<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 1998:
Common Stock, par value $.01 per share: 79,221,082
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<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 38
Item 6. Exhibits and Reports on Form 8-K.................... 39
SIGNATURE................................................... 40
</TABLE>
ii
<PAGE> 3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results reflect property write-downs, investment losses and restructuring
charges -- MCN experienced losses in the 1998 third quarter, nine- and
twelve-month periods of $177.2 million, $306.7 million and $256.5 million,
respectively. Results for all 1998 periods were unfavorably affected by several
unusual charges which reduced earnings in total by $169.2 million for the 1998
third quarter and $389.6 million for the 1998 nine- and twelve-month periods. As
subsequently discussed, the unusual charges consist of property write-downs,
investment losses and restructuring charges.
Excluding the unusual charges, MCN's earnings decreased $9.2 million for the
1998 third quarter and nine-month period and decreased $.7 million for the 1998
twelve-month period, as compared to the corresponding 1997 periods. The earnings
comparisons reflect the effects of low energy prices and abnormally warm
weather, partially offset by reduced operating costs in the Gas Distribution
segment. Diluted per share comparisons for the 1998 nine- and twelve-month
periods reflect an increase in the average number of shares outstanding due to
the June 1997 issuance of 9,775,000 shares of new common stock.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------------- ------------------ -------------------
1998 1997 1998 1997 1998 1997
------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS) (in Millions)
Diversified Energy:
Before unusual charges.............. $ (.2) $ 17.8 $ 25.3 $43.6 $ 43.0 $ 57.0
Unusual charges (Notes 3a, 3b and
4)............................... (152.5) -- (372.9) -- (372.9) --
------- ------ ------- ----- ------- ------
(152.7) 17.8 (347.6) 43.6 (329.9) 57.0
------- ------ ------- ----- ------- ------
Gas Distribution:
Before unusual charges.............. (7.8) (16.6) 57.6 48.5 90.1 76.8
Unusual charges (Note 3c)........... (16.7) -- (16.7) -- (16.7) --
------- ------ ------- ----- ------- ------
(24.5) (16.6) 40.9 48.5 73.4 76.8
------- ------ ------- ----- ------- ------
Net Income (Loss):
Before unusual charges.............. (8.0) 1.2 82.9 92.1 133.1 133.8
Unusual charges (Notes 3 and 4)..... (169.2) -- (389.6) -- (389.6) --
------- ------ ------- ----- ------- ------
$(177.2) $ 1.2 $(306.7) $92.1 $(256.5) $133.8
======= ====== ======= ===== ======= ======
DILUTED EARNINGS (LOSS) PER SHARE
Diversified Energy:
Before unusual charges.............. $ -- $ .23 $ .32 $ .62 $ .55 $ .82
Unusual charges (Notes 3a, 3b and
4)............................... (1.93) -- (4.74) -- (4.75) --
------- ------ ------- ----- ------- ------
(1.93) .23 (4.42) .62 (4.20) .82
------- ------ ------- ----- ------- ------
Gas Distribution:
Before unusual charges.............. (.10) (.21) .73 .65 1.14 1.04
Unusual charges (Note 3c)........... (.21) -- (.21) -- (.21) --
------- ------ ------- ----- ------- ------
(.31) (.21) .52 .65 .93 1.04
------- ------ ------- ----- ------- ------
Diluted Earnings (Loss) Per Share:
Before unusual charges.............. (.10) .02 1.05 1.27 1.69 1.86
Unusual charges (Notes 3 and 4)..... (2.14) -- (4.95) -- (4.96) --
------- ------ ------- ----- ------- ------
$ (2.24) $ .02 $ (3.90) $1.27 $ (3.27) $ 1.86
======= ====== ======= ===== ======= ======
</TABLE>
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION -- MCN's objective is to achieve competitive, long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in this
portfolio-management strategy is the frequent review of internal and external
factors affecting the company's investments. Therefore, the pace of new
investments and the disposition of existing assets are subject to change.
Reflecting this strategy, MCN has decided to: realign the company in order to
improve operating efficiencies through a more streamlined organizational
structure; sell its Exploration & Production (E&P) oil and gas properties in
whole or part; and reduce planned capital investment levels to approximately
$600 million to $700 million annually, which will be invested primarily in North
America. MCN will continue to review the overall mix of its existing portfolio
and the level of new investments.
UNUSUAL CHARGES -- As previously discussed, MCN recorded several unusual
charges, consisting of property write-downs, investment losses and restructuring
charges, which reduced earnings in total by $169.2 million for the 1998 third
quarter and $389.6 million for the 1998 nine- and twelve-month periods. A
detailed discussion of each unusual charge by business unit follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
QUARTER 9 MONTHS 12 MONTHS
-------------------- -------------------- --------------------
NET DILUTED NET DILUTED NET DILUTED
INCOME EPS INCOME EPS INCOME EPS
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
UNUSUAL CHARGES
(in Millions, Except Per Share
Amounts)
Diversified Energy:
Exploration & Production (Note
3a)............................ $ (54.6) $ (.69) $(275.0) $(3.50) $(275.0) $(3.50)
Pipelines & Processing (Note
3b)............................ (89.5) (1.13) (89.5) (1.13) (89.5) (1.14)
Electric Power (Note 4)........... (1.6) (.02) (1.6) (.02) (1.6) (.02)
Corporate & Other (Note 4)........ (6.8) (.09) (6.8) (.09) (6.8) (.09)
------- ------ ------- ------ ------- ------
(152.5) (1.93) (372.9) (4.74) (372.9) (4.75)
Gas Distribution (Note 3c).......... (16.7) (.21) (16.7) (.21) (16.7) (.21)
------- ------ ------- ------ ------- ------
$(169.2) $(2.14) $(389.6) $(4.95) $(389.6) $(4.96)
======= ====== ======= ====== ======= ======
</TABLE>
Exploration & Production (E&P) recorded an $83.9 million pre-tax ($54.6 million
net of taxes) write-down in the 1998 third quarter, and a write-down in the 1998
second quarter of $333.0 million pre-tax ($216.4 million net of taxes) relating
to its oil & gas properties. These write-downs reflect the impact of low oil and
gas prices as well as the under-performance of certain oil and gas properties.
The E&P business recognized the write-downs under the full cost method of
accounting as prescribed by the Securities and Exchange Commission. Under the
full cost method of accounting, E&P's capitalized exploration and development
costs at September 30, 1998 and June 30, 1998 exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum of
discounted future net cash flows from the production of proved gas and oil
reserves and the lower of cost or estimated fair value of unproved properties,
net of related income tax effects. Future net cash flows are required to be
estimated based on end-of-quarter prices and costs, unless contractual
arrangements exist, even if any price decline is temporary. A significant
portion of the 1998 second quarter write-down was due to lower-than-expected
exploratory drilling results in the Midcontinent/Gulf Coast region.
During the 1998 second quarter, MCN also recognized a $6.1 million pre-tax ($4.0
million net of taxes) loss from the write-down of an investment in the common
stock of an E&P company. MCN
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
determined that a write-down of this investment was necessary due to a decline
in the fair value of the securities, which was not considered temporary.
Pipelines & Processing recorded a $133.8 million pre-tax ($87.0 million net of
taxes) write-off of its coal fines project in the 1998 third quarter. MCN's coal
fines venture completed the construction of six plants in June 1998 which are
designed to recover particles of coal that have been a waste by-product of coal
mining and then process the particles to create coal briquettes for resale. The
economic viability of the venture is dependent on the briquettes qualifying for
synthetic fuel tax credits and MCN's ability to utilize or sell such credits.
Although the plants were placed in service by June 30, 1998, the date specified
for qualification for the tax credits, operating delays at the plants in the
1998 third quarter have significantly increased the possibility that the
Internal Revenue Service will challenge the project's eligibility for tax
credits. In addition, there is uncertainty as to whether MCN would be able to
utilize or sell the credits. These factors led to MCN's decision to record an
impairment loss related to the project.
During the 1998 third quarter, MCN also recorded an impairment loss of $3.9
million pre-tax ($2.5 million net of taxes) relating to an acquired
out-of-service pipeline in Michigan. This pipeline was acquired, along with
related easements and rights-of-way, for future development. MCN reviewed the
developmental business alternatives for these assets and as a result, determined
that the development of these assets is unlikely, and accordingly, recorded an
impairment loss.
Electric Power recorded a $2.5 million pre-tax ($1.6 million net of taxes)
restructuring charge in the 1998 third quarter related to its decision not to
pursue the development of certain international power projects. The charge was
incurred in connection with MCN's refocused strategic plan and its decision to
exit certain international power projects and limit future international capital
investment to projects where it has existing commitments.
Corporate & Other recorded a $10.4 million pre-tax ($6.8 million net of taxes)
restructuring charge in the 1998 third quarter related to the corporate
realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment includes cost saving
initiatives expected to reduce future operating expenses by approximately $15
million per year. The charge includes $4.7 million pre-tax for employee
severance and termination benefits and $5.7 million pre-tax relating to net
lease expenses and the write-down of fixed assets.
Gas Distribution recorded a $24.8 million pre-tax ($11.2 million net of taxes
and minority interest) write-down of certain gas gathering properties in the
1998 third quarter. As a result of the need to divert certain untreated gas away
from the gathering system, a new gas reserve analysis was performed in the third
quarter of 1998. This analysis revealed that projected cash flows from the
gathering system were not sufficient to cover the system's book value, and
therefore, an impairment loss was recorded.
During the third quarter of 1998, MCN also recorded an $8.5 million pre-tax
($5.5 million net of taxes) loss from the write-down of an investment in a
Missouri gas distribution company. As a result of MCN's September 1998 refocused
strategic direction, MCN has decided to sell this investment. The loss
represents the amount by which the carrying value exceeded the estimated fair
value of the investment at September 30, 1998.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DIVERSIFIED ENERGY
Results impacted by unusual charges and low energy prices -- The Diversified
Energy group reported losses in all three 1998 periods due to the property
write-downs, investment loss and restructuring charges, as previously discussed.
Excluding these unusual items, Diversified Energy's earnings for the 1998 third
quarter, nine- and twelve-month periods declined by $18.0 million, $18.3 million
and $14.0 million, respectively, from the corresponding 1997 periods. These
results reflect the effect of lower oil prices, and higher production-related
expenses on E&P operating and joint venture income, as well as higher financing
costs. Additionally, the 1998 third quarter and nine-month periods reflect
reduced contributions from the Pipelines & Processing business as a result of
lower methanol prices and operating losses related to the start-up of its coal
fines project. Partially offsetting the decreases in all 1998 periods were
increased operating and joint venture income posted by the Energy Marketing, Gas
Storage & Electric Power business, primarily from increased electricity sales.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS (in
Millions)
Operating Revenues*.................... $ 228.9 $208.7 $ 734.0 $646.0 $1,039.3 $865.7
------- ------ -------- ------ -------- ------
Operating Expenses*
Property write-downs (Notes 3a and
3b)............................... 221.6 -- 554.6 -- 554.6 --
Restructuring charges (Note 4)....... 12.9 -- 12.9 -- 12.9 --
Other................................ 228.2 195.9 715.7 603.3 1,004.2 805.3
------- ------ -------- ------ -------- ------
462.7 195.9 1,283.2 603.3 1,571.7 805.3
------- ------ -------- ------ -------- ------
Operating Income (Loss)................ (233.8) 12.8 (549.2) 42.7 (532.4) 60.4
------- ------ -------- ------ -------- ------
Equity in Earnings of Joint Ventures... 17.9 17.1 46.1 40.0 59.2 45.7
------- ------ -------- ------ -------- ------
Other Income & (Deductions)*
Interest income...................... .9 2.6 5.3 4.6 7.4 5.2
Interest expense..................... (16.4) (7.2) (38.1) (26.8) (43.5) (34.6)
Dividends on preferred securities of
Subsidiaries...................... (8.2) (9.8) (27.2) (21.3) (37.0) (25.4)
Investment loss (Note 3a)............ -- -- (6.1) -- (6.1) --
Other................................ (.3) 4.5 12.9 7.2 16.0 9.7
------- ------ -------- ------ -------- ------
(24.0) (9.9) (53.2) (36.3) (63.2) (45.1)
------- ------ -------- ------ -------- ------
Income (Loss) Before Income Taxes...... (239.9) 20.0 (556.3) 46.4 (536.4) 61.0
------- ------ -------- ------ -------- ------
Income Taxes
Current and deferred provision
(benefit)......................... (84.7) 7.2 (197.7) 16.0 (190.9) 21.2
Federal tax credits.................. (2.5) (5.0) (11.0) (13.2) (15.6) (17.2)
------- ------ -------- ------ -------- ------
(87.2) 2.2 (208.7) 2.8 (206.5) 4.0
------- ------ -------- ------ -------- ------
Net Income (Loss)
Before unusual charges............... (.2) 17.8 25.3 43.6 43.0 57.0
Unusual charges (Notes 3a, 3b and
4)................................ (152.5) -- (372.9) -- (372.9) --
------- ------ -------- ------ -------- ------
$(152.7) $ 17.8 $ (347.6) $ 43.6 $ (329.9) $ 57.0
======= ====== ======== ====== ======== ======
</TABLE>
* Includes intercompany transactions
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1998 third quarter, nine- and
twelve-month periods, excluding the unusual charges, declined by $11.3 million,
$18.3 million and $11.8 million, respectively. Results for all 1998 periods
reflect reduced contributions from the E&P business. The 1998 third quarter and
nine-month period also reflect lower income from the Pipelines & Processing
group. The 1998 nine- and twelve-month periods were affected by increased
Corporate & Other expenses. All 1998 periods were also favorably impacted by the
continued growth within the Energy Marketing, Gas Storage & Electric Power
business.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
------- ----- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME
(LOSS)
(in Millions)
Before Unusual Charges:
Exploration & Production.............. $ 6.5 $16.0 $ 23.4 $46.9 $ 34.5 $ 60.9
Pipelines & Processing................ 3.5 7.8 19.1 21.1 27.1 25.4
Energy Marketing, Gas Storage &
Electric Power..................... 8.3 8.1 27.4 18.9 38.3 24.9
Corporate & Other..................... .3 (2.0) (5.5) (4.2) (5.6) (5.1)
------- ----- ------- ----- ------- ------
18.6 29.9 64.4 82.7 94.3 106.1
Unusual Charges (Notes 3a, 3b and 4).... (234.5) -- (567.5) -- (567.5) --
------- ----- ------- ----- ------- ------
$(215.9) $29.9 $(503.1) $82.7 $(473.2) $106.1
======= ===== ======= ===== ======= ======
</TABLE>
EXPLORATION & PRODUCTION operating and joint venture results, excluding the
write-downs, decreased by $9.5 million, $23.5 million and $26.4 million for the
1998 third quarter, nine- and twelve-month periods, respectively. Earnings for
the 1998 periods reflect a sharp decline in average oil sales prices, partially
offset by an increase in average gas sales prices. Oil sales prices declined by
$4.52 per barrel (Bbl) or 28% in the 1998 third quarter, $4.45 per Bbl or 26% in
the current nine-month period and $4.24 per Bbl or 23% in the current
twelve-month period. Gas sales prices increased by $.19 per thousand cubic feet
(Mcf) or 10% in the 1998 third quarter, $.11 per Mcf or 6% in the 1998 nine-
month period and $.07 per Mcf or 4% in the current twelve-month period. The
impact of fluctuations in natural gas and oil sales prices on E&P operating and
joint venture income was mitigated by hedging with swap and futures agreements,
as discussed in the "Risk Management Strategy" section that follows.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf).................. 21.3 19.4 62.4 57.6 83.0 74.1
Oil Production (million Bbl).......... .5 1.0 2.1 2.3 3.1 2.8
Gas and Oil Production (Bcf
equivalent)......................... 24.3 25.6 75.2 71.6 101.9 90.9
Average Gas Selling Price (per Mcf)... $ 2.03 $ 2.02 $ 2.07 $ 2.21 $ 2.23 $ 2.30
Effect of Hedging (per Mcf)........... .02 (.16) (.03) (.28) (.21) (.35)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per
Mcf)................................ $ 2.05 $ 1.86 $ 2.04 $ 1.93 $ 2.02 $ 1.95
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl)..... $10.64 $15.65 $11.55 $17.52 $12.99 $18.00
Effect of Hedging (per Bbl)........... 1.12 .63 1.28 (.24) .82 .05
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per
Bbl)................................ $11.76 $16.28 $12.83 $17.28 $13.81 $18.05
====== ====== ====== ====== ====== ======
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
E&P operating and joint venture income for all 1998 periods also reflects higher
production-related expenses which in total increased per Mcf equivalent by $.26,
$.22 and $.18 for the 1998 third quarter, nine- and twelve-month periods,
respectively. Additionally, earnings comparisons for all periods were affected
by gains recorded in 1997. Specifically, MCN's E&P joint venture sold certain
undeveloped properties generating gains of $1.6 million in the 1997 third
quarter and gains of $6.3 million in the 1997 nine- and twelve-month periods.
Operating and joint venture income comparisons were also affected by varying
levels of gas and oil production. Overall gas and oil production for the current
nine- and twelve-month periods increased by 3.6 billion cubic feet (Bcf)
equivalent and 11.0 Bcf equivalent, respectively, and decreased for the current
quarter by 1.3 Bcf equivalent. Gas and oil production comparisons were impacted
by the sale of proved producing oil properties since late-1997.
PIPELINES & PROCESSING operating and joint venture results, excluding the
write-offs, decreased by $4.3 million and $2.0 million for the 1998 third
quarter and nine-month period, respectively, and increased by $1.7 million for
the 1998 twelve-month period. The 1998 periods were impacted by $5 million of
operating losses related to the start-up of the coal fines plants and lower
earnings from the 25%-owned methanol production business, which was acquired in
late 1996. Earnings from the methanol production business benefited from strong
methanol prices during 1997, but average prices declined 46% for the current
quarter, 38% for the 1998 nine-month period and 27% for the 1998 twelve-month
period.
Pipelines & Processing operating and joint venture income was also affected by
an increase in transportation volumes for the 1998 periods due to new gas
gathering ventures and the expansion of existing pipeline projects. Volumes
transported increased for the 1998 third quarter, nine- and twelve-month periods
by 12.7 Bcf or 39%, 48.5 Bcf or 60% and 57.2 Bcf or 53%, respectively. Pipelines
& Processing results for the 1998 third quarter and nine-month period were also
positively impacted by a slight increase in the level of volumes treated through
gas processing plants. The 1998 twelve-month period reflects a decrease in
volumes processed. Although gas processing volumes have varied, earnings have
not been significantly affected since gas processing services have lower profit
margins.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------ ------------- --------------
1998 1997 1998 1997 1998 1997
---- ---- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)................................. 12.7 11.6 36.2 34.8 44.2 50.4
Methanol Produced (million gallons)................. 15.2 15.9 45.6 45.8 60.6 56.4
Transportation (Bcf)................................ 45.3 32.6 129.4 80.9 164.5 107.3
</TABLE>
* Includes MCN's share of joint ventures
ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER operating and joint venture
results, excluding the restructuring charges, for the 1998 third quarter,
nine-and twelve-month periods increased by $.2 million, $8.5 million and $13.4
million, respectively. The increase in earnings for the 1998 nine-and
twelve-month periods reflects contributions from the Midland Cogeneration
Venture L. P. (MCV), 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. MCN acquired an initial 18% interest
in MCV in the 1997 second quarter and an additional 5% interest in
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MCV during June 1998. Earnings from MCV for the 1997 periods include a favorable
$2.8 million pre-tax adjustment for a change in accounting for property taxes.
Also contributing to the favorable 1998 results were higher earnings from MCN's
50%-owned, 123 MW Michigan Power cogeneration facility and contributions from
the March 1997 acquisition of a 40% interest in an Indian joint venture.
Improved earnings from the Michigan Power facility are due to a higher
electricity sales rate under its long-term sales contract. The Indian joint
venture holds minority interests in electric distribution companies and power
generation facilities in the state of Gujarat, India.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------- ----------------- -----------------
1998 1997 1998 1997 1998 1997
----- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ENERGY MARKETING & ELECTRIC POWER
STATISTICS*
Gas Sales (Bcf)............................. 114.5 80.4 333.0 241.0 435.8 304.1
Exchange Deliveries (Bcf)................... -- -- 6.8 10.0 11.9 15.1
----- ----- ------- ------- ------- -------
114.5 80.4 339.8 251.0 447.7 319.2
===== ===== ======= ======= ======= =======
Electricity Sales (thousands of MW hours)... 988.0 624.6 2,729.6 1,200.4 3,372.4 1,373.6
===== ===== ======= ======= ======= =======
</TABLE>
* Includes MCN's share of joint ventures
Energy Marketing's operating results also reflect an increase in total gas sales
and exchange deliveries of 34.1 Bcf or 42%, 88.8 Bcf or 35% and 128.5 Bcf or 40%
during the 1998 third quarter, nine- and twelve-month periods, respectively. The
increase in Energy Marketing's gas sales volumes resulted from the expansion of
its market base in the Midwest region of the United States and eastern Canada.
Additionally, Energy Marketing's share of joint venture gas sales volumes has
increased, reflecting growth of its markets in the Gulf Coast region.
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 has hedged a much smaller portion of its oil production.
MCN's Energy Marketing business coordinates all of MCN's hedging activities to
ensure compliance with risk management policies that are periodically reviewed
by MCN's Board of Directors. Certain hedging gains or losses related to gas and
oil production are recorded by MCN's E&P operations. Gains and losses on gas and
oil production-related hedging transactions that are not recorded by MCN's E&P
group are recorded by Energy Marketing.
CORPORATE & OTHER operating and joint venture results, excluding the
restructuring charges, reflect adjustments necessary to reduce or eliminate
accruals for employee incentive awards that are based on MCN's operating or
stock-price performance. Offsetting these savings in the 1998 nine- and
twelve-month periods are increased administrative expenses associated with
corporate management activities charged to Diversified Energy.
OTHER INCOME AND DEDUCTIONS
The 1998 nine- and twelve-month periods reflect higher dividends resulting from
the issuance of $132 million of preferred securities in March 1997 and $200
million of preferred securities in June 1997. In addition, the 1998 nine- and
twelve-month periods reflect an unusual charge of $6.1 million representing the
write-down of an investment in the common stock of an E&P
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
company, as previously discussed. All 1998 periods reflect higher interest costs
on increased borrowings required to finance capital investments in the
Diversified Energy group.
Partially offsetting the higher dividends and interest costs for the 1998 nine-
and twelve-month periods was increased interest income resulting from a $46
million advance made to a Philippine independent power producer (Note 2a). Other
income and deductions comparisons for the 1998 nine- and twelve-month periods
were affected by $9.9 million of pre-tax gains recorded in the 1998 first
quarter from the sale of certain gas sales contracts and a 50% interest in the
30 MW Ada cogeneration facility. The 1998 twelve-month period also reflects a
$3.2 million pre-tax gain from the December 1997 sale of Diversified Energy's
25% interest in the Blue Lake storage project. Other income and deductions for
the 1997 third quarter, nine- and twelve-month periods were affected by pre-tax
gains of $2.4 million, $2.4 million and $4.8 million, respectively, related to
Dauphin Island Gathering Partners (DIGP). In a series of transactions during
1996, MCN sold interests in the DIGP partnership generating gains, of which a
portion was deferred until the third quarter of 1997 when a related option
agreement expired unexercised (Note 2c).
INCOME TAXES
The variations in the current and deferred income tax provision for the 1998
periods reflect fluctuations in pre-tax results. Also impacting income taxes is
a decrease in the level of gas production tax credits generated from E&P
projects, reflecting the June 1998 sale of certain tax credits.
OUTLOOK
MCN's refocused strategic direction emphasizes growth through projects that
offer more predictable, long-term income streams. MCN plans to continue
investing in new pipeline and processing ventures as well as developing its
existing projects. MCN will focus on expanding its Energy Marketing coverage
within existing markets as well as entering new markets through strategic
alliances with other energy providers. MCN intends to expand its Electric Power
business, primarily in projects in North America. In addition, MCN will continue
to pursue opportunities to sell properties in order to optimize its portfolio.
As part of its refocused strategic direction, MCN is in the process of selling
all or part of its E&P properties by mid-1999. It is anticipated that MCN will
incur restructuring charges, including costs associated with employee
reductions, in conjunction with the sale of the E&P properties. The timing and
magnitude of the sale is dependent upon receiving bids that reflect the
long-term value of such properties. The actual sales price of the E&P
properties, as well as the resulting gain or loss, will be impacted by changes
in gas and oil prices. Any gain or loss from the sale will also be affected by
MCNs decision to retain, sell or terminate related E&P hedging contracts.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GAS DISTRIBUTION
Results reflect unusual charges and cost-saving initiatives -- Gas
Distribution's earnings comparisons were affected by the property write-down and
investment loss, as previously discussed. Excluding these unusual charges, the
Gas Distribution Group reported a loss of $7.8 million for the 1998 third
quarter, an improvement of $8.8 million over the comparable 1997 quarter. The
Gas Distribution group typically records third quarter losses due to seasonally
lower demand for natural gas during the summer months. Gas Distribution reported
an increase in earnings, excluding the unusual charges, of $9.1 million and
$13.3 million for the 1998 nine- and twelve-month periods, respectively.
Earnings reflect significantly lower operating expenses as well as the continued
growth in revenues from intermediate transportation services. These improvements
more than offset the lower gross margins reported resulting from reduced gas
sales and end user transportation deliveries which were caused by abnormally
warm weather.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------------ ------------------ ----------------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS
(in Millions)
Operating Revenues*
Gas sales.......................... $ 80.2 $ 79.5 $579.1 $729.5 $ 929.7 $1,076.4
End user transportation............ 16.7 16.3 60.0 61.6 83.1 82.8
Intermediate transportation........ 14.5 12.9 48.4 41.0 62.6 54.4
Other.............................. 12.7 12.3 47.2 36.2 62.3 48.1
------ ------ ------ ------ -------- --------
124.1 121.0 734.7 868.3 1,137.7 1,261.7
Cost of Gas.......................... 32.1 28.9 311.6 420.6 533.0 633.0
------ ------ ------ ------ -------- --------
Gross Margin......................... 92.0 92.1 423.1 447.7 604.7 628.7
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.......... 58.3 64.8 184.2 210.6 260.3 297.1
Depreciation, depletion and
amortization.................... 23.2 26.3 69.5 78.7 95.2 103.0
Property and other taxes........... 12.2 12.9 43.8 47.0 58.1 62.1
Property write-down (Note 3c)...... 24.8 -- 24.8 -- 24.8 --
------ ------ ------ ------ -------- --------
118.5 104.0 322.3 336.3 438.4 462.2
------ ------ ------ ------ -------- --------
Operating Income (Loss).............. (26.5) (11.9) 100.8 111.4 166.3 166.5
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint
Ventures........................... .1 .2 .5 2.2 .8 2.6
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income.................... 1.6 1.2 3.6 3.7 4.6 5.0
Interest expense................... (13.1) (12.0) (41.1) (40.0) (55.6) (52.9)
Investment loss (Note 3c).......... (8.5) -- (8.5) -- (8.5) --
Minority interest.................. 7.1 (.6) 5.9 (1.5) 5.5 (1.4)
Other.............................. .5 .1 1.3 .7 1.0 (1.4)
------ ------ ------ ------ -------- --------
(12.4) (11.3) (38.8) (37.1) (53.0) (50.7)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes.... (38.8) (23.0) 62.5 76.5 114.1 118.4
Income Taxes......................... (14.3) (6.4) 21.6 28.0 40.7 41.6
------ ------ ------ ------ -------- --------
Net Income (Loss)
Before unusual charges............. (7.8) (16.6) 57.6 48.5 90.1 76.8
Unusual charges (Note 3c).......... (16.7) -- (16.7) -- (16.7) --
------ ------ ------ ------ -------- --------
$(24.5) $(16.6) $ 40.9 $ 48.5 $ 73.4 $ 76.8
====== ====== ====== ====== ======== ========
</TABLE>
* Includes intercompany transactions
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GROSS MARGIN
Gas Distribution gross margin (operating revenues less cost of gas) decreased
$.1 million, $24.6 million and $24.0 million in the 1998 third quarter, nine-
and twelve-month periods, respectively, reflecting lower gas sales caused by
abnormally warm weather. These declines were partially offset by increased
revenues from the continued growth in intermediate transportation and other
gas-related services.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1998 1997 1998 1997 1998 1997
----- ----- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percentage Colder (Warmer) Than Normal.... N/M N/M (21.6)% 1.7% (14.5)% 2.5%
Increase (Decrease) From Normal in:
Gas markets (in Bcf).................... (1.5) (.3) (26.7) 1.2 (27.4) 3.7
Net income (in Millions)................ $(1.1) $ (.2) $(23.1) $1.1 $(23.7) $3.3
Diluted earnings per share.............. $(.01) $ -- $ (.29) $.01 $ (.30) $.05
</TABLE>
N/M -- Not meaningful
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $1.1
million for the 1998 third quarter, and decreased by $152.0 million and $146.4
million for the 1998 nine- and twelve-month periods, respectively. The increase
in revenues for the 1998 third quarter was caused by higher gas sales rates
required to recover increased gas costs. As discussed in the "Cost of Gas"
section that follows, Gas Distribution's sales rates are set to recover all of
its reasonably and prudently incurred gas costs. Substantially offsetting the
increase in the 1998 third quarter is the impact of reduced gas sales resulting
from warmer weather. The decreases occurring in the 1998 nine- and twelve-month
periods resulted from reduced gas sales caused by the warmer weather.
Additionally, the decreases in the 1998 nine- and twelve-month periods were
affected by lower gas sales rates required to recover gas costs. Although end
user transportation deliveries were unchanged in the 1998 third quarter, and
declined in the current twelve-month period, revenues increased slightly for
these periods because of an increase in the average transportation rate.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1998 1997 1998 1997 1998 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales................................. 12.8 14.1 117.5 144.0 182.6 212.3
End User Transportation................... 28.6 28.6 102.2 105.8 141.5 144.6
----- ----- ----- ----- ----- -----
41.4 42.7 219.7 249.8 324.1 356.9
Intermediate Transportation*.............. 133.9 164.9 430.8 447.0 570.2 567.5
----- ----- ----- ----- ----- -----
175.3 207.6 650.5 696.8 894.3 924.4
===== ===== ===== ===== ===== =====
</TABLE>
* Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues increased by $1.6 million, $7.4 million and
$8.2 million in the 1998 third quarter, nine- and twelve-month periods,
respectively, due in part to increased fees generated from the transfer of gas
title among and between intermediate transportation service users and various
gas owners. The decrease in intermediate transportation deliveries for the 1998
third quarter and nine-month period reflect lower off-system volumes transported
for customers who pay a fixed fee for intermediate transportation capacity
regardless of actual usage. Although volumes associated with these fixed-fee
customers may vary, the related revenues are not affected. Also
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
affecting intermediate transportation revenues in all three 1998 periods were
additional Antrim gas volumes transported for Michigan gas producers and
brokers. In December 1997, MichCon purchased a pipeline to expand the
transportation capacity of its northern Michigan gathering system. This
expansion made possible an increase of 24.0 Bcf in volumes transported through
September 1998.
OTHER OPERATING REVENUES increased in all 1998 periods due in part to an
increase in gas-related services. Also affecting the 1998 nine- and twelve-month
period comparisons to prior year, are unfavorable adjustments for energy
conservation revenues in the 1997 periods 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 purchased gas
as well as related transportation costs. Under the existing Gas Cost Recovery
(GCR) mechanism, MichCon's sales rates are set to recover all of its reasonably
and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold
had little effect on gross margins.
Cost of gas sold increased in the 1998 third quarter due primarily to decreased
supplier refunds and higher prices paid of $.10 (4%) per Mcf, partially offset
by lower sales volumes from the warmer weather. Cost of gas sold decreased in
the 1998 nine- and twelve-month periods due to weather-driven lower sales
volumes, and lower prices paid of $.27 (9%) and $.05 (2%) per Mcf, respectively.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses decreased for all 1998 periods reflecting
lower uncollectible gas accounts expense, and labor and benefit costs, primarily
resulting from lower pension and retiree healthcare costs. MichCon implemented
an early retirement program in the first quarter of 1998 that reduced its net
workforce by approximately 175 employees or 6%. The cost of the program and the
related savings are largely offsetting in 1998 but will contribute to lower
operating costs in future years.
As discussed in MCN's 1997 Annual Report on Form 10-K, MichCon receives a
significant amount of its heating assistance funding through Michigan Home
Heating Credits, which are funded almost exclusively by the federal Low Income
Home Energy Assistance Program (LIHEAP). In October 1998, Congress approved a
budget that provides for LIHEAP funding at $1.1 billion for the fiscal year
ending September 30, 1999, representing an amount equal to the fiscal year 1998
funding. Any future changes in funding levels may impact MichCon's uncollectible
gas accounts expense.
DEPRECIATION AND DEPLETION decreased by $3.1 million, $9.2 million and $7.8
million in the 1998 third quarter, nine- and twelve-month periods, respectively,
resulting from lower depreciation rates for MichCon's utility property, plant
and equipment that became effective January 1, 1998. Depreciation on higher
plant balances partially offset the effect of lower rates.
PROPERTY AND OTHER TAXES decreased in all 1998 periods. The decrease in the 1998
third quarter was attributable to lower Michigan Single Business taxes resulting
from lower taxable income. This decrease was partially offset by higher property
taxes resulting from higher plant balances. The decreases in the nine- and
twelve-month periods reflect lower property taxes based on MichCon's pending
appeals of its personal property tax assessments as discussed in MCN's 1997
Annual Report on Form 10-K.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OTHER INCOME AND DEDUCTIONS increased in all 1998 periods due to the loss from
writing down the investment in a Missouri gas distribution company. The increase
in other income and deductions was partially offset by the change in minority
interest reflecting the joint venture partners' share of the write-down of
certain gas gathering properties. Additionally, other income and deductions for
all 1998 periods were impacted by an increase in the allowance for funds used
during construction and a gain recorded from the sale of land. The 1998
twelve-month period increase is also caused by additional interest expense on
long-term debt required to finance capital investments.
INCOME TAXES
The variations in income taxes for all 1998 periods result from fluctuations in
pre-tax results and the flow through effect of certain book to tax temporary
differences. Income tax comparisons for the nine- and twelve-month periods were
also affected by a 1998 provision for tax issues, and by amounts recorded in the
1997 periods for the favorable resolution of prior years' tax issues and tax
credits.
OUTLOOK
Gas Distribution's strategy is to aggressively expand its role as the preferred
provider of natural gas and high-value energy services within Michigan.
Accordingly, Gas Distribution's objectives are to increase revenues and reduce
its costs in order to maintain strong returns and provide customers with
high-quality service at competitive prices.
Gas Distribution plans to capitalize on opportunities resulting from the gas
industry restructuring by implementing MichCon's Regulatory Reform Plan (Plan)
which was approved by the Michigan Public Service Commission (MPSC) in April
1998. The Plan includes a comprehensive experimental three-year customer choice
program that is designed to offer expanded availability and transportation
options to all sales customers, subject to annual caps on the level of
participation. Beginning April 1, 1999, customers will have the option of
purchasing natural gas from suppliers other than MichCon. However, MichCon will
continue to transport and deliver the gas to the customers' premises at prices
that maintain its existing sales margins.
The Plan also suspends the GCR mechanism for customers who continue to purchase
gas from MichCon and fixes the gas cost component of MichCon's sales rates for
the three-year period beginning on January 1, 1999. Currently MichCon does not
generate earnings on the gas supply portion of its operations; however, under
this Plan, changes in cost of gas will directly impact gross margins and
earnings. As part of its gas acquisition strategy, MichCon has contracted for a
substantial portion of its expected gas requirements. These contracts, coupled
with the use of MichCon's storage facilities, will substantially mitigate risks
from winter price and volume fluctuations.
Also beginning in 1999, an income sharing mechanism will allow customers to
share in profits when actual utility return on equity exceeds predetermined
thresholds. Although the Plan increases MichCon's risk associated with
generating margins that cover its gas costs, management believes this program
will have a favorable impact on future earnings. Various interested parties have
requested a rehearing of the Plan before the MPSC, or its review in the courts.
In October 1998, the MPSC denied a rehearing and affirmed its approval of the
Plan. Various interested parties have appealed the MPSC's decision to the
Michigan Court of Appeals; however, while management
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
believes that based upon applicable Michigan law the order should be upheld by
the Michigan Court of Appeals, there can be no assurance as to the outcome.
Gas Distribution also plans to grow revenues and earnings by providing various
energy-related services that capitalize on its expertise, capabilities and
efficient systems. Reflecting these plans, Gas Distribution began participating
in Michigan's $1.2 billion per year heating, ventilation and air conditioning
market with the October 1998 acquisition of three companies specializing in the
sale, installation and servicing of residential and commercial heating and
cooling systems. The acquired companies have total revenues approximating $20
million per year.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
9 MONTHS
-----------------
1998 1997
------- -------
<S> <C> <C>
CASH AND CASH EQUIVALENTS (in Millions)
Cash Flow Provided From (Used For):
Operating activities...................................... $ 237.5 $ 285.4
Financing activities...................................... 306.9 211.6
Investing activities...................................... (523.9) (486.2)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 20.5 $ 10.8
======= =======
</TABLE>
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $47.9 million during the
1998 nine-month period as compared to the same 1997 period. The decrease was due
primarily to a decline in earnings, after adjusting for non-cash items
(depreciation, unusual charges and deferred taxes).
FINANCING ACTIVITIES
MCN's cash flow from financing activities increased $95.3 million during the
1998 nine-month period as compared to the same 1997 period. The change primarily
reflects an increase in notes payable and long-term commercial paper outstanding
at September 30, 1998. A portion of these facilities are used to finance capital
expenditures on a temporary basis until paid down with the proceeds from the
issuance of more permanent capital, such as long-term debt, preferred securities
and common stock. However, for the remainder of 1998 and into 1999, MCN will
rely more on commercial paper and bank borrowings and less on permanent capital
issuances. Proceeds from the expected sale of MCN's E&P properties in mid-1999
will be used to repay commercial paper and bank borrowings. A summary of MCN's
significant financing activities and financing plans during 1998 follows.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. MCN anticipates that
during 1998 the issuance of new shares of common stock pursuant to these plans
will generate approximately $20 million. During the first nine months of 1998,
issuances under these plans generated proceeds of $14.7 million.
During June 1998, MCN retired early the $100 million of 6.31% Private
Institutional Trust Securities (PRINTS) because it determined other forms of
financing provide greater flexibility.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In late November 1998, MCN anticipates the issuance of $100 million of preferred
securities. Proceeds from the preferred securities will be used to reduce
short-term debt, to fund capital investments by Diversified Energy and for
general corporate purposes.
In December 1998, MCN anticipates the issuance of $250 million of debt under a
one-year term loan. Proceeds from the term loan will be used to repay short-term
debt and for general corporate purposes. MCN intends to repay the term loan with
proceeds from the sale of its E&P properties.
The following table sets forth the current ratings for securities issued by MCN
and its subsidiaries:
<TABLE>
<CAPTION>
STANDARD DUFF &
& POOR'S MOODY'S PHELPS FITCH
-------- ------- ------ -----
<S> <C> <C> <C> <C>
MCN:
FELINE PRIDES............................................ BBB Ba1 BBB BBB
Enhanced PRIDES.......................................... BBB Baa3 BBB BBB
Preferred securities..................................... BBB Ba1 BBB BBB
PRINTS/SPRRCS............................................ BBB+ Baa3 BBB+ BBB+
MCNIC:
Commercial paper*........................................ A2 P3 D2 F2
Medium-term notes*....................................... BBB Baa3 BBB+ BBB
MichCon:
Commercial paper......................................... A2 P1 D1 F1
First mortgage bonds..................................... A- A2 A+ A
</TABLE>
* Ratings based on MCN support agreement.
DIVERSIFIED ENERGY
In March and April 1998, Diversified Energy issued remarketable debt securities
generating net proceeds of $305.7 million (Note 6a). Proceeds from these
issuances were used to reduce short-term debt incurred by the Diversified Energy
group to fund capital investments and for general corporate purposes.
During April 1998, a subsidiary of MCN Investment Corporation retired early a
$100 million five-year term loan because it determined that other forms of debt
financing provide greater flexibility and lower costs.
In July 1998, MCNIC renewed its credit lines, which now allow for borrowings of
up to $200 million under a 364-day revolving credit facility and up to $200
million under a three-year revolving credit facility. These facilities support
MCNIC's $400 million commercial paper program, which is used to finance capital
investments of the Diversified Energy group and working capital requirements of
its gas marketing operations. During the first nine months of 1998, MCNIC
borrowed $200 million under the credit facility and issued $48.5 million of
commercial paper, leaving a balance of $395.8 million of bank debt and
commercial paper outstanding. As of September 30, 1998, MCNIC has the ability to
borrow an additional $4.2 million under its credit lines.
GAS DISTRIBUTION
MichCon maintains a relatively consistent amount of cash and cash equivalents
through the use of short-term borrowings. Short-term borrowings are normally
reduced in the first part of each year as gas inventories are depleted and funds
are received from winter heating sales. During the latter part of the year,
Michcon's short-term borrowings normally increase as funds are used to finance
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
increases in gas inventories and customer accounts receivable. 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 that 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 were renewed in July 1998. During the first nine
months of 1998, MichCon repaid $35.0 million of commercial paper, leaving
borrowings of $201.7 million outstanding under this program at September 30,
1998.
In June 1998, MichCon issued remarketable debt securities generating net
proceeds of $153.1 million (Note 6a). Proceeds were used to retire first
mortgage bonds, fund capital expenditures and for general corporate purposes.
In October 1998, MichCon established a 60-day unsecured credit line that allows
for borrowings of up to an additional $50 million.
During the 1998 second quarter, MichCon redeemed through a tender offer $89.7
million of long-term debt (Note 6b), and repaid $20 million of first mortgage
bonds on their stated maturity date.
INVESTING ACTIVITIES
MCN's cash used for investing activities increased by $37.7 million in the 1998
nine-month period as compared to the same 1997 period. The increase was due
primarily to additional capital investments, partially offset by cash received
from the strategic sale of certain assets and the repayment of an advance to a
Philippine power producer (Note 2a).
Capital investments equaled $636.6 million in the 1998 nine-month period
compared to $613.6 million for the same period in 1997. The 1998 investments
include significantly higher levels of
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
investments in Pipelines & Processing properties, as well as increased
investments in domestic and international power generation projects.
<TABLE>
<CAPTION>
9 MONTHS
---------------
1998 1997
------ ------
<S> <C> <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $283.8 $261.5
Gas Distribution.......................................... 106.3 99.1
------ ------
390.1 360.6
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 166.1 70.3
Energy Marketing, Gas Storage & Electric Power............ 20.3 10.0
Other..................................................... .8 2.5
------ ------
187.2 82.8
------ ------
Acquisitions*............................................... 59.3 170.2
------ ------
Total Capital Investments................................... $636.6 $613.6
====== ======
</TABLE>
* Includes MCN's share of GTEC debt existing at the date of acquisition (Note
2b)
Total capital investments were partially funded with proceeds from the sale of
certain E&P properties and joint venture investments that totaled $44 million
during the 1998 nine-month period.
OUTLOOK
1998 capital investments estimated at $980 million -- MCN's strategic direction
is to grow by investing in a diverse portfolio of energy-related projects. For
1998, MCN anticipates investing approximately $980 million, of which $200
million is expected to be in Gas Distribution and the remaining balance in
Diversified Energy. The 1998 capital investments amount includes approximately
$330 million related to MCN's E&P properties and coal fines project.
Although MCN's 1998 capital investments are estimated to be approximately $980
million, MCN's refocused strategic direction will result in more modest capital
investments in future years of approximately $600 million to $700 million
annually. These investments will be allocated approximately 25% within Gas
Distribution, 35% within Pipelines & Processing, and 40% within Energy
Marketing, Storage & Electric Power.
The proposed level of investments for 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 actual
capital requirements and general market conditions will dictate the timing and
amount of future issuances. It is management's opinion that MCN and its
subsidiaries will have sufficient capital resources, both internal and external,
to meet anticipated capital and operating requirements.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000
Background -- As a 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 Year 2000 issue, if not addressed, could cause computer
systems to malfunction and have a material adverse impact on MCN's operations
and business processes. The effects of the Year 2000 issue are exacerbated as a
result of companies' dependence on partners, operators, suppliers and government
agencies.
Plan and State of Readiness -- MCN, aware of the Year 2000 potential impact,
initiated a business systems replacement program in 1995. Additionally, MCN
established a corporate-wide program in 1997 under the direction of a Year 2000
Project Office that reports regularly to the MCN Board of Directors. MCN has
implemented a four-phase Year 2000 approach consisting of: i) inventory --
identification of the components of MCN's systems, equipment and facilities; ii)
assessment -- assessing Year 2000 readiness and prioritizing the risks of items
identified in the inventory phase; iii) remediation -- upgrading, repairing and
replacing non-compliant systems, equipment and facilities; and iv)
testing -- verifying items are Year 2000 ready. MCN is on schedule to have its
mission critical business systems, and measurement and control systems
(including embedded microprocessors) Year 2000 ready by mid-1999, as detailed
below. MCN's business systems primarily consist of general ledger, payroll,
customer billing and inventory control systems and their related hardware. MCN's
measurement and control systems primarily consist of the "SCADA" system which
measures and monitors the transportation and distribution of gas, as well as
regulators, pressure controls and meters. The estimated completion status of
these systems as of September 30, 1998 and the projected status for the future
follows:
<TABLE>
<CAPTION>
Inventory Assessment Remediation Testing
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Business Systems:
September 30, 1998........................... 95% 90% 10% 10%
December 31, 1998............................ 100% 95% 15% 15%
March 31, 1999............................... 100% 100% 80% 70%
June 30, 1999................................ 100% 100% 100% 100%
Measurement and Control Systems:
September 30, 1998........................... 95% 85% 30% 30%
December 31, 1998............................ 100% 90% 70% 60%
March 31, 1999............................... 100% 100% 100% 90%
June 30, 1999................................ 100% 100% 100% 100%
</TABLE>
MCN has also visited key partners, operators and suppliers to review their Year
2000 issues and share information. To the extent that any of these parties
experience Year 2000 problems in their systems, the reliability of MCN's
services may be adversely affected. The majority of MCN's key partners,
operators and suppliers have completed their Year 2000 inventory and assessment
phases. MCN is continuing to monitor the progress of these key partners,
operators and suppliers toward their completion of the remediation and testing
phases.
Cost of Remediation -- Costs associated with the Year 2000 issue are not
expected to have a material adverse effect on MCN results of operation,
liquidity and financial condition. The total costs are estimated to be between
$5 million and $6 million of which approximately $3.0 million was incurred
through September 1998. This estimate does not include MCN's share of Year 2000
costs that may be incurred by partnerships and joint ventures. The anticipated
costs are not higher due in
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
part to the ongoing replacement of significant older systems. New systems in
process of being installed, as well as those installed over the past few years,
are Year 2000 ready. 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.
Risk and Contingency Planning -- MCN anticipates a relatively smooth transition
to the Year 2000. However, the failure to correct a material Year 2000 problem
could result in an interruption in or a failure of certain business activities
and operations. Such interruptions or failures could have a material adverse
effect on MCN's results of operations, liquidity and financial condition. Due to
the uncertainty inherent in the Year 2000 issue, resulting in part from the
uncertainty of the Year 2000 readiness of key partners, operators, suppliers and
government agencies, MCN cannot certify that it will be unaffected by Year 2000
complications. MCN has addressed the Year 2000 risks of its business by
prioritizing such risks based on the likely worst case scenarios and their
impact on the business. Focusing first on the safety and welfare of MCN's
customers and employees, two mission-critical processes were identified: gas
supply and distribution, and leak management emergency response.
While MCN believes it will be able to remediate and test all internal systems
that support these processes, it fully recognizes its dependence on partners,
operators, suppliers and government agencies. In order to reduce its Year 2000
risk, MCN is developing contingency plans for mission-critical processes in the
event of a Year 2000 complication. Through failure scenario identification,
MCN's approach is to develop reasonable and practical contingency plans to
maintain operations in case of non-performance. Contingency plans are being
developed for these processes, highlighting plan objectives, test approaches,
required equipment and resources, necessary personnel, schedules and locations,
test procedures and expected results. Contingency plans are already in place for
many scenarios and include manual intervention, and arrangements with multiple
suppliers and service providers. Initial testing of MCN's contingency plans is
scheduled to commence by December 1998. Contingency plans will continue to be
refined throughout 1999 as MCN continues to work with partners, operators,
suppliers and governmental agencies.
NEW ACCOUNTING PRONOUNCEMENTS
Computer Software -- In March 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of
internal-use software and specifically identifies which costs should be
capitalized and which costs should be expensed. The statement is effective for
fiscal years beginning after December 15, 1998. Management does not expect the
SOP to have a material impact on MCN's financial statements.
Start-up Activities -- In April 1998, the AcSEC issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." SOP 98-5 requires start-up and organizational
costs to be expensed as incurred and is effective for fiscal years beginning
after December 15, 1998. Management is currently evaluating the effects of
adopting this statement.
Derivative and Hedging Activities -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 1999. SFAS
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
No. 133 requires all derivatives to be recognized in the balance sheet as either
assets or liabilities measured at their fair value and sets forth conditions in
which a derivative instrument may be designated as a hedge. The Statement
requires that changes in the fair value of derivatives be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to be
recorded to other comprehensive income or to offset related results on the
hedged item in earnings.
MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Accordingly, management cannot quantify the effects of
adopting SFAS No. 133.
FORWARD-LOOKING STATEMENTS
The Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve certain risks and uncertainties as set forth in MCN's 1997
Annual Report on Form 10-K. Additional factors that may impact forward-looking
statements include MCN's dependence on partners, operators, suppliers and
governmental agencies, and their ability to remediate their non-compliant
systems to be Year 2000 ready.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and other
interested parties: the Annual Report; the Form 10-K Annual Report; the Form
10-Q Quarterly Reports and the Annual and Quarterly Statistical Supplements. To
request these publications, shareholders and other interested parties are
instructed to contact: MCN Investor Relations, 500 Griswold Street, Detroit,
Michigan 48226, (800) 548-4655. Information is also available on MCN's website
at http://www.mcnenergy.com.
19
<PAGE> 22
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998 1997 1997
(in Thousands) ---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 60,031 $ 41,251 $ 39,495
Accounts receivable, less allowance for doubtful accounts
of $9,515, $16,819 and $15,711, respectively............ 277,229 261,774 404,448
Accrued unbilled revenues................................. 17,359 22,258 93,010
Gas in inventory.......................................... 200,399 124,097 56,777
Property taxes assessed applicable to future periods...... 33,115 27,712 67,879
Accrued gas cost recovery revenues........................ -- -- 12,862
Other..................................................... 56,120 49,195 54,089
---------- ---------- ----------
644,253 526,287 728,560
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes..................................... 53,519 -- --
Investments in debt and equity securities (Notes 2a and
3a)..................................................... 42,986 23,469 97,521
Deferred swap losses and receivables (Note 8)............. 45,033 45,888 51,023
Deferred postretirement benefit costs..................... 619 662 651
Deferred environmental costs.............................. 30,655 30,134 30,234
Prepaid benefit costs..................................... 96,550 65,708 80,242
Other..................................................... 96,719 78,064 85,530
---------- ---------- ----------
366,081 243,925 345,201
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing.................................... 488,536 236,391 323,597
Energy Marketing, Gas Storage & Electric Power............ 253,904 185,651 205,286
Gas Distribution (Note 3c)................................ 628 7,868 8,841
Other..................................................... 19,354 20,101 19,252
---------- ---------- ----------
762,422 450,011 556,976
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Exploration & Production (Note 3a)........................ 1,013,778 1,198,996 1,299,301
Pipelines & Processing (Note 3b).......................... 38,703 29,180 47,037
Gas Distribution (Note 3c)................................ 2,869,897 2,764,762 2,813,434
Other..................................................... 34,747 19,921 27,002
---------- ---------- ----------
3,957,125 4,012,859 4,186,774
Less -- Accumulated depreciation and depletion.............. 1,603,223 1,449,830 1,488,050
---------- ---------- ----------
2,353,902 2,563,029 2,698,724..
---------- ---------- ----------
$4,126,658 $3,783,252 $4,329,461
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
20
<PAGE> 23
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998 1997 1997
(in Thousands) ---------- ---------- ------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 297,771 $ 203,023 $ 326,756
Notes payable............................................. 414,957 75,797 401,726
Current portion of long-term debt and capital lease
obligations............................................. 269,499 29,961 36,878
Federal income, property and other taxes payable.......... 55,020 44,165 91,712
Deferred gas cost recovery revenues....................... 23,899 646 --
Gas payable............................................... 50,302 5,561 8,317
Customer deposits......................................... 16,829 14,045 16,382
Other..................................................... 92,400 84,359 101,630
---------- ---------- ----------
1,220,677 457,557 983,401
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes..................................... -- 161,697 153,159
Unamortized investment tax credit......................... 31,641 33,514 33,046
Tax benefits amortizable to customers..................... 132,676 123,746 123,365
Deferred swap gains and payables (Note 8)................. 38,556 42,824 41,717
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 11,948 17,532 19,188
Other..................................................... 64,454 66,811 69,889
---------- ---------- ----------
314,275 481,124 475,364
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations (Note
6)........................................................ 1,402,526 1,220,394 1,212,564
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN (Note 6b)... 405,481 505,048 505,104
---------- ---------- ----------
CONTINGENCIES (Note 9)
COMMON SHAREHOLDERS' EQUITY
Common stock.............................................. 791 781 782
Additional paid-in capital................................ 813,809 796,705 806,997
Retained earnings......................................... 6,179 344,489 374,807
Accumulated other comprehensive loss (Note 10)............ (14,792) (810) (7,519)
Yield enhancement, contract and issuance costs............ (22,288) (22,036) (22,039)
---------- ---------- ----------
783,699 1,119,129 1,153,028
---------- ---------- ----------
$4,126,658 $3,783,252 $4,329,461
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
21
<PAGE> 24
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS) (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
(in Thousands, Except Per Share Amounts) --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 351,145 $327,817 $1,458,819 $1,504,503 $2,162,183 $2,113,358
--------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas.................................... 201,663 174,141 847,823 873,706 1,295,187 1,244,113
Operation and maintenance...................... 90,712 90,678 277,215 284,364 386,192 393,209
Depreciation, depletion and amortization....... 44,231 45,904 135,478 134,845 182,245 172,841
Property and other taxes....................... 15,542 16,241 54,255 57,469 72,277 76,256
Property write-downs (Note 3).................. 246,436 -- 579,458 -- 579,458 --
Restructuring charges (Note 4)................. 12,860 -- 12,860 -- 12,860 --
--------- -------- ---------- ---------- ---------- ----------
611,444 326,964 1,907,089 1,350,384 2,528,219 1,886,419
--------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................... (260,299) 853 (448,270) 154,119 (366,036) 226,939
--------- -------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES............. 17,963 17,349 46,561 42,180 60,040 48,259
--------- -------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 2,496 2,313 8,659 6,689 13,136 8,756
Interest on long-term debt..................... (24,392) (18,128) (62,345) (58,179) (79,336) (74,835)
Other interest expense......................... (4,991) (332) (16,654) (6,956) (20,981) (10,920)
Dividends on preferred securities of
subsidiaries................................. (8,178) (9,778) (27,162) (21,336) (36,916) (25,424)
Investment losses (Notes 3a and 3c)............ (8,500) -- (14,635) -- (14,635) --
Gains related to DIGP (Note 2c)................ -- 2,398 -- 2,398 -- 4,796
Minority interest.............................. 7,275 (547) 6,030 (1,514) 5,580 (1,487)
Other.......................................... 134 2,836 14,095 5,416 17,040 3,333
--------- -------- ---------- ---------- ---------- ----------
(36,156) (21,238) (92,012) (73,482) (116,112) (95,781)
--------- -------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (278,492) (3,036) (493,721) 122,817 (422,108) 179,417
INCOME TAX PROVISION (BENEFIT)................... (101,341) (4,255) (186,980) 30,753 (165,609) 45,642
--------- -------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................................ $(177,151) $ 1,219 $ (306,741) $ 92,064 $ (256,499) $ 133,775
========= ======== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE (NOTE 5)
Basic.......................................... $ (2.24) $ .02 $ (3.90) $ 1.29 $ (3.27) $ 1.90
========= ======== ========== ========== ========== ==========
Diluted........................................ $ (2.24) $ .02 $ (3.90) $ 1.27 $ (3.27) $ 1.86
========= ======== ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
Basic.......................................... 78,938 78,026 78,689 71,289 78,531 70,268
========= ======== ========== ========== ========== ==========
Diluted........................................ 78,938 79,461 78,689 75,461 78,531 73,666
========= ======== ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................... $ .2550 $ .2425 $ .7650 $ .7275 $ 1.0200 $ .9700
========= ======== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
(in Thousands) --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- BEGINNING OF PERIOD................... $ 203,776 $362,570 $ 374,807 $ 305,352 $ 344,489 $ 280,478
ADD -- NET INCOME (LOSS)......................... (177,151) 1,219 (306,741) 92,064 (256,499) 133,775
--------- -------- ---------- ---------- ---------- ----------
26,625 363,789 68,066 397,416 87,990 414,253
DEDUCT -- CASH DIVIDENDS DECLARED................ 20,446 19,300 61,887 52,927 81,811 69,764
--------- -------- ---------- ---------- ---------- ----------
BALANCE -- END OF PERIOD......................... $ 6,179 $344,489 $ 6,179 $ 344,489 $ 6,179 $ 344,489
========= ======== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
22
<PAGE> 25
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
(in Thousands) --------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(306,741) $ 92,064
Adjustments to reconcile net income (loss) to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 135,478 134,845
Charged to other accounts............................. 5,990 5,695
Property write-downs, net of taxes and minority interest
(Note 3)............................................... 371,728 --
Investment losses, net of taxes (Note 3)................ 9,512 --
Restructuring charges, net of taxes (Note 4)............ 8,358 --
Deferred income taxes -- current........................ (11,994) (27,410)
Deferred income taxes and investment tax credit, net.... 14,779 17,704
Equity in earnings of joint ventures, net of
distributions.......................................... (30,344) (12,054)
Other................................................... (9,331) (3,457)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 50,063 78,036
--------- ---------
Net cash provided from operating activities........... 237,498 285,423
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ 103,588 (257,929)
Dividends paid............................................ (61,887) (52,927)
Issuance of common stock.................................. 14,742 290,626
Issuance of preferred securities.......................... -- 326,521
Issuance of long-term debt (Note 6a)...................... 458,761 273,241
Long-term commercial paper, net........................... 109,643 (261,822)
Retirement of long-term debt and preferred securities
(Note 6b)............................................... (326,194) (106,073)
Other..................................................... 8,243 --
--------- ---------
Net cash provided from financing activities........... 306,896 211,637
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (390,067) (359,023)
Acquisitions (Note 2b).................................... (36,731) (128,206)
Investment in debt and equity securities, net (Note 2a)... 46,286 12,113
Investment in joint ventures.............................. (166,977) (67,352)
Sale of property and joint venture interests.............. 44,034 38,604
Other..................................................... (20,403) 17,593
--------- ---------
Net cash used for investing activities................ (523,858) (486,271)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 20,536 10,789
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 39,495 30,462
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30..................... $ 60,031 $ 41,251
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 115,267 $ 99,357
Accrued unbilled revenues................................. 75,651 86,251
Gas in inventory.......................................... (143,622) (44,936)
Property taxes assessed applicable to future periods...... 34,764 32,254
Accrued/deferred gas cost recovery revenues, net.......... 36,761 28,318
Accounts payable.......................................... (27,495) (114,899)
Federal income, property and other taxes payable.......... (36,664) (53,481)
Gas payable............................................... 41,985 2,768
Prepaid benefit costs..................................... (16,276) (1,563)
Other current assets and liabilities, net................. (9,210) 23,906
Other deferred assets and liabilities, net................ (21,098) 20,061
--------- ---------
$ 50,063 $ 78,036
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 90,088 $ 82,470
Federal income taxes.................................... 11,700 22,500
</TABLE>
- --------------------------------------------------------------------------------
The notes to the consolidated financial statements are an integral part of this
statement.
23
<PAGE> 26
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements should be read in conjunction
with MCN's 1997 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1998
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments necessary for a fair presentation of the
financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS
A. PHILIPPINE INVESTMENT
In 1997, MCN advanced approximately $46,000,000 to an independent power
producer to fund power generation projects under development in the
Philippines. This investment was originally structured as an
interest-bearing loan with the possibility of being converted into an
equity interest in the independent power producer. Contract negotiations
were concluded in March 1998 when MCN received the total amount of its
advance, plus accrued interest.
B. TORRENT POWER LIMITED
In 1997, MCN acquired a 40% interest in the common equity of Torrent Power
Limited (TPL), an Indian joint venture that holds minority interests in
electric distribution companies and power generation facilities located in
the state of Gujarat, India. In March 1998, MCN paid approximately
$5,600,000 representing the remaining amount due on its initial acquisition
commitment. Also in March 1998, MCN acquired preference shares in TPL for
approximately $7,600,000 to fund TPL's additional 4.7% investment in
Gujarat Torrent Energy Corporation (GTEC). GTEC is a company formed to
build, own and operate a 655 MW dual-fuel facility that has begun
generating electricity and is expected to be fully operational in late
November 1998.
C. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN sold 64% of its
99% interest in Dauphin Island Gathering Partners (DIGP) in a series of
transactions during 1996. The transactions resulted in pre-tax gains
totaling $8,782,000, of which $2,398,000 was deferred until 1997 when a
related option agreement expired unexercised. DIGP is a general partnership
that owns a natural gas gathering system in the Gulf of Mexico.
3. PROPERTY WRITE-DOWNS AND INVESTMENT LOSSES
A. EXPLORATION & PRODUCTION (E&P)
Property -- During the third and second quarters of 1998, MCN recognized
write-downs of its gas and oil properties under the full cost method of
accounting of $83,955,000 pre-tax ($54,570,000 net of taxes) and
$333,022,000 pre-tax ($216,465,000 net of taxes), respectively. These
write-downs were due primarily to lower gas and oil prices and the
under-performance of certain exploration properties. Gas and oil prices
have historically been impacted by temporary
24
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
declines. Under the full cost method of accounting as prescribed by the
Securities and Exchange Commission, MCN's capitalized exploration and
development costs at September 30, 1998 and June 30, 1998 exceeded the full
cost "ceiling," resulting in the excess being written off to income. The
ceiling is the sum of discounted future net cash flows from the production
of proved gas and oil reserves, and the lower of cost or estimated fair
value of unproved properties, net of related income tax effects. Future net
cash flows are required to be estimated based on end-of-quarter prices and
costs, unless contractual arrangements exist, even if any price decline is
temporary. A significant portion of the write-down for the 1998 second
quarter is due to lower-than-expected exploratory drilling results.
Investment -- During the second quarter of 1998, MCN recognized a
$6,135,000 pre-tax ($3,987,000 net of taxes) loss from the write-down of an
investment in the common stock of an E&P company. The loss is due to a
decline in the fair value of the securities which is not considered
temporary.
B. PIPELINES & PROCESSING
Property -- During the third quarter of 1998, MCN recorded an impairment
loss relating to its coal fines project totaling $133,782,000 pre-tax
($86,959,000 net of taxes). MCN completed the construction of six coal
fines plants in June 1998 which are designed to recover particles of coal
that have been a waste by-product of coal mining and then process the
particles to create coal briquettes for resale. The economic viability of
the venture is dependent on the briquettes qualifying for synthetic fuel
tax credits and MCN's ability to utilize or sell such credits. Although the
plants were in service by June 30, 1998, the date specified for
qualification for the tax credits, operating delays at the plants in the
1998 third quarter have significantly increased the possibility that the
Internal Revenue Service will challenge the project's eligibility for tax
credits. In addition, there is uncertainty as to whether MCN would be able
to utilize or sell the credits. Without the credits, the project is not
expected to generate positive cash flows. These factors led to MCN's
decision to record an impairment loss related to the project.
During the third quarter of 1998, MCN recorded an impairment loss of
$3,899,000 pre-tax ($2,534,000 net of taxes) relating to an acquired
out-of-service pipeline in Michigan. This pipeline was acquired, along with
easements and rights-of-way, for future development. In the 1998 third
quarter, MCN reviewed the developmental business alternatives for these
assets, and as a result, has determined that the development of these
assets is unlikely, and accordingly, recorded an impairment loss.
C. GAS DISTRIBUTION
Property -- During the third quarter of 1998, MichCon recognized a
$24,800,000 loss ($11,200,000 net of taxes and minority interest) from the
write-down of a gas gathering pipeline system. As a result of the need to
divert certain untreated gas away from the gathering system, a new gas
reserve analysis was performed in the third quarter of 1998. This analysis
revealed that projected cash flows from the gathering system were not
sufficient to cover the system's book value, and therefore, an impairment
loss was recorded.
Investment -- During the third quarter of 1998, MCN recognized an
$8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of a
joint venture investment in a small gas distribution company located in
Missouri. As a result of MCN's refocused strategic direction,
25
<PAGE> 28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MCN has decided to sell this investment. The loss represents the amount by
which the carrying value exceeded the estimated fair value of the
investment at September 30, 1998.
4. RESTRUCTURING CHARGES
During the third quarter of 1998, MCN initiated a two-part corporate
restructuring and recorded a combined restructuring charge that totaled
$12,860,000 pre-tax ($8,358,000 net of taxes).
Corporate -- The first part consists of a corporate realignment designed to
improve operating efficiencies through a more streamlined organizational
structure and totaled $10,390,000 pre-tax. The realignment includes the
reduction of 37 employees resulting in severance and termination benefits of
$4,714,000 pre-tax. Also included in the charge was $5,676,000 pre-tax relating
to net lease expenses and the write-down of fixed assets consisting of leasehold
improvements, office equipment and information systems. As of September 30, 1998
no payments have been made against these restructuring accruals. The severance
and termination benefits will be paid through 2000 while the costs accrued for
net lease expenses are expected to be paid over the related lease terms which
expire through 2006.
Electric Power -- The second part of the corporate restructuring relates to a
revised international investment strategy whereby MCN will primarily limit
future international capital investments to amounts required to fulfill existing
commitments. As a result of this revised strategy, MCN exited certain
international power projects and recorded a charge of $2,470,000 pre-tax,
primarily related to costs that had been incurred on these exited projects.
5. EARNINGS PER SHARE COMPUTATION
As discussed in MCN's 1997 Annual Report on Form 10-K, MCN adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" which requires the
presentation of basic earnings per share (EPS) and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the 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.
26
<PAGE> 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of both calculations follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EARNINGS
COMMON (LOSS)
NET INCOME (LOSS) SHARES PER SHARE
--------------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997
--------- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
(in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SEPTEMBER 30
Basic EPS............................. $(177,151) $ 1,219 78,938 78,026 $(2.24) $ .02
------ -----
Effect of Dilutive Securities:
FELINE PRIDES...................... -- -- -- --
Enhanced PRIDES.................... -- 54 -- 630
Stock-based compensation plans..... -- -- -- 805
--------- -------- ------ ------
Diluted EPS........................... $(177,151) $ 1,273 78,938 79,461 $(2.24) $ .02
========= ======== ====== ====== ------ -----
NINE MONTHS ENDED SEPTEMBER 30
Basic EPS............................. $(306,741) $ 92,064 78,689 71,289 $(3.90) $1.29
------ -----
Effect of Dilutive Securities:
FELINE PRIDES...................... -- 3,262 -- 2,985
Enhanced PRIDES.................... -- 177 -- 442
Stock-based compensation plans..... -- -- -- 745
--------- -------- ------ ------
Diluted EPS........................... $(306,741) $ 95,503 78,689 75,461 $(3.90) $1.27
========= ======== ====== ====== ------ -----
TWELVE MONTHS ENDED SEPTEMBER 30
Basic EPS............................. $(256,499) $133,775 78,531 70,268 $(3.27) $1.90
------ -----
Effect of Dilutive Securities:
FELINE PRIDES...................... -- 3,262 -- 2,239
Enhanced PRIDES.................... -- 250 -- 373
Stock-based compensation plans..... -- -- -- 786
--------- -------- ------ ------
Diluted EPS........................... $(256,499) $137,287 78,531 73,666 $(3.27) $1.86
========= ======== ====== ====== ------ -----
</TABLE>
6. CAPITALIZATION
A. ISSUANCES OF LONG-TERM DEBT
Diversified Energy -- In 1998, MCN Investment Corporation (MCNIC) issued
$100,000,000 of 6.3%, $100,000,000 of 6.35%, and $100,000,000 of 6.375%
remarketable debt securities due April 2011, April 2012 and April 2008,
respectively. These securities are senior unsecured obligations of MCNIC
and are subject to a support agreement between MCN and MCNIC, under which
MCN will provide funds to MCNIC to make payments of interest and principal
in the event of default by MCNIC.
The securities are structured such that at a specified future remarketing
date the remarketing agents may elect to remarket the securities whereby
the annual interest rate will be reset. MCNIC received option premiums in
return for the remarketing option. If the remarketing agents elect not to
remarket the securities, MCNIC will be required to repurchase the
securities at their principal amounts. The option premiums received net of
financing costs incurred, totaled $5,709,000, and are being amortized to
income over the life of the debt. The remarketing dates are April 2, 2001,
April 2, 2002 and April 1, 2003 for the 6.3% securities, the 6.35%
securities, and the 6.375% securities, respectively.
27
<PAGE> 30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gas Distribution -- In 1998, MichCon issued $75,000,000 of 6.2% and
$75,000,000 of 6.45% remarketable debt securities, both of which have
stated maturities of June 2038. These securities are "fall-away mortgage"
debt, and as such, are secured debt as long as MichCon's current first
mortgage bonds are outstanding and become senior unsecured debt thereafter.
The securities are structured such that the interest rates of the issues
can be reset at various remarketing dates over the life of the debt. The
initial remarketing date is June 30, 2003 for the 6.2% debt and June 30,
2008 for the 6.45% debt. MichCon received an option premium in return for
granting options to underwriters to reset the interest rate for a period of
ten years at the initial remarketing date. The option premiums received for
these securities, net of financing costs incurred, totaled $3,052,000. The
option premiums are being amortized to income over the initial interest and
corresponding option periods. If the underwriters elect not to exercise
their reset options, the securities become subject to the remarketing
feature. If MichCon and the remarketing agent cannot agree on an interest
rate or the remarketing agent is unable to remarket the securities, MichCon
will be required to repurchase the securities at their principal amounts.
B. REDEMPTIONS OF PREFERRED SECURITIES AND LONG-TERM DEBT
Diversified Energy -- In the 1998 second quarter, MCN Financing V, a wholly
owned business trust of MCN, redeemed $100,000,000 of 6.3% preferred
securities. Also in the 1998 second quarter, MCNIC Oil & Gas Company, a
subsidiary of MCNIC, retired early a $100,000,000 five-year term loan.
Gas Distribution -- During the second quarter of 1998, MichCon redeemed
through a tender offer $37,000,000 of the outstanding $55,000,000 balance
of 9.125% first mortgage bonds due 2004, and $52,686,000 of the outstanding
$70,000,000 balance of 8% first mortgage bonds due 2002.
7. LINES OF CREDIT
As discussed in MCN's 1997 Annual Report on Form 10-K, MCNIC and MichCon
maintain credit lines totaling $700,000,000 to support their commercial paper
programs. In July 1998, MCNIC renewed its credit lines that allow for borrowings
of up to $200,000,000 under a 364-day revolving credit facility and up to
$200,000,000 under a three-year revolving credit facility. In July 1998, MichCon
renewed its credit lines that allow for borrowings of up to $150,000,000 under a
364-day revolving credit facility and up to $150,000,000 under a three-year
revolving credit facility.
In October 1998, MichCon established a 60-day unsecured credit line that allows
for borrowings of up to $50,000,000. This facility will terminate upon execution
of a $250,000,000 one-year term loan by MCN which is expected to be completed in
December 1998.
8. COMMODITY SWAP AGREEMENTS
MCN's Diversified Energy and Gas Distribution groups manage commodity price risk
through the use of various derivative instruments and predominately limit the
use of such instruments to hedging activities. If MCN did not use derivative
instruments, its exposure to such risk would be higher. Although this strategy
reduces risk, it also limits potential gains from favorable changes in commodity
prices. Natural gas and oil swap agreements are used to manage exposure to the
risk of market price fluctuations on gas sale contracts, gas purchase
commitments and gas and oil
28
<PAGE> 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
production. Market value changes of swap contracts are recorded as deferred
gains or losses until the hedged transactions are completed, at which time the
realized gains or losses are included as adjustments to revenues or the cost of
purchased gas. The offsets to the unrealized losses are recorded as deferred
payables, and the offsets to the unrealized gains are recorded as deferred
receivables. The following assets and liabilities related to the use of gas and
oil swap agreements are reflected in the Consolidated Statement of Financial
Position:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1998 1997 1997
(in Thousands) ------- ------- ------------
<S> <C> <C> <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses...................................... $31,923 $33,539 $34,736
Receivables............................................ 13,776 12,349 16,683
------- ------- -------
45,699 45,888 51,419
Less -- Current portion................................ 666 -- 396
------- ------- -------
$45,033 $45,888 $51,023
======= ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains....................................... $13,024 $ 8,501 $15,005
Payables............................................... 36,890 49,317 41,164
------- ------- -------
49,914 57,818 56,169
Less -- Current portion................................ 11,358 14,994 14,452
------- ------- -------
$38,556 $42,824 $41,717
======= ======= =======
</TABLE>
9. CONTINGENCIES
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.
29
<PAGE> 32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMPREHENSIVE INCOME (LOSS)
MCN has adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income. Comprehensive income is defined as the change in common
shareholder's equity during a period from transactions and events from nonowner
sources, including net income. Other items of comprehensive income include
revenues, expenses, gains and losses that are excluded from net income. Total
comprehensive income (loss) for the applicable periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------- --------------------
1998 1997 1998 1997 1998 1997
(in Thousands) --------- ------ --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)................. $(177,151) $1,219 $(306,741) $92,064 $(256,499) $133,775
--------- ------ --------- ------- --------- --------
Other comprehensive loss, net of
taxes:
Foreign currency translation
adjustment................... (85) (754) (5,898) (767) (11,423) (781)
--------- ------ --------- ------- --------- --------
Unrealized losses on securities:
Unrealized losses during
period..................... (2,559) -- (5,362) -- (6,546) --
Less: Reclassification for
losses recognized in net
income..................... -- -- 3,987 -- 3,987 --
--------- ------ --------- ------- --------- --------
(2,559) -- (1,375) -- (2,559) --
--------- ------ --------- ------- --------- --------
Total other comprehensive loss,
net of taxes.................... (2,644) (754) (7,273) (767) (13,982) (781)
--------- ------ --------- ------- --------- --------
Total comprehensive income
(loss).......................... $(179,795) $ 465 $(314,014) $91,297 $(270,481) $132,994
========= ====== ========= ======= ========= ========
</TABLE>
11. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCNIC's securities. The carrying value of MCN's assets on
an unconsolidated basis, primarily investments in its subsidiaries other than
MichCon, is $695,987,000 at September 30, 1998.
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, MCN Michigan Limited Partnership, MCN Financing I, MCN Financing
III, MCN Financing V, MCN Financing VI, and Blue Lake Holdings, Inc. (until
December 31, 1997).
30
<PAGE> 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (LOSS)(Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
(in Thousands) THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................ $ 1,634 $ 228,949 $122,428 $ (1,866) $ 351,145
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of gas..................................... 931 170,696 31,143 (1,107) 201,663
Operation and maintenance....................... (8,742) 42,791 57,422 (759) 90,712
Depreciation, depletion and amortization........ 696 20,562 22,973 -- 44,231
Property and other taxes........................ 360 3,095 12,087 -- 15,542
Property write-downs............................ -- 221,636 24,800 -- 246,436
Restructuring charges........................... 8,669 4,191 -- -- 12,860
--------- --------- -------- -------- ---------
1,914 462,971 148,425 (1,866) 611,444
--------- --------- -------- -------- ---------
OPERATING LOSS.................................... (280) (234,022) (25,997) -- (260,299)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES.................................... (171,516) 17,896 511 171,072 17,963
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 8,447 1,149 1,639 (8,739) 2,496
Interest on long-term debt...................... 91 (13,508) (10,975) -- (24,392)
Other interest expense.......................... (445) (11,244) (2,001) 8,699 (4,991)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (8,178) (8,178)
Investment losses............................... (8,500) -- -- -- (8,500)
Minority interest............................... -- 225 7,050 -- 7,275
Other........................................... 17 (412) 529 -- 134
--------- --------- -------- -------- ---------
(390) (23,790) (3,758) (8,218) (36,156)
--------- --------- -------- -------- ---------
LOSS BEFORE INCOME TAXES.......................... (172,186) (239,916) (29,244) 162,854 (278,492)
INCOME TAX BENEFIT................................ (3,254) (87,181) (10,906) -- (101,341)
--------- --------- -------- -------- ---------
NET LOSS.......................................... (168,932) (152,735) (18,338) 162,854 (177,151)
DIVIDENDS ON PREFERRED SECURITIES................. 8,178 -- -- (8,178) --
--------- --------- -------- -------- ---------
NET LOSS AVAILABLE FOR COMMON STOCK............... $(177,110) $(152,735) $(18,338) $171,032 $(177,151)
========= ========= ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................ $ 1,853 $ 208,649 $119,114 $ (1,799) $ 327,817
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of gas..................................... 1,050 146,284 27,848 (1,041) 174,141
Operation and maintenance....................... 1,217 26,410 63,809 (758) 90,678
Depreciation, depletion and amortization........ 578 19,167 26,159 -- 45,904
Property and other taxes........................ 321 3,253 12,667 -- 16,241
--------- --------- -------- -------- ---------
3,166 195,114 130,483 (1,799) 326,964
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS)........................... (1,313) 13,535 (11,369) -- 853
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................... 2,463 16,960 212 (2,286) 17,349
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 10,819 1,460 1,144 (11,110) 2,313
Interest on long-term debt...................... 88 (6,557) (11,659) -- (18,128)
Other interest expense.......................... (252) (10,190) (1,033) 11,143 (332)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (9,778) (9,778)
Gains related to DIGP........................... -- 2,398 -- -- 2,398
Minority interest............................... -- (24) (523) -- (547)
Other........................................... 28 2,042 766 -- 2,836
--------- --------- -------- -------- ---------
10,683 (10,871) (11,305) (9,745) (21,238)
--------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................. 11,833 19,624 (22,462) (12,031) (3,036)
INCOME TAX PROVISION (BENEFIT).................... 163 2,008 (6,426) -- (4,255)
--------- --------- -------- -------- ---------
NET INCOME (LOSS)................................. 11,670 17,616 (16,036) (12,031) 1,219
DIVIDENDS ON PREFERRED SECURITIES................. 9,778 -- -- (9,778) --
--------- --------- -------- -------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK...... $ 1,892 $ 17,616 $(16,036) $ (2,253) $ 1,219
========= ========= ======== ======== =========
</TABLE>
31
<PAGE> 34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (LOSS) (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
(in Thousands) NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................ $ 10,303 $ 734,031 $724,442 $ (9,957) $1,458,819
--------- ---------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas..................................... 5,374 542,047 306,244 (5,842) 847,823
Operation and maintenance....................... (8,502) 108,320 181,512 (4,115) 277,215
Depreciation, depletion and amortization........ 2,035 64,533 68,910 -- 135,478
Property and other taxes........................ 1,531 9,382 43,342 -- 54,255
Property write-downs............................ -- 554,658 24,800 -- 579,458
Restructuring charges........................... 8,669 4,191 -- -- 12,860
--------- ---------- -------- --------- ----------
9,107 1,283,131 624,808 (9,957) 1,907,089
--------- ---------- -------- --------- ----------
OPERATING INCOME (LOSS)........................... 1,196 (549,100) 99,634 -- (448,270)
--------- ---------- -------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES.................................... (302,203) 46,062 1,461 301,241 46,561
--------- ---------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 28,019 5,314 3,573 (28,247) 8,659
Interest on long-term debt...................... 494 (29,145) (33,694) -- (62,345)
Other interest expense.......................... (1,104) (36,647) (7,149) 28,246 (16,654)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (27,162) (27,162)
Investment losses............................... (8,500) (6,135) -- -- (14,635)
Minority interest............................... -- 123 5,907 -- 6,030
Other........................................... (490) 13,350 1,235 -- 14,095
--------- ---------- -------- --------- ----------
18,419 (53,140) (30,128) (27,163) (92,012)
--------- ---------- -------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................. (282,588) (556,178) 70,967 274,078 (493,721)
INCOME TAX PROVISION (BENEFIT).................... (3,010) (208,597) 24,627 -- (186,980)
--------- ---------- -------- --------- ----------
NET INCOME (LOSS)................................. (279,578) (347,581) 46,340 274,078 (306,741)
DIVIDENDS ON PREFERRED SECURITIES................. 27,162 -- -- (27,162) --
--------- ---------- -------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK...... $(306,740) $ (347,581) $46,340 $ 301,240 $ (306,741)
========= ========== ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................ $ 11,943 $ 645,990 $856,359 $ (9,789) $1,504,503
--------- ---------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas..................................... 6,479 459,662 414,152 (6,587) 873,706
Operation and maintenance....................... 1,873 78,385 207,308 (3,202) 284,364
Depreciation, depletion and amortization........ 1,705 55,056 78,084 -- 134,845
Property and other taxes........................ 1,350 9,517 46,602 -- 57,469
--------- ---------- -------- --------- ----------
11,407 602,620 746,146 (9,789) 1,350,384
--------- ---------- -------- --------- ----------
OPERATING INCOME.................................. 536 43,370 110,213 -- 154,119
--------- ---------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................... 94,445 39,444 853 (92,562) 42,180
--------- ---------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................. 22,741 3,274 3,630 (22,956) 6,689
Interest on long-term debt...................... 300 (24,506) (33,973) -- (58,179)
Other interest expense.......................... (750) (23,413) (5,782) 22,989 (6,956)
Dividends on preferred securities of
subsidiaries.................................. -- -- -- (21,336) (21,336)
Gains related to DIGP........................... -- 2,398 -- -- 2,398
Minority interest............................... -- (58) (1,456) -- (1,514)
Other........................................... 1 752 663 -- 5,416
--------- ---------- -------- --------- ----------
22,292 (37,553) (36,918) (21,303) (73,482)
--------- ---------- -------- --------- ----------
INCOME BEFORE INCOME TAXES........................ 117,273 45,261 74,148 (113,865) 122,817
INCOME TAX PROVISION.............................. 1,729 1,964 27,060 -- 30,753
--------- ---------- -------- --------- ----------
NET INCOME........................................ 115,544 43,297 47,088 (113,865) 92,064
DIVIDENDS ON PREFERRED SECURITIES................. 21,336 -- -- (21,336) --
--------- ---------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............. $ 94,208 $ 43,297 $47,088 $ (92,529) $ 92,064
========= ========== ======== ========= ==========
</TABLE>
32
<PAGE> 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENTS OF INCOME (LOSS) (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
(in Thousands) TWELVE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................... $ 15,967 $1,039,310 $1,121,762 $ (14,856) $2,162,183
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas........................................ 8,644 771,567 524,321 (9,345) 1,295,187
Operation and maintenance.......................... (8,094) 142,953 256,844 (5,511) 386,192
Depreciation, depletion and amortization........... 2,609 85,107 94,529 -- 182,245
Property and other taxes........................... 1,860 12,933 57,484 -- 72,277
Property write-downs............................... -- 554,658 24,800 -- 579,458
Restructuring charges.............................. 8,669 4,191 -- -- 12,860
--------- ---------- ---------- --------- ----------
13,688 1,571,409 957,978 (14,856) 2,528,219
--------- ---------- ---------- --------- ----------
OPERATING INCOME (LOSS).............................. 2,279 (532,099) 163,784 -- (366,036)
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES....................................... (251,814) 58,974 1,807 251,073 60,040
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................... 38,135 8,418 4,602 (38,019) 13,136
Interest on long-term debt......................... 602 (34,691) (45,247) -- (79,336)
Other interest expense............................. (1,607) (47,616) (10,031) 38,273 (20,981)
Dividends on preferred securities of
subsidiaries..................................... -- -- -- (36,916) (36,916)
Investment losses.................................. (8,500) (6,135) -- -- (14,635)
Minority interest.................................. -- 99 5,481 -- 5,580
Other.............................................. (417) 16,349 1,108 -- 17,040
--------- ---------- ---------- --------- ----------
28,213 (63,576) (44,087) (36,662) (116,112)
--------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................... (221,322) (536,701) 121,504 214,411 (422,108)
INCOME TAX PROVISION (BENEFIT)....................... (2,166) (206,675) 43,232 -- (165,609)
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS).................................... (219,156) (330,026) 78,272 214,411 (256,499)
DIVIDENDS ON PREFERRED SECURITIES.................... 36,916 -- -- (36,916) --
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK......... $(256,072) $ (330,026) $ 78,272 $ 251,327 $ (256,499)
========= ========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................... $ 17,540 $ 865,706 $1,244,174 $ (14,062) $2,113,358
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas........................................ 9,859 621,000 623,186 (9,932) 1,244,113
Operation and maintenance.......................... 1,428 103,032 292,879 (4,130) 393,209
Depreciation, depletion and amortization........... 2,209 68,364 102,268 -- 172,841
Property and other taxes........................... 2,203 12,462 61,591 -- 76,256
--------- ---------- ---------- --------- ----------
15,699 804,858 1,079,924 (14,062) 1,886,419
--------- ---------- ---------- --------- ----------
OPERATING INCOME..................................... 1,841 60,848 164,250 -- 226,939
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES....................................... 136,327 44,842 1,041 (133,951) 48,259
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................... 26,934 4,036 4,910 (27,124) 8,756
Interest on long-term debt......................... 434 (31,598) (44,438) 767 (74,835)
Other interest expense............................. (1,722) (27,554) (8,802) 27,158 (10,920)
Dividends on preferred securities of
subsidiaries..................................... -- -- -- (25,424) (25,424)
Gains related to DIGP.............................. -- 4,796 -- -- 4,796
Minority interest.................................. -- (76) (1,410) (1) (1,487)
Other.............................................. 366 4,542 (808) (767) 3,333
--------- ---------- ---------- --------- ----------
26,012 (45,854) (50,548) (25,391) (95,781)
--------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES........................... 164,180 59,836 114,743 (159,342) 179,417
INCOME TAX PROVISION................................. 2,225 3,150 40,267 -- 45,642
--------- ---------- ---------- --------- ----------
NET INCOME........................................... 161,955 56,686 74,476 (159,342) 133,775
DIVIDENDS ON PREFERRED SECURITIES.................... 25,424 -- -- (25,424) --
--------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................ $ 136,531 $ 56,686 $ 74,476 $(133,918) $ 133,775
========= ========== ========== ========= ==========
</TABLE>
33
<PAGE> 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) SEPTEMBER 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
Accounts receivable.......................... 5,185 182,097 108,135 (8,673) 286,744
Less -- Allowance for doubtful accounts.... 70 533 8,912 -- 9,515
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 5,115 181,564 99,223 (8,673) 277,229
Accrued unbilled revenues.................... 214 -- 17,145 -- 17,359
Gas in inventory............................. -- 103,934 96,465 -- 200,399
Property taxes assessed applicable to future
periods.................................... 121 1,593 31,401 -- 33,115
Other........................................ 3,904 24,980 136,736 (109,500) 56,120
---------- ---------- ---------- ----------- ----------
10,727 360,118 391,581 (118,173) 644,253
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes........................ 3,387 131,597 -- (81,465) 53,519
Investments in debt and equity securities.... -- 5,464 37,171 351 42,986
Deferred swap losses and receivables......... -- 45,033 -- -- 45,033
Deferred postretirement benefit costs........ 619 -- -- -- 619
Deferred environmental costs................. 2,603 -- 28,052 -- 30,655
Prepaid benefit costs........................ -- -- 103,814 (7,264) 96,550
Other........................................ 4,891 33,671 58,429 (272) 96,719
---------- ---------- ---------- ----------- ----------
11,500 215,765 227,466 (88,650) 366,081
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,293,505 741,335 20,458 (1,292,876) 762,422
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 44,295 1,067,113 2,845,717 -- 3,957,125
Less -- Accumulated depreciation and
depletion.................................. 14,889 211,170 1,377,164 -- 1,603,223
---------- ---------- ---------- ----------- ----------
29,406 855,943 1,468,553 -- 2,353,902
---------- ---------- ---------- ----------- ----------
$1,345,138 $2,173,161 $2,108,058 $(1,499,699) $4,126,658
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 2,894 $ 238,723 $ 67,591 $ (11,437) $ 297,771
Notes payable................................ 107,440 211,348 204,313 (108,144) 414,957
Current portion of long-term debt and capital
lease obligations.......................... -- 211,433 58,066 -- 269,499
Federal income, property and other taxes
payable.................................... 703 13,094 41,223 -- 55,020
Deferred gas cost recovery revenues.......... -- -- 23,899 -- 23,899
Gas payable.................................. -- 21,782 28,520 -- 50,302
Customer deposits............................ 26 -- 16,803 -- 16,829
Other........................................ 19,553 23,231 51,637 (2,021) 92,400
---------- ---------- ---------- ----------- ----------
130,616 719,611 492,052 (121,602) 1,220,677
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (6,574) -- 84,652 (78,078) --
Unamortized investment tax credit............ 279 -- 31,362 -- 31,641
Tax benefits amortizable to customers........ -- -- 132,676 -- 132,676
Deferred swap gains and payables............. -- 38,556 -- -- 38,556
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 2,599 9,349 -- 11,948
Other........................................ 15,712 14,148 41,858 (7,264) 64,454
---------- ---------- ---------- ----------- ----------
12,417 55,303 331,897 (85,342) 314,275
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 780,781 621,745 -- 1,402,526
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 405,481 -- -- -- 405,481
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 792 5 10,300 (10,306) 791
Additional paid-in capital................... 811,941 797,852 230,399 (1,026,383) 813,809
Retained earnings (deficit).................. 6,179 (165,599) 421,665 (256,066) 6,179
Accumulated other comprehensive loss......... -- (14,792) -- -- (14,792)
Yield enhancement, contract and issuance
costs...................................... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
796,624 617,466 662,364 (1,292,755) 783,699
---------- ---------- ---------- ----------- ----------
$1,345,138 $2,173,161 $2,108,058 $(1,499,699) $4,126,658
========== ========== ========== =========== ==========
</TABLE>
34
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) SEPTEMBER 30, 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 75,064 $ 28,037 $ 12,148 $ (73,998) $ 41,251
Accounts receivable.......................... 8,020 161,255 120,322 (11,004) 278,593
Less -- Allowance for doubtful accounts.... 70 645 16,104 -- 16,819
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 7,950 160,610 104,218 (11,004) 261,774
Accrued unbilled revenues.................... 286 -- 21,972 -- 22,258
Gas in inventory............................. -- 27,564 96,533 -- 124,097
Property taxes assessed applicable to future
periods.................................... 113 729 26,870 -- 27,712
Accrued gas cost recovery revenues........... -- -- -- -- --
Other........................................ 7,264 9,819 32,375 (263) 49,195
---------- ---------- ---------- ----------- ----------
90,677 226,759 294,116 (85,265) 526,287
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 1,369 3,810 18,290 23,469
Deferred swap losses and receivables......... -- 45,888 -- -- 45,888
Deferred postretirement benefit costs........ 662 -- -- -- 662
Deferred environmental costs................. 2,534 -- 27,600 -- 30,134
Prepaid benefit costs........................ (3,645) -- 71,345 (1,992) 65,708
Other........................................ 10,397 37,694 51,399 (21,426) 78,064
---------- ---------- ---------- ----------- ----------
9,948 84,951 154,154 (5,128) 243,925
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,552,926 418,359 19,229 (1,540,503) 450,011
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 36,279 1,234,927 2,741,653 -- 4,012,859
Less -- Accumulated depreciation and
depletion.................................. 12,505 133,484 1,303,841 -- 1,449,830
---------- ---------- ---------- ----------- ----------
23,774 1,101,443 1,437,812 -- 2,563,029
---------- ---------- ---------- ----------- ----------
$1,677,325 $1,831,512 $1,905,311 $(1,630,896) $3,783,252
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 4,142 $ 118,352 $ 92,051 $ (11,522) $ 203,023
Notes payable................................ -- 12,353 140,022 (76,578) 75,797
Current portion of long-term debt and capital
lease obligations.......................... 365 1,497 28,099 -- 29,961
Federal income, property and other taxes
payable.................................... 1,628 1,935 40,602 -- 44,165
Gas payable.................................. -- 4,821 740 -- 5,561
Customer deposits............................ 18 -- 14,026 1 14,045
Other........................................ 19,046 10,125 56,181 (347) 85,005
---------- ---------- ---------- ----------- ----------
25,199 149,083 371,721 (88,446) 457,557
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (2,684) 85,088 79,273 20 161,697
Unamortized investment tax credit............ 309 -- 33,206 (1) 33,514
Tax benefits amortizable to customers........ 206 -- 123,540 -- 123,746
Deferred swap gains and payables............. -- 42,824 -- -- 42,824
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 605 16,927 -- 17,532
Other........................................ 11,353 18,916 38,553 (2,011) 66,811
---------- ---------- ---------- ----------- ----------
12,184 147,433 323,499 (1,992) 481,124
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 594,396 625,999 (1) 1,220,394
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 505,048 -- -- -- 505,048
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 782 5 10,300 (10,306) 781
Additional paid-in capital................... 797,910 776,977 230,399 (1,008,581) 796,705
Retained earnings............................ 358,238 164,428 343,393 (521,570) 344,489
Accumulated other comprehensive loss......... -- (810) -- -- (810)
Yield enhancement, contract and issuance
costs...................................... (22,036) -- -- -- (22,036)
---------- ---------- ---------- ----------- ----------
1,134,894 940,600 584,092 (1,540,457) 1,119,129
---------- ---------- ---------- ----------- ----------
$1,677,325 $1,831,512 $1,905,311 $(1,630,896) $3,783,252
========== ========== ========== =========== ==========
</TABLE>
35
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
(in Thousands) DECEMBER 31, 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost........... $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable.......................... 15,525 240,867 210,677 (46,910) 420,159
Less -- Allowance for doubtful accounts.... 75 621 15,015 -- 15,711
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 15,450 240,246 195,662 (46,910) 404,448
Accrued unbilled revenues.................... 1,114 -- 91,896 -- 93,010
Gas in inventory............................. -- 16,576 40,201 -- 56,777
Property taxes assessed applicable to future
periods.................................... 217 2,835 64,827 -- 67,879
Accrued gas cost recovery revenues........... -- -- 12,862 -- 12,862
Other........................................ 3,745 17,612 33,361 (629) 54,089
---------- ---------- ---------- ----------- ----------
20,549 302,388 453,162 (47,539) 728,560
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities.... -- 62,060 35,110 351 97,521
Deferred swap losses and receivables......... -- 51,023 -- -- 51,023
Deferred postretirement benefit costs........ 651 -- -- -- 651
Deferred environmental costs................. 2,535 -- 27,699 -- 30,234
Prepaid benefit costs........................ (3,418) -- 85,790 (2,130) 80,242
Other........................................ 7,610 34,287 46,972 (3,339) 85,530
---------- ---------- ---------- ----------- ----------
7,378 147,370 195,571 (5,118) 345,201
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES............................. 1,641,421 528,492 19,643 (1,632,580) 556,976
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost......... 37,918 1,358,504 2,790,352 -- 4,186,774
Less -- Accumulated depreciation and
depletion.................................. 12,951 152,707 1,322,392 -- 1,488,050
---------- ---------- ---------- ----------- ----------
24,967 1,205,797 1,467,960 -- 2,698,724
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 4,385 $ 238,952 $ 130,267 $ (46,848) $ 326,756
Notes payable................................ -- 163,113 241,691 (3,078) 401,726
Current portion of long-term debt and capital
lease obligations.......................... 365 1,557 34,956 -- 36,878
Federal income, property and other taxes
payable.................................... 401 12,681 78,630 -- 91,712
Gas payable.................................. -- 6,254 2,063 -- 8,317
Customer deposits............................ 19 -- 16,363 -- 16,382
Other........................................ 13,599 22,944 65,717 (630) 101,630
---------- ---------- ---------- ----------- ----------
18,769 445,501 569,687 (50,556) 983,401
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes........................ (4,642) 73,874 83,905 22 153,159
Unamortized investment tax credit............ 301 -- 32,745 -- 33,046
Tax benefits amortizable to customers........ 443 -- 122,922 -- 123,365
Deferred swap gains and payables............. -- 41,717 -- -- 41,717
Accrued environmental costs.................. 3,000 -- 32,000 -- 35,000
Minority interest............................ -- 1,905 17,283 -- 19,188
Other........................................ 10,792 16,586 44,663 (2,152) 69,889
---------- ---------- ---------- ----------- ----------
9,894 134,082 333,518 (2,130) 475,364
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations.................................. -- 595,457 617,107 -- 1,212,564
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................. 505,104 -- -- -- 505,104
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................. 782 5 10,300 (10,305) 782
Additional paid-in capital................... 806,998 834,539 230,399 (1,064,939) 806,997
Retained earnings............................ 374,807 181,982 375,325 (557,307) 374,807
Accumulated other comprehensive loss......... -- (7,519) -- -- (7,519)
Yield enhancement, contract and issuance
costs...................................... (22,039) -- -- (1,292,756) (22,039)
---------- ---------- ---------- ----------- ----------
1,160,548 1,009,007 616,024 (1,632,551) 1,153,028
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,184,047 $2,136,336 $(1,685,237) $4,329,461
========== ========== ========== =========== ==========
</TABLE>
36
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
MCN AND ELIMINATIONS
OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ --------- --------- ------------ ------------
(in Thousands) NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES........... $ 37,775 $ 11,228 $ 218,035 $ (29,540) $ 237,498
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.............................. 107,440 138,592 (37,378) (105,066) 103,588
Capital distributions paid to affiliates, net... -- (38,554) -- 38,554 --
Dividends paid.................................. (61,887) -- -- -- (61,887)
Preferred securities dividends paid............. (27,162) -- -- 27,162 --
Issuance of common stock........................ 14,742 -- -- -- 14,742
Issuance of long-term debt...................... -- 305,709 153,052 -- 458,761
Long-term commercial paper, net................. -- 109,643 -- -- 109,643
Retirement of long-term debt and preferred
securities.................................... (100,365) (101,192) (124,637) -- (326,194)
Other........................................... -- 8,243 -- -- 8,243
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. (67,232) 422,441 (8,963) (39,350) 306,896
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................ (6,632) (278,256) (105,179) -- (390,067)
Acquisitions.................................... -- (36,731) -- -- (36,731)
Investment in debt and equity securities, net... -- 48,347 (2,061) -- 46,286
Investment in joint ventures and subsidiaries... (1,250) (165,776) 49 -- (166,977)
Sale of property and joint venture interests.... -- 46,060 -- (2,026) 44,034
Other........................................... 38,689 (24,385) (105,623) 70,916 (20,403)
--------- --------- --------- --------- ---------
Net cash provided from (used for) investing
activities.................................. 30,807 (410,741) (212,814) 68,890 (523,858)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 1,350 22,928 (3,742) -- 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1.............. 23 25,119 14,353 -- 39,495
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30........... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES........... $ 84,498 $ 52,087 $ 209,947 $ (61,109) $ 285,423
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.............................. -- (56,247) (125,104) (76,578) (257,929)
Capital contributions received from
(distributions paid to) affiliates, net....... (2,488) 545,546 -- (543,058) --
Dividends paid.................................. (52,927) -- (40,000) 40,000 (52,927)
Preferred securities dividends paid............. (21,336) -- -- 21,336 --
Issuance of common stock........................ 290,626 -- -- -- 290,626
Issuance of preferred securities................ 326,521 -- -- -- 326,521
Issuance of long-term debt...................... -- 149,190 124,051 -- 273,241
Long-term commercial paper, net................. -- (261,822) -- -- (261,822)
Retirement of long-term debt and preferred
securities.................................... (56) (31,225) (74,792) -- (106,073)
--------- --------- --------- --------- ---------
Net cash provided from (used for) financing
activities.................................. 540,340 345,442 (115,845) (558,300) 211,637
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures............................ (4,451) (257,530) (97,042) -- (359,023)
Acquisitions.................................... -- (128,206) -- -- (128,206)
Investment in debt and equity securities, net... -- 13,084 (971) -- 12,113
Investment in joint ventures and subsidiaries... (546,046) (67,156) (776) 546,626 (67,352)
Sale of property and joint venture interests.... -- 38,604 -- -- 38,604
Other........................................... (121) 12,104 6,825 (1,215) 17,593
--------- --------- --------- --------- ---------
Net cash used for investing activities........ (550,618) (389,100) (91,964) 545,411 (486,271)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 74,220 8,429 2,138 (73,998) 10,789
CASH AND CASH EQUIVALENTS, JANUARY 1.............. 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30........... $ 75,064 $ 28,037 $ 12,148 $ (73,998) $ 41,251
========= ========= ========= ========= =========
</TABLE>
37
<PAGE> 40
OTHER INFORMATION
LEGAL PROCEEDINGS
MichCon settled the two class action lawsuits relating to the installation of
high-efficiency furnaces. The furnace installation program was handled by
heating contractors under three separate MPSC approved, MichCon financed,
programs between 1989 and 1995. There were 46,000 class members. The notice of
settlement was sent in June 1998 to the class members.
Terms of the settlement included capped co-payments for the repair of chimney
damages or the installation of a chimney liner and a reduced price for a carbon
monoxide detector purchase from MichCon. The request for reimbursement period
ended on October 9, 1998. A total of 113 claim forms were sent out. Claims
totaling $3,105 were received and will be paid out in November 1998.
38
<PAGE> 41
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10-1 Special Retention Agreement-William K. McCrackin
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation
27-1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated August 28, 1998, under Item 5, with
respect to an update of its earnings, operations and investment issues.
MCN filed a report on Form 8-K dated September 28, 1998, under Item 5,
announcing the company's organizational realignment and cost savings.
MCN filed an additional report on Form 8-K dated October 28, 1998, under
Item 5, with respect to its third quarter results and strategic plan.
39
<PAGE> 42
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
Date: November 12, 1998 By: /s/ GERARD KABZINSKI
------------------------------------
Gerard Kabzinski
Vice President and Controller
40
<PAGE> 43
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10-1 Special Retention Agreement-William K. McCrackin
12-1 Computation of Ratio of Earnings to Fixed Charges for
MCN Energy Group Inc.
12-2 Computation of Ratio of Earning to Fixed Charges for
MCN Investment Corporation
27-1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SPECIAL RETENTION AGREEMENT
This Special Retention Agreement ("Agreement") by and between MCN Energy Group
Inc., a Michigan corporation ("Company") and William K. McCrackin ("Executive")
is made as of August 26, 1998 (the "Effective Date").
The Board of Directors of the Company ("Board") has determined that it is in the
best interest of the Company and its shareholders to assure that the Company
will have the continued dedication and expertise of the Executive beyond his
sixty-fifth birthday. The Board believes that retention of Mr. McCrackin is
critical in order to attain projected short-term and long-term financial goals
for of the Company. Therefore, in order to accomplish these objectives, the
Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Minimum Agreement Period. The Executive hereby agrees
to remain in the employ of the Company, in accordance with the terms and
provisions of this Agreement, for the period commencing on the Effective Date
and ending no earlier than December 31, 1999 (the "Minimum Agreement Period").
The Executive shall remain an at-will employee but shall be entitled to any
explicit vested payments provided in this Agreement.
2. Terms of Agreement. (a) Executive's Obligations.
During the Minimum Agreement Period, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive agrees to devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Minimum Agreement Period it shall not be a
violation of this Agreement for the Executive to (A) sit on corporate, civic or
charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed that to
the extent any such activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Effective Date
shall not thereafter be deemed to interfere with the performance of the
Executive's responsibilities to the Company.
1
<PAGE> 2
(b) Award. The Executive shall be eligible for a lump-sum
payment of $400,000.
3. Termination of Employment. (a) Death. The Executive's
employment shall terminate immediately upon the Executive's death during the
term of this Agreement.
(b) Disability. The Executive's employment shall terminate
on the 30th day after receipt of notice from the Company that the Board has
determined the Executive to be disabled ("Disability Effective Date"). For
purposes of this Agreement, "Disability" shall mean the absence of the Executive
from the Executive's duties with the Company on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Executive or the Executive's
legal representative; such agreement as to acceptability shall not be withheld
unreasonably.
(c) Cause. The Company may terminate this Agreement during
the Minimum Agreement Period for Cause. For purposes of this Agreement, "Cause"
shall mean
(i) repeated violations by the Executive of the Executive's
obligations under Section 2(a) (other than as a result of Disability) which are
demonstrably willful and deliberate on the Executive's part, which are committed
in bad faith or without reasonable belief that such violations are in the best
interests of the Company;
(ii) the commitment of malfeasance, embezzlement or fraud by
the Executive; or
(iii) the conviction of the Executive of a felony.
(d) Good Reason. The Executive's employment may by
terminated by the Executive for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities held, exercised and assigned at any time during the 90-day
period immediately preceding the Effective Date, or any other action by the
Company which results in a diminution in such position, authority, duties or
responsibilities that a reasonable man holding a similar position would find
untenable, excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company promptly
after receipt on notice thereof given by the Executive;
2
<PAGE> 3
(ii) the Company's requiring the Executive to be based at
any office or location other than the location where the Executive was employed
immediately preceding the Effective Date ("Current Location") or any office
which is the headquarters of the Company and such office is more than 35 miles
from the Current Location; or
(iii) any purported termination by the Company of this
Agreement other than as expressly permitted by this Agreement.
(e) Notice of Termination. Any termination by the Company
for Cause, or by the Executive for Good Reason, shall be communicated by Notice
of Termination to the other party hereto given in accordance with Section 9(b).
For purposes of this Agreement, a "Notice of Termination" means a written notice
which
(i) indicates the specific termination provision in this
Agreement relied upon;
(ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated; and
(iii) if the Date of Termination (as defined below) is other
than the date of receipt of such notice, specifies the termination date (which
date shall be not more than 15 days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(f) Date of Termination. For purposes of this Agreement,
"Date of Termination" means
(i) if the Executive's employment is terminated by the
Company for Cause, or by the Executive for Good Reason, the date of receipt of
the Notice of Termination or any later date specified therein (which date shall
be not more than 15 days after the giving of such notice), as the case may be;
(ii) if the Executive's employment is terminated by the
Company other than for Cause or Disability, the Date of Termination shall be the
date on which the Company notifies the Executive of such termination; and
3
<PAGE> 4
(iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
4. Payment of Award. (a) Completion of Minimum Agreement
Period. If the Executive remains in the employ of the Company to the end of the
Minimum Agreement Period, the Award shall vest as of the end of such Minimum
Agreement Period. The Company shall deliver a check to the Executive within 30
days.
(b) Termination Due to Good Reason, Death or Disability.
If, during the Minimum Agreement Period, the Executive shall terminate
employment for Good Reason, the Company shall terminate the Executive's
employment other than for Cause, or the Executive's employment is terminated by
reason of the Executive's Death or Disability, this Agreement shall terminate
and the Award shall immediately vest and be paid to the Executive or his estate
or beneficiary, as applicable, within 30 days of the Date of Termination.
(c) Termination Due to Cause; Other than for Good Reason.
If the Company terminates the Executive's employment for Cause during the
Minimum Agreement Period, or if the Executive terminates employment during the
Minimum Agreement Period, other than a termination for Good Reason, this
Agreement shall terminate and the Executive shall forfeit any rights to the
Award specified in paragraph 2(b).
5. Non-exclusivity of Rights. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in any
plan, program, policy or practice provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of, or any contract or
agreement with, the Company or any of its affiliated companies at or subsequent
to the Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement.
6. Full Settlement: Resolution of Disputes. (a) If there
shall be any dispute between the Company and the Executive (i) in the event of
any termination of the Executive's employment by the Company, whether such
termination was for Cause, or (ii) in the event of any termination of employment
by the Executive, whether Good Reason existed, then, unless and until there is a
final, nonappealable judgment by a court of competent jurisdiction declaring
that such termination was for Cause or that the determination by the Executive
of the existence of Good Reason was not made in good faith, the Award the
4
<PAGE> 5
Company would be required to pay or provide pursuant to Section 4(b) if such
termination were by the Company without Cause or by the Executive with Good
Reason shall be held in abeyance. If it is ultimately adjudged by such court
that Cause existed or Good Reason did not exist, the Award held in abeyance
shall be immediately forfeited. If it is ultimately adjudged by such court that
Cause did not exist or Good Reason did exist, the Award, plus interest at 1.5%
per month, shall be paid to the Executive within 30 days of such judgement.
(b) The Company agrees to pay promptly as incurred, to the
full extent permitted by law, all legal fees and expenses which the Executive
may reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement).
7. Confidential Information. The Executive shall hold in
a fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In no event shall an asserted violation of the
provisions of this Section 7 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
8. Successors. (a) This Agreement is personal to the
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the
5
<PAGE> 6
Company as hereinbefore defined and any successor to its business and/or assets
an aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
9. Miscellaneous. (a) This Agreement shall be governed by
and construed in accordance with the laws of the State of Michigan, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
At the most current address of record designated in the
Executive's personnel file
If to the Company:
MCN Energy Group Inc.
500 Griswold Street
Detroit, Michigan 48226
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under
this Agreement such Federal, state or local taxes as shall be required to be
withhold pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or ally other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including, without
6
<PAGE> 7
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 3(d)(i)-(iv), shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except
as may otherwise be provided under any other written agreement between the
Executive and the Company, the employment of the Executive by the Company is "at
will" and, prior to the Effective Date, may be terminated by either the
Executive or the Company at any time. Moreover, if prior to the Effective Date,
the Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.
(g) The Executive and the Company acknowledge that this
Agreement does not constitute a plan and is not subject to the Employee
Retirement Income Security Act of 1974, as amended (also known as "ERISA").
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of Directors,
the Company has caused these presents to be executed in its name on its behalf,
all as of the day and year first above written.
-----------------------------------
MCN Energy Group Inc.
By:
--------------------------------
7
<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
SEPTEMBER 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ----------------- -----------------
EARNINGS AS DEFINED (1)(5)
<S> <C> <C> <C>
Pre-tax income (loss)(2)(6) $ (444,871) $ 181,299 $ 146,607
Fixed charges (3) 146,008 125,338 99,944
--------------- --------------- ---------------
Earnings (loss) as defined $ (298,863) $ 306,637 $ 246,551
=============== =============== ===============
FIXED CHARGES AS DEFINED(1) (4)(5)
Interest, expensed $ 100,317 $ 86,453 $ 77,781
Interest, capitalized 23,028 18,190 13,235
Amortization of debt discounts, premium
and expense 2,600 2,426 2,217
Interest implicit in rentals 2,922 2,181 2,339
Preferred securities dividend requirements
of subsidiaries 36,916 31,090 12,390
--------------- --------------- ---------------
Fixed charges as defined $ 165,783 $ 140,340 $ 107,962
=============== =============== ===============
Ratio of Earnings to Fixed Charges 2.18 2.28
=============== ===============
Coverage Deficiency (7) $ 464,646
===============
</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.
(6) MCN recorded several unusual charges, consisting of property write-downs,
investment losses, and restructuring charges, totaling $599,381,000 pre-tax
and net of minority interest ($389,598,000 net of taxes and minority
interest), in the 1998 second and third quarters.
(7) Earnings for the twelve-month period ended September 30, 1998 were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$464,646,000. The ratio of earnings to fixed charges for 1998, excluding the
unusual charges would have been 1.81.
<PAGE> 1
MCN INVESTMENT CORPORATION AND SUBSIDIARIES EXHIBIT 12-2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ----------------- -----------------
EARNINGS AS DEFINED (1)(4)
<S> <C> <C> <C>
Pre-tax income (loss) (2)(5) $ (561,736) $ 51,892 $ 21,899
Fixed charges (3) 84,157 65,891 41,628
------------------ ----------------- -----------------
Earnings (loss) as defined $ (477,579) $ 117,783 $ 63,527
================= ================= =================
FIXED CHARGES AS DEFINED (1)(4)
Interest, expensed $ 82,307 $ 64,434 $ 40,523
Interest, capitalized 18,860 15,002 8,002
Amortization of debt discounts, premium
and expense 1,399 1,183 982
Interest implicit in rentals 451 274 123
------------------ ----------------- -----------------
Fixed charges as defined $ 103,017 $ 80,893 $ 49,630
================= ================= =================
Ratio of Earnings to Fixed Charges 1.46 1.28
================= =================
Coverage Deficiency (6) $ 580,596
=================
</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.
(5) MCN Investment recorded several unusual charges, consisting of
property write-downs, investment losses, and restructuring charges, totaling
$564,984,000 pre-tax ($367,239,000 net of taxes), in the 1998 second and
third quarters.
(6) Earnings for the twelve-month period ended September 30, 1998 were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$580,596,000. The ratio of earnings to fixed charges for 1998, excluding the
unusual charges would have been 0.85.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 60,031
<SECURITIES> 0
<RECEIVABLES> 286,744
<ALLOWANCES> 9,515
<INVENTORY> 200,399
<CURRENT-ASSETS> 644,253
<PP&E> 3,957,125
<DEPRECIATION> 1,603,223
<TOTAL-ASSETS> 4,126,658
<CURRENT-LIABILITIES> 1,220,677
<BONDS> 1,402,526
405,481
0
<COMMON> 791
<OTHER-SE> 782,908
<TOTAL-LIABILITY-AND-EQUITY> 4,126,658
<SALES> 0
<TOTAL-REVENUES> 1,458,819
<CGS> 0
<TOTAL-COSTS> 1,907,089
<OTHER-EXPENSES> (20,125)
<LOSS-PROVISION> 8,480
<INTEREST-EXPENSE> 78,999
<INCOME-PRETAX> (493,721)
<INCOME-TAX> (186,980)
<INCOME-CONTINUING> (306,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (306,741)
<EPS-PRIMARY> (3.90)
<EPS-DILUTED> (3.90)
</TABLE>
