit
4-2 to Registration Statement No. 333-16285; Note - MichCon hereby
agrees to furnish to the SEC, upon request, a copy of any instruments
defining the rights of holders of long-term debt issued by MichCon.
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration
Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 10-1 to MCN's March 31, 1990
Form 10-Q).
10-3 MCN Corporation Annual Performance Plan (Exhibit 10-6 to MCN's 1993 Form
10-K).
10-4 MCN Corporation Stock Incentive Plan (Exhibit 10-1 to MCN's March 31,
1995 Form 10-Q).
10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to
MCN's September 30, 1996 Form 10-Q).
10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit
10-2 to MCN's September 30, 1996 Form 10-Q).
</TABLE>
46
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30,
1996 Form 10-Q).
10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to
MCN's 1996 Form 10-K).
10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's
1996 Form 10-K).
12-1 Computation of Ratio of Earnings to Fixed Charges.*
23-1 Independent Auditors' Consent - Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1 to
1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit
28-2 to 1989 Form 10-K).
</TABLE>
(B) REPORTS ON FORM 8-K:
None.
* Indicates document filed herewith.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference. References are to MCN (File No. 1-10070) for MCN documents
incorporated by reference.
47
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MICHIGAN CONSOLIDATED GAS COMPANY
(Registrant)
By: /s/ David R. Nowakowski
--------------------------------------
David R. Nowakowski
VICE PRESIDENT, CONTROLLER, TREASURER
AND CHIEF ACCOUNTING OFFICER
FEBRUARY 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<S> <C> <C>
* Director and Chairman February 28, 1997
- -----------------------
Alfred R. Glancy III
* Director, President and Chief February 28, 1997
- ----------------------- Executive Officer
Stephen E. Ewing
/s/ David R. Nowakowski Vice President, Controller, Treasurer February 28, 1997
- ----------------------- and Chief Accounting Officer
David R. Nowakowski
* Director, Vice President February 28, 1997
- ----------------------- and Chief Financial Officer
Howard L. Dow III
* Director, Senior Vice President February 28, 1997
- ----------------------- Regional Operations
Carl J. Croskey
* Director February 28, 1997
- -----------------------
William K. McCrackin
* Director February 28, 1997
- -----------------------
Daniel L. Schiffer
* Director, Senior Vice President February 28, 1997
- ----------------------- Process Development
John E. vonRosen
*By: /s/ David R. Nowakowski
- ----------------------------
David R. Nowakowski
Attorney-in-Fact
</TABLE>
48
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31,
1993 Form 10-Q).
3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).
4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944
(Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth
Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989
Form 8-K); Thirtieth Supplemental Indenture, dated September 1, 1991
(Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form
8-K); Thirty second Supplemental Indenture, dated January 1, 1993
(Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture,
dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093);
and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit
4-2 to Registration Statement No. 333-16285; Note - MichCon hereby
agrees to furnish to the SEC, upon request, a copy of any instruments
defining the rights of holders of long-term debt issued by MichCon.
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration
Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 10-1 to MCN's March 31, 1990
Form 10-Q).
10-3 MCN Corporation Annual Performance Plan (Exhibit 10-6 to MCN's 1993 Form
10-K).
10-4 MCN Corporation Stock Incentive Plan (Exhibit 10-1 to MCN's March 31,
1995 Form 10-Q).
10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to
MCN's September 30, 1996 Form 10-Q).
10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit
10-2 to MCN's September 30, 1996 Form 10-Q).
10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30,
1996 Form 10-Q).
10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to
MCN's 1996 Form 10-K).
10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's
1996 Form 10-K).
12-1 Computation of Ratio of Earnings to Fixed Charges.*
23-1 Independent Auditors' Consent - Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1 to
1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit
28-2 to 1989 Form 10-K).
</TABLE>
(B) REPORTS ON FORM 8-K:
None.
* Indicates document filed herewith.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference. References are to MCN (File No. 1-10070) for MCN documents
incorporated by reference.
<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
------------------- ------------------- -------------------
December 31, 1996 December 31, 1995 December 31, 1994
------------------- ------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Pre-tax income $122,239 $112,727 $ 89,707
Fixed charges 53,831 45,637 39,663
-------- -------- --------
Earnings as defined $176,070 $158,364 $129,370
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt $ 43,163 $ 35,820 $ 27,948
Interest on other borrowed funds 8,012 7,053 9,093
Amortization of debt discounts, premium
and expense 1,081 996 950
Interest implicit in rentals (2) 1,575 1,768 1,672
-------- -------- --------
Fixed charges as defined $ 53,831 $ 45,637 $ 39,663
======== ======== ========
Ratio of Earnings to Fixed Charges 3.27 3.47 3.26
======== ======== ========
</TABLE>
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with
instructions for Item 3 of Form S-3.
(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.
<PAGE> 1
Exhibit 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-16285 of Michigan Consolidated Gas Company on Form S-3 of our report dated
February 7, 1997 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's adoption of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"), appearing in this Annual Report on Form 10-K of Michigan
Consolidated Gas Company for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 28, 1997
<PAGE> 1
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Stephen E.
Ewing and David R. Nowakowski, and each of them, his true and lawful attorneys
and agents, each with full power and authority (acting alone and without the
other) to execute in his name and on his behalf and to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the year ended
December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Alfred R. Glancy III
-------------------------
Alfred R. Glancy III
<PAGE> 2
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III and David R. Nowakowski, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the other) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Stephen E. Ewing
-------------------------
Stephen E. Ewing
<PAGE> 3
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ William K. McCrackin
-------------------------
William K. McCrackin
<PAGE> 4
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III and Stephen E. Ewing, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the other) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ David R. Nowakowski
-------------------------
David R. Nowakowski
<PAGE> 5
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Carl J. Croskey
-------------------------
Carl J. Croskey
<PAGE> 6
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Howard L. Dow III
-------------------------
Howard L. Dow III
<PAGE> 7
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Daniel L. Schiffer
-------------------------
Daniel L. Schiffer
<PAGE> 8
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS
COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R.
Glancy III, Stephen E. Ewing and David R. Nowakowski, and each of them, his
true and lawful attorneys and agents, each with full power and authority
(acting alone and without the others) to execute in his name and on his behalf
and to file with the Securities and Exchange Commission an Annual Report on
Form 10-K for the year ended December 31, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ John E. vonRosen
-------------------------
John E. vonRosen
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,010
<SECURITIES> 0
<RECEIVABLES> 187,143
<ALLOWANCES> 17,707
<INVENTORY> 67,910
<CURRENT-ASSETS> 466,022
<PP&E> 2,668,294
<DEPRECIATION> 1,243,060
<TOTAL-ASSETS> 2,058,344
<CURRENT-LIABILITIES> 610,040
<BONDS> 550,318
0
0
<COMMON> 10,300
<OTHER-SE> 566,704
<TOTAL-LIABILITY-AND-EQUITY> 2,058,344
<SALES> 0
<TOTAL-REVENUES> 1,258,785
<CGS> 0
<TOTAL-COSTS> 1,090,784
<OTHER-EXPENSES> 2,744
<LOSS-PROVISION> 27,809
<INTEREST-EXPENSE> 48,715
<INCOME-PRETAX> 121,328
<INCOME-TAX> 41,486
<INCOME-CONTINUING> 79,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,824
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
