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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO TO
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COMMISSION FILE NUMBER 1-10070
MCN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MICHIGAN 38-2820658
(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)
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Registrant's telephone number, including area code 313-256-5500
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value Per Share New York Stock Exchange
9 3/8% Cumulative Preferred Securities, Series A* New York Stock Exchange
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* Issued by MCN Michigan Limited Partnership and the payments of dividends and
payments on liquidation or redemption are guaranteed by MCN Corporation.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. /X/
The aggregate market value of MCN Corporation Common Stock, $.01 par value
per share, held by non-affiliates as of February 21, 1995 was $1.085 billion
based on 59,862,363 outstanding shares and the closing price on that day (New
York Stock Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of MCN's 1994 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5, 6, 7 and 8 and portions of MCN's March 1995
definitive Proxy Statement are incorporated by reference in Part III, Items 10,
11, 12 and 13.
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KEY TO ABBREVIATED TERMS
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ANG.................................. Adsorbed Natural Gas; a technology which uses an
adsorbent material to store natural gas in tanks or
containers at considerably lower pressures (300 to
500 pounds per square inch) than traditional methods
of natural gas storage, such as compressed natural
gas.
Antrim Gas........................... Natural gas produced from shallow wells in the
Devonian (Antrim) shale formations.
Base Pressure........................ Pressure at which measurements of a volume of gas are
measured. MCN's common base pressure is 14.65 pound
per square inch absolute.
Bcf.................................. One billion cubic feet, which is a unit of
measurement of gas volume. 1 Bcf = 1,000 MMcf.
BTU.................................. British Thermal Unit; the amount of heat required to
raise the temperature of one pound of water one
degree Fahrenheit. One cubic foot of natural gas
contains approximately 1,000 BTUs.
Capital Investments.................. MCN's consolidated capital expenditures plus
acquisitions and MCN's share of capital expenditures
of joint ventures, less the minority partners' share
of consolidated capital expenditures.
Citizens............................. Citizens Gas Fuel Company; a wholly-owned natural gas
distribution subsidiary of MCN Corporation.
CNG.................................. Compressed Natural Gas; natural gas typically
pressurized at 2,400 to 3,000 pounds per square inch
for use in cars and other vehicles.
CoEnergy Trading Company............. A wholly-owned gas marketing subsidiary of MCN
Investment.
Cogeneration......................... The production of two forms of energy, usually steam
and electricity, from a single fuel source such as
natural gas.
Degree Days.......................... A measure of the coldness of the weather based on how
much the average daily temperature is below 65
degrees Fahrenheit.
Diversified Services................. MCN's exploration and production, gas marketing,
cogeneration, gas storage, gas gathering and
processing, and computer operations services
businesses.
End User Transportation.............. A gas delivery service provided to large-volume
commercial and industrial customers who purchase
natural gas directly from producers or brokerage
companies for the customers own use.
FERC................................. Federal Energy Regulatory Commission; a federal
agency that determines the rates and regulations of
interstate pipelines.
Gas Gathering........................ The process of collecting natural gas from gas wells
and then transporting the gas through pipelines to
processing plants or major pipelines.
Gas Processing....................... The removal of various components from natural gas to
meet market quality standards.
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KEY TO ABBREVIATED TERMS (CONCLUDED)
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Gas Storage.......................... The process of injecting and withdrawing natural gas
from a depleted underground natural gas field or salt
cavern.
GCR.................................. Gas Cost Recovery; a process by which MichCon,
through annual gas cost proceedings before the
Michigan Public Service Commission, can recover the
prudent and reasonable cost of gas sold.
The Genix Group...................... The wholly-owned subsidiary of MCN Investment
Corporation providing computer and related
outsourcing services.
Intermediate Transportation.......... A gas delivery service provided to gas producers, gas
brokers and other gas companies that own the natural
gas, but are not the ultimate consumers.
Mcf.................................. One thousand cubic feet, which is a unit of
measurement of gas volume.
MCN.................................. MCN Corporation and its subsidiaries.
MCN Investment....................... MCN Investment Corporation, a wholly-owned subsidiary
of MCN Corporation and the holding company for MCN's
Diversified Services subsidiaries.
MichCon.............................. Michigan Consolidated Gas Company; a wholly-owned
natural gas distribution and intrastate transmission
subsidiary of MCN Corporation.
Minority Interest.................... The minority partners' share of a project, such as
the Saginaw Bay project.
MMcf................................. One million cubic feet, which is a unit of
measurement of gas volume. 1 MMcf = 1,000 Mcf.
MPSC................................. Michigan Public Service Commission; the regulator of
intrastate aspects of the natural gas industry within
the State of Michigan.
Normal Weather....................... The average daily temperature within MCN's Gas
Distribution service area during a recent 30-year
period, as measured and published by the National
Weather Service.
Order No. 636........................ An order issued in 1992 by the FERC, and subsequent
related orders, which require interstate pipeline
companies to separate or unbundle their various
pipeline services.
Peer Group........................... 15 comparable companies: Atlanta Gas Light, Brooklyn
Union, CMS Energy, Columbia Gas, Consolidated Natural
Gas, Detroit Edison, Equitable Resources, Laclede
Gas, National Fuel Gas, NICOR, NorAm Energy Corp.,
Peoples Energy, Southwest Gas, Washington Gas Light
and WICOR.
Saginaw Bay.......................... Saginaw Bay Pipeline Company and Saginaw Bay Lateral
Company; wholly-owned gas gathering subsidiaries of
MCN Investment.
Spot Market.......................... Buying and selling natural gas on a short-term basis,
typically monthly.
Transition Costs..................... Costs incurred by interstate pipeline companies under
FERC Order No. 636 to reduce or eliminate gas supply
related obligations.
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TABLE OF CONTENTS
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PAGE
CONTENTS NUMBER
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Part I
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 14
Item 3. Legal Proceedings................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................. 17
Executive Officers of the Registrant................................................. 18
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 19
Item 6. Selected Financial Data............................................. 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 19
Item 8. Financial Statements and Supplementary Data......................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 19
Part III
Item 10. Directors and Executive Officers of the Registrant.................. 20
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended..... 20
Item 11. Executive Compensation.............................................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 20
Item 13. Certain Relationships and Related Transactions...................... 20
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..... 21
Signatures............................................................................. 26
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PART I
ITEM I. BUSINESS
MCN Corporation (MCN) is a diversified natural gas holding company. Its
principal operating subsidiaries are Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and intrastate transmission company, and
MCN Investment Corporation, (MCN Investment) a holding company with subsidiaries
involved in exploration and production, gas marketing, cogeneration, gas
storage, gas gathering and processing and computer operations services. MCN, a
Michigan corporation organized in 1988, is exempt from most provisions of the
Public Utilities Holding Company Act of 1935. The operating revenues, operating
income, and identifiable assets of MCN's business segments are included in the
financial statements, incorporated by reference in Item 8, "Financial Statements
and Supplementary Data" on page 19. At December 31, 1994, MCN and its
subsidiaries had 3,889 employees.
BUSINESS SEGMENTS
MCN's major business segments are Gas Distribution and, within the
Diversified Services group, Gas Services and Computer Operations Services. Gas
Technology includes MichCon's and MCN Investment's research and development
programs.
GAS DISTRIBUTION operates the largest natural gas distribution and intrastate
transmission system in Michigan and one of the largest in the United States.
This segment includes the following companies:
MichCon -- A Michigan corporation organized in 1898 that, with its
predecessors, has been in business for nearly 150 years. MichCon is a
public utility, engaged in the distribution and transmission of natural gas
in the State of Michigan serving over 1.1 million residential, commercial
and industrial customers.
Citizens -- A Michigan corporation organized in 1951 that, with its
predecessors, has been in business for more than 135 years. Citizens is a
gas utility that conducts all of its business in the State of Michigan
serving 13,000 residential, commercial and industrial customers.
GAS SERVICES is an integrated energy group with investments in: Gas Marketing
and Cogeneration, Exploration and Production, Gas Gathering and Processing and
Gas Storage.
COMPUTER OPERATIONS SERVICES has data centers in three states and is one of the
top ten computer operations management businesses in the United States. The
Genix Group provides computer management, data processing and related services
to more than 100 corporate clients.
GAS TECHNOLOGY researches and develops innovative applications for natural gas
pressurized combustion technologies under MCN Investment and for adsorbed
natural gas (ANG) technology through MichCon.
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GAS DISTRIBUTION
GAS MARKETING AND TRANSPORTATION
Gas Distribution serves customers in the Detroit, Grand Rapids, Ann Arbor,
Traverse City, Muskegon and Adrian metropolitan areas and in various other
communities throughout the State of Michigan. The following services are
provided by Gas Distribution:
- Gas Sales -- Includes the marketing and delivery of natural gas to
residential, commercial and industrial customers.
- End User Transportation -- Through this service, large volume customers
that purchase gas directly from producers or marketers utilize the
company's gas distribution network to transport the gas to their
facilities.
- Intermediate Transportation -- Through this service, Gas Distribution
provides transportation service to pipelines, gas marketers, Michigan
producers and other local distribution companies in the United States and
Canada that own the natural gas, but are not the ultimate consumer.
The following table sets forth revenues earned through gas sales, end user
transportation, intermediate transportation and other revenues for the years
1992-1994.
Gas Distribution -- Revenues (In millions of dollars)
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1994 1993 1992
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Gas Sales.................................................. $ 968.7 $ 983.1 $ 969.2
End User Transportation.................................... 76.5 71.7 70.2
Intermediate Transportation................................ 28.7 19.6 17.8
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Total Sales and Transportation.......................... 1,073.9 1,074.4 1,057.2
-------- -------- --------
Conservation Programs, Storage Service and other........... 52.2 54.9 103.3
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Total Operating Revenues................................ $1,126.1 $1,129.3 $1,160.5
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The following table sets forth Gas Distribution's gas sales and
transportation delivery volumes for the years 1992-1994.
Gas Distribution -- Markets (Bcf)
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1994 1993 1992
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Gas Sales......................................................... 204.4 205.4 203.1
End User Transportation........................................... 140.0 128.6 129.7
Intermediate Transportation....................................... 303.6 281.1 184.0
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Total Sales and Transportation................................. 648.0 615.1 516.8
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NOTE: Gas sales and intermediate transportation volumes include intercompany
transactions.
Effect of Weather: Gas Distribution's sales and end user transportation
volumes, revenues and net income are impacted by the weather. Given the seasonal
nature of the business, revenues and net income tend to be higher in the first
and fourth quarters of the calendar year. Warmer than normal weather in the last
three years caused total sales and transportation volumes to be lower by 4.4 Bcf
in 1994, 4.3 Bcf in 1993 and 10.2 Bcf in 1992. As a result, weather reduced net
income by $4.0 million in 1994, $3.7 million in 1993 and $8.7 million in 1992.
GAS SALES: This market represents 31% of total deliveries and produced 81%
of Gas Distribution's gross profit margin from sales and transportation
services. The average margin per Mcf from gas sales in 1994 was
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$2.11. Lower consumption per customer, primarily related to the installation of
more energy efficient equipment, offset sales to new customers.
Competition in the gas sales market from alternative energy is minimal,
coming primarily from sources such as electricity, propane, and to a lesser
degree, oil and wood. Natural gas continues to be the preferred fuel for
Michigan residences and businesses. Once the switch to natural gas is made, the
customer rarely switches back to the alternate fuel. Nearly every residential
and commercial developer in Gas Distribution's service territories selects
natural gas in new construction because of the convenience, cleanliness and
price advantage of natural gas compared to propane, fuel oil and other
alternative fuels. Service and price are the primary factors affecting this
market.
The Gas Distribution business continues to take steps to remain
competitive, including broadening the scope of services provided. For example,
MichCon offers the financing of distribution lines and gas appliances to
encourage potential customers to switch to natural gas. The Gas Distribution
business also continues its commitment to maintain low gas costs. During 1994,
it's annual average cost of gas rate of $2.66 per Mcf was the lowest level since
1980, meeting its objective of being in the lowest quartile for costs of gas in
Michigan as well as neighboring states. In addition, the Gas Distribution
business is continuously striving to reduce the cost of operating the business.
In 1994, MichCon aligned its operations along core business processes to make
the company more efficient, competitive and customer focused.
The Gas Distribution business has an Area Expansion Program (AEP) in place
to meet demand for natural gas in areas currently not served. The program is
primarily directed toward the residential and small commercial markets. By
financing the cost of conversion, this program makes it easier for users of
other fuels, primarily propane and fuel oil, to use natural gas for space heat
and other appliances. The AEP has contributed to the 12,559, 11,821 and 5,373
net increases in customers in 1994, 1993 and 1992, respectively. In 1994, 23 new
areas of Michigan were served by MichCon, bringing to 100 the total number of
new areas added since 1984. From time to time in reaching new areas, Gas
Distribution will request a franchise in competition with others wanting to
serve the area.
END USER TRANSPORTATION: In 1994, this market accounted for 22% of total
gas deliveries and produced 14% of Gas Distribution's gross profit margin from
sales and transportation services. The average revenue per Mcf from end user
transportation in 1994 was $.55. End user transportation deliveries increased in
1994 due to a higher level of usage by large-volume commercial and industrial
customers driven by improved business activity in Michigan. The addition of new
customers also contributed to the increased deliveries.
At December 31, 1994, Gas Distribution had end user transportation
agreements representing annual volumes of 133 Bcf. Approximately 75% of these
volumes are under contracts that extend to 1996 or beyond and include virtually
all of the large and most price competitive customers. The contracts for the
remaining volumes are typically one-year contracts that expire at various times
during 1995 and relate to a large number of low volume users with relatively low
price sensitivity. Negotiations have commenced with customers whose contracts
expire in 1995.
Through technical and financial assistance, customers have been encouraged
to increase the use of natural gas in their industrial and commercial
facilities. Gas-fueled cogeneration and air conditioning have been two expanding
markets for natural gas. In 1994, these markets accounted for approximately 16
Bcf of gas deliveries. Air compressors and other small engines in certain
commercial applications also provide possibilities for conversion to natural
gas-powered equipment. The efficiencies and price competitiveness of natural gas
can significantly reduce operating costs for customers, even though a higher
initial outlay may be required.
The primary focus of competition in this market is total cost of fuel.
While some large commercial and industrial customers have the capability to
switch to alternative fuel sources including coal, electricity, oil and steam,
the vast majority of these customers are under long-term contracts. In addition,
some of these customers could bypass Gas Distribution's system and obtain
service directly from a pipeline company. However, cost differentials must be
sufficient to offset the substantial investment costs and risk associated with
fuel switching or bypass. Gas Distribution competes against alternative fuel
sources by providing competitive pricing, reliability
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of supply through use of the company's extensive storage capacity and multiple
supply sources. Almost all significant customers that are in proximity to
pipeline facilities are under long-term contracts.
In the past several years, MichCon has been successful in converting many
customers' facilities to natural gas from alternative fuels and in retaining
those customers after conversion. In 1994, approximately 28 Bcf of MichCon's
transportation deliveries were to customers who displaced coal with natural gas.
End user transportation will expand further in late 1995 with the
completion of the Michigan Power Project. During the third quarter of 1994, MCN
and Destec Energy began construction of a 123 megawatt cogeneration plant in
Ludington, Michigan. MichCon will provide end user transportation of the natural
gas needed to fuel the plant, approximately nine Bcf annually. A 12-mile
pipeline extension, costing $15 million, is being constructed for this purpose.
INTERMEDIATE TRANSPORTATION: This service accounts for 47% of total gas
volumes, but, due to the lower rate charged for this service, represents only 5%
of Gas Distribution's gross profit margin from sales and transportation
services. The average revenue per Mcf from intermediate transportation in 1994
was $.09.
Gas Distribution's extensive transmission pipeline system has enabled it to
increase the volumes transported in 1994 and 1993 for Michigan gas producers,
ANR Pipeline Company (ANR) and other shippers. Gas Distribution operates in a
pivotal geographic location with links to major interstate pipelines that reach
markets elsewhere in the Midwest, the eastern United States and eastern Canada.
Transportation volumes increased due to the start-up of the Blue Lake gas
storage project, in which MichCon began transporting gas for ANR under a firm,
long-term contract. Profit margins on intermediate transportation services are
considerably less than margins on gas sales or for end user transportation
markets.
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. Intermediate transportation
deliveries have nearly tripled since 1991, and have resulted from time to time
in capacity constraints on MichCon's northern Michigan pipeline system. MichCon
currently has a proposal before the MPSC to construct facilities to expand
transportation capacity. This proposal, as well as other competing proposals,
are being reviewed by the MPSC and a decision is expected early in 1995. The
cost of this project could be approximately $40 million over the 1995-1996
period. In addition, MCN's Diversified Services group will invest in new gas
processing facilities related to the expansion.
MichCon currently has a proposal before the MPSC to construct the
Milford-Belle River Loop. This pipeline could be placed in service for the
1995-1996 heating season, and will enable the Gas Distribution business to
expand its intermediate transportation services.
ENERGY ASSISTANCE AND CONSERVATION PROGRAMS
Energy assistance programs funded by the federal government and the state
of Michigan, including the Home Heating Credit for low-income customers and the
Department of Social Services' (DSS) Heating Assistance Program, continue to be
critical to MichCon's ability to control its uncollectible expenses. MichCon has
historically obtained favorable regulatory treatment of its uncollectible costs,
including those related to these energy assistance programs.
The Low-Income Home Energy Assistance Program (LIHEAP) currently provides
approximately $78 million in heating assistance to 385,000 Michigan households
through the DSS, with approximately 40% of the funds going to MichCon's
customers. Congress has approved $1.3 billion for the 1995 fiscal year, which is
a reduction of $.1 billion. In November 1994, however, officials indicated that
all federal programs, including LIHEAP, would be reviewed for cuts or
elimination. MichCon is working to maintain this funding.
MichCon also offers a number of energy conservation programs for its
residential and commercial customers, the costs of which are recovered through
customer charges and MPSC-approved surcharges on gas sales. The MPSC has
consistently provided for recovery of program costs. In September 1994, MichCon
filed a proposal with the MPSC in connection with a Demand Side Management Plan.
This plan is a comprehensive and cost effective energy conservation plan that
includes natural gas conservation programs
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with an emphasis on low income users, and other programs intended to reduce
energy costs for all MichCon's customers, including incentives to promote the
use of natural gas rather than other less efficient fuels. Over the three-year
period ending June 30, 1998, the plan could generate a net annual reduction in
natural gas demand of .4 Bcf, about 0.2% of MichCon's annual sales volume. If
approved by the MPSC, MichCon would spend up to $26 million over the three-year
period, which would be recovered through surcharges on gas sales. An MPSC order
on the case is expected in late 1995.
GAS SUPPLY
MichCon obtains its natural gas supply from various sources in different
geographic areas under agreements that vary in both pricing and terms. This
geographic and contractual diversity of supply ensures that MichCon will be able
to meet the requirements of its present and future customers with reliable
supplies of natural gas at competitive, market responsive prices. Citizens is
currently served by two interstate pipelines, Panhandle Eastern Pipe Line
Company (Panhandle) and ANR. Westside Pipeline Company (Westside), an affiliate
intrastate pipeline company, connects ANR to Citizens' distribution system.
Citizens has firm transportation contracts with ANR and Westside that provide
daily quantities sufficient to meet the needs of Citizens' firm customers.
Citizens purchases gas from suppliers who have firm transportation agreements
with Panhandle. During 1994, Citizens' purchases were 83% from an affiliated
company that had access to long-term supplies and 17% from other non-affiliated
suppliers.
One of MCN's objectives for its Gas Distribution businesses is to be in the
lowest quartile for cost of gas in Michigan and neighboring states. As a result
of efforts to lower cost of gas, including extensive contract renegotiations,
increased use of spot market-priced purchases and the use of available storage,
Gas Distribution's gas cost declined to $2.66 per Mcf in 1994, the lowest among
a group of 22 utilities in Michigan and neighboring states. Gas Distribution's
gas costs have decreased 34% in the last ten years.
The following table summarizes Gas Distribution's gas supply purchases for
the years 1992-1994.
Gas Distribution -- Gas Supply Purchases (Bcf)
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1994 1993 1992
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Michigan Producers.............................................. 86.0 92.7 100.0
Interstate Suppliers............................................ 64.3 80.4 71.7
Canadian Suppliers.............................................. 29.4 15.4 12.1
Spot Market..................................................... 37.2 13.1 17.9
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216.9 201.6 201.7
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Gas Distribution purchased 46% of its 1994 supply from producers in the
southern and midcontinent regions of the United States, 40% from Michigan
producers and 14% from Canadian producers. These supplies are complemented by
130 Bcf of working storage capacity from storage fields owned and operated in
Michigan.
The 1994 increase in volumes associated with Spot Market is due to the
subsequent discontinuance of MichCon purchases of gas from ANR as a result of
FERC Order No. 636, as discussed below.
As a result of ANR's FERC Order No. 636 restructuring, its long-term
relationship with MichCon changed significantly. MichCon no longer purchases
natural gas supply directly from ANR, but instead utilizes ANR solely as a
transporter of gas. MichCon purchases gas directly from producers and marketers
with access to natural gas supplies in Texas, Oklahoma, Louisiana and Canada.
Although MichCon had been purchasing gas directly from others during the last
several years to supplement its purchases from ANR, effective November 1, 1993,
MichCon completely eliminated its reliance on pipeline suppliers for the
purchase of gas supply.
FERC ORDER NO. 636: In 1992, FERC issued Order No. 636 which required
interstate pipelines to separate their pipeline sales service into its various
service components and to price each component separately. The order also
permitted interstate pipelines to recover 100% of their prudently incurred
transition
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costs including costs incurred by interstate pipelines to assign and/or
renegotiate their gas supply related obligations.
In November 1993, ANR, MichCon's primary interstate natural gas
transporter, implemented its FERC Order No. 636 service restructuring. ANR
discontinued its merchant function and modified its rates to reflect the
Straight Fixed/Variable rate design (SFV) mandated by Order No. 636. Under SFV,
pipelines recover fixed costs through monthly demand charges based upon capacity
entitlement and recover only variable costs through volume-sensitive commodity
charges. SFV significantly increases costs to many weather-sensitive local
distribution companies who do not have on-system storage capacity. In contrast,
through the use of its extensive underground storage facilities, MichCon has
been able to lower its pipeline capacity entitlement thereby minimizing pipeline
fixed charges.
During 1994, ANR filed several requests for recovery of these transition
costs, and MichCon accrued its portion totaling $5.4 million, of which $3.9
million is reflected in cost of gas. The MPSC has held that these transition
costs are recoverable through the GCR mechanism, and therefore, an asset has
been recorded for their future recovery. As periodic filings are made by ANR,
MichCon will accrue its allocated portion. It is management's belief that these
costs will have no effect on earnings.
GENERAL SUPPLY: To ensure continuous, uninterrupted service to customers,
MichCon has in place long-term firm transportation agreements with ANR and Great
Lakes Gas Transmission Limited Partnership (Great Lakes). ANR is obligated to
transport approximately 375 MMcf per day of supply for MichCon, while Great
Lakes is obligated to transport 30 MMcf per day. These transportation contracts
expire on various dates between 1999 and 2011.
MichCon also has contracts with independent Michigan producers that expire
on various dates through 2009. A portion of these contracts expire in 1995.
MichCon has begun discussions with several producers concerning gas purchases
after 1995. MichCon has reached agreement with the majority of its intrastate
suppliers to limit the unit price of gas through 1995 to a price indexed to the
natural gas spot market. This will ensure that the price of intrastate supplies
remains competitive with the prices available on the interstate market.
In 1993, Panhandle refunded to MichCon the costs of certain direct billings
totaling $5.4 million plus interest of $4.4 million in compliance with a FERC
order. During late 1994 and early 1995, the FERC issued rehearing orders
permitting Panhandle to seek reimbursement of the $4.4 million in interest from
MichCon. MichCon intends to contest Panhandle's claim in the appropriate courts.
Should MichCon ultimately be unsuccessful in defeating Panhandle's claim, it is
anticipated that these costs will be recoverable through the GCR mechanism.
Accordingly, an asset has been recorded for their future recovery.
At December 31, 1994, MichCon owned and operated five natural gas storage
fields in Michigan with a working storage capacity of approximately 130 Bcf.
MichCon uses its storage capacity to supplement its supply during the winter
months, replacing the gas in April through October when demand is at its lowest.
The use of this storage capacity also allows MichCon to lower its peak day
entitlement, thereby reducing interstate pipeline costs. During 1994, MichCon's
maximum one-day sendout exceeded 2.7 Bcf, of which approximately 70% came from
its underground storage fields. MichCon sells a portion of its natural gas
storage capacity to an affiliated company and third parties.
In 1994, MichCon proposed the construction of the Milford-Belle River Loop.
This 59-mile pipeline would parallel an existing portion of MichCon's pipeline
which is the major link between MichCon's gas storage facilities and major
markets in southeast Michigan. The proposed pipeline is estimated to cost $80
million and will provide backup and more reliable service during peak demand to
customers in southeast Michigan as well as enable Gas Distribution to expand its
intermediate transportation services. If regulatory approval is received this
spring, this pipeline could be in service for the 1995-1996 heating season.
REGULATION AND RATES
MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales rates, service, accounting and the issuance
of securities. Citizens rates are set by the Adrian Gas Rate
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Commission, a municipal commission. Other various phases of its operations are
subject to the jurisdiction of the MPSC. Both MichCon and Citizens are subject
to the requirements of other regulatory agencies with respect to safety, the
environment and health.
Michigan offers an environment of progressive and reasonable rate
regulation. This is reflected in the approval of flexible rates in the large
volume transportation market, the recovery of postretirement health care costs,
the deferral and future recovery of costs associated with the clean-up of former
gas manufacturing sites and recovery of take-or-pay and gas pipeline transition
costs.
GENERAL RATE PROCEEDINGS: In October 1993, MichCon received approval from
the MPSC in its general rate case to increase rates $15.7 million beginning in
January 1994. This rate increase included $28.7 million for retiree health care
benefits recognized under new accounting requirements and $8.1 million for
higher depreciation rates. Additionally, the MPSC's decision lowered MichCon's
allowed rate of return on common equity to 11.5%. This was consistent with other
rate of return percentages being authorized for local distribution companies in
the United States during 1993.
In addition, MichCon received authorization to defer manufactured gas plant
(MGP) investigation and remediation costs in excess of the $11.7 million
previously reserved by MichCon. The costs are to be amortized over a 10-year
period beginning in the year subsequent to the year environmental investigation
and remediation costs are paid. The recovery of any remediation costs incurred
and any carrying charges will be reviewed in a future rate case. Any carrying
charges accrued will be based on MichCon's pre-tax authorized rate of return.
In June 1994, the MPSC approved the property tax stipulation and settlement
agreement which addresses the treatment of reduced state property tax and
increased state sales tax and federal income tax. The estimated net decrease in
MichCon's operating expense was approximately $4.0 million for 1994 and $6.2
million annually thereafter. The agreement allows MichCon to accelerate the
amortization of its 1993 deferred costs associated with the implementation of
Statement of Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pension," by the net decreased tax expenses.
In 1993 and 1992, MichCon operated under a comprehensive agreement which
allowed for annual rate adjustments to recover the effects of inflation on
operation and maintenance expenses. MichCon received an inflation-related
increase in rates of $4.9 million, effective January 1992. The agreement also
contained a provision to adjust rates if weather-normalized earnings were above
or below a specified range of return on common equity. Increased gas markets
enabled MichCon to earn returns above the specified range in 1992 which resulted
in a portion of these higher earnings being shared with customers.
In 1994, Citizens proposed and reached a new rate agreement with the
municipal commission that sets Citizens' rates. Under the agreement, Citizens
received a 3% rate increase and will freeze rates for five years. This rate
increase is Citizens' first rate increase in ten years. The new rate agreement,
which went into effect in January 1995, will provide Citizens' customers with
known prices and the company with an opportunity to control costs and continue
to earn a reasonable rate of return.
GAS COST RECOVERY: The GCR process allows MichCon to recover its cost of
gas sold if the MPSC determines that such costs are reasonable and prudent. This
determination includes an annual Gas Supply and Cost Review, in which the MPSC
approves maximum monthly GCR factors. A subsequent annual GCR reconciliation
proceeding provides a review of gas costs incurred during the year, determines
whether approved gas costs have been overcollected or undercollected and, as a
result, whether a refund or surcharge, including interest, is required.
In June 1993, the MPSC issued an order in the 1992 GCR reconciliation case
approving a partial settlement that also consolidated refunds from other cases.
The order allowed MichCon to refund to customers $8.4 million during the July
billing cycle. In August 1993, the MPSC issued its final order approving
MichCon's 1992 purchased gas costs and providing final resolution for previously
unrefunded balances of approximately $1 million.
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<PAGE> 12
In May 1994, the MPSC issued an order in MichCon's 1993 GCR reconciliation
case approving a partial settlement allowing MichCon to refund $11.6 million to
its natural gas customers on their June 1994 bills. The refund consisted
primarily of supply realignment overcollections and excess transportation and
storage revenues, partially offset by 1993 GCR undercollections. In September
1994, the MPSC approved the final settlement, which provides for additional
refunds of $350,000 applicable to GCR sales customers and $100,000 applicable to
transportation customers.
In July 1994, MichCon filed its 1995 GCR plan case. An MPSC order is
expected in the first half of 1995. In February 1995, MichCon filed its 1994 GCR
reconciliation case indicating an over-recovery of $19 million, including
interest, which will be returned to GCR customers using the new rolled-in
prospective refunding methodology approved by the MPSC on June 30, 1994.
ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANTS: Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon and Citizens own or previously owned 17
former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were
conducted at former MGP sites, and some contamination related to the byproducts
of gas manufacturing was discovered at each site. The existence of these sites
and the results of the environmental investigations have been reported to the
Michigan Department of Natural Resources (MDNR). None of these former MGP sites
are on the National Priorities List prepared by the U.S. Environmental
Protection Agency (USEPA).
MCN is not involved in any administrative proceedings regarding these
former MGP sites, but MichCon is currently negotiating a remedial action plan
for one site with the MDNR and is conducting more extensive investigations at
three other sites. MichCon is involved, however, in a suit with an adjacent
property owner regarding one site. Management believes that the property owner's
claims have no merit and MichCon is vigorously defending this suit.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1994, MichCon spent $.6 million
investigating its former MGP sites. The balance in the reserve at December 31,
1994 was $5.5 million.
During 1993, MichCon received MPSC approval of a cost deferral and rate
recovery mechanism for investigation and remediation costs incurred at former
MGP sites in excess of the original $11.7 million reserve. In addition, MCN
notified more than 50 current and former insurance carriers of the environmental
conditions at its former MGP sites and claimed insurance coverage for costs
associated with the investigation and remediation of these sites. MCN is
pursuing any claims it may have against these carriers.
MCN is currently unable to estimate the future costs to be incurred in the
investigation and remediation of their former MGP sites. Management believes,
however, that insurance coverage and the cost deferral and rate recovery
mechanism will prevent environmental costs from having a material adverse impact
on MCN's financial results.
HARBORTOWN: MichCon Development Company, a 100% owned subsidiary of
MichCon, has a minority interest in four partnerships that are developing
Harbortown. Harbortown is a residential development that is being constructed on
a 50 acre parcel along the Detroit River. Environmental and other approvals were
received in 1984, prior to construction. In 1991, the partnerships undertook
additional environmental testing at Harbortown to assess whether there was any
potential public health risk from the presence of metals detected in certain
past soil samples. In 1992, the MDNR accepted the results of this risk
assessment and agreed that there was no health risk due to lead in Harbortown
surface soils.
During 1994, the partnerships completed additional environmental testing
and submitted a remedial action plan for Harbortown to the MDNR. The remedy
includes meeting certain landscaping requirements, and, during future
development, excavation controls consistent with occupational safety and health
regulations. The MDNR supported the proposed remedy at a public meeting in early
1995. Management expects
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<PAGE> 13
approval of the proposed remedy and believes that its implementation will not
have a material adverse impact on future development opportunities at Harbortown
or the financial statements of MCN.
OTHER: In 1993, MichCon received a general notice of liability letter from
the USEPA stating that MichCon is one of two potentially responsible parties at
a suspected dump site in Wyandotte, Michigan. The USEPA requested that MichCon
undertake a remedial investigation and feasibility study at the site. MichCon
has investigated its prior activities in the area, as well as the USEPA's basis
for its conclusion, and does not believe that it is responsible for any
contamination that may exist at the site. In early 1994, MichCon informed the
USEPA of this belief and declined to undertake the requested activities at the
site. MichCon has not received any additional requests from USEPA.
FRANCHISES
MichCon operates in numerous cities, villages, and townships under
franchises or permits that typically are revocable at will and have a 30 year
maximum duration. In Detroit, Grand Rapids and a number of other municipalities
where a substantial part of MichCon's service is furnished, MichCon's operations
originated under franchises that have since expired (in 1923 in the case of
Detroit). In 1993, MichCon began renewing or re-establishing formal franchises
in those municipalities in order to avoid uncertainty with regards to MichCon's
ability to continue and expand service in those areas. Regarding the franchises
which have not been renewed, MichCon's gas distribution systems are rightfully
occupying the streets with the consent or acquiescence of the municipalities.
While MichCon could be ordered by any municipality in which its franchise has
expired to remove its property, it could be deprived of ownership only by its
consent and the payment of an agreed price, or by condemnation and the payment
of the fair value of such property. Should any of these municipalities seek to
terminate MichCon's operations therein and substitute another gas utility
operation, publicly or privately owned, the municipality must either (i) acquire
and operate MichCon's system, (ii) construct a new system or (iii) grant a
franchise to another privately owned utility to construct or acquire its own
distribution system.
During 1994, MichCon gained six new franchises with yearly aggregate gas
sales volumes of approximately 486,000 Mcf annually. Approximately 53 major
franchises were renewed in 1994.
Public utility franchises in Michigan are non-exclusive. Construction under
a second franchise granted to another public utility requires authorization by
the MPSC which must consider, among other things, the service rendered by the
existing utility, the investment by such utility, and the benefit, if any, to
the public of having a second utility serve in the area. In one township where
MichCon formerly served approximately 450 residential customers (representing
78,400 Mcf) under an expired franchise, and upon the suit of a competing utility
with a franchise overlapping the area, a local circuit judge entered an order to
enjoin MichCon from expanding its service in that township. This matter is
presently pending before the Michigan Court of Appeals. On October 1, 1994,
MichCon sold its distribution facilities in that township to the competing
utility. Management expects that issues involving franchise rights will continue
to be actively pursued in judicial and regulatory proceedings.
Citizens operates in cities and townships in and around Adrian, Michigan
under franchises or permits that are revocable, have a 30 year maximum duration,
and provide for municipal rate setting. In 1994, Citizens obtained franchises
from seven remaining townships in Lenawee County. Although Citizens did not
extend its distribution system to any of these areas in 1994, the company is
reviewing potential areas to be served.
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<PAGE> 14
DIVERSIFIED SERVICES
GAS SERVICES
In its Gas Services segment, MCN Investment, through its subsidiaries and
joint ventures, markets natural gas to large-volume customers, develops gas
cogeneration facilities, engages in exploration and production (E&P), provides
gas gathering and processing services and provides gas storage services. The
following table sets forth gas sales and transportation delivery volumes for the
years 1992-1994 for Gas Services.
Diversified Services -- Gas Markets (Bcf)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Gas Sales*
Gas Marketing & Cogeneration................................... 142.4 122.8 112.3
Exploration & Production**..................................... 7.5 .1 --
Transportation.................................................... 20.5 21.8 25.4
----- ----- -----
Total........................................................ 170.4 144.7 137.7
===== ===== =====
</TABLE>
- ---------------
* Includes intercompany volumes.
** Represents gas sales made directly to third parties by MCN's E&P operations.
Other E&P production is sold to affiliated companies for marketing.
GAS MARKETING & COGENERATION
MCN's non-regulated gas marketing activities are directed by CoEnergy
Trading Company (CoEnergy Trading). CoEnergy Trading, a wholly-owned subsidiary
of MCN Investment, is engaged in the purchase and sale of natural gas to
large-volume gas users and gas and electric utilities throughout the eastern
United States and Canada. CoEnergy Trading is able to offer buyers in these
markets a bundled service by making arrangements for the acquisition of the
required gas volumes and delivery to customers' facilities, and for all the
necessary services in between. This bundled service is more in demand during the
winter months when interstate pipeline capacity in certain areas of the
Northeast and Midwest is either constrained or uneconomical. The company serves
more than 700 large-volume commercial and industrial customers and numerous
utilities.
To manage CoEnergy's exposure to the risk of fluctuating spot market prices
on profit margins, a comprehensive hedging program is in place. This program
utilizes natural gas futures, options and swap agreements to hedge exposure to
the risk of market price fluctuations on gas sales and purchase contracts and
gas inventories. CoEnergy's objective is to reduce the risk of changes in
natural gas prices which could affect its ability to achieve targeted profit
margins.
CoEnergy Trading competes against numerous marketing companies. A diverse
portfolio of short-, medium- and long-term sales and supply contracts combined
with access to reliable gas suppliers, storage facilities and multiple pipeline
connections enhances its competitive position.
To expand its markets into the northeastern United States, CoEnergy Trading
opened an office in Connecticut during 1994. This office will allow CoEnergy
Trading the opportunity to capitalize on its strengths in terms of gas storage
and gas supply flexibility to meet the growing needs for seasonal services in
the northeast United States. Further, a presence in the market will allow MCN
Investment's various businesses the opportunity to pursue additional
investments.
Cogen Development Company (Cogen), a wholly-owned subsidiary of MCN
Investment which was formed in 1993, pursues cogeneration related opportunities
throughout the United States and Canada. Cogeneration is a process of generating
both electricity and steam from a single fuel source, such as natural
10
<PAGE> 15
gas. Cogeneration projects offer MCN the potential for multiple sources of
income, such as long-term gas sales, transportation services and a return on the
investment in the facility.
In recent years, an increasing amount of new electric generating capacity
has been fueled by natural gas because of the lower capital costs, lower
emissions and other advantages associated with natural gas-fueled facilities. In
addition, many states have passed regulations requiring electric utilities to
consider bids from third parties to meet new electric generation needs. Cogen
has the capacity to provide cogeneration facilities with long-term gas supplies
at known prices.
During the third quarter 1994, MCN and Destec Energy broke ground on the
Michigan Power Project, a 123 megawatt cogeneration plant in Ludington,
Michigan. MCN and Destec, through their equal partnership, will build, own and
operate the $150 million facility. The plant, which is expected to be completed
in late 1995, will provide electricity to Consumers Power Company and steam to
Dow Chemical under long-term contracts. In December 1994, the partnership
obtained a $189 million credit facility to finance 100% of the construction
costs and working capital requirements. MCN, through its cogeneration business
group and Gas Distribution operations, will supply and transport the nine Bcf of
natural gas needed annually to fuel the plant.
Cogen owns a 99% limited partnership interest in Ada Cogeneration Limited
Partnership (Ada Cogeneration), which owns and operates a natural gas-fueled
cogeneration facility in western Michigan. Annually, the Ada Cogeneration
facility generates up to 30 megawatts of electricity which is sold to Consumers
Power Company and produces up to 50,000 pounds of steam per hour which is sold
to a nearby commercial operation. MCN supplies and transports two Bcf of natural
gas needed annually to fuel the plant.
Cogen's business also includes a number of small cogeneration units located
at the operating facilities of large commercial and industrial customers. Cogen
has long-term agreements for the sale and transportation of natural gas to these
units.
Cogen's strategy is to take a diversified approach of investing in power
projects of varying size and geographic location that offer an acceptable rate
of return. This industry has seen an increase in the number of participants,
many that are willing to accept lower returns on cogeneration projects
considerably below Cogen's threshold. Because more attractive returns are
available by developing and acquiring gas reserves, MCN will invest more in
these areas and less in gas cogeneration. This decision emphasizes MCN's
investment discipline of not pursuing projects which do not meet its investment
criteria.
Approximately 6% of the gas supply needed for gas marketing and
cogeneration sales in 1994 came from gas produced by affiliates. The remaining
supply was purchased from other producers under various arrangements, mostly of
short-term duration.
EXPLORATION & PRODUCTION
MCN Investment is engaged in natural gas exploration, development and
production through its wholly-owned subsidiary, Supply Development Group, Inc.
(SDGI). The primary objective of entering into gas E&P is to develop a reliable
long-term gas reserve pool to supply its gas marketing and cogeneration
operations, as well as other businesses seeking long-term gas supplies.
Long-term sales obligations of these businesses require long-term gas supplies
at known prices. Gas production in 1994 increased to 16.5 Bcf from 2.3 Bcf in
1993.
During the latter part of 1994, natural gas prices decreased significantly
throughout the United States. MCN's risk management strategy of selling future
gas production under fixed-price contracts and by entering into long-term
fixed-price swap agreements with financial institutions mitigated the effect of
lower prices on MCN's profitability. This strategy increases the likelihood the
Company will achieve its targeted rate of return from E&P investments. As of
December 31, 1994, MCN's gas production for the next ten years was largely
hedged at prices above year-end levels.
In 1994, SDGI drilled approximately 250 wells, bringing the total drilled
to 680 wells since the Company program began in 1992. About 86% of these wells
were drilled in Michigan Devonian (Antrim) shale formations. Even though the
potential natural gas recovery from an average well is less than the recovery
from
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<PAGE> 16
wells drilled in other types of formations, wells drilled in the Antrim shale
formation have a high success rate and are therefore considered relatively low
risk. SDGI's average working interest in Antrim shale E&P wells is approximately
80%. The remaining wells drilled were in the midcontinent region and in Ohio.
The exploratory activities in these areas involve greater risk of dry holes or
unproductive wells but there is also a greater potential for finding larger gas
reserves than with the drilling in Antrim shale. The average working interest in
these wells is approximately 30%. SDGI's strategy is to focus efforts on known
producing areas, both within and outside Michigan. As a result, SDGI's success
rate in the drilling program has averaged 96%.
In 1994, SDGI made significant investments in natural gas reserves
acquiring interests in over 800 gas wells located primarily in Oklahoma, Kansas
and Texas. At December 1994, SDGI owned 422 Bcf of proven gas reserves, 363 Bcf
of potential gas reserves and 1.3 million barrels (equivalent to 8 Bcf) of
proven and potential oil reserves. SDGI held interests in approximately 650,000
undeveloped acres which could support drilling over 2,000 additional wells.
At December 31, 1994, approximately 1,295 wells were producing. An
additional 200 wells were in various stages of completion and are expected to
begin producing in 1995. Additional information on SDGI's exploration and
production activities is reported under Item 2. Properties, located on pages 15
and 16.
The natural gas industry is very competitive, especially in the area of
obtaining desirable properties and projects for the production of natural gas
and oil. SDGI's approach to E&P is selective, conservative, and diversified.
Focus is primarily in known areas of gas production where chances of finding gas
are high. SDGI further reduces the risks inherent in E&P drilling by working
with several producers who use different gas well technologies and operate in
diverse geographical gas producing areas. Additional investments in natural gas
reserves will be made in areas that offer proven reserves and an acceptable
success percentage. Competition ranges from the major oil companies to numerous
small independent gas and oil companies.
GAS GATHERING & PROCESSING
With gas production in Michigan surpassing 220 Bcf annually, there is an
increasing need for the transportation of natural gas from the wellhead to
processing plants and ultimately to consumers. Saginaw Bay Pipeline Company and
Saginaw Bay Lateral Company (collectively "Saginaw Bay") are general partners in
ventures that transport natural gas and natural gas liquids from east-central
Michigan gas fields to processing plants in the northern part of the state.
During 1994, the Saginaw Bay pipeline transported an average of 44.9 MMcf
of natural gas per day and related liquids. Volumes transported in 1994 were
less than 1993 due to a normal production decline of gas reserves from the deep
Prairie du Chien formation.
To increase utilization of existing assets and increase its participation
in this business, MCN plans to extend the gas gathering system to reach new
Antrim gas reserves. MCN is both constructing and acquiring pipeline extensions
and processing plants. Recent pipeline extensions include the Jordan Valley
pipeline and the Lovells extension project. The Jordan Valley pipeline began
operations in early November 1994 and is transporting approximately 22 MMcf of
gas daily. The Lovells project, which has the potential to transport up to 50
MMcf of gas daily, will begin operation in the first half of 1995 and will
initially transport 30 MMcf of gas daily. This expansion is expected to mitigate
the effect of a decrease in the transportation rate of Saginaw Bay's largest
customer that will become effective in January 1996. The rate decrease is in
accordance with the terms of a 15-year contract that reduces the transportation
rate for the last 10 years of the agreement.
Antrim gas contains significant amounts of carbon dioxide that must be
removed before the gas is sold to end users. During 1994, MCN Investment
acquired two carbon dioxide gas processing plants in northern Michigan. In
January 1995, MCN Investment sold its 40% interest in two other plants. In 1995,
it expects to acquire or build additional processing plants which will also
process Antrim gas produced in northern Michigan. These additional plants,
together with the development of new pipeline infrastructure, will allow the
company to use carbon dioxide from these plants to pursue enhanced oil recovery
in Michigan.
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<PAGE> 17
MCN's strategy to grow its gas gathering and processing operations is
focused in Michigan and other states where MCN has gas production interests or
can readily apply its expertise in gas pipelines and processing.
GAS STORAGE
MCN Investment, through its subsidiary, Storage Development Company,
(Storage Development) has adopted a strategy of using joint ventures and
strategic partnerships to provide gas storage services, either as a separate
service or bundled with full gas service, to other gas utilities, pipeline
companies and large-volume gas users. Storage facilities near major consuming
markets provide supply flexibility, improve reliability of deliveries and help
reduce gas costs.
The gas industry's new operating environment requires local distribution
companies to assume greater responsibility for securing gas supplies and
developing a cost-effective, reliable gas supply portfolio. At the same time,
gas marketers and others are playing a larger role in the purchase and delivery
of natural gas to end users. These developments, as well as Michigan's pivotal
geographic location, favorable geology and depleting gas fields, present
significant opportunities for MCN's storage services.
MCN currently is a 50% partner with ANR Storage Company in the Blue Lake
gas storage field. This 42 Bcf field, located in north central lower Michigan
(Kalkaska County), was developed at a cost of $122 million and began operations
in April 1993. MCN's 50% share of the field is equally divided between MichCon
and Storage Development. The field's entire capacity has been sold to ANR
Pipeline under a 20-year contract.
Storage Development also has a 50% interest in the Washington 28 storage
field, which is located northeast of Detroit in Macomb County. This 10 Bcf field
provides storage for MCN's Diversified Services gas marketing operations.
Storage Development entered into a partnership with three partners to
develop a 42 Bcf underground storage field, Washington 10, which is located
northeast of Detroit in Macomb County. The partnership, in which Storage
Development has a 40% interest, plans to invest approximately $120 million to
convert the underground natural gas producing field into a storage field. Three
of the partners or their affiliates, including MCN Investment, will store gas in
the field under long-term contracts. In December 1994, the partnership received
all regulatory approvals to construct the storage field. In conjunction with
their partners, Storage Development is currently assessing how and when to
proceed with the project.
COMPUTER OPERATIONS SERVICES
The Genix Group (Genix), a wholly-owned subsidiary of MCN Investment,
provides data processing, computer operations management, network design and
management, large-scale electronic printing and mailing, and business process
solution services to more than a dozen industries in 23 states. Among the
industries served are manufacturing, insurance, financial services, utilities,
transportation, advertising, publishing, education, retail, health care,
software and food services.
Throughout 1993-1994, Genix gained new customers and increased services to
existing customers. Computer Operations now maintains a well diversified
customer base of over 100 customers with annualized revenues that exceed $100
million. Broken down by service category, 79% of Genix's 1994 revenues were from
computer operations management; 12% from network services and the remaining nine
percent from other services. In providing these services, Genix typically
acquires and operates mainframes and other types of computers that process
information for customers. This allows Genix's customers to focus on their core
businesses rather than investing in and operating in-house data centers.
Genix competes in the computer services outsourcing industry on price, high
quality, flexible contracts and a wide menu of services. Genix targets corporate
clients that are looking for reliable, quality, value-added computer services.
By outsourcing in-house computer and related operations, a company can lower its
cost of doing business by taking advantage of Genix's economies of scale,
skilled personnel and state-of-the-art equipment. Genix added six new clients,
totaling more than $24 million in annualized revenues, in 1994. These
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<PAGE> 18
new contracts provide Genix with multi-year revenue streams ranging from two to
seven years. All major service contracts that were to expire in 1994 were
renewed.
During 1993, Genix expanded the capabilities of its major computing centers
in Michigan and Pennsylvania to handle new business. In 1994, Genix added data
centers in North Carolina and in London, England, and expanded its operating
facilities in Michigan and Pennsylvania. These new facilities will offer Genix
new business opportunities in the southeast U.S. and overseas. IBM compatible
mainframe processing power has expanded to 1,200 million instructions per second
(MIPS) in 1994, a 20% increase from 1993.
GAS TECHNOLOGY
MCN continues to develop technologies that may lead to new markets for
natural gas. One focus of this effort is adsorbed natural gas (ANG), a
technology that permits natural gas to be stored in containers at pressures
one-sixth to one-tenth that of conventional methods. ANG technology has been
used on a fleet of golf carts at The Orchards Golf Club, located approximately
30 miles north of Detroit. Since that golf course opened in 1993, this showcase
project has interested others elsewhere in the United States to begin exploring
ANG use in golf carts. In addition, preparations began for extensive field
testing of natural gas forklifts utilizing ANG technology. MichCon also renewed
its efforts to market ANG technology for brazing and cutting torches.
MCN is also focusing on pressurized combustion technology, which provides
increased fuel efficiency, heat uniformity and compactness of equipment. MCN
Investment developed and patented a prototype residential compact furnace which
is about one-fourth the size of a conventional furnace, with a more efficient
heat output. MCN Investment succeeded in applying pressurized combustion
technology to an industrial furnace.
MCN believes these technologies offer opportunities to expand the use of
natural gas, grow markets and eventually generate profits. MCN's current
investment in technology is minimal. MCN will continually assess the potential
of the technologies to determine whether the potential returns justify the
continuing investment.
OTHER
MCN Investment is involved in several residential and commercial community
development partnerships.
Bridgewater Holdings Inc., a 100% owned subsidiary of MCN Investment, holds
a 33 1/3% limited partnership interest in Bridgewater Place Ltd. Limited
Partnership. The partnership owns a 17-story commercial real estate complex
consisting of approximately 375,000 square feet of leasable office space in
Grand Rapids, Michigan.
Storage Development Company, a 100% owned subsidiary of MCN Investment,
holds a 50% limited partnership interest in The Orchards Golf Limited
Partnership. The Orchards golf course is above the Washington 28 storage field,
which is located north of Detroit. The partnership was formed in 1991 to develop
approximately 520 acres of land in Washington Township, Michigan. This
development consists of an 18-hole championship golf course of approximately 200
acres and a planned residential development for the remaining 320 acres.
ITEM 2. PROPERTIES
MCN, through its principal subsidiaries, leases approximately 62,000 sq.
feet of office space in Detroit and Grand Rapids under long-term leases.
GAS DISTRIBUTION
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1994, MichCon's
distribution system included 15,252 miles of distribution mains, 1,035,542
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<PAGE> 19
service lines and 1,157,567 active meters. MichCon owns 2,506 miles of
transmission and production lines which deliver natural gas to the distribution
districts and interconnect its storage fields with the sources of supply and the
market areas. MichCon also owns properties relating to five underground storage
fields with an aggregate storage capacity of approximately 130 Bcf.
Additionally, MichCon owns district office buildings, service buildings and gas
receiving and metering stations. MichCon occupies its principal office
buildings, located in Detroit and Grand Rapids, Michigan under long-term leases.
Portions of these buildings are subleased to affiliates and others.
Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending
beyond that date. The principal plants and properties of MichCon are held
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under
which MichCon's First Mortgage Bonds are issued. Some existing properties are
being fully utilized and new properties are being added to meet the requirements
of expansion into new areas. MichCon's capital expenditures for 1994 totaled
$145.4 million and could reach $250 million in 1995.
Citizens owns all of the properties used in the conduct of its utility
business. Included in these properties is a gas distribution system, a two-story
office building in downtown Adrian and a one-story service center.
DIVERSIFIED SERVICES
The Saginaw Bay partnership owns substantially all of the properties used
in the conduct of its business, primarily a 126-mile transmission line and
related lateral lines.
The Supply Development Group Inc. has interests in properties used for gas
production, including compressor facilities and gathering lines. (See
information below on Exploration and Production Activities for further details).
Genix owns certain properties, including land and building at their
headquarters located in Dearborn, Michigan. Genix leases facilities and computer
equipment located in Pennsylvania; North Carolina; Southgate, Michigan and
London, England. Certain computer equipment is owned at all locations.
MCN is involved in joint ventures that own property associated with gas
storage, cogeneration, gas gathering and processing, and real estate.
MCN's facilities are suitable and adequate for their intended use.
EXPLORATION AND PRODUCTION ACTIVITIES
Supply Development Group, Inc. (SDGI), a subsidiary of MCN, is involved in
various gas and oil producing activities. The following data, together with the
financial information detailed in Note 12 to the Consolidated Financial
Statements, incorporated by reference in Item 8 of this report and the general
data provided under the "Diversified Services: Gas Services -- Exploration &
Production" section of Item 1 located on page 11, provide additional information
regarding this activity. Reserves were estimated using contract sales prices.
Future revenues (included in the standardized measure of discounted future net
cash flows presented in Note 12 to the Consolidated Financial Statements) were
increased for the higher fixed prices from swap contracts covering a portion of
the volumes. Information on estimated gas and oil reserves was obtained by SDGI
from the independent petroleum engineering consultants Ryder Scott Company and
Miller and Lents, Ltd.
PRODUCTION
<TABLE>
<CAPTION>
For the Year Ended December 31 1994 1993
- ------------------------------------------------------------------------- -------- --------
<S> <C> <C>
Average Gas Sales Price (per Mcf)........................................ $ 1.91 $ 2.35
Average Oil Sales Price (per Bbl)........................................ $ 16.29 $ 18.59
Average Production Cost (per Mcf)........................................ $ .52 $ 1.62
</TABLE>
15
<PAGE> 20
PRODUCTIVE WELLS AND ACREAGE
<TABLE>
<CAPTION>
1994 1994
Producing Wells Gross Net
- ------------------------------------------------------------------------- -------- --------
<S> <C> <C>
United States............................................................ 1,295 620
======= =======
</TABLE>
Gross wells include nine with multiple completions.
<TABLE>
<CAPTION>
Developed Lease Acreage
- -------------------------------------------------------------------------
<S> <C> <C>
United States............................................................ 212,941 101,301
======= =======
</TABLE>
<TABLE>
<CAPTION>
Undeveloped Lease Acreage
- -------------------------------------------------------------------------
<S> <C> <C>
United States............................................................ 610,606 442,796
Canada................................................................... 42,500 18,063
-------- --------
653,106 460,859
======= =======
</TABLE>
DRILLING ACTIVITY
<TABLE>
<CAPTION>
1994 1994
Gross Net
----- ----
<S> <C> <C>
Working Interest Well Completions:
Exploratory
Productive.............................................................. 22 11
Dry..................................................................... 16 11
----- ----
Total Exploratory.................................................. 38 22
----- ----
Development
Productive.............................................................. 137 120
Dry..................................................................... 9 6
----- ----
Total Development.................................................. 146 126
----- ----
Total Working Interest Well Completions.................................... 184 148
===== ====
</TABLE>
PRESENT ACTIVITIES
<TABLE>
<CAPTION>
1994 1994
At December 31, 1994 Gross Net
- ----------------------------------------------------------------------------- ----- ----
<S> <C> <C>
Wells in Process of Drilling................................................. 92 72
</TABLE>
DELIVERY COMMITMENTS
Once operations begin in late 1995, Cogen will provide to the Michigan
Power Project up to 9 Bcf of gas, on an annual basis.
ITEM 3. LEGAL PROCEEDINGS
In addition to the Gas Distribution's regulatory proceedings and other
matters described in Item 1, "Business", MCN is also involved in a number of
lawsuits and administrative proceedings in the ordinary course of business with
respect to taxes, environmental matters, personal injury, property damage claims
and other matters.
16
<PAGE> 21
On December 27, 1994, a class action complaint was filed against MichCon in
Wayne County Circuit Court, Detroit, Michigan, by six residential customers of
MichCon on behalf of themselves and others who purchased and installed high
efficiency furnaces financed through one of MichCon's energy conservation
programs approved by the MPSC. These furnaces were installed by independent
licensed contractors. Plaintiffs allege, among other things, that MichCon failed
to warn them that unsafe conditions could result from improper installation and
venting of gas appliances, failed to take corrective action to remedy such
conditions, and made false representations and/or omissions in connection
therewith. Plaintiffs seek injunctive relief requiring MichCon to (a) warn its
customers of unsafe conditions created by the installation of high efficiency
furnaces, and (b) to reline all chimneys or install hot water heaters that vent
to the outside. Plaintiffs also seek unspecified money damages among other
things for diminution in the value of their homes, damage to homes, cost of
repairs, exemplary damages, attorneys fees and costs. On February 3, 1995,
immediately following a hearing on plaintiffs' motion to certify the class of
customers, the Wayne County Circuit Court issued an order that denied
plaintiffs' motion without prejudice. While plaintiffs could refile the motion,
the judge stated on the record that before he would reconsider plaintiffs'
motion, plaintiffs must be able to establish a more clearly defined plaintiff
class and damages. Management believes plaintiffs' allegations are without merit
and intends to vigorously defend this action.
The management of MCN believes that the resolution of these matters will
not have a material adverse effect on the financial statements of MCN.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 22
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MCN, as of February
21, 1995, is set forth below. Such officers are appointed by the Board of
Directors for terms expiring at the next annual meeting of shareholders
scheduled to be held on April 27, 1995.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Alfred R. Glancy III............. 57 Present position since September 1992; Chairman, Chief
Chairman, President, Chief Executive Officer and Director since August 1988;
Executive Officer and Director Chairman and Director of MCN Investment since 1988;
Chairman and Director of MichCon since 1984 and 1981
respectively; Chief Executive Officer of MichCon from
1984 to September 1992.
Rai P. K. Bhargava............... 47 Present position since January 1994; Executive Vice
President and Chief Executive President and Chief Operating Officer of MCN
Officer of MCN Investment Investment from July 1993 to January 1994; Director of
MCN Investment since November 1993; Vice President,
Marketing, of MichCon from July 1988 to July 1993.
Stephen E. Ewing................. 51 Present position since September 1992; President and
President and Chief Executive Chief Operating Officer from August 1988 to September
Officer of MichCon and Director 1992; Director since August 1988; President and
Director of MichCon since 1985 and 1984 respectively;
Chief Operating Officer of MichCon from 1985 to
September 1992.
William K. McCrackin............. 61 Present position since September 1992; Vice Chairman,
Vice Chairman, Chief Financial Chief Financial Officer, Treasurer and Director from
Officer and Director August 1988 to September 1992; Director of MCN
Investment since 1988; Vice Chairman of MichCon from
March 1986 to September 1992; Chief Financial Officer
of MichCon from 1985 to September 1992; Director of
MichCon since 1984.
Daniel L. Schiffer............... 51 Present position since April 1989; General Counsel and
Vice President, General Counsel Secretary of MCN since August 1988; Vice President and
and Secretary General Counsel of MichCon from July 1991 to September
1992; Associate General Counsel of MichCon from 1984
to July 1991; Secretary of MichCon from June 1988 to
April 1990 and a Director of MichCon since January
1989.
</TABLE>
18
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MCN Common Stock is traded on the New York Stock Exchange. On February 21,
1995 there were 24,705 holders of record of MCN Common Stock. Information
regarding the market price of MCN Common Stock and related security holder
matters is incorporated by reference herein from the section entitled
"Supplementary Financial Information" in MCN's 1994 Annual Report to
Shareholders, pages 58 and 59.
ITEM 6. SELECTED FINANCIAL DATA
Information required pursuant to this item is incorporated by reference
herein from the section entitled "Supplementary Financial Information" in MCN's
1994 Annual Report to Shareholders, pages 58 and 59.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required pursuant to this item is incorporated by reference
herein from the section entitled "Management's Discussion and Analysis" in MCN's
1994 Annual Report to Shareholders, pages 32 through 39.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required pursuant to this item is incorporated by reference
herein from the following sections of MCN's 1994 Annual Report to Shareholders.
The consolidated statement of income, cash flows and capitalization are for each
of the years ended December 31, 1994, 1993 and 1992 and the consolidated
statement of financial position is as of December 31, 1994 and 1993.
Consolidated Statement of Income, page 40
Consolidated Statement of Financial Position, page 41
Consolidated Statement of Capitalization, page 42
Consolidated Statement of Cash Flows, page 43
Summary of Accounting Policies, page 44
Notes to Consolidated Financial Statements, pages 45 through 55
Independent Auditors' Report, page 56; and
Supplementary Financial Information, pages 58 and 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section entitled "Proposal 1-Election of
Directors" in MCN's March 1995 definitive Proxy Statement is incorporated by
reference herein.
Information concerning the executive officers of MCN is set forth in the
section entitled "Executive Officers of the Registrant" on page 18 in Part I of
this Report.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
All reports concerning ownership of MCN equity securities required to be
filed by MCN's directors and executive officers pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended, were filed on a timely basis with
the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the section entitled "Compensation of
Directors and Executive Officers" in MCN's March 1995 definitive Proxy Statement
is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth in the section entitled "Beneficial Security
Ownership of Directors, Nominees and Executive Officers" in MCN's March 1995
definitive Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the section entitled "Other Compensation
Matters" in MCN's March 1995 definitive Proxy Statement is incorporated by
reference herein.
20
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. For a list of financial statements incorporated by reference, see the
section entitled "Financial Statements and Supplementary Data", on page
19 in Part II, Item 8 of this Report.
2. The Financial Statement Schedule for each of the three years in the
period ended December 31, 1994, unless otherwise noted, is included
herein in response to Part II, Item 8:
Independent Auditor's Report
SCHEDULE
II -- Valuation and Qualifying Accounts
Schedules other than that referred to above are omitted as not applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
21
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
MCN Corporation:
We have audited the consolidated financial statements of MCN Corporation
and subsidiaries as of December 31, 1994 and 1993, and for each of the three
years in the period ended December 31, 1994, and have issued our report thereon
dated February 6, 1995; such consolidated financial statements and report are
included in your 1994 Annual Report to Shareholders and are incorporated therein
by reference. Our audits also included the consolidated financial statement
schedule of MCN Corporation and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Detroit, Michigan
February 6, 1995
22
<PAGE> 27
SCHEDULE II
MCN CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN C
ADDITIONS
------------------ COLUMN D
PROVISIONS DEDUCTIONS
COLUMN B CHARGED TO FOR PURPOSES COLUMN E
BALANCE AT ------------------ FOR WHICH THE BALANCE
COLUMN A BEGINNING UTILITY RESERVES WERE AT END
DESCRIPTION OF PERIOD INCOME PLANT PROVIDED OF PERIOD
- --------------------------------------------------------------- ----------- ------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Reserve deducted from assets in Consolidated Statement of
Financial Position:
Allowance for doubtful accounts............................ $19,576 $20,392 $ -- $23,867 $16,101
Allowance for sale of partnership interest (1)............. -- 91 -- -- 91
Allowance for notes receivable............................. 579 1,375 -- -- 1,954
----------- ------- ------- ------------- ---------
$20,155 $21,858 $ -- $23,867 $18,146
========== ======= ====== ============= ==========
Reserves included in Current Liabilities -- Other in
Consolidated Statement of Financial Position:
Environmental testing (2).................................. $ 6,179 $ -- $ -- $ 639 $ 5,540
========== ======= ====== ============= ==========
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of Financial
Position:
Injuries and damages....................................... $ 9,090 $ 1,656 $ 387 $ 2,731 $ 8,402
========== ======= ====== ============= ==========
YEAR ENDED DECEMBER 31, 1993
Reserve deducted from assets in Consolidated Statement of
Financial Position:
Allowance for doubtful accounts............................ $24,930 $21,138 $ -- $26,492 $19,576
Allowance for notes receivable............................. -- 579 -- -- 579
----------- ------- ------- ------------- ---------
$24,930 $21,717 $ -- $26,492 $20,155
========== ======= ====== ============= ==========
Reserves included in Current Liabilities -- Other in
Consolidated Statement of Financial Position:
Environmental testing (2).................................. $ 1,677 $ -- $ -- $(4,502) $ 6,179
========== ======= ====== ============= ==========
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of Financial
Position:
Injuries and damages....................................... $10,105 $ 1,895 $ 372 $ 3,282 $ 9,090
Environmental testing (2).................................. 6,575 -- -- 6,575 --
----------- ------- ------- ------------- ---------
$16,680 $ 1,895 $ 372 $ 9,857 $ 9,090
========== ======= ====== ============= ==========
YEAR ENDED DECEMBER 31, 1992
Reserves deducted from assets in Consolidated Statement of
Financial Position:
Allowance for doubtful accounts............................ $31,216 $20,201 $ -- $26,487 $24,930
Allowance for notes receivable............................. 223 -- -- 223 --
----------- ------- ------- ------------- ---------
$31,439 $20,201 $ -- $26,710 $24,930
========== ======= ====== ============= ==========
Reserves included in Current Liabilities -- Other in
Consolidated Statement of Financial Position:
Environmental testing (2).................................. $ 458 $ -- $ -- $(1,219) $ 1,677
Restructuring of gas technology operations................. 150 -- -- 150 --
----------- ------- ------- ------------- ---------
$ 608 $ -- $ -- $(1,069) $ 1,677
========== ======= ====== ============= ==========
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of Financial
Position:
Injuries and damages....................................... $11,893 $ 629 $ 243 $ 2,660 $10,105
Environmental testing (2).................................. 8,575 -- -- 2,000 6,575
----------- ------- ------- ------------- ---------
$20,468 $ 629 $ 243 $ 4,660 $16,680
========== ======= ====== ============= ==========
</TABLE>
- ---------------
NOTES:
(1) During 1994, MCN established a reserve for the expected loss relating to the
sale of a partnership interest in a gas marketing joint venture. The sale is
anticipated to take place during the first half of 1995.
(2) Reference is made to Note 5b to the Consolidated Financial Statements in the
1994 Annual Report to Shareholders of MCN Corporation, page 47. During the
year ended December 31, 1993, $6,575,000 was transferred from Deferred
Credits and Other Liabilities -- Other to Current Liabilities -- Other.
Similarly, $2,000,000 was transferred during the year ended December 31,
1992. Actual expenditures deducted against the reserve in 1993 and 1992 were
$2,073,000 and $781,000, respectively.
23
<PAGE> 28
3. Exhibits, Including Those Incorporated By Reference.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<S> <C>
3-1 Articles of Incorporation of MCN Corporation (Exhibit 3-1 to March 31, 1993
Form 10-Q).
3-2 By-Laws of MCN Corporation, as amended (Exhibit 3-2 to March 31, 1993 Form
10-Q).
4-1 Rights Plan (Exhibit 28-1 to Form 8-K dated December 20, 1989).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (Registration Statement
No. 33-21930-99).
10-2 Directors' Deferred Fee Plan (Exhibit 10-3 to 1989 Form 10-K).
10-3 Executive Deferred Compensation Plan (Exhibit 10-4 to 1989 Form 10-K).
10-4 MCN Corporation Stock Incentive Plan (Exhibit 10-5 to 1989 Form 10-K).
10-5 Form of Employment Agreement (Exhibit 10-1 to March 31, 1990 Form 10-Q).
10-6 MCN Corporation Annual Performance Plan (Exhibit 10-6 to 1993 Form 10-K).
10-7 MCN Corporation Non-Officer Director Stock Award Plan (Exhibit 10-1 to March
31, 1994 Form 10-Q).
10-8 MCN Corporation Mandatory Deferred Compensation Plan.*
13-1 MCN Corporation 1994 Annual Report to Shareholders.*
21-1 List of MCN Subsidiaries.*
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP.*
23-2 Consent of Ryder Scott Company.*
23-3 Consent of Miller and Lents, Ltd.,*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporate by reference.
24
<PAGE> 29
(B) REPORTS ON FORM 8-K:
MCN filed a report on Form 8-K dated October 21, 1994, under Item 5, with
respect to the reporting of its third quarter results of operations.
MCN filed a report on Form 8-K dated October 26, 1994, under Item 5, with
respect to the offering by MCN Michigan Limited Partnership (MCN Michigan) of
its 9 3/8% Cumulative Preferred Securities, Series A, liquidation preference $25
per Preferred Security (Preferred Securities). MCN is the general partner of MCN
Michigan. A Form of Purchase Agreement was filed as an Exhibit thereto.
MCN filed an additional report on Form 8-K dated October 26, 1994, under
Item 5, with respect to the offering of the Preferred Securities by MCN
Michigan. The following documents were filed as Exhibits thereto:
- Amended and Restated Limited Partnership Agreement of MCN Michigan
Limited Partnership.
- Action by the General Partner of MCN Michigan Limited Partnership
creating the 9 3/8% Cumulative Preferred Securities, Series A, dated
October 26, 1994.
- Form of Certificate Evidencing Preferred Partner Interest of MCN Michigan
Limited Partnership.
- MCN Corporation Board of Directors' Pricing Committee Resolution
establishing the price, terms and conditions of the Debt Securities.
- Terms and Conditions of Series A Subordinated Deferrable Interest Debt
Securities.
- Form of MCN Corporation Series A Subordinated Deferrable Interest Debt
Security for $100,000,000.
- Form of MCN Corporation Series A Subordinated Deferrable Interest Debt
Security for $1,100,000.
- Form of the Series A Subordinated Deferrable Interest Debt Security to be
issued in the event that MCN Michigan ceases to be the sole holder.
25
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MCN CORPORATION
--------------------------------------
(Registrant)
By: /s/ Patrick Zurlinden
------------------------------------
Patrick Zurlinden
Vice President, Controller
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
TITLE DATE
-------------------------------------- ------------------
<S> <C> <C>
* Director, Chairman, President and February 28, 1995
- -------------------------------------------- Chief Executive Officer
Alfred R. Glancy III
* Director, Vice Chairman and Chief February 28, 1995
- -------------------------------------------- Financial Officer
William K. McCrackin
/s/ Patrick Zurlinden Vice President, Controller and Chief February 28, 1995
- -------------------------------------------- Accounting Officer
Patrick Zurlinden
* Director February 28, 1995
- --------------------------------------------
Stephen E. Ewing
* Director February 28, 1995
- --------------------------------------------
Roger Fridholm
* Director February 28, 1995
- --------------------------------------------
Frank M. Hennessey
* Director February 28, 1995
- --------------------------------------------
Thomas H. Jeffs II
* Director February 28, 1995
- --------------------------------------------
Arthur L. Johnson
* Director February 28, 1995
- --------------------------------------------
Dale A. Johnson
* Director February 28, 1995
- --------------------------------------------
Helen O. Petrauskas
* Director February 28, 1995
- --------------------------------------------
Howard F. Sims
*By: /s/ Patrick
Zurlinden
- --------------------------------------------
Patrick Zurlinden
Attorney-in-Fact
</TABLE>
26
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
3-1 Articles of Incorporation of MCN Corporation (Exhibit 3-1 to March 31,
1993 Form 10-Q).
3-2 By-Laws of MCN Corporation, as amended (Exhibit 3-2 to March 31, 1993
Form 10-Q).
4-1 Rights Plan (Exhibit 28-1 to Form 8-K dated December 20, 1989).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (Registration
Statement No. 33-21930-99).
10-2 Directors' Deferred Fee Plan (Exhibit 10-3 to 1989 Form 10-K).
10-3 Executive Deferred Compensation Plan (Exhibit 10-4 to 1989 Form 10-K).
10-4 MCN Corporation Stock Incentive Plan (Exhibit 10-5 to 1989 Form 10-K).
10-5 Form of Employment Agreement (Exhibit 10-1 to March 31, 1990 Form
10-Q).
10-6 MCN Corporation Annual Performance Plan (Exhibit 10-6 to 1993 Form
10-K).
10-7 MCN Corporation Non-Officer Director Stock Award Plan (Exhibit 10-1 to
March 31, 1994 Form 10-Q).
10-8 MCN Corporation Mandatory Deferred Compensation Plan*.
13-1 MCN Corporation 1994 Annual Report to Shareholders*.
21-1 List of MCN Subsidiaries*.
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP*.
23-2 Consent of Ryder Scott Company*.
23-3 Consent of Miller and Lents, Ltd.,*.
24-1 Powers of Attorney*.
27-1 Financial Data Schedule*.
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporate by reference.
<PAGE> 1
EXIBIT 10-8
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
SECTION 1
TITLE, PURPOSE AND EFFECTIVE DATE
1.01. Title ..................................
1.02. Purpose ................................
1.03. Effective Date .........................
SECTION 2
DEFINITIONS
2.01. "Account" ..............................
2.02. "Affiliated Company" ...................
2.03. "Annual Base Salary" ...................
2.04. "Annual Incentive Compensation" ........
2.05. "Beneficiary" ..........................
2.06. "Board of Directors" ...................
2.07. "Code" .................................
2.08. "Committee" ............................
2.09. "Company" ..............................
2.10. "Covered Employee" .....................
2.11. "Deferral" .............................
2.12. "Deferral Form" ........................
2.13. "Deferral Period" ......................
2.14. "ERISA" ................................
2.15. "FICA" .................................
2.16. "In Pay Status" ........................
2.17. "Participant" ..........................
2.18. "Performance Unit Award" ...............
2.19. "Plan" .................................
2.20. "Plan Interest Rate" ...................
2.21. "Plan Year" ............................
2.22. "Restricted Stock Plan" ................
2.23. "Savings Plan" .........................
2.24. "Spouse" ...............................
2.25. "Total Compensation" ...................
SECTION 3 ..................................................................
PARTICIPATION
3.01. Determination of Covered Employee Status
3.02. Commencement of Participation ..........
3.03. Deferral Form ..........................
3.04. Amount of Deferral .....................
3.05. Increased Deferral .....................
3.06. Denomination of Deferrals ..............
3.07. Establishment of Account ...............
SECTION 4 ..................................................................
FUNDING OF BENEFITS
4.01. Unfunded Plan ..........................
4.02. Dividend Equivalents ...................
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
SECTION 5 ..................................................................
FORM AND TIMING OF PAYMENT
5.01. Form and Timing of Payment .............
5.02. Change in Payment Option ...............
5.03. Hardship Withdrawal Benefits ...........
SECTION 6 ..................................................................
SELECTION OF AND PAYMENTS TO A BENEFICIARY ........................
6.01. Beneficiary Designation ................
6.02. Change in Beneficiary Designation ......
6.03. Pre-Retirement Survivor Benefit ........
6.04. Post-Retirement Survivor Benefit .......
SECTION 7 ..................................................................
VESTING OF BENEFITS
7.01. Vesting of Benefits ....................
SECTION 8 ..................................................................
ADDITIONAL PROVISIONS AFFECTING BENEFITS
8.01. Tax Withholding ........................
8.02. Dilution and Other Adjustments .........
SECTION 9
ADMINISTRATION OF THE PLAN
9.01. Duties and Power .......................
9.02. Benefit Statements .....................
SECTION 10
AMENDMENT, SUSPENSION, AND TERMINATION
10.01. Right to Amend or Terminate ............
10.02. Right to Suspend .......................
10.03. Non-ERISA Plan .........................
10.04. Right to Accelerate ....................
SECTION 11
MISCELLANEOUS
11.01. Right to Continued Employment ..........
11.02. Prohibition Against Alienation .........
11.03. Sayings Clause .........................
11.04. Payment of Benefit of Incompetent ......
11.05. Spouse's Interest ......................
11.06. Successors .............................
11.07. Gender, Number and Heading .............
11.08. Legal Fees and Expenses ................
11.09. Choice of Law ..........................
11.10. Affiliated Employees ...................
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
SECTION 12
CHANGE IN CONTROL PROVISIONS
12.01. General ................................
12.02. Transfer to Rabbi Trust ................
12.03. Joint and Several Liability ............
12.04. Definition of Change in Control ........
</TABLE>
<PAGE> 5
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
SECTION 1
TITLE, PURPOSE AND EFFECTIVE DATE
1.01. Title. The title of this Plan shall be the "MCN Corporation
Mandatory Deferred Compensation Plan" and shall be referred to in this document
as the "Plan."
1.02. Purpose. The purpose of the Plan is to promote the success of
MCN Corporation (hereinafter referred to as the "Company") by providing the
Company a method to meet the deduction limitation in Section 162(m) of the
Internal Revenue Code of 1986, as amended, whereby Covered Employees of the
Company and its affiliated companies are required to defer the amount of
compensation payable in one calendar year in excess of $1 million until after
completion of the Deferral Period thereby increasing the employees' personal
interest in the continued success and progress of the Company.
It is intended that this Plan provide benefits for "a select group of
management or highly compensated employees" within the meaning of Sections 201,
301 and 401 of the Employee Retirement Income Security Act of 1974, as amended
(hereinafter referred to as "ERISA") and, therefore, to be exempt from the
provisions of Parts 2, 3 and 4 of Title I of ERISA.
1.03. Effective Date. The Plan shall be effective January 1, 1995.
SECTION 2
DEFINITIONS
The following words and terms used herein shall, unless the context
clearly requires a different meaning, have the respective meanings hereinafter
set forth.
2.01. "Account" means the record maintained by the Company of each
Participant's Deferrals, credited dividend equivalents and distributions under
the Plan.
- 1 -
<PAGE> 6
2.02. "Affiliated Company" means any corporation while such
corporation is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as the Company or any other
employing entity while such entity is under common control (within the meaning
of Section 414(c) of the Code) with the Company.
2.03. "Annual Base Salary" means annual base salary payable in the
current Plan Year after any deferrals under Sections 125, 129 or 401(k) of the
Code and after any election to defer an amount under the MCN Executive Deferred
Compensation Plan and the MichCon Supplemental Savings Plan and before any
payroll deduction for taxes or any other purpose, but excluding any bonus,
fringe benefit or other form of remuneration.
2.04. "Annual Incentive Compensation" means the cash compensation
earned in the current Plan Year and payable in the subsequent Plan Year under
the MCN Corporation Annual Management Performance Plan.
2.05. "Beneficiary" means the person, persons or entity designated
in writing by the Participant on forms provided by the Company to receive
distribution of certain death benefits under the Plan in the event of the
Participant's death.
2.06. "Board of Directors" means the Board of Directors of the
Company.
2.07. "Code" means the Internal Revenue Code of 1986, as amended.
2.08. "Committee" means the Savings Plan Committee under the MichCon
Savings and Stock Ownership Plan (as defined in Section 2.23). The Committee
is responsible for the administration of the Plan.
2.09. "Company" means MCN, a Michigan corporation, its successors
and assigns, and any affiliated company.
2.10. "Covered Employee" means any employee with Total Compensation
in excess of $1 million who, on the last day of the taxable year, is the chief
executive officer ("CEO") of the Company or is acting in such capacity, or is
among the four highest compensated officers (other than the CEO) whose
compensation is required by the Securities Exchange Act of 1934 to be disclosed
in the Company's proxy statement.
2.11. "Deferral" means the amount of a Participant's Performance
Unit Award, Restricted Stock Award, Annual Incentive Compensation and/or Annual
Base Salary that must be deferred in accordance with Section 3 to reduce the
Participant's estimated Total Compensation to an amount less than $1 million
for a Plan
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<PAGE> 7
Year. The source of the Deferral shall be at the discretion of the Company's
Director of Human Resources. Deferral amounts are retained by the Company as
part of its general assets.
2.12. "Deferral Form" means the deferral form described in Section
3.03 relating to a Participant's commitment to make a Deferral.
2.13. "Deferral Period" means the period beginning with the date a
Participant becomes a Covered Employee and ending the day after the date the
Participant is no longer a Covered Employee.
2.14. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
2.15. "FICA" means the Federal Insurance Contributions Act tax as
set forth in Chapter 26 of the Code.
2.16. "In Pay Status" means a benefit under the Plan that is
currently being paid or that is about to be paid to a Participant or
Beneficiary under Section 5.01, 6.01, 6.03 or 6.04.
2.17. "Participant" means a Covered Employee who has made a written
election on a properly executed Deferral Form to participate in the Plan in
accordance with Section 3.02.
2.18. "Performance Unit Award" means the final award under the MCN
Corporation Long Term Incentive Performance Unit Plan which is part of the MCN
Corporation Stock Incentive Plan.
2.19. "Plan" means the MCN Corporation Mandatory Deferred
Compensation Plan, as described herein and as hereafter amended.
2.20. "Plan Interest Rate" means the interest rate for the latest
issue, as of the end of the previous month, of ten-year U.S. Treasury Notes,
or such other rate as set by the Committee.
2.21. "Plan Year" means the period beginning January 1 and ending
December 31 of each year (the calendar year).
2.22. "Restricted Stock Award" means the final award under the
Restricted Stock Program which is part of the MCN Corporation Stock Incentive
Plan.
2.23. "Savings Plan" means the MichCon Savings and Stock Ownership
Plan or a successor thereto.
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<PAGE> 8
2.24. "Spouse" means an individual who is legally married to a
Participant under the laws of the State in which the Participant resides, on
the day immediately preceding the Participant's date of death.
2.25. "Total Compensation" means all remuneration for services
received by an employee in a calendar year, including cash and the cash value
of all noncash remuneration (including taxable benefits) less any amount
deferred under Sections 125, 129 and 401(k) of the Code, the MCN Executive
Deferred Compensation Plan and the MichCon Supplemental Savings Plan.
Generally, Total Compensation will equal the taxable compensation as reportable
on a Form W-2.
SECTION 3
PARTICIPATION
3.01. Determination of Covered Employee Status. To determine
whether an employee is a Covered Employee, the estimated Total Compensation of
an employee who would be a Covered Employee if such employee had Total
Compensation in excess of $1 million shall monitored.
3.02. Commencement of Participation. An employee shall become a
Participant upon execution of a Deferral Form no later than 15 days after the
execution of this Plan or the December 22 prior to the January 1 of the year
the Company has determined the employee will become a Covered Employee. A
properly executed Deferral Form shall be effective on the January 1 immediately
following execution of the Deferral Form, and shall contain the items described
in this Section and in Sections 3.03, 5.01 and 6.01. Subject to Section 5.03,
the mandatory deferral required by the Plan shall be effective for all Plan
Years the Participant is a Covered Employee and shall be irrevocable.
3.03. Deferral Form. The Committee shall provide each Covered
Employee with a Deferral Form as set forth in Exhibit A. A Participant shall
file a Deferral Form to defer Total Compensation in excess of $1 million for
all Plan Years in which he is a Covered Employee. A Participant's consent to
the mandatory deferral required by the Plan, as evidenced by his signature on
the Deferral Form, shall be irrevocable during the Deferral Period. The
Deferral Form shall set forth the Covered Employee's acceptance of the benefits
provided hereunder, his agreement to be bound by the terms of the Plan and such
other matters as are set forth in this Plan or deemed advisable by the
Committee.
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<PAGE> 9
3.04. Amount of Deferral. A Participant's Deferral shall be equal
to an amount that will reduce the Participant's estimated Total Compensation
for the subsequent Plan Year to an amount less than $1 million. However, such
annual Deferral shall not exceed
(a) 100% of the Performance Unit Award less the FICA tax thereon;
(b) 100% of the Restricted Stock Award less the FICA tax thereon;
(c) 100% of the Annual Incentive Compensation less the FICA tax
thereon; and
(d) 100% of Annual Base Salary less the FICA tax thereon;
and shall not be less than $10,000.
3.05. Increased Deferral. A Participant's Deferral shall increase
automatically for each Plan Year in which he is a Participant, up to the limits
set forth in Section 3.04.
3.06. Denomination of Deferrals. A Participant's Deferral shall be
denominated in Company common stock valued at an amount equal to the closing
price of a share of Company common stock on the New York Stock Exchange
Composite Tape for the trading day preceding the day on which a deferral is to
be made. Dividend equivalents shall be credited to the Participant's Account
in accordance with Section 4.02.
3.07. Establishment of Account. The Committee shall establish an
Account for each Participant to which the Participant's Deferrals shall be
credited, dividend equivalents in accordance with Section 4.02 shall be
reinvested and distributions shall be debited.
SECTION 4
FUNDING OF BENEFITS
4.01. Unfunded Plan. The Plan shall be unfunded. All benefits
payable under the Plan shall be paid from the Company's general assets. The
Company shall not be required to set aside or hold in trust any funds for the
benefit of a Participant or Beneficiary, who shall have the status of a general
unsecured creditor with respect to the Company's obligation to make benefit
payments pursuant to the Plan. Any assets of the Company available
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<PAGE> 10
to pay Plan benefits shall be subject to the claims of the Company's general
creditors and may be used by the Company in its sole discretion for any
purpose.
4.02. Dividend Equivalents. Dividend equivalents equal to 50% of
the dividends payable on MCN Common Stock shall be credited to a Participant's
Account during the Deferral Period based on the number of shares of Company
common stock deemed to be held in such Participant's Account. A Participant
may elect on his Deferral Form to have 0%, 50% or 100% of such credited
dividend equivalents paid directly to him in cash during the Plan Year. A
Participant's election regarding credited dividend equivalents shall be
effective on the January 1 immediately following execution of his Deferral Form
and shall remain in effect until revoked by the Participant. Revocation of a
dividend equivalent election shall be effective on the January 1 immediately
following revocation.
SECTION 5
FORM AND TIMING OF PAYMENT
5.01. Form and Timing of Payment. After completion of his Deferral
Period, a Participant shall be entitled to a distribution of his Account on the
first of the month following the month in which his Deferral Period ends. The
distribution to a Participant shall be paid in cash in an amount equal to the
number of shares of Company common stock deemed to be held in the Participant's
Account and valued at the closing price of MCN Corporation common stock on the
New York Stock Exchange Composite Tape on the day before payment is made.
Payment shall be made in accordance with the Participant's selection on his
Deferral Form; either in equal monthly payments over a period not less than one
year and not more than 15 years, in one year increments, or as a lump sum
distribution of the Participant's Account. The amount of monthly payments
shall be calculated to pay out over the specified period the entire balance in
the Participant's Account as of the end of the Deferral Period with interest
credited monthly on the declining balance at the Plan Interest Rate. The
amount of the monthly payments to the Participant shall be adjusted on January
1 of each year to reflect changes in the Plan Interest Rate and other changes
to the Participant's Account balance.
5.02. Change in Payment Option. The payment option selected by the
Participant on his Deferral Form may be changed at any time by the Participant
by submitting a new payment selection to the Committee, but a change shall be
effective only if it is received by the Committee at least 36 months before
payments under the Plan commence.
5.03. Hardship Withdrawal Benefits. At any time prior to
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<PAGE> 11
a distribution in accordance with Section 5.01, a Participant may request that
the Committee make a distribution to him of all or part of his Account within
120 days. Such distribution shall be made only if the Committee determines
that the Participant is suffering from a financial hardship that cannot be
satisfied from his normal sources of income, and the distribution shall be
limited to the amount required to meet the financial hardship. In making these
determinations, the Committee shall utilize the regulations proposed or adopted
by the U.S. Department of Treasury pursuant to Section 401(k) of the Code and
the rules under the Savings Plan. A financial hardship shall be satisfied from
the Plan to the extent possible then from the MCN Executive Deferred
Compensation Plan, the Supplemental Savings Plan, and finally from the Savings
Plan.
SECTION 6
SELECTION OF AND PAYMENTS TO A BENEFICIARY
6.01. Beneficiary Designation. A Participant shall designate a
Beneficiary on his Beneficiary Designation Form, as provided in Exhibit B. The
designation of a Beneficiary other than the Participant's Spouse must be
consented to in writing by the Spouse. If a Participant has not designated a
Beneficiary, or if a designated Beneficiary is not living or in existence at
the time of a Participant's death, any death benefits payable under the Plan
shall be paid to the Participant's Spouse, if then living, and if the
Participant's Spouse is not then living, to the Participant's estate.
6.02. Change in Beneficiary Designation. A Participant may change
the designated Beneficiary, subject to the restriction in Section 6.01, from
time to time by filing a new written designation with the Committee. Such
designation shall be effective upon receipt by the Committee.
6.03. Pre-Retirement Survivor Benefit. If a Participant dies prior
to completion of the Deferral Period, his Beneficiary shall be entitled to
receive a distribution of the Participant's Account. The distribution to a
Beneficiary shall be paid in cash in an amount equal to the number of shares of
Company common stock deemed to be held in the Participant's Account and valued
at the closing price of MCN Corporation common stock on the New York Stock
Exchange Composite Tape on the day of the Participant's death. The
distribution shall be paid in accordance with the Participant's selection on
his Deferral Form; either in monthly payments over a period not less than one
year and not more than 15
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<PAGE> 12
years, in one year increments, or as a lump sum distribution. Payments to the
Beneficiary shall begin as soon as practicable, but in no event later than one
year following the Participant's death.
6.04. Post-Retirement Survivor Benefit. If a Participant dies
subsequent to the start of his distribution payments under Section 5.01, his
Beneficiary shall be entitled to continue to receive the distribution of the
Participant's Account for the remainder of the period over which benefits were
being paid to the deceased Participant.
SECTION 7
VESTING OF BENEFITS
7.01. Vesting of Benefits. A Participant shall be 100% vested in
his benefits under the Plan at all times, except as set forth in Sections 8.02,
10.02, 10.03 and 10.04. A Participant shall rank as an unsecured creditor of
the Company for all benefits under the Plan.
SECTION 8
ADDITIONAL PROVISIONS AFFECTING BENEFITS
8.01. Tax Withholding. Benefit payments hereunder shall be subject
to applicable federal, state or local tax withholding laws.
8.02. Dilution and Other Adjustments. In the event of any change in
the outstanding shares of Company common stock by reason of any stock dividend,
stock split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares or other similar corporate change, the
Committee, in its sole discretion, shall make the appropriate adjustment in
each Participant's Account. If any such adjustment shall result in a
fractional share, such fraction shall be disregarded. Such adjustments made by
the Committee shall be conclusive and binding for all purposes of the Plan.
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<PAGE> 13
SECTION 9
ADMINISTRATION OF THE PLAN
9.01. Duties and Power. The Committee shall be responsible for the
general administration of the Plan and the proper execution of its provisions.
It shall also be responsible for the interpretation of the Plan and the
determination of all questions arising thereunder. It shall maintain all
necessary books of accounts and records. It shall have power to establish,
interpret, enforce, amend, and revoke, from time to time, such rules and
regulations for the administration of the Plan and the conduct of its business
as it deems appropriate, including the right to remedy ambiguities,
inconsistencies and omissions (provided such rules and regulations are
uniformly applied to all persons similarly situated). Any action that the
Committee is required or authorized to take shall be final and binding upon
each and every person who is or may become a Plan Participant or Beneficiary.
The Committee may amend this Plan to comply with changes to the Code, so long
as the amendment does not materially increase the cost of maintaining the Plan
or decrease benefits to Participants or Beneficiaries.
9.02. Benefit Statements. No later than 120 days after the end of
each Plan Year, the Committee will provide each Participant with a statement
setting forth the Participant's Account balance as of the last day of the
immediately preceding Plan Year.
SECTION 10
AMENDMENT, SUSPENSION, AND TERMINATION
10.01. Right to Amend or Terminate. The Plan may be amended or
terminated by the Board of Directors at any time. Such amendment or
termination may modify or eliminate any benefit hereunder except that such
amendment or termination shall not affect the rights of Participants or
Beneficiaries to the vested portion of a Participant's Account as of the date
of such amendment or termination.
10.02. Right to Suspend. If the Board of Directors determines that
payments under the Plan would have a materially adverse affect on the Company's
ability to carry on its business, the Board of Directors may suspend such
payments temporarily for such time as in it sole discretion it deems advisable,
but in no event for a period in excess of one year. During the period of
suspension, the payment of dividend equivalents shall continue to
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<PAGE> 14
be made in cash to the Participant in accordance with Section 5.01. The
Company shall pay such suspended payments in a lump sum immediately upon the
expiration of the period of suspension.
10.03. Non-ERISA Plan. The Plan is intended to provide benefits for
"a select group of management or highly compensated employees" within the
meaning of Sections 201, 301 and 401 of ERISA, and therefore to be exempt from
Sections 2, 3 and 4 of Title 1 of ERISA. Accordingly, the Plan shall terminate
and, existing Account balances and other benefits In Pay Status shall be paid
in a single, actuarially equivalent lump-sum and no further benefits, vested or
non-vested, shall be paid hereunder in the event it is determined by a court of
competent jurisdiction or by an opinion of counsel that the Plan constitutes an
employee pension benefit plan within the meaning of Section 3(2) of ERISA which
is not so exempt.
10.04. Right to Accelerate. The Board of Directors in its sole
discretion may accelerate all vested benefits upon termination of the Plan, and
pay such benefits in a single, actuarially equivalent lump-sum.
SECTION 11
MISCELLANEOUS
11.01 Right to Continued Employment. Nothing in the Plan shall
create or be construed as a contract between the Company and employees for any
matter including giving any person employed by the Company the right to be
retained in the Company's employ. The Company expressly reserves the right to
dismiss any person at any time, with or without cause, without liability for
the effect that such dismissal might have upon him as a Participant in the
Plan.
11.02. Prohibition Against Alienation. Except as otherwise provided
in the Plan, no right or benefit under the Plan shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
or charge, and any attempt to so anticipate, alienate, sell, transfer, assign,
pledge, encumber, or charge the same shall be void. No such right or benefit
shall be liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such right or benefit.
11.03. Sayings Clause. If any provision of this Plan is held by a
court of competent jurisdiction to be invalid or unenforceable, such invalidity
or unenforceability shall not affect any other provision and the remaining
provisions hereof shall continue to be construed and enforced as if the invalid
or unenforceable provision had not been included.
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<PAGE> 15
11.04. Payment of Benefit of Incompetent. In the event the Committee
finds that a Participant, former Participant, or Beneficiary is unable to care
for his affairs because of his minority, illness, accident, or other reason,
any benefits payable hereunder may, unless other claim has been made therefor
by a duly appointed guardian, committee or other legal representative, be paid
to a spouse, child, parent, or other blood relative or dependent or to any
person found by the Committee to have incurred expenses for the support and
maintenance of such Participant, former Participant, or Beneficiary; and any
such payments so made shall be a complete discharge of all liability therefor.
11.05. Spouse's Interest. The interest in the benefits hereunder of
a Spouse who has predeceased the Participant shall automatically pass to the
Participant and shall not be transferable by such Spouse in any manner
including but not limited to such Spouse's will, nor shall such interest pass
under the laws of intestate succession.
11.06. Successors. In the event of any consolidation, merger,
acquisition or reorganization of the Company, the obligations of the Company
under this Plan shall continue and be binding upon the Company and its
successors.
11.07. Gender, Number and Heading. Whenever any words are used
herein in the masculine gender, they shall be construed as though they were
also used in the feminine gender in all cases where they would so apply.
Whenever any words used herein are in the singular form, they shall be
construed as though they were also used in the plural form in all cases where
they would so apply. Headings of sections and subsections as used herein are
inserted solely for convenience and reference and constitute no part of the
Plan.
11.08. Legal Fees and Expenses. The Company shall pay all legal fees
and expenses that a Participant may incur as a result of the Company contesting
the validity, enforceability, or the Participant's interpretation of, or
determinations under this Plan, other than Section 5.03.
11.09. Choice of Law. This Plan shall be governed by and construed
in accordance with the laws of the State of Michigan to the extent not
superseded by applicable federal statues or regulations.
11.10. Affiliated Employees. Transfers of employment between
Affiliated Companies and the Company or other Affiliated Companies will be
treated as continuous and uninterrupted service under the Plan.
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<PAGE> 16
SECTION 12
CHANGE IN CONTROL PROVISIONS
12.01. General. In the event of a Change in Control, as defined in
Section 12.04, then notwithstanding any other provision of the Plan, the
provisions of this Section 12 shall be applicable and shall supersede any
conflicting provisions of the Plan.
12.02. Transfer to Rabbi Trust. The Company has established a trust
pursuant to a Trust Agreement dated January 3, 1991 (the "Rabbi Trust"). The
terms of the Rabbi trust provide that, in the event of a Change in Control and
thereafter, assets are to be transferred to such trust to provide benefits
under the Plan. The Company shall make all transfers of funds required by such
Rabbi trust in a timely manner and shall otherwise abide by the terms of such
Rabbi trust.
12.03. Joint and Several Liability. Upon and at all times after a
Change in Control, the liability under the Plan of the Company and each
Affiliated Company that has adopted the Plan shall be joint and several so that
the Company and each such Affiliated Company shall each be liable for all
obligations under the Plan to each employee covered by the Plan, regardless of
the corporation by which such employee is employed.
12.04. Definition of Change in Control. A "Change of Control" means:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisition shall not constitute a Change
of Control: (A) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (B) any
acquisition by the Company, (C) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation pursuant to
a reorganization, merger or consolidated, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and
(iii) or subsection (c) of this Section 12.04 are satisfied; or
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<PAGE> 17
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than 60% of, respectively,
the then outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be (ii) no person (excluding the Company,
any employee benefit plan or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation and any Person
beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 20% or more of the Outstanding Company
Common Stock or Outstanding Voting Securities, as the case may be beneficially
owns, directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the
then outstanding voting securities or such corporation entitled to vote
generally in the election of directors and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent Board at
the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
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<PAGE> 18
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition,
(A) more than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (B)
no person (excluding the Company and any employee benefit plan (or related
trust) of the Company or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or indirectly,
20% or more of the Outstanding Company Common Stock or Outstanding Company
Voting Securities, as the case may be beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors and (C) at least a majority of the members of the board
of directors of such corporation were members of the Incumbent Board at the
time of the execution of the initial agreement or action of the Board providing
for such sale or other disposition of assets of the Company.
IN WITNESS WHEREOF, MCN Corporation has caused this Plan to be executed
as of this 21st day of December, 1994.
MCN CORPORATION
/s/ Daniel L. Schiffer
By: -----------------------------------
Daniel L. Schiffer, Vice President,
General Counsel and Secretary
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<PAGE> 19
EXHIBIT A
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
DEFERRAL FORM
Employee Name (Print) Social Security No. I. D. Number
Address (Number/Street) City State Zip Code
In accordance with the terms of the MCN Corporation Mandatory Deferred
Compensation Plan ("Plan" ), which is hereby incorporated by reference, I
hereby accept and agree to all the provisions of the Plan and irrevocably elect
pursuant to Section 3 of the Plan to have all Total Compensation paid to me in
excess of $1 million in any calendar year in which I am a Covered Employee
deferred until completion of the Deferral Period.
Benefit Payment Election
That the amount deferred shall be paid to me after completion of the Deferral
Period in the manner specified below:
________ Lump-sum payment
________ Payment in monthly installments over _________ years (in 1
year increments, not to exceed 15 years)
I understand that, notwithstanding the above benefit payment election, I may be
eligible for a hardship withdrawal pursuant to Section 5 of the Plan.
Dividend Payment Election
I hereby elect to have the dividend equivalents credited to my Account paid as
specified below:
________ All reinvested in my Account and denominated in shares of MCN
Corporation common stock
________ 50% reinvested in my Account, denominated in shares of MCN
Corporation common stock, and 50% paid directly to me in cash
________ 100% paid directly to me in cash
Employee Signature Date
Receipt Acknowledged By Title Date
December 20, 1994
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<PAGE> 20
EXHIBIT B
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION FORM
Employee Name (Print) Social Security No. I. D. Number
Address (Number/Street) City State Zip Code
I hereby designate, pursuant to Article 6 of the above-referenced plan,
the below designated person(s) as my beneficiary in the event of my
death:
Beneficiary's Name Address
I UNDERSTAND THAT THE DESIGNATION OF A BENEFICIARY OTHER THAN MY SPOUSE
MUST BE CONSENTED TO IN WRITING BY MY SPOUSE.
In the event any of the above-named beneficiaries should predecease me,
or shall survive me but die before receiving all amounts to be paid, I
hereby name the following as a contingent beneficiary to receive any such
unpaid amounts:
Beneficiary's Name Address
In the event none of the above-named beneficiaries survive me, any unpaid
amounts shall be paid to my lawful successor in interest. I reserve the
right to change this beneficiary designation at any time by filing with
the Committee or its Designee a new beneficiary designation form.
I UNDERSTAND THAT MY MOST RECENT ELECTION AS TO THE BENEFICIARY
DESIGNATION WILL APPLY TO ALL DEFERRALS BY ME UNDER THE PLAN.
Employee Signature Date
Receipt Acknowledged By Title Date
Spousal Consent: I hereby consent to the designation of beneficiary set
fourth herein.
Spouse's Signature Date
Witness Date
December 9, 1994
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<PAGE> 1
EXHIBIT 13-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Earnings hit record high - MCN's earnings rose to a record $77.8 million ($1.31
per share) in 1994, an increase of $5.0 million ($.07 per share) or 7% from
1993. This performance reflects in part the success of the strategic direction
discussed below. Earnings for 1993 increased $15.7 million ($.19 per share)
from 1992. All common share and per share amounts reflect a November 1994
two-for-one stock split (Note 3c). A summary of financial performance follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Net Income (in Millions)
Gas Distribution . . . . . . . . . . . . . . . $ 61.0 $62.6 $49.4
Diversified Services . . . . . . . . . . . . . 16.8 10.2 7.7
------ ----- -----
$ 77.8 $72.8 $57.1
======= ===== =====
Earnings Per Share
Gas Distribution . . . . . . . . . . . . . . . $ 1.03 $1.07 $ .91
Diversified Services . . . . . . . . . . . . . .28 .17 .14
------ ----- ----
$ 1.31 $1.24 $1.05
====== ===== =====
</TABLE>
Strategic direction - The natural gas industry has been changing rapidly in
recent years and is positioned for future growth. Given these changes,
management has capitalized on investment opportunities within the gas industry
to significantly grow MCN. Accordingly, MCN's strategic direction continues to
be to invest in a portfolio of gas-related projects, including gas
distribution, exploration & production, gathering & processing systems,
storage projects, cogeneration facilities and other areas of expertise.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Percentage Colder (Warmer)
than Normal . . . . . . . . . . . . . . . . . (4.2)% (2.2)% (3.7)%
Increase (Decrease) from Normal in:
Gas Markets (Bcf) . . . . . . . . . . . . . . (4.4) (4.3) (10.2)
Net Income (Millions) . . . . . . . . . . . . $ (4.0) $ (3.7) $ (8.7)
Earnings Per Share . . . . . . . . . . . . . . $ (.07) $ (.06) $ (.16)
</TABLE>
GAS DISTRIBUTION
Earnings produce a 15.2% return on equity - Gas Distribution operations
maintained a high level of earnings, delivering one of the highest returns
among local distribution companies. Earnings for 1994 of $61.0 million
decreased by $1.6 million ($.04 per share) compared to 1993, reflecting a lower
return on equity authorized in MichCon's last rate order which went into effect
in January 1994. Earnings for 1993 increased by $13.2 million ($.16 per share)
over 1992. The increase was due primarily to lower operating costs, which
reflect a focused effort to control costs, and higher gas sales as a result of
colder weather. Although Gas Distribution has maintained a high return on
equity, its results have been affected by significantly warmer-than-normal
weather over the past three years.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
GROSS MARGIN
Gross margin up 9% - Gas Distribution gross margin (operating revenues less
cost of gas) increased $48.1 million and $17.1 million in 1994 and 1993,
respectively. The increases reflect expanded gas markets and higher sales
rates, as subsequently discussed.
GAS DISTRIBUTION (in Millions)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues* . . . . . . . . . . . . . . . . . . . . . $1,126.1 $1,129.3 $1,160.5
Cost of Gas . . . . . . . . . . . . . . . . . . . . . . . . 536.7 588.0 636.3
-------- -------- --------
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . 589.4 541.3 524.2
-------- -------- --------
Other Operating Expenses*
Operation & Maintenance . . . . . . . . . . . . . . . . . . 317.2 280.3 286.7
Depreciation & Depletion . . . . . . . . . . . . . . . . . 84.8 74.4 70.3
Property & Other Taxes . . . . . . . . . . . . . . . . . . 58.7 58.9 59.3
-------- -------- -------
460.7 413.6 416.3
-------- -------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . . 128.7 127.7 107.9
-------- -------- --------
Equity in Earnings of
Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . 2.0 3.1 (.7)
-------- -------- -------
Other Income & (Deductions)*
Interest Income . . . . . . . . . . . . . . . . . . . . . . 4.2 4.1 6.6
Interest on Long-Term Debt . . . . . . . . . . . . . . . . (28.0) (25.7) (28.0)
Other Interest Expense . . . . . . . . . . . . . . . . . . (9.1) (8.0) (8.2)
Other . . . . . . . . . . . . . . . . . . . . . . . . (5.2) (6.0) (2.4)
-------- -------- -------
(38.1) (35.6) (32.0)
-------- -------- --------
Income Before Income Taxes . . . . . . . . . . . . . . . . . 92.6 95.2 75.2
-------- -------- --------
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 31.6 32.6 25.8
-------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 61.0 $ 62.6 $ 49.4
======== ======== ========
</TABLE>
*Includes intercompany transactions (Note 13)
GAS MARKETS
End user transportation up 9% - End user transportation deliveries increased
11.4 Bcf in 1994 reflecting an overall higher level of gas usage by
large-volume commercial and industrial customers. End user transportation
customers purchase gas directly from gas producers or marketers, including
MCN's gas marketing subsidiaries, and then contract with MichCon to deliver the
gas to their place of business. Gas sales increased 2.3 Bcf in 1993 due
primarily to weather being colder than in 1992.
GAS DISTRIBUTION MARKETS (in Bcf)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Gas Sales* . . . . . . . . . . . . . . . . . . . . . . . . 204.4 205.4 203.1
End User Transportation . . . . . . . . . . . . . . . . . . . 140.0 128.6 129.7
Intermediate Transportation* . . . . . . . . . . . . . . . . 303.6 281.1 184.0
------ ------ ------
648.0 615.1 516.8
====== ====== ======
</TABLE>
*Includes intercompany volumes
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
During the third quarter of 1994, MCN and Destec Energy began
construction of a 123 megawatt cogeneration plant in Ludington, Michigan.
MichCon will provide end user transportation of the natural gas needed to fuel
the plant, approximately nine Bcf annually, upon its completion in late 1995.
Intermediate transportation increases 8% - Intermediate transportation
volumes continue to rise, increasing by 22.5 Bcf and 97.1 Bcf in 1994 and 1993,
respectively. The increases are due to additional volumes transported for ANR
Pipeline Company (ANR), Michigan gas producers and other shippers. In
connection with the April 1993 start-up of the Blue Lake gas storage project,
MichCon began transporting gas for ANR under a firm, long-term contract.
Profit margins on intermediate transportation services are considerably less
than margins on gas sales or for end user transportation markets.
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. Intermediate transportation
deliveries have nearly tripled since 1991 and have resulted from time to time
in capacity constraints on MichCon's northern Michigan pipeline system.
MichCon currently has a proposal before the Michigan Public Service Commission
(MPSC) to construct facilities to expand transportation capacity. This
proposal, as well as other competing proposals, are being reviewed by the MPSC
and a decision is expected early in 1995.
RATE MATTERS
MichCon has implemented a number of rate increases since 1991 to recover higher
operating costs and costs relating to low income customer assistance programs.
In October 1993, MichCon received approval from the MPSC in its general
rate case to increase rates $15.7 million, beginning in January 1994. The
higher rates included $28.7 million for retiree health care benefits recognized
under new accounting requirements and $8.1 million for higher depreciation
rates. Additionally, the MPSC's decision lowered MichCon's allowed rate of
return on common equity to 11.5%.
During 1993 and 1992, MichCon operated under a comprehensive agreement
which provided for an operating incentive plan that allowed for annual rate
adjustments to recover the effects of inflation on operation and maintenance
expenses based on changes in the Consumer Price Index. MichCon received an
inflation related increase in rates of $4.9 million, effective January 1992.
The comprehensive agreement also contained a performance incentive provision
designed to adjust rates if weather-normalized earnings were above or below a
specified range of return on common equity. Increased gas markets enabled
MichCon to earn returns above the specified range in 1992 which resulted in a
portion of these higher earnings being shared with customers. A provision for
this sharing of earnings with customers was recorded in the fourth quarter of
1992, which reduced net income by $5.9 million.
MichCon received MPSC approval to increase rates from March 1992 through
February 1993 by $6.8 million to recover costs relating to the Michigan
Department of Social Services (DSS) Heating Assistance Program. This program
was extended through February 1994 with the MPSC approving new rates of $10.5
million, effective February 1993. MichCon also received MPSC approval to
extend $6 million of rates related to DSS uncollectible gas accounts for 1993.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set to
recover 100% of prudently and reasonably incurred gas costs. Therefore,
significant fluctuations in total gas costs have little effect on gross margins
or earnings.
Cost of gas sold decreased in 1994 as a result of slightly lower gas
sales volumes and significantly lower market prices for natural gas. For 1993,
cost of gas sold decreased as a result of a reduction in the unit cost of gas,
partially offset by the effect of slightly higher gas sales volumes. Lower
fixed costs under a gas purchase contract with ANR reduced the unit cost of gas
in 1993. The cost of gas sold per thousand cubic feet decreased by $.26 (9%)
during 1994 and by $.24 (8%) during 1993.
As discussed in the Summary of Accounting Policies, MichCon's rates are
set to recover its lost gas costs using an averaging method based on historical
lost gas experience. For the seasonal cycle ended August 1994, the actual lost
gas experienced was lower than the historical average lost gas amount, which
resulted in a $6.2 million reduction in cost of gas during 1994. No
significant adjustment occurred during 1993.
The Federal Energy Regulatory Commission (FERC) issued Order No. 636 in
1992 which required interstate pipelines to separate their pipeline sales
service into its various service components. The order also allows interstate
pipelines to recover their prudently incurred transition costs resulting from
restructuring. ANR, MichCon's primary interstate natural gas transporter,
implemented its Order No. 636 restructuring in November 1993. During 1994, ANR
filed several transition cost recovery requests. MichCon accrued its portion
of these costs totaling $5.4 million, of which $3.9 million is reflected in
cost of gas. These transition costs are recoverable through the GCR mechanism,
and therefore, an asset has been recorded for their future recovery. As
periodic filings are made by ANR, MichCon will accrue its allocated portion. It
is management's belief that there will be no effect on earnings.
In 1993, the FERC issued an order which required Panhandle Eastern Pipe
Line Company (Panhandle) to refund to MichCon the costs of certain direct
billings totaling $5.4 million plus interest of $4.4 million. During 1994, the
FERC issued an order permitting Panhandle to seek reimbursement of the $4.4
million in interest from MichCon. MichCon is currently seeking rehearing of
the FERC order. Should MichCon ultimately be unsuccessful in defeating the FERC
order, it is anticipated that these costs will be recoverable through the GCR
mechanism. Accordingly, an asset has been recorded for their future recovery.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses increased due to higher postretirement
benefit costs of $29.8 million in 1994 being recognized as a result of the new
accounting requirements under Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions."
These costs are being recovered in rates that became effective in January 1994.
Management's efforts to reduce operating costs resulted in a decrease in
operation and maintenance expenses in 1993 and helped moderate the 1994
increase. Management is continuously assessing ways to improve Gas
Distribution's cost competitiveness and quality of customer service. MichCon
has recently reorganized along "core business processes," which has streamlined
its organizational structure. The number of Gas Distribution employees has
declined by 8% since 1992.
Operation and maintenance expenses in future years may be affected by
investigation and remediation costs associated with several environmentally
contaminated sites, as discussed in detail in the "Environmental Matters"
section that follows. Management anticipates that these costs will not
materially affect earnings as such amounts are expected to be recoverable in
rates.
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
In February 1994, President Clinton submitted a proposed federal budget
for the 1995 fiscal year reflecting a 50% reduction in funding for the
Low-Income Home Energy Assistance Program (LIHEAP). This proposed reduction
was defeated by Congress in October 1994, and $1.3 billion was approved for the
1995 fiscal year, which is a reduction of $.1 billion. In November 1994,
however, officials indicated that all federal programs would be reviewed for
cuts or elimination, including LIHEAP. MichCon is working to maintain this
funding. LIHEAP funding currently provides approximately $78 million in
heating assistance to 385,000 Michigan households through the DSS, with
approximately 40% of the funds going to MichCon customers.
DEPRECIATION AND DEPLETION increased in 1994 and 1993 due to higher plant
balances, reflecting capital expenditures of $419 million over the past three
years. In addition, higher depreciation rates that were implemented in January
1994 contributed to the 1994 increase. The higher costs do not materially
affect 1994 earnings because these costs are reflected in the January 1994 rate
increase. Depreciation and depletion expenses are expected to increase in
future years due to higher planned capital investments.
PROPERTY AND OTHER TAXES decreased slightly in 1994 reflecting recently
enacted Michigan legislation which lowered property taxes. Although the tax
reduction lowered property taxes in 1994 and will lower property taxes in
future years, it is not expected to significantly affect earnings because the
MPSC has approved the acceleration of amortization of the deferred 1993
postretirement costs to offset these tax savings (Note 8b).
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures decreased in 1994, but increased in 1993.
The 1994 decrease was due primarily to higher operating and interest expenses
from the Blue Lake gas storage project. MCN's 50% interest in the Blue Lake
project is owned equally by Gas Distribution and Diversified Services. The
1993 increase in earnings from joint ventures reflects earnings from the Blue
Lake storage project which began operations in April 1993.
OTHER INCOME AND DEDUCTIONS
INTEREST INCOME decreased in 1993 due to interest received in 1992 on a
refund of windfall profit taxes as well as a 1992 interest adjustment on
MichCon's energy conservation programs.
INTEREST ON LONG-TERM DEBT increased in 1994 due to issuing $80 million
of first mortgage bonds in September 1994 and $120 million in September 1993.
The decrease in 1993 reflects lower financing costs resulting from the
refinancing of $160.1 million of first mortgage bonds since September 1992
(Note 3a).
OTHER INTEREST EXPENSE in 1994 and 1993 reflects interest on varying
levels of pending customer refunds during the periods.
OTHER INCOME AND DEDUCTIONS for 1994 and 1993 reflect higher charitable
contributions. The 1993 increase also reflects the write-off of certain
assets.
INCOME TAXES
Income taxes decreased in 1994 and increased in 1993 as a result of
changes in earnings. Additionally, 1993 reflects The Omnibus Budget
Reconciliation Act of 1993 which increased the corporate tax rate to 35%
effective January 1993. Income taxes were reduced by $3.3 million, $1.2
million and $1.3 million during 1994, 1993 and 1992, respectively, due to the
favorable resolution of prior years' tax issues.
5
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANTS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon and Citizens own or previously owned 17
such former manufactured gas plant (MGP) sites.
During the mid-1980's, preliminary environmental investigations were
conducted at these former MGP sites, and some contamination related to the
byproducts of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Natural Resources (MDNR). None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency (USEPA).
MCN is not involved in any administrative proceedings regarding these
former MGP sites, but is currently negotiating a remedial action plan for one
site with the MDNR and is conducting more extensive investigations at three
other sites. MichCon is, however, involved in a suit with an adjacent property
owner regarding one site. Management believes that the property owner's claims
have no merit, and MichCon is vigorously defending this suit.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1994, MichCon spent $.6 million
investigating its former MGP sites. The balance in the reserve at December 31,
1994 was $5.5 million.
During 1993, MichCon received MPSC approval of a cost deferral and rate
recovery mechanism for investigation and remediation costs incurred at former
MGP sites in excess of the reserve. In addition, MCN has notified more than 50
current and former insurance carriers of the environmental conditions at its
former MGP sites and requested insurance coverage for costs associated with the
investigation and remediation of these sites. MCN is pursuing any claims it
may have against these carriers.
MCN is currently unable to estimate the future costs to be incurred in
the investigation and remediation of these former MGP sites. Management
believes, however, that insurance coverage and the cost deferral and rate
recovery mechanism will prevent environmental costs from having a material
adverse impact on MCN's financial results.
HARBORTOWN - MichCon Development Company, a 100% owned subsidiary of MichCon,
has a minority interest in four partnerships that are developing Harbortown.
Harbortown is a residential development that is being constructed on a 50 acre
parcel along the Detroit River. Environmental and other approvals were
received in 1984, prior to construction. In 1991, the partnerships undertook
additional environmental testing at Harbortown to assess whether there was any
potential public health risk from the presence of metals detected in certain
past soil samples. In 1992, the MDNR accepted the results of this risk
assessment and agreed that there was no health risk due to lead in Harbortown
surface soils.
During 1994, the partnerships completed additional environmental testing
and submitted a remedial action plan for Harbortown to the MDNR. The remedy
includes meeting certain landscaping requirements and, during future
development, excavation controls consistent with occupational safety and health
regulations. The MDNR supported the proposed remedy at a public meeting in
early 1995. Management expects approval of the proposed remedy and believes
that its implementation will not have a material adverse impact on future
development opportunities at Harbortown or the financial statements of MCN.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OTHER - In 1993, MichCon received a general notice of liability letter from the
USEPA stating that it is one of two potentially responsible parties at a
suspected dump site in Wyandotte, Michigan. The USEPA requested that MichCon
undertake a remedial investigation and feasibility study at the site. MichCon
has investigated its prior activities in the area, as well as the USEPA's bases
for its conclusion, and does not believe that it is responsible for any
contamination that may exist at the site. In early 1994, MichCon informed the
USEPA of this belief and declined to undertake the requested activities at the
site. MichCon has not received any additional requests from the USEPA.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
DIVERSIFIED SERVICES
Earnings increase 65% -- The Diversified Services group continued its rapid
growth in 1994, contributing 22% of MCN's total earnings. Diversified Services
earnings for 1994 increased $6.6 million ($.11 per share) compared to 1993.
Higher earnings from both the gas services and the computer operations services
segments contributed to the improvement, as subsequently discussed.
Similarly, Diversified Services earnings for 1993 increased $2.5 million
($.03 per share) over 1992. This improvement also reflects increased earnings
from natural gas storage and gas processing joint ventures.
DIVERSIFIED SERVICES (in Millions)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Operating Revenues*
Gas Services . . . . . . . . . . . . . . . . . . . . . . . $357.3 $301.5 $242.3
Computer Operations Services . . . . . . . . . . . . . . . 88.2 74.4 67.7
------ ------ ------
445.5 375.9 310.0
------ ------ ------
Operating Expenses*
Gas Services . . . . . . . . . . . . . . . . . . . . . . . 330.3 284.6 226.6
Computer Operations Services . . . . . . . . . . . . . . . 81.6 69.2 63.0
Corporate & Other . . . . . . . . . . . . . . . . . . . . . 7.9 5.9 2.9
------ ------ ------
419.8 359.7 292.5
------ ------ ------
Operating Income (Loss)
Gas Services
Gas Marketing & Cogeneration . . . . . . . . . . . . . 5.1 5.9 6.1
Gas Gathering & Processing . . . . . . . . . . . . . . 8.2 8.9 9.6
Exploration & Production . . . . . . . . . . . . . . . 13.7 2.1 -
------ ------ ------
27.0 16.9 15.7
Computer Operations Services . . . . . . . . . . . . . . . 6.6 5.2 4.7
Corporate & Other . . . . . . . . . . . . . . . . . . . . . (7.9) (5.9) (2.9)
------ ------ ------
25.7 16.2 17.5
------ ------ ------
Equity in Earnings of
Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . 4.3 4.6 (.1)
------ ------ ------
Other Income & (Deductions)*
Interest Income . . . . . . . . . . . . . . . . . . . . . . 4.0 1.4 1.3
Interest Expense . . . . . . . . . . . . . . . . . . . . . (13.5) (5.3) (4.3)
Minority Interest . . . . . . . . . . . . . . . . . . . . . (2.9) (3.3) (3.6)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.4) (.1) .1
------ ------ ------
(14.8) (7.3) (6.5)
------ ------ ------
Income Before Income Taxes . . . . . . . . . . . . . . . . . 15.2 13.5 10.9
------ ------ ------
Income Taxes
Current and Deferred Provision . . . . . . . . . . . . . . 6.3 5.6 3.2
Federal Gas Production Tax
Credits . . . . . . . . . . . . . . . . . . . . . . . . . (7.9) (2.3) -
------ ------ ------
(1.6) 3.3 3.2
------ ------ ------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.8 $ 10.2 $ 7.7
====== ====== ======
- -------------------------------------------------------------------------------
</TABLE>
*Includes intercompany transactions (Note 13)
GAS SERVICES
Operating income increases 60% -- Gas Services increase in operating income of
$10.1 million and $1.2 million in 1994 and 1993, respectively, reflects
earnings from the relatively new gas exploration & production operations which
began producing gas in early 1993. The improvements were partially offset by
slight declines in the gas marketing & cogeneration and gas gathering &
processing businesses.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
DIVERSIFIED SERVICES GAS STATISTICS (in Bcf)
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- ----
<S> <C> <C> <C>
Gas Sales*
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . 142.4 122.8 112.3
Exploration & Production** . . . . . . . . . . . . . . . . 7.5 .1 -
Transportation . . . . . . . . . . . . . . . . . . . . . . . 20.5 21.8 25.4
----- ----- -----
170.4 144.7 137.7
===== ===== =====
Exchange Gas Flows . . . . . . . . . . . . . . . . . . . . . 23.0 21.0 5.5
===== ===== =====
Company Gas Production . . . . . . . . . . . . . . . . . . . 16.5 2.3 -
===== ===== =====
</TABLE>
*Includes intercompany volumes
**Represents gas sales made directly to third parties by E&P operations. Other
E&P production is sold to affiliated companies for marketing.
GAS MARKETING & COGENERATION operating income decreased $.8 million
during 1994 despite an increase in gas sales of 19.6 Bcf. The decrease
reflects reduced profit margins due to lower gas prices during the second half
of the year and higher costs associated with increased storage and
transportation capacity. The increased storage and transportation costs were
incurred to support an anticipated higher level of gas sales in future periods.
The reduced profit margins were partially offset by additional revenues earned
from providing gas peaking services and increased volumes related to exchange
gas contracts. Typically under exchange contracts, MCN's gas marketing
business delivers gas to customers during periods of peak demand and takes
redelivery of the gas at an off-peak time.
Earnings from gas marketing & cogeneration declined $.2 million during
1993. The decline in operating income reflects lower margins on gas sales
which were significantly impacted by a spike in spot market prices during the
first half of 1993. A more comprehensive hedging program was subsequently
implemented to minimize the effect on margins of fluctuations in gas prices.
During 1994 and the latter half of 1993, more favorable margins were maintained
due to the use of natural gas futures and options contracts.
During the 1994 third quarter, MCN and Destec Energy began construction
of a 123 megawatt cogeneration plant, as discussed in the "Equity in Earnings
of Joint Ventures" section that follows. Upon its completion in late 1995,
MCN's gas marketing & cogeneration business will supply nine Bcf of natural gas
needed annually to fuel the plant.
GAS GATHERING & PROCESSING operating income decreased by $.7 million
during 1994 and 1993 due to declines in transportation volumes of 1.3 Bcf and
3.6 Bcf, respectively. The declines in volumes were primarily due to lower gas
production from fields currently utilizing MCN's Saginaw Bay pipeline system.
A reduction in operating costs during 1994 and 1993 partially offset the effect
of the decline in transportation volumes.
MCN expands its transportation network - In response to an increase in
Michigan Antrim gas production, MCN is partnering with others to meet a growing
demand for transportation and processing services. Specifically, MCN is both
constructing and acquiring pipeline extensions and processing plants which will
interconnect with MCN's existing Gas Distribution and Diversified Services
pipeline network, including the Saginaw Bay system. Certain facilities, which
became operational in the 1994 fourth quarter, combined with additional
facilities that are expected to be operational in early 1995, have the
capability of increasing gas deliveries by more than 30 Bcf per year. This
expansion is expected to mitigate the effect of a decrease in the
transportation rate of one major customer that will become effective in January
1996. The rate decrease is in accordance with the terms of a 15-year contract
that reduces the transportation rate for the last 10 years of the agreement.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
EXPLORATION & PRODUCTION (E&P) operating income increased $11.6 million
during 1994 and contributed $2.1 million in 1993. The results are due to the
start-up of production in early 1993 as well as production from newly acquired
properties, as discussed below, and the development of other new projects
during 1994. Additionally, E&P operations have lowered the income taxes of the
Diversified Services group through the generation of $7.9 million and $2.3
million of federal production tax credits during 1994 and 1993, respectively.
The E&P operating results were achieved despite much lower-than-expected
natural gas prices in the latter half of 1994. The results were due in part to
MCN's risk management strategy of hedging sales prices on gas produced to
increase the likelihood of achieving targeted rates of return. As of December
31, 1994, MCN's gas production for the next ten years was largely hedged at
prices substantially above year end levels.
MCN acquires natural gas reserves - MCN made significant investments in
natural gas reserves throughout 1994, acquiring interests in over 800 gas wells
located primarily in Oklahoma, Kansas and Texas. Additionally, MCN drilled
approximately 250 new wells during 1994. Since the establishment of the E&P
program in 1992, MCN has invested over $275 million in such projects (Note 12).
As of December 31, 1994, MCN owned 422 Bcf of proved reserves, 363 Bcf of
potential gas reserves and 1,340 thousand barrels (Mbbl) (equivalent to 8 Bcf)
of proved and potential oil reserves.
COMPUTER OPERATIONS SERVICES
Operating income increases over 25% - Computer operations services operating
income increased $1.4 million and $.5 million during 1994 and 1993,
respectively. The improvements reflect higher operating revenues from new
business added throughout 1993-1994 and from increased services to existing
customers.
Annualized revenues to exceed $100 million - During 1994, contracts with
six new customers were signed representing approximately $24 million in
annualized revenues. Computer operations now maintains a well diversified
customer base of over 100 customers with annualized revenues that exceed $100
million.
Computer operations services added a third data center during 1994 as a
result of a new major customer. This new center, located in Charlotte, North
Carolina, complements other facilities in Michigan and Pennsylvania.
Management anticipates continued growth from its computer operations services
business over the next several years given the added facility capacity and the
industry's projected 15% annual growth.
CORPORATE & OTHER
Corporate operations during 1994 and 1993 reflect increased expenses associated
with the development of new projects.
EQUITY IN EARNINGS OF JOINT VENTURES
Diversified Services earnings from joint ventures decreased $.3 million in
1994. The decrease relates to lower earnings from gas storage and gas
gathering & processing ventures. Gas storage earnings were down due to lower
initial expenses relating to the 1993 startup of the Blue Lake storage project.
Gas gathering & processing earnings declined due to additional operating
expenses incurred related to a second processing facility which became
operational in 1994. Future earnings from gas gathering & processing joint
ventures will be impacted as MCN sold its interest in the gas processing
facilities in January 1995. Gas marketing & cogeneration losses relate to the
Ada cogeneration facility. However, the facility does generate a strong cash
flow due to tax benefits related to the project.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Diversified Services earnings from joint ventures reached $4.6 million in
1993 due to earnings from the Blue Lake gas storage project, which began
operations in April 1993, and earnings from a gas processing project reflecting
a full year of operations in 1993. The increased loss in 1993 from other joint
ventures is due to a reserve for the write-off of assets related to the natural
gas torch business.
<TABLE>
<CAPTION>
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES
(in Millions) 1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . $ 4.2 $ 4.9 $ 1.1
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . (1.3) (1.4) (1.5)
Gas Gathering & Processing . . . . . . . . . . . . . . . . . 1.7 2.1 .4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.3) (1.0) (.1)
------ ------ ------
$ 4.3 $ 4.6 $ (.1)
====== ====== ======
</TABLE>
MCN partnership breaks ground on cogeneration plant - During 1994, MCN
and Destec Energy broke ground on the Michigan Power Project, a 123 megawatt
cogeneration plant in Ludington, Michigan. An equally owned partnership will
build and operate the $150 million cogeneration facility. The plant, which is
expected to be completed in late 1995, will provide electricity to Consumers
Power Company and steam to Dow Chemical. MCN, through its gas marketing &
cogeneration business group and Gas Distribution operations, will supply and
transport the nine Bcf of natural gas needed annually to fuel the plant.
MCN partnership receives approval to construct storage field - MCN has
a 40% interest in a partnership which was formed to own and operate a $120
million, 42 Bcf underground natural gas storage field in southeastern Michigan.
During December 1994, the partnership received all regulatory approvals
required to construct the field. However, MCN and its partners are assessing
whether enough long-term markets exist before the storage project is developed.
OTHER INCOME & DEDUCTIONS
Other income & deductions for 1994 and 1993 reflect higher interest costs on
long-term debt due to increased borrowings required to finance capital
investments in the Diversified Services operations. Interest costs were also
affected by higher interest rates during 1994. Other income and deductions for
1994 also include dividends on $100 million of preferred securities of a
subsidiary which were issued in November 1994 (Note 3b).
INCOME TAXES
Income taxes for 1994 and 1993 were favorably impacted by $7.9 million and $2.3
million, respectively, of federal gas production tax credits related to gas
production projects. This impact was offset partially by higher taxes on
improved earnings in both periods. Income taxes for 1994 and 1993 were also
affected by the Omnibus Budget Reconciliation Act of 1993 which increased the
corporate tax rate to 35%, effective January 1993.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Cash flow rises 60% - MCN's cash flow from operating activities in 1994
increased $64.9 million in 1994 and $27.9 million in 1993. The increases were
due primarily to higher net income and lower working capital requirements. The
cash flow increase in 1993 also reflects additional deferred income taxes which
relate primarily to the accounting for postretirement benefit costs (Note 8b).
CASH FLOW FROM OPERATING ACTIVITIES (in Millions)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Gas Distribution . . . . . . . . . . . . . . . . . . . . . . $143.8 $154.6 $130.0
Diversified Services . . . . . . . . . . . . . . . . . . . . 51.1 25.5 26.1
------ ------ ------
194.9 180.1 156.1
Changes in Assets & Liabilities . . . . . . . . . . . . . . . (19.9) (70.0) (73.9)
------ ------ ------
Cash Flow from Operating Activities . . . . . . . . . . . . . $175.0 $110.1 $ 82.2
====== ====== ======
</TABLE>
FINANCING ACTIVITIES
To meet current and future capital requirements, MCN filed a universal shelf
registration with the Securities and Exchange Commission for the issuance of up
to $300 million of securities, including preferred and common equity and debt
securities. The shelf registration became effective in October 1994. Under
this registration, MCN, through a limited partnership, issued $100 million of
cumulative preferred securities in November 1994 (Note 3b). The preferred
securities were rated BBB+ by three major rating agencies and baa2 by a fourth.
The proceeds received from this issuance were used by Diversified Services for
capital investments, repayment of loans under bank credit agreements and
general corporate purposes. Dividends on the preferred securities are payable
monthly and in substance are tax deductible by MCN.
During the first half of 1995, MCN anticipates issuing approximately $100
million of new common stock under this shelf registration to finance a portion
of its 1995 capital investments.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment
and Stock Purchase Plan and various employee benefit plans. During the
1992-1994 period, MCN raised approximately $39.5 million from new shares of
common stock issued pursuant to these plans. During 1995, MCN anticipates the
issuance of new common stock generating about $16.0 million.
Gas Distribution
During the latter part of each year, Gas Distribution generally incurs
short-term debt to finance increases in gas inventories and customer accounts
receivable. The short-term debt is normally reduced in the first part of the
year as gas inventories are depleted and funds are received from winter heating
sales. To meet its seasonal short-term borrowing needs, MichCon normally
issues commercial paper which is backed by credit lines with several banks.
MichCon has established credit lines of up to $250 million through March 1995
which decrease to $109 million through August 1995. Commercial paper of $143.4
million was outstanding at December 31, 1994 under these lines. MichCon's
commercial paper is currently rated "A-1" or its equivalent by the major rating
agencies.
In July 1994, MichCon began a Trust Demand Note program which allows for
borrowings of up to $25 million through April 1995. At December 31, 1994,
borrowings of $25 million were outstanding under this program.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
In September 1994, MichCon issued first mortgage bonds totaling $80 million
under its existing shelf registration. The proceeds were used to repay
short-term obligations and for general corporate purposes. Gas Distribution
capital investments for 1995 are anticipated to be between $200 and $250
million. In anticipation of future permanent capital requirements, MichCon
filed an application with the MPSC in November 1994 requesting authority to
issue securities and to enter into additional long-term financing arrangements
of up to $150 million. MichCon's current shelf registrations allow for the
issuance of up to an additional $30 million of first mortgage bonds. MichCon's
capital requirements and general financial market conditions will affect the
timing and amount of future debt issuances. MichCon's capitalization objective
is to maintain a ratio of approximately 50% debt to 50% equity. Future
long-term debt offerings are expected to carry MichCon's current debt rating of
"A."
MichCon issued $120 million of first mortgage bonds in both 1993 and 1992.
The 1993 proceeds were used to redeem approximately $74.9 million of its
outstanding first mortgage bonds and for general corporate purposes. These
redemptions allowed MichCon to lower its interest costs. The 1992 proceeds
were used to finance capital expenditures, permanent working capital
requirements and scheduled maturities and sinking fund requirements of
long-term debt. A portion of the proceeds was used to redeem $85.2 million of
long-term debt in 1992.
Diversified Services
In order to finance Diversified Services capital investments, MCN and MCN
Investment maintain a joint unsecured, revolving credit facility. In 1994, MCN
and MCN Investment renegotiated the terms of the facility to allow for
borrowings of up to $250 million and to extend the expiration date of the
facility through August 1997. At December 31, 1994, borrowings outstanding
under the facility totaled $182 million.
MCN Investment also maintains short-term credit lines to finance the working
capital requirements of its gas marketing operations. During 1994, MCN
Investment renewed these lines of credit to allow for borrowings of up to $70
million through August 1995 at interest rates which are generally less than the
prevailing prime rate. Funds under the credit lines are required by gas
marketing operations to finance increases in natural gas inventories during the
summer and fall. Borrowings are repaid from sales of the inventory during the
winter months. At December 31, 1994, borrowings of $60.4 million were
outstanding under the lines of credit.
In December 1994, MCN and Destec Energy, through their partnership, obtained
a $189 million credit facility to finance 100% of the construction costs and
working capital requirements of the 123 megawatt Michigan Power cogeneration
plant. Following completion of the project, the credit facility will be
converted to permanent financing for 85% of the project's costs. MCN will fund
its equal share of the remaining project expenditures through an equity
contribution of approximately $11.5 million in 1996.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INVESTING ACTIVITIES
Capital investments reach $400 million - Capital investments increased $156.8
million in 1994, primarily due to higher capital expenditures for Diversified
Services E&P and joint venture cogeneration projects.
CAPITAL INVESTMENTS (in Millions)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Consolidated Capital Expenditures:
Gas Distribution . . . . . . . . . . . . . . . . . . . $146.7 $142.4 $129.4
Diversified Services . . . . . . . . . . . . . . . . . 216.5 66.4 41.9
------ ------ ------
363.2 208.8 171.3
------ ------ ------
MCN's Share of Joint Venture Capital
Expenditures:
Gas Storage . . . . . . . . . . . . . . . . . . . . . 1.9 31.4 27.4
Gas Cogeneration . . . . . . . . . . . . . . . . . . . 32.8 - .1
Other . . . . . . . . . . . . . . . . . . . . . . . . 5.8 5.1 3.7
------ ------ ------
40.5 36.5 31.2
------ ------ ------
Minority Partners' Share of Consolidated
Capital Expenditures . . . . . . . . . . . . . . . . . (1.7) (.1) (.4)
------ ------ ------
Total Capital Investments . . . . . . . . . . . . . . . . $402.0 $245.2 $202.1
====== ====== ======
</TABLE>
The capital investments increase of $43.1 million in 1993 reflects higher
capital expenditures for Gas Distribution, Diversified Services E&P and joint
venture investments. Gas Distribution capital expenditures included
construction of distribution lines to reach communities not previously served
by MichCon. The increase in joint venture investments during 1993 reflects the
Blue Lake gas storage project which began operations in April 1993, and
investments in other natural gas-related projects. MCN's 50% share of Blue
Lake's 1992-1993 expenditures was financed with $9.6 million of equity
contributions and the remaining cost was financed with partnership borrowings.
MCN's strategic direction is to significantly grow MCN by investing in a
portfolio of gas-related projects. Accordingly, MCN's capital investments are
anticipated to range from $400 to $600 million annually over the next several
years. For 1995, MCN anticipates investing about $250 million in Gas
Distribution to add new customers and develop new gas transportation markets.
Another $350 million is expected to be spent in Diversified Services, of which
$200 million will be in exploration and production, $35 million to develop the
Michigan Power cogeneration facility and the remainder primarily in gas storage
and gathering pipeline projects.
The proposed level of investments in 1995 and future years will increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. MCN's
capitalization objective is to maintain a ratio of approximately 50% debt to
50% equity. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
EFFECTS OF INFLATION
MCN's Gas Distribution operations are subject to inflationary pressures. Such
inflationary pressures exist because Gas Distribution's ability to adjust rates
to recover increases in operating costs is dependent upon obtaining approval
from the MPSC. The effects of inflation on operating results, however, are
mitigated to the extent that assets are financed with debt that will be repaid
with dollars of less purchasing power. MCN's Diversified Services operations
have not been significantly affected by inflation.
14
<PAGE> 15
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------- ---------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
OPERATING REVENUES
Gas sales (Note 6) . . . . . . . . . . . . . . . . . . . . . . $1,307,815 $1,262,771 $1,237,137
Transportation and storage services (Note 6a) . . . . . . . . . 119,779 109,694 108,771
Computer operations services and other . . . . . . . . . . . . 118,206 107,189 101,344
---------- ---------- ----------
Total operating revenues . . . . . . . . . . . . . . . . . . . 1,545,800 1,479,654 1,447,252
---------- ---------- ----------
OPERATING EXPENSES
Cost of gas . . . . . . . . . . . . . . . . . . . . . . . . . . 823,436 846,733 845,534
Operation and maintenance . . . . . . . . . . . . . . . . . . . 399,225 344,712 337,249
Depreciation, depletion and amortization . . . . . . . . . . . 103,620 81,646 76,434
Property and other taxes . . . . . . . . . . . . . . . . . . . 64,988 62,677 62,542
---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . 1,391,269 1,335,768 1,321,759
---------- ---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . 154,531 143,886 125,493
---------- ---------- ----------
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES (Note 1) . . . . . 6,289 7,710 (753)
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 6,493 5,187 6,238
Interest on long-term debt . . . . . . . . . . . . . . . . . . (38,213) (28,789) (30,803)
Other interest expense . . . . . . . . . . . . . . . . . . . . (10,735) (9,939) (8,071)
Dividends on preferred securities of subsidiaries (Note 3b) . . (2,018) (727) (973)
Minority interest . . . . . . . . . . . . . . . . . . . . . . . (2,879) (3,284) (3,620)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,641) (5,313) (1,314)
---------- ---------- ----------
Total other income and (deductions) . . . . . . . . . . . . . . (52,993) (42,865) (38,543)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . 107,827 108,731 86,197
INCOME TAX PROVISION (Note 11) . . . . . . . . . . . . . . . . 30,059 35,941 29,079
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,768 $ 72,790 $ 57,118
=========== ========== ==========
EARNINGS PER SHARE (Note 3c) . . . . . . . . . . . . . . . . . $ 1.31 $ 1.24 $ 1.05
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING (Notes 3c and 3d) . . . . . . 59,394 58,642 54,216
========== ========== ==========
DIVIDENDS DECLARED PER SHARE (Note 3c) . . . . . . . . . . . . $ .8675 $ .8450 $ .8250
========== ========== ==========
</TABLE>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
15
<PAGE> 16
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31 1994 1993
---------- ----------
(In Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments, at cost (which approximates
market value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,547 $ 12,474
Accounts receivable, less allowance for doubtful accounts of $16,101 and
$19,576, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,158 236,934
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,053 101,327
Gas in inventory (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,649 45,895
Property taxes assessed applicable to future periods . . . . . . . . . . . . . . . . 54,728 50,709
Gas receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,069 7,949
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,306 27,383
---------- ----------
543,510 482,671
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures (Note 1) . . . . . . . . . . . . . . . . 64,505 60,528
Deferred postretirement benefit cost (Note 8b) . . . . . . . . . . . . . . . . . . . 20,670 25,612
Other (Note 9a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,501 76,501
---------- ----------
208,676 162,641
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost (Note 7)
Gas distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,206,462 2,101,616
Exploration & production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277,118 92,319
Gas gathering & processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,889 54,458
Computer operations services & other . . . . . . . . . . . . . . . . . . . . . . . 53,356 36,136
---------- ----------
2,604,825 2,284,529
Less: Accumulated depreciation and depletion . . . . . . . . . . . . . . . . . . . 1,112,387 1,047,941
---------- ----------
1,492,438 1,236,588
---------- ----------
$2,244,624 $1,881,900
========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,647 $ 130,058
Notes payable (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,807 280,304
Current portion of long-term debt, capital lease obligations and redeemable
cumulative preferred stock (Notes 3 and 7) . . . . . . . . . . . . . . . . . . . . 7,319 5,980
Federal income, property and other taxes payable . . . . . . . . . . . . . . . . . . 86,972 63,790
Refunds payable to customers (Note 6b) . . . . . . . . . . . . . . . . . . . . . . . 19,560 10,794
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,581 13,271
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,809 78,146
---------- ----------
564,695 582,343
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes (Note 11) . . . . . . . . . . . . . . . . . . . . . 185,337 171,630
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . 38,684 40,571
Tax benefits amortizable to customers . . . . . . . . . . . . . . . . . . . . . . . . 23,056 31,666
Accrued postretirement benefit cost (Note 8b) . . . . . . . . . . . . . . . . . . . . 26,060 3,392
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,670 18,357
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,490 63,334
---------- ----------
380,297 328,950
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
CAPITALIZATION (See accompanying statement)
Long-term debt, including capital lease obligations . . . . . . . . . . . . . . . . . 685,519 494,821
Redeemable cumulative preferred securities of subsidiaries . . . . . . . . . . . . . 102,618 5,618
Common shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511,495 470,168
---------- ----------
1,299,632 970,607
---------- ----------
$2,244,624 $1,881,900
========== ==========
</TABLE>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
16
<PAGE> 17
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
LONG-TERM DEBT, EXCLUDING CURRENT REQUIREMENTS (Notes 3a and 7)
First Mortgage Bonds
9-1/4% series due 1996 . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 6,000
6-1/4% series due 1997 . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 50,000
8-5/8% series due 1997 . . . . . . . . . . . . . . . . . . . . . . - - 7,069
5-3/4% series due 2001 . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000 -
8% series due 2002 . . . . . . . . . . . . . . . . . . . . . . . . 70,000 70,000 70,000
9-1/8% series due 2004 . . . . . . . . . . . . . . . . . . . . . . 55,000 55,000 55,000
8-1/4% series due 2014 . . . . . . . . . . . . . . . . . . . . . . 80,000 - -
9-1/8% series due 2017 . . . . . . . . . . . . . . . . . . . . . . - - 60,000
9-1/2% series due 2019 . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000 5,000
9-1/2% series due 2021 . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 40,000
6-3/4% series due 2023 . . . . . . . . . . . . . . . . . . . . . . 19,109 20,000 -
7% series due 2025 . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 -
Unamortized premium and (discount) - net . . . . . . . . . . . . . (1,508) (920) (549)
Senior Notes - 7.79% series due 1997 . . . . . . . . . . . . . . . . 30,000 30,000 30,000
Unsecured Notes - 9-3/4% series due 2000 . . . . . . . . . . . . . . 12,000 12,000 12,000
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . 182,000 71,900 -
Project loan due 2006 . . . . . . . . . . . . . . . . . . . . . . . . 19,360 21,122 22,884
Long-term capital lease obligations . . . . . . . . . . . . . . . . . 21,814 17,625 18,253
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 2,744 3,094 4,154
---------- -------- --------
Total long-term debt, excluding current requirements . . . . . . . . 685,519 494,821 379,811
---------- -------- --------
REDEEMABLE CUMULATIVE PREFERRED SECURITIES OF SUBSIDIARIES (Note 3b)
REDEEMABLE CUMULATIVE PREFERRED STOCK OF SUBSIDIARY,
EXCLUDING CURRENT REQUIREMENTS,
par value $1 per share - authorized 7,000,000 shares,
outstanding 104,732, 224,732 and 360,000 shares,
respectively, $2.05 Series . . . . . . . . . . . . . . . . . . . . 2,618 5,618 9,000
REDEEMABLE CUMULATIVE PREFERRED SECURITIES OF SUBSIDIARY,
stated at $25 liquidation preference value,
authorized 4,000,000 shares, outstanding
4,000,000 shares, Series A . . . . . . . . . . . . . . . . . . . . 100,000 - -
---------- -------- --------
Total preferred securities . . . . . . . . . . . . . . . . . . . . . 102,618 5,618 9,000
---------- -------- --------
COMMON SHAREHOLDERS' EQUITY (Note 3)
COMMON STOCK,
par value $.01 per share - authorized 100,000,000 shares,
outstanding 59,787,966, 58,992,726
and 58,291,576 shares, respectively . . . . . . . . . . . . . . . . 598 590 583
---------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of period . . . . . . . . . . . . . . . . . . . . 317,117 306,379 235,587
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . 15,628 11,644 70,980
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,174) (906) (188)
---------- -------- --------
Balance - end of period . . . . . . . . . . . . . . . . . . . . . . . 331,571 317,117 306,379
---------- -------- --------
RETAINED EARNINGS
Balance - beginning of period . . . . . . . . . . . . . . . . . . . . 153,589 130,329 118,231
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,768 72,790 57,118
Cash dividends declared on common stock . . . . . . . . . . . . . . . (51,492) (49,527) (44,940)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (3) (80)
---------- -------- --------
Balance - end of period . . . . . . . . . . . . . . . . . . . . . . . 179,862 153,589 130,329
---------- -------- --------
UNEARNED COMPENSATION AND ESOP BENEFIT . . . . . . . . . . . . . . . (536) (1,128) (3,483)
---------- -------- --------
Total common shareholders' equity . . . . . . . . . . . . . . . . . . 511,495 470,168 433,808
---------- -------- --------
TOTAL CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . $1,299,632 $970,607 $822,619
========== ======== ========
</TABLE>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement
17
<PAGE> 18
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,768 $ 72,790 $ 57,118
Adjustments to reconcile net income to net cash provided from
operating activities
Depreciation, depletion and amortization
Per statement of income . . . . . . . . . . . . . . . . . . . . . . . 103,620 81,646 76,434
Charged to other accounts . . . . . . . . . . . . . . . . . . . . . . 7,281 6,398 6,459
Deferred income taxes and investment tax credit - net . . . . . . . . . 3,210 25,411 10,442
Equity in earnings of joint ventures, net of distributions . . . . . . 1,125 (6,746) 2,576
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 589 3,035
--------- --------- ---------
194,875 180,088 156,064
Changes in assets and liabilities, exclusive of changes shown
separately . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,893) (69,972) (73,843)
---------- --------- ---------
Net cash provided from operating activities . . . . . . . . . . . . . . . . 174,982 110,116 82,221
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable - net . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,497) 44,981 54,933
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (51,492) (49,527) (44,940)
Issuance of common stock (Notes 3c and 3d) . . . . . . . . . . . . . . . . 15,390 11,432 70,285
Issuance of preferred securities (Note 3b) . . . . . . . . . . . . . . . . 96,329 - -
Issuance of long-term debt (Note 3a) . . . . . . . . . . . . . . . . . . . 78,620 118,129 148,724
Revolving credit facility - net (Note 3a) . . . . . . . . . . . . . . . . . 110,100 71,900 (4,650)
Retirement of long-term debt and preferred stock (Notes 3a and 3b) . . . . (7,667) (87,932) (119,466)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,202) (193) (957)
--------- --------- ---------
Net cash provided from financing activities . . . . . . . . . . . . . . . . 187,581 108,790 103,929
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (356,037) (208,811) (171,309)
Investment in joint ventures . . . . . . . . . . . . . . . . . . . . . . . (5,847) (6,457) (10,036)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,606) (1,030) (3,169)
--------- --------- ---------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . (363,490) (216,298) (184,514)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS . . . . . . (927) 2,608 1,636
CASH AND TEMPORARY CASH INVESTMENTS, January 1 . . . . . . . . . . . . . . 12,474 9,866 8,230
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, December 31 . . . . . . . . . . . . . $ 11,547 $ 12,474 $ 9,866
========= ========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN
SEPARATELY
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,776 $ (27,476) $ (12,014)
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . 18,274 (9,911) (41,250)
Gas in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,754) 1,905 11,830
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,589 2,436 23,238
Deferred income taxes - current . . . . . . . . . . . . . . . . . . . . . . (15,761) 6,010 13,361
Federal income, property and other taxes payable . . . . . . . . . . . . . 23,199 23,751 (14,570)
Refunds payable to customers . . . . . . . . . . . . . . . . . . . . . . . 8,766 7,479 (39,730)
Other current assets and liabilities . . . . . . . . . . . . . . . . . . . (13,387) 13,144 (7,697)
Deferred assets and liabilities . . . . . . . . . . . . . . . . . . . . . . 9,405 (39,808) (7,011)
--------- --------- ---------
$ (19,893) $ (69,972) $ (73,843)
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid, net of amounts capitalized . . . . . . . . . . . . . . . . . $ 44,915 $ 37,880 $ 44,925
========= ========= =========
Federal income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,046 $ 12,850 $ 21,745
========= ========= =========
Property purchased under capital leases . . . . . . . . . . . . . . . . . . $ 7,190 $ 433 $ -
========= ========= =========
</TABLE>
The summary of accounting policies and notes to the consolidated financial
statements are integral parts of this statement.
18
<PAGE> 19
SUMMARY OF ACCOUNTING POLICIES
The principal accounting policies of MCN Corporation and its subsidiaries are
set forth below. MichCon, the principal subsidiary of MCN, is subject to the
accounting requirements of and rate regulation by the Michigan Public Service
Commission (MPSC) with respect to the distribution and intrastate
transportation of natural gas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MCN and all
subsidiaries and partnerships in which it has a controlling influence.
Generally investments in 50% or less owned partnerships (Note 1) have been
accounted for under the equity method, because MCN has significant, but not
controlling influence over these entities. Certain reclassifications have been
made to prior years' statements to conform with the 1994 presentation.
REVENUES AND COST OF GAS
Gas Distribution operations accrue revenues for gas service provided but
unbilled at month end. MichCon also accrues revenues equal to the recoverable
cost of gas sold. Annual gas cost recovery (GCR) proceedings before the MPSC
permit MichCon to recover the prudent and reasonable cost of gas sold. Any
overcollection or undercollection of costs, including interest, will be
refunded or billed to customers.
MichCon's rates are set to recover its lost gas costs using an averaging
method based on historical lost gas experience. Prior to 1993, MichCon deferred
or accrued revenues for differences between historical average lost gas amounts
and the actual amount experienced during the seasonal cycles ended August 31 of
each year. However, as a result of an October 1993 General Rate Case order,
MichCon no longer defers or accrues revenues for these differences in lost gas
amounts. The amounts previously deferred or accrued are being amortized to
income over the subsequent five years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and includes appropriate
amounts of labor, materials, overhead and an allowance for funds used during
construction. Upon retirement of Gas Distribution property, the cost of
property, plant and equipment and net removal costs are charged to accumulated
depreciation.
Exploration and production costs are accounted for using the full cost
method. Substantially all acquisition, exploration and development costs are
capitalized.
DEPRECIATION AND DEPLETION
A major portion of Gas Distribution property, plant and equipment is
depreciated on the basis of straight-line rates prescribed by the MPSC. Unit of
production depreciation and depletion is used for certain exploration,
production and transmission property (Note 12). All other property, plant and
equipment of MCN is depreciated over its useful life using the straight-line
method. Depreciation rates vary by class of property. The ratio of the
provision for depreciation and depletion to the average cost of depreciable
property was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gas Distribution......................... 4.5% 4.2% 4.2%
Gas Gathering & Processing............... 2.1 2.1 4.2
Computer Operations Services and Other... 12.6 11.7 10.5
</TABLE>
19
<PAGE> 20
SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
INCOME TAXES AND INVESTMENT TAX CREDIT
Effective January 1993, MCN adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Net excess
deferred taxes on existing Gas Distribution plant in service, due to current
tax rates that are lower than the tax rates in effect when the original
deferred taxes were recorded, are included in a Tax Benefits Amortizable to
Customers account. Also included in this amount is the reduction in income
taxes that will result from the amortization of accumulated investment tax
credits. These tax benefits are being amortized to Gas Distribution customers
through reduced rates over the life of the related plant.
In accordance with MPSC requirements, investment tax credits relating to Gas
Distribution property placed into service were deferred and are being credited
to income over the life of the related property. Investment tax credits relating
to Diversified Services operations were recorded to income in the year the
related property was placed into service.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Gas Distribution operations capitalize an allowance for both debt and equity
funds used during construction in the cost of major additions to plant.
Diversified Services operations also include an allowance for debt funds used
during construction. The total amount capitalized was $2,928,000, $3,966,000
and $1,650,000 in 1994, 1993 and 1992, respectively.
DEFERRED DEBT COSTS
In accordance with MPSC regulations, MichCon defers reacquisition and
unamortized issuance costs of reacquired long-term debt when such debt is
refinanced. These costs are amortized over the term of the replacement debt.
REFUNDS PAYABLE TO CUSTOMERS
Gas Distribution operations accrue amounts to be paid to customers in
accordance with various refund requirements. These requirements relate to
pipeline supplier refunds received, gas cost overcollections, supply
realignment cost overcollections, and the gross margin from gas storage,
transportation and sales to certain customers when the total margin exceeds
that assumed in rate orders.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of this statement, MCN considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MCN has equity interests in several partnerships involved in the following
business ventures: Gas Storage - 40% to 50% owned (Blue Lake Gas Storage
Company, South Romeo Gas Storage Company and Washington 10 Storage
Partnership), Gas Marketing & Cogeneration - 40% to 99% owned (CoWest Energy,
Ada Cogeneration Ltd. Partnership, and Michigan Power Ltd. Partnership), Gas
Gathering & Processing - 40% owned (Antrim Ltd. Partnership which was sold in
January 1995), and Real Estate & Other - 33% to 50% owned (several residential
and commercial community development partnerships and other natural gas-related
ventures). The following is the combined summarized financial information of
the joint ventures. No provision for income taxes has been included since
income taxes are paid directly by the joint venture participants.
<TABLE>
<CAPTION>
(in Thousands) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
OPERATING REVENUES
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,656 $24,451 $ 3,678
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . 39,597 17,252 11,791
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . . . . 6,589 6,555 2,831
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,635 10,348 4,685
------- ------- -------
$88,477 $58,606 $22,985
======= ======= =======
OPERATING INCOME (LOSS)
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,261 $17,787 $ 2,026
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . 1,744 1,004 1,153
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . . . . 4,575 5,139 2,018
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,548 880 (895)
------- ------- -------
$27,128 $24,810 $ 4,302
======= ======= =======
INCOME (LOSS) BEFORE TAXES
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,724 $17,309 $ 2,580
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . (862) (1,154) (1,543)
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . . . . 4,313 4,873 1,744
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,518) (5,763) (3,311)
------- ------- -------
$10,657 $15,265 $ (530)
======= ======= =======
MCN'S SHARE OF INCOME (LOSS) BEFORE TAXES
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,897 $ 8,728 $ 1,285
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . (1,306) (1,391) (1,529)
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730 2,121 436
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,032) (1,748) (945)
------- ------- -------
$ 6,289 $ 7,710 $ (753)
======= ======= =======
MCN'S SHARE OF INCOME (LOSS) BEFORE TAXES BY SEGMENT
Gas Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000 $ 3,077 $ (679)
Diversified Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,289 4,633 (74)
------- ------- -------
$ 6,289 $ 7,710 $ (753)
======= ======= =======
</TABLE>
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
(in Thousands) 1994 1993
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,190 $ 7,731
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 9,328 9,213
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 2,066 2,941
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620 4,196
-------- --------
23,204 24,081
-------- --------
NONCURRENT ASSETS
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,307 136,144
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 105,134 40,808
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 21,525 16,157
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 139,018 131,851
-------- --------
405,984 324,960
-------- --------
$429,188 $349,041
======== ========
MCN'S SHARE OF TOTAL ASSETS
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,481 $ 71,652
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 65,541 34,968
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 9,436 7,639
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 33,523 31,359
-------- --------
$182,981 $145,618
======== ========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,618 $ 88,497
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 8,300 8,077
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 2,759 4,612
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,267 9,323
-------- --------
26,944 110,509
-------- --------
NONCURRENT LIABILITIES
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,328 915
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 93,458 28,331
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 2,740 4,718
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 103,239 96,161
-------- --------
281,765 130,125
-------- --------
PARTNERS' EQUITY
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,551 54,463
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 12,704 13,613
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 18,093 9,767
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 33,131 30,564
-------- --------
120,479 108,407
-------- --------
$429,188 $349,041
======== ========
MCN'S SHARE OF PARTNERS' EQUITY
Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,638 $ 26,991
Gas Marketing & Cogeneration . . . . . . . . . . . . . . . . . . . . . . 8,758 10,010
Gas Gathering & Processing . . . . . . . . . . . . . . . . . . . . . . . 7,237 3,907
Real Estate & Other . . . . . . . . . . . . . . . . . . . . . . . . . . 12,795 11,619
-------- --------
56,428 52,527
Advances and Goodwill (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,077 8,001
-------- --------
MCN's Investment in and Advances to Joint Ventures . . . . . . . . . . . . . $ 64,505 $ 60,528
======== ========
</TABLE>
(1) Differences between MCN's carrying value and its share of the
partnerships' underlying equity interest are accounted for as goodwill and
are being amortized over the expected useful lives of the related assets.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1994, the replacement cost exceeded the $131,649,000 LIFO cost for 104.0 Bcf by
$123,283,000 and at December 31, 1993, the replacement cost exceeded the
$45,895,000 LIFO cost for 67.6 Bcf by $169,850,000. MichCon's current GCR
tariff provisions prevent MichCon from retaining any benefits from a lower cost
of gas sold resulting from liquidating quantities of LIFO inventory.
3. CAPITALIZATION
A. LONG-TERM DEBT
The following long-term debt was issued during 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
Amount
Issue Date Description Issued
- ---------- ------------ ----------
<S> <C> <C>
September 1994 MichCon - First Mortgage Bonds, $80,000
8-1/4%, due May 2014
September 1993 MichCon - First Mortgage Bonds, $60,000
5-3/4%, due May 2001
MichCon - First Mortgage Bonds, $20,000
6-3/4%, due November 2023
MichCon - First Mortgage Bonds, $40,000
7%, due May 2025
</TABLE>
The proceeds received from the September 1993 debt issuances were used in
part to redeem existing series of first mortgage bonds totaling approximately
$74,900,000. Substantially all of the properties of MichCon are pledged as
security for payment of the outstanding first mortgage bonds.
MichCon has a variable interest rate swap agreement through April 2000 on
$12,000,000 of unsecured notes which has effectively reduced the cost of this
debt from 9.8% to 4.6% for the year ended December 31, 1994.
In 1994, MCN and MCN Investment renegotiated their joint unsecured revolving
credit facility to allow for borrowings of up to $250,000,000 and to extend the
expiration date through August 1997. Outstanding advances are subject to
interest at fixed or certain alternative variable rates at MCN's option.
Borrowings of $182,000,000 and $71,900,000 were outstanding under this facility
at a weighted average interest rate of 6.6% and 4.5% at December 31, 1994 and
1993, respectively. The most restrictive provision of the credit facility
requires MCN to maintain a debt to total capitalization ratio not to exceed .65
to 1.00.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Saginaw Bay Pipeline Company (Saginaw Bay) has an interest rate swap agree-
ment on the $21,100,000 outstanding balance of its project loan agreement at
December 31, 1994, which effectively fixes the interest rate at 7.5% through
February 2003. The most restrictive provision of the agreement requires
Saginaw Bay to maintain a debt service coverage ratio greater than or equal to
1.25 to 1.00. Substantially all of the properties of Saginaw Bay Pipeline
Company and the partnership serve as collateral for the project loan.
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1994 are $2,300,000 in 1995,
$1,900,000 in 1996, $81,900,000 in 1997, $2,200,000 in 1998 and $21,800,000 in
1999. In addition, the balance outstanding under the MCN and MCN Investment
joint unsecured revolving credit facility, which was $182,000,000 as of
December 31, 1994, is due upon the expiration of the facility in 1997.
B. PREFERRED AND PREFERENCE SECURITIES
In November 1994, MCN Michigan Limited Partnership (MCN Michigan), a limited
partnership of which MCN is a 1% general partner, issued 4,000,000 shares of
9-3/8% Redeemable Cumulative Preferred Securities, Series A, for $100,000,000.
The limited partnership interests represented by the preferred securities are
redeemable at the option of MCN Michigan, in whole or in part, from time to
time, on or after November 30, 1999, at $25 per security plus accrued and
unpaid dividends. Holders of the securities are entitled to receive dividends
at an annual rate of 9-3/8% of the liquidation preference value of $25.
Dividends are payable monthly in substance and are tax deductible by MCN.
MichCon has outstanding Redeemable Cumulative Preferred Stock, $2.05 Series.
At MichCon's option, all or part of the preferred stock is redeemable at prices
progressively decreasing to $25 per share. Sinking fund provisions require
that 60,000 shares be retired annually and also provide for a noncumulative
option to retire an additional 60,000 shares each year. MichCon redeemed
120,000 shares at the sinking fund redemption price of $25 per share in January
1995.
MCN is authorized to issue 25,000,000 shares of no par value preferred stock,
and MichCon is authorized to issue 4,000,000 shares of preference stock with a
par value of $1 per share. As of December 31, 1994, there have been no
issuances of preferred or preference stock under these authorizations.
C. COMMON STOCK
The MCN Board of Directors authorized a two-for-one split of common stock
effective November 1994. All references in the accompanying financial
statements, as to the number of common share and per share amounts, have been
adjusted for the split.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment
and Stock Purchase Plan and various employee benefit plans. The number of
shares issued was approximately 855,000 in 1994, 776,000 in 1993 and 1,148,000
in 1992 and generated net proceeds of $15,400,000, $11,400,000, and $12,600,000,
respectively.
In October 1992, MCN sold 4,400,000 shares of common stock in a public
offering, generating net proceeds of $57,700,000.
D. STOCK INCENTIVE AND OPTION PLANS
MCN's Stock Incentive Plan authorizes the use of performance units, restricted
stock or other stock-related awards to key management employees. During 1993,
MCN changed this program to place a larger portion of incentives at-risk,
encourage a more strategic focus on long-term performance and increase the
retention value of the plan. MCN now issues performance units, denominated in
shares of MCN stock, to executives based on total shareholder return as
compared to a group of peer companies over a six-year period. MCN granted
322,820 and 283,376 performance units in 1994 and 1993, respectively, based on
total shareholder return for the previous three-year period. The units granted
will be adjusted upward or downward based on total shareholder return for the
subsequent three-year period. The final awards are then payable in cash and
shares of common stock. Participants receive dividend equivalents, based on
the units granted. The performance units are recorded at market value and
amortized to expense as compensation over the periods earned. At December 31,
1994, 862,160 shares were available to be issued under the Stock Incentive
Plan.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MCN issued 55,600 restricted shares in 1992 under the Stock Incentive Plan.
The restricted shares generally vest six years after the date of grant, prior
to which, they are nontransferable and forfeitable. Holders of the shares
receive cash dividends and are entitled to vote. The market value of the
shares when granted is recorded as unearned compensation and amortized to
expense over the periods earned.
The MCN Stock Option Plan was effectively replaced in May 1989 by the MCN
Stock Incentive Plan. The 30,844 remaining options outstanding under the Stock
Option Plan at December 31, 1993 were exercised in 1994 at $10.52 per share.
There are no options available for grant in future years.
E. SHAREHOLDERS' RIGHTS PLAN
One preferred share purchase right is attached to each outstanding share of
common stock. The rights, which cannot be traded separately from MCN's common
stock, are designed to protect shareholders from coercive or unfair takeover
tactics. The rights are exercisable only upon certain triggering events and
expire in January 2000.
4. NOTES PAYABLE
During 1994, MichCon renewed its annual bank lines of credit, which allow it to
borrow up to $250,000,000 through March 1995 decreasing to $109,000,000 through
August 1995. These lines are at interest rates that are generally less than
the prevailing prime rate. MichCon usually issues commercial paper in lieu of
an equivalent amount of borrowings under these lines of credit. Commercial
paper outstanding at December 31, 1994 and 1993, totaled $143,457,000 and
$260,304,000, respectively at weighted average interest rates of 5.8% and 3.4%.
Fees are paid to compensate banks for lines of credit.
During 1994, MCN Investment renewed its short-term credit lines that
allow for borrowings of up to $70,000,000 through August 1995 at interest
rates which are generally less than the prevailing prime rate. At December
31, 1994 and 1993, borrowings of $60,350,000 and $20,000,000, respectively
were outstanding under these lines of credit at a weighted average interest
rate of 6.4% and 4.4%. Fees are paid to compensate banks for lines of
credit.
During 1994, MichCon began a Trust Demand Note program which allows for
borrowings of up to $25,000,000 through April 1995. At December 31, 1994,
borrowings of $25,000,000 were outstanding under this program at an interest
rate of 6.1%.
5. COMMITMENTS AND CONTINGENCIES
A. GUARANTY
A subsidiary of MichCon and an unaffiliated corporation have formed a
series of partnerships which are engaged in the construction and development
of a residential community on the Detroit riverfront (Harbortown). One of
the partnerships obtained $12,000,000 of tax-exempt financing through the
Michigan State Housing Development Authority due June 2004. The interest
rate on this debt was 4.4% and 2.5% at December 31, 1994 and 1993,
respectively. Both partners and their parent corporations have issued
guaranties for the full amount of this financing and each parent corporation
has agreed to reimburse the other for 50% of any payments made as a result
of these guaranties.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
B. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns or previously owned 17 such former manufactured gas plant (MGP) sites.
During the mid-1980's, preliminary environmental investigations were
conducted at these former MGP sites, and some contamination related to the
byproducts of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Natural Resources (MDNR). None of
these former MGP sites are on the National Priorities List prepared by the
U.S. Environmental Protection Agency (USEPA).
MCN is not involved in any administrative proceedings regarding these
former MGP sites, but is currently negotiating a remedial action plan for one
site with the MDNR and is conducting more extensive investigations at three
other sites. MichCon is, however, involved in a suit with an adjacent
property owner regarding one site. Management believes that the property
owner's claims have no merit, and MichCon is vigorously defending this suit.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1994, MichCon spent $600,000
investigating these former MGP sites. The balance in the reserve at December
31, 1994 was $5,500,000.
During 1993, MichCon received MPSC approval of a cost deferral and rate
recovery mechanism for investigation and remediation costs incurred at former
MGP sites in excess of the reserve. In addition, MCN has notified more than 50
current and former insurance carriers of the environmental conditions at these
former MGP sites and requested insurance coverage for costs associated with the
investigation and remediation of these sites. MCN is pursuing any claims it
may have against these carriers.
MCN is currently unable to estimate the future costs to be incurred in the
investigation and remediation of the former MGP sites. Management believes,
however, that insurance coverage and the cost deferral and rate recovery
mechanism will prevent environmental costs from having a material adverse
impact on MCN's financial results.
MichCon Development Company, a 100% owned subsidiary of MichCon, has a
minority interest in four partnerships that are developing Harbortown.
Harbortown is a residential development that is being constructed on a 50 acre
parcel along the Detroit River. Environmental and other approvals were
received in 1984, prior to construction. In 1991, the partnerships undertook
additional environmental testing at Harbortown to assess whether there was any
potential public health risk from the presence of metals detected in certain
past soil samples. In 1992, the MDNR accepted the results of this risk
assessment and agreed that there was no health risk due to lead in Harbortown
surface soils.
During 1994, the partnerships completed additional environmental testing and
submitted a remedial action plan for Harbortown to the MDNR. The remedy
includes meeting certain landscaping requirements and, during future
development, excavation controls consistent with occupational safety and health
regulations. The MDNR supported the proposed remedy at a public meeting in
early 1995. Management expects approval of the proposed remedy and believes
that its implementation will not have a material adverse impact on future
development opportunities at Harbortown or the financial statements of MCN.
In 1993, MichCon received a general notice of liability letter from the USEPA
stating that MichCon is one of two potentially responsible parties at a
suspected dump site in Wyandotte, Michigan. The USEPA requested that MichCon
undertake a remedial investigation and feasibility study at the site. MichCon
has investigated its prior activities in the area, as well as the USEPA's bases
for its conclusion, and does not believe that it is responsible for any
contamination that may exist at the site. In early 1994, MichCon informed the
USEPA of this belief and declined to undertake the requested activities at the
site. MichCon has not received any additional requests from the USEPA.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. COMMITMENTS
To ensure a reliable supply of natural gas at competitive prices, MCN has
entered into long-term purchase and transportation contracts with various
suppliers and producers. In general, purchase prices under these contracts are
determined by formulas based on market prices. In 1995, MCN has firm purchase
commitments for approximately 137 Bcf of gas. This annual commitment declines
each year, through the year 2005. MCN expects that sales will exceed its
minimum purchase commitments. The Company is also committed to pay demand
charges of $77,600,000 during 1995 related to firm purchase and transportation
agreements. Of this total, approximately $67,800,000 relates to Gas
Distribution operations and is recoverable through the GCR mechanism.
Capital investments for 1995 are estimated to range from $300,000,000 to
$600,000,000 and certain commitments have been made in connection therewith.
D. INTERSTATE PIPELINE RESTRUCTURING
The Federal Energy Regulatory Commission (FERC) issued Order No. 636 in 1992
which required interstate pipelines to separate their pipeline sales service
into its various service components. The order also allows interstate
pipelines to recover their prudently incurred transition costs resulting from
the restructuring.
ANR Pipeline Company (ANR), MichCon's primary interstate natural gas
transporter, implemented its Order No. 636 restructuring in November 1993.
During 1994, ANR filed several requests for recovery of these transition costs,
and MichCon accrued its portion totaling $5,400,000 of which $3,900,000 is
reflected in cost of gas. The MPSC has held that these transition costs are
recoverable through the GCR mechanism, and therefore, an asset has been
recorded for the unrecovered costs. As periodic filings are made by ANR,
MichCon will accrue its allocated portion. It is management's belief that
these costs will have no effect on earnings.
In 1993, the FERC issued an order which required Panhandle Eastern Pipe Line
Company (Panhandle) to refund to MichCon the costs of certain direct billings
totaling $5,400,000 plus interest of $4,400,000. During 1994, the FERC issued
an order permitting Panhandle to seek reimbursement of the $4,400,000 of
interest from MichCon. MichCon is currently seeking rehearing of the FERC
order. Should MichCon be unsuccessful in defeating the FERC order, it is
anticipated that these costs will be recoverable through the GCR mechanism, and
therefore, an asset has been recorded for their future recovery.
E. OTHER
MCN 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 MCN's financial statements.
6. RATE MATTERS
A. GENERAL RATE PROCEEDINGS
In October 1993, MichCon received approval from the MPSC in its general rate
case to increase rates $15,700,000 beginning in January 1994. The higher rates
include $28,700,000 for retiree health care benefits recognized under new
accounting requirements and $8,100,000 for higher depreciation rates.
Additionally, the MPSC's decision lowered MichCon's allowed rate of return on
common equity to 11.5%.
During 1993 and 1992, MichCon had been operating under a comprehensive
agreement which provided for an operating incentive plan that allowed for
annual rate adjustments to recover the effects of inflation on operation and
maintenance expenses based on changes in the Consumer Price Index. MichCon
received an inflation-related increase in rates of $4,900,000 effective January
1992.
The comprehensive agreement also contained a performance incentive provision
designed to adjust rates if weather-normalized earnings were above or below a
specified range of return on common equity. Increased gas markets enabled
MichCon to earn returns above the specified range in 1992 which resulted in a
portion of these higher earnings being shared with customers. A provision for
this sharing of earnings with customers was recorded in 1992, which reduced net
income by $5,900,000.
MichCon received MPSC approval to increase rates from March 1992 through
February 1993 by $6,800,000 to recover its costs relating to the Michigan
Department of Social Services (DSS) Heating Assistance Program. This program
was extended through February 1994 with the MPSC approving rates of $10,500,000
effective February 1993. MichCon also received MPSC approval to extend
$6,000,000 of rates to recover its costs related to DSS uncollectible gas
accounts for 1993.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The MPSC approved MichCon's requests for a rate increase of $19,900,000
effective September 1991, and $3,900,000 effective November 1992, in order to
implement MichCon's Supply Realignment Plan. The increased rates were needed to
recover the costs of maintaining a higher level of gas in inventory, to replace
the reduction in storage revenue resulting from using MichCon's storage capacity
for the benefit of gas sales customers, and to cover transportation costs
incurred to integrate gas supply to certain gas markets serviced by MichCon.
B. GAS COST RECOVERY AND REFUNDS
At December 31, 1994, refunds payable to customers totaled $19,600,000
consisting primarily of 1994 GCR overcollections.
At December 31, 1993, refunds payable to customers totaled $10,800,000
consisting primarily of $7,500,000 of supply realignment overcollections and
$5,800,000 of excess transportation and storage revenues. These amounts are
partially offset by $4,600,000 of 1993 GCR undercollections.
7. CAPITAL AND OPERATING LEASES
MCN leases certain property (principally office buildings, a warehouse, a
parking structure and computer equipment) under lease arrangements expiring at
various dates to 2010, with renewal options extending beyond that date.
Portions of the office buildings and parking structure are subleased to various
tenants.
The gross amount of assets recorded under capital leases and the related
accumulated depreciation at December 31, 1994 are $34,077,000 and $9,507,000,
respectively. The gross amount of assets and related accumulated depreciation
at December 31, 1993 were $26,887,000 and $8,206,000, respectively.
Minimum rental commitments under noncancelable leases at December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
(in Thousands)
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,896 $ 18,253
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,571 14,267
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,515 11,695
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,188 9,387
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,852 5,408
2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 13,378 17,258
--------- ---------
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . 35,400 $ 76,268
=========
Less: Amount representing interest . . . . . . . . . . . . . . . . . 11,571
---------
Present value of minimum lease payments . . . . . . . . . . . . . . . 23,829
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . . 2,015
---------
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . $ 21,814
=========
</TABLE>
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total minimum lease payments for capital and operating leases have not
been reduced by future minimum sublease receipts of $10,200,000 and $3,600,000,
respectively, under noncancelable subleases.
Capital and operating lease payments for the years ended December 31
consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(in Thousands)
<S> <C> <C> <C>
Capital lease expense:
Depreciation expense . . . . . . . . . . . . . . . . . . $ 1,369 $ 941 $ 847
Interest expense . . . . . . . . . . . . . . . . . . . . 2,156 1,923 2,003
------- ------- -------
Total capital lease expense . . . . . . . . . . . . . . . . $ 3,525 $ 2,864 $ 2,850
======= ======= =======
Operating lease expense . . . . . . . . . . . . . . . . . . $20,670 $16,641 $15,441
======= ======= =======
</TABLE>
8. RETIREMENT BENEFITS
A. PENSION PLAN BENEFITS
Separate defined benefit retirement plans are maintained for union and nonunion
employees. The plans are noncontributory, cover substantially all employees
and provide for normal retirement at age 65, but with the option to retire
earlier or later under certain conditions. The plans provide pension benefits
that are based on the employee's compensation and years of credited service.
MCN's funding policy is to fund each year's actuarially determined funding
requirements of the plans, subject to regulations issued by the Internal
Revenue Service. Currently, these plans meet the full funding limitations of
the Internal Revenue Code. Accordingly, no contributions for the 1994, 1993 or
1992 plan years were made, and none will be made for the 1995 plan year.
Net pension cost for these plans included the following components:
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- --------
(in Thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period . . . . . . . . . . . . . . . . . . . . . . . . $ 12,854 $ 11,046 $ 10,109
Interest cost on projected benefit
obligations . . . . . . . . . . . . . . . . . . . . . . . . 30,450 29,987 28,699
Net amortization and deferral . . . . . . . . . . . . . . . . (60,508) 65,146 202
Actual (return) loss on plan assets . . . . . . . . . . . . . 15,461 (107,148) (40,739)
--------- --------- --------
Net pension credit . . . . . . . . . . . . . . . . . . . . . $ (1,743) $ (969) $ (1,729)
========= ========= ========
</TABLE>
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as prepaid pension cost in the Consolidated
Statement of Financial Position:
<TABLE>
<CAPTION>
(in Thousands) 1994 1993
-------- --------
<S> <C> <C>
Measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-31-94 10-31-93
Actuarial present value of:
Accumulated vested benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 323,391 $366,781
Accumulated nonvested benefit obligation . . . . . . . . . . . . . . . . . . . 24,908 27,487
--------- --------
Total accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 348,299 $394,268
========= ========
Projected benefit obligation for service rendered
to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 399,724 $468,464
Plan assets at measurement date . . . . . . . . . . . . . . . . . . . . . . . . . 572,271 609,122
--------- --------
Plan assets in excess of projected benefit obligation . . . . . . . . . . . . . . 172,547 140,658
Less: Unrecognized net asset at transition . . . . . . . . . . . . . . . . . . . 50,179 55,219
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . 3,076 3,310
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . . . . 112,155 76,735
--------- --------
Prepaid pension cost recognized in the Consolidated
Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . $ 7,137 $ 5,394
========= ========
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 8.0% for 1994 and 6.5% for
1993. The rate of increase in future compensation levels used was 5.0% for
1994 and 1993 and 5.5% for 1992. The expected long-term rate of return on plan
assets was 7.5% for 1994, 1993 and 1992. For 1994 and 1993, plan assets
consisted primarily of equity and fixed income securities.
Following the conclusion of union negotiations in December 1994, these
pension plans were amended to enhance certain benefits to participants
effective January 1995. The amendments are estimated to increase the projected
benefit obligation by $6,000,000 and the annual service and interest costs by
$600,000. The impact of the amendments is not reflected in the retirement
amounts as of December 31, 1994.
MCN and its subsidiaries also sponsor several defined contribution pension
plans. Participation in one of these plans is available to substantially all
union and nonunion employees. Company contributions to these plans are based
upon salary and the matching of employee contributions. The cost of these
plans was $6,700,000 in 1994, $6,100,000 in 1993, and $5,800,000 in 1992.
B. OTHER POSTRETIREMENT BENEFITS
MCN provides certain health care and life insurance benefits for retired
employees. Substantially all of MCN's employees may become eligible for these
benefits if they reach retirement age while working for MCN. Prior to 1993,
these costs were recognized as expense and paid when claims were incurred and
amounted to $10,700,000 for 1992.
Effective January 1993, MCN adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," which requires the use of
accrual accounting for postretirement benefits. Consistent with a December
1992 MPSC order, MCN deferred 1993 postretirement benefit costs related to its
Gas Distribution operations in excess of claims paid (including the
amortization of the initial transition obligation) until January 1994 when new
rates to recover such costs became effective.
The deferred 1993 costs were initially being amortized over a period of 19
years. However, in June 1994, the MPSC approved a settlement agreement that
allows MichCon to offset the impact of a net reduction in property and other
taxes, resulting from federal and Michigan legislative changes, against its
deferred 1993 postretirement costs. This will accelerate the amortization of
the deferred postretirement cost from 19 years to approximately four years.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 1993, MCN established a policy of funding its postretirement
benefit costs to the extent such amounts are recoverable in Gas Distribution
rates. During 1993, separate qualified Voluntary Employees' Beneficiary
Association (VEBA) trusts were established for union and nonunion employees.
In December 1993, funding to the VEBA trusts was initiated and totaled
$28,700,000. Additional contributions of $8,345,000 and $22,100,000 were made
in December 1994 and January 1995, respectively. The expected long-term rate
of return on plan assets, which are invested in life insurance policies, equity
securities and fixed income securities, was 7.4% for 1994.
Net postretirement cost for the years ended December 31, includes the
following components:
<TABLE>
<CAPTION>
(in Thousands) 1994 1993
-------- --------
<S> <C> <C>
Service cost - benefits earned during the period . . . . . . . . . . . . . . . . . . $ 7,859 $ 7,738
Interest cost on accumulated benefit obligation . . . . . . . . . . . . . . . . . . . 21,749 20,517
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . 14,601 14,656
Deferred loss on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,607) -
Actual loss on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 -
-------- --------
Total postretirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,091 42,911
Regulatory adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,942 (25,612)
-------- --------
Net postretirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,033 $ 17,299
======== ========
</TABLE>
The following table sets forth a reconciliation of the funded status of
the plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
(in Thousands)
1994 1993
-------- --------
<S> <C> <C>
Measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-31-94 10-31-93
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,328 $190,995
Fully eligible active participants . . . . . . . . . . . . . . . . . . . . . . . . 31,055 47,035
Participants with less than 30 years of service . . . . . . . . . . . . . . . . . . 73,388 97,482
-------- --------
258,771 335,512
Plan assets at measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,211 -
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,560 335,512
Less: Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . 261,488 278,453
Unrecognized net (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . (65,333) 24,967
Contributions made after measurement date . . . . . . . . . . . . . . . . . . 8,345 28,700
-------- --------
Accrued postretirement liability recognized in the
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . $ 26,060 $ 3,392
======== ========
</TABLE>
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The rate at which health care costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 15% for 1993, 14% for 1994 and a rate that gradually declines
each year until it stabilizes at 5% in 2003. A one percentage point increase
in the assumed rate would increase the accumulated postretirement benefit
obligation at December 31, 1994 by 14% and increase the sum of the service cost
and interest cost by 16% for the year then ended. The discount rate used in
determining the accumulated postretirement benefit obligation was 8.0% and 6.5%
for 1994 and 1993, respectively.
MCN has amended certain provisions of its retiree health care benefit
plans which go into effect in January 1995. The amendments are estimated to
reduce the accumulated postretirement benefit obligation by $13,200,000 and the
annual service and interest costs by $1,800,000. The impact of the amendments
is not reflected in the postretirement amounts as of December 31, 1994.
9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
MCN manages market risk through the use of various commodity and interest rate
instruments and limits the use of such instruments to hedging activities.
Although this strategy reduces market risk, it also limits potential gains from
favorable changes in commodity prices and interest rates. Under commodity and
interest rate instruments, MCN receives or makes payments based on the
difference between a specified rate and a market-based rate. MCN is exposed to
credit risk in the event of nonperformance by the counterparties to these
instruments. However, MCN only enters into agreements with investment grade
institutions rated "A" or better which are expected to fully perform under the
terms of the agreements thereby reducing the credit risk. MCN and the
counterparties generally require cash as collateral when exposure to MCN or the
counterparty exceeds certain predefined limits.
A. NATURAL GAS HEDGING
Natural gas futures, options and swap agreements are used to manage Diversified
Services' exposure to the risk of market price fluctuations on gas sale and
purchase contracts, gas production, gas inventories, and certain anticipated
transactions. MichCon has not used financial derivatives to hedge natural gas
prices. Changes in the market value of contracts that hedge gas supply
transactions are deferred and included in inventory costs until the hedged
transaction is completed at which time the realized gain or loss is included in
the cost of gas. Market value changes that hedge gas sales transactions are
also deferred and recorded as a deferred credit or deferred charge until the
hedged transaction is completed at which time the realized gain or loss is
included as an adjustment to revenues.
MCN's objective is to manage its risk exposure from changes in natural gas
prices to increase the likelihood of achieving targeted rates of return on
investments. Net open positions that give rise to such risks are monitored and
actions taken to control the risk.
During 1993 and 1994, MCN entered into natural gas swap agreements to exchange
fixed and variable prices. At December 31, 1994, MCN had natural gas swap
agreements covering 266.1 Bcf through 2008. At December 31, 1993, MCN had
natural gas swap agreements covering 80.3 Bcf through 1998. As a result of gas
prices declining from the time the swaps were entered into, the market values
of the swap agreements have declined by $32,969,000 and $17,470,000 as of
December 31, 1994 and 1993, respectively. The estimated market value of fixed
price sales contracts being hedged by such swaps exceeded the swap market value
declines.
As of December 31, 1994, MCN had provided $21,000,000 cash as collateral
under its gas swap agreements.
B. INTEREST RATE HEDGING
In order to reduce interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life of
the agreements without the exchange of the underlying principal amounts.
Interest rate swaps are subject to market risk as interest rates fluctuate.
The difference to be received or paid on these agreements is accrued and
recorded as an adjustment to interest expense over the life of the agreements.
At December 31, 1994, MCN had interest rate swap agreements with notional
principal amounts totaling $33,100,000 (Note 3a) and a weighted average
remaining life of 5.3 years. At December 31, 1993, the notional principal
amount of outstanding interest rate swaps totaled $34,900,000. The notional
principal amounts are used solely to calculate amounts to be paid or received
under the interest rate swap agreements and approximate the principal amount of
the underlying debt being hedged. If the interest rate swap agreements were
terminated, it is estimated that MCN would have had to pay counterparties a net
$387,000 as of December 31, 1994 and would have received a net $1,175,000 as of
December 31, 1993.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
MCN has estimated the fair value of its financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgement is required in developing the estimates of fair value presented
herein and therefore, the values are not necessarily indicative of the amounts
that MCN could realize in a current market exchange. The carrying amounts of
certain financial instruments such as notes payable and customer deposits are
assumed to approximate fair value due to the short-term nature of these items.
The carrying amount and the estimated fair value of other financial
instruments consist of the following:
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
Carrying Estimated Carrying Estimated
(in Thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
ASSETS:
<S> <C> <C> <C> <C>
Notes receivable and advances . . . . . . . . . . . . . . $ 10,192 $ 10,192 $ 9,592 $ 9,592
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt, excluding capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . 663,705 644,367 477,196 502,433
Redeemable cumulative preferred securities,
including current portion . . . . . . . . . . . . . . . 105,618 106,658 8,618 8,955
DERIVATIVE FINANCIAL INSTRUMENTS: (Note 9)
Natural gas swap agreements:
with unrealized gains . . . . . . . . . . . . . . . . . 916 916 - -
with unrealized losses . . . . . . . . . . . . . . . . 33,885 33,885 17,470 17,470
Interest rate swap agreements:
with unrealized gains . . . . . . . . . . . . . . . . . 693 2,468
with unrealized losses . . . . . . . . . . . . . . . . 1,080 1,293
</TABLE>
The estimated fair values are determined based on the following:
Notes receivable and advances - interest rates currently available to
MCN for investments with similar maturities and credit quality assumptions.
Long-term debt - interest rates currently available to MCN for issuance
of debt with similar terms and remaining maturities.
Redeemable cumulative preferred securities - quoted market price.
Natural gas and interest rate swap agreements - estimated amount that
MCN would receive or pay to terminate the swap agreements, taking into
account current gas prices, interest rates and the creditworthiness of the
swap counterparties.
Guaranty (Note 5a) - management is unable to practicably estimate the
fair value of the Harbortown guaranty due to the nature of the related
party transaction and the fact that there is no similar market for the
instrument.
The fair value estimates presented herein are based on information
available to management as of December 31, 1994 and 1993. Management is not
aware of any subsequent factors that would significantly affect the estimated
fair value amounts.
33
<PAGE> 34
234
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. SUMMARY OF INCOME TAXES
Effective January 1993, MCN adopted SFAS No. 109, "Accounting for Income
Taxes," which supersedes SFAS No. 96. No cumulative adjustment was necessary
for the adoption of this standard because its provisions are not materially
different than those applied under the previous standard which MCN adopted in
1987.
<TABLE>
<CAPTION>
(in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Effective federal income tax rate . . . . . . . . . . . . .. . . . . . . . . 26.7% 32.5% 32.7%
======== ======== ========
Income taxes consist of:
Current provision . . . . . . . . . . . . . . . . . . . .. . . . . . . . . $ 48,526 $ 4,628 $ 6,073
Deferred provision - net . . . . . . . . . . . . . . . .. . . . . . . . . (8,709) 35,494 24,961
Federal gas production tax credits . . . . . . . . . . .. . . . . . . . . (7,872) (2,258) (12)
Investment tax credit - net . . . . . . . . . . . . . . .. . . . . . . . . (1,886) (1,923) (1,943)
-------- -------- --------
Total income taxes . . . . . . . . . . . . . . . . . . . .. . . . . . . . . $ 30,059 $ 35,941 $ 29,079
======== ======== ========
Reconciliation between statutory and actual income taxes:
Statutory federal income taxes at a rate of 35%,
35% and 34%, respectively . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,739 $ 38,056 $ 29,307
Adjustments to federal tax expense:
Excess of book over tax depreciation, allowed . . . . . . . . . . . . . . . 6,119 4,302 4,279
Adjustment of federal income taxes provided
in prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,303) (1,187) (1,320)
Amortization of investment tax credit . . . . . . . . . . . . . . . . . . . (1,886) (1,923) (1,943)
Federal gas production tax credits . . . . . . . . . . . . . . . . . . . . (7,872) (2,258) (12)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (738) (1,049) (1,232)
-------- -------- --------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,059 $ 35,941 $ 29,079
======== ======== ========
</TABLE>
Deferred tax assets and liabilities are recognized for the estimated
future tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The tax effect of
temporary differences that gave rise to MCN's deferred tax assets and
liabilities consisted of the following:
<TABLE>
<CAPTION>
(in Thousands)
1994 1993
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Uncollectibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,880 $ 6,773
Vacation and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 7,548 4,980
Deferred lost gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 2,266
Federal gas production tax credits . . . . . . . . . . . . . . . . . . . . . . 4,298 2,270
Refunds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,284 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,919 5,735
--------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,224 22,024
--------- --------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,799 160,083
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,414 17,579
Postretirement benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . 366 10,045
Receivable from GCR customers . . . . . . . . . . . . . . . . . . . . . . . . . - 6,524
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,689 12,891
--------- --------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 214,268 207,122
--------- --------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,044 185,098
Less: Net deferred tax (asset) liability - current . . . . . . . . . . . . . . . (2,293) 13,468
--------- --------
Net deferred tax liability - noncurrent . . . . . . . . . . . . . . . . . . . . . $ 185,337 $171,630
========= ========
</TABLE>
The Omnibus Budget Reconciliation Act of 1993, which was enacted in August
1993, increased the corporate income tax rate from 34% to 35% effective January
1993.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (Unaudited)
The following information was prepared in accordance with SFAS 69, "Disclosures
about Oil and Gas Producing Activities" and related SEC accounting rules. Data
is presented for the 1994 period only as MCN's gas and oil producing activities
were not significant in prior years.
<TABLE>
<CAPTION>
CAPITALIZED COSTS
in Thousands - December 31 1994
--------
<S> <C>
Proved properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,736
Unproved properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,382
--------
277,118
Accumulated depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . . 12,377
--------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $264,741
========
</TABLE>
CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION
Unproved properties held by MCN are excluded from amortization until they have
been evaluated. A summary of costs excluded from amortization at December 31,
1994, and the year in which such costs were incurred follows:
<TABLE>
<CAPTION>
In Thousands
YEAR COSTS INCURRED
------------------------
1993 &
TOTAL 1994 Prior
------- ------- -------
<S> <C> <C> <C>
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . $42,307 $40,365 $ 1,942
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . 5,075 4,069 1,006
------- ------- -------
$47,382 $44,434 $ 2,948
======= ======= =======
</TABLE>
The acquisition amount includes all costs incurred to purchase or lease
property with unproved reserves.
COSTS INCURRED
<TABLE>
<CAPTION>
in Thousands - Year Ended December 31 1994
-----
<S> <C>
Acquisition:
Proved properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,571
Unproved properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,365
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,936
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,921
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,052
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $185,909
========
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
in Thousands - Year Ended December 31 1994
--------
<S> <C>
Operating revenues:
Unaffiliated customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,097
Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,375
--------
31,472
--------
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,573
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800
--------
19,373
--------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,099
--------
Income taxes:
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,235
Federal gas production tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,872)
--------
(3,637)
--------
Results of operations, excluding corporate and interest costs . . . . . . . . . . . . . . . . . . . $ 15,736
========
</TABLE>
The 1994 average amortization rate per Mcf equivalent was $.65.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RESERVE QUANTITY INFORMATION
MCN's proved reserves are located in the United States. The estimated
quantities of proved reserves disclosed below are based upon estimates by MCN's
independent petroleum engineers.
<TABLE>
<CAPTION>
1994
--------------------
December 31 GAS OIL
-------- -------
(MMCF) (MBBL)
<S> <C> <C>
Proved reserves:
Developed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,992 1,042
Undeveloped . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,996 119
-------- -------
421,988 1,161
======== =======
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------
Year Ended December 31 GAS OIL
-------- -------
(MMCF) (MBBL)
<S> <C> <C>
Production of reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,513 85
======== =======
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following presentation of the standardized measure of discounted future net
cash flows is intended to be neither a measure of the fair market value of
MCN's gas and oil properties, nor an estimate of the present value of actual
future cash flows to be obtained as a result of their development and
production. It is based upon subjective estimates of proved reserves only and
attributes no value to categories of reserves other than proved reserves, such
as probable or possible reserves, or to unproved acreage. Furthermore, as it
is based on year end prices and costs adjusted only for existing contractual
arrangements (Note 9) and assumes an arbitrary annual discount rate of 10%, it
does not reflect the impact of future price and cost changes. Future income
tax expenses were computed by applying statutory tax rates adjusted for
permanent differences and tax credits, to estimated future pretax net cash
flows.
The standardized measure is intended to provide a better means for
comparing the value of MCN's proved reserves at a given time with those of
other gas and oil producing companies than is provided by a simple comparison
of raw proved reserve quantities.
<TABLE>
<CAPTION>
Thousands of Dollars - December 31 1994
----------
<S> <C>
Future revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,084,046
Future production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,564
Future development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,256
----------
Future net cash flows before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,226
Discount to present value at 10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,120
----------
Present value of future net cash flows before income taxes . . . . . . . . . . . . . . . . . . 318,106
Future income taxes discounted at 10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,329
Future production tax credits discounted at 10% . . . . . . . . . . . . . . . . . . . . . . . . (49,288)
----------
Standardized measure of discounted future net cash flows . . . . . . . . . . . . . . . . . . . $ 311,065
==========
</TABLE>
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
13. SEGMENT INFORMATION
The business segments of MCN are defined as follows: a) Gas Distribution -
natural gas distribution and transmission operations; b) Gas Services - natural
gas marketing, gathering and production operations; c) Computer Operations
Services - computer processing and network services, high speed electronic
printing and direct mail services; d) Corporate & Other - corporate and other
services. Amounts presented below are that of MCN's consolidated operations
only and do not include its share of joint ventures (Note 1).
<TABLE>
<CAPTION>
COMPUTER
GAS GAS OPERATIONS CORPORATE INTERCOMPANY CONSOLIDATED
DISTRIBUTION SERVICES SERVICES & OTHER ELIMINATIONS TOTAL
-------------- ---------- ---------- ---------- ------------ ------------
(in Thousands)
1994
- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues . . . . . . . . . . $1,126,134 $357,336 $88,211 $ - $(25,881)(1) $1,545,800
Operating Income (Loss) . . . . . . . . 128,749 27,024 6,617 (7,859) - 154,531
Identifiable Assets . . . . . . . . . . 1,587,972 585,030 65,378 19,005 (12,761) 2,244,624
Depreciation, Depletion and Amortization 84,815 12,358 5,785 662 - 103,620
Capital Expenditures . . . . . . . . . 146,701 201,328 12,458 2,740 - 363,227
1993
- ----
Operating Revenues . . . . . . . . . . $1,129,264 $301,496 $74,391 $ - $(25,497)(1) $1,479,654
Operating Income (Loss) . . . . . . . . 127,704 16,928 5,192 (5,938) - 143,886
Identifiable Assets . . . . . . . . . . 1,525,991 306,226 53,802 65,109 (69,228) 1,881,900
Depreciation, Depletion and Amortization 74,414 2,232 4,616 384 - 81,646
Capital Expenditures . . . . . . . . . 142,428 59,088 5,064 2,231 - 208,811
1992
- ----
Operating Revenues . . . . . . . . . . $1,160,494 $242,302 $67,730 $ - $(23,274)(1) $1,447,252
Operating Income (Loss) . . . . . . . . 107,922 15,707 4,749 (2,885) - 125,493
Identifiable Assets . . . . . . . . . . 1,440,279 199,605 46,205 33,771 (70,871) 1,648,989
Depreciation, Depletion and Amortization 70,289 2,195 3,818 132 - 76,434
Capital Expenditures . . . . . . . . . 129,423 35,935 5,484 467 - 171,309
</TABLE>
(1) Intercompany eliminations include revenue of Computer Operations Services
from Gas Distribution of $15,877, $15,340 and $15,631 for 1994, 1993 and
1992, respectively. The remaining balance is primarily for gas
transportation and gas sales between Gas Distribution and Gas Services.
37
<PAGE> 38
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of MCN Corporation:
We have audited the accompanying consolidated statements of financial position
of MCN Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, cash flows and capitalization for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MCN Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 8b to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits other than
pensions effective January 1, 1993 to conform with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions."
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 6, 1995
38
<PAGE> 39
SUPPLEMENTARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (Unaudited) 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . $ 77,768 $ 72,790 $ 57,118 $ 35,078 $ 32,336
========== ========== ========== ========== ==========
CASH DIVIDENDS DECLARED ON COMMON STOCK . . . . . $ 51,492 $ 49,527 $ 44,940 $ 40,400 $ 37,519
========== ========== ========== ========== ==========
COMMON STOCK DATA (1)
Earnings per share . . . . . . . . . . . . . . . $ 1.31 $ 1.24 $ 1.05 $ .71 $ .69
Book value per share . . . . . . . . . . . . . . $ 8.56 $ 7.97 $ 7.44 $ 6.61 $ 6.31
Return on average common shareholders' equity . . 15.8% 16.1% 14.6% 10.8% 10.8%
Actual common shares outstanding (000) . . . . . 59,788 58,992 58,292 52,776 47,860
Average shares outstanding (000) . . . . . . . . 59,394 58,642 54,216 49,386 47,032
PROPERTY, PLANT AND EQUIPMENT
Gas Distribution . . . . . . . . . . . . . . . . $2,206,462 $2,101,616 $1,981,741 $1,866,971 $1,755,033
Diversified Services . . . . . . . . . . . . . . 398,363 182,913 116,394 75,179 66,784
---------- ---------- ---------- ---------- ----------
2,604,825 2,284,529 2,098,135 1,942,150 1,821,817
Less - Accumulated depreciation and depletion . . 1,112,387 1,047,941 983,038 919,004 857,092
---------- ---------- ---------- ---------- ----------
Net . . . . . . . . . . . . . . . . . . . . . . . $1,492,438 $1,236,588 $1,115,097 $1,023,146 $ 964,725
========== ========== ========== ========== ==========
TOTAL ASSETS . . . . . . . . . . . . . . . . . . $2,244,624 $1,881,900 $1,648,989 $1,517,387 $1,500,360
========== ========== ========== ========== ==========
CAPITAL INVESTMENTS . . . . . . . . . . . . . . . $ 401,969 $ 245,178 $ 202,071 $ 145,021 $ 177,667
========== ========== ========== ========== ==========
CAPITALIZATION
Long-term debt and capital lease obligations . . $ 685,519 $ 494,821 $ 379,811 $ 328,052 $ 320,516
Redeemable cumulative preferred securities . . . 102,618 5,618 9,000 12,000 15,000
Common shareholders' equity . . . . . . . . . . . 511,495 470,168 433,808 348,937 301,791
---------- ---------- ---------- ---------- ----------
$1,299,632 $ 970,607 $ 822,619 $ 688,989 $ 637,307
========== ========== ========== ========== ==========
OPERATING REVENUES
Gas Distribution:
Gas sales . . . . . . . . . . . . . . . . . . . $ 968,659 $ 983,083 $ 969,221 $ 929,339 $ 895,092
End user transportation . . . . . . . . . . . . 76,483 71,718 70,160 63,298 58,355
Intermediate transportation . . . . . . . . . . 28,744 19,637 17,840 7,979 4,535
Storage services . . . . . . . . . . . . . . . 8,054 10,090 9,584 16,946 26,329
Conservation and other assistance programs . . 18,716 23,935 27,677 30,803 15,550
Application of (provision for) refunds - net . 223 (3,165) 43,792 (15,799) 12,203
Other . . . . . . . . . . . . . . . . . . . . . 25,255 23,966 22,220 16,487 14,933
---------- ---------- ---------- ---------- ----------
1,126,134 1,129,264 1,160,494 1,049,053 1,026,997
---------- ---------- ---------- ---------- ----------
Diversified Services:
Gas sales and transportation . . . . . . . . . 357,336 301,496 242,302 193,310 163,436
Computer operations services and other . . . . 88,211 74,391 67,730 62,430 44,627
---------- ---------- ---------- ---------- ----------
445,547 375,887 310,032 255,740 208,063
---------- ---------- ---------- ---------- ----------
Less intercompany transactions . . . . . . . . . 25,881 25,497 23,274 20,242 18,032
---------- ---------- ---------- ---------- ----------
$1,545,800 $1,479,654 $1,447,252 $1,284,551 $1,217,028
========== ========== ========== ========== ==========
EFFECT OF WEATHER
Degree days . . . . . . . . . . . . . . . . . . . 6,489 6,675 6,607 6,092 5,967
Percent colder (warmer) than normal . . . . . . . (4.2)% (2.2)% (3.7)% (10.7)% (12.5)%
Increase (decrease) from normal in:
Gas markets (MMcf) . . . . . . . . . . . . . . (4,353) (4,328) (10,218) (17,110) (21,369)
Net income . . . . . . . . . . . . . . . . . . $ (3,984) $ (3,696) $ (8,728) $ (13,268) $ (15,623)
Earnings per share . . . . . . . . . . . . . . $ (.07) $ (.06) $ (.16) $ (.27) $ (.33)
</TABLE>
(1) All common share and per share amounts reflect the two-for-one stock
split completed in November 1994.
39
<PAGE> 40
SUPPLEMENTARY FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (Unaudited) 1994 1993 1992 1991 1990
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAS MARKETS (MMcf)
Gas Distribution:
Gas sales . . . . . . . . . . . . . . . 204,384 205,372 203,110 192,770 188,066
End user transportation . . . . . . . . 140,020 128,643 129,722 119,846 111,373
Intermediate transportation . . . . . . 303,617 281,116 183,978 105,496 73,330
--------- --------- --------- ---------- ----------
648,021 615,131 516,810 418,112 372,769
--------- --------- --------- ---------- ----------
Diversified Services:
Gas sales:
Gas marketing & cogeneration . . . . 142,352 122,782 112,263 91,968 74,380
Exploration & production (2) . . . . 7,459 67 - - -
Transportation . . . . . . . . . . . . 20,546 21,840 25,382 25,335 -
--------- --------- --------- ---------- ----------
170,357 144,689 137,645 117,303 74,380
--------- --------- --------- ---------- ----------
Less intercompany transactions . . . . . 13,256 17,406 6,816 2,509 89
--------- --------- --------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . 805,122 742,414 647,639 532,906 447,060
========= ========= ========= ========== ==========
GAS DISTRIBUTION CUSTOMERS
Residential . . . . . . . . . . . . . . . 1,073,306 1,061,679 1,050,533 1,045,618 1,038,260
Total . . . . . . . . . . . . . . . . . . 1,154,545 1,141,986 1,130,165 1,124,792 1,116,924
EMPLOYEES
Gas Distribution . . . . . . . . . . . . 3,301 3,379 3,588 3,544 3,489
Diversified Services . . . . . . . . . . 588 489 380 338 380
</TABLE>
QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (Unaudited) (1)
Due to the seasonal nature of MCN's Gas Distribution operations, revenues, net
income and earnings per share tend to be higher in the first and fourth
quarters of the calendar year. Quarterly earnings per share may not total for
the years, since quarterly computations are based on weighted average common
shares outstanding during each quarter. There were 24,583 and 26,512
holders of record of MCN common shares at December 31, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
(Dollars in Thousands Except Per Share Amounts)
1994
<S> <C> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . $656,757 $272,567 $204,389 $412,087 $1,545,800
Operating income (loss) . . . . . . . . . $113,554 $ 12,060 $(16,605) $ 45,522 $ 154,531
Net income (loss) . . . . . . . . . . . . $ 69,122 $ 3,477 $(15,570) $ 20,739 $ 77,768
Earnings (loss) per share . . . . . . . . $ 1.17 $ .06 $ (.26) $ .35 $ 1.31
Dividends paid per share . . . . . . . . $ .2150 $ .2150 $ .2150 $ .2225 $ .8675
Average daily trading volume . . . . . . 109,958 89,126 84,122 61,495 84,554
Price per share
High . . . . . . . . . . . . . . . . . $ 20.00 $ 20.13 $ 20.25 $ 19.06 $ 20.25
Low . . . . . . . . . . . . . . . . . . $ 16.88 $ 17.63 $ 17.25 $ 17.13 $ 16.88
Close . . . . . . . . . . . . . . . . . $ 17.88 $ 20.00 $ 18.06 $ 18.00 $ 18.00
1993
Operating revenues . . . . . . . . . . . $559,348 $289,794 $182,732 $447,780 $1,479,654
Operating income (loss) . . . . . . . . . $ 90,640 $ 6,994 $ (9,404) $ 55,656 $ 143,886
Net income (loss) . . . . . . . . . . . $ 54,044 $ 1,938 $(11,220) $ 28,028 $ 72,790
Earnings (loss) per share . . . . . . . . $ .93 $ .03 $ (.19) $ .48 $ 1.24
Dividends paid per share . . . . . . . . $ .2100 $ .2100 $ .2100 $ .2150 $ .8450
Average daily trading volume . . . . . . 144,538 113,596 81,356 66,372 101,078
Price per share
High . . . . . . . . . . . . . . . . . $ 16.81 $ 17.44 $ 18.25 $ 18.31 $ 18.31
Low . . . . . . . . . . . . . . . . . . $ 14.50 $ 15.44 $ 16.50 $ 16.94 $ 14.50
Close . . . . . . . . . . . . . . . . . $ 16.81 $ 17.44 $ 17.44 $ 17.38 $ 17.38
</TABLE>
(2) Represents gas sales made directly to third parties by MCN's E&P
operations. Other E&P production is sold to affiliated companies for
marketing.
40
<PAGE> 1
EXHIBIT 21-1
LIST OF MCN SUBSIDIARIES
MCN CORPORATION (MCN) is a holding company organized under the laws of the
state of Michigan. MCN owns directly all of the outstanding common stock of
Michigan Consolidated Gas Company (MichCon), Citizens Gas Fuel Company
(Citizens), and MCN Investment Corporation (MCN Investment). MCN is organized
along two major business segments, Gas Distribution and Diversified Services.
Except where otherwise indicated, the companies set forth below are Michigan
corporations.
GAS DISTRIBUTION
A. MICHCON. Except where otherwise indicated, the companies set forth
below are wholly-owned subsidiaries of MichCon.
1. Michigan Consolidated Homes Limited Dividend Housing
Corporation, a Delaware corporation.
2. MichCon Development Corporation.
3. Blue Lake Holdings, Inc. holds a 50% interest in a partnership
that has converted a depleted natural gas field in northern
Michigan into a 42 Bcf natural gas storage field which it now
operates. MichCon owns 50% of Blue Lake Holdings, Inc., the
other half is owned by Storage Development Company, a
subsidiary of MCN Investment.
4. G-T Energy Concepts, Inc. developed a natural gas torch and
the related fueling modules which are adapted for use in metal
cutting, brazing and soldering. G-T Energy Concepts, Inc. was
transferred to MichCon from MCN Investment in April 1994.
5. Fuel Concepts, Inc. is involved in the development and
commercialization of low pressure natural gas storage and
related technologies. Fuel Concepts, Inc. was transferred to
MichCon from MCN Investment in April 1994.
6. Kalkaska Gas Storage Limited Partnership, a Michigan
partnership in which MichCon has a 31% interest, holds a 53.5%
interest in a partnership which has plans to develop and
operate a gas storage field in northern Michigan with 15 Bcf
of working capacity.
B. CITIZENS.
DIVERSIFIED SERVICES
C. MCN INVESTMENT is the holding company for MCN's various diversified
services subsidiaries. MCN Investment's major business segments are
Gas Services and Computer Operations Services. MCN Investment is also
involved in Gas Technology and other businesses. Except where
otherwise indicated, the companies set forth below are wholly-owned
subsidiaries of MCN Investment.
Gas Services
The Gas Services segment is an integrated energy group with investments in the
following businesses: Gas Marketing and Cogeneration, Gas Gathering and
Processing, Exploration and Production, and Gas Storage.
Gas Marketing and Cogeneration
1. CoEnergy Trading Company.
2. CoEnergy Canadian Holdings, Ltd., a New Brunswick Corporation,
which holds a 40% interest in a Canadian partnership.
3. CoEnergy Supply Company was formed in 1994 to engage in the
purchase and sale of natural gas developed by the Supply
Development Group, Inc. CoEnergy Supply Company expects to
begin operations in 1995.
4. Cogen Development Company (Cogen) pursues cogeneration related
opportunities throughout the United States and Canada.
i. Ada Cogeneration Limited Partnership, a Michigan
partnership, in which Cogen is a 99% limited partner.
<PAGE> 2
ii. Ludington Cogeneration Co. is the 1% general partner
in a joint venture that is constructing and intends
to operate a 123 megawatt natural gas-fueled
cogeneration plant in western Michigan.
iii. Ludington Cogeneration Holdings, Ltd. is a 49%
limited partner in the 123 megawatt cogeneration
plant mentioned above.
Gas Gathering & Processing
5. Saginaw Bay Pipeline Company, a 66% general partner in the
Saginaw Bay Area Limited Partnership.
6. Saginaw Bay Lateral Company, a 46% general partner in the
Saginaw Bay Lateral Limited Partnership.
7. Otsego Holdings, Inc., a 40% general partner in two gas
processing facilities, located in northern Michigan, that
remove carbon dioxide from natural gas. In January 1995,
Ostego Holdings, Inc. sold its partnership interest in these
two plants.
8. Westside Pipeline Company.
i. Jordan Valley Limited Partnership (85% interest)
ii. Warner Treating Limited Liability Company (95% interest)
iii. Terra Westside Processing Company (85% interest)
Exploration & Production
9. Supply Development Group, Inc.
i. Elmira Antrim Company
ii. Green River Antrim Company
iii. Warner Antrim Company
iv. Green Oak Development Company
v. MGS Development Company
vi. Southwest Gas Supply, Inc.
vii. Geotrend Exploration, Inc.
viii. Huron Energy
ix. CoEnergy MidContinent
x. CoEnergy Anadarko
xi. P'Bell Energy
xii. CoEnergy Operating Company
xiii. CoEnergy Canadian Exploration, Inc.
xiv. Petro Ventures Exploration Company
xv. SDG Marketing Company
Gas Storage
10. Storage Development Company.
i. South Romeo Gas Storage Company, a Michigan
Partnership in which Storage Development
Company has a 50% interest.
ii. The Orchard Golf Limited Partnership, a
Michigan Partnership in which Storage
Development Company has a 50% interest.
iii. W-10 Holdings, Inc., holds a 40% interest in
Washington 10 Storage Partnership.
iv. Blue Lake Holdings, Inc. (see description
under Gas Distribution - MichCon)
<PAGE> 3
3
Computer Operations Services
11. The Genix Group, Inc.
i. Genix Corporation, a Delaware corporation, located in
Pittsburgh, PA.
ii. MCN Computer Services, Inc., located in Dearborn, MI
iii. Genix Group, Ltd., located in London, England
Gas Technology
MCN's Gas Technology businesses, which also includes G-T Energy Concepts, Inc.
and Fuel Concepts, Inc. which were transferred to the Gas Distribution
operations in April 1994, research and develop innovative applications for
natural gas in pressurized combustion technologies and as a fuel for vehicles
and other applications.
12. Combustion Concepts, Inc., is engaged in the development of
pressurized combustion technologies which provides increased
fuel efficiency, heat uniformity and compactness of equipment.
Other
13. Bridgewater Holdings, Inc. holds a 33-1/3% Limited partner
interest in a 17-story commercial real estate complex located
in Grand Rapids, Michigan.
D. MCN MICHIGAN LIMITED PARTNERSHIP (MCN Michigan): MCN is the 1% general
partner in MCN Michigan, a Michigan limited partnership. MCN Michigan
exists for the sole purpose of issuing its limited partnership
interests to the public in the form of preferred securities and
investing the proceeds thereof in debt securities of MCN.
<PAGE> 1
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-52825, 33-52827 and 33-43075 on Form S-8, 33-40424, 33-55665, and 33-57115 on
Form S-3 and Post-Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Corporation of our reports dated February 6,
1995, appearing in and incorporated by reference in this Annual Report on Form
10-K of MCN Corporation for the year ended December 31, 1994.
February 28, 1995
Deloitte & Touche LLP
Detroit, Michigan
<PAGE> 1
EXHIBIT 23-2
[Ryder Scott Company Letterhead]
February 28, 1995
MCN Corporation
500 Griswold
Detroit, MI 48226
Re: MCN Corporation
1994 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Ryder Scott Company, Petroleum Engineers, consents to the
use of its name and the information contained in its report dated January 26,
1995, regarding MCN Corporation oil and gas reserve information as of December
31, 1994, in its 1994 Annual Report on Form 10-K.
In addition, Ryder Scott Company Petroleum Engineers, consents to the
incorporation by reference of said material in Registration Statement Nos.
33-43075, 33-52825 and 33-52827 on Form S-8, 33-40424, 33-55665 and 33-57115 on
Form S-3 and Post Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Corporation.
Ryder Scott Company Petroleum Engineers, has no interest in MCN
Corporation or in any affiliated companies or subsidiaries and is not to
receive such interest as payment for such reports and has no director, officer,
or employee otherwise connected with MCN Corporation. We are not employed by
MCN Corporation on a contingent basis.
Very truly yours,
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
-----------------------
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
<PAGE> 1
EXHIBIT 23-3
[Miller and Lents, Ltd. Letterhead]
February 28, 1995
MCN Corporation
500 Griswold
Detroit, MI 48226
Re: MCN Corporation
Securities and Exchange Commission
1994 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Miller and Lents, Ltd., consents to the use of its name and
the information contained in its report dated January 19, 1995, regarding MCN
Corporation Reserves and Future Net Revenues as of December 31, 1994, in its
1994 Annual Report on Form 10-K.
In addition, Miller and Lents, Ltd., consents to the incorporation by
reference of said material in Registration Statement Nos. 33-43075, 33-52825
and 33-52827 on Form S-8, 33-40424, 33-55665 and 33-57115 on Form S-3 and Post
Effective Amendment No. 1 to Registration Statement No. 33-21930-99 on Form
S-8 of MCN Corporation.
Miller and Lents, Ltd., has no interest in MCN Corporation or in any
affiliated companies or subsidiaries and is not to receive such interest as
payment for such reports and has no director, officer, or employee otherwise
connected with MCN Corporation. We are not employed by MCN Corporation on a
contingent basis.
Yours very truly,
By /s/ Walter Crow
-------------------------
Walter Crow
Chairman
MILLER AND LENTS, LTD.
<PAGE> 1
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Stephen E. Ewing
-----------------------------
Stephen E. Ewing
<PAGE> 2
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ William K. McCrackin
-----------------------------
William K. McCrackin
<PAGE> 3
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Roger Fridholm
-----------------------------
Roger Fridholm
<PAGE> 4
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Frank M. Hennessey
-----------------------------
Frank M. Hennessey
<PAGE> 5
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Thomas H. Jeffs II
-----------------------------
Thomas H. Jeffs II
<PAGE> 6
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Arthur L. Johnson
-----------------------------
Arthur L. Johnson
<PAGE> 7
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Dale A. Johnson
-----------------------------
Dale A. Johnson
<PAGE> 8
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, her true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in her name and on her behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Helen O. Petrauskas
-----------------------------
Helen O. Petrauskas
<PAGE> 9
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Patrick Zurlinden, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Howard F. Sims
-----------------------------
Howard F. Sims
<PAGE> 10
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Daniel L. Schiffer and
Patrick Zurlinden, and each of them, his true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in his name and on his behalf and to file with the Securities and
Exchange Commission an Annual Report on Form 10-K for the year ended December
31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Alfred R. Glancy III
-----------------------------
Alfred R. Glancy III
<PAGE> 11
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III and
Daniel L. Schiffer, and each of them, his true and lawful attorneys and
agents, each with full power and authority (acting alone and without the
other) to execute in his name and on his behalf and to file with the
Securities and Exchange Commission an Annual Report on Form 10-K for the year
ended December 31, 1994, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 23rd
day of February, 1995.
/s/ Patrick Zurlinden
-----------------------------
Patrick Zurlinden
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of income and the Consolidated Statement of Financial
Position and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 11,547
<SECURITIES> 0
<RECEIVABLES> 230,259
<ALLOWANCES> 16,101
<INVENTORY> 131,649
<CURRENT-ASSETS> 543,510
<PP&E> 2,604,825
<DEPRECIATION> 1,112,387
<TOTAL-ASSETS> 2,244,624
<CURRENT-LIABILITIES> 564,695
<BONDS> 685,519
<COMMON> 598
102,618
0
<OTHER-SE> 510,897
<TOTAL-LIABILITY-AND-EQUITY> 2,244,624
<SALES> 0
<TOTAL-REVENUES> 1,545,800
<CGS> 0
<TOTAL-COSTS> 1,391,269
<OTHER-EXPENSES> 5,641
<LOSS-PROVISION> 16,344
<INTEREST-EXPENSE> 48,948
<INCOME-PRETAX> 107,827
<INCOME-TAX> 30,059
<INCOME-CONTINUING> 77,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,768
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 0
</TABLE>
