<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______________ TO _______________
COMMISSION FILE NUMBER 1-7310
MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0478040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-965-2430
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 31, 1998:
Common Stock, par value $.01 per share: 10,300,000
================================================================================
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1998
PAGE
NUMBER
------
COVER........................................................... i
INDEX........................................................... ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 1
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 12
Item 6. Exhibits and Reports on Form 8-K....................... 12
SIGNATURE....................................................... 14
<PAGE> 3
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings increased $2.1 million, $1.6 million and $8.5 million for the 1998
quarter, six- and twelve-month periods, respectively. Earnings reflect
significantly lower operating costs as well as continued growth in intermediate
transportation revenues. These improvements more than offset lower gross margins
resulting from reduced gas sales and end user transportation deliveries, which
were due to warmer weather.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
EARNINGS COMPONENTS (IN MILLIONS)
COMPARING 1998 TO 1997
Quarter Six Months Twelve Months
------- ---------- -------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue .............. $ (37.0) (17.6) $(135.2) (18.3) $ (123.9) (10.0)
Cost of Gas .................... (25.5) (30.7) (111.2) (28.8) (103.5) (16.6)
Gross Margin ................... (11.5) (9.1) (24.0) (6.9) (20.4) (3.3)
Operation and Maintenance ...... (7.5) (10.9) (19.4) (13.5) (34.6) (11.6)
Depreciation and Depletion ..... (2.9) (11.1) (6.0) (11.5) (3.2) (3.2)
Property and Other Taxes ....... (2.2) (13.6) (2.7) (7.9) (4.0) (6.5)
Other Income and Deductions .... (1.7) (13.3) 0.5 1.8 1.4 2.9
Income Tax Provision ........... 0.8 65.6 2.0 6.1 11.5 31.8
Net Income ..................... 2.1 223.7 1.6 2.5 8.5 11.8
- ------------------------------------------------------------------------------------------------------
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) decreased in the 1998
quarter, six- and twelve-month periods, reflecting lower gas deliveries
resulting from significantly warmer weather. These declines were partially
offset by increased revenues from intermediate transportation and gas-related
services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
Quarter Six Months Twelve Months
------- ---------- -------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Percentage Colder (Warmer)
than Normal ................... (24.8)% 21.9% (20.1)% 1.9% (12.9)% 2.0%
Increase (Decrease) from
Normal in:
Gas Markets (Bcf) ......... (6.1) 4.6 (25.3) 1.5 (26.2) 3.8
Net Income (Millions) .... $(5.3) $4.1 $(22.0) $1.3 $(22.8) $3.4
- ------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 4
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gas sales and end user transportation revenues in total decreased $42.7
million, $151.5 million and $149.2 million in the 1998 quarter, six- and
twelve-month periods, respectively. The decrease in revenues for the 1998
quarter is due primarily to reduced gas sales as a result of warmer weather,
partially offset by higher prices to recover gas costs. Weather for the 1998
quarter was over 40% warmer than the equivalent 1997 period. The decrease in
revenues for the 1998 six- and twelve-month periods is due primarily to reduced
gas sales as a result of warmer weather, as well as lower prices required to
recover gas costs. End user transportation deliveries also declined in all three
1998 periods; however, revenues remained flat in the twelve-month period as a
result of a slight increase in the average transportation rate.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Six Months Twelve Months
------- ---------- -------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GAS MARKETS ($ MILLIONS)
Gas Sales .......................... $ 123.6 $ 165.2 $ 490.5 $ 640.0 $ 913.2 $ 1,062.4
End User Transportation ............ 18.2 19.3 43.2 45.2 82.5 82.5
Intermediate Transportation ........ 15.9 13.3 33.8 28.1 60.9 53.9
Other .............................. 15.1 12.0 34.5 23.9 61.8 43.5
--------- --------- --------- ---------- ---------- ----------
$ 172.8 $ 209.8 $ 602.0 $ 737.2 $ 1,118.4 $ 1,242.3
--------- --------- --------- ---------- ---------- ----------
GAS MARKETS (IN BCF)
Gas Sales ......................... 24.2 34.7 102.8 128.0 180.6 209.4
End User Transportation ........... 31.0 32.7 73.4 77.0 141.4 144.3
Intermediate Transportation ....... 148.4 141.6 296.9 282.2 601.1 551.3
--------- --------- --------- ---------- ---------- ----------
203.6 209.0 473.1 487.2 923.1 905.0
--------- --------- --------- ---------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Intermediate transportation revenues increased for the 1998 quarter, six-
and twelve-month periods by $2.6 million, $5.7 million and $7.0 million,
respectively, due in part to increased deliveries and increased fees generated
from the transfer of gas title among and between intermediate transportation
service users and various gas owners. The increase in intermediate
transportation deliveries for all three periods reflects additional Antrim gas
volumes transported for Michigan gas producers and brokers. In December 1997,
MichCon purchased a pipeline to expand the transportation capacity of its
northern Michigan gathering system. This expansion made possible an increase of
16.6 Bcf in volumes transported through June 1998. Although volumes have
increased significantly, profit margins on intermediate transportation services
are considerably less than margins on gas sales or end user transportation
services.
Other operating revenues increased for all three 1998 periods due in part to
an increase in gas-related services. Also affecting the comparison to the 1997
periods are unfavorable adjustments for energy conservation revenues in the 1997
periods resulting from the discontinuance of MichCon's energy conservation
programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of purchased
gas as well as related transportation costs. Under the existing 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 had
little effect on gross margins.
2
<PAGE> 5
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cost of gas sold decreased in all three 1998 periods due primarily to lower
sales volumes resulting from warmer weather. The decrease in the 1998 quarter
was partially offset by higher market prices paid of $.19 (7.56%) per thousand
cubic feet of gas sold. Additionally, cost of gas sold decreased in the 1998
six- and twelve-month periods due to reductions in the market prices paid of
$.31 (9.9%) and $.07 (2.2%) per thousand cubic feet of gas sold, respectively.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased in all 1998 periods, reflecting
lower uncollectible gas accounts expense and lower benefit costs, primarily
pension and retiree healthcare costs. MichCon implemented an early retirement
program in the first quarter of 1998 which reduced its net workforce by
approximately 150 employees (5%). The cost of the program and the related
savings will not have a material impact on 1998 net income. However, it is
expected that the results of the program will contribute to lower operating
costs in future years.
As discussed in MichCon's 1997 Annual Report on Form 10-K, MichCon
receives a significant amount of its heating assistance funding through
Michigan Home Heating Credits, which are funded almost exclusively by the
federal Low Income Home Energy Assistance Program (LIHEAP). While Congress
increased LIHEAP funding to $1.1 billion for the fiscal year ending September
30, 1998, the U.S. House of Representatives' Appropriations Committee in July
1998, voted to eliminate funding for the program for the 1999 fiscal year,
which begins October 1, 1998. The full House is expected to consider the
Labor-Health & Human Services-Education funding bill in the third quarter of
1998. In contrast to the House Appropriations Committee, the U.S. Senate Labor
and Human Resources Committee unanimously voted to reauthorize LIHEAP through
2004 at a funding level of $2.0 billion annually. In recent years, proposed
reductions to LIHEAP funding have been repeatedly defeated. The Company is
working with legislators and others to maintain the LIHEAP funding and is
optimistic that it will ultimately be continued. If funding levels are
significantly reduced, the Company will take steps to minimize the impact on
its customers and its earnings. Any future changes in funding levels may impact
MichCon's uncollectible gas accounts expense.
DEPRECIATION AND DEPLETION
The decrease in depreciation and depletion for all three 1998 periods
reflects lower depreciation rates for MichCon's utility property, plant and
equipment, which became effective January 1, 1998. Depreciation on higher plant
balances partially offset the effect of the lower rates.
PROPERTY AND OTHER TAXES
Property and other taxes decreased in the 1998 periods reflecting lower
property taxes based on the Company's pending appeals of its personal property
tax assessments as discussed in MichCon's 1997 Annual Report on Form 10-K. The
decrease in the 1998 twelve-month period was partially offset by higher Michigan
single business taxes.
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased in the 1998 quarter due primarily to
an increase in the allowance for funds used during construction and a gain from
the sale of land. The increase in the six-and twelve-month periods is due
primarily to additional interest expense on long-term debt required to finance
capital investments.
3
<PAGE> 6
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
Income taxes increased for the 1998 quarter, six- and twelve months periods
as a result of higher pre-tax earnings. Income tax comparisons for the six- and
twelve-month periods were also affected by a 1998 provision for tax issues and
by amounts recorded in the 1997 periods for the favorable resolution of prior
years' tax issues and tax credits.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MichCon's cash flow from operating activities totaled $286.6 million for the
1998 six-month period, increasing $12.9 million from the comparable 1997 period.
The increase was due primarily to lower working capital requirements resulting
from the effects of warmer weather in 1998. Operating cash flows were sufficient
for the payment of all capital expenditures.
FINANCING ACTIVITIES
Cash and cash equivalents increased $5.7 million during the 1998 six-month
period. Cash and cash equivalents normally increase and short-term debt is
reduced in the first part of each year as gas inventories are depleted and funds
are received from winter heating sales. During the latter part of the year, cash
and cash equivalents normally decrease as funds are used to finance increases in
gas inventories and customer accounts receivable. To meet its seasonal
short-term borrowing needs, MichCon normally issues commercial paper that 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 were renewed in July 1998. During the first six months of 1998,
MichCon repaid $239.2 million of commercial paper, leaving no borrowings
outstanding under this program at June 30, 1998.
In June 1998, MichCon issued long term debt generating net proceeds of
$153.1 million. The proceeds were used to retire first mortgage bonds, fund
future capital expenditures and for general corporate purposes. During the 1998
quarter, MichCon redeemed through a tender offer $89.7 million of long-term debt
and repaid $20 million of a first mortgage bond on its stated maturity date.
During June 1998, MichCon filed a new shelf registration statement with the
Securities and Exchange Commission allowing for the issuance of an additional
$185 million in long term debt. As of June 30, 1998, MichCon's capacity under
its shelf registration totaled $250 million.
INVESTING ACTIVITIES
MichCon's capital expenditures totaled $74.5 million during the 1998
six-month period and are anticipated to be approximately $200 million for the
year. Capital expenditures primarily represent the construction of
transportation pipelines, the construction of new distribution lines to attach
new customers, new computer systems and improvements to existing storage,
distribution, and transmission systems.
It is management's opinion that MichCon will have sufficient capital
resources, both internal and external, to meet anticipated capital requirements.
4
<PAGE> 7
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK
MichCon's strategy is to aggressively expand its role as the preferred
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.
MichCon plans to capitalize on the opportunities resulting from the gas
industry restructuring by implementing its Regulatory Reform Plan, which was
approved by the Michigan Public Service Commission (MPSC) in April 1998. The
plan includes a comprehensive experimental three-year customer choice program
that is designed to offer expanded availability and transportation options to
all sales customers, subject to annual caps on the level of participation.
Beginning April 1, 1999, customers will have the option of purchasing natural
gas from suppliers other than MichCon. However, MichCon will continue to
transport and deliver the gas to the customers' premises at prices that maintain
its existing sales margins.
The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas cost component of MichCon's sales
rates for the three-year period beginning on January 1, 1999. Currently, MichCon
does not generate earnings on the gas-supply portion of its operations; however
under this plan, changes in cost of gas will directly impact gross margins and
earnings. As part of its gas acquisition strategy, MichCon will implement steps
to mitigate risks from price and volume fluctuations.
Also beginning in 1999, an income sharing mechanism will allow customers to
share in profits when actual utility return on equity exceeds predetermined
thresholds. Although the Regulatory Reform Plan increases MichCon's risk
associated with generating margins that cover its gas costs, management believes
this program will have a favorable impact on future earnings. Various
interested parties have requested a rehearing before the MPSC, or a review in
the court; however, management believes the order will be upheld.
NEW ACCOUNTING PRONOUNCEMENTS
COMPUTER SOFTWARE
In March 1998, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires the capitalization of internal-use software
and specifically identifies which costs should be capitalized and which costs
should be expensed. The statement is effective for fiscal years beginning after
December 15, 1998. Management does not expect the SOP to have a material impact
on MichCon's financial statements.
START-UP ACTIVITIES
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires organizational and start-up costs to be
expensed as incurred and is effective for fiscal years beginning after December
15, 1998. Management does not expect the SOP to have a material impact on
MichCon's financial statements.
5
<PAGE> 8
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
DERIVATIVE AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires all derivatives to be recognized in the
balance sheet as either assets or liabilities measured at their fair value, and
sets forth conditions in which a derivative instrument may be designated as a
hedge. The Statement requires that changes in the fair value of derivatives be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to be recorded to other comprehensive income or to offset related results
on the hedged item in earnings.
MichCon manages gas price risk and interest rate risk through the use of
various derivative instruments and limits the use of such instruments to hedging
activities. The effects of SFAS No. 133 on MichCon's financial statements are
subject to fluctuations in the market value of hedging contracts, which are, in
turn, affected by variations in gas prices and in interest rates. Accordingly,
management cannot quantify the effects of adopting SFAS No. 133.
FORWARD LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve certain risks and uncertainties as set forth
in MichCon's 1997 Annual Report on Form 10-K.
6
<PAGE> 9
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------- ----------------------- ---------------------------
1998 1997 1998 1997 1998 1997
------------ ----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES...................... $ 172,787 $ 209,800 $ 602,014 $ 737,245 $1,118,448 $ 1,242,311
----------- ----------- ---------- ---------- ---------- ------------
OPERATING EXPENSES
Cost of gas........................... 57,512 83,031 275,101 386,304 521,026 624,501
Operation and maintenance............. 61,868 69,394 124,090 143,499 263,231 297,797
Depreciation and depletion............ 23,492 26,424 45,937 51,925 97,715 100,939
Property and other taxes.............. 13,953 16,141 31,255 33,935 58,064 62,085
----------- ----------- ---------- ---------- ---------- ------------
Total operating expenses............ 156,825 194,990 476,383 615,663 940,036 1,085,322
----------- ----------- ---------- ---------- ---------- ------------
OPERATING INCOME........................ 15,962 14,810 125,631 121,582 178,412 156,989
----------- ----------- ---------- ---------- ---------- ------------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................... 822 1,277 1,934 2,486 4,107 5,167
Interest on long-term debt............ (10,513) (11,574) (22,719) (22,314) (45,931) (43,092)
Other interest expense................ (1,891) (1,858) (5,148) (4,749) (9,063) (8,986)
Minority interest..................... (398) (595) (1,143) (933) (2,092) (1,219)
Equity in Earnings of Joint Ventures.. 361 331 950 641 1,508 1,032
Other................................. 585 (304) 706 (103) 1,345 (1,610)
----------- ----------- ---------- ---------- ---------- ------------
Total other income and (deductions). (11,034) (12,723) (25,420) (24,972) (50,126) (48,708)
----------- ----------- ---------- ---------- ---------- ------------
INCOME BEFORE INCOME TAXES.............. 4,928 2,087 100,211 96,610 128,286 108,281
INCOME TAX PROVISION.................... 1,914 1,156 35,533 33,486 47,712 36,206
----------- ----------- ---------- ---------- ---------- ------------
NET INCOME AVAILABLE FOR COMMON STOCK... $ 3,014 $ 931 $ 64,678 $ 63,124 $ 80,574 $ 72,075
=========== =========== ========== ========== ========== ============
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------- ----------------------- ---------------------------
1998 1997 1998 1997 1998 1997
------------ ----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE - BEGINNING OF PERIOD........... $ 436,989 $ 383,498 $ 375,325 $ 336,305 $ 359,429 $ 331,617
Add - Net income...................... 3,014 931 64,678 63,124 80,574 72,075
----------- ----------- ---------- ---------- ---------- ------------
440,003 384,429 440,003 399,429 440,003 403,692
Deduct - Cash dividends declared:
Common Stock....................... - 25,000 - 40,000 - 44,263
----------- ----------- ---------- ---------- ---------- ------------
BALANCE - END OF PERIOD................. $ 440,003 $ 359,429 $ 440,003 $ 359,429 $ 440,003 $ 359,429
=========== =========== ========== ========== ========== ============
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
7
<PAGE> 10
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------------- ------------
1998 1997 1997
--------------- ---------------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 20,032 $ 18,355 $ 14,353
Accounts receivable, less allowance for doubtful accounts of
$14,132, $23,442 and $15,015, respectively........................ 136,248 173,373 195,662
Accrued unbilled revenues.......................................... 15,500 16,158 91,896
Gas in inventory................................................... 35,617 36,499 40,201
Property taxes assessed applicable to future periods............... 43,152 37,885 64,827
Accrued gas cost recovery revenues................................. - 14,072 12,862
Other.............................................................. 28,408 29,344 33,361
--------------- ---------------- ------------
278,957 325,686 453,162
--------------- ---------------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures....................... 20,436 19,731 19,643
Long term investments.............................................. 36,532 3,737 35,110
Deferred postretirement benefit costs.............................. - 1,886 -
Deferred environmental costs....................................... 27,934 27,680 27,699
Prepaid benefit costs.............................................. 95,008 64,737 85,790
Other.............................................................. 52,612 50,587 46,972
--------------- ---------------- ------------
232,522 168,358 215,214
--------------- ---------------- ------------
Property, Plant and Equipment........................................ 2,843,708 2,706,922 2,790,352
Less - Accumulated depreciation and depletion ..................... 1,356,842 1,282,057 1,322,392
--------------- ---------------- ------------
1,486,866 1,424,865 1,467,960
--------------- ---------------- ------------
$ 1,998,345 $ 1,918,909 $ 2,136,336
=============== ================ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $ 89,329 $ 105,822 $ 130,267
Notes payable...................................................... 4,067 38,366 241,691
Current portion of long-term debt and capital lease obligations.... 58,204 28,512 34,956
Gas inventory equalization (Note 1)................................ 15,478 66,685 -
Federal income, property and other taxes payable................... 80,931 73,638 78,630
Deferred gas cost recovery revenues................................ 29,139 - -
Exchange gas payable............................................... 26,998 - 2,063
Customer deposits.................................................. 14,900 11,985 16,363
Other.............................................................. 37,241 45,842 65,717
--------------- ---------------- ------------
356,287 370,850 569,687
--------------- ---------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes.................................. 89,549 78,701 83,905
Unamortized investment tax credit.................................. 31,823 33,666 32,745
Tax benefits amortizable to customers.............................. 123,444 115,432 122,922
Accrued environmental costs........................................ 32,000 32,000 32,000
Minority interest.................................................. 16,600 18,070 17,283
Other.............................................................. 43,926 40,578 44,663
--------------- ---------------- ------------
337,342 318,447 333,518
--------------- ---------------- ------------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (NOTE 2). 624,014 629,484 617,107
--------------- ---------------- ------------
CONTINGENCIES (NOTE 5)
COMMON SHAREHOLDER'S EQUITY
Common stock....................................................... 10,300 10,300 10,300
Additional paid-in capital......................................... 230,399 230,399 230,399
Retained earnings.................................................. 440,003 359,429 375,325
--------------- ---------------- ------------
680,702 600,128 616,024
--------------- ---------------- ------------
$ 1,998,345 $ 1,918,909 $ 2,136,336
=============== ================ ============
</TABLE>
The notes to the consolidated financial statements are an integral part of
this statement.
8
<PAGE> 11
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 64,678 $ 63,124
Adjustments to reconcile net income to net cash
flow provided
from operating activities:
Depreciation and depletion
Per statement of income............................. 45,937 51,925
Charged to other accounts........................... 3,991 3,724
Deferred income taxes - current....................... (12,096) (13,122)
Deferred income taxes and investment tax credit - net. 5,244 375
Other................................................. (3,045) (544)
Changes in assets and liabilities, exclusive of changes
shown separately.................................... 181,909 168,284
---------- --------
Net cash provided from operating activities....... 286,618 273,766
---------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net....................................... (237,624) (226,760)
Issuance of long-term debt................................ 153,052 124,051
Cash dividend paid applicable to common stock............. - (40,000)
Retirement of long-term debt.............................. (122,263) (72,229)
---------- --------
Net cash used for financing activities............ (206,835) (214,938)
---------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (74,503) (57,423)
Other - net............................................... 399 6,940
---------- --------
Net cash used for investing activities............ (74,104) (50,483)
---------- --------
Net Increase in Cash and Cash Equivalents................... 5,679 8,345
Cash and Cash Equivalents, January 1........................ 14,353 10,010
---------- --------
Cash and Cash Equivalents, June 30.......................... $ 20,032 $ 18,355
========== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable - net............................... $ 57,377 $ (7,915)
Gas inventory equalization.............................. 15,478 66,685
Accrued/deferred gas cost recovery revenues............. 42,001 13,600
Accrued unbilled revenues............................... 76,396 91,219
Gas in inventory........................................ 4,584 31,411
Property taxes assessed applicable to future periods.... 21,675 22,707
Accounts payable........................................ (40,928) (24,903)
Federal income, property and other taxes payable........ 2,301 (11,150)
Exchange gas............................................ 24,935 (7,572)
Other current assets and liabilities.................... (12,890) (3,664)
Deferred and prepaid benefit costs...................... (9,218) 2,547
Deferred assets and liabilities......................... 198 (4,681)
---------- --------
$ 181,909 $168,284
========== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest, net of amounts capitalized.................... $ 29,174 $ 27,883
========== ========
Federal income taxes.................................... $ 12,541 $ 29,299
========== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
9
<PAGE> 12
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In
anticipation that interim inventory reductions will be replaced prior to year
end, the cost of gas for net withdrawals from inventory is recorded at the
estimated average purchase rate for the calendar year. The excess of these
charges over the LIFO cost is credited to the gas inventory equalization
account. During interim periods when there are net injections to inventory, the
equalization account is reversed. Approximately 57.8 billion cubic feet (Bcf)
and 39.8 Bcf of gas was included in inventory at June 30, 1998 and 1997,
respectively.
2. CAPITALIZATION
A. LONG-TERM DEBT ISSUANCE
In June 1998, MichCon issued $75,000,000 of 6.2% and $75,000,000 of
6.45% remarketable debt securities, both of which have stated maturities of
June 2038. These securities are "fall-away mortgage" debt and as such, are
secured debt as long as MichCon's current first mortgage bonds are
outstanding and become senior unsecured debt thereafter.
The securities are structured such that the interest rates of the
issues can be reset at various remarketing dates over the life of the debt.
The initial remarketing date is June 30, 2003 for the 6.2% debt and June 30,
2008 for the 6.45% debt. MichCon received a premium in return for
granting options to the underwriters to reset the interest rate for a period
of ten years at the initial remarketing date. The option premiums received
for these securities, net of financing costs incurred, totaled $3,052,000.
The option premium portions are being amortized to income over the intial
interest and corresponding option periods. If the underwriters elect not to
excercise their reset options, the securities become subject to the
remarketing feature. If MichCon and the remarketing agent cannot agree on an
interest rate or the remarketing agent is unable to remarket the securities,
MichCon will be required to repurchase the securities at their principal
amounts.
B. LONG-TERM DEBT REDEMPTION
In the second quarter of 1998, MichCon redeemed through a tender offer
$37,000,000 of the outstanding $55,000,000 balance of 9.125% first mortgage
bonds, due 2004 and $52,686,000 of the outstanding $70,000,000 balance of 8%
first mortgage bonds, due 2002.
3. LINES OF CREDIT
MichCon has established credit lines that allow for borrowings of up to
$150,000,000 under a 364-day revolving credit facility and up to $150,000,000
under a three-year revolving credit facility. These credit lines totaling
$300,000,000 support its commercial paper program. No borrowings were
outstanding under these lines as of June 30, 1998. Both the 364-day revolving
and three-year revolving credit facilities were renewed in July 1998.
10
<PAGE> 13
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
4. GAS PURCHASE SWAP AGREEMENTS
MichCon has entered into gas swap agreements that are intended to hedge
MichCon's gas purchase commitments and effectively fix the commodity rate
portion of certain gas purchase agreements. The swap reduces MichCon's price
risk; however, it limits potential gains from favorable changes in gas purchase
prices. Changes in the market value of the swap contracts are deferred and
included in inventory costs until the hedged transaction is completed, at which
time the realized gain or loss in included in the cost of purchased gas. As of
June 30, 1998 MichCon's deferred gain from such swap contracts is $214,800.
5. CONTINGENCIES
MichCon is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. Management cannot predict the final disposition of
such proceedings, but believes that adequate provision has been made for
probable losses. It is management's belief, after discussion with legal counsel,
that the ultimate resolution of those proceedings still pending will not have a
material adverse effect on MichCon's financial statements.
6. GENERAL
The accompanying consolidated financial statements should be read in
conjuction with MichCon's 1997 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1998 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary for a fair
presentation of the financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses and net income for
the interim periods should not be construed as representative of revenues,
expenses and net income for all or any part of the balance of the current year
or succeeding periods.
11
<PAGE> 14
OTHER INFORMATION
LEGAL PROCEEDINGS
As discussed most recently on page 10 in MichCon's 1997 Annual Report on
Form 10-K, in December 1994, a suit was filed against MichCon in Wayne County
Michigan Circuit Court by certain 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. Plaintiffs sought
injunctive relief, unspecified monetary damages and class action certification.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. The trial court denied
such certification on two separate occasions but granted a third motion to
certify the class.
While MichCon's appeal of the trial court decision granting class action
certification was pending in the Michigan Court of Appeals, the matter was
settled. On July 24, 1998, the Wayne County Circuit Court approved the
settlement. Under the terms of the settlement, 46,000 conservation loan
participants have until October 9, 1998 (75 days) to submit a claim form to be
reimbursed for a portion of the costs of installing a chimney liner or making
repairs to their chimney. In addition, customers will be eligible to purchase a
carbon monoxide detector from MichCon at a discounted price. MichCon will seek
indemnification and coverage of its attorney's fees from some of the contractors
and contribution from the other installers. It is management's belief, after
discussion with legal counsel, that the ultimate resolution of this proceeding
will not have a material effect on MichCon's financial statements.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
12-1 Computation of Ratio of Earnings to Fixed Charges
27-1 Financial Data Schedule
(b) Reports on Form 8-K
MichCon filed a report on Form 8-K dated June 2, 1998, under
Item 5, with respect to MCN Energy Group Inc.'s update of its
coal fines project and earnings expectations.
12
<PAGE> 15
MichCon also filed a report on Form 8-K dated June 18, 1998,
under Item 5, with respect to its offering of 6.20% Resetable
MAndatory Putable/remarketable Securities ("MAPS(SM)") due
June 30, 2038 and its 6.45% Extendable MandatOry Par Put
Remarketed Securities(SM) ("MOPPRS(SM)") due June 30, 2038
pursuant to its registration statement on Form S-3 (No.
333-56333) filed with the Securities and Exchange Commission
under the Securities Act of 1933. The following documents
were filed as Exhibits thereto:
- Purchase Agreement dated June 18, 1998 with respect
to the MAPS(SM).
- Purchase Agreement dated June 18, 1998 with respect
to the MOPPRS(SM).
- First Supplemental Indenture dated as of June 18,
1998 to the Senior Debt Securities Indenture dated
as of June 1, 1998 between Michigan Consolidated Gas
Company and Citibank, N.A.
- Thirty-fifth Supplemental Indenture dated as of June
18, 1998 to the Indenture of Mortgage and Deed of
Trust dated as of March 1, 1944 between Michigan
Consolidated
Gas Company and Citibank, N.A. and Robert T.
Kirchner, Trustees.
- Reset Remarketing Agreement dated as of June 23,
1998, by and between Michigan Consolidated Gas
Company and Salomon Brothers Inc.
- Reset Remarketing Agreement dated as of June 23,
1998, by and between Michigan Consolidated Gas
Company and Merrill Lynch & Co./Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
13
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICHIGAN CONSOLIDATED GAS COMPANY
Date: August 14, 1998 By: /s/ Howard L. Dow III
------------------------------
Howard L. Dow III
Senior Vice President and
Chief Financial Officer
14
<PAGE> 1
EXHIBIT 12-1
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended Twelve Months Ended
------------------- ------------------- -------------------
June 30, 1998 December 31, 1997 December 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)
Net Income ..................................... $128,267 $125,630 $122,239
Fixed charges .................................. 59,197 57,905 53,831
-------- -------- --------
Earnings as defined .......................... $187,464 $183,535 $176,070
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt ..................... $ 47,586 $ 47,024 $ 43,163
Interest on other borrowed funds ............... 9,063 8,664 8,012
Amortization of debt discounts, premium
and expense .................................. 1,003 1,032 1,081
Interest implicit in rentals (2) ............... 1,545 1,185 1,575
-------- -------- --------
Fixed charges as defined ..................... $ 59,197 $ 57,905 $ 53,831
======== ======== ========
Ratio of Earnings to Fixed Charges ............. 3.17 3.17 3.27
======== ======== ========
</TABLE>
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount is estimated to be a reasonable approximation of the interest
portion of rentals.
MichCon is a guarantor of certain other debt. Fixed charges related to such debt
are deemed to be immaterial and therefore have been excluded from the above
ratios.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,032
<SECURITIES> 0
<RECEIVABLES> 150,380
<ALLOWANCES> 14,132
<INVENTORY> 35,617
<CURRENT-ASSETS> 278,957
<PP&E> 2,843,708
<DEPRECIATION> 1,356,842
<TOTAL-ASSETS> 1,998,345
<CURRENT-LIABILITIES> 356,287
<BONDS> 624,014
0
0
<COMMON> 10,300
<OTHER-SE> 670,402
<TOTAL-LIABILITY-AND-EQUITY> 1,998,345
<SALES> 0
<TOTAL-REVENUES> 602,014
<CGS> 0
<TOTAL-COSTS> 476,383
<OTHER-EXPENSES> 437
<LOSS-PROVISION> 7,146
<INTEREST-EXPENSE> 27,867
<INCOME-PRETAX> 100,211
<INCOME-TAX> 35,533
<INCOME-CONTINUING> 64,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,678
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
