<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
500 GRISWOLD STREET, DETROIT, MICHIGAN
(Address of principal executive offices)
38-2820658
(I.R.S. Employer
Identification No.)
48226
(Zip Code)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of April 30, 1998:
Common Stock, par value $.01 per share: 78,817,533
================================================================================
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders............................................. 26
Item 6. Exhibits and Reports on Form 8-K.................... 27
SIGNATURE................................................... 28
</TABLE>
ii
<PAGE> 3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings continue to generate solid returns -- Although MCN generated solid
results for the 1998 quarter, its earnings declined slightly by 1.6% or $1.3
million from the 1997 quarter. However, earnings from continuing operations for
the 1998 twelve-month period increased 22.3% or $25.7 million over the
comparable 1997 period. As discussed below, this performance reflects the
successful implementation of MCN's diversified portfolio strategy.
MCN's twelve-month period earnings comparison was also affected by income from
discontinued operations. As discussed in the "Discontinued Operations" section
that follows, MCN sold The Genix Group, Inc. (Genix) during the second quarter
of 1996.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
---------------- ------------------
1998 1997 1998 1997
----- ----- ------ ------
<S> <C> <C> <C> <C>
NET INCOME (in Millions)
Continuing Operations:
Diversified Energy...................................... $17.8 $17.9 $ 61.2 $ 41.3
Gas Distribution........................................ 62.7 63.9 79.8 74.0
----- ----- ------ ------
80.5 81.8 141.0 115.3
----- ----- ------ ------
Discontinued Operations:
Income from operations.................................. -- -- -- .6
Gain on sale............................................ -- -- -- 36.2
----- ----- ------ ------
-- -- -- 36.8
----- ----- ------ ------
$80.5 $81.8 $141.0 $152.1
===== ===== ====== ======
DILUTED EARNINGS PER SHARE
Continuing Operations:
Diversified Energy...................................... $ .23 $ .26 $ .83 $ .61
Gas Distribution........................................ .74 .93 .98 1.08
----- ----- ------ ------
.97 1.19 1.81 1.69
----- ----- ------ ------
Discontinued Operations:
Income from operations.................................. -- -- -- .01
Gain on sale............................................ -- -- -- .53
----- ----- ------ ------
-- -- -- .54
----- ----- ------ ------
$ .97 $1.19 $ 1.81 $ 2.23
===== ===== ====== ======
</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 essentially unchanged despite plunge in oil prices -- The Diversified
Energy group reported earnings of $17.8 million in the 1998 quarter, virtually
unchanged from the 1997 quarter. These results reflect the effect of lower oil
prices on operating and joint venture income as well as higher financing costs,
which were offset by gains from the strategic sale of certain assets. Earnings
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
for the 1998 twelve-month period increased by $19.9 million over last year's
twelve-month period, resulting from increased operating and joint venture income
posted by all of MCN's Diversified Energy business units. Earnings for the
twelve-month period were also affected by asset sales and higher financing
costs.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*..................................... $271.9 $260.2 $963.0 $737.2
Operating Expenses*..................................... 264.3 242.8 913.2 691.4
------ ------ ------ ------
Operating Income........................................ 7.6 17.4 49.8 45.8
------ ------ ------ ------
Equity in Earnings of Joint Ventures.................... 16.3 13.4 56.1 26.3
------ ------ ------ ------
Other Income and (Deductions)*
Interest income....................................... 3.3 1.2 8.8 3.1
Interest expense...................................... (9.9) (10.2) (31.9) (31.3)
Dividends on preferred securities of subsidiaries..... (9.8) (4.3) (36.6) (14.3)
Gains related to DIGP (Note 2c)....................... -- -- 2.4 6.4
Other................................................. 12.8 2.8 17.7 2.6
------ ------ ------ ------
(3.6) (10.5) (39.6) (33.5)
------ ------ ------ ------
Income Before Income Taxes.............................. 20.3 20.3 66.3 38.6
------ ------ ------ ------
Income Taxes
Current and deferred provision........................ 6.5 6.4 22.9 13.3
Federal tax credits................................... (4.0) (4.0) (17.8) (16.0)
------ ------ ------ ------
2.5 2.4 5.1 (2.7)
------ ------ ------ ------
Net Income.............................................. $ 17.8 $ 17.9 $ 61.2 $ 41.3
====== ====== ====== ======
</TABLE>
*Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income decreased $6.9 million in the 1998 quarter
and increased $33.8 million for the current twelve-month period. Earnings for
the current quarter reflect the continued growth within the Pipelines &
Processing business and the Energy Marketing, Gas Storage & Electric Power
business which were more than offset by reduced contributions from the
Exploration & Production (E&P) business. Results for the 1998 twelve-month
period were driven by increased earnings from all of Diversified Energy's
business units, particularly within the Pipelines & Processing and Energy
Marketing, Gas Storage & Electric Power businesses which more than doubled last
year's contributions.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME (in Millions)
Exploration & Production................................ $ 8.7 $ 18.1 $ 48.7 $ 44.8
Pipelines & Processing.................................. 9.4 7.2 31.4 15.4
Energy Marketing, Gas Storage & Electric Power.......... 8.6 7.0 31.4 13.5
Corporate & Other....................................... (2.8) (1.5) (5.6) (1.6)
------ ------ ------ ------
$ 23.9 $ 30.8 $105.9 $ 72.1
====== ====== ====== ======
</TABLE>
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EXPLORATION & PRODUCTION operating and joint venture income decreased by $9.4
million for the 1998 quarter, but increased by $3.9 million for the 1998
twelve-month period. Several factors have combined to contribute to these
variations from the prior year, specifically an increase in gas and oil
production, a plunge in oil prices, and the strategic sale in 1997 of certain
E&P properties located in the Midcontinent/Gulf Coast region. Overall gas and
oil production increased by 3.7 billion cubic feet (Bcf) equivalent and 29.7 Bcf
equivalent in the current quarter and twelve-month period, respectively, due to
the development and acquisition of properties acquired over the past few years.
Earnings for both 1998 periods were impacted by a slight increase in the average
gas sales price per thousand cubic feet (Mcf) and a sharp decline in the average
oil sales price. Oil prices declined by $6.86 per barrel (Bbl) or 33.7% in the
1998 quarter and $5.04 per Bbl or 24.5% in the current twelve-month period. The
impact on E&P operating and joint venture income of fluctuations in natural gas
and oil sales prices in the marketplace was mitigated by hedging with swap and
futures agreements, as discussed in the "Risk Management Strategy" section that
follows.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf).................................... 20.5 18.7 80.1 63.4
Oil Production (million Bbl)............................ .9 .6 3.6 1.5
Gas and Oil Production (Bcf equivalent)................. 25.7 22.0 102.0 72.3
Average Gas Selling Price (per Mcf)..................... $ 2.10 $ 2.71 $ 2.20 $ 2.40
Effect of Hedging (per Mcf)............................. (.05) (.70) (.24) (.45)
------ ------ ------ ------
Overall Average Gas Sales Price (per Mcf)............... $ 2.05 $ 2.01 $ 1.96 $ 1.95
====== ====== ====== ======
Average Oil Selling Price (per Bbl)..................... $13.04 $22.40 $15.32 $21.30
Effect of Hedging (per Bbl)............................. .43 (2.07) .22 (.72)
------ ------ ------ ------
Overall Average Oil Sales Price (per Bbl)............... $13.47 $20.33 $15.54 $20.58
====== ====== ====== ======
</TABLE>
E&P year-to-year earnings comparisons were also impacted by a $4.7 million
pre-tax gain that was recorded in the first quarter of 1997 from the sale of
undeveloped properties. Also impacting the earnings comparisons was the sale of
proved producing properties during mid-1997, which tempered the increase in gas
and oil production during 1998. Additionally, E&P's operating results were
affected by higher depreciation, depletion and amortization expense.
PIPELINES & PROCESSING operating and joint venture income increased $2.2 million
and $16.0 million for the 1998 quarter and twelve-month period, respectively.
These results primarily reflect a significant increase in transportation volumes
resulting from the acquisition and expansion of pipeline facilities during 1997.
Volumes transported during the 1998 quarter more than doubled those of the
comparable 1997 period, and transportation volumes for the 1998 twelve-month
period increased 65%. Pipelines & Processing results also reflect contributions
from the acquisition of a 25% interest in Lyondell Methanol Company, L.P.
(Lyondell), a limited partnership formed in December 1996 that owns and operates
a 248 million gallon-per-year methanol production plant. Earnings from Lyondell
benefited from strong methanol prices during 1997, but average prices
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
declined 21% in the 1998 quarter compared to the 1997 quarter. Results for both
1998 periods also reflect a higher level of volumes treated through gas
processing plants.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
---------------- ------------------
1998 1997 1998 1997
----- ----- ------- -----
<S> <C> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)........................................ 12.3 9.8 45.3 44.9
Methanol Produced (million gallons)........................ 15.5 15.3 61.1 25.8
Transportation (Bcf)....................................... 41.9 18.9 138.9 84.2
</TABLE>
* Includes MCN's share of joint ventures
ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER operating and joint venture
income for the 1998 quarter and twelve-month period increased by $1.6 million
and $17.9 million, respectively. The increase in earnings for all periods
primarily resulted from the second quarter 1997 acquisition of an 18% interest
in Midland Cogeneration Venture L.P., a limited partnership that owns a
gas-fired cogeneration facility capable of producing up to 1,370 megawatts (MW)
of electricity and 1.35 million pounds per hour of process steam. Also
contributing to the favorable results were contributions from the March 1997
acquisition of a 40% interest in an India joint venture which holds minority
interests in electric distribution companies and power generation facilities in
the state of Gujarat, India. As a result of these acquisitions, Electric Power
earnings reflect a significantly higher level of electricity sales.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
---------------- ------------------
1998 1997 1998 1997
----- ----- ------- -----
<S> <C> <C> <C> <C>
ENERGY MARKETING STATISTICS*
Gas Sales (Bcf)............................................ 115.3 88.2 370.8 236.3
Exchange Deliveries (Bcf).................................. 6.5 8.7 12.9 21.9
----- ----- ------- -----
121.8 96.9 383.7 258.2
===== ===== ======= =====
Electricity Sales (thousands of megawatt hours)............ 861.8 180.5 2,524.6 713.9
===== ===== ======= =====
</TABLE>
* Includes MCN's share of joint ventures
Energy Marketing's operating results reflect an increase in total gas sales and
exchange deliveries of 25.7% and 48.6% during the 1998 quarter and twelve-month
period, respectively. Also affecting Energy Marketing's results were lower
margins on gas sales during both 1998 periods as compared to the same 1997
periods.
RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its
portfolio of gas and oil supply and sales agreements. MCN has hedged a
significant portion of its gas 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 that are
periodically reviewed 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 recorded by Energy Marketing.
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CORPORATE & OTHER operating and joint venture losses are due mainly to the
increased proportion of administrative expenses associated with corporate
management activities charged to Diversified Energy, reflecting its growing
percentage of MCN's business. The 1997 twelve-month period also includes a $1.7
million gain from the sale of land by a 50%-owned real estate joint venture.
OTHER INCOME AND DEDUCTIONS
Both 1998 periods reflect higher dividends resulting from the issuance of $132
million of preferred securities in March 1997, and $200 million of preferred
securities in June 1997. The 1998 twelve-month period also reflects higher
interest costs on increased borrowings required to finance capital investments
in the Diversified Energy group. Partially offsetting the preferred dividends
and interest costs was increased interest income resulting from a $46 million
advance made to a Philippine independent power producer (Note 2a).
Other income and deductions comparisons were affected by $9.9 million of pre-tax
gains recorded in the 1998 quarter from the sale of certain gas sales contracts
and a 50% interest in the 30 MW Ada cogeneration facility. The 1998 twelve-month
period also reflects a $3.2 million pre-tax gain from the December 1997 sale of
Diversified Energy's interest in the 46 Bcf Blue Lake storage project. The 1998
and 1997 twelve-month periods were affected by gains related to Dauphin Island
Gathering Partners (DIGP). In a series of transactions during 1996, MCN sold 64%
of its 99% interest in the DIGP partnership, resulting in pre-tax gains totaling
$8.8 million. Of this amount, $2.4 million was deferred until the third quarter
of 1997, when a related option agreement expired unexercised (Note 2c).
INCOME TAXES
The increase in the current and deferred income tax provision for the 1998
twelve-month period reflects higher pre-tax earnings. Partially offsetting this
increase in taxes was an increase in the level of gas production tax credits
generated from E&P projects.
OUTLOOK
MCN intends to continue the growth of its business by investing in
energy-related projects that generate attractive returns. MCN is slowing its
1998 drilling program as a result of lower oil prices and lower-than-expected
exploratory drilling results in the Midcontinent/Gulf Coast region. MCN formed
partnerships in 1997 to construct six plants, which will produce coal briquettes
from particles of coal. In May 1998, MCN received a favorable Internal Revenue
Service ruling in connection with its coal fines project. The economic viability
of the coal fines venture is dependent upon qualifying for synthetic fuel tax
credits by bringing the plants in service by June 30, 1998. MCN is working to
meet the required in-service date for all six plants.
Additionally, MCN will focus on expanding its Energy Marketing coverage within
existing markets as well as entering new markets through strategic alliances
with other energy providers. MCN intends to expand aggressively its electric
power business, especially within international markets where MCN is currently
negotiating investments in several projects. In addition, MCN will continue to
pursue opportunities to sell properties in order to optimize its portfolio.
MCN has minority interests in electric distribution companies and power
generation facilities and is pursuing the development of several other projects
in India. The United States and several other countries have imposed or are
considering imposing economic sanctions on India as a result of its nuclear
testing program. MCN is currently evaluating the impact of such sanctions but
does not expect them to have a material adverse effect on its financial
statements.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
Results reflect warmer weather and cost-saving initiatives -- The Gas
Distribution group reported a marginal decline in earnings of $1.2 million for
the 1998 quarter, and an increase of $5.8 million for the 1998 twelve-month
period. Earnings were reduced by lower gross margins resulting from reduced gas
sales and end user transportation deliveries due to warmer weather, offset by
significantly lower operating expenses.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
------------------ ----------------------
1998 1997 1998 1997
------ ------ -------- --------
<S> <C> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
Gas sales.......................................... $372.9 $481.7 $ 971.3 $1,096.8
End user transportation............................ 25.1 26.0 83.8 82.1
Intermediate transportation........................ 18.0 14.8 58.4 51.9
Other.............................................. 19.4 11.9 58.8 41.2
------ ------ -------- --------
435.4 534.4 1,172.3 1,272.0
Cost of Gas.......................................... 220.7 307.1 555.6 650.8
------ ------ -------- --------
Gross Margin......................................... 214.7 227.3 616.7 621.2
------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.......................... 63.1 75.2 274.6 303.7
Depreciation, depletion and amortization........... 22.7 25.7 101.4 100.0
Property and other taxes........................... 17.5 17.9 61.0 61.8
------ ------ -------- --------
103.3 118.8 437.0 465.5
------ ------ -------- --------
Operating Income..................................... 111.4 108.5 179.7 155.7
------ ------ -------- --------
Equity in Earnings of Joint Ventures................. .5 1.0 2.0 1.9
------ ------ -------- --------
Other Income and (Deductions)*
Interest income.................................... 1.0 1.2 4.5 4.6
Interest expense................................... (15.4) (13.7) (56.2) (52.9)
Minority interest.................................. (.7) (.3) (2.3) (1.0)
Other.............................................. .1 .2 .4 2.0
------ ------ -------- --------
(15.0) (12.6) (53.6) (47.3)
------ ------ -------- --------
Income Before Income Taxes........................... 96.9 96.9 128.1 110.3
Income Taxes......................................... 34.2 33.0 48.3 36.3
------ ------ -------- --------
Net Income........................................... $ 62.7 $ 63.9 $ 79.8 $ 74.0
====== ====== ======== ========
</TABLE>
* Includes intercompany transactions
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GROSS MARGIN
Gas Distribution gross margin (operating revenues less cost of gas) decreased
$12.6 million and $4.5 million for the 1998 quarter and twelve-month period,
respectively, reflecting lower gas sales and end user transportation deliveries
because of the warmer weather. These declines were partially offset by increased
revenues from the continued growth in intermediate transportation and other
gas-related services.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
----------------- ----------------
1998 1997 1998 1997
------ ----- ------ ----
<S> <C> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) Than Normal..................... (18.8)% (3.3)% (6.9)% 1.0%
Increase (Decrease) From Normal in:
Gas markets (in Bcf)..................................... (19.2) (3.1) (15.5) 2.4
Net income (in millions)................................. $(16.7) $(2.8) $(13.5) $2.2
Diluted earnings per share............................... $ (.20) $(.04) $ (.17) $.03
</TABLE>
GAS SALES AND END USER TRANSPORTATION revenues in total decreased by $109.7
million and $123.8 million in the 1998 quarter and twelve-month period,
respectively. Revenues were affected by lower gas sales and end user
transportation deliveries due to significantly warmer weather in both 1998
periods as compared to the same 1997 periods, as well as lower sales rates
required to recover lower gas costs as subsequently discussed. Although end user
transportation deliveries declined in the 1998 twelve-month period, revenues
increased in such period because of a slight increase in the average
transportation rate.
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales.................................................. 80.0 94.6 194.3 212.0
End User Transportation.................................... 42.5 44.4 143.2 143.8
----- ----- ----- -----
122.5 139.0 337.5 355.8
Intermediate Transportation*............................... 148.4 140.6 594.3 520.1
----- ----- ----- -----
270.9 279.6 931.8 875.9
===== ===== ===== =====
</TABLE>
*Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues increased by $3.2 million and $6.5 million
in the 1998 quarter and twelve-month period, respectively, due to increased
deliveries. The increase in intermediate transportation deliveries reflects
additional Antrim gas volumes transported for Michigan gas producers and
brokers. In December 1997, MichCon purchased a pipeline to expand the
transportation capacity of its northern Michigan gathering system. This
expansion made possible an increase of 8.1 Bcf in intermediate transportation
deliveries in both 1998 periods. Although intermediate transportation volumes
have increased significantly, profit margins on this service are considerably
less than margins on gas sales or end user transportation.
OTHER OPERATING REVENUES increased in both 1998 periods due in part to an
increase in gas-related services. Also affecting the comparison to the 1997
periods are unfavorable adjustments for energy conservation revenues in the 1997
periods resulting from the discontinuance of MichCon's energy conservation
programs.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of purchased
gas. Through the Gas Cost Recovery (GCR) mechanism, MichCon's sales rates are
set to recover its reasonably and prudently incurred gas costs. Therefore,
fluctuations in cost of gas sold have little effect on gross margins.
Cost of gas sold decreased in the 1998 periods due primarily to lower gas sales
volumes resulting from the warmer weather. The decrease also reflects reductions
in the market prices paid of $.48 (15%) and $.19 (6%) per Mcf of gas sold in the
1998 quarter and twelve-month period, respectively.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses decreased for both 1998 periods, reflecting
lower uncollectible gas accounts expense and lower benefit costs, primarily
pension and retiree healthcare costs. MichCon implemented an early retirement
program in the first quarter of 1998 that reduced its workforce by approximately
150 employees. The cost of the program and the related savings will not have a
material impact on 1998 net income. However, it is expected that the results of
the program will contribute to lower operating costs in future years.
DEPRECIATION AND DEPLETION decreased by $3.0 million in the 1998 quarter as a
result of lower depreciation rates for MichCon's utility property, plant and
equipment that became effective January 1, 1998. Depreciation on higher plant
balances partially offset the effect of the lower rates.
OTHER INCOME AND DEDUCTIONS increased in both 1998 periods due primarily to
additional interest expense on long-term debt required to finance capital
investments.
INCOME TAXES
The increase in income taxes for the 1998 twelve-month period reflects taxes on
higher pre-tax earnings. Income tax comparisons for both 1998 periods were
affected by a 1998 provision for tax issues as well as for amounts recorded in
the 1997 periods for the favorable resolution of prior years' tax issues and tax
credits.
OUTLOOK
Gas Distribution's strategy is to expand aggressively its role as the preferred
provider of natural gas and high-value energy services within Michigan.
Accordingly, Gas Distribution's objectives are to increase revenues and reduce
its costs in order to maintain strong returns and provide customers with
high-quality service at competitive prices.
Gas Distribution plans to capitalize on the opportunities resulting from the gas
industry restructuring by implementing MichCon's Regulatory Reform Plan which
was approved by the Michigan Public Service Commission in April 1998. The plan
includes a comprehensive experimental three-year customer choice program that is
designed to offer expanded availability and transportation options to all sales
customers, subject to annual caps on the level of participation. Beginning April
1, 1999, customers will have the option of purchasing natural gas from suppliers
other than MichCon. However, MichCon will continue to transport and deliver the
gas to the customers' premises at prices equal to its existing sales margins.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The plan also suspends the GCR mechanism for customers who continue to purchase
gas from MichCon and fixes the gas cost component of MichCon's sales rates for
the three-year period beginning on January 1, 1999. Currently MichCon does not
generate earnings on the gas-supply portion of its operations; however under
this plan, changes in cost of gas will directly impact gross margins and
earnings. As part of its gas acquisition strategy, MichCon will implement steps
to mitigate risks from price and volume fluctuations.
Also beginning in 1999, an income sharing mechanism will allow customers to
share in profits when actual utility return on equity exceeds predetermined
thresholds. Although this program increases MichCon's risk associated with
generating margins that cover its gas costs, management believes the
opportunities from this program will have a favorable impact on future earnings.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc., resulting in an after-tax gain of
$36.2 million. Although Genix had experienced significant growth in revenues and
operating income, MCN's focused strategy is to invest in energy-related projects
that generate higher rates of return.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $14.9 million during the
1998 quarter as compared to the same 1997 period. The decrease was due primarily
to an increase in working capital requirements.
FINANCING ACTIVITIES
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. MCN anticipates that
during 1998 the issuance of new shares of common stock pursuant to these plans
will generate approximately $20 million. During the first three months of 1998,
issuances under these plans generated proceeds of $5.6 million.
DIVERSIFIED ENERGY
In March 1998, Diversified Energy issued MandatOry Par Put Remarketed
Securities(SM) (MOPPRS(SM)) generating net proceeds of $204.6 million. In April
1998, Diversified Energy also issued REset Put Securities (REPS(SM)) generating
net proceeds of $101.1 million (Note 4). Proceeds from these issuances were used
to reduce short-term debt incurred by the Diversified Energy group to fund
capital investments and for general corporate purposes. The MOPPRS and REPS are
currently rated the equivalent of "BBB+" by the major rating agencies.
MCNIC has established credit lines 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, both of which expire in July 1998. These 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 gas marketing operations. During the first three months of
1998, MCNIC repaid $95.8 million of commercial paper, leaving a balance of $51.6
million outstanding as of March 31, 1998.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced in
the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon issues commercial paper that is backed by credit lines
with several banks. MichCon has established credit lines to allow for borrowings
of up to $150 million under a 364-day revolving credit facility and up to $150
million under a three-year revolving credit facility, both of which expire in
July 1998. During the first three months of 1998, MichCon repaid $123.2 million
of commercial paper, leaving a balance of $113.5 million outstanding as of March
31, 1998.
INVESTING ACTIVITIES
Capital investments equaled $194.1 million in the 1998 quarter compared to
$133.4 million for the same period in 1997. The 1998 investments include
significantly higher levels of investment in Pipelines & Processing properties
as well as investments in electric power projects in India.
During the 1998 quarter, MCN received repayment of a $46 million advance made to
an independent power producer (Note 2a).
<TABLE>
<CAPTION>
QUARTER
----------------
1998 1997
------ ------
<S> <C> <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $ 82.0 $ 72.7
Gas Distribution.......................................... 38.5 24.5
------ ------
120.5 97.2
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 37.0 11.2
Other..................................................... 1.7 .6
------ ------
38.7 11.8
------ ------
Acquisitions*............................................... 34.9 24.4
------ ------
Total Capital Investments................................... $194.1 $133.4
====== ======
</TABLE>
*Includes MCN's share of GTEC debt existing at the date of acquisition (Note 2b)
OUTLOOK
1998 capital investments are expected to exceed $1 billion -- MCN's strategic
direction is to grow significantly by investing in a portfolio of energy-related
projects. For 1998, MCN anticipates investing approximately $200 million in Gas
Distribution and the remaining balance in Diversified Energy.
The proposed level of investment for 1998 increases capital requirements
materially in excess of internally generated funds and requires the issuance of
additional debt and equity securities. MCN's actual capital requirements and
general market conditions will dictate the timing and amount of future
issuances. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 generally requires the capitalization of internal
use software and specifically identifies which costs should be capitalized and
which costs should be expensed. The statement is effective for fiscal years
beginning after December 15, 1998. Management does not expect the SOP to have a
material impact on MCN's financial statements.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires start-up and organizational costs to be expensed
as incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. Management is currently evaluating the effects of
adopting this statement.
FORWARD-LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve certain risk and uncertainties as set forth in MCN's 1997
Annual Report on Form 10-K.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and other
interested parties: the Annual Report; the Form 10-K Annual Report; the Form
10-Q Quarterly Reports; and the Annual and Quarterly Statistical Supplements. To
request these publications, shareholders and other interested parties are
instructed to contact: MCN Investor Relations, 500 Griswold Street, Detroit,
Michigan 48226, (800) 548-4655. Information is also available on MCN's website
at www.mcnenergy.com.
11
<PAGE> 14
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, DECEMBER 31,
------------------------ -------------
1998 1997 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 39,713 $ 41,520 $ 39,495
Accounts receivable, less allowance for doubtful accounts
of $18,661, $25,274 and $15,711, respectively........... 434,004 401,701 404,448
Accrued unbilled revenues................................. 64,246 72,373 93,010
Gas in inventory (Note 5)................................. 65,112 38,611 56,777
Property taxes assessed applicable to future periods...... 56,726 51,141 67,879
Accrued gas cost recovery revenues........................ -- 21,500 12,862
Other..................................................... 62,675 55,198 54,089
---------- ---------- ----------
722,476 682,044 728,560
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities (Note 2a)....... 49,986 36,636 97,521
Deferred swap losses and receivables (Note 6)............. 67,053 60,329 51,023
Deferred postretirement benefit costs..................... 640 4,784 651
Deferred environmental costs.............................. 30,351 31,116 30,234
Prepaid benefit costs..................................... 79,229 54,961 80,242
Other..................................................... 82,307 64,105 85,530
---------- ---------- ----------
309,566 251,931 345,201
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing.................................... 359,051 185,082 323,597
Energy Marketing, Gas Storage & Electric Power............ 218,882 83,405 205,286
Gas Distribution.......................................... 8,906 7,659 8,841
Other..................................................... 18,916 19,796 19,252
---------- ---------- ----------
605,755 295,942 556,976
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Exploration & Production.................................. 1,363,663 1,047,517 1,299,301
Pipelines & Processing.................................... 61,670 28,582 47,037
Gas Distribution.......................................... 2,832,622 2,706,962 2,813,434
Other..................................................... 29,304 19,838 27,002
---------- ---------- ----------
4,287,259 3,802,899 4,186,774
Less -- Accumulated depreciation and depletion.............. 1,520,994 1,375,077 1,488,050
---------- ---------- ----------
2,766,265 2,427,822 2,698,724
---------- ---------- ----------
$4,404,062 $3,657,739 $4,329,461
========== ========== ==========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
12
<PAGE> 15
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, DECEMBER 31,
------------------------ -------------
1998 1997 1997
---------- ---------- -------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 266,596 $ 219,475 $ 326,756
Notes payable............................................. 172,751 211,345 401,726
Current portion of long-term debt and capital lease
obligations............................................. 29,538 84,853 36,878
Gas inventory equalization (Note 5)....................... 70,900 97,084 --
Federal income, property and other taxes payable.......... 95,852 88,993 91,712
Deferred gas cost recovery revenues....................... 18,937 -- --
Customer deposits......................................... 15,343 12,650 16,382
Other..................................................... 100,728 77,142 109,947
---------- ---------- ----------
770,645 791,542 983,401
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................... 163,686 161,095 153,159
Unamortized investment tax credit......................... 32,577 34,451 33,046
Tax benefits amortizable to customers..................... 123,189 116,095 123,365
Deferred swap gains and payables (Note 6)................. 49,216 50,406 41,717
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 20,276 18,059 19,188
Other..................................................... 69,105 69,929 69,889
---------- ---------- ----------
493,049 485,035 475,364
---------- ---------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS (Note
4)........................................................ 1,415,494 1,223,509 1,212,564
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES
OF MCN.................................................... 504,869 305,840 505,104
---------- ---------- ----------
CONTINGENCIES (Note 7)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................. 788 680 782
Additional paid-in capital................................ 815,364 502,869 806,997
Retained earnings......................................... 434,862 370,361 374,807
Accumulated other comprehensive income (Note 8)........... (9,085) (61) (7,519)
Yield enhancement, contract and issuance costs............ (21,924) (22,036) (22,039)
---------- ---------- ----------
1,220,005 851,813 1,153,028
---------- ---------- ----------
$4,404,062 $3,657,739 $4,329,461
========== ========== ==========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
13
<PAGE> 16
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in Thousands, Except Per Share Amounts) THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES................................... $701,460 $788,761 $2,120,566 $1,995,391
-------- -------- ---------- ----------
OPERATING EXPENSES
Cost of gas........................................ 421,792 499,545 1,243,317 1,180,694
Operation and maintenance.......................... 94,874 98,421 389,794 384,049
Depreciation, depletion and amortization........... 44,789 43,457 182,944 154,649
Property and other taxes........................... 20,875 21,472 74,894 74,547
-------- -------- ---------- ----------
582,330 662,895 1,890,949 1,793,939
-------- -------- ---------- ----------
OPERATING INCOME..................................... 119,130 125,866 229,617 201,452
-------- -------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES................. 16,761 14,361 58,059 28,185
-------- -------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................... 4,348 2,212 13,302 7,901
Interest on long-term debt......................... (18,529) (18,982) (74,717) (69,360)
Other interest expense............................. (6,841) (4,730) (13,394) (11,893)
Dividends on preferred securities of
subsidiaries..................................... (9,754) (4,229) (36,615) (14,241)
Gains related to DIGP (Note 2c).................... -- -- 2,398 6,384
Other.............................................. 12,079 2,668 15,808 599
-------- -------- ---------- ----------
(18,697) (23,061) (93,218) (80,610)
-------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.............................................. 117,194 117,166 194,458 149,027
INCOME TAX PROVISION................................. 36,684 35,397 53,411 33,743
-------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.................... 80,510 81,769 141,047 115,284
-------- -------- ---------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES (NOTE 2D)
Income from operations............................. -- -- -- 582
Gain on sale....................................... -- -- -- 36,176
-------- -------- ---------- ----------
-- -- -- 36,758
-------- -------- ---------- ----------
NET INCOME........................................... $ 80,510 $ 81,769 $ 141,047 $ 152,042
======== ======== ========== ==========
BASIC EARNINGS PER SHARE (NOTE 3)
Continuing operations.............................. $ 1.03 $ 1.21 $ 1.86 $ 1.71
-------- -------- ---------- ----------
Discontinued operations (Note 2d)
Income from operations........................... -- -- -- .01
Gain on sale..................................... -- -- -- .54
-------- -------- ---------- ----------
-- -- -- .55
-------- -------- ---------- ----------
$ 1.03 $ 1.21 $ 1.86 $ 2.26
======== ======== ========== ==========
DILUTED EARNINGS PER SHARE (NOTE 3)
Continuing operations.............................. $ .97 $ 1.19 $ 1.81 $ 1.69
-------- -------- ---------- ----------
Discontinued operations (Note 2d)
Income from operations........................... -- -- -- .01
Gain on sale..................................... -- -- -- .53
-------- -------- ---------- ----------
-- -- -- .54
-------- -------- ---------- ----------
$ .97 $ 1.19 $ 1.81 $ 2.23
======== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
Basic.............................................. 78,365 67,547 75,658 67,187
======== ======== ========== ==========
Diluted............................................ 84,504 69,098 81,439 68,159
======== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE......................... $ .2550 $ .2425 $ .9950 $ .9500
======== ======== ========== ==========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
14
<PAGE> 17
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 80,510 $ 81,769
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 44,789 43,457
Charged to other accounts............................. 2,055 1,930
Deferred income taxes -- current........................ (8,822) (12,337)
Deferred income taxes and investment tax credit, net.... 10,151 10,388
Equity in earnings of joint ventures, net of
distributions.......................................... (8,670) (1,172)
Other................................................... 359 (1,003)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 34,589 46,859
--------- ---------
Net cash provided from operating activities........... 154,961 169,891
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (138,618) (122,381)
Dividends paid............................................ (20,192) (16,333)
Issuance of common stock.................................. 5,584 5,398
Issuance of preferred securities.......................... -- 127,418
Issuance of long-term debt (Note 4)....................... 204,609 149,190
Long-term commercial paper, net........................... (90,357) (176,235)
Retirement of long-term debt.............................. (5,181) (1,664)
Other..................................................... 3,634 (164)
--------- ---------
Net cash used for financing activities................ (40,521) (34,771)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (120,503) (96,911)
Acquisitions (Note 2b).................................... (13,232) (24,400)
Investment in debt and equity securities (Note 2a)........ 46,468 (1,054)
Investment in joint ventures.............................. (37,810) (10,023)
Sale of property and investment in joint ventures......... 9,147 --
Return of investment in joint ventures.................... 2,591 4,000
Other..................................................... (883) 4,326
--------- ---------
Net cash used for investing activities................ (114,222) (124,062)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 218 11,058
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 39,495 30,462
--------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31......................... $ 39,713 $ 41,520
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ (31,016) $ (37,627)
Accrued unbilled revenues................................. 28,764 36,136
Accrued/deferred gas cost recovery revenues............... 31,799 6,172
Gas in inventory.......................................... (8,335) 40,550
Accounts payable.......................................... (60,160) (98,447)
Federal income, property and other taxes payable.......... 4,140 (8,653)
Gas inventory equalization................................ 70,900 97,084
Prepaid/accrued benefit costs............................. 1,024 5,062
Other current assets and liabilities...................... 1,131 250
Deferred assets and liabilities........................... (3,658) 6,332
--------- ---------
$ 34,589 $ 46,859
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 37,344 $ 27,988
Federal income taxes.................................... 1,500 17,500
</TABLE>
- --------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
15
<PAGE> 18
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements should be read in conjunction
with MCN's 1997 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1998
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments necessary for a fair presentation of the
financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS
A. PHILIPPINE INVESTMENT
In 1997, MCN advanced approximately $46,000,000 to an independent power
producer to fund power generation projects already under development in the
Philippines. This investment was originally structured as an
interest-bearing loan with the possibility of being converted into an
equity interest in the independent power producer. Contract negotiations
were concluded in March 1998 when MCN received the total amount of its
advance, plus accrued interest.
B. TORRENT POWER LIMITED
In 1997, MCN acquired a 40% interest in the common equity of Torrent Power
Limited (TPL), an India joint venture that holds minority interests in
electric distribution companies and power generation facilities located in
the state of Gujarat, India. In March 1998, MCN paid approximately
$5,600,000 representing the remaining amount due on its initial acquisition
commitment. Also in March 1998, MCN acquired preference shares in TPL for
approximately $7,600,000 to fund TPL's additional 4.7% investment in
Gujarat Torrent Energy Corporation (GTEC). GTEC is a company formed to
build, own and operate a 655 MW dual-fuel facility that is expected to be
fully operational by the end of 1998.
C. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN sold 64% of its
99% interest in Dauphin Island Gathering Partners (DIGP) in a series of
transactions during 1996. The transactions resulted in pre-tax gains
totaling $8,782,000, of which $2,398,000 was deferred until 1997 when a
related option agreement expired unexercised. DIGP is a general partnership
that owns a gas gathering system in the Gulf of Mexico.
D. THE GENIX GROUP, INC.
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN completed the
sale of its computer operations subsidiary, The Genix Group, Inc., to
Affiliated Computer Services, Inc. in June 1996, resulting in an after-tax
gain of $36,176,000.
3. EARNINGS PER SHARE COMPUTATION
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" which requires the
presentation of basic earnings per share (EPS) and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the
16
<PAGE> 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
period. Diluted EPS assumes the issuance of potential dilutive common shares
outstanding during the period and adjusts for changes in income and the
repurchase of common shares that would have occurred from the assumed issuance.
A reconciliation of both calculations is shown below.
<TABLE>
<CAPTION>
WEIGHTED
INCOME FROM AVERAGE
CONTINUING COMMON EARNINGS
OPERATIONS SHARES PER SHARE
-------------------- ---------------- --------------
1998 1997 1998 1997 1998 1997
-------- -------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
(in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED MARCH 31
Basic EPS............................... $ 80,510 $ 81,769 78,365 67,547 $1.03 $1.21
----- -----
Effect of Dilutive Securities:
FELINE PRIDES........................ 1,581 104 3,738 348
Enhanced PRIDES...................... 40 66 1,343 446
Stock-based compensation plans....... -- -- 1,058 757
-------- -------- ------ ------
Diluted EPS............................. $ 82,131 $ 81,939 84,504 69,098 $ .97 $1.19
======== ======== ====== ====== ----- -----
TWELVE MONTHS ENDED MARCH 31
Basic EPS............................... $141,047 $115,284 75,658 67,187 $1.86 $1.71
----- -----
Effect of Dilutive Securities:
FELINE PRIDES........................ 6,323 104 4,020 87
Enhanced PRIDES...................... 196 139 848 153
Stock-based compensation plans....... -- -- 913 732
-------- -------- ------ ------
Diluted EPS............................. $147,566 $115,527 81,439 68,159 $1.81 $1.69
======== ======== ====== ====== ----- -----
</TABLE>
4. LONG-TERM DEBT
In March 1998, MCN Investment Corporation (MCNIC) issued $100,000,000 of 6.3%
MandatOry Par Put Remarketed Securities(SM) (MOPPRS(SM)) due April 2011 (2011
MOPPRS) and $100,000,000 of 6.35% MOPPRS due April 2012 (2012 MOPPRS). Also in
April 1998, MCNIC issued $100,000,000 of 6.375% REset Put Securities (REPS(SM))
due April 2008. The MOPPRS and REPS are senior unsecured obligations of MCNIC.
The MOPPRS and REPS are structured such that, at a specified future remarketing
date, the remarketing agents may elect to remarket the MOPPRS and REPS whereby
the annual interest rate on the securities will be reset to a specified base
rate, plus a defined spread established at that time. If the remarketing agents
elect not to remarket the securities, MCNIC will be required to repurchase the
MOPPRS and REPS at their principal amount. The remarketing date for the 2011
MOPPRS is April 2, 2001, for the 2012 MOPPRS is April 2, 2002 and for the REPS
is April 1, 2003. Prior to the remarketing dates, holders of the 2011 MOPPRS,
2012 MOPPRS and REPS are entitled to receive interest payments at annual rates
of 6.3%, 6.35% and 6.375%, respectively, payable semi-annually.
MCNIC received an option premium in return for the remarketing option. In March
1998, the option premium received related to the MOPPRS, net of financing costs
incurred, totaled $4,609,000. The MOPPRS and REPS are subject to a support
agreement between MCN and MCNIC, under which MCN will provide funds to MCNIC to
make payments of interest and principal in the event of default by MCNIC.
17
<PAGE> 20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation
that interim inventory reductions will be replaced prior to year-end, the cost
of gas for net withdrawals from inventory is generally recorded at the estimated
average purchase rate for the calendar year. The excess of these changes over
the LIFO cost is credited to the gas inventory equalization account. During
interim periods when there are net injections to inventory, the equalization
account is reversed. Approximately 53.5 billion cubic feet (Bcf) and 30.7 Bcf of
gas was in inventory at March 31, 1998 and 1997, respectively.
6. COMMODITY SWAP AGREEMENTS
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN manages commodity
price risk through the use of various derivative instruments and generally
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. Natural gas and oil swap agreements are used to manage
exposure to the risk of market price fluctuations on gas sale contracts and gas
and oil production. Market value changes of swap contracts are recorded as
deferred gains or losses until the hedged transactions are completed, at which
time the realized gains or losses are included as adjustments to revenues. The
offsets to the unrealized losses are recorded as deferred payables, and the
offsets to the unrealized gains are recorded as deferred receivables.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- ------------
1998 1997 1997
(in Thousands) ------- ------- ------------
<S> <C> <C> <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses...................................... $59,307 $46,740 $34,736
Receivables............................................ 8,134 13,589 16,683
------- ------- -------
67,441 60,329 51,419
Less -- Current portion................................ 388 -- 396
------- ------- -------
$67,053 $60,329 $51,023
======= ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains....................................... $ 4,504 $10,737 $15,005
Payables............................................... 67,407 54,572 41,164
------- ------- -------
71,911 65,309 56,169
Less -- Current portion................................ 22,695 14,903 14,452
------- ------- -------
$49,216 $50,406 $41,717
======= ======= =======
</TABLE>
7. CONTINGENCIES
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.
18
<PAGE> 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMPREHENSIVE INCOME
MCN has adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income. Comprehensive income is defined as the change in common
shareholder's equity during a period from transactions and events from nonowner
sources, including net income. Other items of comprehensive income include
revenues, expenses, gains and losses that are excluded from net income. Total
comprehensive income for the applicable periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
(in Thousands) ------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income.................................... $80,510 $81,769 $141,047 $152,042
Other comprehensive loss, net of taxes:
Foreign currency translation adjustment..... (499) (18) (6,773) (29)
Unrealized losses on securities............. (1,067) -- (2,251) --
------- ------- -------- --------
(1,566) (18) (9,024) (29)
------- ------- -------- --------
Total comprehensive income.................... $78,944 $81,751 $132,023 $152,013
======= ======= ======== ========
</TABLE>
9. 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. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any 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, is $1,106,726,000 at March 31, 1998.
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, MCN Michigan Limited Partnership, MCN Financing I, MCN Financing
III, MCN Financing V, MCN Financing VI, and Blue Lake Holdings, Inc., until
December 31, 1997.
19
<PAGE> 22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ -------- -------- ------------ ------------
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................ $ 6,182 $271,854 $429,227 $ (5,803) $701,460
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................. 3,121 204,277 217,589 (3,195) 421,792
Operation and maintenance................... 140 35,120 62,222 (2,608) 94,874
Depreciation, depletion and amortization.... 646 21,698 22,445 -- 44,789
Property and other taxes.................... 633 2,940 17,302 -- 20,875
------- -------- -------- -------- --------
4,540 264,035 319,558 (5,803) 582,330
------- -------- -------- -------- --------
OPERATING INCOME.............................. 1,642 7,819 109,669 -- 119,130
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES................................ 79,253 16,307 589 (79,388) 16,761
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................. 10,045 3,194 1,112 (10,003) 4,348
Interest on long-term debt.................. 241 (6,564) (12,206) -- (18,529)
Other interest expense...................... (449) (13,240) (3,257) 10,105 (6,841)
Dividends on preferred securities of
subsidiaries.............................. -- -- -- (9,754) (9,754)
Other....................................... 34 12,669 (624) -- 12,079
------- -------- -------- -------- --------
9,871 (3,941) (14,975) (9,652) (18,697)
------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................... 90,766 20,185 95,283 (89,040) 117,194
INCOME TAX PROVISION.......................... 604 2,461 33,619 -- 36,684
------- -------- -------- -------- --------
NET INCOME.................................... 90,162 17,724 61,664 (89,040) 80,510
DIVIDENDS ON PREFERRED SECURITIES............. 9,754 -- -- (9,754) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK......... $80,408 $ 17,724 $61,664 $(79,286) $ 80,510
======= ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------------------------
OPERATING REVENUES............................ $ 6,937 $260,154 $527,445 $ (5,775) $788,761
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................. 3,813 196,317 303,273 (3,858) 499,545
Operation and maintenance................... 54 26,179 74,105 (1,917) 98,421
Depreciation, depletion and amortization.... 552 17,404 25,501 -- 43,457
Property and other taxes.................... 698 2,980 17,794 -- 21,472
------- -------- -------- -------- --------
5,117 242,880.. 420,673 (5,775) 662,895
------- -------- -------- -------- --------
OPERATING INCOME.............................. 1,820 17,274 106,772 -- 125,866
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES................................ 81,647 13,160 310 (80,756) 14,361
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................. 4,348 969 1,209 (4,314) 2,212
Interest on long-term debt.................. 141 (8,383) (10,740) -- (18,982)
Other interest expense...................... (230) (5,923) (2,891) 4,314 (4,730)
Dividends on preferred securities of
subsidiaries.............................. -- -- -- (4,229) (4,229)
Other....................................... (56) 2,861 (137) -- 2,668
------- -------- -------- -------- --------
4,203 (10,476) (12,559) (4,229) (23,061)
------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................... 87,670 19,958 94,523 (84,985) 117,166
INCOME TAX PROVISION.......................... 942 2,125 32,330 -- 35,397
------- -------- -------- -------- --------
NET INCOME.................................... 86,728 17,833 62,193 (84,985) 81,769
DIVIDENDS ON PREFERRED SECURITIES............. 4,229 -- -- (4,229) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK......... $82,499 $ 17,833 $62,193 $(80,756) $ 81,769
======= ======== ======== ======== ========
</TABLE>
20
<PAGE> 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................................. $ 16,852 $962,969 $1,155,461 $ (14,716) $2,120,566
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 9,057 697,142 546,545 (9,427) 1,243,317
Operation and maintenance......................... 2,367 121,959 270,757 (5,289) 389,794
Depreciation, depletion and amortization.......... 2,373 79,924 100,647 -- 182,944
Property and other taxes.......................... 1,614 13,028 60,252 -- 74,894
-------- -------- ---------- --------- ----------
15,411 912,053 978,201 (14,716) 1,890,949
-------- -------- ---------- --------- ----------
OPERATING INCOME.................................... 1,441 50,916 177,260 -- 229,617
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 142,440 55,503 1,478 (141,362) 58,059
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 38,554 8,603 4,562 (38,417) 13,302
Interest on long-term debt........................ 508 (28,233) (46,992) -- (74,717)
Other interest expense............................ (1,472) (41,699) (9,030) 38,807 (13,394)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (36,615) (36,615)
Gains related to DIGP............................. -- 2,398 -- -- 2,398
Other............................................. 164 17,477 (1,833) -- 15,808
-------- -------- ---------- --------- ----------
37,754 (41,454) (53,293) (36,225) (93,218)
-------- -------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES.......................... 181,635 64,965 125,445 (177,587) 194,458
INCOME TAX PROVISION................................ 2,235 4,222 46,954 -- 53,411
-------- -------- ---------- --------- ----------
NET INCOME.......................................... 179,400 60,743 78,491 (177,587) 141,047
DIVIDENDS ON PREFERRED SECURITIES................... 36,615 -- -- (36,615) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $142,785 $ 60,743 $ 78,491 $(140,972) $ 141,047
======== ======== ========== ========= ==========
TWELVE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------------------------
OPERATING REVENUES.................................. $ 17,199 $737,226 $1,254,838 $ (13,872) $1,995,391
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 9,697 540,034 641,151 (10,188) 1,180,694
Operation and maintenance......................... 653 87,465 299,615 (3,684) 384,049
Depreciation, depletion and amortization.......... 2,024 53,370 99,255 -- 154,649
Property and other taxes.......................... 2,271 10,949 60,948 379 74,547
-------- -------- ---------- --------- ----------
14,645 691,818 1,100,969 (13,493) 1,793,939
-------- -------- ---------- --------- ----------
OPERATING INCOME.................................... 2,554 45,408 153,869 (379) 201,452
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 154,173 25,615 961 (152,564) 28,185
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 14,623 3,259 4,524 (14,505) 7,901
Interest on long-term debt........................ 265 (27,950) (41,675) -- (69,360)
Other interest expense............................ (1,434) (16,896) (8,068) 14,505 (11,893)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (14,241) (14,241)
Gains related to DIGP............................. -- 6,384 -- -- 6,384
Other............................................. 422 2,040 (2,237) 374 599
-------- -------- ---------- --------- ----------
13,876 (33,163) (47,456) (13,867) (80,610)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................. 170,603 37,860 107,374 (166,810) 149,027
INCOME TAX PROVISION (BENEFIT)...................... 1,656 (3,292) 35,379 -- 33,743
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS................... 168,947 41,152 71,995 (166,810) 115,284
-------- -------- ---------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations............................ -- 582 -- -- 582
Gain on sale...................................... -- 36,176 -- -- 36,176
-------- -------- ---------- --------- ----------
-- 36,758 -- -- 36,758
-------- -------- ---------- --------- ----------
NET INCOME.......................................... 168,947 77,910 71,995 (166,810) 152,042
DIVIDENDS ON PREFERRED SECURITIES................... 14,241 -- -- (14,241) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $154,706 $ 77,910 $ 71,995 $(152,569) $ 152,042
======== ======== ========== ========= ==========
</TABLE>
21
<PAGE> 24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ ---------- ---------- ------------ ------------
MARCH 31, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost................... $ 8,349 $ 14,281 $ 17,083 $ -- $ 39,713
Accounts receivable.................................. 17,102 204,104 280,891 (49,432) 452,665
Less -- Allowance for doubtful accounts............ 85 453 18,123 -- 18,661
---------- ---------- ---------- ----------- ----------
Accounts receivable, net............................. 17,017 203,651 262,768 (49,432) 434,004
Accrued unbilled revenue............................. 846 -- 63,400 -- 64,246
Gas in inventory..................................... -- 44,923 20,188 1 65,112
Property taxes assessed applicable to future
periods............................................ 178 1,783 54,765 -- 56,726
Other................................................ 6,092 35,334 28,348 (7,099) 62,675
---------- ---------- ---------- ----------- ----------
32,482 299,972 446,552 (56,530) 722,476
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities............ -- 14,098 35,538 350 49,986
Deferred swap losses and receivables................. -- 67,053 -- -- 67,053
Deferred postretirement benefit costs................ 640 -- -- -- 640
Deferred environmental costs......................... 2,535 -- 27,816 -- 30,351
Prepaid benefit costs................................ -- -- 85,817 (6,588) 79,229
Other................................................ 6,280 30,097 47,232 (1,302) 82,307
---------- ---------- ---------- ----------- ----------
9,455 111,248 196,403 (7,540) 309,566
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES......................................... 1,703,787 576,771 20,078 (1,694,881) 605,755
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost................. 39,635 1,438,282 2,809,342 -- 4,287,259
Less -- Accumulated depreciation and depletion....... 13,568 172,613 1,334,813 -- 1,520,994
---------- ---------- ---------- ----------- ----------
26,067 1,265,669 1,474,529 -- 2,766,265
---------- ---------- ---------- ----------- ----------
$1,771,791 $2,253,660 $2,137,562 $(1,758,951) $4,404,062
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 6,028 $ 211,011 $ 90,568 $ (41,011) $ 266,596
Notes payable........................................ -- 65,048 117,094 (9,391) 172,751
Current portion of long-term debt and capital lease
obligations........................................ 365 1,557 27,616 -- 29,538
Gas inventory equalization........................... -- 6 70,894 -- 70,900
Federal income, property and other taxes payable..... 1,166 1,519 100,257 (7,090) 95,852
Deferred gas cost recovery revenues.................. -- -- 18,937 -- 18,937
Customer deposits.................................... 20 -- 15,323 -- 15,343
Other................................................ 17,754 15,231 67,751 (8) 100,728
---------- ---------- ---------- ----------- ----------
25,333 294,372 508,440 (57,500) 770,645
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes.................... (4,290) 83,117 84,839 20 163,686
Unamortized investment tax credit.................... 293 -- 32,284 -- 32,577
Tax benefits amortizable to customers................ -- -- 123,189 -- 123,189
Deferred swap gains and payables..................... -- 49,216 -- -- 49,216
Accrued environmental costs.......................... 3,000 -- 32,000 -- 35,000
Minority interest.................................... -- 2,322 17,954 -- 20,276
Other................................................ 13,496 13,255 48,963 (6,609) 69,105
---------- ---------- ---------- ----------- ----------
12,499 147,910 339,229 (6,589) 493,049
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease obligations.... -- 803,289 612,205 -- 1,415,494
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES........ 504,869 -- -- -- 504,869
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock......................................... 788 5 10,300 (10,305) 788
Additional paid-in capital........................... 815,364 817,463 230,399 (1,047,862) 815,364
Retained earnings.................................... 434,862 199,706 436,989 (636,695) 434,862
Accumulated other comprehensive income............... -- (9,085) -- -- (9,085)
Yield enhancement, contract and issuance costs....... (21,924) -- -- -- (21,924)
---------- ---------- ---------- ----------- ----------
1,229,090 1,008,089 677,688 (1,694,862) 1,220,005
---------- ---------- ---------- ----------- ----------
$1,771,791 $2,253,660 $2,137,562 $(1,758,951) $4,404,062
========== ========== ========== =========== ==========
</TABLE>
22
<PAGE> 25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ ----- ------- ------------ ------------
MARCH 31, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............. $ 3,413 $ 21,885 $ 15,284 $ 938 $ 41,520
Accounts receivable............................ 5,094 149,665 281,090 (8,874) 426,975
Less -- Allowance for doubtful accounts...... 76 800 24,398 -- 25,274
---------- ---------- ---------- ----------- ----------
Accounts receivable, net....................... 5,018 148,865 256,692 (8,874) 401,701
Accrued unbilled revenue....................... 866 -- 71,507 -- 72,373
Gas in inventory............................... -- 17,192 21,419 -- 38,611
Property taxes assessed applicable to future
periods...................................... 162 1,679 49,300 -- 51,141
Accrued gas cost recovery revenues............. -- -- 21,500 -- 21,500
Other.......................................... 3,031 30,726 29,292 (7,851) 55,198
---------- ---------- ---------- ----------- ----------
12,490 220,347 464,994 (15,787) 682,044
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities...... -- 15,445 3,737 17,454 36,636
Deferred swap losses and receivables........... -- 60,329 -- -- 60,329
Deferred postretirement benefit costs.......... 685 -- 4,099 -- 4,784
Deferred environmental costs................... 3,000 -- 28,116 -- 31,116
Prepaid benefit costs.......................... (3,561) -- 60,228 (1,706) 54,961
Other.......................................... 21,571 27,929 48,942 (34,337) 64,105
---------- ---------- ---------- ----------- ----------
21,695 103,703 145,122 (18,589) 251,931
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES................................... 1,154,740 265,712 19,865 (1,144,375) 295,942
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost........... 33,310 1,084,133 2,685,456 -- 3,802,899
Less -- Accumulated depreciation and
depletion.................................... 11,485 98,497 1,265,095 -- 1,375,077
---------- ---------- ---------- ----------- ----------
21,825 985,636 1,420,361 -- 2,427,822
---------- ---------- ---------- ----------- ----------
$1,210,750 $1,575,398 $2,050,342 $(1,178,751) $3,657,739
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................... $ 11,289 $ 137,266 $ 95,299 $ (24,379) $ 219,475
Notes payable.................................. -- 50,406 160,958 (19) 211,345
Current portion of long-term debt and capital
lease obligations............................ 55 31,512 53,286 -- 84,853
Gas inventory equalization..................... -- 887 96,197 -- 97,084
Federal income, property and other taxes
payable...................................... 1,804 2,149 89,578 (4,538) 88,993
Customer deposits.............................. 19 -- 12,630 1 12,650
Other.......................................... 9,759 19,255 51,894 (3,766) 77,142
---------- ---------- ---------- ----------- ----------
22,926 241,475 559,842 (32,701) 791,542
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes.............. (2,191) 87,420 75,846 20 161,095
Unamortized investment tax credit.............. 324 -- 34,127 -- 34,451
Tax benefits amortizable to customers.......... 198 -- 115,897 -- 116,095
Deferred swap gains and payables............... -- 50,406 -- -- 50,406
Accrued environmental costs.................... 3,000 -- 32,000 -- 35,000
Minority interest.............................. -- 321 17,738 -- 18,059
Other.......................................... 12,594 17,346 41,695 (1,706) 69,929
---------- ---------- ---------- ----------- ----------
13,925 155,493 317,303 (1,686) 485,035
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................... 365 674,144 549,000 -- 1,223,509
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................... 305,840 -- -- -- 305,840
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................... 680 5 10,300 (10,305) 680
Additional paid-in capital..................... 506,392 365,379 230,399 (599,301) 502,869
Retained earnings.............................. 382,658 138,963 383,498 (534,758) 370,361
Accumulated other comprehensive income......... -- (61) -- -- (61)
Yield enhancement, contract and issuance
costs........................................ (22,036) -- -- -- (22,036)
---------- ---------- ---------- ----------- ----------
867,694 504,286 624,197 (1,144,364) 851,813
---------- ---------- ---------- ----------- ----------
$1,210,750 $1,575,398 $2,050,342 $(1,178,751) $3,657,739
========== ========== ========== =========== ==========
</TABLE>
23
<PAGE> 26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ ---------- ---------- ------------ ------------
DECEMBER 31, 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable.......................... 15,525 240,867 210,677 (46,910) 420,159
Less -- Allowance for doubtful
accounts............................... 75 621 15,015 -- 15,711
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 15,450 240,246 195,662 (46,910) 404,448
Accrued unbilled revenue..................... 1,114 -- 91,896 -- 93,010
Gas in inventory............................. -- 16,576 40,201 -- 56,777
Property taxes assessed applicable to future
periods.................................... 217 2,835 64,827 -- 67,879
Accrued gas cost recovery revenues........... -- -- 12,862 -- 12,862
Other........................................ 3,745 17,612 33,361 (629) 54,089
---------- ---------- ---------- ----------- ----------
20,549 302,388 453,162 (47,539) 728,560
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 62,060 35,110 351 97,521
Deferred swap losses and receivables......... -- 51,023 -- -- 51,023
Deferred postretirement benefit costs........ 651 -- -- -- 651
Deferred environmental costs................. 2,535 -- 27,699 -- 30,234
Prepaid benefit costs........................ (3,418) -- 85,790 (2,130) 80,242
Other........................................ 7,610 34,287 46,972 (3,339) 85,530
---------- ---------- ---------- ----------- ----------
7,378 147,370 195,571 (5,118) 345,201
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,641,421 528,492 19,643 (1,632,580) 556,976
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 37,918 1,358,504 2,790,352 -- 4,186,774
Less -- Accumulated depreciation and
depletion.................................. 12,951 152,707 1,322,392 -- 1,488,050
---------- ---------- ---------- ----------- ----------
24,967 1,205,797 1,467,960 -- 2,698,724
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 4,385 $ 238,952 $ 130,267 $ (46,848) $ 326,756
Notes payable................................ -- 163,113 241,691 (3,078) 401,726
Current portion of long-term debt and capital
lease obligations.......................... 365 1,557 34,956 -- 36,878
Federal income, property and other taxes
payable.................................... 401 12,681 78,630 -- 91,712
Customer deposits............................ 19 -- 16,363 -- 16,382
Other........................................ 13,599 29,198 67,780 (630) 109,947
---------- ---------- ---------- ----------- ----------
18,769 445,501 569,687 (50,556) 983,401
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes............ (4,642) 73,874 83,905 22 153,159
Unamortized investment tax credit............ 301 -- 32,745 -- 33,046
Tax benefits amortizable to customers........ 443 -- 122,922 -- 123,365
Deferred swap gains and payables............. -- 41,717 -- -- 41,717
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 1,905 17,283 -- 19,188
Other........................................ 10,792 16,586 44,663 (2,152) 69,889
---------- ---------- ---------- ----------- ----------
9,894 134,082 333,518 (2,130) 475,364
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 595,457 617,107 -- 1,212,564
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 505,104 -- -- -- 505,104
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 782 5 10,300 (10,305) 782
Additional paid-in capital................... 806,998 834,539 230,399 (1,064,939) 806,997
Retained earnings............................ 374,807 181,982 375,325 (557,307) 374,807
Accumulated other comprehensive income....... -- (7,519) -- -- (7,519)
Yield enhancement, contract and issuance
costs...................................... (22,039) -- -- -- (22,039)
---------- ---------- ---------- ----------- ----------
1,160,548 1,009,007 616,024 (1,632,551) 1,153,028
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
</TABLE>
24
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
(in Thousands) ------------ -------- --------- ------------ ------------
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES............. $ 17,563 $(29,269) $170,119 $ (3,452) $ 154,961
-------- -------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................. -- (7,708) (124,597) (6,313) (138,618)
Capital distributions paid to affiliates, net...... -- (17,076) -- 17,076 --
Dividends paid..................................... (20,192) -- -- -- (20,192)
Preferred securities dividends paid................ (9,754) -- -- 9,754 --
Issuance of common stock........................... 5,584 -- -- -- 5,584
Issuance of long-term debt......................... -- 204,609 -- -- 204,609
Long-term commercial paper, net.................... -- (90,357) -- -- (90,357)
Retirement of long-term debt....................... -- (409) (4,772) -- (5,181)
Other.............................................. -- 3,634 -- -- 3,634
-------- -------- --------- -------- ---------
Net cash provided from (used for) financing
activities..................................... (24,362) 92,693 (129,369) 20,517 (40,521)
-------- -------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................... (1,765) (80,456) (38,282) -- (120,503)
Acquisitions....................................... -- (13,232) -- -- (13,232)
Investment in debt and equity securities........... -- 46,895 (427) -- 46,468
Investment in joint ventures and subsidiaries...... 16,876 (37,623) 12 (17,075) (37,810)
Sale of property and investment in joint
ventures......................................... -- 9,147 -- -- 9,147
Return of investment in joint ventures............. -- 2,591 -- -- 2,591
Other.............................................. 14 (1,584) 677 10 (883)
-------- -------- --------- -------- ---------
Net cash provided from (used for) investing
activities..................................... 15,125 (74,262) (38,020) (17,065) (114,222)
-------- -------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 8,326 (10,838) 2,730 -- 218
CASH AND CASH EQUIVALENTS, JANUARY 1................ 23 25,119 14,353 -- 39,495
-------- -------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31................. $ 8,349 $14,281 $ 17,083 $ -- $ 39,713
======== ======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES............. $ 26,527 $ 14,989 $146,859 $ (18,484) $ 169,891
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net................................. -- (18,194) (104,168) (19) (122,381)
Capital contributions received from (distributions
paid to) affiliates, net......................... (172) 133,949 -- (133,777) --
Dividends paid..................................... (16,333) -- (15,000) 15,000 (16,333)
Preferred securities dividends paid................ (4,229) -- -- 4,229 --
Issuance of common stock........................... 5,398 -- -- -- 5,398
Issuance of preferred securities................... 127,418 -- -- -- 127,418
Issuance of long-term debt......................... -- 149,190 -- -- 149,190
Long-term commercial paper, net.................... -- (176,235) -- -- (176,235)
Retirement of long-term debt....................... -- (367) (1,297) -- (1,664)
Other.............................................. (164) -- -- -- (164)
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities..................................... 111,918 88,343 (120,465) (114,567) (34,771)
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................... (1,424) (71,785) (23,702) -- (96,911)
Acquisitions....................................... -- (24,400) -- -- (24,400)
Investment in debt and equity securities........... -- (993) (61) -- (1,054)
Investment in joint ventures and subsidiaries...... (134,449) (9,485) (78) 133,989 (10,023)
Return of investment in joint ventures............. -- 4,000 -- -- 4,000
Other.............................................. (3) 1,608 2,721 -- 4,326
--------- --------- --------- --------- ---------
Net cash used for investing activities........... (135,876) (101,055) (21,120) 133,989 (124,062)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........... 2,569 2,277 5,274 938 11,058
CASH AND CASH EQUIVALENTS, JANUARY 1................ 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31................. $ 3,413 $ 21,885 $ 15,284 $ 938 $ 41,520
========= ========= ========= ========= =========
</TABLE>
25
<PAGE> 28
OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MCN held its Annual Meeting of Shareholders on April 22, 1998. As of
February 25, 1998, the record date for determination of shareholders entitled to
vote at the Annual Meeting, there were 78,718,473 shares outstanding and
entitled to vote. Of these shares, 71,147,846 or 90.4%, were present in person
or by proxy, and 7,570,627 shares were not voted.
At the Annual Meeting, shareholders voted:
1) To elect the following Directors to serve for three year terms:
<TABLE>
<CAPTION>
Number of shares
Number of shares Withholding
Director Consenting FOR Consent
- ------------------------------------------------ ---------------- ----------------
(Three-Year Terms)
<S> <C> <C>
James G. Berges................................. 65,410,407 5,737,439
Thomas H. Jeffs................................. 65,443,729 5,704,117
William K. McCrackin............................ 65,445,123 5,702,723
Bill M. Thompson................................ 65,451,315 5,696,531
</TABLE>
Stephen E. Ewing, Roger Fridholm, Alfred R. Glancy III, Frank M. Hennessey,
Helen O. Petrauskas and Howard F. Sims did not have terms of office expiring
in 1998 and continue to serve as directors of the corporation.
2) To approve an Amendment to the Articles of Incorporation to increase the
number of authorized shares of MCN common stock, of the par value of $.01 per
share, from 100 million to 250 million, with 57,695,318 shares voted for the
ratification of the amendment, 12,852,137 shares voted against and
abstentions of 600,391 shares.
3) To approve an Amendment to the Articles of Incorporation to change the number
of directors of the Company from not fewer than seven, nor more than ten to
not fewer than nine, nor more than twelve, with 67,139,585 shares voted for
ratification of the amendment, 3,251,444 shares voted against and abstentions
of 756,817 shares.
4) To appoint Deloitte & Touche LLP as independent auditors for the year ending
December 31, 1998, with 70,554,255 shares voted for the appointment, 178,800
shares voted against, and abstentions of 414,791 shares.
26
<PAGE> 29
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Energy Group Inc.
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Interest Coverage Ratio for MCN Energy Group
Inc.
12-3 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation
12-4 Computation of Interest Coverage Ratio for MCN Investment
Corporation
27-1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
MCN filed reports on Form 8-K dated March 26, 1998 and March 31, 1998,
under Item 5, with respect to the offering by MCN Investment Corporation of
its 6.30% MandatOry Par Put Remarketed Securities(SM) (MOPPRS(SM)) due
April 2, 2011 and its 6.35% MOPPRS due April 2, 2012 pursuant to the
registration statement of the registrant and MCN Investment Corporation on
Form S-3 (No. 333-47137) filed with the Securities and Exchange Commission
under the Securities Act of 1933. The following documents were filed as
Exhibits thereto:
- Purchase Agreement dated March 26, 1998 with respect to the MOPPRS
- Form of Note with respect to the 2011 MOPPRS
- Form of Note with respect to the 2012 MOPPRS
- Remarketing Agreement, dated as of March 31, 1998, between MCN
Investment Corporation, MCN Energy Group Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated with respect to the 2011 MOPPRS
- Remarketing Agreement, dated as of March 31, 1998, between MCN
Investment Corporation, MCN Energy Group Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated with respect to the 2012 MOPPRS
MCN filed an additional report on Form 8-K dated April 1, 1998, under Item
5, with respect to the offering by MCN Investment Corporation of its 6.375%
REset Put Securities (REPS(SM)) due 2008 pursuant to the registration
statement of the registrant and MCN Investment Corporation on Form S-3 (No.
333-47137) filed with the Securities and Exchange Commission under the
Securities Act of 1933. The following documents were filed as Exhibits
thereto:
- Underwriting Agreement dated April 1, 1998 with respect to the REPS
- Form of Note with respect to the REPS
27
<PAGE> 30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
Date: May 14, 1998 By: /s/ HAROLD GARDNER
------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
28
<PAGE> 1
EXHIBIT 3-1
STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
CORPORATION AND SECURITIES BUREAU
CORPORATION DIVISION
LANSING, MICHIGAN
MCN CORPORATION
ARTICLES OF INCORPORATION
FILED
AUGUST 12, 1988
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
IDENTIFICATION NUMBER 381-153
<PAGE> 2
ARTICLES OF INCORPORATION
OF
MCN CORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the
undersigned corporation executes the following Articles:
FIRST. The name of the corporation is MCN Corporation
SECOND. The purpose or purposes for which the Corporation is organized is
to engage in any activity with in the purposes for which corporations may be
organized under the Michigan Business Corporation Act.
THIRD. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 75,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 50,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
The designations, voting powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions of the above classes of stock and other general provisions
relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
2
<PAGE> 3
(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other
series of Preferred Stock, the terms and conditions upon which
and the periods in respect of which dividends shall be payable,
whether and upon what conditions such dividends shall be
cumulative and, if cumulative, the date or dates from which
dividends shall accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or
rate or rates at which, the adjustments with which and the manner
in which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution
or winding up of the Corporation, which rights may vary depending
on whether such liquidation, dissolution, distribution or winding
up is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of capital stock of the Corporation, and, if
so convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
3
<PAGE> 4
adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of the
shares of such series, and whether and under what conditions the
shares of such series (along or together with the shares of one
or more other series having similar provisions) shall be entitled
to vote separately as a single class, for the election of one or
more additional directors of the Corporation in case of dividend
arrearages, or other specified events, or upon other matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to
restrictions as to issuance or as to the powers, preferences or
rights of any such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as
the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or
provided in the resolution or resolutions of the Board of Directors creating
any series of Preferred Stock pursuant to this Part I, the holders of the
shares of Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged,
purchased, retired or surrendered to the Corporation, or which have been issued
and reacquired in any manner, may, upon compliance with any applicable
provisions of the Michigan Business Corporation Act, be given the status of
authorized and unissued shares of Preferred Stock and may be reissued by the
Board of Directors as part of the series of which they were originally a part
or may be reclassified into and reissued as part of a new series or as a part
of any other series, all subject to the protective conditions or restrictions
of any outstanding series of Preferred Stock.
PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
4
<PAGE> 5
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable requirements, if any, with
respect to the setting aside of sums of purchase, retirement or sinking funds
for Preferred Stock, the holders of Common Stock shall be entitled to receive,
to the extent permitted by law, such dividends as may be declared from time to
time by the Board of Directors.
5
<PAGE> 6
PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
FOURTH.
(a) The address of the registered office of the Corporation is 500
Griswold Street, Detroit, Michigan 48226.
(b) The name of the registered agent at the registered office is
Daniel L. Schiffer.
FIFTH. The name and address of the incorporator is as follows;
Name Address
- ---- -------
Michigan Consolidated Gas Company 500 Griswold Street
Detroit, Michigan 48226
SIXTH.
(a) The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors. The number of directors of the
Corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
Corporation, except that the minimum number of directors shall be fixed at not
fewer than seven and the maximum number of directors shall be fixed at not more
than ten. The directors shall be divided into three classes, designated as
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. At the 1989 annual meeting of shareholders and at each
succeeding annual meeting of shareholders, successors to the class of directors
whose terms of office expire at that annual meeting shall be elected to hold
6
<PAGE> 7
office for a three-year term, so that the term of office of one class of
directors shall expire in each year.
Any vacancy occurring on the Board of Directors through death,
resignation, retirement, disqualification, removal or other cause, or resulting
from an increase, the number of directors, may be filled by the affirmative
vote of a majority of the then remaining directors, through less than a quorum,
or by the sole remaining director for a term of office continuing only until
the next election of directors by the shareholders.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly created directorships are filled by the Board of Directors, there shall
be no classification of the additional directors until the next election of
directors by the shareholders.
(b) Any director may be removed from office at any time either (i) by vote
of the holders of two-thirds of the shares entitled to vote at an election of
directors, but only for cause, or (ii) by vote of two-thirds of the other
directors, with or without cause.
(c) Notwithstanding the foregoing paragraphs, whenever the holders of any
one or more class or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of the Articles of Incorporation applicable thereto. The then
authorized number of directors of the Corporation shall be increased by the
number of additional directors to be elected, and such directors so elected
shall not be divided into classes pursuant to this Article SIXTH unless
expressly provided by such terms.
(d) Nominations for election to the Board of Directors of the Corporation
at a meeting of shareholders may be made by the Board of Directors, on behalf
of the Board of Directors by any nominating committee appointed by the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of directors at a meeting. Nominations, other than those made by or
on behalf of the Board of Directors, shall be made by notice in writing
delivered to or mailed, postage prepaid, and received by the Secretary of the
Corporation at least 90 days but no more than 120 days prior to the anniversary
date of the immediately preceding annual meeting of shareholders. The notice
shall set forth (i) the name and address of the shareholder who intends to make
the nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the number of shares of stock of the Corporation which are
beneficially owned by each nominee and by the nominating
7
<PAGE> 8
shareholder; (v) any other information concerning the nominee that must be
disclosed of nominees in proxy solicitations pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (or any subsequent provisions replacing such
Regulation); and (vi) the executed consent of each nominee to serve as a
director of the Corporation, if elected. The chairman of the meeting of
shareholders may, if the facts warrant, determine that a nomination was not
made in accordance with the foregoing procedures, and if the chairman should so
determine, the chairman shall so declare to the meeting and the defective
nomination shall be disregarded.
SEVENTH. Any action required to permitted to be taken by any shareholders
of the Corporation must be effected at a duly called annual or special meeting
of such shareholders and may not be effected by any consent in writing by such
shareholders. Except as may be otherwise required by law, special meetings of
shareholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution approved by a majority of the Board of Directors.
EIGHTH. The Board of Directors shall not approve, adopt or recommend any
proposal to enter into a Business Combination (as hereinafter defined) or any
offer of any person or entity, other than the Corporation, to make a tender or
exchange offer for any capital stock of the Corporation, unless and until the
Board of Directors shall first establish a procedure for evaluating, and shall
have evaluated, the proposal or offer and determine that it would be in
compliance with all applicable laws and in the best interests of the
Corporation and its shareholders. In connection with its evaluation, the Board
of Directors may seek and obtain the advice of independent investment counsel,
may seek and rely upon an opinion of legal counsel and other independent
advisers, and may test such compliance with laws in any state or federal court
or before any state or federal administrative agency which may have appropriate
jurisdiction. In connection with its evaluation as to the best interests of
the Corporation and its shareholders, the Board of Directors shall consider all
factors which it deems relevant, including without limitation: (i) the adequacy
and fairness of the consideration to be received by the Corporation and/or its
shareholders considering the future prospects for the Corporation and its
business, historical trading prices of the Corporation capital stock, the price
that might be achieved in a negotiated sale of the Corporation as a whole, and
premiums over trading prices which have been proposed or offered with respect
to the securities of other companies in the past in connection with similar
offers; (ii) the business, financial condition and earnings prospects of the
acquiring person or entity and the competence, experience and integrity of the
acquiring person or entity and its management; and (iii) the potential social
and economic impact of the offer and its consummation upon the Corporation's
customers, the communities in which the Corporation operates or is located and
upon the Corporation's employees, other than its officers.
The term "Business Combination" shall mean any merger or consolidation of
the Corporation with any other person or entity.
8
<PAGE> 9
NINTH. A director of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Corporation or its shareholders, (ii) acts or
omissions not in good faith or that involve international misconduct or a
knowing violation of law, (iii) a violation of Section 551(1) of the Michigan
Business Corporation Act, or (iv) any transaction from which the director
derived an improper personal benefit. If the Michigan Business Corporation Act
is amended after the date of these Articles of Incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Michigan Business
Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
TENTH. The Corporation shall have perpetual existence.
ELEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by the laws of Michigan, and all rights
conferred herein upon shareholders and directors are granted subject to this
reservation. Notwithstanding the foregoing as well as any other provision
contained in these Articles of Incorporation, any agreement with any national
securities exchange or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote required by any
other provision of these Articles of Incorporation, any agreement with any
national securities exchange or any provision of law, the affirmative vote of
the holders of at least two-thirds of the votes entitled to be cast by the
holders of all the then outstanding shares of the Corporation, voting together
as a single class, shall be required to amend or repeal Articles SIXTH,
SEVENTH, EIGHTH, or this Article ELEVENTH of these Articles of Incorporation or
adopt any provision inconsistent therewith.
The incorporator signs its name this 12th day of August, 1988.
MICHIGAN CONSOLIDATED GAS COMPANY
By:
-----------------------------------------
Alfred R. Glancy III
Chairman and Chief Executive Officer
9
<PAGE> 10
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
FILED
DECEMBER 28, 1989
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is: MCN
Corporation
2. The corporation identification
number (CID) assigned by the Bureau is: 381-153
3. The location of its registered office is:
500 Griswold Detroit, Michigan 48226
----------------------------- -----
4. Article Third of the Articles of Incorporation is hereby
------------
amended to read
add thereto the Certificate of Establishment and Designation of Junior
Participating Preferred Stock, Series A of MCN Corporation in the form attached
hereto as Exhibit A.
<PAGE> 11
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B)
b. X The foregoing amendment to the Articles of Incorporation was duly
adopted on the 20th day of December, 1989. The amendment:
(check one of the following)
X was duly adopted in accordance with Section 302 of the Act by the
Board of Directors.
Signed this 28th day of December , 1989
------ ------------
By
---------------------------------------
Stephen E. Ewing, President
---------------------------------------
<PAGE> 12
Exhibit A
FORM
of
CERTIFICATE OF ESTABLISHMENT AND DESIGNATION
of
JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A
of
MCN CORPORATION
(Pursuant to Section 450.1302 of the
Michigan Business Corporation Act)
MCN Corporation, a corporation organized and existing under the Business
Corporation Act of the State of Michigan (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 450.1302 of
the Michigan Business Corporation Act at a meeting duly called and held on
December 20, 1989;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") by the provisions of the Articles of Incorporation
of the Corporation, the Board of Directors hereby establishes a series of
Preferred Stock, without par value (the "Preferred Stock"), of the Corporation
and hereby states the designation and number of shares, and prescribes the
relative rights and preferences thereof as follows:
Junior Participating Preferred Stock, Series A:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Junior Participating Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 250,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number shares then outstanding plus the number of shares reserved for issuance
upon the exercise of outstanding options, rights or warrants, or the conversion
of any outstanding securities, issued by the Corporation exercisable for or
convertible into Series A Preferred Stock.
A-1
<PAGE> 13
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $.01 per share (the "Common Stock"), of the Corporation,
and of any other junior stock, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commending on
the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event
the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such even under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided,
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend
of $1 per share on the Series A Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
A-2
<PAGE> 14
(C) The Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior
to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the stockholders
of the Corporation.
(B) Except as otherwise provided herein, in any other Certificate of
Establishment and Designation establishing a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote together
as one class on all matters submitted to a vote of the stockholders of the
Corporation.
(C) Except as otherwise provided herein, or by law, holders of
shares of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are
entitled to vote with holders of shares of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in
A-3
<PAGE> 15
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series
A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A
Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a party (either as
to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except dividends paid ratably on the
Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock; provided, that the Corporation may at any
time redeem, purchase or otherwise acquire shares of such junior
stock in exchange for shares of stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders
of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. Required Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition
A-4
<PAGE> 16
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Articles of Incorporation, or in any other Certificate of
Establishment and Designation establishing a series of Preferred Stock or any
similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided, that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior
to such event under the provisio to clause (1) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of
A-5
<PAGE> 17
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
A-6
<PAGE> 18
EXHIBIT A
THIRD. 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 125,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 100,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
2. The designations, voting powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the above classes of stock and other general
provisions relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other series
of Preferred
<PAGE> 19
Stock, the terms and conditions upon which and the periods in
respect of which dividends shall be payable, whether and upon
what conditions such dividends shall be cumulative and, if
cumulative, the date or dates from which dividends shall
accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or
rate or rates at which, the adjustments with which and the manner
in which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution
or winding up of the Corporation, which rights may vary depending
on whether such liquidation, dissolution, distribution or winding
up is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of capital stock of the Corporation, and, if
so convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of
<PAGE> 20
the shares of such series, and whether and under what conditions
the shares of such series (along or together with the shares of
one or more other series having similar provisions) shall be
entitled to vote separately as a single class, for the election
of one or more additional directors of the Corporation in case of
dividend arrearages, or other specified events, or upon other
matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to
restrictions as to issuance or as to the powers, preferences or
rights of any such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as
the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock pursuant to this Part I, the holders of the shares of
Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any applicable provisions
of the Michigan Business Corporation Act, be given the status of authorized and
unissued shares of Preferred Stock and may be reissued by the Board of
Directors as part of the series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as a part of any
other series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.
PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable
<PAGE> 21
requirements, if any, with respect to the setting aside of sums of purchase,
retirement or sinking funds for Preferred Stock, the holders of Common Stock
shall be entitled to receive, to the extent permitted by law, such dividends as
may be declared from time to time by the Board of Directors.
PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
<PAGE> 22
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
FILED
May 4, 1994
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is:
MCN Corporation
2. The corporation
identification number (CID)
assigned by the Bureau is: 381-153
3. The location of its registered office is:
500 Griswold Detroit, Michigan 48226
------------------------------- -----
4. Article Third of the Articles of Incorporation is hereby
-------------
amended to read
(See attached Exhibit A)
<PAGE> 23
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B)
b. X The foregoing amendment to the Articles of Incorporation was duly
adopted on the 28th day of April , 1994. The amendment:
(check one of the following)
X was duly adopted in accordance with Section 611(2) of the Act by the
vote of the shareholders if a profit corporation, or by the vote of
the shareholders or members if a nonprofit corporation, or by the
vote of the directors if a nonprofit corporation organized on a
nonstock directorship basis. The necessary votes were cast in favor
of the amendment.
Signed this 2nd day of May, 1994
----- ---- --
By
-------------------------------------
Alfred R. Glancy III, Chairman, President and CEO
-------------------------------------------------
<PAGE> 24
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
- --------------------------------------------------------------------------------
Date Received
FILED
APR 23, 1997
Administrator
- ------------------------------ MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
Name CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU
- ------------------------------
Address
- ------------------------------
City State Zip Code
EFFECTIVE DATE:
- ------------------------------
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is: MCN CORPORATION
2. The identification number assigned by the Bureau is: 381-153
3. The location of the registered office is:
500 Griswold Street Detroit ,Michigan 48226
- --------------------------------------------------------------------------------
(Street Address) (City) (Zip Code)
4. Article I of the Articles of Incorporation is hereby amended to read as
-------
follows:
The name of the corporation shall be MCN Energy Group Inc.
The effective date of this Certificate of Amendment to the Articles
of Incorporation shall be April 28, 1997.
<PAGE> 25
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B). DO NOT COMPLETE
BOTH.
b. [ ] The foregoing amendment to the Articles of Incorporation was duly
adopted on the 22nd day of April, 1997.
[ ] was duly adopted in accordance with Section 611(2) of the Act by the
vote of the shareholders if a profit corporation, or by the
shareholders or members if a nonprofit corporation, or by the vote of
the directors if a nonprofit corporation organized on a nonstock
directorship basis. The necessary votes were cast in favor of the
amendment.
Signed this 22nd day of April, 1997
By /s/
----------------------------------------------------------------
(Only Signature of President, Vice-President, Chairperson, or Vice
Chairperson)
Daniel Schiffer, Senior Vice President, General Counsel and
Secretary
------------------------------------------------------------------
(Type or Print Name) (Type or Print Title)
<PAGE> 26
EXHIBIT A
THIRD. 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 275,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 250,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
2. The designations, voting powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the above classes of stock and other general
provisions relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
<PAGE> 27
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other series
of Preferred Stock, the terms and conditions upon which and the
periods in respect of which dividends shall be payable, whether and
upon what conditions such dividends shall be cumulative and, if
cumulative, the date or dates from which dividends shall
accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or rate
or rates at which, the adjustments with which and the manner in
which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution or
winding up of the Corporation, which rights may vary depending on
whether such liquidation, dissolution, distribution or winding up
is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of
2
<PAGE> 28
convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of the
shares of such series, and whether and under what conditions the
shares of such series (along or together with the shares of one or
more other series having similar provisions) shall be entitled to
vote separately as a single class, for the election of one or more
additional directors of the Corporation in case of dividend
arrearages, or other specified events, or upon other matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions
as to issuance or as to the powers, preferences or rights of any
such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as the
Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock pursuant to this Part I, the holders of the shares of
Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any applicable provisions
of the Michigan Business Corporation Act, be given the status of authorized and
unissued shares of Preferred Stock and may be reissued by the Board of
Directors as part of the series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as a part of any
other series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.
3
<PAGE> 29
PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable requirements, if any, with
respect to the setting aside of sums of purchase, retirement or sinking funds
for Preferred Stock, the holders of Common Stock shall be entitled to receive,
to the extent permitted by law, such dividends as may be declared from time to
time by the Board of Directors.
PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
4
<PAGE> 30
EXHIBIT B
SIXTH.
(a) The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors. The number of directors of the
Corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
Corporation, except that the minimum number of directors shall be fixed at not
fewer than nine and the maximum number of directors shall be fixed at not more
than twelve. The directors shall be divided into three classes, designated as
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. At the 1989 annual meeting of shareholders and at each
succeeding annual meeting of shareholders, successors to the class of directors
whose terms of office expire at that annual meeting shall be elected to hold
office for a three-year term, so that the term of office of one class of
directors shall expire in each year.
Any vacancy occurring on the Board of Directors through death,
resignation, retirement, disqualification, removal or other cause, or resulting
from an increase, the number of directors, may be filled by the affirmative
vote of a majority of the then remaining directors, through less than a quorum,
or by the sole remaining director for a term of office continuing only until
the next election of directors by the shareholders.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly created directorships are filled by the Board of Directors, there shall
be no classification of the additional directors until the next election of
directors by the shareholders.
(b) Any director may be removed from office at any time either (i) by vote
of the holders of two-thirds of the shares entitled to vote at an election of
directors, but only for cause, or (ii) by vote of two-thirds of the other
directors, with or without cause.
(c) Notwithstanding the foregoing paragraphs, whenever the holders of any
one or more class or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special
<PAGE> 31
meeting of shareholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of the
Articles of Incorporation applicable thereto. The then authorized number of
directors of the Corporation shall be increased by the number of additional
directors to be elected, and such directors so elected shall not be divided
into classes pursuant to this Article SIXTH unless expressly provided by such
terms.
(d) Nominations for election to the Board of Directors of the Corporation
at a meeting of shareholders may be made by the Board of Directors, on behalf
of the Board of Directors by any nominating committee appointed by the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of directors at a meeting. Nominations, other than those made by or
on behalf of the Board of Directors, shall be made by notice in writing
delivered to or mailed, postage prepaid, and received by the Secretary of the
Corporation at least 90 days but no more than 120 days prior to the anniversary
date of the immediately preceding annual meeting of shareholders. The notice
shall set forth (i) the name and address of the shareholder who intends to make
the nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the number of shares of stock of the Corporation which are
beneficially owned by each nominee and by the nominating shareholder; (v) any
other information concerning the nominee that must be disclosed of nominees in
proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act
of 1934 (or any subsequent provisions replacing such Regulation); and (vi) the
executed consent of each nominee to serve as a director of the Corporation, if
elected. The chairman of the meeting of shareholders may, if the facts
warrant, determine that a nomination was not made in accordance with the
foregoing procedures, and if the chairman should so determine, the chairman
shall so declare to the meeting and the defective nomination shall be
disregarded.
2
<PAGE> 1
EXHIBIT 12-1
MCN ENERGY GROUP INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars In Thousands)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
March 31, 1998 December 31, 1997 December 31, 1996
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (5)
Pre-tax income (2) $ 190,082 $ 181,299 $ 146,607
Fixed charges (3) 132,454 125,338 99,944
--------- --------- ---------
Earnings as defined $ 322,536 $ 306,637 $ 246,551
========= ========= =========
FIXED CHARGES AS DEFINED (1) (4) (5)
Interest, expensed $ 88,111 $ 86,453 $ 77,781
Interest, capitalized 19,601 18,190 13,235
Amortization of debt discounts, premium
and expense 2,267 2,426 2,217
Interest implicit in rentals 2,375 2,181 2,339
Preferred securities dividend requirements
of subsidiaries 36,615 31,090 12,390
--------- --------- ---------
Fixed charges as defined $ 148,969 $ 140,340 $ 107,962
========= ========= =========
Ratio of Earnings to Fixed Charges 2.17 2.18 2.28
========= ========= =========
</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, 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 ENERGY GROUP INC. EXHIBIT 12-2
COMPUTATION OF INTEREST COVERAGE RATIO
(Dollars In Thousands)
The following table sets forth the interest coverage ratio for MCN on a
historical basis for the periods indicated. This ratio differs from the SEC
prescribed "Ratio of Earnings to Fixed Charges" in its treatment of certain
hybrid securities of MCN.
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
March 31, 1998 December 31, 1997 December 31, 1996
---------------------- ----------------------- ---------------------
<S> <C> <C> <C>
EARNINGS AS ADJUSTED:
Pre-tax income (1) $ 194,458 $ 194,430 $ 148,944
Non-recourse interest 2,478 1,609 -
Interest capitalized (19,601) (18,190) (14,631)
Preferred dividend adjustment (2) 34,701 32,465 17,989
Pension costs (34,954) (20,539) (14,029)
Postretirement costs 11,717 11,411 13,586
Interest rate charges 109,523 103,840 89,136
--------- --------- ---------
$ 298,322 $ 305,026 $ 240,995
========= ========= =========
INTEREST RATE CHARGES:
Interest expensed $ 88,111 $ 86,453 $ 77,781
Interest capitalized 19,601 18,190 14,631
Interest implicit in rentals 2,375 2,181 2,339
Non-recourse interest (2,478) (1,609) -
Preferred dividends adjustment (3) 1,914 (1,375) (5,615)
--------- --------- ---------
$ 109,523 $ 103,840 $ 89,136
========= ========= =========
Interest Coverage Ratio 2.72 2.94 2.70
========= ========= =========
</TABLE>
(1) Income from continuing operations before income taxes
(2) Preferred dividends expensed, adjusted to: exclude(a) dividends on the
$100,000,000 of Single Point Remarketed Reset Capital Securities (SPRRCS)
of MCN Financing VI, (b) dividends on the $100,000,000 of Private
Institutional Trust Securities (PRINTS) of MCN Financing V and to include
(c) interest on the $130,000,000 of 6.82% Series Medium-Term Notes,
issued in conjunction with the $135,000,000 of 8% Preferred Redeemable
Increased Dividend Equity Securities of MCN.
(3) Interest rate charges are being adjusted to exclude interest on
$130,000,000 of 6.82% Series Medium-Term Notes and include dividends on
the SPRRCS and PRINTS.
<PAGE> 1
EXHIBIT 12-3
MCN INVESTMENT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars In Thousands)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
March 31, 1998 December 31, 1997 December 31, 1996
--------------------- --------------------- -------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (4)
Pre-tax income (2) $ 61,063 $ 51,892 $ 21,899
Fixed charges (3) 71,334 65,891 41,628
-------- -------- --------
Earnings as defined $132,397 $117,783 $ 63,527
======== ======== ========
FIXED CHARGES AS DEFINED (1) (4)
Interest, expensed $ 69,932 $ 64,434 $ 40,523
Interest, capitalized 16,517 15,002 8,002
Amortization of debt discounts, premium
and expense 1,098 1,183 982
Interest implicit in rentals 304 274 123
-------- -------- --------
Fixed charges as defined $ 87,851 $ 80,893 $ 49,630
======== ======== ========
Ratio of Earnings to Fixed Charges 1.51 1.46 1.28
======== ======== ========
</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 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
MCN INVESTMENT CORPORATION EXHIBIT 12-4
COMPUTATION OF INTEREST COVERAGE RATIO
(Dollars In Thousands)
The following table sets forth the interest coverage ratio for MCN Investment on
a historical basis for the periods indicated. This ratio differs from the SEC
prescribed "Ratio of Earnings to Fixed Charges" in its treatment of certain
hybrid securities of MCN and MCN Investment.
<TABLE>
<CAPTION>
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
March 31, 1998 December 31, 1997 December 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS ADJUSTED:
Pretax income (1) $ 64,965 $ 64,738 $ 24,208
Interest capitalized (16,517) (15,002) (9,398)
Preferred dividend adjustment (2) 34,701 39,956 17,989
Interest rate charges 52,052 40,476 32,696
-------- -------- --------
$135,201 $130,168 $ 65,495
======== ======== ========
INTEREST RATE CHARGES:
Interest expensed $ 69,932 $ 64,434 $ 40,523
Interest capitalized 16,517 15,002 9,398
Interest implicit in rentals 304 996 764
Preferred dividends adjustment (2) (34,701) (39,956) (17,989)
-------- -------- --------
$ 52,052 $ 40,476 $ 32,696
======== ======== ========
Interest Coverage Ratio 2.60 3.22 2.00
======== ======== ========
</TABLE>
(1) Income from continuing operations before income taxes
(2) Preferred dividends expense of MCN allocated to MCN Investment
which includes (a) dividends on the $100,000,000 of 9 3/8% redeemable
preferred securities of MCN Michigan Limited Partnership, (b) dividends on
the $132,250,000 of 8% FELINE PRIDES of MCN Financing III, (c) interest on
the $130,000,000 of 6.82% Series Medium-Term Notes issued in conjunction
with the $135,000,000 of 8% Preferred Redeemable Increased Dividend Equity
Securities of MCN and (d) dividends on the $80,000,000 of 8 5/8% Trust
Originated Preferred Securities of MCN Financing I.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 39,713
<SECURITIES> 0
<RECEIVABLES> 452,665
<ALLOWANCES> 18,661
<INVENTORY> 65,112
<CURRENT-ASSETS> 722,476
<PP&E> 4,287,259
<DEPRECIATION> 1,520,994
<TOTAL-ASSETS> 4,404,062
<CURRENT-LIABILITIES> 770,645
<BONDS> 1,415,494
504,869
0
<COMMON> 788
<OTHER-SE> 1,219,217
<TOTAL-LIABILITY-AND-EQUITY> 4,404,062
<SALES> 0
<TOTAL-REVENUES> 701,460
<CGS> 0
<TOTAL-COSTS> 582,330
<OTHER-EXPENSES> (12,079)
<LOSS-PROVISION> 7,507
<INTEREST-EXPENSE> 25,370
<INCOME-PRETAX> 117,194
<INCOME-TAX> 36,684
<INCOME-CONTINUING> 80,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,510
<EPS-PRIMARY> 1.03
<EPS-DILUTED> .97
</TABLE>
