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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 Energy Group Inc.
Documents Incorporated by Reference: None
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KEY TO ABBREVIATED TERMS
<TABLE>
<CAPTION>
<S> <C>
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, is allowed to recover its 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 Energy Group Inc. and its subsidiaries.
MichCon.............................................. Michigan Consolidated Gas Company; a wholly owned
natural gas distribution and intrastate transmission
subsidiary of MCN.
MichCon Pipeline Co.................................. A wholly owned subsidiary of MichCon that engages in
pipeline projects through its subsidiaries.
</TABLE>
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KEY TO ABBREVIATED TERMS
(concluded)
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- NUMBER
------
<S> <C>
Part I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 9
Item 3. Legal Proceedings............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 10
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......................................................................... 44
Part III
Item 10. Directors and Executive Officers of the Registrant........................................... 44
Item 11. Executive Compensation....................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 44
Item 13. Certain Relationships and Related Transactions............................................... 44
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.............................. 45
Signatures ............................................................................................. 47
</TABLE>
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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 natural
gas utility primarily engaged in the distribution and transmission of natural
gas in the state of Michigan. MichCon also has subsidiaries involved in the
gathering and transmission of natural gas in northern 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, 1997, MichCon and its subsidiaries employed 2,867
persons. Of that number, slightly less than half are covered by five
collective bargaining agreements. In December 1997, MichCon successfully
negotiated and signed two collective bargaining agreements. The remaining
three agreements covering approximately 15% of the workforce 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 sale 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 network to transport the gas to their
facilities.
Intermediate Transportation - Provides transportation service through the
Company's gathering and high pressure transmission system to producers, brokers
and other local distribution companies that own the natural gas, but are not the
ultimate consumer.
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUE (In millions of dollars)
Gas Sales................................................ $ 1,062.8. $ 1,085.8 $ 917.2
End User Transportation.................................. 84.5. 82.2 80.4
Intermediate Transportation.............................. 55.2. 48.6 31.9
-------------- --------------- ----------------
Total Sales and Transportation ...................... 1,202.5. 1,216.6 1,029.5
-------------- --------------- ----------------
Other ................................................... 51.2. 42.2 51.3
============== =============== ================
Total Operating Revenues ............................ $ 1,253.7. $ 1,258.8 $ 1,080.8
============== =============== ================
MARKETS (Bcf)
Gas Sales................................................ 205.8 217.7 206.9
End User Transportation.................................. 145.0 146.7 145.3
Intermediate Transportation.............................. 586.4 527.5 341.6
============== =============== ================
Total Sales and Transportation ...................... 937.2 891.9 693.8
============== =============== ================
</TABLE>
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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>
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Percentage Colder Than Normal....................................... 0.8% 5.4% 0.3%
Increase From Normal in:
Gas Markets (in Bcf)............................................ 0.6 10.9 1.5
Net Income (in Millions)........................................ $ 0.5 $ 9.9 $ 1.4
</TABLE>
GAS SALES: Revenues decreased $23.0 million in 1997 due primarily to
reduced gas sales as a result of warmer weather, partially offset by higher
prices to recover gas costs. This market represents 22% of total deliveries and
produced approximately 75% of MichCon's gross profit margin from sales and
transportation services (gross profit margin). The average margin per Mcf from
gas sales was $2.09 in 1997 and $2.06 in 1996.
Competition in the gas sales market comes primarily from alternative fuels
such as electricity, propane and, to a lesser degree, oil and wood, and other
natural gas providers in a few areas. 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 take steps to become the preferred provider of natural
gas and high-value energy services within Michigan and to maintain financial
results. 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'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 switch to natural gas for space heat and other
applications. This program has contributed 15% of the 72,673 new customers added
during the past 3 years. In 1997, 9 new areas of Michigan were served by
MichCon, bringing the total number of new areas added since the program's
inception in 1984 to 137.
Cost of gas sold per Mcf for 1997 was $3.11, an increase of $.19 (6.5%)
over 1996. MichCon still retained a significant cost advantage over competing
fuels. Cost of gas sold per Mcf for 1996 increased from 1995 by $.56 (24%).
END USER TRANSPORTATION: Deliveries decreased in 1997 as a result of warmer
weather. In 1997, this market accounted for 15% of total gas deliveries and
produced approximately 15% of MichCon's gross profit margin.
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At December 31, 1997, MichCon had end user transportation agreements
representing annual volumes of 151 Bcf. Approximately 56% of these volumes are
under contracts that extend to 1999 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 1998 and
relate to a large number of low volume users with relatively low price
sensitivity.
Through technical and financial assistance, industrial and commercial
customers have been encouraged to increase the use of natural gas. The natural
gas-fueled power generation market accounted for approximately 31 Bcf of gas
deliveries in both 1996 and 1997. 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 such as coal, electricity, oil and steam. In addition,
some of these customers could bypass MichCon's distribution system and obtain
gas 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 other company's 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 any significant fuel switching by its customers. In 1997,
approximately 22 Bcf of MichCon's transportation deliveries were to customers
who displaced coal with natural gas.
Although the MPSC has approved a direct access program for the state's two
largest electric utilities which will allow large electric users to directly
purchase lower priced electricity, beginning in mid-1998, this program is not
expected to materially impact the competitiveness of natural gas.
INTERMEDIATE TRANSPORTATION: This service accounts for 63% of total gas
volumes but, due to the lower rates applicable to this service, represents only
10% of MichCon's gross profit margin. The increases in intermediate
transportation deliveries in 1997 and 1996 are due primarily to the sale of
additional transportation services including increased transportation volumes of
Michigan gas production. Volumes were also impacted by lower deliveries to major
fixed-fee customers in 1997 compared to increased deliveries in 1996. Although
volumes for these fixed-fee customers have varied, the related revenues were not
significantly affected.
MichCon's extensive transmission pipeline system has enabled it to increase
the volumes transported for Michigan gas producers, marketers, distribution
companies and other pipelines. 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.
In 1997, through efficient use of transmission and storage assets as well
as upstream supply, MichCon sold significant short-term services resulting in
increased revenues from 1996.
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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, which is owned by MichCon Pipeline Company (MichCon Pipeline).
This expansion contributed 128.5 Bcf in volumes transported during 1997 and 75
Bcf in 1996.
MichCon Pipeline, a wholly-owned, non-utility subsidiary of MichCon, is
involved in ventures that transport natural gas and natural gas liquids from
northern and east-central Michigan gas fields to processing plants in the
northern part of the state. In December 1997, MichCon Pipeline purchased a
pipeline to expand the transportation capacity of its northern Michigan
gathering system. The cost of the pipeline was approximately $13 million and is
expected to transport approximately 44 Bcf of Antrim gas annually. During 1997,
MichCon Pipeline transported an average of 646 MMcf/d of natural gas and related
liquids. The transportation rate on the Saginaw Bay Pipeline, which was to
decrease 40% in accordance with the terms of a contract that reduces the
transportation rate for the last 10 years of the agreement was successfully
renegotiated at the maximum MPSC approved rate during 1997. Moreover, Saginaw
Bay was successful in restructuring all transportation contracts relating to the
Saginaw Bay Pipeline to the maximum tariff rates.
In January 1997, MichCon placed into service a 59-mile loop of its existing
Milford to Belle River Pipeline at a cost of approximately $91 million. The
pipeline has improved the overall reliability and efficiency of MichCon's gas
storage and transmission system by mitigating the risk of disruption in the
operation of the existing pipeline or other facilities used to supply gas to
MichCon's customers. In addition, the pipeline provides significant off-system
transportation opportunities as discussed below.
With significant new supplies of western Canadian gas projected into the
Chicago area beginning in November 1998, MichCon is in an excellent position
to increase revenues through transportation to growing markets in eastern
Canada and the Northeast U.S. In December 1997, MichCon entered into a
long-term lease of capacity on its Milford to Belle River Pipeline with
Vector Pipeline to effectuate transportation from Chicago supplies to Dawn,
Ontario if and when Vector is constructed and placed in service, potentially
in late 1999 or 2000. Additional opportunities for transportation services are
being pursued which will further maximize the use of MichCon's existing
transmission infrastructure.
In 1998 MichCon expects to 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 facilities. This project will further
enhance MichCon's ability to transport gas bound for both Canadian and Northeast
U.S. markets.
ENERGY ASSISTANCE 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 Family Independence Agencys' State Emergency Relief 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) which funds
the State of Michigan's Home Heating Credit program. In 1997 Congress provided
$1.0 billion for LIHEAP and supplemented it
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with a $300 million emergency fund that could be tapped only upon order of the
President. The State of Michigan received $64 million of the total $1.2 billion
that was released in 1997. The bulk of this money was passed on to qualified
taxpayers in the form of Michigan Home Heating Credits. MichCon received $12.7
million through this program in 1997. Home Heating Credits assisted 83,000
MichCon customers in 1997. Congress voted to continue LIHEAP in 1998 and 1999.
For federal Fiscal Year 1998, which began October 1, 1997, Congress continued
funding at the $1.0 billion level and again authorized a $300 million emergency
fund. In addition, it appropriated $1.1 billion for federal Fiscal Year 1999
subject to revision as part of Congress' 1999 budget deliberations. MichCon is
currently working with federal and state officials to identify other ways to
obtain energy assistance for low-income customers, and is taking actions to
minimize the impact a reduction in LIHEAP funds could have on MichCon's
financial position.
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 among comparable gas
utilities in the Midwest. Although MichCon's gas costs rose 6.5% during the year
to $3.11 per Mcf, they remained in the lowest quartile among a group of 22
utilities in the region, having decreased 15% over the last ten years. MichCon
believes that its gas purchasing strategies will enable it to maintain its low
cost position. Cost of gas sold decreased in 1997 as a result of lower sales
volumes, due primarily to warmer weather as well as supplier refunds. Under its
gas cost recovery mechanism, MichCon expects to continue to collect all of its
cost of gas sold.
Gas Supply Purchases(Bcf)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- -----------------
<S> <C> <C> <C>
Long-term Supply:
Michigan Producers..................................... 66.0 86.3 90.9
Interstate Suppliers................................... 13.8 14.5 18.2
Canadian Suppliers..................................... 31.3 37.3 31.5
Spot Market............................................... 85.8 90.6 52.2
-------------- --------------- ----------------
196.9 228.7 192.8
============== =============== ================
</TABLE>
MichCon purchased 34% of its 1997 supply from Michigan producers, 50% from
producers in the southern and midcontinent regions of the United States and 16%
from Canadian producers. These supplies are complemented by 130 Bcf of working
storage capacity from storage fields owned and operated by MichCon in Michigan,
of which 25 Bcf is leased to others.
MichCon has long-term firm transportation agreements with ANR and Great
Lakes Gas Transmission Limited Partnership (Great Lakes). Under these
agreements, 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, while Great Lakes is obligated to transport 30 MMcf/d. These
transportation agreements expire on various dates between 1999 and 2011.
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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 price volatility related to spot market prices for sales customers,
MichCon has been authorized by the MPSC to change its supply strategy to
purchase up to one-third of its gas under fixed price contracts.
MichCon has also developed a program for fixing the prices of individual
forward months for a maximum of one-third of its supply. This program is based
on an analysis of the historic price activity over the past five years, and
would give MichCon the flexibility to take advantage of price dips below
historical averages. This program was implemented in March 1997 and since that
time small blocks of gas have been purchased at fixed prices for 1998.
At December 31, 1997, 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 1997,
MichCon's maximum one-day sendout exceeded 2.3 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 leases 25 Bcf 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 and transportation rates, service and
accounting. MichCon is also subject to the requirements of other regulatory
agencies with respect to safety, the environment and health.
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, 1997 is approximately $1.7 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.
MichCon filed an application with the MPSC in October 1996 requesting
authority to decrease depreciation rates from the existing 4.09% to 3.44%. In
December 1997 the MPSC issued an order approving a reduction in annual
depreciation costs by more than $16 million. While the Michigan Attorney General
has appealed the depreciation order, management believes the MPSC order
approving the lower depreciation rates will be upheld.
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
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GCR customers using the rolled-in prospective refunding methodology approved by
the MPSC on June 30, 1994.
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. The total
1996 underrecovery was rolled into MichCon's 1997 GCR cost recovery, pursuant to
the prospective refunding methodology discussed above. In September 1997, the
MPSC issued an order finding that all of MichCon's 1996 gas costs were
reasonable and prudent, including $4.4 million in interest costs from Panhandle
related to certain direct billings.
In July 1997, MichCon filed its 1998 GCR Plan Case. An MPSC order is
expected in May 1998.
In February 1998, MichCon filed its 1997 GCR reconciliation case indicating
a net under-recovery of approximately $13 million, including interest. An MPSC
order is expected in late 1998.
ENVIRONMENTAL MATTERS
Prior to the 1940's when major natural gas pipelines became sufficient to
meet MichCon's supply requirements, 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
by-products 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 is 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 four of these sites and
conducting more extensive investigations at four other former MGP 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. The findings of these investigations indicated
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.
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MichCon notified more than 40 current and former insurance carriers of the
environmental conditions at these former MGP sites. MichCon concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MichCon filed suit against major
nonsettling carriers seeking recovery of incurred costs and a declaratory
judgment of the carriers' liability for future costs of environmental
investigation and remediation costs at former MGP sites.
During 1997, 1996 and 1995, MichCon spent $0.8 million, $0.9 million and
$2.1 million, respectively, investigating and remediating these former MGP
sites. At December 31, 1997, the reserve balance was $33.7 million, of which
$1.7 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 over 530 cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year
maximum duration. In 1993, MichCon began a structured process to renew or
re-establish previously expired formal franchises in 233 municipalities. During
the period between 1994 and 1997 an additional 168 franchises expired. To date,
381 franchises have been renewed, 11 of which were renewed in 1997 which account
for gas sales volumes of approximately 40 Bcf annually. Additionally, two new
franchises were acquired. There were no franchises lost.
As for the 20 franchises that are currently expired, MichCon's gas
distribution systems are rightfully occupying the streets with the consent or
acquiescence of the municipalities. While MichCon could be ordered by any
municipality in which its franchise has expired to remove its property, it could
be deprived of ownership only by its consent and the payment of an agreed upon
price, or by condemnation and the payment of the fair market 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.
Public utility franchises in Michigan are non-exclusive. Construction under
a second franchise granted to another public utility requires authorization by
the MPSC, which considers, 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 June 1996, a
statutory amendment was adopted which provides that only irrevocable franchises
need municipal voter confirmation. The amendment further clarified that
franchises which are not voter confirmed are valid but revocable. In light of
that amendment, the Michigan Supreme Court dismissed as moot an appeal involving
MichCon concerning the status of utility franchises which had not received voter
confirmation.
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ITEM 2. PROPERTIES
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1997, MichCon's
distribution system included 16,537 miles of distribution mains, 1,076,212
service lines and 1,190,314 active meters. MichCon owns 2,549 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. In January 1998 MichCon purchased its principal
office building in Detroit, The Guardian Building, ending its long-term capital
lease obligation. MichCon occupies its principal office building in Grand Rapids
under a long-term lease. 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 1997 totaled
$155.2 million. MichCon's capital requirements for 1998 are anticipated to be
approximately $200 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 Pipeline Company, a wholly owned subsidiary of MichCon Pipeline Co.,
owns an 82.62% interest in Jordan Valley Pipeline, a 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, 11-mile and 25.2 mile major gathering
lines and a 2400 horsepower compressor station.
Thunder Bay 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 miles of gathering lines.
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.
9
<PAGE> 14
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 taken any subsequent action against MichCon. 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 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.
10
<PAGE> 15
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 $40.0 million in 1997, $11.3 million in 1996
and $6.5 million in 1995 on its common stock.
11
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Selected Financial Data 1997 1996 1995 1994 1993
- ------------------------------------------------- ---------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
INCOME AVAILABLE FOR COMMON STOCK ............... $ 79,020 $ 79,824 $ 71,488 $ 59,387 $ 61,649
=========== =========== =========== =========== ===========
Cash Dividends Declared on Common Stock ......... $ 40,000 $ 11,000 $ 6,500 $ 8,500 $ 75,000
=========== =========== =========== =========== ===========
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY.... 13.3% 14.7% 15.8% 15.2% 16.6%
=========== =========== =========== =========== ===========
PROPERTY, PLANT AND EQUIPMENT ................... $ 2,790,352 $ 2,668,294 $ 2,413,120 $ 2,189,150 $ 2,084,516
Less - accumulated depreciation and depletion.... 1,322,392 1,243,060 1,151,160 1,071,588 1,024,009
----------- ----------- ----------- ----------- -----------
Net property, plant and equipment ............... $ 1,467,960 $ 1,425,234 $ 1,261,960 $ 1,117,562 $ 1,060,507
=========== =========== =========== =========== ===========
TOTAL ASSETS .................................... $ 2,136,336 $ 2,058,344 $ 1,798,493 $ 1,571,910 $ 1,509,120
=========== =========== =========== =========== ===========
CAPITAL EXPENDITURES ............................ $ 155,208 $ 212,668 $ 235,767 $ 145,421 $ 141,279
=========== =========== =========== =========== ===========
CAPITALIZATION
Long-term debt .................................. $ 611,763 $ 536,561 $ 501,396 $ 431,870 $ 353,214
Long-term capital lease obligations ............. 5,344 13,757 15,168 16,459 17,625
Redeemable cumulative preferred stock ........... -- -- -- 2,618 5,618
Common shareholder's equity ..................... 616,024 577,004 489,821 417,833 365,785
----------- ----------- ----------- ----------- -----------
Total capitalization ............................ $ 1,233,131 $ 1,127,322 $ 1,006,385 $ 868,780 $ 742,242
=========== =========== =========== =========== ===========
SOURCES OF OPERATING REVENUES
Gas sales ....................................... $ 1,079,530 $ 1,058,499 $ 896,707 $ 954,537 $ 1,079,020
Application of (provision for) refunds-net ...... (16,736) 27,346 20,473 223 (3,164)
End user transportation ......................... 84,516 82,210 80,360 76,228 71,412
Intermediate transportation ..................... 55,221 48,570 31,913 28,745 19,638
Storage services ................................ 7,630 6,956 8,857 8,054 9,084
Conservation and other assistance programs ...... (2,914) (2,483) 14,499 18,716 23,935
Other ........................................... 46,432 37,687 28,004 25,175 23,590
----------- ----------- ----------- ----------- -----------
Total operating revenues ........................ $ 1,253,679 $ 1,258,785 $ 1,080,813 $ 1,111,678 $ 1,223,515
=========== =========== =========== =========== ===========
DISPOSITION OF GAS (MMCF)
Gas sales ....................................... 205,760 217,672 206,951 201,423 250,510
End user transportation ......................... 144,963 146,662 145,288 139,800 128,409
Intermediate transportation ..................... 586,496 527,510 341,550 303,617 281,116
----------- ----------- ----------- ----------- -----------
937,219 891,844 693,789 644,840 660,035
Company use and lost gas ........................ 3,896 5,746 2,990 2,239 3,828
----------- ----------- ----------- ----------- -----------
Total disposition of gas ........................ 941,115 897,590 696,779 647,079 663,863
=========== =========== =========== =========== ===========
DEGREE DAYS
For calendar period ............................. 6,830 7,171 6,777 6,489 6,675
Percent colder (warmer) than normal ............. 0.8% 5.4% 0.3% (4.2)% (2.2)%
UTILITY CUSTOMERS
Residential ..................................... 1,092,334 1,087,450 1,077,668 1,061,300 1,050,188
Total ........................................... 1,178,543 1,169,690 1,159,140 1,141,463 1,129,416
EMPLOYEES ....................................... 2,867 3,062 3,128 3,273 3,364
</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 1997 were $79.0 million, a decrease of $0.8 million from 1996.
The 1997 decrease is due primarily to lower gross margins caused by warmer
weather, and higher depreciation and financing costs due to capital investments,
partially offset by lower operation and maintenance expenses. Earnings for 1996
increased by $8.3 million over 1995 due primarily to increased gross margins
resulting from higher gas sales and transportation deliveries due to colder
weather.
<TABLE>
<CAPTION>
EARNINGS COMPONENTS (IN MILLIONS)
COMPARING 1997 TO 1996 COMPARING 1996 TO 1995
--------------------------------- ------------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
CHANGE CHANGE CHANGE CHANGE
------ ------ ------ -------
<S> <C> <C> <C> <C>
Operating Revenues ................. $(5.1) (0.4)% $178.0 16.5%
Cost of Gas ........................ (4.4) (0.7) 152.6 31.5
Gross Margin ....................... (0.7) (0.1) 25.4 4.3
Operation and Maintenance .......... (11.6) (4.0) (0.1) (0.1)
Depreciation and Depletion ......... 5.6 5.7 9.0 10.1
Property and Other Taxes ........... (1.0) (1.7) 4.8 8.3
Other Income and Deductions ........ 3.3 7.0 3.3 7.4
Income Tax Provision ............... 4.2 10.1 0.5 1.2
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) decreased in 1997 and
increased in 1996, reflecting varying gas sales and end user transportation
deliveries due primarily to significantly colder weather in 1996. Additionally,
gross margins increased in both periods as a result of the continued growth in
intermediate transportation services. Margins in 1997 were also impacted by
increased other operating revenues resulting from initiatives to grow revenues
by providing gas-related services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
---------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Percentage Colder than Normal............................... 0.8% 5.4% 0.3%
Increase from Normal in:
Gas Markets (Bcf) ....................................... 0.6 10.9 1.5
Net Income (Millions) ................................... $0.5 $9.9 $1.4
</TABLE>
13
<PAGE> 18
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Gas Markets ($ Millions)
Gas Sales.......................................... $ 1,062.8 $ 1,085.8 $ 917.2
End User Transportation............................ 84.5 82.2 80.4
Intermediate Transportation........................ 55.2 48.6 31.9
Other ............................................. 51.2 42.2 51.3
--------- --------- ----------
$ 1,253.7 $ 1,258.8 $ 1,080.8
========= ========= ==========
Gas Markets (Bcf)
Gas Sales.......................................... 205.8 217.7 206.9
End User Transportation ........................... 145.0 146.7 145.3
Intermediate Transportation ....................... 586.4 527.5 341.6
----- ----- -----
937.2 891.9 693.8
===== ===== =====
</TABLE>
Operating Revenues
Gas sales and end user transportation revenues in total decreased $20.7
million in 1997 and increased $170.4 million in 1996. The decrease in revenues
for 1997 is due primarily to reduced gas sales and end user transportation
deliveries as a result of warmer weather, partially offset by higher prices to
recover gas costs. The increase in 1996 gas sales and end user transportation
revenues was due primarily to colder weather and higher prices to recover gas
costs, as well as marketing initiatives that expanded gas markets.
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 most recent 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 in 1995. 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 1997 and 1996
are due primarily to increased transportation of Antrim gas for Michigan gas
producers and brokers. 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. This expansion contributed 128.5 Bcf in
volumes transported during 1997 and 75 Bcf in 1996.
In December 1997, MichCon purchased a pipeline to expand the transportation
capacity of its northern Michigan gathering system. The cost of the pipeline was
approximately $13 million and is expected to transport approximately 44 Bcf of
Antrim gas annually.
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 76.5 Bcf in volumes
transported during 1997 and 63.3 Bcf in 1996.
14
<PAGE> 19
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other operating revenue increased $9.0 million in 1997 due primarily to
increased merchandise sales and other gas-related services. The decrease of $9.2
million in the 1996 other operating revenue was due primarily to the
discontinuance of MichCon's conservation program, partially offset by an
increase in gas processing revenues generated from the Michigan pipeline
operations which were transferred from MCN to MichCon at the beginning of 1996.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon recovers all of
its reasonably and prudently incurred cost of gas sold. As a result,
fluctuations in cost of gas sold have little or no effect on gross margins.
Cost of gas sold decreased in 1997 due to lower sales volumes, due
primarily to warmer weather, as well as supplier refunds. Substantially
offsetting this decrease was higher spot market prices resulting in a $.19
(6.5%) increase in the cost of good sold per Mcf. In 1996, cost of gas sold
increased 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 for 1996 increased from 1995 by $.56 (24%) per Mcf. To mitigate
price volatility related to spot market prices for sales customers, MichCon has
been authorized by the Michigan Public Service Commission (MPSC) to change its
supply strategy to purchase up to one-third of its gas under fixed price
contracts.
As previously discussed, cost of gas is affected by variations in lost gas
amounts. Lost gas costs for 1997 decreased by $0.5 million and increased in 1996
by $6.6 million.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased in 1997 due to decreased
pension and retiree health care costs and uncollectible gas accounts expense.
Partially offsetting the decrease in 1997 were higher operating expenses related
to the increase in merchandise sales. Operation and maintenance expenses
decreased slightly in 1996. This was a result of decreased benefit costs,
primarily pension and retiree health care costs and a decrease in expenses
related to the conservation program. This decrease was offset by increased
uncollectible gas accounts expense and additional expenses related to the
transfer of the Michigan pipeline operations from MCN to MichCon. Uncollectible
gas accounts were driven higher by 1996's colder temperatures and rising gas
prices which significantly increased customers' heating bills. The impact of
higher heating bills was aggravated by a reduction and delay in the home heating
assistance funding obtained by low-income customers.
MichCon receives a significant amount of its heating assistance funding
from the federal Low-Income Home Energy Assistance Program (LIHEAP). Congress
increased the program's funding to $1 billion for the 1997 fiscal year. The
State of Michigan's share of LIHEAP funds was increased from $47.5 million in
fiscal year 1996 to $64 million in 1997. The bulk of this money was passed on to
qualified taxpayers in the form of Michigan Home Heating Credits. MichCon
received $12.7 million through this effort, $3.5 million more than in 1996. Home
Heating Credits assisted 83,000 MichCon customers in 1997, compared to 74,000 in
1996. During 1997, Congress approved a budget which provides for federal LIHEAP
funding at $1 billion and $1.1 billion for fiscal years 1998 and 1999,
respectively. 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 other ways to obtain energy assistance for
low-income customers, and is taking actions to minimize the impact a reduction
in LIHEAP funds could have on MichCon's financial position.
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 1997 and 1996 were due
to higher plant balances reflecting capital expenditures of $603.6 million over
the past three years. The MPSC approved lower depreciation rates for MichCon
effective January 1, 1998. In 1998, these new depreciation rates will largely
offset the increase in depreciation expense resulting from additional capital
expenditures. While the Michigan Attorney General has appealed the depreciation
order, management believes the MPSC order approving the lower depreciation rates
will be upheld.
PROPERTY AND OTHER TAXES
Property and other taxes decreased in 1997. The Company reduced its
property taxes for 1997 based on pending appeals of personal property tax
assessments. The Company has been assessed additional amounts which are being
protested. The Company does not believe payments of these additional amounts is
probable. Offsetting the reduction in 1997 property and other taxes was an
increase in Michigan single business taxes. Property and other taxes increased
in 1996 as a result of higher plant balances.
OTHER INCOME AND DEDUCTIONS
Other income and deductions increased in 1997 and 1996 due to additional
interest expense on long-term debt required to finance capital investments.
Other income and deductions for 1997 was partially offset by reduced interest on
lower outstanding commercial paper. In 1996 other income and deductions was
partially offset by an increase in the capitalization of the cost of funds used
during construction resulting from higher construction balances.
Interest on long-term debt increased in 1997 as a result of issuing first
mortgage bonds in the aggregate of $85 million and MichCon's nonutility
subsidiaries borrowing $40 million under a nonrecourse credit agreement.
INCOME TAX PROVISION
Income taxes for 1997 increased as a result of higher earnings. The
increase in income taxes was also impacted by the amounts recorded in 1996 for
the favorable resolution of prior years' tax issues and tax credits. Income
taxes for 1996 remained consistent with 1995 despite the increase in earnings
due to an increase resulting from the favorable resolution of prior year tax
issues.
ENVIRONMENTAL MATTERS
Prior to the 1940's when major natural gas pipelines became sufficient to
meet MichCon's supply requirements, 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
by-products 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 is 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 four of these sites and
conducting more extensive investigations at four other former MGP 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. The findings of these investigations indicated
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 $32 million during
1995.
MichCon notified more than 40 current and former insurance carriers of the
environmental conditions at these former MGP sites. MichCon concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MichCon filed suit against major
nonsettling carriers seeking recovery of incurred costs and a declaratory
judgment of the carriers' liability for future costs of environmental
investigation and remediation costs at former MGP sites.
During 1997, 1996 and 1995, MichCon spent $0.8 million, $0.9 million and
$2.1 million, respectively, investigating and remediating these former MGP
sites. At December 31, 1997, the reserve balance is $33.7 million, of which $1.7
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 increased $85.6 million in
1997 from 1996 and decreased $56.5 million in 1996 compared to 1995. The 1997
increase was due primarily to lower working capital requirements reflecting a
reduction in the gas cost recovery undercollection and gas in inventory,
partially offset by lower net income after adjusting for depreciation and
deferred taxes. The 1996 decrease in cash flow from operating activities was 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 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
17
<PAGE> 22
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
seasonal short-term borrowing needs, MichCon normally issues commercial paper
which is backed by credit lines with several banks. MichCon has established
credit lines to allow for borrowings of up to $150 million under a 364-day
revolving credit facility and up to $150 million under a three-year revolving
credit facility both of which expire July 1998. Commercial paper of $236.7
million was outstanding as of December 31, 1997.
During 1997, MichCon issued $85 million of first mortgage bonds under its
existing shelf registrations. The funds from this issuance were used to retire
first mortgage bonds, fund capital expenditures and for general corporate
purposes. The existing shelf registration will allow MichCon to issue up to $215
million of debt securities. MichCon's capital requirements and general market
conditions will affect the timing and amount of future issuances.
MichCon issued $70 million of first mortgage bonds in both 1996 and 1995.
The 1996 and 1995 proceeds were used to repay short-term obligations, to finance
capital expenditures and for general corporate purposes.
During 1997, subsidiaries of MichCon borrowed $40 million under a
nonrecourse credit agreement that matures in 2005. Proceeds were used to finance
the expansion of its northern Michigan gathering system.
During the 1997 second quarter, MichCon redeemed $17 million of long-term
debt. MichCon also repaid $50 million of first mortgage bonds on its stated
maturity date in May 1997.
MichCon repaid all amounts owing under its Trust Demand Note and did not
renew this program which expired in March 1997 and allowed for borrowings of up
to $25 million.
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.
Consistent with MichCon's capitalization objective, at December 31, 1997,
the capitalization ratio was approximately 50% debt and 50% equity excluding
nonrecourse debt.
INVESTING ACTIVITIES
MichCon's capital expenditures for 1997 totaled $155.2 million representing
a decrease of $57.5 million compared to 1996. MichCon's capital requirements for
1998 are expected to approximate $200 million for capital investments. 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, distribution,
transmission and information systems.
18
<PAGE> 23
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
As described in Note 9 to the consolidated financial statements, in
December 1997, MichCon invested $31.3 million in a Grantor Trust to meet future
cash flow obligations related to certain postretirement health care costs.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital requirements.
OUTLOOK
MichCon's strategy is to aggressively expand its role as a major 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 20,000 new customers in
1998. MichCon's market share for residential heating customers in the
communities in which it serves is approximately 80%. While this saturation rate
is high, significant opportunities exist through conversion of existing homes
from other fuels 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 has signed contracts with Detroit
Edison and other utilities to share the cost of payment processing, meter
reading and staking of underground facilities. MichCon is continuing to explore
opportunities to share the cost of common, duplicative operating functions.
In December 1997, MichCon announced an early retirement incentive program.
This program is available to approximately 10% of MichCon's work force.
Management does not believe that these costs will have a material impact on 1998
net income. However, it is expected to contribute to lower operating costs in
future years.
The challenges and opportunities resulting from increased competition in
the natural gas industry have been a catalyst for MPSC action in the development
of major reforms in utility regulation aimed at giving all customers added
choices and more price certainty. The overall package of regulatory changes
connected with the gas industry restructuring is expected to generate additional
revenue and cost savings 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 safe and reliable system
for customers. MichCon remains focused on these goals in 1998 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."
Future regulatory changes or changes in the competitive environment could result
in MichCon discontinuing the application of SFAS 71 for all or part if
its business and requires the write-off of the portion of any regulatory
asset or liability that is no longer probable of recovery or refund. If
MichCon were to have discontinued the application of SFAS 71 for all of its
operations as of December 31, 1997, it would have had an extraordinary,
non-cash increase to net income of approximately $46 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)
19
<PAGE> 24
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Concluded)
a significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. Based on a current
evaluation of the various factors and conditions that are expected to impact
future regulation, MichCon believes that its regulatory assets are probable of
future recovery.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996 the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board reached a consensus that the costs associated with modifying
internal use software for the year 2000 should be expensed as incurred. The year
2000 issue is the result of computer programs being written using two digits
rather than four digits to define the year. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could cause computer systems to perform inaccurate
calculations.
MichCon has established processes for evaluating and managing the risks and
costs associated with the year 2000 issue. MichCon has conducted a review to
identify computer systems that could be affected by the inability of these
systems to properly recognize the digits for the year 2000. MichCon has
developed a corrective plan and is currently implementing such plan. Based on
the corrective plan, costs associated with the year 2000 issue are estimated to
total approximately $3 million to $4 million over the next two years. The
anticipated costs are not higher due in part to the ongoing replacement of
significant old systems. New systems in process of being installed as well as
those installed over the past few years are year 2000 compliant. These systems
were necessary to maintain a high level of customer satisfaction and to respond
to changes in regulation and increased competition within the energy industry.
MichCon is working with its suppliers and operators to mitigate any adverse
effects of their system failures on MichCon. As a result, management cannot
quantify the impact to MichCon of other companies' system failures, but does not
expect it to be material.
In 1997 the EITF reached a consensus that the cost of business process
re-engineering activities, whether done internally or by third parties, is to be
expensed as incurred. This consensus also applies when the business process
re-engineering activities are part of a project to acquire, develop or implement
internal-use software. Management does not expect the financial impact of such
activities to be material to MichCon's financial results or operations.
FORWARD-LOOKING STATEMENTS
The Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve certain risks and uncertainties that may
cause actual future results to differ materially from those contemplated,
projected, estimated or budgeted in such forward-looking statements. Factors
that may impact forward-looking statements include, but are not limited to, the
following: (i) the effects of weather and other natural phenomenon; (ii)
increased competition from other energy suppliers as well as alternative forms
of energy; (iii) the capital intensive nature of MichCon's business; (iv)
economic climate and growth in the geographic areas in which MichCon does
business; (v) the uncertainty of gas reserve estimates; (vi) the timing and
extent of changes in commodity prices for natural gas, electricity and crude
oil; (vii) conditions of capital markets and equity markets, and (viii) the
effects of changes in governmental policies and regulatory actions, including
income taxes, environmental compliance and authorized rates.
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............................................................................... 41
Supplementary Financial Information - Quarterly Operating Results (Unaudited).............................. 42
Financial Statement Schedule for each of the three years in the period ended
December 31, 1997, unless otherwise noted-
Schedule II - Valuation and Qualifying Accounts........................................................ 43
</TABLE>
21
<PAGE> 26
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------- ------------- ------------- -------------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas Sales......................................... $ 1,062,794 $ 1,085,845 $ 917,180
Transportation and storage services............... 11 147,367 137,737 121,130
Other............................................. 43,518 35,203 42,503
------------- ------------- -------------
Total Operating Revenues........................ 1,253,679 1,258,785 1,080,813
------------- ------------- -------------
OPERATING EXPENSES
Cost of gas....................................... 632,229 636,594 483,962
Operation and maintenance......................... 11 282,640 294,281 294,424
Depreciation and depletion........................ 103,703 98,147 89,128
Property and other taxes.......................... 60,744 61,762 57,012
------------- ------------- -------------
Total operating expenses........................ 1,079,316 1,090,784 924,526
------------- ------------- -------------
OPERATING INCOME.................................... 174,363 168,001 156,287
------------- ------------- -------------
EQUITY IN EARNINGS OF JOINT VENTURES................ 1,199 886 739
------------- ------------- -------------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 4,659 3,900 3,983
Interest on long-term debt........................ (45,526) (40,703) (35,047)
Other interest expense............................ (8,664) (8,012) (7,053)
Minority interest................................. 5 (1,882) (988) -
Other............................................. 536 (1,756) (6,182)
------------- ------------- -------------
Total other income and (deductions)............. (50,877) (47,559) (44,299)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES.......................... 124,685 121,328 112,727
INCOME TAX PROVISION................................ 12 45,665 41,486 41,004
------------- ------------- -------------
NET INCOME.......................................... 79,020 79,842 71,723
DIVIDENDS ON PREFERRED STOCK........................ - 18 235
------------- ------------- -------------
NET INCOME AVAILABLE FOR COMMON STOCK............... $ 79,020 $ 79,824 $ 71,488
============= ============= =============
</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 1997 1996
- ----------------------------------------------------------------------------- ----------- -----------
(Thousands of Dollars) Note(s)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ 14,353 $ 10,010
Accounts receivable, less allowance for doubtful accounts of
$15,015 and $17,707 respectively....................................... 195,662 169,436
Accrued unbilled revenues................................................ 91,896 107,377
Gas in inventory......................................................... 2 40,201 67,910
Property taxes assessed applicable to future periods..................... 64,827 60,592
Accrued gas cost recovery revenues....................................... 7 12,862 27,672
Other.................................................................... 33,361 23,025
----------- -----------
453,162 466,022
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures............................. 19,643 19,479
Long-term investments.................................................... 9c,10 35,110 3,735
Deferred postretirement benefit costs.................................... 7, 9b - 4,863
Deferred environmental costs............................................. 6b, 7 27,699 28,233
Prepaid benefit costs.................................................... 9 85,790 64,307
Other.................................................................... 46,972 46,471
----------- -----------
215,214 167,088
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost..................................... 8 2,790,352 2,668,294
Less - Accumulated depreciation and depletion............................ 1,322,392 1,243,060
----------- -----------
1,467,960 1,425,234
----------- -----------
$ 2,136,336 $ 2,058,344
=========== ===========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable......................................................... $ 130,267 $ 130,725
Notes payable............................................................ 4 241,691 265,126
Current portion of long-term debt and capital lease obligations.......... 3a, 8 34,956 53,232
Federal income, property and other taxes payable......................... 78,630 84,788
Customer deposits........................................................ 16,363 12,860
Other.................................................................... 67,780 63,309
----------- -----------
569,687 610,040
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes........................................ 12 83,905 76,523
Unamortized investment tax credit........................................ 32,745 34,588
Tax benefits amortizable to customers.................................... 7 122,922 116,313
Accrued environmental costs.............................................. 6b 32,000 32,000
Minority interest........................................................ 5 17,283 17,604
Other.................................................................... 44,663 43,954
----------- -----------
333,518 320,982
----------- -----------
COMMITMENTS AND CONTINGENCIES 6, 8
CAPITALIZATION (see accompanying statement)
Long-term debt, including capital lease obligations...................... 3a, 8, 10 617,107 550,318
Common shareholder's equity.............................................. 616,024 577,004
----------- -----------
1,233,131 1,127,322
----------- -----------
$ 2,136,336 $ 2,058,344
=========== ===========
</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 1997 1996 1995
- ------------------------------------------------------------------------- ---------- ---------- ----------
(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
6.3 % series due 1998.................................................. - 20,000 20,000
6.51 % series due 1999................................................. 30,000 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 4,150
6.8 % series due 2003.................................................. 15,850 15,850 15,850
9.125 % series due 2004................................................ 55,000 55,000 55,000
7.15 % series due 2006................................................. 40,000 40,000 -
7.21 % series due 2007................................................. 30,000 - -
7.06 % series due 2012................................................. 40,000 - -
8.25 % series due 2014................................................. 80,000 80,000 80,000
7.6 % series due 2017.................................................. 14,990 - -
9.5 % series due 2019.................................................. - 5,000 5,000
7.5 % series due 2020.................................................. 29,641 29,812 30,000
9.5 % series due 2021.................................................. 40,000 40,000 40,000
6.75 % series due 2023................................................. 17,177 17,782 18,416
7 % series due 2025.................................................... 40,000 40,000 40,000
Unamortized discount .................................................. (1,235) (1,349) (1,390)
Unsecured Notes - 9.750 % series due 2000
interest payable semi-annually......................................... - 12,000 12,000
Long-term capital lease obligations...................................... 8 5,344 13,757 15,168
Other long-term debt..................................................... 5 46,190 18,316 2,370
---------- ---------- ----------
Total.................................................................... 617,107 550,318 516,564
---------- ---------- ----------
COMMON SHAREHOLDER'S EQUITY
COMMON STOCK, par value $1 per share - authorized, for
all periods, 15,100,000 shares; outstanding 10,300,000 shares.......... 10,300 10,300 10,300
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of period.......................................... 230,399 211,777 204,777
Equity investment...................................................... 5 - 18,622 7,000
---------- ---------- ----------
Balance - end of period................................................ 230,399 230,399 211,777
---------- ---------- ----------
RETAINED EARNINGS
Balance - beginning of period.......................................... 336,305 267,744 202,756
Net income............................................................. 79,020 79,842 71,723
Cash dividends declared:
Common stock......................................................... (40,000) (11,263) (6,500)
Preferred stock...................................................... 3b - (18) (235)
---------- ---------- ----------
Balance - end of period................................................ 375,325 336,305 267,744
---------- ---------- ----------
Total common shareholder's equity.......................................... 616,024 577,004 489,821
---------- ---------- ----------
Total capitalization....................................................... $1,233,131 $1,127,322 $1,006,385
========== ========== ==========
</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, 1997 1996 1995
- -------------------------------------------------------------------------------- ---------- ------- -------
(Thousands of Dollars) Note(s)
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income ..................................................................... $ 79,020 $ 79,842 $ 71,723
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income .................................................. 103,703 98,147 89,128
Charged to other accounts ................................................ 7,663 7,579 7,318
Deferred income taxes - current ............................................ (3,130) 4,963 9,739
Deferred income taxes and investment tax credit - net....................... 12 10,853 6,999 6,474
Other ...................................................................... (679) (2,629) 878
Changes in assets and liabilities, exclusive of changes
shown separately ......................................................... (10,167) (93,207) (27,033)
--------- --------- ---------
Net cash provided from operating activities ............................ 187,263 101,694 158,227
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net.............................................................4 (23,435) 68,491 28,178
Issuance of long-term debt......................................................3a 124,051 69,645 68,764
Equity investment .............................................................. -- 1,614 7,000
Cash dividend paid:
Common stock ................................................................. (40,000) (11,263) (6,500)
Preferred stock .............................................................. -- (54) (276)
Retirement of long-term debt and preferred stock................................3 (76,854) (6,384) (4,757)
--------- --------- ---------
Net cash (used for) provided from financing activities ................. (16,238) 122,049 92,409
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures ........................................................... (155,208) (212,668) (235,767)
Other - net .................................................................... (11,474) (9,534) (7,705)
--------- --------- ---------
Net cash used for investing activities ................................. (166,682) (222,202) (243,472)
--------- --------- ---------
Net Increase in Cash and Cash Equivalents ........................................ 4,343 1,541 7,164
Cash and Cash Equivalents, January 1 ............................................. 10,010 8,469 1,305
--------- --------- ---------
Cash and Cash Equivalents, December 31 ........................................... $ 14,353 $ 10,010 $ 8,469
========= ========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable - net .................................................... $ (43,510) $ 7,807 $ (37,782)
Accrued gas cost recovery revenues ........................................... 14,810 (28,250) (18,495)
Accrued unbilled revenues .................................................... 15,481 (16,243) (8,901)
Gas in inventory ............................................................. 28,008 (27,719) 37,652
Accounts payable ............................................................. (585) 21,401 27,537
Federal income, property and other taxes payable ............................. (6,228) (2,424) (611)
Other current assets and liabilities ......................................... (4,525) 2,669 (11,059)
Deferred and prepaid benefit costs ........................................... (16,620) (44,021) (20,471)
Deferred assets and liabilities .............................................. 3,002 (6,427) 5,097
--------- --------- ---------
$ (10,167) $ (93,207) $ (27,033)
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized ......................................... $ 52,978 $ 45,896 $ 40,037
========= ========= =========
Federal income taxes ......................................................... $ 46,984 $ 31,927 $ 30,874
========= ========= =========
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 principal markets are
located in the Detroit, Grand Rapids, Ann Arbor, Traverse City, and Muskegon
metropolitan areas. MichCon's non-regulated operations are insignificant.
MichCon is a wholly owned subsidiary of MCN Energy Group Inc.
Less than half of MichCon's labor force is covered by collective bargaining
agreements, with the earliest agreements set to expire in June 1998. Fifteen
percent of the Company's labor force is covered under the agreements expiring in
June 1998.
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 1997 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, non-depreciable base gas 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 $3,188,000, $5,233,000 and $1,644,000 in 1997, 1996 and 1995,
respectively.
DEPRECIATION AND DEPLETION
MichCon records 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 4.1% in 1997 and 4.4% in 1996 and 1995.
FINANCIAL INSTRUMENTS
To manage interest rate exposure, MichCon and its subsidiaries engage in
interest rate swaps 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.
Investment tax credits relating to property placed into service were
deferred and are being credited to income over the life of the related property.
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, excluding restricted
investments, purchased with a maturity of three months or less to be cash
equivalents.
2. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December
31, 1997, the replacement cost exceeded the $40,201,000 LIFO cost by
$170,240,000 and at December 31, 1996, the replacement cost exceeded the
$67,910,000 LIFO cost by $240,442,000. 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 64.8 Bcf and 73.6 Bcf as of December 31, 1997 and 1996, respectively.
A portion of gas in underground storage used as a pressure base is included
in "Property, Plant and Equipment" in the amount of $32,493,000 at December 31,
1997 and $32,792,000 at December 31, 1996.
3. CAPITALIZATION
A. LONG-TERM DEBT
MichCon issued long-term debt totaling $85,000,000 during 1997.
Substantially all of the net utility properties of MichCon in the
approximate amount of $1,200,000,000 are pledged as security for the
payment of outstanding first mortgage bonds.
During 1997, MichCon subsidiaries borrowed $40,000,000 under a
nonrecourse credit agreement. Under terms of the agreement, certain
alternative variable interest rates are available at the borrowers' option
during the life of the agreement. Quarterly principal payments commenced in
June 1997 with a final installment due November 2005. The loan is secured
by a pledge of stock of the borrowers and a security interest in certain of
their assets. MichCon may be required to support the credit agreement
through limited capital contributions to the subsidiaries if certain cash
flow and operating targets are not met. At December 31, 1997, $36,400,000
was outstanding at a weighted average interest rate 6.43%.
In the second quarter of 1997, MichCon redeemed $5,000,000 of 9.50%
first mortgage bonds and $12,000,000 of 9.75% unsecured notes. MichCon had
a variable interest rate swap agreement through April 2000 on the
$12,000,000 unsecured notes. This agreement reduced the cost of debt of the
fixed-rate unsecured notes from 9.75% to 5.77% for the six months ended
June 30, 1997. This swap has been redesignated as a hedge for $12,000,000
of the outstanding $80,000,000 first mortgage bond due May 1, 2004. This
redesignation reduced the cost of debt of this fixed rate bond from 8.25%
to 7.73% for the six months ended December 31, 1997.
28
<PAGE> 33
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MichCon entered into variable interest rate swap agreements with
notional principal amounts aggregating $80,000,000 in connection with the
first mortgage bonds issued May 1997. Swap agreements of $40,000,000
through May 2002 have reduced the average cost of debt from 7.31% to 6.32%
for the year ended December 31, 1997. Swap agreements of $40,000,000
through May 2005 have reduced the average cost of debt from 7.06% to 5.91%
for the year ended December 31, 1997. A subsidiary of MichCon has an
interest rate swap agreement on the $15,840,000 outstanding balance of its
project loan agreement at December 31, 1997, which effectively fixes the
interest rate at 7.5% through February 2003.
Maturities and sinking fund requirements during the next five years
for long-term debt outstanding at December 31, 1997, are $26,560,000 in
1998, $57,360,000 in 1999, $26,960,000 in 2000, $26,560,000 in 2001, and
$76,360,000 in 2002.
B. CUMULATIVE PREFERRED AND PREFERENCE STOCK
During January 1996, MichCon redeemed all of its outstanding
Redeemable Cumulative Preferred Stock, $2.05 Series shares at the sinking
fund redemption price of $25 per share. MichCon has 7,000,000 shares of $1
per share par value Redeemable Cumulative Preferred Stock authorized at
December 31, 1997. MichCon has 4,000,000 shares of $1 per share par value
Preference Stock authorized; however, no shares were outstanding at
December 31, 1997.
4. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
MichCon maintains credit lines 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. Both credit
facilities expire in July 1998. MichCon usually issues commercial paper in
lieu of an equivalent amount of borrowings under these lines of credit.
Commercial paper outstanding at December 31, 1997 and 1996 totaled
$236,740,000 and $238,251,000, respectively, at weighted average interest
rates of 5.8% and 5.5%, 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 had a Trust Demand Note program which allowed
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%. The Trust Demand Note program was not renewed in
1997.
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 $1,714,000 and $626,000
for the years ended 1997 and 1996, respectively. 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 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 1940's when major natural gas pipelines became sufficient
to meet MichCon's supply requirements, 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 by-products 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 four of these sites.
More extensive investigations are underway at four other former MGP 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. The findings of
these investigations indicate that the estimated total expenditures for
investigation and remediation activities for these sites could range from
$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.
MichCon notified more than 40 current and former insurance carriers of
the environmental conditions at these former MGP sites. MichCon concluded
settlement negotiations with certain carriers in 1996 and 1997 and has
received payments from several carriers. In October 1997, MichCon filed
suit against major nonsettling carriers seeking recovery of incurred costs
and a declaratory judgment of the carriers' liability for future costs of
environmental investigation and remediation costs at former MGP sites.
30
<PAGE> 35
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 1997, 1996, and 1995, MichCon spent $835,000, $900,000 and
$2,100,000, respectively, investigating and remediating these former MGP
sites. At December 31, 1997, the reserve balance is approximately
$33,741,000, of which $1,741,000 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, prices under
the purchase contracts are determined by formulas based on market prices.
In 1998, MichCon has firm purchase commitments for approximately 124 Bcf of
gas. The Company expects that sales will exceed its minimum purchase
commitments. 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
$53,000,000 during 1998 related to firm transportation agreements. These
demand charges are recoverable through the GCR mechanism.
Capital investments for 1998 are expected to approximate $200,000,000
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).
Congress increased the program's funding for the 1997 fiscal year to
$1,000,000,000. The State of Michigan's share of LIHEAP funds was increased
from $47,500,000 in fiscal year 1996 to $64,000,000 in 1997. During 1997,
Congress approved a budget which provides for federal LIHEAP funding at
$1,000,000,000 and $1,100,000,000 for fiscal years 1998 and 1999,
respectively. 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) 1997 1996
------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Regulatory Assets:
Deferred postretirement benefit costs (Note 9b)................ $ - $ 4,863
Unamortized loss on retirement of debt......................... 10,181 9,237
Accrued gas cost recovery revenues............................. 12,862 27,672
Environmental costs (Note 6b).................................. 27,699 28,233
Conservation program costs.................................... - 2,908
Other ......................................................... 986 1,681
--------------- --------------
$ 51,728 $ 74,594
=============== ==============
Regulatory Liabilities:
Tax benefits amortizable to customers.......................... $ 122,922 $ 116,313
Refunds payable................................................ - 405
--------------- --------------
$ 122,922 $ 116,718
=============== ==============
</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 for all of its
operations as of December 31, 1997, it would have had an extraordinary, noncash
increase to net income of approximately $46,000,000. Management believes that
evidence currently available supports the continued application of SFAS No. 71.
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.
32
<PAGE> 37
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The gross amount of assets recorded under capital leases and the related
accumulated depreciation at December 31, 1997, are $26,887,000 and $13,146,000,
respectively. The gross amount of assets and related accumulated depreciation at
December 31, 1996, were $26,887,000 and $11,719,000, respectively.
In January 1998 MichCon purchased the office building, ending its long-term
capital lease obligation existing at December 31, 1997. As a result, the
long-term lease obligation of $6,818,000 was reclassified as a current capital
lease obligation at December 31, 1997; therefore, no future minimum lease
payments associated with the building lease are disclosed.
Operating lease payments for the years ended December 31, 1997, 1996, and
1995 consist of $2,015,000, $2,239,000 and $2,378,000, respectively.
9. RETIREMENT BENEFITS AND TRUSTEED ASSETS
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 1997, 1996 or 1995 plan years were
made and none are expected to be made for the 1998 plan year.
Net pension cost for these plans included the following components:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1997 1996 1995
------------------------------------------------------ ------------- ------------- --------------
<S> <C> <C> <C>
Service cost - benefits earned during the period...... $ 9,406 $ 10,400 $ 8,735
Interest cost on projected benefit obligation......... 34,408 33,262 31,197
Net amortization and deferral......................... 66,915 15,675 64,435
Actual return on plan assets.......................... (138,863) (78,260) (121,508)
------------- ------------- --------------
Net pension credit.................................... $ (28,134) $ (18,923) $ (17,141)
============= ============= ==============
</TABLE>
MichCon settled a portion of its pension liabilities by paying lump
sum amounts to employees who retired or otherwise terminated employment. A
gain of $3,250,000 was recognized in 1997 related to the settlement of
these liabilities.
33
<PAGE> 38
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) 1997 1996
----------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Measurement date................................................... OCTOBER 31 October 31
Actuarial present value of:
Accumulated vested benefit obligation............................ $ 365,336 $ 349,809
Accumulated nonvested benefit obligation......................... 30,929 27,280
-------------- ------------
Total accumulated benefit obligation........................... $ 396,265 $ 377,089
============== ============
Projected benefit obligation for service rendered to date.......... $ 465,098 $ 430,100
Plan assets at measurement date.................................... 814,548 707,987
-------------- ------------
Plan assets in excess of projected benefit obligation.............. 349,450 277,887
Unrecognized net asset at transition............................... (34,342) (39,702)
Unrecognized prior service cost.................................... (1,439) (1,602)
Unrecognized net gain............................................. (237,923) (192,221)
-------------- ------------
Prepaid pension cost recognized in the Consolidated
Statement of Financial Position.................................. $ 75,746 $ 44,362
============== ============
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 7.5% for 1997 and 8.0%
for 1996. The rate of increase in future compensation levels used was 5%
for 1997 and 1996. The expected long-term rate of return on plan assets,
which are invested primarily in equity and fixed income securities, was
9.25% for 1997 and 1996, and 9.0% for 1995.
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
limits. The cost of these plans was $5,200,000 in 1997, $5,300,000 in 1996,
and $5,200,000 in 1995.
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 were amortized over 1994 through 1997.
34
<PAGE> 39
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MichCon's policy is to fund its postretirement benefit costs to the
extent such amounts are recognized in rates. Separate qualified Voluntary
Employees' Beneficiary Association (VEBA) trusts exist for union and
nonunion employees. Funding to the VEBA trusts totaled $6,500,000,
$41,600,000 and $27,300,000 in 1997, 1996 and 1995, respectively. The
expected weighted average long-term rate of return on plan assets, which
are invested in life insurance policies, equity securities and fixed income
securities, was 9.1% for 1997 and 1996.
Net postretirement cost for the years ended December 31, includes the
following components:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1997 1996 1995
-------------------------------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
Service cost - benefits earned during the period....... $ 4,094 $ 4,259 $ 5,017
Interest cost on accumulated benefit obligation........ 17,430 16,395 18,315
Amortization of transition obligation.................. 13,391 13,391 13,528
Net amortization and deferral.......................... 10,227 (1,915) 7,445
Actual (return) loss on plan assets ................... (26,125) (12,230) (15,634)
------------- ------------- ------------
19,017 19,900 28,671
Regulatory adjustment.................................. 4,863 7,509 7,515
------------- ------------- ------------
Net postretirement cost................................ $ 23,880 $ 27,409 $ 36,186
============= ============= ============
</TABLE>
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) 1997 1996
------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Measurement Date................................................... OCTOBER 31 October 31
Accumulated postretirement benefit obligation:
Retirees......................................................... $ 131,576 $ 138,753
Fully eligible active participants............................... 30,343 25,346
Participants with less than 30 years of service.................. 61,205 53,784
------------- ------------
223,124 217,883
Plan assets at measurement date.................................... 151,645 126,282
------------- ------------
Accumulated postretirement benefit obligation in excess
of plan assets................................................... (71,479) (91,601)
Unrecognized transition obligation................................. 200,728 214,119
Unrecognized net gain.............................................. (125,705) (109,625)
Contributions and adjustments made after measurement date.......... 6,500 7,052
------------- ------------
Accrued postretirement asset (liability) recognized in the
Consolidated Statement of Financial Position..................... $ 10,044 $ 19,945
============= ============
</TABLE>
35
<PAGE> 40
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 6.5% in 1997, 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, 1997 by 12.2% and increase the sum of the service cost and interest
cost by 14.7% for the year then ended. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 8% for 1997 and 1996,
respectively.
C. GRANTOR TRUST
In December 1997, MichCon established a Grantor Trust and contributed
$31,300,000 to the trust, which invested such proceeds in fixed income
securities. By funding the Grantor Trust and the VEBA trusts (Note 9b), MichCon
is complying with MPSC directives that it fund various trusts to the extent its
postretirement benefit costs to are recognized in rates. Subject to MPSC
notification, MichCon can revoke the Grantor Trust, and employees and retirees
have no right, title or interest in the assets of the trust. MichCon classifies
the Grantor Trust as available-for-sale and as such records it at fair value
with changes in the fair value recorded in Common Shareholder's Equity.
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.
The carrying amount and the estimated fair value of other financial
instruments consist of the following:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1997 1996
- ------------------------------------------------- ------------------------------- -----------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Assets:
Grantor Trust.................................. 31,300 31,300 - -
Liabilities and Shareholders' Equity:
Long-term debt, excluding capital lease
obligations.................................... 611,763 651,980 536,561 567,011
Derivative Financial Instruments:
Interest rate swap agreements
with unrealized gains........................ 4,048 1,154
with unrealized losses....................... 415 294
</TABLE>
36
<PAGE> 41
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The estimated fair values are determined based on the following:
Grantor Trust - carrying amount is assumed to approximate market at
December 31, 1997 as the investment was purchased on December 31, 1997.
Long-term debt - interest rates available to MichCon for issuance of
debt with similar terms and remaining maturities.
Interest rate swaps - 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 instruments.
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.
Other long-term investments - management is unable to practicably
estimate the fair value of the various other long-term investments because
there is no readily determinable market for the investments.
The fair value estimates presented herein are based on information
available to management as of December 31, 1997 and 1996. Management is not
aware of any subsequent factors that would significantly affect the estimated
fair value amounts.
11. RELATED PARTY TRANSACTIONS
MichCon enters into transactions with affiliated companies to sell
transportation and storage services. MichCon purchased computer operations
services from an affiliate that 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) 1997 1996 1995
-------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Storage and transportation sales............................. $ 14,744 $ 14,400 $ 11,100
Purchase of computer operations services..................... - 6,800 15,300
Corporate expenses........................................... 18,546 15,700 15,561
</TABLE>
MichCon's accounts receivable from and accounts payable to affiliated
companies were $20,990,000 and $25,863,000 at December 31, 1997, respectively.
37
<PAGE> 42
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. SUMMARY OF INCOME TAXES
<TABLE>
<CAPTION>
(Thousands of Dollars) 1997 1996 1995
---------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Effective Federal Income Tax Rate.............................. 36.4 % 33.8 % 36.4 %
=========== =========== =============
Income taxes consist of:
Current provision........................................... $ 37,901 $ 31,318 $ 22,873
Deferred provision.......................................... 9,607 12,018 19,988
Amortization of investment tax credits...................... (1,843) (1,850) (1,857)
----------- ----------- -------------
Total income taxes............................................. $ 45,665 $ 41,486 $ 41,004
=========== =========== =============
Reconciliation between statutory and actual income taxes:
Statutory federal income taxes at a rate of 35%................ $ 43,640 $ 42,465 $ 39,454
Adjustments to federal tax expense:
Excess of book over tax depreciation ....................... 5,301 6,367 7,365
Adjustments to taxes provided in prior periods.............. 300 (3,368) (1,343)
Amortization of investment tax credits...................... (1,843) (1,850) (1,857)
Other - net................................................. (1,733) (2,128) (2,615)
----------- ----------- -------------
Total income taxes............................................. $ 45,665 $ 41,486 $ 41,004
=========== =========== =============
</TABLE>
38
<PAGE> 43
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) 1997 1996
------------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Deferred tax assets:
Employee Benefits............................................. $ 9,391 $ 9,323
Uncollectibles................................................ 4,671 6,130
Vacation Accrual.............................................. 3,442 3,355
Other......................................................... 2,283 5,613
---------------- -------------
Total deferred tax assets........................................ 19,787 24,421
---------------- -------------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net........................................... 58,215 62,443
Pensions...................................................... 24,564 13,926
Property taxes................................................ 13,313 11,040
Gas cost recovery undercollection............................. 4,502 8,455
Postretirement benefit........................................ 3,515 9,186
Other......................................................... 9,795 9,236
---------------- -------------
Total deferred tax liabilities................................... 113,904 114,286
---------------- -------------
Net deferred tax liability....................................... 94,117 89,865
Less: Net deferred tax liability-current....................... 10,212 13,342
---------------- -------------
Net deferred tax liability-noncurrent............................ $ 83,905 $ 76,523
================ =============
</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.
39
<PAGE> 44
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
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 or deferred performance units.
Participants must retain fifty percent of any common shares paid until certain
stock ownership guidelines are met. The deferred units must be retained by the
participants until their employment with MichCon ceases.
During February 1997, MichCon granted 102,750 performance units with a
weighted-average grant date fair value of $31.00 per unit. During February 1996
and 1995, MichCon granted 122,669 and 191,500 performance units, respectively.
In May 1996, MichCon modified its 1995 performance units granted to allow
limited acceleration in the vesting for a portion of the awards. As a result,
the 1995 awards have been accounted for under the recognition provisions of SFAS
No. 123 from the date of modification. The weighted average fair value at the
modification date for 1995 awards was $24.875 per unit. Stock-based compensation
cost recognized during 1997, 1996 and 1995 for all awards outstanding totaled
$7,430,000, $6,885,000, and $7,919,000, respectively. At December 31, 1997,
there were 2,530,148 MCN shares available to be issued under the Stock Incentive
Plan.
40
<PAGE> 45
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, 1997 and 1996, and the related consolidated statements of income,
cash flows and capitalization for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 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 12, 1998
41
<PAGE> 46
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY OPERATING RESULTS (UNAUDITED)
Due to the seasonal nature of MichCon's business, revenues and net income
tend to be higher in the first and fourth quarters of the calendar year.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------- -------------- -------------- -------------- --------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1997
Operating Revenue............................................. $527,445 $209,800 $119,114 $397,320
Operating Income (loss)....................................... 106,772 14,810 (11,369) 64,150
Net Income (loss)............................................. 62,193 931 (16,036) 31,932
Net Income (loss) applicable to common stock.................. 62,193 931 (16,036) 31,932
1996
Operating Revenues............................................ $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
</TABLE>
42
<PAGE> 47
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 COLUMN D COLUMN E
Additions
------------------------------
Provisions charged to Deductions
------------------------------ for Purposes
Balance at Utility Plant/ for Which the Balance
Beginning Regulatory Reserves Were at End
Description of Period Income Asset Provided of Period
- --------------------------------------------------- ---------------- ---------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserve deducted from Assets in
Consolidated Statement of Financial Position:
Allowance for doubtful accounts ................ $17,707 $ 21,680 $ -- $24,372 $15,015
======= ======== ======== ======= =======
Reserve included in Current Liabilities - Other
and in Accrued Environmental Costs
in Consolidated Statement of Financial Position:
Environmental testing .......................... $34,576 $ -- $ -- $ 835 $33,741
======= ======== ======== ======= =======
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages ......................... $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838
======= ======== ======== ======= =======
YEAR ENDED DECEMBER 31, 1996
Reserve deducted from Assets in
Consolidated Statement of Financial Position:
Allowance for doubtful accounts ................ $13,250 $ 29,052 $ -- $24,595 $17,707
======= ======== ======== ======= =======
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing .......................... $35,451 $ -- $ -- $ 875 $34,576
======= ======== ======== ======= =======
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages ......................... $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182
======= ======== ======== ======= =======
YEAR ENDED DECEMBER 31, 1995
Reserve deducted from Assets in
Consolidated Statement of Financial Position:
Allowance for doubtful accounts ................ $15,322 $ 15,367 $ -- $17,439 $13,250
======= ======== ======== ======= =======
Reserve included in Current Liabilities - Other
in Consolidated Statement of Financial Position:
Environmental testing .......................... $ 5,540 $ -- $ 32,000 $ 2,089 $35,451
======= ======== ======== ======= =======
Reserves included in Deferred Credits and
Other Liabilities - Other
in Consolidated Statement of Financial Position:
Injuries and damages ......................... $ 8,402 $ 1,026 $ 686 $ 2,101 $ 8,013
======= ======== ======== ======= =======
</TABLE>
43
<PAGE> 48
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).
44
<PAGE> 49
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 99-2 to MCN's June 30,
1997 Form 10-Q).
10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6 to
MCN's 1993 Form 10-K).
10-4 MCN Energy Group Inc. 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).
</TABLE>
45
<PAGE> 50
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
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
99-1 to MCN's March 31, 1997 Form 10-Q).
99-2 MCN Energy Group Savings and Stock Ownership Plan, as amended
(Exhibit 99-22 to MCN's March 31, 1997 Form 10-Q).
</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.
46
<PAGE> 51
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/Howard L. Dow III
---------------------------
Howard L. Dow III
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
FEBRUARY 27, 1998
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 27, 1998
Alfred R. Glancy III
* Director, President and Chief February 27, 1998
Stephen E. Ewing Executive Officer
/s/Howard L. Dow III Director, Senior Vice President February 27, 1998
-------------------- and Chief Financial Officer
Howard L. Dow III
* Director, Senior Vice President, February 27, 1998
-------------------- Business Development
Carl J. Croskey
* Director February 27, 1998
--------------------
William K. McCrackin
* Director February 27, 1998
--------------------
Daniel L. Schiffer
* Director, Senior Vice President, February 27, 1998
-------------------- Process Development
John E. vonRosen
</TABLE>
*By: /s/ Howard L. Dow III
---------------------
Howard L. Dow III
Attorney-in-Fact
47
<PAGE> 52
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3-1 Restated Articles of Incorporation of MichCon (Exhibit
3-1 to March 31, 1993 Form 10-Q).
3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).
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); Thirteith 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 10-K); Thirty-third 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 99-2 to MCN's June 30,
1997 Form 10-Q).
10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6
to MCN's 1993 Form 10-K).
10-4 MCN Energy Group Inc. 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 99-1 to MCN's March 31, 1997 Form 10-Q).
99-2 MCN Energy Group Savings and Stock Ownership Plan, as amended
(Exhibit 99-22 to MCN's march 31, 1997 Form 10-Q).
- ----------------
* 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
refernece.
<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, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Net Income ................................. $125,630 $122,239 $112,727
Fixed charges .............................. 57,905 53,831 45,637
-------- -------- --------
Earnings as defined ...................... $183,535 $176,070 $158,364
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt ................. $ 47,024 $ 43,163 $ 35,820
Interest on other borrowed funds ........... 8,664 8,012 7,053
Amortization of debt discounts, premium
and expense .............................. 1,032 1,081 996
Interest implicit in rentals (2) ........... 1,185 1,575 1,768
-------- -------- --------
Fixed charges as defined ................. $ 57,905 $ 53,831 $ 45,637
======== ======== ========
Ratio of Earnings to Fixed Charges ......... 3.17 3.27 3.47
======== ======== ========
</TABLE>
- ----------------
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount is estimated to be a reasonable approximation of the interest
portion of rentals.
MichCon is a guarantor of certain other debt. Fixed charges related to such debt
are deemed to be immaterial and therefore have been excluded from the above
ratios.
<PAGE> 1
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-16285 on Form S-3 of Michigan Consolidated Gas Company (the "Company"), of
our report dated February 12, 1998 (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 the
Company for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 27, 1998
<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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/s/ Howard L. Dow III
------------------------
Howard L. Dow III
<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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/s/ Daniel L. Schiffer
------------------------
Daniel L. Schiffer
<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 Howard L. Dow III, 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, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th
day of February, 1998.
/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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,353
<SECURITIES> 0
<RECEIVABLES> 210,677
<ALLOWANCES> 15,015
<INVENTORY> 40,201
<CURRENT-ASSETS> 453,162
<PP&E> 2,790,352
<DEPRECIATION> 1,322,392
<TOTAL-ASSETS> 2,136,336
<CURRENT-LIABILITIES> 569,687
<BONDS> 617,107
0
0
<COMMON> 10,300
<OTHER-SE> 605,724
<TOTAL-LIABILITY-AND-EQUITY> 2,136,336
<SALES> 0
<TOTAL-REVENUES> 1,253,679
<CGS> 0
<TOTAL-COSTS> 1,079,316
<OTHER-EXPENSES> 1,346
<LOSS-PROVISION> 20,868
<INTEREST-EXPENSE> 54,190
<INCOME-PRETAX> 124,685
<INCOME-TAX> 45,665
<INCOME-CONTINUING> 70,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,020
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
