==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each Exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
Common Stock, $.01 Par Value Per Share New York Stock Exchange
9-3/8% Cumulative Preferred Securities, Series A* New York Stock Exchange
<FN>
- ----------------
* Issued by MCN Michigan Limited Partnership. The payments of dividends and
payments on liquidation or redemption are guaranteed by MCN Corporation.
</TABLE>
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. ________
The aggregate market value of MCN Corporation Common Stock, $.01 par
value per share, held by non-affiliates as of February 26, 1996 was $1.628
billion based on 66,776,428 outstanding shares and the closing price on that
day (New York Stock Exchange Composite Transactions).
Documents Incorporated by Reference:
Portions of MCN's 1995 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5,6,7 and 8 and portions of MCN's February 1996
definitive Proxy Statement are incorporated by reference in Part III.
==============================================================================
<PAGE>
KEY TO ABBREVIATED TERMS
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. To
determine the Bcf equivalent (Bcfe) for oil,
multiply the number of barrels (in millions) by
six.
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.
Coalbed Methane ......... Natural Gas formed during the coalification
of plant material into coal. Drilling a well into
the coal and dewatering the coal seam will cause a
reduction in pressure, releasing natural gas.
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 day's average temperature is below
65 degrees Fahrenheit.
Diversified Energy group MCN's exploration and production, gas
gathering and processing, gas storage, gas
marketing, cogeneration 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.
ii
<PAGE>
KEY TO ABBREVIATED TERMS
(continued)
FERC .................... Federal Energy Regulatory Commission; a federal
agency that determines the interstate rates and
regulations of interstate pipelines.
Gas Gathering ........... The process of collecting 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.
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 Company 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 of MCN's Diversified Energy groups
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.
iii
<PAGE>
KEY TO ABBREVIATED TERMS
(concluded)
Normal Weather ......... The average daily temperature within MCN's
Gas Distribution service area during a recent
30-year period.
Order No. 636 .......... An order issued in 1992 by the FERC, with subsequent
related orders, requiring interstate pipeline
companies to separate or unbundle their various
pipeline services.
Saginaw Bay ........... Saginaw Bay Pipeline Company and Saginaw Bay Lateral
Company; wholly-owned gas gathering subsidiaries of
MichCon.
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.
iv
<PAGE>
TABLE OF CONTENTS
Page
Contents Number
-------- ----------
Part I
Item 1. Business ............................................ 1
Item 2. Properties .......................................... 16
Item 3. Legal Proceedings ................................... 18
Item 4. Submission of Matters to a Vote of Security Holders . 18
Executive Officers of the Registrant ................ 19
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................. 20
Item 6. Selected Financial Data ............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 20
Item 8. Financial Statements and Supplementary Data ......... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................. 20
Part III
Item 10. Directors and Executive Officers of the Registrant .. 21
Compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended .................... 21
Item 11. Executive Compensation .............................. 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management .......................................... 21
Item 13. Certain Relationships and Related Transactions ...... 21
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K ......................................... 21
Signatures ....................................................... 26
v
<PAGE>
PART I
ITEM 1. 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 subholding company for various
energy businesses and a computer operations management firm. MCN, a Michigan
corporation organized in 1988, is exempt from most provisions of the Public
Utility 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 20. At December 31, 1995, MCN and
its subsidiaries had 3,777 employees.
BUSINESS SEGMENTS
MCN's major business segments are Gas Distribution and, within the
Diversified Energy group, Gas Services and Computer Operations Services.
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 1.2 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: exploration
and production, gas gathering and processing, gas storage and gas marketing
and cogeneration.
Computer Operations Services is the largest Michigan-based computer operations
management firm and one of the leading computer services providers in the
United States. The Genix Group provides computer management, data processing
and related services to approximately 100 corporate clients.
1
<PAGE>
GAS DISTRIBUTION
Gas Sales 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 -- Gas Distribution also provides
transportation service within Michigan to pipelines, gas marketers,
producers and other local distribution companies that own the natural
gas, but are not the ultimate consumer.
In January 1996, MCN consolidated its northern Michigan pipeline
operations through the transfer of its Michigan gathering and transportation
network from its Diversified Energy group to its Gas Distribution group. The
transfer was made in order to unify MCN's Michigan gathering pipeline
activities within one business unit. The segment information included herein
is reported as though the combined intrastate pipeline operations were part of
Gas Distribution for all periods presented.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues (In millions of dollars)
Gas Sales ...................................... $ 931.9 $ 969.0 $ 979.9
End User Transportation ........................ 80.8 76.5 71.7
Intermediate Transportation .................... 42.0 39.4 31.4
-------- -------- --------
Total Sales and Transportation ............. 1,054.7 1,084.9 1,083.0
-------- -------- --------
Conservation Programs, Storage Service and other 52.9 52.1 58.5
-------- -------- --------
Total Operating Revenues ................... $1,107.6 $1,137.0 $1,141.5
======== ======== ========
Markets (Bcf)
Gas Sales ...................................... 209.8 204.4 205.4
End User Transportation ........................ 145.8 140.0 128.6
Intermediate Transportation .................... 374.4 323.0 302.7
-------- -------- --------
Total Sales and Transportation ............. 730.0 667.4 636.7
======== ======== ========
</TABLE>
Note: 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.
<TABLE>
<CAPTION>
Effect of Weather on Gas Markets and Earnings
- ------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Percentage Colder (Warmer) than Normal 0.3% (4.2)% (2.2)%
Increase (Decrease) from Normal in:
Gas Markets (in Bcf) 1.5 (4.4) (4.3)
Net Income (in Millions) $ 1.4 $ (4.0) $ (3.7)
</TABLE>
2
<PAGE>
Gas Sales: Revenues declined by $37.1 million in 1995 due to the
pass-through to customers of lower cost of gas purchased. This market
represents 29% of total deliveries and produced 77% of Gas Distribution's
gross profit margin from sales and transportation services (Gross Profit
Margin). The average margin per Mcf from gas sales in 1995 was $2.10. A
majority of the sales to the approximately 18,000 net increase in customers
were offset by lower consumption per customer, primarily related to the
installation of more energy efficient equipment.
Competition in the gas sales market comes primarily from alternative
fuels such as electricity, propane, and to a lesser degree, oil and wood, and
in a few areas from other natural gas providers. Natural gas continues to be
the preferred fuel for Michigan residences and businesses. Nearly every
residential and commercial developer in MichCon'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.
Gas Distribution continues to focus on the needs of customers and the
marketplace in order to position itself as the preferred provider of
natural gas within Michigan. To accomplish this, MichCon will increase
efforts to reduce cost of gas and operating costs, and will take
advantage of growth opportunities to expand to new geographic areas.
For example, Gas Distribution offers the financing of distribution lines
and gas appliances to encourage potential customers to utilize natural gas.
Offering a variety of gas-related services, such as appliance repair
and equipment leasing, should also increase MichCon's penetration into
existing markets.
Gas Distribution continues its commitment to maintain low gas costs.
During 1995, its annual average cost of gas rate of $2.36 per Mcf was at the
lowest level since 1979, meeting its objective of being in the lowest quartile
for costs of gas in Michigan as well as neighboring states. In addition, Gas
Distribution 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.
Gas Distribution's Area Expansion Program (AEP) is intended to spur
demand for natural gas in areas currently not served, primarily in the
residential and small commercial markets. By financing the cost of main
extensions, this program makes it easier for users of other higher cost fuels,
such as propane and fuel oil, to consider using natural gas for space heat and
other appliances. The AEP, which reaches rural and developing areas not
currently using natural gas, has contributed to the 18,068, 12,559 and 11,821
net increases in customers in 1995, 1994 and 1993, respectively. In 1995, 17
new areas of Michigan were served by MichCon, bringing to 117 the total number
of new areas added since 1984.
Gas Distribution's market share for residential heating customers in the
communities in which it serves is approximately 85%. While this saturation
rate is high, there continues to be significant growth opportunities through
conversion of existing homes as well as from new construction. Gas
Distribution continues to grow the industrial and commercial markets by
aggressively facilitating the use of existing gas technologies and equipment.
During 1995, MCN agreed to acquire a 47.5% interest in a partnership
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 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. Initial operations began during November 1995 when
construction of the first phase was completed. The 475 mile pipeline system,
when completed, is expected to provide service to approximately 10,000
customers.
End User Transportation: End user transportation deliveries increased in
1995 due to a higher level of usage by large-volume commercial and industrial
customers. Additional deliveries to gas cogeneration facilities and colder
weather also contributed to the increased deliveries. In 1995, this market
accounted for 20% of total gas deliveries and produced 15% of Gross Profit
Margin.
3
<PAGE>
At December 31, 1995, Gas Distribution had end user transportation
agreements representing annual volumes of 143 Bcf. Approximately 69% of these
volumes are under contracts that extend to 1997 or beyond and include
virtually all of the large, and most price sensitive, customers. The contracts
for the remaining volumes are typically one-year contracts that expire at
various times during 1996 and relate to a large number of low volume
users with relatively low price sensitivity. Negotiations have commenced with
customers whose contracts expire in 1996.
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 has been an expanding market
for natural gas. In 1995, this market accounted for approximately 24 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 for gas-burning equipment may be required.
The primary focus of competition in this market is total cost of fuel.
Some large commercial and industrial customers have the capacity to switch to
alternative fuel sources including coal, electricity, oil and steam. 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 and reliable supply
through the 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, Gas Distribution has been successful in
converting many customers' facilities to natural gas from alternative fuels
and in retaining those customers after conversion. Also, in the past several
years, Gas Distribution has not experienced any fuel switching of any
significance by its customers. In 1995, approximately 27 Bcf of MichCon's
transportation deliveries were to customers who displaced coal with natural
gas.
End user transportation expanded further in 1995 with the completion of
the Michigan Power cogeneration facility. During the third quarter of 1994,
MCN Investment and Destec Energy began construction of a 123 megawatt
cogeneration plant in Ludington, Michigan. In October 1995, the plant was
completed and MichCon began providing end user transportation of the natural
gas needed to fuel the plant, approximately nine Bcf annually.
Intermediate Transportation: This service accounts for 51% of total gas
volumes, but, due to the lower rate charged for this service, represents only
8% of Gross Profit Margin.
Gas Distribution's extensive transmission pipeline system has enabled it
to increase the volumes transported 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. In 1995, transportation volumes increased due to additional volumes
transported for ANR and increased transportation of Antrim gas for Michigan
gas producers and brokers.
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 1995, the Saginaw
Bay pipeline transported an average of 58.1 MMcf of natural gas per day and
related liquids. Gas volumes transported on the Saginaw Bay pipeline have
declined over the past several years as production of the Prairie du Chien
reserves begin their normal decline. Effective in January 1996, the
transportation rate of one customer will decrease 40% in accordance with the
terms of a 15-year contract that reduces the transportation rate for the last
ten years of the agreement. Revenues from the customer subject to the rate
decrease totaled $6.0 million in 1995. Gas Distribution will continue to look
at new sources of volume and revenue to increase the profitability of this
asset.
4
<PAGE>
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 almost tripled since 1991, and have resulted from time to
time in capacity constraints on MichCon's northern Michigan pipeline system.
In order to meet the increased demand, MichCon filed a proposal before the
MPSC in 1994 to construct facilities to expand transportation capacity. In
March 1995, the MPSC approved MichCon's proposal. Construction of the 65 mile
pipeline began during the 1995 second quarter and will be completed by June
1996. The expansion project will total approximately $40 million for
additional pipeline and related facilities and is expected to transport
approximately 135 Bcf of Antrim gas annually, generating new revenues of
approximately $8 million per year. In addition, MCN's Diversified Energy group
will invest in new gas processing facilities related to the expansion.
In June 1995, 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 transportation system and will
enable MichCon to expand its intermediate transportation capabilities.
Construction of the pipeline is expected to be completed in early 1997.
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,
remain 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.
MichCon receives a significant amount of its heating assistance funding
from the Low-Income Home Energy Assistance Program (LIHEAP). Congress has
reduced a substantial portion of the program's funding for the 1996 fiscal
year, and there are proposals to eliminate all program funding in future
years. Michigan's share of LIHEAP funds were reduced from $78 million in
fiscal year 1995 to $47.5 million in 1996. During 1995 and 1994, $27.3 million
and $27.0 million in LIHEAP funds assisted approximately 112,000 and 131,000
MichCon customers, respectively. A portion of the decreased funding may result
in increased uncollectibles expense. MichCon is currently working with federal
and state officials to identify ways to obtain energy assistance for
low-income customers from other avenues, and is taking actions to minimize any
impact that reductions in LIHEAP funding would have on MCN's financial
statements.
In September 1994, MichCon filed for MPSC approval to implement its
three-year, $26 million Demand Side Management Plan (DSM Plan). The DSM Plan
included proposals for continuation of several energy conservation programs
targeted at low-income customers and several innovative programs intended to
help other MichCon customers reduce their energy costs. MichCon intended to
implement its surcharge-funded DSM Plan by October 1995. In its order issued
in November 1995, the MPSC rejected the plan and found that MichCon's energy
conservation program surcharge should be discontinued.
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 1995, Citizens' purchases
were 97% from an affiliated company that had access to long-term supplies and
3% from other non-affiliated suppliers.
5
<PAGE>
One of MCN's objectives for its Gas Distribution businesses is to rank
in the lowest quartile for cost of gas in Michigan and neighboring states. As
a result of efforts to lower its cost of gas, including extensive contract
renegotiations, increased use of spot market-priced purchases and the use of
available storage, Gas Distribution's gas costs declined to $2.36 per Mcf in
1995, a reduction of 11% from 1994. Gas Distribution's gas costs have
decreased 45% in the last ten years.
<TABLE>
<CAPTION>
Gas Distribution -- Sources of Gas Supply (Bcf)
- ------------------------------------------------------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Firm Suppliers:
Michigan Producers .... 90.9 86.0 92.7
Interstate Suppliers .. 18.2 64.3 80.4
Canadian Suppliers .... 31.5 29.4 15.4
Spot Market ............... 55.1 37.2 13.1
------ ------ ------
195.7 216.9 201.6
====== ====== ======
</TABLE>
Gas Distribution purchased 47% of its 1995 supply from Michigan
producers, 37% from producers in the southern and midcontinent regions of the
United States and 16% from Canadian producers. These supplies are complemented
by 130 Bcf of working storage capacity from storage fields owned and operated
in Michigan.
The 1995 and 1994 increases in volumes associated with Spot Market are
due to the subsequent discontinuance of MichCon purchases of gas from ANR as a
result of FERC Order No. 636, as discussed below.
FERC Order No. 636: In 1992, the FERC issued Order No. 636 which
required interstate pipelines to separate their pipeline sales service into
its various service components. The order also permitted interstate pipelines
to recover their prudently incurred transition costs resulting from
restructuring. 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.
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 transportation requirements
thereby minimizing pipeline fixed charges.
During 1995 and 1994, ANR filed several requests for recovery of these
transition costs. MichCon accrued its portion of these costs totaling $6.8
million and $5.4 million, of which $5.0 million and $3.9 million are reflected
in cost of gas, in 1995 and 1994, respectively. The MPSC has held that these
transition costs are recoverable through the GCR mechanism as paid and,
therefore, a regulatory 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 the transition costs will have no significant
effect on MCN's financial statements.
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 395 MMcf per day of supply for MichCon
under these agreements, while Great Lakes is obligated to transport 30 MMcf
per day. These transportation contracts expire on various dates between 1999
and 2011.
6
<PAGE>
MichCon also has contracts with independent Michigan producers that
expire on various dates through 2009. A portion of these contracts expire in
1996. MichCon has begun discussions with several producers to limit the cost
of gas purchases after 1996.
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 1994, the FERC issued an order
permitting Panhandle to seek reimbursement of the $4.4 million in
interest from MichCon. MichCon's request for rehearing of the 1994
order was denied. MichCon has appealed the issue to the D.C. Circuit Court. If
MichCon is ultimately unsuccessful in defeating Panhandle's claim, it is
anticipated that these costs will be recoverable through the GCR mechanism
and, therefore, a regulatory asset has been recorded for their future
recovery.
At December 31, 1995, MichCon owned and operated five natural gas
storage fields in Michigan with a working storage capacity of approximately
130 Bcf. These facilities play an important role in providing reliable and
cost-effective service. 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 1995, MichCon's maximum one-day sendout exceeded 2.2
Bcf, of which approximately 70% came from its underground storage fields.
MichCon's gas distribution system has a maximum daily sendout capability of
2.7 Bcf, with approximately 70% coming from underground storage. MichCon also
sells a portion of its natural gas storage capacity to an affiliated company
and third parties.
Regulation and Rates
MichCon is subject to the jurisdiction of the MPSC as to various phases
of its operations, including gas sales rates, service and accounting. Citizens
rates are set by the Adrian Gas Rate 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 evident by the efforts underway to change the current form
of regulation. In January 1996, the Governor of Michigan submitted to the MPSC
his recommendations for utility reform, designed to make Michigan more
competitive in energy costs. If the Governor's recommendations are adopted,
the current form of regulation, based on rate of return and cost of service,
may be replaced by a form that is based on price caps or other incentives. The
proposed form of regulation is consistent with a competitive environment and
would promote efficient and cost-effective products and services. The gas
industry is moving towards the unbundling of locally provided gas services. If
this occurs, all customers, including those at the residential level, may be
able to choose their own gas supplier while Gas Distribution continues to move
the gas to the ultimate user. Gas Distributions' efficient operations and well
managed gas supply portfolio will prepare it to take full advantage of this
opportunity. As the MPSC evaluates expanded competition for the electric and
natural gas industries within the State, MichCon will continue its active
involvement.
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. The higher rates include $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 remaining balance of this initial reserve
at December 31, 1995 is approximately $3.5 million. Any excess costs are to be
amortized over a ten year period beginning in the year subsequent to the year
environmental investigation and remediation costs are paid. The recovery of
any remediation costs incurred will be reviewed in a future rate case.
7
<PAGE>
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 expense.
In 1994, Citizens entered into a new rate agreement with the municipal
commission that sets Citizens' rates. Under the terms of this agreement,
Citizens received a 3% rate increase and will freeze its 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 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 $0.4 million applicable to GCR sales
customers and $0.1 million applicable to transportation customers.
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. In February 1996, the MPSC
issued an order finding that all of MichCon's 1994 gas costs were reasonable
and prudent, and made no disallowance of gas costs as a result of MichCon
fixing gas prices on a portion of its gas purchases.
In February 1996, MichCon filed its 1995 GCR reconciliation case
indicating an under-recovery of less than $0.1 million, including interest,
which will be collected from GCR customers using the new rolled-in prospective
refunding methodology. In July 1995, MichCon filed its 1996 plan case. An MPSC
order is expected in the first half of 1996.
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 MGP sites.
During the mid-1980s, MCN conducted preliminary environmental
investigations 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 Environmental Quality. None of these
former MGP sites are on the National Priorities List prepared by the U.S.
Environmental Protection Agency.
MCN is not involved in any administrative proceedings regarding these
former MGP sites. MCN is currently remediating a former MGP site in Muskegon,
Michigan. The remedy consists of limited excavation and disposal of soils, a
new soil cover and, if necessary, a ground water capture and treatment system.
MCN is also conducting more extensive investigations at three other former MGP
sites.
8
<PAGE>
MCN has employed outside consultants to evaluate remediation
alternatives at these sites, to assist in estimating its potential liabilities
and to review its archived insurance policies. MCN 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 its claims
against these carriers. The findings of these investigations indicate that the
estimated total expenditures for investigation and remediation activities for
these sites could range from $30 million to $170 million based on undiscounted
1995 costs.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of
a cost deferral and rate recovery mechanism for reasonable and prudent
investigation and remediation costs incurred at former MGP sites in excess of
the reserve. During 1995, 1994 and 1993, MCN spent $2.1 million, $0.6 million
and $2.1 million, respectively, investigating and remediating these former MGP
sites. As a result of the studies discussed above, MCN added $35 million to
the reserve and established a corresponding regulatory asset during the fourth
quarter of 1995. At December 31, 1995, the reserve balance was approximately
$38.5 million. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial action costs for the sites and,
therefore, have an effect on MCN's financial position and cash flows. However,
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 results of operations.
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 Grand Rapids and a number of other municipalities where a
significant part of MichCon's service is furnished, MichCon's operations
originated under franchises that have since expired. In 1993, MichCon began
renewing or re-establishing formal franchises in those municipalities in order
to avoid uncertainty with regard 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 1995, MichCon gained 37 franchises with aggregate gas sales
volumes of approximately 0.6 Bcf annually. Approximately 81 major franchises
have been renewed in 1995, including Detroit which accounts for gas sales
volumes of approximately 66.5 Bcf annually.
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. However, the Michigan Court of Appeals reversed that decision.
This matter is presently pending before the Michigan Supreme Court. 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 November 1995, the
residents of Adrian voted favorably on granting a 30-year renewal franchise to
Citizens.
9
<PAGE>
DIVERSIFIED ENERGY
GAS SERVICES
In its Gas Services segment, MCN Investment, through its subsidiaries
and joint ventures, engages in gas and oil exploration and production (E&P),
provides gas gathering and processing services, provides gas storage services,
markets natural gas to large-volume customers and develops gas cogeneration
facilities. Gas Services' operating income, including its share of earnings
from joint ventures, was $28.5 million in 1995, an increase of 61% from 1994.
The significant improvement is primarily the result of nearly doubling the
level of gas production over 1994 and a 20% increase in gas sales volume from
Gas Marketing and Cogeneration activities.
<TABLE>
<CAPTION>
Diversified Energy -- Gas Markets (Bcf)
- ------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gas Sales*
Gas Marketing & Cogeneration .. 170.7 142.3 122.8
Exploration & Production** .... 16.2 7.5 .1
Transportation* ................. 1.1 1.2 .2
----- ----- -----
Total ......................... 188.0 151.0 123.1
===== ===== =====
Gas Production .................. 31.4 16.5 2.3
===== ===== =====
<FN>
* 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.
</TABLE>
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 was 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. Operating income increased by $7.7 million over
1994 to $18.4 million. This reflects an increase in gas and oil production
during 1995 to 33.7 Bcfe from 17.0 Bcfe in 1994. Approximately 50% of this
production occurred in the Midwest/Appalachian region and the remainder
in the Midcontinent/Gulf Coast region. Approximately $11.3 million in tax
credits were generated in 1995 primarily related to gas and oil production
from certain Antrim and coalbed methane gas wells.
SDGI's strategy is to focus primarily on reserve acquisition and
investing in low-to-medium risk development drilling in known producing areas,
both within and outside Michigan. SDGI invests prudently in gas production
projects with partners/operators, who typically operate the properties while
SDGI manages their performance. This strategy allows SDGI to avoid a
significant up-front, fixed-cost infrastructure.
In 1995, SDGI drilled approximately 416 wells, bringing the total
drilled to 1,083 wells since the Company program began in 1992. In 1995, about
64% 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 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 75%. The remaining wells
drilled were in the Midcontinent/Gulf Coast region. 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. SDGI's average
working interest in these wells is approximately 40%. SDGI's overall success
rate in the drilling program has averaged approximately 95%.
10
<PAGE>
SDGI's success in the Antrim shale formations provided the company with
the confidence to begin a thorough evaluation of similar nonconventional
reservoirs (fractured shales, coal seams and tight sands) throughout the
United States. This effort culminated in late 1995 with the acquisition of a
100% interest in 130 producing wells and rights to undertake additional
development drilling on natural gas properties covering approximately 100,000
acres in the Bluefield, Virginia area. The property contains in excess of 190
Bcf of proved gas reserves. In addition, the purchase included 80 miles of
gathering lines.
In September 1995, MCN announced the acquisition of a 60% joint venture
interest in a $65 million offshore oil and gas exploration and development
program in the Gulf of Mexico. The joint venture party contributes existing
gas reserves and provides the project with development drilling opportunities.
In 1995, SDGI made significant investments in natural gas reserves
acquiring interests in over 383 producing wells. At December 1995, SDGI owned
approximately 858 Bcf of proved gas reserves and 4.7 million barrels
(28.1 Bcfe) of proved oil reserves. SDGI holds interests in approximately
1,346,000 undeveloped acres which could support drilling approximately
4,875 additional wells, primarily in the Midwest/Appalachian region.
At December 31, 1995, approximately 1,972 wells were producing. An
additional 362 wells were in various stages of completion and are expected to
begin producing in 1996. Additional information on SDGI's exploration and
production activities is reported under Item 2. Properties, located on pages
16, 17 and 18 under this section.
In pursuing growth opportunities in the secondary oil production
business, MCN Investment recently acquired an interest in four oil reservoirs
in Michigan, where MCN Investment intends to spur additional oil production
from existing wells by using carbon dioxide, which must be removed from
certain gas produced in Michigan. New facilities for the necessary
compression, dehydration and transportation of the carbon dioxide to the oil
reefs are under construction. Upon completion, MCN Investment will begin
injecting carbon dioxide into the reefs. Oil production is expected to begin
later this year.
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 the chances of
finding gas are high. SDGI further reduces the risks inherent in E&P drilling
by working with several producers who operate in diverse geographical gas
producing areas. Additional investments in natural gas reserves will be made
in areas that offer proved reserves and an acceptable success percentage.
Competition ranges from the major oil companies to numerous small independent
gas and oil companies.
It is anticipated that SDGI will invest approximately $450 million in
exploration and production activities in 1996 and between $1.2 billion and
$1.4 billion between 1996 and 2000.
Gas Gathering & Processing
Operating and joint venture income decreased from $2.0 million in 1994,
to $1.0 million in 1995. The decrease is primarily due to the January 1995
sale of MCN Investment's interest in two gas processing plants.
MCN Investment, through its subsidiary, Pipeline & Processing Group,
Inc., continued to expand its Gas Gathering & Processing business by acquiring
a one-third interest in a natural gas, oil and condensate gathering system in
the Gulf of Mexico in the third quarter of 1995. The interest was acquired
from Blue Dolphin Energy Company for $10 million. The system includes a 40
mile pipeline, separation facility and a barge loading terminal that is
located in an area that has access to significant natural gas reserves of
approximately 250 Bcf and oil reserves of approximately 15 million barrels (90
Bcfe). In December 1995, MCN Investment also acquired a 50% interest in a 40
mile gathering line connected to coalbed methane reserves in the Appalachian
region. A portion of the gas transported in the Appalachian region is from gas
properties we own in the area.
11
<PAGE>
In early 1996, MCN Investment acquired a 99% interest in the gas
gathering properties of Dauphin Island Gathering Partnership in the Mobile
Bay area of offshore Alabama. Included in the acquisition is a 90 mile
offshore gas gathering system that is capable of moving 400 million cubic feet
of gas a day. The total cost of the acquisition is approximately $75 million.
In January 1996, MCN Investment reached an agreement in principal to
join the Portland Natural Gas Transmission System (PNGTS) as a shipper and
equity partner, with a 20% interest in a proposed 250 mile, $230 million
project. PNGTS is designed to serve the New England market with a capacity
of 175 MMcf per day. Regulatory filing is expected in March 1996 and
the pipeline is expected to begin operation in late 1998.
During 1995, MCN Investment constructed two new carbon dioxide
processing plants and acquired an interest in another, all located in
Michigan. With these new additions, MCN Investment now owns or has an interest
in five carbon dioxide processing facilities with a total capacity of 124
MMcf/day. In 1996, MCN Investment expects to complete the construction of two
additional plants, and may expand or acquire additional facilities in Michigan
by year-end.
MCN's strategy to grow its gas gathering and processing operations is
focused on areas where either reserve development or markets are increasing
and on regions where Gas Services has gas and oil reserves or a gas marketing
focus. It is anticipated that $100 million will be invested in gas gathering
and processing facilities in 1996, and $200 million over the next five years.
Gas Storage
Joint venture income from two gas storage fields in Michigan for 1995
was $4.2 million, unchanged from 1994.
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 has resulted in more
efficient use of existing storage facilities and a reduced immediate need for
additional capacity. However, Gas Services' growing markets will require
expanded storage capabilities in selected areas in the long-term. This future
need, together with Michigan's pivotal geographic location and favorable
geology, presents a significant opportunity for MCN's storage services.
MCN currently is a 50% partner with ANR Storage Company in the Blue Lake
gas storage field. This 46 Bcf field is located in north central lower
Michigan. 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 ten Bcf
field provides storage to MCN's Diversified Energy group's gas marketing
operations.
MCN is currently evaluating the development of the Washington 10 storage
field in southeastern Michigan. This is a depleted gas reservoir with 42 Bcf
of working gas capacity and excellent deliverability. MCN holds a 50% interest
in the field in partnership with one other company. Development will proceed
once sufficient markets are signed under long-term contract.
12
<PAGE>
It is anticipated that up to $150 million may be invested in storage
projects over the next five years.
Gas Marketing & Cogeneration
Operating income plus joint venture earnings for 1995 increased to $4.9
million from $1.1 million in 1994. This improvement reflects a 20% increase in
sales volumes and improved margins.
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 over 700 commercial and industrial users, as well as gas and electric
utilities and other large-volume customers throughout the midwest and
northeast United States and Canada. Through its offices located in Hartford,
Connecticut, Detroit and Grand Rapids, Michigan, 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.
CoEnergy Trading is able to better meet this demand through the use of gas
production and access to storage fields and other physical assets owned by
affiliates.
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. Further,
CoEnergy Trading uses its competitive position to identify and complement
business opportunities for MCN Investment's various businesses.
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 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.
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. However, the restructuring of the
electric utility industry should increase the long-term opportunities for
Cogen.
In October 1995, the Michigan Power cogeneration facility, a 123
megawatt cogeneration plant in Ludington, Michigan, began commercial
operations. The $150 million facility provides electricity to Consumers Power
Company and steam to Dow Chemical under long-term contracts. The facility is
owned and operated by an equal partnership between MCN Investment and Destec
Energy. 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.
In March 1995, Cogen signed a 15 year gas sales agreement to provide up
to eight Bcf of natural gas annually to the Panda Brandywine Limited
Partnership, a 230 megawatt cogeneration facility located in Brandywine,
Maryland. The Panda Brandywine project will sell electricity under a long-term
agreement to Potomac Electric Power. Commercial operation is expected to
commence in the fall of 1996.
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
13
<PAGE>
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.
Based on a large demand for electric power, a significant shortfall in
power generating capacity and government incentives to invest in power
generation facilities, Cogen believes substantial opportunities for investment
exist in India. Cogen's strategy for entering India will be the same
diversification strategy employed by Gas Services domestically. Cogen will
partner with local Indian businesses and U.S. companies and will invest in
projects in various geographic locations using a variety of fuels.
In partnership with other U.S. firms and local Indian businesses, MCN
Investment is actively pursuing six to eight power generation facilities in
various parts of India and will take varying interests in the projects. MCN's
share of construction costs for these facilities is expected to be
approximately $400 million. Some of these plants could go into operation
starting as early as 1997.
It is anticipated that Cogen will invest approximately $50 million in
power generation projects in 1996 and between $400-$600 million over the next
five years.
Risk Management Strategy
MCN primarily manages price risk by attempting to maintain a balanced
portfolio of gas supply and gas sales agreements. Net open positions often
result from the timing of new transactions. MCN uses natural gas futures,
options and swap contracts to manage its price risk by offsetting a large
portion of its open positions. MCN has hedged most of its gas and oil
production not covered by long-term fixed-price sales obligations.
COMPUTER OPERATIONS SERVICES
Operating income for Computer Operations Services increased to $8.0
million in 1995, from $6.6 million in 1994. Services to new and established
customers was the primary contributor to the increase.
The Genix Group (Genix), a wholly-owned subsidiary of MCN Investment,
provides computer operations management, data processing, 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, software and consumer products.
Throughout 1995, Genix has gained new customers and increased services
to existing customers. Computer Operations now maintains a well diversified
customer base of approximately 100 customers with annualized revenues that
exceed $100 million. Broken down by service category, 79% of Genix's 1995
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 business rather than investing and operating
in-house data centers.
14
<PAGE>
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 eight
new computer operations management clients, totaling approximately $16 million
in annualized revenues, in 1995. During 1995 major service contracts were
renewed with eight customers representing approximately $27 million in annual
revenues.
Genix has entered into long-term contracts to obtain software license
rights for both internal use and for support of client data processing. Under
these agreements, Genix is required to make minimum annual payments through
2004 which total $45,150,000. Additionally, Genix is required to make
contingent payments beginning in 1997 if computer operations revenues exceed
$89,000,000.
Genix has data centers in North Carolina, Michigan and Pennsylvania. A
London, England operation provides computer operations and desktop services to
European operations of U.S. customers. In 1995, IBM compatible mainframe
processing power has expanded to 1,500 million instructions per second (MIPS),
a 25% increase from 1994. Total processing capacity increased by approximately
40% to 2,700 MIPS.
As MCN continues to pursue its focused strategy of investments in
energy-related projects, it will periodically evaluate the value and strategic
fit of staying in the computer services business.
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.
15
<PAGE>
ITEM 2. PROPERTIES
MCN, through its principal subsidiaries, leases approximately 84,000 sq.
feet of office space in Detroit and Grand Rapids, Michigan and Hartford,
Connecticut under long-term leases.
Gas Distribution
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1995, MichCon's
distribution system included 15,804 miles of distribution mains, 1,051,094
service lines and 1,175,020 active meters. MichCon owns 2,515 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 1995 totaled $235.8 million and could reach $220 million in 1996.
The Saginaw Bay Pipeline Company owns a 66% interest in the Saginaw Bay
Area Limited Partnership which owns substantially all of the properties used
in the conduct of its business, primarily a 126-mile transmission line. The
Saginaw Bay Lateral Company owns a 46% interest in the Saginaw Bay Lateral
Limited Partnership which owns substantially all of the properties used in the
conduct of its business, primarily lateral lines related to the Saginaw Bay
transmission line.
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 Energy
The Supply Development Group Inc. has interests in properties used for
gas production, including compressor facilities and small gathering lines. (See
information on the following page 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.
16
<PAGE>
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 14 to the Consolidated Financial
Statements, incorporated by reference in Item 8 of this report, and the
general data provided under the "Diversified Energy: Gas Services --
Exploration & Production" section of Item 1 located on page 10, provide
additional information regarding this activity. Information on estimated gas
and oil reserves were obtained by SDGI from the independent petroleum
engineering consultants Ryder Scott Company, Miller and Lents, Ltd., Lee
Keeling & Associates, Inc. and S.A. Holditch & Associates, Inc.
<TABLE>
<CAPTION>
Production
For the Year Ended December 31 1995 1994
- ------------------------------ ---- ----
<S> <C> <C> <C> <C>
Average Gas Sales Price (per Mcf) $ 2.02 $ 1.97
Average Oil Sales Price (per Bbl) $ 16.24 $ 16.29
Average Production Cost (Mcf) $ 0.56 $ 0.52
<CAPTION>
1995 1994 1995 1994
Gross Gross Net Net
----- ----- ---- ----
<S> <C> <C> <C> <C>
Productive Wells and Acreage
Producing Wells
- ---------------
United States 1,972 1,295 1,014 620
========= ======= ======= =======
Developed Lease Acreage
- -----------------------
United States 308,878 212,941 149,104 101,301
========= ======= ======= =======
Undeveloped Lease Acreage
- -------------------------
United States 1,345,864 610,606 819,049 442,796
Canada -- 42,500 -- 18,063
--------- ------- ------- -------
1,345,864 653,106 819,049 460,859
========= ======= ======= =======
Drilling Activity
Working Interest Well Completions:
Exploratory
Productive 26 22 6 11
Dry 22 16 7 11
--------- ------- ------- -------
Total Exploratory 48 38 13 22
--------- ------- ------- -------
Development
Productive 333 137 228 120
Dry 18 9 9 6
--------- ------- ------- -------
Total Development 351 146 237 126
--------- ------- ------- -------
Total Working Interest Well Completions 399 184 250 148
========= ======= ======= =======
Wells in Process of Drilling at December 31 120 92 82 72
</TABLE>
17
<PAGE>
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.
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.
18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MCN, as of March
1, 1996, 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 25, 1996.
<TABLE>
<CAPTION>
Business Experience During
Name and Position Age Past Five Years
- ----------------- --- --------------------------
<S> <C> <C>
Alfred R. Glancy III 58 Present position since September 1992;
Chairman, President, Chief Chairman, Chief Executive Officer and
Executive Officer and Director since August 1988; Chairman
Director 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. Bhargava 48 Present position since January 1994;
President and Chief Executive Vice President and Chief
Executive Officer of MCN Operating 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 52 Present position since September 1992;
President and Chief President and Chief Operating Officer
Executive Officer of from August 1988 to September 1992;
MichCon and Director 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 62 Present position since September 1992;
Vice Chairman, Chief Financial Vice Chairman, Chief Financial Officer,
Officer and Director Treasurer and Director from 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 52 Present position since September 1995;
Senior Vice President, Vice President, General Counsel and
General Counsel and Secretary Secretary of MCN sinceApril 1989;
General Counsel and Secretary of MCN
since August 1988; Vice President and
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>
19
<PAGE>
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
26, 1996 there were 24,051 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 1995 Annual Report to
Shareholders, pages 64 and 65.
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 1995 Annual Report to Shareholders, pages 64 and 65.
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 1995 Annual Report to Shareholders, pages 34 through 42.
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 1995 Annual Report to
Shareholders. The consolidated statement of income, cash flows and
capitalization are for each of the years ended December 31, 1995, 1994 and
1993 and the consolidated statement of financial position is as of December
31, 1995 and 1994.
Consolidated Statement of Financial Position, page 43
Consolidated Statement of Income, page 44
Consolidated Statement of Cash Flows, page 45
Consolidated Statement of Capitalization, page 46
Notes to Consolidated Financial Statements, pages 47 through 63
Supplementary Financial Information, page 64 and 65; and
Independent Auditors' Report, page 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
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 February 1996 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 19 in Part I
of this Report.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
The information set forth in the section entitled "Filings Under Section
16 (a)" in MCN's February 1996 definitive Proxy Statement is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections entitled "Compensation of
Directors and Executive Officers" and "Report of the Compensation Committee of
the Board of Directors on Executive Compensation", in MCN's February 1996
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 February
1996 definitive Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the sections entitled "Executive
Compensation" and "Other Compensation Matters", in MCN's February 1996
definitive Proxy Statement is incorporated by reference herein.
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 20 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, 1995, unless otherwise noted, are
included herein in response to Part II, Item 8:
Independent Auditors' 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>
INDEPENDENT AUDITORS' REPORT
MCN Corporation:
We have audited the consolidated financial statements of MCN Corporation
and subsidiaries as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995, and have issued our report
thereon dated February 8, 1996; such consolidated financial statements and
report are included in your 1995 Annual Report to Shareholders and are
incorporated herein 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 8, 1996
22
<PAGE>
SCHEDULE II
MCN CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Column C
Column A Column B Additions Column D Column E
--------------------- Deductions
Provisions charged to for Purposes
Balance at --------------------- for Which the Balance
Beginning Regulatory Reserves Were at End
Description of Period Income Asset Provided of Period
- ---------------------------------------------------- ---------- ---------- --------- ------------- ---------
Year Ended December 31, 1995
----------------------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from assets in
Consolidated Statement of Financial Position:
Allowance for doubtful accounts ................. $16,101 $ 15,274 $ -- $17,610 $13,765
Allowance for sale of partnership interest (1) .. 91 -- -- 91 --
Allowance for notes receivable (2) .............. 1,954 (1,607) -- 347 --
------- -------- ------- ------- -------
$18,146 $ 13,667 $ -- $18,048 $13,765
======= ======== ======= ======= =======
Reserves included in Current Liabilities --
Other and in Accrued Environmental Costs
in Consolidated Statement of Financial
Position:
Environmental testing (3) ....................... $ 5,540 $ -- $35,000 $ 2,089 $38,451
======= ======== ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages ............................ $ 8,402 $ 1,026 $ 686 $ 2,101 $ 8,013
======= ======== ======= ======= =======
<CAPTION>
Year Ended December 31, 1994
----------------------------
<S> <C> <C> <C> <C> <C>
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 (3) ....................... $ 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
======= ======== ======= ======= =======
<CAPTION>
Year Ended December 31, 1993
----------------------------
<S> <C> <C> <C> <C> <C>
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 (3) ....................... $ 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 (3) ....................... 6,575 -- -- 6,575 --
------- -------- ------- ------- -------
$16,680 $ 1,895 $ 372 $ 9,857 $ 9,090
======= ======== ======= ======= =======
<FN>
- ---------
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 took place in 1995.
(2) During 1995, MCN reversed $1,600,000 of an uncollectible reserve on an
advance made to a joint venture. The uncollectible provision was reversed
upon the receipt of payments and credit support to ensure repayment of the
remaining advance balance.
(3) Reference is made to Note 7b to the Consolidated Financial Statements in
the 1995 Annual Report to Shareholders of MCN Corporation, page 51. During
the year ended December 31, 1993, $6,575,000 was transferred from Deferred
Credits and Other Liabilities -- Other to Current Liabilities -- Other.
Actual expenditures deducted against the reserve in 1993 was $2,073,000.
</TABLE>
23
<PAGE>
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).
4-2 Subordinated Debt Securities Indenture between MCN
Corp. and NBD Bank, N.A., as Trustee (Exhibit 4-5 to
Registration Statement No. 33-55665).
4-3 Debt Securities Indenture between MCN Investment
Corp. and NBD Bank as Trustee (Exhibit 4-1 to
Registration Statement No. 33-63311).
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
(Exhibit 10-8 to 1995 Form 10-K).
12-1 Computation of Ratio of Earnings to Fixed Charges for
MCN Corporation.*
12-2 Computation of Ratio of Earnings to Fixed Charges for
MCN Investment Corporation.*
13-1 MCN Corporation 1995 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.*
23-4 Consent of Lee Keeling & Associates, Inc.*
23-5 Consent of S.A. Holditch & Associates, Inc.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
<FN>
- ----------------
*Indicates document filed herewith.
</TABLE>
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
24
<PAGE>
(B) REPORTS ON FORM 8-K:
MCN filed a report on Form 8-K dated November 17, 1995, under Item 5
with respect to the offering by MCN Investment Corporation of its Medium-Term
Notes, Series A, pursuant to the joint registration statement of MCN and MCN
Investment Corporation on Form S-3, as amended, (No. 33-63311), as described
in the Prospectus Supplement dated November 17, 1995 to the Prospectus dated
November 6, 1995. A Form of Purchase Agreement was filed as an Exhibit
thereto.
25
<PAGE>
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 dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
* Director, Chairman, President March 1, 1996
- --------------------------- and Chief Executive Officer
Alfred R. Glancy III
* Director, Vice Chairman and March 1, 1996
- --------------------------- Chief Financial Officer
William K. McCrackin
Patrick Zurlinden Vice President, Controller and March 1, 1996
- --------------------------- Chief Accounting Officer
Patrick Zurlinden
* Director March 1, 1996
- ---------------------------
Stephen E. Ewing
* Director March 1, 1996
- ---------------------------
Roger Fridholm
* Director March 1, 1996
- ---------------------------
Frank M. Hennessey
* Director March 1, 1996
- ---------------------------
Thomas H. Jeffs II
* Director March 1, 1996
- ---------------------------
Arthur L. Johnson
* Director March 1, 1996
- ---------------------------
Dale A. Johnson
* Director March 1, 1996
- ---------------------------
Helen O. Petrauskas
* Director March 1, 1996
- ---------------------------
Howard F. Sims
*By: /s/ Patrick Zurlinden
---------------------
Patrick Zurlinden
Attorney-in-Fact
</TABLE>
26
EXHIBIT 12-1
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1995 December 31, 1994 December 31, 1993
------------------- ------------------- -------------------
EARNINGS AS DEFINED (1)
<S> <C> <C> <C>
Pre-tax income (2) ....................... $135,210 $105,887 $106,987
Fixed charges (3) ........................ 78,725 60,910 48,955
-------- -------- --------
Earnings as defined .................... $213,935 $166,797 $155,942
======== ======== ========
FIXED CHARGES AS DEFINED (1) (4)
Interest, expensed ....................... $ 57,378 $ 48,948 $ 38,728
Interest, capitalized .................... 7,926 2,928 3,966
Amortization of debt discounts, premium
and expense ............................ 1,641 1,332 1,153
Interest implicit in rentals ............. 8,452 7,773 6,350
Preferred securities dividend requirements
of subsidiaries ........................ 9,702 2,203 1,086
-------- -------- --------
Fixed charges as defined ............... $ 85,099 $ 63,184 $ 51,283
======== ======== ========
Ratio of Earnings to Fixed Charges ....... 2.51 2.64 3.04
======== ======== ========
<FN>
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with
Item 503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income of MCN and
its majority-owned subsidiaries, (b) MCN's share of pre-tax income of its
50% owned companies, and (c) any income actually received from less than
50% owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period for nonutility companies and the preferred
securities dividend requirements of MichCon included in fixed charges but
not deducted in the determination of pre-tax income.
(4) Fixed charges represent (a) interest, whether expensed or capitalized,
(b) amortization of debt discount, premium and expense, (c) an estimate
of interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries (MichCon and MCN Michigan Limited
Partnership), increased to reflect the pre-tax earnings requirement for
MichCon.
</TABLE>
EXHIBIT 12-2
<TABLE>
<CAPTION>
MCN INVESTMENT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1995 December 31, 1994 December 31, 1993
------------------- ------------------- -------------------
EARNINGS AS DEFINED (1)
<S> <C> <C> <C> <C>
Pre-tax income (2) .................... $19,376 $12,440 $ 9,588
Fixed charges (3) ..................... 21,041 17,814 9,307
------- ------- -------
Earnings as defined ................. $40,417 $30,254 $18,895
======= ======= =======
FIXED CHARGES AS DEFINED (1)
Interest, expensed .................... $14,376 $11,656 $ 4,464
Interest, capitalized ................. 5,895 2,089 1,579
Amortization of debt discounts, premium
and expense ......................... 520 289 96
Interest implicit in rentals .......... 6,145 5,869 4,747
------- ------- -------
Fixed charges as defined ............ $26,936 $19,903 $10,886
======= ======= =======
Ratio of Earnings to Fixed Charges .... 1.50 1.52 1.74
======= ======= =======
<FN>
Notes:
(1) Earnings and fixed charges are defined and computed in accordance with
Item 503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income of MCN
Investment and its majority-owned subsidiaries, (b) MCN Investment's
share of pre-tax income of its 50% owned companies, and (c) any income
actually received from less than 50% owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period and, therefore, may differ from fixed
charges as defined.
</TABLE>
EXHIBIT 13-1
MCN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Record earnings reported for the third consecutive year - MCN's earnings rose
to a record $96.8 million ($1.49 per share) in 1995, an increase of $19.0
million ($.18 per share) or 24% from 1994. This performance reflects the
successful implementation of the strategic direction discussed below. MCN
earned $77.8 million ($1.31 per share) in 1994, an increase of $5.0 million
($.07 per share) from 1993.
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net Income (in Millions)
Gas Distribution ...... $ 75.6 $ 63.2 $ 65.4
Diversified Energy .... 21.2 14.6 7.4
-------- -------- --------
$ 96.8 $ 77.8 $ 72.8
======== ======== ========
Earnings Per Share
Gas Distribution ...... $ 1.17 $ 1.06 $ 1.11
Diversified Energy .... .32 .25 .13
-------- -------- --------
$ 1.49 $ 1.31 $ 1.24
======== ======== ========
</TABLE>
Strategic Direction - MCN's primary objective is to achieve superior,
long-term returns for its shareholders. To accomplish this, MCN's strategy is
to aggressively invest in a diverse portfolio of domestic and international
natural gas-related projects. The success of this strategy will be
demonstrated by the growth of MCN's earnings and the total return to its
shareholders over time.
Reorganization of Michigan Pipeline Operations - In January 1996, MCN
consolidated its Michigan pipeline operations through the transfer of its
Michigan gathering and transportation network from its Diversified Energy
group to its Gas Distribution group. The transfer was made in order to
consolidate MCN's Michigan gathering pipeline activities within one business
unit. The segment information included herein is reported as though the
combined intrastate pipeline operations were part of Gas Distribution for all
periods presented.
Gas Distribution
- ----------------
Earnings produce a 15.6% return on equity - Gas Distribution earnings
increased $12.4 million ($.11 per share) compared to 1994. The 20% increase is
due primarily to higher gas sales and transportation deliveries as well as
lower operating costs. Earnings for 1994 decreased by $2.2 million ($.05 per
share) from 1993 due primarily to the lower return on equity authorized in
MichCon's rate order which went into effect in January 1994 and lower gas
deliveries resulting from warmer weather.
<TABLE>
<CAPTION>
1995 1994 1993
Effect of Weather on Gas Markets and Earnings ----------- ----------- -----------
<S> <C> <C> <C>
Percentage Colder (Warmer) than Normal ...... .3 % (4.2)% (2.2)%
Increase (Decrease) from Normal in:
Gas Markets (in Bcf) ..................... 1.5 (4.4) (4.3)
Net Income (in Millions) ................. $ 1.4 $ (4.0) $ (3.7)
Earnings Per Share ....................... $ .02 $ (.07) $ (.06)
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gross Margin
Gross margin increases - Gas Distribution gross margin (operating revenues
less cost of gas) increased $15.9 million in 1995 reflecting higher gas sales
due to colder weather and increased transportation deliveries. The 1994
increase of $46.8 million reflects revenues from increased transportation
deliveries and higher gas sales rates.
<TABLE>
<CAPTION>
Gas Distribution Operations (in Millions) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues* ..................... $1,107.6 $1,137.0 $1,141.5
Cost of Gas ............................. 491.4 536.7 588.0
-------- -------- --------
Gross Margin ......................... 616.2 600.3 553.5
-------- -------- --------
Other Operating Expenses*
Operation & Maintenance .............. 299.8 318.1 281.4
Depreciation, Depletion & Amortization 91.3 86.0 75.5
Property & Other Taxes ............... 58.8 59.6 60.0
-------- -------- --------
449.9 463.7 416.9
-------- -------- --------
Operating Income ........................ 166.3 136.6 136.6
-------- -------- --------
Equity in Earnings of Joint Ventures .... 1.3 2.0 3.1
-------- -------- --------
Other Income & (Deductions)*
Interest Income ...................... 4.4 4.4 4.3
Interest Expense ..................... (44.5) (38.8) (35.7)
Minority Interest .................... (2.4) (2.9) (3.3)
Other ................................ (5.6) (5.3) (5.3)
-------- -------- --------
(48.1) (42.6) (40.0)
-------- -------- --------
Income Before Income Taxes .............. 119.5 96.0 99.7
Income Taxes ............................ 43.9 32.8 34.3
-------- -------- --------
Net Income .............................. $ 75.6 $ 63.2 $ 65.4
======== ======== ========
<FN>
*Includes intercompany transactions
</TABLE>
Gas sales rates for 1995 and 1994 reflect increased rates of $15.7 million
beginning in January 1994, as approved by the Michigan Public Service
Commission (MPSC) in MichCon's last general rate case. The higher rates
included $28.7 million for retiree healthcare benefits recognized under new
accounting requirements and $8.1 million for higher depreciation rates. The
MPSC's decision also lowered MichCon's allowed rate of return on common equity
to 11.5%. MichCon has no plans to file a general rate increase request with
the MPSC.
Additionally, gas sales rates are set to recover 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. However, as a
result of the order issued in MichCon's last general rate case, MichCon no
longer defers or accrues revenues for these differences in lost gas amounts.
Amortization of previously deferred amounts was completed in 1995 and
increased revenues by $3.4 million, $3.1 million and $4.7 million in 1995,
1994 and 1993, respectively.
Gas sales and end user transportation deliveries in total increased 11.2 Bcf
due primarily to colder weather and expanded markets. End user transportation
deliveries for both 1995 and 1994 reflect an overall higher level of gas usage
by large-volume commercial and industrial customers.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In addition, MichCon began providing end user transportation deliveries of
natural gas in October 1995 to a 123 megawatt cogeneration plant that was
constructed by MCN Investment and Destec Energy during 1995. The plant uses
approximately nine Bcf of natural gas annually.
<TABLE>
<CAPTION>
Gas Distribution Markets (in Bcf) 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Gas Sales ...................... 209.8 204.4 205.4
End User Transportation ........ 145.8 140.0 128.6
----- ----- -----
355.6 344.4 334.0
Intermediate Transportation* ... 374.4 323.0 302.7
----- ----- -----
730.0 667.4 636.7
===== ===== =====
<FN>
* Includes intercompany volumes
</TABLE>
Intermediate transportation deliveries increased in both 1995 and 1994 due
primarily to additional volumes transported for pipeline customers and
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. In order to meet the increased
demand, MichCon began construction of facilities in 1995 to expand the
transportation capacity of its northern Michigan gathering system. A
significant portion of the project was completed in 1995 and the remainder is
to be completed by June 1996. The expansion project will total approximately
$40 million for additional pipeline and related facilities and is expected to
transport approximately 135 Bcf of Antrim gas annually, generating new
revenues of approximately $8 million per year.
Effective in January 1996, the transportation rate of one customer will
decrease 40% in accordance with the terms of a 15 year contract that reduces
the transportation rate for the last ten years of the agreement. Revenues from
the customer subject to the rate decrease totaled $6.0 million in 1995.
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,
fluctuations in total gas costs have little or no effect on gross margins and
earnings.
Cost of gas sold decreased in 1995 as a result of significantly lower prices
for natural gas purchased, partially offset by higher gas sales volumes due to
colder weather. Lower natural gas prices as well as lower gas sales volumes
due to warmer weather resulted in the 1994 decrease in cost of gas sold. Cost
of gas sold per thousand cubic feet for 1995 was $2.36, a decrease of $.30
(11%) from 1994. Cost of gas sold per thousand cubic feet for 1994 decreased
by $.26 (9%) from 1993. MichCon will continue its supply strategy of
purchasing gas under contracts that tie purchase prices to spot market prices.
To mitigate price volatility associated with gas purchases, MichCon 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. Subsequently,
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 million (1.9%)
lower for 1994. In February 1996, the MPSC issued an order finding that all of
MichCon's 1994 gas costs were reasonable and prudent, and made no disallowance
of gas costs as a result of MichCon fixing its gas prices. MichCon did not fix
any gas prices during 1995.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As previously discussed, MichCon's rates are set to recover its lost gas costs
using an averaging method based on historical lost gas experience. The
difference between the historical average lost gas amount and the actual lost
gas amount is recorded to income at the end of the seasonal cycle ended August
31 of each year. For the seasonal cycles ended August 1995 and August 1994,
the actual lost gas experienced was lower than the historical average lost gas
amount, resulting in reductions to cost of gas of $1.5 million and $5.9
million during 1995 and 1994, respectively. 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 Pipeline Company (ANR), MichCon's primary interstate
natural gas transporter, implemented its Order No. 636 restructuring in
November 1993. During 1995 and 1994, ANR filed several transition cost
recovery requests. MichCon accrued its portion of these costs in 1995 and 1994
totaling $6.8 million and $5.4 million, of which $5.0 million and $3.9 million
is reflected in cost of gas, respectively. These transition costs are
recovered through the GCR mechanism as paid, and therefore, a regulatory 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
there will be no significant effect on MCN's financial statements.
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 be ultimately unsuccessful in defeating Panhandle's
claim, it is anticipated that these costs will be recoverable through the GCR
mechanism and therefore, a regulatory asset has been recorded for their future
recovery.
Other Operating Expenses
Operation and maintenance expenses decreased 6% during 1995 due to lower
benefit costs, primarily pension and retiree healthcare costs. Operation and
maintenance expenses increased in 1994 due to higher postretirement healthcare
costs being recognized in 1994 as a result of the new accounting requirements
under Statement of Financial Accounting Standards (SFAS) 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 also contributed to the 1995 decrease in
operation and maintenance expenses and helped moderate the 1994 increase.
Management is continually assessing ways to improve cost competitiveness and
the quality of customer service. During 1994, MichCon reorganized along core
business processes, which has streamlined its organizational structure. The
number of Gas Distribution employees declined by 201 (6%) and 78 (2%) in 1995
and 1994, respectively. Employee reductions were achieved while providing
services to an additional 31,000 customers since 1993.
Gas Distribution Operation and Maintenance Expense (in Millions):
<TABLE>
<S> <C>
1995........................... $299.8
1994........................... $318.1
1993........................... $281.4
</TABLE>
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 because any amounts not covered by insurance are
expected to be recoverable in rates.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
MichCon receives a significant amount of its heating assistance funding from
the Low-Income Home Energy Assistance Program (LIHEAP). Congress has reduced a
substantial portion of the program's funding for the 1996 fiscal year, and
there are proposals to eliminate all program funding in future years.
Michigan's share of LIHEAP funds were reduced from $78 million in fiscal year
1995 to $47.5 million in 1996. During 1995 and 1994, $27.3 million and $27.0
million in LIHEAP funds assisted approximately 112,000 and 131,000 MichCon
customers, respectively. A portion of the decreased funding may result in
increased uncollectibles expense. MichCon is currently working with federal
and state officials to identify ways to obtain energy assistance for
low-income customers from other avenues, and is taking actions to minimize any
impact that reductions in LIHEAP funding would have on MCN's financial
statements.
Depreciation and depletion increased in 1995 and 1994 due to higher plant
balances, reflecting capital expenditures of $539.4 million over the past
three years. In addition, higher depreciation rates implemented in January
1994 contributed to the 1994 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 both 1995 and 1994. The 1995
decrease was due mainly to a decrease in Michigan single business taxes
resulting from changes made by the State of Michigan to the method of
computing the tax. The decrease in 1994 was a result of Michigan legislation
which lowered property taxes, partially offset by increased taxes due to
higher property balances and higher Michigan single business taxes.
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased in 1995 and 1994 due to lower earnings
from the Blue Lake gas storage venture. Blue Lake's earnings were affected by
lower revenues from reduced storage rates and higher interest expense in 1995.
The 1994 decrease was due primarily to higher operating and interest expenses.
MCN's 50% interest in the Blue Lake project is owned equally by Gas
Distribution and Diversified Energy.
MCN to acquire interest in Missouri utility - During 1995, MCN agreed to
acquire a 47.5% interest in a partnership 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. Initial operations began during November 1995 when construction of
the first phase was completed. The 475 mile pipeline system, when completed,
is expected to provide service to approximately 10,000 customers.
Other Income & Deductions
Interest expense rose in 1995 as a result of the average amount of long-term
debt outstanding increasing $95.7 million and a slight increase in the
weighted average interest rate on long-term debt. Interest on long-term debt
also rose in 1994 as a result of the average amount of long-term debt
outstanding increasing $56.1 million, partially offset by a decrease in the
weighted average interest rate on long-term debt. The increases in the average
amount of long-term debt outstanding were the result of the issuance of first
mortgage bonds of $70 million in 1995, $80 million in 1994 and $120 million in
1993.
Income Taxes
Income taxes increased in 1995 and decreased in 1994 primarily as a result of
changes in earnings. Income taxes were reduced by $1.3 million, $3.3 million
and $1.2 million during 1995, 1994 and 1993, respectively, due to the
favorable resolution of prior years' tax issues.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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 Environmental Quality. None of these former MGP sites
are on the National Priorities List prepared by the U.S. Environmental
Protection Agency. MCN is not involved in any administrative proceedings
regarding these former MGP sites, but is currently remediating one of the
sites. The remedy consists of limited excavation and disposal of soils, a new
soil cover and, if necessary, a groundwater capture and treatment system. More
extensive investigations are underway at three other sites.
In 1984, MichCon established an $11.7 million reserve for environmental
investigation and remediation. 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 this reserve.
MCN has employed outside consultants to evaluate remediation alternatives at
these sites, to assist in estimating its potential liabilities and to review
its archived insurance policies. 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 its claims
against these carriers. The findings of these investigations indicate that the
estimated total expenditures for investigation and remedial activities at all
17 former MGP sites will be between $30 million and $170 million based on
undiscounted 1995 costs. As a result of these studies, MCN accrued an
additional liability and a corresponding regulatory asset of approximately
$35.0 million in the 1995 fourth quarter. During 1995, 1994 and 1993, MCN
spent $2.1 million, $.6 million and $2.1 million, respectively, investigating
these former MGP sites. At December 31, 1995, the balance of the reserve is
approximately $38.5 million. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and, therefore, have an effect on MCN's financial position and cash flows.
However, 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 results of operations.
Outlook
Gas Distribution's objectives are to grow revenues and reduce its
cost structure in order to maintain strong returns and provide customers with
quality service at competitive prices. Gas Distribution expects to provide
natural gas to approximately 20,000 new customers in 1996, continuing its
strategy to aggressively expand its residential, commercial and industrial
markets in Michigan. Gas Distribution's market share for residential heating
customers in the communities in which it serves is approximately 85%. While
this saturation rate is high, there continue to be significant growth
opportunities through conversion of existing homes as well as from new
construction. Gas Distribution operations continue to grow their industrial
and commercial markets by aggressively facilitating the use of existing gas
technologies and equipment, as well as by developing new natural gas
technologies.
Gas Distribution continues to focus on challenges and opportunities
resulting from increased competition with other natural gas distribution
companies and other energy providers. The MPSC is scheduling hearings to
explore major reforms of Michigan's gas utility regulatory process. MCN is
positioning itself to respond to changes in regulation and increased
competition by successfully reducing its cost of operations while maintaining
a high level of customer satisfaction. MCN remains focused to continue this
trend in 1996 and beyond. The success is due to targeted productivity
initiatives and the alignment of the company's organization around core
business processes and customer services. The ongoing benefit of these efforts
is a strengthened competitive position in the gas industry.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Diversified Energy
Earnings generate a 20.2% return on equity - The Diversified Energy group
continues to reflect the success of MCN's long-term growth strategy, reporting
higher earnings from all of its operating units in 1995. Diversified Energy
earnings for 1995 increased $6.6 million ($.07 per share) compared to 1994.
The growth in earnings was partially offset by increased financing
costs as a result of additional capital needed to fund investments.
Earnings from Diversified Energy continue to provide an increasing portion of
MCN's total results, contributing 22% in 1995 compared to 19% in 1994.
Similarly, Diversified Energy earnings for 1994 increased $7.2 million ($.12
per share) over 1993. The improvements reflect increased earnings from both
the Gas Services and the Computer Operations Services segments.
MCN allocated certain operating expenses from its Corporate & Other segment to
its Gas Services businesses. The allocation was made to better represent
actual operating results for each business unit. Segment information included
herein reflects the allocation for all periods presented.
<TABLE>
<CAPTION>
Diversified Energy Operations (in Millions) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Operating Revenues*
Gas Services ........................ $ 400.0 $ 346.5 $ 289.3
Computer Operations Services ........ 105.2 88.2 74.4
------- ------- -------
505.2 434.7 363.7
------- ------- -------
Operating Expenses*
Gas Services ........................ 375.4 333.1 284.5
Computer Operations Services ........ 97.2 81.6 69.2
Corporate & Other ................... 2.7 2.0 2.7
------- ------- -------
475.3 416.7 356.4
------- ------- -------
Operating Income (Loss)
Gas Services
Exploration & Production .......... 18.4 10.7 1.2
Gas Marketing & Cogeneration ...... 5.8 2.4 3.6
Gas Gathering & Processing ........ .4 .3 --
------- ------- -------
24.6 13.4 4.8
Computer Operations Services ........ 8.0 6.6 5.2
Corporate & Other ................... (2.7) (2.0) (2.7)
------- ------- -------
29.9 18.0 7.3
------- ------- -------
Equity in Earnings of Joint Ventures ... 3.9 4.3 4.6
------- ------- -------
Other Income & (Deductions)*
Interest Income ..................... 1.4 .4 1.2
Interest Expense .................... (12.9) (8.5) (3.3)
Dividends on Preferred Securities
of Subsidiary .................... (9.4) (1.5) --
Other ............................... 2.3 (.8) (.7)
------- ------- -------
(18.6) (10.4) (2.8)
------- ------- -------
Income Before Income Taxes ............. 15.2 11.9 9.1
------- ------- -------
Income Taxes
Current and Deferred Provision ...... 5.3 5.2 4.0
Federal Tax Credits ................. (11.3) (7.9) (2.3)
------- ------- -------
(6.0) (2.7) 1.7
------- ------- -------
Net Income ............................. $ 21.2 $ 14.6 $ 7.4
======= ======= =======
<FN>
*Includes intercompany transactions
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gas Services
Operating income increases over 80% - Gas Services increase in operating
income of $11.2 million and $8.6 million in 1995 and 1994, respectively,
primarily reflects higher earnings from Exploration & Production (E&P)
operations. Improved results from Gas Marketing & Cogeneration also
contributed to the 1995 increase. However, the 1994 improvement was partially
offset by a slight decline in the Gas Marketing & Cogeneration business.
<TABLE>
<CAPTION>
Diversified Energy Gas Statistics*
(in Bcf) 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Gas Sales
Gas Marketing & Cogeneration ... 170.7 142.3 122.8
Exploration & Production** ..... 16.2 7.5 .1
Transportation .................... 1.1 1.2 .2
----- ----- -----
188.0 151.0 123.1
===== ===== =====
Exchange Gas Flows ................ 39.1 23.0 21.0
===== ===== =====
Gas Processed ..................... 16.3 1.9 --
===== ===== =====
<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 operating income increased $7.7 million and $9.5
million for the 1995 and 1994 periods, respectively. The results reflect a
significantly higher level of gas produced from properties that have been
acquired since mid-1994 and the development of other new projects during 1994
and 1995.
Since the inception of its E&P program in late 1992, MCN has invested over
$575 million to acquire and develop gas and oil reserves. Proved property
acquisitions added reserves of over 300 Bcf in 1995 and approximately 100 Bcf
in 1994. MCN has investments in various regions and geological structures
including the shallow Michigan and Ohio Antrim formation, the Midcontinent and
Gulf Coast areas, and most recently, in Virginia coalbed methane properties.
During 1996, MCN expects to complete its first enhanced oil recovery project
using carbon dioxide injection to recover additional oil reserves. At December
31, 1995, proved gas reserves totaled 858.4 Bcf and proved oil reserves
approximated 4.7 million barrels or the equivalent of another 28.1 Bcf of
natural gas.
E&P operating results were also impacted by a higher average sales rate for
1995, reflecting the success of MCN's risk management strategy. The 1995
average gas sales rate of $2.02 per Mcf included revenue from natural gas
swaps of $.51 per Mcf, while the 1994 average gas sales rate of $1.97 per Mcf
included swap revenue of $.39 per Mcf. The effects of increased gas production
and higher sales rates have been partially offset by higher unit operating and
depreciation costs in 1995.
<TABLE>
<CAPTION>
Gas Production Volumes (in Bcf):
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax Credit Production ... 11.4 7.9 2.2
Other Production ........ 20.0 8.6 0.1
---- ---- ----
31.4 16.5 2.3
==== ==== ====
</TABLE>
Additionally, E&P operations have increased Diversified Energy's earnings
through the generation of an increasing amount of federal gas production tax
credits. Of the gas produced in 1995 and 1994, 11.2 Bcf (36%) and 7.9 Bcf
(48%), respectively, generated federal gas production tax credits that
approximated $.98 per Mcf.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Outlook - MCN's strategy is to continue the aggressive growth of its reserve
base in known producing areas, generating attractive returns and developing
reliable, long-term gas supplies to meet sales requirements of its Gas
Marketing & Cogeneration operations. MCN anticipates a significant increase in
E&P operating results as it implements this growth strategy, completes
additional developmental drilling and obtains the full benefits from previous
acquisitions.
Risks associated with significant future E&P activities will be minimized by
diversifying investments along the lines of geography, geology, risk profile
and technology, as well as by partnering with operators who bring capital and
expertise. Furthermore, MCN's risk management strategy is designed to minimize
its exposure to changes in gas prices.
Gas Marketing & Cogeneration operating income increased $3.4 million for 1995
reflecting a 20% increase in gas sales volumes and more favorable margins on
gas sales. The increase in gas sales volumes was driven by additional sales to
the northeast United States and eastern Canada. As subsequently discussed,
margins were affected by the use of natural gas hedging contracts.
Additionally, higher revenues from a 70% increase in volumes related to
exchange gas contracts and gas peaking services contributed to the 1995
improvement. Typically under exchange contracts, MCN's gas marketing business
delivers gas to customers during periods of peak demand and takes redelivery
of gas during low demand periods.
<TABLE>
<CAPTION>
Gas Marketing and Cogeneration
Gas Sales Volumes by Region:
1995 1994
---------------- ----------------
<S> <C> <C>
Michigan and Other.............. 71.8% 79.3%
Northeast U.S................... 8.6% 1.0%
Eastern Canada.................. 19.6% 19.7%
</TABLE>
Operating income decreased $1.2 million during 1994 despite an increase in gas
sales of 19.5 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 the higher level of gas sales in
1995 and 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.
Outlook - In order to grow MCN's Gas Marketing & Cogeneration operations,
management's strategy is to continue to expand its gas markets into areas
beyond Michigan's borders. Enhanced by its ability to provide bundled sales,
transportation and storage services to utilities and other large-volume users,
MCN is positioned to capitalize on opportunities to further expand its market
base into the northeast and midwest United States and eastern Canada.
Accordingly, MCN anticipates a sustained growth in annual gas sales volumes of
approximately 10% for the next several years. MCN's cogeneration business will
continue to develop power projects that generate desired levels of returns.
MCN is pursuing power projects in both the United States and India.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gas Gathering & Processing operating income increased by $.1 million and $.3
million during 1995 and 1994, respectively. The increases reflect a higher
level of volumes treated through additional gas processing plants. During
1995, MCN's Gas Gathering & Processing business constructed two new plants,
bringing the total number of operating plants to four. The processing plants
reduce carbon dioxide levels in Michigan Antrim gas. The higher revenues
earned in 1995 were partially offset by additional maintenance expenses
incurred at one of the new plants.
Outlook - Gas Gathering & Processing's expansion strategy will focus primarily
on investments in gas gathering facilities outside of Michigan. Implementation
of this strategy is evidenced by MCN's February 1996 announcement that it has
agreed to acquire a 99% interest in a 90 mile gas gathering system in the
Mobile Bay area of offshore Alabama. The Gas Gathering & Processing business
anticipates working with other Diversified Energy businesses that complement
its operations by targeting facilities in areas that either contain gas
marketing opportunities or are near MCN's E&P reserves. In addition, MCN's Gas
Gathering & Processing group will continue to operate and develop gas
processing facilities within Michigan.
Risk Management Strategy - MCN primarily manages price risk by attempting to
maintain a balanced portfolio of gas supply and gas sales agreements. Net open
positions often result from the timing of new transactions. MCN uses natural
gas futures, options and swap contracts to manage its price risk by offsetting
a large portion of its open positions. MCN has hedged most of its gas and oil
production not covered by long-term fixed-price sales obligations.
Computer Operations Services
Operating income increases over 20% - Computer operations services operating
income increased $1.4 million during both 1995 and 1994. The improvements
reflect higher operating revenues from new business added throughout 1994 and
1995 and from increased services to existing customers.
Computer Operations Services Operating Revenues (in Millions):
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ----------------- --------------------
<S> <C> <C> <C>
New Customers $ 96.8 $ 81.0 $ 63.4
Existing Customers 8.4 7.2 11.0
---------------- ----------------- --------------------
$ 105.2 $ 88.2 $ 74.4
================ ================= ====================
</TABLE>
Outlook - MCN's Computer Operations Services continue to work toward
increasing its profitability. As such, the primary focus of management is to
expand and diversify its customer base, as well as to increase services to its
present customers. To accomplish this, computer services has broadened its
product and service lines over the past several years, while working to
maintain customer satisfaction. The business group has also established
agreements with major computer companies to enhance the array of products and
services available to customers.
Corporate & Other
Corporate operations during 1995 and 1994 reflect expenses associated with the
growth of the Diversified Energy group.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased during 1995 and 1994. Joint venture
results for 1995 reflect lower gas processing earnings due to the sale of two
gas processing facilities in the first quarter of 1995. Gas Marketing &
Cogeneration losses are due to the structure of electric sales rates at the
Ada cogeneration facility. However, the facility does generate a strong cash
flow due to tax benefits related to the project.
The 1994 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 processing facility which became operational in 1994.
The loss in other joint ventures for 1993 includes a reserve of $.5 million
for the write-off of assets related to the natural gas torch business.
<TABLE>
<CAPTION>
Equity in Earnings of Joint Ventures (in Millions) 1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Gas Storage......................................... $ 4.2 $ 4.2 $ 4.9
Gas Marketing & Cogeneration........................ (.9) (1.3) (1.4)
Gas Gathering & Processing.......................... .6 1.7 2.1
Other............................................... - (.3) (1.0)
------------ ----------- ------------
$ 3.9 $ 4.3 $ 4.6
============ =========== ============
</TABLE>
MCN acquires interest in two pipelines - Through continuing efforts to expand
its Gas Gathering & Processing business, MCN acquired a one-third interest in
a natural gas, oil and condensate gathering system in the Gulf of Mexico
during the third quarter of 1995. The interest includes a 40 mile pipeline,
separation facility and barge loading terminal. In December 1995, MCN also
acquired a 50% interest in a 40 mile gathering line located in Virginia.
Cogeneration plant begins operations - In October 1995, the Michigan Power
project, a 123 megawatt cogeneration plant in Ludington, Michigan, began
commercial operations. The $150 million facility provides electricity to
Consumers Power Company and steam to Dow Chemical. The facility is owned and
operated by an equal partnership between MCN Investment and Destec Energy.
MCN, through its Gas Marketing & Cogeneration business and Gas Distribution
operations, will supply and transport the nine Bcf of natural gas needed
annually to fuel the plant.
Other Income & Deductions
Other income & deductions for 1995 and 1994 reflect higher interest costs on
increased borrowings required to finance capital investments in the
Diversified Energy operations, as well as dividends on $100 million of
preferred securities of a subsidiary which were issued in November 1994. Also
included in 1995 other income & deductions is a $1.4 million bonus received
from exceeding required performance criteria at the Michigan Power project and
the reversal of a $1.6 million uncollectible reserve on an advance made to a
joint venture. The uncollectible provision was reversed upon the receipt of
payments and credit support to ensure repayment of the remaining advance
balance.
Income Taxes
Income taxes for 1995, 1994 and 1993 were favorably impacted by $11.3 million,
$7.9 million and $2.3 million, respectively, of federal tax credits related to
E&P projects. This impact was offset partially by higher taxes on improved
earnings in both periods.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
CAPITAL RESOURCES AND LIQUIDITY
Operating Activities
MCN's cash flow from operating activities increased $93.0 million and $64.9
million during 1995 and 1994, respectively. The increases were primarily due
to higher net income, adjusted for noncash items of depreciation and deferred
taxes, and lower working capital requirements.
Cash Flow from Operating Activities (in Millions):
<TABLE>
<S> <C>
1995........................ $268.0
1994........................ $175.0
1993........................ $110.1
</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, to 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 the 1993-1995 period, MCN issued 2,489,000 shares, generating $43.3
million. During 1996, MCN anticipates the issuance of new shares of common
stock pursuant to these plans, generating approximately $17.5 million.
The following table sets forth the ratings for securities issued by MCN and
its subsidiaries. These ratings are considered investment grade by each rating
agency.
<TABLE>
<CAPTION>
Standard Duff &
& Poor's Moody's Phelps Fitch
-------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
MichCon:
Commercial Paper.......................... A1 P1 D1 F1
First Mortgage Bonds...................... A A2 A+ A
MCN Investment:
Commercial Paper.......................... A2 P2 D1- F2
Medium-Term Notes*........................ BBB+ baa2 A- BBB+
MCN Michigan Preferred Securities........... BBB+ baa2 BBB+ BBB+
<FN>
* Ratings based on MCN support agreement.
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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 to allow for borrowings of up to
$100 million under a 364 day revolving credit facility and up to $150 million
under a three year revolving credit facility. Commercial paper of $194.8
million was outstanding at December 31, 1995 under these lines.
During 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. MichCon
issued $70 million of first mortgage bonds under shelf registration statements
in 1995. The proceeds from the bonds were used to repay short-term
obligations, to finance MichCon's capital expenditures and for general
corporate purposes.
MichCon issued $80 million and $120 million of first mortgage bonds in 1994
and 1993, respectively. The 1994 proceeds were used to repay short-term
obligations and for general corporate purposes. 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.
During 1995, MichCon renewed its Trust Demand Note program which allows
MichCon to borrow up to $25 million through April 1996. No borrowings were
outstanding as of December 31, 1995, but $25 million was borrowed in January
1996.
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.
Construction of the $40 million transmission and distribution system located
in southern Missouri will be funded through construction financing and $16
million of partner contributions. Through December 31, 1995, MCN has invested
a total of $6.6 million in the project. Construction financing that allows for
borrowings of up to $25 million was obtained in October 1995. MCN has issued a
guaranty for the full amount of this financing, and one of the parties to the
project is obligated to reimburse MCN for 50% of any payments made as a result
of this guaranty. The guaranty will remain in place until permanent financing
is established, which is anticipated to be late 1997.
Diversified Energy
In anticipation of future permanent capital requirements, MCN Investment and
MCN filed a joint shelf registration with the SEC in October 1995 for the
issuance of up to $200 million of debt securities. Under this shelf
registration, MCN Investment issued $200 million of medium-term notes in
January 1996. The proceeds received from this issuance were used by
Diversified Energy to repay short-term debt and for general corporate
purposes.
Prior to the third quarter of 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.
Commercial paper of $373.7 million was outstanding as of December 31, 1995
under these lines.
In order to finance continued investments in exploration and production
activities, MCN's E&P business obtained $100 million under a five year term
loan during 1995.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
<TABLE>
<CAPTION>
Investing Activities
Capital Investments (in Millions) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Consolidated Capital Expenditures:
Gas Distribution .............................. $ 241.5 $ 154.6 $ 143.2
Diversified Energy ............................ 300.9 208.6 66.0
------- ------- -------
542.4 363.2 209.2
------- ------- -------
MCN's Share of Joint Venture Capital Expenditures:
Gas Distribution ............................ 10.3 -- --
Gas Storage ................................. .4 1.8 31.4
Gas Cogeneration ............................ 39.6 32.8 --
Other ....................................... 2.5 5.8 5.1
------- ------- -------
52.8 40.4 36.5
------- ------- -------
Acquisitions:
Consolidated Entities (Note 3) ................. 83.2 -- --
Gas Gathering Joint Venture .................... 10.5 -- --
------- ------- -------
93.7 -- --
------- ------- -------
Minority Partners' Share of Consolidated
Capital Expenditures .......................... (.1) (1.6) (.1)
------- ------- -------
Total Capital Investments ........................ $ 688.8 $ 402.0 $ 245.6
======= ======= =======
</TABLE>
Capital investments near $690 million - Capital investments increased $286.8
million in 1995 due to higher capital expenditures made by both Gas
Distribution and Diversified Energy. Gas Distribution capital expenditures
included the Antrim expansion project, construction of new distribution lines
to reach communities previously not served by MichCon and construction of a
new joint venture gas transmission and distribution system located in southern
Missouri.
Diversified Energy investments reflect increased expenditures for E&P and for
the Michigan Power joint venture cogeneration project. Acquisitions for 1995
represent Diversified Energy's purchase of certain gas producing and pipeline
properties.
The capital investments increase of $156.4 million in 1994 also reflects
higher capital expenditures for E&P assets and the Michigan Power joint
venture cogeneration project.
Outlook
MCN's strategic direction is to grow significantly by investing in a portfolio
of gas-related projects. Accordingly, MCN's capital investments could range
between $2.5 billion and $3.3 billion from 1996 through 2000. For 1996, MCN
expects to invest approximately $850 million with $250 million in Gas
Distribution and $600 million in the Diversified Energy group.
Gas Distribution investments will be made to add new gas sales customers,
develop new gas transportation markets and make improvements to existing
storage and transmission systems. In January 1996, MichCon began construction
of a 59 mile loop of its existing Milford-to-Belle River Pipeline. The
pipeline is anticipated to be completed in early 1997 at a cost of
approximately $80 million. The pipeline will improve the overall reliability
and efficiency of MichCon's gas storage and transmission system.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (concluded)
Within the Diversified Energy group, approximately $450 million will be
invested in E&P projects for drilling operations and to acquire reserves in
the Michigan, Appalachian, Midcontinent, Gulf Coast and Rocky Mountain
regions. The remaining $150 million of expenditures are anticipated to be in
gas gathering, gas processing and power generation projects that are
consistent with MCN's growth strategies.
The proposed level of investments in 1996 and future years will increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. Based on 1996
and 1997 anticipated requirements, MCN and MCN Investment plan to file shelf
registrations with the SEC during the first half of 1996 for the issuance of
up to $900 million of debt and equity securities. MCN's capital requirements
and general market conditions will affect the timing and amount of future
issuances.
As it expands its business, MCN's capitalization objective is to maintain its
solid credit ratings through a strong balance sheet. It is management's
opinion that MCN and its subsidiaries will have sufficient capital resources,
both internal and external, to meet anticipated capital requirements.
15
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Year Ended December 31-(in Thousands)
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost
(which approximates market value) ...... $ 19,259 $ 11,547
Accounts receivable, less allowance
for doubtful accounts of $13,765
and $16,101, respectively .............. 317,945 214,158
Accrued unbilled revenues ............... 92,410 83,053
Gas in inventory (Note 4) ............... 71,763 131,649
Property taxes assessed applicable
to future periods ...................... 60,633 54,728
Gas receivable .......................... 19,266 21,069
Other ................................... 34,220 27,306
---------- ----------
615,496 543,510
---------- ----------
Deferred Charges and Other Assets
Investment in and advances to joint
ventures (Note 2) ...................... 129,026 64,505
Deferred postretirement benefit cost
(Note 10b) ............................. 13,112 20,670
Deferred environmental costs (Note 7b) .. 35,000 --
Prepaid pension costs (Note 10a) ........ 23,827 7,137
Other ................................... 145,433 112,713
---------- ----------
346,398 205,025
---------- ----------
Property, Plant and Equipment, at cost
Gas distribution ........................ 2,496,711 2,267,187
Exploration & production ................ 576,810 277,118
Gas gathering & processing .............. 22,324 7,164
Computer operations & other ............. 64,709 53,356
---------- ----------
3,160,554 2,604,825
Less - Accumulated depreciation
and depletion ........................... 1,223,808 1,112,387
---------- ----------
1,936,746 1,492,438
---------- ----------
$2,898,640 $2,240,973
========== ==========
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable ........................ $ 217,184 $ 142,647
Notes payable (Note 5) .................. 245,635 228,807
Current portion of long-term debt,
capital lease obligations and
redeemable cumulative preferred
securities (Notes 5 and 9) ............. 7,000 7,319
Federal income, property and
other taxes payable .................... 83,384 86,972
Refunds payable to customers ............ 785 19,560
Customer deposits ....................... 11,550 11,581
Other ................................... 86,790 67,809
---------- ----------
652,328 564,695
---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes
(Note 13) .............................. 125,896 93,326
Unamortized investment tax credit ....... 36,797 38,684
Tax benefits amortizable to customers ... 114,668 115,067
Accrued postretirement benefit cost
(Note 10b) ............................. 15,551 26,060
Accrued environmental costs (Note 7b) ... 35,000 --
Minority interest ....................... 18,375 18,670
Other ................................... 145,393 88,490
---------- ----------
491,680 380,297
---------- ----------
Commitments and Contingencies
(Notes 7 and 9)
Capitalization (See accompanying
statement)
Long-term debt, including capital
lease obligations ..................... 993,407 685,519
Redeemable cumulative preferred
securities of subsidiaries ............ 96,449 98,967
Common shareholders' equity ............ 664,776 511,495
---------- ----------
1,754,632 1,295,981
---------- ----------
$2,898,640 $2,240,973
========== ==========
<FN>
The notes to the consolidated financial statements are an integral part of
this statement.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31-(in Thousands, Except Per Share Amounts)
1995 1994 1993
<S> <C> <C> <C>
Operating Revenues
Gas sales (Note 8a) ...................... $ 1,317,136 $ 1,307,815 $ 1,262,771
Transportation and storage services ...... 124,448 119,779 109,694
Computer operations services and other ... 143,356 118,206 107,189
----------- ----------- -----------
Total operating revenues ................. 1,584,940 1,545,800 1,479,654
----------- ----------- -----------
Operating Expenses
Cost of gas ............................. 786,193 823,436 846,733
Operation and maintenance ............... 414,533 399,225 344,712
Depreciation, depletion and
amortization ........................... 121,566 103,620 81,646
Property and other taxes ................ 66,423 64,988 62,677
----------- ----------- -----------
Total operating expenses ................. 1,388,715 1,391,269 1,335,768
----------- ----------- -----------
Operating Income ......................... 196,225 154,531 143,886
----------- ----------- -----------
Equity in Earnings of Joint
Ventures (Note 2) ....................... 5,245 6,289 7,710
----------- ----------- -----------
Other Income and (Deductions)
Interest income ......................... 5,681 6,493 5,187
Interest on long-term debt .............. (45,756) (38,213) (28,789)
Other interest expense .................. (11,622) (10,735) (9,939)
Dividends on preferred securities of
subsidiaries (Note 6a) ................. (9,610) (2,018) (727)
Minority interest ....................... (2,491) (2,879) (3,284)
Other ................................... (2,964) (5,641) (5,313)
----------- ----------- -----------
Total other income and (deductions) ...... (66,762) (52,993) (42,865)
----------- ----------- -----------
Income Before Income Taxes ............... 134,708 107,827 108,731
Income Tax Provision (Note 13) ........... 37,952 30,059 35,941
----------- ----------- -----------
Net Income ............................... $ 96,756 $ 77,768 $ 72,790
=========== =========== ===========
Earnings Per Share ....................... $ 1.49 $ 1.31 $ 1.24
=========== =========== ===========
Average Common Shares Outstanding
(Note 6b) ............................... 64,743 59,394 58,642
=========== =========== ===========
Dividends Declared Per Share ............. $ .9000 $ .8675 $ .8450
=========== =========== ===========
<FN>
The notes to the consolidated financial statements are an integral part of
this statement.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31-(in Thousands)
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net income ................................... $ 96,756 $ 77,768 $ 72,790
Adjustments to reconcile net income
to net cash provided from operating
activities
Depreciation, depletion and amortization
Per statement of income .................. 121,566 103,620 81,646
Charged to other accounts ................ 7,337 7,281 6,398
Deferred income taxes - current ........... 8,927 (15,761) 6,010
Deferred income taxes and investment tax
credits, net ............................ 30,284 3,210 25,411
Equity in earnings of joint ventures,
net of distributions .................... 1,777 1,125 (6,746)
Other .................................... 1,376 1,871 589
Changes in assets and liabilities,
exclusive of changes shown separately ... (20) (4,132) (75,982)
--------- --------- ---------
Net cash provided from operating
activities ......................... 268,003 174,982 110,116
--------- --------- ---------
Cash Flow from Financing Activities
Notes payable, net ........................... 16,828 (51,497) 44,981
Common stock dividends paid .................. (58,193) (51,492) (49,527)
Issuance of common stock (Note 6b) ........... 115,725 15,390 11,432
Issuance of preferred securities
(Note 6a) ................................... -- 96,329 --
Issuance of long-term debt ................... 168,864 78,620 118,129
Long-term commercial paper and
credit facilities, net (Note 5) ............. 142,657 110,100 71,900
Retirement of long-term debt and
preferred securities ........................ (8,271) (7,667) (87,932)
Other ........................................ (2,084) (2,202) (193)
--------- --------- ---------
Net cash provided from
financing activities ......................... 375,526 187,581 108,790
--------- --------- ---------
Cash Flow from Investing Activities
Capital expenditures ......................... (537,156) (356,037) (208,811)
Acquisitions (Note 3) ........................ (83,176) -- --
Investment in joint ventures ................. (20,539) (5,847) (6,457)
Sale of investment in joint
ventures (Note 2) ........................... 10,803 -- --
Other ........................................ (5,749) (1,606) (1,030)
--------- --------- ---------
Net cash used for investing activities ........ (635,817) (363,490) (216,298)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents ............................. 7,712 (927) 2,608
Cash and Cash Equivalents, January 1 .......... 11,547 12,474 9,866
--------- --------- ---------
Cash and Cash Equivalents, December 31 ........ $ 19,259 $ 11,547 $ 12,474
========= ========= =========
Changes in Assets and Liabilities,
Exclusive of Changes Shown Separately
Accounts receivable, net ..................... $(103,951) $ 22,776 $ (27,476)
Accrued unbilled revenues .................... (9,357) 18,274 (9,911)
Gas in inventory ............................. 59,886 (85,754) 1,905
Accounts payable ............................. 74,537 12,589 2,436
Federal income, property and other
taxes payable ............................... (3,716) 23,199 (23,751)
Refunds payable to customers ................. (18,775) 8,766 7,479
Other current assets and liabilities ......... (2,819) (13,387) 13,144
Deferred assets and liabilities .............. 4,175 9,405 (39,808)
--------- --------- ---------
$ (20) $ (4,132) $ (75,982)
========= ========= =========
Supplemental Disclosures Cash paid
during the year for:
Interest, net of amounts capitalized ........ $ 52,833 $ 44,915 $ 37,880
========= ========= =========
Federal income taxes ........................ $ 9,366 $ 32,000 $ 12,850
========= ========= =========
Noncash investing activities:
Property purchased under capital leases ...... $ 3,809 $ 7,190 $ 433
========= ========= =========
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>
18
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
Year Ended December 31-(in Thousands)
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Long-Term Debt, Excluding Current
Requirements (Notes 5 and 9)
First Mortgage Bonds, interest
payable semi-annually
6-1/4% series due 1997 ................. $ 50,000 $ 50,000 $ 50,000
6.30% series due 1998 .................. 20,000 -- --
5-3/4% series due 2001 ................. 60,000 60,000 60,000
8% series due 2002 ..................... 70,000 70,000 70,000
6.72% series due 2003 .................. 4,150 -- --
6.80% series due 2003 .................. 15,850 -- --
9-1/8% series due 2004 ................. 55,000 55,000 55,000
8-1/4% series due 2014 ................. 80,000 80,000 --
9-1/2% series due 2019 ................. 5,000 5,000 5,000
7-1/2% series due 2020 ................. 30,000 -- --
9-1/2% series due 2021 ................. 40,000 40,000 40,000
6-3/4% series due 2023 ................. 18,416 19,109 20,000
7% series due 2025 ..................... 40,000 40,000 40,000
Unamortized premium and
(discount), net ....................... (1,390) (1,508) (920)
Senior Notes - 7.79% series due
1997, interest payable
semi-annually ........................... 30,000 30,000 30,000
Term loan due 2000, interest
payable quarterly ....................... 100,000 -- --
Unsecured Notes - 9-3/4% series
due 2000, interest payable
semi-annually ........................... 12,000 12,000 12,000
Commercial paper and
credit facilities ....................... 324,657 182,000 71,900
Project loan due 2006,
interest payable quarterly .............. 17,600 19,360 21,122
Long-term capital lease
obligations ............................. 18,532 21,814 17,625
Other long-term debt ..................... 3,592 2,744 3,094
----------- ----------- -----------
Total long-term debt, excluding
current requirements .................... 993,407 685,519 494,821
----------- ----------- -----------
Redeemable Cumulative Preferred
Securities of Subsidiaries (Note 6a)
Redeemable Cumulative Preferred
Stock of Subsidiary, Excluding Current
Requirements, par value $1 per share
- 7,000,000 shares authorized, 104,732
and 224,732 shares outstanding at
1994 and 1993, respectively,
$2.05 Series ............................ -- 2,618 5,618
Redeemable Cumulative Preferred
Securities of Subsidiary,
net of unamortized deferred
issuance costs,
$100,000,000 aggregate
liquidation preference value,
4,000,000 shares authorized and
outstanding, Series A ................... 96,449 96,349 --
----------- ----------- -----------
Total preferred securities ............... 96,449 98,967 5,618
----------- ----------- -----------
Common Shareholders' Equity (Note 6)
Common Stock,
par value $.01 per share -
100,000,000 shares authorized,
66,370,230, 59,787,966, and 58,992,726
shares outstanding, respectively ..... 664 598 590
----------- ----------- -----------
Additional Paid-in Capital
Balance - beginning of period ............ 331,571 317,117 306,379
Common stock issued ...................... 115,840 15,628 11,644
Other .................................... (1,356) (1,174) (906)
----------- ----------- -----------
Balance - end of period .................. 446,055 331,571 317,117
----------- ----------- -----------
Retained Earnings
Balance - beginning of period ............ 179,862 153,589 130,329
Net income ............................... 96,756 77,768 72,790
Cash dividends declared on common stock .. (58,193) (51,492) (49,527)
Other .................................... -- (3) (3)
----------- ----------- -----------
Balance - end of period .................. 218,425 179,862 153,589
----------- ----------- -----------
Unearned Compensation .................... (368) (536) (1,128)
----------- ----------- -----------
Total common shareholders' equity ........ 664,776 511,495 470,168
----------- ----------- -----------
Total Capitalization ..................... $ 1,754,632 $ 1,295,981 $ 970,607
=========== =========== ===========
<FN>
The notes to the consolidated financial statements are an integral part of
this statement.
</TABLE>
19
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
MCN Corporation (MCN) is a diversified natural gas holding company with gas
markets and investments throughout North America. 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 subsidiary holding company for various
Diversified Energy businesses. MichCon currently serves 1.2 million Michigan
customers and is subject to the accounting requirements and rate regulation of
the Michigan Public Service Commission (MPSC) with respect to the distribution
and intrastate transportation of natural gas. MCN Investment owns subsidiaries
involved in exploration and production, gas marketing, cogeneration, gas
storage, gas gathering and processing, and computer operations management.
Basis of Presentation - The accompanying consolidated financial statements
were prepared in conformity with generally accepted accounting principles. In
connection with their preparation, management was required to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of MCN and certain consolidated subsidiaries and partnerships.
All exploration and production investments are accounted for using the
proportionate consolidation method. Investments in other entities in which MCN
has a controlling influence are consolidated. Generally, investments in 50% or
less owned entities (Note 2) 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 1995 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 reflected in future rates.
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 - The 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 14). 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 is as follows:
<TABLE>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Gas Distribution ........................ 4.4% 4.4% 4.1%
Gas Gathering & Processing .............. 2.1% 2.4% .5%
Computer Operations Services and other .. 13.5% 12.6% 11.7%
</TABLE>
20
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Taxes and Investment Tax Credits - Due to current tax rates being lower
than the tax rates in effect when the original deferred taxes were recorded,
net excess deferred taxes on existing Gas Distribution plant in service are
included in the tax benefits amortizable to customers account. Also included
in this account is the reduction in income taxes that will result from
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 Energy 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 plant. Diversified Energy operations also include
an allowance for debt funds used during construction. The total amount
capitalized was $7,893,000, $2,928,000 and $3,966,000 in 1995, 1994 and 1993,
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, including
gas cost overcollections.
Consolidated Statement of Cash Flows - MCN considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
Accounting Pronouncements - During 1995, MCN adopted Statement of Financial
Accounting Standards (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. Adoption
of this statement had no effect on MCN's financial statements. In the first
quarter of 1996, MCN will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation plans. Adoption of this statement is not expected to
have a significant effect on MCN's financial statements.
21
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Investments In and Advances to Joint Ventures
MCN has equity interests in several ventures involved in the following
businesses: Gas Distribution - 47 1/2% owned, Gas Storage - 50% owned, Gas
Marketing & Cogeneration - 50% to 99% owned, Gas Gathering & Processing - 33%
to 50% owned, and Real Estate & Other - 33% to 50% owned. In January 1995, MCN
sold its interest in one of its Gas Gathering & Processing joint 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) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues
Gas Storage ............................... $ 31,765 $ 30,656 $ 24,451
Gas Marketing & Cogeneration .............. 27,869 39,597 17,252
Gas Gathering & Processing ................ 3,700 6,589 6,555
Real Estate & Other ....................... 17,471 11,635 10,348
-------- -------- --------
$ 80,805 $ 88,477 $ 58,606
======== ======== ========
Operating Income
Gas Storage ............................... $ 18,595 $ 19,261 $ 17,787
Gas Marketing & Cogeneration .............. 3,258 1,744 1,004
Gas Gathering & Processing ................ 1,545 4,575 5,139
Real Estate & Other ....................... 1,984 1,548 880
-------- -------- --------
$ 25,382 $ 27,128 $ 24,810
======== ======== ========
Income (Loss) Before Taxes
Gas Storage ............................... $ 11,911 $ 13,724 $ 17,309
Gas Marketing & Cogeneration .............. (1,353) (862) (1,154)
Gas Gathering & Processing ................ 1,546 4,313 4,873
Real Estate & Other ....................... (5,202) (6,518) (5,763)
-------- -------- --------
$ 6,902 $ 10,657 $ 15,265
======== ======== ========
MCN's Share of Income (Loss) Before Taxes
Gas Storage ............................... $ 5,916 $ 6,897 $ 8,728
Gas Marketing & Cogeneration .............. (886) (1,306) (1,391)
Gas Gathering & Processing ................ 628 1,730 2,121
Real Estate & Other ....................... (413) (1,032) (1,748)
-------- -------- --------
$ 5,245 $ 6,289 $ 7,710
======== ======== ========
MCN's Share of Income Before Taxes by Segment
Gas Distribution .......................... $ 1,342 $ 2,000 $ 3,077
Diversified Energy ........................ 3,903 4,289 4,633
-------- -------- --------
$ 5,245 $ 6,289 $ 7,710
======== ======== ========
</TABLE>
22
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in Thousands) 1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Gas Distribution ...................................... $ 210 $ --
Gas Storage ........................................... 10,154 10,190
Gas Marketing & Cogeneration .......................... 13,990 9,328
Gas Gathering & Processing ............................ 1,579 2,066
Real Estate & Other ................................... 7,068 1,620
-------- --------
33,001 23,204
-------- --------
Noncurrent Assets
Gas Distribution ...................................... 24,430 --
Gas Storage ........................................... 135,169 140,307
Gas Marketing & Cogeneration .......................... 180,251 105,134
Gas Gathering & Processing ............................ 71,762 21,525
Real Estate & Other ................................... 129,690 139,018
-------- --------
541,302 405,984
-------- --------
$574,303 $429,188
======== ========
MCN's Share of Total Assets
Gas Distribution ...................................... $ 20,532 $ --
Gas Storage ........................................... 72,661 74,481
Gas Marketing & Cogeneration .......................... 116,381 65,541
Gas Gathering & Processing ............................ 31,339 9,436
Real Estate & Other ................................... 40,161 33,523
======== ========
$281,074 $182,981
======== ========
LIABILITIES AND JOINT VENTURES' EQUITY
Current Liabilities
Gas Distribution ...................................... $ 994 $ --
Gas Storage ........................................... 12,099 11,618
Gas Marketing & Cogeneration .......................... 9,716 8,300
Gas Gathering & Processing ............................ 1,981 2,759
Real Estate & Other ................................... 5,321 4,267
-------- --------
30,111 26,944
-------- --------
Noncurrent Liabilities
Gas Distribution ...................................... 15,725 --
Gas Storage ........................................... 75,775 82,328
Gas Marketing & Cogeneration .......................... 176,948 93,458
Gas Gathering & Processing ............................ -- 2,740
Real Estate & Other ................................... 93,939 103,239
-------- --------
362,387 281,765
-------- --------
Joint Ventures' Equity
Gas Distribution ...................................... 7,921 --
Gas Storage ........................................... 57,449 56,551
Gas Marketing & Cogeneration .......................... 7,577 12,704
Gas Gathering & Processing ............................ 71,360 18,093
Real Estate & Other ................................... 37,498 33,131
-------- --------
181,805 120,479
======== ========
$574,303 $429,188
======== ========
MCN's Share of Joint Ventures' Equity
Gas Distribution ...................................... $ 6,600 $ --
Gas Storage ........................................... 28,724 27,638
Gas Marketing & Cogeneration .......................... 7,596 8,758
Gas Gathering & Processing ............................ 30,637 7,237
Real Estate & Other ................................... 18,681 12,795
-------- --------
92,238 56,428
Advances and Other (1) .................................. 36,788 8,077
-------- --------
MCN's investment in and advances to joint venture........ $129,026 $ 64,505
======== ========
<FN>
- ---------
(1) Differences between MCN's carrying value and its share of the joint
ventures' underlying equity interest are being amortized over the weighted
average useful lives of the related assets which equaled 20 years.
</TABLE>
23
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Acquisitions
During December 1995, MCN acquired certain gas producing and pipeline
businesses located in Virginia from CONSOL Coal Group. The acquisition
included 193 Bcf of proved reserves, as well as rights to undertake additional
development drilling on approximately 100,000 acres of coalbed methane
properties. The acquisition also included approximately 80 miles of gathering
lines and a 50% interest in a 40 mile gathering line connected to a major
interstate pipeline. The total cost of the acquisition was $83,176,000 which
is being accounted for under the purchase method.
In early 1996, MCN agreed to acquire a 99% interest in the Dauphin Island
Gathering Partnership. The partnership owns a 90 mile gas gathering system in
the Mobile Bay area of offshore Alabama. The total cost of the acquisition is
approximately $75,000,000 and will be accounted for under the purchase method.
4. Gas in Inventory
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1995, the replacement cost exceeded the $71,763,000 LIFO cost for 80 Bcf by
$140,835,000 and at December 31, 1994, the replacement cost exceeded the
$131,649,000 LIFO cost for 104 Bcf by $123,283,000. MichCon's current GCR
tariff provisions prevent MichCon from retaining any benefits from a lower
cost of gas sold resulting from liquidating its LIFO inventory. MichCon's LIFO
inventory balance was 64 Bcf as of December 31, 1995.
5. Credit Facilities, Short-Term Borrowings and Long-Term Debt
During 1995, MichCon negotiated new credit lines 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 usually
issues commercial paper in lieu of an equivalent amount of borrowings under
these lines of credit. Commercial paper outstanding at December 31, 1995 and
1994, totaled $194,760,000 and $143,457,000, respectively, at weighted average
interest rates of 5.7% and 5.8%. This debt is classified as short-term based
on management's intent to repay it within one year. Fees are paid to
compensate banks for lines of credit.
During 1995, MCN Investment increased its credit lines 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. These facilities
replaced credit facilities totaling $320,000,000 that existed at December 31,
1994. The facilities support MCN Investment's $400,000,000 commercial paper
program that was established in 1995. MCN Investment has issued commercial
paper in lieu of an equivalent amount of borrowings under these lines of
credit. Commercial paper used to temporarily finance working capital
requirements totaling $49,000,000 at December 31, 1995 is classified as
short-term based upon management's intent to repay this debt within one year.
The remaining commercial paper balance at December 31, 1995 is classified as
long-term. Commercial paper borrowings outstanding as of December 31, 1995
totaled $373,657,000 and are at a weighted average interest rate of 6.0%. At
December 31, 1994, borrowings of $182,000,000 were outstanding under its
revolving credit facility at a weighted average rate of 6.6%. Fees are paid to
compensate banks for lines of credit.
MichCon renewed its Trust Demand Note program during 1995 which allows for
borrowings of up to $25,000,000 through April 1996. No borrowings were
outstanding at December 31, 1995, but $25,000,000 was borrowed in January 1996
at an interest rate of 5.6%. Borrowings of $25,000,000 were outstanding under
this program at December 31, 1994 at an interest rate of 6.1%.
Substantially all of the properties of MichCon totaling approximately
$1,066,000,000 serve as collateral for its outstanding first mortgage bonds.
During 1995, Supply Development Group, Inc. (Supply Development), a subsidiary
of MCN Investment, established a five year term loan at certain alternative
variable rates at MCN's option. The loan allows for borrowings of up to
$100,000,000 and is based on Supply Development's proved gas reserves. The
balance outstanding at December 31, 1995 was at a weighted average interest
rate of 6.3%. Fees are paid to compensate banks for the loan facility. The
most restrictive provision of the agreement requires Supply Development to
maintain an interest coverage ratio greater than or equal to 2.25 to 1.00.
MichCon has a variable interest rate swap agreement through April 2000 on
$12,000,000 of fixed rate unsecured notes which effectively reduced the cost
of this debt from 9.8% to 6.2% for the year ended December 31, 1995.
24
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Saginaw Bay Pipeline Company (Saginaw Bay) has an interest rate swap agreement
on the $19,360,000 outstanding balance of its project loan agreement at
December 31, 1995, 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
1.15 to 1.00 at December 31, 1995. Substantially all of the properties of
Saginaw Bay and its partnership totaling approximately $37,458,000 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, 1995 are $1,900,000 in 1996,
$81,900,000 in 1997, $22,200,000 in 1998, $21,800,000 in 1999 and $133,800,000
in 2000. In addition, the long-term commercial paper balance outstanding as of
December 31, 1995 is supported by the three year credit facility that expires
in 1998.
The following long-term debt was issued during early 1996 (in thousands):
<TABLE>
<CAPTION>
Issue Date Description Amount Issued
---------- ----------- -------------
<S> <C> <C>
January 1996 MCN Investment Medium-Term Notes
5.84%, due February 1999 $ 80,000
6.03%, due February 2001 60,000
6.32%, due February 2003 60,000
</TABLE>
6. Preferred Securities and Common Stock
a. Preferred and Preference Securities
In 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, at the
liquidation preference value of $25 per share. Holders of the securities
are entitled to receive dividends at an annual rate of 9 3/8% of the
liquidation preference value. Dividends are payable monthly and in
substance are tax deductable by MCN. Gross proceeds of the issuance totaled
$100,000,000 and were loaned to MCN. Financing costs were deferred and
reflected as a reduction in the carrying value of the preferred securities.
These costs are being amortized using the straight-line method over 30
years. MCN has the right under the loan agreement to extend interest
payment periods for up to 60 months, and as a consequence, monthly dividend
payments on the preferred securities can be deferred by MCN Michigan during
any such interest payment period. In the event that MCN exercises this
right, MCN may not declare dividends on its common stock. With MCN's
consent, the preferred securities are redeemable at the option of MCN
Michigan, in whole or in part , for $25 per share on or after November 30,
1999. In addition, upon final maturity of the loan in 2024, MCN Michigan is
required to redeem the preferred securities. In the event of default,
holders of the preferred securities will be entitled to exercise and
enforce MCN Michigan's creditor rights against MCN, which may include
acceleration of the principal amount of the loan.
At December 31, 1995, MichCon had outstanding 104,732 shares of Redeemable
Cumulative Preferred Stock, $2.05 Series. In January 1996, MichCon redeemed
all outstanding shares at the sinking fund redemption price of $25 per share.
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, 1995, there have been no
issuances of preferred or preference stock under these authorizations.
b. Common Stock
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.
MCN also 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 858,000 in 1995, 855,000 in 1994 and
776,000 in 1993 and generated net proceeds of $16,500,000, $15,400,000 and
$11,400,000, respectively.
25
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
c. Stock Incentive Plan
MCN's Stock Incentive Plan authorizes the use of performance units, restricted
stock or other stock-related awards to key management employees. MCN's current
policy is to issue performance units which encourages a strategic focus on
long-term performance and have a high retention value. The performance units
are denominated in shares of MCN stock, and issued to executives based on
total shareholder return as compared to a group of peer companies over a
six-year period. MCN granted 370,920, 322,820 and 283,376 performance units in
1995, 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. Under the Stock Incentive Plan,
2,999,315 shares were available to be issued at December 31, 1995.
d. 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.
7. Commitments and Contingencies
a. Guaranties
During 1995, MCN agreed to acquire a 47.5% interest in a partnership formed to
construct, own and operate a natural gas transmission and distribution system
located in southern Missouri. Construction financing was obtained that allows
for borrowings of up to $25,000,000. MCN has issued a guaranty for the full
amount of this financing, and one of the parties to the project is obligated
to reimburse MCN for 50% of any payments made as a result of this guaranty.
The guaranty will remain in place until permanent financing is established
which is anticipated to be in late 1997. Borrowings under the construction
loan totaled $15,600,000 at December 31, 1995.
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. 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.
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 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 Environmental Quality. None of these former MGP sites
are on the National Priorities List prepared by the U.S. Environmental
Protection Agency.
MCN is not involved in any administrative proceedings regarding these former
MGP sites, but is currently remediating one of the sites. The remedy consists
of limited excavation and disposal of soils, a new soil cover and, if
necessary, a groundwater capture and treatment system. More extensive
investigations are underway at three other sites.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of
a cost deferral and rate recovery mechanism for reasonable and prudent
investigation and remediation costs incurred at former MGP sites in excess of
this reserve.
26
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MCN has employed outside consultants to evaluate remediation alternatives at
these sites, to assist in estimating its potential liabilities and to review
its archived insurance policies. 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 its claims
against these carriers. The findings of these investigations indicate that the
estimated total expenditures for investigation and remediation at all 17
former MGP sites will be between $30,000,000 and $170,000,000 based on
undiscounted 1995 costs. As a result of these studies, MCN accrued in the 1995
fourth quarter an additional liability and corresponding regulatory asset of
$35,000,000.
During 1995, 1994 and 1993, MCN spent $2,100,000, $600,000 and $2,100,000,
respectively, investigating these former MGP sites. At December 31, 1995, the
reserve balance is $38,451,000, of which $3,451,000 is classified as current.
Any significant change in assumptions, such as remediation techniques, nature
and extent of contamination and regulatory requirements, could impact the
estimate of remedial action costs and therefore have an effect on MCN's
financial position and cash flows. However, 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 results of operations.
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 1996, MCN has firm purchase
commitments for approximately 193 Bcf of gas of which approximately 131 Bcf
are MichCon purchase commitments. MCN expects that sales will exceed its
minimum purchase commitments. To ensure that there is sufficient flexibility
to obtain the lowest cost natural gas supplies in the future, MichCon is
reducing the length of its long-term gas purchase contracts. As longer-term
contracts expire, they will be replaced with contracts of one year or less,
ensuring that MichCon's supply portfolio is compatible with the market at any
point in time. MCN has long-term transportation contracts with various
interstate pipeline companies which expire on various dates through the year
2011. MCN is also committed to pay demand charges of $81,711,000 during 1996
related to firm purchase and transportation agreements. Of this total,
approximately $66,474,000 relates to Gas Distribution operations and is
recoverable through the GCR mechanism.
MCN's computer operations has entered into long-term contracts to obtain
software license rights for both internal use and for support of client data
processing. Under these agreements, MCN is required to make minimum annual
payments through 2004 which total $45,150,000. Additionally, MCN is required
to make contingent payments beginning in 1997 if computer operations revenues
exceed $89,000,000.
Capital investments for 1996 are estimated to be $850,000,000, 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 1995 and 1994, ANR filed several requests for recovery of these
transition costs. MichCon accrued its portion totaling $6,800,000 and
$5,400,000 in 1995 and 1994, respectively. These transition costs are
recovered through the GCR mechanism as paid, and therefore, a regulatory 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
there will be no significant effect on MCN's financial statements.
27
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 ultimately unsuccessful in defeating Panhandle's
claim, it is anticipated that these costs will be recoverable through the GCR
mechanism, and therefore, a regulatory asset has been recorded for their
future recovery.
e. Other
MichCon receives a significant amount of heating assistance funding from the
Low-Income Home Energy Assistance Program (LIHEAP). A substantial portion of
the 1996 program funding has been reduced by Congress, with Michigan's share
of the funds being reduced from $78,000,000 in 1995 to $47,500,000 in 1996.
MichCon customers currently receive 35% of the funds available in Michigan.
MichCon is currently working with federal and state officials to identify ways
to obtain energy assistance for low-income customers from other avenues and is
taking actions to minimize any impact that reductions in LIHEAP funding would
have on MCN's financial statements.
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.
8. 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 authorized rate of return
on common equity to 11.5%.
b. Regulatory Assets and Liabilities
MCN's Gas Distribution operations are subject to the provisions of SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." As a
result, several regulatory assets and liabilities are recorded in MCN's
financial statements. Regulatory assets represent costs which will be
recovered from customers through the ratemaking process. Regulatory
liabilities represent benefits which will flow-through to customers as
refunds or reduced rates. The following regulatory assets and liabilities
were reflected in the Consolidated Statement of Financial Position as of
December 31:
<TABLE>
<CAPTION>
(in Thousands) 1995 1994
-------- --------
<S> <C> <C>
Regulatory Assets:
Deferred postretirement benefit (Note 10b) .. $ 13,112 $ 20,670
Unamortized loss on retirement of debt ...... 9,773 10,248
Deferred environmental costs (Note 7b) ...... 35,000 --
Conservation programs ....................... 7,792 13,170
Other (Note 7d) ............................. 6,242 5,938
-------- --------
$ 71,919 $ 50,026
======== ========
Regulatory Liabilities:
Refunds payable to customers ................ $ 785 $ 19,560
Unamortized investment tax credit ........... 36,797 38,684
Tax benefits amortizable to customers ....... 114,668 115,067
-------- --------
$152,250 $173,311
======== ========
</TABLE>
28
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MCN's Gas Distribution operations currently have regulatory precedents and
orders in effect which provide for the probable recovery or refund of their
regulatory assets and liabilities. Future regulatory changes or changes in the
competitive environment could result in MCN discontinuing the application of
SFAS No. 71 for all or part of its Gas Distribution business and require the
write-off of the portion of any regulatory asset or liability which was no
longer probable of recovery or refund. If MCN were to have discontinued the
application of SFAS No. 71 as of December 31, 1995, it would have had a
noncash increase to net income from extraordinary items of approximately
$52,000,000. Management believes that evidence currently available supports
the continued application of SFAS No. 71 and the recorded regulatory assets
and liabilities.
9. 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 related
accumulated depreciation at December 31, 1995 are $34,978,000 and $11,266,000,
respectively. The gross amount of assets and related accumulated depreciation
at December 31, 1994 were $34,077,000 and $9,507,000, respectively.
29
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Minimum rental commitments under noncancelable leases at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
Capital Operating
(in Thousands) Leases Leases
-------- --------
<C> <C> <C>
1996 .................................. $ 4,423 $20,585
1997 .................................. 4,379 17,789
1998 .................................. 4,070 13,158
1999 .................................. 3,827 8,451
2000 .................................. 3,109 4,538
2001 and thereafter ................... 10,470 21,571
------- -------
Total minimum lease payments .......... 30,278 $86,092
=======
Less: Amount representing interest ... 9,240
-------
Present value of minimum lease payments 21,038
Less: Current portion ................ 2,506
-------
Long-term obligations ................. $18,532
=======
</TABLE>
Total minimum lease payments for capital and operating leases have not been
reduced by future minimum sublease rentals of $8,547,000 and $2,708,000,
respectively, under noncancelable subleases.
Capital and operating lease payments for the years ended December 31 consist
of the following:
<TABLE>
<CAPTION>
(in Thousands) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Capital lease expense:
Depreciation expense ........ $ 1,679 $ 1,369 $ 941
Interest expense ............ 2,170 2,156 1,923
------- ------- -------
Total capital lease expense ... $ 3,849 $ 3,525 $ 2,864
======= ======= =======
Operating lease expense ....... $23,295 $20,670 $16,641
======= ======= =======
</TABLE>
30
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. 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 1995, 1994 or 1993 plan years were made, and none will be made for the
1996 plan year.
Net pension cost for these plans included the following components:
<TABLE>
<CAPTION>
(in Thousands) 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period ... $ 9,318 $ 12,854 $ 11,046
Interest cost on projected benefit obligation ...... 32,061 30,450 29,987
Net amortization and deferral ...................... 65,883 (60,508) 65,146
Actual (return) loss on plan assets ................ (123,952) 15,461 (107,148)
--------- --------- ---------
Net pension credit ................................. $ (16,690) $ (1,743) $ (969)
========= ========= =========
</TABLE>
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) 1995 1994
---------- ---------
<S> <C> <C>
Measurement date .......................................... October 31 October 31
Actuarial present value of:
Accumulated vested benefit obligation ................... $357,377 $323,391
Accumulated nonvested benefit obligation ................ 33,850 24,908
-------- --------
Total accumulated benefit obligation .................... $391,227 $348,299
======== ========
Projected benefit obligation for service rendered to date $456,309 $399,724
Plan assets at measurement date ........................... 670,629 572,271
-------- --------
Plan assets in excess of projected benefit obligation ..... 214,320 172,547
Less: Unrecognized net asset at transition ............... 45,139 50,179
Unrecognized prior service cost ................. 1,662 3,076
Unrecognized net gain ........................... 143,692 112,155
-------- --------
Prepaid pension cost recognized in the Consolidated
Statement of Financial Position ......................... $ 23,827 $ 7,137
======== ========
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 7.5% for 1995 and 8.0% for
1994. The rate of increase in future compensation levels used was 5.0% for
1995 and 1994. The expected long-term rate of return on plan assets was 9.0%
for 1995 and 7.5% for 1994 and 1993. For 1995 and 1994, plan assets consisted
primarily of equity and fixed income securities.
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 matching of employee contributions. The cost of these plans
was $7,300,000 in 1995, $6,700,000 in 1994 and $6,100,000 in 1993.
31
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
b. Other Postretirement Benefits
MCN provides certain healthcare 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.
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 accelerated the amortization of the
deferred postretirement cost from 19 years to approximately four years.
MCN's policy is to fund its postretirement benefit costs to the extent such
amounts are recoverable in Gas Distribution rates. Separate qualified
Voluntary Employees' Beneficiary Association (VEBA) trusts exist for union and
nonunion employees. Funding to the VEBA trusts totaled $27,504,000, $8,345,000
and $28,700,000 in 1995, 1994 and 1993, respectively. An additional
contribution of $34,718,000 was made in January 1996. The expected long-term
rate of return on plan assets, which are invested in life insurance policies,
equity securities and fixed income securities, was 8.9% for 1995 and 7.4% for
1994.
Net postretirement cost for the years ended December 31, includes the
following components:
<TABLE>
<CAPTION>
(in Thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the period ... $ 5,345 $ 7,859 $ 7,738
Interest cost on accumulated benefit obligation .... 18,815 21,749 20,517
Amortization of transition obligation .............. 13,810 14,601 14,656
Net amortization and deferral ...................... 7,396 (2,607) --
Actual (return) loss on plan assets ................ (15,670) 489 --
-------- -------- --------
Total postretirement cost .......................... 29,696 42,091 42,911
Regulatory adjustment .............................. 7,558 4,942 (25,612)
-------- -------- --------
Net postretirement cost ............................ $ 37,254 $ 47,033 $ 17,299
======== ======== ========
</TABLE>
32
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
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 accrued postretirement cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
(in Thousands) 1995 1994
---------- ----------
<S> <C> <C>
Measurement Date ...................................... October 31 October 31
Accumulated postretirement benefit obligation:
Retirees ............................................ $ 156,944 $ 154,328
Fully eligible active participants .................. 29,057 31,055
Participants with less than 30 years of service ..... 67,094 73,388
--------- ---------
253,095 258,771
Plan assets at measurement date ....................... 74,295 28,211
--------- ---------
Accumulated postretirement benefit obligation in excess
of plan assets ...................................... 178,800 230,560
Less: Unrecognized transition obligation ............. 232,248 261,488
Unrecognized net gain ....................... (75,130) (65,333)
Contributions made after measurement date ... 6,131 8,345
--------- ---------
Accrued postretirement liability recognized in the
Consolidated Statement of Financial Position ........ $ 15,551 $ 26,060
========= =========
</TABLE>
The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 12% for 1996, 11% for 1997 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, 1995 by 13% and increase the sum of the service
cost and interest cost by 18% for the year then ended. The discount rate used
in determining the accumulated postretirement benefit obligation was 7.5% and
8.0% for 1995 and 1994, respectively.
11. Risk Management Activities and Derivative Financial Instruments
MCN manages commodity price and interest rate risk through the use of various
derivative instruments and limits the use of such instruments to hedging
activities. If MCN did not use derivative instruments, its exposure to such
risk would be higher. Although this strategy reduces risk, it also limits
potential gains from favorable changes in commodity prices and interest rates.
Derivative instruments also give rise to credit risks due to nonperformance by
counterparties. MCN's control procedures are designed to minimize overall
exposure to credit risk. MCN closely monitors the financial condition and
credit rating of counterparties, diversifies its risk by having a significant
number of counterparties and limits its counterparties to investment grade
institutions. MCN generally requires cash collateral when exposure to the
counterparty exceeds certain limits, and its agreements with each counterparty
generally allow for the netting of positive and negative positions.
Commodity price and interest rate risks are actively monitored by an
independent risk control group to ensure compliance with MCN's risk management
policies at both the corporate and subsidiary levels. These policies,
including related risk limits, are regularly assessed to ensure their
appropriateness given MCN's objectives, strategies and current market
conditions. Derivative instruments are reviewed periodically to ensure
they continue to effectively reduce exposure to commodity price and
interest rate risks. MCN's objective is to maintain a balanced
portfolio of gas supply and gas sales contracts. Net open positions
often result from the timing of new transactions. MCN closely
monitors and manages its exposure to commodity price risk through
a variety of risk management techniques. MCN's objective is to manage
its exposure to commodity price risk to increase the likelihood of
achieving targeted rates of return.
33
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a. Commodity Price Hedging
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts, gas and oil production and gas inventories.
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 of contracts that hedge gas and oil 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.
The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received:
<TABLE>
<CAPTION>
(in Thousands of Dollars) 1995 1994
-------- --------
<S> <C> <C>
Fixed price receiver:
Volumes (Bcf equivalent) 278.4 170.4
Notional value ......... $635,017 $418,645
Latest maturity ........ 2008 2008
Variable price receiver:
Volumes (Bcf equivalent) 73.8 95.7
Notional value ......... $149,654 $205,099
Latest maturity ........ 2006 2006
</TABLE>
Notional amounts represent the volume of transactions valued at the fixed or
variable price that MCN has contracted to obtain. Notional amounts do not
represent the amounts exchanged by the parties to the swaps, and therefore do
not reflect MCN's exposure to commodity price or credit risks (Note 12).
Collateral in the form of letters of credit of $7,000,000 was provided as of
December 31, 1995. MCN provided $21,000,000 cash as collateral under its gas
swap agreements as of December 31, 1994.
b. Interest Rate Hedging
In order to manage interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life of
the agreements without exchange of the underlying principal amounts. 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, 1995, MCN had interest rate swap agreements with notional
principal amounts totaling $31,360,000 (Note 5) and a weighted average
remaining life of 4.6 years. At December 31, 1994, the notional principal
amount of outstanding interest rate swaps totaled $33,100,000. 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.
12. Fair Value of Financial Instruments and Common Stock
MCN has estimated the fair value of its financial instruments and common stock
using available market information and appropriate valuation methodologies.
Considerable judgment is required in developing the estimates of the fair
value of financial instruments, 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 their
short-term nature.
34
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying amount and fair value of other financial instruments and common
stock consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Assets:
Notes receivable and advances ............. $ 6,550 $ 6,550 $ 10,192 $ 10,192
Liabilities and Shareholders' Equity:
Long-term debt, excluding capital
lease obligations ....................... 974,875 1,018,096 663,705 644,367
Redeemable cumulative preferred securities,
including current portion ............... 99,067 109,133 101,967 103,007
Common shareholders' equity .............. 664,776 1,543,108 511,495 1,076,183
Derivative Financial Instruments: (Note 11)
Natural gas and oil swaps:
with unrealized gains ................... 35,514 35,514 916 916
with unrealized losses .................. 18,084 18,084 33,885 33,885
Interest rate swaps:
with unrealized gains ................... 1,778 693
with unrealized losses .................. 927 1,080
</TABLE>
The fair values are determined based on the following:
Notes receivable and advances - interest rates available to MCN for
investments with similar maturities and credit quality assumptions.
Long-term debt - interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.
Redeemable cumulative preferred securities and common stock - quoted market
prices.
Natural gas and oil and interest rate swaps - estimated amounts that MCN would
receive or pay to terminate the swap agreements, taking into account current
gas and oil prices, interest rates and the creditworthiness of the swap
counterparties.
Guaranties (Note 7a) - estimated cost to terminate the Southern Missouri
project guaranty is immaterial. Management is unable to practicably estimate
the fair value of the Harbortown guaranty due to the nature of the related
party transaction.
The fair value estimates presented herein are based on information available
to management as of December 31, 1995 and 1994. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
35<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Summary of Income Taxes
<TABLE>
<CAPTION>
(in Thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Effective federal income tax rate ....................... 28.0% 26.7% 32.5%
======== ======== ========
Income taxes consist of:
Current provision .................................... $ (1,647) $ 48,526 $ 4,628
Deferred provision, net .............................. 52,756 (8,709) 35,494
Federal tax credits .................................. (11,271) (7,872) (2,258)
Investment tax credits, net .......................... (1,886) (1,886) (1,923)
-------- -------- --------
Total income taxes ...................................... $ 37,952 $ 30,059 $ 35,941
======== ======== ========
Reconciliation between statutory and actual income taxes:
Statutory federal income taxes at a rate of 35% ......... $ 47,148 $ 37,739 38,056
Adjustments to federal tax expense:
Excess of book over tax depreciation, allowed ........ 7,365 6,119 4,302
Adjustments to federal income taxes provided in
prior periods ...................................... (1,337) (3,303) (1,187)
Amortization of investment tax credit ................ (1,886) (1,886) (1,923)
Federal tax credits ................................. (11,271) (7,872) (2,258)
Other, net ........................................... (2,067) (738) (1,049)
-------- -------- --------
Total income taxes .................................... $ 37,952 $ 30,059 $ 35,941
======== ======== ========
</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. Unused federal gas
production tax credits may be carried forward indefinitely. 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) 1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Uncollectibles ................................ $ 5,249 $ 5,880
Vacation and other benefits ................... 10,288 7,548
Federal gas production tax credits carryforward 10,907 4,298
Other ......................................... 8,513 13,498
--------- ---------
Total deferred tax assets ........................ 34,957 31,224
--------- ---------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net ........................... 126,045 90,788
Property taxes ................................ 14,156 12,414
Other ......................................... 27,286 19,055
--------- ---------
Total deferred tax liabilities ................... 167,487 122,257
--------- ---------
Net deferred tax liability ....................... 132,530 91,033
Less: Net deferred tax (asset) liability, current 6,634 (2,293)
--------- ---------
Net deferred tax liability, noncurrent ........... $ 125,896 $ 93,326
========= =========
</TABLE>
14. Supplementary Information for Gas and Oil Producing Activities
(Unaudited) The following information was prepared in accordance with
SFAS No. 69, "Disclosures about Oil and Gas Producing Activities" and related
SEC accounting rules. Data is presented for the 1995 and 1994 periods only as
MCN's gas and oil producing activities were not significant prior to 1994.
36
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Capitalized Costs
(in Thousands) 1995 1994
-------- --------
<S> <C> <C>
Proved properties ..................................... $477,411 $229,736
Unproved properties ................................... 99,399 47,382
-------- --------
576,810 277,118
Accumulated depreciation, depletion and amortization .. 34,895 12,377
-------- --------
Net capitalized costs ................................. $541,915 $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,
1995, and the year in which they were incurred follows:
<TABLE>
<CAPTION>
Year Costs Incurred
-----------------------------
1993 &
(in Thousands) Total 1995 1994 Prior
------- ------- ------- -------
<S> <C> <C> <C> <C>
Acquisition .... $72,423 $46,808 $24,367 $ 1,248
Exploration .... 26,976 25,119 1,782 75
------- ------- ------- -------
$99,399 $71,927 $26,149 $ 1,323
======= ======= ======= =======
</TABLE>
The acquisition amount includes all costs incurred to purchase or lease
property with unproved reserves.
<TABLE>
<CAPTION>
Costs Incurred
Year Ended December 31 - (in Thousands) 1995 1994
-------- --------
<S> <C> <C>
Acquisition:
Proved properties ................... $114,956 $ 86,571
Unproved properties ................. 46,984 40,365
-------- --------
Total ........................... 161,940 126,936
Exploration ............................ 39,106 14,921
Development ............................ 98,099 44,362
-------- --------
Total ........................... $299,145 $186,219
======== ========
</TABLE>
37
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Results of Operations
(in Thousands) 1995 1994
-------- --------
<S> <C> <C>
Operating revenues:
Unaffiliated customers .................. $ 32,089 $ 14,532
Affiliated customers .................... 37,091 18,375
-------- --------
69,180 32,907
-------- --------
Production costs ........................... 18,447 8,697
Depreciation, depletion and amortization ... 22,518 10,800
-------- --------
40,965 19,497
-------- --------
Income before income taxes ................. 28,215 13,410
-------- --------
Income taxes:
Income tax provision .................... 9,805 4,674
Federal tax credits .................... (11,271) (7,872)
-------- --------
(1,466) (3,198)
-------- --------
Results of operations, excluding corporate
and interest costs ...................... $ 29,681 $ 16,608
======== ========
</TABLE>
The average amortization rate per Mcf was $.74 and $.66 in 1995 and 1994,
respectively.
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>
1995
------------------------
Gas (MMcf) Oil (Mbbl)
---------- ----------
<S> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year ........................ 421,988 1,161
Revisions of previous estimates ....... (34,581) 859
Extensions and discoveries ............ 188,568 730
Production ............................ (31,420) (388)
Purchases of minerals in place ........ 313,826 2,323
------- -----
End of year .............................. 858,381 4,685
======= =====
Proved developed reserves:
Beginning of year ........................ 247,992 1,042
End of year .............................. 563,395 3,349
</TABLE>
38
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 11) 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>
(in Thousands) 1995 1994
----------- -----------
<S> <C> <C>
Future revenues .............................................. $ 2,143,506 $ 1,084,046
Future production costs ...................................... 860,134 342,564
Future development costs ..................................... 199,284 66,256
----------- -----------
Future net cash flows before income taxes .................... 1,084,088 675,226
Discount to present value at 10% ............................. 536,405 357,120
----------- -----------
Present value of future net cash flows before income taxes ... 547,683 318,106
Future income taxes discounted at 10% ........................ 88,954 56,329
Future tax credits discounted at 10% ......................... (63,178) (49,288)
----------- -----------
Standardized measure of discounted future net cash flows ..... $ 521,907 $ 311,065
=========== ===========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows were as follows:
<TABLE>
<CAPTION>
(in Thousands) 1995
---------
<S> <C>
Beginning of year ..................................... $ 311,065
Net changes in sales prices and production costs ... (55,262)
Net change due to revisions in quantity estimates .. (21,294)
Extensions and discoveries ......................... 145,184
Development costs incurred, previously estimated ... 75,537
Changes in estimated future development costs ...... (50,757)
Sales, net of production costs ..................... (50,733)
Net change in income taxes ......................... (6,381)
Federal tax credits generated ...................... (11,271)
Purchases of reserves in place ..................... 160,497
Accretion of discount and other .................... 25,322
---------
End of year ........................................... $ 521,907
=========
</TABLE>
39
<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. 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 2).
<TABLE>
<CAPTION>
Computer
Gas Gas Operations Corporate Intercompany Consolidated
(in Thousands) Distribution(1) Services(1) Services & Other(3) Eliminations Total
(3)
-------------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995
Operating Revenues ........ $ 1,107,646 $ 400,027 $ 105,161 $ -- $(27,894)(2) $1,584,940
Operating Income (Loss) ... 166,319 24,619 7,996 (2,709) -- 196,225
Identifiable Assets ....... 1,893,888 925,141 67,714 21,775 (9,878) 2,898,640
Depreciation, Depletion and
Amortization ........... 91,314 22,502 6,981 769 -- 121,566
Capital Expenditures ...... 241,567 284,703 9,380 6,795 -- 542,445
Capital Investments ....... 252,081 420,277 9,380 7,100 -- 688,838
1994
Operating Revenues $ 1,136,970 $ 346,500 $ 88,211 $ -- $ (25,881)(2) $1,545,800
Operating Income (Loss) ... 136,559 13,383 6,617 (2,028) -- 154,531
Identifiable Assets ....... 1,655,208 517,775 65,378 11,225 (8,613) 2,240,973
Depreciation, Depletion and
Amortization ........... 86,010 11,163 5,785 662 -- 103,620
Capital Expenditures ...... 154,595 193,434 12,458 2,740 -- 363,227
Capital Investments ....... 153,600 230,678 12,458 5,233 -- 401,969
1993
Operating Revenues ........ $ 1,141,464 $ 289,296 $ 74,391 $ -- $ (25,497) $1,479,654
Operating Income (Loss) ... 136,602 4,763 5,192 (2,671) -- 143,886
Identifiable Assets ....... 1,583,085 244,570 51,372 13,979 (11,106) 1,881,900
Depreciation, Depletion and
Amortization ........... 75,504 1,142 4,616 384 -- 81,646
Capital Expenditures ...... 143,255 58,694 5,064 2,231 -- 209,244
Capital Investments ....... 158,162 78,494 5,064 3,891 -- 245,611
<FN>
- ---------
(1) In January 1996, MCN consolidated its Michigan pipeline operations by
transferring its Michigan gathering and transportation network
operations from Gas Services to Gas Distribution. The segment
information included herein is presented as though the combined
intrastate pipeline operations were part of Gas Distribution for all
periods presented.
(2) Intercompany eliminations include revenue of Computer Operations
Services from Gas Distribution of $15,254, $15,877 and $15,340 for 1995,
1994 and 1993, respectively. The remaining balance is primarily for gas
transportation and gas sales between Gas Distribution and Gas Services.
(3) MCN allocated certain operating expenses from Corporate & Other to Gas
Services. The segment information included herein reflects the
allocation for all periods presented.
</TABLE>
40<PAGE>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Consolidating Financial Statements
Debt securities issued by MCN Investment in January 1996 (Note 5) are subject
to a support agreement between MCN and MCN Investment, under which MCN has
committed to make payments of interest and principal on MCN Investment's
securities. Under the terms of the support agreement, the assets of MCN, other
than MichCon, and the cash dividends paid to MCN by any of its subsidiaries
are available as recourse to holders of MCN Investment's securities. The
carrying value of MCN's assets on an unconsolidated basis, primarily
investments in its subsidiaries other than MichCon, is $296,271,000 at
December 31, 1995.
The following MCN consolidating financial statements are presented and
include separately MCN Investment, MichCon and MCN and other subsidiaries. MCN
has determined that separate financial statements and other disclosures
concerning MCN Investment are not material to investors. The other MCN
subsidiaries represent Citizens Gas Fuel Company, Blue Lake Holdings, Inc. and
MCN Michigan Limited Partnership.
41<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
(in Thousands)
MCN Eliminations
and other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ----------
December 31, 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost ............. $ 168 $ 10,622 $ 8,469 $ -- $ 19,259
Accounts receivable ............................ 4,934 147,510 188,353 (9,087) 331,710
Less: allowance for doubtful accounts ........ 70 445 13,250 -- 13,765
Accounts receivable, net ....................... 4,864 147,065 175,103 (9,087) 317,945
Accrued unbilled revenue ....................... 1,276 -- 91,134 -- 92,410
Gas in inventory ............................... -- 31,572 40,191 -- 71,763
Property taxes assessed applicable to
future periods ................................ 176 3,508 56,949 -- 60,633
Gas receivable ................................. -- 4,995 14,242 29 19,266
Other .......................................... 596 25,422 18,256 (10,054) 34,220
----------- ----------- ----------- ----------- -----------
7,080 223,184 404,344 (19,112) 615,496
----------- ----------- ----------- ----------- -----------
Deferred Charges and Other Assets
Investments in and advances to joint ventures
and subsidiaries ............................. 773,344 100,483 20,318 (765,119) 129,026
Deferred postretirement benefit cost ........... 740 -- 12,372 -- 13,112
Deferred environmental costs ................... 3,000 -- 32,000 -- 35,000
Prepaid pension costs .......................... -- -- 25,438 (1,611) 23,827
Other .......................................... 7,501 94,756 42,061 1,115 145,433
----------- ----------- ----------- ----------- -----------
784,585 195,239 132,189 (765,615) 346,398
----------- ----------- ----------- ----------- -----------
Property, Plant and Equipment, at cost .......... 27,784 719,650 2,413,120 -- 3,160,554
Less - Accumulated depreciation and depletion .. 9,732 62,916 1,151,160 -- 1,223,808
----------- ----------- ----------- ----------- -----------
18,052 656,734 1,261,960 -- 1,936,746
----------- ----------- ----------- ----------- -----------
$ 809,717 $ 1,075,157 $ 1,798,493 $ (784,727) $ 2,898,640
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................... $ 4,489 $ 112,630 $ 108,208 $ (8,143) $ 217,184
Notes payable .................................. -- 49,000 196,635 -- 245,635
Current portion of long-term debt,
capital leases
and redeemable cumulative
preferred securities .......................... 55 2,976 3,969 -- 7,000
Federal income, property and
other taxes payable ........................... 1,372 6,180 85,195 (9,363) 83,384
Refunds payable to customers ................... -- -- 728 57 785
Customer deposits .............................. 19 -- 11,531 -- 11,550
Other .......................................... 2,935 20,715 63,859 (719) 86,790
----------- ----------- ----------- ----------- -----------
8,870 191,501 470,125 (18,168) 652,328
----------- ----------- ----------- ----------- -----------
Deferred Charges and Other Liabilities
Accumulated deferred income taxes .............. (590) 65,341 61,146 (1) 125,896
Unamortized investment tax credit .............. 360 -- 36,437 -- 36,797
Tax benefits amortizable to customers .......... 181 -- 114,487 -- 114,668
Accrued postretirement benefit cost ............ 2,177 713 12,661 -- 15,551
Accrued environmental costs .................... 3,000 -- 32,000 -- 35,000
Minority interest .............................. -- 18,375 -- -- 18,375
Other .......................................... 18,175 63,469 65,252 (1,503) 145,393
----------- ----------- ----------- ----------- -----------
23,303 147,898 321,983 (1,504) 491,680
----------- ----------- ----------- ----------- -----------
Capitalization
Long-term debt, including capital
lease obligations ............................. 420 476,424 516,564 (1) 993,407
Redeemable cumulative preferred securities
of subsidiaries .............................. 96,449 -- -- -- 96,449
Common shareholders' equity .................... 680,675 259,334 489,821 (765,054) 664,776
----------- ----------- ----------- ----------- -----------
777,544 735,758 1,006,385 (765,055) 1,754,632
----------- ----------- ----------- ----------- -----------
$ 809,717 $ 1,075,157 $ 1,798,493 $ (784,727) $ 2,898,640
=========== =========== =========== =========== ===========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
(in Thousands)
MCN Eliminations
and other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
December 31, 1994
-------------------------------------------------------------------------
ASSETS
Current Assets
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents, at cost ...... $ 29 $ 10,213 $ 1,305 $ -- $ 11,547
Accounts receivable ..................... 2,754 82,617 150,302 (5,414) 230,259
Less: allowance for doubtful accounts . 71 708 15,322 -- 16,101
----------- ----------- ----------- ----------- -----------
Accounts receivable, net ................ 2,683 81,909 134,980 (5,414) 214,158
Accrued unbilled revenue ................ 820 -- 82,233 -- 83,053
Gas in inventory ........................ -- 53,806 77,843 -- 131,649
Property taxes assessed applicable to
future periods ......................... 2,565 -- 52,163 -- 54,728
Gas receivable .......................... -- 16,925 4,144 -- 21,069
Other ................................... 927 11,222 18,958 (3,801) 27,306
----------- ----------- ----------- ----------- -----------
7,024 174,075 371,626 (9,215) 543,510
----------- ----------- ----------- ----------- -----------
Deferred Charges and Other Assets
Investments in and advances to
joint ventures
and subsidiaries ....................... 615,131 42,613 20,791 (614,030) 64,505
Deferred postretirement benefit cost .... 783 -- 19,887 -- 20,670
Prepaid (accrued) pension costs ......... (802) (359) 8,298 -- 7,137
Other ................................... 7,211 70,850 33,746 906 112,713
----------- ----------- ----------- ----------- -----------
622,323 113,104 82,722 (613,124) 205,025
----------- ----------- ----------- ----------- -----------
Property, Plant and Equipment, at cost ... 23,028 392,647 2,189,150 -- 2,604,825
Less - Accumulated depreciation
and depletion .......................... 8,192 32,607 1,071,588 -- 1,112,387
----------- ----------- ----------- ----------- -----------
14,836 360,040 1,117,562 -- 1,492,438
----------- ----------- ----------- ----------- -----------
$ 644,183 $ 647,219 $ 1,571,910 $ (622,339) $ 2,240,973
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ........................ $ 712 $ 66,178 $ 80,671 $ (4,914) $ 142,647
Notes payable ........................... -- 60,350 168,457 -- 228,807
Current portion of long-term debt,
capital leases
and redeemable cumulative
preferred securities ................... (179) 3,273 4,225 -- 7,319
Federal income, property and
other taxes payable .................... (751) 3,678 85,806 (1,761) 86,972
Refunds payable to customers ............ 1 -- 19,559 -- 19,560
Customer deposits ....................... 18 -- 11,563 -- 11,581
Other ................................... 4,588 14,343 50,670 (1,792) 67,809
----------- ----------- ----------- ----------- -----------
4,389 147,822 420,951 (8,467) 564,695
----------- ----------- ----------- ----------- -----------
Deferred Charges and Other Liabilities
Accumulated deferred income taxes ....... 41 40,889 52,396 -- 93,326
Unamortized investment tax credit ....... 390 -- 38,294 -- 38,684
Tax benefits amortizable to customers ... 161 -- 114,906 -- 115,067
Accrued postretirement benefit cost ..... 1,830 723 23,507 -- 26,060
Minority interest ....................... -- 18,670 -- -- 18,670
Other ................................... 11,773 23,641 53,076 -- 88,490
----------- ----------- ----------- ----------- -----------
14,195 83,923 282,179 -- 380,297
----------- ----------- ----------- ----------- -----------
Capitalization
Long-term debt, including capital
lease obligations ...................... 1,139 236,051 448,329 -- 685,519
Redeemable cumulative preferred
securities
of subsidiaries ........................ 96,349 -- 2,618 -- 98,967
Common shareholders' equity ............. 528,111 179,423 417,833 (613,872) 511,495
----------- ----------- ----------- ----------- -----------
625,599 415,474 868,780 (613,872) 1,295,981
----------- ----------- ----------- ----------- -----------
$ 644,183 $ 647,219 $ 1,571,910 $ (622,339) $ 2,240,973
=========== =========== =========== =========== ===========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME
(in Thousands)
MCN Eliminations
and other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Twelve Months Ended December 31, 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues ....................... $ 15,162 $ 516,661 $ 1,080,813 $ (27,696) $ 1,584,940
----------- ----------- ----------- ----------- -----------
Operating Expenses
Cost of gas ............................. 7,451 302,273 483,962 (7,493) 786,193
Operation and maintenance ............... (5,451) 145,763 294,424 (20,203) 414,533
Depreciation, depletion and
amortization .......................... 1,671 30,767 89,128 -- 121,566
Property and other taxes ................ 1,330 8,081 57,012 -- 66,423
----------- ----------- ----------- ----------- -----------
Total operating expenses ................. 5,001 486,884 924,526 (27,696) 1,388,715
----------- ----------- ----------- ----------- -----------
Operating Income ......................... 10,161 29,777 156,287 -- 196,225
----------- ----------- ----------- ----------- -----------
Equity in Earnings of Joint Ventures
and Subsidiaries ........................ 98,751 3,300 739 (97,545) 5,245
----------- ----------- ----------- ----------- -----------
Other Income and (Deductions)
Interest income ......................... 207 1,491 3,983 -- 5,681
Interest on long-term debt .............. (76) (9,860) (35,820) -- (45,756)
Other interest expense .................. (53) (4,516) (7,053) -- (11,622)
Dividends on preferred securities
of subsidiaries ......................... -- -- -- (9,610) (9,610)
Minority interest ....................... -- (2,491) -- -- (2,491)
Other ................................... 1,483 962 (5,409) -- (2,964)
----------- ----------- ----------- ----------- -----------
Total other income and (deductions) ...... 1,561 (14,414) (44,299) (9,610) (66,762)
----------- ----------- ----------- ----------- -----------
Income Before Income Taxes ............... 110,473 18,663 112,727 (107,155) 134,708
Income Tax Provision (Benefit) ........... 2,118 (5,170) 41,004 -- 37,952
----------- ----------- ----------- ----------- -----------
Net Income ............................... 108,355 23,833 71,723 (107,155) 96,756
Dividends on Preferred Securities ........ 9,375 -- 235 (9,610) --
----------- ----------- ----------- ----------- -----------
Net Income Available for Common Stock .... $ 98,980 $ 23,833 $ 71,488 $ (97,545) $ 96,756
=========== =========== =========== =========== ===========
<CAPTION>
Twelve Months Ended December 31, 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues ....................... $ 14,401 $ 445,361 $ 1,111,678 $ (25,640) $ 1,545,800
----------- ----------- ----------- ----------- -----------
Operating Expenses
Cost of gas ............................. 7,230 293,285 529,426 (6,505) 823,436
Operation and maintenance ............... (691) 105,531 313,575 (19,190) 399,225
Depreciation, depletion and
amortization .......................... 1,314 18,076 84,230 -- 103,620
Property and other taxes ................ 1,244 5,615 58,129 -- 64,988
----------- ----------- ----------- ----------- -----------
Total operating expenses ................. 9,097 422,507 985,360 (25,695) 1,391,269
----------- ----------- ----------- ----------- -----------
Operating Income ......................... 5,304 22,854 126,318 55 154,531
----------- ----------- ----------- ----------- -----------
Equity in Earnings of Joint Ventures
and Subsidiaries ........................ 81,547 3,332 1,043 (79,633) 6,289
----------- ----------- ----------- ----------- -----------
Other Income and (Deductions)
Interest income ......................... 587 2,333 4,064 (491) 6,493
Interest on long-term debt .............. (590) (9,675) (27,948) -- (38,213)
Other interest expense .................. (152) (1,981) (9,093) 491 (10,735)
Dividends on preferred securities
of subsidiaries ......................... -- -- -- (2,018) (2,018)
Minority interest ....................... -- (2,879) -- -- (2,879)
Other ................................... (1,376) 468 (4,677) (56) (5,641)
----------- ----------- ----------- ----------- -----------
Total other income and (deductions) ...... (1,531) (11,734) (37,654) (2,074) (52,993)
----------- ----------- ----------- ----------- -----------
Income Before Income Taxes ............... 85,320 14,452 89,707 (81,652) 107,827
Income Tax Provision (Benefit) ........... 2,585 (2,365) 29,839 -- 30,059
----------- ----------- ----------- ----------- -----------
Net Income ............................... 82,735 16,817 59,868 (81,652) 77,768
Dividends on Preferred Securities ........ 1,537 -- 481 (2,018) --
----------- ----------- ----------- ----------- -----------
Net Income Available for Common Stock .... $ 81,198 $ 16,817 59,387 $ (79,634) $ 77,768
=========== =========== =========== =========== ===========
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF INCOME
(in Thousands)
MCN Eliminations
and other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Twelve Months Ended December 31, 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues ............................. $ 16,155 $ 290,792 $ 1,223,515 $ (50,808) $ 1,479,654
----------- ----------- ----------- ----------- -----------
Operating Expenses
Cost of gas ................................... 9,314 185,733 685,679 (33,993) 846,733
Operation and maintenance ..................... 1,445 79,900 280,182 (16,815) 344,712
Depreciation, depletion and
amortization ................................. 923 6,857 73,866 -- 81,646
Property and other taxes ...................... 1,131 3,273 58,177 96 62,677
----------- ----------- ----------- ----------- -----------
Total operating expenses ....................... 12,813 275,763 1,097,904 (50,712) 1,335,768
----------- ----------- ----------- ----------- -----------
Operating Income ............................... 3,342 15,029 125,611 (96) 143,886
----------- ----------- ----------- ----------- -----------
Equity in Earnings of Joint Ventures
and Subsidiaries .............................. 78,892 2,704 1,826 (75,712) 7,710
----------- ----------- ----------- ----------- -----------
Other Income and (Deductions)
Interest income ............................... 1,100 968 4,205 (1,086) 5,187
Interest on long-term debt .................... (102) (3,093) (25,594) -- (28,789)
Other interest expense ........................ (1,697) (1,371) (7,961) 1,090 (9,939)
Dividends on preferred securities
of subsidiaries .............................. -- -- -- (727) (727)
Minority interest ............................. -- (3,331) -- 47 (3,284)
Other ......................................... (519) 612 (4,772) (634) (5,313)
----------- ----------- ----------- ----------- -----------
Total other income and (deductions) ............ (1,218) (6,215) (34,122) (1,310) (42,865)
----------- ----------- ----------- ----------- -----------
Income Before Income Taxes ..................... 81,016 11,518 93,315 (77,118) 108,731
Income Tax Provision (Benefit) ................. 3,060 1,942 30,939 -- 35,941
----------- ----------- ----------- ----------- -----------
Net Income ..................................... 77,956 9,576 62,376 (77,118) 72,790
Dividends on Preferred Securities .............. -- -- 727 (727) --
----------- ----------- ----------- ----------- -----------
Net Income Available for Common Stock .......... $ 77,956 $ 9,576 $ 61,649 $ (76,391) $ 72,790
=========== =========== =========== =========== ===========
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in Thousands)
Twelve Months Ended December 31, 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Cash Flow from Operating Activities ........ $ 29,451 $ 100,271 $ 158,227 $ (19,946) $ 268,003
----------- ----------- ----------- ----------- -----------
Cash Flow from Financing Activities
Notes payable, net ............................ -- (11,349) 28,178 (1) 16,828
Capital contributions received from
(distributions paid to)
subsidiaries, net ............................ (3,066) 54,598 7,000 (58,532) --
Common stock dividends paid ................... (58,193) -- (6,500) 6,500 (58,193)
Preferred securities dividends paid ........... (9,375) -- (276) 9,651 --
Issuance of common stock ...................... 115,725 -- -- -- 115,725
Issuance of long-term debt .................... -- 99,880 68,764 220 168,864
Long-term commercial paper and
credit facilities, net ........................ -- 142,657 -- -- 142,657
Retirement of long-term debt and
preferred securities .......................... (485) (3,029) (4,757) -- (8,271)
Other ......................................... (678) (1,406) -- -- (2,084)
----------- ----------- ----------- ----------- -----------
Net cash provided from (used for)
financing activities ......................... 43,928 281,351 92,409 (42,162) 375,526
----------- ----------- ----------- ----------- -----------
Cash Flow from Investing Activities
Capital expenditures .......................... (5,098) (296,356) (235,767) 65 (537,156)
Acquisitions .................................. -- (83,176) -- -- (83,176)
Investment in joint ventures and
subsidiaries ................................. (68,198) (13,810) -- 61,469 (20,539)
Sale of investment in joint ventures .......... -- 10,803 -- -- 10,803
Other ......................................... 56 1,326 (7,705) 574 (5,749)
----------- ----------- ----------- ----------- -----------
Net cash provided from (used for)
investing activities ......................... (73,240) (381,213) (243,472) 62,108 (635,817)
----------- ----------- ----------- ----------- -----------
Net Increase in Cash and
Cash Equivalents .............................. 139 409 7,164 -- 7,712
Cash and Cash Equivalents, January 1 ........... 29 10,213 1,305 -- 11,547
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents, December 31 ......... $ 168 $ 10,622 $ 8,469 $ -- $ 19,259
=========== =========== =========== =========== ===========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
MCN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in Thousands)
MCN Eliminations
and other MCN and Consolidated
Subsidiaries Investment MichCon Reclassifications Totals
------------ ---------- ------- ----------------- ------------
Twelve Months Ended December 31, 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Cash Flow from Operating Activities ...... $ 20,865 $ (7,677) $ 174,168 $ (12,374) $ 174,982
-------- --------- --------- --------- ---------
Cash Flows from Financing Activities
Notes payable, net .......................... -- 40,350 (91,847) -- (51,497)
Notes payable - affiliate, net .............. (1,428) (18,403) -- 19,831 --
Capital contributions received from
(distributions paid to)
subsidiaries, net .......................... (1,816) 16,579 -- (14,763) --
Common stock dividends paid ................. (51,492) -- (8,500) 8,500 (51,492)
Preferred securities dividends paid ......... (1,536) -- (522) 2,058 --
Issuance of common stock .................... 15,390 -- -- -- 15,390
Issuance of preferred securities ............ 96,329 -- -- -- 96,329
Issuance of long-term debt .................. -- -- 78,620 -- 78,620
Long-term commercial paper and
credit facilities, net ..................... (71,900) 182,000 -- -- 110,100
Retirement of long-term debt and
preferred securities ....................... (110) (2,748) (4,809) -- (7,667)
Other ....................................... (2,335) (1,028) 1,161 -- (2,202)
-------- --------- --------- --------- ---------
Net cash provided from (used for)
financing activities ........................ (18,898) 216,750 (25,897) 15,626 187,581
-------- --------- --------- --------- ---------
Cash Flows from Investing Activities
Capital expenditures ........................ (3,312) (207,304) (145,421) -- (356,037)
Investment in joint ventures and
subsidiaries .............................. (16,579) (3,856) (1,992) 16,580 (5,847)
Other ....................................... (488) 2,287 (1,976) (1,429) (1,606)
-------- --------- --------- --------- ---------
Net cash provided from (used for)
investing activities ....................... (20,379) (208,873) (149,389) 15,151 (363,490)
-------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents ............................ (18,412) 200 (1,118) 18,403 (927)
Cash and Cash Equivalents, January 1 ......... 18,441 10,013 2,423 (18,403) 12,474
-------- --------- --------- --------- ---------
Cash and Cash Equivalents, December 31 ....... $ 29 $ 10,213 $ 1,305 $ -- $ 11,547
======== ========= ========= ========= =========
<CAPTION>
Twelve Months Ended December 31, 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Cash Flow from Operating Activities ...... $ 85,320 $ (10,850) $ 146,363 $(110,717) $ 110,116
-------- --------- --------- --------- ---------
Cash Flows from Financing Activities
Notes payable, net .......................... -- 20,000 19,083 5,898 44,981
Notes payable - affiliate, net .............. (8,679) 13,211 -- (4,532) --
Capital contributions received from
(distributions paid to)
subsidiaries, net .......................... 2,019 92,684 -- (94,703) --
Common stock dividends paid ................. (49,527) (5,900) (75,000) 80,900 (49,527)
Preferred securities dividends paid ......... -- -- (768) 768 --
Issuance of common stock .................... 11,432 -- -- -- 11,432
Issuance of long-term debt .................. -- -- 118,129 -- 118,129
Long-term commercial paper and
credit facilities, net ..................... 71,900 -- -- -- 71,900
Retirement of long-term debt and
preferred securities ........................ (1,920) (1,852) (84,160) -- (87,932)
Other ....................................... 1,101 (1,294) -- -- (193)
-------- --------- --------- --------- ---------
Net cash provided from (used for)
financing activities ....................... 26,326 116,849 (22,716) (11,669) 108,790
-------- --------- --------- --------- ---------
Cash Flows from Investing Activities
Capital expenditures ........................ (3,608) (63,924) (141,279) -- (208,811)
Investment in joint ventures and
subsidiaries ............................... (94,703) (3,655) (2,802) 94,703 (6,457)
Sale (acquisition) of investment
in joint ventures .......................... -- (42,284) 19,898 22,386 --
Repayments from (advances to)
joint ventures ............................ 5,898 (1,581) -- (4,317) --
Other ....................................... (996) (2,486) 981 1,471 (1,030)
-------- --------- --------- --------- ---------
Net cash provided from (used for)
investing activities ....................... (93,409) (113,930) (123,202) 114,243 (216,298)
-------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents ............................ 18,237 (7,931) 445 (8,143) 2,608
Cash and Cash Equivalents, January 1 ......... 204 17,944 1,978 (10,260) 9,866
-------- --------- --------- --------- ---------
Cash and Cash Equivalents, December 31 ....... $ 18,441 $ 10,013 $ 2,423 $ (18,403) $ 12,474
======== ========= ========= ========= =========
</TABLE>
46
<PAGE>
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, 1995 and 1994, and the
related consolidated statements of income, cash flows and capitalization for
each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 8, 1996
47
<PAGE>
Responsibilities for Financial Statements
The consolidated financial statements of MCN Corporation were prepared by
management which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Financial information elsewhere in this Annual Report is consistent with that
in the consolidated financial statements.
Management is further responsible for maintaining a system of internal
accounting controls, designed to provide reasonable assurance that the books
and records reflect the transactions of MCN and its subsidiaries and that
established policies and procedures are carefully followed. Perhaps the most
important feature in the system of internal control is that it is continually
reviewed for its effectiveness and is augmented by a strong internal audit
program.
Deloitte & Touche LLP, independent certified public accountants, is engaged to
audit the consolidated financial statements of MCN and issue reports thereon.
Their audit is conducted in accordance with generally accepted auditing
standards which comprehend a review of internal accounting controls and tests
of transactions.
MCN's Board of Directors, through its Audit Committee is responsible for: (1)
assuring that management fulfills its responsibilities in the preparation of
the consolidated financial statements, and (2) engaging the independent public
accountants. The Committee reviews the scope of the audits and the accounting
principles being applied in financial reporting. The independent public
accountants, representatives of management and the internal auditors meet
regularly (separately and jointly) with the Committee to review the activities
of each and to ensure that each is properly discharging its responsibilities.
Alfred R. Glancy III
Chairman, President and Chief Executive Officer
William K. McCrackin
Vice Chairman and Chief Financial Officer
Patrick Zurlinden
Vice President, Controller and Chief Accounting Officer
48
<PAGE>
<TABLE>
<CAPTION>
Supplementary Financial Information
Selected Financial Data (Unaudited)
(In Thousands of Dollars - Except Per Share Amounts)
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income .................................. $ 96,756 $ 77,768 $ 72,790 $ 57,118 $ 35,078
=========== =========== =========== =========== ===========
Cash Dividends Declared on Common Stock ..... $ 58,193 $ 51,492 $ 49,527 $ 44,940 $ 40,400
=========== =========== =========== =========== ===========
Common Stock Data
Earnings per share .......................... $ 1.49 $ 1.31 $ 1.24 $ 1.05 $ .71
Book value per share ....................... $ 10.02 $ 8.56 $ 7.97 $ 7.44 $ 6.61
Return on average common shareholders' equity 16.5% 15.8% 16.1% 14.6% 10.8%
Actual common shares outstanding (000) ...... 66,370 59,788 58,993 58,292 52,776
Average common shares outstanding (000) ..... 64,743 59,394 58,642 54,216 49,386
Property, Plant and Equipment (1)
Gas Distribution ............................ $ 2,496,711 $ 2,267,187 $ 2,154,499 $ 2,034,230 $ 1,918,030
Diversified Energy .......................... 663,843 337,638 130,030 63,905 24,120
----------- ----------- ----------- ----------- -----------
3,160,554 2,604,825 2,284,529 2,098,135 1,942,150
Less-Accumulated depreciation
and depletion .............................. 1,223,808 1,112,387 1,047,941 983,038 919,004
----------- ----------- ----------- ----------- -----------
Net ......................................... $ 1,936,746 $ 1,492,438 $ 1,236,588 $ 1,115,097 $ 1,023,146
=========== =========== =========== =========== ===========
Total Assets ................................ $ 2,898,640 $ 2,240,973 $ 1,881,900 $ 1,648,989 $ 1,517,387
=========== =========== =========== =========== ===========
Capital Investments ......................... $ 688,838 $ 401,969 $ 245,611 $ 202,071 $ 145,021
=========== =========== =========== =========== ===========
Capitalization
Long-term debt and capital lease obligations $ 993,407 $ 685,519 $ 494,821 $ 379,811 $ 328,052
Redeemable cumulative preferred securities .. 96,449 98,967 5,618 9,000 12,000
Common shareholders' equity ................. 664,776 511,495 470,168 433,808 348,937
----------- ----------- ----------- ----------- -----------
$ 1,754,632 $ 1,295,981 $ 970,607 $ 822,619 $ 688,989
=========== =========== =========== =========== ===========
Operating Revenues (1)
Gas Distribution
Gas sales .................................. $ 911,467 $ 968,775 $ 983,083 $ 969,221 $ 929,339
End user transportation .................... 80,808 76,483 71,718 70,160 63,298
Intermediate transportation ................ 41,985 39,391 31,397 31,534 21,550
Storage services ........................... 8,857 8,054 10,090 9,584 16,946
Conservation and other assistance programs . 14,499 18,716 23,935 27,677 30,803
Application of (provision for) refunds, net 20,473 223 (3,165) 43,792 (15,799)
Other ...................................... 29,557 25,328 24,406 22,691 16,517
----------- ----------- ----------- ----------- -----------
1,107,646 1,136,970 1,141,464 1,174,659 1,062,654
----------- ----------- ----------- ----------- -----------
Diversified Energy
Gas sales and transportation ............... 400,027 346,500 289,296 228,137 179,709
Computer operations services and other ..... 105,161 88,211 74,391 67,730 62,430
----------- ----------- ----------- ----------- -----------
505,188 434,711 363,687 295,867 242,139
----------- ----------- ----------- ----------- -----------
Less intercompany transactions .............. 27,894 25,881 25,497 23,274 20,242
----------- ----------- ----------- ----------- -----------
$ 1,584,940 $ 1,545,800 $ 1,479,654 $ 1,447,252 $ 1,284,551
=========== =========== =========== =========== ===========
Effect of Weather
Degree days ................................. 6,777 6,489 6,675 6,607 6,092
Percent colder (warmer) than normal ......... .3% (4.2)% (2.2)% (3.7)% (10.7)%
Increase (decrease) from normal in:
Gas markets (MMcf) ......................... 1,488 (4,353) (4,328) (10,218) (17,110)
Net income ................................. $ 1,415 $ (3,984) $ (3,696) $ (8,728) $ (13,268)
Earnings per share ......................... $ .02 $ (.07) $ (.06) $ (.16) $ (.27)
<FN>
(1) In January 1996, MCN consolidated its Michigan pipeline operations by
transferring its Michigan gathering and transportation network operations
from Diversified Energy to Gas Distribution. The segment information
included herein is presented as though the combined intrastate pipeline
operations were part of Gas Distribution for all periods presented.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Supplementary Financial Information
Selected Financial Data (Unaudited)
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gas Markets (MMcf) (1)
Gas Distribution
Gas sales ...................... 209,816 204,384 205,372 203,110 192,770
End user transportation ........ 145,761 140,020 128,643 129,722 119,846
Intermediate transportation .... 374,428 322,969 302,662 209,360 130,831
--------- --------- --------- --------- ---------
730,005 667,373 636,677 542,192 443,447
--------- --------- --------- --------- ---------
Diversified Energy
Gas sales:
Gas Marketing & Cogeneration ... 170,668 142,352 122,782 112,263 91,968
Exploration & Production (2) ... 16,193 7,459 67 -- --
Transportation ................. 1,091 1,194 294 -- --
--------- --------- --------- --------- ---------
187,952 151,005 123,143 112,263 91,968
--------- --------- --------- --------- ---------
Less intercompany transactions .. 16,122 13,256 17,406 6,816 2,509
--------- --------- --------- --------- ---------
901,835 805,122 742,414 647,639 532,906
========= ========= ========= ========= =========
Gas Distribution Customers
Residential ..................... 1,090,039 1,073,306 1,061,679 1,050,533 1,045,618
Total ........................... 1,172,613 1,154,545 1,141,986 1,130,165 1,124,792
Employees
Gas Distribution ................ 3,100 3,301 3,379 3,588 3,544
Diversified Energy .............. 677 588 489 380 338
</TABLE>
Quarterly Operating Results and Common Stock Prices (Unaudited)
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 24,131 and 24,583 holders
of record of MCN common shares at December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
(In Thousands of Dollars - First Second Third Fourth
Except Per Share Amounts) Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
1995
<S> <C> <C> <C> <C> <C>
Operating revenues .............. $547,968 $283,124 $213,195 $540,653 $1,584,940
Operating income (loss) ......... $107,509 $ 11,703 $ (875) $ 77,888 $ 196,225
Net income (loss) ............... $ 61,590 $ 2,312 $ (8,627) $ 41,481 $ 96,756
Earnings (loss) per share ....... $ 1.02 $ .04 $ (.13) $ .63 $ 1.49
Dividends paid per share ........ $ .2225 $ .2225 $ .2225 $ .2325 $ .9000
Average daily trading volume .... 113,278 81,927 102,324 83,694 95,306
Price per share
High ........................... $ 18.63 $ 19.88 $ 20.00 $ 23.50 $ 23.50
Low ............................ $ 16.38 $ 18.00 $ 17.88 $ 19.38 $ 16.38
Close .......................... $ 18.25 $ 19.75 $ 19.75 $ 23.25 $ 23.25
1994
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
<FN>
(2) Represents gas sales made directly to third parties by E&P operations.
Other E&P production is sold to affiliated companies for marketing.
50
</TABLE>
Exhibit 21-1
MCN CORPORATION: MCN Corporation (MCN or the Corporation) is a
diversified natural gas holding company. MCN is organized under the laws of
the state of Michigan and has its principal executive offices at 500 Griswold
Street, Detroit, Michigan 48226. The Corporation owns directly all of the
outstanding common stock of Michigan Consolidated Gas Company (MichCon),
Citizens Gas Fuel Company (Citizens), and MCN Investment Corporation (MCNIC).
MCN's major business segments are Gas Distribution and, within Diversified
Energy, Gas Services and Computer Operations Services. Except where otherwise
indicated, the companies set forth below are Michigan corporations located at
500 Griswold Street, Detroit, Michigan 48226.
GAS DISTRIBUTION
Gas Distribution, through the following subsidiaries, operates the
largest natural gas distribution and intrastate transmission system in
Michigan and one of the largest in the United States.
A. MICHIGAN CONSOLIDATED GAS COMPANY: MichCon is a public utility engaged
in the distribution and transmission of natural gas in the state of
Michigan. MichCon was organized in 1898 and, with its predecessors,
has been in business for nearly 150 years. MichCon serves 1.2 million
residential, commercial and industrial customers in the Detroit, Grand
Rapids, Ann Arbor, Traverse City and Muskegon metropolitan areas and
in various other communities throughout the state of Michigan. MichCon
conducts substantially all of its business in the state of Michigan
and is subject to the jurisdiction of the Michigan Public Service
Commission (MPSC) as to various phases of its operations, including
gas sales rates, service, and accounting. 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, operates a 130-unit, low
and moderate income housing project in Detroit, Michigan.
2. MichCon Development Corporation, through its various
partnership arrangements, is engaged in the design,
construction and management of Harbortown, a residential and
small commercial development constructed on a 50 acre parcel
along the Detroit River in Detroit, Michigan.
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 46 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 MCNIC.
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. These fueling modules utilize
the patented adsorbed natural gas technology described below.
5. Fuel Concepts, Inc., is involved in the development and
commercialization of low pressure natural gas storage and
related technologies. These research and development efforts
have pioneered and patented an adsorbed natural gas technology
which allows natural gas to be stored at one-sixth to one-tenth
the pressure of conventional methods.
6. MichCon Fuel Services Company was formed in 1995 to market
natural gas as a vehicular fuel.
7. MichCon Pipeline Company was formed in 1995 and, through the
subsidiaries below, is engaged in pipeline projects.
a. MichCon Gathering Company
b. Saginaw Bay Pipeline Company (transferred from MCNIC
on January 1, 1996)
c. Saginaw Bay Lateral Company (transferred from MCNIC
on January 1, 1996)
1
<PAGE>
d. Westside Pipeline Company (transferred from MCNIC on
January 1, 1996)
B. CITIZENS GAS FUEL COMPANY: Citizens is a public utility engaged in the
distribution and transmission of natural gas. Citizens was organized
in 1951 and, with its predecessors, has been in business for over 135
years. Citizens serves approximately 13,000 residential, commercial
and industrial customers in and around Adrian, Michigan. Citizens'
principal executive offices are located at 127 N. Main Street, Adrian,
Michigan 49221. Citizens conducts all of its business in the state of
Michigan and its rates are set by the Adrian Gas Rate Commission.
Other various phases of its operations are subject to the jurisdiction
of the MPSC.
C. SOUTHERN MISSOURI GAS COMPANY: During 1995, MCN agreed to acquire a
47.5% interest in a partnership formed to construct, own and operate a
natural gas transmission and distribution system located in Southern
Missouri. The agreement is subject to MCN obtaining authorization from
the SEC for the acquisition under Section 9(a)(2) of PUHCA of 1935. On
October 30, 1995 MCN filed a Form U-1 seeking such authorization.
DIVERSIFIED ENERGY
D. MCN INVESTMENT CORPORATION: MCNIC, organized in 1986, is the holding
company for MCN's various diversified services subsidiaries. MCNIC's
major business segments are Gas Services and Computer Operations
Services. Except where otherwise indicated, the companies set forth
below are wholly owned subsidiaries of MCNIC.
Gas Services
The Gas Services segment is an integrated energy group with
investments in the following businesses: Exploration and Production,
Gas Gathering and Processing, Gas Storage, and Gas Marketing and
Cogeneration.
Exploration & Production
1. Supply Development Group, Inc., through the subsidiaries
listed below, is engaged in natural gas and oil
exploration, development and production primarily in
Michigan, Ohio, and the Appalachian, Midcontinent and
Gulf Coast areas of the U.S.
a. Elmira Antrim Company
b. Green River Antrim Company
c. Warner Antrim Company
d. Green Oak Development Company
e. MGS Development Company
f. Southwest Gas Supply, Inc.
g. Geotrend Exploration, Inc.
h. Huron Energy Company
i. CoEnergy MidContinent, Inc.
j. CoEnergy Anadarko, Inc.
k. P'Bell Energy Corporation
l. CoEnergy Operating Company
m. CoEnergy Canadian Exploration, Inc. (a New
Brunswick corporation)
n. Petro Ventures Exploration Company
o. CoEnergy Rockies, Inc.
p. CoEnergy Central Exploration, Inc.
q. CoEnergy Enhanced Production, Inc.
r. Oakwood Gathering, Inc. (a Delaware corporation)
2
<PAGE>
s. Reid Holdings, Inc. (a Delaware corporation)
i. Appalachian Methane, Inc., a Delaware
corporation, holds a 50% interest
in Buchanan Production Co., a Virginia
general partnership.
ii. Appalachian Operators, Inc., a Delaware
corporation, holds a 50% interest
in Buchanan Production Co., a Virginia
general partnership.
Gas Gathering and Processing
MCNIC's Gas Gathering and Processing businesses are involved in
ventures that transport natural gas from producing fields to
processing plants and/or markets. This business also includes plants
which process natural gas to remove CO2 in order to meet market
specifications.
2. Saginaw Bay Pipeline Company is the 66% general partner
in a partnership that operates a 126-mile pipeline which
transports natural gas and natural gas liquids from
reserves in east-central Michigan to natural gas
processing plants in northern Michigan. On January 1,
1996 Saginaw Bay Pipeline Company was transferred from
MCNIC to MichCon.
3. Saginaw Bay Lateral Company is the 46% general partner
in a partnership which owns and operates lateral
pipelines interconnecting with the 126-mile pipeline
previously described. On January 1, 1996 Saginaw Bay
Lateral Company was transferred from MCNIC to MichCon.
4. Westside Pipeline Company owns and operates a 6 mile
pipeline which provides transportation services to
Citizens. In addition, Westside Pipeline Company invests
in various pipeline and processing plants through equity
interests in the companies listed below.
a. Jordan Valley Limited Partnership (82.62%
interest)
b. Warner Treating Limited Liability Company (95%
interest)
c. Terra Westside Processing Company (85% interest)
On January 1, 1996 Westside Pipeline Company transferred
its interests in Warner Treating Limited Liability
Company and Terra Westside Processing Company to Otsego
Holdings, Inc. In addition, Westside Pipeline Company
transferred its 6 mile pipeline to Otsego Holdings, Inc.
Westside Pipeline Company was then transferred from
MCNIC to MichCon.
5. Pipeline & Processing Group, Inc. was formed in 1995 and
engages in pipeline and processing projects through the
following subsidiaries and partnership.
a. CoEnergy Offshore Pipeline & Processing Company
b. Otsego Holdings, Inc.
i. CoEnergy CSG
ii. Bagley Processing Company (47%
partnership interest)
iii. Warner Treating Limited Liability
Company (95% interest transferred
from Westside Pipeline Company on
January 1, 1996)
iv. Terra Westside Processing Company (85%
interest transferred from
Westside Pipeline Company on
January 1, 1996)
3
<PAGE>
Gas Storage
6. Storage Development Company, through joint ventures and
strategic partnerships, develops and provides gas
storage services to affiliated marketing companies,
other gas utilities, pipeline companies and large-volume
gas users.
a. South Romeo Gas Storage Company, a Michigan
partnership in which Storage Development Company
has a 50% interest, owns and operates a 10 Bcf
storage field in southeastern Michigan which
provides storage services to MCNIC's Gas
Marketing and Cogeneration operations.
b. W-10 Holdings, Inc., holds a 50% interest in a
partnership that intends to develop and operate a
42 Bcf storage field in southeastern Michigan.
c. Blue Lake Holdings, Inc. (See description under
Gas Distribution - MichCon)
d. The Orchards Golf Limited Partnership, a Michigan
partnership in which Storage Development Company
has a 50% interest, developed, owns and operates
a residential community and golf course on 520
acres of land above the South Romeo gas storage
field in southeastern Michigan.
Gas Marketing and Cogeneration
MCN's Gas Marketing and Cogeneration businesses pursue
gas-related opportunities throughout the United States and Canada,
including marketing natural gas to utilities and other large-volume
customers and investing in natural gas cogeneration related projects.
7. CoEnergy Trading Company is engaged in the purchase and
sale of natural gas to large-volume gas users and gas
and electric utilities in Michigan, the Midwest, the
eastern United States and Canada. CoEnergy Trading
Company holds a 50% interest in U.S. CoEnergy Services,
a Wisconsin general partnership.
8. CoEnergy Canadian Holdings, Ltd., a New Brunswick
corporation located at Brunswick House, 10th Floor, 44
Chipman Hill, Saint John, New Brunswick E2L 4S6, was
formed to market and sell natural gas in Canada and the
northeastern United States.
9. CoEnergy Supply Company engages in the purchase and sale
of natural gas, a portion of which is produced by the
Supply Development Group, Inc., an affiliate.
10. Cogen Development Company pursues cogeneration
related opportunities throughout the United States
and Canada.
a. CDC Ada, Inc., is a 99% limited partner in a
venture which owns and operates a 30 megawatt
natural gas-fueled cogeneration facility in
western Michigan.
b. Ludington Cogeneration Co. is the 1% general
partner in a joint venture that built and
operates a 123 megawatt natural gas-fueled
cogeneration plant in western Michigan.
c. Ludington Cogeneration Holdings, Ltd. is a 49%
limited partner in the 123 megawatt cogeneration
plant mentioned above.
4
<PAGE>
Computer Operations Services
The Genix Group and its subsidiaries make up the largest
Michigan based computer operations management firm and one of the top
ten in the United States.
11. The Genix Group, Inc., through the subsidiaries listed
below, provides computer operations management, data
processing, network design and management, large-scale
electronic printing and mailing and business process
solution services to more than a dozen industries in 23
states.
a. Genix Corporation, a Delaware corporation,
located in Pittsburgh, Pennsylvania.
b. MCN Computer Services, Inc., located in
Dearborn, Michigan.
c. The 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. under Gas Distribution,
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., is a 33-1/3% limited partner
in a 17-story commercial real estate complex located in
Grand Rapids, Michigan.
E. 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.
5
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, 33-55665 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 8,
1996, appearing in and incorporated by reference in this Annual Report on
Form 10-K of MCN Corporation for the year ended December 31, 1995.
DELOITT & TOUCHE LLP
Detroit, Michigan
March 1, 1996
EXHIBIT 23-2
[ RYDER SCOTT COMPANY Letterhead ]
1100 Louisiana Suite 3800 Houston, Texas 77002-5218
Telephone(713) 651-9191
February 29, 1996
MCN Corporation
500 Griswold
Detroit, Michigan 48226
Re: MCN Corporation
1995 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 February 16,
1996, regarding MCN Corporation oil and gas reserve information as of
December 31, 1995, in its 1995 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, 33-57115 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
EXHIBIT 23-3
Miller and Lents, Ltd. [Leterhead]
February 27, 1996
MCN Corporation
500 Griswold
Detroit, Mi 48226
Re: MCN Corporation
1995 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 12, 1996, regarding MCN
corporation oil and gas reserve information as of December 31, 1995, in its
1995 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, 33-55665 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,
MILLER AND LENTS, LTD.
By /s/ P.G. Von Tungeln
--------------------
P.G. Von Tungeln
President
PGVT/mk
EXHIBIT 23-4
[letterhead of LEE KEELING AND ASSOCIATES, INC.]
PETROLEUM CONSULTANTS
3500 FIRST PLACE TOWER
15 EAST 5TH STREET
TULSA, OKLAHOMA 74103-4350 USA
(918) 587-5521
FACSIMILE 587-2881
February 29, 1996
MCN Corporation
500 Griswold
Detroit, Michigan 48226
Re: MCN Corporation
1995 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Lee Keeling and Associates, Inc., Petroleum
Consultants, consents to the use of its name and the
information contained in its report dated January 16, 1996,
regarding MCN Corporation oil and gas reserve information as
of January 1, 1996, in its 1995 Annual Report on Form 10-K.
In addition, Lee Keeling and Associates, Inc. consents to
the incorporation by reference of said material in
Registration Statement Nos. 33-43075, 33-52825 and 33-
52827 on Form S-8, 33-55665 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.
Lee Keeling and Associates, Inc. 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 yours truly,
/s/ Lee Keeling and Associates, Inc.
LEE KEELING AND ASSOCIATES, INC.
PETROLEUM CONSULTANTS
EXHIBIT 23-5
[Letterhead S.A. Holditch & Associates, Inc.]
ONE SHELL SQUARE, SUITE 4320
701 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70139-4301
February 29, 1996
MCN Corporation
500 Griswold
Detroit, Michigan 48226
Re: MCN Corporation
1995 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of S.A. Holditch & Associates, Inc., consents to
the use of its name and the information contained in its
report dated December 28, 1995, regarding MCN Corporation
oil and gas reserve information as of December 31, 1995, in
its 1995 Annual Report on Form 10-K.
In addition, S.A. Holditch & Associates, Inc. consents to
the incorporation by reference of said material in
Registration Statement Nos. 33-43075, 33-52825 and 33-
52827 on Form S-8, 33-55665 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.
S.A. Holditch & Associates, Inc. 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 yours truly,
/s/ W. Denton Copeland, P.E.
W. Denton Copeland, P.E.
WDC/dg
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Stephen E. Ewing
Stephen E. Ewing
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ William K. McCrackin
William K. McCrackin
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Roger Fridholm
Roger Fridholm
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Frank M. Hennessey
Frank M. Hennessey
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Thomas H. Jeffs II
Thomas H. Jeffs II
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Arthur L. Johnson
Arthur L. Johnson
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Dale A. Johnson
Dale A. Johnson
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Helen O. Petrauskas
Helen O. Petrauskas
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Howard F. Sims
Howard F. Sims
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Patrick Zurlinden
Patrick Zurlinden
<PAGE>
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, 1995, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this
22nd day of February, 1996.
/s/ Alfred R. Glancy III
Alfred R. Glancy III
<PAGE>
<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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 19,259
<SECURITIES> 0
<RECEIVABLES> 331,710
<ALLOWANCES> 13,765
<INVENTORY> 71,763
<CURRENT-ASSETS> 615,496
<PP&E> 3,160,554
<DEPRECIATION> 1,223,808
<TOTAL-ASSETS> 2,898,640
<CURRENT-LIABILITIES> 652,328
<BONDS> 993,407
96,449
0
<COMMON> 664
<OTHER-SE> 664,112
<TOTAL-LIABILITY-AND-EQUITY> 2,898,640
<SALES> 0
<TOTAL-REVENUES> 1,584,940
<CGS> 0
<TOTAL-COSTS> 1,388,715
<OTHER-EXPENSES> 2,964
<LOSS-PROVISION> 13,698
<INTEREST-EXPENSE> 57,378
<INCOME-PRETAX> 134,708
<INCOME-TAX> 37,952
<INCOME-CONTINUING> 96,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,756
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 0
</TABLE>
