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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-10070
MCN CORPORATION
(Exact name of registrant as specified in its charter)
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MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
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313-256-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value Per Share New York Stock Exchange
9 3/8% Cumulative Preferred Securities, Series A* New York Stock Exchange
8 5/8% Trust Originated Preferred Securities** New York Stock Exchange
8 3/4% Preferred Redeemable Increased Dividend Equity
Securities New York Stock Exchange
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* Issued by MCN Michigan Limited Partnership. The payments of dividends and
payments on liquidation or redemption are guaranteed by MCN Corporation.
** Issued by MCN Financing I. The payments of dividends and payments on
liquidation or redemption are guaranteed by MCN Corporation.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
---
The aggregate market value of MCN Corporation Common Stock, $.01 par value
per share, held by non-affiliates as of February 18, 1997 was $2.069 billion
based on 67,545,500 outstanding shares and the closing price on that day (New
York Stock Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of MCN's 1996 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5,6,7 and 8 and portions of MCN's February 1997
definitive Proxy Statement are incorporated by reference in Part III.
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KEY TO ABBREVIATED TERMS
Antrim Gas............................ Natural gas produced from shallow
wells in the Devonian (Antrim) shale
formations.
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.
Coalbed Methane....................... Natural gas formed during the
transformation 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.
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,
pipeline and processing, gas storage,
energy marketing, and power
generation 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.
FERC.................................. Federal Energy Regulatory Commission;
a federal agency that determines the
interstate rates and regulations of
interstate pipelines.
Gas Gathering......................... The process of collecting natural gas
from gas wells and then transporting
the gas through pipelines to
processing plants or major pipelines.
Gas Processing........................ For MCN, the removal of carbon
dioxide and petroleum liquids from
natural gas so it meets market
quality standards.
Gas Storage........................... The process of injecting, storing 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 reasonable and prudent
cost of gas sold.
Intermediate Transportation........... A gas delivery service provided to
producers, brokers and other gas
companies that own the natural gas,
but are not the ultimate consumers.
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KEY TO ABBREVIATED TERMS
(concluded)
Methanol.............................. A form of alcohol manufactured from
various feedstocks, including natural
gas, and used as a solvent,
antifreeze and high octane fuel.
MCN................................... MCN Corporation, doing business as
MCN Energy Group Inc., and its
subsidiaries.
MCNIC................................. MCN Investment Corporation, a wholly
owned subsidiary of MCN and the
holding company of MCN's Diversified
Energy group subsidiaries.
MichCon............................... Michigan Consolidated Gas Company; a
wholly owned natural gas distribution
and intrastate transmission
subsidiary of MCN.
MichCon Pipeline Co................... MichCon Pipeline Co; a wholly-owned
subsidiary of MichCon that engages in
pipeline projects through its
subsidiaries.
MPSC.................................. Michigan Public Service Commission;
the regulator of intrastate aspects
of the natural gas industry within
the State of Michigan.
Normal Weather........................ The average daily temperature within
MCN's Gas Distribution service area
during a recent 30-year period.
Spot Market........................... Buying and selling natural gas on a
short-term basis, typically month to
month.
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Units of Measurement
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Bcf..................................................... One billion cubic feet of natural gas.
MBbl.................................................... One thousand barrels, which is a unit of
measurement of oil and other petroleum
liquids.
Mcf..................................................... One thousand cubic feet of natural gas.
MMcf.................................................... One million cubic feet of natural gas.
Tcf..................................................... One trillion cubic feet of natural gas.
/d...................................................... Added to MMcf or Bcf to denote average
volumes per day.
/e...................................................... Added to other units of measurement to
provide a consolidated measure of equivalent
natural gas, crude oil and condensate at a
rate of 6 Mcf per barrel of oil or
condensate.
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TABLE OF CONTENTS
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PAGE
CONTENTS NUMBER
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 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
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
26
Signatures..............................................................
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PART I
ITEM 1. BUSINESS
MCN Corporation, doing business as MCN Energy Group Inc. (MCN), is a
diversified energy holding company with natural gas markets and investments
throughout North America. MCN has been doing business as MCN Energy Group Inc.
since January 14, 1997. At its 1997 Annual Meeting of Shareholders on April 22,
1997, MCN's Shareholders will vote on a proposed amendment to the MCN Articles
of Incorporation to change the name of MCN Corporation to MCN Energy Group Inc.
The name change is intended to reflect MCN's evolution from a "plain-vanilla"
Michigan natural gas distribution company into a new, far-reaching diversified
energy company. 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, 1996, MCN and its subsidiaries had 3,360
employees.
MCN operates through two major business groups, Diversified Energy and Gas
Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC), is
involved in the following businesses: Exploration & Production (E&P), with 1.2
trillion cubic feet (Tcf) equivalent of proved gas and oil reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions; Pipelines &
Processing, with gathering, processing and transmission facilities near areas
of rapid reserve development and growing consuming markets; Energy Marketing,
with total gas sales and exchange delivery markets of 241.5 billion cubic feet
(Bcf); Power Generation, with investments in electric generation facilities
with a combined 153 megawatts of capacity; and Gas Storage, with investments
in storage facilities that have 56 Bcf of storage capacity.
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and intrastate transmission company
serving 1.2 million customers in more than 500 communities throughout
Michigan. MichCon 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. Of MichCon's
labor force, 46% is covered by collective bargaining agreements, with 28% of
the labor force having agreements set to expire in December 1997.
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DIVERSIFIED ENERGY
Diversified Energy's operating revenues for 1996 totaled $734.4 million
(including intercompany transactions), while operating and joint venture income
was $57.4 million in 1996, more than double 1995 operating and joint venture
income. The significant improvement primarily reflects higher results from
Exploration & Production (E&P) operations. Improved results from Pipelines &
Processing and Energy Marketing & Power Generation also contributed to the
increase in 1996.
Diversified Energy -- Operating Statistics
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1996 1995 1994
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Exploration & Production
Gas Production (MMcf)..................................... 57,202 31,420 16,513
Oil Production (MBbl)..................................... 1,086 388 85
Gas and Oil Production (MMcf Equivalent).................. 63,718 33,748 17,023
Pipelines & Processing (MMcf)*
Gas Processed............................................. 44,223 14,588 1,942
Transportation............................................ 86,391 4,994 1,194
Energy Marketing & Power Generation (MMcf)
Gas Sales................................................. 218,952 170,668 142,352
Exchange Gas Deliveries................................... 22,586 16,462 13,301
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241,538 187,130 155,653
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* Includes MCN's share of joint ventures
EXPLORATION & PRODUCTION
MCNIC is engaged in natural gas and oil exploration, development and
production through its wholly owned subsidiary, MCNIC Oil & Gas Company (MOG),
formerly known as Supply Development Group, Inc. At December 31, 1996, proved
gas reserves totaled 1,137.7 Bcf and proved oil reserves were 103.2 Bcfe, up a
combined 354.4 Bcfe, or 40%, from December 1995 levels. Operating income for
1996 increased by $14.7 million over 1995 to $33.2 million, reflecting a
significant increase in gas and oil production during 1996 to 63.7 Bcfe from
33.7 Bcfe in 1995. Approximately $15.9 million in federal tax credits were
generated in 1996 related to gas production from certain Antrim and coalbed
methane gas wells. E&P operating results for 1996 reflect a $1.96 average gas
sales rate per million cubic feet (Mcf), which declined $.06 per Mcf compared to
1995. Operating results for 1995 reflect a gas sales rate of $2.02 per Mcf,
compared to $1.97 per Mcf in 1994. The average sales rates include the effect of
hedging with natural gas swap and futures agreements, which are used to manage
Diversified Energy's exposure to the risk of market price fluctuations. As a
result of strong gas prices in the marketplace, hedging agreements had the
effect of reducing the average sales rate for 1996 by $.35 per Mcf. Conversely,
hedging agreements increased the average sales rates for 1995 and 1994 by $.51
per Mcf and $.39 per Mcf, respectively, in a less favorable gas market. E&P
operating results also reflect an average oil sales rate of $20.18 per barrel,
which increased by $3.94 per barrel compared to 1995. The average oil sales rate
for 1995 decreased by $.05 per barrel compared to 1994.
MOG'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. This will be achieved by continuing its successful
practice of investing in and managing E&P projects through a network of joint-
venture partnerships. MOG partners with companies who are recognized as the
local experts in each play, thereby gaining access to drilling programs that are
well advanced, in addition to new exploratory plays, without the fixed-cost
infrastructure that a traditional E&P company would experience. MCNIC
anticipates a significant increase in MOG's operating results as it continues to
implement this growth strategy by acquiring additional properties, developing
existing acreage and realizing the full benefits of previous acquisitions. MOG
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anticipates that production will increase in the future through the continued
development of MOG's approximately one million net (1.7 million gross) acres of
undeveloped property.
In 1996, MOG participated in the drilling of 547 wells (320 net), bringing
the total drilled to 1,630 wells (1,080 net) since it began operations in 1992.
The 1996 drilling program achieved an overall drilling success rate of 94% and
added approximately 216 Bcfe of proved reserves. In 1996, about 40% of these
wells were drilled in Michigan Devonian (Antrim) shale formations. Even though
the potential natural gas recovery from an average Antrim well is less than the
recovery from wells drilled in other types of formations, wells drilled in the
Antrim shale formations have a high success rate and are therefore considered
relatively low risk. MOG's average working interest in Antrim shale E&P wells is
approximately 80%. Exploratory activities in the Midcontinent/Gulf Coast and
Western regions involve greater risk of dry holes or unproductive wells, but
there is also a greater potential for finding larger gas reserves. MOG's average
working interest in these wells is approximately 30%. MOG's success rate in its
drilling program since its inception in 1992 has averaged approximately 95%.
Average finding cost in 1996 was $.83 per Mcfe, up from $.72 per Mcfe in 1995.
Average production cost in 1996 was $.76 per Mcfe, up from $.56 in 1995. The
increased costs are a result of the significant investments made during 1996 and
should trend downward as reserves and production from 1996 investments rise.
Approximately 52% of MOG's production and almost 70% of its proved reserves
were associated with the Midwest/Appalachia region in 1996, as MOG added 305 net
wells in the region. MOG continued as the largest Antrim producer, holding
interests in approximately 20% of the area's estimated 5,000 producing wells.
MOG's success in the Antrim shale formation provided them with the foundation to
begin a thorough evaluation of similar nonconventional reservoirs (fractured
shales, coal seams and tight sands) throughout the United States. In December
1995, MOG acquired from CONSOL Coal Group 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 late 1996,
MOG announced a partnership with Equitable Resources, Inc. in the nearby Nora
field development project. As a result of these activities, MOG has become one
of Appalachia's largest coalbed methane producers.
About 42% of production and 21% of reserves were from the Midcontinent/Gulf
Coast in 1996. MOG owns a 41% working interest in the Broughton Joint Venture, a
partnership that is actively drilling in the Cotton Valley Pinnacle Reef play in
east Texas. With more than 300,000 gross acres in the known producing portion of
this major play, Broughton holds the largest position of any single company or
partnership. The Broughton partnership participated in the drilling of eight
wells during 1996, four of which were significant discoveries. Two of these, in
which our initial net interest averaged 12.5%, were producing 17.5 MMcf/d and
29.0 MMcf/d at year-end. The other two discoveries will be completed in early
1997. In 1996, MOG added 94 net wells in the Midcontinent/Gulf Coast region,
including wells in the Anadarko and Permian Basins.
In May 1996, MOG became a one-third partner in a 52,000-acre block in and
around the Jonah field, located in the Green River Basin of Wyoming. This
partnership included 12 existing gas wells and a 42 MMcf/d gathering system.
Through the end of 1996, MOG had drilled 13 additional wells, all of which were
successful. As a result, total field production tripled to 54 MMcf/d and the
gathering system was expanded to 65 MMcf/d. With 35 proved undeveloped locations
identified and ready to drill, MOG's net proved reserves from this field are
approximately 63 Bcfe.
In December 1996, MOG added California oil-producing acreage to their
Western region through the formation of Venoco L.L.C. Venoco Inc. serves as
operator. Development drilling and installation of secondary oil recovery
facilities are expected to boost the partnership's production as much as 60%
within the next two years from the current combined gross rate of about 2,200
barrels per day.
In 1996, MOG made significant investments in natural gas reserves,
acquiring interests in more than 520 producing wells (290 net). At December 31,
1996, 2,890 wells were producing. An additional 434 wells were in various stages
of completion and are expected to begin producing in 1997. Additional
information on MOG's exploration and production activities is reported under
Item 2. Properties, located on pages 16 and 17 under this section.
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MOG anticipates that oil will become a larger percentage of total reserves
and production in order to achieve a more balanced portfolio. Oil could comprise
as much as 15% of total production by 1998. In addition to producing increasing
quantities of oil through traditional methods, MCN expects increased production
from enhanced oil recovery investments. In Michigan's Niagaran Reef formation,
carbon dioxide extracted from Antrim natural gas production is being injected
into existing oil reservoirs. Production is scheduled to begin in 1997. MOG is
also participating in a number of secondary recovery water-flood projects,
designed to increase the flow rate and overall production of MCN's oil wells.
The natural gas industry is very competitive, especially when it comes to
obtaining desirable properties and projects for the production of natural gas
and oil. The successful relationships MOG has developed with its various
operating partners has created a unique network through which many potential E&P
investments have been, and will continue to be, presented to MOG for
consideration. MOG'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, although high-potential exploratory projects
will also be pursued. Additional investments in natural gas reserves will be
made in areas that offer proved reserves and an acceptable success percentage.
MOG's investment portfolio is built on a diversification strategy intended to
manage risk: geographically, with investments in the Midwest/Appalachia,
Midcontinent/Gulf Coast and Western regions; geologically, with formation depths
ranging from less than 400 feet to more than 18,000 feet; and technologically,
with investments in both conventional and unconventional gas and oil projects.
Competition ranges from the major oil companies to numerous small independent
gas and oil companies.
It is anticipated that MCN will invest approximately $400 million in
exploration and production activities in 1997 and 1998.
PIPELINES & PROCESSING
Operating and joint venture income increased from $1.0 million in 1995 to
$10.7 million in 1996. This reflects an increase in transportation volumes in
1996 to 86.4 Bcf from 5.0 Bcf in 1995 and an increase in processing volumes in
1996 to 44.2 Bcf from 14.6 Bcf in 1995. The increase in 1996 primarily reflects
income from the December 1995 acquisition from CONSOL Coal Group of an interest
in a 40-mile gas gathering line in Virginia and the February 1996 acquisition of
an interest in a 90-mile gas gathering system in the Mobile Bay area of offshore
Alabama. Results also reflect a higher level of volumes treated through
additional gas processing plants that extract carbon dioxide from Michigan
Antrim gas.
Pipelines & Processing's strategy is to own interests in natural gas and
gas liquid gathering, processing and transmission facilities near areas of rapid
reserve development or growing consumer markets. This strategy includes working
with other Diversified Energy businesses that complement Pipelines &
Processing's operations. Operating responsibilities for these facilities are
generally assigned to our partners.
In early 1996, MCNIC, through its subsidiary, MCNIC Pipeline & Processing
Company, continued to expand its Pipelines & Processing business by acquiring a
99% interest in Dauphin Island Gathering Partners (DIGP), a general partnership
that owns a 90-mile gas gathering system in the Mobile Bay area of offshore
Alabama that is capable of moving 355 MMcf/d. The total cost of the acquisition
was $78.6 million. In mid-1996, Pipelines & Processing sold a 40% interest in
the partnership to PanEnergy Dauphin Island Company for $36 million. In the
fourth quarter of 1996, a 41% interest in the partnership was sold to three
additional partners. The new partners paid for their interests by contributing
the Main Pass Gathering System (Main Pass) to DIGP. Main Pass is a 57-mile, 300
MMcf/d offshore gas gathering system in the Gulf of Mexico. As a result of the
transaction, Pipelines & Processing's ownership interest in DIGP was reduced
from 59% to 35%.
MCNIC has formed a new partnership with PanEnergy Corp and Offshore Energy
Development Corporation to construct a 600 MMcf/d processing plant at the
gathering system's northern terminus, onshore Alabama, at an estimated cost of
$80 million. The facility is planned to be operational in mid-1998.
In early 1996, Pipelines & Processing joined a partnership to construct the
Portland Natural Gas Transmission System (PNGTS) as a shipper and a 20% equity
partner. As proposed in an amended regulatory filing made in late 1996, this
271-mile, $300 million pipeline, with initial expected capacity of 178 MMcf/d,
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would connect with the TransCanada PipeLines system at the Vermont border and
with the Tennessee Gas Pipeline system in Massachusetts and would be in service
in late 1998. We expect PNGTS to be certificated by August 1997.
In May 1996, Pipelines & Processing became a 50% partner in Copano Field
Services L.P., a newly formed partnership that owned two non-contiguous systems
in south Texas. This partnership in June purchased a third system, raising its
total miles of pipe to approximately 320. In early 1997, Copano acquired a 25
MMcf/d gas processing facility attached to one of its systems and reached an
agreement with KCS Energy, Inc. to purchase a 150-mile, 150 MMcf/d intrastate
gas pipeline system in south Texas. Significant additional growth of the Copano
partnership is expected during 1997 through strategic acquisitions and
expansions.
In December 1996, Pipelines & Processing acquired a 25% interest in
Lyondell Methanol Company, L.P., a limited partnership that owns and operates a
248 million gallon per year methanol processing plant in Texas. MCNIC will
supply natural gas to the methanol plant and will have the opportunity to
participate with the other partner in future electric power generation projects
during the next five years. The total cost of the acquisition was $54.5 million.
In Michigan, gas processing capacity was expanded 25% to 140 MMcf/d,
primarily through the construction of a new 35 MMcf/d plant. Pipelines &
Processing now has an average interest of 85% in six such plants, which extract
carbon dioxide from Antrim gas production.
MCN's strategy to grow its pipelines and processing operations is to take
equity positions, usually in partnerships owning natural gas gathering,
processing and transmission facilities near areas of either rapid reserve
development or growing consumer markets. It is anticipated that approximately
$150 million will be invested in pipelines and processing facilities in 1997, a
level of investment that is anticipated to be sustained in 1998.
ENERGY MARKETING & POWER GENERATION
Operating and joint venture income for 1996 increased to $10.0 million from
$4.9 million in 1995. This improvement reflects a 28% increase in gas sales
volumes and slightly higher margins on gas sales. The increase in gas sales
volumes was driven primarily by additional sales to the northeastern United
States, as well as sales to the Michigan Power project which began operations in
late 1995. The results also reflect a 37% increase in volumes delivered under
gas exchange contracts in 1996. Typically under exchange contracts, Energy
Marketing accepts delivery of gas during low demand periods and delivers gas to
customers during periods of peak demand.
MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company (CTC). CTC, a wholly owned subsidiary of MCNIC, 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 in Canada. Through its
offices located in Hartford, Connecticut and Detroit and Grand Rapids, Michigan,
CTC is able to offer buyers 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. CTC 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.
CTC 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. In 1996, CTC entered into a marketing
alliance with Torch Energy Advisors of Houston. This alliance links Torch's
supply-aggregation and marketing strengths in the Gulf Coast region with CTC's
strong presence in high-consumption markets. CTC uses its competitive position
in both the market and production regions to identify and complement business
opportunities for MCNIC's various businesses.
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The restructuring of the U.S. electric power industry is expected to create
substantial investment opportunities, including energy marketing. We plan to
pursue energy marketing primarily at the end-user level, rather than in the
high-volume wholesale market because of our retail marketing experience and the
more favorable margins. Currently, we are working with several potential
partners regarding the formation of electricity marketing alliances in the U.S.
Midwest and Northeast.
MCNIC Power Company (MCNIC Power), formerly known as Cogen Development
Company, a wholly owned subsidiary of MCNIC formed in 1993, pursues domestic and
international power generation-related opportunities. Power generation projects
offer 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. MCNIC
Power has the capacity to provide power generation facilities long-term gas
supplies at known prices.
MCNIC Power's strategy is to capture synergies among MCN's businesses and
to profitably apply the expertise they have gained in managing energy-related
projects. The gas-fueled power generation industry has seen an increase in the
number of participants, many of whom are willing to accept returns on power
generation projects that are considerably below MCNIC Power's threshold. The
restructuring of the electric utility industry could increase the long-term
opportunities for MCNIC Power. MCN's experience in the natural gas industry's
transition to a more competitive environment, combined with our success as a
partner in several independent power projects, should enable us to capture such
opportunities.
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 under long-term contracts. The facility is owned and operated by an
equal partnership between MCNIC Power and Destec Energy. MCN, through its Energy
Marketing & Power Generation business group and Gas Distribution operations,
supplied and transported 9.8 Bcf of natural gas needed to fuel the plant during
1996.
In March 1995, MCNIC Power signed a 15-year gas sales agreement to provide
up to 8 Bcf of natural gas annually to the Panda Brandywine Limited Partnership,
a 230 megawatt cogeneration facility located in Brandywine, Maryland. The Panda
Brandywine project sells electricity under a long-term agreement to Potomac
Electric Power. Commercial operation commenced in October 1996.
In late 1996, MCNIC Power purchased the remaining 1% interest in Ada
Cogeneration Limited Partnership (Ada Cogeneration) from the general partner.
MCNIC Power now owns 100% of Ada Cogeneration, which owns and operates a natural
gas-fueled cogeneration facility in western Michigan. The Ada Cogeneration
facility generates up to 30 megawatts of electricity, which is sold to Consumers
Power Company, and produces up to 50,000 pounds of steam per hour, which is sold
to a nearby commercial operation. MCN supplies and transports 2 Bcf of natural
gas needed annually to fuel the plant. MCN is not consolidating Ada Cogeneration
due to the anticipated sale of a portion of the entity.
MCNIC Power's business also includes a number of small cogeneration units
located at the operating facilities of large commercial and industrial
customers. MCNIC Power has long-term agreements for the sale and transportation
of natural gas to these units.
MCNIC Power's experience and relationships in the energy business have
provided a solid base with which to pursue opportunities internationally. The
current focus is on India, where there is tremendous demand for additional power
generation capacity. The strategy in India is to partner with others who bring
expertise and capital to the venture, including an experienced Indian partner.
In February 1997, MCN reached an agreement to acquire a 40% interest in a
joint venture with Torrent Group of Ahmedabad, India. Under the agreement, which
is subject to certain regulatory approvals. MCN
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will invest as much as $115 million, of which approximately half will be funded
through nonrecourse financing. The joint venture will hold interests in several
electric companies and power projects in India.
Entering 1997, MCN is pursuing opportunities to participate in the
construction of more than 2,500 additional megawatts of generating capacity in
India. Among them is a 525 megawatt coal-fired facility in the state of Tamil
Nadu and a 330 megawatt naphtha-fired facility in the state of Madhya Pradesh,
as well as several captive power projects ranging from 20 megawatts to 210
megawatts in various locations and a railway electrification project in the
state of Andhra Pradesh.
MCN continues to pursue other domestic and international power generation
opportunities, several of which are in the early stages of development. It is
anticipated that MCNIC Power will invest between $400-$600 million through the
year 2000, with most of this amount invested in India.
GAS STORAGE
Joint venture income decreased slightly in 1996 to $4.0 million from $4.2
million in 1995.
MCNIC, 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.
MCNIC's storage capacity in Michigan allows Gas Storage to flow gas into storage
at relatively steady rates during off-peak periods, and to draw upon this
storage for delivery during peak-demand periods.
The gas industry's changing operating environment has resulted in more
efficient use of existing storage facilities. However, 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.
As of December 31, 1996, MCN was 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 owned equally by MichCon and
Storage Development. In February 1997, Storage Development signed an agreement
to sell its share of Blue Lake effective December 1997. MichCon will retain its
share of the project.
Storage Development also has a 50% interest in the Washington 28 storage
field, located northeast of Detroit in Macomb County. This 10 Bcf field provides
storage to MCNIC's Energy Marketing operations.
MCNIC expects to develop the Washington 10 storage field in 1997.
Washington 10, a depleted gas reservoir with 42 Bcf of working gas capacity and
excellent deliverability, is located in southeastern Michigan. MCNIC expects the
storage field to be completed by mid-1999. MCNIC currently has long-term
contracts in place for approximately 40% of the field's capacity and the
remaining 60% is expected to be contracted to Energy Marketing.
RISK MANAGEMENT STRATEGY
MCN primarily manages commodity price risk by utilizing futures, options
and swap contracts to more fully balance its portfolio of supply and sales
agreements. MCN has hedged most of its gas and oil production not covered by
long-term, fixed-price sales obligations. MCN's Energy Marketing group
coordinates all of MCN's hedging activities to ensure compliance with risk
management policies established by MCN's board of directors. Certain hedging
gains or losses related to gas and oil production are recorded by MCN's E&P
operations. Gains and losses on gas and oil production-related hedging
transactions that are not recorded by MCN's E&P group are absorbed by Energy
Marketing.
7
<PAGE> 12
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 and small-volume commercial customers.
- End User Transportation -- Through this service, large-volume commercial
and industrial customers that purchase natural gas directly from
producers or brokerage companies utilize the company's gas distribution
network to transport the gas to their facilities.
- Intermediate Transportation -- Provides transportation service to
producers, brokers and other local distribution companies that own the
natural gas, but are not the ultimate consumer.
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.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES (In millions of dollars)
Gas Sales.................................................. $1,102.9 $ 931.9 $ 969.0
End User Transportation.................................... 82.5 80.8 76.5
Intermediate Transportation................................ 48.6 42.0 39.4
-------- -------- --------
Total Sales and Transportation........................... 1,234.0 1,054.7 1,084.9
-------- -------- --------
Other...................................................... 42.3 52.9 52.1
-------- -------- --------
Total Operating Revenues................................. $1,276.3 $1,107.6 $1,137.0
======== ======== ========
MARKETS (Bcf)
Gas Sales.................................................. 221.0 209.8 204.4
End User Transportation.................................... 146.9 145.8 140.0
Intermediate Transportation................................ 527.5 374.4 323.0
-------- -------- --------
Total Sales and Transportation........................... 895.4 730.0 667.4
======== ======== ========
</TABLE>
NOTE: Revenues and volumes include intercompany transactions.
EFFECT OF WEATHER: Gas Distribution's sales and end user transportation
volumes, revenues and net income are impacted by 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.
Effect of Weather on Gas Markets and Earnings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Percentage Colder (Warmer) Than Normal...................... 5.4% 0.3% (4.2)%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf)...................................... 10.9 1.5 (4.4)
Net Income (in Millions).................................. $ 9.9 $1.4 $(4.0)
</TABLE>
8
<PAGE> 13
GAS SALES: Revenues increased $171.0 million in 1996 primarily due to
higher gas costs, colder weather and market expansion. This market represents
25% of total deliveries and produced 78% of Gas Distribution's gross profit
margin from sales and transportation services (Gross Profit Margin). The average
margin per Mcf from gas sales was $2.07 in 1996 and $2.10 in 1995.
Competition in the gas sales market from alternative energy sources is
minimal, coming primarily from sources such as electricity, propane, and to a
lesser degree, oil and wood. Natural gas continues to be the preferred fuel for
Michigan residences and businesses. 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 challenges and opportunities
resulting from increased competition with other natural gas distribution
companies and other energy providers. The MPSC is reviewing various plans to
reform Michigan's gas utility regulatory process to give all customers added
choices and to increase competition. MichCon and other Michigan gas utilities
will implement pilot transportation service programs in 1997 for small-volume
commercial and residential customers. Under MichCon's two-year program, 47,000
customers in the pilot territory will have the opportunity to select alternative
natural gas suppliers beginning in April 1997. This option has been available to
MichCon's larger commercial and industrial customers for several years. MichCon
currently generates no earnings on the gas supply portion of operations.
Therefore, a customer's selection of an alternative supplier is generally
expected to be income-neutral. The overall package of regulatory changes
connected with the gas industry restructuring is expected to result in
lighter-handed regulation and the potential to improve earnings. Gas
Distribution is positioning itself to respond to changes in regulation and
increased competition by reducing its cost of operations while maintaining a
high level of customer satisfaction. Gas Distribution remains focused on these
goals in 1997 and beyond.
Gas Distribution continues to take steps to become the preferred provider
of natural gas and high-value energy services within Michigan and to maintain
strong returns. To accomplish this, MichCon will increase penetration of
existing markets by focusing on meeting the needs of customers and the
marketplace, will increase efforts to reduce cost of gas and operating costs,
and will take advantage of growth opportunities to expand to new geographic
areas.
Gas Distribution is continually assessing ways to improve cost
competitiveness. Among other cost saving initiatives, MichCon and The Detroit
Edison Company are exploring opportunities to share the cost of common,
duplicative functions, including billing, meter reading, payment processing and
excavation. Significant cost savings could be achieved, given that approximately
60% of Gas Distribution's 1.2 million customers are also customers of Detroit
Edison.
Cost of gas sold increased in 1996 as a result of significantly higher spot
market prices paid for natural gas purchases and higher gas sales volumes due to
colder weather. Cost of gas sold per Mcf for 1996 was $2.92, an increase of $.56
(24%). Gas Distribution still retained a significant cost advantage over
competing fuels. Lower natural gas prices, partially offset by higher gas sales
volumes, resulted in the 1995 decrease in cost of gas sold. Cost of gas sold per
Mcf for 1995 decreased from 1994 by $.30 (11%).
Gas Distribution's Market Expansion Program is intended to spur demand for
natural gas in areas currently not served, primarily targeted at residential and
small-volume 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
applications. The Market Expansion Program, which reaches rural and developing
areas not currently using natural gas, has contributed to the 10,830, 18,068 and
12,559 net increases in customers in 1996, 1995 and 1994, respectively. In 1996,
11 new areas of Michigan were served by MichCon, bringing to 128 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, significant growth opportunities exist through
9
<PAGE> 14
conversion of existing homes as well as from new construction. Gas Distribution
also promotes expanded natural gas usage through programs designed to increase
non-heating applications, including gas ranges, clothes dryers, grills,
fireplace logs and lighting. Gas Distribution continues to expand 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. In September 1996, MCN received notification from
the Securities and Exchange Commission that the acquisition is consistent with
its exemption under the Public Utility Holding Act of 1935. Southern Missouri
Gas Company, L.P. was formed effective November 1, 1996. Construction of the
system, which began in March 1995, is planned to be completed in early 1997 at a
cost of approximately $40 million. The 475-mile pipeline system, when completed,
is expected to provide service to approximately 13,000 customers.
END USER TRANSPORTATION: End user transportation deliveries increased in
1996 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 1996, this market
accounted for 16% of total gas deliveries and produced 14% of Gross Profit
Margin.
At December 31, 1996, Gas Distribution had end user transportation
agreements representing annual volumes of 146 Bcf. Approximately 65% of these
volumes are under contracts that extend to 1998 or beyond and include the
majority of the large, and most price-sensitive, customers. Contracts for the
remaining volumes are typically one-year contracts that expire at various times
during 1997 and relate to a large number of low volume users with relatively low
price sensitivity. Negotiations have commenced with customers whose contracts
expire in 1997.
Through technical and financial assistance, customers have been encouraged
to increase the use of natural gas in their industrial and commercial
facilities. Gas-fueled power generation has been an expanding market for natural
gas. In 1996, this market accounted for approximately 31 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 capability 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 risks
associated with fuel switching or bypass. Gas Distribution competes against
alternative fuel sources by providing competitive pricing and reliability of
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 fuel switching of any significance by its
customers. In 1996, approximately 22 Bcf of MichCon's transportation deliveries
were to customers who displaced coal with natural gas.
INTERMEDIATE TRANSPORTATION: This service accounts for 59% of total gas
volumes, but, due to the lower rate charged for this service, represents only 8%
of Gross Profit Margin. The increases in intermediate transportation deliveries
in 1996 and 1995 are due primarily to additional volumes transported for two
major fixed-fee customers and increased transportation of Antrim gas for
Michigan gas producers and brokers.
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.
10
<PAGE> 15
MichCon, through its subsidiary MichCon Pipeline Company (MichCon
Pipeline), is involved 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 1996, MichCon Pipeline transported an average
of 551 MMcf/d of natural gas and related liquids. In January 1996, the
transportation rate of one customer on the Saginaw Bay Pipeline decreased 40% in
accordance with the terms of a 15-year contract that reduces the transportation
rate for the last 10 years of the agreement. However, in December 1996, the
contract was renegotiated, thus eliminating the 40% decrease. This contract
expires in December 1997. Negotiations are currently underway to extend this
contract. Moreover, all transportation contracts relating to the Saginaw Bay
Pipeline are being negotiated to raise the transportation rate to the maximum
authorized rate. MichCon will continue to look at new sources of volume and
revenue to increase the profitability of this asset.
There has been a significant increase in Michigan Antrim gas production
over the past several years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. In order to meet the increased
demand, MichCon expanded the capacity of its northern Michigan gathering system
in 1996. The expansion enabled MichCon to transport an additional 75 Bcf in
1996.
In January 1997, MichCon completed construction of a 59-mile loop of its
existing Milford to Belle River Pipeline at a cost of approximately $85 million.
The pipeline will improve the overall reliability and efficiency of MichCon's
gas storage and transmission system by serving as a back-up means of
transportation in the event of disruption in the operation of the existing
pipeline or other facilities used to supply gas to MichCon's system.
In 1997, MichCon will exercise its option to purchase a 50% interest in an
additional pipeline under the St. Clair River to link MichCon's system with
Consumers Gas of Toronto's pipeline. When placed into service during 1997, this
project will enhance MichCon's ability to transport gas bound for both Canadian
and Northeast U.S. markets.
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 federal Low-Income Home Energy Assistance Program (LIHEAP). During
1995, Congress reduced a substantial portion of the program's funding for the
1996 fiscal year. The state of Michigan's share of federal LIHEAP funds was
reduced from $78 million in fiscal year 1995 to $47.5 million in 1996.
Uncollectible gas accounts were further impacted by the late receipt of fiscal
year 1996 funding by the state of Michigan. Due to this delay, many of MichCon's
customers who were eligible for assistance did not file to receive such funds.
During 1996 and 1995, $10.1 million and $27.3 million in federal LIHEAP funds
assisted approximately 74,000 and 112,000 MichCon customers, respectively, in
making their gas payments. During October 1996, President Clinton signed an
Omnibus Spending Bill passed by Congress that provided for $1 billion in federal
LIHEAP funding for 1997, an increase of $100 million over 1996 levels. During
February 1997, the President released his proposed budget which provides for
federal LIHEAP funding at $1 billion annually through fiscal year 2002. Receipt
of this funding is not expected to be delayed in 1997. A portion of any future
increase or decrease in funding may impact uncollectible gas accounts.
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, a
wholly owned gas utility subsidiary of MCN that serves approximately 13,000
customers, is currently served by two interstate pipelines, Panhandle
11
<PAGE> 16
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 1996, Citizens' purchases were
99% from CTC, an affiliated company and 1% from non-affiliated suppliers.
One of MCN's objectives for its Gas Distribution business is to rank in the
lowest quartile for cost of gas in Michigan as well as neighboring states.
Although Gas Distribution's gas costs rose 24% during the year to $2.92 per Mcf,
they remained in the lowest quartile among a group of 22 utilities in the
region, having decreased 32% over the last 10 years. Under its gas cost recovery
mechanism, MichCon expects to continue to collect all of its prudently incurred
gas costs.
Gas Distribution -- Sources of Gas Supply (Bcf)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Firm Suppliers:
Michigan Producers........................................ 86.3 90.9 86.0
Interstate Suppliers...................................... 14.5 18.2 64.3
Canadian Suppliers........................................ 37.3 31.5 29.4
Spot Market................................................. 94.0 55.1 37.2
----- ----- -----
232.1 195.7 216.9
===== ===== =====
</TABLE>
Gas Distribution purchased 37% of its 1996 supply from Michigan producers,
47% 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.
MichCon has in place long-term firm transportation agreements with ANR and
Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR is obligated
to transport approximately 375 MMcf/d of supply during the summer months and 310
MMcf/d of supply during the winter months for MichCon under these agreements,
while Great Lakes is obligated to transport 30 MMcf/d. These transportation
contracts expire on various dates between 1999 and 2011.
MichCon also has contracts with independent Michigan producers that expire
on various dates through 2011. MichCon continues its supply strategy of
purchasing gas under contracts that tie purchase prices to spot market prices.
To mitigate risk related to spot market prices, MichCon has filed a proposal
with the MPSC to change its supply strategy to purchase approximately two-thirds
of its gas under contracts that tie purchase prices to spot market prices and to
acquire the remainder under fixed price contracts. MichCon expects approval of
this proposal during the second quarter of 1997.
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 appealed the issue to the
District of Columbia (D.C.) Circuit Court. In February 1996, the U.S. District
Court Eastern District of Michigan ruled that the FERC orders were final for
purposes of requiring MichCon to pay Panhandle's invoice for the $4.4 million in
interest. MichCon satisfied the judgment. In September 1996, the D.C. Circuit
Court upheld the FERC's previous orders. MichCon has filed for recovery of these
costs through its 1996 GCR reconciliation case.
At December 31, 1996, 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
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<PAGE> 17
capacity also allows MichCon to lower its peak-day entitlement, thereby reducing
interstate pipeline costs. During 1996, MichCon's maximum one-day sendout
exceeded 2.4 Bcf, of which approximately 70% came from its underground storage
fields. MichCon's gas distribution system has a maximum daily sendout capability
of 2.8 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. The MPSC is reviewing various plans to reform Michigan's gas
utility regulatory process to give all customers added choices and to increase
competition. One such plan is MichCon's Pilot Transportation Program being
offered to 47,000 small-volume residential and commercial customers, discussed
previously. MichCon 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. 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: 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, 1996 is approximately $2.6 million. Any excess
costs are to be amortized over a 10 year period beginning in the year subsequent
to the year environmental investigation and remediation costs are paid. The
recovery of any remediation costs incurred will be reviewed in a future rate
case.
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 Pensions," by the net decreased tax expense.
MichCon filed an application with the MPSC in October requesting authority
to decrease depreciation rates from the existing 4.09% to 3.44%. Based on
December 1996 plant balances, depreciation expense would have effectively
decreased by approximately $11.2 million. The final determination of MichCon's
depreciation rate reduction is subject to an MPSC order. An MPSC order is
expected by December 1997.
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 10 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 to be
returned to or collected from GCR customers using the rolled-in prospective
refunding methodology approved by the MPSC on June 30, 1994.
13
<PAGE> 18
In February 1995, MichCon filed its 1994 GCR reconciliation case indicating
an over-recovery of $19 million, including interest. 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 February 1997, the MPSC issued an order finding that all of
MichCon's 1995 gas costs were reasonable and prudent.
In February 1997, MichCon filed its 1996 GCR reconciliation case indicating
a net under-recovery of approximately $28 million, including interest. An MPSC
order is expected in December 1997. In July 1996, MichCon filed its 1997 GCR
plan case. An MPSC order is expected in May 1997.
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. 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 these sites. The remedy
consists of limited excavation and disposal of soils, a new soil cover and
long-term groundwater monitoring. More extensive investigations are underway at
seven 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 employed outside consultants to evaluate remediation alternatives for
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. In
1996, MichCon received payments from certain carriers and expects additional
insurance recoveries over the next several years. 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 million during 1995.
During 1996, 1995 and 1994, MCN spent $.9 million, $2.1 million and $.6
million, respectively, investigating these former MGP sites. At December 31,
1996 the reserve balance was $37.6 million, of which $2.6 million was 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.
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
substantial 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
14
<PAGE> 19
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 that 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 upon 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 1996, MichCon gained six franchises with aggregate gas sales volumes
of approximately 0.4 Bcf annually. Approximately 40 major franchises have been
renewed in 1996, which account for gas sales volumes of approximately 18 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 annually) 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
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 but are not expected to have a
significant impact on its business.
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.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
The Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. for an
initial sales price of $137.5 million, resulting in an after-tax gain of $36.2
million. In October 1996, the initial sales price was decreased by $4.6 million
to reflect the reduction in Genix's working capital between the effective and
closing dates of the transaction. The selling price of Genix could be further
adjusted downward by as much as $32 million depending upon the occurrence of
certain contingencies that include, among other things, retention of certain
customers through mid-1998 and tax-related matters. Management believes that no
further adjustment to the selling price will occur. Although Genix had
experienced significant growth in revenues and operating income over the past
several years, MCN's focused strategy is to invest in energy-related projects
that generate higher rates of return. Summary statements and other information
on discontinued computer operations can be found in Note 2 to the consolidated
financial statements.
OTHER
MCNIC is involved in several residential and commercial community
development partnerships.
Storage Development Company, a 100% owned subsidiary of MCNIC, holds a 50%
limited partnership interest in The Orchards Golf Limited Partnership. The
partnership was formed in 1991 to develop approximately 520 acres of land in
Washington Township, Michigan. The development consisted of an 18-hole
championship golf course, The Orchards, of approximately 200 acres located above
the Washington 28 storage field and residential development of the remaining
acreage. The Orchards Golf Limited Partnership entered into an agreement with
Westcreek Estates to sell approximately 70 residential development acres.
15
<PAGE> 20
ITEM 2. PROPERTIES
MCN, through its principal subsidiaries, leases approximately 105,000 sq.
feet of office space in Detroit and Grand Rapids, Michigan, Houston, Texas,
Denver, Colorado, 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, 1996, MichCon's
distribution system included 16,257 miles of distribution mains, 1,065,233
service lines and 1,185,445 active meters. MichCon owns 2,509 miles of
transmission and production lines that 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, 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 1996 totaled
$212.7 million. MichCon's capital requirements for 1997 are anticipated to be
approximately $175 million for capital investments.
The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline Co., owns a 66 2/3% 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 major gathering line. The Saginaw Bay
Lateral Company, a wholly owned subsidiary of MichCon Pipeline Co., 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 major gathering line.
Westside Pipeline Company, a wholly owned subsidiary of MichCon Pipeline Co.,
owns an 82.62% interest in Jordan Valley Pipeline, an 14-mile major gathering
line and the Terra-Hayes Pipeline, a 18-mile major gathering line.
MichCon Gathering Company, a wholly owned subsidiary of MichCon Pipeline
Co., owns substantially all of the properties used in the conduct of its
business, including 44.7-mile, 8.6-mile and 11-mile major gathering lines and a
2400 horsepower compressor station.
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
MCNIC Oil & Gas Company has interests in properties used for gas
production, including compressor facilities and small gathering lines. (See
information on the following page on Exploration & Production Activities for
further details).
MCN is involved in joint ventures that own property associated with gas
storage, power generation, gas gathering and processing, and real estate.
MCN's facilities are suitable and adequate for their intended use.
16
<PAGE> 21
EXPLORATION & PRODUCTION ACTIVITIES
MCNIC Oil & Gas Company (MOG), 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 "Exploration & Production" section of Item 1 located on
page 2, provide additional information regarding this activity. Information on
estimated gas and oil reserves was obtained by MOG from the independent
petroleum engineering consultants Ryder Scott Company, Miller and Lents, Ltd.,
Lee Keeling & Associates, Inc., Questa Engineering Corporation, Advanced
Resources International, Inc. and S.A. Holditch & Associates, Inc.
PRODUCTION
<TABLE>
<CAPTION>
For the Year Ended December 31 1996 1995 1994
------------------------------ ------ ------ ------
<S> <C> <C> <C>
Average Gas Sales Price (per Mcf) $ 1.96 $ 2.02 $ 1.97
Average Oil Sales Price (per Bbl) $20.18 $16.24 $16.29
Average Production Cost (per Mcfe) $ 0.76 $ 0.56 $ 0.52
</TABLE>
PRODUCTIVE WELLS AND ACREAGE
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- -------------------- ------------------
Gross Net Gross Net Gross Net
--------- --- --------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Producing Wells
- -----------------
United States 2,890 1,481 1,972 1,014 1,295 620
========= ======== ========= ======= ======= =======
Developed Lease Acreage
- ---------------------------
United States 519,107 287,964 308,878 149,104 212,941 101,301
========= ======== ========= ======= ======= =======
Undeveloped Leased Acreage
- -------------------------------
United States 1,701,063 970,873 1,345,864 819,049 573,106 390,859
========= ======== ========= ======= ======= =======
</TABLE>
DRILLING ACTIVITY
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Working Interest Well Completions:
Exploratory
Productive 63 28 26 6 22 11
Dry 37 15 22 7 16 11
--- --- --- --- --- ---
Total Exploratory 100 43 48 13 38 22
--- --- --- --- --- ---
Development
Productive 355 230 333 228 137 120
Dry 12 6 18 9 9 6
--- --- --- --- --- ---
Total Development 367 236 351 237 146 126
--- --- --- --- --- ---
Total Working Interest Well Completions 467 279 399 250 184 148
=== === === === === ===
Wells in Process of Drilling at December 31, 1996 167 108 120 82 92 72
</TABLE>
17
<PAGE> 22
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, contracts, personal injury, property
damage claims and other matters.
ENVIRONMENTAL
In 1994, MichCon received a general notice of liability letter from the
U.S. Environmental Protection Agency (USEPA) stating that it was one of two
potentially responsible parties at the Lower Ecorse Creek Superfund site in
Wyandotte, Michigan. USEPA requested that MichCon conduct a remedial
investigation and feasibility study at that site. MichCon investigated its prior
activities in the area and USEPA's bases for its conclusion, and concluded that
it was not responsible for contamination discovered at that site. MichCon
informed USEPA of this belief and did not undertake the requested activities.
In September 1996, USEPA sent MichCon a second general notice of liability
letter for the site and demanded reimbursement of approximately $2.3 million in
past costs, plus interest. USEPA then issued MichCon and the other potentially
responsible party a unilateral administrative order under section 106 of the
Comprehensive Environmental Response Compensation and Liability Act to implement
the remedy. USEPA estimates the cost of the remedy to be approximately $650,000.
MichCon again reviewed USEPA's bases for determining that it is a potentially
responsible party and concluded again that it was not responsible for
contamination discovered at that site and informed USEPA of its decision. USEPA
has not subsequently contacted MichCon about this response. USEPA may sue
MichCon to force compliance with the order or may implement the remedy and then
sue MichCon for recovery of all incurred costs. If USEPA institutes and prevails
in such a suit and if the court determines that MichCon did not have sufficient
cause not to comply with the order, the court may impose civil penalties and
punitive damages. Management believes MichCon was not responsible for
contamination at the site and has sufficient cause not to comply with this order
and that the resolution of this matter will not have a material adverse effect
on MCN's financial statements.
ENERGY CONSERVATION PROGRAMS
In December 1994, a suit was filed against MichCon in Wayne County Michigan
Circuit Court by six customers who had participated in one of three energy
conservation programs sponsored by MichCon. Under these programs, which had been
approved by the MPSC and operated from 1990 to 1996, MichCon offered
low-interest loans, rebates and other arrangements to assist approximately
46,000 qualified residential customers in purchasing high-efficiency furnaces.
MichCon did not manufacture, sell or install any of the furnaces. The complaint
alleged that MichCon induced the purchase of these furnaces through its
conservation programs and that it had a duty to, but failed to, warn its
customers that harmful levels of carbon monoxide could backdraft if a chimney
was not properly sized and a chimney liner installed. No personal injuries were
claimed. Plaintiffs sought injunctive relief, unspecified monetary damages and
class action certification. The trial court denied such certification on two
separate occasions; the Michigan Court of Appeals denied plaintiffs' request for
an appeal of those rulings.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. On September 13, 1996,
plaintiffs' third motion to certify the lawsuit as a class action was granted.
MichCon appealed the granting of certification and on December 2, 1996, the
Michigan Court of Appeals granted MichCon's motion for immediate consideration
and stayed all further proceedings until the Court issues its decision. MichCon
believes that the plaintiffs' allegations are without merit and will continue to
defend the case vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE> 23
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MCN, as of February
28, 1997, 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 April 22, 1997.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- ----------------- --- ------------------------------------------
<S> <C> <C>
Alfred R. Glancy III 58 Present position since September 1992; Chairman, Chief
Chairman, President, Chief Executive Officer and Director since August 1988;
Executive Officer and Director Chairman and Director of MCN Investment since 1988;
Chairman and Director of MichCon since 1984 and 1981
respectively; Chief Executive Officer of MichCon from
1984 to September 1992.
Rai P. Bhargava 49 Present position since January 1994; Executive Vice
President and Chief Executive President and Chief Operating Officer of MCN Investment
Officer of MCN 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
President and Chief Executive Chief Operating Officer from August 1988 to September
Officer Officer of MichCon and 1992; Director since August 1988; President and
Director Director of MichCon since 1985 and 1984 respectively;
Chief Operating Officer of MichCon from 1985 to
September 1992.
William K. McCrackin 63 Present position since September 1992; Vice Chairman,
Vice Chairman, Chief Financial Chief Financial Officer, Treasurer and Director from
Officer and Director August 1988 to September 1992; Director of MCN
Investment since 1988; Vice Chairman of MichCon from
March 1986 to September 1992; Chief Financial Officer
of MichCon from 1985 to September 1992; Director of
MichCon since 1984.
Daniel L. Schiffer 53 Present position since September 1995; Vice President,
Senior Vice President, General General Counsel and Secretary of MCN since April 1989;
Counsel and Secretary 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; Director of MichCon
since January 1989.
</TABLE>
19
<PAGE> 24
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 18,
1997 there were 23,344 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 titled
"Supplementary Financial Information" in MCN's 1996 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 titled "Supplementary Financial Information" in MCN's
1996 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 titled "Management's Discussion and Analysis" in MCN's
1996 Annual Report to Shareholders, pages 32 through 40.
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 1996 Annual Report to Shareholders.
The consolidated statement of income, cash flows and capitalization are for each
of the years ended December 31, 1996, 1995 and 1994 and the consolidated
statement of financial position is as of December 31, 1996 and 1995.
Consolidated Statement of Income, page 41
Consolidated Statement of Financial Position, page 42
Consolidated Statement of Cash Flows, page 43
Consolidated Statement of Capitalization, page 44
Notes to Consolidated Financial Statements, pages 45 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> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section titled "Proposal 1 -- Election of
Directors" in MCN's February 1997 definitive Proxy Statement is incorporated by
reference herein.
Information concerning the executive officers of MCN is set forth in the
section titled "Executive Officers of the Registrant" on page 19 in Part I of
this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections titled "Compensation of Directors
and Executive Officers" and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation" in MCN's February 1997 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 titled "Beneficial Security
Ownership of Directors, Nominees and Executive Officers" in MCN's February 1997
definitive Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the sections titled "Executive Compensation"
and "Other Compensation Matters" in MCN's February 1997 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, 1996, 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 those referred to above are omitted as not applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
21
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors:
We have audited the consolidated financial statements of MCN Corporation
and subsidiaries doing business as MCN Energy Group Inc. (the "Corporation"), as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, and have issued our report thereon dated February 7,
1997 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to the Corporation's adoption of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"), such
consolidated financial statements and report are included in your 1996 Annual
Report to Shareholders and are incorporated herein by reference. Our audits also
included the consolidated financial statement schedule of the Corporation,
listed in Item 14. This consolidated financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated 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 7, 1997
22
<PAGE> 27
SCHEDULE II
MCN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------
PROVISIONS DEDUCTIONS
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, 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $13,765 $29,425 $ -- $ 24,703 $18,487
======= ======= ======= ========= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (1)........................ $38,451 $ -- $ -- $ 875 $37,576
======= ======= ======= ========= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182
======= ======= ======= ========= =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves 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 (2)... 91 -- -- 91 --
Allowance for notes receivable (3)............... 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 (1)........................ $ 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>
Reserves 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 (2)... -- 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 (1)........................ $ 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
======= ======= ======= ========= =======
</TABLE>
- ---------------
NOTES:
(1) Reference is made to Note 7b to the Consolidated Financial Statements in
MCN's 1996 Annual Report to Shareholders, page 50.
(2) 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.
(3) During 1995, MCN reversed $1,607,000 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.
23
<PAGE> 28
3. Exhibits, Including Those Incorporated by Reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Corporation (Exhibit 3-1 to
March 31, 1994 Form 10-Q).
3-2 By-Laws of MCN Corporation, as amended (Exhibit 3-2 to March
31, 1993 Form 10-Q).
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K).
4-2 Subordinated Debt Securities Indenture between MCN Corp. and
NBD Bank, N.A., as Trustee, dated September 1, 1994 (Exhibit
4-5 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated April 17, 1996 (Exhibit 4-18
to Amendment No. 2 to Registration Statement No. 333-01521);
and Second Supplemental Indenture, dated July 24, 1996
(Exhibit 5-2 to July 24, 1996 Form 8-K).
4-3 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-forth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-4 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank as Trustee, dated September 1, 1995 (Exhibit 4-1 to
Registration Statement No. 33-63311).
4-5 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-6 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-7 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-8 Form of MCN Corporation Series A Subordinated Deferrable
Interest Debt Security for $100,000,000 (Exhibit 4-6 to
October 26, 1994 Form 8-K).
4-9 Form of MCN Corporation Series A Subordinated Deferrable
Interest Debt Security for $1,100,000 (Exhibit 4-7 to
October 26, 1994 Form 8-K).
4-10 Purchase Contract Agreement dated April 22, 1996 between MCN
Corporation and the First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-11 Pledge Agreement dated April 22, 1996 among MCN Corporation,
Chemical Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 4-10 to
April 22, 1996 Form 8-K).
4-12 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit A to the Purchase Contract
Agreement included as Exhibit 4-10 hereto).
4-13 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-14 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
</TABLE>
24
<PAGE> 29
<TABLE>
<C> <S>
4-15 Form of Preferred Security of MCN Financing I (Annex I to the Amended and Restated Declaration of Trust
of MCN Financing I included as Exhibit 4-13 hereto).
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 Form of Employment Agreement (Exhibit 10-1 to March 31, 1990 Form 10-Q).
10-4 MCN Corporation Annual Performance Plan (Exhibit 10-6 to 1993 Form 10-K).
10-5 MCN Corporation Non-Officer Director Stock Award Plan (Exhibit 10-1 to March 31, 1994 Form 10-Q).
10-6 MCN Corporation Stock Incentive Plan (Exhibit 10-1 to March 31, 1995 Form 10-Q).
10-7 Special Retention Agreement between MCN Corporation and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995
Form 10-Q).
10-8 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-9 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to September 30, 1996 Form
10-Q).
10-10 MichCon Supplemental Retirement Plan (Exhibit 10-3 to September 30, 1996 Form 10-Q).
10-11 MCN Corporation Mandatory Deferred Compensation Plan, as amended.*
10-12 MCN Energy Group Inc. Supplemental Savings Plan.*
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN Energy Group Inc.*
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN Investment Corporation.*
13-1 MCN Energy Group Inc. 1996 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.*
23-6 Consent of Questa Engineering Corporation.*
23-7 Consent of Advanced Resources International, Inc.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1 to MichCon's 1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit 28-2 to MichCon's 1989 Form 10-K).
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
(B) REPORTS ON FORM 8-K:
MCN Corporation filed a report on Form 8-K dated January 14, 1997, under
Item 5 with respect to the announcement that MCN Corporation had begun doing
business under the name MCN Energy Group Inc., reflecting the company's growth
during the past five years into a diversified energy company.
25
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MCN CORPORATION
--------------------------------------
(Registrant)
By: /s/ Harold Gardner
------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
* Director, Chairman, President and February 28, 1997
- --------------------------------------------- Chief Executive Officer
Alfred R. Glancy III
* Director, Vice Chairman and Chief February 28, 1997
- --------------------------------------------- Financial Officer
William K. McCrackin
/s/ Harold Gardner Vice President, Controller and February 28, 1997
- --------------------------------------------- Chief Accounting Officer
Harold Gardner
* Director February 28, 1997
- ---------------------------------------------
Stephen E. Ewing
* Director February 28, 1997
- ---------------------------------------------
Roger Fridholm
* Director February 28, 1997
- ---------------------------------------------
Frank M. Hennessey
* Director February 28, 1997
- ---------------------------------------------
Thomas H. Jeffs II
* Director February 28, 1997
- ---------------------------------------------
Dale A. Johnson
* Director February 28, 1997
- ---------------------------------------------
Helen O. Petrauskas
* Director February 28, 1997
- ---------------------------------------------
Howard F. Sims
* Director February 28, 1997
- ---------------------------------------------
Bill M. Thompson
*By: /s/ HAROLD GARDNER
---------------------------------------
Harold Gardner
Attorney-in-Fact
</TABLE>
26
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Corporation (Exhibit 3-1 to
March 31, 1994 Form 10-Q).
3-2 By-Laws of MCN Corporation, as amended (Exhibit 3-2 to March
31, 1993 Form 10-Q).
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K).
4-2 Subordinated Debt Securities Indenture between MCN Corp. and
NBD Bank, N.A., as Trustee, dated September 1, 1994 (Exhibit
4-5 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated April 17, 1996 (Exhibit 4-18
to Amendment No. 2 to Registration Statement No. 333-01521);
and Second Supplemental Indenture, dated July 24, 1996
(Exhibit 5-2 to July 24, 1996 Form 8-K).
4-3 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-forth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-4 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank as Trustee, dated September 1, 1995 (Exhibit 4-1 to
Registration Statement No. 33-63311).
4-5 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-6 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-7 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-8 Form of MCN Corporation Series A Subordinated Deferrable
Interest Debt Security for $100,000,000 (Exhibit 4-6 to
October 26, 1994 Form 8-K).
4-9 Form of MCN Corporation Series A Subordinated Deferrable
Interest Debt Security for $1,100,000 (Exhibit 4-7 to
October 26, 1994 Form 8-K).
4-10 Purchase Contract Agreement dated April 22, 1996 between MCN
Corporation and the First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-11 Pledge Agreement dated April 22, 1996 among MCN Corporation,
Chemical Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 4-10 to
April 22, 1996 Form 8-K).
4-12 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit A to the Purchase Contract
Agreement included as Exhibit 4-10 hereto).
4-13 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-14 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
</TABLE>
<PAGE> 32
<TABLE>
<C> <S>
4-15 Form of Preferred Security of MCN Financing I (Annex I to the Amended and Restated Declaration of Trust
of MCN Financing I included as Exhibit 4-13 hereto).
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 Form of Employment Agreement (Exhibit 10-1 to March 31, 1990 Form 10-Q).
10-4 MCN Corporation Annual Performance Plan (Exhibit 10-6 to 1993 Form 10-K).
10-5 MCN Corporation Non-Officer Director Stock Award Plan (Exhibit 10-1 to March 31, 1994 Form 10-Q).
10-6 MCN Corporation Stock Incentive Plan (Exhibit 10-1 to March 31, 1995 Form 10-Q).
10-7 Special Retention Agreement between MCN Corporation and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995
Form 10-Q).
10-8 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-9 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to September 30, 1996 Form
10-Q).
10-10 MichCon Supplemental Retirement Plan (Exhibit 10-3 to September 30, 1996 Form 10-Q).
10-11 MCN Corporation Mandatory Deferred Compensation Plan, as amended.*
10-12 MCN Energy Group Inc. Supplemental Savings Plan.*
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN Energy Group Inc.*
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN Investment Corporation.*
13-1 MCN Energy Group Inc. 1996 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.*
23-6 Consent of Questa Engineering Corporation.*
23-7 Consent of Advanced Resources International, Inc.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended (Exhibit 28-1 to MichCon's 1989 Form 10-K).
99-2 MichCon Savings and Stock Ownership Plan, as amended (Exhibit 28-2 to MichCon's 1989 Form 10-K).
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
(B) REPORTS ON FORM 8-K:
MCN Corporation filed a report on Form 8-K dated January 14, 1997, under
Item 5 with respect to the announcement that MCN Corporation had begun doing
business under the name MCN Energy Group Inc., reflecting the company's growth
during the past five years into a diversified energy company.
<PAGE> 1
EXHIBIT 10-11
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
(AS AMENDED EFFECTIVE MAY 23, 1996)
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
SECTION 1 ................................................... 1
TITLE, PURPOSE AND EFFECTIVE DATE
1.01. Title .................................. 1
1.02. Purpose ................................ 1
1.03. Effective Date ......................... 1
SECTION 2 ................................................... 1
DEFINITIONS
2.01. "Account" .............................. 1
2.02. "Affiliated Company .................... 1
2.03. "Annual Base Salary" ................... 2
2.04. "Annual Incentive Compensation" ........ 2
2.05. "Beneficiary" .......................... 2
2.06. "Board of Directors" ................... 2
2.07. "Code" ................................. 2
2.08. "Committee" ............................ 2
2.09. "Company" .............................. 2
2.10. "Covered Employee" ..................... 2
2.11. "Deferral" ............................. 2
2.12. "Deferral Form" ........................ 2
2.13. "Deferral Period" ...................... 3
2.14. "ERISA" ................................ 3
2.15. "FICA" ................................. 3
2.16. "In Pay Status" ........................ 3
2.17. "Participant" .......................... 3
2.18. "Performance Unit Award" ............... 3
2.19. "Plan" ................................. 3
2.20. "Plan Interest Rate" ................... 3
2.21. "Plan Year" ............................ 3
2.22. "Restricted Stock Plan" 3
2.23. "Savings Plan" ......................... 3
2.24. "Spouse" ............................... 3
2.25. "Total Compensation" ................... 3
SECTION 3 ................................................... 4
PARTICIPATION
3.01. Determination of Covered Employee Status 4
3.02. Commencement of Participation .......... 4
3.03. Deferral Form .......................... 4
3.04. Amount of Deferral ..................... 4
3.05. Increased Deferral ..................... 5
3.06. Denomination of Deferrals .............. 5
3.07. Establishment of Account ............... 5
SECTION 4 .................................................... 5
FUNDING OF BENEFITS
4.01. Unfunded Plan .......................... 5
4.02. Dividend Equivalents ................... 5
<PAGE> 3
SECTION PAGE
SECTION 5 ..................................................... 6
FORM AND TIMING OF PAYMENT
5.01. Form and Timing of Payment ............. 6
5.02. Change in Payment Option ............... 6
5.03. Hardship Withdrawal Benefits ........... 6
SECTION 6 ..................................................... 7
SELECTION OF AND PAYMENTS TO A BENEFICIARY .............. 7
6.01. Beneficiary Designation ................ 7
6.02. Change in Beneficiary Designation ...... 7
6.03. Pre-Retirement Survivor Benefit ........ 7
6.04. Post-Retirement Survivor Benefit ....... 7
SECTION 7 ..................................................... 7
VESTING OF BENEFITS
7.01. Vesting of Benefits .................... 7
SECTION 8 ..................................................... 8
ADDITIONAL PROVISIONS AFFECTING BENEFITS
8.01. Tax Withholding ........................ 8
8.02. Dilution and Other Adjustments ......... 8
SECTION 9 .................................................... 8
ADMINISTRATION OF THE PLAN
9.01. Duties and Power ....................... 8
9.02. Benefit Statements ..................... 9
SECTION 10 ................................................... 9
AMENDMENT, SUSPENSION, AND TERMINATION
10.01. Right to Amend or Terminate ............ 9
10.02. Right to Suspend ....................... 9
10.03. Non-ERISA Plan ......................... 9
10.04. Right to Accelerate .................... 9
SECTION 11 ................................................... 10
MISCELLANEOUS
11.01. Right to Continued Employment .......... 10
11.02. Prohibition Against Alienation ......... 10
11.03. Sayings Clause ......................... 10
11.04. Payment of Benefit of Incompetent ...... 10
11.05. Spouse's Interest ...................... 10
11.06. Successors ............................. 10
11.07. Gender, Number and Heading ............. 11
11.08. Legal Fees and Expenses ................ 11
11.09. Choice of Law .......................... 11
11.10. Affiliated Employees ................... 11
<PAGE> 4
SECTION PAGE
SECTION 12 ................................................... 11
CHANGE IN CONTROL PROVISIONS
12.01. General ................................ 11
12.02. Transfer to Rabbi Trust ................ 11
12.03. Joint and Several Liability ............ 11
12.04. Definition of Change in Control ........ 12
<PAGE> 5
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
SECTION 1
TITLE, PURPOSE AND EFFECTIVE DATE
1.01. Title. The title of this Plan shall be the "MCN Corporation
Mandatory Deferred Compensation Plan" and shall be referred to in this document
as the "Plan."
1.02. Purpose. The purpose of the Plan is to promote the success of MCN
Corporation (hereinafter referred to as the "Company") by providing the Company
a method to meet the deduction limitation in Section 162(m) of the Internal
Revenue Code of 1986, as amended, whereby Covered Employees of the Company and
its affiliated companies are required to defer the amount of compensation
payable in one calendar year in excess of $1 million until after completion of
the Deferral Period thereby increasing the employees' personal interest in the
continued success and progress of the Company.
It is intended that this Plan provide benefits for "a select group of
management or highly compensated employees" within the meaning of Sections 201,
301 and 401 of the Employee Retirement Income Security Act of 1974, as amended
(hereinafter referred to as "ERISA") and, therefore, to be exempt from the
provisions of Parts 2, 3 and 4 of Title I of ERISA.
1.03. Effective Date. The Plan shall be effective January 1, 1995.
SECTION 2
DEFINITIONS
The following words and terms used herein shall, unless the context
clearly requires a different meaning, have the respective meanings hereinafter
set forth.
2.01. "Account" means the record maintained by the Company of each
Participant's Deferrals, credited dividend equivalents and distributions under
the Plan.
2.02. "Affiliated Company" means any corporation while such corporation is
a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Company or any other employing entity while
such entity is
-1-
<PAGE> 6
under common control (within the meaning of Section 414(c) of the Code) with
the Company.
2.03. "Annual Base Salary" means annual base salary payable in the current
Plan Year after any deferrals under Sections 125, 129 or 401(k) of the Code and
after any election to defer an amount under the MCN Executive Deferred
Compensation Plan and the MichCon Supplemental Savings Plan and before any
payroll deduction for taxes or any other purpose, but excluding any bonus,
fringe benefit or other form of remuneration.
2.04. "Annual Incentive Compensation" means the cash compensation earned
in the current Plan Year and payable in the subsequent Plan Year under the MCN
Corporation Annual Management Performance Plan.
2.05. "Beneficiary" means the person, persons or entity designated in
writing by the Participant on forms provided by the Company to receive
distribution of certain death benefits under the Plan in the event of the
Participant's death.
2.06. "Board of Directors" means the Board of Directors of the Company.
2.07. "Code" means the Internal Revenue Code of 1986, as amended.
2.08. "Committee" means the Savings Plan Committee under the MichCon
Savings and Stock Ownership Plan (as defined in Section 2.23). The Committee
is responsible for the administration of the Plan.
2.09. "Company" means MCN, a Michigan corporation, its successors and
assigns, and any affiliated company.
2.10. "Covered Employee" means any employee with Total Compensation in
excess of $1 million who, on the last day of the taxable year, is the chief
executive officer ("CEO") of the Company or is acting in such capacity, or is
among the four highest compensated officers (other than the CEO) whose
compensation is required by the Securities Exchange Act of 1934 to be disclosed
in the Company's proxy statement.
2.11. "Deferral" means the amount of a Participant's Performance Unit
Award, Restricted Stock Award, Annual Incentive Compensation and/or Annual Base
Salary that must be deferred in accordance with Section 3 to reduce the
Participant's estimated Total Compensation to an amount less than $1 million
for a Plan Year. The source of the Deferral shall be at the discretion of the
Company's Director of Human Resources. Deferral amounts are retained by the
Company as part of its general assets.
2.12 "Deferral Form" means the deferral form described in Section 3.03
relating to a Participant's commitment to make a Deferral.
-2-
<PAGE> 7
2.13. "Deferral Period" means the period beginning with the date a
Participant becomes a Covered Employee and ending the day after the date the
Participant is no longer a Covered Employee.
2.14. "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.15. "FICA" means the Federal Insurance Contributions Act tax as set
forth in Chapter 26 of the Code.
2.16. "In Pay Status" means a benefit under the Plan that is currently
being paid or that is about to be paid to a Participant or Beneficiary under
Section 5.01, 6.01, 6.03 or 6.04.
2.17. "Participant" means a Covered Employee who has made a written
election on a properly executed Deferral Form to participate in the Plan in
accordance with Section 3.02.
2.18. "Performance Unit Award" means the final award under the MCN
Corporation Long Term Incentive Performance Unit Plan which is part of the MCN
Corporation Stock Incentive Plan.
2.19. "Plan" means the MCN Corporation Mandatory Deferred Compensation
Plan, as described herein and as hereafter amended.
2.20. "Plan Interest Rate" means the interest rate for the latest issue,
as of the end of the previous month, of ten-year U.S. Treasury Notes, or such
other rate as set by the Committee.
2.21. "Plan Year" means the period beginning January 1 and ending December
31 of each year (the calendar year).
2.22. "Restricted Stock Award" means the final award under the Restricted
Stock Program which is part of the MCN Corporation Stock Incentive Plan.
2.23. "Savings Plan" means the MichCon Savings and Stock Ownership Plan or
a successor thereto.
2.24. "Spouse" means an individual who is legally married to a Participant
under the laws of the State in which the Participant resides, on the day
immediately preceding the Participant's date of death.
2.25. "Total Compensation" means all remuneration for services received by
an employee in a calendar year, including cash and the cash value of all
noncash remuneration (including taxable benefits) less any amount deferred
under Sections 125, 129 and 401(k) of the Code, the MCN Executive Deferred
Compensation Plan and the MichCon Supplemental Savings Plan which is subject to
the deduction limitation described in Section 162(m) of the Code for such
calendar year.
-3-
<PAGE> 8
SECTION 3
PARTICIPATION
3.01. Determination of Covered Employee Status. To determine whether an
employee is a Covered Employee, the estimated Total Compensation of an
employee who would be a Covered Employee if such employee had Total
Compensation in excess of $1 million shall monitored.
3.02. Commencement of Participation. An employee shall become a
Participant upon execution of a Deferral Form no later than 15 days after the
execution of this Plan or the December 22 prior to the January 1 of the year
the Company has determined the employee will become a Covered Employee. A
properly executed Deferral Form shall be effective on the January 1 immediately
following execution of the Deferral Form, and shall contain the items described
in this Section and in Sections 3.03, 5.01 and 6.01. Subject to Section 5.03,
the mandatory deferral required by the Plan shall be effective for all Plan
Years the Participant is a Covered Employee and shall be irrevocable.
3.03. Deferral Form. The Committee shall provide each Covered Employee
with a Deferral Form as set forth in Exhibit A. A Participant shall file a
Deferral Form to defer Total Compensation in excess of $1 million for all Plan
Years in which he is a Covered Employee. A Participant's consent to the
mandatory deferral required by the Plan, as evidenced by his signature on the
Deferral Form, shall be irrevocable during the Deferral Period. The Deferral
Form shall set forth the Covered Employee's acceptance of the benefits provided
hereunder, his agreement to be bound by the terms of the Plan and such other
matters as are set forth in this Plan or deemed advisable by the Committee.
3.04. Amount of Deferral. A Participant's Deferral shall be equal to an
amount that will reduce the Participant's estimated Total Compensation for the
subsequent Plan Year to an amount less than $1 million. However, such annual
Deferral shall not exceed
(a) 100% of the Performance Unit Award less the FICA
tax thereon;
(b) 100% of the Restricted Stock Award less the FICA tax thereon;
(c) 100% of the Annual Incentive Compensation less
the FICA tax thereon; and
(d) 100% of Annual Base Salary less the FICA tax
thereon;
and shall not be less than $10,000.
-4-
<PAGE> 9
3.05. Increased Deferral. A Participant's Deferral shall increase
automatically for each Plan Year in which he is a Participant, up to the limits
set forth in Section 3.04.
3.06. Denomination of Deferrals. During the Deferral Period, a
Participant's Deferral shall be denominated in Company common stock valued at
an amount equal to the closing price of a share of Company common stock on the
New York Stock Exchange Composite Tape for the trading day preceding the day on
which a deferral is to be made. Dividend equivalents shall be credited to the
Participant's Account in accordance with Section 4.02. After completion of the
Deferral Period, the Participant's Account shall be valued on a cash basis with
interest credited monthly, as provided in Section 5.01.
3.07. Establishment of Account. The Committee shall establish an Account
for each Participant to which the Participant's Deferrals shall be credited,
dividend equivalents in accordance with Section 4.02 shall be reinvested and
distributions shall be debited.
SECTION 4
FUNDING OF BENEFITS
4.01. Unfunded Plan. The Plan shall be unfunded. All benefits payable
under the Plan shall be paid from the Company's general assets. The Company
shall not be required to set aside or hold in trust any funds for the benefit
of a Participant or Beneficiary, who shall have the status of a general
unsecured creditor with respect to the Company's obligation to make benefit
payments pursuant to the Plan. Any assets of the Company available to pay Plan
benefits shall be subject to the claims of the Company's general creditors and
may be used by the Company in its sole discretion for any purpose.
4.02. Dividend Equivalents. Dividend equivalents equal to 50% of the
dividends payable on MCN Common Stock shall be credited to a Participant's
Account during the Deferral Period based on the number of shares of Company
common stock deemed to be held in such Participant's Account. A Participant
may elect on his Deferral Form to have 0%, 50% or 100% of such credited
dividend equivalents paid directly to him in cash during the Plan Year. A
Participant's election regarding credited dividend equivalents shall be
effective on the January 1 immediately following execution of his Deferral Form
and shall remain in effect until revoked by the Participant. Revocation of a
dividend equivalent election shall be effective on the January 1 immediately
following revocation.
-5-
<PAGE> 10
SECTION 5
FORM AND TIMING OF PAYMENT
5.01. Form and Timing of Payment. After completion of his Deferral
Period, a Participant shall be entitled to a distribution of his Account on the
first of the month following the month in which his Deferral Period ends.
Notwithstanding the fact that a Participant's Account will be valued on a cash
basis after completion of the Deferral Period in accordance with Section 3.06,
the distribution to a Participant shall be paid in Company common stock equal
to the number of shares of Company common stock deemed to be held in the
Participant's Account and valued at the closing price of MCN Corporation common
stock on the New York Stock Exchange Composite Tape on the day before payment
is made. The distribution of Company common stock shall be made in accordance
with the Participant's selection on his Deferral Form; either in equal monthly
payments over a period not less than one year and not more than 15 years, in
one year increments, or as a lump sum distribution of the Participant's
Account. The number of shares distributed monthly shall be calculated to pay
out over the specified period the entire balance in the Participant's Account
as of the end of the Deferral Period with interest credited monthly on the
declining balance at the Plan Interest Rate. The number of shares distributed
monthly to the Participant shall be adjusted on January 1 of each year to
reflect changes in the Plan Interest Rate and other changes to the
Participant's Account balance.
5.02. Change in Payment Option. The payment option selected by the
Participant on his Deferral Form may be changed at any time by the Participant
by submitting a new payment selection to the Committee, but a change shall be
effective only if it is received by the Committee at least 36 months before
payments under the Plan commence.
5.03. Hardship Withdrawal Benefits. At any time prior to a distribution
in accordance with Section 5.01, a Participant may request that the Committee
make a distribution to him of all or part of his Account within 120 days. Such
distribution shall be made only if the Committee determines that the
Participant is suffering from a financial hardship that cannot be satisfied
from his normal sources of income, and the distribution shall be limited to the
amount required to meet the financial hardship. In making these
determinations, the Committee shall utilize the regulations proposed or adopted
by the U.S. Department of Treasury pursuant to Section 401(k) of the Code and
the rules under the Savings Plan. A financial hardship shall be satisfied from
the Plan to the extent possible then from the MCN Executive Deferred
Compensation Plan, the Supplemental Savings Plan, and finally from the Savings
Plan.
-6-
<PAGE> 11
SECTION 6
SELECTION OF AND PAYMENTS TO A BENEFICIARY
6.01. Beneficiary Designation. A Participant shall designate a Beneficiary
on his Beneficiary Designation Form, as provided in Exhibit B. The designation
of a Beneficiary other than the Participant's Spouse must be consented to in
writing by the Spouse. If a Participant has not designated a Beneficiary, or
if a designated Beneficiary is not living or in existence at the time of a
Participant's death, any death benefits payable under the Plan shall be paid to
the Participant's Spouse, if then living, and if the Participant's Spouse is
not then living, to the Participant's estate.
6.02. Change in Beneficiary Designation. A Participant may change the
designated Beneficiary, subject to the restriction in Section 6.01, from time
to time by filing a new written designation with the Committee. Such
designation shall be effective upon receipt by the Committee.
6.03. Pre-Retirement Survivor Benefit. If a Participant dies prior to
completion of the Deferral Period, his Beneficiary shall be entitled to receive
a distribution of the Participant's Account. The distribution to a Beneficiary
shall be paid in Company common stock equal to the number of shares of Company
common stock deemed to be held in the Participant's Account and valued at the
closing price of MCN Corporation common stock on the New York Stock Exchange
Composite Tape on the day of the Participant's death. The distribution shall
be paid in accordance with the Participant's selection on his Deferral Form;
either in monthly payments over a period not less than one year and not more
than 15 years, in one year increments, or as a lump sum distribution. Payments
to the Beneficiary shall begin as soon as practicable, but in no event later
than one year following the Participant's death.
6.04. Post-Retirement Survivor Benefit. If a Participant dies subsequent
to the start of his distribution payments under Section 5.01, his Beneficiary
shall be entitled to continue to receive the distribution of the Participant's
Account for the remainder of the period over which benefits were being paid to
the deceased Participant.
SECTION 7
VESTING OF BENEFITS
7.01. Vesting of Benefits. A Participant shall be 100% vested in his
benefits under the Plan at all times, except as set forth in Sections 8.02,
10.02, 10.03 and 10.04. A Participant shall rank as an unsecured creditor of
the Company for all benefits under the Plan.
-7-
<PAGE> 12
SECTION 8
ADDITIONAL PROVISIONS AFFECTING BENEFITS
8.01. Tax Withholding. Benefit payments hereunder shall be subject to
applicable federal, state or local tax withholding laws. A Participant shall be
responsible for making payment to MCN Corporation or a participating Affiliated
Company, as appropriate, in an amount equal to the income payroll tax
withholdings on the fair market value of the payments made in accordance with
Section 5.01. A Participant may sell up to 50 percent of a distribution made
under Section 5.01 on the open market to facilitate payment of the tax
withholdings. In no circumstance will the Company purchase or otherwise issue
cash for any stock distributed under this Plan.
8.02. Dilution and Other Adjustments. In the event of any change in the
outstanding shares of Company common stock by reason of any stock dividend,
stock split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares or other similar corporate change, the
Committee, in its sole discretion, shall make the appropriate adjustment in
each Participant's Account. If any such adjustment shall result in a
fractional share, such fraction shall be disregarded. Such adjustments made by
the Committee shall be conclusive and binding for all purposes of the Plan.
SECTION 9
ADMINISTRATION OF THE PLAN
9.01. Duties and Power. The Committee shall be responsible for the
general administration of the Plan and the proper execution of its provisions.
It shall also be responsible for the interpretation of the Plan and the
determination of all questions arising thereunder. It shall maintain all
necessary books of accounts and records. It shall have power to establish,
interpret, enforce, amend, and revoke, from time to time, such rules and
regulations for the administration of the Plan and the conduct of its business
as it deems appropriate, including the right to remedy ambiguities,
inconsistencies and omissions (provided such rules and regulations are
uniformly applied to all persons similarly situated). Any action that the
Committee is required or authorized to take shall be final and binding upon
each and every person who is or may become a Plan Participant or Beneficiary.
The Committee may amend this Plan to comply with changes to the Code, so long
as the amendment does not materially increase the cost of maintaining the Plan
or decrease benefits to Participants or Beneficiaries.
-8-
<PAGE> 13
9.02. Benefit Statements. No later than 120 days after the end of each
Plan Year, the Committee will provide each Participant with a statement setting
forth the Participant's Account balance as of the last day of the immediately
preceding Plan Year.
SECTION 10
AMENDMENT, SUSPENSION, AND TERMINATION
10.01. Right to Amend or Terminate. The Plan may be amended or terminated
by the Board of Directors at any time. Such amendment or termination may
modify or eliminate any benefit hereunder except that such amendment or
termination shall not affect the rights of Participants or Beneficiaries to the
vested portion of a Participant's Account as of the date of such amendment or
termination.
10.02. Right to Suspend. If the Board of Directors determines that
payments under the Plan would have a materially adverse affect on the Company's
ability to carry on its business, the Board of Directors may suspend such
payments temporarily for such time as in it sole discretion it deems advisable,
but in no event for a period in excess of one year. During the period of
suspension, the payment of dividend equivalents shall continue to be made in
cash to the Participant in accordance with Section 5.01. The Company shall pay
such suspended payments in a lump sum distribution of Company common stock
immediately upon the expiration of the period of suspension.
10.03. Non-ERISA Plan. The Plan is intended to provide benefits for "a
select group of management or highly compensated employees" within the meaning
of Sections 201, 301 and 401 of ERISA, and therefore to be exempt from Sections
2, 3 and 4 of Title 1 of ERISA. Accordingly, the Plan shall terminate and,
existing Account balances and other benefits In Pay Status shall be paid in a
single, actuarially equivalent lump-sum and no further benefits, vested or
non-vested, shall be paid hereunder in the event it is determined by a court of
competent jurisdiction or by an opinion of counsel that the Plan constitutes an
employee pension benefit plan within the meaning of Section 3(2) of ERISA which
is not so exempt.
10.04. Right to Accelerate. The Board of Directors in its sole discretion
may accelerate all vested benefits upon termination of the Plan, and pay such
benefits in a single, actuarially equivalent lump-sum distribution of Company
stock.
-9-
<PAGE> 14
SECTION 11
MISCELLANEOUS
11.01 Right to Continued Employment. Nothing in the Plan shall create or
be construed as a contract between the Company and employees for any matter
including giving any person employed by the Company the right to be retained in
the Company's employ. The Company expressly reserves the right to dismiss any
person at any time, with or without cause, without liability for the effect
that such dismissal might have upon him as a Participant in the Plan.
11.02. Prohibition Against Alienation. Except as otherwise provided in
the Plan, no right or benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to so anticipate, alienate, sell, transfer, assign,
pledge, encumber, or charge the same shall be void. No such right or benefit
shall be liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such right or benefit.
11.03. Sayings Clause. If any provision of this Plan is held by a court
of competent jurisdiction to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision and the remaining
provisions hereof shall continue to be construed and enforced as if the invalid
or unenforceable provision had not been included.
11.04. Payment of Benefit of Incompetent. In the event the Committee
finds that a Participant, former Participant, or Beneficiary is unable to care
for his affairs because of his minority, illness, accident, or other reason,
any benefits payable hereunder may, unless other claim has been made therefor
by a duly appointed guardian, committee or other legal representative, be paid
to a spouse, child, parent, or other blood relative or dependent or to any
person found by the Committee to have incurred expenses for the support and
maintenance of such Participant, former Participant, or Beneficiary; and any
such payments so made shall be a complete discharge of all liability therefor.
11.05. Spouse's Interest. The interest in the benefits hereunder of a
Spouse who has predeceased the Participant shall automatically pass to the
Participant and shall not be transferable by such Spouse in any manner
including but not limited to such Spouse's will, nor shall such interest pass
under the laws of intestate succession.
11.06. Successors. In the event of any consolidation, merger, acquisition
or reorganization of the Company, the obligations of the Company under this
Plan shall continue and be binding upon the Company and its successors.
-10-
<PAGE> 15
11.07. Gender, Number and Heading. Whenever any words are used herein in
the masculine gender, they shall be construed as though they were also used in
the feminine gender in all cases where they would so apply. Whenever any words
used herein are in the singular form, they shall be construed as though they
were also used in the plural form in all cases where they would so apply.
Headings of sections and subsections as used herein are inserted solely for
convenience and reference and constitute no part of the Plan.
11.08. Legal Fees and Expenses. The Company shall pay all legal fees and
expenses that a Participant may incur as a result of the Company contesting the
validity, enforceability, or the Participant's interpretation of, or
determinations under this Plan, other than Section 5.03.
11.09. Choice of Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Michigan to the extent not superseded
by applicable federal statues or regulations.
11.10. Affiliated Employees. Transfers of employment between Affiliated
Companies and the Company or other Affiliated Companies will be treated as
continuous and uninterrupted service under the Plan.
SECTION 12
CHANGE IN CONTROL PROVISIONS
12.01. General. In the event of a Change in Control, as defined in
Section 12.04, then notwithstanding any other provision of the Plan, the
provisions of this Section 12 shall be applicable and shall supersede any
conflicting provisions of the Plan.
12.02. Transfer to Rabbi Trust. The Company has established a trust
pursuant to a Trust Agreement dated January 3, 1991 (the "Rabbi Trust"). The
terms of the Rabbi trust provide that, in the event of a Change in Control and
thereafter, assets are to be transferred to such trust to provide benefits
under the Plan. The Company shall make all transfers of funds required by such
Rabbi trust in a timely manner and shall otherwise abide by the terms of such
Rabbi trust.
12.03. Joint and Several Liability. Upon and at all times after a Change
in Control, the liability under the Plan of the Company and each Affiliated
Company that has adopted the Plan shall be joint and several so that the
Company and each such Affiliated Company shall each be liable for all
obligations under the Plan to each employee covered by the Plan, regardless of
the corporation by which such employee is employed.
-11-
<PAGE> 16
12.04 Definition of Change in Control. A "Change of Control" means:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisition shall not constitute a Change
of Control: (A) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (B) any
acquisition by the Company, (C) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation pursuant to
a reorganization, merger or consolidated, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and
(iii) or subsection (c) of this Section 12.04 are satisfied; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be (ii) no person (excluding the Company,
any employee benefit plan or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation and any Person
beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 20% or more of the Outstanding Company
Common Stock or Outstanding Voting Securities, as the case
-12-
<PAGE> 17
may be beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities or such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the Incumbent
Board at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition,
(A) more than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (B)
no person (excluding the Company and any employee benefit plan (or related
trust) of the Company or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or indirectly,
20% or more of the Outstanding Company Common Stock or Outstanding Company
Voting Securities, as the case may be beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors and (C) at least a majority of the members of the board
of directors of such corporation were members of the Incumbent Board at the
time of the execution of the initial agreement or action of the Board providing
for such sale or other disposition of assets of the Company.
-13-
<PAGE> 18
IN WITNESS WHEREOF, MCN Corporation has caused this Plan to be executed as
of this 23rd day of May, 1996.
MCN CORPORATION
By:/s/ Daniel L. Schiffer
-----------------------
Daniel L. Schiffer, Vice President,
General Counsel and Secretary
-14-
<PAGE> 19
EXHIBIT A
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
DEFERRAL FORM
==============================================================================
Employee Name (Print) Social Security No. I. D. Number
- ------------------------------------------------------------------------------
Address (Number/Street) City State Zip Code
==============================================================================
In accordance with the terms of the MCN Corporation Mandatory Deferred
Compensation Plan ("Plan" ), which is hereby incorporated by reference, I
hereby accept and agree to all the provisions of the Plan and irrevocably elect
pursuant to Section 3 of the Plan to have all Total Compensation paid to me in
excess of $1 million in any calendar year in which I am a Covered Employee
deferred until completion of the Deferral Period.
Benefit Payment Election
That the amount deferred shall be paid to me after completion of the Deferral
Period in the manner specified below:
Lump-sum payment of MCN Corporation common stock.
-------
Payment in monthly installments of MCN Corporation common
------- stock over years (in 1 year increments, not to
exceed 15 years)
I understand that, notwithstanding the above benefit payment election, I may be
eligible for a hardship withdrawal pursuant to Section 5 of the Plan.
Dividend Payment Election
- -------------------------
I hereby elect to have the dividend equivalents credited to my Account paid as
specified below:
All reinvested in my Account and denominated in shares of MCN
-------- Corporation common stock
50% reinvested in my Account, denominated in shares of MCN
-------- Corporation common stock, and 50% paid directly to me in cash
100% paid directly to me in cash
--------
==============================================================================
Employee Signature Date
- ------------------------------------------------------------------------------
Receipt Acknowledged By Title Date
===============================================================================
May 23, 1996
<PAGE> 20
EXHIBIT B
MCN CORPORATION
MANDATORY DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION FORM
==============================================================================
Employee Name (Print) Social Security No. I. D. Number
- ------------------------------------------------------------------------------
Address (Number/Street) City State Zip Code
==============================================================================
I hereby designate, pursuant to Article 6 of the above-referenced plan,
the below designated person(s) as my beneficiary in the event of my death:
==============================================================================
Beneficiary's Name Address
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
I UNDERSTAND THAT THE DESIGNATION OF A BENEFICIARY OTHER THAN MY SPOUSE
MUST BE CONSENTED TO IN WRITING BY MY SPOUSE.
In the event any of the above-named beneficiaries should predecease me, or
shall survive me but die before receiving all amounts to be paid, I hereby
name the following as a contingent beneficiary to receive any such unpaid
amounts:
==============================================================================
Beneficiary's Name Address
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
In the event none of the above-named beneficiaries survive me, any unpaid
amounts shall be paid to my lawful successor in interest. I reserve the
right to change this beneficiary designation at any time by filing with
the Committee or its Designee a new beneficiary designation form.
I UNDERSTAND THAT MY MOST RECENT ELECTION AS TO THE BENEFICIARY
DESIGNATION WILL APPLY TO ALL DEFERRALS BY ME UNDER THE PLAN.
==============================================================================
Employee Signature Date
- ------------------------------------------------------------------------------
Receipt Acknowledged By Title Date
==============================================================================
Spousal Consent: I hereby consent to the designation of beneficiary set fourth
herein.
==============================================================================
Spouse's Signature Date
- ------------------------------------------------------------------------------
Witness Date
==============================================================================
<PAGE> 1
EXHIBIT 10-12
MCN ENERGY GROUP INC.
SUPPLEMENTAL SAVINGS PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1997)
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
ARTICLE 1.............................................. 1
Title
ARTICLE 2.............................................. 1
Definitions
ARTICLE 3.............................................. 1
Purpose
ARTICLE 4.............................................. 2
Effective Date
ARTICLE 5.............................................. 2
Participation
Section 5.1 Eligibility to Participate......... 2
Section 5.2 Election to Participate............ 2
Section 5.3 Restriction on Change of Deferrals
Under the Plan............................. 3
ARTICLE 6.............................................. 3
Participant's Accounts
Section 6.1 Establishment of Accounts and
Subordination of Executive's Rights........ 3
Section 6.2 Credits and Debits to
Participants' Accounts..................... 4
Section 6.3 Election of Accounts............... 5
Section 6.4 Change of Election for Accounts.... 5
Section 6.5 Transfers Between Accounts......... 5
ARTICLE 7.............................................. 6
Hardship Withdrawals
ARTICLE 8.............................................. 6
Vesting and Payment of Benefits
Section 8.1 Form and Timing of Payments........ 6
Section 8.2 Change in Payment Options.......... 7
Section 8.3 Payments Subject to Golden Parachute
Provisions................................. 7
Section 8.4 Vested Portion of Participants'
Accounts................................... 7
Section 8.5 Recrediting of Forfeited Amounts... 8
Section 8.6 Transfer to an Affiliated Company.. 8
ARTICLE 9.............................................. 8
Beneficiary in the Event of Death
ARTICLE 10............................................. 9
i
<PAGE> 3
Administration
ARTICLE 11............................................. 9
Amendment and Termination
ARTICLE 12............................................. 10
Miscellaneous
Section 12.1 Non-Assignability................. 10
Section 12.2 No Employment Rights.............. 10
Section 12.3 Law Applicable.................... 10
Section 12.4 Legal Fees and Expenses........... 10
ARTICLE 13............................................. 10
Change in Control Provisions
Section 13.1 General........................... 10
Section 13.2 Transfer to Rabbi Trust........... 11
Section 13.3 Joint and Several Liability....... 11
Section 13.4 Dispute Procedures................ 11
Section 13.5 Definition of Change in Control... 11
ii
<PAGE> 4
MCN ENERGY GROUP INC.
SUPPLEMENTAL SAVINGS PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1997)
WHEREAS, MCN Energy Group Inc. (the "Company") has previously adopted the
MichCon Supplemental Savings Plan and the Company desires to make certain
changes in the plan.
NOW, THEREFORE, effective January 1, 1997, the MichCon Supplemental
Savings Plan is hereby amended and restated as follows:
ARTICLE 1
TITLE
The title of this Plan shall be the "MCN Energy Group Inc. Supplemental
Savings Plan" and shall be referred to in this document as the "Plan".
ARTICLE 2
DEFINITIONS
The words and phrases used in the Plan shall have the same meanings as
provided under Article 2 of the MCN Energy Group Inc. Savings and Stock
Ownership Plan (the "Qualified Plan"), as amended from time to time, unless
otherwise defined in the Plan or the context clearly requires otherwise.
ARTICLE 3
PURPOSE
The principal purpose of the Plan is to provide deferred compensation for
a select group of management or highly compensated Employees of the Company and
any other Employer that has adopted the Plan with the consent of the Company
who has been specifically designated by the
<PAGE> 5
Committee to be eligible for Plan participation (an "Executive"). Such an
employee shall remain an Executive so long as this designation is not revoked
by the Committee.
It is intended that this Plan provide benefits for "a select group of
management or highly compensated employees" within the meaning of Section 201,
301 and 401 of ERISA and, therefore, to be exempt from the provisions of Parts
2, 3, and 4 of Title I of ERISA.
ARTICLE 4
EFFECTIVE DATE
The original effective date of the Plan for the Company was May 31, 1988,
and for any other Employer shall be the date established by such Employer at
the time of adoption of the Plan.
ARTICLE 5
PARTICIPATION
Section 5.1 Eligibility to Participate. Only the following individuals
shall be eligible to participate in the Plan: (i) any Executive whose
contributions under the Qualified Plan are limited because of the limitation on
compensation under Section 401(a)(17) of the Code, the limitation on elective
deferrals under Section 402(g) of the Code, the limitation on benefits and
contributions under Section 415 of the Code, or any other provision of the Code
or other law that the Committee hereafter designates; and (ii) such other
management or highly compensated Employees as shall be approved by the Chief
Executive Officer of an Employer that has adopted the Plan.
Section 5.2 Election to Participate. An Executive who is eligible to
participate may become a participant in the Plan (a "Participant") by filing a
written election with the Committee on a form approved by the Committee. The
Executive's election shall authorize the Employer to defer the amount of such
Executive's Eligible Compensation pursuant to Section 6.2(a) and (c) hereof and
shall evidence the Executive's acceptance of and agreement to all the
provisions of the Plan.
The Executive's election must be made no later than December 31 of the
year which immediately precedes the year for which it applies; provided,
however, the first election by any
2
<PAGE> 6
Executive to participate in this Plan may be effective for Eligible
Compensation earned after the last day of the month in which the election is
received by the Committee. An election shall be irrevocable for the current
calendar year. An election shall be irrevocable for future calendar years
unless a written revocation is filed with the Committee prior to the first day
of the calendar year for which the revocation is desired.
Section 5.3 Restriction on Change of Deferrals Under the Plan. The amount
to be deferred by an Executive for a Plan year shall be determined using the
percentage of his or her Compensation Rate in effect as of the December 31 of
the year which immediately precedes the year for which it applies. An
Executive who elects to participate in the Plan may not, after the effective
date of such election, change the percentage of his or her Compensation Rate
deferred under the Qualified Plan to affect the amount to be deferred under the
Plan, except for a change submitted prior to the first day of the calendar year
for which the change is desired, and, when the Qualified Plan is amended to
permit increased Voluntary Reductions or Salary Reductions and such change is
submitted prior to the effective date of such amendments. Any such other
change in the percentage of his or her Compensation Rate deferred under the
Qualified Plan shall be ignored for deferral purposes under the Plan.
ARTICLE 6
PARTICIPANT'S ACCOUNTS
Section 6.1 Establishment of Accounts and Subordination of Executive's
Rights. The Employer shall establish accounts for each of its Executives who
is a Participant in the Plan. Separate accounts corresponding in name to the
separate funds under the Qualified Plan shall be maintained for each
Participant. Credits under Sections 6.2(a) and (b) shall also be maintained in
separate accounts. The accounts shall be maintained as unfunded bookkeeping
accounts and all amounts represented by the accounts shall remain a part of the
general funds of the Employer of such Participant, subject to the claims of its
general creditors. Nothing in the Plan and no action taken pursuant to the
provisions of the Plan shall be deemed to create a trust or fund of any kind or
to create any fiduciary relationship. The obligation to make payments under
this Plan shall be and remain an unsecured, unfunded general
3
<PAGE> 7
obligation of the Employer of the particular Participant. Each Executive who
is a Participant in the Plan shall be provided an annual statement of the
unfunded accounts maintained for the Participant.
Section 6.2 Credits and Debits to Participants' Accounts.
As of the end of a pay period, total credits shall be made to the accounts
maintained for a Participant as set forth below:
(a) An amount equal to the difference between (1) and (2) below:
(1) the amount that such Participant would have contributed
to the Qualified Plan for such pay period, assuming (x) the
Participant satisfied the eligibility requirements set forth in
Section 3.1 of the Qualified Plan and (y) the allotments of such
Participant under the Qualified Plan were not limited by the
application of the following: (i) the limitation on compensation
set forth in Section 401(a)(17) of the Code; (ii) the limitation on
elective deferrals set forth in Section 402(g) of the Code; (iii)
the discrimination rules set forth in Section 401(k) or (m) of the
Code; (iv) the limitation on benefits and contributions set forth
in Section 415 of the Code; (v) any other provision of the Code or
other law that the Committee hereafter designates; or (vi) any
provision of the Qualified Plan relating to the limitations
described in (i) - (v) above;
(2) the amount that such Participant actually contributed to
the Qualified Plan for such pay period.
(b) An amount equal to the difference between (1) and (2) below:
(1) the amount that the Employer of such Participant would
have contributed to the Qualified Plan on behalf of such
Participant for such pay period if the Participant had contributed
the amount set forth in (a)(1) above to the Qualified Plan during
such pay period;
(2) the amount that the Employer actually contributed to the
Qualified Plan on behalf of such Participant for such pay period.
(c) An amount of compensation equal to the distribution of
dividends on the MCN Stock held in a Participant's Plan Account
under the Qualified Plan to the extent the Executive has not elected
or was ineligible to make Additional Allotments and the Executive
has elected to contribute such amount to the Plan.
4
<PAGE> 8
The total credits under (a) and (b) of this Section shall be allocated to
the specific accounts elected by the Participant as provided under Section 6.3
hereof. The credits under (c) of this Section shall be allocated to the MCN
Stock account in this Plan.
Each account shall be credited with an amount representing earnings or
debited with an amount representing losses on a daily basis. Earnings or
losses for a pay period shall be calculated using the daily valuation
methodology employed by the recordkeeper for each corresponding fund under the
Qualified Plan.
Section 6.3 Election of Accounts. Each Participant shall, by filing a
written election with the Committee, on a form approved by the Committee, elect
the accounts which are to be used for recording credits under Sections 6.2(a)
and (b) hereof.
A Participant may direct that credits under Sections 6.2(a) and (b) may be
made to any account corresponding in name to the funds under the Qualified Plan
that are available to accept contributions or allotments. Notwithstanding the
foregoing, a Participant must at all times maintain an aggregate balance in the
MCN Stock fund in the Qualified Plan or the MCN Stock account in this Plan or a
combination of both such plans in an amount at least equal to the sum of the
Employer contributions made pursuant to Section 4.3(a) of the Qualified Plan
after April 1, 1989, plus seventy-five percent of the credits recorded under
Section 6.2(b) of this Plan (or the corresponding Predecessor provision) after
April 1, 1989. This balance may be maintained in the Qualified Plan, this
Plan, or a combination of both such plans, at the discretion of the
Participant.
Section 6.4 Change of Election for Accounts. Any election of accounts
given by a Participant under the preceding Section shall be deemed to be a
continuing election until changed by the Participant. A Participant may change
any such election as of any normal business day of any month by giving prior
notice of such change to the Plan recordkeeper in the form prescribed by the
Committee.
Section 6.5 Transfers Between Accounts. Transfers between accounts shall
be effected on any normal business day of any month upon directions to the Plan
recordkeeper in the form prescribed by the Committee.
A Participant may not transfer any amount from the MCN Stock account if
the balance remaining in such account after the transfer would be less than the
amount required to be credited to such account under Section 6.3 hereof, plus
the earnings thereon.
5
<PAGE> 9
ARTICLE 7
HARDSHIP WITHDRAWALS
A Participant may request, upon 20 days written notice to the Committee, a
withdrawal from his or her accounts if the withdrawal is on account of
financial hardship as defined under the Qualified Plan. A financial hardship
shall be satisfied from the MCN Executive Deferred Compensation Plan to the
extent possible; then from the Plan; and finally from the Qualified Plan. The
amount of such withdrawal shall be limited to the amounts deferred under
Sections 6.2(a) and (c) hereof, or the total value of the accounts maintained
under Sections 6.2(a) and (c) hereof as of the end of the prior month,
whichever is smaller.
The determination of the existence of financial hardship and the amount
required to be distributed to meet the need created by the hardship shall be
made by the Committee. All determinations regarding financial hardship shall
be made in accordance with written procedures established by the Committee for
hardship withdrawals from the Qualified Plan and shall be applied in a uniform
and nondiscriminatory manner. Such written procedures shall specify the
requirements for requesting and receiving withdrawals on account of financial
hardship, including the forms that must be submitted, and to whom the forms are
to be submitted. If a Participant receives a hardship withdrawal from this
Plan or from the Qualified Plan, no amounts may be credited to the
Participant's accounts under Section 6.2(a) or (b) for a period of twelve
months after receipt of the hardship withdrawal. No other withdrawals or loans
are permitted under this Plan.
ARTICLE 8
VESTING AND PAYMENT OF BENEFITS
Section 8.1 Form and Timing of Payment. On the date that a Participant
becomes entitled, pursuant to either Section 9.1 or 9.2 of the Qualified Plan
(the "Retirement Date"), to a distribution of his or her account in the
Qualified Plan, such Participant shall be entitled to receive the vested
portion of the amount credited to his or her accounts in the Plan commencing on
the first of the month following the month in which his Retirement Date occurs.
As of the first of the month following the month in which his Retirement Date
occurs, the Participant's Account shall be valued on a cash basis
6
<PAGE> 10
with interest credited monthly at a rate equal to the interest rate for the
latest issue, as of the end of the previous month, of ten-year U.S. Treasury
Notes, or such other rate as set by the Committee (the "Plan Interest Rate").
Payment of the vested portion of a Participant's accounts shall be made in
accordance with the Participant's selection on his Benefit Agreement either in
monthly payments in one year increments, not to exceed 15 years, or in one lump
sum by the Employer maintaining the accounts. The amount of the monthly
payments shall be calculated to pay out over the specified period the entire
balance in the Participant's Account as of his Retirement Date with interest
credited monthly on the declining balance at the Plan Interest Rate. The
Participant's Account shall continue to be credited monthly with interest at
the Plan Interest Rate and charged with the monthly payments to the
Participant. The amount of the monthly payments to the Participant shall be
adjusted on January 1 of each year to reflect changes in the Plan Interest Rate
and other changes in the Participant's Account balance.
Section 8.2. Change in Payment Option. The payment option selected by
the Participant may be changed at any time by the Participant submitting a new
payment selection to the Committee, by a change shall be effective only if it
is received by the Committee at least 12 months before payments under the Plan
commence.
Section 8.3 Payments Subject to Golden Parachute Provisions.
Notwithstanding the above, if payment at the time specified in the first
sentence of this paragraph would subject the Participant to the excise tax
under Section 4999 of the Code, payment of the vested portion of a
Participant's accounts shall be deferred until the earlier of (a) the date that
would have been the Participant's Normal Retirement Date, Early Retirement Date
or Disability Retirement Date, (b) death of the Participant, or (c) total and
permanent disability or legally established mental incompetency of the
Participant.
Section 8.4 Vested Portion of Participants' Accounts. The vested portion
of a Participant's account shall mean: (i) the total value of the accounts of a
Participant who is entitled to a distribution pursuant to Section 9.1 of the
Qualified Plan; or (ii) with respect to a Participant who is entitled to a
distribution pursuant to Section 9.2 of the Qualified Plan, the total value of
the accounts maintained under Sections 6.2(a) and (c) hereof. Notwithstanding
the foregoing, the total value of the accounts of a Participant shall become
nonforfeitable as of the date on which the Participant attains age 65.
7
<PAGE> 11
Section 8.5 Recrediting of Forfeited Amounts. If a Participant entitled
to a distribution pursuant to Section 9.2 of the Qualified Plan receives the
vested portion of the amount credited to his or her accounts in the Plan,
forfeits the remainder, and is thereafter reemployed prior to incurring five
consecutive Break in Service Years, then as of the end of the month coincident
with or next following the Participant's date of reemployment, the amount of
the Participant's accounts that was forfeited upon the earlier termination of
employment shall be credited to the Participant's accounts. Interest shall not
accrue on such amount between the time it was forfeited and the time at which
it was recredited.
Section 8.6 Transfer to an Affiliated Company. Benefits for a Participant who
transfers employment from one Employer to an Affiliated Company shall be
subject to Section 9.7(c) of the Qualified Plan. Such a transfer of employment
shall cause a transfer of the accounts maintained by an Employer for a
Participant if the new Employer has adopted the Plan and the former Employer
transfers cash to the new Employer equal to the amount of the accounts
transferred. In all other events, a transfer of employment shall not cause a
transfer of the accounts maintained by an Employer for a Participant.
ARTICLE 9
BENEFICIARY IN THE EVENT OF DEATH
Each Participant shall have the right to designate a beneficiary or
beneficiaries to receive any distribution to be made under Article 8 upon the
death of such Participant, or, in the case of a Participant who dies subsequent
to termination of his or her employment but prior to the distribution of the
entire amount to which the Participant is entitled under the Plan, any
undistributed balance to which such Participant would have been entitled. Each
Participant shall also have the right to designate a contingent beneficiary in
the event any of the primary beneficiaries predecease the Participant or die
prior to complete disbursement of the Participant's account.
If no beneficiary has been named by a Participant at the time of the
Participant's death, or if the beneficiary designated by the Participant has
predeceased the Participant or such designated beneficiary has died prior to
complete disbursement of the Participant's accounts and the Participant has
failed to name a contingent beneficiary, the value of the Participant's
accounts, or the undistributed portion thereof, shall be paid by the Employer
to the deceased employee's lawful successor(s) in interest in a lump sum as
soon as practicable, but in no event later than one year following the
employee's death.
8
<PAGE> 12
ARTICLE 10
ADMINISTRATION
The Plan shall be administered by the Committee appointed pursuant to the
provisions of Section 10.1 of the Qualified Plan. The Committee shall have the
same powers and duties, and shall be subject to the same limitations, as are
described in the Qualified Plan. However, unlike the limitation on the
Committee's power to amend or modify the Qualified Plan under Section 11.1 of
the Qualified Plan, the Committee shall have full power to amend or modify the
Plan in all respects.
ARTICLE 11
AMENDMENT AND TERMINATION
The Company may amend or terminate the Plan at any time and for any
reason. The power to amend or modify the Plan shall rest solely with the
Committee. No such amendment or termination shall affect the rights of
Participants or beneficiaries to the vested portion of amounts credited to
Participants' accounts as of the date of such amendment or termination. In the
event of a termination of the Plan, all amounts credited to a Participant's
accounts shall be fully vested.
9
<PAGE> 13
ARTICLE 12
MISCELLANEOUS
Section 12.1 Non-Assignability. This Plan shall be subject to the same
terms and conditions as specified in Section 15.4 of the Qualified Plan, and
said Section is hereby incorporated by reference.
Section 12.2 No Employment Rights. Nothing contained in the Plan and no
action taken pursuant to the provisions of the Plan shall be construed as a
contract of employment between the Employer and an Employee, or as a right of
any Employee to be continued in the employment of the Employer, or as a
limitation of the right of the Employer to discharge any of its Employees at
any time, with or without cause, or as a limitation of the right of the
Employee to terminate employment at any time.
Section 12.3 Law Applicable. This Plan and all actions hereunder shall be
governed by and construed according to the laws of the State of Michigan.
Section 12.4 Legal Fees and Expenses. The Company shall pay all legal
fees and expenses which a Participant may incur as a result of the Company
contesting the validity, enforceability, or the Participant's interpretation
of, or determinations under this Plan other than the hardship withdrawal
provisions hereof.
ARTICLE 13
CHANGE IN CONTROL PROVISIONS
Section 13.1 General. In the event of a Change in Control, as defined in
Section 13.5, then, notwithstanding any other provision of the Plan, the
provisions of this Section 13 shall be applicable and shall supersede any
conflicting provisions of the Plan.
Section 13.2 Transfer to Rabbi Trust. MCN Energy Group Inc. ("MCN") has
established a trust pursuant to a Trust Agreement dated January 3, 1991 (the
"Rabbi Trust"). The terms of the Rabbi Trust provide that, in the event of a
Change in Control and thereafter, assets are to be transferred to such trust to
provide benefits under the Plan. MCN shall make all transfers of funds
required by the Rabbi Trust in a timely manner and shall otherwise abide by
the terms of the Rabbi Trust.
10
<PAGE> 14
Section 13.3 Joint and Several Liability. Upon and at all times after a
Change in Control, the liability under the Plan of MCN and each Affiliated
Employer that has adopted the Plan shall be joint and several so that MCN and
each such Affiliated Employer shall each be liable for all obligations under
the Plan to each employee covered by the Plan, regardless of the corporation by
which such employee is employed.
Section 13.4 Dispute Procedures. In the event that, upon or at any time
subsequent to a Change in Control, a claim for benefits under the Plan of a
Participant or distributee who has exhausted the claims and appeals procedures
set forth in Section 10.6 of the Qualified Plan is denied in whole or in part,
the following additional procedures shall be applicable:
(a) Any amount that is not in dispute shall be paid to the
Participant or distributee at the time or times provided herein.
(b) MCN shall advance to such claimant from time to time
such amounts as shall be required to reimburse the claimant for
reasonable legal fees, costs and expenses incurred by such
claimant in seeking a judicial resolution of his or her claim,
including reasonable fees, costs and expenses relating to appeals;
provided, however, that MCN shall not be obligated to advance to
the claimant any amounts under this Section 13.4(b) unless and
until the claimant agrees in writing to repay to MCN, immediately
upon the occurrence of a final judicial determination with respect
to such dispute, any amount of such fees, costs and expenses that
is not awarded to such claimant in a final order of a court of
competent jurisdiction.
Section 13.5 Definition of Change in Control. A "Change of Control"
means:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of either
(i) the then outstanding shares of common stock of MCN (the
"Outstanding MCN Common Stock") or (ii) the combined voting power
of the then outstanding voting securities of MCN entitled to vote
generally in the election of directors (the "Outstanding MCN Voting
Securities"); provided, however, that the following acquisitions shall
not constitute a Change of Control: (A) any acquisition directly from
MCN (excluding any
11
<PAGE> 15
acquisition by virtue of the exercise of a conversion privilege),
(B) any acquisition by MCN, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by MCN or any
corporation controlled by MCN or (D) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation,
if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection
(c) of this Section 13.5 are satisfied; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors of MCN (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by MCN's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(c) Approval by the shareholders of MCN of a reorganization,
merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than 60% of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding MCN Common Stock and Outstanding
MCN Voting Securities immediately prior to such reorganization, merger
or consolidation in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation,
of the Outstanding MCN Common Stock and Outstanding MCN Voting
Securities, as the case may be, (ii) no Person (excluding MCN, any
employee benefit plan or related trust
12
<PAGE> 16
sponsored or maintained by MCN or any corporation controlled by MCN or
such corporation resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly,
20% or more of the Outstanding MCN Common Stock or Outstanding MCN
Voting Securities, as the case may be) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting
power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of
directors and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial
agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the shareholders of MCN of (i) a complete
liquidation or dissolution of MCN or (ii) the sale or other
disposition of all or substantially all of the assets of MCN,
other than to a corporation, with respect to which following such
sale or other disposition, (A) more than 60% of, respectively, the
then outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding MCN Common Stock and Outstanding MCN Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding MCN
Common Stock and Outstanding MCN Voting Securities, as the case
may be, (B) no Person (excluding MCN Corporation, any employee
benefit plan or related trust sponsored or maintained by MCN or
any corporation controlled by MCN or such corporation resulting
from such reorganization, merger or consolidation and any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the
Outstanding MCN Common Stock or
13
<PAGE> 17
Outstanding MCN Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of MCN.
IN WITNESS WHEREOF, the undersigned officer of the Company has executed
this Plan as of this 1st day of January, 1997.
MCN ENERGY GROUP INC.
By: /s/ Alfred R. Glancy III
------------------------------
Alfred R. Glancy III,
Chairman and Chief Executive Officer
Restated: January 1, 1997
14
<PAGE> 1
MCN ENERGY GROUP INC. AND SUBSIDIARIES EXHIBIT 12-1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (5)
Pre-tax income (2) $146,607 $128,997 $100,143
Fixed charges (3) 99,944 72,895 55,197
-------- -------- --------
Earnings as defined $246,551 $201,892 $155,340
======== ======== ========
FIXED CHARGES AS DEFINED (1) (4) (5)
Interest, expensed $77,781 $57,675 $49,104
Interest, capitalized 13,235 7,926 2,928
Amortization of debt discounts, premium
and expense 2,217 1,641 1,332
Interest implicit in rentals 2,339 2,325 1,904
Preferred securities dividend requirements
of subsidiaries 12,390 9,699 2,194
-------- -------- --------
Fixed charges as defined $107,962 $79,266 $57,462
======== ======== ========
Ratio of Earnings to Fixed Charges 2.28 2.55 2.70
======== ======== ========
</TABLE>
(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 from
continuing operations 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, MCN Limited Partnership and MCN
Financing I), increased to reflect the pre-tax earnings requirement for
MichCon.
(5) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposes of calculating the Ratio of Earnings
to Fixed Charges, it has been classified as a discontinued operation and
therefore excluded from the ratio for all periods presented.
<PAGE> 1
MCN INVESTMENT CORPORATION AND SUBSIDIARIES EXHIBIT 12-2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (4)
Pre-tax income (2) $21,899 $13,163 $6,696
Fixed charges (3) 41,628 24,748 13,640
------- ------- -------
Earnings as defined $63,527 $37,911 $20,336
======= ======= =======
FIXED CHARGES AS DEFINED (1) (4)
Interest, expensed $40,523 $24,151 $13,365
Interest, capitalized 8,002 5,895 2,089
Amortization of debt discounts, premium
and expense 982 520 275
Interest implicit in rentals 123 77 0
------- ------- -------
Fixed charges as defined $49,630 $30,643 $15,729
======= ======= =======
Ratio of Earnings to Fixed Charges 1.28 1.24 1.29
======= ======= =======
</TABLE>
(1) Earnings and fixed charges are defined and computed in accordance with It
Item 503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income
from continuing operations 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.
(4) In June 1996, MCN completed the sale of The Genix Group, its
computer operations subsidiary. For purposes of calculating the Ratio of
Earnings to Fixed Charges, it has been classified as a discontinued
operation and therefore excluded from the ratio for all periods presented.
<PAGE> 1
EXHIBIT 13-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
MCN boasts another record-setting year--MCN's earnings from continuing
operations increased 21%, or $19.4 million, to a record $112.6 million in 1996.
This performance reflects the successful implementation of the strategic
direction discussed below. MCN's continuing operations earned $93.2 million in
1995, an increase of $18.6 million from 1994.
MCN's earnings were further bolstered by income from discontinued operations,
including a one-time gain of $36.2 million from the sale of The Genix Group,
Inc. (Genix), MCN's computer operations subsidiary. As discussed in the
"Discontinued Operations" section that follows, MCN sold Genix during the
second quarter of 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------
1996 1995 1994
=================================================
<S> <C> <C> <C>
Net Income (in Millions)
Continuing Operations:
Diversified Energy $ 31.2 $ 17.6 $ 11.4
Gas Distribution 81.4 75.6 63.2
------------------------
112.6 93.2 74.6
------------------------
Discontinued Operations:
Income From Operations 1.6 3.6 3.2
Gain on Sale 36.2 - -
------------------------
37.8 3.6 3.2
------------------------
$ 150.4 $ 96.8 $ 77.8
========================
Earnings Per Share
Continuing Operations:
Diversified Energy $ .47 $ .27 $ .20
Gas Distribution 1.21 1.17 1.06
------------------------
1.68 1.44 1.26
------------------------
Discontinued Operations:
Income From Operations .03 .05 .05
Gain on Sale .54 - -
------------------------
.57 .05 .05
------------------------
$ 2.25 $ 1.49 $ 1.31
=================================================
</TABLE>
Strategic Direction--MCN's objective is to achieve superior, long-term returns
for its shareholders. To accomplish this, MCN will aggressively invest in a
diverse portfolio of domestic and international energy-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.
DIVERSIFIED ENERGY
Earnings Generate a 19.7% Return on Equity--The synergies at work within the
Diversified Energy group continue to contribute to its strong financial
performance as earnings for 1996 increased 77%, or $13.6 million, from 1995.
The growth in earnings was fueled by increased operating and joint venture
income, partially offset by increased financing costs as a result of additional
capital needed to fund investments. Diversified Energy continues to provide an
increasing portion of MCN's earnings, contributing 28% in 1996 compared to 19%
in 1995. Similarly, Diversified Energy earnings for 1995 increased $6.2 million
over 1994.
Diversified Energy Operations
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
==============================================================
<S> <C> <C> <C>
Operating Revenues* $ 734.4 $ 400.0 $ 346.5
Operating Expenses* 693.6 378.1 335.1
-------------------------
Operating Income 40.8 21.9 11.4
-------------------------
Equity in Earnings of Joint Ventures 16.6 3.9 4.3
-------------------------
Other Income and (Deductions)*
Interest Income 3.0 3.6 3.4
Interest Expense (28.7) (13.3) (10.5)
Dividends on Preferred Securities (12.4) (9.4) (1.5)
Gains Related to DIGP (Note 2b) 6.4 - -
Other (.9) 2.3 (.9)
-------------------------
(32.6) (16.8) (9.5)
-------------------------
Income Before Income Taxes 24.8 9.0 6.2
-------------------------
Income Taxes
Current and Deferred Provision 9.5 2.7 2.7
Federal Tax Credits (15.9) (11.3) (7.9)
-------------------------
(6.4) (8.6) (5.2)
-------------------------
Net Income $ 31.2 $ 17.6 $ 11.4
===============================================================
</TABLE>
*Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income more than doubles--
Diversified Energy's operating and joint venture income increased $31.6 million
and $10.1 million in 1996 and 1995, respectively, due primarily to higher
results from Exploration & Production (E&P) operations. Improved results from
Pipelines & Processing and Energy Marketing & Power Generation also contributed
to the increase in 1996.
Operating and Joint Venture Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
=============================================================
<S> <C> <C> <C>
Exploration & Production $ 33.2 $ 18.5 $ 10.7
Pipelines & Processing 10.7 1.0 2.0
Energy Marketing & Power Generation 10.0 4.9 1.1
Gas Storage 4.0 4.2 4.2
Corporate & Other (.5) (2.8) (2.3)
------------------------
$ 57.4 $ 25.8 $ 15.7
=============================================================
</TABLE>
Exploration & Production operating income increased $14.7 million and $7.8
million for the 1996 and 1995 periods, respectively. The results reflect a
significant increase in the level of gas and oil produced due to the
development and acquisition of properties during 1996 and 1995.
GAS AND OIL PRODUCTION
<TABLE>
<CAPTION>
(in BCF equivalent) 1996 1995 1994
==========================================
<S> <C> <C> <C>
Gas 57.2 31.4 16.5
Oil 6.5 2.3 0.5
-------------------
Total Production 63.7 33.7 17
===================
</TABLE>
32
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Since the inception of its E&P program in late 1992, MCN has invested more than
$950 million to develop and acquire gas and oil reserves. At December 31, 1996,
proved gas reserves totaled 1,137.7 billion cubic feet (Bcf), and proved oil
reserves approximated 17.2 million barrels, or the equivalent of another 103.2
Bcf of natural gas. Proved gas and oil reserves increased 354.4 Bcf equivalent
(40%) during 1996, primarily from the development of existing acreage.
MCN has investments in various regions and geological structures, including the
shallow Michigan and Ohio Antrim formations, the Midcontinent and Gulf Coast
areas, Virginia coalbed methane properties and, most recently, reserves in the
western United States.
E&P operating results for 1996 reflect a $1.96 average gas sales rate per
thousand cubic feet (Mcf), which declined $.06 per Mcf compared to 1995.
Operating results for 1995 reflect a gas sales rate of $2.02 per Mcf, compared
to $1.97 per Mcf in 1994. The average sales rates include the effect of hedging
with natural gas swap and futures agreements, which are used to manage
Diversified Energy's exposure to the risk of market price fluctuations. As a
result of strong gas prices in the marketplace, hedging agreements had the
effect of reducing the average sales rate for 1996 by $.35 per Mcf. Conversely,
hedging agreements increased the average sales rates for 1995 and 1994 by $.51
per Mcf and $.39 per Mcf, respectively, in a less favorable gas market. E&P
operating results also reflect an average oil sales rate of $20.18 per barrel,
which increased by $3.94 per barrel compared to 1995. The average oil sales
rate for 1995 decreased by $.05 per barrel compared to 1994. E&P's operating
results include higher average production costs per Mcf equivalent.
Additionally, E&P operations have supplemented Diversified Energy's earnings
through the generation of an increasing amount of federal gas production tax
credits. Of the gas produced in 1996, 1995 and 1994, 15.5 Bcf (27%), 11.2 Bcf
(36%) and 7.9 Bcf (48%), respectively, generated federal gas production tax
credits that approximated $1.00 per Mcf.
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. MCN anticipates a significant increase in E&P
operating results as it implements this growth strategy by acquiring additional
properties, developing existing acreage and realizing the full benefits of
previous acquisitions. E&P expects gas and oil production levels to increase
over 50% in 1997, exceeding 100 Bcf equivalent. A significant portion of this
increased production will be achieved through the continued development of
E&P's one million net acres of undeveloped property.
MCN also anticipates that oil will become a larger percentage of total reserves
and production in order to achieve a more balanced portfolio. Oil could
comprise as much as 15% of total production by the end of 1998. In addition to
producing increasing quantities of oil through traditional methods, MCN expects
increased production from enhanced oil recovery (EOR) investments. EOR projects
are currently in process in which carbon dioxide extracted during production
and processing of Antrim gas is transported and injected into existing oil
reservoirs to increase production. MCN is also participating in a number of
secondary recovery water-flood projects which are also intended to increase the
flow rate and overall production of MCN's oil wells.
Risks associated with future E&P activities will be reduced 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 price risk management strategy is designed to manage its
exposure to changes in gas prices.
Pipelines & Processing operating and joint venture income increased $9.7
million in 1996 and decreased $1.0 million during 1995. The increase in 1996
primarily reflects income from the December 1995 acquisition of an interest in
a 40-mile gas gathering line in Virginia (Note 2c) and the February 1996
acquisition of an interest in a 90-mile gas gathering system in the Mobile Bay
area of offshore Alabama (Note 2b). Results also reflect a higher level of
volumes treated through additional gas processing plants which reduce carbon
dioxide levels in Michigan Antrim gas.
<TABLE>
PIPELINES & PROCESSING VOLUMES
(in BCF equivalent)
1996 1995 1994
----------------
<S> <C> <C> <C>
Gas Processing 44.2 14.6 1.9
Transportation 86.4 5.0 1.2
Note: Includes MCN's share of
Joint Ventures
</TABLE>
Operating and joint venture income also benefited from the December 1996
acquisition of a 25% interest in a 248 million gallon per year methanol
processing plant in Texas (Note 2a). MCN expects the partnership to contribute
significantly to operating and joint venture income in 1997 and beyond. This
acquisition adds yet another facet of the energy industry to MCN's already
diverse portfolio, thereby enhancing its growth and profitability prospects.
The decrease in operating and joint venture income in 1995 reflects lower gas
processing earnings due to the sale of two processing facilities in the first
quarter of 1995. Results during 1995 were also impacted by two
newly-constructed processing plants which had high initial startup expenses.
Outlook--Pipelines & Processing's expansion strategy will focus primarily on
investments in natural gas and gas liquid gathering, processing and
transmission facilities near areas of rapid reserve
33
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
development or growing consumer markets. Pipelines & Processing anticipates
working with other Diversified Energy businesses that complement its operations.
Energy Marketing & Power Generation operating and joint venture income increased
$5.1 million for 1996 reflecting a 28% increase in gas sales volumes and
slightly higher margins on gas sales. The increase in gas sales volumes was
driven primarily by additional sales to the northeastern United States, as well
as sales to the Michigan Power project which began operations in late 1995.
Additionally, these results reflect a 37% increase in volumes delivered under
gas exchange contracts in 1996. Typically under exchange contracts, Energy
Marketing accepts delivery of gas during low demand periods and delivers gas to
customers during periods of peak demand.
Operating and joint venture income increased $3.8 million for 1995, reflecting a
20% increase in gas sales volumes and more favorable margins on gas sales.
Additionally, higher revenues from exchange gas services contributed to the 1995
improvement.
ENERGY MARKETING GAS SALES & EXCHANGE DELIVERIES
(in BCF)
<TABLE>
<CAPTION>
1996 1995 1994
------------------
<S> <C> <C> <C>
Gas sales 219 170.7 142.4
Exchange deliveries 22.5 16.4 13.3
-------------------
Total 241.5 187.1 155.7
===================
</TABLE>
Outlook--In order to grow Energy Marketing operations, MCN's strategy is to
aggressively pursue marketing opportunities within its current target markets,
as well as to expand its coverage outside of those areas. Enhanced by its
ability to provide bundled sales, transportation and storage services to
large-volume end users and utilities, MCN is positioned to capitalize on
opportunities to further expand its market base into the northeast and midwest
United States and eastern Canada. MCN has also entered into marketing alliances
with other gas marketers and suppliers in order to expand its markets in the
Great Lakes and Gulf Coast regions, as well as to enter new markets throughout
the southern United States.
MCN's Power Generation business is expected to make significant investments in
international projects over the next several years. In February 1997, MCN
reached an agreement to acquire a 40% interest in a joint venture with Torrent
Group of Ahmedabad, India. Under the agreement, which is subject to certain
regulatory approvals, MCN will invest as much as $115 million, of which
approximately half will be funded through nonrecourse financing. The joint
venture will hold interests in several electric companies and power projects in
India. MCN is continuing to pursue several other domestic and international
power generation projects.
Risk Management Strategy--MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its
portfolio of supply and sales agreements. MCN has hedged most of its gas and oil
production not covered by long-term, fixed-price sales obligations. MCN's Energy
Marketing group coordinates all of MCN's hedging activities to ensure compliance
with risk management policies established by MCN's board of directors. Certain
hedging gains or losses related to gas and oil production are recorded by MCN's
E&P operations. Gains and losses on gas and oil production-related hedging
transactions that are not recorded by MCN's E&P group are absorbed by Energy
Marketing.
Gas Storage joint venture income decreased slightly in 1996 and was unchanged in
1995. Gas Storage results include the operations of Blue Lake Gas Storage
Company (Blue Lake). As of December 31, 1996, MCN's 50% interest in Blue Lake
was owned equally by Gas Distribution and Diversified Energy. In February 1997,
Diversified Energy signed an agreement to sell its share of Blue Lake effective
December 1997. Gas Distribution will maintain its share of the project.
Outlook--MCN has an equity interest in two joint venture storage projects that
have 56 Bcf of storage capacity, of which 10 Bcf is utilized by Energy
Marketing. During 1997, MCN plans to begin converting a depleted natural gas
reservoir into a 42 Bcf storage facility. MCN expects the storage field to be
completed by mid-1999. MCN has long-term contracts in place for approximately
40% of the field's capacity and the remaining 60% is expected to be contracted
to Energy Marketing. Upon completion, the storage field will add to Gas Storage
joint venture results and support Energy Marketing operations by enhancing its
ability to offer a reliable gas supply during peak winter months.
Corporate & Other operating and joint venture income includes administrative
expenses associated with corporate management activities. Expenses in 1996 were
partially offset by a $1.7 million gain from the sale of land by a 50%-owned
real estate joint venture.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for all periods reflects higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group, as well as dividends on $100 million of preferred securities
issued in November 1994 and $80 million of preferred securities issued in July
1996 (Note 6c).
Other income and deductions for 1996 includes gains related to Dauphin Island
Gathering Partners (DIGP). In mid-1996, MCN sold a 40% interest in the DIGP
partnership, resulting in a pre-tax gain of $4.0 million. In December 1996,
interests in the partnership were sold to three additional partners, resulting
in a reduction of MCN's partnership interest from 59% to 35%. This transaction
resulted in a pre-tax gain of $4.8 million, of which $2.4 million was deferred
(Note 2b).
34
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Included in 1995 other income and 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
The current and deferred income tax provision for all periods reflect increased
federal taxes on improved pre-tax earnings. This increase was partially offset
by increased federal gas production tax credits related to E&P projects.
GAS DISTRIBUTION
Earnings produce a 14.6% return on equity--MCN's Gas Distribution group
continued its solid performance during 1996 with earnings of $81.4 million,
representing an 8%, or $5.8 million improvement over 1995. Similarly, earnings
for 1995 increased $12.4 million over 1994. These improvements are due primarily
to increased gross margins resulting from higher gas sales and transportation
deliveries.
<TABLE>
<CAPTION>
GAS DISTRIBUTION OPERATIONS
- -----------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
=================================================================
<S> <C> <C> <C>
Operating Revenues*
Gas Sales $ 1,102.9 $ 931.9 $ 969.0
End User Transportation 82.5 80.8 76.5
Intermediate Transportation 48.6 42.0 39.4
Other 42.3 52.9 52.1
---------------------------
1,276.3 1,107.6 1,137.0
Cost of Gas 646.3 491.4 536.7
---------------------------
Gross Margin 630.0 616.2 600.3
---------------------------
Other Operating Expenses*
Operation and Maintenance 298.4 299.8 318.1
Depreciation and Depletion 98.8 91.3 86.0
Property and Other Taxes 62.3 58.8 59.6
---------------------------
459.5 449.9 463.7
---------------------------
Operating Income 170.5 166.3 136.6
---------------------------
Equity in Earnings of Joint Ventures
Storage 2.0 1.7 2.7
Other (.7) (.4) (.7)
---------------------------
1.3 1.3 2.0
---------------------------
Other Income and (Deductions)*
Interest Income 4.0 4.4 4.4
Interest Expense (48.9) (43.7) (38.4)
Minority Interest (1.0) (2.4) (2.9)
Other (1.8) (6.4) (5.7)
---------------------------
(47.7) (48.1) (42.6)
---------------------------
Income Before Income Taxes 124.1 119.5 96.0
Income Taxes 42.7 43.9 32.8
---------------------------
Net Income $ 81.4 $ 75.6 $ 63.2
=================================================================
</TABLE>
*Includes intercompany transactions
GROSS MARGIN
Gross margin increases--Gas Distribution gross margin (operating revenues less
cost of gas) increased $13.8 million and $15.9 million in 1996 and 1995,
respectively, reflecting higher gas sales and end user transportation deliveries
due primarily to colder weather. Additionally, gross margins increased as a
result of the continued growth in intermediate transportation services.
<TABLE>
<CAPTION>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
- -----------------------------------------------------------------------
1996 1995 1994
=======================================================================
<S> <C> <C> <C>
Percentage Colder (Warmer) Than Normal 5.4% .3% (4.2)%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf) 10.9 1.5 (4.4)
Net Income (in Millions) $ 9.9 $ 1.4 $ (4.0)
Earnings Per Share $ .15 $ .02 $ (.07)
=======================================================================
</TABLE>
Gas sales and end user transportation revenues increased $172.7 million in 1996
and decreased $32.8 million in 1995. Revenues were affected by higher gas sales
and end user transportation deliveries which totaled 367.9 Bcf in 1996 and 355.6
Bcf in 1995, increases of 12.3 Bcf and 11.2 Bcf, respectively. The increases
were due primarily to colder weather, as well as marketing initiatives that
expanded gas markets. The decline in gas sales revenues during 1995 reflects
lower gas costs as subsequently discussed. End user transportation deliveries
for both 1996 and 1995 also reflect an overall higher level of gas usage by
large-volume commercial and industrial customers, including power generation
customers. End user transportation services are provided to large-volume
customers who purchase gas directly from producers and brokers, including Energy
Marketing, and contract with MichCon to transport the gas to their facilities.
Gas Distribution continues to enter into multi-year, competitively priced
transportation agreements with large-volume users to maintain these gas markets
over the long term.
Gas sales and gross margins have also been affected by variations in revenues
associated with MichCon's lost gas costs. MichCon's 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 an October 1993 Michigan Public Service Commission
(MPSC) 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 and $3.1 million in 1995 and 1994, respectively. As
discussed in the "Cost of Gas" section that follows, gross margins have also
been impacted by variations in lost gas costs.
Intermediate transportation revenues increased $6.6 million and $2.6 million in
1996 and 1995, respectively. Revenues reflect deliveries of 527.5 Bcf in 1996
and 374.4 Bcf in 1995, increases of 153.1 Bcf and 51.4 Bcf, respectively. The
increased
35
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
deliveries are due primarily to additional volumes transported for two major
fixed-fee customers and increased transportation of Antrim gas for Michigan gas
producers and brokers. Intermediate transportation is 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.
GAS DISTRIBUTION
VOLUME/GROSS MARGIN COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994
---------------------
<S> <C> <C> <C>
Volumes (in BCF)
Gas sales 221.0 209.8 204.4
End user transportation 146.9 145.8 140.0
Intermediate transportation 527.5 374.4 323.0
---------------------
Total 895.4 730.0 667.4
=====================
<CAPTION>
Gross Margins, Excluding Other Operating Revenues
(Dollars in Millions)
<S> <C> <C> <C>
Gas sales $456.6 $440.5 $432.3
End user transportation 82.5 80.8 76.5
Intermediate transportation 48.6 42.0 39.4
----------------------
Total $587.7 $563.3 $548.2
======================
</TABLE>
There has been a significant increase in Michigan Antrim gas production over
the past several years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. In order to meet the
increased demand, Gas Distribution expanded the capacity of its northern
Michigan gathering system during 1996. The expansion enabled Gas Distribution
to transport an additional 75 Bcf in 1996. Although intermediate transportation
volumes have increased significantly, profit margins on this service are
considerably less than margins on gas sales or for end user transportation
markets.
Other operating revenues decreased $10.6 million in 1996 primarily due to a
decrease in conservation revenues resulting from the discontinuance of
MichCon's energy conservation programs. As discussed in the "Other Operating
Expenses" section that follows, the decrease in revenues is offset by a
corresponding decrease in expenses related to the conservation programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the gas cost recovery mechanism, the MPSC allows MichCon the timely
recovery of 100% of its reasonably and prudently incurred cost of gas sold.
Therefore, fluctuations in cost of gas sold have little or no effect on gross
margins.
Cost of gas sold increased in 1996 as a result of significantly higher spot
market prices paid for natural gas purchases and higher gas sales volumes due
to colder weather. Cost of gas sold for 1996 was $2.92 per Mcf, an increase of
$.56 (24%).
Lower natural gas prices, partially offset by higher gas volumes,
resulted in the 1995 decrease in cost of gas sold. Cost of gas sold for 1995
decreased $.30 per Mcf (11%) from 1994. To mitigate risk related to spot market
prices, MichCon has filed a proposal with the MPSC to change its supply
strategy to obtain approximately two-thirds of its gas under contracts that tie
purchase prices to spot market prices and to acquire the remainder under
fixed-price contracts. MichCon expects approval of this proposal by the second
quarter of 1997.
As previously discussed, cost of gas is affected by variations in lost gas
amounts. Lost gas costs for 1996 and 1995 increased by $6.6 million and $8.5
million, respectively.
OTHER OPERATING EXPENSES
Operation and maintenance expenses declined slightly in 1996 and decreased 6%
during 1995 due to lower benefit costs, primarily pension and retiree
healthcare costs. Expenses in 1996 were also lowered by the discontinuance of
Gas Distribution's energy conservation programs. Management's continuing
efforts to control operating costs also contributed to the reductions in
operation and maintenance expenses. Gas Distribution has streamlined its
organizational structure over the past four years while increasing its customer
base and expanding energy services to customers. Since 1993, the number of Gas
Distribution employees has declined by 303 (9%) while the number of customers
has increased by over 40,000 (4%).
Partially offsetting the lower benefit, conservation and other operating costs
were increased uncollectible gas accounts. The increase in uncollectible gas
accounts resulted from higher heating bills due to the colder-than-normal
winter temperatures over the last two years and a rise in gas prices during
1996. The impact of higher heating bills was exacerbated by a reduction, as
well as a delay, in home heating assistance funding obtained by low-income
customers.
Gas Distribution receives a significant amount of its heating assistance
funding from the federal Low-Income Home Energy Assistance Program (LIHEAP).
During 1995, Congress reduced a substantial portion of the program's funding
for the 1996 fiscal year. The state of Michigan's share of LIHEAP funds was
reduced from $78 million in fiscal year 1995 to $47.5 million in 1996.
Uncollectible gas accounts were further impacted by the late receipt of fiscal
year 1996 funding by the state of Michigan. Due to this delay, many of Gas
Distribution's customers who were eligible for assistance did not file. During
1996 and 1995, $10.1 million and $27.3 million in LIHEAP funds assisted
approximately 74,000 and 112,000 MichCon customers, respectively. During
October 1996, President Clinton signed an Omnibus Spending Bill passed by
Congress that provided for $1 billion in federal LIHEAP funding for 1997, an
increase of $100 million over 1996 levels. During February 1997, the President
released his proposed budget which provides for federal LIHEAP funding of $1
billion annually through fiscal year 2002. A portion of any future
36
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
increase or decrease in funding may impact uncollectible gas accounts.
Depreciation and depletion increased in both 1996 and 1995 due to higher plant
balances, reflecting capital expenditures of $611.4 million over the past three
years. Depreciation and depletion expenses are expected to increase in future
years due to higher planned capital investments. MichCon has filed an
application with the MPSC to lower its depreciation rates, which could
partially offset the anticipated increase in depreciation expense in 1997 and
future years.
Property and other taxes increased in 1996 reflecting an increase in property
taxes due to higher property balances. Property and other taxes decreased
slightly in 1995 due mainly to a reduction in Michigan single business taxes,
resulting from favorable amendments to the Michigan tax law.
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures were unchanged in 1996 as compared to 1995. Joint
ventures' earnings decreased $.7 million during 1995 due to lower earnings from
the Blue Lake gas storage venture. Blue Lake's 1995 earnings were affected by
lower revenues from reduced storage rates and higher interest expense.
OTHER INCOME AND DEDUCTIONS
Interest on long-term debt increased in 1996 and 1995 as a result of the
average amount of long-term debt outstanding increasing $72.6 million and $95.7
million, respectively. The increase in 1996 was partially offset by a slight
decrease in the weighted-average interest rate. The increases in long-term debt
outstanding were the result of issuing first mortgage bonds of $70 million in
each 1996 and 1995, and $80 million in 1994.
Other deductions decreased in 1996 primarily due to an increase in the
allowance for funds used during construction resulting from higher construction
balances.
INCOME TAXES
Income taxes declined slightly during 1996 and increased $11.1 million in 1995.
Income taxes in both years were impacted by improved earnings and were reduced
by $3.4 million, $1.3 million and $3.3 million during 1996, 1995 and 1994,
respectively, due to the favorable resolution of prior years' tax issues.
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 these sites. The remedy consists
of limited excavation and disposal of soils, a new soil cover and long-term
groundwater monitoring. More extensive investigations are underway at seven
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 employed outside consultants to evaluate remediation alternatives for 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.
In 1996, MichCon received payments from certain carriers and expects additional
insurance recoveries over the next several years. 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 million during 1995.
During 1996, 1995 and 1994, MCN spent $.9 million, $2.1 million and $.6
million, respectively, investigating these former MGP sites. At December 31,
1996, the reserve balance was $37.6 million, of which $2.6 million was
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.
OUTLOOK
Gas Distribution's strategy is to become the dominant provider of natural gas
and high-value energy services within Michigan. Accordingly, Gas Distribution's
objectives are to grow its revenues and reduce its costs in order to maintain
strong returns and provide customers with high-quality service at competitive
prices. Revenue growth will be achieved through initiatives to expand Gas
Distribution's 895 Bcf of gas markets. There continue to be opportunities to
grow residential markets through the conversion of existing homes, as well as
from new construction. Gas Distribution continues to grow industrial and
37
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
commercial markets by aggressively facilitating the use of existing gas
technologies and equipment.
Management is continually assessing ways to improve cost competitiveness. Among
other cost saving initiatives, MichCon and The Detroit Edison Company are
exploring opportunities to share the cost of common, duplicative functions,
including billing, meter reading, payment processing and excavation.
Significant cost savings could be achieved given that approximately 60% of Gas
Distribution's 1.2 million customers are also customers of Detroit Edison.
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 reviewing various plans to reform
Michigan's gas utility regulatory process to give all customers added choices
and to increase competition. MichCon and other Michigan gas utilities will
implement pilot transportation service programs in 1997 for small commercial
and residential customers. Under MichCon's two-year program, 47,000 customers
in the pilot territory will have the opportunity to select alternative natural
gas suppliers beginning in April 1997. This option has been available to
MichCon's larger commercial customers for several years. MichCon currently
generates no earnings on the gas supply portion of operations. Therefore, a
customer's selection of an alternative supplier generally is expected to be
income-neutral. The overall package of regulatory changes connected with the
gas industry restructuring is expected to result in lighter-handed regulation
and the potential to improve earnings. Gas Distribution is positioning itself
to respond to changes in regulation and increased competition by reducing its
cost of operations while maintaining a high level of customer satisfaction. Gas
Distribution remains focused on these goals in 1997 and beyond.
As described in Note 8 to the consolidated financial statements, Gas
Distribution complies with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." In the event that Gas Distribution determines it no longer meets
the criteria for following SFAS No. 71, the accounting impact would be an
extraordinary, noncash increase to net income of approximately $48 million.
Criteria that give rise to the discontinuance of SFAS No. 71 include (1)
increasing competition that restricts Gas Distribution's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. Gas Distribution periodically reviews these criteria to ensure that
the continuing application of SFAS No. 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to impact
future cost recovery, Gas Distribution believes that its regulatory assets are
probable of future recovery.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc. for an initial sales price of
$137.5 million, resulting in an after-tax gain of $36.2 million. In October
1996, the initial sales price was decreased by $4.6 million to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $32 million depending upon the occurrence of certain
contingencies that include, among other things, retention of certain customers
through mid-1998 and tax-related matters. Management believes that no further
adjustment to the selling price will occur. Although Genix had experienced
significant growth in revenues and operating income over the past several
years, MCN's focused strategy is to invest in energy-related projects that
generate higher rates of return. Summary statements and other information on
discontinued computer operations can be found in Note 2d to the consolidated
financial statements.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $69.7 million during 1996
and increased $93 million during 1995. The 1996 decrease was due primarily to
an increase in working capital requirements, partially offset by higher net
income, after adjusting for depreciation, deferred taxes and nonoperating gains
(Note 2). The 1995 increase was primarily due to higher net income adjusted for
noncash items, partially offset by an increase in working capital requirements.
FINANCING ACTIVITIES
In July 1996, MCN issued through a wholly-owned trust, 3,200,000 shares of
8-5/8% Trust Originated Preferred Securities (TOPrS) for $80 million (Note 6a).
Dividends on the TOPrS are in substance tax deductible by MCN. Proceeds from
the issuance were invested by MCN in its Diversified Energy group and were used
to reduce short-term debt incurred to fund capital expenditures, for working
capital requirements and for general corporate purposes.
In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (PRIDES), yielding 8-3/4% (Note 6b). The PRIDES are
convertible securities that consist of a forward contract under which MCN is
obligated to sell, and the PRIDES holders are obligated to purchase,
approximately $135 million of MCN common stock in April 1999.
In March 1995, MCN sold 5,750,000 shares of new common stock in a public
offering, generating approximately $99 million. In November 1994, through a
limited partnership, MCN issued $100 million of cumulative preferred
securities. Proceeds from these issuances were used to fund capital
expenditures, to repay short-term obligations and for general corporate
purposes.
38
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. During the 1994-1996
period, MCN issued 2,639,000 shares, generating $49.2 million. During 1997, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $18 million.
At December 31, 1996, MCN had an outstanding shelf registration with
approximately $185 million remaining to be issued in the form of debt or equity
securities. In February 1997, MCN filed a new registration statement with the
Securities and Exchange Commission (SEC) that allows it to issue an additional
$500 million of debt and equity securities. MCN's capital requirements and
general market conditions will affect the timing and amount of future
issuances.
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>
MCN:
PRIDES BBB+ baa1 BBB+ BBB+
Preferred Securities BBB+ baa2 BBB+ BBB+
MCNIC:
Commercial Paper* A2 P2 D1- F2
Medium-Term Notes* BBB+ Baa2 A- BBB+
MichCon:
Commercial Paper A1 P1 D1 F1
First Mortgage Bonds A A2 A+ A
=========================================================
</TABLE>
* Ratings based on MCN support agreement.
DIVERSIFIED ENERGY
MCNIC has established credit lines to allow for borrowings of up to $100
million under a 364-day revolving credit facility and up to $300 million under
a three-year revolving credit facility. The facilities support MCNIC's $400
million commercial paper program, which is used to finance capital investments
of the Diversified Energy group and working capital requirements of its Energy
Marketing operations. Commercial paper of $329.8 million was outstanding at
December 31, 1996.
In January and May 1996, MCNIC issued $200 million and $130 million,
respectively, of medium-term notes, using the proceeds to repay commercial
paper balances and for general corporate purposes. In January 1997, MCNIC
issued $150 million of medium-term notes, using the proceeds to finance capital
expenditures and for general corporate purposes. As of February 1997, MCNIC has
an outstanding shelf registration with approximately $220 million remaining to
be issued in the form of debt securities. MCNIC's capital requirements and
general market conditions will affect the timing and amount of future
issuances.
In order to finance investment activities, MCN's E&P business obtained $100
million under a five-year term loan during 1995.
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 backed by credit lines with several banks. MichCon has
established credit lines to allow for borrowings of up to $150 million under a
364-day revolving credit facility and up to $150 million under a three-year
revolving credit facility. Commercial paper of $238.3 million was outstanding
at December 31, 1996.
In 1996, MichCon issued first mortgage bonds totaling $70 million under an
existing shelf registration. The proceeds were used to repay short-term
obligations, finance capital expenditures and for general corporate purposes.
MichCon issued $70 million and $80 million of first mortgage bonds in
1995 and 1994, respectively. Proceeds were used to repay short-term
obligations, finance capital expenditures and for general corporate purposes.
During the fourth quarter of 1996, MichCon filed a shelf registration statement
with the SEC that will allow it to issue, in conjunction with an existing shelf
registration, up to $300 million of debt securities during the next several
years. MichCon's capital requirements and general financial market conditions
will affect the timing and amount of future debt issuances.
During 1996, MichCon renewed its Trust Demand Note program, which allows it to
borrow up to $25 million through March 1997. At December 31, 1996, $25 million
was outstanding under this program.
At December 31, 1996, MCN had invested a total of $6.7 million in a partnership
that owns and operates a transmission and distribution system located in
southern Missouri. The project is expected to cost $40 million, which will be
funded through construction financing and $16 million of partner contributions.
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 in late 1997.
39
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
INVESTING ACTIVITIES
<TABLE>
<CAPTION>
CAPITAL INVESTMENTS
- ----------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
================================================================
<S> <C> <C> <C>
Consolidated Capital Expenditures:
Diversified Energy $395.3 $291.5 $196.2
Gas Distribution 215.3 241.5 154.6
Discontinued Operations 6.5 9.4 12.4
----------------------
617.1 542.4 363.2
----------------------
MCN's Share of Joint Venture
Capital Expenditures:
Pipelines & Processing 5.2 1.0 2.5
Energy Marketing & Power Generation 5.5 39.6 32.8
Gas Storage .2 .4 1.8
Gas Distribution 4.8 10.3 -
Other .3 1.5 3.3
----------------------
16.0 52.8 40.4
----------------------
Acquisitions:
Significant (Note 2) 133.2 83.2 -
Other 24.4 10.5 -
----------------------
157.6 93.7 -
Minority Partners' Share of Consolidated
Capital Expenditures - (.1) (1.6)
----------------------
Total Capital Investments $790.7 $688.8 $402.0
================================================================
</TABLE>
Capital investments near $800 million--Capital investments increased $101.9
million in 1996 due to higher Diversified Energy capital investments primarily
by E&P operations and Pipelines & Processing. Gas Distribution capital
expenditures were incurred for the construction of transportation pipelines and
new distribution lines to reach communities not previously served by MichCon
and to make improvements to existing storage and transmission systems.
MCN completed the sale of Genix (Note 2d) and interests in DIGP (Note 2b) in
1996 resulting in proceeds of $168.9 million. Proceeds from these sales were
used to reduce debt incurred to fund Diversified Energy's capital investments.
OUTLOOK
MCN's strategic direction is to grow significantly by investing in a portfolio
of energy-related projects. Accordingly, MCN's capital investments could exceed
$3 billion by the year 2000. During 1997, MCN expects to invest more than $800
million, with approximately 80% in Diversified Energy and the remainder in Gas
Distribution.
Within the Diversified Energy group, MCN anticipates $400 million to be
invested in E&P projects for drilling operations and to acquire reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions. The remaining
expenditures are anticipated to be in gas gathering, gas processing and power
generation projects that are consistent with MCN's growth strategies.
Gas Distribution investments will be made to add new customers, develop new gas
transportation markets, make improvements to existing storage and transmission
systems and to improve its information system.
The proposed level of investments in 1997 and future years will increase
capital requirements materially in excess of internally generated funds and
require the issuance of additional debt and equity securities. MCN's 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. Accordingly, its
capitalization objective is a ratio of 55% equity and 45% debt. It is
management's opinion that MCN and its subsidiaries will have sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
NEW ACCOUNTING PRONOUNCEMENTS
During 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This pronouncement provides accounting and reporting guidance
on transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Although certain aspects of SFAS
No. 125 have been delayed, the effective date for most of its provisions
remains January 1, 1997. MCN has analyzed the impacts of adopting SFAS No. 125
and expects that it will have no significant impact on its financial
statements.
During 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities," which
provides guidance on the issues present in the recognition, measurement,
display and disclosure of environmental remediation liabilities. MCN does not
expect the 1997 adoption of this pronouncement to have a material impact on its
financial statements.
40
<PAGE> 10
CONSOLIDATED STATEMENT OF INCOME
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
YEAR ENDED DECEMBER 31-(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Operating Revenues
Gas and oil sales $ 1,827,198 $ 1,323,432 $ 1,309,192
Transportation 120,019 120,494 114,932
Other 50,051 51,306 49,509
------------------------------------------------
1,997,268 1,495,232 1,473,633
------------------------------------------------
Operating Expenses
Cost of gas 1,193,578 786,193 823,436
Operation and maintenance 371,980 342,521 341,585
Depreciation, depletion and amortization 145,990 114,585 97,835
Property and other taxes 74,427 63,704 62,863
------------------------------------------------
1,785,975 1,307,003 1,325,719
------------------------------------------------
Operating Income 211,293 188,229 147,914
------------------------------------------------
Equity in Earnings of Joint Ventures (Note 3)
17,867 5,245 6,289
------------------------------------------------
Other Income and (Deductions)
Interest income 7,234 7,741 7,628
Interest on long-term debt (66,517) (44,853) (37,811)
Other interest expense (11,264) (12,049) (10,899)
Dividends on preferred securities of subsidiaries (Notes 6a and 6c) (12,374) (9,610) (2,018)
Gains related to DIGP (Note 2b) 6,384 - -
Minority interest (1,059) (2,491) (2,879)
Other (2,620) (3,713) (6,136)
------------------------------------------------
(80,216) (64,975) (52,115)
------------------------------------------------
Income From Continuing Operations Before Income Taxes 148,944 128,499 102,088
Income Tax Provision (Note 13) 36,375 35,330 27,490
------------------------------------------------
Income From Continuing Operations 112,569 93,169 74,598
------------------------------------------------
Discontinued Operations, Net of Taxes (Note 2d)
Income from operations 1,595 3,587 3,170
Gain on sale 36,176 - -
------------------------------------------------
37,771 3,587 3,170
-------------------------------------------------
Net Income $ 150,340 $ 96,756 $ 77,768
================================================
Earnings Per Share
Continuing operations $ 1.68 $ 1.44 $ 1.26
------------------------------------------------
Discontinued operations (Note 2d)
Income from operations .03 .05 .05
Gain on sale .54 - -
------------------------------------------------
.57 .05 .05
------------------------------------------------
$ 2.25 $ 1.49 $ 1.31
================================================
Average Common Shares Outstanding (Note 6d) 66,944 64,743 59,394
================================================
Dividends Declared Per Share $ .9400 $ .9000 $ .8675
===========================================================================================================================
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
41
<PAGE> 11
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31-(IN THOUSANDS) 1996 1995
===================================================================================================================
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost (which approximates market value) $ 30,462 $ 19,259
Accounts receivable, less allowance for doubtful accounts of $18,487
and $13,765, respectively 362,596 317,945
Accrued unbilled revenues 108,509 92,410
Gas in inventory (Note 4) 79,161 71,763
Property taxes assessed applicable to future periods 62,966 60,633
Accrued gas cost recovery revenues 27,672 -
Other 52,862 53,486
------------------------------------------
724,228 615,496
------------------------------------------
Deferred Charges and Other Assets
Investment in and advances to joint ventures (Note 3) 265,388 129,026
Deferred swap losses and receivables (Note 11a) 65,051 54,807
Deferred postretirement benefit costs (Note 10b) 5,559 13,112
Deferred environmental costs (Note 7b) 31,233 35,000
Prepaid benefit costs (Note 10) 59,248 23,827
Other 100,341 90,626
------------------------------------------
526,820 346,398
------------------------------------------
Property, Plant and Equipment, at cost
Gas Distribution 2,689,039 2,496,711
Exploration & Production 981,901 576,810
Pipelines & Processing 27,895 22,324
Other 18,722 64,709
------------------------------------------
3,717,557 3,160,554
Less-Accumulated depreciation and depletion 1,335,201 1,223,808
------------------------------------------
2,382,356 1,936,746
------------------------------------------
$ 3,633,404 $ 2,898,640
==========================================
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 317,922 $ 217,184
Notes payable (Note 5) 336,126 245,635
Current portion of long-term debt, capital lease obligations and
redeemable cumulative preferred securities (Notes 5 and 9) 84,747 7,000
Federal income, property and other taxes payable 97,646 83,384
Customer deposits 12,881 11,550
Other 97,873 87,575
------------------------------------------
947,195 652,328
------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note 13) 149,838 125,896
Unamortized investment tax credit 34,919 36,797
Tax benefits amortizable to customers 116,496 114,668
Deferred swap gains and payables (Note 11a) 48,365 51,923
Accrued postretirement benefit costs (Note 10b) - 15,551
Accrued environmental costs (Note 7b) 35,000 35,000
Minority interest 17,911 18,375
Other 73,263 93,470
------------------------------------------
475,792 491,680
------------------------------------------
Commitments and Contingencies (Notes 7 and 9)
Capitalization (See accompanying statement)
Long-term debt, including capital lease obligations 1,252,040 993,407
MCN-obligated mandatorily redeemable preferred securities of
subsidiaries holding solely subordinated debentures of MCN 173,809 96,449
Common shareholders' equity 784,568 664,776
------------------------------------------
2,210,417 1,754,632
------------------------------------------
$ 3,633,404 $ 2,898,640
===================================================================================================================
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
42
<PAGE> 12
CONSOLIDATED STATEMENT OF CASH FLOWS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31-(IN THOUSANDS) 1996 1995 1994
==================================================================================================================================
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net income $150,340 $ 96,756 $ 77,768
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income 145,990 114,585 97,835
Charged to other accounts 11,026 14,318 13,066
Deferred income taxes-current 8,061 8,927 (15,761)
Deferred income taxes and investment tax credits, net 23,892 30,284 3,210
Gains related to Genix and DIGP, net of taxes (Notes 2b and 2d) (40,326) - -
Equity in earnings of joint ventures, net of distributions (2,506) 1,777 1,125
Other (3,391) 1,376 1,871
Changes in assets and liabilities, exclusive of
changes shown separately (94,754) (20) (4,132)
------------------------------------------------
Net cash provided from operating activities 198,332 268,003 174,982
------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net 87,491 16,828 (51,497)
Common stock dividends paid (62,875) (58,193) (51,492)
Issuance of common stock (Note 6d) 17,264 115,725 15,390
Issuance of preferred securities (Note 6a) 77,218 - 96,329
Issuance of long-term debt 398,540 168,864 78,620
Long-term commercial paper and credit facilities, net (Note 5) (62,835) 142,657 110,100
Retirement of long-term debt and preferred securities (8,139) (8,271) (7,667)
Other (6,249) (2,084) (2,202)
-----------------------------------------------
Net cash provided from financing activities 440,415 375,526 187,581
-----------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (610,323) (537,156) (356,037)
Sale of Genix (Note 2d) 132,889 - -
Acquisitions (Notes 2a, 2b and 2c) (133,201) (83,176) -
Investment in joint ventures (36,217) (20,539) (5,847)
Sale of investment in joint ventures (Note 2b) 36,000 10,803 -
Other (16,692) (5,749) (1,606)
-----------------------------------------------
Net cash used for investing activities (627,544) (635,817) (363,490)
-----------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 11,203 7,712 (927)
Cash and Cash Equivalents, January 1 19,259 11,547 12,474
-----------------------------------------------
Cash and Cash Equivalents, December 31 $ 30,462 $ 19,259 $ 11,547
===============================================
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable, net $(66,183) $ (103,951) $ 22,776
Accrued unbilled revenues (16,099) (9,357) 18,274
Gas in inventory (7,398) 59,886 (85,754)
Accrued/deferred gas cost recovery revenues (28,250) (18,495) 23,696
Accounts payable 102,711 74,537 12,589
Federal income, property and other taxes payable (19,587) (3,716) 23,199
Prepaid/accrued benefit costs (50,972) (27,199) 20,925
Other current assets and liabilities (14,485) (2,819) (13,387)
Deferred assets and liabilities 5,509 31,094 (26,450)
-----------------------------------------------
$(94,754) $ (20) $ (4,132)
===============================================
Supplemental Disclosures
Cash paid during the year for:
Interest, net of amounts capitalized $ 74,775 $ 52,833 $ 44,915
Federal income taxes 19,934 9,366 32,000
Noncash investing and financing activities:
PRIDES yield enhancement costs (Note 6b) $ 8,243 $ - $ -
Common stock issued under stock incentive plan (Note 6e) 6,210 - -
Property purchased under capital leases 6,765 3,809 7,190
Gains related to DIGP (Note 2b) 4,796 - -
===================================================================================================================================
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
43
<PAGE> 13
CONSOLIDATED STATEMENT OF CAPITALIZATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31-(IN THOUSANDS) 1996 1995 1994
=====================================================================================================================
<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
6.30% series due 1998 20,000 20,000 -
6.51% series due 1999 30,000 - -
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 4,150 -
6.80% series due 2003 15,850 15,850 -
9-1/8% series due 2004 55,000 55,000 55,000
7.15% series due 2006 40,000 - -
8-1/4% series due 2014 80,000 80,000 80,000
9-1/2% series due 2019 5,000 5,000 5,000
7-1/2% series due 2020 29,812 30,000 -
9-1/2% series due 2021 40,000 40,000 40,000
6-3/4% series due 2023 17,782 18,416 19,109
7% series due 2025 40,000 40,000 40,000
Unamortized discount (1,349) (1,390) (1,508)
Medium-term notes, interest payable semi-annually
5.84% series due 1999 80,000 - -
6.82% series due 1999 130,000 - -
6.03% series due 2001 60,000 - -
6.32% series due 2003 60,000 - -
Senior notes-7.79% series due 1997, interest payable semi-annually - 30,000 30,000
Term loan due 2000, interest payable quarterly 100,000 100,000 -
Unsecured notes-9-3/4% series due 2000, interest
payable semi-annually 12,000 12,000 12,000
Commercial paper and credit facilities 261,822 324,657 182,000
Project loan due 2006, interest payable quarterly 15,840 17,600 19,360
Long-term capital lease obligations 16,625 18,532 21,814
Other long-term debt 9,508 3,592 2,744
---------------------------------------------
1,252,040 993,407 685,519
---------------------------------------------
Redeemable Preferred Securities of Subsidiaries (Note 6)
Redeemable Cumulative Preferred Stock of Subsidiary,
Excluding Current Requirements,
par value $1 per share-7,000,000 shares authorized,
104,732 shares outstanding at 1994, $2.05 Series - - 2,618
MCN-Obligated Mandatorily Redeemable Preferred Securities
of MCN Michigan Holding Solely Subordinated Debentures
of MCN, net of unamortized deferred issuance costs,
$100,000,000 aggregate liquidation preference value,
4,000,000 shares authorized and outstanding, Series A 96,573 96,449 96,349
MCN-Obligated Mandatorily Redeemable Preferred Securities
of MCN Financing Holding Solely Junior Subordinated Debentures
of MCN, net of unamortized deferred issuance costs,
$80,000,000 aggregate liquidation preference value,
3,200,000 shares authorized and outstanding, Series A 77,236 - -
---------------------------------------------
173,809 96,449 98,967
---------------------------------------------
Common Shareholders' Equity (Note 6)
Common Stock,
par value $.01 per share-100,000,000 shares authorized,
67,303,908, 66,370,230 and 59,787,966 shares outstanding,
respectively 673 664 598
---------------------------------------------
Additional Paid-in Capital
Balance-beginning of period 446,055 331,571 317,117
Common stock issued 23,474 115,840 15,628
Performance units 23,852 - -
Other 88 (1,356) (1,174)
---------------------------------------------
Balance-end of period 493,469 446,055 331,571
---------------------------------------------
Retained Earnings
Balance-beginning of period 218,425 179,862 153,589
Net income 150,340 96,756 77,768
Cash dividends declared on common stock (62,875) (58,193) (51,492)
Other (538) - (3)
---------------------------------------------
Balance-end of period 305,352 218,425 179,862
---------------------------------------------
PRIDES Yield Enhancement and Issuance Costs (14,492) - -
---------------------------------------------
Unearned Compensation (434) (368) (536)
---------------------------------------------
784,568 664,776 511,495
---------------------------------------------
Total Capitalization $2,210,417 $1,754,632 $1,295,981
=====================================================================================================================
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
44
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCN Corporation, doing business as MCN Energy Group Inc. (MCN), is a
diversified energy holding company with natural gas markets and investments
throughout North America. MCN operates through two major business groups,
Diversified Energy and Gas Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC), is
involved in the following businesses: Exploration & Production (E&P) with 1.2
trillion cubic feet equivalent of proved gas and oil reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions; Pipelines &
Processing with gathering, processing and transmission facilities near areas
of rapid reserve development and growing consuming markets; Energy Marketing
with total gas sales and exchange delivery markets of 241.5 billion cubic
feet (Bcf); Power Generation with investments in electric generation
facilities with a combined 153 megawatts of capacity; and Gas Storage with
investments in storage facilities that have 56 Bcf of storage capacity.
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and intra-state transmission company
serving 1.2 million customers in more than 500 communities throughout
Michigan. MichCon 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. Of MichCon's
labor force, 46% is covered by collective bargaining agreements, with 28% of
the labor force having agreements set to expire in December 1997.
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 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. E&P
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 in which MCN
has significant but not controlling influence, and entities where control is
temporary, have been accounted for under the equity method. Certain
reclassifications have been made to prior years' statements to conform with the
1996 presentation.
REVENUES AND COST OF GAS--Gas Distribution accrues 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.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION--The full-cost accounting method
prescribed by the Securities and Exchange Commission (SEC) is followed for gas
and oil properties. Substantially all acquisition, exploration and development
costs are capitalized. The unit of production method is used for calculating
depreciation and depletion on proved gas and oil properties. The average
amortization rate per Mcf was $.78, $.74 and $.66 in 1996, 1995 and 1994,
respectively. Costs directly associated with the acquisition and evaluation of
unproved gas and oil properties are excluded from the amortization base until
the related properties are evaluated. Such unproved properties are assessed
periodically, and a provision for impairment is made to the full-cost
amortization base when appropriate.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment, excluding E&P
property, is stated at cost and includes appropriate amounts of labor,
materials, overhead and an allowance for funds used during construction. Unit
of production depreciation and depletion is used for certain Gas Distribution
transmission property. All other property, plant and equipment of MCN,
excluding E&P property, 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>
<CAPTION>
- -------------------------------------------
1996 1995 1994
===========================================
<S> <C> <C> <C>
Gas Distribution 4.4% 4.4% 4.4%
Pipelines & Processing 3.8% 2.1% 2.4%
Other 10.1% 13.3% 19.3%
===========================================
</TABLE>
INCOME TAXES AND INVESTMENT TAX CREDITS--Tax Benefits Amortizable to Customers
represents the net revenue equivalent of the difference in property-related
accumulated deferred income taxes computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" as
compared to the amounts previously reflected in setting utility rates. This
amount is due to current tax rates being lower than the rates in effect when
the original deferred taxes were recorded and because of temporary differences,
including accumulated investment tax credits, for which deferred income taxes
were not previously recorded in setting utility rates. These net tax benefits
are being amortized in accordance with the regulatory treatment over the life
of the related plant as the related temporary differences reverse.
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.
45
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION--Gas Distribution capitalizes an
allowance for both debt and equity funds used during construction in the cost
of major additions to plant. Diversified Energy also capitalizes interest on
debt funds used during construction. The total amount capitalized was
$14,631,000, $7,893,000, and $2,928,000 in 1996, 1995 and 1994, 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.
CONSOLIDATED STATEMENT OF CASH FLOWS--For purposes of this statement, MCN
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
SALES OF OWNERSHIP INTEREST BY SUBSIDIARIES AND PARTNERSHIPS--MCN recognizes
gains or losses on the sale of stock by subsidiaries or the sale of partnership
interests. Such gains or losses represent the difference between MCN's share of
the consideration received and the historical book value of its investment.
2. ACQUISITIONS AND DISPOSITION
a. LYONDELL METHANOL COMPANY, L.P.
In December 1996, MCN acquired a 25% interest in Lyondell Methanol Company, L.
P., a limited partnership that owns and operates a 248 million gallon per year
methanol processing plant in Texas. MCNIC will supply natural gas to the
methanol plant and will have the opportunity to participate with the other
partner in future electric power generation projects during the next five
years. The total cost of the acquisition was $54,500,000 and was accounted for
under the purchase method.
b. DAUPHIN ISLAND GATHERING PARTNERS
During the first quarter of 1996, MCN acquired a 99% interest in Dauphin Island
Gathering Partners (DIGP), a general partnership that owns a 90-mile gas
gathering system in the Mobile Bay area of offshore Alabama. The total cost of
the acquisition was $78,620,000 and was accounted for under the purchase
method. In mid-1996, MCN sold a 40% interest in the partnership to PanEnergy
Dauphin Island Company for $36,000,000. The sale resulted in a pre-tax gain of
$3,986,000.
In the fourth quarter of 1996, a 41% interest in the partnership was sold to
three additional partners. The new partners paid for their interests by
contributing the Main Pass Gas Gathering System (Main Pass) to DIGP. Main Pass
is a 57-mile offshore gas gathering system in the Gulf of Mexico with an
independently determined appraised value of $72,200,000. MCN's ownership
interest in DIGP was reduced from 59% to 35% resulting in a pre-tax gain of
$4,796,000 of which $2,398,000 was deferred due to a related option agreement.
Since MCN's ownership percentage has been reduced below 50%, MCN no longer has
a controlling interest in the partnership. Accordingly, DIGP was deconsolidated
and accounted for under the equity method. The financial information included
herein reflects DIGP as an unconsolidated partnership for all periods
presented.
c. CONSOL COAL GROUP PROPERTIES
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
was accounted for under the purchase method.
d. THE GENIX GROUP, INC.
On June 21, 1996, MCN completed the sale of its computer operations subsidiary,
The Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. (ACS) for
an initial sales price of $137,500,000, resulting in an after-tax gain of
$36,176,000. Accordingly, Genix's results of operations after June 21, 1996 are
not reflected in the Consolidated Statement of Income. In October 1996, the
initial sales price was decreased approximately $4,600,000 to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $32,000,000 depending upon the occurrence of certain
contingencies, which include, among other things, retention of certain
customers through mid-1998 and tax-related matters. Management believes that no
further adjustment to the selling price will occur. The following financial
information summarizes Genix's operations:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
========================================================
<S> <C> <C> <C>
Operating Revenues
Non-affiliates $48,054 $89,907 $72,334
Affiliates 6,826 15,254 15,877
-------------------------
54,880 105,161 88,211
Operating Expenses 50,765 97,165 81,594
-------------------------
Operating Income 4,115 7,996 6,617
-------------------------
Other Income and (Deductions)
Interest expense-affiliate (1,110) (2,088) (1,290)
Other (336) 301 412
-------------------------
(1,446) (1,787) (878)
-------------------------
Income Before Income Taxes 2,669 6,209 5,739
Income Tax Provision 1,074 2,622 2,569
-------------------------
Net Income $1,595 $3,587 $3,170
========================================================
</TABLE>
46
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------
JUNE 21, DEC. 31,
------------------
(IN THOUSANDS) 1996 1995
=======================================================
<S> <C> <C>
Assets
Accounts receivable, net $24,006 $21,723
Property, plant and equipment, net 33,216 30,717
Other 18,335 15,486
------------------
$75,557 $67,926
==================
Liabilities
Accounts payable $9,823 $7,639
Notes payable-affiliate 27,522 29,386
Other 15,578 9,926
------------------
$52,923 $46,951
=======================================================
</TABLE>
Related party transactions between Genix and other MCN companies are included
in the individual captions of the Consolidated Statement of Income as
components of both continuing and discontinued operations.
3. 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; Pipelines & Processing-20% to 80%
owned; Energy Marketing & Power Generation-50% to 100% owned (includes
temporarily controlled entities); Gas Storage-50% owned; and Real Estate &
Other-33% to 50% owned. 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) 1996 1995 1994
===================================================================
<S> <C> <C> <C>
Operating Revenues
Pipelines & Processing $64,530 $3,700 $6,589
Energy Marketing & Power Generation 84,202 27,869 39,597
Gas Storage 30,591 31,765 30,656
Real Estate & Other 19,937 17,471 11,635
--------------------------
$199,260 $80,805 $88,477
==========================
Operating Income
Pipelines & Processing $21,426 $1,545 $4,575
Energy Marketing & Power Generation 14,630 3,258 1,744
Gas Storage 18,106 18,595 19,261
Real Estate & Other 1,914 1,984 1,548
--------------------------
$56,076 $25,382 $27,128
==========================
Income (Loss) Before Taxes
Pipelines & Processing $21,391 $1,546 $4,313
Energy Marketing & Power Generation 263 (1,353) (862)
Gas Storage 11,872 11,911 13,724
Real Estate & Other (3,332) (5,202) (6,518)
--------------------------
$30,194 $6,902 $10,657
==========================
MCN's Share of Income (Loss)
Before Taxes
Pipelines & Processing $10,590 $628 $1,730
Energy Marketing & Power Generation 1 (886) (1,306)
Gas Storage 5,978 5,916 6,897
Real Estate & Other 1,298 (413) (1,032)
--------------------------
$17,867 $5,245 $6,289
==========================
MCN's Share of Income
Before Taxes by Segment
Gas Distribution $1,256 $1,342 $2,000
Diversified Energy 16,611 3,903 4,289
--------------------------
$17,867 $5,245 $6,289
===================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
======================================================================
<S> <C> <C>
ASSETS
Current Assets
Gas Distribution $1,834 $210
Pipelines & Processing 33,065 1,579
Energy Marketing & Power Generation 20,916 13,990
Gas Storage 7,877 10,154
Real Estate & Other 8,964 7,068
------------------
72,656 33,001
------------------
Noncurrent Assets
Gas Distribution 36,619 24,430
Pipelines & Processing 309,837 71,762
Energy Marketing & Power Generation 180,790 180,251
Gas Storage 131,151 135,169
Real Estate & Other 119,203 129,690
------------------
777,600 541,302
------------------
$850,256 $574,303
==================
MCN's Share of Total Assets
Gas Distribution $18,265 $20,532
Pipelines & Processing 162,145 31,339
Energy Marketing & Power Generation 122,333 116,381
Gas Storage 69,513 72,661
Real Estate & Other 39,824 40,161
------------------
$412,080 $281,074
==================
LIABILITIES AND JOINT VENTURES' EQUITY
Current Liabilities
Gas Distribution $1,036 $994
Pipelines & Processing 20,591 1,981
Energy Marketing & Power Generation 16,198 9,716
Gas Storage 10,146 12,099
Real Estate & Other 5,253 5,321
------------------
53,224 30,111
------------------
Noncurrent Liabilities
Gas Distribution 23,600 15,725
Pipelines & Processing 8,455 -
Energy Marketing & Power Generation 156,639 176,948
Gas Storage 70,235 75,775
Real Estate & Other 92,723 93,939
------------------
351,652 362,387
------------------
Joint Ventures' Equity
Gas Distribution 13,817 7,921
Pipelines & Processing 313,856 71,360
Energy Marketing & Power Generation 28,869 7,577
Gas Storage 58,647 57,449
Real Estate & Other 30,191 37,498
------------------
445,380 181,805
------------------
$850,256 $574,303
==================
MCN's Share of Joint Ventures' Equity
Gas Distribution $6,675 $6,600
Pipelines & Processing 146,356 30,637
Energy Marketing & Power Generation 19,637 7,596
Gas Storage 29,322 28,724
Real Estate & Other 17,886 18,681
------------------
219,876 92,238
Advances and other (1) 45,512 36,788
------------------
MCN's investment in and advances to joint ventures $265,388 $129,026
======================================================================
</TABLE>
(1) Differences between MCN's carrying value and its share of the joint
ventures' underlying equity interest are being amortized over the useful lives
of the related assets which, on a weighted-average basis, equaled 23 years.
47
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
4. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1996, the replacement cost exceeded the $79,161,000 LIFO cost for 85 Bcf by
$269,083,000. At December 31, 1995, the replacement cost exceeded the
$71,763,000 LIFO cost for 80 Bcf by $140,835,000. 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 74 Bcf and 64 Bcf at December 31, 1996 and 1995, respectively.
5. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
During 1996, MichCon increased its credit lines by $50,000,000 to allow for
borrowings of up to $150,000,000 under a 364-day revolving credit facility and
up to $150,000,000 under a three-year revolving credit facility. MichCon
usually issues commercial paper in lieu of an equivalent amount of borrowings
under these lines of credit. Commercial paper outstanding at December 31, 1996
and 1995, totaled $238,251,000 and $194,760,000, at weighted-average interest
rates of 5.5% and 5.7%, respectively. 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.
At December 31, 1996, MCNIC had credit lines permitting borrowings of up to
$100,000,000 under a 364-day revolving credit facility and up to $300,000,000
under a three-year revolving credit facility. The facilities support MCNIC's
$400,000,000 commercial paper program that was established in 1995. MCNIC 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 $68,000,000 and $49,000,000 at December 31, 1996
and 1995, respectively, is classified as short-term based upon management's
intent to repay this debt within one year. The remaining commercial paper
balance is classified as long-term. Commercial paper borrowings outstanding as
of December 31, 1996 and 1995 totaled $329,822,000 and $373,657,000 at
weighted-average interest rates of 5.8% and 6.0%, respectively. Fees are paid
to compensate banks for lines of credit.
During 1996, MichCon renewed its Trust Demand Note program which allows for
borrowings of up to $25,000,000 through March 1997. Borrowings of $25,000,000
were outstanding under this program at December 31, 1996 at an interest rate of
5.9%. No borrowings were outstanding at December 31, 1995.
MCNIC Oil & Gas Company, a subsidiary of MCNIC, established a five-year term
loan during 1995 at certain alternative variable rates at MCN's option. The
loan allows for borrowings of up to $100,000,000 and is based on MCNIC Oil &
Gas Company's proved gas reserves. The balances outstanding at December 31,
1996 and 1995 were at weighted-average interest rates of 5.9% and 6.3%,
respectively. The most restrictive provision of the agreement requires MCNIC
Oil & Gas Company to maintain a minimum interest coverage ratio.
MichCon has a variable interest rate swap agreement through April 2000 on
$12,000,000 of fixed-rate unsecured notes that effectively reduced the cost of
this debt from 9.8% to 5.7% for the year ended December 31, 1996. A subsidiary
of MichCon has an interest rate swap agreement on the $17,600,000 outstanding
balance of its project loan as of December 31, 1996, which effectively fixes
the interest rate at 7.5% through February 2003.
Substantially all of the properties of MichCon, totaling approximately
$1,100,000,000, serve as collateral for its outstanding first mortgage bonds.
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1996 are $81,900,000 in 1997,
$22,200,000 in 1998, $261,800,000 in 1999, $133,800,000 in 2000 and $81,800,000
in 2001. In addition, the long-term commercial paper balance outstanding at
December 31, 1996 is supported by the three-year credit facility that expires
in 1998.
The following long-term debt was issued during early 1997
(in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
ISSUE DATE DESCRIPTION AMOUNT ISSUED
=======================================================
<S> <C> <C>
January 1997 MCNIC Medium-Term Notes
6.89%, due January 2002 $ 90,000
7.12%, due January 2004 60,000
=======================================================
</TABLE>
6. PREFERRED SECURITIES AND COMMON STOCK
a. TRUST ORIGINATED PREFERRED SECURITIES (TOPrS)
In 1996, MCN Financing I (MCN Financing), a business trust wholly-owned by MCN,
was formed for the sole purpose of issuing preferred securities and lending the
gross proceeds thereof to MCN. In July 1996, the trust issued 3,200,000 shares
of 8-5/8% TOPrS, at the liquidation preference value of $25 per share. MCN
Financing invested the $80,000,000 of gross proceeds from the issuance of the
TOPrS, as well as $2,474,250 of proceeds from the issuance of common securities
to MCN in an equivalent amount of 8-5/8% Junior Subordinated Debentures of MCN
due 2036. The $82,474,250 of Junior Subordinated Debentures are the sole assets
of the trust. Holders of the preferred securities are entitled to receive
cumulative dividends at an annual rate of 8-5/8% of the liquidation preference
value. Dividends are payable quarterly and in substance are tax deductible by
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 40 years.
MCN has the right to extend interest payment periods on the debentures for up
to 20 consecutive quarters. As a consequence, quarterly dividend payments on
the preferred securities can be deferred by MCN Financing during any such
48
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
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 Financing, in whole or in part,
during or after July 2001. In addition, upon final maturity of the debentures,
MCN Financing 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 Financing's creditor rights against MCN, which may
include acceleration of the principal amount due on the debentures. MCN has
issued a guaranty with respect to the preferred securities that, when taken
together with MCN's obligations under the debentures, the related indenture, and
the trust documents, provides a full and unconditional guaranty of MCN
Financing's obligations under the TOPrS.
In October 1996, MCN entered into two five-year variable interest rate swap
agreements with a combined notional amount of $80,000,000. The swap agreements
effectively reduced the TOPrS fixed dividend rate from 8-5/8% to 7.9% for the
three months ended December 31, 1996.
b. PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY
SECURITIES (PRIDES)
In April 1996, MCN issued 5,865,000 PRIDES yielding 8-3/4% with a stated amount
of $23.00 per security. Each security represents a contract to purchase MCN
common stock in April 1999, or earlier under certain limited circumstances.
Proceeds from the issuance totaling approximately $135,000,000 were used to
acquire 6.5% U.S. Treasury Notes underlying the security as subsequently
discussed. Accordingly, MCN received no cash from issuing the PRIDES.
Under each security, MCN is obligated to sell and the PRIDES holder is obligated
to purchase for $23.00, between .8333 of a share and one share of MCN common
stock. The exact number of MCN common shares to be sold is dependent on the
market value of a share in April 1999. However, the total number to be sold will
not be less than 4,887,500 shares or more than 5,865,000 shares.
MCN is also obligated to pay the PRIDES holders a semi-annual yield enhancement
payment at an annual rate of 2-1/4% of the stated amount. MCN has recorded the
present value of the yield enhancement payments, totaling $8,243,000, as a
liability and a reduction to Common Shareholders' Equity on MCN's Consolidated
Statement of Financial Position. The liability is reduced when the yield
enhancement payments are paid. MCN has the right to defer the yield enhancement
payments, in which case MCN cannot declare dividends on its common stock until
the yield enhancement payments have been made. In addition, MCN has incurred
costs of $6,249,000 in conjunction with the issuance of PRIDES and similarly has
recorded the costs as a reduction to Common Shareholders' Equity.
The Treasury Notes underlying the securities are pledged as collateral to secure
the PRIDES holders' obligation to purchase MCN common stock under the stock
purchase contract. At maturity in April 1999, the principal received from the
U.S. Treasury Notes will be used to satisfy the PRIDES holders' obligation in
full. Neither the PRIDES nor the U.S. Treasury Notes are included on MCN's
Consolidated Statement of Financial Position. However, the issuance of common
stock will be reflected when cash proceeds totaling approximately $135,000,000
are received by MCN in April 1999.
c. REDEEMABLE CUMULATIVE PREFERRED 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 deductible 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 104,732 shares outstanding 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. At December 31, 1996, no issuances of preferred or
preference stock were made under these authorizations.
d. COMMON STOCK
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. The number of shares
issued was approximately 926,000 in 1996, 858,000 in 1995 and 855,000 in 1994,
generating net proceeds of $17,300,000, $16,500,000, and $15,400,000,
respectively.
49
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
In 1995, MCN sold 5,750,000 shares of new common stock in a public offering,
generating net proceeds of approximately $99,000,000.
e. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units, restricted
stock or other stock-related awards to key employees, primarily management.
MCN's current policy is to issue performance units which encourage a strategic
focus on long-term performance and have a high employee retention value. The
performance units are denominated in shares of MCN common stock and issued to
employees based on total shareholder return over a six-year period, as compared
to a group of peer companies. The initial number of performance units granted
is based on total shareholder return during the previous three-year period.
Participants receive dividend equivalents on the units granted. The initial
grants will be adjusted upward or downward based on total shareholder return
for the subsequent three-year period. The final awards are then payable in
shares of common stock, 50% of which must be retained by the recipient while
employed by MCN.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement requires expanded
disclosures about stock-based employee compensation and encourages a fair
value-based method of accounting for such compensation for fiscal years
beginning after December 15, 1995. During the fourth quarter of 1996, MCN
adopted the recommended fair value-based method of accounting for its
stock-based compensation plans. Due to the immaterial effect of adoption, prior
1996 quarterly periods will not be restated.
During February 1996, MCN granted 301,616 performance units with a
weighted-average grant date fair value of $24.625 per unit. During February
1995 and 1994, MCN granted 370,920 and 322,820 performance units, respectively.
In May 1996, MCN modified the 1995 and 1994 performance units granted to allow
limited acceleration in the vesting of the awards. As a result, the 1995 and
1994 awards also have been accounted for under the recognition provisions of
SFAS No. 123 from the date of modification. The weighted-average modification
date fair value for both the 1995 and 1994 awards was $24.875 per unit. Upon
adoption of SFAS No.123, the previously accrued liability of $23,852,000
relating to the 1996, 1995 and 1994 performance units was reclassified to
Additional Paid-in Capital. The unrecognized costs of all outstanding
performance units is being recorded as compensation expense and Additional
Paid-in Capital over the remaining vesting period. Stock-based compensation
cost recognized during 1996, 1995 and 1994 for all awards outstanding totaled
$14,055,000, $15,076,000 and $7,182,000, respectively. At December 31, 1996,
there were 2,773,788 shares available to be issued under the Stock Incentive
Plan.
f. 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
In 1990, MCN issued a guaranty in conjunction with a Genix building lease
expiring no later than 2010. The lease agreement does not allow MCN to transfer
its obligation under the guaranty to ACS, who acquired Genix in June 1996 (Note
2d). However, ACS is obligated to reimburse MCN for any payments made as a
result of this guaranty. Obligations under the guaranty approximated
$15,000,000 at December 31, 1996.
During 1996, MCN acquired a 47.5% interest in a partnership that owns and
operates 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 partnership 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
$23,600,000 at December 31, 1996.
A MichCon subsidiary 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 due June 2004 through
the Michigan State Housing Development Authority. 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-1980s, 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 is on the
National Priorities List prepared by the U.S. Environmental Protection Agency.
MichCon is not involved in any administrative proceedings regarding these
former MGP sites but is currently remediating
50
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
a former MGP site in Muskegon, Michigan. The remedy consists of limited
excavation and disposal of soils, a new soil cover and long-term groundwater
monitoring. More extensive investigations are underway at seven 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.
MCN employed outside consultants to evaluate remediation alternatives for 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. In
1996, MichCon received payments from certain carriers and expects additional
insurance recoveries over the next several years. 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 an additional liability and corresponding regulatory asset of
$35,000,000 during 1995.
During 1996, 1995 and 1994, MCN spent $900,000, $2,100,000 and $600,000,
respectively, investigating these former MGP sites. At December 31, 1996, the
reserve balance was $37,576,000, of which $2,576,000 was 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 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 1997, MCN has firm purchase
commitments for approximately 248 Bcf of gas, approximately 132 Bcf of which are
MichCon purchase commitments. MCN expects sales to exceed its minimum purchase
commitments. MCN is also committed to pay demand charges of approximately
$98,900,000 during 1997 related to firm purchase and transportation agreements.
Of this total, approximately $56,000,000 relates to Gas Distribution and is
recoverable through the GCR mechanism.
Capital investments for 1997 are estimated to be more than $800,000,000. Certain
commitments have been made in connection therewith.
d. OTHER
MichCon receives a significant amount of its heating assistance funding from the
federal Low-Income Home Energy Assistance Program (LIHEAP). During 1995,
Congress reduced a substantial portion of the program's funding for the 1996
fiscal year and had proposed to eliminate all funding in future years. The state
of Michigan's share of LIHEAP funds was reduced from $78,000,000 in fiscal year
1995 to $47,500,000 in 1996. During October 1996, President Clinton signed an
Omnibus Spending Bill passed by Congress that provided for $1,000,000,000 in
LIHEAP funding, which increases the 1997 funding $100,000,000 over 1996 levels.
During February 1997, the President released his proposed budget which provides
for federal LIHEAP funding of $1,000,000,000 annually through fiscal year 2002.
A portion of any future increase or decrease in funding may impact uncollectible
gas accounts.
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. 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 that will be recovered from
customers through the ratemaking process. Regulatory liabilities represent
benefits that 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) 1996 1995
================================================================================
<S> <C> <C>
Regulatory Assets:
Accrued gas cost recovery revenues $ 27,672 $ -
Deferred postretirement benefit costs (Note 10b) 5,559 13,112
Deferred environmental costs (Note 7b) 31,233 35,000
Unamortized loss on retirement of debt 9,237 9,773
Conservation programs 2,908 7,792
Other 1,681 6,242
------------------
$ 78,290 $ 71,919
==================
Regulatory Liabilities:
Unamortized investment tax credit $ 34,919 $ 36,797
Tax benefits amortizable to customers 116,496 114,668
Other 405 785
------------------
$151,820 $152,250
================================================================================
</TABLE>
Gas Distribution currently has regulatory precedents and orders in effect that
provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or
51
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
changes in the competitive environment could result in MCN discontinuing the
application of SFAS No. 71 for all or part of its business and require the
write-off of the portion of any regulatory asset or liability that was no
longer probable of recovery or refund. If MCN were to have discontinued the
application of SFAS No. 71 as of December 31, 1996, it would have had an
extraordinary noncash increase to net income of approximately $48,000,000.
Management believes evidence currently available supports the continued
application of SFAS No. 71.
9. CAPITAL AND OPERATING LEASES
MCN leases certain property (principally office buildings, a warehouse and a
parking structure) under lease arrangements expiring at various dates to 2006,
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 and related accumulated depreciation at December 31,
1996 were $36,034,000 and $12,516,000, respectively. The gross amount of assets
recorded under capital leases and related accumulated depreciation at December
31, 1995 were $34,978,000 and $11,266,000, respectively.
Minimum rental commitments under noncancelable leases at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
=================================================================
<S> <C> <C>
1997 $ 4,757 $ 4,934
1998 4,509 4,818
1999 4,205 4,718
2000 3,416 4,315
2001 2,911 4,374
2002 and thereafter 7,558 9,293
---------------------------
Total minimum lease payments 27,356 $ 32,452
===============
Less: Amount representing interest 7,860
------------
Present value of minimum lease
payments 19,496
Less: Current portion 2,871
------------
Long-term obligations $ 16,625
=================================================================
</TABLE>
Total minimum lease payments for capital and operating leases have not been
reduced by future minimum sublease rentals of $8,743,000 and $2,207,000,
respectively, under noncancelable subleases.
Capital and operating lease payments of continuing operations for the years
ended December 31 consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
===================================================
<S> <C> <C> <C>
Capital lease expense:
Depreciation expense $ 1,632 $ 1,526 $ 1,140
Interest expense 2,051 2,057 2,087
---------------------------
$ 3,683 $ 3,583 $ 3,227
===========================
Operating lease expense $ 5,243 $ 4,860 $ 3,063
===================================================
</TABLE>
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 1996, 1995 or
1994 plan years were made, and none are expected to be made for the 1997 plan
year.
Net pension cost for these plans included the following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
=====================================================================
<S> <C> <C> <C>
Service cost-benefits earned during
the period $ 11,194 $ 9,318 $ 12,854
Interest cost on projected
benefit obligation 34,223 32,061 30,450
Net amortization and deferral 16,111 65,883 (60,508)
Actual (return) loss on plan assets (79,912) (123,952) 15,461
---------------------------------
Net pension credit $ (18,384) $ (16,690) $ (1,743)
=====================================================================
</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) 1996 1995
=========================================================================
<S> <C> <C>
Measurement date Oct. 31 Oct. 31
Actuarial present value of:
Accumulated vested benefit obligation $ 358,952 $ 357,377
Accumulated nonvested benefit obligation 29,235 33,850
------------------------
Total accumulated benefit obligation $ 388,187 $ 391,227
========================
Projected benefit obligation for
service rendered to date $ 444,937 $ 456,309
Plan assets at measurement date 723,493 670,629
------------------------
Plan assets in excess of projected
benefit obligation 278,556 214,320
Unrecognized net asset at transition (40,099) (45,139)
Unrecognized prior service cost (1,506) (1,662)
Unrecognized net gain (194,648) (143,692)
------------------------
Prepaid pension cost $ 42,303 $ 23,827
=========================================================================
</TABLE>
In determining the actuarial present value of the projected benefit obligation,
the weighted average discount rate was 8% for 1996 and 7.5% for 1995. The rate
of increase in future compensation levels used was 5% for 1996 and 1995. The
expected long-term rate of return on plan assets, which are invested primarily
in equity and fixed income securities, was 9.25%, 9% and 7.5% for 1996, 1995
and 1994, respectively.
52
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MCN and its subsidiaries also sponsor defined contribution retirement savings
plans. Participation in one of these plans is available to substantially all
union and nonunion employees. The company matches employee contributions up to
certain predefined limits based upon salary and years of credited service. The
cost of these plans for continuing operations was $6,100,000 in 1996, $6,000,000
in 1995 and $5,600,000 in 1994.
b. OTHER POSTRETIREMENT BENEFITS
MCN provides certain healthcare and life insurance benefits for retired
employees who may become eligible for these benefits if they reach retirement
age while working for MCN. These benefits are currently being accounted for
under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," which requires the use of accrual accounting. Upon adoption of
SFAS No. 106, MCN deferred postretirement costs related to Gas Distribution (in
excess of claims paid) until January 1994 when new rates to recover such costs
became effective. The deferred costs are being amortized through 1997.
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 $41,918,000, $27,504,000 and
$8,345,000 in 1996, 1995 and 1994, respectively. The expected long-term rate of
return on plan assets, which are invested in life insurance policies, equity
securities and fixed income securities, was 9.1%, 8.9% and 7.4% for 1996, 1995
and 1994, respectively.
Net postretirement cost for the years ended December 31 includes the following
components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 4,541 $ 5,345 $ 7,859
Interest cost on accumulated
benefit obligation 16,826 18,815 21,749
Amortization of transition obligation 13,587 13,810 14,601
Net amortization and deferral (1,936) 7,396 (2,607)
Actual (return) loss on plan assets (12,268) (15,670) 489
-----------------------------
Total postretirement cost 20,750 29,696 42,091
Regulatory adjustment 7,553 7,558 4,942
-----------------------------
Net postretirement cost $ 28,303 $ 37,254 $ 47,033
================================================================================
</TABLE>
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
<S> <C> <C>
Measurement date OCT. 31 OCT. 31
Accumulated postretirement benefit obligation:
Retirees $ 140,310 $ 156,944
Fully eligible active participants 26,178 29,057
Participants with less than 30 years of service 56,726 67,094
---------------------
223,214 253,095
Plan assets at measurement date 126,716 74,295
---------------------
Accumulated postretirement benefit obligation
in excess of plan assets (96,498) (178,800)
Unrecognized transition obligation 217,261 232,248
Unrecognized net gain (111,030) (75,130)
Contributions made after measurement date 7,212 6,131
---------------------
Accrued postretirement asset (liability) $ 16,945 $ (15,551)
================================================================================
</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 6.5% 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
rates would increase the accumulated postretirement benefit obligation at
December 31, 1996 by 9% and increase the sum of the service cost and interest
cost by 8% for the year then ended. The discount rate used in determining the
accumulated postretirement benefit obligation was 8% and 7.5% for 1996 and 1995,
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.
53
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
Commodity price and interest rate risks are actively monitored by a 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 that they continue to effectively reduce
exposure to commodity price and interest rate risks. 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.
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 also are 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 assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position at
December 31.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(IN THOUSANDS) 1996 1995
============================================================
<S> <C> <C>
Deferred Swap Losses and Receivables:
Unrealized losses $ 53,166 $ 18,084
Deferred receivables 11,885 37,345
----------------------
65,051 55,429
Less-Current portion - 622
----------------------
$ 65,051 $ 54,807
======================
Deferred Swap Gains and Payables:
Unrealized gains $ 5,519 $ 35,514
Deferred payables 64,641 25,532
----------------------
70,160 61,046
Less-Current portion 21,795 9,123
----------------------
$ 48,365 $ 51,923
=============================================================
</TABLE>
The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received. 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.
<TABLE>
<CAPTION>
- -----------------------------------------------
(IN THOUSANDS OF DOLLARS) 1996 1995
===============================================
<S> <C> <C>
Fixed Price Receiver:
Volumes (Bcf equivalent) 355.7 278.4
Notional value $790,549 $635,017
Latest maturity 2008 2008
Variable Price Receiver:
Volumes (Bcf equivalent) 58.8 73.8
Notional value $140,080 $149,654
Latest maturity 2006 2006
===============================================
</TABLE>
In addition, at December 31, 1996, MCN had futures contracts that permit
settlement by delivery of the underlying commodity of 46.7 Bcf with unrealized
gains of $7,899,000 and 23.9 Bcf with unrealized losses of $2,351,000. Futures
contracts of 53.9 Bcf with unrealized gains of $2,995,000 and 1.0 Bcf with
unrealized losses of $568,000 were outstanding at December 31, 1995.
Collateral in the form of cash and letters of credit totaling $8,900,000 were
provided under hedging contracts at December 31, 1996.
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, 1996, MCN had interest rate swap agreements with notional
principal amounts totaling $109,600,000 (Notes 5 and 6a) and a weighted average
remaining life of 4.6 years. At December 31, 1995, the notional principal
amount of outstanding interest rate swaps totaled $31,360,000. 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.
54
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
12. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS
MCN has estimated the fair value of its financial instruments 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.
The carrying amount and fair value of other financial instruments consist of
the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
=======================================================================================
<S> <C> <C> <C> <C>
Assets:
Notes receivable and
advances $ 17,713 $ 17,713 $ 6,550 $ 6,550
Liabilities and
Shareholders' Equity:
Long-term debt,
excluding capital
lease obligations 1,235,415 1,264,836 974,875 1,018,096
Redeemable cumulative
preferred securities,
including current portion 173,809 184,109 99,067 109,133
Derivative Financial
and Other Similar
Instruments: (Note 11)
Natural gas and oil swaps:
with unrealized gains 5,519 5,519 35,514 35,514
with unrealized losses 53,166 53,166 18,084 18,084
Natural gas and oil futures:
with unrealized gains 7,899 7,899 2,995 2,995
with unrealized losses 2,351 2,351 568 568
Interest rate swaps:
with unrealized gains 1,154 1,778
with unrealized losses 476 927
=======================================================================================
</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-quoted market prices on the New York
Stock Exchange.
Natural gas and oil and interest rate swaps and futures-estimated amounts that
MCN would receive or pay to terminate the swap agreements and futures, taking
into account current gas and oil prices, interest rates and the
creditworthiness of the 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 and Genix guaranties due to the nature of the
transactions.
The fair value estimates presented herein are based on information available to
management as of December 31, 1996 and 1995. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
13. SUMMARY OF INCOME TAXES
MCN files a consolidated federal income tax return. The income tax provisions
or benefits of MCN's subsidiaries are determined on an individual company
basis. The subsidiaries record income tax payable or receivable from MCN
resulting from the inclusion of its taxable income or loss in MCN's
consolidated tax return.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
============================================================================
<S> <C> <C> <C>
Effective federal income tax rate 23.4% 27.6% 26.1%
==================================
Income taxes consist of:
Current provision $ 603 $ (4,600) $ 46,466
Deferred provision, net 53,528 53,087 (9,218)
Federal tax credits (15,878) (11,271) (7,872)
Investment tax credits, net (1,878) (1,886) (1,886)
----------------------------------
$ 36,375 $ 35,330 $ 27,490
==================================
Reconciliation between statutory and
actual income taxes:
Statutory federal income taxes
at a rate of 35% $ 52,130 $ 44,975 $ 35,730
Adjustments to federal tax expense:
Excess of book over tax depreciation 6,367 7,365 6,119
Adjustments to federal income taxes
provided in prior periods (3,369) (1,337) (3,303)
Amortization of investment tax credit (1,878) (1,886) (1,886)
Federal tax credits (15,878) (11,271) (7,872)
Other, net (997) (2,516) (1,298)
----------------------------------
Total income taxes $ 36,375 $ 35,330 $ 27,490
============================================================================
</TABLE>
55
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Deferred tax assets and liabilities are recognized for the estimated future tax
effect of temporary differences between the tax basis of assets or liabilities
and the reported amounts in the financial statements. Deferred tax assets and
liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The alternative minimum
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) 1996 1995
================================================================================
<S> <C> <C>
Deferred tax assets:
Uncollectibles $ 6,359 $ 5,249
Vacation and other benefits 13,127 10,288
Alternative minimum tax credit carryforward 34,711 11,120
Other 9,432 8,300
------------------------
63,629 34,957
------------------------
Deferred tax liabilities:
Depreciation and other property related basis
differences, net 175,213 126,045
Property taxes 11,178 14,156
Postretirement benefit 9,186 2,783
Gas cost recovery undercollection 8,455 1,785
Other 24,130 22,718
------------------------
228,162 167,487
------------------------
Net deferred tax liability 164,533 132,530
Less: Net deferred tax liability-current 14,695 6,634
------------------------
Net deferred tax liability-noncurrent $149,838 $125,896
================================================================================
</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.
<TABLE>
<Capital>
Capitalized Costs
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
================================================================================
<S> <C> <C>
Proved properties $ 771,817 $ 477,411
Unproved properties 210,084 99,399
----------------------
981,901 576,810
Accumulated depreciation, depletion and amortization 79,426 34,895
----------------------
Net capitalized costs $ 902,475 $ 541,915
================================================================================
</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,
1996, and the year in which they were incurred, follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR COSTS INCURRED
-----------------------------------
1994 &
(IN THOUSANDS) TOTAL 1996 1995 PRIOR
================================================================================
<S> <C> <C> <C> <C>
Acquisition $ 144,976 $ 113,035 $ 23,701 $ 8,240
Exploration 65,108 52,812 12,079 217
------------------------------------------------------
$ 210,084 $ 165,847 $ 35,780 $ 8,457
================================================================================
</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) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Acquisition:
Proved properties $ 60,340 $ 114,956 $ 86,571
Unproved properties 136,142 46,984 40,365
----------------------------------------
196,482 161,940 126,936
Exploration 65,160 39,106 14,921
Development 120,569 98,099 44,362
----------------------------------------
$ 382,211 $ 299,145 $ 186,219
================================================================================
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
================================================================================
Operating revenues:
Unaffiliated customers $ 94,615 $ 32,089 $ 14,532
Affiliated customers 43,326 37,091 18,375
----------------------------------------
137,941 69,180 32,907
----------------------------------------
Production costs 48,255 18,447 8,697
Depreciation, depletion and amortization 44,469 22,518 10,800
----------------------------------------
92,724 40,965 19,497
----------------------------------------
Income before income taxes 45,217 28,215 13,410
----------------------------------------
Income taxes:
Income tax provision 16,438 9,805 4,674
Federal tax credits (15,878) (11,271) (7,872)
----------------------------------------
560 (1,466) (3,198)
----------------------------------------
Results of operations,
excluding corporate and interest costs $ 44,657 $ 29,681 $ 16,608
================================================================================
</TABLE>
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>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)
================================================================================
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year 858,381 4,685 421,988 1,161
Revisions of
previous estimates 3,274 304 (34,581) 859
Extensions and discoveries 204,277 1,985 188,568 730
Production (57,203) (1,086) (31,420) (388)
Purchases of minerals
in place 129,000 11,326 313,826 2,323
--------------------------------------------------
End of year 1,137,729 17,214 858,381 4,685
==================================================
Proved developed reserves:
Beginning of year 563,395 3,349 247,992 1,042
End of year 688,995 9,554 563,395 3,349
================================================================================
</TABLE>
56
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
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 pre-tax 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) 1996 1995 1994
=====================================================================================================
<S> <C> <C> <C>
Future revenues $ 3,867,785 $ 2,143,506 $ 1,084,046
Future production costs 1,322,108 860,134 342,564
Future development costs 340,190 199,284 66,256
------------------------------------------------------------------
Future net cash flows
before income taxes 2,205,487 1,084,088 675,226
Discount to present value at 10% 1,139,507 536,405 357,120
------------------------------------------------------------------
Present value of future net cash
flows before income taxes 1,065,980 547,683 318,106
Future income taxes discounted at
10% 226,913 88,954 56,329
Future tax credits discounted
at 10% (62,207) (63,178) (49,288)
------------------------------------------------------------------
Standardized measure of discounted
future net cash flows $ 901,274 $ 521,907 $ 311,065
=====================================================================================================
</TABLE>
The principle sources of change in the standardized measure of
discounted future net cash flows were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
======================================================================================
<S> <C> <C>
Beginning of year $ 521,907 $ 311,065
Net changes in sales prices and production costs 126,526 (55,262)
Net change due to revisions in quantity estimates 5,061 (21,294)
Extensions, discoveries, additions and
improved recovery, net of related costs 200,026 145,184
Development costs incurred, previously estimated 86,810 75,537
Changes in estimated future development costs (81,069) (50,757)
Sales, net of production costs (89,686) (50,733)
Net change in future income taxes (85,616) (6,381)
Federal tax credits generated (15,878) (11,271)
Purchases of reserves in place 193,550 160,497
Accretion of discount and other 39,643 25,322
----------------------------------
End of year $ 901,274 $ 521,907
======================================================================================
</TABLE>
57
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
15. SEGMENT INFORMATION
The business segments of MCN are defined as follows:
a) Gas Distribution-natural gas distribution and transmission operations; b)
Gas Services-E&P, Pipelines & Processing, Energy Marketing & Power Generation
and Gas Storage; c) Corporate & Other-corporate and other services. In June
1996, MCN sold its computer operations subsidiary, Genix (Note 2d).
Accordingly, Genix has been accounted for as a discontinued operation for
income statement purposes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED ENERGY
-------------------- DISCONTINUED
GAS GAS CORPORATE COMPUTER INTERCOMPANY CONSOLIDATED
(IN THOUSANDS) DISTRIBUTION SERVICES & OTHER OPERATIONS ELIMINATIONS(1) TOTAL
=============================================================================================================================
1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $1,276,254 $ 734,441 $ - $ - $ (13,427) $ 1,997,268
Operating income (loss) 170,484 43,333 (2,524) - - 211,293
Operating and joint venture income (loss) 171,738 57,921 (499) - - 229,160
Depreciation, depletion and amortization 98,814 46,238 938 - - 145,990
Identifiable assets 2,086,325 1,528,338 40,714 - (21,973) 3,633,404
Capital expenditures 215,318 392,275 2,987 6,508 - 617,088
Capital investments 220,393 560,850 2,997 6,508 - 790,748
- -----------------------------------------------------------------------------------------------------------------------------
1995
Operating revenues $1,107,646 $ 400,027 $ - $ - $ (12,441) $ 1,495,232
Operating income (loss) 166,319 24,619 (2,709) - - 188,229
Operating and joint venture income (loss) 167,660 28,561 (2,747) - - 193,474
Depreciation, depletion and amortization 91,314 22,502 769 - - 114,585
Identifiable assets 1,893,888 925,141 21,775 67,714 (9,878) 2,898,640
Capital expenditures 241,567 284,703 6,795 9,380 - 542,445
Capital investments 252,081 420,277 7,100 9,380 - 688,838
- -----------------------------------------------------------------------------------------------------------------------------
1994
Operating revenues $1,136,970 $ 346,500 $ - $ - $ (9,837) $ 1,473,633
Operating income (loss) 136,559 13,383 (2,028) - - 147,914
Operating and joint venture income (loss) 138,560 18,032 (2,389) - - 154,203
Depreciation, depletion and amortization 86,010 11,163 662 - - 97,835
Identifiable assets 1,655,208 517,775 11,225 65,378 (8,613) 2,240,973
Capital expenditures 154,595 193,434 2,740 12,458 - 363,227
Capital investments 153,600 230,678 5,233 12,458 - 401,969
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intercompany eliminations primarily reflect revenues and receivables
related to gas sales and transportation agreements between Gas Distribution and
Gas Services.
16. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC.
Restrictions in the support agreement prohibit recourse on the part of MCNIC's
investors against the stock and assets of MichCon. 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 MCNIC's securities. The carrying value of MCN's assets on an
unconsolidated basis, primarily investments in its subsidiaries other than
MichCon, are $410,354,000 at December 31, 1996.
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, Blue Lake Holdings, Inc., MCN Michigan Limited Partnership and
MCN Financing.
58
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
Consolidating Statement of Financial Position
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATION TOTALS
-------------------------------------------------------------------------------
(IN THOUSANDS) DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost $ 844 $ 19,608 $ 10,010 $ - $ 30,462
Accounts receivable 19,824 198,777 187,143 (24,661) 381,083
Less-Allowance for doubtful accounts 70 710 17,707 - 18,487
----------------------------------------------------------------------------
Accounts receivable, net 19,754 198,067 169,436 (24,661) 362,596
Accrued unbilled revenue 1,132 - 107,377 - 108,509
Gas in inventory - 11,251 67,910 - 79,161
Property taxes assessed applicable to future periods 195 2,179 60,592 - 62,966
Accrued gas cost recovery revenues - - 27,672 - 27,672
Other 1,973 28,315 23,025 (451) 52,862
----------------------------------------------------------------------------
23,898 259,420 466,022 (25,112) 724,228
----------------------------------------------------------------------------
Deferred Charges and Other Assets
Investments in and advances to joint ventures
and subsidiaries 954,479 236,057 19,479 (944,627) 265,388
Deferred swap losses and receivables - 65,051 - - 65,051
Deferred postretirement benefit costs 696 - 4,863 - 5,559
Deferred environmental costs 3,000 - 28,233 - 31,233
Prepaid benefit costs - - 64,307 (5,059) 59,248
Other 4,204 45,104 50,206 827 100,341
----------------------------------------------------------------------------
962,379 346,212 167,088 (948,859) 526,820
----------------------------------------------------------------------------
Property, Plant and Equipment, at Cost 31,967 1,017,296 2,668,294 - 3,717,557
Less-Accumulated depreciation and depletion 10,983 81,158 1,243,060 - 1,335,201
----------------------------------------------------------------------------
20,984 936,138 1,425,234 - 2,382,356
----------------------------------------------------------------------------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
============================================================================
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 5,745 $ 205,073 $ 130,725 $ (23,621) $ 317,922
Notes payable - 71,000 265,126 - 336,126
Current portion of long-term debt, capital lease
obligations and redeemable cumulative preferred
securities 55 31,460 53,232 - 84,747
Federal income, property and other taxes payable 280 12,578 84,788 - 97,646
Customer deposits 21 - 12,860 - 12,881
Other 9,315 25,701 63,309 (452) 97,873
----------------------------------------------------------------------------
15,416 345,812 610,040 (24,073) 947,195
----------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (1,625) 74,940 76,523 - 149,838
Unamortized investment tax credit 331 - 34,588 - 34,919
Tax benefits amortizable to customers 183 - 116,313 - 116,496
Deferred swap gains and payables - 48,365 - - 48,365
Accrued environmental costs 3,000 - 32,000 - 35,000
Minority interest - 306 17,604 1 17,911
Other 15,902 18,466 43,954 (5,059) 73,263
----------------------------------------------------------------------------
17,791 142,077 320,982 (5,058) 475,792
----------------------------------------------------------------------------
Capitalization
Long-term debt, including capital lease obligations 365 701,357 550,318 - 1,252,040
Redeemable preferred securities of subsidiaries 173,809 - - - 173,809
Common shareholders' equity 799,880 352,524 577,004 (944,840) 784,568
----------------------------------------------------------------------------
974,054 1,053,881 1,127,322 (944,840) 2,210,417
----------------------------------------------------------------------------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
====================================================================================================================================
</TABLE>
59
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
Consolidating Statement of Financial Position
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
---------------------------------------------------------------------
(IN THOUSANDS) 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
Other 596 30,417 32,498 (10,025) 53,486
----------------------------------------------------------------------
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 swap losses and receivables - 54,807 - - 54,807
Deferred postretirement benefit costs 740 - 12,372 - 13,112
Deferred environmental costs 3,000 - 32,000 - 35,000
Prepaid benefit costs - - 25,438 (1,611) 23,827
Other 7,501 39,949 42,061 1,115 90,626
-------------------------------------------------- -------------------
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 CAPITALIZATION
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 lease
obligations 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
Customer deposits 19 - 11,531 - 11,550
Other 2,935 20,715 64,587 (662) 87,575
----------------------------------------------------------------------
8,870 191,501 470,125 (18,168) 652,328
----------------------------------------------------------------------
Deferred Credits 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
Deferred swap gains and payables - 51,923 - - 51,923
Accrued postretirement benefit costs 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 11,546 65,252 (1,503) 93,470
----------------------------------------------------------------------
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 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>
60
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP Inc. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
--------------------------------------------------------------------------
(IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 17,469 $ 734,441 $ 1,258,785 $ (13,427) $ 1,997,268
--------------------------------------------------------------------------
Operating Expenses
Cost of gas 9,655 557,340 636,594 (10,011) 1,193,578
Operation and maintenance 785 80,330 294,281 (3,416) 371,980
Depreciation, depletion and amortization 1,940 45,903 98,147 - 145,990
Property and other taxes 2,134 10,531 61,762 - 74,427
--------------------------------------------------------------------------
14,514 694,104 1,090,784 (13,427) 1,785,975
--------------------------------------------------------------------------
Operating Income 2,955 40,337 168,001 - 211,293
--------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 152,368 15,915 886 (151,302) 17,867
--------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 12,675 3,220 3,900 (12,561) 7,234
Interest on long-term debt 114 (25,928) (40,703) - (66,517)
Other interest expense (1,218) (14,595) (8,012) 12,561 (11,264)
Dividends on preferred securities
of subsidiaries - - - (12,374) (12,374)
Gains related to DIGP - 6,384 - - 6,384
Minority interest - ( 71) (988) - (1,059)
Other 190 (1,054) (1,756) - (2,620)
--------------------------------------------------------------------------
11,761 (32,044) (47,559) (12,374) (80,216)
--------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 167,084 24,208 121,328 (163,676) 148,944
Income Tax Provision (Benefit) 1,814 (6,925) 41,486 - 36,375
--------------------------------------------------------------------------
Income From Continuing Operations 165,270 31,133 79,842 (163,676) 112,569
--------------------------------------------------------------------------
Discontinued Operations, Net of Taxes
Income from operations - 1,595 - - 1,595
Gain on sale - 36,176 - - 36,176
--------------------------------------------------------------------------
- 37,771 - - 37,771
-------------------------------------------------------------------------
Net Income 165,270 68,904 79,842 (163,676) 150,340
--------------------------------------------------------------------------
Dividends on Preferred Securities 12,356 - 18 (12,374) -
--------------------------------------------------------------------------
Net Income Available for Common Stock $152,914 $68,904 $79,824 $(151,302) $ 150,340
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 15,162 $ 411,699 $ 1,080,813 $ (12,442) $ 1,495,232
--------------------------------------------------------------------------
Operating Expenses
Cost of gas 7,451 302,273 483,962 (7,493) 786,193
Operation and maintenance 4,027 49,019 294,424 (4,949) 342,521
Depreciation, depletion and amortization 1,671 23,786 89,128 - 114,585
Property and other taxes 1,330 5,362 57,012 - 63,704
--------------------------------------------------------------------------
14,479 380,440 924,526 (12,442) 1,307,003
--------------------------------------------------------------------------
Operating Income 683 31,259 156,287 - 188,229
--------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 98,751 3,300 739 (97,545) 5,245
--------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 9,685 3,551 3,983 (9,478) 7,741
Interest on long-term debt (76) (9,730) (35,047) - (44,853)
Other interest expense (53) (14,421) (7,053) 9,478 (12,049)
Dividends on preferred securities
of subsidiaries - - - (9,610) (9,610)
Minority interest - (2,491) - - (2,491)
Other 1,483 986 (6,182) - (3,713)
--------------------------------------------------------------------------
11,039 (22,105) (44,299) (9,610) (64,975)
--------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 110,473 12,454 112,727 (107,155) 128,499
Income Tax Provision (Benefit) 2,118 (7,792) 41,004 - 35,330
--------------------------------------------------------------------------
Income From Continuing Operations 108,355 20,246 71,723 (107,155) 93,169
Discontinued Operations, Net of Taxes - 3,587 - - 3,587
--------------------------------------------------------------------------
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
================================================================================================================================
</TABLE>
61
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF INCOME
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
---------------------------------------------------------------------------------
(IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1994
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 14,401 $ 357,317 $1,111,678 $ (9,763) $1,473,633
------------------------------------------------------------------------------
Operating Expenses
Cost of gas 7,230 293,285 529,426 (6,505) 823,436
Operation and maintenance 862 30,461 313,575 (3,313) 341,585
Depreciation, depletion and amortization 1,314 12,291 84,230 - 97,835
Property and other taxes 1,244 3,490 58,129 - 62,863
------------------------------------------------------------------------------
10,650 339,527 985,360 (9,818) 1,325,719
------------------------------------------------------------------------------
Operating Income 3,751 17,790 126,318 55 147,914
------------------------------------------------------------------------------
Equity in Earnings of Joint Ventures
and Subsidiaries 81,547 3,332 1,043 (79,633) 6,289
------------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 2,140 3,468 4,064 (2,044) 7,628
Interest on long-term debt (590) (9,667) (27,554) - (37,811)
Other interest expense (152) (3,698) (9,093) 2,044 (10,899)
Dividends on preferred securities of subsidiaries - - - (2,018) (2,018)
Minority interest - (2,879) - - (2,879)
Other (1,376) 367 (5,071) (56) (6,136)
------------------------------------------------------------------------------
22 (12,409) (37,654) (2,074) (52,115)
------------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 85,320 8,713 89,707 (81,652) 102,088
Income Tax Provision (Benefit) 2,585 (4,934) 29,839 - 27,490
------------------------------------------------------------------------------
Income From Continuing Operations 82,735 13,647 59,868 (81,652) 74,598
Discontinued Operations, Net of Taxes - 3,170 - - 3,170
------------------------------------------------------------------------------
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
==================================================================================================================================
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Cash Flow From Operating Activities $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
------------------------------------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net - 19,000 68,491 - 87,491
Capital contributions received from
(distributions paid to) affiliates, net (3,069) 41,195 1,614 (39,740) -
Common stock dividends paid (62,875) - (11,263) 11,263 (62,875)
Preferred securities dividends paid (12,356) - (54) 12,410 -
Issuance of common stock 17,264 - - - 17,264
Issuance of preferred securities 77,218 - - - 77,218
Issuance of long-term debt - 328,895 69,645 - 398,540
Long-term commercial paper and credit
facilities, net - (62,835) - - (62,835)
Retirement of long-term debt and
preferred securities (55) (1,701) (6,384) 1 (8,139)
Other (6,249) - - - (6,249)
-------------------------------------------------------------------------------
Net cash provided from financing activities 9,878 324,554 122,049 (16,066) 440,415
-------------------------------------------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (5,474) (392,181) (212,668) - (610,323)
Sale of Genix - 132,889 - - 132,889
Acquisitions - (133,201) - - (133,201)
Investment in joint ventures and subsidiaries (42,809) (35,793) (278) 42,663 (36,217)
Sale of investment in joint ventures - 36,000 - - 36,000
Other 546 (7,960) (9,256) (22) (16,692)
-------------------------------------------------------------------------------
Net cash used for investing activities (47,737) (400,246) (222,202) 42,641 (627,544)
-------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 676 8,986 1,541 - 11,203
Cash and Cash Equivalents, January 1 168 10,622 8,469 - 19,259
-------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 844 $ 19,608 $ 10,010 $ - $ 30,462
===================================================================================================================================
</TABLE>
62
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
----------------------------------------------------------------------------------
(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 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 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
====================================================================================================================================
<CAPTION>
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 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
====================================================================================================================================
</TABLE>
63
<PAGE> 33
SUPPLEMENTARY FINANCIAL INFORMATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Selected Financial Data (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS-EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Income
Continuing operations $ 112,569 $ 93,169 $ 74,598 $ 70,173 $ 54,537
Discontinued operations 37,771 3,587 3,170 2,617 2,581
-----------------------------------------------------------------
$ 150,340 $ 96,756 $ 77,768 $ 72,790 $ 57,118
=================================================================
Cash Dividends Declared on Common Stock $ 62,875 $ 58,193 $ 51,492 $ 49,527 $ 44,940
=================================================================
Common Stock Data
Earnings per share
Continuing operations $ 1.68 $ 1.44 $ 1.26 $ 1.20 $ 1.00
Discontinued operations .57 .05 .05 .04 .05
-----------------------------------------------------------------
$ 2.25 $ 1.49 $ 1.31 $ 1.24 $ 1.05
=================================================================
Book value per share $ 11.66 $ 10.02 $ 8.56 $ 7.97 $ 7.44
Return on average common shareholders' equity,
excluding gain on sale of Genix 15.8% 16.5% 15.8% 16.1% 14.6%
Common shares outstanding (000):
Actual 67,304 66,370 59,788 58,993 58,292
Average 66,944 64,743 59,394 58,642 54,216
Property, Plant and Equipment
Gas Distribution $2,689,039 $2,496,711 $2,267,187 $2,154,499 $2,034,230
Diversified Energy 1,028,518 663,843 337,638 130,030 63,905
-----------------------------------------------------------------
3,717,557 3,160,554 2,604,825 2,284,529 2,098,135
Less-Accumulated depreciation and depletion 1,335,201 1,223,808 1,112,387 1,047,941 983,038
-----------------------------------------------------------------
$2,382,356 $1,936,746 $1,492,438 $1,236,588 $1,115,097
=================================================================
Assets $3,633,404 $2,898,640 $2,240,973 $1,881,900 $1,648,989
=================================================================
Capital Investments $ 790,748 $ 688,838 $ 401,969 $ 245,611 $ 202,071
=================================================================
Capitalization
Long-term debt and capital lease obligations $1,252,040 $ 993,407 $ 685,519 $ 494,821 $ 379,811
Redeemable cumulative preferred securities 173,809 96,449 98,967 5,618 9,000
Common shareholders' equity 784,568 664,776 511,495 470,168 433,808
-----------------------------------------------------------------
$2,210,417 $1,754,632 $1,295,981 $ 970,607 $ 822,619
=================================================================
Operating Revenues
Gas Distribution
Gas sales $1,102,957 $ 931,940 $ 968,998 $ 979,918 $1,013,013
End user transportation 82,467 80,808 76,483 71,718 70,160
Intermediate transportation 48,570 41,985 39,391 31,397 31,534
Other 42,260 52,913 52,098 58,431 59,952
-----------------------------------------------------------------
Diversified Energy 1,276,254 1,107,646 1,136,970 1,141,464 1,174,659
-----------------------------------------------------------------
Gas and oil sales, transportation and other 734,441 400,027 346,500 289,296 228,137
-----------------------------------------------------------------
Less intercompany transactions 13,427 12,441 9,837 10,006 7,455
-----------------------------------------------------------------
$1,997,268 $1,495,232 $1,473,633 $1,420,754 $1,395,341
=================================================================
Effect of Weather
Degree days 7,170 6,777 6,489 6,675 6,607
Percent colder (warmer) than normal 5.4% .3% (4.2)% (2.2)% (3.7)%
Increase (decrease) from normal in:
Gas markets (MMcf) 10,909 1,488 (4,353) (4,328) (10,218)
Net income $ 9,886 $ 1,415 $ (3,984) $ (3,696) $ (8,728)
Earnings per share $ .15 $ .02 $ (.07) $ (.06) $ (.16)
=======================================================================================================================
</TABLE>
64
<PAGE> 34
SUPPLEMENTARY FINANCIAL INFORMATION
MCN ENERGY GROUP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Selected Financial Data (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Gas and Oil Operating Statistics
Gas Distribution (MMcf):
Gas sales 220,958 209,816 204,384 205,372 203,110
End user transportation 146,895 145,761 140,020 128,643 129,722
Intermediate transportation 527,510 374,428 322,969 302,662 209,360
-----------------------------------------------------------
895,363 730,005 667,373 636,677 542,192
-----------------------------------------------------------
Diversified Energy:
Exploration & Production:
Gas production (MMcf) 57,202 31,420 16,513 2,307 -
Oil production (Mbbl) 1,086 388 85 - -
Gas and oil production (MMcf Equivalent) 63,718 33,748 17,023 2,307 -
Pipelines & Processing (MMcf)(1):
Gas processed 44,223 14,588 1,942 - -
Transportation 86,391 4,994 1,194 294 -
Energy Marketing and Power Generation (MMcf):
Gas sales 218,952 170,668 142,352 122,782 112,263
Exchange gas deliveries 22,586 16,462 13,301 10,016 2,443
-----------------------------------------------------------
241,538 187,130 155,653 132,798 114,706
===========================================================
Gas Distribution Customers
Residential 1,100,101 1,090,039 1,073,306 1,061,679 1,050,533
Total 1,183,443 1,172,613 1,154,545 1,141,986 1,130,165
Employees
Gas Distribution 3,117 3,183 3,328 3,420 3,619
Diversified Energy, excluding discontinued operations 243 219 190 176 49
==================================================================================================================
</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 23,431 and 24,131 holders of record
of MCN common shares at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS OF DOLLARS-EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
1996
Operating revenues $ 790,638 $ 354,464 $ 243,311 $ 608,855 $ 1,997,268
Operating income (loss) $ 135,707 $ 13,732 $ (10,966) $ 72,820 $ 211,293
Operating and joint venture income (loss) $ 139,750 $ 18,574 $ (8,063) $ 78,899 $ 229,160
Net income (loss):
Continuing operations $ 79,054 $ 5,207 $ (13,403) $ 41,711 $ 112,569
Discontinued operations 1,013 36,758 - - 37,771
--------------------------------------------------------------------------
$ 80,067 $ 41,965 $ (13,403) $ 41,711 $ 150,340
==========================================================================
Earnings (loss) per share:
Continuing operations $ 1.19 $ .08 $ (.20) $ .62 $ 1.68
Discontinued operations .01 .55 - - .57
--------------------------------------------------------------------------
$ 1.20 $ .63 $ (.20) $ .62 $ 2.25
==========================================================================
Dividends paid per share $ .2325 $ .2325 $ .2325 $ .2425 $ .9400
Average daily trading volume 96,592 84,515 99,434 89,070 92,417
Price per share
High $ 25.50 $ 25.63 $ 27.63 $ 30.50 $ 30.50
Low $ 21.63 $ 22.75 $ 22.75 $ 26.63 $ 21.63
Close $ 23.13 $ 24.38 $ 26.88 $ 28.88 $ 28.88
- ---------------------------------------------------------------------------------------------------------------------------
1995
Operating revenues $ 526,088 $ 262,343 $ 190,691 $ 516,110 $ 1,495,232
Operating income (loss) $ 105,232 $ 9,889 $ (2,967) $ 76,075 $ 188,229
Operating and joint venture income (loss) $ 106,476 $ 10,712 $ (1,145) $ 77,431 $ 193,474
Net income (loss):
Continuing operations $ 60,561 $ 1,605 $ (9,553) $ 40,556 $ 93,169
Discontinued operations 1,029 707 926 925 3,587
--------------------------------------------------------------------------
$ 61,590 $ 2,312 $ (8,627) $ 41,481 $ 96,756
==========================================================================
Earnings (loss) per share:
Continuing operations $ 1.00 $ .03 $ (.14) $ .62 $ 1.44
Discontinued operations .02 .01 .01 .01 .05
--------------------------------------------------------------------------
$ 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
===========================================================================================================================
</TABLE>
(1) Includes MCN's share of joint ventures.
65
<PAGE> 35
MANAGEMENT'S AND INDEPENDENT AUDITORS' REPORTS
MCN ENERGY GROUP INC. AND SUBSIDIARIES
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The consolidated financial statements of MCN Energy Group Inc. 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
Alfred R. Glancy III
Chairman, President and Chief Executive Officer
WILLIAM K. MCCRACKIN
William K. McCrackin
Vice Chairman and Chief Financial Officer
HAROLD GARDNER
Harold Gardner
Vice President, Controller and Chief Accounting Officer
TO THE BOARD OF DIRECTORS:
We have audited the accompanying consolidated statements of financial position
of MCN Corporation and subsidiaries, doing business as MCN Energy Group Inc.
(the "Corporation"), as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and capitalization for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation'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 the Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 6e to the consolidated financial statements, in 1996 the
Corporation adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 7, 1997
66
<PAGE> 1
EXHIBIT 21.1
MCN CORPORATION: MCN Corporation (MCN or the Corporation), doing business
as MCN Energy Group Inc. since January 14, 1997, is a diversified energy
holding company with natural gas markets and investments throughout North
America. At its 1997 Annual Meeting of Shareholders to be held on April 22,
1997, MCN's Shareholders will vote on a proposed amendment to the MCN Articles
of Incorporation to change the name of the Corporation to MCN Energy Group Inc.
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 groups are Gas
Distribution and Diversified Energy. In June 1996, MCN completed the sale of
its computer operations subsidiary, The Genix Group, Inc. (Genix), to
Affiliated Computer Services, Inc. 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
<PAGE> 2
1. Michigan Consolidated Homes Limited Dividend Housing Corporation
a/k/a MichCon Homes, 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. (Blue Lake), 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, the other half is
owned by Storage Development Company, a subsidiary of MCNIC. In
February 1997, Diversified Energy signed an agreement to sell its
share of Blue Lake effective December 1997.
4. MichCon Fuel Services Company markets natural gas as a vehicular
fuel.
5. MichCon Pipeline Company, through the subsidiaries below, is engaged
in pipeline projects.
a. MichCon Gathering Company owns and operates the Antrim Expansion
Pipeline.
b. 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.
c. 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.
d. Westside Pipeline Company invests in various pipeline assets
through its 82.62% interest in the Jordan Valley Partnership.
On January 1, 1996 Westside Pipeline Company transferred its
interests in Warner Treating Limited Liability Company and
Terra Westside Processing Company to MCNIC Michigan Holdings,
Inc. In addition, Westside Pipeline Company transferred its 6
mile pipeline to MCNIC Michigan Holdings, Inc. Westside Pipeline
Company was then transferred from MCNIC to MichCon.
e. Thunder Bay Gathering Company was formed in 1996 and holds an
option to acquire the Thunder Bay Pipeline.
6. Huron Pipeline Company was formed in 1996 to acquire an ownership
interest in the ANR Link Pipeline, which interconnects with a
pipeline owned by Niagara Gas Transmission Limited, a subsidiary of
The Consumers Gas Co. Ltd.
7. G-T Energy Concepts, Inc. ceased business operations on August 31,
1996 and is planned to be dissolved during 1997. G-T Energy
Concepts, Inc., developed a natural gas torch and the related
fueling modules which were adapted for use in metal cutting, brazing
and soldering.
8. Fuel Concepts, Inc. was sold on December 6, 1996. Fuel Concepts,
Inc., was involved in the development and commercialization of low
pressure natural gas storage and related technologies.
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 140 years.
Citizens serves approximately 14,000 residential, commercial and
2
<PAGE> 3
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 was subject to MCN obtaining authorization from
the SEC for the acquisition under Section 9(a)(2) of PUHCA of 1935. In
September 1996, MCN received notification from the SEC that the
acquisition was consistent with its exemption under PUHCA of 1935.
Southern Missouri Gas Company, L.P. ("SMGC") was formed effective
November 1, 1996.
SMGC is a public utility engaged in the distribution and transmission of
natural gas. SMGC, with its predecessors, has been in business since
1995. At year-end 1996 SMGC served approximately 4,000 residential,
commercial, and industrial customers in southern Missouri. The
principal executive offices of SMGC are located at 301 East 17th Street,
Mountain Grove, Missouri 65711. SMGC conducts all of its business in the
state of Missouri and is subject to the jurisdiction of the Missouri Public
Service Commission as to various phases of its operations, including gas
sales rates, service, and accounting.
DIVERSIFIED ENERGY
D. MCN INVESTMENT CORPORATION: MCNIC, organized in 1986, is the holding
company for MCN's various diversified energy subsidiaries. MCNIC's major
business segment is Gas Services. In the Gas Services segment, MCNIC,
through its subsidiaries and joint ventures, engages in gas and oil
exploration and production (E&P), provides pipeline and processing
services, provides gas storage services, markets natural gas to
large-volume customers and develops gas cogeneration and electric
generation facilities. The sale of MCNIC's computer operations services
subsidiary, Genix, was completed in June 1996. Except where otherwise
indicated, the companies set forth below are wholly owned subsidiaries of
MCNIC.
Gas Services
Exploration & Production
1. MCNIC Oil & Gas Company (MOG), formerly known as
Supply Development Group, Inc., is engaged in natural gas and
oil exploration, development and production in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western
regions of the U.S. Effective December 31, 1996, Huron Energy
Company was merged into MOG. The following companies are
direct subsidiaries of MOG:
a. Elmira Antrim Company
b. Geo Trend Exploration, Inc.
c. Green Oak Development Company
d. Green River Antrim Company
e. Otsego Exploration Company, L.L.C.
f. MCNIC Enhanced Production, Inc. (formerly known as
CoEnergy Enhanced Production, Inc.), has a 75% interest
in Otsego EOR, L.L.C.
g. MCNIC Oil & Gas Midcontinent, Inc., as the surviving
entity after merger with CoEnergy Anadarko, Inc., MCNIC Oil
& Gas Operating Company (formerly known as CoEnergy
Operating Company), CoEnergy Midcontinent, Inc., and P'Bell
Energy Company.
3
<PAGE> 4
h. MCNIC Oil & Gas Canada, Inc. (a New Brunswick
corporation), (formerly known as CoEnergy Canadian
Exploration, Inc.)
i. MCNIC Oil & Gas Properties, Inc. (formerly known as
CoEnergy Rockies, Inc.). Effective February 28, 1997,
PetroVentures Exploration Company, Southwest Gas Supply,
Inc., MGS Development Company and CoEnergy Central
Exploration, Inc. will be merged into MCNIC Oil & Gas
Properties, Inc.
j. MCNIC Oil & Gas Reid Properties, Inc. (a Delaware
corporation), (formerly known as Reid Holdings, Inc.)
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.
iii. MCNIC Oakwood Gathering, Inc. (a Delaware
corporation), (formerly Oakwood Gathering, Inc.)
k. MCNIC West Coast Company
l. Warner Antrim Company
Pipelines & Processing
MCNIC's Pipelines & Processing businesses are involved in ventures that
gather and transport natural gas from producing fields to processing plants
and/or markets. This business also includes plants which process natural gas to
remove CO2 and other impurities and recover natural gas liquids. Additionally
this segment has an investment in a methanol production facility.
2. MCNIC Pipeline & Processing Company, formerly known as
Pipeline & Processing Group, Inc., engages in pipeline and
processing projects through the following subsidiaries and
partnerships.
a. MCNIC Offshore Pipeline & Processing Company (formerly
known as CoEnergy Offshore Pipeline & Processing Company),
holds a 33% interest in the Blue Dolphin System.
b. MCNIC Michigan Holdings, Inc., (formerly known as Otsego
Holdings, Inc.)
i. MCNIC CSG Pipeline Company (formerly known as CoEnergy
CSG Pipeline Company), holds a 50% interest in
Cardinal States Gathering.
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)
c. MCNIC East Coast Pipeline Company (formerly known as East
Coast Pipeline Company), holds a 20% interest in Portland
Natural Gas Transmission System.
d. MCNIC Jonah Pipeline Company (formerly known as Jonah
Pipeline Company), holds a 33% partnership interest in
Jonah Gas Gathering Company.
e. MCNIC Gulf Coast Gathering Corporation, holds a 1% general
partnership interest in Copano Field Services Group, L.P.
f. MCNIC Gulf Coast Limited, Inc., holds a 49% limited
partnership interest in Copano Field Services Group, L.P.
g. MCNIC Mobile Bay Gathering Company holds a 35% interest in
Dauphin Island Gathering Partners.
h. MCNIC Mobile Bay Processing Company holds a 49.5% interest
in Mobile Bay Processing Partners.
i. MCNIC South Texas Gathering Company holds a 1% general
partnership interest in each of CFS/Copano Bay, L.P.,
CFS/South Texas, L.P., and CFS/Agua Dulce, L.P.
4
<PAGE> 5
j. MCNIC Rodeo Gathering, Inc. (formerly known as Rodeo
Gathering, Inc.) holds an 80% interest in Black Bear
Venture, L.L.C.
k. MCNIC General Methanol Company holds a 1% general
partnership interest in Lyondell Methanol Company, L.P.
l. MCNIC Methanol Holdings Company holds a 24% limited
partnership interest in Lyondell Methanol Company, L.P.
Gas Storage
3. 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.
Storage Development Company holds a 33% interest in South
Romeo Gas Storage Corporation.
a. South Romeo Gas Storage Company, a Michigan partnership
in which Storage Development Company has a 50% interest,
owns and operates the Washington 28 Storage Field, a
10 Bcf storage field in southeastern Michigan which
provides storage services to MCNIC's Energy & Power
Generation operations. South Romeo Gas Storage Company
holds a 33% interest in South Romeo Gas Storage
Corporation.
b. W-10 Holdings, Inc., holds a 50% interest in a
partnership that intends to develop and operate the
Washington 10 Storage Field, 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.
Energy Marketing & Power Generation
MCNIC's Energy Marketing & Power Generation 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 and electric generation related projects
and facilities.
4. 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, a
50% interest in Torch-CoEnergy Limited Liablity Company and a
50% interest in Michigan Gas Exchange LLC.
5. CoEnergy Canadian Holdings, Ltd., a New Brunswick corporation,
was formed to market and sell natural gas in Canada and the
northeastern United States.
6. CoEnergy Supply Company engages in the purchase and sale of
natural gas, a portion of which is produced by MOG, an
affiliate.
5
<PAGE> 6
7. MCNIC Power Company, formerly known as Cogen Development
Company, pursues cogeneration related opportunities
throughout the United States and Canada.
a. CDC Ada, Inc., is a 99% limited partner in Ada
Cogeneration Limited Partnership, which owns and operates
a 30 megawatt natural gas-fueled cogeneration facility in
western Michigan.
b. MCNIC Ada GP, Inc., was formed in 1996 to hold the 1%
general partnership interest in the Ada Cogeneration
Limited Partnership.
c. Ludington Cogeneration Co. is the 1% general partner in
Michigan Power L.P., a joint venture that built and
operates a 123 megawatt natural gas-fueled cogeneration
plant in western Michigan.
d. Ludington Cogeneration Holdings, Ltd. is a 49% limited
partner in the 123 megawatt cogeneration plant mentioned
above.
Gas Technology
8. Combustion Concepts, Inc., is engaged in the development of
pressurized combustion technologies which provides increased
fuel efficiency, heat uniformity and compactness of equipment.
Other
9. MCNIC International Holdings and MCNIC - GP International
Holdings, each of Grand Cayman, Cayman Islands, hold a 99% and
1% interest, respectively, in IG-ONE LTD of Port-Louis,
Mauritius. Subject to certain regulatory and other approvals,
MCNIC, through IG-ONE LTD, has agreed to invest approximately
$115 million (of which half will be funded through nonrecourse
financing) in return for a 40 percent interest in Torrent
Power Private Limited, a joint venture with Torrent Group of
Ahmedabad, India. The joint venture will be involved in the
electric generation and distribution business in western
India.
COMPUTER OPERATIONS SERVICES (SOLD JUNE 1996 - DISCONTINUED OPERATIONS)
MCNIC completed the sale of its computer operations services subsidiary,
Genix, in June 1996. At the time of its sale, Genix and its subsidiaries made
up the largest Michigan based computer operations management firm and one of
the top ten in the United States.
1. The Genix Group, Inc., through the subsidiaries listed below,
provided computer operations management, data processing,
network design and management, large-scale electronic
printing and mailing and business process solution services.
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.
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.
F. MCN FINANCING I: MCN is the sole owner of MCN Financing I, a Delaware
Business Trust. MCN Financing I exists for the sole purpose of issuing
preferred securities to the public and lending the gross proceeds thereof
to MCN in exchange for MCN's Junior Subordinated Debentures.
G. MCN FINANCING II: MCN is the sole owner of MCN Financing II, a Delaware
Business Trust. MCN Financing II exists for the sole purpose of issuing
preferred securities and lending the gross proceeds thereof to MCN.
6
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-02105 and 333-02107 on Form S-8,333-01521 and 333-01523 on Form S-3 and
Post-Effective Amendment No. 1 to Registration Statement No. 33-21930-99 on Form
S-8 of MCN Corporation, doing business as MCN Energy Group Inc. (the
"Corporation"), of our reports dated February 7, 1997 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Corporation's adoption of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"), appearing in and incorporated by
reference in this Annual Report of Form 10-K of the Corporation for the year
ended December 31, 1996.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 28, 1997
<PAGE> 1
EXHIBIT 23-2
February 28, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
RE: MCN Corporation
1996 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 10, 1997,
regarding MCN Corporation oil and gas reserve information as of December 31,
1996, in its 1996 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.
333-02105 and 333-02107 on Form S-8, 333-01521, 333-01523 and 33-57115 on Form
S-3 and Post Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Corporation.
Ryder Scott Company Petroleum Engineers has no interest in MCN Corporation or
in any affiliated companies or subsidiaries and is not to receive such interest
as payment for such reports and has no director, officer, or employee otherwise
connected with MCN Corporation. We are not employed by MCN Corporation on a
contingent basis.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
<PAGE> 1
EXHIBIT 23-3
February 28, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
RE: MCN Corporation
1996 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 15, 1997, regarding MCN
Corporation oil and gas reserve information as of December 31, 1996, in its
1996 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. 333-02105 and 333-02107 on Form
S-8, 333-01521, 333-01523 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.
Very truly yours,
MILLER AND LENTS, LTD.
By P.G. Von Tungeln
Chairman
<PAGE> 1
EXHIBIT 23-4
February 28, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
RE: MCN Corporation
1996 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 7, 1997, regarding MCN Corporation oil and gas reserve information as
of December 31, 1996, in its 1996 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. 333-02105 and
333-02107 on Form S-8, 333-01521, 333-01523 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 truly yours,
LEE KEELING AND ASSOCIATES, INC.
PETROLEUM CONSULTANTS
<PAGE> 1
EXHIBIT 23.5
February 28, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
Re: MCN Corporation
1996 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 30, 1996, regarding
MCN Corporation oil and gas reserve information as of December 31, 1996, in its
1996 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. 333-02105 and
333-02107 on Form S-8, 333-01521, 333-01523 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 truly yours,
W. Denton Copeland, P.E.
Vice President, S.A. Holditch & Associates, Inc.
<PAGE> 1
EXHIBIT 23.6
February 28, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
Re: MCN Corporation
1996 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Questa Engineering Corporation consents to the use of its name and
the information contained in its report dated January 6, 1997, regarding MCN
Corporation oil and gas reserve information as of December 31, 1996, in its
1996 Annual Report on Form 10-K.
In addition Questa Engineering Corporation consents to the incorporation by
reference of said material in Registration Statement Nos. 333-02105 and
333-02107 on Form S-8, 333-01521, 333-01523 and 33-57115 on Form S-3 and Post
Effective Admendment No. 1 to Registration Statement No. 33-21930-99 on Form
S-8 of MCN Corporation.
Questa Engineering Corporation has no interest in MCN Corporation or in any
affiliated companies or subsidiaries and its not to receive such interest as
payment for such reports and has no director, officer, employee otherwise
connected with MCN Corporation. We are not employed by MCN Corporation on a
contingent basis.
Very truly yours,
QUESTA ENGINEERING CORPORATION
John D. Wright
President
<PAGE> 1
EXHIBIT 23-7
February 25, 1997
MCN Corporation
500 Griswold
Detroit, Michigan 48226
RE: MCN Corporation
1996 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Advanced Resources International, Inc. consents to the use of its
name and the information contained in its report dated January 21, 1997,
regarding MCN Corporation oil and gas reserve information as of December 31,
1996, in its 1996 Annual Report on Form 10-K.
In addition Advanced Resources International, Inc. consents to the
incorporation by reference of said material in Registration Statement Nos.
333-02105 and 333-02107 on Form S-8, 333-01521, 333-01523 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.
Advanced Resources International, 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 truly yours,
Vello A. Kuusakraa
President
<PAGE> 1
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Stephen E. Ewing
------------------------
Stephen E. Ewing
<PAGE> 2
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ William K. McCrackin
-------------------------
William K. McCrackin
<PAGE> 3
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Roger Fridholm
-----------------------
Roger Fridholm
<PAGE> 4
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Frank M. Hennessey
------------------------
Frank M. Hennessey
<PAGE> 5
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Thomas H. Jeffs II
-----------------------
Thomas H. Jeffs II
<PAGE> 6
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Bill M. Thompson
----------------------
Bill M. Thompson
<PAGE> 7
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Dale A. Johnson
---------------------
Dale A. Johnson
<PAGE> 8
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Helen O. Petrauskas
------------------------
Helen O. Petrauskas
<PAGE> 9
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Alfred R. Glancy III, Daniel
L. Schiffer and Harold Gardner, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Howard F. Sims
---------------------
Howard F. Sims
<PAGE> 10
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, 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, 1996, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Harold Gardner
--------------------
Harold Gardner
<PAGE> 11
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN CORPORATION, a Michigan
corporation, does hereby constitute and appoint, Daniel L. Schiffer and Harold
Gardner, 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, 1996, including
all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 26th day
of February, 1997.
/s/ Alfred R. Glancy III
-------------------------
Alfred R. Glancy III
<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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,462
<SECURITIES> 0
<RECEIVABLES> 381,083
<ALLOWANCES> 18,487
<INVENTORY> 79,161
<CURRENT-ASSETS> 724,228
<PP&E> 3,717,557
<DEPRECIATION> 1,335,201
<TOTAL-ASSETS> 3,633,404
<CURRENT-LIABILITIES> 947,195
<BONDS> 1,252,040
173,809
0
<COMMON> 673
<OTHER-SE> 783,895
<TOTAL-LIABILITY-AND-EQUITY> 3,633,404
<SALES> 0
<TOTAL-REVENUES> 1,997,268
<CGS> 0
<TOTAL-COSTS> 1,785,975
<OTHER-EXPENSES> 2,620
<LOSS-PROVISION> 29,425
<INTEREST-EXPENSE> 77,781
<INCOME-PRETAX> 148,944
<INCOME-TAX> 36,375
<INCOME-CONTINUING> 112,569
<DISCONTINUED> 1,595
<EXTRAORDINARY> 36,176
<CHANGES> 0
<NET-INCOME> 150,340
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 0
</TABLE>
