<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 MARCH 31, 1999, 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 April 30, 1999:
Common Stock, par value $1.00 per share: 10,300,000
================================================================================
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
PAGE
NUMBER
------
COVER................................................................ i
INDEX................................................................ ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 8
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............................ 13
SIGNATURE............................................................ 14
<PAGE> 3
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Results reflect earnings from new gas sales program and more favorable
weather - MichCon's earnings were $84.0 million for the 1999 first quarter, an
increase of $22.3 million from the comparable 1998 period. Earnings for the 1999
twelve-month period were $99.3 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 $110.5 million, an increase of $32.0 million over the corresponding 1998
period. The earnings improvement for the 1999 first quarter reflects
contributions from the new gas sales program, the impact of more favorable
weather and an increase in other operating revenues. The increase in earnings
for the 1999 twelve-month period reflects the impact of the gas sales program,
an increase in other operating revenues, as well as significantly lower
operating expenses. These improvements for the 1999 twelve-month period more
than offset the lower gross margins resulting from reduced gas sales and end
user transportation deliveries which were caused by warmer weather.
- --------------------------------------------------------------------------------
EARNINGS COMPONENTS (DOLLARS IN MILLIONS)
COMPARING 1999 TO 1998
<TABLE>
<CAPTION>
QUARTER TWELVE MONTHS
---------------------------- ----------------------------
$ CHANGE % CHANGE $ CHANGE % CHANGE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue............................ 68.9 16.0 (52.9) (4.6)
Cost of Gas.................................. 30.8 14.1 (64.3) (11.8)
Gross Margin................................. 38.1 18.0 11.3 1.9
Operation and Maintenance.................... 5.3 8.6 (13.0) (4.8)
Depreciation and Depletion................... 2.2 9.6 (5.6) (5.6)
Property and Other Taxes..................... 1.2 6.7 (3.7) (6.1)
Write-down of Gathering Property (Note 3).... - - 24.8 -
Other Income and Deductions.................. (2.4) (16.8) (10.4) (20.1)
Income Tax Provision......................... 9.6 28.4 (1.6) (3.4)
Net Income................................... 22.3 36.2 20.8 26.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
GROSS MARGIN
Gross margin (operating revenues less cost of gas) increased $38.1 million
and $11.3 million in the 1999 first quarter and twelve-month period,
respectively, due primarily to approximately $22.5 million of margins generated
in the current quarter under MichCon's new three-year gas sales program that
began in January 1999 (Note 2a). Under the gas sales program, 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 produce favorable margins in each of the three years.
Gross margins for the 1999 first quarter also reflect higher gas sales
resulting from colder weather compared to the same 1998 period. Gross margins
for the current twelve-month period reflect lower gas sales due to significantly
warmer weather. Additionally, gross margins for both 1999 periods reflect
revenues from the continued growth in other gas-related services.
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
MichCon's operations are very 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
---------------------------------------------
<TABLE>
<CAPTION>
QUARTER TWELVE MONTHS
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Percentage Colder (Warmer)
than Normal....................... (4.3)% (18.8)% (12.0)% (6.9)%
Increase (Decrease) from
Normal in:
Gas Markets (Bcf)............. (5.1) (19.2) (26.2) (15.5)
Net Income (Millions)........ $ (5.1) $ (16.7) $ (23.7) $ (13.5)
</TABLE>
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $70.5
million for the 1999 first quarter and decreased by $62.1 million for the 1999
twelve-month period. Revenues were affected by fluctuations in gas sales and end
user transportation deliveries that increased 12.3 billion cubic feet (Bcf) in
the current quarter and decreased by 12.9 Bcf in the 1999 twelve-month period.
The fluctuations in gas sales and end user transportation deliveries were due
primarily to weather, which was 14.5% colder in the 1999 first quarter and 5.1%
warmer in the current twelve-month period compared to the corresponding 1998
periods. 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 $.18 per Mcf (6%) for the 1999
first quarter and decreased $.10 per Mcf (3%) for the 1999 twelve-month period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
QUARTER TWELVE MONTHS
1999 1998 1999 1998
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
GAS MARKETS (IN MILLIONS)
Gas Sales.............................. $ 435.7 $ 366.9 $ 892.6 $ 954.8
End User Transportation................ 26.7 25.0 83.7 83.6
Intermediate Transportation............ 14.7 18.0 59.9 58.4
Other.................................. 21.0 19.3 66.3 58.7
------------- ----------- ------------ -----------
$ 498.1 $ 429.2 $ 1,102.5 $ 1,155.5
============= =========== ============ ===========
GAS MARKETS (IN BCF)
Gas Sales.............................. 91.0 78.7 181.2 191.1
End User Transportation................ 42.4 42.4 140.1 143.1
------------- ----------- ------------ -----------
133.4 121.1 321.3 334.2
Intermediate Transportation............ 127.4 148.4 516.5 594.3
------------- ----------- ------------ -----------
260.8 269.5 837.8 928.5
============= =========== ============ ===========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INTERMEDIATE TRANSPORTATION revenues decreased $3.3 million in the 1999
first quarter and increased $1.5 million in the 1999 twelve-month period.
Intermediate transportation revenues reflect lower off-system
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
volumes of 21.0 Bcf and 77.8 Bcf in the 1999 first quarter and twelve-month
period, 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 increase in
intermediate transportation revenues for the 1999 twelve-month period is due in
part to increased fees generated from tracking the transfer of gas title on
MichCon's transportation system.
OTHER OPERATING REVENUES increased $1.7 million in the 1999 first quarter
and $7.6 million in the 1999 twelve-month period. The improvements are due to an
increase in appliance maintenance services 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 $30.8 million in the 1999 first quarter and
decreased $64.3 million in the 1999 twelve-month period, primarily due to
variations in weather-driven sales volumes. Cost of gas sold was also impacted
by a decrease in prices paid of $.06 per Mcf (2%) in the 1999 first quarter and
$.22 per Mcf (8%) in the current twelve-month period.
OPERATION AND MAINTENANCE
Operation and maintenance expenses increased $5.3 million in the 1999
first quarter and decreased $13.0 million in the 1999 twelve-month period. The
increase in the 1999 quarter is due in part to additional computer system costs
and advertising costs associated with MichCon's new gas sales program, partially
offset by lower uncollectible gas accounts expense. The decrease in the 1999
twelve-month period reflects lower employee benefit costs, primarily pension and
retiree healthcare costs, as well as lower uncollectible gas accounts expense.
Additionally, both 1998 periods benefited from an interstate pipeline company
refund.
DEPRECIATION AND DEPLETION
Depreciation and depletion increased $2.2 million in the 1999 first
quarter and decreased $5.6 million in the 1999 twelve-month period. Depreciation
on higher plant balances impacted both 1999 periods. Additionally, the
twelve-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 increased $1.2 million in the 1999 first quarter
and decreased $3.7 million in the 1999 twelve-month period. The current quarter
increase reflects higher Michigan Single Business Tax resulting from an
increase in taxable income as well as higher property taxes due to an increase
in plant balances. The decrease in the 1999 twelve-month period is attributable
to lower Michigan Single Business Tax.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
WRITE-DOWN OF GATHERING PROPERTY
The property write-down of $24.8 million in the 1999 twelve-month period
reflects the impairment of a Michigan gas gathering system (Note 3).
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $2.4 million in the 1999 first
quarter and $10.4 million in the current twelve-month period. Both 1999 periods
were impacted by lower interest costs primarily due to a decrease in the average
interest rate on borrowings. Other income and deductions in the 1999
twelve-month period also reflect 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 both 1999 periods were impacted by an increase in pre-tax
earnings. Income tax comparisons were also affected by the favorable resolution
of prior years' tax issues in the 1999 first quarter. Additionally,
stock-related tax benefits were recorded in 1998 as well as a provision for tax
issues.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
QUARTER
---------------------------------
CASH AND CASH EQUIVALENTS (in Millions) 1999 1998
------------- ------------
Cash Flow Provided From (Used For):
<S> <C> <C>
Operating activities.............................................. $ 179.7 $ 170.1
Financing activities.............................................. (136.7) (129.4)
Investing activities.............................................. (26.1) (38.0)
------------ ------------
Net Increase in Cash and Cash Equivalents............................ $ 16.9 $ 2.7
============ ============
</TABLE>
OPERATING ACTIVITIES
MichCon's cash flow from operating activities increased $9.6 million
during the 1999 first quarter as compared to the same 1998 period. The increase
was due primarily to higher earnings, after adjusting for non-cash items
(depreciation and deferred taxes), partially offset by changes in working
capital requirements.
FINANCING ACTIVITIES
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. During the first three months of 1999, MichCon repaid $113.3
million of commercial paper, leaving borrowings of $106.6 million outstanding
under this program at March 31, 1999.
During the 1999 second quarter, MichCon anticipates issuing approximately
$110 million of debt. MichCon repaid $20 million of first mortgage bonds that
matured in May 1999 and anticipates repaying $30 million of first mortgage bonds
that mature in June 1999.
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INVESTING ACTIVITIES
MichCon's cash used for investing activities decreased $11.9 million in
the 1999 first quarter as compared to the same 1998 period. The decrease was due
primarily 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.
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 that 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. 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
return on equity from utility operations exceed predetermined thresholds.
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 generally 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 and its vendors. The estimated completion
status of these systems and the projected status for the future follows:
<TABLE>
<CAPTION>
Inventory Assessment Remediation Testing
------------- ------------- --------------- -----------
Business Systems:
<S> <C> <C> <C> <C>
March 31, 1999...................... 100% 100% 80% 45%
June 30, 1999....................... 100% 100% 95% 85%
September 30, 1999.................. 100% 100% 100% 100%
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
<TABLE>
Measurement and Control Systems:
<S> <C> <C> <C> <C>
March 31, 1999...................... 98% 98% 93% 88%
June 30, 1999....................... 100% 100% 98% 98%
September 30, 1999.................. 100% 100% 100% 100%
</TABLE>
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 $2.5 million was incurred through March 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 various derivative instruments and limits the use of such instruments to
hedging activities.
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 first quarter,
there were no material changes to MichCon's natural gas price risk.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONCLUDED)
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 first
quarter, there were no material changes to MichCon's interest rate risk.
NEW ACCOUNTING PRONOUNCEMENTS
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 at this time.
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.
7
<PAGE> 10
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES............................. $ 498,090 $ 429,227 $ 1,102,521 $ 1,155,461
----------- ----------- ------------- -------------
OPERATING EXPENSES
Cost of gas.................................. 248,351 217,589 482,291 546,545
Operation and maintenance.................... 67,546 62,222 257,721 270,757
Depreciation and depletion................... 24,608 22,445 95,046 100,647
Property and other taxes..................... 18,462 17,302 56,598 60,252
Write-down of gathering properties
(Note 3).................................... - - 24,800 -
----------- ----------- ------------- -------------
Total operating expenses................... 358,967 319,558 916,456 978,201
----------- ----------- ------------- -------------
OPERATING INCOME 139,123 109,669 186,065 177,260
----------- ----------- ------------- -------------
OTHER INCOME AND (DEDUCTIONS)
Interest income.............................. 999 1,112 5,575 4,562
Interest on long-term debt................... (10,966) (12,206) (43,644) (46,992)
Other interest expense....................... (2,655) (3,257) (11,511) (9,030)
Minority interest............................ (257) (745) 6,215 (2,289)
Equity in earnings of joint ventures......... 441 589 1,798 1,478
Other........................................ 464 121 161 456
----------- ----------- ------------- -------------
Total other income and (deductions)........ (11,974) (14,386) (41,406) (51,815)
----------- ----------- ------------- -------------
INCOME BEFORE INCOME TAXES..................... 127,149 95,283 144,659 125,445
INCOME TAX PROVISION........................... 43,176 33,619 45,374 46,954
----------- ----------- ------------- -------------
NET INCOME..................................... $ 83,973 $ 61,664 $ 99,285 $ 78,491
=========== =========== ============= =============
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF PERIOD................. $ 406,144 $ 375,325 $ 436,989 $ 383,498
Add - Net income............................ 83,973 61,664 99,285 78,491
----------- ------------ ------------ ------------
490,117 436,989 536,274 461,989
Deduct - Cash dividends declared:
Common Stock............................. 17,677 - 63,834 25,000
----------- ------------ ------------ ------------
BALANCE - END OF PERIOD....................... $ 472,440 $ 436,989 $ 472,440 $ 436,989
=========== ============ ============ ============
</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 FINANCIAL POSITION (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, December 31,
------------------------------- --------------
1999 1998 1998
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 23,512 $ 17,083 $ 6,603
Accounts receivable, less allowance for doubtful accounts of
$11,545, $18,123 and $8,928, respectively....................... 214,693 262,768 142,818
Accrued unbilled revenues........................................ 76,431 63,400 86,767
Gas in inventory (Note 4)........................................ 24,485 20,188 56,969
Property taxes assessed applicable to future periods............. 59,255 54,765 71,165
Other............................................................ 32,990 28,348 30,169
-------------- ------------- --------------
431,366 446,552 394,491
-------------- ------------- --------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures..................... 19,808 20,078 19,343
Long-term investments............................................ 66,110 35,538 65,556
Deferred environmental costs..................................... 28,286 27,816 28,169
Prepaid benefit costs............................................ 124,235 85,817 113,879
Other............................................................ 61,250 47,232 59,007
-------------- ------------- --------------
299,689 216,481 285,954
-------------- ------------- --------------
Property, Plant and Equipment...................................... 2,911,368 2,809,342 2,889,020
Less - Accumulated depreciation and depletion.................... 1,420,513 1,334,813 1,396,940
-------------- ------------- --------------
1,490,855 1,474,529 1,492,080
-------------- ------------- --------------
$ 2,221,910 $ 2,137,562 $ 2,172,525
============== ============= ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable................................................. $ 96,390 $ 90,568 $ 98,891
Notes payable.................................................... 107,900 117,094 221,169
Current portion of long-term debt and capital lease
obligations.................................................... 58,211 27,616 58,288
Gas inventory equalization (Note 4).............................. 79,559 70,894 -
Federal income, property and other taxes payable................. 103,464 100,257 61,059
Deferred gas cost recovery revenues (Note 2b).................... - 18,937 14,980
Exchange gas payable............................................. 25,835 18,027 25,337
Customer deposits................................................ 17,459 15,323 18,769
Other............................................................ 58,935 49,724 67,222
-------------- ------------- --------------
547,753 508,440 565,715
-------------- ------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................................ 96,353 84,839 88,567
Unamortized investment tax credit................................ 29,303 32,284 29,784
Tax benefits amortizable to customers............................ 129,494 123,189 130,120
Accrued environmental costs...................................... 31,888 32,000 32,000
Minority interest................................................ 8,175 17,954 8,201
Other............................................................ 51,860 48,963 51,460
-------------- ------------- --------------
347,073 339,229 340,132
-------------- ------------- --------------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS 613,945 612,205 619,835
-------------- ------------- --------------
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................................................ 472,440 436,989 406,144
-------------- ------------- --------------
713,139 677,688 646,843
-------------- ------------- --------------
$ 2,221,910 $ 2,137,562 $ 2,172,525
============== ============= ==============
</TABLE>
The notes to the consolidated financial statements are an integral
part of this statement.
9
<PAGE> 12
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................................. $ 83,973 $ 61,664
Adjustments to reconcile net income to net cash flow provided
from operating activities:
Depreciation and depletion
Per statement of income.............................................. 24,608 22,445
Charged to other accounts............................................ 2,162 2,043
Deferred income taxes - current........................................ (5,309) (9,131)
Deferred income taxes and investment tax credit - net.................. 6,679 740
Other.................................................................. (1,211) (250)
Changes in assets and liabilities, exclusive of changes
shown separately..................................................... 68,811 92,608
---------- ----------
Net cash provided from operating activities........................ 179,713 170,119
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net........................................................ (113,269) (124,597)
Cash dividend paid applicable to common stock.............................. (17,500) -
Retirement of long-term debt............................................... (5,934) (4,772)
---------- ----------
Net cash used for financing activities............................. (136,703) (129,369)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Notes receivable - affiliate - net......................................... (1,201) -
Capital expenditures....................................................... (24,209) (38,282)
Other - net................................................................ (691) 262
---------- ----------
Net cash used for investing activities............................. (26,101) (38,020)
---------- ----------
Net Increase in Cash and Cash Equivalents.................................... 16,909 2,730
Cash and Cash Equivalents, January 1......................................... 6,603 14,353
---------- ----------
Cash and Cash Equivalents, March 31.......................................... $ 23,512 $ 17,083
========== ==========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable - net................................................ $ (72,560) $ (67,555)
Gas inventory equalization............................................... 79,559 70,894
Accrued/deferred gas cost recovery revenues.............................. (15,153) 31,799
Accrued unbilled revenues................................................ 10,336 28,496
Gas in inventory......................................................... 32,484 20,013
Property taxes assessed applicable to future periods..................... 11,910 10,062
Accounts payable......................................................... (2,501) (39,699)
Federal income, property and other taxes payable......................... 42,405 21,627
Other current assets and liabilities..................................... (5,350) 13,075
Prepaid benefit costs.................................................... (10,356) (27)
Deferred assets and liabilities.......................................... (1,963) 3,923
---------- ----------
$ 68,811 $ 92,608
========== ==========
SUPPLEMENTAL DISCLOSURES Cash paid (received) for:
Interest, net of amounts capitalized.................................... $ 13,447 $ 13,089
========== ==========
Federal income taxes.................................................... $ (5,133) $ (5,497)
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral
part of this statement.
10
<PAGE> 13
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, when approximately 70,000 customers
chose 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. 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 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
11
<PAGE> 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
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 sale 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 30.0 Bcf and 32.9 Bcf of gas was
included in inventory at March 31, 1999 and 1998, respectively.
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. 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.
12
<PAGE> 15
OTHER INFORMATION
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
None
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: May 17, 1999 By: /s/ Harold Gardner
----------------------------------
Harold Gardner
Vice President and
Chief Accounting Officer
14
<PAGE> 17
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
12.1 Michigan Consolidated Gas Company and
Subsidiaries Computation of Ratio of
Earnings to fixed charges
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 12-1
MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended Twelve Months Ended
March 31, 1999 December 31, 1998 December 31, 1997
------------------- ------------------- -------------------
EARNINGS AS DEFINED (1)
<S> <C> <C> <C>
Net Income................................................ $146,502 $114,619 $125,630
Fixed charges............................................. 59,622 61,304 57,905
-------- -------- --------
Earnings as defined..................................... $206,124 $175,923 $183,535
======== ======== ========
FIXED CHARGES AS DEFINED (1)
Interest on long-term debt................................ $ 46,021 $ 47,091 $ 47,024
Interest on other borrowed funds.......................... 11,511 12,113 8,664
Amortization of debt discounts, premium
and expense............................................. 929 955 1,032
Interest implicit in rentals (2).......................... 1,161 1,145 1,185
-------- -------- --------
Fixed charges as defined................................ $ 59,622 $ 61,304 $ 57,905
======== ======== ========
Ratio of Earnings to Fixed Charges..............................3.46 2.87 3.17
==== ==== ====
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 23,512
<SECURITIES> 0
<RECEIVABLES> 226,238
<ALLOWANCES> 11,545
<INVENTORY> 24,485
<CURRENT-ASSETS> 431,366
<PP&E> 2,911,368
<DEPRECIATION> 1,420,513
<TOTAL-ASSETS> 2,221,910
<CURRENT-LIABILITIES> 547,753
<BONDS> 613,945
0
0
<COMMON> 10,300
<OTHER-SE> 702,839
<TOTAL-LIABILITY-AND-EQUITY> 2,221,910
<SALES> 0
<TOTAL-REVENUES> 498,090
<CGS> 0
<TOTAL-COSTS> 358,967
<OTHER-EXPENSES> (464)
<LOSS-PROVISION> 5,291
<INTEREST-EXPENSE> 13,621
<INCOME-PRETAX> 127,149
<INCOME-TAX> 43,176
<INCOME-CONTINUING> 83,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,973
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
