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Previous: SIEBERT FINANCIAL CORP, 10-Q/A, 1999-08-16 |
Next: MICHIGAN CONSOLIDATED GAS CO /MI/, 10-Q, 1999-08-16 |
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 1999,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from to
Commission File Number 1-7310
MICHIGAN CONSOLIDATED GAS COMPANY
| Michigan | 38-0478040 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of 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.
Number of shares outstanding of each of the registrant’s classes of common stock, as of July 30, 1999:
Common Stock, par value $1.00 per share: 10,300,000
Index to Form 10-Q
For Quarter Ended June 30, 1999
| Page | ||||||
| Number | ||||||
| COVER | i | |||||
| INDEX | ii | |||||
| PART I — FINANCIAL INFORMATION | ||||||
| Item 1. | Financial Statements | 11 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 1 | ||||
| PART II — OTHER INFORMATION | ||||||
| Item 6. | Exhibits and Reports on Form 8-K | 17 | ||||
| SIGNATURE | 18 | |||||
ii
Results of Operations
Results reflect earnings from new gas sales program — MichCon’s earnings were $8.2 million and $92.1 million for the 1999 second quarter and six-month period, respectively, resulting in increases of $5.2 million and $27.5 million from the comparable 1998 periods. Earnings for the 1999 twelve-month period were $104.4 million, which included an $11.2 million write-down (net of taxes and minority interest) of a gas gathering pipeline (Note 3). Excluding the write-down, earnings for the 1999 twelve-month period were $115.6 million, an increase of $35.1 million over the corresponding 1998 period. The earnings improvement for all 1999 periods reflects contributions from the new gas sales program as subsequently discussed. The 1999 six-month period also reflects the impact of more favorable weather.
Earnings Components (Dollars in Millions)
| Quarter | Six Months | Twelve Months | ||||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
| Change | Change | Change | Change | Change | Change | |||||||||||||||||||
| Operating Revenues | 12.8 | 7.4 | 81.6 | 13.6 | (3.2 | ) | (.3 | ) | ||||||||||||||||
| Cost of Gas | 2.9 | 5.0 | 33.7 | 12.2 | (35.8 | ) | (6.9 | ) | ||||||||||||||||
| Gross Margin | 9.9 | 8.6 | 47.9 | 14.7 | 32.6 | 5.5 | ||||||||||||||||||
| Operation and Maintenance | 2.1 | 3.4 | 7.4 | 6.0 | (3.4 | ) | (1.3 | ) | ||||||||||||||||
| Depreciation and Depletion | 1.3 | 5.4 | 3.4 | 7.5 | (1.4 | ) | (1.4 | ) | ||||||||||||||||
| Property and Other Taxes | (1.3 | ) | (9.0 | ) | (.1 | ) | (.2 | ) | (2.8 | ) | (4.7 | ) | ||||||||||||
| Write-down of Gathering Property (Note 3) | — | — | — | — | 24.8 | — | ||||||||||||||||||
| Other Income and Deductions | .6 | 5.4 | (1.8 | ) | (7.1 | ) | (8.1 | ) | (16.2 | ) | ||||||||||||||
| Income Before Income Taxes | 7.2 | 145.8 | 39.1 | 39.0 | 23.6 | 18.4 | ||||||||||||||||||
| Income Tax Provision | 2.0 | 106.3 | 11.6 | 32.6 | (.3 | ) | (.6 | ) | ||||||||||||||||
| Net Income | 5.2 | 171.0 | 27.5 | 42.5 | 23.9 | 29.6 | ||||||||||||||||||
Gross Margin
Gross margin (operating revenues less cost of gas) increased $9.9 million, $47.9 million and $32.6 million in the 1999 quarter, six- and twelve-month periods, respectively. The increase is due primarily to margins generated under MichCon’s new three-year gas sales program, which is part of its Regulatory Reform Plan (Note 2a). Under the gas sales program that began in January 1999, MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. This strategy is likely to continue producing favorable margins in each of the three years.
1
Management’s Discussion and Analysis (Continued)
Gross margins for the 1999 six-month period also reflect higher gas sales resulting from colder weather compared to the same 1998 period. Additionally, gross margins for all 1999 periods reflect revenues from the continued growth in other gas-related services.
MichCon’s operations are seasonal, with gross margins and earnings concentrated in the first and fourth quarters of each calendar year. By the end of the first quarter, the heating season is largely over, and MichCon typically incurs substantially reduced gross margins and earnings in the second quarter and losses in the third quarter. The seasonal nature of MichCon’s operations is expected to be more pronounced as a result of its new gas sales program.
Effect of Weather on Gas Markets and Earnings
| Quarter | Six Months | Twelve Months | |||||||||||||||||||||||
| 1999 | 1998 | 1999 | 1998 | 1999 | 1998 | ||||||||||||||||||||
| Percent Warmer Than Normal | (21.4 | )% | (24.8 | )% | (7.8 | )% | (20.1 | )% | (11.6 | )% | (12.9 | )% | |||||||||||||
| Decrease From Normal in: | |||||||||||||||||||||||||
| Gas Markets (Bcf) | (5.3 | ) | (6.1 | ) | (10.4 | ) | (25.3 | ) | (25.4 | ) | (26.2 | ) | |||||||||||||
| Net Income (Millions) | $ | (5.1 | ) | $ | (5.3 | ) | $ | (10.3 | ) | $ | (22.0 | ) | $ | (23.7 | ) | $ | (22.8 | ) | |||||||
Gas Sales and End User Transportation revenues in total increased by $14.5 million and $85.0 million for the 1999 quarter and six-month period, respectively, and decreased by $4.9 million for the 1999 twelve-month period. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that increased by .2 billion cubic feet (Bcf) and 12.6 Bcf in the current quarter and six-month period, respectively, and decreased by .5 Bcf in the 1999 twelve-month period. The fluctuations in gas sales and end user transportation deliveries were due primarily to weather, which was colder in all the 1999 periods compared to the corresponding 1998 periods. The effect of more favorable weather on deliveries in the 1999 twelve-month period was more than offset by a decrease in end user transportation deliveries as a result of the temporary shutdown of an industrial customer’s plant.
Revenues were also impacted by variations in the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCon’s new gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCon’s sales increased $.20 per Mcf (7%) and $.18 per Mcf (6%) for the 1999 quarter and six-month period, respectively, and decreased $.12 per Mcf (4%) for the 1999 twelve-month period.
2
Management’s Discussion and Analysis (Continued)
| Quarter | Six Months | Twelve Months | |||||||||||||||||||||||
| 1999 | 1998 | 1999 | 1998 | 1999 | 1998 | ||||||||||||||||||||
| Gas Markets (Millions) | |||||||||||||||||||||||||
| Gas Sales | $ | 133.0 | $ | 123.6 | $ | 568.7 | $ | 490.5 | $ | 902.0 | $ | 913.2 | |||||||||||||
| End User Transportation | 23.3 | 18.2 | 50.0 | 43.2 | 88.8 | 82.5 | |||||||||||||||||||
| Intermediate Transportation | 13.9 | 15.9 | 28.6 | 33.8 | 58.0 | 60.9 | |||||||||||||||||||
| Other | 15.4 | 15.1 | 36.3 | 34.5 | 66.5 | 61.8 | |||||||||||||||||||
| $ | 185.6 | $ | 172.8 | $ | 683.6 | $ | 602.0 | $ | 1,115.3 | $ | 1,118.4 | ||||||||||||||
| Gas Markets (Bcf) | |||||||||||||||||||||||||
| Gas Sales | 23.6 | 24.2 | 114.6 | 102.8 | 180.7 | 180.6 | |||||||||||||||||||
| End User Transportation | 31.8 | 31.0 | 74.2 | 73.4 | 140.8 | 141.4 | |||||||||||||||||||
| 55.4 | 55.2 | 188.8 | 176.2 | 321.5 | 322.0 | ||||||||||||||||||||
| Intermediate Transportation | 135.0 | 148.4 | 262.3 | 296.9 | 503.0 | 601.1 | |||||||||||||||||||
| 190.4 | 203.6 | 451.1 | 473.1 | 824.5 | 923.1 | ||||||||||||||||||||
Additionally, gas sales and end user transportation revenues in total were impacted by MichCon’s three-year customer choice program, which is also part of its Regulatory Reform Plan. Under the customer choice program that began in April 1999, approximately 70,000 or 6% of its customers are purchasing natural gas from suppliers other than MichCon. However, MichCon continues to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. MichCon’s customers who have chosen to purchase their gas from other suppliers are reflected as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have decreased, partially offset by an increase in end user transportation revenues, resulting in a net decrease in total operating revenues due to the gas commodity component included in gas sales rates.
Intermediate Transportation revenues decreased $2.0 million, $5.2 million and $2.9 million in the 1999 quarter, six- and twelve-month periods, respectively. Intermediate transportation revenues reflect lower off-system volumes of 13.4 Bcf, 34.6 Bcf and 98.1 Bcf in the 1999 quarter, six- and twelve-month periods, respectively. A significant portion of the volume decrease was for customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected. The decrease in intermediate transportation revenues for all 1999 periods is due in part to an adjustment in 1998 of revenues related to fees generated from tracking the transfer of gas title on MichCon’s transportation system. The decrease for all 1999 periods is also due to customers shifting volumes from a higher rate to a lower rate transportation route.
3
Management’s Discussion and Analysis (Continued)
Other Operating Revenues increased $.3 million, $1.8 million and $4.7 million in the 1999 quarter, six- and twelve-month periods, respectively. The improvements are due to an increase in facility development and appliance maintenance services, late payment fees and other gas-related services.
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 Gas Cost Recovery (GCR) mechanism that was in effect through December 1998 (Note 2b), MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon’s new gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.
Cost of gas sold increased $2.9 million and $33.7 million in the 1999 quarter and six-month period, respectively, and decreased $35.8 million in the 1999 twelve-month period. The increase in the current quarter and six-month period was due primarily to higher weather-driven sales volumes. Cost of gas sold was also impacted by a decrease in average prices paid of $.05 per Mcf (2%) in the 1999 six-month period and $.27 per Mcf (9%) in the current twelve-month period. Prices paid for gas sold in the 1999 second quarter increased by $.01 per Mcf.
Operation and Maintenance
Operation and maintenance expenses increased $2.1 million and $7.4 million in the 1999 quarter and six-month period, respectively, and decreased $3.4 million in the 1999 twelve-month period. The increase in the 1999 quarter and six-month period is due in part to additional computer system support costs associated with MichCon’s new customer information system as well as advertising costs associated with MichCon’s new gas sales program. Additionally, the 1999 quarter increase reflects higher uncollectible gas accounts expense due to higher gas sales revenues. The decrease in the 1999 twelve-month period is due to lower employee benefit costs, primarily pension and retiree healthcare costs, as well as lower uncollectible gas accounts expense. The 1998 six-and twelve-month periods benefited from an interstate pipeline company refund.
Depreciation and Depletion
Depreciation and depletion increased $1.3 million and $3.4 million in the 1999 quarter and six-month period, respectively, and decreased $1.4 million in the 1999 twelve-month period. Depreciation on higher plant balances impacted all 1999 periods. Additionally, the twelve-
4
Management’s Discussion and Analysis (Continued)
month period comparison reflects the effect of lower depreciation rates for MichCon’s utility property, plant and equipment that became effective in January 1998.
Property and Other Taxes
Property and other taxes decreased $1.3 million, $.1 million and $2.8 million in the 1999 quarter, six- and twelve-month periods, respectively. The improvement in all 1999 periods is attributable to lower property taxes. The 1999 quarter and twelve-month periods were also impacted by lower Michigan Single Business Tax resulting from an increase in capital acquisition deductions.
Write-Down of Gathering Property
The property write-down of $24.8 million in the 1999 twelve-month period represents the impairment of a Michigan gas gathering system (Note 3).
Other Income and Deductions
Other income and deductions increased $.6 million in the 1999 quarter, and decreased $1.8 million and $8.1 million in the current six- and twelve-month periods, respectively. All 1998 periods were impacted by gains from the sale of property. The 1999 quarter and twelve-month period include slightly higher interest costs. Other income and deductions in the 1999 twelve-month period also include a change in minority interest reflecting the joint venture partners’ share of the write-down of the gas gathering properties (Note 3).
Income Taxes
Income taxes for all 1999 periods were impacted by an increase in pre-tax earnings. Income tax comparisons for the 1999 six- and twelve-month periods were also affected by the favorable resolution of prior years’ tax issues as well as the flow-through effect of certain book-to-tax temporary differences. The 1998 six- and twelve-month periods include stock-related tax benefits.
Capital Resources and Liquidity
| Six Months | |||||||||
| 1999 | 1998 | ||||||||
| Cash and Cash Equivalents (in Millions) | |||||||||
| Cash Flow Provided From (Used For): | |||||||||
| Operating activities | $ | 222.6 | $ | 286.6 | |||||
| Financing activities | (159.7 | ) | (206.8 | ) | |||||
| Investing activities | (58.7 | ) | (74.1 | ) | |||||
| Net Increase in Cash and Cash Equivalents | $ | 4.2 | $ | 5.7 | |||||
5
Management’s Discussion and Analysis (Continued)
Operating Activities
MichCon’s cash flow from operating activities decreased $64.0 million during the 1999 six-month period as compared to the same 1998 period. The decrease was due primarily to higher working capital requirements, partially offset by higher earnings, after adjusting for non-cash items (depreciation and deferred taxes).
Financing Activities
MichCon’s cash used for financing activities decreased $47.1 million in the 1999 six-month period as compared to the same 1998 period due primarily to less short-term and long-term debt being repaid in 1999.
MichCon maintains a relatively consistent amount of cash and cash equivalents through the use of short-term borrowings. Short-term borrowings are normally 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, MichCon’s short-term borrowings normally increase 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. The 364-day facility was renewed in July 1999. During the first six months of 1999, MichCon repaid $194.1 million of commercial paper, leaving borrowings of $24.3 million outstanding under this program at June 30, 1999.
During the 1999 quarter, MichCon issued $110 million of senior debt (Note 6) and repaid $50 million of first mortgage bonds.
Investing Activities
MichCon’s cash used for investing activities decreased $15.4 million in the 1999 six-month period as compared to the same 1998 period. The decrease was due to lower capital expenditures, primarily related to the 1998 period including the purchase of an office building previously leased. Capital expenditures primarily represent 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.
6
Management’s Discussion and Analysis (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 control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices.
MichCon has begun, and plans to continue capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently implementing its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program which is designed to offer all sales customers added choices and greater price certainty. Beginning April 1, 1999, a limited number of customers 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 previously existing sales margins on these services. The Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon and fixed the gas commodity component of MichCon’s sales rates at $2.95 per Mcf for the three-year period that began in January 1999. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. Also beginning in 1999, an income sharing mechanism allows customers to share in profits when actual returns on equity from utility operations exceed predetermined thresholds. The impact of weather and expenses incurred in the second half of 1999 will determine the actual amount of profit, if any, to be shared with customers.
Year 2000
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon has implemented a corporate-wide, four-phase Year 2000 approach consisting of: i) inventory — identification of the components of MichCon’s systems, equipment and facilities; ii) assessment — assessing Year 2000 readiness and prioritizing the risks of items identified in the inventory phase; iii) remediation — upgrading, repairing and replacing non-compliant systems, equipment and facilities; and iv) testing — verifying items remediated. MichCon is on schedule to have its mission critical business systems, and measurement and control systems (including embedded microprocessors) Year 2000 ready as detailed below. The extension of the program to September 1999 reflects MichCon’s determination that additional testing and remediation is appropriate for some critical business and control systems for both MichCon
7
Management’s Discussion and Analysis (Continued)
and its vendors. The estimated completion status of these systems and the projected status for the future follows:
| Inventory | Assessment | Remediation | Testing | ||||||||||||||
| Business Systems: | |||||||||||||||||
| June 30, 1999 | 100% | 100% | 90% | 80% | |||||||||||||
| September 30, 1999 | 100% | 100% | 100% | 100% | |||||||||||||
| Measurement and Control Systems: | |||||||||||||||||
| June 30, 1999 | 100% | 100% | 98% | 98% | |||||||||||||
| September 30, 1999 | 100% | 100% | 100% | 100% | |||||||||||||
Costs associated with the Year 2000 issue are not expected to have a material adverse effect on MichCon’s results of operation, liquidity and financial condition. The total costs are estimated to be between $3 million and $4 million, of which approximately $2.8 million was incurred through June 1999. 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 ready. 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 anticipates a smooth transition to the Year 2000. However, the failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain business activities and operations. Such interruptions or failures could have a material adverse effect on MichCon’s results of operations, liquidity and financial condition. Due to the uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of key operators, suppliers and government agencies, MichCon cannot certify that it will be unaffected by Year 2000 complications.
In order to reduce its Year 2000 risk, MichCon is developing contingency plans for mission-critical processes in the event of a Year 2000 complication. Contingency plans for several essential gas transmission facilities continue to be tested under a “power outage” scenario and have achieved excellent results. Contingency plans will continue to be refined throughout 1999 as MichCon works with operators, suppliers and governmental agencies.
Market Risk Information
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon’s primary market risk arises from fluctuations in natural gas prices and interest rates. MichCon manages natural gas price and interest rate risk through the use of derivative instruments and limits the use of such instruments to hedging activities.
8
Management’s Discussion and Analysis (Continued)
Natural Gas Price Risk
MichCon closely monitors and manages its exposure to natural gas price risk through a variety of risk management techniques. Natural gas swap agreements are used to manage MichCon’s exposure to the risk of market price fluctuations on natural gas purchase contracts. During the 1999 six-month period, there were no significant changes to MichCon’s natural gas price risk.
Interest Rate Risk
MichCon is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. In order to manage interest costs and risk, MichCon uses interest rate swap agreements to exchange fixed and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. During the 1999 six-month period, there were no significant changes to MichCon’s interest rate risk.
New Accounting Pronouncements
Derivative and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) 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. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133.” SFAS No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
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 at this time.
9
Management’s Discussion and Analysis (Concluded)
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 1998 Annual Report on Form 10-K.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act. Therefore, MichCon claims the full protections established by the Act.
10
| Three Months Ended | Six Months Ended | Twelve Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | June 30, | |||||||||||||||||||||||||
| 1999 | 1998 | 1999 | 1998 | 1999 | 1998 | ||||||||||||||||||||||
| Operating Revenues (Note 2) | $ | 185,555 | $ | 172,787 | $ | 683,645 | $ | 602,014 | $ | 1,115,289 | $ | 1,118,448 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||
| Cost of gas | 60,410 | 57,512 | 308,761 | 275,101 | 485,189 | 521,026 | |||||||||||||||||||||
| Operation and maintenance | 63,942 | 61,868 | 131,488 | 124,090 | 259,795 | 263,231 | |||||||||||||||||||||
| Depreciation and depletion | 24,758 | 23,492 | 49,366 | 45,937 | 96,312 | 97,715 | |||||||||||||||||||||
| Property and other taxes | 12,700 | 13,953 | 31,162 | 31,255 | 55,345 | 58,064 | |||||||||||||||||||||
| Write-down of gathering property (Note 4) | — | — | — | — | 24,800 | — | |||||||||||||||||||||
| Total operating expenses | 161,810 | 156,825 | 520,777 | 476,383 | 921,441 | 940,036 | |||||||||||||||||||||
| Operating Income | 23,745 | 15,962 | 162,868 | 125,631 | 193,848 | 178,412 | |||||||||||||||||||||
| Other Income and (Deductions) | |||||||||||||||||||||||||||
| Interest income | 946 | 822 | 1,945 | 1,934 | 5,699 | 4,107 | |||||||||||||||||||||
| Interest on long-term debt | (11,525 | ) | (10,513 | ) | (22,491 | ) | (22,719 | ) | (44,656 | ) | (45,931 | ) | |||||||||||||||
| Other interest expense | (1,181 | ) | (1,891 | ) | (3,836 | ) | (5,148 | ) | (10,801 | ) | (9,063 | ) | |||||||||||||||
| Minority interest | (266 | ) | (398 | ) | (523 | ) | (1,143 | ) | 6,347 | (2,092 | ) | ||||||||||||||||
| Equity in earnings of joint ventures | 572 | 361 | 1,013 | 950 | 2,009 | 1,508 | |||||||||||||||||||||
| Other | (177 | ) | 585 | 287 | 706 | (601 | ) | 1,345 | |||||||||||||||||||
| Total other income and (deductions) | (11,631 | ) | (11,034 | ) | (23,605 | ) | (25,420 | ) | (42,003 | ) | (50,126 | ) | |||||||||||||||
| Income Before Income Taxes | 12,114 | 4,928 | 139,263 | 100,211 | 151,845 | 128,286 | |||||||||||||||||||||
| Income Tax Provision | 3,949 | 1,914 | 47,125 | 35,533 | 47,409 | 47,712 | |||||||||||||||||||||
| Net Income Available for Common Stock | $ | 8,165 | $ | 3,014 | $ | 92,138 | $ | 64,678 | $ | 104,436 | $ | 80,574 | |||||||||||||||
Consolidated Statement of Retained Earnings (Unaudited)
| Three Months Ended | Six Months Ended | Twelve Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | June 30, | |||||||||||||||||||||||
| 1999 | 1998 | 1999 | 1998 | 1999 | 1998 | ||||||||||||||||||||
| Balance — Beginning of Period | $ | 472,440 | $ | 436,989 | $ | 406,144 | $ | 375,325 | $ | 440,003 | $ | 359,429 | |||||||||||||
| Add — Net income | 8,165 | 3,014 | 92,138 | 64,678 | 104,436 | 80,574 | |||||||||||||||||||
| 480,605 | 440,003 | 498,282 | 440,003 | 544,439 | 440,003 | ||||||||||||||||||||
| Deduct — Cash dividends declared | — | — | 17,500 | — | 63,657 | — | |||||||||||||||||||
| — Other | — | — | 177 | — | 177 | — | |||||||||||||||||||
| Balance — End of Period | $ | 480,605 | $ | 440,003 | $ | 480,605 | $ | 440,003 | $ | 480,605 | $ | 440,003 | |||||||||||||
The notes to the consolidated financial statements are an integral part of these statements.
11
Michigan Consolidated Gas Company and Subsidiaries
| June 30, | ||||||||||||||
| December 31, | ||||||||||||||
| 1999 | 1998 | 1998 | ||||||||||||
| Assets | ||||||||||||||
| Current Assets | ||||||||||||||
| Cash and cash equivalents | $ | 10,823 | $ | 20,032 | $ | 6,603 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $13,492, $14,132 and $8,928, respectively | 142,017 | 136,248 | 142,818 | |||||||||||
| Accrued unbilled revenues | 20,302 | 15,500 | 86,767 | |||||||||||
| Gas in inventory | 43,892 | 35,617 | 56,969 | |||||||||||
| Property taxes assessed applicable to future periods | 48,473 | 43,152 | 71,165 | |||||||||||
| Other | 34,512 | 28,408 | 30,169 | |||||||||||
| 300,019 | 278,957 | 394,491 | ||||||||||||
| Deferred Charges and Other Assets | ||||||||||||||
| Investment in and advances to joint ventures | 19,853 | 20,436 | 19,343 | |||||||||||
| Long term investments | 66,202 | 36,532 | 65,556 | |||||||||||
| Deferred environmental costs | 28,404 | 27,934 | 28,169 | |||||||||||
| Prepaid benefit costs | 134,590 | 95,008 | 113,879 | |||||||||||
| Other | 66,758 | 52,612 | 59,007 | |||||||||||
| 315,807 | 232,522 | 285,954 | ||||||||||||
| Property, Plant and Equipment (Note 4) | 2,942,856 | 2,843,708 | 2,889,020 | |||||||||||
| Less — Accumulated depreciation and depletion | 1,445,967 | 1,356,842 | 1,396,940 | |||||||||||
| 1,496,889 | 1,486,866 | 1,492,080 | ||||||||||||
| $ | 2,112,715 | $ | 1,998,345 | $ | 2,172,525 | |||||||||
| Liabilities and Shareholder’s Equity | ||||||||||||||
| Current Liabilities | ||||||||||||||
| Accounts payable | $ | 89,662 | $ | 89,329 | $ | 98,891 | ||||||||
| Notes payable | 28,319 | 4,067 | 221,169 | |||||||||||
| Current portion of long-term debt and capital lease obligations | 46,135 | 58,204 | 58,288 | |||||||||||
| Gas inventory equalization (Note 1) | 22,774 | 15,478 | — | |||||||||||
| Federal income, property and other taxes payable | 86,097 | 80,931 | 61,059 | |||||||||||
| Deferred gas cost recovery revenues | — | 29,139 | 14,980 | |||||||||||
| Exchange gas payable | 20,845 | 26,998 | 25,337 | |||||||||||
| Customer deposits | 15,830 | 14,900 | 18,769 | |||||||||||
| Other | 43,125 | 37,241 | 67,222 | |||||||||||
| 352,787 | 356,287 | 565,715 | ||||||||||||
| Deferred Credits and Other Liabilities | ||||||||||||||
| Deferred income taxes | 103,198 | 89,549 | 88,567 | |||||||||||
| Unamortized investment tax credit | 28,823 | 31,823 | 29,784 | |||||||||||
| Tax benefits amortizable to customers | 128,869 | 123,444 | 130,120 | |||||||||||
| Accrued environmental costs | 31,704 | 32,000 | 32,000 | |||||||||||
| Minority interest | 8,363 | 16,600 | 8,201 | |||||||||||
| Other | 51,663 | 43,926 | 51,460 | |||||||||||
| 352,620 | 337,342 | 340,132 | ||||||||||||
| Long-Term Debt, Including Capital Lease Obligations (Note 1) | 686,004 | 624,014 | 619,835 | |||||||||||
| Contingencies (Note 6) | ||||||||||||||
| Common Shareholder’s Equity | ||||||||||||||
| Common stock | 10,300 | 10,300 | 10,300 | |||||||||||
| Additional paid-in capital | 230,399 | 230,399 | 230,399 | |||||||||||
| Retained earnings | 480,605 | 440,003 | 406,144 | |||||||||||
| 721,304 | 680,702 | 646,843 | ||||||||||||
| $ | 2,112,715 | $ | 1,998,345 | $ | 2,172,525 | |||||||||
The notes to the consolidated financial statements are an integral part of this statement.
12
Michigan Consolidated Gas Company and Subsidiaries
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 1999 | 1998 | |||||||||||
| Cash Flow From Operating Activities | ||||||||||||
| Net income | $ | 92,138 | $ | 64,678 | ||||||||
| Adjustments to reconcile net income to net cash flow provided from operating activities: | ||||||||||||
| Depreciation and depletion | ||||||||||||
| Per statement of income | 49,366 | 45,937 | ||||||||||
| Charged to other accounts | 4,390 | 3,991 | ||||||||||
| Deferred income taxes — current | (11,003 | ) | (12,096 | ) | ||||||||
| Deferred income taxes and investment tax credit — net | 12,419 | 5,244 | ||||||||||
| Other | (1,388 | ) | (3,045 | ) | ||||||||
| Changes in assets and liabilities, exclusive of changes shown separately | 76,700 | 181,909 | ||||||||||
| Net cash provided from operating activities | 222,622 | 286,618 | ||||||||||
| Cash Flow From Financing Activities | ||||||||||||
| Notes payable — net | (192,850 | ) | (237,624 | ) | ||||||||
| Issuance of long-term debt (Note 6) | 106,535 | 153,052 | ||||||||||
| Cash dividend paid applicable to common stock | (17,500 | ) | — | |||||||||
| Retirement of long-term debt | (55,918 | ) | (122,263 | ) | ||||||||
| Net cash used for financing activities | (159,733 | ) | (206,835 | ) | ||||||||
| Cash Flow From Investing Activities | ||||||||||||
| Notes receivable — affiliate — net | (1,669 | ) | — | |||||||||
| Capital expenditures | (58,097 | ) | (74,503 | ) | ||||||||
| Other — net | 1,097 | 399 | ||||||||||
| Net cash used for investing activities | (58,669 | ) | (74,104 | ) | ||||||||
| Net Increase in Cash and Cash Equivalents | 4,220 | 5,679 | ||||||||||
| Cash and Cash Equivalents, January 1 | 6,603 | 14,353 | ||||||||||
| Cash and Cash Equivalents, June 30 | $ | 10,823 | $ | 20,032 | ||||||||
| Changes in Assets and Liabilities, Exclusive of Changes Shown Separately | ||||||||||||
| Accounts receivable — net | $ | (609 | ) | $ | 57,377 | |||||||
| Gas inventory equalization | 22,774 | 15,478 | ||||||||||
| Accrued/deferred gas cost recovery revenues | (15,153 | ) | 42,001 | |||||||||
| Accrued unbilled revenues | 66,465 | 76,396 | ||||||||||
| Gas in inventory | 13,077 | 4,584 | ||||||||||
| Property taxes assessed applicable to future periods | 22,692 | 21,675 | ||||||||||
| Accounts payable | (9,229 | ) | (40,928 | ) | ||||||||
| Federal income, property and other taxes payable | 25,038 | 2,301 | ||||||||||
| Exchange gas payable | (4,492 | ) | 24,935 | |||||||||
| Other current assets and liabilities | (18,647 | ) | (12,890 | ) | ||||||||
| Prepaid benefit costs | (20,711 | ) | (9,218 | ) | ||||||||
| Deferred assets and liabilities | (4,505 | ) | 198 | |||||||||
| $ | 76,700 | $ | 181,909 | |||||||||
| Supplemental Disclosures | ||||||||||||
| Cash paid for: | ||||||||||||
| Interest, net of amounts capitalized | $ | 30,314 | $ | 29,174 | ||||||||
| Federal income taxes | $ | 13,224 | $ | 12,541 | ||||||||
The notes to the consolidated financial statements are an integral part of this statement.
13
Michigan Consolidated Gas Company and Subsidiaries
1. General
The accompanying consolidated financial statements should be read in conjunction with MichCon’s 1998 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year’s financial statements to conform with the 1999 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.
2. Regulatory Matters
a. Regulatory Reform Plan
| As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon implemented its Regulatory Reform Plan in January 1999. The plan includes a new three-year gas sales program under which MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. | |
| The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, with approximately 70,000 customers choosing to purchase natural gas from suppliers other than MichCon. Plan years begin April 1 of each year, and the number of customers allowed to participate in the plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume limitation on commercial and industrial participants. The volume limitation for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. Various parties have appealed the Michigan Public Service Commission’s (MPSC) approval of the plan. While management believes the plan will be upheld on appeal, there can be no assurance as to the outcome. |
b. Gas Cost Recovery Proceedings
| Prior to January 1999, the Gas Cost Recovery (GCR) process allowed MichCon to recover its cost of gas sold if the MPSC determined that such costs were reasonable and prudent. An annual GCR reconciliation proceeding provided a review of gas costs incurred during the previous year and determined whether gas costs had been overcollected or undercollected, and as a result, whether a refund or surcharge, including interest, was |
14
Notes to the Consolidated Financial Statements (Continued)
| required to be returned to or collected from GCR customers. The GCR process was suspended with the implementation of MichCon’s Regulatory Reform Plan in January 1999. |
| In February 1999, MichCon filed its final GCR reconciliation case covering gas costs incurred during 1998 which indicates an overrecovery of $18,000,000, including interest. Management believes that 1998 gas costs were reasonable and prudent and that the MPSC will approve the gas costs incurred. However, management cannot predict the outcome of this proceeding. During the first quarter of 1999, MichCon refunded the overrecovery to customers as a reduction in gas sales rates. |
3. Property Write-Down
As discussed in MichCon’s 1998 Annual Report on Form 10-K, MichCon recognized a $24,800,000 pre-tax loss ($11,200,000 net of taxes and minority interest) from the write-down of a gas gathering pipeline system in the third quarter of 1998. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the system’s carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value.
4. 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 58.9 Bcf and 57.8 Bcf of gas was included in inventory at June 30, 1999 and 1998, respectively.
5. Lines of Credit
MichCon has established credit lines that allow for borrowing 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 MichCon’s commercial paper program. The 364-day facility was renewed in July 1999.
6. Long-Term Debt
In June 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due June 2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. The notes are insured by a financial guaranty insurance policy and are rated AAA or its equivalent by the major rating agencies. The notes are redeemable on or after June 1, 2004.
15
Notes to the Consolidated Financial Statements (Concluded)
7. 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. These proceedings include certain contract disputes between MichCon and gas producers. 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.
16
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
| Registrant filed a report on Form 8-K dated June 14, 1999, under Item 5, with respect to the offering of its 6.85% Senior Secured Insured Quarterly Notes due 2038 and its 6.85% Senior Notes due 2039 pursuant to the 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 4, 1999 with respect to the Senior Secured Insured Quarterly Notes due 2038 | |
| • | Purchase agreement dated June 4, 1999 with respect to the Senior Notes due 2039 | |
| • | Second Supplemental Indenture dated as of June 9, 1999 to the Senior Debt Securities Indenture dated as of June 1, 1998 between registrant and Citibank, N.A. | |
| • | Consent of PricewaterhouseCoopers LLP with respect to the Senior Secured Insured Quarterly Notes due 2038 | |
| • | Consent of PricewaterhouseCoopers LLP with respect to the Senior Notes due 2039 |
17
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 |
| By: | /s/ ROBERT KASLIK |
|
|
|
| Robert Kaslik | |
| Controller |
Date: August 16, 1999
18
Exhibit Index
| Exhibit No. | Description | |||
| 12.1 | Computation of Ratio of Earnings to Fixed Changes | |||
| 27-1 | Financial Data Schedule | |||
|
|