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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
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38-2820658
(I.R.S.
MICHIGAN Employer
(State or other jurisdiction of Identification
incorporation or organization) No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
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313-256-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS ---------------------
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Common Stock, $.01 Par Value Per Share New York Stock Exchange
9 3/8% Cumulative Preferred Securities, Series A* New York Stock Exchange
8 5/8% Trust Originated Preferred Securities** New York Stock Exchange
8 3/4% Preferred Redeemable Increased Dividend Equity
Securities New York Stock Exchange
8% FELINE PRIDES New York Stock Exchange
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* Issued by MCN Michigan Limited Partnership. The payments of dividends and
payments on liquidation or redemption are guaranteed by MCN Energy Group Inc.
** Issued by MCN Financing I. The payments of dividends and payments on
liquidation or redemption are guaranteed by MCN Energy Group Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
The aggregate market value of MCN Energy Group Inc. Common Stock, $.01 par
value per share, held by non-affiliates as of February 24, 1998 was $2.896
billion based on 78,270,811 outstanding shares and the closing price on that day
(New York Stock Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of MCN's 1997 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5,6,7 and 8 and portions of MCN's February 1998
definitive Proxy Statement are incorporated by reference in Part III.
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KEY TO ABBREVIATED TERMS
Antrim Gas............................ Natural gas produced from shallow
wells in the Devonian (Antrim) shale
formations.
Capital Investments................... MCN's consolidated capital
expenditures plus acquisitions and
MCN's share of capital expenditures
of joint ventures, less the minority
partners' share of consolidated
capital expenditures.
Citizens.............................. Citizens Gas Fuel Company; a wholly
owned natural gas distribution
subsidiary of MCN.
Coalbed Methane....................... Natural gas formed during the
transformation of plant material into
coal. Drilling a well into the coal
and dewatering the coal seam will
cause a reduction in pressure,
releasing natural gas.
Cogeneration.......................... The production of two forms of
energy, usually steam and
electricity, from a single fuel
source such as natural gas.
Degree Days........................... A measure of the coldness of the
weather based on how much the day's
average temperature is below 65
degrees Fahrenheit.
Diversified Energy group.............. MCN's exploration and production,
pipeline and processing, gas storage,
energy marketing, and electric power
businesses.
End User Transportation............... A gas delivery service provided to
large-volume commercial and
industrial customers who purchase
natural gas directly from producers
or brokerage companies.
FERC.................................. Federal Energy Regulatory Commission;
a federal agency that determines the
interstate rates and regulations of
interstate pipelines.
Gas Gathering......................... The process of collecting natural gas
from gas wells and then transporting
the gas through pipelines to
processing plants or major pipelines.
Gas Processing........................ For MCN, the removal of carbon
dioxide and petroleum liquids from
natural gas so it meets market
quality standards.
Gas Storage........................... The process of injecting, storing and
withdrawing natural gas from a
depleted underground natural gas
field or salt cavern.
GCR................................... Gas Cost Recovery; a process by which
MichCon, through annual gas cost
proceedings before the Michigan
Public Service Commission, is allowed
to recover its reasonable and prudent
cost of gas sold.
Intermediate Transportation........... A gas delivery service provided to
producers, brokers and other gas
companies that own the natural gas,
but are not the ultimate consumers.
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KEY TO ABBREVIATED TERMS
(concluded)
Methanol.............................. A form of alcohol manufactured from
various feedstocks, including natural
gas, and used as a solvent,
antifreeze and high octane fuel.
MCN................................... MCN Energy Group Inc. and its
subsidiaries.
MCNIC................................. MCN Investment Corporation, a wholly
owned subsidiary of MCN and the
holding company of MCN's Diversified
Energy group subsidiaries.
MichCon............................... Michigan Consolidated Gas Company; a
wholly owned natural gas distribution
and intrastate transmission
subsidiary of MCN.
MichCon Pipeline Co. ................. A wholly-owned subsidiary of MichCon
that engages in pipeline projects
through its subsidiaries.
MPSC.................................. Michigan Public Service Commission;
the regulator of intrastate aspects
of the natural gas industry within
the State of Michigan.
Normal Weather........................ The average daily temperature within
MCN's Gas Distribution service area
during a recent 30-year period.
Spot Market........................... Buying and selling natural gas on a
short-term basis, typically month to
month.
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Units of Measurement
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Bcf..................................................... One billion cubic feet of natural gas.
Mbbl.................................................... One thousand barrels, which is a unit of
measurement of oil and other petroleum
liquids.
Mcf..................................................... One thousand cubic feet of natural gas.
MMcf.................................................... One million cubic feet of natural gas.
MW...................................................... One million watts of electricity.
Tcf..................................................... One trillion cubic feet of natural gas.
/d...................................................... Added to MMcf or Bcf to denote average
volumes per day.
/e...................................................... Added to other units of measurement to
provide a consolidated measure of equivalent
natural gas, crude oil and condensate at a
rate of 6 Mcf per barrel of oil or
condensate.
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TABLE OF CONTENTS
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PAGE
CONTENTS NUMBER
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Executive Officers of the Registrant........................ 21
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 22
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 23
Item 13. Certain Relationships and Related Transactions.............. 23
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 23
Signatures.............................................................. 29
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PART I
ITEM 1. BUSINESS
MCN Energy Group Inc. (MCN), is a diversified energy holding company with
markets and investments throughout North America and in Asia. The operating
revenues, operating income, and identifiable assets of MCN's business segments
are included in the financial statements, incorporated by reference in Item 8,
"Financial Statements and Supplementary Data," on page 22. At December 31, 1997,
MCN and its subsidiaries had 3,209 employees.
MCN operates through two major business groups, Diversified Energy and Gas
Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC), is
involved in the following businesses: Exploration & Production (E&P), with 1.3
trillion cubic feet equivalent (Tcfe) of proved gas and oil reserves at
December 31, 1997 in the Midwest/Appalachia, Midcontinent/Gulf Coast and
Western regions of the United States; Pipelines & Processing, with gathering,
processing and transmission facilities near areas of rapid reserve development
and growing consumer markets; Energy Marketing, with total gas sales and
exchange gas delivery markets of 358.8 billion cubic feet (Bcf) for 1997;
Electric Power, with investments in electric generation facilities in
operation and under development with a combined 2,804 megawatts (MW) of gross
capacity and investments in electric distribution facilities; and Gas Storage,
with investments in storage facilities that have 52 Bcf of storage capacity,
42 Bcf of which is currently under development.
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and intrastate transmission company
serving 1.2 million customers in more than 500 communities throughout
Michigan. MichCon is subject to the accounting requirements and rate
regulation of the Michigan Public Service Commission (MPSC) with respect to
the distribution and intrastate transportation of natural gas. Slightly less
than half of MichCon's labor force is covered by collective bargaining
agreements. In June 1998, bargaining agreements covering approximately 15% of
the labor force are due to expire.
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DIVERSIFIED ENERGY
Diversified Energy's operating revenues for 1997 totaled $951.3 million
(including intercompany transactions), while operating and joint venture income
was $112.7 million in 1997, nearly double 1996 operating and joint venture
income. Diversified Energy contributed 43% of the company's earnings, up from
28% in 1996. The growth in earnings was driven primarily by increased operating
and joint venture income as all of MCN's Diversified Energy business units
turned in exceptional performances. Partially offsetting the growth in earnings
were increased financing costs resulting from additional capital needed to fund
investments.
Diversified Energy -- Operating Statistics
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1997 1996 1995
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Exploration & Production
Gas Production (MMcf)..................................... 78,218 57,202 31,420
Oil Production (Mbbl)..................................... 3,346 1,086 388
Gas and Oil Production (MMcf Equivalent).................. 98,294 63,718 33,748
Pipelines & Processing*
Gas Processed (MMcf)...................................... 42,761 44,223 14,588
Methanol Produced (Thousand Gallons)...................... 60,810 10,545 --
Transportation (MMcf)..................................... 115,975 86,391 4,994
Energy Marketing, Gas Storage & Electric Power*
Gas Sales (MMcf).......................................... 343,719 218,952 170,668
Exchange Gas Deliveries (MMcf)............................ 15,109 22,586 16,462
------- ------- -------
358,828 241,538 187,130
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Electricity sales (thousands of MW hours)................. 1,843 709 272
======= ======= =======
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* Includes MCN's share of joint ventures
EXPLORATION & PRODUCTION
MCNIC is engaged in natural gas and oil exploration, development and
production through its wholly owned subsidiary, MCNIC Oil & Gas Company (MOG).
At December 31, 1997, proved gas reserves totaled 1,166.2 Bcf and proved oil
reserves were 155.1 Bcfe, up a combined 80.2 Bcfe, or 7%, from December 1996
levels. The increase in gas and oil reserves during 1997 was tempered by the
sale of properties with 57.6 Bcfe of proved reserves and net downward reserve
revisions of 32.8 Bcfe. Operating and joint venture income for 1997 increased by
$24.9 million over 1996 to $58.1 million, reflecting a significant increase in
gas and oil production during 1997 to 98.3 Bcfe from 63.7 Bcfe in 1996.
Approximately $17.8 million in federal tax credits were generated in 1997
related to gas production from certain Antrim and coalbed methane gas wells. E&P
operating results for 1997 reflect a $1.95 average gas sales rate per thousand
cubic feet (Mcf), which declined $.01 per Mcf compared to 1996. Operating
results for 1996 reflect a gas sales rate of $1.96 per Mcf, compared to $2.02
per Mcf in 1995. The average sales rates include the effect of hedging with
commodity swap and futures agreements, which are used to manage Diversified
Energy's exposure to the risk of market price fluctuations. As a result of
strong gas prices in the marketplace, hedging agreements had the effect of
reducing the average sales rate for 1997 by $.40 per Mcf and for 1996 by $.35
per Mcf. Conversely, hedging agreements increased the average sales rates for
1995 by $.51 per Mcf in a less favorable gas market. E&P operating results also
reflect an average oil sales rate of $16.87 per barrel, which decreased by $3.31
per barrel compared to 1996. The average oil sales rate for 1996 increased by
$3.94 per barrel compared to 1995.
MOG's strategy is to continue to grow its U.S. gas reserve base and
production in known producing areas through drilling and acquisition, generating
attractive returns. MOG is also pursuing international opportunities in areas
with known hydrocarbons involving both lower risk, unconventional long-life
reserves and higher risk conventional exploration and development prospects with
substantial upside potential. Although MOG may increase its operating role in
the future, currently it takes mainly a non-operated, but active role, investing
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with operators with local expertise in each play. MOG anticipates that
production will increase in the future through the continued development of its
large inventory of unconventional and conventional drilling locations and from
additional exploration and development of MOG's approximately 1.2 million net
(2.6 million gross) acres of undeveloped property.
In 1997, MOG participated in the drilling of 696 wells (412 net), bringing
the total drilled to 2,273 wells (1,477 net) since it began operations in 1992.
The 1997 drilling program achieved an overall drilling success rate of 91% and
added approximately 269 Bcfe of proved reserves. MOG's success rate in its
drilling program since its inception in 1992 has averaged approximately 91%. In
1997, about 26% of these wells were drilled in Michigan Devonian (Antrim) shale
formations. Even though the potential natural gas recovery from an average
Antrim well is less than the recovery from wells drilled in other types of
formations, wells drilled in the Antrim shale formations have a high success
rate and are therefore considered relatively low risk. MOG's average working
interest in Antrim shale E&P wells is approximately 80%. Exploratory activities
in the Midcontinent/Gulf Coast and Western regions involve greater risk of dry
holes or unproductive wells, but there is also a greater potential for finding
larger gas reserves. MOG's average working interest in these wells is
approximately 30%. Average finding cost in 1997 was $.90 per Mcfe, up from $.83
per Mcfe in 1996. Average production cost in 1997 was $.70 per Mcfe, down from
$.76 in 1996.
Approximately 42% of MOG's production and 71% of its proved reserves were
associated with the Midwest/Appalachia region in 1997, as MOG added 257 net
wells in the region. MOG continued as the largest Antrim producer, holding
interests in approximately 20% of the area's estimated 5,950 producing wells.
MOG's success in the Antrim shale formation provided them with the foundation to
begin a thorough evaluation of similar nonconventional reservoirs (fractured
shales, coal seams and tight sands) throughout the United States. Coalbed
methane production from MOG's CONSOL properties and partnership with Equitable
Resources, Inc. continued to place it among the largest players in the region.
MOG participated in 162 coalbed wells in this area during 1997.
About 33% of production and 14% of reserves were from the Midcontinent/Gulf
Coast in 1997. MOG owns a 41% working interest in the Broughton Joint Venture, a
partnership that is actively drilling in the Cotton Valley pinnacle reef play in
east Texas. The partnership made a significant natural gas discovery during the
third quarter 1997. The Camp Cooley #2R natural gas well, in which MOG holds a
24% net interest, has been producing since October at rates in excess of 30
million cubic feet per day (MMcf/d). With an absolute open flow potential
calculated at 48 MMcf/d, it is one of the largest discoveries in the play to
date. The Cotton Valley pinnacle reef play continues to attract national
attention for its high-potential drilling prospects despite difficult drilling
and completion conditions that have driven up exploration costs. Broughton holds
one of the biggest positions in this major play, with numerous large anomalies
identified through three-dimensional (3-D) seismic on its more than 300,000
gross acres concentrated within the three-county heart of the known producing
area. As a result, Broughton can be selective in choosing only the largest and
most prospective reef targets. The Broughton partnership participated in the
drilling of 10 wells during 1997, and 18 since entering the play in 1996.
Also on the Gulf Coast, MOG is involved in a number of high-potential 3-D
seismic plays that appear promising. These include a 17.7% working interest in a
120,000-acre Sligo reef play and a 47% working interest in a 29,500-acre project
in the successful Yegua and Wilcox plays, both in Texas, as well as a 43.8%
interest in a 154,000-acre project in Louisiana.
In the Midcontinent, development drilling continued in the Anadarko and
Permian Basins as MOG participated in 135 wells. Most notable were the 35 wells
completed in the Delaware Sands play in southeast New Mexico. These wells
boosted MOG's net production from the play and set up a number of development
locations for future drilling. In 1997, MOG added 65 net wells in the
Midcontinent/Gulf Coast region, while divesting of its interests in more than
500 mature Midcontinent wells and selling its ownership interest in an offshore
Gulf of Mexico venture.
The Western region became a significantly larger piece of the business in
1997, accounting for 25% of production and 15% of reserves, compared with only
6% and 9%, respectively, in 1996. In the Western region during 1997, MOG
participated in 200 wells and achieved a 93% drilling success rate that resulted
in the
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addition of 51 net wells. Production from the region is expected to increase at
double-digit rates again in 1998 with about 250 new wells planned for drilling.
Western region production has grown rapidly due to the Venoco and Jonah Field
partnerships.
MOG continues to develop its one-third partnership interest in a
52,000-acre block in and around the Jonah Field, located in the Green River
Basin of Wyoming. This partnership, which originally began in May 1996, included
12 existing gas wells and a 42 MMcf/d gathering system. Through the end of 1997,
MOG had drilled 28 additional wells, all of which were successful. As a result,
total field production tripled to 54 MMcf/d and the gathering system was
expanded to 65 MMcf/d. With 65 proved undeveloped locations identified and ready
to drill, MOG's net proved reserves from this field are approximately 104 Bcfe.
MOG's net natural gas volumes grew from 1.4 Bcfe of partial-year production in
1996 to 8.9 Bcfe in 1997.
In December 1996, MOG added California oil-producing acreage to the Western
region through the formation of Venoco L.L.C. Development drilling and
installation of secondary oil recovery facilities have increased the
partnership's production as much as 5,300 Bbls per day during 1997 to over 7,000
Bbls per day. The Venoco venture contributed 11.7 Bcfe of oil and gas production
in this region. In addition, the partnership acquired the South Ellwood
properties that have provided MOG with 4,000 Bbls per day of production in 1997.
Other areas of interest within MOG's Western region include the Powder
River Basin in Wyoming, where MOG has a 35% working interest in a coalbed
methane project that drilled 61 wells during 1997, bringing the well count to
118. In the Uinta Basin in Utah, MOG has 50% interests in both a secondary oil
recovery venture that drilled 50 successful producing wells in 1997 and a
coalbed methane project that has begun a five-well pilot program in anticipation
of full-scale development starting in 1999.
In 1997, MOG made significant investments in natural gas reserves,
acquiring interests in more than 32 producing wells. At December 31, 1997, 2,917
wells were producing. An additional 384 wells were in various stages of
completion and are expected to begin producing in 1998. Additional information
on MOG's exploration and production activities is reported under Item 2.
Properties, located on pages 20 and 21 under this section.
MOG anticipates that oil will become a larger percentage of total reserves
and production in order to achieve a more balanced portfolio. In addition to
producing increasing quantities of oil through traditional methods, MCN expects
increased production from enhanced oil recovery investments. In Michigan's
Niagaran Reef formation, carbon dioxide extracted from Antrim natural gas
production is being injected into existing oil reservoirs. Production began in
1997. MOG is also participating in a number of secondary recovery water-flood
projects, designed to increase the flow rate and overall production of MCN's oil
wells.
The natural gas industry is very competitive, especially when it comes to
obtaining desirable properties and projects for the production of natural gas
and oil. The successful relationships MOG has developed with its various joint
venture partners has created a unique network through which many potential E&P
investments have been, and will continue to be, presented to MOG for
consideration. MOG's primary focus is in known areas of gas production where the
chances of finding gas are high, although high-potential exploratory projects
will also be pursued. Additional investments in natural gas reserves will be
made in areas that offer proved reserves and an acceptable success rate. MOG's
investment portfolio is built on a diversification strategy intended to manage
risk: geographically, with investments in the Midwest/Appalachia,
Midcontinent/Gulf Coast and Western regions; geologically, with formation depths
ranging from less than 400 feet to more than 18,000 feet; and technologically,
with investments in both conventional and unconventional gas and oil projects.
Key to its strategy is also to significantly hedge the commodity price exposure
of its gas and oil portfolio long-term. Competition ranges from the major oil
companies to numerous small independent gas and oil companies.
It is anticipated that MCN will invest in excess of $400 million in
exploration and production activities in each of 1998 and 1999.
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PIPELINES & PROCESSING
Operating and joint venture income nearly tripled from $10.7 million in
1996 to $29.1 million in 1997 due to full-year contributions from projects added
in 1996 and strong growth across the range of its businesses. Also,
transportation volumes increased in 1997 to 116.0 Bcf from 86.4 Bcf in 1996,
while there was a slight decrease in processing volumes in 1997 to 42.8 Bcf from
44.2 Bcf in 1996. Results also reflect a significant contribution of methanol
production totaling 60.8 million gallons, compared with initial 1996 production
of 10.5 million gallons, from MCNIC's partnership with Lyondell Petrochemical
Co., formed in late 1996. Earnings from Lyondell also benefited from higher than
expected methanol prices during 1997.
Pipelines & Processing's expansion strategy is to own interests in natural
gas and gas liquid gathering, processing and transmission facilities near areas
of rapid reserve development or growing consumer markets. This strategy includes
working with other Diversified Energy businesses that complement Pipelines &
Processing's operations. Operating responsibilities for these facilities are
generally assigned to our partners.
The Dauphin Island Gathering Partners (DIGP) have approved expansion plans
to construct approximately 78 miles of gas gathering lines to provide an
incremental 500 MMcf/d of capacity. At year-end 1997 DIGP completed the first
phase of its planned expansion, adding 63 miles of pipe to interconnect its
existing 400 MMcf/d Mobile Bay and 300 MMcf/d Main Pass systems and to add more
than 200 MMcf/d of additional capacity. The result of the two-phase expansion
will be a 229-mile system that can deliver up to 1.1 Bcf/d of gas from more than
70 committed blocks that represent approximately 60% of the 5 Tcf of reserves
estimated to be in this part of the Gulf of Mexico. Pipelines & Processing's
share of this partnership is 34.6%.
Closely related to the DIGP project is the Mobile Bay Processing
partnership, formed during 1997 to build a major liquids handling and gas
processing facility, primarily for gas coming onshore from the Dauphin Island
system. MCNIC holds a 42.8% share of this venture, which began construction in
November 1997 and is scheduled to be in service in summer 1998 with a processing
capacity of 600 MMcf/d. Producer contracts are in place that commit sufficient
gas volumes to the plant to warrant its full design capacity. The partnership
intends to connect other sources of gas to the plant inlet, which would allow
for its expansion to 900 MMcf/d of capacity. MCNIC Power Company also has become
associated with this project by entering into a separate venture to construct a
40 MW cogeneration plant to meet the facility's electricity and thermal heating
requirements. Duke Energy Corp. is MCNIC's primary partner in this power
facility, as well as in the Dauphin Island Gathering and Mobile Bay Processing
ventures.
MCNIC's other offshore gathering system, the one-third owned 40-mile Blue
Dolphin Pipeline, increased its throughput 38% during 1997 to average 92
MMcfe/d. Strong leasing and drilling activity in the area indicates potential to
continue increasing this system's throughput during 1998 and beyond.
Elsewhere in the Midcontinent/Gulf Coast region, MCNIC formed two gathering
ventures with American Central Gas Companies, Inc. MCNIC holds a 40% interest in
each. In July 1997 the Foss Lake Gathering System venture was created to own and
operate a 76-mile low-pressure system in the Anadarko Basin of western Oklahoma.
This system currently gathers approximately 40 MMcf/d of natural gas and has a
design capacity of 60 MMcf/d, a level of service the partnership intends to
achieve during 1998 by attracting additional area producers to the system. In
December 1997 the second venture was formed to own and operate the East Texas
Gathering system. This system primarily consists of 68 miles of gas gathering
lines with throughput capacity of about 150 MMcf/d. It is located in an area of
significant drilling activity, providing opportunity for rapid expansion.
In September 1997 MCNIC created a partnership with Petro Source Corporation
to develop CO2 pipeline, processing plant and marketing projects in support of
enhanced oil recovery projects. As its first initiative, the partnership has
begun construction of an 82-mile, 100 MMcf/d CO2 pipeline that will connect four
gas treating plants to a distribution system servicing enhanced oil recovery
projects in the Permian Basin of west Texas. MCNIC Pipeline & Processing has a
33% interest in the pipeline, which is expected to be placed in service during
the second quarter of 1998.
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In early 1996, Pipelines & Processing joined a partnership to construct the
Portland Natural Gas Transmission System (PNGTS) as a shipper and a 20% equity
partner. As proposed in an amended regulatory filing made in late 1996, this
292-mile, $340 million pipeline would connect with the TransCanada PipeLines
system at the Vermont border and with the Tennessee Gas Pipeline system in
Massachusetts and would be in service in late 1998. PNGTS is proceeding on
schedule toward construction and is expected to begin providing up to 210 MMcf/d
of transportation service in late 1998. This system will transport gas from
pipeline interconnections in Quebec to markets as far south as Boston.
In April 1997 MCNIC agreed in principle to participate in the Millennium
Pipeline project as a 10.5% equity partner. This is a proposed $680 million
project to carry up to 700 MMcf/d of western Canadian and U.S. natural gas to
New York and other northeastern markets, with deliveries beginning in time for
the 1999-2000 winter heating season. The pipeline would originate at an
interconnection with the TransCanada PipeLines Ltd. system in Lake Erie and
primarily follow existing Columbia Gas Transmission rights-of-way to pipeline
interconnections in Westchester County, N.Y. An application seeking Federal
Energy Regulatory Commission (FERC) approval of the project was filed in
December 1997.
In August 1997 MCNIC joined the Vector Pipeline project with a 25% equity
interest. The $450 million project, which will transport up to 1 Bcf/d of
natural gas from the Chicago area, through Michigan and into the Dawn, Ontario
gas hub for ultimate redelivery in various U.S. and Canadian markets. Since the
Dawn hub will be readily accessible to Millennium, these two projects provide a
potential direct link from the Chicago hub to Northeast markets. This link is
becoming crucial as significant new pipeline capacity is being developed to move
western Canadian gas to the Chicago hub, with limited existing take-away
capacity, and as gas demand in the Northeast continues to grow at rates far
higher than the national average. Vector also filed a FERC application in
December 1997 with service proposed to begin in time for the 1999-2000 winter
heating season.
Both Millennium and Vector have conducted open seasons, in which customers
expressed interest in contracting for capacity in excess of the proposed
amounts. Subsequently, each of the pipelines has obtained binding precedent
agreements for transportation service that represent sufficient capacity to
proceed with development.
Pipelines & Processing is a 50% partner in Copano Field Services L.P.,
which continued its growth in 1997 primarily through strategic acquisitions. In
early 1997, Copano acquired a 25 MMcf/d gas processing facility attached to one
of its systems and reached an agreement with KCS Energy, Inc. to purchase a
150-mile, 150 MMcf/d intrastate gas pipeline system in south Texas. Throughput
capacity doubled to 290 MMcf/d while gas processing capacity was added, totaling
25 MMcf/d. The system now has 621 miles of pipe. Efforts are underway to acquire
or build new pipeline sections to link the various Copano systems.
In December 1996 Pipelines & Processing acquired a 25% interest in Lyondell
Methanol Company, L.P., a limited partnership that owns and operates a 248
million gallon-per-year methanol processing plant in Texas. MCNIC will supply
natural gas to the methanol plant and will have the opportunity to participate
with the other partner in future electric power generation projects during the
next five years. MCNIC's share of methanol production in 1997 was 60.8 million
gallons, compared with initial production of 10.6 million gallons. Higher than
expected methanol prices provided a large boost to joint venture income.
In September 1997 Pipelines & Processing announced an asphalt manufacturing
partnership. The asphalt venture is with Crown Energy Corporation and was
created to develop the Asphalt Ridge oil sand project in northeast Utah. The
first phase of this project includes construction of a $15 million manufacturing
facility designed to produce approximately 100,000 tons of premium-quality
asphalt annually. It is expected to begin delivering product in summer 1998. A
second facility is expected to be built in 1999 and a third in 2000, if market
conditions warrant. The project benefits from the unique, abundant oil sands
found at the plant's site, as well as new federal standards favoring the use of
premium-grade asphalt such as that to be produced by the facility.
In November 1997 Pipelines & Processing announced a coal fines venture
project to recover fine particles of coal that have been a wasted by-product of
coal mining, then chemically process the fines through a
6
<PAGE> 11
procedure to produce coal briquettes for resale into existing coal markets. MCN
has filed for and expects to receive from the Internal Revenue Service a
determination that production from the plants will qualify for synthetic fuel
tax credits, estimated to range from $20 to $25 per ton. MCN anticipates
constructing up to six plants, each of which would have a rated capacity to
produce one million tons of coal briquettes annually, although actual production
levels may vary significantly depending upon actual site conditions, including
coal fines quality and quantity, equipment performance and other factors. Having
the plants in service by June 30, 1998 is essential to the project, since they
must be operational by that date to qualify for tax credits.
In Michigan and Indiana, gas processing capacity was expanded 20% to 185
MMcf/d, primarily due to the acquisition of a new plant. Pipelines & Processing
now has an average interest of 89% in seven such plants that extract CO2 from
Antrim gas production.
MCN's strategy to grow its pipelines and processing operations is to take
equity positions, usually in partnerships owning natural gas gathering,
processing and transmission facilities near areas of either rapid reserve
development or growing consumer markets. It is anticipated that in excess of
$350 million will be invested in pipelines and processing facilities in 1998, a
level of investment that could rise significantly in future years based on the
numerous potential domestic and international projects currently being pursued.
ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER
Operating and joint venture income for 1997 for the combined results of
these three businesses more than doubled to $29.8 million from $14.0 million in
1996. The improvement reflects the acquisition in May of an interest in the
Midland Cogeneration Venture in Michigan, as well as gas sales and exchange
deliveries that increased 49% to 359 Bcf in 1997 from 242 Bcf in 1996. These
volumes include 61.4 Bcf of supply-area sales added due to the marketing
alliance with Torch Energy Advisors of Houston, which began operations in early
1997.
Capital investments for the combined marketing, storage and electric power
units during 1997 totaled approximately $250 million, compared with $21 million
in 1996, and are anticipated to exceed $250 million in 1998. These capital
investments primarily target electric power generation projects.
ENERGY MARKETING
MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company (CTC). CTC, a wholly owned subsidiary of MCNIC, is engaged in
the purchase and sale of natural gas to over 700 commercial and industrial
users, as well as gas and electric utilities and other large-volume customers
throughout the Midwest, Gulf Coast and Northeast regions of the United States
and Eastern Canada. Through its offices located in Hartford, Connecticut and
Detroit and Grand Rapids, Michigan, CTC is able to offer buyers a bundled
service by making arrangements for the acquisition of the required gas volumes
and delivery to customers' facilities, and for all the necessary services in
between. This bundled service is more in demand during the winter months, when
interstate pipeline capacity in certain areas of the Northeast and Midwest is
either constrained or uneconomical. CTC is able to better meet this demand
through the use of gas production and access to storage fields and other
physical assets owned by affiliates.
CTC competes against numerous marketing companies. A diverse portfolio of
short-, medium- and long-term sales and supply contracts combined with access to
reliable gas suppliers, storage facilities and multiple pipeline connections
enhances its competitive position. In 1996, CTC entered into a marketing
alliance with Torch Energy Advisors of Houston that began contributing to
results in early 1997. This alliance links Torch's supply-aggregation and
marketing strengths in the Gulf Coast region with CTC's strong presence in high-
consumption markets. In June 1997, CTC and Gulf Canada Resources Limited signed
a letter of intent to form Gulf-CoEnergy Services, an alliance combining their
expertise to market North American natural gas. Gulf will hold 60 percent and
CTC will hold 40 percent in this new venture. Gulf-CoEnergy Services will have
more than 500 MMcf/d of committed natural gas supply and utilize Gulf's strong
position in gathering and processing in western Canada and gas marketing in the
western United States. CTC uses its competitive position in both the market and
production regions to identify and complement business opportunities for MCNIC's
various businesses.
7
<PAGE> 12
Also assisting MCNIC's marketing efforts is strategically selected pipeline
capacity that is used to deliver gas to Midwest, Northeast and Canadian
customers. In support of the gas marketing function, MCNIC has firm
transportation service contracts on various pipeline systems totaling
approximately 250 MMcf/d, which is supplemented by interruptible service as
needed. MCNIC expects to increase its reserved pipeline capacity, particularly
on recently proposed west-to-east systems, to help meet customers' needs. In
addition to MCNIC's anticipated equity interests in three of these projects, CTC
expects to capture significant marketing opportunities utilizing the new
pipelines.
An alliance formed in June 1997 added electricity to CTC's marketing
portfolio. DTE-CoEnergy L.L.C. is jointly owned with DTE Energy Co., parent of
Detroit Edison, and markets a wide range of energy services to industrial,
commercial and institutional customers. The alliance's target market area spans
the Great Lakes and Mid-Atlantic states, as well as the Province of Ontario.
Offerings include electricity and natural gas supplies, plus associated energy
and risk management services required to create cost-effective, bundled energy
packages tailored to meet individual customers' needs in a non-regulated
environment.
It is expected that electricity sales volumes initially will be slow to
develop, since this business relies on the restructuring of the retail
electricity industry. Restructuring is being pursued at the state level
nationwide, so marketing opportunities will open only gradually. Within
DTE-CoEnergy's target market area, Pennsylvania has opened limited access to the
retail electricity market through pilot programs. DTE-CoEnergy is one of 25
suppliers participating in a 14-month, 1,200 MW Pennsylvania pilot that began in
November 1997. Initial sales volumes from this pilot, although modest, have
provided important experience that will assist future efforts as additional
states open the electricity sector to competition. Within the target region,
Michigan, Indiana, Maryland, New Jersey, New York and Ohio are developing plans
to open portions of their retail markets to competition beginning in 1998 or
1999, with most planning to be fully restructured by 2002.
GAS STORAGE
MCNIC, through its subsidiary MCNIC Gas Storage Company (MCNIC Gas
Storage), has adopted a strategy of using joint ventures and strategic
partnerships to provide gas storage services, either as a separate service or
bundled with full gas service, to other gas utilities, pipeline companies and
large-volume gas users. Storage facilities near major consuming markets provide
supply flexibility, improve reliability of deliveries and help reduce gas costs.
MCNIC's 35 Bcf of owned and leased storage capacity in Michigan allows the
company to flow gas into storage at relatively steady rates during off-peak
periods, and to draw upon this storage for delivery during peak-demand periods.
This strategy allows for a very reliable service while keeping operating costs
low.
The gas industry's changing operating environment has resulted in more
efficient use of existing storage facilities and a reduced immediate need for
additional capacity. However, growing markets will require expanded storage
capabilities in selected areas in the long-term. This future need, together with
Michigan's pivotal geographic location and favorable geology, presents a
significant opportunity for MCN's storage services.
During August 1997 MCNIC began developing the $160 million Washington 10
storage field project that will significantly increase the amount of gas storage
capacity available to CoEnergy for its markets. The Washington 10 project is
converting a depleted gas reservoir in southeast Michigan to a 42 Bcf storage
facility, capable of delivering approximately 400 MMcf of natural gas on an
average winter day and much higher volumes during peak-demand periods. Initial
gas injection is scheduled for the spring of 1999, with the facility expected to
be fully operational in time for the 1999-2000 winter heating season.
MCNIC Gas Storage also has a 50% interest in the Washington 28 storage
field, located northeast of Detroit in Macomb County. This 10 Bcf field provides
storage to MCNIC's Energy Marketing operations. MCNIC Gas Storage sold its 25%
share of the Blue Lake gas storage project in December 1997. MCN's Gas
Distribution segment also owns a 25% interest in the Blue Lake and will maintain
its share of the venture.
8
<PAGE> 13
ELECTRIC POWER
MCNIC's Electric Power unit operates through MCNIC Power Company (MCNIC
Power), MCNIC International Holdings and MCNIC-GP International Holdings, wholly
owned subsidiaries of MCNIC, to pursue domestic and international power
generation-related opportunities. Power generation projects offer the potential
for multiple sources of income, such as long-term gas sales, transportation
services and a return on the investment in the facility, particularly in the
U.S.
In recent years, an increasing amount of new electric generating capacity
has been fueled by natural gas because of the lower capital costs, lower
emissions and other advantages associated with natural gas-fueled facilities. In
addition, many states have passed regulations requiring electric utilities to
consider bids from third parties to meet new electric generation needs. MCNIC
Power has the capacity to provide long-term gas supplies at known prices to
power generation facilities.
MCNIC Power's strategy is to capture synergies among MCN's businesses and
to profitably apply the expertise they have gained in managing energy-related
projects. The gas-fueled power generation industry has seen an increase in the
number of participants, many of whom are willing to accept returns on power
generation projects that are considerably below MCNIC Power's threshold. The
restructuring of the electric utility industry could increase the long-term
opportunities for MCNIC Power. MCN's experience in the natural gas industry's
transition to a more competitive environment, combined with our success as a
partner in several independent power projects, should enable us to capture such
opportunities.
Electric Power sales increased 160% to 1.8 million MW hours (MWh) in 1997
from 700,000 MWh in 1996, primarily due to the addition of interests in the
Midland Cogeneration Venture (MCV) in April 1997 and a power generation and
distribution partnership in India in March 1997. Net generating capacity climbed
to 506 MW from 91 MW.
MCNIC's experience and relationships in the energy business have provided a
solid base with which to pursue opportunities internationally. India holds
significant investment potential, where there is tremendous demand for
additional power generation capacity and the business environment remains
conducive to attractive returns on investment. The strategy in India is to
partner with others who bring expertise and capital to the venture, including an
experienced Indian partner.
In March 1997, MCNIC made its first international investment with the
formation of Torrent Power Ltd. (Torrent), a venture with Torrent Exports Ltd.
of Ahmedabad, India. MCNIC's investment of approximately $173 million gives it a
40% interest in Torrent and its growing electricity generation and distribution
business in the state of Gujarat in western India. Torrent consists of: a 36%
interest in Ahmedabad Electricity Company (AEC), an electric utility with 550 MW
of generating capacity and the exclusive franchise to operate in the city of
Ahmedabad, which has a population of about 5 million; a 43% interest in Surat
Electricity Company, an electric utility with the exclusive franchise to operate
in the city of Surat, which has a population of about 3.5 million; and a 42%
interest in Gujarat Torrent Energy Corporation (GTEC), a project company set up
to build, own and operate a 655 MW dual-fuel (natural gas and liquid fuel)
facility near the city of Bharuch. Torrent continues to pursue opportunities to
purchase additional interests in these companies.
The first of GTEC's three 138 MW gas-turbine generators was placed on
commercial production in January 1998. The other two, followed by the facility's
241 MW steam-turbine generator, are expected to be placed into service
approximately three months apart, such that the full 655 MW of generating
capacity should be commercially on-line in late 1998. GTEC is considering an
expansion that could double the facility's capacity, if conditions warrant.
Entering 1998, MCN is pursuing opportunities to participate in the
construction of more than 5,000 additional gross MW of generating capacity in
India. Among them is a 525 MW coal-fired facility in the state of Tamil Nadu and
a 347 MW dual-fuel project in the state of Madhya Pradesh, as well as several
captive power projects ranging from 20 MW to 210 MW in various locations.
In December 1997, MCNIC made another international power investment with
the acquisition of an approximate 65% interest in a 36 MW hydroelectric power
project in Nepal. The $98 million Upper Bhote
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<PAGE> 14
Koshi Hydroelectric Project began construction in 1997 and is scheduled to be
placed into commercial operation in late 1999. The power project, located
approximately 60 miles northeast of Kathmandu, will boost Nepal's existing
electric power generation capacity by more than 10% and play a vital role in
Nepal's emerging economy. Electricity production from the facility will be sold
under long-term firm contract to state-owned Nepal Electricity Authority.
Also in 1997, MCNIC made an approximate $46 million advance to fund power
generation projects already under construction in the Philippines. MCNIC has the
option to convert this advance into an equity interest in either the overall
independent power company or specific power generation assets.
Potential future additions to the Electric Power unit continued to multiply
during 1997. Domestically, projects representing almost 1,000 gross MW of
capacity are being pursued, including the 40 MW unit associated with MCNIC
Pipeline & Processing Company's Mobile Bay, Alabama, gas processing project. The
$28 million Mobile Bay cogeneration project is expected to provide electric
power and thermal energy to the processing plant beginning in third quarter 1998
utilizing 10 natural gas-fired electric generators and a hot oil recovery
system. MCN anticipates expanding the power facility up to 60 MW as the energy
needs of the processing plant increase. Other potential domestic power projects
include facilities in Ohio, Virginia, West Virginia and New Mexico.
In April 1997, MCNIC invested approximately $55 million for an 18% general
partnership interest in Midland Cogeneration Venture Limited Partnership, which
operates the MCV facility in Midland, Michigan. MCV, the nation's largest
cogeneration facility, can produce up to 1,370 MW of electricity and 1.35
million pounds per hour of process steam for industrial use. It sells
electricity to Consumers Energy Co. and The Dow Chemical Co. under long-term
contracts. Dow Chemical and Dow Corning Corp. also purchase process steam from
the facility under long-term contracts. In addition to MCNIC's share of the
partnership's income, the interest in MCV may provide significant growth
opportunities through incremental energy marketing and gas services that
CoEnergy could provide for the facility.
MCNIC Power's business also includes a number of small cogeneration units
located at the operating facilities of large commercial and industrial
customers. MCNIC Power has long-term agreements for the sale and transportation
of natural gas to these units.
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 through long-term financial swaps most of its
anticipated future gas production not covered by long-term, fixed-price sales
obligations. MCN's Energy Marketing group coordinates all of MCN's hedging
activities. A management committee ensures compliance with risk management
policies and periodically reports to 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 hedging transactions that are not recorded
by MCN's E&P group are absorbed by Energy Marketing.
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<PAGE> 15
GAS DISTRIBUTION
GAS SALES AND TRANSPORTATION
Gas Distribution serves customers in the Detroit, Grand Rapids, Ann Arbor,
Traverse City, Muskegon and Adrian metropolitan areas and in various other
communities throughout the State of Michigan. The following services are
provided by Gas Distribution:
- Gas Sales -- Includes the sale and delivery of natural gas to residential
and small-volume commercial customers.
- End User Transportation -- Through this service, large-volume commercial
and industrial customers that purchase natural gas directly from
producers or brokerage companies utilize the company's network to
transport the gas to their facilities.
- Intermediate Transportation -- Provides transportation service through
the company's gathering and high pressure transmission system to
producers, brokers and other local distribution companies that own the
natural gas, but are not the ultimate consumer.
In January 1996, MCN consolidated its Michigan pipeline operations through
the transfer of its Michigan gathering and transportation network from its
Diversified Energy group to its Gas Distribution group. The transfer was made in
order to consolidate MCN's Michigan gathering pipeline activities within one
business unit. The segment information included herein is reported as though the
combined intrastate pipeline operations were part of Gas Distribution for all
periods presented.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES (In millions of dollars)
Gas Sales................................................... $1,080.1 $1,102.9 $ 931.9
End User Transportation..................................... 84.7 82.5 80.8
Intermediate Transportation................................. 55.2 48.6 42.0
-------- -------- --------
Total Sales and Transportation............................ 1,220.0 1,234.0 1,054.7
-------- -------- --------
Other....................................................... 51.3 42.3 52.9
-------- -------- --------
Total Operating Revenues.................................. $1,271.3 $1,276.3 $1,107.6
======== ======== ========
MARKETS (Bcf)
Gas Sales................................................... 209.1 221.0 209.8
End User Transportation..................................... 145.1 146.9 145.8
Intermediate Transportation................................. 586.5 527.5 374.4
-------- -------- --------
Total Sales and Transportation............................ 940.7 895.4 730.0
======== ======== ========
</TABLE>
NOTE: Intermediate transportation volumes include intercompany transactions.
EFFECT OF WEATHER: Gas Distribution's sales and end user transportation
volumes, revenues and net income are impacted by weather. Given the seasonal
nature of the business, revenues and net income tend to be higher in the first
and fourth quarters of the calendar year.
Effect of Weather on Gas Markets and Earnings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage Colder Than Normal............................... 0.8% 5.4% 0.3%
Increase From Normal in:
Gas Markets (in Bcf)...................................... 0.6 10.9 1.5
Net Income (in Millions).................................. $0.5 $ 9.9 $1.4
</TABLE>
11
<PAGE> 16
GAS SALES: Revenues decreased $22.8 million in 1997 due primarily to
weather which was 4.6% warmer than in 1996, partially offset by higher prices to
recover gas costs. This market represents 22% of total deliveries and produced
76% of Gas Distribution's gross profit margin from sales and transportation
services (gross profit margin). The average margin per Mcf from gas sales was
$2.09 in 1997 and $2.07 in 1996.
Competition in the gas sales market from alternative energy sources is
minimal, coming primarily from sources such as electricity, propane, and to a
lesser degree, oil and wood. Natural gas continues to be the preferred fuel for
Michigan residences and businesses. Nearly every residential and commercial
developer in MichCon's service territories selects natural gas in new
construction because of the convenience, cleanliness and price advantage of
natural gas compared to propane, fuel oil and other alternative fuels. Service
and price are the primary factors affecting this market.
Gas Distribution continues to take steps to become the preferred provider
of natural gas and high-value energy services within Michigan and to maintain
strong financial results. To accomplish this, MichCon will increase penetration
of existing markets by focusing on meeting the needs of customers and the
marketplace, will increase efforts to reduce cost of gas and operating costs,
and will take advantage of growth opportunities to expand to new geographic
areas. There continue to be opportunities to grow residential markets through
the conversion of existing homes, as well as from new construction. Gas
Distribution continues to grow industrial and commercial markets by aggressively
facilitating the use of existing gas technologies and equipment.
Gas Distribution's Market Expansion Program is intended to spur demand for
natural gas in areas currently not served, primarily targeted at residential and
small-volume commercial markets. By financing the cost of main extensions, this
program makes it easier for users of other higher-cost fuels, such as propane
and fuel oil, to switch to natural gas for space heat and other applications.
This program has contributed 15% of the 74,150 new customers added during the
past 3 years. In 1997, 9 new areas of Michigan were served by MichCon, bringing
the total number of new areas added since the program's inception in 1984 to
137.
Cost of gas sold per Mcf for 1997 was $3.11, an increase of $.19 (7%) over
1996. Cost of gas sold per Mcf for 1996 increased from 1995 by $.56 (24%).
MCN owns a 47.5% interest in Southern Missouri Gas Company, L.P. which was
formed in November 1996. The initial phase of system construction was completed
in 1997 at a cost of approximately $40 million. As of December 31, 1997 the
system was comprised of a 441 mile pipeline system and served approximately
6,000 customers.
END USER TRANSPORTATION: End user transportation deliveries decreased
slightly to 145 Bcf in 1997 due to warmer weather. In 1997, this market
accounted for 15% of total gas deliveries and produced 15% of gross profit
margin.
At December 31, 1997, Gas Distribution had end user transportation
agreements representing annual volumes of 151 Bcf, up from 146 Bcf a year
before. Approximately 56% of these volumes are under contracts that extend to
1999 or beyond and include the majority of the large, and most price-sensitive,
customers.
Through technical and financial assistance, industrial and commercial
customers have been encouraged to increase the use of natural gas. The natural
gas-fueled power generation accounted for approximately 31 Bcf of gas deliveries
in both 1996 and 1997. Air compressors and other small engines in certain
commercial applications also provide possibilities for conversion to natural
gas-powered equipment. The efficiencies and price competitiveness of natural gas
can significantly reduce operating costs for customers, even though a higher
initial outlay for gas-burning equipment may be required.
The primary focus of competition in this market is total cost of fuel. Some
large commercial and industrial customers have the capability to switch to
alternative fuel sources such as coal, electricity, oil and steam. In addition,
some of these customers could bypass Gas Distribution's system and obtain gas
directly from a pipeline company. However, cost differentials must be sufficient
to offset the substantial investment costs and risks associated with fuel
switching or bypass. Gas Distribution competes against alternative fuel sources
by providing competitive pricing and reliability of supply, through the use of
the company's extensive
12
<PAGE> 17
storage capacity and multiple supply sources. Almost all significant customers
that are in proximity to other company's pipeline facilities are under long-term
contracts.
In the past several years, Gas Distribution has been successful in
converting many customers' facilities to natural gas from alternative fuels and
in retaining those customers after conversion. Also, in the past several years,
Gas Distribution has not experienced any significant fuel switching of any
significance by its customers. In 1997, approximately 22 Bcf of MichCon's
transportation deliveries were to customers who displaced coal with natural gas.
Although the MPSC has approved a direct access program for the state's two
largest electric utilities which will allow large electric users to directly
purchase lower priced electricity, beginning in mid-1998, this program is not
expected to materially impact the competitiveness of natural gas.
INTERMEDIATE TRANSPORTATION: This service accounts for about 63% of total
gas deliveries, but, due to the lower rates applicable to this service,
represents only 9% of gross profit margin. The increases in intermediate
transportation deliveries in 1997 and 1996 are due primarily to additional
volumes transported for two major fixed-fee customers and increased
transportation of Antrim gas for Michigan gas producers and brokers.
Gas Distribution's extensive transmission pipeline system has enabled it to
increase the volumes transported for Michigan gas producers, ANR Pipeline
Company (ANR) and other shippers. Gas Distribution operates in a pivotal
geographic location with links to major interstate pipelines that reach markets
elsewhere in the Midwest, the eastern United States and eastern Canada.
There has been a significant increase in Michigan Antrim gas production
over the past few years, resulting in a growing demand by gas producers and
brokers for intermediate transportation services. In order to meet the growing
demand for the transportation of Antrim gas, MichCon recently completed the
expansion of the transportation capacity of its northern Michigan gathering
system, which is owned by MichCon Pipeline Company (MichCon Pipeline). Pipeline
expansion enabled MichCon to transport an additional 53.5 Bcf in 1997.
MichCon Pipeline, a wholly-owned, non-utility subsidiary of MichCon, is
involved in ventures that transport natural gas and natural gas liquids from
northern and east-central Michigan gas fields to processing plants in the
northern part of the state. In December 1997, MichCon Pipeline purchased a
pipeline to expand the transportation capacity of its northern Michigan
gathering system. The cost of the pipeline was approximately $13 million and is
expected to transport approximately 44 Bcf of Antrim gas annually. During 1997,
MichCon Pipeline transported an average of 646 MMcf/d of natural gas and related
liquids. The transportation rate of one customer on the Saginaw Bay Pipeline,
which was to decrease 40% in accordance with the terms of a contract that
reduces the transportation rate for the last 10 years of the agreement, was
successfully renegotiated at the maximum MPSC approved rate during 1997.
Moreover, Saginaw Bay was successful in restructuring all transportation
contracts relating to the Saginaw Bay Pipeline to the maximum tariff rates.
In January 1997, MichCon placed into service a 59-mile loop of its existing
Milford to Belle River Pipeline at a cost of approximately $91 million. The
pipeline has improved the overall reliability and efficiency of MichCon's gas
storage and transmission system by mitigating the risk of disruption in the
operation of the existing pipeline or other facilities used to supply gas to
MichCon's customers. In addition, the pipeline provides significant off-system
transportation opportunities as discussed below.
With significant new supplies of western Canadian gas projected into the
Chicago area beginning in November 1998, MichCon is in an excellent position to
increase revenues through transportation to growing markets in eastern Canada
and the Northeast U.S. In December 1997, MichCon entered into a long-term lease
of capacity on its Milford to Belle River Pipeline with Vector Pipeline to
effectuate transportation from Chicago supplies to Dawn, Ontario if and when
Vector is constructed and placed in service, potentially in late 1999 or 2000.
Additional opportunities for transportation services are being pursued which
will further maximize the use of MichCon's existing transmission infrastructure.
13
<PAGE> 18
In 1998 MichCon expects to exercise its option to purchase a 50% interest
in an additional pipeline under the St. Clair River to link MichCon's system
with Consumers' Gas of Toronto's pipeline facilities. This project will further
enhance MichCon's ability to transport gas bound for both Canadian and Northeast
U.S. markets.
ENERGY ASSISTANCE AND CONSERVATION PROGRAMS
Energy assistance programs funded by the federal government and the State
of Michigan, including the Home Heating Credit for low-income customers and the
Family Independence Agencys' State Emergency Relief Program, remain critical to
MichCon's ability to control its uncollectible expenses. MichCon has
historically obtained favorable regulatory treatment of its uncollectible costs,
including those related to these energy assistance programs.
MichCon receives a significant amount of its heating assistance funding
from the federal Low-Income Home Energy Assistance Program (LIHEAP) which funds
the State of Michigan's Home Heating Credit program. In 1997 Congress provided
$1.0 billion for LIHEAP and supplemented it with a $300 million emergency fund
that could be tapped only upon order of the President. The State of Michigan
received $64 million of the total $1.2 billion that was released in 1997. The
bulk of this money was passed on to qualified taxpayers in the form of Michigan
Home Heating Credits. MichCon received $12.7 million through this program in
1997. Home Heating Credits assisted 83,000 MichCon customers in 1997. Congress
voted to continue LIHEAP in 1998 and 1999. For federal Fiscal Year 1998, which
began October 1, 1997, Congress continued funding at the $1.0 billion level and
again authorized a $300 million emergency fund. In addition, it appropriated
$1.1 billion for federal Fiscal Year 1999 subject to revision as part of
Congress' 1999 budget deliberations. MichCon is currently working with federal
and state officials to identify other ways to obtain energy assistance for
low-income customers, and is taking actions to minimize the impact a reduction
in LIHEAP funds could have on MichCon's financial position.
GAS SUPPLY
MichCon obtains its natural gas supply from various sources in different
geographic areas under agreements that vary in both pricing and terms. This
geographic and contractual diversity of supply ensures that MichCon will be able
to meet the requirements of its present and future customers with reliable
supplies of natural gas at competitive, market responsive prices. Citizens
serves approximately 14,000 customers and is served by two interstate pipelines,
Panhandle Eastern Pipe Line Company (Panhandle) and ANR. MCNIC Michigan
Holdings, Inc., an affiliate intrastate pipeline company, connects ANR to
Citizens' distribution system. During 1997, nearly all of Citizens' purchases
were from CTC, an affiliated company.
One of the objectives of the Gas Distribution business is to rank in the
lowest quartile for cost of gas in Michigan as well as neighboring states.
Although Gas Distribution's gas costs rose approximately 7% during the year to
$3.11 per Mcf, they remained in the lowest quartile among a group of 22
utilities in the region, having decreased 15% over the last 10 years. Cost of
gas sold decreased in 1997 as a result of lower sales volumes, due primarily to
warmer weather as well as supplier refunds. Under its gas cost recovery
mechanism, MichCon expects to continue to collect all of its cost of gas sold.
Gas Distribution -- Sources of Gas Supply (Bcf)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Long-term Supply:
Michigan Producers........................................ 66.0 86.3 90.9
Interstate Suppliers...................................... 13.8 14.5 18.2
Canadian Suppliers........................................ 31.3 37.3 31.5
Spot Market................................................. 89.1 94.0 55.1
----- ----- -----
200.2 232.1 195.7
===== ===== =====
</TABLE>
14
<PAGE> 19
Gas Distribution purchased 33% of its 1997 supply from Michigan producers,
51% from producers in the southern and midcontinent regions of the United States
and 16% from Canadian producers. These supplies are complemented by 130 Bcf of
working storage capacity from storage fields owned and operated by MichCon in
Michigan, of which 25 Bcf is leased to others.
MichCon has long-term firm transportation agreements with ANR and Great
Lakes Gas Transmission Limited Partnership (Great Lakes). Under these agreements
ANR is obligated to transport approximately 375 MMcf per day of supply during
the summer months and 310 MMcf per day of supply during the winter months for
MichCon, while Great Lakes is obligated to transport 30 MMcf per day. These
transportation agreements expire on various dates between 1999 and 2011.
MichCon also has contracts with independent Michigan producers that expire
on various dates through 2011. MichCon's continues its supply strategy of
purchasing gas under contracts that tie purchase prices to spot market prices.
To mitigate price volatility related to spot market prices for sales customers,
MichCon has been authorized by the MPSC to change its supply strategy to
purchase up to one-third of its gas under fixed price contracts.
At December 31, 1997, MichCon owned and operated five natural gas storage
fields in Michigan with a working storage capacity of approximately 130 Bcf.
These facilities play an important role in providing reliable and cost-effective
service. MichCon uses its storage capacity to supplement its supply during the
winter months, replacing the gas in April through October when demand is at its
lowest. The use of this storage capacity also allows MichCon to lower its
peak-day entitlement, thereby reducing interstate pipeline costs. During 1997,
MichCon's maximum one-day sendout exceeded 2.3 Bcf, of which approximately 70%
came from its underground storage fields. MichCon's gas distribution system has
a maximum daily sendout capability of 2.8 Bcf, with approximately 70% coming
from underground storage. MichCon also leases 25 Bcf of its natural gas storage
capacity to an affiliated company and to third parties.
REGULATION AND RATES
MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales and transportation rates, service and
accounting. Citizens' rates are set by the Adrian Gas Rate Commission, a
municipal commission. Other various phases of its operations are subject to the
jurisdiction of the MPSC. Both MichCon and Citizens are subject to the
requirements of other regulatory agencies with respect to safety, the
environment and health.
GENERAL RATE PROCEEDINGS: MichCon received authorization to defer
manufactured gas plant (MGP) investigation and remediation costs in excess of
the $11.7 million previously reserved by MichCon. The remaining balance of this
initial reserve at December 31, 1997 is approximately $1.7 million. Any excess
costs are to be amortized over a 10 year period beginning in the year subsequent
to the year environmental investigation and remediation costs are paid. The
recovery of any remediation costs incurred will be reviewed in a future rate
case.
MichCon filed an application with the MPSC in October requesting authority
to decrease depreciation rates from the existing 4.09% to 3.44%. In December
1997 the MPSC issued an order approving a reduction in annual depreciation costs
by more than $16 million. While the Michigan Attorney General has appealed the
depreciation order, management believes the MPSC order approving the lower
depreciation rates will be upheld.
In 1994, Citizens entered into a new rate agreement with the municipal
commission that sets Citizens' rates. Under the terms of this agreement which
went into effect in January 1995, Citizens received a 3% rate increase and its
rates will be frozen for five years. The rate agreement provides Citizens'
customers with known prices and the company with an opportunity to control costs
and continue to earn a reasonable rate of return.
GAS COST RECOVERY: The GCR process allows MichCon to recover its cost of
gas sold if the MPSC determines that such costs are reasonable and prudent. This
determination includes an annual Gas Supply and Cost Review, in which the MPSC
approves maximum monthly GCR factors. A subsequent annual GCR reconciliation
proceeding provides a review of gas costs incurred during the year, determines
whether approved
15
<PAGE> 20
gas costs have been overcollected or undercollected and, as a result, whether a
refund or surcharge, including interest, is required to be returned to or
collected from GCR customers using the rolled-in prospective refunding
methodology approved by the MPSC on June 30, 1994.
In February 1996, MichCon filed its 1995 GCR reconciliation case indicating
an under-recovery of less than $0.1 million, including interest, which will be
collected from GCR customers using the new rolled-in prospective refunding
methodology. In February 1997, the MPSC issued an order finding that all of
MichCon's 1995 gas costs were reasonable and prudent.
In February 1997, MichCon filed its 1996 GCR reconciliation case indicating
a net under-recovery of approximately $28 million, including interest. The total
1996 underrecovery was rolled into MichCon's 1997 GCR cost recovery, pursuant to
the prospective refunding methodology discussed above. In September 1997, the
MPSC issued an order finding that all of MichCon's 1996 gas costs were
reasonable and prudent, including $4.4 million in interest costs from Panhandle
related to certain direct billings.
In July 1997, MichCon filed its 1998 GCR Plan Case. An MPSC order is
expected in May 1998.
In February 1998, MichCon filed its 1997 GCR reconciliation case indicating
a net under-recovery of approximately $13 million, including interest. An MPSC
order is expected in late 1998.
ENVIRONMENTAL MATTERS
Prior to the 1940's when major natural gas pipelines became sufficient to
meet MichCon's supply requirements, gas for heating and other uses was
manufactured from processes involving coal, coke or oil. MCN owns, or previously
owned, 17 former manufactured gas plant (MGP) sites.
During the mid-1980s, MichCon conducted preliminary environmental
investigations at former MGP sites, and some contamination related to the
by-products of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Environmental Quality. None of these
former MGP sites is on the National Priorities List prepared by the U.S.
Environmental Protection Agency.
MCN is not involved in any administrative proceedings regarding these
former MGP sites, but is currently remediating four of these sites and
conducting more extensive investigations at five other former MGP sites.
In 1984, MCN established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance polices. The findings of these investigations indicated that
the estimated total expenditures for investigation and remediation activities
for these sites could range from $30 million to $170 million based on
undiscounted 1995 costs. As a result of these studies, MichCon accrued an
additional liability and a corresponding regulatory asset of approximately $35
million during 1995.
MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MCN filed suit against major nonsettling
carriers seeking recovery of incurred costs and a declaratory judgment of the
carriers' liability for future costs of environmental investigation and
remediation costs at former MGP sites.
During 1997, 1996 and 1995, MCN spent $0.8 million, $0.9 million and $2.1
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1997, the reserve balance was $36.7 million, of which $1.7 million
is classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and therefore have an effect on MCN's financial position and
16
<PAGE> 21
cash flows. However, management believes insurance coverage and the cost
deferral and rate recovery mechanism approved by the MPSC will prevent
environmental costs from having a material adverse impact on MCN's results of
operations.
FRANCHISES
MichCon operates in over 530 cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year
maximum duration. In 1993, MichCon began a structured process to renew or
re-establish previously expired formal franchises in 233 municipalities. During
the period between 1994 and 1997 an additional 168 franchises expired. To date,
381 franchises have been renewed, 11 of which were renewed in 1997 which account
for gas sales volumes of approximately 40 Bcf annually. Additionally, two new
franchises were acquired. There were no franchises lost.
As for the 20 franchises that are currently expired, MichCon's gas
distribution systems are rightfully occupying the streets with the consent or
acquiescence of the municipalities. While MichCon could be ordered by any
municipality in which its franchise has expired to remove its property, it could
be deprived of ownership only by its consent and the payment of an agreed upon
price, or by condemnation and the payment of the fair market value of such
property. Should any of these municipalities seek to terminate MichCon's
operations therein and substitute another gas utility operation, publicly or
privately owned, the municipality must either (i) acquire and operate MichCon's
system, (ii) construct a new system or (iii) grant a franchise to another
privately owned utility to construct or acquire its own distribution system.
Public utility franchises in Michigan are non-exclusive. Construction under
a second franchise granted to another public utility requires authorization by
the MPSC, which considers, among other things, the service rendered by the
existing utility, the investment by such utility, and the benefit, if any, to
the public of having a second utility serve in the area. In June 1996, a
statutory amendment was adopted which provides that only irrevocable franchises
need municipal voter confirmation. The amendment further clarified that
franchises which are not voter confirmed are valid but revocable. In light of
that amendment, the Michigan Supreme Court dismissed an appeal involving MichCon
concerning the status of utility franchises which had not received voter
confirmation.
Citizens operates in cities and townships in and around Adrian, Michigan
under franchises or permits that are revocable, have a 30-year maximum duration,
and provide for municipal rate setting. In November 1995, the residents of
Adrian voted favorably on granting a 30-year renewal franchise to Citizens.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc. for an initial sales price of
$137.5 million, resulting in an after-tax gain of $36.2 million. In October
1996, the initial sales price was decreased by $4.6 million to reflect the
reduction in Genix's working capital between the effective and closing dates of
the transaction. The selling price of Genix could be further adjusted downward
by as much as $26.2 million depending upon the occurrence of certain
contingencies that include, among other things, retention of certain customers
through mid-1998 and tax-related matters. Management believes that no further
adjustment to the selling price will occur. Summary statements and other
information on discontinued computer operations can be found in Note 2 to the
consolidated financial statements.
OTHER
MCNIC is involved in several residential and commercial community
development partnerships.
MCNIC Gas Storage Company, a 100% owned subsidiary of MCNIC, holds a 50%
limited partnership interest in The Orchards Golf Limited Partnership. The
Orchards golf course is above the Washington 28 storage field, which is located
north of Detroit. The partnership was formed in 1991 to develop approximately
520 acres of land in Washington Township, Michigan. The Orchards Golf Limited
Partnership entered into an agreement with Westcreek Estates to sell
approximately 70 acres. The remaining acreage consists of an 18-hole
championship golf course of approximately 200 acres and residential development
of the remaining 250 acres.
17
<PAGE> 22
ITEM 2. PROPERTIES
MCN, through its principal subsidiaries, owns or leases under long-term
leases office space in Detroit and Grand Rapids, Michigan, Houston, Texas,
Denver, Colorado, and Hartford, Connecticut.
GAS DISTRIBUTION
MichCon operates natural gas distribution, transmission and storage
facilities in the state of Michigan. At December 31, 1997, MichCon's
distribution system included 16,537 miles of distribution mains, 1,076,212
service lines and 1,190,314 active meters. MichCon owns 2,549 miles of
transmission and production lines that deliver natural gas to the distribution
districts and interconnect its storage fields with the sources of supply and the
market areas. MichCon also owns properties relating to five underground storage
fields with an aggregate storage capacity of approximately 130 Bcf.
Additionally, MichCon owns district office buildings, service buildings and gas
receiving and metering stations. In January 1998 MichCon purchased its principal
office building in Detroit, The Guardian Building, ending its long-term capital
lease obligation. MichCon occupies its principal office building in Grand Rapids
under a long-term lease. Portions of these buildings are subleased to affiliates
and others.
Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending
beyond that date. The principal plants and properties of MichCon are held
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under
which MichCon's First Mortgage Bonds are issued. Some existing properties are
being fully utilized and new properties are being added to meet the requirements
of expansion into new areas. MichCon's capital expenditures for 1997 totaled
$155.2 million. MichCon's capital requirements for 1998 are anticipated to be
approximately $200 million for capital investments.
The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline Co., owns a 66 2/3% interest in the Saginaw Bay Area Limited
Partnership, which owns substantially all of the properties used in the conduct
of its business, primarily a 126-mile transmission line. The Saginaw Bay Lateral
Company, a wholly owned subsidiary of MichCon Pipeline Co., owns a 46% interest
in the Saginaw Bay Lateral Limited Partnership, which owns substantially all of
the properties used in the conduct of its business, primarily lateral lines
related to the Saginaw Bay transmission line. Westside Pipeline Company, a
wholly owned subsidiary of MichCon Pipeline Co., owns an 82.59% interest in
Jordan Valley Pipeline, a 14-mile major gathering line and the Terra-Hayes
Pipeline, a 18-mile major gathering line.
MichCon Gathering Company, a wholly owned subsidiary of MichCon Pipeline
Co., owns substantially all of the properties used in the conduct of its
business, including 44.7-mile, 8.6-mile, 11-mile and 25.2-mile transmission
lines and a 2400 horsepower compressor station.
Thunder Bay Gathering Company, a wholly owned subsidiary of MichCon
Pipeline Co., owns substantially all of the properties used in the conduct of
its business, including 44 miles of gathering lines.
Citizens owns all of the properties used in the conduct of its utility
business. Included in these properties is a gas distribution system, a two-story
office building in downtown Adrian and a one-story service center.
DIVERSIFIED ENERGY
MCNIC Oil & Gas Company has interests in properties used for gas
production, including compressor facilities and small gathering lines. (See
information on the following page on Exploration & Production Activities for
further details).
MCN is involved in joint ventures that own property associated with gas
storage, electric power, gas gathering and processing, and real estate.
MCN's facilities are suitable and adequate for their intended use.
18
<PAGE> 23
EXPLORATION & PRODUCTION ACTIVITIES
MCNIC Oil & Gas Company (MOG), a subsidiary of MCN, is involved in various
gas and oil producing activities. The following data, together with the
financial information detailed in Note 15 to the Consolidated Financial
Statements, incorporated by reference in Item 8 of this report, and the general
data provided under the "Exploration & Production" section of Item 1 located on
page 2, provide additional information regarding this activity. Information on
estimated gas and oil reserves was obtained by MOG from the independent
petroleum engineering consultants Ryder Scott Company, Miller and Lents, Ltd.,
Questa Engineering Corporation, S.A. Holditch & Associates, Inc., Netherland,
Sewell & Associates, Inc., and Williamson Petroleum Consultants, Inc.
PRODUCTION
<TABLE>
<CAPTION>
For the Year Ended December 31 1997 1996 1995
------------------------------ ------ ------ ------
<S> <C> <C> <C>
Average Gas Sales Price (per Mcf) $ 1.95 $ 1.96 $ 2.02
Average Oil Sales Price (per Bbl) $16.87 $20.18 $16.24
Average Production Cost (Mcf) $ 0.70 $ 0.76 $ 0.56
</TABLE>
PRODUCTIVE WELLS AND ACREAGE
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- -------------------- --------------------
Gross Net Gross Net Gross Net
--------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Producing Wells
- -----------------
United States 2,917 1,677 2,890 1,481 1,972 1,014
========= ========= ========= ======= ========= =======
Developed Lease Acreage
- ---------------------------
United States 663,767 344,818 519,107 287,964 308,878 149,104
========= ========= ========= ======= ========= =======
Undeveloped Leased Acreage
- -------------------------------
United States 2,592,915 1,239,908 1,701,063 970,873 1,345,864 819,049
========= ========= ========= ======= ========= =======
</TABLE>
DRILLING ACTIVITY
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Working Interest Well Completions:
Exploratory
Productive 63 30 63 28 26 6
Dry 39 19 37 15 22 7
--- --- --- --- --- ---
Total Exploratory 102 49 100 43 48 13
--- --- --- --- --- ---
Development
Productive 574 354 355 230 333 228
Dry 20 9 12 6 18 9
--- --- --- --- --- ---
Total Development 594 363 367 236 351 237
--- --- --- --- --- ---
Total Working Interest Well Completions 696 412 467 279 399 250
=== === === === === ===
Wells in Process of Drilling at December 31 150 92 167 108 120 82
</TABLE>
19
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
In addition to the Gas Distribution's regulatory proceedings and other
matters described in Item 1, "Business," MCN is also involved in a number of
lawsuits and administrative proceedings in the ordinary course of business with
respect to taxes, environmental matters, contracts, personal injury, property
damage claims and other matters.
ENVIRONMENTAL
In 1994, MichCon received a general notice of liability letter from the
U.S. Environmental Protection Agency (USEPA) stating that it was one of two
potentially responsible parties at the Lower Ecorse Creek Superfund site in
Wyandotte, Michigan. USEPA requested that MichCon conduct a remedial
investigation and feasibility study at that site. MichCon investigated its prior
activities in the area and USEPA's bases for its conclusion, and concluded that
it was not responsible for contamination discovered at that site. MichCon
informed USEPA of this belief and did not undertake the requested activities.
In September 1996, USEPA sent MichCon a second general notice of liability
letter for the site and demanded reimbursement of approximately $2.3 million in
past costs, plus interest. USEPA then issued MichCon and the other potentially
responsible party a unilateral administrative order under section 106 of the
Comprehensive Environmental Response Compensation and Liability Act to implement
the remedy. USEPA estimates the cost of the remedy to be approximately $650,000.
MichCon again reviewed USEPA's bases for determining that it is a potentially
responsible party and concluded again that it was not responsible for
contamination discovered at that site and informed USEPA of its decision. USEPA
has not taken any subsequent action against MichCon. USEPA may sue MichCon to
force compliance with the order or may implement the remedy and then sue MichCon
for recovery of all incurred costs. If USEPA institutes and prevails in such a
suit and if the court determines that MichCon did not have sufficient cause not
to comply with the order, the court may impose civil penalties and punitive
damages. Management believes MichCon was not responsible for contamination at
the site and has sufficient cause not to comply with this order and that the
resolution of this matter will not have a material adverse effect on MichCon's
financial statements.
ENERGY CONSERVATION PROGRAMS
In December 1994, a suit was filed against MichCon in Wayne County Michigan
Circuit Court by six customers who had participated in one of three energy
conservation programs sponsored by MichCon. Under these programs, which had been
approved by the MPSC and operated from 1990 to 1996, MichCon offered
low-interest loans, rebates and other arrangements to assist approximately
46,000 qualified residential customers in purchasing high-efficiency furnaces.
MichCon did not manufacture, sell or install any of the furnaces. The complaint
alleged that MichCon induced the purchase of these furnaces through its
conservation programs and that it had a duty to, but failed to, warn its
customers that harmful levels of carbon monoxide could backdraft if a chimney
was not properly sized and a chimney liner installed. No personal injuries were
claimed. Plaintiffs sought injunctive relief, unspecified monetary damages and
class action certification. The trial court denied such certification on two
separate occasions; the Michigan Court of Appeals denied plaintiffs' request for
an appeal of those rulings.
MichCon impleaded, as third-party defendants, all of the manufacturers,
contractors and installers of the plaintiffs' furnaces. On September 13, 1996,
plaintiffs' third motion to certify the lawsuit as a class action was granted.
MichCon appealed the granting of certification and, on December 2, 1996, the
Michigan Court of Appeals granted MichCon's motion for immediate consideration
and stayed all further proceedings until the Court issues its decision. MichCon
believes that the plaintiffs' allegations are without merit and will continue to
defend the case vigorously
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 25
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MCN, as of February
27, 1998, is set forth below. Such officers are appointed by the Board of
Directors for terms expiring at the next annual meeting of shareholders,
scheduled to be held April 22, 1998.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- ----------------- --- ------------------------------------------
<S> <C> <C>
Alfred R. Glancy III 59 Present position since September 1992; Chairman, Chief
Chairman, President, Chief Executive Officer and Director since August 1988;
Executive Officer and Director Chairman and Director of MCN Investment since 1988;
Chairman and Director of MichCon since 1984 and 1981
respectively; Chief Executive Officer of MichCon from
1984 to September 1992.
Rai P. Bhargava 50 Present position since January 1994; Executive Vice
President and Chief Executive President and Chief Operating Officer of MCN Investment
Officer of MCN Investment from July 1993 to January 1994; Director of MCN
Investment since November 1993; Vice President,
Marketing, of MichCon from July 1988 to July 1993.
Stephen E. Ewing 53 Present position since September 1992; President and
President and Chief Executive Chief Operating Officer from August 1988 to September
Officer of MichCon and Director 1992; Director since August 1988; President and
Director of MichCon since 1985 and 1984 respectively;
Chief Operating Officer of MichCon from 1985 to
September 1992.
William K. McCrackin 64 Present position since September 1992; Vice Chairman,
Vice Chairman, Chief Financial Chief Financial Officer, Treasurer and Director from
Officer and Director August 1988 to September 1992; Director of MCN
Investment since 1988; Vice Chairman of MichCon from
March 1986 to September 1992; Chief Financial Officer
of MichCon from 1985 to September 1992; Director of
MichCon since 1984.
Daniel L. Schiffer 54 Present position since September 1995; Vice
Senior Vice President, General President,General Counsel and Secretary of MCN since
Counsel and Secretary April 1989; General Counsel and Secretary of MCN since
August 1988; Vice President and General Counsel of
MichCon from July 1991 to September 1992; Director of
MichCon since January 1989.
</TABLE>
21
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MCN Common Stock is traded on the New York Stock Exchange. On February 19,
1998 there were 21,984 holders of record of MCN Common Stock. Information
regarding the market price of MCN Common Stock and related security holder
matters is incorporated by reference herein from the section titled
"Supplementary Financial Information" in MCN's 1997 Annual Report to
Shareholders, pages 67 and 68.
ITEM 6. SELECTED FINANCIAL DATA
Information required pursuant to this item is incorporated by reference
herein from the section titled "Supplementary Financial Information" in MCN's
1997 Annual Report to Shareholders, pages 67 and 68.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required pursuant to this item is incorporated by reference
herein from the section titled "Management's Discussion and Analysis" in MCN's
1997 Annual Report to Shareholders, pages 31 through 41.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required pursuant to this item is incorporated by reference
herein from the following sections of MCN's 1997 Annual Report to Shareholders.
The consolidated statement of income, cash flows and capitalization are for each
of the years ended December 31, 1997, 1996 and 1995 and the consolidated
statement of financial position is as of December 31, 1997 and 1996.
Consolidated Statement of Financial Position, page 43
Consolidated Statement of Income, page 42
Consolidated Statement of Cash Flows, page 44
Consolidated Statement of Capitalization, page 45
Notes to Consolidated Financial Statements, pages 46 through 66
Supplementary Financial Information, page 67 and 68; and
Independent Auditors' Report, page 69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section titled "Proposal 1 -- Election of
Directors" in MCN's February 1998 definitive Proxy Statement is incorporated by
reference herein.
Information concerning the executive officers of MCN is set forth in the
section titled "Executive Officers of the Registrant" on page 21 in Part I of
this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections titled "Compensation of Directors
and Executive Officers" and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation" in MCN's February 1998 definitive Proxy
Statement is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the section titled "Beneficial Security
Ownership of Directors, Nominees and Executive Officers" in MCN's February 1998
definitive Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the sections titled "Executive Compensation"
and "Other Compensation Matters" in MCN's February 1998 definitive Proxy
Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. For a list of financial statements incorporated by reference, see the
section entitled "Financial Statements and Supplementary Data", on page
22 in Part II, Item 8 of this Report.
2. The Financial Statement Schedule for each of the three years in the
period ended December 31, 1997, unless otherwise noted, are included
herein in response to Part II, Item 8:
Independent Auditors' Report
SCHEDULE
II -- Valuation and Qualifying Accounts
Schedules other than those referred to above are omitted as not applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
23
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors:
We have audited the consolidated financial statements of MCN Energy Group
Inc. and subsidiaries (the "Corporation"), as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated February 12, 1998 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Corporation's adoption of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"), such consolidated financial
statements and report are included in your 1997 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Corporation, listed in Item 14.
This consolidated financial statement schedules is the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 12, 1998
24
<PAGE> 29
SCHEDULE II
MCN ENERGY GROUP INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
[CAPTION]
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUME E
<S> <C> <C> <C> <C> <C>
ADDITIONS
--------------------
PROVISIONS DEDUCTIONS
CHARGED TO FOR PURPOSES BALANCE
BALANCE AT -------------------- FOR WHICH THE AT END
BEGINNING REGULATORY RESERVES WERE OF
DESCRIPTION OF PERIOD INCOME ASSET PROVIDED PERIOD
- ----------------------------------------------------- ---------- ------- ---------- ------------- --------
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $18,487 $21,847 $ -- $24,623 $15,711
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Accrued
Environmental Statement of Financial Position:
Environmental testing (1)........................ $37,576 $ -- $ -- $ 835 $36,741
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $13,765 $29,425 $ -- $24,703 $18,487
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (1)........................ $38,451 $ -- $ -- $ 875 $37,576
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $16,101 $15,274 $ -- $17,610 $13,765
Allowance for sale of partnership interest (2)... 91 -- -- 91 --
Allowance for notes receivable (3)............... 1,954 (1,607) -- 347 --
------- ------- ------- ------- -------
$18,146 $13,667 $ -- $18,048 $13,765
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Accrued Statement
of Financial Position:
Environmental testing (1)........................ $ 5,540 $ -- $35,000 $ 2,089 $38,451
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 8,402 $ 1,026 $ 686 $ 2,101 $ 8,013
======= ======= ======= ======= =======
</TABLE>
- ---------------
NOTES:
(1) Reference is made to Note 8b to the Consolidated Financial Statements MCN's
1997 Annual Report to Shareholders, page 54.
(2) During 1994, MCN established a reserve for the expected loss relating to the
sale of a partnership interest in a gas marketing joint venture. The sale
took place in 1995.
(3) During 1995, MCN reversed $1,607,000 of an uncollectible reserve on an
advance made to a joint venture. The uncollectible provision was reversed
upon the receipt of payments and credit support to ensure repayment of the
remaining advance balance.
25
<PAGE> 30
3. Exhibits, Including Those Incorporated by Reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Energy Group Inc. (Exhibit
3-1 to March 31, 1997 Form 10-Q).
3-2 By-Laws of MCN Energy Group Inc., as amended.*
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
3-5 Certificate of Trust of MCN Financing III (Exhibit 4-16 to
Registration Statement No. 333-21175).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K and
Exhibit 4 to July 23, 1997 Form 8-K).
4-2 Senior Debt Securities Indenture between MCN Energy Group
Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
(Exhibit 4-4 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated June 4, 1997.*
4-3 Subordinated Debt Securities Indenture between MCN Energy
Group Inc. and NBD Bank, N.A., as Trustee, dated September
1, 1994 (Exhibit 4-5 to Registration Statement No.
33-55665); First Supplemental Indenture, dated April 17,
1996 (Exhibit 4-18 to Amendment No. 2 to Registration
Statement No. 333-01521); and Second Supplemental Indenture,
dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
4-4 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-forth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-5 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank as Trustee, dated September 1, 1995 (Exhibit 4-1 to
Registration Statement No. 33-63311).
4-6 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-7 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-8 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-9 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $100,000,000 (Exhibit
4-6 to October 26, 1994 Form 8-K).
4-10 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $1,100,000 (Exhibit
4-7 to October 26, 1994 Form 8-K).
4-11 Purchase Contract Agreement dated April 22, 1996 between MCN
Energy Group Inc. and the First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-12 Pledge Agreement dated April 22, 1996 among MCN Energy Group
Inc., Chemical Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent
(Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4-13 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit A to the Purchase Contract
Agreement included as Exhibit 4-10 hereto).
4-14 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-15 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
4-16 Form of Preferred Security of MCN Financing I (Annex I to
the Amended and Restated Declaration of Trust of MCN
Financing I included as Exhibit 4-13 hereto).
4-17 Purchase Contract Agreement dated March 25, 1997 between MCN
and The First National Bank of Chicago, as Purchase Contract
Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
4-18 Pledge Agreement dated March 25, 1997 among MCN, Chase
Manhattan Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
March 19, 1997 Form 8-K.)
4-19 Form of FELINE PRIDES Certificate (Exhibit A to the Purchase
Contract Agreement included as Exhibit 4-17 hereto).
4-20 Amended and Restated Declaration of Trust of MCN Financing
III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
1997 Form 8-K).
4-21 Preferred Securities Guarantee Agreement, dated as of March
19, 1997, between MCN and Wilmington Trust Company (Exhibit
5-4 to March 19, 1997 Form 8-K).
4-22 Form of Preferred Security of MCN Financing III (Annex I to
the Amended and Restated Declaration of Trust of MCN
Financing III included as Exhibit 4-20 hereto).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1
(Registration Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
Form 10-Q).
10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6
to 1993 Form 10-K).
10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
March 31, 1995 Form 10-Q).
10-5 Special Retention Agreement between MCN Energy Group Inc.
and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
10-Q).
10-6 MCN Executive Deferred Compensation Plan, as amended
(Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-7 MichCon Supplemental Death Benefit and Retirement Income
Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
10-8 MichCon Supplemental Retirement Plan (Exhibit 10-3 to
September 30, 1996 Form 10-Q).
10-9 MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
as amended (Exhibit 10-11 to 1996 Form 10-K).
10-10 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
10-12 to 1996 Form 10-K).
10-11 MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
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.*
13-1 MCN Energy Group Inc. 1997 Annual Report to Shareholders.*
21-1 List of MCN Subsidiaries.*
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP.*
23-2 Consent of Ryder Scott Company.*
23-3 Consent of Miller and Lents, Ltd.*
23-4 Consent of S.A. Holditch & Associates, Inc.*
23-5 Consent of Williamson Petroleum Consultants, Inc.*
23-6 Consent of Questa Engineering Corporation.*
23-7 Consent of Netherland, Sewell & Associates, Inc.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended
(Exhibit 99-1 to March 31, 1997 Form 10-Q).
99-2 MCN Energy Group Inc. Savings and Stock Ownership Plan, as
amended (Exhibit 99-2 to March 31, 1997 Form 10-Q).
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
(B) REPORTS ON FORM 8-K:
None.
28
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
--------------------------------------
(Registrant)
By: /s/ Harold Gardner
------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
* Director, Chairman, President and February 27, 1998
- --------------------------------------------- Chief Executive Officer
Alfred R. Glancy III
* Director, Vice Chairman and Chief February 27, 1998
- --------------------------------------------- Financial Officer
William K. McCrackin
/s/ Harold Gardner Vice President, Controller and February 27, 1998
- --------------------------------------------- Chief Accounting Officer
Harold Gardner
* Director February 27, 1998
- ---------------------------------------------
Stephen E. Ewing
* Director February 27, 1998
- ---------------------------------------------
Roger Fridholm
* Director February 27, 1998
- ---------------------------------------------
Frank M. Hennessey
* Director February 27, 1998
- ---------------------------------------------
Thomas H. Jeffs II
* Director February 27, 1998
- ---------------------------------------------
Dale A. Johnson
* Director February 27, 1998
- ---------------------------------------------
Helen O. Petrauskas
* Director February 27, 1998
- ---------------------------------------------
Howard F. Sims
* Director February 27, 1998
- ---------------------------------------------
Bill M. Thompson
*By: /s/ HAROLD GARDNER
---------------------------------------
Harold Gardner
Attorney-in-Fact
</TABLE>
29
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Energy Group Inc. (Exhibit
3-1 to March 31, 1997 Form 10-Q).
3-2 By-Laws of MCN Energy Group Inc., as amended.*
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
3-5 Certificate of Trust of MCN Financing III (Exhibit 4-16 to
Registration Statement No. 333-21175).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K).
4-2 Senior Debt Securities Indenture between MCN Energy Group
Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
(Exhibit 4-4 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated June 4, 1997.*
4-3 Subordinated Debt Securities Indenture between MCN Energy
Group Inc. and NBD Bank, N.A., as Trustee, dated September
1, 1994 (Exhibit 4-5 to Registration Statement No.
33-55665); First Supplemental Indenture, dated April 17,
1996 (Exhibit 4-18 to Amendment No. 2 to Registration
Statement No. 333-01521); and Second Supplemental Indenture,
dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
4-4 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-forth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-5 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank as Trustee, dated September 1, 1995 (Exhibit 4-1 to
Registration Statement No. 33-63311).
4-6 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-7 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-8 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-9 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $100,000,000 (Exhibit
4-6 to October 26, 1994 Form 8-K).
4-10 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $1,100,000 (Exhibit
4-7 to October 26, 1994 Form 8-K).
4-11 Purchase Contract Agreement dated April 22, 1996 between MCN
Energy Group Inc. and the First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-12 Pledge Agreement dated April 22, 1996 among MCN Energy Group
Inc., Chemical Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent
(Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4-13 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit A to the Purchase Contract
Agreement included as Exhibit 4-10 hereto).
4-14 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-15 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
4-16 Form of Preferred Security of MCN Financing I (Annex I to
the Amended and Restated Declaration of Trust of MCN
Financing I included as Exhibit 4-13 hereto).
4-17 Purchase Contract Agreement dated March 25, 1997 between MCN
and The First National Bank of Chicago, as Purchase Contract
Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
4-18 Pledge Agreement dated March 25, 1997 among MCN, Chase
Manhattan Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
March 19, 1997 Form 8-K.)
4-19 Form of FELINE PRIDES Certificate (Exhibit A to the Purchase
Contract Agreement included as Exhibit 4-17 hereto).
4-20 Amended and Restated Declaration of Trust of MCN Financing
III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
1997 Form 8-K).
4-21 Preferred Securities Guarantee Agreement, dated as of March
19, 1997, between MCN and Wilmington Trust Company (Exhibit
5-4 to March 19, 1997 Form 8-K).
4-22 Form of Preferred Security of MCN Financing III (Annex I to
the Amended and Restated Declaration of Trust of MCN
Financing III included as Exhibit 4-20 hereto).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1
(Registration Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
Form 10-Q).
10-3 MCN Energy Group Inc. Annual Performance Plan (Exhibit 10-6
to 1993 Form 10-K).
10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
March 31, 1995 Form 10-Q).
10-5 Special Retention Agreement between MCN Energy Group Inc.
and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
10-Q).
10-6 MCN Executive Deferred Compensation Plan, as amended
(Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-7 MichCon Supplemental Death Benefit and Retirement Income
Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
10-8 MichCon Supplemental Retirement Plan (Exhibit 10-3 to
September 30, 1996 Form 10-Q).
10-9 MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
as amended (Exhibit 10-11 to 1996 Form 10-K).
10-10 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
10-12 to 1996 Form 10-K).
10-11 MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
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.*
13-1 MCN Energy Group Inc. 1997 Annual Report to Shareholders.*
21-1 List of MCN Subsidiaries.*
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP.*
23-2 Consent of Ryder Scott Company.*
23-3 Consent of Miller and Lents, Ltd.*
23-4 Consent of S.A. Holditch & Associates, Inc.*
23-5 Consent of Williamson Petroleum Consultants, Inc.*
23-6 Consent of Questa Engineering Corporation.*
23-7 Consent of Netherland, Sewell & Associates, Inc.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
99-1 MichCon Investment and Stock Ownership Plan, as amended
(Exhibit 99-1 to March 31, 1997 Form 10-Q).
99-2 MCN Energy Group Inc. Savings and Stock Ownership Plan, as
amended (Exhibit 99-2 to March 31, 1997 Form 10-Q).
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
<PAGE> 1
EXHIBIT NO. 3-2
BY-LAWS
OF
MCN ENERGY GROUP INC.
ARTICLE I
OFFICES
SECTION 1.1. Registered Office. The registered office of the
corporation shall be in Detroit, Michigan, at such place as the Board of
Directors may from time to time designate.
SECTION 1.2. Other Offices. The corporation may also have
offices at such other places both within and without the State of Michigan as
the Board of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS
OF SHAREHOLDERS
SECTION 2.1. Annual Meeting. The annual meeting of
shareholders shall be held each year on such day during the month of May, or
such day during any other month, and at such hour of the day as shall be
designated by the Board of Directors. At such meeting, the shareholders shall
elect Directors and transact such other business as may come before the meeting
pursuant to the provisions of Section 2.11 of Article II below. The day, place
and hour of each annual meeting shall be specified in the notice of the annual
meeting. The meeting may be adjourned by the chairman of the meeting from time
to time and place to place. At any adjourned meeting the Corporation may
transact any business which might have been transacted at the original meeting.
The Board of Directors acting by resolution may postpone and reschedule any
previously scheduled annual or special meeting of shareholders.
- 1 -
<PAGE> 2
SECTION 2.2. Special Meetings. Except as otherwise prescribed
by law, special meetings of the shareholders, for any purpose or purposes, may
be called only by the Board of Directors pursuant to a resolution approved by a
majority of the Board of Directors. The notice of the special meeting shall
state the time, place, and purposes of the special meeting. Business transacted
at a special meeting shall be confined to the purposes stated in the notice.
SECTION 2.3. Place of Meetings. The Board of directors may
designate any place either within or without the State of Michigan as the Place
of meeting for any annual meeting or for any special meeting of shareholders. If
no designation is made, the place of meeting shall be the registered office of
the corporation in the State of Michigan.
SECTION 2.4. Notice of Meetings. Except as otherwise provided
by law, written notice of the time, place and purpose or purposes for which a
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting to each shareholder of record entitled to vote at
the meeting. If mailed, such notice shall be deemed to be given when deposited
in the United States mail by the corporation or its duly authorized agent,
addressed to the shareholder at his or her address as it appears on the stock
transfer books of the corporation, with postage prepaid.
SECTION 2.5. Shareholder List. Before every meeting of
shareholders, the officer or agent having charge of the stock transfer books
shall prepare and certify a complete list of the shareholders entitled to vote
at the meeting, arranged in alphabetical order within each class, if any, the
address of, and number of voting shares registered in the name of each
shareholder. Such list shall be produced at the time and place of the meeting.
SECTION 2.6. Quorum. At each meeting of shareholders, the
holders of record of a majority of the issued and outstanding stock of the
corporation entitled to vote at such meeting, present in person or by proxy,
shall constitute a quorum for the transaction of business, except where
otherwise provided by law, the Articles of Incorporation or these By-Laws.
- 2 -
<PAGE> 3
SECTION 2.7. Proxies. At every meeting of shareholders, each
shareholder has the right to vote in person or by proxy. Such proxy shall be
appointed by an instrument in writing subscribed by the shareholder or his or
her authorized agent or representative, and bearing a date not more than three
years prior to such meeting, unless the proxy provides for a longer period. Each
proxy shall be filed with the Secretary of the corporation prior to or at the
time of the meeting.
SECTION 2.8. Voting. Except as otherwise provided in the
Articles of Incorporation, at every meeting of shareholders each holder of
record of the issued and outstanding stock of the corporation entitled to vote
thereat shall be entitled to one vote, in person or by proxy, for each share of
stock held by such shareholder. At all meetings of shareholders, a quorum being
present, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide all matters presented to
the shareholders except as otherwise required by law or the Articles of
Incorporation.
SECTION 2.9. Action Without Meeting. Any action required or
permitted to be taken at an annual or special meeting of shareholders may be
taken without a meeting; without prior notice and without a vote, if all the
shareholders entitled to vote thereon consent thereto in writing.
SECTION 2.10. Adjournments. Any annual or special meeting of
shareholders, whether or not a quorum is present, may be adjourned from time to
time by a majority vote of the shares present in person or by proxy. Unless the
Board of Directors fixes a new record date for the adjourned meeting, it shall
not be necessary to give notice of the adjourned meeting if the date, time and
place to which the meeting is adjourned are announced at the meeting at which
the adjournment is taken and at the adjourned meeting only such business is
transacted as might have been transacted at the original meeting.
SECTION 2.11. Shareholder Business By-Law.
(A) Annual Meeting of Shareholders. (1) The proposal of
business to be considered by the shareholders at an annual meeting of
shareholders may be made (a) pursuant to the Corporation's notice of meetings,
(b) by or at the direction of the Board of Directors or (c) by any shareholder
of the Corporation who was a shareholder of record at the time of giving of
notice provided for in this
- 3 -
<PAGE> 4
By-Law, who is entitled to vote at the meeting and who complied with the notice
procedures set forth in this By-Law.
(2) For business to be properly brought before an annual
meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of the
By-Law, the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
received by the Secretary at the principal executive offices of the Corporation
not less than 60 days no more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than 30 days from such
anniversary date, notice by the shareholder to be timely must be so received not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. Such shareholder's notice shall set forth (a) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; (b) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the proposal is made (i) the name and
address of such shareholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
(3) The Corporation shall set forth in its proxy statement for
each annual meeting of shareholders the date by which notice of nominations by
shareholders of persons for election as directors or of other business proposed
to be brought by shareholders at the next annual meeting of shareholders must be
received by the Corporation to be considered timely pursuant to paragraph (d) of
Article Seven of the Corporation's Articles of Incorporation and this By-Law.
With respect to the first annual meeting of shareholders after the adoption of
this By-Law, the Corporation shall issue a public announcement setting forth
such information not less than 30 days prior to the applicable date.
(B) Special Meetings of Shareholders. Only such business shall
be conducted at a special meeting of
- 4 -
<PAGE> 5
shareholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting.
(C) General. (1) Only such business shall be conducted at a
meeting of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-Law. The Chairman of the
meeting shall have the power and duty to determine whether notice of any
business proposed to be brought before the meeting was given in accordance with
the procedures set forth in this By-Law, and, if not given in compliance with
this By-Law, to declare that such proposal shall not be considered at the
meeting.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14, 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(3) Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights of shareholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 Management Responsibility. The business and
affairs of the corporation shall be managed by the Board of Directors except as
otherwise provided by law or by the Articles of Incorporation.
SECTION 3.2. Number; Election; Term. 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
- 5 -
<PAGE> 6
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.
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.
SECTION 3.3. Resignation and Vacancies. Any Director may
resign at any time by giving written notice to the corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. Any
vacancy occurring on the Board of Directors through death, resignation,
retirement, removal or other cause, or resulting from an increase in the number
of Directors, may be filled by the affirmative vote of a majority of the then
remaining Directors, though 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.
SECTION 3.4. Removal. 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.
SECTION 3.5. Meetings.
(A) Annual Meetings. As soon as practicable after each annual
election of Directors, the Board of Directors shall meet for the purpose of
organization and the transaction of other business.
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(B) Other Meetings. Other meetings of the Board of Directors
shall be held at such times and places as the Board shall from time to time
determine or upon call by the Chairman of the corporation.
SECTION 3.6. Notice of Meetings. The Secretary of the
corporation shall give notice to each Director of the time and place of such
meeting. Notice of each meeting shall be mailed to each Director at his or her
residence or usual place of business, at least three days before the day on
which such meeting is to be held, or shall be sent by telegraph, cable, or other
form of recorded communication or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held. The
attendance of a Director at any meeting shall constitute a waiver of notice of
such meeting, except where a Director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened. A written waiver of notice, signed by a Director,
whether before or after the time stated therein, shall be deemed equivalent to
adequate notice.
SECTION 3.7. Quorum and Manner of Acting. At each meeting of
the Board of Directors, the presence of not less than a majority of the whole
Board shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the Directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by law. If a quorum
shall not be present at any meeting of Directors, the Directors present thereat
may adjourn the meeting from time to time, without notice until a quorum shall
be present.
SECTION 3.8. Action By Consent. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent thereto is signed by all members of the
Board and such written consent is filed with the minutes of proceedings of the
Board. Such consent shall have the same effect as a vote of the Board for all
purposes.
SECTION 3.9. Meetings By Telephone. Members of the Board of
Directors, or of any committee thereof, may participate in a meeting of the
Board, or of such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting
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<PAGE> 8
pursuant to this section shall constitute presence in person at such meeting.
SECTION 3.10. Compensation. Each Director, in consideration of
his or her serving as such, shall be entitled to receive from the corporation
such amount per annum or such fees for attendance at meetings of the Board of
Directors or of any committee thereof, or both, as the Board shall from time to
time determine. The Board may likewise provide that the corporation shall
reimburse each Director or member of a committee for any expenses incurred by
him or her on account of attendance at any such meeting. Nothing contained in
this Section shall be construed to preclude any Director from serving the
corporation in any other capacity and receiving compensation thereof.
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<PAGE> 9
ARTICLE IV
OFFICERS
SECTION 4.1. Officers. The officers of the corporation shall
be a Chairman, President, a Secretary, and a Treasurer. The Board of Directors
may elect or appoint such other officers of the corporation, including a Vice
Chairman, a Controller, and one or more Vice Presidents, Assistant Secretaries
and Assistant Treasurers, as it deems necessary for the proper conduct and
regulation of the business of the corporation and who shall have such authority
and shall perform such duties as the Board of Directors, the Chairman or the
President shall prescribe.
SECTION 4.2. Election and Term of Office. The officers of the
corporation shall be elected by the Board of Directors at the annual meeting of
the Board of Directors. If the election of officers shall not be held at such
meeting of the Board, such election shall be held at a regular or special
meeting of the Board of Directors as soon thereafter as may be convenient. Each
officer shall hold office for the term for which he or she is elected and until
his or her successor is elected and qualified, or until his or her earlier
resignation or removal.
SECTION 4.3. Removal or Resignation. Any officer may be
removed, with or without cause, by the Board of Directors. Any officer may
resign at any time by giving written notice to the corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 4.4. Vacancies. Any vacancy occurring in any office of
the corporation because of death, resignation, removal or any other cause may be
filled for the unexpired portion of the term by the Board of Directors.
SECTION 4.5. Chairman. The Chairman shall be the Chief
Executive Officer of the corporation and shall preside at all meetings of the
shareholders and of the Board of Directors. Subject only to the Board of
Directors, the Chairman shall have direct and general control of the management,
business and affairs of the corporation, including the power and authority to
make final decisions of policy relating to the corporation's goals and plans or
which have a substantial effect upon the operations of the corporation, its
financial position or results, or its
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<PAGE> 10
relations with governmental bodies, consumers and the public generally.
SECTION 4.6. President. The President, subject to the
direction of the Board of Directors and Chairman, shall be the Chief Operating
Officer of the corporation and shall be responsible for directing and overseeing
the administration and operations of the corporation. In the event that the
offices of Chairman and President are held by the same person, the Board of
Directors may designate an officer to serve as Chief Operating Officer. In the
event of the Chairman's absence or inability to act, the President shall perform
the duties of the Chairman. In the absence or disability of the President, the
officer designated by the Chairman or the Board of Directors shall perform the
duties and have the authority and exercise the powers of the President.
SECTION 4.7. Secretary. The Secretary shall keep the minutes
of the meetings of the shareholders, the Board of Directors and committees of
Directors, in one or more books provided for that purpose; see that all notices
are duly given in accordance with the provisions of these By-Laws or as required
by law; have charge of the corporate records and of the seal of the corporation
and shall affix the seal to any instrument requiring it, and when so affixed,
shall attest to it by his or her signature. The Secretary shall perform such
other duties and have such other authority and powers as the Board of Directors,
the Chairman or President may from time to time prescribe.
SECTION 4.8. Treasurer. The Treasurer shall be responsible to
the Board of Directors for the receipt, custody and disbursement of all funds
and securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever and deposit all such
moneys in the name of the corporation in such banks, trust companies, or other
depositories as the Board of Directors shall designate; disburse the funds of
the corporation as ordered by the Board of Directors, the Chairman or the
President or as required in the ordinary conduct of the business of the
corporation; render to the Chairman, the President or the Board of Directors,
upon request, an account of all transactions as Treasurer and a report on the
financial condition of the corporation; and in general, perform all the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to the Treasurer by the Board of Directors, the Chairman, the
President, or these By-Laws.
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<PAGE> 11
SECTION 4.9. Vice President, Controller, Assistant Treasurers,
Assistant Secretaries and Assistant Controllers. The Vice President, the
Controller, the Assistant Treasurers, Assistant Secretaries and Assistant
Controllers shall, in general, perform such duties as shall be assigned to them
by the Treasurer, Secretary or Controller, respectively, or by the Chairman,
President or the Board of Directors.
ARTICLE V
COMMITTEES
SECTION 5.1. Audit Committee. There shall be an Audit
Committee which shall have the authority to (1) cause the books and records of
the corporation and its subsidiaries to be audited by a nationally recognized
firm of independent auditors on an annual basis and at any other time it deems
appropriate; (2) recommend the selection or discharge by the Board of Directors,
as the case may be, of said firm of independent auditors; (3) meet with said
firm of independent auditors and the Corporate Auditor of the corporation as
often as necessary to review the audit plans and scope of audit procedures, the
results of the respective audits and recommendations to management of the
corporation and its subsidiaries; (4) review the accounting principles and
policies and reporting practices followed by the corporation and its
subsidiaries with management and with the independent auditors; (5) review the
adequacy of the accounting and financial systems and internal controls of the
corporation and its subsidiaries with the Corporate Auditor; (6) request the
Corporate Auditor to conduct such other audits, investigations, or reviews of
such books and records, accounting and internal control systems as the Audit
Committee deems appropriate; and (7) review periodically the corporation's
policies relating to the corporation's Code of Conduct including conflicts of
interest, political contributions and sensitive payments and, if it deems it
appropriate, investigate any alleged violations of such policies. The Audit
Committee shall report to the Board of Directors at any time it deems
appropriate or whenever called upon to do so.
SECTION 5.2. Compensation Committee. There shall be a
Compensation Committee which shall, subject to approval of the Board of
Directors, (1) fix the salaries and other direct compensation for all officers
of the corporation or its subsidiaries or affiliates who are also Directors of
the corporation; (2) have the authority to
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<PAGE> 12
review and make recommendations with respect to the salary policies for other
officers of the corporation and its subsidiaries and other management and
supervisory personnel thereof; (3) have the authority to annually review and
make recommendations to the Board of Directors with respect to the compensation
to be paid to outside Directors of the corporation; (4) administer any executive
stock incentive plan which may be approved by the shareholders; (5) administer
any incentive bonus compensation plan approved for officers of the corporation
or its subsidiaries or affiliates; and (6) report to the Board of Directors at
the regular meeting of the Board immediately following any action taken by such
Committee, or whenever it shall be called upon or believes it desirable to do
so.
SECTION 5.3. Corporate Governance and Nominating Committee.
There shall be a Corporate Governance and Nominating Committee which shall (1)
screen and recommend candidates for the Board of Directors of the Corporation;
(2) review matters of corporate governance to ensure continued alignment with
shareholder interests; (3) review the Corporation's efforts to meet its
responsibilities to its non-owner stakeholders; (4) make recommendations
regarding the ongoing effectiveness of the Board and the duties of the
committees of the Board; and (5) consult with management with respect to
policies affecting involvement of the Corporation and its subsidiaries in
community affairs as well as philanthropic contributions by the Corporation, its
subsidiaries, and the foundations sponsored by the Corporation and its
subsidiaries.
SECTION 5.4. Finance Committee. There shall be a Finance
Committee which shall have the authority to review and consult with management
regarding the financial affairs of the corporation and its subsidiaries and to
make recommendations thereon to the Board of Directors, including without
limitation (1) the review of action regarding financial plans for the
corporation and its subsidiaries submitted by the management; (2) the review of
action regarding the timing and amount of debt and equity securities to be
issued and sold by the corporation and its subsidiaries; (3) the semi-annual
review of the investment performance under the Trusteed Benefit Plans and any
recommended changes of investment policy for such plans; and (4) review of the
investment policy for corporate funds.
SECTION 5.5. Membership. Each Committee of the Board shall
consist of two or more Directors appointed by the Board of Directors. Each
member of a Committee shall hold office until the annual meeting of the Board of
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<PAGE> 13
Directors, except as hereinafter provided. Vacancies which occur in the
membership of a Committee shall be filled by the Board of Directors. Any member
of a Committee may be removed at any time by the Board of Directors upon a
majority vote of the whole Board when, in the judgment of the Board of
Directors, the best interests of the corporation will be served thereby. The
Board of Directors shall designate the Committee member who shall serve as
Chairman of the Committee and its presiding officer. The Committee shall select
a Secretary who need not be a member of the Committee but may be an officer or
employee of the corporation.
SECTION 5.6. Meetings. The date, time and place of each
meeting of a Committee shall be specified in a notice to be given by the
Secretary of the Committee to each Committee member not less than 24 hours prior
to the meeting. Notice shall be given by oral, telegraph or telephone, or sent
by mail to each Committee member at his or her usual place of business or at
such address as the member may request in writing. At all meetings, the
Secretary of the Committee shall take minutes of the proceedings and shall keep
such minutes in the corporation's records. The Chairman of the Committee shall
make an oral or a written report of all action taken by the Committee at the
next regular meeting of the Board of Directors.
SECTION 5.7. Quorum. A majority of the members of a Committee
shall constitute a quorum for the transaction of business, but if less than a
quorum shall be present at any meeting, a majority of those present may adjourn
the meeting from time to time. The vote of a majority of the members of the
Committee present at any meeting of such Committee at which a quorum is present
constitutes the action of such Committee.
SECTION 5.8. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of a Committee may be taken without a
meeting if prior to or after such action a written consent thereto is signed by
all members of the Committee, and such written consent is filed with the minutes
of proceedings of the Committee. Any such consent shall have the same effect as
a vote of the Committee for all purposes.
SECTION 5.9. Rules of Procedure. Each Committee shall
determine its own rules of procedure consistent with these By-Laws.
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<PAGE> 14
SECTION 5.10. Other Committees. The Board of Directors may by
resolution establish such other committees as may be desirable, the
responsibilities and duties of which may be prescribed by the Board, subject to
such limitations as provided by law.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 6.1. Indemnification. Any Director or officer of the
corporation who is or was a party or is threatened to be made a party or is
otherwise involved in any threatened, pending or completed action (including any
civil, criminal, administrative or investigative suit or proceeding) by reason
of the fact that he or she is or was a Director or officer of the corporation or
is or was serving another corporation, partnership, joint venture, trust or
other enterprise at the request of the corporation, including service with
respect to employee benefit plans, shall be indemnified by the corporation
against expenses, including attorneys' fees, judgments, penalties, fines and
amounts paid or to be paid in settlement reasonably incurred by such person in
connection with the action. Such indemnification shall include the right to be
paid by the corporation any reasonable expenses incurred by such person in
defending such action in advance of its final disposition.
Indemnification hereunder shall be to the fullest extent now
or hereafter authorized by the Michigan Business Corporation Act, and shall be
determined in the manner provided therein; provided, however, that the
corporation shall indemnify any person seeking indemnity in connection with an
action (or part thereof) initiated by such person only if the action (or part
thereof) was authorized by the Board of Directors. It shall be a defense to any
claim for indemnity hereunder that the claimant has not met the applicable
standard of conduct for which indemnification is permitted under the Michigan
Business Corporation Act.
The corporation may, by action of its Board of Directors,
provide indemnification to employees and agents to the same or a lesser extent
as the foregoing indemnification of Directors and officers.
Indemnification provided hereunder shall be a contract right
between the corporation and each Director or officer of the corporation who
serves in such capacity at
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<PAGE> 15
any time while this Section 6.1 is in effect; shall continue to a person who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, personal representatives and administrators of such person; and shall not
be exclusive of any other right which any person may have or hereafter acquire
under any other written contractual agreement.
Neither the corporation nor its Directors or officers nor any
person acting on its behalf shall be liable to anyone for any determination as
to the existence or absence of conduct which would provide a basis for making or
refusing to make any payment hereunder or for taking or omitting to take any
other action hereunder, in reliance upon advice of counsel.
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<PAGE> 16
ARTICLE VII
CERTIFICATES FOR SHARES AND
THEIR TRANSFER
SECTION 7.1. Certificates for Shares. The certificates for
shares of the capital stock of the corporation, shall be in such form as shall
from time to time be approved by the Board of Directors. The certificate shall
be signed by the Chairman, President or a Vice President and by the Secretary or
Treasurer, and may be sealed with the seal of the corporation or a facsimile
thereof. The signatures of the officers may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
corporation itself or its employees. In case an officer who has signed or whose
facsimile signature has been placed on a certificate ceases to be such officer
before the certificate is issued, it may be issued by the corporation with the
same effect as if he or she were such officer at the date of issue.
SECTION 7.2. Transfer of Shares. Shares shall be transferable
only on the books of the corporation by the holder thereof in person or by his
or her duly authorized attorney.
SECTION 7.3. Fixing Record Date. The record date for
determining shareholders for any purpose shall be established by resolution of
the Board of Directors and shall be not more than 60 days before any meeting,
payment date, or any other action and, in the case of a meeting, shall not be
less than 10 days before such meeting.
SECTION 7.4. Lost, Destroyed or Mutilated Certificate. In case
of the alleged loss or destruction or the mutilation of a certificate
representing stock of the corporation, a new certificate may be issued in place
thereof, in the manner and upon such terms as the Board of Directors may
prescribe.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Books and Records. The corporation shall keep
current and complete books and records of account and shall keep minutes of the
proceedings of the shareholders and Board of Directors, and shall keep at its
registered office or principal place of business, or
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<PAGE> 17
at the office of its transfer agent or registrar, a record of the names and
addresses of all shareholders and the number and class of shares held by each.
SECTION 8.2. Fiscal Year. The fiscal year of the corporation
shall commence on the first day of January, and end the thirty-first day in
December of each year.
SECTION 8.3. Corporate Seal. The corporate seal of the
corporation shall be circular in form, one and seven-eighths inches in diameter,
with the name of the corporation engraved around the margin, and the figures
"1988", the year of its incorporation, engraved in the center.
SECTION 8.4. Voting of Stock. Unless otherwise ordered by the
Board of Directors, the Chairman, the President or any Vice President of the
corporation shall have full power and authority to act and vote, in the name and
on behalf of this corporation, at any meeting of shareholders of any corporation
in which this corporation may hold stock, and at any such meeting shall possess
and may exercise any and all of the rights and powers incident to the ownership
of such stock, and shall have full power and authority to execute, in the name
and on behalf of this corporation, proxies authorizing any suitable person or
persons to act and to vote at any meeting of shareholders of any corporation in
which this corporation may hold stock, and at any such meeting the person or
persons so designated shall possess and may exercise any and all of the rights
and powers incident to the ownership of such stock.
SECTION 8.5. Amendment of By-Laws. Subject to applicable law,
the Board of Directors shall have power to make, amend and repeal the By-laws of
the corporation, at any regular or special meeting of the Board by a majority
vote of the Board. Nothing in this Section shall be construed to limit the power
of the shareholders to amend, alter or rescind any of the By-laws of the
corporation.
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<PAGE> 1
EXHIBIT 4-2
================================================================================
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 4, 1997
between
MCN ENERGY GROUP INC.
AS ISSUER
and
NBD BANK
AS TRUSTEE
Supplementing the Indenture
Date as of September 1, 1994
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of June 4, 1997 (the "First
Supplemental Indenture"), between MCN Energy Group Inc. (formerly MCN
Corporation), a corporation duly organized and existing under the laws of the
State of Michigan, having its principal office at 500 Griswold Street, Detroit,
Michigan 48226 (the "Company"), and NBD Bank, a Michigan banking corporation
(formerly NBD Bank, N.A.), as trustee (the "Trustee").
WHEREAS, the Company executed and delivered the Senior Debt Securities
Indenture dated as of September 1, 1994 (the "Indenture"), to the Trustee to
provide for the future issuance of the Company's unsecured debentures, notes or
other evidence of indebtedness (the "Securities"), to be issued from time to
time in one or more series as might be determined by the Company under the
Indenture;
WHEREAS, pursuant to the terms of the Indenture, the Company desires to
supplement and amend the Indenture, including amending and restating certain
provisions relating to an Event of Default as set forth in Article Five,
Section 501(4) of the Indenture and certain definitions as set forth in Article
One, Section 101 of the Indenture;
WHEREAS, the Board of Directors of the Company has authorized the
Company to enter into this First Supplemental Indenture with the Trustee;
WHEREAS, all things necessary to make this First Supplemental Indenture
a valid agreement of the Company and the Trustee in accordance with its terms
and a valid amendment and supplement to the Indenture, have been done.
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained, the Company and the Trustee agree as follows for
the purposes of setting forth the terms, provisions and conditions of the
desired amendments to Article Five, Section 501(4) of the Indenture and Article
One, Section 101 of the Indenture:
ARTICLE I
DEFINITIONS
2
<PAGE> 3
SECTION 1.1. Definition of Terms.
Unless the context otherwise requires:
(a) a term defined in the Indenture has the same meaning when used
in this First Supplemental Indenture;
(b) capitalized terms used herein that are not otherwise defined
herein shall have the meaning assigned to such terms in the Indenture;
(c) a term defined anywhere in this First Supplemental Indenture has
the same meaning throughout;
(d) the singular includes the plural and vice versa;
(e) headings are for convenience of reference only and do not affect
interpretation;
ARTICLE II
AMENDMENTS TO THE INDENTURE
SECTION 2.1
Article One, Section 101 of the Indenture is amended to add the
following language between the definitions of "Place of Payment" and
"Redemption Date":
"Project Finance Indebtedness" means indebtedness of a Subsidiary
(other than a Utility and other than the Company) secured by a Lien on any
property acquired, constructed or improved by such Subsidiary after the date of
this Indenture which Lien is created or assumed contemporaneously with, or
within 120 days after, such acquisition or completion of such construction or
improvement, or within six months thereafter pursuant to a firm commitment for
financing arranged with a lender or investor within such 120-day period, to
secure or provide for the payment of all or any part of the purchase price of
such property or the cost of such construction or improvement or on any
property existing at the time of acquisition thereof; provided that such a
Lien shall not apply to any property theretofore owned by any such Subsidiary
other than, in the case of any such construc-
3
<PAGE> 4
tion or improvement, any theretofore unimproved real property on which the
property so constructed or the improvement is located; and provided further
that such indebtedness, by its terms, shall limit the recourse of any holder of
such Indebtedness (or trustee on such holder's behalf) in the event of any
default in such Indebtedness to the assets subject to such Liens and the
capital stock of, or the dividends received from, the Subsidiary issuing such
Indebtedness. Notwithstanding the foregoing, Project Finance Indebtedness
shall include all Indebtedness that would constitute Project Finance
Indebtedness but for the fact that such Indebtedness was issued prior to the
date of this Indenture and taking into account the fact that the property
subject to the Lien may have been acquired prior to the date of this
Indenture."
SECTION 2.2.
Article One, Section 101 of the Indenture is amended to add the
following language between the definitions of "U.S. Government Obligations"
and "Value":
"Utility" shall mean any Subsidiary of the Company engaged in the
business of distributing natural gas at retail."
SECTION 2.3.
Article Five, Section 501(4) of the Indenture is hereby amended in
its entirety to read as follows:
"(4) any Event of Default under any series of Securities issued
pursuant to this Indenture or any event of default, as defined in any
other indenture, mortgage, or instrument under which there may be issued,
or by which there may be secured or evidenced, any Indebtedness of the
Company or a Subsidiary (whether such Indebtedness now exists or shall
hereafter be created or incurred), but excluding Project Finance
Indebtedness, shall occur and shall consist of default in the payment of
such Indebtedness at the maturity thereof (after giving effect to any
applicable grace period) or shall result in Indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise
become due and payable, and such default in payment
4
<PAGE> 5
is not cured or such acceleration shall not be rescinded or annulled within 10
days after written notice to the Company from the Trustee or to the Company and
to the Trustee from the Holders of at least 10% in aggregate principal amount
of the Securities of that series at the time outstanding; provided that it
shall not be an Event of Default if the principal amount of Indebtedness (other
than Indebtedness represented by Securities issued pursuant to this Indenture)
which is not paid at maturity or the maturity of which is accelerated is less
than the amount equal to 1% of the Company's consolidated total assets
(determined as of its most recent fiscal year-end); provided further, that it
shall not be an Event of Default if the Indebtedness with respect to which such
default has occurred is Indebtedness of MCNIC Oil & Gas Company ("MOG")
(formerly Supply Development Group, Inc.) or its Subsidiaries and the
obligations of MCN and its Subsidiaries with respect to such Indebtedness
(other than MOG and its Subsidiaries) are no greater than the obligations of
MCN pursuant to the Support Agreement of MCN Corporation made as of August 23,
1995, as amended on October 4, 1995 (the "Supply Development Agreement") among
MCN, Supply Development Group, Inc. and certain of its Subsidiaries and does
not obligate payments by the obligor under such agreement with respect to
anything other than the payments specified in Paragraphs 3, 4 and 5 of the
Supply Development Agreement (limiting for these purposes the term "Material
Contracts" to the same general type of contracts for which MCN is obligated to
make payments under the Supply Development Agreement); provided further that
if, prior to a declaration of acceleration of the maturity of the Securities of
that series or the entry of judgment in favor of the Trustee in a suit pursuant
to Section 503, such default shall be remedied or cured by the Company or
waived by the holders of such Indebtedness, then the Event of Default hereunder
by reason thereof shall be deemed likewise to have been thereupon remedied,
cured or waived without further action on the part of either the Trustee or any
of the Holders of the Securities of that series, and provided further, that,
subject to Sections 601 and 602, the Trustee shall not be charged with
knowledge of any such default unless written notice of such
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<PAGE> 6
default shall have been given to the Trustee by the Company, by a holder or an
agent of a holder of any such Indebtedness, by the trustee then acting under
any indenture or other instrument under which such default shall have
occurred, or by the Holders of at least five percent in aggregate principal
amount of the Securities of that series at the time outstanding; or"
SECTION 2.4.
The amendments set forth in Sections 2.1, 2.2 and 2.3 shall not be
effective as to any Security Outstanding of any series created prior to the
date hereof.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. Ratification of Indenture.
The Indenture, as supplemented by this First Supplemental Indenture,
is in all respects ratified and confirmed, and this First Supplemental
Indenture shall be deemed part of the Indenture in the manner and to the extent
herein and therein provided.
SECTION 3.2. Governing Law.
This First Supplemental Indenture shall be deemed to be a contract
made under the internal laws of the State of New York, and for all purposes
shall be construed in accordance with the laws of said State.
SECTION 3.3. Separability.
In case any one or more of the provisions contained in this First
Supplemental Indenture shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this First Supplemental Indenture but
this First Supplemental Indenture shall be construed as if such invalid or
illegal or unenforceable provision had never been contained herein or therein.
SECTION 3.4. Counterparts.
6
<PAGE> 7
This First Supplemental Indenture may be executed in any number of
counterparts each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
SECTION 3.5. Effectiveness.
This First Supplemental Indenture shall be effective and binding when
executed by the Company and the Trustee.
SECTION 3.6. Trustee Not Responsible for Recitals.
The recitals herein contained are made by the Company and not by the
Trustee, and the Trustee assumes no responsibility for the correctness thereof.
The Trustee makes no representation as to the validity or sufficiency of this
First Supplemental Indenture.
SECTION 3.7. Performance by Trustee.
The Trustee, for itself and its successors accepts the Trust of the
Indenture as amended by this First Supplemental Indenture and agrees to perform
this First Supplemental Indenture, but only upon the terms and conditions set
forth in the Indenture, including the terms and provisions defining and
limiting the liability and responsibility of the Trustee.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and their respective corporate
seals to be hereunto affixed and attested, all as of the day and year first
above written.
MCN ENERGY GROUP INC.
By /s/ Sebastian Coppola
-----------------------
Name: Sebastian Coppola
Title: Senior Vice President
and Treasurer
Attest:
By: /s/ Daniel L. Schiffer
----------------------
Daniel L. Schiffer
Senior Vice President,
General Counsel
and Secretary
NBD BANK
as Trustee
By /s/ James Khami
-----------------------
Name: James Khami
Title: Assistant Vice President
Attest:
By: Signature
-------------------
8
<PAGE> 1
MCN ENERGY GROUP INC. AND SUBSIDIARIES EXHIBIT 12-1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS DEFINED(1)(5)
Pre-tax income(2) $ 181,299 $ 146,607 $ 128,997
Fixed charges(3) 125,338 99,944 72,895
----------------- ---------------- ----------------
Earnings as defined $ 306,637 $ 246,551 $ 201,892
================= ================ ================
FIXED CHARGES AS DEFINED(1)(4)(5)
Interest, expensed $ 86,453 $ 77,781 $ 57,675
Interest, capitalized 18,190 13,235 7,926
Amortization of debt discounts, premium
and expense 2,426 2,217 1,641
Interest implicit in rentals 2,181 2,339 2,325
Preferred securities dividend requirements
of subsidiaries 31,090 12,390 9,699
----------------- ---------------- ----------------
Fixed charges as defined $ 140,340 $ 107,962 $ 79,266
================= ================ ================
Ratio of Earnings to Fixed Charges 2.18 2.28 2.55
================= ================ ================
</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
EXHIBIT 12.2
MCN ENERGY GROUP INC. AND SUBSIDIARIES
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
December 31, 1997 December 31, 1996 December 31, 1995
--------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AS ADJUSTED:
Pre-tax income (1) $ 194,430 148,944 128,499
Nonrecourse debt 1,609 -- --
Interest capitalized (18,190) (14,631) (7,893)
Preferred dividend adjustment (2) 32,465 17,989 9,610
Pension costs (20,539) (14,029) (14,099)
Postretirement costs 11,411 13,586 19,460
Interest rate charges 103,840 89,136 67,120
----------- ----------- ------------
305,026 240,995 202,697
=========== =========== ============
INTEREST RATE CHARGES:
Interest expensed 86,453 77,781 56,902
Interest capitalized 18,190 14,631 7,893
Interest implicit in rentals 2,181 2,339 2,325
Nonrecourse interest (1,609) -- --
Preferred dividends adjustment (3) (1,375) (5,615) --
----------- ----------- ------------
103,840 89,136 67,120
=========== =========== ============
Interest Coverage Ratio 2.94 2.70 3.02
=========== =========== ============
</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) Includes interest on $130,000,000 of 6.82% Series Medium-Term Notes less
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
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1)(4)
Pre-tax income (2) $ 51,892 $ 21,899 $ 13,163
Fixed charges (3) 65,891 41,628 24,748
------------ -------- ---------
Earnings as defined $ 117,783 $ 63,527 $ 37,911
============ ======== =========
FIXED CHARGES AS DEFINED (1)(4)
Interest, expensed $ 64,434 $ 40,523 $ 24,151
Interest, capitalized 15,002 8,002 5,895
Amortization of debt discounts, premium
and expense 1,183 982 520
Interest implicit in rentals 274 123 77
------------ -------- ---------
Fixed charges as defined $ 80,893 $ 49,630 $ 30,643
============ ======== =========
Ratio of Earnings to Fixed Charges 1.46 1.28 1.24
============ ======== =========
</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
EXHIBIT 12-4
MCN INVESTMENT CORPORATION AND SUBSIDIARIES
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
December 31, December 31, December 31,
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
EARNINGS AS ADJUSTED:
Pre-tax Income (1) $ 64,738 $ 24,208 $ 12,454
Interest capitalized (15,002) (9,398) (6,249)
Preferred dividend adjustment (2) 39,956 17,989 9,375
Interest rate charges 40,476 32,696 21,582
-------- --------- --------
130,168 65,495 37,162
======== ========= ========
INTEREST RATE CHARGES:
Interest expensed 64,434 40,523 24,151
Interest capitalized 15,002 9,398 6,249
Interest implicit in rentals 996 764 557
Preferred dividends adjustment (2) (39,956) (17,989) (9,375)
-------- ------ -----
40,476 32,696 21,582
======== ====== ======
Interest Coverage Ratio 3.22 2.00 1.72
==== ==== ====
</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.
<PAGE> 1
EXHIBIT 13.1
Management's Discusson and Analysis
RESULTS OF OPERATIONS
MCN posts fifth consecutive record-setting year -- MCN's earnings from
continuing operations increased 26%, or $29.7 million, to a record $142.3
million in 1997. Basic earnings per share reached an all-time high, increasing
16% to $1.95. This performance reflects the successful implementation of MCN's
diversified portfolio investment strategy discussed below. MCN's continuing
operations generated 1996 income of $112.6 million, or basic earnings per share
of $1.68, an increase of $19.4 million or $.24 per share from 1995.
MCN's earnings comparisons were also affected by income from discontinued
operations. As discussed in the "Discontinued Operations" section
that follows, MCN sold its computer operations subsidiary, The Genix Group,
Inc. (Genix), during the second quarter of 1996.
NET INCOME
<TABLE>
<CAPTION>
(in Millions) 1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Continuing Operations:
Diversified Energy $ 61.2 $ 31.2 $ 17.6
Gas Distribution 81.1 81.4 75.6
----------------------------------
142.3 112.6 93.2
----------------------------------
Discontinued Operations:
Income from operations -- 1.6 3.6
Gain on sale -- 36.2 --
----------------------------------
-- 37.8 3.6
----------------------------------
$ 142.3 $ 150.4 $ 96.8
==================================
BASIC EARNINGS PER SHARE
Continuing Operations:
Diversified Energy $ .84 $ .47 $ .27
Gas Distribution 1.11 1.21 1.17
-----------------------------------
1.95 1.68 1.44
-----------------------------------
Discontinued Operations:
Income from operations -- .03 .05
Gain on sale -- .54 --
-----------------------------------
-- .57 .05
-----------------------------------
$ 1.95 $ 2.25 $ 1.49
===================================
</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 continuing growth of MCN's
earnings and the total return to its shareholders over time. MCN has achieved a
three-year annual growth rate in basic earnings per share of 15.7%. Similarly,
MCN's total return to shareholders, which includes stock price appreciation and
reinvested dividends, has averaged 35.9% per year since 1995.
DIVERSIFIED ENERGY
Earnings generate a 17.2% return on equity -- The Diversified Energy group
continued its strong financial performance with its sixth consecutive year of
double- or triple-digit earnings increases. Earnings for 1997 increased to $61.2
million, nearly double the $31.2 million earned in 1996. The growth in earnings
was driven primarily by increased operating and joint venture income as all of
MCN's Diversified Energy business units turned in exceptional performances.
Partially offsetting the growth in earnings were increased financing costs
resulting from additional capital needed to fund investments. Diversified Energy
continues to provide an increasing portion of MCN's earnings, contributing 43%
in 1997 compared to 28% in 1996 and 19% in 1995. Diversified Energy's earnings
for 1996 increased $13.6 million or 77% over 1995.
DIVERSIFIED ENERGY OPERATONS
(in Millions)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Operating Revenues* $ 951.3 $ 734.4 $ 400.0
Operating Expenses* 891.7 693.6 378.1
------------------------------
Operating Income 59.6 40.8 21.9
------------------------------
Equity in Earnings of
Joint Ventures 53.1 16.6 3.9
------------------------------
Other Income and (Deductions)*
Interest income 6.7 3.0 3.6
Interest expense (32.2) (28.7) (13.3)
Dividends on
preferred securities (31.1) (12.4) (9.4)
Other 10.1 5.5 2.3
------------------------------
(46.5) (32.6) (16.8)
------------------------------
Income Before Income Taxes 66.2 24.8 9.0
------------------------------
Income Taxes
Current and deferred provision 22.8 9.5 2.7
Federal tax credits (17.8) (15.9) (11.3)
------------------------------
5.0 (6.4) (8.6)
------------------------------
Net Income $ 61.2 $ 31.2 $ 17.6
------------------------------
</TABLE>
*Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income nearly doubles -- Diversified Energy's
operating and joint venture income increased $55.3 million and $31.6 million in
1997 and 1996, respectively. This performance primarily reflects the growing
returns from all business units resulting from successfully investing almost $2
billion in a diverse portfolio of energy-related projects during the past three
years. A discussion of each business unit, its contributions and its outlook
follows.
<TABLE>
<CAPTION>
OPERATING AND JOINT VENTURE INCOME
(in Millions)
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Exploration & Production $ 58.1 $ 33.2 $ 18.5
Pipelines & Processing 29.1 10.7 1.0
Energy Marketing, Gas
Storage & Electric Power 29.8 14.0 9.1
Corporate & Other (4.3) (.5) (2.8)
----------------------------------
$ 112.7 $ 57.4 $ 25.8
----------------------------------
</TABLE>
EXPLORATION & PRODUCTION (E&P) owns, invests in and manages a diverse portfolio
of gas and oil properties in the Midwest/Appalachia, Midcontinent/Gulf Coast
and Western regions of the United States. MCN's gas and oil projects utilize
various technologies in diverse geological structures, including shallow
31
<PAGE> 2
Management's Discussion and Analysis
Antrim shale formations, coalbed methane properties and unconventional oil
recovery projects.
E&P operating and joint venture income increased $24.9
million in 1997 and $14.7 million for 1996. The results reflect a significant
increase in the level of gas and oil produced due to the development and
acquisition of properties during 1997 and 1996. Gas and oil production increased
34.6 billion cubic feet equivalent (Bcfe) or 54% in 1997 and 30 Bcfe or 89% in
1996. This growth in production is primarily attributable to ongoing
developmental drilling as well as the acquisition of properties. MCN continues
to add oil to its production mix to further diversify its portfolio. Oil
accounted for 20.1 Bcfe or 20% of production in 1997 compared to 6.5 Bcfe or 10%
in 1996 and 2.3 Bcfe or 7% in 1995. MCN's unconsolidated joint ventures
generated $6.6 million of pre-tax income in 1997 from the sale of undeveloped
properties.
GAS AND OIL PRODUCTION PROVED GAS AND OIL RESERVES
(in Bcf equivalent) (in Tcf equivalent)
98.3................................97 1.32..........................97
1.24...................96
.89.............95
63.7........................96
33.7................95
[ ] Gas Production [ ] Developed
[ ] Oil Production [ ] Undeveloped
Since the inception of its E&P program in late 1992, MCN has invested more than
$1.3 billion to develop and acquire gas and oil reserves. Proved gas reserves
increased slightly in 1997 to 1,166.2 billion cubic feet (Bcf), and proved oil
reserves rose 50% to 155.1 Bcfe. The increase in gas and oil reserves during
1997 was tempered by the sale of properties with 57.6 Bcfe of proved reserves
and net downward reserve revisions of 32.8 Bcfe. Proved gas reserves increased
33% in 1996 to 1,137.7 Bcf, and proved oil reserves more than tripled to 103.2
Bcfe. MCN invested $375 million in its E&P business during 1997 with
approximately 34% directed toward developing existing properties. Developed
producing reserves represent 665.9 Bcfe, or 50% of total gas and oil reserves at
year end 1997 compared to 746.3 Bcfe in 1996, and 583.5 Bcfe in 1995.
E&P operating results reflect average gas sales rates per thousand cubic feet
(Mcf) of $1.95 in 1997, $1.96 in 1996 and $2.02 in 1995. E&P operating results
also reflect an average oil sales rate per barrel of $16.87 in 1997, $20.18 in
1996 and $16.24 in 1995. The average gas and oil sales rates include the effect
of hedging with commodity swap and futures agreements, which are used to manage
Diversified Energy's exposure to the risk of market price fluctuations as
discussed in the "Risk Management Strategy" section that follows. As a result of
strong energy prices, hedging agreements had the effect of reducing the average
gas sales rates by $.40 and $.35 per Mcf in 1997 and 1996, respectively, as well
as reducing the average oil sales rates by $.21, $.75 and $.20 per barrel in
1997, 1996 and 1995, respectively. Conversely, in a less favorable gas market
hedging agreements increased 1995's average gas sales rate by $.51 per Mcf.
E&P's 1997 operating costs per Mcfe remained relatively flat compared to 1996 as
lower unit production costs offset a higher depreciation, depletion and
amortization rate. Operating costs per Mcfe increased in 1996 over 1995
reflecting a $.24 higher average production and depreciation cost rate.
E&P operations have supplemented Diversified Energy's earnings through the
generation of an increasing amount of gas production tax credits, primarily from
production of coalbed methane and Antrim shale gas properties in the
Midwest/Appalachia region. Tax credits increased 12% to $17.8 million in 1997,
compared to $15.9 million in 1996 and $11.3 million in 1995.
Outlook -- MCN's strategy is to continue the growth of its reserve base in known
producing areas, generating attractive returns and developing reliable,
long-term gas supplies. MCN anticipates an increase in E&P operating results as
it implements this growth strategy by acquiring additional properties,
developing existing acreage and realizing the full benefits of previous
acquisitions. E&P expects gas and oil production levels to increase
significantly in 1998 as a result of acquisitions and the continued development
of E&P's 1.25 million acres of undeveloped property and proved undeveloped
reserves.
MCN will continue to evaluate opportunities to strategically sell certain E&P
properties. MCN's strategy is to sell and purchase assets to optimize its E&P
portfolio.
MCN also anticipates that oil will become a larger percentage of total
reserves and production in order to achieve a more balanced portfolio. In
addition to producing increasing quantities of oil through traditional methods,
MCN expects increased production from its investments in unconventional oil
recovery projects.
Risks associated with E&P activities are managed by diversifying investments
along the lines of geography, geology, risk profile and technology. MCN is
currently evaluating international investment opportunities which would
further diversify its E&P portfolio.
PIPELINES & PROCESSING owns and invests in pipeline, gathering, processing and
related facilities in major supply areas, including the Midwest/Appalachia,
Midcontinent/Gulf Coast and Rocky Mountain regions.
Pipelines & Processing operating and joint venture income increased $18.4
million in 1997 and $9.7 million during 1996. The increase in 1997 reflects
income from the December 1996 acquisition of a 25% interest in Lyondell Methanol
Company, L. P.
32
<PAGE> 3
(Lyondell), a limited partnership that owns and operates a 248 million
gallon-per-year methanol production plant in Texas (Note 2e). Earnings from
Lyondell have benefited from strong methanol prices during 1997. Pipelines &
Processing operating and joint venture income for 1997 also reflects income
from a 29.6 Bcf or 34% increase in transportation volumes resulting from
the acquisition and expansion of pipeline facilities during the year.
PIPELINES & PROCESSING STATISTICS*
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Transportation (Bcf) 116.0 86.4 5.0
Methanol Produced
(Million Gallons) 60.8 10.5 --
Gas Processed (Bcf) 42.8 44.2 14.6
</TABLE>
*Includes MCN's share of joint ventures
The increase in 1996 operating and joint venture income compared to 1995 is due
to the December 1995 acquisition of a 50% interest in a 40-mile gas gathering
line in Virginia (Note 2g) and the February 1996 acquisition of an interest in a
90-mile gas gathering system in the Mobile Bay area of offshore Alabama (Note
2f). Results for 1996 also reflect a higher level of volumes treated through
additional gas processing plants.
Outlook -- Pipelines & Processing's expansion strategy will continue to focus
on investing in natural gas and gas liquid gathering, processing and
transmission facilities near areas of rapid reserve development or growing
consumer markets. MCN has partnership interests in three interstate pipeline
projects that will transport Canadian natural gas volumes into the
Mid-Atlantic and Northeast United States markets. MCN has a 20% interest in
the Portland Natural Gas Transmission System, its initial interstate pipeline
investment. The $340 million, 292-mile Portland pipeline is expected to
begin transporting up to 210,000 Mcf per day in late 1998. The Millennium
Pipeline System and the Vector Pipeline project are the other two interstate
pipeline projects. Both projects are subject to Federal Energy Regulatory
Commission approval and are expected to be completed in late 1999. MCN has a
10.5% interest in the $680 million, 440-mile Millennium Pipeline which will have
the capacity to transport up to 700,000 Mcf per day. MCN also has a 25% interest
in the $450 million, 343-mile Vector Pipeline which is expected to transport up
to 1 Bcf per day.
MCN's Pipelines & Processing business also formed partnerships in 1997 to
construct plants which will process coal fines and manufacture asphalt.
The coal fines venture produces coal briquettes from particles of coal that are
by-products of coal mining. The coal fines venture is currently constructing six
plants which are expected to be completed by June 1998. Each plant will be
capable of processing up to one million tons annually. Actual production levels
may vary significantly depending upon actual site conditions, including coal
fines quality and quantity, equipment performance and other factors. The
economic viability of the coal fines venture is highly dependent upon an
Internal Revenue Service (IRS) ruling that production from the plants qualifies
for synthetic fuel tax credits estimated to range from $20 to $25 per ton. MCN
has filed for, and expects to receive, a favorable IRS ruling by mid-1998.
The asphalt partnership is constructing a $15 million manufacturing facility
designed to produce approximately 100,000 tons of high quality asphalt annually.
The first plant is expected to be completed by the third quarter of 1998, with
additional plants built in 1999 and 2000 if market conditions warrant.
MCN is also evaluating various international pipeline and processing
opportunities, including investments in natural gas-based fertilizer projects.
ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER markets premium, reliable,
primarily bundled energy services to large-volume customers in the Midwest, Gulf
Coast and Northeast regions of the United States and Eastern Canada. In addition
to owning market-area storage that adds value to its energy marketing
activities, this business unit holds interests in electric power generation
facilities in the United States and Asia.
Energy Marketing, Gas Storage & Electric Power operating and joint venture
income increased $15.8 million in 1997 and $4.9 million in 1996. The increase in
1997 reflects contributions from all businesses, specifically from the April
1997 acquisition of an 18% interest in Midland Cogeneration Venture L. P. (MCV)
(Note 2d). MCV is 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. Earnings from MCV include a favorable
$2.8 million adjustment for a change in accounting for property taxes. Also
contributing to the favorable 1997 results were higher earnings from MCN's
investment in the 50%-owned, 123 MW Michigan Power cogeneration facility.
Improved earnings from the Michigan Power facility are due to an increase in
plant availability and a higher electricity sales rate under its long-term sales
contract. Electric Power earnings reflect a higher level of electricity sales
which more than doubled 1996 sales levels.
33
<PAGE> 4
Management's Discussion and Analysis
[Line Graph]
GAS SALES AND
ELECTRIC POWER SALES* EXCHANGE GAS DELIVERIES*
(in Thousands of MW Hours) (in Bcf)
1,843.3...........................97 358.8...................97
241.5...............96
187.1.........95
708.9.....................96
271.8.................95
*Includes MCN's share of joint ventures
The improvement in Energy Marketing's earnings in 1997 is due to a 117.3 Bcf or
49% increase in gas sales and exchange gas deliveries, partially offset by a
slight decrease in margins. The increase in gas sales volumes was driven by
additional sales to the Midwest and Northeast markets. Under exchange gas
contracts, Energy Marketing accepts gas from customers or delivers gas to
customers, and the gas is returned during a subsequent period. MCN has a 50%
equity interest in a joint venture storage project that owns a 10 Bcf storage
facility. This entire storage facility is utilized by MCN's Energy Marketing
unit to enhance its ability to provide reliable gas sales and exchange gas
services.
Gas Storage operating and joint venture income improved slightly in
1997 compared to 1996, primarily resulting from increased contributions from
Diversified Energy's 25% interest in the Blue Lake gas storage project (Blue
Lake). Diversified Energy sold its interest in Blue Lake in December 1997.
Accordingly, the comparability of Gas Storage's future operating results will be
impacted by such sale. MCN's Gas Distribution segment also owns a 25% interest
in Blue Lake and will maintain its share of the venture.
The increase in Energy Marketing, Gas Storage & Electric Power operating and
joint venture income for 1996 reflects a 54.4 Bcf or 29% increase in gas sales
and exchange gas deliveries as well as slightly higher margins on gas sales. The
increase in gas sales volumes was driven primarily by additional sales to
customers in the northeastern United States, as well as sales to the Michigan
Power cogeneration facility which began operations in late 1995.
Outlook - In order to grow Energy Marketing operations, MCN's strategy is to
aggressively pursue marketing opportunities within its current target markets as
well as expanding its coverage outside of those areas. Enhanced by its ability
to provide reliable and custom-tailored storage services to large-volume end
users and utilities, MCN is positioned to capitalize on opportunities to further
expand its market base into the Northeast and Midwest United States and eastern
Canada. MCN has entered into marketing alliances with other energy marketers and
suppliers in order to expand its markets in the Great Lakes and Gulf Coast
regions as well as to enter new markets throughout the southern United States.
During 1997, MCN began converting a depleted natural gas reservoir into a 42 Bcf
storage facility. MCN expects the storage field to be completed by mid-1999 and
therefore to be available for the 1999-2000 winter heating season. Upon
completion, the storage field will support Energy Marketing's operations by
enhancing its ability to offer a reliable gas supply during peak winter months.
A key component of MCN's strategy to grow its Energy Marketing business is its
ability to capitalize on opportunities presented by the restructuring of the
electric industry. The electric industry is undergoing transition as a result of
efforts to deregulate electricity sales, on both a federal and state level. MCN
has formed a joint venture with DTE Energy Company to sell electricity, natural
gas and energy-related services to industrial and commercial customers in
nonregulated markets in the Mid-Atlantic and Midwest regions of the United
States. The Michigan Public Service Commission (MPSC) has issued its final order
regarding electric restructuring, which is being appealed. MCN has investments
in three Michigan electric power generation facilities which could be impacted
by electric restructuring.
During 1997, MCN acquired equity securities of Torrent Power Limited, an India
joint venture that holds interests in two electric distribution companies and a
power generation project under construction in the state of Gujarat, India. In
December 1997, MCN acquired an approximate 65% interest in a 36 MW hydroelectric
power plant in Nepal. Construction on the $98 million project began in early
1997 and is scheduled to be completed in late 1999. In October 1997, MCN
advanced funds to an independent power producer to fund power generation
projects currently under construction in the Philippines. MCN is negotiating the
possible conversion of its advance to an equity interest in the power producer.
MCN is continuing to pursue several other domestic and international power
generation projects. MCN expects a significant increase in Electric Power joint
venture income as it realizes the full benefits from existing investments as
well as from additional investments in international projects over the next
several years.
Foreign currency translation adjustments relating to MCN's international equity
investments are included in Common Shareholders' Equity. The foreign currency
translation adjustment through December 1997 primarily relates to the United
States dollar and India rupee exchange rate fluctuations from the Torrent Power
Limited investment. MCN's financial statements will continue to be impacted by
currency exchange rate fluctuations.
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
34
<PAGE> 5
to ensure compliance with risk management policies which 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 absorbed by Energy Marketing.
CORPORATE & OTHER operating and joint venture income includes administrative
expenses associated with corporate management activities. The Diversified Energy
group has been charged a larger portion of such expenses in 1997, reflecting its
growing percentage of MCN. Operating and joint venture losses in 1996 were
partially offset by a $1.7 million pre-tax gain from the sale of land by a
50%-owned real estate joint venture.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for 1997 and 1996 reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group, as well as dividends on $200 million of preferred securities
issued in June 1997, $132 million of preferred securities issued in March 1997
and $80 million of preferred securities issued in July 1996 (Note 6).
Partially offsetting the higher interest costs and preferred dividends was
increased interest income resulting from a $46 million advance made to a
Philippine independent power producer (Note 2b).
The other income and deductions comparisons were affected by gains related to
Dauphin Island Gathering Partners (DIGP) as well as a $2.5 million pre-tax gain
from the sale of pipeline assets in 1997 and a $3.2 million pre-tax gain from
the December 1997 sale of Diversified Energy's interest in the Blue Lake storage
project. 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 which $2.4 million was deferred until 1997 when a related option
agreement expired unexercised (Note 2f).
Included in other income and deductions in 1995 is a $1.4 million bonus received
for exceeding required performance criteria at the Michigan Power project and
the reversal of a $1.6 million uncollectible reserve on an advance made to a
joint venture. The uncollectible provision was reversed upon the receipt of
payments and credit support to ensure repayment of the remaining advance
balance.
INCOME TAXES
The current and deferred income tax provisions reflect increased federal
taxes on improved pre-tax earnings. This increase was partially offset
by increased gas production tax credits related to E&P projects.
GAS DISTRIBUTION
Earnings produce a 13.2% return on equity - The Gas Distribution group
continued its solid performance during 1997 with earnings of $81.1 million,
representing a slight decrease from 1996. Earnings for 1996 increased
$5.8 million or 8% over 1995. The 1996 improvement was due primarily to
increased gross margins resulting from higher gas sales and transportation
deliveries.
GAS DISTRIBUTION OPERATIONS
<TABLE>
<CAPTION>
(in Millions) 1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Operating Revenues*
Gas sales $ 1,080.1 $ 1,102.9 $ 931.9
End user transportation 84.7 82.5 80.8
Intermediate transportation 55.2 48.6 42.0
Other 51.3 42.3 52.9
----------------------------------
1,271.3 1,276.3 1,107.6
Cost of Gas 642.0 646.3 491.4
----------------------------------
Gross Margin 629.3 630.0 616.2
----------------------------------
Other Operating Expenses*
Operation and maintenance 286.7 298.4 299.8
Depreciation and depletion 104.4 98.8 91.3
Property and other taxes 61.3 62.3 58.8
----------------------------------
452.4 459.5 449.9
----------------------------------
Operating Income 176.9 170.5 166.3
----------------------------------
Equity in Earnings
of Joint Ventures 2.5 1.3 1.3
----------------------------------
Other Income and (Deductions)*
Interest income 4.7 4.0 4.4
Interest expense (54.5) (48.9) (43.7)
Minority interest (1.9) (1.0) (2.4)
Other .5 (1.8) (6.4)
(51.2) (47.7) (48.1)
----------------------------------
Income Before Income Taxes 128.2 124.1 119.5
Income Taxes 47.1 42.7 43.9
----------------------------------
Net Income $ 81.1 $ 81.4 $ 75.6
----------------------------------
</TABLE>
*Includes intercompany transactions
GROSS MARGIN
Gross margins preserved despite warmer weather - Gas Distribution gross margin
(operating revenues less cost of gas) decreased $.7 million in 1997 and
increased $13.8 million in 1996, reflecting changes in gas sales and end user
transportation deliveries due primarily to significantly colder weather in 1996.
Additionally, gross margins in 1997 and 1996 were favorably affected by the
continued growth in intermediate transportation services. Margins in 1997 also
reflect increased other operating revenues resulting from initiatives of the Gas
Distribution segment to grow revenues by providing gas-related services.
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------
<S> <C> <C> <C>
Percentage Colder than Normal .8% 5.4% .3%
Increase from Normal in:
Gas markets (in Bcf) .6 10.9 1.5
Net income (in Millions) $ .5 $ 9.9 $ 1.4
Basic earnings per share $ .01 $ .15 $ .02
</TABLE>
35
<PAGE> 6
Management's Discussion and Analysis
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $20.6 million
in 1997 and increased $172.7 million in 1996. Revenues were affected by
fluctuations in gas sales and end user transportation deliveries which decreased
by 13.7 Bcf to 354.2 Bcf in 1997 and increased by 12.3 Bcf to 367.9 Bcf in 1996.
The decrease in gas sales and end user transportation deliveries in 1997 was due
primarily to weather, which was 4.6% warmer than in 1996. The increase in sales
and transportation deliveries in 1996 was due to 5.1% colder weather over the
previous year as well as marketing initiatives that expanded gas markets. Gas
sales revenues in 1997 and 1996 were also affected by higher gas costs which are
recovered in gas sales rates as discussed in the "Cost of Gas" section. End user
transportation services are provided to large-volume commercial and industrial
customers who purchase gas directly from producers and brokers, including MCN's
Energy Marketing business, and contract with MichCon to transport the gas to
their facilities. Gas Distribution continues to enter into multi-year,
competitively priced transportation agreements with large-volume users to
maintain these gas markets over the long term. Gas sales and gross margins have
also been affected by variations in revenues associated with MichCon's lost gas
costs.
MichCon's gas sales rates are set to recover lost gas costs using an
averaging method based on historical lost gas experience. As discussed in the
"Cost of Gas" section that follows, gross margins have also been impacted by
variations in lost gas costs.
GAS DISTRIBUTION - VOLUMES/GROSS MARGIN COMPARISON
VOLUMES GROSS MARGINS
(in Bcf) (in Millions of Dollars)
630........................97
940.7...........................97 629.3................................96
895.4....................96 616.2...............95
730.0..............95
[ ] Gas sales [ ] Intermediate Transportation
[ ] End User Transportation [ ] Other
INTERMEDIATE TRANSPORTATION revenues increased by $6.6 million in both 1997 and
in 1996. Revenues reflect deliveries of 586.5 Bcf in 1997 and 527.5 Bcf in 1996,
increases of 59.0 Bcf and 153.1 Bcf, respectively. The increased deliveries are
due primarily to additional volumes of Antrim gas transported for Michigan gas
producers and brokers. There has been a significant increase in Michigan Antrim
gas production over the past several years, resulting in a growing demand by gas
producers and brokers for intermediate transportation services. In order to meet
the increased demand, Gas Distribution expanded the capacity of its northern
Michigan gathering system. The expansion enabled Gas Distribution to transport
an additional 128.5 Bcf in 1997 and 75 Bcf in 1996.
In December 1997, MichCon purchased a $13 million pipeline to expand the
transportation capacity of its northern Michigan gathering system. The pipeline
is expected to transport 44 Bcf of Antrim gas annually.
Intermediate transportation is a gas delivery service provided to gas producers,
gas brokers and other gas companies that own the natural gas but are not the
ultimate consumers. Although intermediate transportation volumes have increased
significantly, profit margins on this service are considerably less than margins
on gas sales or for end user transportation markets.
OTHER OPERATING REVENUES increased $9.0 million in 1997 and decreased $10.6
million in 1996. The improvement in 1997 is due primarily to increased
merchandise sales and other gas-related services. The 1996 decrease reflects the
loss of revenues resulting from the discontinuance of MichCon's energy
conservation programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the gas cost recovery mechanism, the MPSC allows MichCon to recover all
of its reasonably and prudently incurred cost of gas sold. Therefore,
fluctuations in cost of gas sold have little or no effect on gross margins.
Cost of gas sold decreased in 1997 as a result of lower sales volumes, primarily
due to warmer weather and supplier refunds. Substantially offsetting this
decrease were higher spot market prices paid for natural gas purchases resulting
in a 7% or $.19 increase in the cost of gas sold per Mcf. In 1996, cost of gas
sold increased as a result of significantly higher spot market prices paid for
natural gas purchased and higher sales volumes due to colder weather. Cost of
gas sold for 1996 increased 24% or $.56 per Mcf. To mitigate price volatility
related to spot market prices, MichCon has been authorized by the MPSC to change
its supply strategy to purchase up to one-third of its gas under fixed price
contracts.
As previously discussed, cost of gas is affected by variations in lost gas
amounts. Lost gas costs for 1997 decreased by $.5 million and increased in 1996
by $6.6 million.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses declined by $11.7 million or 4% in 1997 and
decreased slightly in 1996. The reduction for 1997 is due to lower benefit
costs, primarily pension and retiree healthcare costs, as well as lower
uncollectible gas accounts expense. Partially offsetting the decrease in 1997
were higher expenses associated with increased merchandise sales.
Management's continuing efforts to control operating costs also contributed to
the reductions in operation and maintenance expenses. Gas Distribution has
streamlined its organizational
36
<PAGE> 7
structure over the past several years while increasing its customer base and
expanding energy services to customers. Since 1994, the number of Gas
Distribution employees has declined by 408 or 12%, while the number of
customers has increased by nearly 40,000 or 3%.
GAS DISTRIBUTION - NUMBER OF
CUSTOMERS SERVED PER EMPLOYEE
409..............................97
380........................96
369................95
Expenses in 1996 were affected by lower benefit costs and reduced expenses
resulting from the discontinuance of MichCon's energy conservation programs.
Significantly offsetting these lower costs in 1996 was an increase in
uncollectible gas accounts expense. Uncollectible gas accounts were driven
higher by 1996's colder temperatures and rising gas prices which significantly
increased customers' heating bills. The impact of higher heating bills was
worsened by a reduction and delay in the home heating assistance funding
obtained by low-income customers.
Gas Distribution receives a significant amount of its heating assistance
funding from the federal Low-Income Home Energy Assistance Program (LIHEAP).
Congress reduced a substantial portion of the program's funding for the 1996
fiscal year, but increased the program's funding for the 1997 fiscal year to
$1 billion. The State of Michigan's share of LIHEAP funds was increased from
$47.5 million in fiscal year 1996 to $64 million in 1997. A significant
portion of such funds was passed on to qualified residents in the form of
Michigan Home Heating Credits. Gas Distribution received $12.7 million of
these funds, $3.5 million more than in 1996. Home Heating Credits assisted
83,000 Gas Distribution customers in 1997, compared to 74,000 in 1996.
During 1997, Congress approved a budget, which provides for federal LIHEAP
funding at $1 billion and $1.1 billion for fiscal years 1998 and 1999,
respectively. A portion of any future increase or decrease in funding may impact
MichCon's uncollectible accounts. MichCon is currently working with federal and
state officials to identify other ways to obtain energy assistance for
low-income customers and is taking actions to minimize the impact a reduction in
LIHEAP funds would have on MCN's financial statements.
DEPRECIATION AND DEPLETION increased in both 1997 and 1996 due to higher plant
balances, reflecting capital expenditures of $614.5 million over the past
three years. The MPSC approved an order that lowers MichCon's depreciation
rates effective January 1, 1998. In 1998, these new depreciation rates will
largely offset the increase in depreciation expense resulting from additional
capital expenditures. While the Michigan Attorney General has appealed the
depreciation order, management believes the MPSC order approving the lower
depreciation rates will be upheld.
PROPERTY AND OTHER TAXES decreased in 1997 and increased in 1996. Gas
Distribution reduced its property taxes for 1997 based on pending appeals of
personal property tax assessments. Gas Distribution has been assessed additional
amounts which are being protested. Management does not believe payments of these
additional amounts is probable. Offsetting the reduction in 1997 property and
other taxes was an increase in Michigan single business taxes due to improved
pre-tax earnings. Property and other taxes increased in 1996 as a result of
higher plant balances.
EQUITY IN EARNINGS OF JOINT VENTURES
Earnings from joint ventures increased in 1997 and were unchanged in 1996 as
compared to 1995. Joint venture earnings in 1997 reflect increased contributions
from the Blue Lake gas storage project as a result of reduced operating and
financing costs.
OTHER INCOME AND DEDUCTIONS
Interest expense increased in 1997 and 1996 due to additional long-term debt
required to finance capital investments. During 1997, MichCon issued $85
million of first mortgage bonds and nonutility subsidiaries of MichCon borrowed
$40 million under a nonrecourse credit agreement. During 1996, MichCon issued
$70 million of first mortgage bonds. In 1996, other income and deductions were
affected by an increase in the capitalization of the cost of equity funds used
during construction resulting from higher construction balances.
INCOME TAXES
Income tax increased in 1997 and decreased in 1996. Income taxes were
impacted by variations in pre-tax earnings. Income tax comparisons were
also impacted by the amounts recorded in 1996 for the favorable resolution of
prior years' tax issues and tax credits.
ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were conducted at
these former MGP sites, and some contamination related to the by-products of gas
manufacturing was discovered at each site. The existence of these sites and the
results of the environmental investigations have been reported to the Michigan
Department of Environmental Quality. None of these former MGP sites is on the
National Priorities List prepared by the U.S. Environmental Protection Agency.
37
<PAGE> 8
Management's Discussion and Analysis
MCN is not involved in any administrative proceedings regarding these former MGP
sites but is currently remediating four of these sites and conducting more
extensive investigations at five other sites.
In 1984, MCN established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of
a cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for these
sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that
the estimated total expenditures for investigation and remedial activities at
all 17 former MGP sites could range between $30 million and $170 million based
on undiscounted 1995 costs. As a result of these studies, MCN accrued an
additional liability and a corresponding regulatory asset of approximately $35
million during 1995.
MCN has notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MCN filed suit against major nonsettling
carriers seeking recovery of incurred costs and a declaratory judgment of the
carriers' liability for future costs of environmental investigation and
remediation costs at former MGP sites.
During 1997, 1996 and 1995, MCN spent $.8 million, $.9 million and $2.1 million,
respectively, investigating and remediating these former MGP sites. At December
31, 1997, the reserve balance was $36.7 million, of which $1.7 million is
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs and therefore
have an effect on MCN's financial position and cash flows. However, management
believes that insurance coverage and the cost deferral and rate recovery
mechanism approved by the MPSC will prevent environmental costs from having a
material adverse impact on MCN's results of operations.
OUTLOOK
Gas Distribution's strategy is to become the provider of choice for natural gas
and high-value energy services within Michigan. Accordingly, Gas Distribution's
objectives are to grow its revenues and reduce its costs in order to maintain
strong returns and provide customers with high-quality service at competitive
prices. Revenue growth will be achieved through initiatives to expand Gas
Distribution's 940 Bcf of gas markets and its 1.2 million residential,
commercial and industrial customer base.
Gas Distribution expects to provide natural gas to approximately 20,000 new
customers in 1998. Gas Distribution's market share for residential heating
customers in the communities in which it serves is approximately 80%. While this
saturation rate is high, significant opportunities exist through conversion of
existing homes from other fuels as well as from new construction. Gas
Distribution continues to expand the industrial and commercial markets by
aggressively facilitating the use of existing gas technologies and equipment as
well as by developing new natural gas technologies.
Management is continually assessing ways to improve cost competitiveness. Among
other cost saving initiatives, Gas Distribution has signed contracts with the
Detroit Edison Company and other utilities to share the cost of payment
processing, meter reading and staking of underground facilities. Gas
Distribution is continuing to explore opportunities to share the cost of common,
duplicative operating functions.
In December 1997, MichCon announced an early retirement incentive program. This
program could affect approximately 10% of MichCon's work force. Management does
not believe that these costs will have a material impact on 1998 net income.
However, the early retirement of employees is expected to contribute toward
reducing operating costs in future years.
The challenges and opportunities resulting from increased competition in the
natural gas industry have been a catalyst for MPSC action in the development of
major reforms in utility regulation aimed at giving all customers added choices
and more price certainty. MichCon and other Michigan gas utilities voluntarily
implemented pilot transportation service programs in 1997 for small commercial
and residential customers. The overall package of regulatory changes connected
with the gas industry restructuring is expected to generate additional revenue
and cost savings opportunities as the restructuring advances. Gas Distribution
is positioning itself to respond to changes in regulation and increased
competition by reducing its cost of operations while maintaining a safe and
reliable system for customers.
As described in Note 9 to the consolidated financial statements, MCN's Gas
Distribution segment complies with the provisions of Statement of Financial
Accounting Standards (SFAS), No. 71, "Accounting for the Effects of Certain
Types of Regulation." Future regulatory changes or changes in the competitive
environment could result in Gas Distribution discontinuing the application of
SFAS No. 71 for all or part of its business and require the write-off of the
portion of any regulatory asset or liability that was no longer probable of
recovery or refund. If Gas Distribution were to discontinue application of SFAS
No. 71 for all of its operations as of December 31, 1997, it would have an
extraordinary, noncash increase to net income of approximately $44 million.
Criteria that give rise to the discontinuance of SFAS No. 71 include (1)
increasing competition that restricts Gas Distribution's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. Based on a current evaluation of the various factors and conditions
that are expected to impact future regulation, man-
38
<PAGE> 9
agement believes currently available facts support the continued application of
SFAS No. 71.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc. for an initial sales price of
$137.5 million, resulting in an after-tax gain of $36.2 million. In October
1996, the initial sales price was decreased by $4.6 million to reflect the
reduction in Genix's working capital between the effective and closing dates
of the transaction. The selling price of Genix could be further adjusted
downward by as much as $26.2 million depending upon the occurrence of certain
contingencies that include, among other things, retention of certain customers
through mid-1998 and tax-related matters. Management believes that no further
adjustment to the selling price will occur.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities increased $145.1 million during 1997
and decreased $69.7 million during 1996. The increase in 1997 was primarily the
result of lower working capital requirements. Higher net income, after adjusting
for noncash items (depreciation and deferred taxes) and nonoperating gains
(Notes 2f and 2h), also contributed to the increase in 1997. The 1996 decrease
was due primarily to an increase in working capital requirements, partially
offset by higher net income, after adjusting for noncash items and nonoperating
gains.
FINANCING ACTIVITIES
In June 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 7a). Proceeds from this issuance
were used to fund capital expenditures, to repay short-term obligations and for
general corporate purposes.
In June 1997, MCN issued, through wholly-owned trusts, 100,000 Private
Institutional Trust Securities (PRINTS) and 100,000 Single Point Remarketed
Reset Capital Securities (SPRRCS) (Note 6b). Net proceeds of $199.1 million from
these issuances were invested by MCN in its Diversified Energy group and were
used to reduce short-term debt incurred to fund capital investments.
In March 1997, MCN issued 2,645,000 FELINE PRIDES, generating net proceeds of
$127.4 million (Note 6a). Proceeds from the issuance were used to reduce
short-term debt incurred by the Diversified Energy group to fund capital
investments and for general corporate purposes.
In July 1996, MCN issued, through a wholly-owned trust, 3,200,000 shares of
Trust Originated Preferred Securities (TOPrS), generating net proceeds of $77.2
million (Note 6c). Proceeds from the issuance were invested by MCN in its
Diversified Energy group and were used to reduce short-term debt incurred to
fund capital expenditures, for working capital requirements and for general
corporate purposes.
In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (Enhanced PRIDES) (Note 6d). The Enhanced PRIDES are
convertible securities that consist of a forward contract under which MCN is
obligated to sell, and the Enhanced PRIDES holders are obligated to purchase,
approximately $135 million of MCN common stock in April 1999.
In March 1995, MCN sold 5,750,000 shares of new common stock in a public
offering, generating approximately $99 million. Proceeds from this issuance were
used to fund capital expenditures, to repay short-term obligations and for
general corporate purposes.
MCN also issues new shares of common stock pursuant to its Dividend Reinvestment
and Stock Purchase Plan and various employee benefit plans. During the 1995-1997
period, MCN issued 2,949,000 shares, generating $51.6 million. During 1998, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $20 million.
As of December 1997, MCN had an outstanding shelf registration with
approximately $136 million remaining to be issued in the form of debt or equity
securities. MCN anticipates filing a new registration statement with the
Securities and Exchange Commission (SEC) in the first quarter of 1998 to allow
it to issue an additional $800 million of debt and equity securities. MCN's
capital requirements and general market conditions will affect the timing and
amount of future issuances.
The following table sets forth the ratings for securities issued by MCN and
its subsidiaries. These ratings are considered investment grade by each rating
agency.
<TABLE>
<CAPTION>
Standard Duff &
& Poor's Moody's Phelps Fitch
--------------------------------------------
<S> <C> <C> <C> <C>
MCN:
FELINE PRIDES BBB+ baa2 BBB+ BBB+
Enhanced PRIDES BBB+ baa1 BBB+ BBB+
PRINTS/SPRRCS A- baa1 A- A-
TOPrS/preferred
securities BBB+ baa2 BBB+ BBB+
MCNIC:
Commercial paper* A2 P2 D1- F2
Medium-term notes* BBB+ Baa2 A- BBB+
MichCon:
Commercial paper A1 P1 D1 F1
First mortgage bonds A A2 A+ A
--------------------------------------------
</TABLE>
*Ratings based on MCN support agreement
DIVERSIFIED ENERGY
MCNIC has established credit lines 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 1997, MCNIC repaid $182.5 million of commercial paper. Commercial paper
of $147.4 million was outstanding at December 31, 1997.
39
<PAGE> 10
Management's Discussion and Analysis
In June 1997, MCNIC repaid $30 million of senior debt on its stated maturity
date.
In January 1997, MCNIC issued $150 million of medium-term notes, using the
proceeds to repay short-term debt and for general corporate purposes.
In January and May 1996, MCNIC issued $200 million and $130 million,
respectively, of medium-term notes using the proceeds to repay commercial paper
balances and for general corporate purposes.
As of December 1997, MCNIC had an outstanding shelf registration with
approximately $220 million remaining to be issued in the form of debt
securities. MCNIC anticipates filing a new registration statement with the SEC
in the first quarter of 1998 to allow it to issue an additional $700 million of
debt securities. MCNIC's capital requirements and general market conditions will
affect the timing and amount of future issuances.
In order to finance investment activities, MCN's E&P business obtained $100
million under a five-year term loan during 1995.
GAS DISTRIBUTION
During the latter part of each year, Gas Distribution generally incurs
short-term debt to finance increases in gas inventories and customer accounts
receivable. The short-term debt is normally reduced in the first part of the
year as gas inventories are depleted and funds are received from winter heating
sales. To meet its seasonal short-term borrowing needs, MichCon normally issues
commercial paper 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. At December 31,
1997, commercial paper of $236.7 million was outstanding under this program.
During May 1997, MichCon issued $85 million of first mortgage bonds under its
existing shelf registrations. The funds from this issuance were used to retire
first mortgage bonds, fund capital expenditures and for general corporate
purposes.
During April 1997, nonutility subsidiaries of MichCon borrowed $40 million under
a nonrecourse credit agreement that matures in 2005. Proceeds were used to
finance the expansion of the northern Michigan gathering system.
During the second quarter of 1997, MichCon redeemed $17 million of long-term
debt. MichCon also repaid $50 million of first mortgage bonds on its stated
maturity date in May 1997.
MichCon issued first mortgage bonds totaling $70 million in both 1996 and 1995.
The proceeds were used to repay short-term obligations, finance capital
expenditures and for general corporate purposes.
MichCon repaid all amounts owing under its Trust Demand Note program and did not
renew this program which expired in March 1997 and allowed for borrowings of up
to $25 million.
As of December 1997, MichCon had an outstanding shelf registration with
approximately $215 million remaining to be issued in the form of debt
securities.
INVESTING ACTIVITIES
<TABLE>
<CAPTION>
CAPITAL INVESTMENTS
(in Millions) 1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Consolidated Capital Expenditures:
Diversified Energy $ 405.0 $ 395.3 $ 291.5
Gas Distribution 157.7 215.3 241.5
Discontinued Operations - 6.5 9.4
-----------------------------------
562.7 617.1 542.4
-----------------------------------
MCN's Share of Joint Venture
Capital Expenditures:
Pipelines & Processing 152.2 5.2 1.0
Energy Marketing, Gas Storage,
& Power Generation 10.6 5.7 40.0
Gas Distribution 2.6 4.8 10.3
Other .5 .3 1.5
-----------------------------------
165.9 16.0 52.8
-----------------------------------
Acquisitions:
Significant (Note 2)* 231.0 133.2 83.2
Other - 24.4 10.4
-----------------------------------
231.0 157.6 93.6
-----------------------------------
Total Capital Investments $ 959.6 $ 790.7 $ 688.8
-----------------------------------
</TABLE>
*Includes MCN's share of GTEC debt existing at the date of acquisition (Note 2c)
Capital investments near $1 billion - Capital investments increased $168.9
million in 1997 due to acquisitions in electric power generation and
distribution projects (Notes 2a, 2c and 2d) and increased investments in
Pipelines & Processing joint ventures.
In December 1997, Gas Distribution invested $31.3 million in a grantor trust to
meet future obligations related to certain postretirement healthcare costs (Note
11c), and Diversified Energy advanced $46 million to an independent power
producer to fund power generation projects under development in the Philippines
(Note 2b).
During 1997, MCN's E&P business sold certain gas and oil properties generating
proceeds of $64.2 million. During 1996, MCN completed the sale of Genix (Note
2h) and interests in DIGP (Note 2f) resulting in total proceeds of $168.9
million. Proceeds from these sales were used to reduce debt incurred to fund
Diversified Energy's capital investments.
Outlook
MCN's strategic direction is to grow significantly by investing in a portfolio
of energy-related projects. MCN's capital investments could range between $6
billion and $9 billion over the next five years. During 1998, MCN expects
capital investments to range from $1.2 billion to $1.5 billion, with
approximately 80% to 85% in Diversified Energy and the remainder in Gas
Distribution.
Within the Diversified Energy group, MCN anticipates over $400 million will be
invested in E&P projects for drilling operations and to acquire reserves in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western regions. Approximately
$250 million is expected to be invested in electric power projects, primarily
through foreign joint ventures. The remaining $350 million of
40
<PAGE> 11
expenditures are anticipated to be in pipeline, gathering, processing and
related projects.
Gas Distribution capital investments during 1998 will approximate $200 million
and will be made to add new customers, develop new gas transportation markets,
make improvements to existing storage and transmission systems and improve its
information system.
The proposed level of investments in 1998 and future years will increase capital
requirements materially in excess of internally generated funds and require the
issuance of additional debt and equity securities. MCN's capital requirements
and general market conditions will affect the timing and amount of future
issuances.
As it expands its business, MCN's capitalization objective is to maintain its
credit ratings through a strong balance sheet. Its capitalization objective is a
ratio of 55% equity and 45% debt. It is management's opinion that MCN and its
subsidiaries will have sufficient capital resources, both internal and external,
to meet anticipated capital requirements.
NEW ACCOUNTING PRONOUNCEMENTS
YEAR 2000 - In 1996 the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus that the cost associated with
modifying internal use software for the year 2000 should be expensed as
incurred. The year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the year. Any programs that
have time sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could cause computer systems to perform
inaccurate calculations.
MCN has established processes for evaluating and managing the risks and costs
associated with the year 2000 issue. MCN has conducted a review to identify
computer systems that could be affected by the inability of these systems to
properly recognize the digits for the year 2000. MCN has developed a corrective
plan and is currently implementing such plan. Based on the corrective plan,
costs associated with the year 2000 issue are estimated to total between $5
million and $6 million over the next two years. The anticipated costs are not
higher due in part to the ongoing replacement of significant old systems. New
systems in process of being installed as well as those installed over the past
few years are year 2000 compliant. These systems were necessary to maintain a
high level of customer satisfaction and to respond to changes in regulation and
increased competition within the energy industry.
MCN is working with its suppliers, operators and partners to mitigate any
adverse effects of their system failures on MCN. As a result, management cannot
quantify the impact to MCN of other companies' system failures, but does not
expect it to be material.
REENGINEERING ACTIVITIES - In 1997 the EITF reached a consensus that the cost of
business process reengineering activities, whether done internally or by third
parties, is to be expensed as incurred. This consensus also applies when the
business process reengineering activities are part of a project to acquire,
develop or implement internal use software. Management does not expect the
financial impact of such activities to be material to MCN's results of
operations.
FORWARD LOOKING STATEMENTS
The Annual Report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements. Factors that may impact forward-looking
statements include, but are not limited to, the following: (i) the effects of
weather and other natural phenomena; (ii) increased competition from other
energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, electricity and crude oil; (vii) the nature, availability and
projected profitability of potential projects and other investments available to
MCN; (viii) conditions of capital markets and equity markets; (ix) changes in
the economic and political climate and currencies of foreign countries where MCN
has invested or may invest in the future, and (x) the effects of changes in
governmental policies and regulatory actions, including income taxes,
environmental compliance and authorized rates.
41
<PAGE> 12
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 (in Thousands) 1997 1996 1995
----------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 142,306 $150,340 $ 96,756
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of income 181,612 145,990 114,585
Charged to other accounts 7,728 11,026 14,318
Deferred income taxes-current (2,701) 8,061 8,927
Deferred income taxes and investment tax
credit, net 11,660 23,892 30,284
Gains related to DIGP and Genix, net of taxes (Notes 2f and 2h) (1,560) (40,326) -
Equity in earnings of joint ventures, net of distributions (16,511) (2,506) 1,777
Other (3,896) (3,391) 1,376
Changes in assets and liabilities, exclusive of
changes shown separately 24,746 (94,754) (20)
----------------------------------
Net cash provided from operating activities 343,384 198,332 268,003
----------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net 68,000 87,491 16,828
Dividends paid (72,851) (62,875) (58,193)
Issuance of common stock (Note 7a) 294,402 17,264 115,725
Issuance of preferred securities (Note 6) 326,521 77,218 -
Issuance of long-term debt 273,241 398,540 168,864
Long-term commercial paper and credit facilities, net (261,822) (62,835) 142,657
Retirement of long-term debt and preferred securities (109,224) (8,139) (8,271)
Other 4,612 (6,249) (2,084)
----------------------------------
Net cash provided from financing activities 522,879 440,415 375,526
----------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (561,354) (610,323) (537,156)
Acquisitions (Notes 2) (166,553) (133,201) (83,176)
Investment in debt and equity securities (Notes 2b and 11c) (63,123) (26,903) (243)
Investment in joint ventures (152,642) (36,217) (20,539)
Sale of E&P property and equipment 64,200 621 -
Sale of Genix (Note 2h) - 132,889 -
Sale of investment in joint ventures 3,165 36,000 10,803
Other 19,077 9,590 (5,506)
----------------------------------
Net cash used for investing activities (857,230) (627,544) (635,817)
----------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,033 11,203 7,712
CASH AND CASH EQUIVALENTS, JANUARY 1 30,462 19,259 11,547
----------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 39,495 $ 30,462 $ 19,259
----------------------------------
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF
CHANGES SHOWN SEPARATELY
Accounts receivable, net $ (47,541) $(66,183) $(103,951)
Accrued unbilled revenues 15,499 (16,099) (9,357)
Accrued/deferred gas cost recovery revenues 14,810 (28,250) (18,495)
Gas in inventory 22,384 (7,398) 59,886
Accounts payable 8,834 102,711 74,537
Federal income, property and other taxes payable (5,934) (19,587) (3,716)
Prepaid/accrued benefit costs (16,086) (50,972) (27,199)
Other current assets and liabilities 11,522 (14,485) (2,819)
Deferred assets and liabilities 21,258 5,509 31,094
----------------------------------
24,746 $(94,754) $ (20)
----------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized $ 97,659 $ 74,775 $ 52,833
Federal income taxes 30,300 19,934 9,366
Noncash investing and financing activities:
Common stock and performance units $ 19,188 $ 6,210 $ -
Foreign currency translation adjustment 6,292 98 123
Sale of investment in joint ventures 8,562 - -
Yield enhancement and contract costs 2,702 8,243 -
Property purchased under capital leases 1,303 6,765 3,809
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
44
<PAGE> 13
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
1997 1996 1995
Year Ended December 31 (in Thousands) ----------------------------------------
<S> <C> <C> <C>
LONG-TERM DEBT, EXCLUDING CURRENT REQUIREMENTS (Note 5)
First mortgage bonds, interest payable semi-annually
6-1/4% series due 1997 $ - $ - $ 50,000
6.30% series due 1998 - 20,000 20,000
6.51% series due 1999 30,000 30,000 -
5-3/4% series due 2001 60,000 60,000 60,000
8% series due 2002 70,000 70,000 70,000
6.72% series due 2003 4,150 4,150 4,150
6.80% series due 2003 15,850 15,850 15,850
9-1/8% series due 2004 55,000 55,000 55,000
7.15% series due 2006 40,000 40,000 -
7.21% series due 2007 30,000 - -
7.06% series due 2012 40,000 - -
8-1/4% series due 2014 80,000 80,000 80,000
7.60% series due 2017 14,990 - -
9-1/2% series due 2019 - 5,000 5,000
7-1/2% series due 2020 29,641 29,812 30,000
9-1/2% series due 2021 40,000 40,000 40,000
6-3/4% series due 2023 17,177 17,782 18,416
7% series due 2025 40,000 40,000 40,000
Unamortized discount (1,235) (1,349) (1,390)
Medium-term notes, interest payable semi-annually
5.84% series due 1999 80,000 80,000 -
6.82% series due 1999 130,000 130,000 -
6.03% series due 2001 60,000 60,000 -
6.89% series due 2002 90,000 - -
6.32% series due 2003 60,000 60,000 -
7.12% series due 2004 60,000 - -
Senior notes-7.79% series due 1997, interest
payable semi-annually - - 30,000
Term loan due 2000, interest
payable quarterly 100,000 100,000 100,000
Unsecured notes-9-3/4% series due 2000,
interest payable semi-annually - 12,000 12,000
Commercial paper and credit facilities - 261,822 324,657
Project loan due 2006, interest payable
quarterly 14,080 15,840 17,600
Long-term capital lease obligations 7,702 16,625 18,532
Other long-term debt 45,209 9,508 3,592
-------------------------------------------
1,212,564 1,252,040 993,407
-------------------------------------------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES (Note 6)
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
HOLDING SOLELY DEBENTURES OF MCN, net of unamortized deferred
issuance costs, $512,250,000 aggregate liquidation preference value,
10,045,000 shares authorized and outstanding, Series A 505,104 173,809 96,449
-------------------------------------------
COMMON SHAREHOLDERS' EQUITY (Note 7)
COMMON STOCK,
par value $.01 per share-100,000,000 shares authorized,
78,231,889, 67,303,908, and 66,370,230 shares outstanding,
respectively 782 673 664
-------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance-beginning of period 493,469 446,055 331,571
Common stock and performance units 313,485 47,326 115,840
Other (1,141) (303) (1,583)
-------------------------------------------
Balance-end of period 805,813 493,078 445,828
-------------------------------------------
RETAINED EARNINGS
Balance-beginning of period 305,352 218,425 179,862
Net income 142,306 150,340 96,756
Cash dividends declared on common stock (72,851) (62,875) (58,193)
Other - (538) -
-------------------------------------------
Balance-end of period 374,807 305,352 218,425
-------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (Note 1) (6,335) (43) (141)
-------------------------------------------
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS (Notes 6a and 6d) (22,039) (14,492) -
-------------------------------------------
1,153,028 784,568 664,776
-------------------------------------------
TOTAL CAPITALIZATION
$ 2,870,696 $2,210,417 $1,754,632
-------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of
this statement.
45
<PAGE> 14
Notes to Consolidated Finanacial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCN Energy Group Inc. (MCN) is a diversified energy company with markets and
investments throughout North America and in Asia. MCN operates through two major
business groups, Diversified Energy and Gas Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC),
is involved in the following businesses: Exploration & Production (E&P)
with 1.3 trillion cubic feet equivalent (Tcfe) of proved gas and oil
reserves at December 31, 1997 in the Midwest/Appalachia, Midcontinent/Gulf
Coast and Western regions of the United States; Pipelines & Processing with
gathering, processing and transmission facilities near areas of rapid
reserve development and growing consumer markets; Energy Marketing with
total gas sales and exchange gas delivery markets of 358.8 billion cubic
feet (Bcf) for 1997; Electric Power with investments in electric generation
facilities in operation and under development with a combined 2,804
megawatts (MW) of gross capacity and investments in electric distribution
facilities; and Gas Storage with investments in storage facilities that
have 52 Bcf of storage capacity, 42 Bcf of which is currently under
development.
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and transmission company serving 1.2
million customers in more than 500 communities throughout Michigan. MichCon
is subject to the accounting requirements and rate regulation of the
Michigan Public Service Commission (MPSC) with respect to the distribution
and intrastate transportation of natural gas. Less than half of MichCon's
labor force is covered by collective bargaining agreements. In June 1998,
bargaining agreements covering approximately 15% of the labor force are due
to expire.
BASIS OF PRESENTATION -- The accompanying consolidated financial statements were
prepared in conformity with generally accepted accounting principles. In
connection with their preparation, management was required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and the disclosure of contingent liabilities. Actual results could
differ from those estimates. Certain reclassifications have been made to prior
years' statements to conform to the 1997 presentation.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of MCN and certain consolidated subsidiaries and partnerships. E&P
investments are predominantly accounted for using the proportionate
consolidation method. Investments in other entities in which MCN has a
controlling influence are consolidated. Generally, investments in 50% or less
owned entities in which MCN has significant but not controlling influence, and
entities where control is temporary, have been accounted for under the equity
method.
REVENUES AND COST OF GAS -- Gas Distribution accrues revenues for gas service
provided but unbilled at month end. MichCon also accrues revenues equal to the
recoverable cost of gas sold. Annual gas cost recovery (GCR) proceedings before
the MPSC permit MichCon to recover the prudent and reasonable cost of gas sold.
Any overcollection or undercollection of costs, including interest, will be
reflected in future rates.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION -- The full-cost accounting
method prescribed by the Securities and Exchange Commission (SEC) is
followed for investments in gas and oil properties. Under the full cost method
substantially all acquisition, exploration and development costs are
capitalized. To the extent such capitalized costs exceed the "ceiling," the
excess is written off to income. The ceiling is the sum of discounted future
net cash flows from proved gas and oil reserves (using unescalated prices and
costs unless contractual arrangements exist), and the costs of unproved
properties after income tax effects. The ceiling test is applied at the end of
each quarter and requires a write-down of gas and oil properties if the ceiling
is exceeded, even if any price decline is temporary. Management's investment
and operating decisions are based upon prices, costs and production assumptions
that are different from those used to compute the ceiling. As a result, it is
possible that future fluctuations in key forecast assumptions could result in
impairments being recorded for accounting purposes, when the long-term
economics of such properties have not changed.
The unit of production method is used for calculating depreciation, depletion
and amortization (DD&A) on proved gas and oil properties. The average DD&A
expense per thousand cubic feet equivalent (Mcfe) was $.75, $.70, and $.67 in
1997, 1996 and 1995, respectively. Costs directly associated with the
acquisition and evaluation of unproved gas and oil properties are excluded
from the amortization base until the related properties are evaluated. Such
unproved properties are assessed periodically, and a provision for impairment
is made to the full-cost amortization base when appropriate.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, excluding E&P
property, is stated at cost and includes appropriate amounts of labor,
materials, overhead and an allowance for funds used during construction. Unit of
production depreciation and depletion is used for certain Gas Distribution
transmission property. All other property, plant and equipment of MCN, excluding
E&P property, is depreciated over its useful life using the straight-line
method. Depreciation rates vary by class of property.
The ratio of the provision for depreciation and depletion to the average cost
of depreciable property is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Pipelines & Processing 3.5% 3.8% 2.1%
Gas Distribution 4.1% 4.4% 4.4%
Other 12.3% 10.1% 13.3%
</TABLE>
INCOME TAXES AND INVESTMENT TAX CREDITS -- Tax Benefits Amortizable to Customers
represents the net revenue equivalent
46
<PAGE> 15
of the difference in property-related accumulated deferred income taxes computed
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" as compared to the amounts previously reflected in
setting utility rates. This amount is due to current tax rates being lower than
the rates in effect when the original deferred taxes were recorded and because
of temporary differences, including accumulated investment tax credits, for
which deferred income taxes were not previously recorded in setting utility
rates. These net tax benefits are being amortized in accordance with the
regulatory treatment over the life of the related plant as the related temporary
differences reverse.
Investment tax credits relating to Gas Distribution property placed into service
were deferred and are being credited to income over the life of the related
property. Investment tax credits relating to Diversified Energy operations were
recorded to income in the year the related property was placed into service.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION -- Gas Distribution capitalizes an
allowance for both debt and equity funds used during construction in the cost of
major additions to plant. Diversified Energy also capitalizes interest on debt
funds used during construction. The total amount capitalized was $18,190,000,
$14,631,000, and $7,893,000 in 1997, 1996 and 1995, respectively.
DEFERRED DEBT COSTS -- In accordance with MPSC regulations, MichCon defers
reacquisition and unamortized issuance costs of reacquired long-term debt when
such debt is refinanced. These costs are amortized over the term of the
replacement debt.
CONSOLIDATED STATEMENT OF CASH FLOWS -- For purposes of this statement, MCN
considers all highly liquid investments, excluding restricted investments,
purchased with a maturity of three months or less to be cash equivalents.
SALES OF OWNERSHIP INTEREST BY SUBSIDIARIES AND PARTNERSHIPS -- MCN recognizes
gains or losses on the sale of stock by subsidiaries or the sale of partnership
interests. Such gains or losses represent the difference between MCN's share of
the consideration received and the historical book value of its investment.
FOREIGN CURRENCY TRANSLATION -- MCN's foreign joint ventures use the local
currency as the functional currency. As a result, MCN's investments in foreign
entities are translated from foreign currencies into United States dollars using
end of period exchange rates. Equity in earnings of foreign entities is
translated at the average exchange rate prevailing during the month the
respective earnings occur. Translation adjustments, net of deferred taxes, are
shown as a separate component of Common Shareholders' Equity and have no effect
on net income.
2. ACQUISITIONS, INVESTMENTS AND DISPOSITION
a. BHOTE KOSHI POWER COMPANY
In December 1997, MCN acquired an approximate 65% interest in Bhote Koshi Power
Company, a partnership that is constructing a 36 MW hydroelectric power plant in
Nepal. Construction of the plant began in early 1997 and is scheduled to be
completed in the fourth quarter of 1999. At December 31, 1997, MCN had paid
$3,760,000 of its total equity commitment of $20,100,000. The equity commitment
balance will be paid over the next two years. The investment is accounted for
under the equity method.
b. PHILIPPINE INVESTMENT
In October 1997, MCN advanced approximately $46,000,000 to an independent power
producer to fund power generation projects already under construction in the
Philippines. This investment is structured as an interest bearing loan with the
possibility of being converted into an equity interest in the independent power
producer. MCN's negotiations toward converting its advance to an equity interest
have been complicated by the devaluation of the Philippine peso.
c. TORRENT POWER LIMITED
In March 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 August and October 1997, MCN acquired preference shares in
TPL, bringing the total cost of the acquisitions to $114,200,000, of which
$108,000,000 was paid through December 1997. The remainder is expected to be
paid in 1998. Specifically, the joint venture holds a 36% interest in Ahmedabad
Electricity Company Limited (AEC), a 43% interest in Surat Electricity Company
Limited (SECL) and a 42% interest in Gujarat Torrent Energy Corporation (GTEC).
AEC serves the city of Ahmedabad and has 550 MW of electric generating capacity.
SECL provides electricity to the city of Surat. GTEC is currently constructing a
655 MW dual fuel generation facility, the first phase of which became
operational in October 1997, and the entire facility is expected to be fully
completed by the end of 1998. In addition to equity investments, the
construction of this facility is being funded through nonrecourse project
financing of which the portion attributable to MCN's existing interest will be
approximately $90,000,000. TPL is currently negotiating to acquire further
interests in AEC and GTEC.
d. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
During the second quarter of 1997, MCN purchased an 18% general partnership
interest in Midland Cogeneration Venture Limited Partnership (MCV), a
partnership that leases and operates a cogeneration facility in Midland,
Michigan. The facility can produce up to 1,370 MW of electricity, as well as
1.35 million pounds per hour of process steam. The investment totaled
$54,750,000 and is accounted for under the equity method. During 1997, MCV
changed its method of accounting for property taxes. As a result, MCN's pre-tax
income from MCV was favorably impacted by $2,800,000.
47
<PAGE> 16
Notes to Consolidated Financial Statements
e. LYONDELL METHANOL COMPANY, L.P.
In December 1996, MCN acquired a 25% interest in Lyondell Methanol Company,
L.P., a limited partnership that owns and operates a 248 million gallon-per-year
methanol processing plant in Texas. MCNIC supplies a portion of the natural gas
to the methanol plant. The acquisition totaled $54,500,000 and is accounted for
under the equity method.
f. DAUPHIN ISLAND GATHERING PARTNERS
In the first quarter of 1996, MCN acquired a 99% interest in Dauphin Island
Gathering Partners (DIGP), a general partnership that owns a 90-mile gas
gathering system in the Mobile Bay area of offshore Alabama. The acquisition
totaled $78,620,000 and was accounted for under the purchase method. In mid-1996
MCN sold a 40% interest in the partnership to Pan Energy Dauphin Island Company
for $36,000,000. The sale resulted in a pre-tax gain of $3,986,000.
In December 1996, a 41% interest in the partnership was sold to three additional
partners resulting in a pre-tax gain of $4,796,000, of which $2,398,000 was
deferred until the third quarter of 1997 when the related option agreement
expired unexercised. The three additional partners paid for their interests by
contributing the Main Pass Gathering System (Main Pass) to DIGP. Main Pass is a
57-mile offshore gas gathering system in the Gulf of Mexico, which was appraised
at $72,200,000. As a result of the sales, MCN's ownership interest in DIGP was
reduced to 35%. MCN no longer had a controlling interest, and accordingly DIGP
was deconsolidated and is accounted for under the equity method. The financial
information included herein reflects DIGP as an unconsolidated partnership for
all periods presented.
g. CONSOL COAL GROUP PROPERTIES
During December 1995, MCN acquired certain gas producing and pipeline businesses
located in Virginia from CONSOL Coal Group. The acquisition included 193 Bcf of
proved reserves, as well as rights to undertake additional development drilling
on approximately 100,000 acres of coalbed methane properties. The acquisition
also included approximately 80 miles of gathering lines and a 50% interest in a
40-mile gathering line connected to a major interstate pipeline. The acquisition
totaled $83,176,000 and was accounted for under the purchase method.
h. THE GENIX GROUP, INC.
In June 1996, MCN completed the sale of its computer operations subsidiary, The
Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. (ACS) for an
initial sales price of $137,500,000, resulting in an after-tax gain of
$36,176,000. In October 1996, the initial sales price was decreased
approximately $4,600,000 to reflect the reduction in Genix's working capital
between the effective and closing dates of the transaction. The selling price of
Genix could be further adjusted downward by as much as $26,200,000 depending
upon the occurrence of certain contingencies which include, among other things,
retention of certain customers through mid-1998 and tax-related matters.
Management believes that no further adjustment to the selling price will occur.
The results of Genix's operations have been accounted for as a discontinued
operation.
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MCN has equity interests in several ventures involved in the following
businesses: Pipelines & Processing - 20% to 85% owned; Energy Marketing, Gas
Storage & Electric Power - 18% to 100% owned (includes temporarily controlled
entities); Gas Distribution - 47-1/2% owned; and Real Estate & Other - 33% to
50% owned. The following is the combined summarized financial information of the
joint ventures. No provision for income taxes has been included, since income
taxes are paid directly by the joint venture participants.
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Pipelines & Processing $ 306,636 $ 64,530 $ 3,700
Energy Marketing, Gas
Storage & Electric Power 1,269,125 114,793 59,634
Real Estate & Other 22,447 19,937 17,471
-------------------------------------------
$ 1,598,208 $ 199,260 $ 80,805
-------------------------------------------
MCN's Share of Operating Revenues
Pipelines & Processing $ 144,823 $ 36,927 $ 1,535
Energy Marketing, Gas
Storage & Electric Power 418,005 64,595 36,381
Real Estate & Other 7,740 8,684 5,914
-------------------------------------------
$ 570,568 $ 110,206 $ 43,830
-------------------------------------------
Operating Income
Pipelines & Processing $ 89,491 $ 21,426 $ 1,545
Energy Marketing, Gas
Storage & Electric Power 256,236 32,736 21,853
Real Estate & Other 2,817 1,914 1,984
-------------------------------------------
$ 348,544 $ 56,076 $ 25,382
-------------------------------------------
MCN's Share of Operating Income
Pipelines & Processing $ 27,485 $ 11,584 $ 718
Energy Marketing, Gas
Storage & Electric Power 58,604 17,533 11,790
Real Estate & Other 645 1,387 425
-------------------------------------------
$ 86,734 $ 30,504 $ 12,933
-------------------------------------------
Income (Loss) Before Taxes
Pipelines & Processing $ 90,047 $ 21,391 $ 1,546
Energy Marketing, Gas
Storage & Electric Power 99,718 12,135 10,558
Real Estate & Other 7,688 (3,332) (5,202)
-------------------------------------------
$ 197,453 $ 30,194 $ 6,902
-------------------------------------------
MCN's Share of Income (Loss)
Before Taxes
Pipelines & Processing $ 28,551 $ 10,590 $ 628
Energy Marketing, Gas
Storage & Electric Power 20,034 5,979 5,030
Real Estate & Other 7,074 1,298 (413)
-------------------------------------------
$ 55,659 $ 17,867 $ 5,245
-------------------------------------------
MCN's Share of Income
Before Taxes by Segment
Diversified Energy $ 53,125 $ 16,611 $ 3,903
Gas Distribution 2,534 1,256 1,342
-------------------------------------------
$ 55,659 $ 17,867 $ 5,245
-------------------------------------------
</TABLE>
48
<PAGE> 17
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
ASSETS
Current Assets
Pipelines & Processing $ 98,563 $ 33,065
Energy Marketing, Gas
Storage & Electric Power 601,313 28,793
Gas Distribution 2,183 1,834
Real Estate & Other 15,287 8,964
--------------------------
717,346 72,656
--------------------------
Noncurrent Assets
Pipelines & Processing 494,784 309,837
Energy Marketing, Gas
Storage & Electric Power 3,029,580 311,941
Gas Distribution 45,450 36,619
Real Estate & Other 107,781 119,203
--------------------------
3,677,595 777,600
--------------------------
$ 4,394,941 $ 850,256
--------------------------
MCN's Share of Total Assets
Pipelines & Processing $ 296,670 $ 162,145
Energy Marketing, Gas
Storage & Electric Power 776,141 191,846
Gas Distribution 22,626 18,265
Real Estate & Other 38,826 39,824
--------------------------
$ 1,134,263 $ 412,080
--------------------------
LIABILITIES AND JOINT VENTURES' EQUITY
Current Liabilities
Pipelines & Processing $ 48,262 $ 20,591
Energy Marketing, Gas
Storage & Electric Power 531,004 26,344
Gas Distribution 986 1,036
Real Estate & Other 9,982 5,253
--------------------------
590,234 53,224
--------------------------
Noncurrent Liabilities
Pipelines & Processing 5,466 8,455
Energy Marketing, Gas
Storage & Electric Power 2,223,088 226,874
Gas Distribution 29,042 23,600
Real Estate & Other 88,320 92,723
--------------------------
2,345,916 351,652
--------------------------
Joint Ventures' Equity
Pipelines & Processing 539,619 313,856
Energy Marketing, Gas
Storage & Electric Power 876,801 87,516
Gas Distribution 17,605 13,817
Real Estate & Other 24,766 30,191
--------------------------
1,458,791 445,380
--------------------------
$ 4,394,941 $ 850,256
--------------------------
MCN's Share of Joint Ventures' Equity
Pipelines & Processing $ 259,116 $ 146,356
Energy Marketing, Gas
Storage & Electric Power 186,076 48,959
Gas Distribution 8,363 6,675
Real Estate & Other 16,558 17,886
--------------------------
470,113 219,876
Goodwill and Other(1) 86,863 45,512
--------------------------
MCN's Investment In and
Advances to Joint Ventures $ 556,976 $ 265,388
--------------------------
</TABLE>
(1) Primarily represents differences between MCN's carrying value and its share
of the joint ventures' underlying equity interest that is amortized over the
estimated useful lives of the related assets which, on a weighted average
basis, equaled 23 years.
4. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1997, the replacement cost exceeded the $56,777,000 LIFO cost for 73 Bcf by
$176,373,000. At December 31, 1996, the replacement cost exceeded the
$79,161,000 LIFO cost for 85 Bcf by $269,083,000. MichCon's current GCR tariff
provisions prevent MichCon from retaining any benefits from a lower cost of gas
sold resulting from liquidating its LIFO inventory. MichCon's LIFO inventory
balance was 65 Bcf and 74 Bcf at December 31, 1997 and 1996, respectively.
5. CREDIT FACILITIES, SHORT-TERM
BORROWINGS AND LONG-TERM DEBT
At December 31, 1997, MCNIC had credit lines permitting borrowings of up to
$100,000,000 under a 364-day revolving credit facility and up to $300,000,000
under a three-year revolving credit facility, both of which expire in July 1998.
These facilities support MCNIC's $400,000,000 commercial paper program. MCNIC
has issued commercial paper in lieu of an equivalent amount of borrowings under
these lines of credit. The commercial paper balance outstanding at December 31,
1997 totaling $147,358,000 is classified as short-term. The commercial paper
balance used to temporarily finance working capital requirements at December 31,
1996 totaling $68,000,000 was classified as short-term. The remaining 1996
commercial paper balance of $261,822,000 was classified as long-term. Commercial
paper borrowings outstanding as of December 31, 1997 and 1996 were at weighted
average interest rates of 6.2% and 5.8%, respectively. Fees are paid to
compensate banks for lines of credit.
MCNIC Oil & Gas Company, a subsidiary of MCNIC, established a five-year term
loan during 1995 at certain alternative variable rates at MCN's option. The loan
allows for borrowings of up to $100,000,000 and is based on MCNIC Oil & Gas
Company's proved gas reserves. The balances outstanding at December 31, 1997 and
1996 were $100,000,000 at weighted average interest rates of 6.3% and 5.9%,
respectively. The most restrictive provision of the agreement requires MCNIC Oil
& Gas Company to maintain a minimum interest coverage ratio.
At December 31, 1997, MichCon had credit lines permitting borrowings of up to
$150,000,000 under a 364-day revolving credit facility and up to $150,000,000
under a three-year revolving credit facility, both of which expire in July 1998.
MichCon usually issues commercial paper in lieu of an equivalent amount of
borrowings under these lines of credit. Commercial paper outstanding at December
31, 1997 and 1996 totaled $236,740,000 and $238,251,000, respectively, at
weighted average interest rates of 5.8% and 5.5%, respectively. This debt is
classified as short-term. Fees are paid to compensate banks for lines of credit.
In 1997, MichCon did not renew its Trust Demand Note program which expired in
March 1997 and allowed for borrowings of up to
49
<PAGE> 18
Notes to Consolidated Financial Statements
$25,000,000. At December 31, 1996, borrowings of $25,000,000 were outstanding
under this program at an interest rate of 5.9%.
During 1997, nonutility subsidiaries of MichCon borrowed $40,000,000 under a
nonrecourse credit agreement. Under terms of the agreement, certain alternative
variable interest rates are available at the borrowers' option during the life
of the agreement. Quarterly principal payments commenced in June 1997 with a
final installment due November 2005. The loan is secured by a pledge of stock of
the borrowers and a security interest in certain of their assets. MichCon may be
required to make limited capital contributions to the subsidiaries if certain
cash flow and operating targets are not met. At December 31, 1997, $36,400,000
was outstanding at a weighted average interest rate of 6.4%.
During 1997, MichCon redeemed early $5,000,000 of 9.5% first mortgage bonds and
$12,000,000 of 9.8% unsecured notes. MichCon had a variable interest rate swap
agreement through April 2000 on the $12,000,000 unsecured notes. This swap has
been redesignated as a hedge of other outstanding first mortgage bonds.
MichCon entered into variable interest rate swap agreements with notional
principal amounts aggregating $80,000,000 in connection with the first mortgage
bonds issued May 1997. Swap agreements of $40,000,000 through May 2002 have
reduced the average cost of debt from 7.3% to 6.3% for the year ended December
31, 1997. Swap agreements of $40,000,000 through May 2005 have reduced the
average cost of debt from 7.1% to 5.9% for the year ended December 31, 1997. A
nonutility subsidiary of MichCon has an interest rate swap agreement on the
$15,840,000 outstanding balance of its project loan agreement at December 31,
1997, which effectively fixes the interest rate at 7.5% through February 2003.
Substantially all of the properties of MichCon, totaling approximately
$1,200,000,000, serve as collateral for its outstanding first mortgage bonds.
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1997 are $26,900,000 in 1998,
$267,400,000 in 1999, $127,000,000 in 2000, $86,600,000 in 2001 and $166,400,000
in 2002.
6. PREFERRED AND HYBRID SECURITIES
a. FELINE PRIDES
In 1997, MCN issued 2,645,000 FELINE PRIDES yielding 8% with a stated amount of
$50 per security. Each security initially consists of a stock purchase contract
and a preferred security of MCN Financing III.
Under each stock purchase contract MCN is obligated to sell, and the FELINE
PRIDES holder is obligated to purchase in May 2000 for $50, between 1.4132 and
1.7241 shares of MCN common stock. The exact number of MCN common shares to be
sold is dependent on the market value of a share in May 2000, but will not be
less than 3,737,988 or more than 4,560,345 shares. MCN is also obligated to pay
the FELINE PRIDES holders a quarterly contract adjustment payment at an annual
rate of .75% of the stated amount. MCN has recorded the present value of the
contract adjustment payments, totaling $2,661,015, as a liability and a
reduction to Common Shareholders' Equity on MCN's Consolidated Statement of
Financial Position. The liability is reduced as the contract adjustment payments
are made. MCN has the right to defer the contract adjustment payments, in which
case MCN cannot declare dividends on its common stock until the contract
adjustment payments have been made. In addition, MCN has incurred costs of
approximately $4,900,000 in conjunction with the issuance and similarly has
recorded these costs as a reduction to Common Shareholders' Equity.
MCN Financing III, a business trust wholly owned by MCN, was formed for the sole
purpose of issuing preferred securities and lending the gross proceeds thereof
to MCN. In March 1997, the trust issued 2,645,000 shares of 7.25% redeemable
preferred securities, at the liquidation preference value of $50 per share. The
trust invested the $132,250,000 of gross proceeds from the issuance of the
preferred securities, as well as $4,090,250 of proceeds from the issuance of
common securities to MCN, in an equivalent amount of 7.25% Junior Subordinated
Debentures of MCN. The $136,340,250 of Junior Subordinated Debentures are due
May 2002 and are the sole assets of the trust. Upon maturity of the debentures,
the trust is required to redeem the preferred securities.
Holders of the preferred securities are entitled to receive cumulative dividends
at an annual rate of 7.25% of the liquidation preference value. Dividends are
payable quarterly and in substance are tax deductible by MCN. MCN has the right
to extend interest payment periods on the debentures for successive periods
through the May 2002 maturity date. As a consequence, quarterly dividend
payments on the preferred securities can be deferred by the trust during any
such interest payment period. In the event that MCN exercises this right, MCN
may not declare dividends on its common stock.
In the event of default, holders of the preferred securities will be entitled to
exercise and enforce the trust's creditor rights against MCN, which may include
acceleration of the principal amount due on the debentures. MCN has issued a
guaranty with respect to payments on the preferred securities. This guaranty,
taken together with MCN's obligations under the debentures, the related
indenture, and the trust documents, provides a full and unconditional guaranty
of the trust's obligations under the preferred securities to the extent the
trust has funds available therefor.
The preferred securities are pledged as collateral to secure the FELINE PRIDES
holders' obligation to purchase MCN common stock under the stock purchase
contracts. Each holder has the right after issuance of the FELINE PRIDES to
substitute for the preferred securities, zero coupon United States Treasury
50
<PAGE> 19
Securities maturing in May 2000. Each FELINE PRIDES holder has the option to use
the preferred securities, treasury securities or cash to satisfy the May 2000
purchase contract commitment.
b. PRIVATE INSTITUTIONAL TRUST SECURITIES (PRINTS) AND SINGLE POINT REMARKETED
RESET CAPITAL SECURITIES (SPRRCS)
In 1997, MCN Financing V and MCN Financing VI, business trusts wholly owned by
MCN, were formed for the sole purpose of issuing preferred securities and
lending the gross proceeds thereof to MCN. In June 1997, MCN Financing V issued
100,000 PRINTS, and MCN Financing VI issued 100,000 SPRRCS, both at their
liquidation preference value of $1,000 per security. The trusts invested the
$200,000,000 of gross proceeds from the issuances of the preferred securities,
as well as $6,186,000 of proceeds from the issuances of common securities to
MCN, in an equivalent amount of senior debentures of MCN. The $206,186,000 of
senior debentures due 2037 are on terms substantially the same as the preferred
securities and are the sole assets of the trusts.
The preferred securities are structured such that at a specified future date,
the rate reset date, the securities may be remarketed with a new
liquidation preference value of $25 per security. The annual dividend payment
rate will be reset to reflect the lowest rate, less than or equal to a maximum
rate, at which the securities can be remarketed at a price equal to their
liquidation preference value. On the rate reset date, the terms of an equivalent
amount of the MCN senior debentures will change to reflect the new terms of the
remarketed preferred securities. The debentures will thereafter be subordinated
and junior in right of payment to all senior obligations of MCN. The rate reset
dates for the PRINTS and SPRRCS are anticipated to be June 1, 1998 and October
28, 1999, respectively.
Prior to the rate reset date, holders of the PRINTS and SPRRCS are entitled to
receive cumulative dividends at annual rates of 6.3% and 6.9% of the
liquidation preference value, respectively. Dividends are in substance tax
deductible by MCN and are payable semi-annually until the rate reset date, after
which they will become payable quarterly. Financing costs were deferred and
reflected as a reduction in the carrying value of the preferred securities.
These costs are being amortized using the straight-line method over 40 years.
Subsequent to the rate reset date, MCN has the right to extend
interest payment periods on the debentures for up to 20 consecutive quarters
through the June 2037 maturity date. As a consequence, dividend payments on the
preferred securities can be deferred by the trusts during any such interest
payment period. In the event that MCN exercises this right, MCN may not declare
dividends on its common stock. With MCN's consent, the preferred securities are
redeemable at the option of the trusts, in whole or in part, on the rate reset
date or at any time after the fifth anniversary of the rate reset date. In
addition, upon maturity of the debentures, the trusts are required to redeem the
preferred securities.
In the event of default, holders of the preferred securities will be entitled to
exercise and enforce the trusts' creditor rights against MCN, which may
include acceleration of the principal amount due on the debentures. MCN has
issued guaranties with respect to payments on the preferred securities. These
guaranties, when taken together with MCN's obligations under the debentures, the
related indenture, and the trust documents, provide full and unconditional
guaranties of the trusts' obligations under the preferred securities to the
extent the trust has funds available therefor.
In 1997, MCN entered into a one-year variable interest rate swap agreement
with a notional amount of $100,000,000. The swap agreement effectively reduced
the PRINTS fixed dividend rate from 6.3% to 6.0% through December 31, 1997.
c. TRUST ORIGINATED PREFERRED SECURITIES (TOPrS)
In 1996, MCN Financing I, a business trust wholly owned by MCN, was formed
for the sole purpose of issuing preferred securities and lending the gross
proceeds thereof to MCN. In July 1996, the trust issued 3,200,000 shares of
8-5/8% TOPrS, at the liquidation preference value of $25 per share. The trust
invested the $80,000,000 of gross proceeds from the issuance of the TOPrS, as
well as $2,474,250 of proceeds from the issuance of common securities to MCN in
an equivalent amount of 8-5/8% Junior Subordinated Debentures of MCN due 2036.
The $82,474,250 of Junior Subordinated Debentures are the sole assets of the
trust. Holders of the preferred securities are entitled to receive cumulative
dividends at an annual rate of 8-5/8% of the liquidation preference value.
Dividends are payable quarterly and in substance are tax deductible by MCN.
Financing costs were deferred and reflected as a reduction in the carrying value
of the preferred securities. These costs are being amortized using the
straight-line method over 40 years.
MCN has the right to extend interest payment periods on the debentures for up to
20 consecutive quarters. As a consequence, quarterly dividend payments on the
preferred securities can be deferred by the trust during any such interest
payment period. In the event that MCN exercises this right, MCN may not declare
dividends on its common stock. With MCN's consent, the preferred securities are
redeemable at the option of the trust, in whole or in part, during or after July
2001. In addition, upon final maturity of the debentures, the trust is required
to redeem the preferred securities.
In the event of default, holders of the preferred securities will be entitled to
exercise and enforce the trust's creditor rights against MCN, which may
include acceleration of the principal amount due on the debentures. MCN has
issued a guaranty with respect to the preferred securities that, when taken
together with MCN's obligations under the debentures, the related indenture, and
the trust documents, provides a full and unconditional guaranty of the trust's
obligations under the TOPrS to the extent the trust has funds available
therefor.
51
<PAGE> 20
Notes to Consolidated Financial Statements
In 1996, MCN entered into two five-year variable interest rate swap
agreements with a combined notional amount of $80,000,000. The swap agreements
effectively reduced the TOPrS fixed dividend rate from 8-5/8% to 8.2% for the
year ended December 31, 1997.
d. PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES (ENHANCED PRIDES)
In 1996, MCN issued 5,865,000 Enhanced PRIDES yielding 8-3/4% with a stated
amount of $23.00 per security. Each security represents a contract to purchase
MCN common stock in April 1999, or earlier under certain limited circumstances.
Proceeds from the issuance totaling approximately $135,000,000 were used to
acquire 6.5% United States Treasury Notes underlying the security as
subsequently discussed. Accordingly, MCN received no cash from issuing the
Enhanced PRIDES.
Under each security MCN is obligated to sell, and the Enhanced
PRIDES holder is obligated to purchase for $23.00, between .8333 of a share and
one share of MCN common stock. The exact number of MCN common shares to be sold
is dependent on the market value of a share in April 1999. However, the total
number to be sold will not be less than 4,887,500 shares or more than 5,865,000
shares.
MCN is also obligated to pay the Enhanced PRIDES holders a semi-annual yield
enhancement payment at an annual rate of 2-1/4% of the stated amount. MCN has
recorded the present value of the yield enhancement payments, totaling
$8,243,000, as a liability and a reduction to Common Shareholders' Equity on
MCN's Consolidated Statement of Financial Position. The liability is reduced
when the yield enhancement payments are paid. MCN has the right to defer the
yield enhancement payments, in which case MCN cannot declare dividends on its
common stock until the yield enhancement payments have been made. In addition,
MCN has incurred costs of $6,249,000 in conjunction with the issuance of the
Enhanced PRIDES and similarly has recorded the costs as a reduction to Common
Shareholders' Equity.
The Treasury Notes underlying the securities are pledged as collateral to secure
the Enhanced PRIDES holders' obligation to purchase MCN common stock under the
stock purchase contract. At maturity in April 1999, the principal received from
the Treasury Notes will be used to satisfy the Enhanced PRIDES holders
obligation in full. Neither the Enhanced PRIDES nor the Treasury Notes are
included on MCN's Consolidated Statement of Financial Position. However, the
issuance of common stock will be reflected when cash proceeds totaling
approximately $135,000,000 are received by MCN in April 1999.
e. REDEEMABLE CUMULATIVE PREFERRED SECURITIES
MCN Michigan Limited Partnership (MCN Michigan), a limited partnership of which
MCN is a 1% general partner, has outstanding 4,000,000 shares of 9-3/8%
Redeemable Cumulative Preferred Securities, Series A, at the liquidation
preference value of $25 per share. Holders of the securities are entitled to
receive dividends at an annual rate of 9-3/8% of the liquidation preference
value. Dividends are payable monthly and in substance are tax deductible by MCN.
Gross proceeds of the issuance totaling $100,000,000 were loaned to MCN.
Financing costs were deferred and reflected as a reduction in the carrying value
of the preferred securities. These costs are being amortized using the
straight-line method through 2024. MCN has the right under the loan agreement to
extend interest payment periods for up to 60 months, and as a consequence,
monthly dividend payments on the preferred securities can be deferred by MCN
Michigan during any such interest payment period. In the event that MCN
exercises this right, MCN may not declare dividends on its common stock. With
MCN's consent, the preferred securities are redeemable at the option of MCN
Michigan, in whole or in part, for $25 per share on or after November 30, 1999.
In addition, upon final maturity of the loan in 2024, MCN Michigan is required
to redeem the preferred securities. In the event of default, holders of the
preferred securities will be entitled to exercise and enforce MCN Michigan's
creditor rights against MCN, which may include acceleration of the principal
amount of the loan.
MCN is authorized to issue 25,000,000 shares of no par value preferred stock,
and MichCon is authorized to issue 4,000,000 shares of preference stock with a
par value of $1 per share. At December 31, 1997, no issuances of preferred or
preference stock were made under these authorizations.
7. COMMON STOCK AND EARNINGS PER SHARE
a. COMMON STOCK
In 1997, MCN sold 9,775,000 shares of new common stock in a public offering,
generating net of $276,600,000. In 1995, MCN sold 5,750,000 shares of new
common stock in a public offering, generating net proceeds of approximately
$99,000,000.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
rchase Plan and various employee benefit plans. The number of shares issued was
approximately 1,165,000 in 1997, 926,000 in 1996 and 858,000 in 1995, generating
net proceeds of $17,800,000, $17,300,000, and $16,500,000, respectively.
b. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units, restricted
stock or other stock-related awards to key employees, primarily management.
MCN's current policy is to issue performance units which encourage a strategic
focus on long-term performance and have a high employee retention value. The
performance units are denominated in shares of MCN common stock and issued to
employees based on total shareholder return over a six-year period, as compared
to a group of peer companies. The initial number of performance units granted is
based on total shareholder return relative to the peer group during the
previous
52
<PAGE> 21
three-year period. Participants receive dividend equivalents on the units
granted. The initial grants will be adjusted upward or downward based on total
shareholder return relative to the peer group for the subsequent three-year
period. The final awards are then payable in shares of common stock or can be
deferred. Participants must retain fifty percent of any common shares paid until
certain stock ownership guidelines are met. The deferred units must be retained
by the participants until their employment with MCN ceases.
During 1996, MCN adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" and the fair value-based method of accounting for its stock-based
compensation plans.
During 1997 and 1996, MCN granted 245,340 and 301,616 performance units with a
weighted average grant date fair value of $31.00 and $24.625 per unit,
respectively. During 1995, MCN granted 370,920 performance units with a weighted
average modification date fair value of $24.875 per unit. Upon adoption of SFAS
No. 123, the previously accrued liability of $23,852,000 relating to then
outstanding performance units was reclassified to Additional Paid-in Capital.
The unrecognized costs of all outstanding performance units are being recorded
as compensation expense and Additional Paid-in Capital over the remaining
vesting period. Stock-based compensation costs recognized during 1997, 1996 and
1995 for all awards outstanding totaled $15,070,000, $14,055,000 and
$15,076,000, respectively. At December 31, 1997, there were 5,578,381 shares
available to be issued under the Stock Incentive Plan.
c. SHAREHOLDERS' RIGHTS PLAN
One preferred share purchase right is attached to each outstanding share of
MCN common stock. The rights are exercisable only upon certain triggering events
and expire in July 2007. The rights, which cannot be traded separately from
MCN's common stock, are intended to maximize shareholders' value in the event
that MCN is acquired.
d. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share", which is effective for MCN's year-end 1997 financial
statements. SFAS No. 128 simplifies the standards for computing earnings per
share (EPS), replaces simple and primary EPS with a newly defined basic EPS and
modifies the computation of diluted EPS. Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the 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>
Income From Wtd. Avg. Earnings
Continuing Common Per
(in Thousands, Except Per Share Amounts) Operations Shares Share
-------------------------------------------
<S> <C> <C> <C>
1997
Basic EPS $ 142,306 72,887 $ 1.95
---------
Effect of Dilutive Securities:
FELINE PRIDES 1,688 1,021
Enhanced PRIDES 222 623
Stock-based compensation plans - 904
-------------------------
Diluted EPS $ 144,216 75,435 $ 1.91
-----------------------------------------
1996
Basic EPS $ 112,569 66,944 $ 1.68
---------
Effect of Dilutive Securities:
Enhanced PRIDES 73 41
Stock-based compensation plans - 536
-------------------------
Diluted EPS $ 112,642 67,521 $ 1.67
-----------------------------------------
1995
Basic EPS $ 93,169 64,743 $ 1.44
---------
Effect of Dilutive Securities:
Stock-based compensation plans - 401
-------------------------
Diluted EPS $ 93,169 65,144 $ 1.43
-----------------------------------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
a. GUARANTIES
In 1990, MCN issued a guaranty in conjunction with a Genix building lease
expiring no later than 2010. The lease agreement does not allow MCN to transfer
its obligation under the guaranty to ACS, who acquired Genix in June 1996 (Note
2h). However, ACS is obligated to reimburse MCN for any payments made as a
result of this guaranty. Obligations under the guaranty approximated $13,068,000
at December 31, 1997.
During 1996, MCN acquired a 47.5% interest in a partnership that owns and
operates a natural gas transmission and distribution system located in southern
Missouri. In 1997, construction financing was in place to allow for borrowings
of up to $29,000,000. MCN has issued a guaranty for the full amount of this
financing, and one of the parties to the partnership is obligated to reimburse
MCN for 50% of any payments made as a result of this guaranty. The guaranty will
remain in place until permanent financing is established which is anticipated to
be in late 1998. Borrowings under the construction loan totaled $29,000,000 at
December 31, 1997.
A MichCon subsidiary and an unaffiliated corporation have formed a series of
partnerships engaged in the construction and development of a residential
community on the Detroit riverfront (Harbortown). One of the partnerships
obtained $12,000,000 of tax-exempt financing due June 2004 through the Michigan
State Housing Development Authority. Both partners and their parent corporations
have issued guaranties for the full amount of this financing, and each parent
corporation has agreed to reimburse the other for 50% of any payments made as a
result of these guaranties.
53
<PAGE> 22
Notes to Consolidated Financial Statements
b. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were conducted
at these former MGP sites, and some contamination related to by-products of gas
manufacturing was discovered at each site. The existence of these sites and the
results of the environmental investigations have been reported to the Michigan
Department of Environmental Quality. None of these former MGP sites is on the
National Priorities List prepared by the U.S. Environmental Protection Agency.
MCN is not involved in any administrative proceedings regarding these former
MGP sites but is currently remediating four of them. More extensive
investigations are underway at five other sites.
In 1984, MichCon established an $11,700,000 reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for reasonable and prudent
investigation and remediation costs incurred at former MGP sites in excess of
this reserve.
MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. MCN has notified more than 50 current and former
insurance carriers of the environmental conditions at these former MGP sites. In
1996 and 1997, MichCon received payments from certain carriers and expects
additional insurance recoveries over the next several years. The findings of
these investigations indicate that the estimated total expenditures for
investigation and remediation at all 17 former MGP sites will be between
$30,000,000 and $170,000,000 based on undiscounted 1995 costs. As a result of
these studies, MCN accrued an additional liability and corresponding regulatory
asset of $35,000,000 during 1995.
During 1997, 1996 and 1995, MCN spent $835,000, $900,000, and $2,100,000
respectively, investigating and remediating these former MGP sites. At
December 31, 1997, the reserve balance was $36,741,000, of which $1,741,000 was
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs and therefore
have an effect on MCN's financial position and cash flows. However, management
believes insurance coverage and the cost deferral and rate recovery mechanism
approved by the MPSC will prevent environmental costs from having a material
adverse impact on MCN's results of operations.
c. COMMITMENTS
In July 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership
(W-10), entered into a leveraged lease transaction to finance the conversion of
a depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000 to
develop. MCN has entered into a contract with W-10 to market 100% of the
capacity of the storage field through 2029. Under the terms of the marketing
contract, MCN is obligated to generate sufficient revenues to cover W-10's
lease payments and certain operating costs, which average approximately
$16,000,000 annually. As of December 31, 1997, MCN had long-term contracts in
place for approximately 40% of the field's capacity thereby reducing its
commitments under the marketing contract. A significant portion of the remaining
capacity is expected to be contracted by MCN's Energy Marketing operations,
thereby enhancing its ability to offer a reliable gas supply during peak winter
months.
To ensure a reliable supply of natural gas at competitive prices, MCN has
entered into long-term purchase and transportation contracts with various
suppliers and producers. In general, purchase prices under these contracts are
determined by formulas based on market prices. In 1998, MCN has firm purchase
commitments for approximately 254 Bcf of gas, approximately 124 Bcf of which are
MichCon purchase commitments. MCN expects sales to exceed its minimum purchase
commitments. MCN is also committed to pay demand charges of approximately
$93,400,000 during 1998 related to firm transportation agreements. Of this
total, approximately $53,000,000 relates to Gas Distribution and is recoverable
through the GCR mechanism.
Capital investments for 1998 are estimated to be in the range of $1,200,000,000
to $1,500,000,000. Certain commitments have been made in connection with such
capital investments.
d. OTHER
MichCon receives a significant amount of heating assistance funding from the
federal Low-Income Home Energy Assistance Program (LIHEAP). Congress
increased the program's funding for the 1997 fiscal year to $1,000,000,000. The
State of Michigan's share of LIHEAP funds was increased from $47,500,000 in
fiscal year 1996 to $64,000,000 in 1997. During 1997, Congress approved a
budget, which provides for federal LIHEAP funding at $1,000,000,000 and
$1,100,000,000 in fiscal years 1998 and 1999, respectively. A portion of any
future increase or decrease in funding may impact MichCon's uncollectible gas
accounts.
MCN is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. Management cannot predict the final disposition of
such proceedings, but believes that adequate provision has been made for
probable losses. It is management's belief, after discussion with legal counsel,
that the ultimate resolution of those proceedings still pending will not have a
material adverse effect on MCN's financial statements.
54
<PAGE> 23
9. REGULATORY ASSETS AND LIABILITIES
MCN's Gas Distribution operations are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result,
several regulatory assets and liabilities are recorded in MCN's financial
statements. Regulatory assets represent costs that will be recovered from
customers through the ratemaking process. Regulatory liabilities represent
benefits that will flow through to customers as refunds or reduced rates. The
following regulatory assets and liabilities were reflected in the Consolidated
Statement of Financial Position as of December 31:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
-------------------------
<S> <C> <C>
Regulatory Assets:
Accrued gas cost recovery revenues $ 12,862 $ 27,672
Deferred postretirement
benefit costs (Note 11b) 651 5,559
Deferred environmental costs (Note 8b) 30,234 31,233
Unamortized loss on retirement of debt 10,181 9,237
Conservation programs - 2,908
Other 986 1,681
-------------------------
$ 54,914 $ 78,290
-------------------------
Regulatory Liabilities:
Tax benefits amortizable to customers $ 123,365 $ 116,496
Other - 405
-------------------------
$ 123,365 $ 116,901
-------------------------
</TABLE>
Gas Distribution currently has regulatory precedents and orders in effect that
provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or changes in the competitive environment
could result in MCN discontinuing the application of SFAS No. 71 for all or part
of its business and require the write-off of the portion of any regulatory asset
or liability that was no longer probable of recovery or refund. If MCN were to
have discontinued the application of SFAS No. 71 for all its operations as of
December 31, 1997, it would have had an extraordinary, noncash increase to net
income of approximately $44,000,000. Management believes currently available
facts support the continued application of SFAS No. 71.
10. LEASES
MCN leases certain property (principally office buildings, a warehouse and a
parking structure) under lease arrangements expiring at various dates to 2006,
with renewal options extending beyond that date. Portions of the office
buildings and parking structure are subleased to various tenants.
In January 1998, MCN purchased one of its principal office buildings, thereby
eliminating the related long-term capital lease obligation. As a result, the
long-term capital lease obligation of $6,818,000 was reclassified as a current
capital lease obligation at December 31, 1997. Other long-term capital lease
obligations of MCN are not significant.
Minimum rental commitments related to noncancelable operating leases outstanding
at December 31, 1997 are $5,801,000 in 1998, $5,815,000 in 1999, $5,551,000
in 2000, $5,102,000 in 2001, $4,231,000 in 2002, and $10,686,000 in 2003 and
thereafter.
Total minimum lease payments for operating leases have not been reduced by
future minimum sublease rentals of $3,740,000 under noncancelable subleases.
Operating lease expense reflected in MCN's Consolidated Statement of Income
for the years ended December 31, 1997, 1996 and 1995 was $5,007,000, $5,243,000
and $4,860,000, respectively.
11. RETIREMENT BENEFITS AND TRUSTEED ASSETS
a. PENSION PLAN BENEFITS
Separate defined benefit retirement plans are maintained for union and
nonunion employees. The plans are noncontributory, cover substantially all
employees and provide for normal retirement at age 65, but with the option to
retire earlier or later under certain conditions. The plans provide pension
benefits that are based on the employee's compensation and years of credited
service. MCN's funding policy is to fund each year's actuarially determined
funding requirements of the plans, subject to regulations issued by the Internal
Revenue Service. Currently these plans meet the full funding limitations of the
Internal Revenue Code. Accordingly, no contributions for the 1997, 1996 or 1995
plan years were made, and none is expected to be made for the 1998 plan year.
During 1997, a pro-rata portion of deferred pension gains was recognized in
earnings in the amount of $3,266,000 due to the settlement of the projected
benefit obligation through lump sum payments to employees.
Net pension cost for these plans included the following components:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Service Cost - Benefits
Earned During the Period $ 10,380 $ 11,194 $ 9,318
Interest Cost on Projected
Benefit Obligation 36,059 34,223 32,061
Net Amortization and Deferral 69,341 16,111 65,883
Actual Return on Plan Assets (143,859) (79,912) (123,952)
-----------------------------------------------
Net Pension Credit $ (28,079) $ (18,384) $ (16,690)
-----------------------------------------------
</TABLE>
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as prepaid pension cost in the Consolidated
Statement of Financial Position:
55
<PAGE> 24
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Measurement Date October 31 October 31
Actuarial Present Value of:
Accumulated vested benefit obligation $ 379,930 $ 358,952
Accumulated nonvested benefit obligation 33,350 29,235
--------------------------
Total accumulated benefit obligation $ 413,280 $ 388,187
--------------------------
Projected benefit obligation for
service rendered to date $ 489,779 $ 444,937
Plan Assets at Fair Value 844,107 723,493
--------------------------
Plan Assets in Excess of Projected
Benefit Obligation 354,328 278,556
Unrecognized Net Asset at Transition (35,014) (40,099)
Unrecognized Prior Service Cost (1,275) (1,506)
Unrecognized Net Gain (244,405) (194,648)
--------------------------
Prepaid Pension Cost $ 73,634 $ 42,303
--------------------------
</TABLE>
In determining the actuarial present value of the projected benefit obligation,
the weighted average discount rate was 7.5% for 1997 and 8% for 1996. The rate
of increase in future compensation levels used was 5% for 1997 and 1996. The
expected long-term rate of return on plan assets which are invested primarily in
equity and fixed income securities was 9.25%, 9.25% and 9% for 1997, 1996 and
1995, respectively.
Following the conclusion of union negotiations in December 1997, MichCon amended
its pension plans to enhance certain benefits to participants effective January
1998. The amendment is estimated to increase the projected benefit obligation by
$19,300,000 and the annual pension costs by $1,700,000. The impact of the
amendment is not reflected in the retirement amounts as of December 31, 1997.
Additionally, MichCon announced an early retirement program in December 1997
under which 10% of its workforce could retire effective April 1, 1998 with
incentives. MCN cannot estimate at this time the impact of the early retirement
program on the projected benefit obligation and 1998 pension costs.
MCN and its subsidiaries also sponsor defined contribution retirement savings
plans. Participation in one of these plans is available to substantially all
union and nonunion employees. The company matches employee contributions
up to certain predefined limits based upon salary and years of credited service.
The cost of these plans for continuing operations was $6,200,000 in 1997,
$6,100,000 in 1996 and $6,000,000 in 1995.
b. OTHER POSTRETIREMENT BENEFITS
MCN provides certain healthcare and life insurance benefits for retired
employees who may become eligible for these benefits if they reach retirement
age while working for MCN. These benefits are currently being accounted for
under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," which requires the use of accrual accounting. Upon adoption of
SFAS No. 106, MCN deferred postretirement costs related to Gas Distribution (in
excess of claims paid) until January 1994 when new rates to recover such costs
became effective.
MCN's policy is to fund certain trusts to the extent its postretirement benefit
costs are recoverable in Gas Distribution rates. Separate qualified Voluntary
Employees' Beneficiary Association (VEBA) trusts exist for union and nonunion
employees. Funding to the VEBA trusts totaled $6,700,000, $41,918,000 and
$27,504,000 in 1997, 1996 and 1995, respectively. The expected long-term rate of
return on plan assets which are invested in life insurance policies, equity
securities and fixed income securities was 9.1%, 9.1% and 8.9% for 1997, 1996
and 1995, respectively.
Net postretirement cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Service Cost - Benefits Earned
During the Period $ 4,354 $ 4,541 $ 5,345
Interest Cost on Accumulated
Benefit Obligation 17,857 16,826 18,815
Amortization of Transition
Obligation 13,587 13,587 13,810
Net Amortization and Deferral 10,236 (1,936) 7,396
Actual Return on Plan Assets (26,251) (12,268) (15,670)
-----------------------------------------------
Total Postretirement Cost 19,783 20,750 29,696
Regulatory Adjustment 4,907 7,553 7,558
-----------------------------------------------
Net Postretirement Cost $ 24,690 $ 28,303 $ 37,254
-----------------------------------------------
</TABLE>
The following table sets forth a reconciliation of the funded status of the
plans and the amounts recorded as accrued postretirement cost in the
Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Measurement Date October 31 October 31
Accumulated Postretirement Benefit Obligation:
Retirees $ 133,219 $ 140,310
Fully eligible active participants 31,285 26,178
Participants with less than
30 years of service 64,833 56,726
--------------------------
229,337 223,214
Plan Assets at Fair Value 152,405 126,716
--------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (76,932) (96,498)
Unrecognized Transition Obligation 203,674 217,261
Unrecognized Net Gain (126,834) (111,030)
Contributions Made After Measurement Date 6,700 7,212
--------------------------
Accrued Postretirement Asset $ 6,608 $ 16,945
--------------------------
</TABLE>
The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 6.25% for 1998 and a rate that gradually declines each year until
it stabilizes at 5% in 2003. A one percentage point increase in the assumed
rates would increase the accumulated postretirement benefit obligation at
December 31, 1997 by 12% and increase the sum of the service cost and interest
cost by 15% for the year then ended. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.50% and 8.00% for 1997 and
1996, respectively.
56
<PAGE> 25
MichCon has amended its retiree healthcare plans to reduce medical benefits to
certain existing retirees and all future retirees effective January 1998.
The amendment is estimated to decrease the accumulated postretirement benefit
obligation by $3,800,000 and the annual postretirement costs by $1,100,000. The
impact of the amendment is not reflected in the postretirement amounts as of
December 31, 1997. Additionally, MichCon announced an early retirement program
in December 1997 under which 10% of its workforce could retire effective April
1, 1998 with incentives. MCN cannot estimate at this time the impact of the
early retirement program on the postretirement benefit obligation and 1998
postretirement costs.
c. GRANTOR TRUST
In 1997, MichCon established a Grantor Trust and contributed $31,300,000
to the trust, which invested such proceeds in fixed income securities. These
assets are classified as available for sale and are recorded at fair value with
the unrealized gains and losses excluded from earnings and reported as a
separate component of Common Shareholders' Equity. By funding the Grantor Trust
and the VEBA trusts (Note 11b), MichCon is complying with MPSC directives that
it fund various trusts to the extent its postretirement benefit costs are
recoverable in Gas Distribution rates. Subject to MPSC notification, MichCon can
revoke the Grantor Trust, and employees and retirees have no right, title or
interest in the assets of the trust.
12. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
MCN manages commodity price and interest rate risk through the use
of various derivative instruments and predominantly limits the use of such
instruments to hedging activities. If MCN did not use derivative instruments,
its exposure to such risk would be higher. Although this strategy reduces risk,
it also limits potential gains from favorable changes in commodity prices and
interest rates. Derivative instruments also give rise to credit risks due to
nonperformance by counterparties. MCN's control procedures are designed to
minimize overall exposure to credit risk. MCN closely monitors the financial
condition and credit rating of counterparties, diversifies its risk by having a
significant number of counterparties, and limits its counterparties to
investment grade institutions. MCN generally requires cash collateral when
exposure to each counterparty exceeds certain limits, and its agreements with
each counterparty generally allow for the netting of positive and negative
positions.
Commodity price and interest rate risks are actively monitored by a
risk control group to ensure compliance with MCN's risk management policies at
both the corporate and subsidiary levels. These policies, including related risk
limits, are regularly assessed to ensure their appropriateness given MCN's
objectives, strategies and current market conditions. MCN closely monitors and
manages its exposure to commodity price risk through a variety of risk
management techniques. MCN's objective is to manage its exposure to commodity
price risk to increase the likelihood of achieving targeted rates of return.
Derivative instruments are reviewed periodically to ensure they continue to
effectively reduce exposure to commodity price and interest rate risks, and
therefore high correlation is maintained between changes in the fair value of
derivative instruments and the underlying items or transactions being hedged. In
the event that a derivative is no longer deemed effective or does not qualify
for hedge accounting, the instruments are recorded as an asset or liability at
fair value, with changes in fair value recorded to income.
a. COMMODITY PRICE HEDGING
Natural gas and oil futures, options and swap agreements are used to
manage Diversified Energy's exposure to the risk of market price fluctuations on
gas sale and purchase contracts, gas and oil production and gas inventories.
MichCon has not used financial derivatives to hedge natural gas prices in 1997
or prior years. Changes in the market value of contracts that hedge gas supply
transactions are deferred and included in inventory costs until the hedged
transaction is completed, at which time the realized gain or loss is included in
the cost of gas. Market value changes of contracts that hedge gas and oil sales
transactions also are deferred and recorded as a deferred credit or deferred
charge until the hedged transaction is completed, at which time the realized
gain or loss is included as an adjustment to revenues. Unrealized gains and
losses on derivative contracts that are terminated or sold continue to be
deferred until such time as the initial hedged transactions are completed. In
the instance when a hedged item no longer exists or is no longer probable of
occurring, unrealized gains and losses would be included in income unless the
derivative is redesignated to a similar transaction and qualifies for hedge
accounting.
The following assets and liabilities related to the use of gas and
oil swap agreements are reflected in the Consolidated Statement of Financial
Position at December 31.
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Deferred Swap Losses and Receivables:
Unrealized losses $ 34,736 $ 53,166
Receivables 16,683 11,885
--------------------------
51,419 65,051
Less - Current portion 396 -
--------------------------
$ 51,023 $ 65,051
--------------------------
Deferred Swap Gains and Payables:
Unrealized gains $ 15,005 $ 5,519
Payables 41,164 64,641
--------------------------
56,169 70,160
Less - Current portion 14,452 21,795
--------------------------
$ 41,717 $ 48,365
--------------------------
</TABLE>
The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received. Notional
amounts represent the volume of
57
<PAGE> 26
Notes to Consolidated Financial Statements
transactions valued at the fixed or variable price that MCN has contracted to
obtain. Notional amounts do not represent the amounts exchanged by the parties
to the swaps, and therefore do not reflect MCN's exposure to commodity price or
credit risks.
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Fixed Price Receiver:
Volumes (Bcf equivalent) 447.5 355.7
Notional value $ 994,159 $ 790,549
Latest maturity 2013 2008
Variable Price Receiver:
Volumes (Bcf equivalent) 39.5 58.8
Notional value $ 94,082 $ 140,080
Latest maturity 2006 2006
</TABLE>
In addition, at December 31, 1997, MCN had futures contracts that permit
settlement by delivery of the underlying commodity of 73.3 Bcf with unrealized
gains of $2,031,000 and 21.7 Bcf with unrealized losses of $10,120,000. Futures
contracts of 46.7 Bcf with unrealized gains of $7,899,000 and 23.9 Bcf with
unrealized losses of $2,351,000 were outstanding at December 31, 1996.
Collateral in the form of cash totalling $1,920,000 was provided under hedging
contracts at December 31,1997.
b. INTEREST RATE HEDGING
In order to manage interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life
of the agreements without exchange of the underlying principal amounts. Interest
rate swaps are subject to market risk as interest rates fluctuate. The
difference to be received or paid on these agreements is accrued and recorded as
an adjustment to interest expense over the life of the agreements. The fair
value of the swap agreements and changes in the fair value as a result of
changes in market interest rates are not recognized in the financial statements.
In the event of an interest rate swap termination, any associated gains and
losses would be deferred as an adjustment to interest expense related to the
debt over the remaining term of the original contract life of the terminated
swap agreement. In the event of an early extinguishment of a designated debt
obligation, derivative gains and losses would be included in income, unless the
swap agreement could be redesignated as a hedge of another outstanding debt
obligation with similar characteristics and qualifies for hedge accounting.
At December 31, 1997, MCN had interest rate swap agreements with notional
principal amounts totaling $288,000,000 (Notes 5, 6b and 6c) and a
weighted average remaining life of 3.2 years. At December 31, 1996, the notional
principal amount of outstanding interest rate swaps totaled $109,600,000. The
notional principal amounts are used solely to calculate amounts to be paid or
received under the interest rate swap agreements and approximate the principal
amount of the underlying debt being hedged.
13. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS
MCN has estimated the fair value of its financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment is required in developing the estimates of the fair value of financial
instruments and therefore, the values are not necessarily indicative of the
amounts that MCN could realize in a current market exchange. The carrying
amounts of certain financial instruments, such as notes payable and customer
deposits, are assumed to approximate fair value due to their short-term nature.
The carrying amount and fair value of other financial instruments consist of the
following:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Carrying Estimated Carrying Estimated
(in Thousands) Amount Fair Value Amount Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investment in debt and
equity securities $ 97,521 $ 97,521 $ 35,582 $ 35,582
Liabilities and
Capitalization:
Long-term debt,
excluding capital
lease obligations 1,204,862 1,251,883 1,235,415 1,264,836
Redeemable
preferred securities 505,104 550,197 173,809 184,109
Derivative Financial
and Other Similar
Instruments (Note 12):
Natural gas and oil swaps:
with unrealized gains 15,005 15,005 5,519 5,519
with unrealized losses 34,736 34,736 53,166 53,166
Natural gas and oil futures:
with unrealized gains 2,031 2,031 7,899 7,899
with unrealized losses 10,120 10,120 2,351 2,351
Interest rate swaps:
with unrealized gains 5,006 1,154
with unrealized losses 415 476
</TABLE>
The fair values are determined based on the following:
Investment in debt and equity securities - carrying amount approximates fair
value taking into consideration interest rates available to MCN for investments
with similar assumptions.
Long-term debt - interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.
Redeemable cumulative preferred securities - quoted market prices on the New
York Stock Exchange and interest rates available to MCN for issuance of
preferred securities with similar terms.
Natural gas and oil and interest rate swaps and futures - estimated amounts
that MCN would receive or pay to terminate the swap agreements and futures,
taking into account current gas and oil prices, interest rates and the
creditworthiness of the counterparties.
Guaranties (Note 8a) - estimated cost to terminate the southern Missouri
project guaranty is immaterial. Management is unable
58
<PAGE> 27
to practicably estimate the fair value of the Harbortown and Genix guaranties
due to the nature of the transactions.
The fair value estimates presented herein are based on information available to
management as of December 31, 1997 and 1996. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
14. SUMMARY OF INCOME TAXES
MCN files a consolidated federal income tax return. The income tax provisions
or benefits of MCN's subsidiaries are determined on an individual company
basis. The subsidiaries record income tax payable or receivable from MCN
resulting from the inclusion of its taxable income or loss in MCN's
consolidated tax return.
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Effective Federal
Income Tax Rate 25.8% 23.4% 27.6%
---------------------------------------------
Income Taxes Consist of:
Current provision $ 23,166 $ 603 $ (4,600)
Deferred provision, net 48,628 53,528 53,087
Gas production tax credits (17,797) (15,878) (11,271)
Investment tax credits (1,873) (1,878) (1,886)
---------------------------------------------
$ 52,124 $ 36,375 $ 35,330
---------------------------------------------
Reconciliation Between
Statutory and Actual
Income Taxes:
Statutory Federal Income
Taxes at a Rate of 35% $ 68,051 $ 52,130 $ 44,975
Adjustments to Federal
Tax Expense:
Book over tax depreciation 5,301 6,367 7,365
Adjustments to taxes provided
in prior periods (162) (3,369) (1,337)
Investment tax credits (1,873) (1,878) (1,886)
Gas production tax credits (17,797) (15,878) (11,271)
Other, net (1,396) (997) (2,516)
---------------------------------------------
Total Income Taxes $ 52,124 $ 36,375 $ 35,330
---------------------------------------------
</TABLE>
Deferred tax assets and liabilities are recognized for the estimated future tax
effect of temporary differences between the tax basis of assets or liabilities
and the reported amounts in the financial statements. Deferred tax assets and
liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The alternative minimum tax
credits may be carried forward indefinitely. The tax effect of temporary
differences that gave rise to MCN's deferred tax assets and liabilities
consisted of the following:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Deferred Tax Assets:
Alternative minimum tax credit carryforward $ 60,121 $ 34,711
Vacation and other benefits 20,846 21,716
Uncollectibles 4,771 6,359
Other 11,985 14,035
--------------------------
97,723 76,821
--------------------------
Deferred Tax Liabilities:
Depreciation and other property-
related basis differences, net 200,216 175,213
Pensions 24,027 13,192
Property taxes 12,931 11,178
Postretirement benefit 2,768 9,186
Gas cost recovery undercollection 4,502 8,455
Other 18,432 24,130
--------------------------
262,876 241,354
--------------------------
Net Deferred Tax Liability 165,153 164,533
Less: Net Deferred Tax Liability-Current 11,994 14,695
--------------------------
Net Deferred Tax Liability-Noncurrent $ 153,159 $ 149,838
--------------------------
</TABLE>
15. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities" and related SEC accounting
rules.
CAPITALIZED COSTS
<TABLE>
<CAPTION>
(in Thousands) 1997 1996
--------------------------
<S> <C> <C>
Proved Properties $1,033,492 $ 771,817
Unproved Properties 265,809 210,084
--------------------------
1,299,301 981,901
Accumulated Depreciation,
Depletion and Amortization 150,015 79,426
--------------------------
Net Capitalized Costs $1,149,286 $ 902,475
--------------------------
</TABLE>
CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION
Unproved properties held by MCN are excluded from amortization until they have
been evaluated. A summary of costs excluded from amortization at December 31,
1997, and the year in which they were incurred, follows:
<TABLE>
<CAPTION>
Year Costs Incurred
------------------------------------
1995 &
(in Thousands) Total 1997 1996 Prior
------------------------------------------------
<S> <C> <C> <C> <C>
Acquisition $ 147,903 $ 48,077 $ 85,527 $ 14,299
Exploration 117,906 90,057 24,987 2,862
------------------------------------------------
$ 265,809 $ 138,134 $ 110,514 $ 17,161
------------------------------------------------
</TABLE>
The acquisition amount includes all costs incurred to purchase or lease property
with unproved reserves.
59
<PAGE> 28
Notes to Consolidated Financial Statements
COSTS INCURRED
<TABLE>
<CAPTION>
Year Ended December 31 - (in Thousands) 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Acquisition:
Proved properties $ 35,695 $ 60,340 $ 114,956
Unproved properties 66,721 136,142 46,984
-------------------------------------------
102,416 196,482 161,940
Exploration 143,580 65,160 39,106
Development 129,001 120,569 98,099
-------------------------------------------
$ 374,997 $ 382,211 $ 299,145
-------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Operating Revenues:
Unaffiliated customers $ 144,041 $ 94,615 $ 32,089
Affiliated customers 71,787 43,326 37,091
-------------------------------------------
215,828 137,941 69,180
-------------------------------------------
Production Costs 68,364 48,255 18,447
Depreciation, Depletion
and Amortization 73,910 44,469 22,518
-------------------------------------------
142,274 92,724 40,965
-------------------------------------------
Income Before Income Taxes 73,554 45,217 28,215
-------------------------------------------
Income Taxes:
Income tax provision 26,997 16,438 9,805
Gas production tax credits (17,797) (15,878) (11,271)
-------------------------------------------
9,200 560 (1,466)
-------------------------------------------
Results of Operations,
Excluding Corporate
and Interest Costs $ 64,354 $ 44,657 $ 29,681
-------------------------------------------
</TABLE>
RESERVE QUANTITY INFORMATION
MCN's proved reserves are located in the United States. The estimated quantities
of proved reserves disclosed below are based upon estimates by MCN's independent
petroleum engineers.
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------
Gas Oil Gas Oil
(MMcf) (Mbbl) (MMcf) (Mbbl)
----------------------------------------------------
<S> <C> <C> <C> <C>
Proved Developed and
Undeveloped Reserves:
Beginning of year 1,137,729 17,214 858,381 4,685
Revisions of previous
estimates (30,260) (430) 3,274 304
Extensions and
discoveries 165,283 4,435 204,277 1,985
Production (78,218) (3,346) (57,203) (1,086)
Sales of minerals
in place (51,465) (1,019) - -
Purchases of minerals
in place 23,105 8,989 129,000 11,326
----------------------------------------------------
End of year 1,166,174 25,843 1,137,729 17,214
----------------------------------------------------
Proved Developed
Reserves:
Beginning of year 688,995 9,554 563,395 3,349
End of year 590,299 12,601 688,995 9,554
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following presentation of the standardized measure of discounted future net
cash flows is intended to be neither a measure of the fair market value of MCN's
gas and oil properties, nor an estimate of the present value of actual future
cash flows to be obtained as a result of their development and production. It is
based upon subjective estimates of proved reserves only and attributes no value
to categories of reserves other than proved reserves, such as probable or
possible reserves, or to unproved acreage. Furthermore, as it is based on year
end prices and costs adjusted only for existing contractual arrangements (Note
12) and assumes an arbitrary annual discount rate of 10%, it does not reflect
the impact of future price and cost changes. Future income tax expenses were
computed by applying statutory tax rates, adjusted for permanent differences and
tax credits, to estimated future pre-tax net cash flows.
The standardized measure is intended to provide a better means for comparing
the value of MCN's proved reserves at a given time with those of other gas and
oil producing companies than is provided by a simple comparison of raw proved
reserve quantities.
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Future Revenues $3,121,124 $3,867,785 $2,143,506
Future Production Costs 1,155,734 1,322,108 860,134
Future Development Costs 328,739 340,190 199,284
-------------------------------------------
Future Net Cash Flows
Before Income Taxes 1,636,651 2,205,487 1,084,088
Discount to Present
Value at 10% 812,605 1,139,507 536,405
-------------------------------------------
Present Value of Future
Net Cash Flows
Before Income Taxes 824,046 1,065,980 547,683
Future Income Taxes
Discounted at 10% 105,371 226,913 88,954
Future Tax Credits
Discounted at 10% (50,889) (62,207) (63,178)
-------------------------------------------
Standardized Measure of Discounted
Future Net Cash Flows $ 769,564 $ 901,274 $ 521,907
-------------------------------------------
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows were as follows:
<TABLE>
<CAPTION>
(in Thousands) 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Beginning of Year $ 901,274 $ 521,907 $ 311,065
Net changes in sales prices
and production costs (261,154) 126,526 (55,262)
Net change due to revisions
in quantity estimates (26,015) 5,061 (21,294)
Extensions, discoveries, additions
and improved recovery, net
of related costs 153,291 200,026 145,184
Development costs incurred,
previously estimated 103,201 86,810 75,537
Changes in estimated
future development costs (120,219) (81,069) (50,757)
Sales, net of production costs (147,464) (89,686) (50,733)
Net change in future
income taxes 116,366 (85,616) (6,381)
Federal tax credits generated (17,797) (15,878) (11,271)
Sales of reserves in place (83,985) - -
Purchases of reserves in place 48,685 193,550 160,497
Accretion of discount and other 103,381 39,643 25,322
-------------------------------------------
End of Year $ 769,564 $ 901,274 $ 521,907
-------------------------------------------
</TABLE>
60
<PAGE> 29
16. SEGMENT INFORMATION
The business segments of MCN are defined as follows:
a) Diversified Energy - E&P, Pipelines & Processing, Energy Marketing, Gas
Storage & Electric Power; b) Gas Distribution - natural gas distribution and
transmission operations; c) Corporate & Other - corporate and other services.
<TABLE>
<CAPTION>
Diversified Energy
------------------------------------- Intercompany
Gas Corporate Gas Eliminations Consolidated
(in Thousands) Services & Other Distribution & Other(1) Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
OPERATING REVENUES $ 951,269 $ - $ 1,271,286 $ (14,688) $ 2,207,867
OPERATING INCOME (LOSS) 63,966 (4,433) 176,820 - 236,353
OPERATING AND JOINT
VENTURE INCOME (LOSS) 116,952 (4,294) 179,354 - 292,012
DEPRECIATION, DEPLETION AND
AMORTIZATION 75,955 1,220 104,437 - 181,612
IDENTIFIABLE ASSETS 2,135,085 97,819 2,167,637 (71,080) 4,329,461
CAPITAL EXPENDITURES 399,974 4,951 157,732 - 562,657
CAPITAL INVESTMENTS 793,856 5,425 160,329 - 959,610
- --------------------------------------------------------------------------------------------------------------------------------
1996
Operating Revenues $ 734,441 $ - $ 1,276,254 $ (13,427) $ 1,997,268
Operating Income (Loss) 43,333 (2,524) 170,484 - 211,293
Operating and Joint
Venture Income (Loss) 57,921 (499) 171,738 - 229,160
Depreciation, Depletion and
Amortization 46,238 938 98,814 - 145,990
Identifiable Assets 1,528,338 40,714 2,086,325 (21,973) 3,633,404
Capital Expenditures 392,275 2,987 215,318 6,508 617,088
Capital Investments 560,850 2,997 220,393 6,508 790,748
- --------------------------------------------------------------------------------------------------------------------------------
1995
Operating Revenues $ 400,027 $ - $ 1,107,646 $ (12,441) $ 1,495,232
Operating Income (Loss) 24,619 (2,709) 166,319 - 188,229
Operating and Joint
Venture Income (Loss) 28,561 (2,747) 167,660 - 193,474
Depreciation, Depletion and
Amortization 22,502 769 91,314 - 114,585
Identifiable Assets 925,141 21,775 1,893,888 57,836 2,898,640
Capital Expenditures 284,703 6,795 241,567 9,380 542,445
Capital Investments 420,277 7,100 252,081 9,380 688,838
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intercompany eliminations primarily reflect revenues and receivables
related to gas sales and transportation agreements between Gas
Distribution and Gas Services. Other represents MCN's discontinued
computer operations (Note 2h).
17. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC.
Restrictions in the support agreement prohibit recourse on the part of MCNIC's
investors against the stock and assets of MichCon. Under the terms of the
support agreement, the assets of MCN, other than MichCon, and the cash dividends
paid to MCN by any of its subsidiaries are available as recourse to holders of
MCNIC's securities. The carrying value of MCN's assets on an unconsolidated
basis, primarily investments in its subsidiaries other than MichCon, are
$1,093,125,000 at December 31, 1997.
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.
61
<PAGE> 30
Notes to Consolidated Financial Statements
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
MCN
and Other
(in Thousands) Subsidiaries MCNIC MichCon
-----------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost $ 23 $ 25,119 $ 14,353
Accounts receivable 15,525 240,867 210,677
Less-Allowance for doubtful accounts 75 621 15,015
-----------------------------------------
Accounts receivable, net 15,450 240,246 195,662
Accrued unbilled revenue 1,114 -- 91,896
Gas in inventory -- 16,576 40,201
Property taxes assessed applicable to future periods 217 2,835 64,827
Accrued gas cost recovery revenues -- -- 12,862
Other 3,745 17,612 33,361
-----------------------------------------
20,549 302,388 453,162
-----------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities -- 62,060 35,110
Deferred swap losses and receivables -- 51,023 --
Deferred postretirement benefit costs 651 -- --
Deferred environmental costs 2,535 -- 27,699
Prepaid benefit costs (3,418) -- 85,790
Other 7,610 34,287 46,972
-----------------------------------------
7,378 147,370 195,571
-----------------------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND SUBSIDIARIES 1,641,421 528,492 19,643
-----------------------------------------
PROPERTY, PLANT AND EQUIPMENT, at cost 37,918 1,358,504 2,790,352
Less-Accumulated depreciation and depletion 12,951 152,707 1,322,392
-----------------------------------------
24,967 1,205,797 1,467,960
-----------------------------------------
$ 1,694,315 $ 2,184,047 $ 2,136,336
-----------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable $ 4,385 $ 238,952 $ 130,267
Notes payable -- 163,113 241,691
Current portion of long-term debt and capital lease obligations 365 1,557 34,956
Federal income, property and other taxes payable 401 12,681 78,630
Customer deposits 19 -- 16,363
Other 13,599 29,198 67,780
-----------------------------------------
18,769 445,501 569,687
-----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes (4,642) 73,874 83,905
Unamortized investment tax credit 301 -- 32,745
Tax benefits amortizable to customers 443 -- 122,922
Deferred swap gains and payables -- 41,717 --
Accrued environmental costs 3,000 -- 32,000
Minority interest -- 1,905 17,283
Other 10,792 16,586 44,663
-----------------------------------------
9,894 134,082 333,518
-----------------------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations -- 595,457 617,107
Redeemable preferred securities of subsidiaries 505,104 -- --
Common shareholders' equity 1,160,548 1,009,007 616,024
-----------------------------------------
1,665,652 1,604,464 1,233,131
-----------------------------------------
$ 1,694,315 $ 2,184,047 $ 2,136,336
-----------------------------------------
<CAPTION>
DECEMBER 31, 1997
---------------------------
Eliminations
and Consolidated
Reclasses Total
---------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost $ - $ 39,495
Accounts receivable (46,910) 420,159
Less-Allowance for doubtful accounts -- 15,711
---------------------------
Accounts receivable, net (46,910) 404,448
Accrued unbilled revenue -- 93,010
Gas in inventory -- 56,777
Property taxes assessed applicable to future periods -- 67,879
Accrued gas cost recovery revenues -- 12,862
Other (629) 54,089
---------------------------
(47,539) 728,560
---------------------------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities 351 97,521
Deferred swap losses and receivables -- 51,023
Deferred postretirement benefit costs -- 651
Deferred environmental costs -- 30,234
Prepaid benefit costs (2,130) 80,242
Other (3,339) 85,530
---------------------------
(5,118) 345,201
---------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND SUBSIDIARIES (1,632,580) 556,976
---------------------------
PROPERTY, PLANT AND EQUIPMENT, at cost - 4,186,774
Less-Accumulated depreciation and depletion - 1,488,050
---------------------------
- 2,698,724
---------------------------
$(1,685,237) $ 4,329,461
===========================
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable $ (46,848) $ 326,756
Notes payable (3,078) 401,726
Current portion of long-term debt and capital lease obligations -- 36,878
Federal income, property and other taxes payable -- 91,712
Customer deposits -- 16,382
Other (630) 109,947
---------------------------
(50,556) 983,401
---------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes 22 153,159
Unamortized investment tax credit -- 33,046
Tax benefits amortizable to customers -- 123,365
Deferred swap gains and payables -- 41,717
Accrued environmental costs -- 35,000
Minority interest -- 19,188
Other (2,152) 69,889
---------------------------
(2,130) 475,364
---------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations -- 1,212,564
Redeemable preferred securities of subsidiaries -- 505,104
Common shareholders' equity (1,632,551) 1,153,028
---------------------------
(1,632,551) 2,870,696
---------------------------
$(1,685,237) $ 4,329,461
===========================
</TABLE>
62
<PAGE> 31
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1996
-----------------------------------------------------------------
MCN Eliminations
and Other and Consolidated
Subsidiaries MCNIC MichCon Reclasses Total
-----------------------------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost $ 844 $ 19,608 $ 10,010 $ - $ 30,462
Accounts receivable 19,824 198,777 187,143 (24,661) 381,083
Less -Allowance for doubtful accounts 70 710 17,707 - 18,487
-----------------------------------------------------------------
Accounts receivable, net 19,754 198,067 169,436 (24,661) 362,596
Accrued unbilled revenue 1,132 - 107,377 - 108,509
Gas in inventory - 11,251 67,910 - 79,161
Property taxes assessed applicable to future periods 195 2,179 60,592 - 62,966
Accrued gas cost recovery revenues - - 27,672 - 27,672
Other 1,973 28,315 23,025 (451) 52,862
-----------------------------------------------------------------
23,898 259,420 466,022 (25,112) 724,228
-----------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Investment in debt and equity securities - 14,803 20,780 (1) 35,582
Deferred swap losses and receivables - 65,051 - - 65,051
Deferred postretirement benefit costs 696 - 4,863 - 5,559
Deferred environmental costs 3,000 - 28,233 - 31,233
Prepaid benefit costs - - 64,307 (5,059) 59,248
Other 4,204 30,301 29,426 828 64,759
-----------------------------------------------------------------
7,900 110,155 147,609 (4,232) 261,432
-----------------------------------------------------------------
Investments in and Advances to Joint Ventures and Subsidiaries 954,479 236,057 19,479 (944,627) 265,388
-----------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, at cost 31,967 1,017,296 2,668,294 - 3,717,557
Less-Accumulated depreciation and depletion 10,983 81,158 1,243,060 - 1,335,201
-----------------------------------------------------------------
20,984 936,138 1,425,234 - 2,382,356
-----------------------------------------------------------------
$ 1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
-----------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable $ 5,745 $ 205,073 $ 130,725 $ (23,621) $ 317,922
Notes payable - 71,000 265,126 - 336,126
Current portion of long-term debt and capital lease obligations 55 31,460 53,232 - 84,747
Federal income, property and other taxes payable 280 12,578 84,788 - 97,646
Customer deposits 21 - 12,860 - 12,881
Other 9,315 25,701 63,309 (452) 97,873
-----------------------------------------------------------------
15,416 345,812 610,040 (24,073) 947,195
-----------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes (1,625) 74,940 76,523 - 149,838
Unamortized investment tax credit 331 - 34,588 - 34,919
Tax benefits amortizable to customers 183 - 116,313 - 116,496
Deferred swap gains and payables - 48,365 - - 48,365
Accrued environmental costs 3,000 - 32,000 - 35,000
Minority interest - 306 17,604 1 17,911
Other 15,902 18,466 43,954 (5,059) 73,263
-----------------------------------------------------------------
17,791 142,077 320,982 (5,058) 475,792
-----------------------------------------------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations 365 701,357 550,318 - 1,252,040
Redeemable preferred securities of subsidiaries 173,809 - - - 173,809
Common shareholders' equity 799,880 352,524 577,004 (944,840) 784,568
-----------------------------------------------------------------
974,054 1,053,881 1,127,322 (944,840) 2,210,417
-----------------------------------------------------------------
$ 1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
-----------------------------------------------------------------
</TABLE>
63
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997
CONSOLIDATING STATEMENTS OF INCOME ----------------------------------------------------------------------
MCN Eliminations
and Other and Consolidated
(in Thousands) Subsidiaries MCNIC MichCon Reclasses Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 17,607 $ 951,269 $ 1,253,679 $ (14,688) $ 2,207,867
-----------------------------------------------------------------------
Operating Expenses
Cost of gas 9,749 689,182 632,229 (10,090) 1,321,070
Operation and maintenance 2,281 113,018 282,640 (4,598) 393,341
Depreciation, depletion and amortization 2,279 75,630 103,703 - 181,612
Property and other taxes 1,679 13,068 60,744 - 75,491
-----------------------------------------------------------------------
15,988 890,898 1,079,316 (14,688) 1,971,514
-----------------------------------------------------------------------
Operating Income 1,619 60,371 174,363 - 236,353
-----------------------------------------------------------------------
Equity in Earnings of Joint Ventures and Subsidiaries 144,834 52,356 1,199 (142,730) 55,659
-----------------------------------------------------------------------
Other Income and (Deductions)
Interest income 32,857 6,378 4,659 (32,728) 11,166
Interest on long-term debt 408 (30,052) (45,526) - (75,170)
Other interest expense (1,253) (34,382) (8,664) 33,016 (11,283)
Dividends on preferred securities of subsidiaries - - - (31,090) (31,090)
Gains related to DIGP - 2,398 - - 2,398
Other 74 7,669 (1,346) - 6,397
-----------------------------------------------------------------------
32,086 (47,989) (50,877) (30,802) (97,582)
-----------------------------------------------------------------------
Income Before Income Taxes 178,539 64,738 124,685 (173,532) 194,430
Income Tax Provision 2,573 3,886 45,665 - 52,124
-----------------------------------------------------------------------
Net Income 175,966 60,852 79,020 (173,532) 142,306
Dividends on Preferred Securities 31,090 - - (31,090) -
-----------------------------------------------------------------------
Net Income Available for Common Stock $ 144,876 $ 60,852 $ 79,020 $ (142,442) $ 142,306
=======================================================================
<CAPTION>
(in Thousands) TWELVE MONTHS ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 17,469 $ 734,441 $ 1,258,785 $ (13,427) $ 1,997,268
-----------------------------------------------------------------------
Operating Expenses
Cost of gas 9,655 557,340 636,594 (10,011) 1,193,578
Operation and maintenance 785 80,330 294,281 (3,416) 371,980
Depreciation, depletion and amortization 1,940 45,903 98,147 - 145,990
Property and other taxes 2,134 10,531 61,762 - 74,427
-----------------------------------------------------------------------
14,514 694,104 1,090,784 (13,427) 1,785,975
-----------------------------------------------------------------------
Operating Income 2,955 40,337 168,001 - 211,293
-----------------------------------------------------------------------
Equity in Earnings of Joint Ventures and Subsidiaries 152,368 15,915 886 (151,302) 17,867
-----------------------------------------------------------------------
Other Income and (Deductions)
Interest income 12,675 3,220 3,900 (12,561) 7,234
Interest on long-term debt 114 (25,928) (40,703) - (66,517)
Other interest expense (1,218) (14,595) (8,012) 12,561 (11,264)
Dividends on preferred securities of subsidiaries - - - (12,374) (12,374)
Gains related to DIGP - 6,384 - - 6,384
Other 190 (1,125) (2,744) - (3,679)
-----------------------------------------------------------------------
11,761 (32,044) (47,559) (12,374) (80,216)
-----------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 167,084 24,208 121,328 (163,676) 148,944
Income Tax Provision (Benefit) 1,814 (6,925) 41,486 - 36,375
-----------------------------------------------------------------------
Income From Continuing Operations 165,270 31,133 79,842 (163,676) 112,569
-----------------------------------------------------------------------
Discontinued Operations, Net of Taxes
Income from operations - 1,595 - - 1,595
Gain on sale - 36,176 - - 36,176
-----------------------------------------------------------------------
- 37,771 - - 37,771
-----------------------------------------------------------------------
Net Income 165,270 68,904 79,842 (163,676) 150,340
Dividends on Preferred Securities 12,356 - 18 (12,374) -
-----------------------------------------------------------------------
Net Income Available for Common Stock $ 152,914 $ 68,904 $ 79,824 $ (151,302) $ 150,340
-----------------------------------------------------------------------
</TABLE>
64
<PAGE> 33
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF INCOME TWELVE MONTHS ENDED DECEMBER 31, 1995
------------------------------------------------------------------------
MCN Eliminations
and Other and Consolidated
Subsidiaries MCNIC MichCon Reclasses Total
(in Thousands) ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 15,162 $ 411,699 $ 1,080,813 $ (12,442) $ 1,495,232
------------------------------------------------------------------------
Operating Expenses
Cost of gas 7,451 302,273 483,962 (7,493) 786,193
Operation and maintenance 4,027 49,019 294,424 (4,949) 342,521
Depreciation, depletion and amortization 1,671 23,786 89,128 - 114,585
Property and other taxes 1,330 5,362 57,012 - 63,704
------------------------------------------------------------------------
14,479 380,440 924,526 (12,442) 1,307,003
------------------------------------------------------------------------
Operating Income 683 31,259 156,287 - 188,229
------------------------------------------------------------------------
Equity in Earnings of Joint Ventures and Subsidiaries 98,751 3,300 739 (97,545) 5,245
------------------------------------------------------------------------
Other Income and (Deductions)
Interest income 9,685 3,551 3,983 (9,478) 7,741
Interest on long-term debt (76) (9,730) (35,047) - (44,853)
Other interest expense (53) (14,421) (7,053) 9,478 (12,049)
Dividends on preferred securities of subsidiaries - - - (9,610) (9,610)
Gains related to DIGP - - - - -
Other 1,483 (1,505) (6,182) - (6,204)
------------------------------------------------------------------------
11,039 (22,105) (44,299) (9,610) (64,975)
------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 110,473 12,454 112,727 (107,155) 128,499
Income Tax Provision (Benefit) 2,118 (7,792) 41,004 - 35,330
------------------------------------------------------------------------
Income From Continuing Operations 108,355 20,246 71,723 (107,155) 93,169
Discontinued Operations, Net of Taxes - 3,587 - - 3,587
------------------------------------------------------------------------
Net Income 108,355 23,833 71,723 (107,155) 96,756
Dividends on Preferred Securities 9,375 - 235 (9,610) -
------------------------------------------------------------------------
Net Income Available for Common Stock $ 98,980 $ 23,833 $ 71,488 $ (97,545) $ 96,756
------------------------------------------------------------------------
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in Thousands) TWELVE MONTHS ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Cash Flow From Operating Activities $ 97,490 $ 148,242 $ 187,263 $ (89,611) $ 343,384
------------------------------------------------------------------------
Cash Flow From Financing Activities
Notes payable, net - 94,513 (23,435) (3,078) 68,000
Capital contributions received from
(distributions paid to) affiliates, net (3,985) 603,150 - (599,165) -
Dividends paid (72,851) - (40,000) 40,000 (72,851)
Preferred securities dividends paid (31,090) - - 31,090 -
Issuance of common stock 294,402 - - - 294,402
Issuance of preferred securities 326,521 - - - 326,521
Issuance of long-term debt - 149,190 124,051 - 273,241
Long-term commercial paper and credit facilities, net - (261,822) - - (261,822)
Retirement of long-term debt and preferred securities (55) (32,315) (76,854) - (109,224)
Other - 4,612 - - 4,612
------------------------------------------------------------------------
Net cash provided from (used for) financing activities 512,942 557,328 (16,238) (531,153) 522,879
------------------------------------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (6,559) (399,586) (155,208) (1) (561,354)
Acquisitions - (166,553) - - (166,553)
Investment in debt and equity securities - (48,441) (31,375) 16,693 (63,123)
Investment in joint ventures and subsidiaries (604,750) (151,360) (304) 603,772 (152,642)
Sale of E&P property and equipment - 64,200 - - 64,200
Sale of investment in joint ventures - 3,165 - - 3,165
Other 56 (1,484) 20,205 300 19,077
------------------------------------------------------------------------
Net cash used for investing activities (611,253) (700,059) (166,682) 620,764 (857,230)
------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (821) 5,511 4,343 - 9,033
Cash and Cash Equivalents, January 1 844 19,608 10,010 - 30,462
------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 23 $ 25,119 $ 14,353 $ - $ 39,495
========================================================================
</TABLE>
65
<PAGE> 34
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS TWELVE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------------
MCN Eliminations
and Other and Consolidated
(in Thousands) Subsidiaries MCNIC MichCon Reclasses Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
----------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net - 19,000 68,491 - 87,491
Capital contributions received from
(distributions paid to) affiliates, net (3,069) 41,195 1,614 (39,740) -
Dividends paid (62,875) - (11,263) 11,263 (62,875)
Preferred securities dividends paid (12,356) - (54) 12,410 -
Issuance of common stock 17,264 - - - 17,264
Issuance of preferred securities 77,218 - - - 77,218
Issuance of long-term debt - 328,895 69,645 - 398,540
Long-term commercial paper and credit facilities, net - (62,835) - - (62,835)
Retirement of long-term debt and preferred securities (55) (1,701) (6,384) 1 (8,139)
Other (6,249) - - - (6,249)
---------------------------------------------------------------
Net cash provided from financing activities 9,878 324,554 122,049 (16,066) 440,415
---------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (5,474) (392,181) (212,668) - (610,323)
Acquisitions - (133,201) - - (133,201)
Investment in debt and equity securities - (11,313) (15,590) - (26,903)
Investment in joint ventures and subsidiaries (42,809) (35,793) (278) 42,663 (36,217)
Sale of E&P property - 621 - - 621
Sale of Genix - 132,889 - - 132,889
Sale of investment in joint ventures - 36,000 - - 36,000
Other 546 2,732 6,334 (22) 9,590
---------------------------------------------------------------
Net cash used for investing activities (47,737) (400,246) (222,202) 42,641 (627,544)
---------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 676 8,986 1,541 - 11,203
CASH AND CASH EQUIVALENTS, JANUARY 1 168 10,622 8,469 - 19,259
---------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 844 $ 19,608 $ 10,010 $ - $ 30,462
---------------------------------------------------------------
<CAPTION>
(in Thousands) TWELVE MONTHS ENDED DECEMBER 31, 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES $ 29,451 $ 100,271 $ 158,227 $ (19,946) $ 268,003
---------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net - (11,349) 28,178 (1) 16,828
Capital contributions received from
(distributions paid to) affiliates, net (3,066) 54,598 7,000 (58,532) -
Dividends paid (58,193) - (6,500) 6,500 (58,193)
Preferred securities dividends paid (9,375) - (276) 9,651 -
Issuance of common stock 115,725 - - - 115,725
Issuance of long-term debt - 99,880 68,764 220 168,864
Long-term commercial paper and credit facilities, net - 142,657 - - 142,657
Retirement of long-term debt and preferred securities (485) (3,029) (4,757) - (8,271)
Other (678) (1,406) - - (2,084)
---------------------------------------------------------------
Net cash provided from financing activities 43,928 281,351 92,409 (42,162) 375,526
---------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (5,098) (296,356) (235,767) 65 (537,156)
Acquisitions - (83,176) - - (83,176)
Investment in debt and equity securities - (243) - - (243)
Investment in joint ventures and subsidiaries (68,198) (13,810) - 61,469 (20,539)
Sale of investment in joint ventures - 10,803 - - 10,803
Other 56 1,569 (7,705) 574 (5,506)
---------------------------------------------------------------
Net cash used for investing activities (73,240) (381,213) (243,472) 62,108 (635,817)
---------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 139 409 7,164 - 7,712
CASH AND CASH EQUIVALENTS, JANUARY 1 29 10,213 1,305 - 11,547
---------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 168 $ 10,622 $ 8,469 $ - $ 19,259
---------------------------------------------------------------
</TABLE>
66
<PAGE> 35
Supplementary Financial Information
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (UNAUDITED)
(In Thousands of Dollars-Except Per Share Amounts) 1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INCOME
Continuing operations $ 142,306 $ 112,569 $ 93,169 $ 74,598 $ 70,173
Discontinued operations - 37,771 3,587 3,170 2,617
--------------------------------------------------------------------
$ 142,306 $ 150,340 $ 96,756 $ 77,768 72,790
--------------------------------------------------------------------
CASH DIVIDENDS DECLARED ON COMMON STOCK $ 72,851 $ 62,875 $ 58,193 $ 51,492 $ 49,527
--------------------------------------------------------------------
COMMON STOCK DATA
Basic earnings per share
Continuing operations $ 1.95 $ 1.68 $ 1.44 $ 1.26 $ 1.20
Discontinued operations - .57 .05 .05 .04
--------------------------------------------------------------------
$ 1.95 $ 2.25 $ 1.49 $ 1.31 $ 1.24
--------------------------------------------------------------------
Diluted earnings per share
Continuing operations $ 1.91 $ 1.67 $ 1.43 $ 1.25 $ 1.20
Discontinued operations - .56 .05 .05 .04
--------------------------------------------------------------------
$ 1.91 $ 2.23 $ 1.48 $ 1.30 $ 1.24
--------------------------------------------------------------------
Book value per share $ 14.74 $ 11.66 $ 10.02 $ 8.56 $ 7.97
Return on average common shareholders' equity,
excluding gain on sale of Genix 14.7% 15.8% 16.5% 15.8% 16.1%
Average common shares outstanding (000)
Basic 72,887 66,944 64,743 59,394 58,642
Diluted 75,435 67,521 65,144 59,481 58,642
Actual common shares outstanding (000) 78,232 67,304 66,370 59,788 58,993
PROPERTY, PLANT AND EQUIPMENT
Gas Distribution $ 2,813,434 $ 2,689,039 $ 2,496,711 $2,267,187 $2,154,499
Diversified Energy 1,373,340 1,028,518 663,843 337,638 130,030
--------------------------------------------------------------------
4,186,774 3,717,557 3,160,554 2,604,825 2,284,529
Less-Accumulated depreciation and depletion 1,488,050 1,335,201 1,223,808 1,112,387 1,047,941
--------------------------------------------------------------------
$ 2,698,724 $ 2,382,356 $ 1,936,746 $1,492,438 $1,236,588
--------------------------------------------------------------------
ASSETS $ 4,329,461 $ 3,633,404 $ 2,898,640 $2,240,973 $1,881,900
--------------------------------------------------------------------
CAPITAL INVESTMENTS $ 959,610 $ 790,748 $ 688,838 $ 401,969 $ 245,611
--------------------------------------------------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations $ 1,212,564 $ 1,252,040 $ 993,407 $ 685,519 $ 494,821
Redeemable cumulative preferred securities 505,104 173,809 96,449 98,967 5,618
Common shareholders' equity 1,153,028 784,568 664,776 511,495 470,168
--------------------------------------------------------------------
$ 2,870,696 $ 2,210,417 $ 1,754,632 $1,295,981 $ 970,607
--------------------------------------------------------------------
OPERATING REVENUES
Diversified Energy $ 951,269 $ 734,441 $ 400,027 $ 346,500 $ 289,296
--------------------------------------------------------------------
Gas Distribution
Gas sales 1,080,104 1,102,957 931,940 968,998 979,918
End user transportation 84,749 82,467 80,808 76,483 71,718
Intermediate transportation 55,221 48,570 41,985 39,391 31,397
Other 51,212 42,260 52,913 52,098 58,431
--------------------------------------------------------------------
1,271,286 1,276,254 1,107,646 1,136,970 1,141,464
--------------------------------------------------------------------
Less intercompany transactions 14,668 13,427 12,441 9,837 10,006
--------------------------------------------------------------------
$ 2,207,887 $ 1,997,268 $ 1,495,232 $1,473,633 $ 1,420,754
--------------------------------------------------------------------
EFFECT OF WEATHER
Degree days 6,818 7,170 6,777 6,489 6,675
Percent colder (warmer) than normal .8% 5.4% .3% (4.2)% (2.2)%
Increase (decrease) from normal in:
Gas markets (MMcf) 589 10,909 1,488 (4,353) (4,328)
Net income (loss) $ 467 $ 9,886 $ 1,415 (3,984) (3,696)
Basic earnings (loss) per share $ .01 $ .15 $ .02 $ (.07) $ (.06)
-----------
EMPLOYEES
Diversified Energy 289 243 219 190 176
Gas Distribution 2,920 3,117 3,183 3,328 3,420
</TABLE>
67
<PAGE> 36
Supplementary Financial Information
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (UNAUDITED)
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS
Diversified Energy:
Exploration & Production:
Gas production (MMcf) 78,218 57,202 31,420 16,513 2,307
Oil production (Mbbl) 3,346 1,086 388 85 --
Gas and oil production (MMcf Equivalent) 98,294 63,718 33,748 17,023 2,307
Pipelines & Processing(1):
Gas processed (MMcf) 42,761 44,223 14,588 1,942 --
Methanol produced (Thousand Gallons) 60,810 10,545 -- -- --
Transportation (MMcf) 115,975 86,391 4,994 1,194 294
Energy Marketing, Gas Storage and Electric Power(1):
Gas sales (MMcf) 343,719 218,952 170,668 142,352 122,782
Exchange gas deliveries (MMcf) 15,109 22,586 16,462 13,301 10,016
---------------------------------------------------------------------
358,828 241,538 187,130 155,653 132,798
---------------------------------------------------------------------
Electricity sales (Thousands of MW Hours) 1,843 709 272 194 191
---------------------------------------------------------------------
Gas Distribution (MMcf):
Gas sales 209,092 220,958 209,816 204,384 205,372
End user transportation 145,101 146,895 145,761 140,020 128,643
Intermediate transportation 586,496 527,510 374,428 322,969 302,662
---------------------------------------------------------------------
940,689 895,363 730,005 667,373 636,677
---------------------------------------------------------------------
GAS DISTRIBUTION CUSTOMERS
Residential 1,105,749 1,100,101 1,090,039 1,073,306 1,061,679
Total 1,193,122 1,183,443 1,172,613 1,154,545 1,141,986
</TABLE>
- --------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (UNAUDITED)
Due to the seasonal nature of MCN's Gas Distribution operations, revenues, net
income and earnings per share tend to be higher in the first and fourth quarters
of the calendar year. Quarterly earnings per share may not total for the years,
since quarterly computations are based on weighed average common shares
outstanding during each quarter. There were 22,160 and 23,431 holders of record
of MCN common shares at December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 First Second Third Fourth
(In Thousands of Dollars-Except Per Share Amounts) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 788,761 $ 387,925 $ 327,817 $ 703,364 $ 2,207,867
Operating income $ 125,866 $ 27,400 $ 853 $ 82,234 $ 236,353
Operating and joint venture income $ 140,227 $ 37,870 $ 18,202 $ 95,713 $ 292,012
Income from continuing operations $ 81,769 $ 9,076 $ 1,219 $ 50,242 $ 142,306
Earnings per share from continuing operations:
Basic $ 1.21 $ .13 $ .02 $ .64 $ 1.95
Diluted $ 1.19 $ .13 $ .02 $ .62 $ 1.91
Dividends paid per share $ .2425 $ .2425 $ .2425 $ .2550 $ .9825
Average daily trading volume 102,659 153,859 159,057 149,650 141,765
Price per share:
High $ 32.63 $ 30.81 $ 33.00 $ 40.50 $ 40.50
Low $ 28.13 $ 27.38 $ 30.38 $ 32.00 $ 27.38
Close $ 28.13 $ 30.63 $ 32.00 $ 40.38 $ 40.38
- ----------------------------------------------------------------------------------------------------------------------------------
1996
Operating revenues $ 790,638 $ 354,464 $ 243,311 $ 608,855 $ 1,997,268
Operating income (loss) $ 135,707 $ 13,732 $ (10,966) $ 72,820 $ 211,293
Operating and joint venture income (loss) $ 139,750 $ 18,574 $ (8,063) $ 78,899 $ 229,160
Net Income (loss):
Continuing operations $ 79,054 $ 5,207 $ (13,403) $ 41,711 $ 112,569
Discontinued operations 1,013 36,758 -- -- 37,771
---------------------------------------------------------------------
$ 80,067 $ 41,965 $ (13,403) $ 41,711 $ 150,340
---------------------------------------------------------------------
Earnings (loss) per share from continuing operations:
Basic $ 1.19 $ .08 $ (.20) $ .62 $ 1.68
Diluted $ 1.17 $ .08 $ (.20) $ .61 $ 1.67
Dividends paid per share $ .2325 $ .2325 $ .2325 $ .2425 .9400
Average daily trading volume 96,592 84,515 99,434 89,070 92,417
Price per share:
High $ 25.50 $ 25.63 $ 27.63 $ 30.50 $ 30.50
Low $ 21.63 $ 22.75 $ 22.75 $ 26.63 $ 21.63
Close $ 23.13 $ 24.38 $ 26.88 $ 28.88 $ 28.88
</TABLE>
(1)Includes MCN's share of joint ventures
68
<PAGE> 37
Responsibilities for Financial Statements
The consolidated financial statements of MCN Energy Group Inc. were prepared by
management which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Financial information elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
Management is further responsible for maintaining a system of internal
accounting controls, designed to provide reasonable assurance that the books and
records reflect the transactions of MCN and its subsidiaries and that
established policies and procedures are carefully followed. Perhaps the most
important feature in the system of internal control is that it is
continually reviewed for its effectiveness and is augmented by a strong internal
audit program.
Deloitte & Touche LLP, independent certified public accountants, is engaged to
audit the consolidated financial statements of MCN and issue reports thereon.
Their audit is conducted in accordance with generally accepted auditing
standards which comprehend a review of internal accounting controls and tests of
transactions.
MCN's Board of Directors, through its Audit Committee, is responsible for: (1)
assuring that management fulfills its responsibilities in the preparation of the
consolidated financial statements, and (2) engaging the independent public
accountants. The Committee reviews the scope of the audits and the accounting
principles being applied in financial reporting. The independent public
accountants, representatives of management and the internal auditors meet
regularly (separately and jointly) with the Committee to review the activities
of each and to ensure that each is properly discharging its responsibilities.
Alfred R. Glancy III
Alfred R. Glancy III
Chairman, President and Chief Executive Officer
William K. McCrackin
William K. McCrackin
Vice Chairman and Chief Financial Officer
Harold Gardner
Harold Gardner
Vice President, Controller and Chief Accounting Officer
To the Board of Directors:
We have audited the accompanying consolidated statements of financial position
of MCN Energy Group Inc. and subsidiaries (the "Corporation"), as of December
31, 1997 and 1996, and the related consolidated statements of income, cash
flows and capitalization for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 7b to the consolidated financial statements, in 1996 the
Corporation adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 12, 1998
69
<PAGE> 1
EXHIBIT 21.1
MCN ENERGY GROUP INC.: MCN Energy Group Inc. (MCN or the Corporation)
is a diversified energy holding company with markets and investments throughout
North America and in Asia. MCN is organized under the laws of the state of
Michigan and has its principal executive offices at 500 Griswold Street,
Detroit, Michigan 48226. The Corporation owns directly all of the outstanding
common stock of Michigan Consolidated Gas Company (MichCon), Citizens Gas Fuel
Company (Citizens), and MCN Investment Corporation (MCNIC). MCN's major business
groups are Gas Distribution and Diversified Energy. Except where otherwise
indicated, the companies set forth below are Michigan corporations located at
500 Griswold Street, Detroit, Michigan 48226.
GAS DISTRIBUTION
MCN, through the following subsidiaries, operates the largest natural
gas distribution and intrastate transmission system in Michigan and one of the
largest in the United States.
A. MICHIGAN CONSOLIDATED GAS COMPANY (MichCon): MichCon is a public
utility engaged in the distribution and transmission of natural gas
in the state of Michigan. MichCon was organized in 1898 and, with
its predecessors, has been in business for nearly 150 years. MichCon
serves 1.2 million residential, commercial and industrial customers
in the Detroit, Grand Rapids, Ann Arbor, Traverse City and Muskegon
metropolitan areas and in various other communities throughout the
state of Michigan. MichCon conducts substantially all of its
business in the state of Michigan and is subject to the jurisdiction
of the Michigan Public Service Commission (MPSC) as to various phases
of its operations, including gas sales rates, service, and accounting.
Except where otherwise indicated, the companies set forth below are
wholly owned subsidiaries of MichCon.
1. Michigan Consolidated Homes Limited Dividend Housing Corporation
a/k/a MichCon Homes, a Delaware corporation, was sold on
April 1, 1997. MichCon Homes operated a 130-unit, low and moderate
income housing project in Detroit, Michigan.
1
<PAGE> 2
2. MichCon Development Corporation, through its various partnership
arrangements, is engaged in the design, construction and management of
Harbortown, a residential and small commercial development constructed
on a 39 acre parcel along the Detroit River in Detroit, Michigan.
3. Blue Lake Holdings, Inc. (Blue Lake), holds a 25% interest in Blue Lake
Gas Storage Company, a partnership that has converted a depleted
natural gas field in northern Michigan into a 46 Bcf natural gas
storage field which it now operates.
4. MichCon Fuel Services Company markets natural gas as a vehicular fuel
and markets energy to residential and commercial customers through a
transportation brokerage pilot program.
5. MichCon Pipeline Company, through the subsidiaries below, is engaged in
pipeline projects.
a. MichCon Gathering Company owns and operates the Antrim Expansion
Pipeline.
b. Saginaw Bay Pipeline Company is the 66% general partner in Saginaw
Bay Area Limited Partnership, a partnership that operates a
126-mile pipeline which transports natural gas and natural gas
liquids from reserves in east-central Michigan to natural gas
processing plants in northern Michigan.
c. Saginaw Bay Lateral Company is the 46% general partner in a
partnership which owns and operates lateral pipelines
interconnecting with the 126-mile pipeline previously described.
d. Westside Pipeline Company invests in various pipeline assets in
Michigan.
e. Thunder Bay Gathering Company acquired the Thunder Bay Pipeline in
December 1997. Thunder Bay Pipeline consists of 44 miles of
gathering lines situated in Alpena and Alcona Counties in northeast
Michigan.
f. MichCon Lateral Company was formed in 1997 to own, operate and
construct natural gas pipelines.
6. Huron Pipeline Company was formed in 1996 to acquire an ownership
interest in the ANR Link Pipeline, which transports natural gas to
Canada through a pipeline owned by Niagara Gas Transmission Limited, a
subsidiary of The Consumers Gas Co. Ltd.
a. Huron Gas Services Company, formed in 1996, markets pipeline
transportation services.
7. Kalkaska Gas Storage Limited Partnership holds a 53.5% general
partnership interest in the Cold Springs Gas Storage Limited
Partnership in Kalkaska County, Michigan.
B. CITIZENS GAS FUEL COMPANY: Citizens is a public utility engaged in the
distribution and transmission of natural gas. Citizens was organized in
1951 and, with its predecessors, has been in business for more than 140
years. Citizens serves approximately 14,000 residential, commercial and
industrial customers in and around Adrian, Michigan. Citizens'
principal executive offices are located at 127 N. Main Street, Adrian,
Michigan 49221. Citizens conducts all of its business in the state of
Michigan and its rates are set by the Adrian Gas Rate Commission. Other
various phases of its operations are subject to the jurisdiction of the
MPSC.
2
<PAGE> 3
C. SOUTHERN MISSOURI GAS COMPANY: MCN has a 47.5% interest in Southern
Missouri Gas Company, L.P. which is a public utility engaged in the
distribution and transmission of natural gas. SMGC was organized in
1996 and, with its predecessors, has been in business since 1995. SMGC
serves approximately 6,000 residential, commercial, and industrial
customers in Southern Missouri. The principal executive offices of SMGC
are located at 301 East 17th Street, Mountain Grove, Missouri 65711.
SMGC conducts all of its business in the state of Missouri. Its rates
and other various phases of its operations are subject to the
jurisdiction of the Missouri Public Service Commission.
DIVERSIFIED ENERGY
D. MCN INVESTMENT CORPORATION (MCNIC): Organized in 1986, MCNIC is the
holding company for MCN's various diversified energy subsidiaries.
MCNIC, through its subsidiaries and joint ventures, engages in gas and
oil exploration, development and production, provides gathering,
processing and transmission services, engages in non-regulated energy
marketing activities, invests in electric generation and distribution
facilities, provides gas storage services and is involved in other
energy-related businesses. Except where otherwise indicated, the
companies set forth below are wholly owned subsidiaries of MCNIC.
Exploration & Production
1. MCNIC Oil & Gas Company (MOG) is engaged in natural gas
and oil exploration, development and production in the
Midwest/Appalachia, Midcontinent/Gulf Coast and Western
regions of the U.S. The following companies are direct
subsidiaries of MOG:
a. Elmira Antrim Company
b. GeoTrend Exploration, Inc.
c. Green Oak Development Company
d. Green River Antrim Company
e. Otsego Exploration Company, L.L.C.
f. MCNIC Enhanced Production, Inc. has a 75%
interest in Otsego EOR, L.L.C.
g. MCNIC Oil & Gas Midcontinent, Inc.
h. MCNIC Oil & Gas Canada, Inc. (a New Brunswick
corporation)
i. MCNIC Oil & Gas Properties, Inc.
i. SEM, a 50% joint venture, was
established to buy and sell E & P
Properties
j. MCNIC Oil & Gas Reid Properties, Inc. (a
Delaware corporation)
i. Appalachian Methane, Inc., a Delaware
corporation, holds a 50% interest
in Buchanan Production Co., a Virginia
general partnership.
ii. Appalachian Operators, Inc., a Delaware
corporation, holds a 50% interest
in Buchanan Production Co., a Virginia
general partnership.
iii. MCNIC Oakwood Gathering, Inc. (a
Delaware corporation)
k. MCNIC West Coast Company
l. Warner Antrim Company
m. MCNIC Oil & Gas CV Company
n. Pageant Corporation
Pipelines & Processing
MCNIC's Pipelines & Processing businesses are involved in
ventures that gather and transport natural gas from producing fields
to processing plants and/or markets. This business also includes
plants which process natural gas to remove CO2 and other impurities
and recover natural gas liquids. Additionally this segment has an
investment in a methanol production facility and other
energy-related businesses.
3
<PAGE> 4
2. MCNIC Pipeline & Processing Company engages in
pipeline and processing projects through the following
subsidiaries and partnerships.
a. MCNIC Offshore Pipeline & Processing Company holds a 33%
interest in the Blue Dolphin System.
b. MCNIC Michigan Holdings, Inc.
i. MCNIC CSG Pipeline Company holds a 50% interest
in Cardinal States Gathering.
ii. Bagley Processing Company (47% partnership
interest)
iii. Warner Treating Limited Liability Company (95%
interest)
iv. Terra-Westside Processing Company (85% interest)
v. ThunderBay Pipeline Company, L.L.C. (90% interest)
holds 2 CO2 Processing Plants.
c. MCNIC East Coast Pipeline Company holds a 20% interest
in the proposed Portland Natural Gas Transmission
System.
d. MCNIC Jonah Pipeline Company holds a 33% partnership
interest in Jonah Gas Gathering Company.
e. MCNIC Gulf Coast Gathering Company, holds a 1% general
partnership interest in Copano Pipeline & Processing
Group, L.P.
f. MCNIC Gulf Coast Limited, Inc., holds a 49% limited
partnership interest in Copano Pipeline & Processing
Group, L.P., and a 90% limited partnership interest in
CFS/Upper Gulf Coast, L.P., Copano Pipelines/Upper
Gulf Coast, L.P., and CES/Upper Gulf Coast, L.P.
g. MCNIC Mobile Bay Pipeline Company holds a 34.6% interest
in Dauphin Island Gathering Partners.
h. MCNIC Mobile Bay Processing Company holds a 42.8%
interest in Mobile Bay Processing Partners.
i. MCNIC South Texas Gathering Company holds a 1% general
partnership interest in each of CFS/Copano Bay, L.P.,
CFS/South Texas, L.P., CFS/Agua Dulce, L.P., CFS/Upper
Gulf Coast, L.P. and CES/Upper Gulf Coast, L.P.
j. MCNIC Upper Gulf Coast Pipeline & Processing Company
holds a 1% interest in Copano Pipeline/Upper Gulf Coast,
L.P.
k. MCNIC General Methanol Company holds a 1% general
partnership interest in Lyondell Methanol Company, L.P.
l. MCNIC Methanol Holdings Company holds a 24% limited
partnership interest in Lyondell Methanol Company, L.P.
m. American Central Western Oklahoma Gas Company (40%
interest)
n. Crown Asphalt Ridge, L.L.C. (75% interest)
o. Indiana Gathering, L.L.C. (69.5% interest)
p. MCNIC East Texas Gathering Company holds a
39.9% limited partnership interest in American Central
Eastern Texas Gas Company, L.P.
q. MCNIC East Texas Pipeline & Processing Company holds
a 0.1% general partnership interest in American Central
Eastern Texas Gas Company, L.P.
r. MCNIC CO2 Investment Company holds a 41.5% limited
partnership interest in PSCO2, L.P., a CO2 pipeline
project.
s. MCNIC Permian Basin Company holds a 0.99% general
partnership interest in PSCO2, L.P.
t. MCNIC Rodeo Gathering Inc.
4
<PAGE> 5
Energy Marketing, Gas Storage & Electric Power
MCNIC's Energy Marketing, Gas Storage & Electric Power businesses pursue
opportunities throughout North America and Asia, including energy marketing to
large-volume customers, investing in electric generation and distribution
facilities and providing gas storage services to affiliated marketing companies,
other gas utilities, pipeline companies and large-volume gas users.
3. CoEnergy Trading Company is engaged in the purchase and sale of
natural gas to large-volume gas users and gas and electric
utilities in Michigan, the Midwest, the eastern United States and
Canada. CoEnergy Trading Company holds a 50% interest in the
following:
a. U.S. CoEnergy Services, a Wisconsin general partnership
b. Torch CoEnergy, L.L.C.
c. DTE-CoEnergy, L.L.C.
4. CoEnergy Canadian Holdings, Ltd., a New Brunswick corporation, was
formed to market and sell natural gas in Canada and the
northeastern United States.
5. CoEnergy Supply Company engages in the purchase and sale of natural
gas, a portion of which is produced by subsidiaries of MCNIC Oil &
Gas Company.
6. MCNIC Gas Storage Company
a. South Romeo Gas Storage Company, a Michigan partnership in which
MCNIC Gas Storage Company has a 50% interest, owns and operates
the Washington 28 Gas Storage Field, a 10 Bcf storage field in
southeastern Michigan which provides storage services to MCNIC's
Energy Marketing and Electric Power operations. South Romeo Gas
Storage Company holds a 33% interest in South Romeo Gas Storage
Corporation.
b. W-10 Holdings, Inc., holds a 50% interest in Washington 10
Storage Partnership, a partnership that is developing and will
operate the Washington 10 Storage Field, a 42 Bcf storage field
in southeastern Michigan. Washington 10 Storage Partnership owns
Washington 10 Storage Corporation.
c. MCNIC Gas Storage Company, a subsidiary of MCNIC, sold its 25%
interest in Blue Lake Gas Storage Company in December 1997.
d. The Orchards Golf Limited Partnership, a Michigan partnership in
which MCNIC Gas Storage Company has a 50% interest, developed,
owns and operates a residential community and golf course on 520
acres of land above the South Romeo gas storage field in
southeastern Michigan.
7. MCNIC Power Company pursues domestic and international power
generation related opportunities.
a. CDC Ada, Inc., is a 99% limited partner in Ada Cogeneration
Limited Partnership, which owns and operates a 30 megawatt
natural gas-fueled cogeneration facility in western
Michigan.
b. MCNIC Ada GP, Inc., was formed in 1996 and holds a 1% general
partnership interest in the Ada Cogeneration Limited
Partnership.
5
<PAGE> 6
c. Ludington Cogeneration Co. is the 1% general partner in Michigan
Power L.P., a joint venture that built and operates a 123 megawatt
natural gas-fueled cogeneration plant in western Michigan.
d. Ludington Cogeneration Holdings, Ltd. is a 49% limited partner in
the 123 megawatt cogeneration plant mentioned above.
e. Summit Computing, Inc., a Delaware corporation, holds a
99% limited partnership interest in Source Midland Limited
Partnership. Source Midland Limited Partnership has an 18.125%
general partnership interest in the Midland Cogeneration Venture
Limited Partnership.
f. Source Cogeneration Company, a Delaware corporation, holds
a 1% general partnership interest in Source Midland Limited
Partnership.
g. Mobile Bay Energy, L.L.C. is constructing a 40 megawatt
cogeneration facility in Alabama (50% interest).
Other
8. MCNIC International Holdings and MCNIC-GP International Holdings, each
of Grand Cayman, Cayman Islands, hold a 99% and 1% interest,
respectively, in IG-ONE LTD of Port-Louis, Mauritius. IG-ONE LTD. has a
40 percent interest in Torrent Power Limited, a joint venture with
Torrent Group of Ahmedabad, India. The joint venture will be involved in
the electric generation and distribution business in western India. IG
-ONE LTD. also holds ownership interests in other power generation
projects in India.
9. MCNIC Nepal Limited holds a 65% ownership interest in a 36 megawatt
hydroelectric power project in Nepal.
10. MCNIC Colombia Holdings was formed to be the shareholder of MCNIC
Colombia International, which holds a 40% interest in an urea processing
plant in Colombia.
11. Bridgewater Holdings, Inc. holds a limited partnership interest in
Bridgewater Place, a Grand Rapids, Michigan office building.
12. Combustion Concepts, Inc., holds patents for the development of
pressurized combustion technologies which provide increased fuel
efficiency, heat uniformity and compactness of equipment.
E. MCN MICHIGAN LIMITED PARTNERSHIP (MCN Michigan): MCN is the 1% general
partner in MCN Michigan, a Michigan limited partnership. MCN Michigan exists
for the sole purpose of issuing its limited partnership interests to the
public in the form of preferred securities and investing the proceeds thereof
in debt securities of MCN.
F. MCN FINANCING I: MCN is the sole owner of MCN Financing I, a Delaware
Business Trust. MCN Financing I exists for the sole purpose of issuing
preferred securities to the public and lending the gross proceeds thereof to
MCN in exchange for MCN's Junior Subordinated Debentures.
G. MCN FINANCING II: MCN is the sole owner of MCN Financing II, a Delaware
Business Trust. MCN Financing II exists for the sole purpose of issuing
preferred securities and lending the gross proceeds thereof to MCN.
6
<PAGE> 7
H. MCN FINANCING III: MCN is the sole owner of MCN Financing III, a Delaware
Business Trust. MCN Financing III exists for the sole purpose of issuing
preferred securities to the public and lending the gross proceeds thereof
to MCN in exchange for MCN's Junior Subordinated Debentures.
I. MCN FINANCING IV: MCN is the sole owner of MCN Financing IV, a Delaware
Business Trust. MCN Financing IV exists for the sole purpose of issuing
preferred securities and lending the gross proceeds thereof to MCN.
J. MCN FINANCING V: MCN is the sole owner of MCN Financing V, a Delaware
Business Trust. MCN Financing V exists for the sole purpose of issuing
preferred securities and lending the gross proceeds thereof to MCN in
exchange for MCN's Junior Subordinated Debentures.
K. MCN FINANCING VI: MCN is the sole owner of MCN Financing VI, a Delaware
Business Trust. MCN Financing VI exists for the sole purpose of issuing
preferred securities and lending the gross proceeds thereof to MCN in
exchange for MCN's Junior Subordinated Debentures.
7
<PAGE> 1
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-02105 and 333-02107 on Form S-8; 333-01523, 333-21175, and 333-45281 on
Form S-3 and Post-Effective Amendment No.1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Energy Group Inc. (the "Corporation"), of our
reports dated February 12, 1998 (which express an unqualified opinion and
include an explanatory paragraph relating to the Corporation's adoption of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"), appearing in and incorporated by reference in this
Annual Report on Form 10-K of the Corporation for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 27, 1998
<PAGE> 1
EXHIBIT 23-2
[RYDER SCOTT COMPANY LETTERHEAD]
February 27, 1998
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
Re: MCN Energy Group Inc.
1997 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Ryder Scott Company Petroleum Engineers consents to the use
of its name and the information contained in its report dated January 22, 1998,
regarding MCN Energy Group Inc.'s oil and gas reserve information as of
December 31, 1997 in its 1997 Annual Report on Form 10-K.
In addition, Ryder Scott Company Petroleum Engineers consents to the
incorporation by reference of said material in Registration Statement Nos.
333-02105 and 333-02107 on Form S-8, 333-01523, 333-21175 and 333-45281 on Form
S-3 and Post Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Energy Group Inc.
Ryder Scott Company Petroleum Engineers has no interest in MCN Energy
Group Inc. or in any affiliated companies or subsidiaries and is not to receive
such interest as payment for such reports and has no director, officer, or
employee otherwise connected with MCN Energy Group Inc. We are not employed by
MCN Energy Group Inc. on a contingent basis.
Very truly yours,
/s/ Ryder Scott Company
Petroleum Engineers
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
CPM/sw
<PAGE> 1
EXHIBIT 23-3
[Miller and Lents, Ltd. LETTERHEAD]
February 24, 1998
MCN Energy Group Inc.
500 Griswold
Detroit, MI 48226
Re: MCN Energy Group Inc.
1997 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Miller and Lents, Ltd. consents to the use of its name and
the information contained in its report dated January 14, 1998, regarding MCN
Energy Group Inc.'s oil and gas reserve information as of December 31, 1997, in
its 1997 Annual Report on Form 10-K.
In addition, Miller and Lents, Ltd. consents to the incorporation by
reference of said material in Registration Statement Nos. 333-02105 and
333-02107 on Form S-8, 333-01523, 333-21175, and 333-45281 on Form S-3 and Post
Effective Amendment No. 1 to Registration Statement No. 33-21930-99 on Form S-8
of MCN Energy Group Inc.
Miller and Lents, Ltd. has no interest in MCN Energy Group Inc. or in
any affiliated companies or subsidiaries and is not to receive such interest as
payment for such reports and has no director, officer, or employee otherwise
connected with MCN Energy Group Inc. We are not employed by MCN Energy Group
Inc. on a contingent basis.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ P. G. Von Tungeln
---------------------
P. G. Von Tungeln
Chairman
PGVT/mk
<PAGE> 1
EXHIBIT 23-4
[S.A. HOLDITCH & ASSOCIATES, INC. LETTERHEAD]
February 27, 1998
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
RE: MCN Energy Group Inc.
1997 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of S.A. Holditch & Associates, Inc. consents to the use of its name
and the information contained in its report dated January 12, 1998, regarding
MCN Energy Group Inc.'s oil and gas reserve information as of December 31, 1997
in its 1997 Annual Report on Form 10-K.
In addition, S.A. Holditch, Inc. consents to the incorporation by reference of
said material in Registration Statement Nos. 333-02105 and 333-02107 on Form
S-8, 333-01523, 333-21175 and 333-45281 on Form S-3 and Post Effective Amendment
No. 1 to Registration Statement No. 33-21930-99 on Form S-8 of MCN Energy Group
Inc.
S.A. Holditch & Associates, Inc. has no interest in MCN Energy Group Inc. or in
any affiliated companies or subsidiaries and is not to receive such interest as
payment for such reports and has no director, officer, or employee otherwise
connected with MCN Energy Group Inc. We are not employed by MCN Energy Group
Inc. on a contingent basis.
Very truly yours,
S.A. HOLDITCH & ASSOCIATES, INC.
/s/ W. Denton Copeland
W. Denton Copeland
Vice President
<PAGE> 1
EXHIBIT 23-5
[WILLIAMSON PETROLEUM CONSULTANTS, INC. LETTERHEAD]
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
Williamson Petroleum Consultants, Inc. hereby consents to the use of its
name and the information contained in its report, "Evaluation of Proved
Oil and Gas Reserves to the Interests of MCNIC Oil & Gas Company in
Various Enhanced Oil Recovery Projects Effective December 31, 1997 for
Disclosure to the Securities and Exchange Commission, Williamson Project
7.8527" dated January 14, 1998, regarding MCN Energy Group Inc.'s oil and
gas reserve information as of December 31, 1997 in its 1997 Annual Report
on Form 10-K.
In addition, as independent oil and gas consultants, Williamson Petroleum
Consultants, Inc. hereby consents to the incorporation by reference of
said material in Registration Statement Nos. 333-02105 and 333-02107 on
Form S-8, 333-01523, 333-21175 and 333-45281 on Form S-3 and Post
Effective Amendment No. 1 to Registration Statement No. 33-21930-99 on
Form S-8 of MCN Energy Group Inc.
Williamson Petroleum Consultants, Inc. has no interest in MCN Energy
Group Inc. or in any affiliated companies or subsidiaries and is not to
receive such interest as payment for such reports and has no director,
officer, or employee otherwise connected with MCN Energy Group Inc. We
are not employed by MCN Energy Group Inc. on a contingent basis.
/s/ Williamson Petroleum Consultants, Inc.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
February 27, 1998
<PAGE> 1
EXHIBIT 23-6
[QUESTA ENGINEERING CORPORATION LETTERHEAD]
February 24, 1998
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
RE: MCN Energy Group Inc.
1997 Annual Report on Form 10-K
Ladies and Gentlemen:
The firm of Questa Engineering Corporation consents to the use of its name and
the information contained in this report dated January 6, 1998, regarding MCN
Energy Group Inc.'s oil and gas reserve information as of December 31, 1997 in
its 1997 Annual Report on Form 10-K.
In addition, Questa Engineering Corporation consents to the incorporation by
reference of said material in Registration Statement Nos. 333-02105 and
333-02107 on Form S-8, 333-01523, 333-21175 and 333-45281 on Form S-3 and Post
Effective Amendment No. 1 to Registration Statement No. 33-21930-99 on Form S-8
of MCN Energy Group Inc.
Questa Engineering Corporation has no interest in MCN Energy Group Inc. or in
any affiliated companies or subsidiaries and is not to receive such interest as
payment for such reports and has no director, officer, or employee otherwise
connected with MCN Energy Group Inc. We are not employed by MCN Energy Group
Inc. on a contingent basis.
Very truly yours,
QUESTA ENGINEERING CORPORATION
/s/ Dave O. Cox
Dave O. Cox, Vice President
<PAGE> 1
EXHIBIT 23-7
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
February 27, 1998
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
RE: MCN Energy Group Inc.
1997 Annual Report on From 10-K
Ladies and Gentlemen:
The firm of Netherland, Sewell & Associates, Inc. consents to the use of
its name and the information contained in this report dated January 15, 1998,
regarding MCN Energy Group Inc.'s oil and gas reserve information as of December
31, 1997 in its 1997 Annual Report on Form 10-K.
In addition, Netherland, Sewell & Associates, Inc. consents to the
incorporation by reference of said material in registration Statement Nos.
333-02105 and 333-02107 on Form S-8, 333-01523, 333-21175, and 333-45281 on Form
S-3, and Post Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 of MCN Energy Group Inc.
Netherland, Sewell & Associates, Inc. has no interest in MCN Energy Group
Inc. or in any affiliated companies or subsidiaries and is not to receive such
interest as payment for such reports and has no director, officer, or employee
otherwise connected with MCN Energy Group Inc. We are not employed by MCN Energy
Group Inc. on a contingent basis.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Clarence M. Netherland
---------------------------------
Clarence M. Netherland
Chairman
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Stephen E. Ewing
---------------------
Stephen E. Ewing
<PAGE> 2
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ William K. McCrackin
--------------------------
William K. McCrackin
<PAGE> 3
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Roger Fridholm
--------------------
Roger Fridholm
<PAGE> 4
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Frank M. Hennessey
------------------------
Frank M. Hennessey
<PAGE> 5
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Thomas H. Jeffs II
-----------------------
Thomas H. Jeffs II
<PAGE> 6
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Bill M. Thompson
----------------------
Bill M. Thompson
<PAGE> 7
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Dale A. Johnson
----------------------
Dale A. Johnson
<PAGE> 8
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, her true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in her name and on her behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Helen O. Petrauskas
------------------------
Helen O. Petrauskas
<PAGE> 9
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Harold Gardner, and each of them, his true and lawful
attorneys and agents, each with full power and authority (acting alone and
without the others) to execute in his name and on his behalf and to file with
the Securities and Exchange Commission an Annual Report on Form 10-K for the
year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Howard F. Sims
--------------------
Howard F. Sims
<PAGE> 10
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III
and Daniel L. Schiffer, and each of them, his true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in his name and on his behalf and to file with the Securities and
Exchange Commission an Annual Report on Form 10-K for the year ended December
31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Harold Gardner
--------------------
Harold Gardner
<PAGE> 11
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Daniel L. Schiffer and
Harold Gardner, and each of them, his true and lawful attorneys and agents, each
with full power and authority (acting alone and without the other) to execute in
his name and on his behalf and to file with the Securities and Exchange
Commission an Annual Report on Form 10-K for the year ended December 31, 1997,
including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 25th
day of February, 1998.
/s/ Alfred R. Glancy III
--------------------------
Alfred R. Glancy III
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 39,495
<SECURITIES> 0
<RECEIVABLES> 420,159
<ALLOWANCES> 15,711
<INVENTORY> 56,777
<CURRENT-ASSETS> 728,560
<PP&E> 4,186,774
<DEPRECIATION> 1,488,050
<TOTAL-ASSETS> 4,329,461
<CURRENT-LIABILITIES> 983,401
<BONDS> 1,212,564
505,104
0
<COMMON> 782
<OTHER-SE> 1,152,246
<TOTAL-LIABILITY-AND-EQUITY> 4,329,461
<SALES> 0
<TOTAL-REVENUES> 2,207,867
<CGS> 0
<TOTAL-COSTS> 1,971,514
<OTHER-EXPENSES> (6,397)
<LOSS-PROVISION> 21,934
<INTEREST-EXPENSE> 86,453
<INCOME-PRETAX> 194,430
<INCOME-TAX> 52,124
<INCOME-CONTINUING> 142,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,306
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.91
</TABLE>
