===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-10070
MCN CORPORATION
(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code 313-256-5500
No Changes
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 31, 1995:
Common Stock, par value $.01 per share: 66,045,991
===============================================================================
<PAGE>
INDEX TO FORM 10-Q
For Quarter Ended June 30, 1995
Page
Number
------
COVER i
INDEX ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 6
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
ii
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
(Thousands of Dollars)
JUNE 30, DECEMBER 31,
----------------------- ------------
1995 1994 1994
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost (which
approximates market value) $ 44,458 $ 11,207 $ 11,547
Accounts receivable, less allowance for doubtful
accounts of $21,040, $25,694 and $16,101,
respectively 186,574 229,875 214,158
Accrued unbilled revenues 14,519 18,705 83,053
Gas in inventory (Note 1) 87,549 64,638 131,649
Property taxes assessed applicable to future
periods 33,117 28,570 54,728
Gas receivable 21,360 13,685 21,069
Other 29,550 28,371 27,306
---------- ---------- ----------
417,127 395,051 543,510
---------- ---------- ----------
Deferred Charges and Other Assets
Investment in and advances to joint ventures 68,371 60,326 64,505
Deferred postretirement benefit cost 17,614 24,727 20,670
Other 149,084 87,833 123,501
---------- ---------- ----------
235,069 172,886 208,676
---------- ---------- ----------
Property, Plant and Equipment, at cost
Gas distribution 2,275,431 2,146,740 2,206,462
Exploration and production 365,116 186,935 277,118
Gas gathering and processing 76,525 57,300 67,889
Computer operations and other 55,466 41,814 53,356
---------- ---------- ----------
2,772,538 2,432,789 2,604,825
Less -- Accumulated depreciation and depletion 1,168,099 1,095,600 1,112,387
---------- ---------- ----------
1,604,439 1,337,189 1,492,438
---------- ---------- ----------
$2,256,635 $1,905,126 $2,244,624
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 150,440 $ 142,363 $ 142,647
Notes payable 71,243 107,327 228,807
Current portion of long-term debt, capital lease
obligations and redeemable cumulative preferred
stock 7,087 9,937 7,319
Gas inventory equalization (Note 1) 36,608 34,156 --
Federal income, property and other taxes payable 78,348 86,063 86,972
Refunds payable to customers 1,258 18,665 19,560
Customer deposits 10,030 10,108 11,581
Other 56,748 58,513 67,809
---------- ---------- ----------
411,762 467,132 564,695
---------- ---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 100,499 73,213 93,326
Unamortized investment tax credit 37,741 39,629 38,684
Tax benefits amortizable to customers 112,639 125,744 115,067
Accrued postretirement benefit cost 14,059 18,622 26,060
Minority interest 18,237 18,516 18,670
Other 100,493 79,573 88,490
---------- ---------- ----------
383,668 355,297 380,297
---------- ---------- ----------
Long-Term Debt, including capital lease obligations
(Note 2b) 706,225 555,064 685,519
---------- ---------- ----------
Redeemable Cumulative Preferred Securities of
Subsidiaries 100,000 2,618 102,618
---------- ---------- ----------
Commitments and Contingencies (Note 4)
Common Shareholders' Equity
Common stock 660 594 598
Additional paid-in capital 439,061 324,449 331,571
Retained earnings 215,801 200,748 179,862
Unearned compensation and ESOP benefit (542) (776) (536)
---------- ---------- ----------
654,980 525,015 511,495
---------- ---------- ----------
$2,256,635 $1,905,126 $2,244,624
========== ========== ==========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(Thousands Except Per Share Amounts)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------- ------------------- -----------------------
1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $283,124 $272,567 $831,092 $929,324 $1,447,568 $1,559,836
-------- -------- -------- -------- ---------- ----------
Operating Expenses
Cost of gas 124,980 126,784 413,275 518,801 717,910 863,214
Operation and maintenance 99,976 88,919 204,305 195,818 407,712 365,514
Depreciation, depletion and amortization 30,023 27,847 59,036 51,899 110,757 92,770
Property and other taxes 16,442 16,957 35,264 37,192 63,060 66,472
-------- -------- -------- -------- ---------- ----------
Total operating expenses 271,421 260,507 711,880 803,710 1,299,439 1,387,970
-------- -------- -------- -------- ---------- ----------
Operating Income 11,703 12,060 119,212 125,614 148,129 171,866
-------- -------- -------- -------- ---------- ----------
Equity in Earnings of Joint Ventures 823 2,190 2,067 3,788 4,568 7,515
-------- -------- -------- -------- ---------- ----------
Other Income and (Deductions)
Interest income 1,534 1,317 3,347 3,194 6,646 5,348
Interest on long-term debt (9,834) (9,128) (21,153) (17,267) (42,099) (31,755)
Other interest expense (1,585) (1,598) (5,709) (4,018) (12,426) (10,471)
Dividends on preferred securities of subsidiaries (2,397) (115) (4,815) (251) (6,582) (604)
Minority interest (604) (707) (1,168) (1,468) (2,579) (3,211)
Other 384 (851) (697) (1,541) (4,797) (6,531)
-------- -------- -------- -------- ---------- ----------
Total other income and (deductions) (12,502) (11,082) (30,195) (21,351) (61,837) (47,224)
-------- -------- -------- -------- ---------- ----------
Income Before Income Taxes 24 3,168 91,084 108,051 90,860 132,157
Income Tax Provision (Benefit) (2,288) (309) 27,182 35,452 21,789 42,750
-------- -------- -------- -------- ---------- ----------
Net Income $ 2,312 $ 3,477 $ 63,902 $ 72,599 $ 69,071 $ 89,407
======== ======== ======== ======== ========== ==========
Earnings Per Share $ .04 $ .06 $ 1.01 $ 1.23 $ 1.12 $ 1.52
======== ======== ======== ======== ========== ==========
Average Common Shares Outstanding 65,884 59,296 63,254 59,192 61,409 59,008
======== ======== ======== ======== ========== ==========
Dividends Declared Per Share $ .2225 $ .2150 $ .4450 $ .4300 $ .8825 $ .8550
======== ======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
(Thousands of Dollars)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance -- Beginning of period $228,137 $210,014 $179,862 $153,589 $200,748 $161,772
Add -- Net income 2,312 3,477 63,902 72,599 69,071 89,407
-------- -------- -------- -------- -------- --------
230,449 213,491 243,764 226,188 269,819 251,179
Deduct -- Cash dividends declared on
common stock 14,648 12,741 27,963 25,438 54,017 50,428
Other -- 2 -- 2 1 3
-------- -------- -------- -------- -------- --------
Balance -- End of period $215,801 $200,748 $215,801 $200,748 $215,801 $200,748
======== ======== ======== ======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of
these statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Thousands of Dollars)
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash Flow from Operating Activities
Net income $ 63,902 $ 72,599
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of income 59,036 51,899
Charged to other accounts 3,601 3,269
Deferred income taxes and investment tax
credit -- net 3,802 (5,281)
Equity in earnings of joint ventures, net of
distributions 1,937 2,191
Other 50 1,496
--------- ---------
132,328 126,173
Changes in assets and liabilities, exclusive
of changes shown separately 137,200 161,487
--------- ---------
Net cash provided from operating activities 269,528 287,660
--------- ---------
Cash Flow from Financing Activities
Notes payable -- net (157,564) (169,077)
Common stock dividends paid (27,963) (25,438)
Issuance of common stock (Note 2a) 107,569 7,354
Issuance of long-term debt (Note 2b) 68,764 --
Revolving credit facility -- net (45,000) 60,100
Retirement of long-term debt and preferred stock (5,184) (4,717)
Other (707) (1,089)
--------- ---------
Net cash used for financing activities (60,085) (132,867)
--------- ---------
Cash Flow from Investing Activities
Capital expenditures (177,390) (151,729)
Investment in joint ventures (11,021) (2,281)
Sale of investment in joint ventures 10,803 --
Other 1,076 (2,050)
--------- ---------
Net cash used for investing activities (176,532) (156,060)
--------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents 32,911 (1,267)
Cash and Cash Equivalents, January 1 11,547 12,474
--------- ---------
Cash and Cash Equivalents, June 30 $ 44,458 $ 11,207
========= =========
Changes in Assets and Liabilities, Exclusive of
Changes Shown Separately
Accounts receivable -- net $ 26,305 $ 7,059
Accrued unbilled revenues 68,534 82,622
Gas in inventory 44,100 (18,743)
Property taxes assessed applicable to future
periods 21,611 22,139
Gas receivable (291) (5,736)
Accounts payable 7,793 12,305
Deferred income taxes -- current (2,838) (13,582)
Gas inventory equalization 36,608 34,156
Federal income, property and other taxes payable (8,624) 22,283
Refunds payable to customers (18,302) 7,871
Other current assets and liabilities (13,844) (9,581)
Deferred assets and liabilities (23,852) 20,694
--------- ---------
Supplemental Disclosures $ 137,200 $ 161,487
========= =========
Cash paid during the year for:
Interest, net of amounts capitalized $ 28,960 $ 21,683
========= =========
Federal income taxes $ 9,366 $ 16,650
========= =========
Noncash investing and financing activities:
Property purchased under capital leases $ 2,418 $ 1,877
========= =========
Land acquired in exchange for note receivable $ 1,480 $ --
========= =========
<FN>
The notes to the consolidated financial statements are an integral part of this
statement.
</TABLE>
3
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Gas in Inventory
Inventory gas is priced on a last-in, first-out (LIFO) basis. In
anticipation that interim inventory reductions will be replaced prior to year
end, the cost of gas for net withdrawals from inventory is recorded at the
estimated average purchase rate for the calendar year. The excess of these
charges over the LIFO cost is credited to the gas inventory equalization
account. During interim periods when there are net injections to inventory, the
equalization account is reversed. Approximately 70.0 billion cubic feet (Bcf)
and 64.9 Bcf of gas was included in inventory at June 30, 1995 and 1994,
respectively.
2. Capitalization
a. Common Stock and Additional Paid-in Capital
In March 1995, MCN sold 5,750,000 shares of new common stock in a
public offering, generating net proceeds of approximately $99,000,000.
b. Long-Term Debt
During the second quarter of 1995, MichCon issued the following
debt:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
First Mortgage Bonds, 7.50%, due May 2020 $30,000,000
First Mortgage Bonds, 6.30%, due June 1998 $20,000,000
First Mortgage Bonds, 6.72%, due June 2003 $ 4,150,000
First Mortgage Bonds, 6.80%, due June 2003 $15,850,000
</TABLE>
3. Lines of Credit
As of June 30, 1995, MichCon maintained credit lines of up to
$109,000,000 which supported its commercial paper program. No commercial paper
was outstanding as of June 30, 1995. In July 1995, new credit lines were
negotiated to allow for borrowings of up to $100,000,000 under a 364 day
revolving credit facility and up to $150,000,000 under a three year revolving
credit facility. MichCon anticipates issuing commercial paper in lieu of an
equivalent amount of borrowings under lines of credit.
As of June 30, 1995, MCN Investment maintained credit lines of up to
$320,000,000 to finance capital investments and working capital requirements of
its subsidiaries. In July 1995, these credit lines were increased to allow for
borrowings of up to $100,000,000 under a 364 day revolving credit facility and
up to $300,000,000 under a three year revolving credit facility. The facilities
support MCN Investment's $400,000,000 commercial paper program that was also
established in July 1995. MCN Investment anticipates issuing commercial paper
in lieu of an equivalent amount of borrowings under lines of credit.
4
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
4. Contingencies
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.
5. General
There have been no changes in MCN's principal accounting policies from
those set forth in MCN's 1994 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1995 presentation.
The unaudited information furnished herein, in the opinion of management,
reflects all adjustments (consisting of only recurring adjustments or accruals)
necessary for a fair presentation of the results of operations during the
periods.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
MCN reports lower quarterly earnings -- MCN's earnings of $2.3 million
($.04 per share) for the second quarter of 1995 decreased by $1.2 million ($.02
per share) from the 1994 quarter. Earnings for the 1995 six- and twelve-month
periods decreased $8.7 million ($.22 per share) and $20.3 million ($.40 per
share), respectively, from the comparable 1994 periods. All earnings per share
comparisons reflect an increase in the number of average common shares
outstanding as a result of MCN's issuance of 5.75 million shares in March 1995.
A summary of financial performance follows:
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
------------- ------------- -------------
1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) (in Millions)
Gas Distribution $(3.4) $(1.7) $53.3 $64.3 $50.0 $72.0
Diversified Services 5.7 5.2 10.6 8.3 19.1 17.4
----- ----- ----- ----- ----- -----
$ 2.3 $ 3.5 $63.9 $72.6 $69.1 $89.4
===== ===== ===== ===== ===== =====
Earnings (Loss) Per Share
Gas Distribution $(.05) $(.03) $ .84 $1.09 $ .81 $1.22
Diversified Services .09 .09 .17 .14 .31 .30
----- ----- ----- ----- ----- -----
$ .04 $ .06 $1.01 $1.23 $1.12 $1.52
===== ===== ===== ===== ===== =====
</TABLE>
_______________________________________________________________________________
Strategic direction -- MCN's strategic direction is to invest in a
portfolio of gas-related projects, including gas distribution, exploration and
production, gathering and processing systems, storage projects, cogeneration
facilities and other areas of expertise. MCN is continuing to pursue
opportunities in these areas through both its Gas Distribution and Diversified
Services businesses, as subsequently discussed.
Gas Distribution
Lower earnings reflect the timing of operating expenses -- Earnings
decreased $1.7 million ($.02 per share) for the 1995 quarter as compared to the
1994 period. The decrease was due mainly to the timing of certain operating
expenses, primarily uncollectible gas accounts expense, partially offset by the
colder weather experienced during the 1995 quarter. Earnings for the 1995 six-
and twelve-month periods decreased $11.0 million ($.25 per share) and $22.0
million ($.41 per share), respectively, reflecting lower gas deliveries
primarily resulting from warmer weather.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
------------- ------------ -------------
1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Effect of Weather on Gas Markets and Earnings
Percentage Colder (Warmer) than Normal 2.5% (9.1)% (4.1)% 4.2% (9.6)% 2.9%
Increase (Decrease) from Normal in:
Gas Markets (in Bcf) .5 (1.3) (4.7) 6.4 (15.5) 6.2
Net Income (in Millions) $ .7 $(1.2) $(4.1) $5.9 $(13.9) $5.7
Earnings Per Share $.01 $(.02) $(.06) $.10 $ (.23) $.10
</TABLE>
Gross Margin
Gross margin increases -- Gas Distribution gross margin (operating
revenues less cost of gas) increased for the quarter but decreased for the six-
and twelve-month periods due to fluctuations in gas deliveries resulting from
the weather variations previously discussed. In addition, the twelve-month
period decrease was partially offset by an increase in gas sales rates,
reflecting a general rate increase of $15.7 million, effective January 1994.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
--------------- --------------- -------------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gas Distribution Operations (in Millions)
Operating Revenues* $187.5 $174.3 $615.3 $715.1 $1,026.3 $1,177.5
Cost of Gas 73.2 62.4 286.1 365.9 456.9 598.0
------ ------ ------ ------ -------- --------
Gross Margin 114.3 111.9 329.2 349.2 569.4 579.5
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation & Maintenance 73.7 69.6 152.1 157.1 312.1 291.4
Depreciation, Depletion & Amortization 22.9 21.6 45.2 42.9 87.1 80.0
Property & Other Taxes 14.3 15.2 31.0 34.1 55.6 61.6
------ ------ ------ ------ -------- --------
110.9 106.4 228.3 234.1 454.8 433.0
------ ------ ------ ------ -------- --------
Operating Income 3.4 5.5 100.9 115.1 114.6 146.5
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures .3 .7 .7 1.4 1.3 3.2
------ ------ ------ ------ -------- --------
Other Income & (Deductions)*
Interest Income 1.1 .7 2.1 2.1 4.2 3.6
Interest on Long-Term Debt (8.4) (6.6) (16.7) (13.2) (31.5) (26.1)
Other Interest Expense (.7) (1.5) (3.7) (3.7) (9.1) (8.2)
Other (.9) (.8) (1.7) (1.5) (5.5) (6.8)
------ ------ ------ ------ -------- --------
(8.9) (8.2) (20.0) (16.3) (41.9) (37.5)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes (5.2) (2.0) 81.6 100.2 74.0 112.2
------ ------ ------ ------ -------- --------
Income Taxes (1.8) (.3) 28.3 35.9 24.0 40.2
------ ------ ------ ------ -------- --------
Net Income (Loss) $ (3.4) $ (1.7) $ 53.3 $ 64.3 $ 50.0 $ 72.0
====== ====== ====== ====== ======== ========
<FN>
*Includes intercompany transactions
</TABLE>
Gas sales and end user transportation deliveries in total were also
impacted by the weather, increasing by 9% for the 1995 quarter but decreasing
by 6% and 5% for the 1995 six- and twelve-month periods, respectively. Higher
demand from large-volume commercial and industrial customers also contributed
to the increase in end user transportation deliveries for all the 1995 periods.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
------------- ------------- -------------
1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Gas Distribution Markets (in Bcf)
Gas Sales 31.9 28.5 122.4 134.4 192.4 216.0
End User Transportation 32.3 30.5 75.9 75.5 140.5 135.7
----- ----- ----- ----- ----- -----
64.2 59.0 198.3 209.9 332.9 351.7
Intermediate Transportation* 64.8 66.4 170.7 174.0 300.2 319.2
----- ----- ----- ----- ----- -----
129.0 125.4 369.0 383.9 633.1 670.9
===== ===== ===== ===== ===== =====
<FN>
*Includes intercompany volumes
</TABLE>
Intermediate transportation deliveries decreased in the 1995 quarter,
six- and twelve-month periods primarily as a result of reduced volumes
transported for Canadian customers, partially offset by increased
transportation of Antrim gas for Michigan gas producers and brokers. 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. The increased demand has
resulted from time to time in capacity constraints on MichCon's northern
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Michigan pipeline system. In March 1995, MichCon received approval from the
Michigan Public Service Commission (MPSC) to expand its transportation system.
The expansion project will require approximately $40 million for additional
pipeline and related facilities. Construction began during the 1995 quarter and
will be completed by early 1996. The expanded system, in conjunction with
existing facilities, is expected to transport approximately 135 Bcf of Antrim
gas annually, generating new revenues of approximately $8 million per year.
During the 1995 quarter, the MPSC approved MichCon's request to construct
and operate a 59 mile loop of the Milford to Belle River Pipeline for
approximately $80 million. The pipeline will improve the overall reliability
and efficiency of MichCon's gas storage and transmission system by serving as a
back-up means of transportation in the event of disruptions in the operation of
the existing pipeline or other facilities used to supply gas to MichCon's
system. Construction of the pipeline will begin in October 1995 and is expected
to be completed by June 1996.
Cost of Gas
Cost of gas is affected by variations in sales volumes and cost of gas
rates. Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set
to recover 100% of prudently and reasonably incurred gas costs. Therefore,
significant fluctuations in total gas costs have little or no effect on gross
margins and earnings.
Cost of gas sold increased in the 1995 quarter due to higher gas volumes
sold resulting from the colder weather and an increase of $.09 (4.2%) in the
cost of gas sold per thousand cubic feet from the 1994 quarter. Cost of gas
sold decreased in the 1995 six- and twelve-month periods due to lower sales
volumes resulting from the warmer weather as well as lower prices paid for
natural gas in the spot market. The decline in spot market prices resulted in a
decrease in the cost of gas sold per thousand cubic feet of $.46 (16.5%) and
$.46 (16.3%) in the 1995 six- and twelve-month periods, respectively, from the
comparable 1994 periods.
A majority of MichCon's interstate gas supply contracts are priced based
on natural gas spot indices. To mitigate price volatility associated with gas
purchases, MichCon has reserved the right to fix the prices it pays under some
of these contracts. In order to capture declining gas prices during 1994,
MichCon fixed the price on approximately 34 Bcf of gas in advance of the month
of purchase. There was a further decline in gas prices during 1994. Had MichCon
not fixed these prices, its cost of gas would have been approximately $10.0
million (1.9%) lower in 1994.
MichCon filed its 1994 GCR reconciliation case with the MPSC in the first
quarter of 1995. In this case, the MPSC will decide whether MichCon's 1994 gas
costs were reasonable and prudent. In July 1995, an intervenor filed testimony
taking issue with some of MichCon's decisions. However, the MPSC Staff did not
file any testimony in this case. An order is expected at the end of 1995.
MichCon believes that it acted reasonably and prudently by fixing the gas
prices based upon the information available at the time.
Other Operating Expenses
Operation and maintenance expenses were higher in the 1995 quarter due to
the timing of uncollectible gas accounts expense and certain other operating
expenses. For the 1995 six-month period, the decrease in operation and
maintenance expenses primarily reflects a reduction in pension expense.
Operation and maintenance expenses increased for the 1995 twelve-month period
due to higher postretirement benefit costs being recognized as a result of the
new accounting requirements under Statement of Financial Accounting Standards
(SFAS) No. 106, "Employers' Accounting for Postretirement
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Benefits Other than Pensions." These costs are being recovered in rates that
became effective in January 1994. Management's continuing efforts to reduce
operating costs contributed to the decrease in operation and maintenance
expenses for the 1995 six-month period and partially offset the increase for
the 1995 quarter and twelve-month period.
In March 1995, the U.S. House of Representatives voted to eliminate all
funding for the Low-Income Home Energy Assistance Program (LIHEAP). However,
several weeks later the U.S. Senate voted to restore the program's $1.3 billion
appropriation. Delegates from the House and Senate later met and agreed upon a
LIHEAP target for 1996. The target, a decrease of more than $300 million from
what had originally been proposed, was part of a package vetoed by President
Clinton. During July 1995, the U.S. House Appropriations Committee adopted 1996
funding legislation that eliminates future energy assistance support. The House
is expected to support this funding bill. The Senate, which continues to
demonstrate strong bipartisan support for LIHEAP, is expected to take up the
1996 appropriations package in September. President Clinton has threatened to
veto the House proposal if not modified. MichCon continues its vigorous efforts
to maintain this funding. LIHEAP funding currently provides approximately $78
million in heating assistance to 385,000 Michigan households through the
Department of Social Services, with approximately 35% of the funds going to
MichCon customers. A portion of any decreased funding may result in increased
uncollectibles expense.
Depreciation and depletion increased in all 1995 periods mainly due to
higher plant balances, reflecting capital expenditures of $289.1 million over
the past two calendar years. The 1995 twelve-month period also reflects higher
depreciation rates that were implemented in January 1994.
Property and other taxes for the 1995 periods reflect a decrease in
Michigan single business taxes due primarily to lower earnings. In addition,
the 1995 periods also reflect lower property taxes due to changes in Michigan
legislation, partially offset by increased taxes due to higher property
balances.
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased in all 1995 periods due to lower
earnings from the Blue Lake gas storage venture, reflecting a reduction in
storage rates and higher interest expense. MCN's 50% interest in the Blue Lake
project is owned equally by Gas Distribution and Diversified Services.
MCN to acquire an interest in Missouri utility -- During the first
quarter of 1995, MCN agreed to acquire an approximately 50% interest in an
entity formed to construct, own and operate a natural gas transmission and
distribution system located in southern Missouri. The agreement is subject to
MCN obtaining assurance from the Securities and Exchange Commission (SEC) that
the acquisition is consistent with its exemption under the Public Utility
Holding Company Act of 1935. Construction of the system, which began in March
1995, is planned to be completed in three phases by early 1997 at a cost of
approximately $40 million. Operations are anticipated to begin during the
fourth quarter of 1995 when construction of the first phase is completed. The
475 mile pipeline system is expected to provide service to approximately 10,000
customers.
Other Income & Deductions
The increase in other income and deductions for all of the 1995 periods
reflects additional interest expense relating to the issuances of first
mortgage bonds of $70 million in the 1995 quarter and $80 million in September
1994.
Income Taxes
Income taxes decreased for all 1995 periods due primarily to reduced
earnings and the favorable resolution of prior years' tax issues.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Environmental Matters
As discussed in MCN's 1994 Annual Report on Form 10-K, MichCon previously
submitted a remedial action plan for a former manufactured gas plant site in
Muskegon, Michigan. The remedy includes limited excavation and disposal of
soils, a new soil cover and, if necessary, a ground water capture and treatment
system. During the 1995 quarter, the Michigan Department of Natural Resources
(MDNR) approved that plan and MichCon began the limited excavation and cover
portion of the remedy. Offsite work and installation of the ground water system
is contingent upon execution of an agreement with the state of Michigan.
In addition, MichCon was involved in litigation with an adjacent property
owner regarding another site. During the 1995 quarter, the property owner
agreed to dismiss the litigation.
MichCon Development Company, a 100% owned subsidiary of MichCon, has a
minority interest in four partnerships that are developing Harbortown, a
residential development that is being constructed on a 50 acre parcel along the
Detroit River. During the 1995 quarter, the MDNR approved a remedial action
plan that had been submitted by the Harbortown partnerships. The plan includes
certain landscaping requirements and, during future development, excavation
controls consistent with occupational safety and health regulations. MichCon
Development Company, along with the other general partner, executed an
agreement with the state of Michigan regarding implementation of the plan. No
further action will be taken by the MDNR.
Management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MCN's financial results.
Diversified Services
Earnings improve for all operating businesses -- The Diversified Services
group reported higher 1995 quarterly earnings from all of its operating units,
with combined results of $5.7 million ($.09 per share) compared to earnings of
$5.2 million ($.09 per share) for the same 1994 period. Earnings increased $2.3
million ($.03 per share) and $1.7 million ($.01 per share) for the 1995 six-
and twelve-month periods, respectively, reflecting higher earnings from both
the gas services and the computer operations services segments. The continued
growth in Diversified Services earnings was partially offset by increased
financing costs due to higher interest rates and the additional capital needed
to fund capital investments.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
--------------- --------------- ---------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Diversified Services Operations (in Millions)
Operating Revenues*
Gas Services $ 76.6 $ 84.2 $180.6 $187.7 $350.2 $327.5
Computer Operations Services 24.6 19.9 50.3 40.0 98.5 80.3
------ ------ ------ ------ ------ ------
101.2 104.1 230.9 227.7 448.7 407.8
------ ------ ------ ------ ------ ------
Operating Expenses*
Gas Services 67.3 77.3 160.7 176.0 315.1 301.6
Computer Operations Services 22.8 18.5 46.2 37.2 90.6 73.5
Corporate & Other 2.8 1.8 5.7 4.0 9.5 7.3
------ ------ ------ ------ ------ ------
92.9 97.6 212.6 217.2 415.2 382.4
------ ------ ------ ------ ------ ------
Operating Income (Loss)
Gas Services
Exploration & Production 4.3 2.8 9.9 3.2 20.3 5.5
Gas Marketing & Cogeneration 2.9 2.2 6.2 4.4 6.9 11.5
Gas Gathering & Processing 2.1 1.9 3.8 4.1 7.9 8.9
------ ------ ------ ------ ------ ------
9.3 6.9 19.9 11.7 35.1 25.9
Computer Operations Services 1.8 1.4 4.1 2.8 7.9 6.8
Corporate & Other (2.8) (1.8) (5.7) (4.0) (9.5) (7.3)
------ ------ ------ ------ ------ ------
8.3 6.5 18.3 10.5 33.5 25.4
------ ------ ------ ------ ------ ------
Equity in Earnings of Joint Ventures .5 1.5 1.4 2.3 3.3 4.3
------ ------ ------ ------ ------ ------
Other Income & (Deductions)*
Interest Income .2 .7 1.0 1.2 2.2 1.8
Interest Expense (2.3) (2.7) (6.5) (4.5) (13.9) (8.0)
Dividends on Preferred Securities of
Subsidiary (2.4) -- (4.7) -- (6.2) --
Minority Interest (.6) (.7) (1.2) (1.5) (2.6) (3.3)
Other 1.5 (.2) 1.1 (.2) .5 (.2)
------ ------ ------ ------ ------ ------
(3.6) (2.9) (10.3) (5.0) (20.0) (9.7)
------ ------ ------ ------ ------ ------
Income Before Income Taxes 5.2 5.1 9.4 7.8 16.8 20.0
------ ------ ------ ------ ------ ------
Income Taxes
Current and Deferred Provision 2.0 1.9 3.6 3.0 6.9 8.1
Federal Gas Production Tax Credits (2.5) (2.0) (4.8) (3.5) (9.2) (5.5)
------ ------ ------ ------ ------ ------
(.5) (.1) (1.2) (.5) (2.3) 2.6
------ ------ ------ ------ ------ ------
Net Income $ 5.7 $ 5.2 $ 10.6 $ 8.3 $ 19.1 $ 17.4
====== ====== ====== ====== ====== ======
<FN>
*Includes intercompany transactions
</TABLE>
Gas Services
Operating income increases 35% -- Gas services' increase in operating
income of $2.4 million, $8.2 million and $9.2 million for the 1995 quarter,
six- and twelve-month periods, respectively, primarily reflects higher earnings
from gas exploration & production operations. The increase for the 1995 quarter
also reflects improved results in the gas marketing & cogeneration business as
well as the gas gathering & processing business.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
----------- ----------- -------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Diversified Services Gas Statistics* (in Bcf)
Gas Sales
Gas Marketing & Cogeneration 32.6 32.6 76.1 71.1 147.3 126.1
Exploration & Production** 3.1 2.6 6.3 2.6 11.2 2.7
Transportation 7.2 4.7 14.4 10.4 24.6 21.3
---- ---- ---- ---- ----- -----
42.9 39.9 96.8 84.1 183.1 150.1
==== ==== ==== ==== ===== =====
Company Production 6.7 4.6 13.1 6.1 23.6 8.2
==== ==== ==== ==== ===== =====
Gas Processed 3.7 -- 6.9 -- 8.9 --
==== ==== ==== ==== ===== =====
<FN>
* 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.
</TABLE>
Exploration & production (E&P) operating income increased $1.5 million
for the 1995 quarter, and $6.7 million and $14.8 million for the six- and
twelve-month periods, respectively. The results reflect a significantly higher
level of gas produced due to the start-up of production in early 1993, as well
as production from properties that were acquired in mid-1994 and the
development of other new projects during 1994 and 1995. Additionally, E&P
operations have increased the earnings of the Diversified Services group
through the generation of increased federal gas production tax credits.
E&P operating results were also impacted by lower sales rates. However,
the lower sales rates were mitigated by MCN's risk management strategy, as
subsequently discussed. Additionally, operating results for the 1995 six- and
twelve-month periods were affected by lower unit operating costs being achieved
as production volumes have increased.
Gas marketing & cogeneration operating income for 1995 quarter and
six-month period increased $.7 million and $1.8 million, respectively, from the
comparable 1994 periods due to more favorable margins. Additionally, the 1995
six-month period reflects margins on a 7% increase in gas sales volumes. As
discussed below, margins were affected by the use of natural gas hedging
contracts.
Operating income for the 1995 twelve-month period decreased $4.6 million
despite an increase in gas sales of 21.2 Bcf. The decrease reflects higher
costs associated with increased storage and transportation capacity. The higher
storage and transportation costs were incurred to support further anticipated
increases in the level of gas sales in future periods.
Risk management strategy -- MCN primarily manages price risk through the
maintenance of a portfolio of gas supply and gas sales agreements. MCN uses
natural gas futures, options and swap contracts to manage net open positions
that give rise to price risk. As of June 30, 1995, net open positions over the
next ten years are minimal and therefore the price risk has been largely
hedged.
Gas gathering & processing operating income increased $.2 million for the
1995 quarter. Earnings were favorably affected by increased volumes transported
and treated through new pipeline extensions and gas processing plants. The
processing plants, which became operational in late 1994 and early 1995, reduce
carbon dioxide levels in Michigan Antrim gas.
Operating income for the 1995 six- and twelve-month periods was down $.3
million and $1.0 million, respectively, despite increases in volumes
transported and processed. The decreases reflect a reduction in Saginaw Bay's
average transportation rate due to the competitive transportation market for
Antrim gas in northern Michigan.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
In response to an increase in Michigan Antrim gas production, MCN has
partnered with others to meet a growing demand for transportation and
processing services. MCN will continue to both construct and acquire pipeline
extensions and processing plants which may interconnect with its existing Gas
Distribution and Diversified Services pipeline network.
Computer Operations Services
Operating income increases over 25% -- Computer operations services'
operating income increased $.4 million for the current quarter, and $1.3
million and $1.1 million for the 1995 six- and twelve-month periods,
respectively. The improvements reflect higher operating revenues from new
business added throughout 1994 and from increased services to existing
customers.
During the 1995 quarter, long-term contracts with two new customers were
signed representing approximately $10 million in annualized revenues. Migration
of these customers is anticipated to occur during the third quarter of 1995.
The new contracts reflect MCN's continuing efforts to grow the computer
services business and to diversify its customer base.
Corporate & Other
All 1995 periods reflect higher expenses associated with the development
of new projects.
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased during all 1995 periods. The
decrease for gas storage joint ventures reflects lower earnings from the Blue
Lake gas storage project due to a reduction in storage rates and higher
interest expense. Earnings from the gas marketing and gas processing joint
ventures have been impacted by the sale of a Canadian gas brokering partnership
and two gas processing facilities in the first quarter of 1995. The loss in
other joint ventures for the 1994 twelve-month period includes a reserve for
the write-off of assets related to the natural gas torch business.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
----------- ----------- -------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Equity in Earnings of Joint Ventures
(in Millions)
Gas Storage $1.0 $1.5 $2.3 $2.5 $ 4.0 $ 4.9
Gas Marketing & Cogeneration (.2) (.4) (.6) (.8) (1.1) (1.4)
Gas Gathering & Processing -- .5 .1 .9 .9 1.9
Other (.3) (.1) (.4) (.3) (.5) (1.1)
---- ---- ---- ---- ----- -----
$ .5 $1.5 $1.4 $2.3 $ 3.3 $ 4.3
==== ==== ==== ==== ===== =====
</TABLE>
In 1993, MCN acquired 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. In March 1995, MCN acquired the remaining 60% interest
in the partnership, giving MCN 100% control over the development of the storage
field. During the second quarter of 1995, MCN completed the sale of a 50%
interest in the project to a third party. The development of the storage field
is awaiting the negotiation of long-term agreements with potential customers.
Additionally, MCN has an ongoing effort to partner with others to acquire
or construct pipeline systems and is currently in negotiations with several
parties.
Other Income & Deductions
All 1995 periods reflect higher interest costs on long-term debt due to
higher interest rates and increased borrowings required to finance capital
investments in the Diversified Services operations, as well as dividends on
$100 million of preferred securities of a subsidiary which were issued in
November 1994. Other income and deductions for the 1995 periods includes the
reversal of an uncollectible reserve on an advance made to a joint venture.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Income Taxes
Income taxes for all 1995 periods were favorably impacted by increased
federal gas production tax credits related to E&P projects. This impact was
offset partially by taxes on improved pretax earnings in the 1995 quarter and
six-month period.
CAPITAL RESOURCES AND LIQUIDITY
Operating Activities
MCN's cash flow from operating activities totaled $269.5 million for the
1995 six-month period, decreasing $18.2 million from the comparable 1994
period. The decrease was due primarily to higher working capital requirements.
<TABLE>
<CAPTION>
6 MONTHS
---------------
1995 1994
------ ------
<S> <C> <C>
Cash Flow from Operating Activities (in Millions)
Gas Distribution $108.4 $107.8
Diversified Services 23.9 18.4
------ ------
132.3 126.2
Changes in Assets and Liabilities 137.2 161.5
------ ------
Cash Flow from Operating Activities $269.5 $287.7
====== ======
</TABLE>
Financing Activities
MCN sold 5.75 million shares of new common stock in a public offering
during the 1995 first quarter, generating net proceeds of approximately
$99 million. Proceeds from the common stock issuance were used to fund capital
expenditures, repay loans under bank credit agreements and for general
corporate purposes.
MCN also issues new shares of common stock pursuant to its Dividend
Reinvestment and Stock Purchase Plan and various employee benefit plans. During
1995, MCN anticipates the issuance of new shares of common stock pursuant to
these plans, generating approximately $17 million. During the first six months
of 1995, MCN issued approximately 446,000 shares, generating $8.6 million.
Gas Distribution
Cash and cash equivalents normally increase and short-term debt is
reduced in the first part of each year as gas inventories are depleted and
funds are received from winter heating sales. During the first six months of
1995, MichCon repaid $166.6 million of commercial paper. During the latter part
of the year, cash and cash equivalents decrease as funds are used to finance
increases in gas inventories and customer accounts receivable. To meet its
seasonal short-term borrowing needs, MichCon normally issues commercial paper
which is backed by credit lines with several banks. MichCon maintained credit
lines of up to $109 million which supported its commercial paper program. No
commercial paper was outstanding as of June 30, 1995. In July 1995, new credit
lines were negotiated to allow for borrowings of up to $250 million. MichCon's
commercial paper is currently rated "A-1" or its equivalent by the major rating
agencies.
In May 1995, MichCon filed a shelf registration statement with the SEC
for the issuance of up to $150 million of first mortgage bonds. This filing,
along with MichCon's existing shelf registrations of $30 million, provided
MichCon the ability to issue up to $180 million of first mortgage bonds. During
the 1995 quarter, MichCon issued an aggregate of $70 million of first mortgage
bonds under these registration statements. The proceeds from the debt issuance
were used to repay short-term obligations
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
and will also be used to finance MichCon's capital expenditures and for general
corporate purposes. 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. In June 1995, Duff & Phelps raised its "A" rating on
MichCon's first mortgage bonds to "A+." MichCon's first mortgage bonds carry
the equivalent of an "A" rating by the other major rating agencies.
In 1994, MichCon began a Trust Demand Note program which allows MichCon
to borrow up to $25 million. Borrowings under this program were repaid during
the second quarter of 1995.
Construction of the $40 million transmission and distribution system
located in southern Missouri will be funded through $25 million of construction
financing and $15 million of partner contributions. Through June 30, 1995, MCN
has invested $6.6 million in the project. Construction financing is expected to
be obtained by the partnership in the third quarter of 1995 and will be
guaranteed or supported by MCN until permanent financing is established.
Diversified Services
In anticipation of future permanent capital requirements, MCN Investment
and MCN plan to file a joint shelf registration with the SEC during the third
quarter of 1995 for the issuance of up to $200 million of debt securities. MCN
Investment's capital requirements and general market conditions will affect the
timing and amount of future debt issuances.
As of June 30, 1995, MCN Investment maintained credit lines of $320
million to finance capital investments and working capital requirements of its
subsidiaries. In July 1995, MCN Investment initiated a $400 million commercial
paper program and increased its credit lines to $400 million to allow for all
commercial paper issuances to be backed by such lines. MCN Investment is
currently refinancing all borrowings as they mature under the credit lines with
commercial paper. MCN Investment's commercial paper is currently rated the
equivalent of "A-2" or better by the major rating agencies.
In order to finance continued investments in exploration and production
activities, MCN's E&P subsidiary anticipates the establishment of a five year
term loan with a bank during the third quarter of 1995. The loan agreement will
allow for borrowings of up to $100 million, based on current gas and oil
reserves, at certain alternative variable rates at MCN's option. Additional
borrowings are permitted as MCN's reserve base grows.
Investing Activities
Capital investments in 1995 to exceed $600 million -- Capital investments
increased $57.0 million in the first six months of 1995 primarily due to higher
capital expenditures for Gas Distribution investments and a Diversified
Services joint venture cogeneration project. Gas Distribution capital
expenditures included construction of distribution lines to reach communities
not previously served by MichCon.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Concluded)
<TABLE>
<CAPTION>
6 MONTHS
---------------
1995 1994
------ ------
<S> <C> <C>
Capital Investments (in Millions)
Consolidated Capital Expenditures:
Gas Distribution $ 76.4 $ 50.4
Diversified Services 104.9 103.2
------ ------
181.3 153.6
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Gas Cogeneration 24.9 --
Other 6.9 2.5
------ ------
31.8 2.5
------ ------
Minority Partners' Share of Consolidated Capital
Expenditures (.1) (.1)
------ ------
Total Capital Investments $213.0 $156.0
====== ======
</TABLE>
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 $300 million to $650 million annually over the next
several years. For 1995, MCN anticipates investing approximately $250 million
in Gas Distribution to add new customers and develop new gas transportation
markets. Another $400 million is expected to be spent in Diversified Services,
of which $250 million will be in exploration and production, $40 million to
develop the Michigan Power cogeneration facility and the remainder primarily in
gas gathering and processing 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. As it expands
its business, MCN's capitalization objective is to maintain a strong balance
sheet with a ratio of approximately 50% debt to 50% equity, excluding
nonrecourse project debt. Including nonrecourse debt, MCN has targeted a ratio
of approximately 60% debt to 40% 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.
ACCOUNTING PRONOUNCEMENTS
During the 1995 quarter, MCN adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets," which requires the impairment of property and
intangibles to be considered whenever evidence suggests a lack of
recoverability. The Statement also modifies existing practice and guidance with
respect to impairment of regulatory assets under SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." Under SFAS No. 121, regulatory
assets recorded as a result of SFAS No. 71 must continue to be probable of
recovery in rates at all times, rather than only at the time the regulatory
asset is recorded. As such, regulatory assets currently recorded by the Gas
Distribution group may require adjustment in the future if recovery is no
longer probable. Adoption of this Statement had no effect on MCN's financial
statements.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10-1 Special Retention Agreement.
27-1 Financial Data Schedule.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN CORPORATION
Date: August 7, 1995 By: /s/ PATRICK ZURLINDEN
-------------------------------
Patrick Zurlinden
Vice President, Controller
and Chief Accounting Officer
18
EXHIBIT 10-1
SPECIAL RETENTION AGREEMENT
This Special Retention Agreement ("Agreement") by and between MCN Corporation, a
Michigan corporation ("Company") and Rai Bhargava ("Executive") is made as of
the 1st day of January, 1995 (the "Effective Date").
The Board of Directors of the Company ("Board") has determined that it is in the
best interest of the Company and its shareholders to assure that the Company
will have the continued dedication and expertise of the Executive. The Board
believes that retention of Mr. Bhargava is critical in order to attain projected
short-term and long-term financial goals for MCN Investment Corporation
("MCNIC"), the subsidiary which is expected to be the primary source of growth
pursuant to the Company's strategic direction. Therefore, in order to accomplish
these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Agreement Period. The Executive hereby agrees to remain in the
employ of the Company, in accordance with the terms and provisions of this
Agreement, for the period commencing on the Effective Date and ending on
December 31, 2002 (the "Agreement Period"). The Executive shall remain an
at-will employee but shall be entitled to any explicit vested payments provided
in this Agreement.
2. Terms of Agreement. (a) Executive's Obligations. During the
Agreement Period, and excluding any periods of vacation and sick leave to which
the Executive is entitled, the Executive agrees to devote reasonable attention
and time during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to perform
faithfully and efficiently such responsibilities. During the Agreement Period it
shall not be a violation of this Agreement for the Executive to (A) sit on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement. It is expressly understood and agreed
that to the extent any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company.
1
<PAGE>
(b) Compensation. The Executive shall be eligible for an annual
award of Restricted Shares (as defined below) during each calendar year of the
Agreement Period ("Award Year").
(i) Restricted Shares. For purposes of this Agreement, "Restricted
Shares" shall mean shares of Company common stock that are restricted as to
transferability and are subject to forfeiture if the Executive's employment is
terminated for Cause (as defined in Section 3(c)) or for other than Good Reason
(as defined in Section 3(d)).
(ii) Value of Award. The value of Restricted Shares to be awarded to
the Executive under this Agreement for an Award Year will be determined by the
achievement of MCNIC return on equity ("ROE") goals related to MCNIC Net Income
(as defined below) as follows:
(A) 5% of Net Income in excess of Threshold ROE but less than Target
ROE; plus
(B) 3% of Net Income in excess of Target ROE;
but in no event shall the value of the Restricted Shares awarded in regards to
an Award Year be in excess of 1.5% of MCNIC's total Net Income for such year.
The value of Restricted Shares to be awarded during the Agreement Period shall
not exceed $4,000,000 (based on the value as of the date of the award), unless
otherwise authorized by the Board.
(iii) Common Equity. For purposes of this Agreement, "Common Equity"
shall mean MCN Corporation common equity reduced by (A) Michigan Consolidated
Gas Company's common equity and (B) the common equity of any other subsidiaries
of MCN Corporation that are specifically designated for exclusion by the
Company.
(iv) ROE. For purposes of this Agreement, ROE shall be calculated by
dividing Net Income by the simple arithmetic average of beginning of the
calendar year and end of the calendar year Common Equity.
(v) Threshold ROE and Target ROE. For purposes of this Agreement,
Threshold ROE and Target ROE are initially set at 11% and 14%, respectively for
1995. For 1996 and subsequent years, Threshold ROE and Target ROE shall increase
to 12% and 15%, respectively. At the discretion of the Board, the Threshold ROE
and the Target ROE for an Award Year may be increased or decreased on or before
the date of the February Board meeting for such Award Year.
2
<PAGE>
(vi) Net Income. For purposes of this Agreement, "Net Income" shall
mean MCN Corporation net income available for common stock less (A) Michigan
Consolidated Gas Company's net income available for common stock and (B) the net
income available for common stock of any other subsidiaries of MCN Corporation
that are specifically designated for exclusion by the Company.
(vii) Number of Restricted Shares Awarded. The number of Restricted
Shares awarded for an Award Year shall be determined using the closing price of
MCN Corporation common stock on the New York Stock Exchange Composite Tape on
the day before the award is made.
(viii) Time of Award. The Company shall award the Restricted Shares
to the Executive on the date of the February Board meeting following the Award
Year for which the Restricted Shares are awarded.
(ix) Dividends. Dividends shall be paid in cash to the Executive in
the same amount and at the same time as dividends are paid on the Company's
outstanding common stock.
(x) Certification of Calculations. All calculations under this
Section 2 of the Agreement shall in the first instance be certified by the
Company's General Auditor. Any disputes shall be referred to the Company's
Independent Auditors (currently, Deloitte and Touche) whose conclusion shall be
binding and not subject to review in any other forum.
3. Termination of Employment. (a) Death. The Executive's
employment shall terminate immediately upon the Executive's death during the
term of this Agreement.
(b) Disability. The Executive's employment shall terminate on the
30th day after receipt of notice from the Company that the Board has determined
the Executive to be disabled ("Disability Effective Date"). For purposes of this
Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative; such agreement as to acceptability shall not be withheld
unreasonably.
(c) Cause. The Company may terminate this Agreement during the
Agreement Period for Cause. For purposes of this Agreement, "Cause" shall
mean
3
<PAGE>
(i) repeated violations by the Executive of the Executive's
obligations under Section 2(a) (other than as a result of Disability) which are
demonstrably willful and deliberate on the Executive's part, which are committed
in bad faith or without reasonable belief that such violations are in the best
interests of the Company;
(ii) the commitment of malfeasance, embezzlement or fraud by the
Executive; or
(iii) the conviction of the Executive of a felony.
(d) Good Reason. The Executive's employment may by terminated
by the Executive for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities held, exercised
and assigned at any time during the 90-day period immediately preceding the
Effective Date, or any other action by the Company which results in a diminution
in such position, authority, duties or responsibilities that a reasonable man
holding a similar position would find untenable, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt on notice thereof given by the
Executive;
(ii) the Company's requiring the Executive to be based at any office
or location other than the location where the Executive was employed immediately
preceding the Effective Date ("Current Location") or any office which is the
headquarters of the Company and such office is more than 35 miles from the
Current Location; or
(iii) any purported termination by the Company of this Agreement
other than as expressly permitted by this Agreement.
(e) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 9(b). For
purposes of this Agreement, a "Notice of Termination" means a written notice
which
(i) indicates the specific termination provision in this
Agreement relied upon;
(ii) to the extent applicable, sets forth in reasonable
detail the facts and
4
<PAGE>
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated; and
(iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall be not more than 15 days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(f) Date of Termination. For purposes of this Agreement, "Date
of Termination" means
(i) if the Executive's employment is terminated by the Company for
Cause, or by the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein (which date shall be not more
than 15 days after the giving of such notice), as the case may be;
(ii) if the Executive's employment is terminated by the Company
other than for Cause or Disability, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination; and
(iii) if the Executive's employment is terminated by reason of death
or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
4. Vesting and Payment of Restricted Shares. (a)
Completion of Agreement Period. If the Executive remains in the employ of
the Company to the end of the Agreement Period, all Restricted Shares shall
vest as of the end of such Agreement Period. The Company shall deliver all
vested Restricted Shares to the Executive within 30 days of such vesting.
(b) Termination Due to Good Reason, Death or Disability. If, during
the Agreement Period, the Executive shall terminate employment for Good Reason,
the Company shall terminate the Executive's employment other than for Cause, or
the Executive's employment is terminated by reason of the Executive's Death or
Disability, this Agreement shall terminate and all Restricted Shares awarded to
the Executive through the Date of Termination shall immediately vest and be
delivered to the Executive or his estate or beneficiary, as applicable, within
30 days of the Date of Termination.
5
<PAGE>
(c) Termination Due to Cause; Other than for Good Reason. If the
Company terminates the Executive's employment for Cause during the Agreement
Period, this Agreement shall terminate and all Restricted Shares awarded to the
Executive through the Date of Termination shall be immediately forfeited. If the
Executive terminates employment during the Agreement Period, other than a
termination for Good Reason, this Agreement shall terminate and all Restricted
Shares awarded to the Executive through the Date of Termination shall be
immediately forfeited.
(d) Involuntary Termination of Mr. Alfred Glancy. If the Company
terminates the employment of Mr. Alfred Glancy, or if Mr. Glancy dies or becomes
disabled while employed by the Company, any Restricted Shares awarded to the
Executive up through the date of Mr. Glancy's termination, death or disability
shall immediately vest and be delivered to the Executive within 30 days of the
date of Mr. Glancy's termination, death or disability. After the date of Mr.
Glancy's termination, death or disability, this Agreement shall remain in effect
through the end of the Agreement Period and all Restricted Shares awarded to the
Executive after such date shall vest immediately when awarded and shall be
delivered to the Executive at the time described in Section 2(b)(viii).
(e) Voluntary Termination of Mr. Alfred Glancy. If Mr. Alfred
Glancy voluntarily terminates employment with the Company, any Restricted
Shares awarded to the Executive up through Mr. Glancy's termination date
shall immediately vest; however, delivery of such shares shall not be made
before the end of the Agreement Period.
5. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor shall anything herein
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of, or any contract or
agreement with, the Company or any of its affiliated companies at or subsequent
to the Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement.
6. Full Settlement: Resolution of Disputes. (a) If there shall
be any dispute between the Company and the Executive (i) in the event of any
termination of the Executive's employment by the Company, whether such
termination was for Cause, or (ii) in the event of any termination of
employment by the Executive, whether Good Reason existed, then, unless
and until there is a final, nonappealable judgment by a court
6
<PAGE>
of competent jurisdiction declaring that such termination was for Cause or that
the determination by the Executive of the existence of Good Reason was not made
in good faith, all awarded Restricted Shares the Company would be required to
pay or provide pursuant to Section 4(b) if such termination were by the
Company without Cause or by the Executive with Good Reason shall be held in
abeyance. If it is ultimately adjudged by such court that Cause existed or Good
Reason did not exist, all Restricted Shares held in abeyance shall be
immediately forfeited. If it is ultimately adjudged by such court that Cause did
not exist or Good Reason did exist, all Restricted Shares held in abeyance shall
vest and be distributed to the Executive within 30 days of such judgement.
(b) The Company agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the outcome thereof)
by the Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement), plus in each case dividends that
otherwise would have been paid during the period the Restricted Shares were held
in abeyance.
7. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 7 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
8. Successors. (a) This Agreement is personal to the Executive
and without the prior written consent of the Company shall not be assignable
by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
7
<PAGE>
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets an
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
9. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
--------------------
At the most current address of record designated in
the Executive's personnel file
If to the Company:
------------------
MCN Corporation
500 Griswold Street
Detroit, Michigan 48226
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
8
<PAGE>
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withhold
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or ally other provision of this Agreement
or the failure to assert any right the Executive or the Company may have
hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 3(d)(i)-(iv), shall not
be deemed to be a waiver of such provision or right or any other provision or
right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, the
Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.
(g) The Executive and the Company acknowledge that this Agreement
does not constitute a plan and is not subject to the Employee Retirement Income
Security Act of 1974, as amended (also known as "ERISA").
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ P. K. Bhargava
-----------------------------------
MCN Corporation
By: /s/ A. R. Glancy III
--------------------------------
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Consolidated Statement of Income and the Consolidated Statement
of Financial Position and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 44,458
<SECURITIES> 0
<RECEIVABLES> 207,614
<ALLOWANCES> 21,040
<INVENTORY> 87,549
<CURRENT-ASSETS> 417,127
<PP&E> 2,772,538
<DEPRECIATION> 1,168,099
<TOTAL-ASSETS> 2,256,635
<CURRENT-LIABILITIES> 411,762
<BONDS> 706,225
100,000
0
<COMMON> 660
<OTHER-SE> 654,320
<TOTAL-LIABILITY-AND-EQUITY> 2,256,635
<SALES> 0
<TOTAL-REVENUES> 831,092
<CGS> 0
<TOTAL-COSTS> 711,880
<OTHER-EXPENSES> 697
<LOSS-PROVISION> 8,948
<INTEREST-EXPENSE> 26,862
<INCOME-PRETAX> 91,084
<INCOME-TAX> 27,182
<INCOME-CONTINUING> 63,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,902
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0
</TABLE>
