1
EXHIBIT 99.G4
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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, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
000 XXXXXXXX XXXXXX, XXXXXXX, XXXXXXXX
(Address of principal executive offices)
00-0000000
(I.R.S. Employer
Identification No.)
48226
(Zip Code)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of November 12, 1999:
Common Stock, par value $.01 per share: 85,655,381
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2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1999
PAGE
NUMBER
------
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 1
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 42
SIGNATURE................................................... 43
ii
3
MCN ENERGY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Results reflect reduced Diversified Energy and Gas Distribution
contributions -- MCN had a net loss for the 1999 third quarter of $31.2 million
or $.37 per share compared with a net loss of $176.7 million or $2.24 per share
in the same 1998 quarter. MCN experienced a net loss in the 1999 nine- and
twelve-month periods of $31.9 million or $.39 per share and $7.9 million or $.10
per share, respectively, compared with a net loss of $310.5 million or $3.95 per
share and $265.6 million or $3.38 per share for the same 1998 periods. As
subsequently discussed, the comparability in earnings was affected by
non-recurring items consisting of an accounting change and several unusual
charges. The unusual charges include losses on the sale of properties, property
write-downs, investment losses and restructuring charges.
QUARTER 9 MONTHS 12 MONTHS
----------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NET INCOME (LOSS)
Diversified Energy:
Before unusual charges............... $(12.7) $ .2 $ (17.8) $ 21.6 $ (24.6) $ 33.9
Unusual charges (Note 3)............. (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- ------- ------- -------
(16.5) (152.2) (105.0) (351.3) (111.8) (339.0)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e)............ -- (16.7) -- (16.7) -- (16.7)
------ ------- ------- ------- ------- -------
(14.7) (24.5) 76.0 40.8 106.8 73.4
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (27.4) (7.6) 58.2 79.1 82.2 124.0
Unusual charges (Note 3)............. (3.8) (169.1) (87.2) (389.6) (87.2) (389.6)
------ ------- ------- ------- ------- -------
(31.2) (176.7) (29.0) (310.5) (5.0) (265.6)
Cumulative Effect of Accounting Change,
Net of Taxes (Note 6)................ -- -- (2.9) -- (2.9) --
------ ------- ------- ------- ------- -------
$(31.2) $(176.7) $ (31.9) $(310.5) $ (7.9) $(265.6)
====== ======= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE -- BASIC AND
DILUTED
Diversified Energy:
Before unusual charges............... $ (.15) $ -- $ (.22) $ .27 $ (.30) $ .43
Unusual charges (Note 3)............. (.05) (1.93) (1.05) (4.74) (1.07) (4.75)
------ ------- ------- ------- ------- -------
(.20) (1.93) (1.27) (4.47) (1.37) (4.32)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (.17) (.10) .92 .73 1.31 1.15
Unusual charges (Note 3e)............ -- (.21) -- (.21) -- (.21)
------ ------- ------- ------- ------- -------
(.17) (.31) .92 .52 1.31 .94
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (.32) (.10) .70 1.00 1.01 1.58
Unusual charges (Note 3)............. (.05) (2.14) (1.05) (4.95) (1.07) (4.96)
------ ------- ------- ------- ------- -------
(.37) (2.24) (.35) (3.95) (.06) (3.38)
Cumulative Effect of Accounting Change
(Note 6)............................. -- -- (.04) -- (.04) --
------ ------- ------- ------- ------- -------
$ (.37) $ (2.24) $ (.39) $ (3.95) $ (.10) $ (3.38)
====== ======= ======= ======= ======= =======
1
4
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Excluding the non-recurring items, MCN had a net loss of $27.4 million for
the 1999 quarter and earnings of $58.2 million and $82.2 million for the 1999
nine-and twelve-month periods, respectively, resulting in decreases of $19.8
million, $20.9 million and $41.8 million from the corresponding 1998 periods.
The comparisons reflect losses in the Diversified Energy group resulting from
the decline in earnings in the Energy Marketing and Exploration & Production
(E&P) segments as well as increased financing costs. The 1999 quarter also
reflects higher seasonal losses in the Gas Distribution segment. The decline in
Diversified Energy's results in the 1999 nine- and twelve-month periods was
partially offset by increased contributions from the Gas Distribution segment
resulting from its new gas sales program and the favorable impact of more normal
weather. Also affecting the comparability for the nine- and twelve-month periods
were gains recorded by the Diversified Energy group in 1998 from the sale of
certain assets.
RESTATEMENT -- As discussed in Note 5 to the Consolidated Financial
Statements included herein and in MCN's 1998 Annual Report included in the Form
8-K filed with the Securities and Exchange Commission (SEC) on October 15, 1999
(Note 1), MCN conducted a special investigation of prior years' operations of
CoEnergy Trading Company, its non-utility energy marketing subsidiary,
subsequent to the issuance of its December 31, 1998 financial statements. As a
result of the investigation, MCN identified that its internal control systems
had been overridden, and that certain transactions had not been properly
accounted for. The accompanying consolidated financial statements for the 1998
periods have been restated from those originally reported to properly account
for the transactions identified. The restatements result in a decrease in net
loss of $.4 million for the 1998 quarter and an increase in net loss of $3.7
million or $.05 per share and $9.1 million or $.11 per share for the 1998 nine-
and twelve-month periods, respectively. The corrections did not have an impact
on the liquidity or cash flows of MCN. The financial information contained in
Management's Discussion and Analysis herein has been revised to reflect the
impact of such restatement.
STRATEGIC DIRECTION -- MCN announced in August 1999 a significantly revised
strategic direction that includes: focusing on the Midwest-to-Northeast region
rather than on North America; emphasizing operational efficiencies and growth
through the integration of existing businesses rather than building a portfolio
of diverse, non-operated energy investments; retaining its natural gas producing
properties in Michigan while going forward with the sale of its other
exploration and production oil and gas properties; and reducing capital
investment levels to approximately $500 million in 1999 and to $300 million in
2000.
PENDING MERGER -- MCN and DTE Energy Company (DTE) have signed a definitive
merger agreement dated October 4, 1999 under which DTE will acquire all
outstanding shares of MCN common stock. The boards of directors of both
companies have unanimously approved the merger agreement. The transaction is
subject to the approval of the shareholders of both companies, regulatory
approvals and other customary merger conditions. The transaction is expected to
close in six to nine months from the date of the merger agreement and will be
accounted for as a purchase by DTE. The combined company, which will be named
DTE Energy Company and headquartered in Detroit, will be the largest electric
and gas utility in Michigan. In the 1999 fourth quarter and 2000 first quarter,
MCN will record legal, accounting, employee benefit and other expenses
associated with the merger. Further information regarding the merger agreement
is included in Note 2 to the Consolidated Financial Statements included herein.
UNUSUAL CHARGES -- MCN recorded several unusual charges in the 1999 second
and third quarters as well as the 1998 second and third quarters, consisting of
losses on the sale of properties, property write-downs, investment losses and
restructuring charges (Note 3).
2
5
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A discussion of each unusual charge by segment follows:
QUARTER 9 MONTHS 12 MONTHS
---------------- ----------------- -----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNUSUAL CHARGES
Diversified Energy:
Pipelines & Processing........... $ -- $ (89.5) $ -- $ (89.5) $ -- $ (89.5)
Electric Power................... -- (1.6) -- (1.6) -- (1.6)
Exploration & Production......... (3.8) (54.5) (87.2) (275.0) (87.2) (275.0)
Corporate & Other................ -- (6.8) -- (6.8) -- (6.8)
----- ------- ------ ------- ------ -------
(3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
Gas Distribution................... -- (16.7) -- (16.7) -- (16.7)
----- ------- ------ ------- ------ -------
$(3.8) $(169.1) $(87.2) $(389.6) $(87.2) $(389.6)
===== ======= ====== ======= ====== =======
Loss Per Share..................... $(.05) $ (2.14) $(1.05) $ (4.95) $(1.07) $ (4.96)
===== ======= ====== ======= ====== =======
PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a $133.8
million pre-tax ($87.0 million net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal briquettes
produced from six coal fines plants 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 to qualify for the tax credits,
operating delays at the plants in the 1998 third quarter significantly increased
the possibility that the Internal Revenue Service (IRS) would challenge the
project's eligibility for tax credits. In addition, there was uncertainty as to
whether MCN could utilize or sell the credits. These factors led to MCN's
decision to record an impairment loss equal to the carrying value of the plants,
reflecting the likely inability to recover such costs. MCN sought to maximize
the value of its investment in the coal fines project, and in May 1999 filed a
request with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, XXX received favorable
determination letters from the IRS ruling that four of the six plants were in
service by June 30, 1998 (Note 4a).
In the third quarter of 1998, 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. MCN reviewed the business alternatives for
this asset and determined that its development is unlikely. Accordingly, XXX
recorded an impairment loss equal to the carrying value of this asset.
ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $2.5
million pre-tax ($1.6 million net of taxes) restructuring charge related to
certain international power projects. The charge was incurred as a result of
refocusing MCN's strategic plan, particularly the decision to exit certain
international power projects.
EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a $52.0
million pre-tax ($33.8 million net of taxes) write-down of its gas and oil
properties under the full cost method of accounting, due primarily to an
unfavorable revision in the timing of production of proved gas and oil reserves
as well as reduced expectations of sales proceeds on unproved acreage. Under the
full cost method of accounting as prescribed by the SEC, MCN's capitalized
exploration and production costs at June 30, 1999 exceeded the
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
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.
In the second and third quarters of 1998, MCN recognized write-downs of its
gas and oil properties totaling $333.0 million pre-tax ($216.5 million net of
taxes) and $83.9 million pre-tax ($54.5 million net of taxes), respectively. The
write-downs were also the result of MCN's capitalized exploration and production
costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN recognized
losses from the sale of its Western and Midcontinent/Gulf Coast E&P properties
totaling $68.8 million pre-tax ($44.7 million net of taxes). In the third
quarter of 1999, MCN recognized additional losses relating to the sale of these
properties totaling $5.9 million pre-tax ($3.8 million net of taxes).
Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5
million pre-tax loss ($4.9 million net of taxes) from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a $6.1
million pre-tax loss ($4.0 million net of taxes) from the write-down of this
investment during the second quarter of 1998. The losses were due to declines in
the fair value of the securities that are not considered temporary. MCN has no
carrying value in this investment after the write-downs.
CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $10.4
million pre-tax ($6.8 million net of taxes) restructuring charge related to the
corporate realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment included cost saving
initiatives expected to reduce future operating expenses.
GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a $24.8
million pre-tax ($11.2 million net of taxes and minority interest) write-down of
certain gas gathering properties. An analysis revealed that projected cash flows
from the gathering system were not sufficient to cover the system's carrying
value. Therefore, an impairment loss was recorded representing the amount by
which the carrying value of the system exceeded its estimated fair value.
Loss on Investment: In the third quarter of 1998, XXX also recorded an $8.5
million pre-tax loss ($5.5 million net of taxes) from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell in
2000. The write-down represents the amount by which the carrying value exceeded
the estimated fair value of the investment.
DIVERSIFIED ENERGY
Results reflect reduced Energy Marketing and E&P contributions -- The
Diversified Energy group had a net loss of $16.5 million for the 1999 third
quarter compared to a net loss of $152.2 million for the same 1998 period.
Diversified Energy had net losses of $105.0 million and $111.8 million in the
1999 nine- and twelve-month periods, respectively, compared to losses of $351.3
million and $339.0 million in the corresponding 1998 periods. As previously
discussed, results for all 1999 and 1998 periods were impacted by the unusual
charges. Excluding the unusual charges, Diversified Energy had losses of $12.7
million, $17.8 million and $24.6 million for the 1999 quarter, nine- and
twelve-month periods, respectively, compared to earnings of $.2 million, $21.6
million and $33.9 million for the same 1998 periods. The results for all 1999
periods reflect losses from the Energy Marketing segment due to higher gas
costs. Additionally, all 1999 periods reflect the impact of lower E&P gas and
oil production on operating and joint venture income as well as higher financing
costs. The earnings comparisons for the nine- and twelve-month periods were also
affected by gains recorded in 1998 from the sale of certain assets.
Additionally, Diversified Energy's results for the 1999 nine- and
4
7
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods reflect the impact of lower methanol prices and methanol
production on the Pipelines & Processing segment.
QUARTER 9 MONTHS 12 MONTHS
---------------- ------------------ -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
DIVERSIFIED ENERGY OPERATIONS
Operating Revenues*...................... $335.5 $ 228.9 $ 927.0 $ 734.0 $1,185.8 $1,039.3
------ ------- ------- -------- -------- --------
Operating Expenses*
Property write-downs and restructuring
charges (Note 3).................... -- 234.5 52.0 567.5 52.0 567.5
Other.................................. 347.9 227.5 929.6 721.4 1,198.0 1,018.2
------ ------- ------- -------- -------- --------
347.9 462.0 981.6 1,288.9 1,250.0 1,585.7
------ ------- ------- -------- -------- --------
Operating Loss........................... (12.4) (233.1) (54.6) (554.9) (64.2) (546.4)
------ ------- ------- -------- -------- --------
Equity in Earnings of Joint Ventures..... 15.0 17.9 38.5 46.1 53.8 59.2
------ ------- ------- -------- -------- --------
Other Income & (Deductions)*
Interest income........................ 1.1 .9 3.1 5.3 3.0 7.4
Interest expense....................... (14.4) (16.4) (46.6) (38.1) (62.8) (43.5)
Dividends on preferred securities of
subsidiaries........................ (10.3) (8.2) (31.0) (27.2) (40.2) (37.0)
Loss on sale of E&P properties (Note
3c)................................. (5.9) -- (74.7) -- (74.7) --
Loss on E&P investment (Note 3c)....... -- -- (7.5) (6.1) (7.5) (6.1)
Other.................................. 3.8 (.1) 13.8 13.1 20.9 16.0
------ ------- ------- -------- -------- --------
(25.7) (23.8) (142.9) (53.0) (161.3) (63.2)
------ ------- ------- -------- -------- --------
Loss Before Income Taxes................. (23.1) (239.0) (159.0) (561.8) (171.7) (550.4)
------ ------- ------- -------- -------- --------
Income Taxes
Current and deferred benefit........... (6.6) (84.3) (54.0) (199.5) (59.9) (195.8)
Federal tax credits.................... -- (2.5) -- (11.0) -- (15.6)
------ ------- ------- -------- -------- --------
(6.6) (86.8) (54.0) (210.5) (59.9) (211.4)
------ ------- ------- -------- -------- --------
Net Income (Loss)
Before unusual charges................. (12.7) .2 (17.8) 21.6 (24.6) 33.9
Unusual charges (Note 3)............... (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- -------- -------- --------
$(16.5) $(152.2) $(105.0) $ (351.3) $ (111.8) $ (339.0)
====== ======= ======= ======== ======== ========
-------------------------
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1999 quarter, nine- and
twelve-month periods (excluding the unusual charges) decreased from the
comparable 1998 periods by $16.7 million, $22.8 million and $38.7 million,
respectively. Results for all 1999 periods reflect reduced contributions from
the Energy Marketing, E&P and Electric Power segments. Pipelines & Processing
results improved in the 1999 quarter,
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
but declined in the 1999 nine- and twelve-month periods. Additionally, lower
Corporate & Other expenses in the 1999 nine- and twelve-month periods favorably
impacted operating and joint venture income.
QUARTER 9 MONTHS 12 MONTHS
--------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
OPERATING AND JOINT VENTURE INCOME
(LOSS)
Before Unusual Charges:
Pipelines & Processing................ $ 4.1 $ 3.5 $ 13.7 $ 19.1 $ 16.0 $ 27.1
Electric Power........................ 6.6 8.6 18.0 21.0 23.0 25.8
Energy Marketing...................... (8.8) .4 (6.0) .7 (10.2) (1.5)
Exploration & Production.............. 1.8 6.5 10.0 23.4 15.6 34.5
Corporate & Other..................... (1.1) .3 .2 (5.5) (2.8) (5.6)
----- ------- ------ ------- ------ -------
2.6 19.3 35.9 58.7 41.6 80.3
Unusual Charges (Note 3)................ -- (234.5) (52.0) (567.5) (52.0) (567.5)
----- ------- ------ ------- ------ -------
$ 2.6 $(215.2) $(16.1) $(508.8) $(10.4) $(487.2)
===== ======= ====== ======= ====== =======
PIPELINES & PROCESSING operating and joint venture results (excluding the
write-offs) increased $.6 million for the 1999 quarter, and decreased $5.4
million and $11.1 million for the 1999 nine- and twelve-month periods,
respectively. All 1999 periods reflect start-up expenditures associated with new
projects and a decline in the "allowance for funds used during construction"
(AFUDC) associated with MCN's 16%-owned Portland Natural Gas Transmission
System, as it was placed in service in the first quarter of 1999. The 1999 nine-
and twelve-month periods also reflect reduced earnings from MCN's 25%-owned
methanol production business resulting from lower methanol margins as well as
lower methanol volumes produced. Earnings from the methanol production business
benefited from strong methanol prices during 1997 and early 1998, but prices and
margins have since weakened. Pipelines & Processing's average methanol sales
prices declined 9% for the 1999 nine-month period and 23% for the 1999
twelve-month period. Methanol production declined 5.0 million gallons for the
1999 nine-month period and 5.2 million gallons for the 1999 twelve-month period
due primarily to the shutdown of the methanol plant for scheduled maintenance in
March 1999. Additionally, Pipelines & Processing results for the 1998 periods
were impacted by operating losses related to the start-up of the coal fines
plants (Note 3a).
Pipelines & Processing operating and joint venture income was also affected
by an increase in transportation volumes for all 1999 periods due to new gas
gathering ventures and the expansion of existing pipeline projects. Volumes
transported increased for the 1999 quarter, nine- and twelve-month periods by
7.1 billion cubic feet (Bcf), 24.1 Bcf and 35.0 Bcf, respectively. Pipelines &
Processing results were also impacted in all 1999 periods by an increase in gas
processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs
increased 11.0 Bcf, 20.0 Bcf and 23.2 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively, reflecting volumes associated with the
acquisition and development of additional processing facilities. Pipelines &
Processing operations include variations in the level of gas processed to remove
carbon dioxide (CO(2)). The volume of CO(2) gas treated decreased .3 Bcf in the
1999 quarter, and increased 2.0 Bcf and 6.7 Bcf in the 1999 nine- and
twelve-month periods, respectively. However, earnings were not significantly
affected by these variations, since under the terms of Pipelines & Processing's
CO(2) processing contracts, revenues are not volume sensitive.
In November 1999, MCN reached an agreement to sell four of its coal fines
plants to DTE in an arms-length transaction that is independent of the pending
merger (Note 4b). The sales price will depend on total production performance of
the four plants. DTE will initially make a $45 million payment that will be
adjusted up to $152 million or down to zero based on the results of a 36-month
production test period. The sale is expected to be finalized in December 1999.
Beginning in 2001, Pipelines & Processing results are expected to
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
be favorably affected by the recording of gains from the sale of the plants as
increasing production levels are achieved.
QUARTER 9 MONTHS 12 MONTHS
------------ -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (Million Gallons)........ 15.7 15.2 40.6 45.6 55.4 60.6
==== ==== ===== ===== ===== =====
Transportation (Bcf)....................... 52.4 45.3 153.5 129.4 199.5 164.5
==== ==== ===== ===== ===== =====
Gas Processed (Bcf):
Carbon Dioxide Treatment................ 12.4 12.7 38.2 36.2 50.9 44.2
Natural Gas Liquids Removal............. 22.6 11.6 54.1 34.1 65.1 41.9
---- ---- ----- ----- ----- -----
35.0 24.3 92.3 70.3 116.0 86.1
==== ==== ===== ===== ===== =====
-------------------------
* Includes MCN's share of joint ventures
Pipelines & Processing has also recorded earnings from certain joint
venture investments where it is allocated income based on its share of the
ventures' earnings but not less than a predetermined fixed amount. Joint venture
income recorded from these investments through September 1999 was based on the
fixed amount. Under the joint venture agreements, the fixed amount will be
lowered or eliminated in 2000.
Pipelines & Processing has a 75% interest in an asphalt manufacturing
partnership that recently completed construction of a plant designed to produce
up to 100,000 tons of high-quality asphalt annually. Currently, the plant is
experiencing difficulties in producing economical quantities of asphalt, and MCN
is aggressively working to resolve the issues.
In 1998, MCN advanced approximately $18 million to a developer of a
fertilizer project in the United Arab Emirates. The advance was structured as an
interest-bearing loan with the possibility of being converted into an equity
investment in the project. The advance, which was due in September 1999, is
being extended for an additional year. The project is being developed more
slowly than initially anticipated, and XXX's continuing role in the project is
under negotiation.
ELECTRIC POWER operating and joint venture results (excluding the
restructuring charges) decreased by $2.0 million, $3.0 million and $2.8 million
in the 1999 quarter, nine- and twelve-month periods, respectively. Results for
all 1999 periods were unfavorably affected by higher start-up expenditures
associated with new ventures as well as reduced contributions from MCN's
international power investments, specifically the Torrent Power Limited (TPL)
venture. In August 1999, XXX completed the sale of its 40% interest in TPL for
approximately $130 million, resulting in a small gain. TPL holds minority
interests in electric distribution companies and power generation facilities in
the state of Gujarat, India. Earnings from TPL for 1999 were deferred due to the
pending sale. Additionally, the nine- and twelve-month periods comparison was
impacted by an uncollectible expense provision recorded in the second quarter of
1999 associated with a customer in bankruptcy as well as reduced contributions
from the 30 megawatt (MW) Ada cogeneration facility, reflecting the sale of a
50% interest in the project in the first quarter of 1998.
Electric Power's earnings comparison for the nine- and twelve-month periods
also was impacted by increased contributions from the 1,370 MW Midland
Cogeneration Venture (MCV) facility, reflecting an increase in MCN's interest in
the MCV partnership from 18% to 23% in June 1998. Earnings from the MCV
partnership for the 1999 nine- and twelve-month periods include a favorable $2.1
million pre-tax adjustment for the resolution of a number of contract issues
with the electricity purchaser. Also contributing favorably to
7
10
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
the 1999 results were higher earnings from MCN's 50%-owned, 123 MW Michigan
Power cogeneration facility due to higher electricity capacity payments received
under its long-term power purchase agreement.
QUARTER 9 MONTHS 12 MONTHS
-------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(THOUSANDS OF MW HOURS)*
ELECTRIC POWER
Electricity Sales -- Domestic...... 692.3 651.5 2,084.2 1,855.4 2,745.4 2,498.0
Electricity
Sales -- International.......... -- 336.5 -- 874.2 414.2 874.4
----- ----- ------- ------- ------- -------
692.3 988.0 2,084.2 2,729.6 3,159.6 3,372.4
===== ===== ======= ======= ======= =======
-------------------------
* Includes MCN's share of joint ventures
ENERGY MARKETING operating and joint venture results decreased $9.2
million, $6.7 million and $8.7 million for the 1999 quarter, nine- and
twelve-month periods, respectively. The 1999 periods reflect the accounting
effect of anticipated temporary high gas prices on gas in inventory and cost of
gas sold. During the third quarter of each year, Energy Marketing normally
increases gas in inventory and depletes such inventories in the colder fourth
and first quarters of the year when gas demand and gas prices typically are at
their highest. In anticipation that third quarter inventory injections will be
withdrawn prior to year-end, Energy Marketing prices the gas inventory
injections at the estimated average purchase rate for the calendar year. For the
1999 third quarter, the actual average purchase rate incurred exceeded the
estimated average purchase rate for the year. This resulted in a higher cost of
gas sold in the 1999 third quarter, the impact of which is expected to reverse
in the 1999 fourth quarter.
Results for all 1999 periods were also impacted by higher costs for natural
gas transportation and storage capacity. The Washington 10 storage project, for
which MCN markets 100% of the 42 Bcf of storage capacity, was completed and
placed into operation in July 1999. Completion of the storage field in time for
the 1999-2000 winter heating season enhances Energy Marketing's ability to offer
a reliable gas supply during peak winter months.
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)*
ENERGY MARKETING
Gas Sales................................ 140.5 114.5 423.1 333.0 544.7 435.8
Exchange Gas Deliveries.................. -- -- 5.6 6.8 9.9 11.9
----- ----- ----- ----- ----- -----
140.5 114.5 428.7 339.8 554.6 447.7
===== ===== ===== ===== ===== =====
-------------------------
* Includes MCN's share of joint ventures
The impact of the higher cost of gas sold as previously discussed, as well
as the higher costs for gas transportation and storage capacity more than offset
the improved margins resulting from an increase in total gas sales and exchange
deliveries. Gas sales and exchange deliveries in total increased 26.0 Bcf, 88.9
Bcf and 106.9 Bcf during the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in gas sales is due in part to the April 1999
acquisition of existing marketing operations that significantly increased Energy
Marketing's level of sales to large commercial and industrial customers in the
Midwest. The comparisons of earnings for the nine- and twelve-month periods were
also affected by losses recorded in 1998 associated with trading activities
(Note 5) as well as higher 1999 uncollectible expenses and costs associated with
the June 1999 dissolution of the DTE-CoEnergy joint venture.
EXPLORATION & PRODUCTION operating and joint venture results (excluding the
unusual charges) decreased by $4.7 million, $13.4 million and $18.9 million for
the 1999 quarter, nine- and twelve-month periods, respectively. These results
reflect a decline in overall gas and oil production of 10.1 billion cubic feet
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
equivalent (Bcfe) in the 1999 quarter, 21.0 Bcfe in the 1999 nine-month period
and 25.0 Bcfe in the 1999 twelve-month period. The decrease in gas and oil
production is due primarily to the sale of MCN's Western and Midcontinent/Gulf
Coast E&P properties recorded in the second quarter of 1999. Gas and oil
production in future periods will also be lower due to the expected sale of
other non-Michigan E&P properties by mid-2000.
E&P results for all 1999 periods were also impacted by an increase in
production-related expenses and variations in gas and oil sales prices.
Production expenses increased per thousand cubic feet (Mcf) equivalent by $.22,
$.12 and $.09 for the 1999 quarter, nine- and twelve-month periods,
respectively, reflecting the higher costs of operating the E&P properties
retained. Gas prices increased by $.17 per Mcf in the 1999 third quarter, by
$.16 per Mcf in the current nine-month period and by $.13 per Mcf in the 1999
twelve-month period. Oil prices increased by $1.44 per barrel (Bbl) in the 1999
quarter, but declined by $.61 per Bbl and $1.82 per Bbl in the current nine-and
twelve-month periods, respectively. 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.
QUARTER 9 MONTHS 12 MONTHS
--------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf)........................... 12.9 21.3 48.1 62.4 67.8 83.0
Oil Production (million Bbl)................... .2 .5 1.0 2.1 1.5 3.1
Gas and Oil Production (Bcf equivalent)........ 14.2 24.3 54.2 75.2 76.9 101.9
Average Gas Selling Price (per Mcf)............ $ 2.59 $ 2.03 $ 2.15 $ 2.07 $ 2.13 $ 2.23
Effect of Hedging (per Mcf).................... (.37) .02 .05 (.03) .02 (.21)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per Mcf)...... $ 2.22 $ 2.05 $ 2.20 $ 2.04 $ 2.15 $ 2.02
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl).............. $13.20 $10.64 $11.77 $11.55 $11.27 $12.99
Effect of Hedging (per Bbl).................... -- 1.12 .45 1.28 .72 .82
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per Bbl)...... $13.20 $11.76 $12.22 $12.83 $11.99 $13.81
====== ====== ====== ====== ====== ======
RISK MANAGEMENT STRATEGY -- MCN 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. In late 1998, XXX began entering into
offsetting positions for existing xxxxxx of gas and oil production from
properties that have been or were expected to be sold in 1999. MCN's risk
management strategy has been revised to reflect the change in its business that
will result from its new strategic direction as previously discussed.
Additionally, as a result of the special investigation, MCN is taking additional
steps to ensure compliance with risk management policies that are periodically
reviewed by the Board of Directors.
CORPORATE & OTHER operating and joint venture results (excluding the
restructuring charges) declined $1.4 million in the 1999 quarter, and improved
$5.7 million and $2.8 million for the 1999 nine- and twelve-month periods,
respectively. The variations primarily reflect adjustments that reduced or
eliminated accruals for employee incentive awards based on MCN's operating or
stock price performance.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for the 1999 quarter, nine- and twelve-month
periods reflect unfavorable changes of $1.9 million, $89.9 and $98.1 million,
respectively. The comparability of other income and deductions for all periods
is affected by unusual charges consisting of losses from the sale of E&P
properties and the write-down of an E&P investment. Other income and deductions
for the 1999 nine- and twelve-month periods reflect higher interest and
preferred dividend expense due to an increase in debt and preferred securities
required to finance capital investments in the Diversified Energy group. The
1999 nine- and
9
12
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods include lower interest income due to the collection in
March 1998 of a $46 million advance made to a Philippine independent power
producer.
Other income in the 1999 nine- and twelve-month periods includes a $3.1
million pre-tax gain recorded in the 1999 second quarter from the sale of a
pipeline facility. Other income in the 1998 nine- and twelve-month periods
includes $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. Other income for the 1998 twelve-month period includes a
$3.2 million pre-tax gain from the December 1997 sale of Diversified Energy's
25% interest in a gas storage project.
Additionally, other income in all 1999 periods include income from a third
quarter 1998 tax credit sale transaction, whereby MCN records income from such
sale as the credits are generated by the purchaser. MCN recorded pre-tax income
of $3.3 million, $9.4 million and $13.6 million in the 1999 quarter, nine- and
twelve-month periods, respectively, from such sale.
INCOME TAXES
The variations in income taxes for all 1999 periods reflect fluctuations in
pre-tax results. Income tax comparisons were also affected by tax credits and
stock-related tax benefits recorded in 1998, as well as the generation of
foreign income in 1998 that was not subject to U.S. or foreign tax provisions.
Gas production tax credits have not been recorded in the 1999 periods as a
result of the 1998 tax credit sale transaction and MCN's current net operating
loss tax position.
OUTLOOK
MCN's new strategic direction emphasizes achieving operational efficiencies
and growth through integration of existing businesses. MCN will continue
pursuing new pipeline, electric power and energy marketing ventures, with an
emphasis on operating projects that enhance MCN businesses within the
Midwest-to-Northeast corridor.
To achieve the operating efficiencies expected from the new strategic
direction, MCN is working to reorganize its Diversified Energy group into the
segments detailed below:
- Midstream & Supply develops and manages MCN's gas producing, gathering,
processing, storage and transmission facilities within the
Midwest-to-Northeast target region.
- Energy Marketing consists of MCN's non-regulated marketing activities to
industrial, commercial and residential customers, both inside and outside
the Gas Distribution segment's service area.
- Power develops and manages independent electric power projects.
- Energy Holdings manages and seeks to maximize the value of existing
ventures outside MCN's target region. It primarily consists of gas
gathering and processing investments in major U.S. producing basins.
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GAS DISTRIBUTION
Results reflect seasonal loss and higher operating costs -- Gas
Distribution had a net loss of $14.7 million for the 1999 third quarter compared
to a net loss of $24.5 million from the same 1998 period. The Gas Distribution
segment typically records third quarter losses due to seasonally lower demand
for natural gas during the summer months. Gas Distribution had earnings of $76.0
million and $106.8 million for the 1999 nine- and twelve-month periods,
respectively, resulting in increases of $35.2 million and $33.4 million from the
comparable 1998 periods. Earnings in all three 1998 periods were unfavorably
affected by $16.7 million of unusual charges as previously discussed. Excluding
the unusual charges, Gas Distribution's earnings declined by $6.9 million for
the 1999 quarter, and improved by $18.5 million and $16.7 million in the 1999
nine- and twelve-month periods, respectively. The 1999 quarter reflects higher
operating costs. The earnings improvements for the 1999 nine- and twelve-month
periods reflect contributions from the new gas sales program as subsequently
discussed. Additionally, all 1999 periods reflect the impact of more favorable
weather.
QUARTER 9 MONTHS 12 MONTHS
---------------- ---------------- --------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
GAS DISTRIBUTION OPERATIONS
Operating Revenues*
Gas sales.............................. $ 74.9 $ 80.2 $653.5 $579.1 $ 913.3 $ 929.7
End user transportation................ 22.4 16.7 72.6 60.0 94.9 83.1
Intermediate transportation............ 14.2 14.5 42.8 48.4 57.6 62.6
Other.................................. 17.9 12.7 62.7 47.2 82.9 62.3
------ ------ ------ ------ -------- --------
129.4 124.1 831.6 734.7 1,148.7 1,137.7
Cost of Sales............................ 33.2 32.1 354.6 311.6 505.1 533.0
------ ------ ------ ------ -------- --------
Gross Margin............................. 96.2 92.0 477.0 423.1 643.6 604.7
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.............. 65.3 58.3 203.5 184.2 275.9 260.3
Depreciation, depletion and
amortization........................ 24.4 23.2 74.4 69.5 98.7 95.2
Property and other taxes............... 12.3 12.2 43.8 43.7 56.0 58.1
Property write-down (Note 3e).......... -- 24.8 -- 24.8 -- 24.8
------ ------ ------ ------ -------- --------
102.0 118.5 321.7 322.2 430.6 438.4
------ ------ ------ ------ -------- --------
Operating Income (Loss).................. (5.8) (26.5) 155.3 100.9 213.0 166.3
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures..... .4 .1 1.5 .5 1.9 .9
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................ .9 1.6 2.7 3.6 4.8 4.6
Interest expense....................... (13.8) (13.1) (40.3) (41.1) (56.7) (55.6)
Investment loss (Note 3e).............. -- (8.5) -- (8.5) -- (8.5)
Minority interest...................... (.3) 7.1 (.8) 5.9 (1.0) 5.5
Other.................................. (.8) .5 (.7) 1.1 (2.1) .9
------ ------ ------ ------ -------- --------
(14.0) (12.4) (39.1) (39.0) (55.0) (53.1)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes........ (19.4) (38.8) 117.7 62.4 159.9 114.1
Income Taxes............................. (4.7) (14.3) 41.7 21.6 53.1 40.7
------ ------ ------ ------ -------- --------
Net Income (Loss)
Before unusual charges................. (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e).............. -- (16.7) -- (16.7) -- (16.7)
------ ------ ------ ------ -------- --------
$(14.7) $(24.5) $ 76.0 $ 40.8 $ 106.8 $ 73.4
====== ====== ====== ====== ======== ========
-------------------------
* Includes intercompany transactions
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GROSS MARGIN
Gross margin (operating revenues less cost of sales) increased $4.2
million, $53.9 million and $38.9 million in the 1999 quarter, nine- and
twelve-month periods, respectively. The increase is due primarily to margins
generated under Michigan Consolidated Gas Company's (MichCon) new three-year gas
sales program, which is part of its Regulatory Reform Plan (Note 7a). Under the
gas sales program that began in January 1999, MichCon's gas sales rates include
a gas commodity component that is fixed at $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy is likely to continue producing
favorable margins in each of the three years.
Gross margins for all three 1999 periods also reflect higher gas sales
resulting from more normal weather, especially the 1999 nine-month period that
was 13.1% colder than the same 1998 period. Additionally, gross margins for all
1999 periods reflect revenues from the continued growth in other gas-related
services as well as revenues and cost of sales associated with three heating and
cooling firms acquired in October 1998.
Gas Distribution's operations are seasonal, with gross margins and earnings
concentrated in the first and fourth quarters of each calendar year. By the end
of the first quarter, the heating season is largely over, and Gas Distribution
typically incurs substantially reduced gross margins and earnings in the second
quarter and losses in the third quarter. The seasonal nature of Gas
Distribution's operations is expected to be more pronounced as a result of
MichCon's new gas sales program.
QUARTER 9 MONTHS 12 MONTHS
------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percent Warmer Than Normal................ N/M N/M (8.5)% (21.6)% (10.7)% (14.5)%
Decrease From Normal in:
Gas Markets (Bcf)...................... (.7) (1.5) (11.1) (26.7) (24.6) (27.4)
Net Income (Millions).................. $ (.7) $(1.1) $(11.0) $(23.1) $(23.2) $(23.7)
Diluted Earnings Per Share............. $(.01) $(.01) $ (.13) $ (.29) $ (.28) $ (.30)
-------------------------
N/M -- not meaningful
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $.4
million and $87.0 million for the 1999 quarter and nine-month period,
respectively, and decreased by $4.6 million for the 1999 twelve-month period.
Revenues were affected by fluctuations in gas sales and end user transportation
deliveries that increased in total by 1.9 Bcf, 14.6 Bcf and 3.0 Bcf in the
current quarter, nine- and twelve-month periods, respectively. The higher gas
sales and end user transportation deliveries were due primarily to weather,
which was colder in all the 1999 periods compared to the corresponding 1998
periods.
Revenues were also impacted by variations in the cost of the gas commodity
component of gas sales rates. As previously discussed, this gas commodity
component was fixed under MichCon's new gas sales program at $2.95 per Mcf
beginning in January 1999. Prior to 1999, XxxxXxx's sales rates were set to
recover all of its reasonably and prudently incurred gas costs. The gas
commodity component of MichCon's sales rate increased
12
15
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
$.58 per Mcf (24%) and $.23 per Mcf (8%) for the 1999 quarter and nine-month
period, respectively, and decreased $.08 per Mcf (3%) for the 1999 twelve-month
period.
QUARTER 9 MONTHS 12 MONTHS
------------- ------------- -------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)
GAS DISTRIBUTION MARKETS
Gas Sales..................................... 10.6 12.8 127.3 117.5 182.0 182.6
End User Transportation....................... 32.7 28.6 107.0 102.2 145.1 141.5
----- ----- ----- ----- ----- -----
43.3 41.4 234.3 219.7 327.1 324.1
Intermediate Transportation*.................. 128.3 133.9 390.8 430.8 497.5 570.2
----- ----- ----- ----- ----- -----
171.6 175.3 625.1 650.5 824.6 894.3
===== ===== ===== ===== ===== =====
-------------------------
* Includes intercompany volumes
Additionally, gas sales and end user transportation revenues in total were
impacted by MichCon's three-year customer choice program, which is also part of
its Regulatory Reform Plan. Under the customer choice program that began in
April 1999, approximately 70,000 or 6% of its customers are purchasing natural
gas from suppliers other than MichCon. However, MichCon continues to transport
and deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services. MichCon's customers who
have chosen to purchase their gas from other suppliers are reflected as end user
transportation customers rather than gas sales customers. Accordingly, gas sales
revenues have decreased, partially offset by an increase in end user
transportation revenues, resulting in a net decrease in total operating revenues
due to the gas commodity component included in gas sales rates.
INTERMEDIATE TRANSPORTATION revenues decreased $.3 million, $5.6 million
and $5.0 million in the 1999 quarter, nine- and twelve-month periods,
respectively. Intermediate transportation revenues reflect lower off-system
volumes of 5.6 Bcf, 40.0 Bcf and 72.7 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively. A significant portion of the volume decrease
was 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. The decrease for all
1999 periods is due to customers shifting volumes from a higher rate to a lower
rate transportation route. The decrease in intermediate transportation revenues
for the 1999 nine- and twelve-month periods is also due in part to an adjustment
in 1998 of revenues related to fees generated from tracking the transfer of gas
title on MichCon's transportation system.
OTHER OPERATING REVENUES increased $5.2 million, $15.5 million and $20.6
million in the 1999 quarter, nine- and twelve-month periods, respectively. The
improvements are due to an increase in facility development and appliance
maintenance services, late payment fees and other gas-related services.
Additionally, all 1999 periods reflect revenues from the acquisition of three
heating and cooling firms in October 1998.
COST OF SALES
Cost of sales is affected by variations in gas sales volumes and the cost
of purchased gas as well as related transportation costs. Under the Gas Cost
Recovery (GCR) mechanism that was in effect through December 1998 (Note 7b),
MichCon's sales rates were 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. Under MichCon's new gas sales program, the gas
commodity component of its sales rates is fixed. Accordingly, beginning in
January 1999, changes in cost of gas sold directly impact gross margins and
earnings.
Cost of sales increased $1.1 million and $43.0 million in the 1999 quarter
and nine-month periods, respectively, and decreased $27.9 million in the 1999
twelve-month period. Cost of sales for all 1999 periods
13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
was affected by a reduction in gas sales volumes as a result of customers who
have chosen to purchase their gas from other suppliers under MichCon's customer
choice program. As previously discussed, MichCon maintains its previously
existing sales margins on these services by continuing to transport and deliver
the gas to the customers' premises.
The increase in the current nine-month period was due primarily to higher
weather-driven sales volumes. Cost of sales was also impacted by average prices
paid for gas, which increased $.42 per Mcf (18%) in the current quarter and
decreased $.25 per Mcf (8%) in the current twelve-month period. Prices paid for
gas sold in the 1999 nine-month period were flat compared to the same 1998
period. Additionally, all 1999 periods reflect cost of sales associated with the
operations of the three heating and cooling firms acquired in October 1998.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses increased $7.0 million, $19.3 million
and $15.6 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in the 1999 quarter and nine-month period is due to
higher employee benefit costs. The increase in all 1999 periods also reflects
additional computer system support costs associated with MichCon's new customer
information system as well as advertising costs associated with MichCon's new
gas sales program. The 1998 nine- and twelve-month periods benefited from an
interstate pipeline company refund.
DEPRECIATION AND DEPLETION increased $1.2 million, $4.9 million and $3.5
million in the 1999 quarter, nine- and twelve-month periods, respectively.
Depreciation on higher plant balances impacted all 1999 periods. The increase in
all 1999 periods was tempered by the effect of lower depreciation rates for
MichCon's utility property, plant and equipment that became effective in January
1998.
PROPERTY AND OTHER TAXES decreased $2.1 million in the 1999 twelve-month
period. The improvement is attributable to lower Michigan Single Business Taxes
resulting from an increase in capital acquisition deductions.
PROPERTY WRITE-DOWN of $24.8 million in the 1998 periods represents the
impairment of a Michigan gas gathering system (Note 3e).
EQUITY IN EARNINGS OF JOINT VENTURES
Equity in earnings of joint ventures increased $.3 million in the 1999
quarter, and $1.0 million in the 1999 nine- and twelve-month periods. The
comparability is affected by losses recorded in the 1998 periods from Gas
Distribution's 47.5% interest in a Missouri gas distribution company. The
investment was written down to fair value in the third quarter of 1998, and no
additional losses have since been recorded as a result of the intended sale of
the investment in 2000.
OTHER INCOME AND DEDUCTIONS
Other income and deductions changed unfavorably by $1.6 million, $.1
million and $1.9 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The 1998 nine- and twelve-month periods were impacted by gains
from the sale of property. The 1999 quarter and twelve-month periods include
slightly higher interest costs. Other income and deductions in all 1998 periods
also reflect an unusual charge to write down the investment in a small natural
gas distribution company located in Missouri (Note 3e). Also impacting other
income and deductions in all 1998 periods was a change in minority interest
reflecting the joint venture partners' share of the write-down of the Michigan
gas gathering properties (Note 3e).
INCOME TAXES
Income taxes increased $9.6 million, $20.1 million and $12.4 million in the
1999 quarter, nine- and twelve-month periods, respectively, reflecting an
increase in pre-tax earnings. The increase for all 1999 periods
14
17
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
is also due to the flow-through effect of certain book-to-tax temporary
differences. Additionally, income tax comparisons for the 1999 nine- and
twelve-month periods were affected by the favorable resolution of prior years'
tax issues.
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 control costs in order to deliver strong shareholder returns and provide
customers with high-quality service at competitive prices.
Gas Distribution has begun and plans to continue capitalizing on
opportunities resulting from the gas industry restructuring. MichCon is
currently implementing its Regulatory Reform Plan, which includes a
comprehensive experimental three-year customer choice program designed to offer
all sales customers added choices and greater price certainty. The customer
choice program began in April 1999, with approximately 70,000 customers choosing
to purchase natural gas from suppliers other than MichCon. Plan years begin
April 1 of each year, and the number of customers allowed to participate in the
plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is
also a volume limitation on commercial and industrial participants of 10 Bcf in
1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon continues to transport and
deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services.
The Plan also suspended the GCR mechanism for customers who continue to
purchase gas from MichCon and fixed the gas commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period that began in January
1999. The suspension of the GCR mechanism allows MichCon to profit from its
ability to purchase gas at less than $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy has produced favorable margins through
September 1999 and is likely to continue producing favorable margins through
2001. The level of margins generated from selling gas will be affected by the
number of customers choosing to purchase gas from suppliers other than MichCon
under the three-year customer choice program.
Also beginning in 1999, an income sharing mechanism allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. The impact of weather and expenses incurred in the
fourth quarter of 1999 will determine the actual amount of profit, if any, to be
shared with customers.
Gas Distribution also plans to grow revenues and earnings by offering a
variety of energy-related services, which include appliance sales, installation
and maintenance. Growth in revenues is expected from the three heating and
cooling firms acquired in October 1998 that have been integrated under MichCon
Home Services, which is expanding its customer base and range of services.
CHANGES IN ACCOUNTING
In the 1999 first quarter, MCN adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants. SOP 98-5 requires start-up and organizational costs to be expensed
as incurred. This change in accounting principle resulted in the write-off of
start-up and organization costs capitalized as of December 31, 1998. The
cumulative effect of the change was to decrease earnings by $2.9 million for the
1999 nine- and twelve-month periods.
In the 1999 first quarter, MCN adopted the Emerging Issues Task Force
consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their
15
18
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
fair value, with changes in fair value recognized in earnings. Adoption of EITF
98-10 did not have a material impact on MCN's financial statements.
CAPITAL RESOURCES AND LIQUIDITY
9 MONTHS
-----------------
1999 1998
---- ----
(IN MILLIONS)
CASH AND CASH EQUIVALENTS
Cash Flow Provided From (Used For):
Operating activities...................................... $ 211.5 $ 237.5
Financing activities...................................... (270.4) 306.9
Investing activities...................................... 72.2 (523.9)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 13.3 $ 20.5
======= =======
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $26.0 million during
the 1999 nine-month period as compared to the same 1998 period. The decrease was
due primarily to higher working capital requirements, substantially offset by
increased earnings, after adjusting for non-cash items (depreciation, unusual
charges and deferred taxes).
FINANCING ACTIVITIES
MCN's cash flow related to financing activities decreased $577.3 million
during the 1999 nine-month period compared to the same 1998 period. The change
primarily reflects lower debt issuances and higher debt repayments, partially
offset by an increase in equity issuances, in the 1999 nine-month period. A
summary of MCN's significant financing activities and financing plans during
1999 follows.
Prior to mid-February 1999, MCN issued new shares of common stock pursuant
to its Dividend Reinvestment and Stock Purchase Plan and various employee
benefit plans. MCN generated $.2 million in the 1999 nine-month period and $14.7
million in the same 1998 period from common stock issuances under these plans.
Beginning in mid-February 1999, shares issued under these plans are being
acquired by MCN through open market purchases.
MCN's 5,865,000 of Preferred Redeemable Increased Dividend Equity
Securities (Enhanced PRIDES) matured in April 1999. Each security represented a
contract to purchase one share of MCN common stock. Upon conversion of the
Enhanced PRIDES, MCN received cash proceeds totaling approximately $135.0
million. The proceeds were used to repay a $130.0 million medium-term note of
Diversified Energy that came due in May 1999.
In March 1999, XXX entered into a $150 million revolving credit agreement
that expired in October 1999. There was no balance outstanding under this credit
agreement at September 30, 1999. XXX effectively replaced this agreement in
October 1999 by entering into a $290 million revolving credit agreement that
expires in July 2000. Borrowings under the credit agreement were used to
refinance $100 million of Single Point Remarketed Reset Capital Securities that
were redeemed in October 1999. The credit agreement will also be used to repay
debt, fund capital investments and for general corporate purposes.
DIVERSIFIED ENERGY
The Diversified Energy group maintains credit lines that 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 Diversified Energy's commercial paper program, which is used
to finance capital investments and working capital requirements. The 364-day
facility was renewed in July 1999. During the first nine months
16
19
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
of 1999, Diversified Energy's commercial paper and bank borrowings outstanding
increased by $129.6 million, leaving borrowings of $355.3 million outstanding
under this program at September 30, 1999.
MCN received approximately $270 million through September 1999 from the
sale of various non-Michigan E&P properties. MCN also received approximately
$130 million in August 1999 from the sale of its interest in TPL. Proceeds from
these sales were used to repay outstanding debt at the MCN Corporate and
Diversified Energy levels. Proceeds from the sale of additional non-Michigan E&P
properties are expected by mid-2000 and will be used to repay outstanding
borrowings and for general corporate purposes.
MCN repaid $80 million and $130 million of medium-term notes that came due
in February 1999 and May 1999, respectively.
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon 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. The 364-day
facility was renewed in July 1999. During the first nine months of 1999, XxxxXxx
repaid $88.7 million of commercial paper, leaving borrowings of $129.6 million
outstanding under this program at September 30, 1999.
During 1999, XxxxXxx issued approximately $110 million of debt (Note 10)
and repaid $68 million of first mortgage bonds.
INVESTING ACTIVITIES
MCN's cash flow related to investing activities increased $596.1 million in
the 1999 nine-month period as compared to the same 1998 period. The increase was
due primarily to proceeds from the sale of property and investments and lower
capital investments.
17
20
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Capital investments equaled $391.6 million in the 1999 nine-month period
compared to $636.6 million for the same period in 1998. The 1999 amounts include
significantly lower levels of investments in E&P properties and Pipelines &
Processing ventures.
9 MONTHS
----------------
1999 1998
---- ----
(IN MILLIONS)
CAPITAL INVESTMENTS
Consolidated Capital Expenditures:
Diversified Energy........................................ $138.5 $283.8
Gas Distribution.......................................... 94.9 106.3
------ ------
233.4 390.1
------ ------
MCN's Share of Joint Venture Capital Expenditures:(1)
Pipelines & Processing.................................... 76.6 166.1
Electric Power............................................ 52.0 19.7
Energy Marketing.......................................... -- .6
Other..................................................... .1 .8
------ ------
128.7 187.2
------ ------
Acquisitions:(2)............................................ 29.5 59.3
------ ------
Total Capital Investments................................... $391.6 $636.6
====== ======
-------------------------
(1) A portion of joint venture capital expenditures is financed with joint
venture debt
(2) Includes MCN's share of certain debt existing at the date of acquisitions
Total capital investments were partially funded from the sale of certain
E&P properties and joint venture investments that totaled approximately $400
million in the 1999 nine-month period.
OUTLOOK
1999 capital investments to approximate $500 million -- MCN's strategic
direction is to grow in its targeted region by investing in energy-related
projects. For 1999, MCN anticipates investing approximately $500 million, of
which 70% is expected to be within the Diversified Energy group.
The proposed level of investments for 2000 and each of the next several
years approximates $300 million and is expected to be financed primarily with
internally generated funds, including proceeds received from the sale of assets.
No issuance of incremental equity securities is expected for the next few years.
It is management's opinion that MCN and its subsidiaries will have sufficient
capital resources to meet anticipated capital and operating requirements.
YEAR 2000
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN has implemented a corporate-wide,
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 remediated. MCN has completed the Year 2000 implementation plan for its
mission critical
18
21
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
business systems and measurement and control systems (including embedded
microprocessors), and therefore considers these systems Year 2000 ready. The
completion status of these systems follows:
INVENTORY ASSESSMENT REMEDIATION TESTING
--------- ---------- ----------- -------
Business Systems:
September 30, 1999.................................. 100% 100% 98% 98%
October 31, 1999.................................... 100% 100% 100% 100%
Measurement and Control Systems:
September 30, 1999.................................. 100% 100% 99% 99%
October 31, 1999.................................... 100% 100% 100% 100%
Costs associated with the Year 2000 issue are not expected to have a
material adverse effect on MCN results of operations, liquidity and financial
condition. The total costs are estimated to be between $5 million and $6
million, of which approximately $4.6 million was incurred through September
1999. 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 part to the ongoing replacement of significant old systems. MCN
has made a substantial investment in new systems that were installed over the
past few years that are Year 2000 ready, particularly MichCon's customer
information system which was installed and functional in April 1999. The
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of customer satisfaction and to respond
to changes in regulation and increased competition within the energy industry.
MCN anticipates a 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.
In order to reduce its Year 2000 risk, MCN has completed the development of
contingency plans for mission-critical processes in the event of a Year 2000
complication. Contingency plans for several essential gas transmission
facilities were tested under a "power outage" scenario and have achieved
excellent results. Completed contingency plans will continue to be enhanced
throughout the remainder of 1999 as MCN works with partners, operators,
suppliers and governmental agencies.
MARKET RISK INFORMATION
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN manages commodity price and interest rate
risk through the use of various derivative instruments and generally limits the
use of such instruments to hedging activities. A discussion and analysis of the
events and factors that have changed MCN's commodity price, interest rate and
foreign currency risk during the 1999 nine-month period follows.
COMMODITY PRICE RISK
HEDGING ACTIVITIES
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts and gas inventories. As a result of changes in
commodity prices that occurred during the 1999 nine-month period, there have
been significant changes in the outcome of the sensitivity analysis performed
for commodity price risk at September 30, 1999 as compared to December 31, 1998.
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A sensitivity analysis calculates the change in fair values of MCN's
natural gas and oil futures and swap agreements given a hypothetical 10%
increase or decrease in commodity prices utilizing applicable forward commodity
rates in effect at the end of the reporting period.
Changes in fair values resulting from sensitivity analysis calculations
follow:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
Commodity Price Sensitive:*
Swaps: Pay fixed/receive variable................. $ 79.6 $(79.6) $ 53.6 $(53.6)
Pay variable/receive fixed................ $(91.0) $ 91.0 $(54.0) $ 54.0
Futures: Longs.................................... $ 5.3 $ (5.3) $ 1.9 $ (1.9)
Shorts................................... $ (3.5) $ 3.5 $ (.1) $ .1
-------------------------
* Includes only the risk related to the derivative instruments that serve as
xxxxxx and does not include the risk associated with the related underlying
hedged item.
NON-HEDGING ACTIVITIES
During 1999, MCN sold its Western and Midcontinent/Gulf Coast E&P
properties, but has not yet fully exited the natural gas and oil swap agreements
and futures contracts that served as xxxxxx of the price risk associated with
the gas and oil produced from these properties. As a result, these natural gas
and oil swap agreements and futures contracts are no longer considered xxxxxx
under definitions prescribed by the SEC and generally accepted accounting
principles. Accordingly, these swap agreements and futures contracts are
accounted for using the mark-to-market method, with unrealized gains and losses
recorded in earnings. At September 30, 1999, these swap agreements and futures
contracts total 14.1 Bcf, have a notional value of $33.0 million and mature
through 2000.
Changes in fair values resulting from sensitivity analysis calculations
previously discussed follow:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
Commodity Price Sensitive:*
Swaps: Pay variable/receive fixed................. $(2.3) $ 2.3 N/A N/A
Futures: Shorts................................... $(1.3) $ 1.3 N/A N/A
INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of
variable and fixed-rate debt and preferred securities. In order to manage
interest costs and risk, MCN uses interest rate swap agreements to exchange
fixed and variable-rate interest payment obligations over the life of the
agreements without exchange of the underlying principal amounts. During the 1999
nine-month period, there have not been any events or factors that have caused
any significant changes to MCN's interest rate risk.
20
23
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONCLUDED)
FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are located in India, Nepal and the United Arab
Emirates. During August 1999, MCN completed the sale of its interest in TPL that
is located in India for approximately $130 million. This sale has reduced MCN's
foreign currency risk to an insignificant level.
NEW ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000.
SFAS 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 xxxxxx 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 at this time.
FORWARD-LOOKING STATEMENTS
This 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 1998 Annual Report included herein in the Form 8-K filed with the SEC
on October 15, 1999.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act. Therefore, XXX claims the full
protections established by the Act.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and
other interested parties: the 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999; the Form 10-Q Quarterly Reports and the
Quarterly Statistical Supplements. To request these publications, shareholders
and other interested parties are instructed to contact: MCN Investor Relations,
000 Xxxxxxxx Xxxxxx, Xxxxxxx, Xxxxxxxx 00000, (000) 000-0000. Information is
also available on MCN's website at xxxx://xxx.xxxxxxxxx.xxx.
21
24
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------- -----------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES............................... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
-------- --------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of sales.................................. 329,339 201,006 1,118,172 853,551 1,470,395 1,309,153
Operation and maintenance...................... 98,159 90,712 298,586 277,215 410,786 386,192
Depreciation, depletion and amortization....... 38,611 44,231 125,948 135,478 169,960 182,245
Property and other taxes....................... 14,921 15,542 52,849 54,255 68,147 72,277
Property write-downs and restructuring charges
(Note 3 ).................................... -- 259,296 52,000 592,318 52,000 592,318
-------- --------- ---------- ---------- ---------- ----------
481,030 610,787 1,647,555 1,912,817 2,171,288 2,542,185
-------- --------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................... (18,171) (259,642) 100,674 (453,998) 148,820 (380,002)
-------- --------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES............. 15,396 17,963 40,020 46,561 55,684 60,040
-------- --------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 1,909 2,496 5,774 8,659 8,008 13,136
Interest on long-term debt..................... (22,540) (24,392) (66,046) (62,345) (91,047) (79,336)
Other interest expense......................... (5,541) (4,991) (20,858) (16,654) (28,608) (20,981)
Dividends on preferred securities of
subsidiaries................................. (10,335) (8,178) (31,004) (27,162) (40,212) (36,916)
Loss on sale of E&P properties (Note 3c)....... (5,877) -- (74,675) -- (74,675) --
Investment losses (Notes 3c and 3e)............ -- (8,500) (7,456) (14,635) (7,456) (14,635)
Minority interest (Note 3e).................... (632) 7,275 (1,371) 6,030 (1,409) 5,580
Other.......................................... 3,281 134 13,655 14,095 19,121 17,040
-------- --------- ---------- ---------- ---------- ----------
(39,735) (36,156) (181,981) (92,012) (216,278) (116,112)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES......................... (42,510) (277,835) (41,287) (499,449) (11,774) (436,074)
INCOME TAX BENEFIT............................... (11,356) (101,111) (12,308) (188,984) (6,792) (170,496)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE......................................... (31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES (NOTE 6)................................. -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
NET LOSS......................................... $(31,154) $(176,724) $ (31,851) $(310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
LOSS PER SHARE -- BASIC AND DILUTED (NOTE 11)
Before cumulative effect of accounting
change....................................... $ (0.37) $ (2.24) $ (.35) $ (3.95) $ (.06) $ (3.38)
Cumulative effect of accounting change (Note
6)........................................... -- -- (.04) -- (.04) --
-------- --------- ---------- ---------- ---------- ----------
$ (0.37) $ (2.24) $ (0.39) $ (3.95) $ (0.10) $ (3.38)
======== ========= ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING -- BASIC AND
DILUTED........................................ 85,282 78,938 82,724 78,689 81,840 78,531
======== ========= ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................... $ .2550 $ .2550 $ .7650 $ .7650 $ 1.0200 $ 1.0200
======== ========= ========== ========== ========== ==========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- ---------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
BALANCE -- BEGINNING OF PERIOD................. $(45,400) $ 190,548 $ (2,977) $ 365,730 $ (6,622) $ 340,767
ADD -- NET LOSS................................ (31,154) (176,724) (31,851) (310,465) (7,854) (265,578)
-------- --------- -------- --------- -------- ---------
(76,554) 13,824 (34,828) 55,265 (14,476) 75,189
DEDUCT -- CASH DIVIDENDS DECLARED.............. 22,009 20,446 63,735 61,887 84,087 81,811
-------- --------- -------- --------- -------- ---------
BALANCE -- END OF PERIOD....................... $(98,563) $ (6,622) $(98,563) $ (6,622) $(98,563) $ (6,622)
======== ========= ======== ========= ======== =========
The notes to the consolidated financial statements are an integral part of these
statements.
22
25
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)...................................... $ 30,353 $ 60,031 $ 17,039
Accounts receivable, less allowance for doubtful
accounts of $16,216, $9,515 and $9,665,
respectively....................................... 301,243 280,496 400,120
Accrued unbilled revenues............................. 21,499 17,359 87,888
Gas in inventory...................................... 238,366 197,799 147,387
Property taxes assessed applicable to future
periods............................................ 39,505 33,115 72,551
Other................................................. 56,799 56,120 42,472
---------- ---------- ----------
687,765 644,920 767,457
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes................................. 11,144 53,519 50,547
Investments in debt and equity securities............. 72,494 42,986 69,705
Deferred swap losses and receivables (Note 15)........ 96,539 45,033 63,147
Deferred environmental costs.......................... 31,291 30,655 30,773
Prepaid benefit costs................................. 140,295 97,169 111,775
Other................................................. 125,569 96,719 98,940
---------- ---------- ----------
477,332 366,081 424,887
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing................................ 581,515 488,536 521,711
Electric Power........................................ 134,298 228,960 231,668
Energy Marketing...................................... 25,496 24,944 29,435
Gas Distribution...................................... 2,478 628 1,478
Other................................................. 18,695 19,354 18,939
---------- ---------- ----------
762,482 762,422 803,231
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Pipelines & Processing................................ 46,094 38,703 48,706
Exploration & Production (Note 3c).................... 690,760 1,013,778 1,040,047
Gas Distribution...................................... 3,001,638 2,869,897 2,916,540
Other................................................. 77,937 34,747 36,124
---------- ---------- ----------
3,816,429 3,957,125 4,041,417
Less -- Accumulated depreciation and depletion........ 1,688,186 1,603,223 1,644,094
---------- ---------- ----------
2,128,243 2,353,902 2,397,323
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
23
26
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................... $ 291,176 $ 318,129 $ 304,349
Notes payable......................................... 370,995 414,957 618,851
Current portion of long-term debt, preferred
securities and capital lease obligations........... 131,302 269,499 269,721
Federal income, property and other taxes payable...... 5,249 48,130 69,465
Deferred gas cost recovery revenues (Note 7b)......... -- 23,899 14,980
Gas payable........................................... 36,073 50,302 42,669
Customer deposits..................................... 15,766 16,829 18,791
Interest payable...................................... 26,459 30,095 30,314
Other................................................. 80,355 62,305 77,996
---------- ---------- ----------
957,375 1,234,145 1,447,136
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credit..................... 28,510 31,641 30,056
Tax benefits amortizable to customers................. 136,906 132,676 130,120
Deferred swap gains and payables (Note 15)............ 76,810 38,556 62,956
Accrued environmental costs........................... 30,373 35,000 35,000
Minority interest..................................... 10,928 11,948 10,898
Other................................................. 104,076 64,454 75,439
---------- ---------- ----------
387,603 314,275 344,469
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations
(Note 10)............................................. 1,460,941 1,402,526 1,307,168
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES HOLDING SOLELY DEBENTURES
OF MCN................................................ 402,900 405,481 502,203
---------- ---------- ----------
CONTINGENCIES (NOTE 14)
COMMON SHAREHOLDERS' EQUITY
Common stock (Note 10)................................ 855 791 797
Additional paid-in capital (Note 10).................. 967,356 813,809 832,966
Retained earnings (deficit)........................... (98,563) (6,622) (2,977)
Accumulated other comprehensive loss (Note 13)........ (357) (14,792) (16,576)
Yield enhancement, contract and issuance costs........ (22,288) (22,288) (22,288)
---------- ---------- ----------
847,003 770,898 791,922
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
The notes to the consolidated financial statements are an integral part of this
statement.
24
27
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998
(RESTATED)
1999 NOTE 5
---- ----------
(IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES
Net loss.................................................. $ (31,851) $(310,465)
Adjustments to reconcile net loss to net cash provided
from operating activities Depreciation, depletion and
amortization:
Per statement of operations........................... 125,948 135,478
Charged to other accounts............................. 6,676 5,990
Unusual charges, net of taxes (Note 3).................. 87,185 389,598
Cumulative effect of accounting change, net of taxes
(Note 6)............................................... 2,872 --
Deferred income taxes -- current........................ (9,791) (11,994)
Deferred income taxes and investment tax credit, net.... 82,738 14,779
Equity in earnings of joint ventures, net of
distributions.......................................... (15,176) (30,344)
Other................................................... (790) (9,331)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... (36,312) 53,787
--------- ---------
Net cash provided from operating activities........... 211,499 237,498
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (247,856) 103,588
Dividends paid............................................ (63,735) (61,887)
Issuance of common stock (Note 10)........................ 132,544 14,742
Reacquisition of common stock............................. (780) --
Issuance of long-term debt (Note 10)...................... 106,535 458,761
Long-term commercial paper and bank borrowings, net....... 92,344 109,643
Retirement of long-term debt and preferred securities
(Note 10)............................................... (289,439) (326,194)
Other..................................................... -- 8,243
--------- ---------
Net cash provided from (used for) financing
activities........................................... (270,387) 306,896
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (233,410) (390,067)
Acquisitions.............................................. (33,071) (36,731)
Investment in debt and equity securities, net............. (4,572) 46,286
Investment in joint ventures.............................. (62,572) (166,977)
Sale of property and joint venture interests.............. 409,616 44,034
Other..................................................... (3,789) (20,403)
--------- ---------
Net cash provided from (used for) investing
activities........................................... 72,202 (523,858)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 13,314 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 17,039 39,495
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30..................... $ 30,353 $ 60,031
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 98,192 $ 113,476
Accrued unbilled revenues................................. 66,389 75,651
Accrued/deferred gas cost recovery revenues, net.......... (15,153) 36,761
Gas in inventory.......................................... (90,979) (141,022)
Property taxes assessed applicable to future periods...... 33,046 34,764
Accounts payable.......................................... (8,373) (22,576)
Federal income, property and other taxes payable.......... (64,216) (38,668)
Gas payable............................................... (6,596) 41,985
Interest payable.......................................... (3,855) 1,635
Prepaid benefit costs, net................................ (28,487) (16,276)
Other current assets and liabilities, net................. (2,193) (10,845)
Other deferred assets and liabilities, net................ (14,087) (21,098)
--------- ---------
$ (36,312) $ 53,787
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 97,395 $ 90,088
========= =========
Federal income taxes.................................... $ 3,550 $ 11,700
========= =========
The notes to the consolidated financial statements are an integral part of this
statement.
25
28
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
MCN Energy Group Inc. (MCN) is a diversified energy company that operates
two major business groups, Diversified Energy and Gas Distribution. Diversified
Energy, operating through MCN Energy Enterprises Inc. (XXXXX), was previously
doing business as MCN Investment Corporation. Gas Distribution principally
consists of Michigan Consolidated Gas Company (MichCon).
In MCN's 1998 Annual Report on Form 10-K/A, MCN accounted for its
Exploration & Production (E&P) segment as a discontinued operation as the result
of its decision to sell all of its oil and gas properties. In August 1999, the
company made a strategic business decision to keep a portion of these properties
(Note 8). Accordingly, financial results included in MCN's 1998 Annual Report on
Form 10-K/A have been reclassified to reflect the E&P segment as a continuing
operation, and are included in MCN's Form 8-K filed October 15, 1999 with the
Securities and Exchange Commission (SEC). Therefore, the accompanying
consolidated financial statements should be read in conjunction with XXX's 1998
Annual Report included in the Form 8-K. Additionally, certain reclassifications
have been made to the prior year's financial statements to conform to the 1999
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. MERGER AGREEMENT WITH DTE ENERGY COMPANY
MCN and DTE Energy Company (DTE) have signed a definitive merger agreement,
dated October 4, 1999, under which DTE will acquire all outstanding shares of
MCN common stock. Under the terms of the agreement, MCN shareholders will have
the right to elect to receive either $28.50 in cash or 0.775 shares of DTE
common stock in exchange for each share of MCN common stock that they hold. The
acquisition of shares is subject to an allocation and proration that is intended
to result in 45% of the MCN shares being converted into shares of DTE common
stock and 55% being converted into cash.
The boards of directors of both companies have unanimously approved the
merger agreement. The transaction is subject to the approval of the shareholders
of both companies, regulatory approvals and other customary merger conditions.
The transaction is expected to close in six to nine months from the date of the
merger agreement and will be accounted for as a purchase by DTE. The combined
company, which will be named DTE Energy Company and headquartered in Detroit,
will be the largest electric and gas utility in Michigan.
DTE is a diversified energy provider. Its principal subsidiary is The
Detroit Edison Company, Michigan's largest electric utility serving 2.1 million
customers in southeastern Michigan. DTE's non-regulated subsidiaries and
ventures sell methane gas from landfills, coal, metallurgical coke and other
energy-related products and services.
Additionally, as part of the merger agreement, MCN has agreed to use its
best efforts to enter into agreements to dispose of some or all of its interests
in certain assets or facilities. MCN may sell all or a portion of several
"Qualifying Facilities" as defined by the Public Utility Regulatory Policies Act
of 1978, as amended. MCN's investments in these "Qualifying Facilities" include:
a 23% interest in the Midland Cogeneration Venture, a 1,370 megawatt (MW)
cogeneration facility located in Michigan; a 50% interest in the Michigan Power
Project, a 123 MW cogeneration plant located in Michigan; a 33 1/3% interest in
the Xxxxxx Cogeneration facility, a 42 MW cogeneration plant located in
California; and a 50% interest in the Ada Cogeneration facility, a 30 MW
cogeneration plant located in Michigan. Furthermore, under the terms of the
merger agreement, MCN will dispose of all or a portion of its 95% interest in
the Cobisa-Person facility, a 140
26
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MW power plant in New Mexico that is currently under construction.
3. UNUSUAL CHARGES
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, XXX recorded several unusual charges in 1998,
consisting of property write-downs, investment losses, and restructuring
charges. In 1999, XXX recorded additional unusual charges. A discussion of each
unusual charge by segment follows:
A. PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$133,782,000 pre-tax ($86,959,000 net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal
briquettes produced from six coal fines plants 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 to
qualify for the tax credits, operating delays at the plants in the 1998
third quarter significantly increased the possibility that the Internal
Revenue Service (IRS) would challenge the project's eligibility for tax
credits. In addition, there was uncertainty as to whether MCN could utilize
or sell the credits. These factors led to MCN's decision to record an
impairment loss equal to the carrying value of the plants, reflecting the
likely inability to recover such costs. MCN sought to maximize the value of
its investment in the coal fines project, and in May 1999 filed a request
with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, XXX received favorable
determination letters from the IRS ruling that four of the six plants were
in service by June 30, 1998 (Note 4a).
In the third quarter of 1998, MCN also 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. MCN reviewed the business alternatives
for this asset and determined that its development is unlikely.
Accordingly, XXX recorded an impairment loss equal to the carrying value of
this asset.
B. ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, XXX recorded a
$2,470,000 pre-tax ($1,605,000 net of taxes) restructuring charge related
to certain international power projects. The charge was incurred as a
result of refocusing MCN's strategic plan, particularly the decision to
exit certain international power projects.
C. EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a
$52,000,000 pre-tax ($33,800,000 net of taxes) write-down of its gas and
oil properties under the full cost method of accounting, due primarily to
an unfavorable revision in the timing of the production of proved gas and
oil reserves as well as reduced expectations of sales proceeds on unproved
acreage. Under the full cost method of accounting as prescribed by the SEC,
MCN's capitalized exploration and production costs at June 30, 1999
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.
In the second and third quarters of 1998, MCN recognized write-downs
of its gas and oil properties totaling $333,022,000 pre-tax ($216,465,000
net of taxes) and $83,955,000 pre-tax ($54,570,000 net of taxes),
respectively. The write-downs were also the result of MCN's capitalized
exploration and production costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN
recognized losses from the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $68,798,000 pre-tax ($44,719,000 net
27
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of taxes). In the third quarter of 1999, MCN recognized additional losses
relating to the sale of these properties totaling $5,877,000 pre-tax
($3,820,000 net of taxes).
Loss on Investment: In the second quarter of 1999, MCN recognized a
$7,456,000 pre-tax ($4,846,000 net of taxes) loss from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a
$6,135,000 pre-tax ($3,987,000 net of taxes) loss from the write-down of
this investment during the second quarter of 1998. The losses were due to
declines in the fair value of the securities that are not considered
temporary. MCN has no carrying value in this investment after the
write-downs.
D. CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a
$10,390,000 pre-tax ($6,753,000 net of taxes) restructuring charge 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. As of September 30, 1999, payments of $3,087,000 have been
charged against the restructuring accruals relating to severance and
termination benefits. These benefits will continue to be paid through 2000.
The remaining restructuring costs, primarily for net lease expenses, are
expected to be paid over the related lease terms that expire through 2006.
E. GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$24,800,000 pre-tax ($11,200,000 net of taxes and minority interest)
write-down of certain gas gathering properties. An analysis revealed that
projected cash flows from the gathering system were not sufficient to cover
the system's carrying value. Therefore, an impairment loss was recorded
representing the amount by which the carrying value of the system exceeded
its estimated fair value.
Loss on Investment: In the third quarter of 1998, XXX also recorded an
$8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell
in 2000. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.
4. COAL FINES PLANTS
A. IRS DETERMINATION
During the third quarter of 1998, XXX recorded an impairment loss of
$133,782,000, pre-tax, which equaled the carrying value of its coal fines
plants and reflected the likely inability to recover such costs (Note 3a).
In September 1999, MCN received "in-service" determination letters from the
IRS with respect to its six coal fines plants, which were built to produce
briquettes that qualify for synthetic fuel tax credits. In the
determination letters, the IRS ruled that four of the plants were in
service by the June 30, 1998 deadline in order to qualify for synthetic
fuel tax credits. The IRS ruled that two other plants did not meet the
in-service requirements. The company continues to believe these two plants
also meet the requirements and intends to appeal the unfavorable rulings.
B. DISPOSITION
In November 1999, MCN reached an agreement to sell four of its coal
fines plants to DTE in an arms-length transaction that is independent of
the pending merger. The sales price will depend on total production
performance of the four plants. DTE will initially make a $45,000,000
payment that will be adjusted up to $152,000,000 or down to zero based on
the results of a 36-month production test period. The sale is expected to
be finalized in December 1999.
28
31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RESTATEMENT
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, subsequent to the issuance of MCN's December
31, 1998 financial statements, certain matters came to management's attention
and resulted in a special investigation of prior years' operations of CoEnergy
Trading Company (CTC), MCN's non-utility energy marketing subsidiary. As a
result of the investigation, MCN identified that its internal controls had been
overridden, and that certain transactions had not been properly accounted for.
Specifically, the investigation concluded that CTC had entered into gas supply
contracts and agreed to pay significantly less than market prices in one period
in return for above-market prices to be paid in subsequent periods through March
2000. The effect of these transactions was to improperly delay the accrual of
cost of gas expenses, resulting in the overstatement of net loss for the 1998
third quarter and nine-month periods by $3,044,000 and $1,680,000, respectively,
and an understatement of net loss for the 1998 twelve-month period by
$3,991,000.
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities were not accounted for
properly using the required mark-to-market method, under which unrealized gains
and losses are recorded as an adjustment to cost of gas. The effect of not
properly accounting for these transactions was the understatement of net loss
for the 1998 third quarter, nine- and twelve-month periods by $1,801,000,
$4,545,000 and $4,208,000, respectively. However, net income of $403,000,
$1,590,000 and $2,682,000 was realized and recorded in connection with these
trading activities in the 1998 third quarter, nine- and twelve-month periods,
respectively, resulting in a net loss from such activities for the 1998 third
quarter, nine- and twelve-month periods of $1,398,000, $2,955,000 and
$1,526,000, respectively. From the inception of these trading activities in
March 1997 through June 1999, $2,714,000 of net loss was realized and recorded
in connection with these trading activities. All of the contracts were
effectively closed by the end of June 1999.
Other items identified during the investigation resulted in the
understatement of net loss for the 1998 third quarter, nine- and twelve-month
periods by $816,000, $859,000 and $880,000, respectively.
The 1998 information in the accompanying consolidated financial statements
has been restated from amounts originally reported to properly account for the
transactions identified. A summary of the significant effects of the restatement
on MCN's September 30, 1998 financial statements is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------- ---------------------- -----------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS
Cost of Sales............... $ 201,663 $ 201,006 $ 847,823 $ 853,551 $1,295,187 $1,309,153
Loss Before Income Taxes.... $(278,492) $(277,835) $(493,721) $(499,449) $ (422,108) $ (436,074)
Income Tax Benefit.......... $(101,341) $(101,111) $(186,980) $(188,984) $ (165,609) $ (170,496)
Net Loss.................... $(177,151) $(176,724) $(306,741) $(310,465) $ (256,499) $ (265,578)
Loss Per Share -- Basic and
Diluted................... $ (2.24) $ (2.24) $ (3.90) $ (3.95) $ (3.27) $ (3.38)
29
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
---------------------
PREVIOUSLY
REPORTED RESTATED
---------- --------
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
Accounts Receivable......................................... $277,229 $280,496
Gas in Inventory............................................ $200,399 $197,799
Accounts Payable............................................ $297,771 $318,129
Federal Income, Property and Other Taxes Payable............ $ 55,020 $ 48,130
Common Shareholders' Equity................................. $783,699 $770,898
6. ACCOUNTING FOR START-UP ACTIVITIES
In January 1999, MCN adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-up Activities," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants.
SOP 98-5 requires start-up and organizational costs to be expensed as incurred.
This change in accounting principle resulted in the write-off of start-up and
organization costs capitalized as of December 31, 1998. The cumulative effect of
the change was to decrease earnings by $4,418,000 pre-tax ($2,872,000 net of
taxes) for the nine- and twelve-month periods ended September 30, 1999.
7. REGULATORY MATTERS
A. REGULATORY REFORM PLAN
As discussed in MCN's 1998 Annual Report included in the Form 8-K
filed with the SEC on October 15, 1999, MichCon implemented its Regulatory
Reform Plan in January 1999. The plan includes a new three-year gas sales
program under which MichCon's gas sales rates include a gas commodity
component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of
its gas acquisition strategy, MichCon has entered into fixed-price
contracts at costs below $2.95 per Mcf for a substantial portion of its
expected gas supply requirements through 2001.
The plan also includes a comprehensive experimental three-year
customer choice program, which is subject to annual caps on the level of
participation. The customer choice program began in April 1999, with
approximately 70,000 customers choosing to purchase natural gas from
suppliers other than MichCon. Plan years begin April 1 of each year, and
the number of customers allowed to participate in the plan is limited to
75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume
limitation on commercial and industrial participants. The volume limitation
for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in
2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the
gas to the customers' premises at prices that maintain its previously
existing sales margins on these services. Various parties have appealed the
Michigan Public Service Commission's (MPSC) approval of the plan. While
management believes the plan will be upheld on appeal, there can be no
assurance as to the outcome.
B. GAS COST RECOVERY PROCEEDINGS
Prior to January 1999, the Gas Cost Recovery (GCR) process allowed
MichCon to recover its cost of gas sold if the MPSC determined that such
costs were reasonable and prudent. An annual GCR reconciliation proceeding
provided a review of gas costs incurred during the previous year and
determined whether gas costs had been overcollected or undercollected, and
as a result, whether a refund or surcharge, including interest, was
required to be returned to or collected from GCR customers. The GCR process
was suspended with the implementation of MichCon's Regulatory Reform Plan
in January 1999.
30
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, MichCon filed its final GCR reconciliation case
covering gas costs incurred during 1998 which indicates an overrecovery of
$18,000,000, including interest. Management believes that 1998 gas costs
were reasonable and prudent and that the MPSC will approve the gas costs
incurred. However, management cannot predict the outcome of this
proceeding. During the first quarter of 1999, MichCon refunded the
overrecovery to customers as a reduction in gas sales rates.
8. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In December 1998, MCN accounted for its E&P segment as a discontinued
operation as a result of its decision to sell all of its gas and oil properties.
In August 1999, management announced its intention to retain its natural gas
producing properties in Michigan. Accordingly, E&P's operating results for prior
periods have been reclassified from discontinued operations to continuing
operations. The decision to retain these properties was based on the interaction
of two factors. MCN significantly revised its strategic direction. Key aspects
of the new corporate strategy include a Midwest-to-Northeast regional focus
rather than a North American focus, and an emphasis on achieving operational
efficiencies and growth through the integration of existing businesses. Shortly
thereafter, the bid for the Michigan properties was lowered significantly. The
lower price was unacceptable, especially in light of MCN's new strategic
direction.
9. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
In October 1999, XXX entered into a $290,000,000 revolving credit agreement
that expires in July 2000. Borrowings under the credit agreement are at variable
rates. This agreement replaced the March 1999 $150,000,000 revolving credit
agreement.
XXXXX and MichCon maintain credit lines that allow for borrowings of up to
$350,000,000 under 364-day revolving credit facilities and up to $350,000,000
under three-year revolving credit facilities. These credit lines totaling
$700,000,000 support their commercial paper programs. The 364-day revolving
credit facilities were renewed in July 1999. The three-year revolving credit
facilities expire in July 2001.
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN borrowed $260,000,000 under a one-year
term loan facility, due December 2, 1999. Principal payments are required based
on certain proceeds received from the sale of E&P assets. As of September 30,
1999, MCN had repaid $203,000,000 of borrowings under the facility.
10. ENHANCED PRIDES, LONG-TERM DEBT AND PREFERRED SECURITIES
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN issued 5,865,000 of Preferred Redeemable
Increased Dividend Equity Securities (Enhanced PRIDES) in 1996. Each security
represented a contract to purchase one share of MCN common stock. The Enhanced
PRIDES were converted into MCN common stock in April 1999, and as a result MCN
received cash proceeds totaling approximately $135,000,000.
In October 1999, MCN borrowed from its $290,000,000 revolving credit
agreement and redeemed, at par, $100,000,000 of Single Point Remarketed Reset
Capital Securities which were due in 2037.
In September 1999, MichCon redeemed $18,000,000 of 9.125% first mortgage
bonds, which were due September 2004.
In June 1999, XxxxXxx issued $55,000,000 of 6.85% senior secured notes, due
June 2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. The
notes are insured by a financial guaranty insurance policy and are rated AAA or
its equivalent by the major rating agencies. The notes are redeemable at par on
or after June 1, 2004.
31
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER SHARE COMPUTATION
MCN reports both basic and diluted earnings per share (EPS). Basic EPS is
computed by dividing income or loss before cumulative effect of accounting
change 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 with proceeds from the
assumed issuance. Potentially dilutive securities have been excluded from the
diluted EPS calculation since their inclusion would have been antidilutive.
12. SHAREHOLDERS' RIGHTS PLAN
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN has a Shareholders' Rights Plan that is
designed to maximize shareholders' value in the event that MCN is acquired. The
rights are attached to and trade with shares of MCN common stock until they are
exercisable upon certain triggering events. The plan has been amended, in
connection with the pending merger with DTE (Note 2), so that DTE's acquisition
of MCN will not represent a triggering event.
13. COMPREHENSIVE INCOME
MCN reports comprehensive income, which is defined as the change in common
shareholder's equity during a period from transactions and events from non-owner
sources, including net income. Total comprehensive income for the applicable
periods is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- -----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
COMPREHENSIVE INCOME (LOSS)
Net Loss...................... $(31,154) $(176,724) $(31,851) $(310,465) $(7,854) $(265,578)
-------- --------- -------- --------- ------- ---------
Other Comprehensive Income
(Loss), Net of Taxes:
Foreign currency
translation adjustment:
Foreign currency
translation
adjustment.......... 16 (85) (600) (5,898) (1,256) (11,423)
Less: Reclassification
for losses
recognized in net
income.............. 13,132 -- 13,132 -- 13,132 --
-------- --------- -------- --------- ------- ---------
13,148 (85) 12,532 (5,898) 11,876 (11,423)
-------- --------- -------- --------- ------- ---------
Unrealized loss on
securities:
Unrealized losses
during period....... -- (2,559) (1,159) (5,362) (2,287) (6,546)
Less: Reclassification
for losses
recognized in net
income.............. -- -- 4,846 3,987 4,846 3,987
-------- --------- -------- --------- ------- ---------
-- (2,559) 3,687 (1,375) 2,559 (2,559)
-------- --------- -------- --------- ------- ---------
Total Other Comprehensive
Income (Loss), Net of
Taxes.................... 13,148 (2,644) 16,219 (7,273) 14,435 (13,982)
-------- --------- -------- --------- ------- ---------
Total Comprehensive Income
(Loss)................... $(18,006) $(179,368) $(15,632) $(317,738) $ 6,581 $(279,560)
======== ========= ======== ========= ======= =========
32
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONTINGENCIES
XXX is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. These proceedings include certain contract disputes
between Gas Distribution and gas producers. 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.
15. 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. The following assets and
liabilities related to the use of gas and oil swap agreements are reflected in
the Consolidated Statement of Financial Position:
SEPTEMBER 30, DECEMBER 31,
------------------- ------------
1999 1998 1998
---- ---- ----
(IN THOUSANDS)
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses..................................... $ 64,940 $31,923 $48,700
Receivables........................................... 43,989 13,776 25,864
-------- ------- -------
108,929 45,699 74,564
Less -- Current portion............................... 12,390 666 11,417
-------- ------- -------
$ 96,539 $45,033 $63,147
======== ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains...................................... $ 34,884 $13,024 $24,126
Payables.............................................. 72,707 36,890 54,525
-------- ------- -------
107,591 49,914 78,651
Less -- Current portion............................... 30,781 11,358 15,695
-------- ------- -------
$ 76,810 $38,556 $62,956
======== ======= =======
33
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION
MCN is organized into two business groups, Diversified Energy and Gas
Distribution. The groups operate five major business segments as set forth in
the following table:
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
REVENUES FROM UNAFFILIATED
CUSTOMERS:
Pipelines & Processing............ $ 6,416 $ 6,238 $ 17,747 $ 14,677 $ 23,927 $ 15,948
Electric Power.................... 14,624 12,727 39,747 34,972 51,905 47,797
Energy Marketing.................. 305,405 184,926 813,594 592,491 1,029,471 858,348
Exploration & Production.......... 9,292 23,810 51,167 87,261 73,109 110,688
Gas Distribution.................. 127,122 123,444 825,974 729,418 1,141,696 1,129,402
-------- --------- ---------- ---------- ---------- ----------
462,859 351,145 1,748,229 1,458,819 2,320,108 2,162,183
-------- --------- ---------- ---------- ---------- ----------
REVENUES FROM AFFILIATED CUSTOMERS:
Pipelines & Processing............ 507 62 1,609 298 1,656 396
Energy Marketing.................. 17,940 15,356 49,466 47,432 66,276 64,696
Exploration & Production.......... 22,538 27,205 68,081 72,467 93,513 108,579
Gas Distribution.................. 2,318 618 5,652 5,328 6,959 8,326
-------- --------- ---------- ---------- ---------- ----------
43,303 43,241 124,808 125,525 168,404 181,997
-------- --------- ---------- ---------- ---------- ----------
Eliminations........................ (43,303) (43,241) (124,808) (125,525) (168,404) (181,997)
-------- --------- ---------- ---------- ---------- ----------
Consolidated Operating Revenues..... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
======== ========= ========== ========== ========== ==========
NET INCOME (LOSS):
Pipelines & Processing............ $ (99) $ (89,332) $ 3,358 $ (82,089) $ 3,207 $ (78,036)
Electric Power.................... 4,311 2,627 11,682 15,290 15,663 18,660
Energy Marketing.................. (7,158) (197) (7,545) 2,646 (11,228) 2,610
Exploration & Production.......... (4,034) (51,017) (83,742) (258,408) (78,687) (249,752)
Gas Distribution.................. (14,671) (24,516) 75,962 40,854 106,842 73,418
Corporate & Other................. (9,503) (14,289) (28,694) (28,758) (40,779) (32,478)
-------- --------- ---------- ---------- ---------- ----------
(31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
Cumulative effect of accounting
change.......................... -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
Consolidated Net Loss............... $(31,154) $(176,724) $ (31,851) $ (310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
17. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by XXXXX are subject to a support agreement between
MCN and XXXXX, under which XXX has committed to make payments of interest and
principal on XXXXX'x securities in the event of failure to pay by XXXXX. 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 XXXXX'x securities. The carrying value of MCN's assets on
an unconsolidated basis, which primarily consists of investments in subsidiaries
other than MichCon, is $736,335,000 at September 30, 1999.
The following MCN consolidating financial statements are presented and
include separately XXXXX, MichCon and MCN and other subsidiaries. XXX has
determined that separate financial statements and other disclosures concerning
XXXXX are not material to investors. The other MCN subsidiaries represent
Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I,
MCN Financing II, MCN Financing III, MCN Financing V, MCN Financing VI, MichCon
Enterprises, Inc. and Blue Lake Holdings, Inc., until its sale on December 31,
1997.
34
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
(IN THOUSANDS)
OPERATING REVENUES................................. $ 6,847 $ 335,539 $122,635 $ (2,162) $ 462,859
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 5,047 298,054 28,187 (1,949) 329,339
Operation and maintenance........................ (752) 36,612 62,486 (187) 98,159
Depreciation, depletion and amortization......... 1,044 13,375 24,192 -- 38,611
Property and other taxes......................... 349 2,397 12,175 -- 14,921
--------- --------- -------- -------- ---------
5,688 350,438 127,040 (2,136) 481,030
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS)............................ 1,159 (14,899) (4,405) (26) (18,171)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (30,454) 14,952 444 30,454 15,396
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 10,841 1,100 916 (10,948) 1,909
Interest on long-term debt....................... 245 (10,248) (12,537) -- (22,540)
Other interest expense........................... (2,304) (13,000) (1,184) 10,947 (5,541)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (10,335) (10,335)
Loss on sale of E&P properties................... -- (5,877) -- -- (5,877)
Minority interest................................ -- (350) (282) -- (632)
Other............................................ (813) 4,657 (590) 27 3,281
--------- --------- -------- -------- ---------
7,969 (23,718) (13,677) (10,309) (39,735)
--------- --------- -------- -------- ---------
LOSS BEFORE INCOME TAXES........................... (21,326) (23,665) (17,638) 20,119 (42,510)
INCOME TAX BENEFIT................................. (507) (6,751) (4,098) -- (11,356)
--------- --------- -------- -------- ---------
NET LOSS........................................... (20,819) (16,914) (13,540) 20,119 (31,154)
DIVIDENDS ON PREFERRED SECURITIES.................. 10,335 -- -- (10,335) --
--------- --------- -------- -------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK....... $ (31,154) $ (16,914) $(13,540) $ 30,454 $ (31,154)
========= ========= ======== ======== =========
THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
OPERATING REVENUES................................. $ 1,634 $ 228,949 $122,428 $ (1,866) $ 351,145
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 931 170,039 31,143 (1,107) 201,006
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 and restructuring charges... 8,669 225,827 24,800 -- 259,296
--------- --------- -------- -------- ---------
1,914 462,314 148,425 (1,866) 610,787
--------- --------- -------- -------- ---------
OPERATING LOSS..................................... (280) (233,365) (25,997) -- (259,642)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (171,089) 17,896 511 170,645 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 loss.................................. (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........................... (171,759) (239,259) (29,244) 162,427 (277,835)
INCOME TAX BENEFIT................................. (3,254) (86,951) (10,906) -- (101,111)
--------- --------- -------- -------- ---------
NET INCOME......................................... (168,505) (152,308) (18,338) 162,427 (176,724)
DIVIDENDS ON PREFERRED SECURITIES.................. 8,178 -- -- (8,178) --
--------- --------- -------- -------- ---------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(176,683) $(152,308) $(18,338) $170,605 $(176,724)
========= ========= ======== ======== =========
35
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
(IN THOUSANDS)
OPERATING REVENUES................................. $ 25,419 $ 927,018 $806,280 $(10,488) $1,748,229
--------- --------- -------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 17,685 771,091 336,948 (7,552) 1,118,172
Operation and maintenance........................ (1,586) 109,108 193,974 (2,910) 298,586
Depreciation, depletion and amortization......... 2,851 49,539 73,558 -- 125,948
Property and other taxes......................... 1,126 8,386 43,337 -- 52,849
Property write-downs and restructuring charges... -- 52,000 -- -- 52,000
--------- --------- -------- -------- ----------
20,076 990,124 647,817 (10,462) 1,647,555
--------- --------- -------- -------- ----------
OPERATING INCOME (LOSS)............................ 5,343 (63,106) 158,463 (26) 100,674
--------- --------- -------- -------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (29,894) 38,563 1,457 29,894 40,020
--------- --------- -------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 32,470 3,088 2,861 (32,645) 5,774
Interest on long-term debt....................... 706 (31,724) (35,028) -- (66,046)
Other interest expense........................... (9,616) (38,867) (5,020) 32,645 (20,858)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (31,004) (31,004)
Loss on sale of E&P properties................... -- (74,675) -- -- (74,675)
Investment loss.................................. -- (7,456) -- -- (7,456)
Minority interest................................ -- (566) (805) -- (1,371)
Other............................................ (1,071) 15,003 (303) 26 13,655
--------- --------- -------- -------- ----------
22,489 (135,197) (38,295) (30,978) (181,981)
--------- --------- -------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (2,062) (159,740) 121,625 (1,110) (41,287)
INCOME TAX PROVISION (BENEFIT)..................... (1,215) (54,120) 43,027 -- (12,308)
--------- --------- -------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................................ (847) (105,620) 78,598 (1,110) (28,979)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES............................................ -- (2,872) -- -- (2,872)
--------- --------- -------- -------- ----------
NET INCOME (LOSS).................................. (847) (108,492) 78,598 (1,110) (31,851)
DIVIDENDS ON PREFERRED SECURITIES.................. 31,004 -- -- (31,004) --
--------- --------- -------- -------- ----------
NET (LOSS) AVAILABLE FOR COMMON STOCK.............. $ (31,851) $(108,492) $78,598 $ 29,894 $ (31,851)
========= ========= ======== ======== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
OPERATING REVENUES................................. $ 10,303 $ 734,031 $724,442 $ (9,957) $1,458,819
--------- --------- -------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 5,374 547,775 306,244 (5,842) 853,551
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
Write-down of E&P properties..................... 8,669 558,849 24,800 -- 592,318
--------- --------- -------- -------- ----------
9,107 1,288,859 624,808 (9,957) 1,912,817
--------- --------- -------- -------- ----------
OPERATING INCOME (LOSS)............................ 1,196 (554,828) 99,634 -- (453,998)
--------- --------- -------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES..................................... (305,927) 46,062 1,461 304,965 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)
Loss on sale of E&P properties................... -- -- -- -- --
Investment loss.................................. (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.................. (286,312) (561,906) 70,967 277,802 (499,449)
INCOME TAX PROVISION (BENEFIT)..................... (3,010) (210,601) 24,627 -- (188,984)
--------- --------- -------- -------- ----------
NET INCOME (LOSS).................................. (283,302) (351,305) 46,340 277,802 (310,465)
DIVIDENDS ON PREFERRED SECURITIES.................. 27,162 -- -- (27,162) --
--------- --------- -------- -------- ----------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(310,464) $(351,305) $46,340 $304,964 $ (310,465)
========= ========= ======== ======== ==========
36
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING REVENUES............................... $ 33,378 $1,185,815 $1,115,496 $(14,581) $2,320,108
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 23,017 975,523 482,233 (10,378) 1,470,395
Operation and maintenance...................... (3,291) 153,395 264,859 (4,177) 410,786
Depreciation, depletion and amortization....... 4,022 68,407 97,531 -- 169,960
Property and other taxes....................... 1,314 11,400 55,433 -- 68,147
Property write-downs and restructuring
charges...................................... -- 52,000 -- -- 52,000
--------- ---------- ---------- -------- ----------
25,062 1,260,725 900,056 (14,555) 2,171,288
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 8,316 (74,910) 215,440 (26) 148,820
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (6,251) 53,743 1,942 6,250 55,684
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 41,859 4,383 4,976 (43,210) 8,008
Interest on long-term debt..................... (429) (44,400) (46,218) -- (91,047)
Other interest expense......................... (10,986) (50,850) (9,984) 43,212 (28,608)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (40,212) (40,212)
Loss on sale of E&P properties................. -- (74,675) -- -- (74,675)
Investment loss................................ -- (7,456) -- -- (7,456)
Minority interest.............................. -- (424) (985) -- (1,409)
Other.......................................... (1,186) 22,001 (1,720) 26 19,121
--------- ---------- ---------- -------- ----------
29,258 (151,421) (53,931) (40,184) (216,278)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ 31,323 (172,588) 163,451 (33,960) (11,774)
INCOME TAX PROVISION (BENEFIT)................... (1,034) (59,975) 54,217 -- (6,792)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............................. 32,357 (112,613) 109,234 (33,960) (4,982)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES.......................................... -- (2,872) -- -- (2,872)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ 32,357 (115,485) 109,234 (33,960) (7,854)
DIVIDENDS ON PREFERRED SECURITIES................ 40,212 -- -- (40,212) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $ (7,855) $ (115,485) $ 109,234 $ 6,252 $ (7,854)
========= ========== ========== ======== ==========
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------
OPERATING REVENUES............................... $ 15,967 $1,039,310 $1,121,762 $(14,856) $2,162,183
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 8,644 785,533 524,321 (9,345) 1,309,153
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 and restructuring
charges...................................... 8,669 558,849 24,800 -- 592,318
--------- ---------- ---------- -------- ----------
13,688 1,585,375 957,978 (14,856) 2,542,185
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 2,279 (546,065) 163,784 -- (380,002)
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (260,893) 58,974 1,807 260,152 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 loss................................ (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................ (230,401) (550,667) 121,504 223,490 (436,074)
INCOME TAX PROVISION (BENEFIT)................... (2,166) (211,562) 43,232 -- (170,496)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ (228,235) (339,105) 78,272 223,490 (265,578)
DIVIDENDS ON PREFERRED SECURITIES................ 36,916 -- -- (36,916) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $(265,151) $ (339,105) $ 78,272 $260,406 $ (265,578)
========= ========== ========== ======== ==========
37
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
Accounts receivable.............................. 5,450 239,004 111,434 (38,429) 317,459
Less -- Allowance for doubtful accounts........ 168 1,652 14,396 -- 16,216
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,282 237,352 97,038 (38,429) 301,243
Accrued unbilled revenues........................ 321 -- 21,178 -- 21,499
Gas in inventory................................. -- 128,196 110,170 -- 238,366
Property taxes assessed applicable to future
periods........................................ 284 1,529 37,692 -- 39,505
Other............................................ 6,171 59,589 38,609 (47,570) 56,799
---------- ---------- ---------- ----------- ----------
12,138 445,059 316,567 (85,999) 687,765
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 9,248 106,934 -- (105,038) 11,144
Investments in debt and equity securities........ -- 5,217 66,653 624 72,494
Deferred swap losses and receivables............. -- 96,539 -- -- 96,539
Deferred environmental costs..................... 2,769 -- 28,522 -- 31,291
Prepaid benefit costs............................ 783 -- 146,534 (7,022) 140,295
Other............................................ 16,273 41,802 64,528 2,966 125,569
---------- ---------- ---------- ----------- ----------
29,073 250,492 306,237 (108,470) 477,332
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,372,832 740,237 19,766 (1,370,353) 762,482
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,697 793,985 2,973,747 -- 3,816,429
Less -- Accumulated depreciation and depletion... 19,537 203,718 1,464,931 -- 1,688,186
---------- ---------- ---------- ----------- ----------
29,160 590,267 1,508,816 -- 2,128,243
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 5,845 $ 213,448 $ 112,090 $ (40,207) $ 291,176
Notes payable.................................... 57,751 181,748 132,465 (969) 370,995
Current portion of long-term debt and capital
lease obligations.............................. 103,094 149 28,059 -- 131,302
Federal income, property and other taxes
payable........................................ (4,359) 2,016 51,591 (43,999) 5,249
Gas payable...................................... -- 30,310 5,763 -- 36,073
Customer deposits................................ 4 -- 15,762 -- 15,766
Interest payable................................. 2,270 12,259 11,930 -- 26,459
Other............................................ 12,548 21,078 47,834 (1,105) 80,355
---------- ---------- ---------- ----------- ----------
177,153 461,008 405,494 (86,280) 957,375
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ -- -- 104,778 (104,778) --
Unamortized investment tax credit................ 252 -- 28,258 -- 28,510
Tax benefits amortizable to customers............ -- -- 136,906 -- 136,906
Deferred swap gains and payables................. -- 76,810 -- -- 76,810
Accrued environmental costs...................... 3,000 -- 27,373 -- 30,373
Minority interest................................ -- 2,358 8,570 -- 10,928
Other............................................ 12,538 45,894 48,757 (3,113) 104,076
---------- ---------- ---------- ----------- ----------
15,790 125,062 354,642 (107,891) 387,603
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 777,455 683,486 -- 1,460,941
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 402,900 -- -- -- 402,900
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 855 5 10,300 (10,305) 855
Additional paid-in capital....................... 967,356 956,767 230,399 (1,187,166) 967,356
Retained earnings (deficit)...................... (98,563) (293,885) 467,065 (173,180) (98,563)
Accumulated other comprehensive loss............. -- (357) -- -- (357)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
847,360 662,530 707,764 (1,370,651) 847,003
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
38
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
Accounts receivable.............................. 5,185 185,364 108,135 (8,673) 290,011
Less -- Allowance for doubtful accounts........ 70 533 8,912 -- 9,515
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,115 184,831 99,223 (8,673) 280,496
Accrued unbilled revenues........................ 214 -- 17,145 -- 17,359
Gas in inventory................................. -- 101,334 96,465 -- 197,799
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
---------- ---------- ---------- ----------- ----------
10,727 360,785 391,581 (118,173) 644,920
---------- ---------- ---------- ----------- ----------
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 environmental costs..................... 2,603 -- 28,052 -- 30,655
Prepaid benefit costs............................ 619 -- 103,814 (7,264) 97,169
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..................................... 1,282,571 741,335 20,458 (1,281,942) 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
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 2,894 $ 259,081 $ 67,591 $ (11,437) $ 318,129
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 6,204 41,223 -- 48,130
Deferred gas cost recovery revenues.............. -- -- 23,899 -- 23,899
Gas payable...................................... -- 21,782 28,520 -- 50,302
Customer deposits................................ 26 -- 16,803 -- 16,829
Interest payable................................. 2,873 13,697 13,525 -- 30,095
Other............................................ 16,680 9,534 38,112 (2,021) 62,305
---------- ---------- ---------- ----------- ----------
130,616 733,079 492,052 (121,602) 1,234,145
---------- ---------- ---------- ----------- ----------
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..................................... 791 5 10,300 (10,305) 791
Additional paid-in capital....................... 813,809 797,852 230,399 (1,028,251) 813,809
Retained earnings (deficit)...................... (6,622) (178,400) 421,665 (243,265) (6,622)
Accumulated other comprehensive loss............. -- (14,792) -- -- (14,792)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
785,690 604,665 662,364 (1,281,821) 770,898
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
39
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 1,400 $ 9,036 $ 6,603 $ -- $ 17,039
Accounts receivable.............................. 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts........ 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues........................ 1,121 -- 86,767 -- 87,888
Gas in inventory................................. -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods........................................ 214 1,172 71,165 -- 72,551
Other............................................ 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities........ -- 3,548 65,556 601 69,705
Deferred swap losses and receivables............. -- 63,147 -- -- 63,147
Deferred environmental costs..................... 2,604 -- 28,169 -- 30,773
Prepaid benefit costs............................ -- -- 113,879 (2,104) 111,775
Other............................................ 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,534,180 782,471 19,343 (1,532,763) 803,231
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,681 1,103,716 2,889,020 -- 4,041,417
Less -- Accumulated depreciation and depletion... 17,210 229,944 1,396,940 -- 1,644,094
---------- ---------- ---------- ----------- ----------
31,471 873,772 1,492,080 -- 2,397,323
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 4,123 $ 218,851 $ 98,891 $ (17,516) $ 304,349
Notes payable.................................... 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations.............................. -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable........................................ 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues.............. -- -- 14,980 -- 14,980
Gas payable...................................... -- 17,332 25,337 -- 42,669
Customer deposits................................ 22 -- 18,769 -- 18,791
Interest payable................................. 2,835 16,519 10,960 -- 30,314
Other............................................ 15,502 8,757 56,262 (2,525) 77,996
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit................ 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers............ -- -- 130,120 -- 130,120
Deferred swap gains and payables................. -- 62,956 -- -- 62,956
Accrued environmental costs...................... 3,000 -- 32,000 -- 35,000
Minority interest................................ -- 2,697 8,201 -- 10,898
Other............................................ 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 687,333 619,835 -- 1,307,168
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 502,203 -- -- -- 502,203
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 797 5 10,300 (10,305) 797
Additional paid-in capital....................... 832,966 1,071,390 230,399 (1,301,789) 832,966
Retained earnings (deficit)...................... (2,977) (185,393) 406,144 (220,751) (2,977)
Accumulated other comprehensive loss............. -- (16,576) -- -- (16,576)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
808,498 869,426 646,843 (1,532,845) 791,922
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
40
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES XXXXX MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
(IN THOUSANDS)
NET CASH FLOW FROM OPERATING ACTIVITIES.......... $ 51,563 $ 30,059 $ 177,343 $(47,466) $ 211,499
--------- --------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net............................. (203,020) 43,986 (88,704) (118) (247,856)
Capital contributions paid to affiliates,
net.......................................... -- (114,623) -- 114,623 --
Dividends paid................................. (63,735) -- (17,500) 17,500 (63,735)
Preferred securities dividends paid............ (31,004) -- -- 31,004 --
Issuance of common stock....................... 132,544 -- -- -- 132,544
Reacquisition of common stock.................. (780) -- -- -- (780)
Issuance of long-term debt..................... -- -- 106,535 -- 106,535
Long-term commercial paper and bank
borrowings, net.............................. -- 92,344 -- -- 92,344
Retirement of long-term debt and preferred
securities................................... -- (212,960) (76,479) -- (289,439)
--------- --------- --------- -------- ---------
NET CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES................................. (165,995) (191,253) (76,148) 163,009 (270,387)
--------- --------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures........................... (882) (138,232) (94,296) -- (233,410)
Acquisitions................................... -- (33,071) -- -- (33,071)
Investment in debt and equity securities,
net.......................................... -- (3,452) (1,097) (23) (4,572)
Investment in joint ventures and
subsidiaries................................. 113,623 (61,558) (14) (114,623) (62,572)
Sale of property and joint venture interests... -- 411,867 -- (2,251) 409,616
Other.......................................... 371 (5,003) (511) 1,354 (3,789)
--------- --------- --------- -------- ---------
Net cash provided from (used for) investing
activities................................. 113,112 170,551 (95,918) (115,543) 72,202
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................... (1,320) 9,357 5,277 -- 13,314
CASH AND CASH EQUIVALENTS, JANUARY 1............. 1,400 9,036 6,603 -- 17,039
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.......... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
========= ========= ========= ======== =========
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
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 contributions 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................... (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 investment in joint
ventures..................................... -- 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 (DECREASE) 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
========= ========= ========= ======== =========
41
44
OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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
Energy Enterprises Inc.
27-1 1999 Financial Data Schedule
27-2 1998 Financial Data Schedule
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated September 22, 1999, under Item 5, with
respect to the offering by MCN Energy Enterprises Inc. of up to
$620,000,000 of its unsecured notes, designated as Medium-Term Notes,
Series C (Offered Notes) pursuant to the registration statement of the
registrant and MCN Energy Enterprises Inc. on Form S-3 (No. 333-47137)
filed with the Securities and Exchange Commission under the Securities Act
of 1933. The following documents were filed as Exhibits thereto:
- Distribution Agreement dated September 22, 1999 with respect to the
Offered Notes.
- Form of Note with respect to the Offered Notes.
MCN filed a report on Form 8-K dated October 4, 1999, under Item 5,
announcing that it had entered into an Agreement and Plan of Merger, dated
as of October 4, 1999, among MCN, DTE Energy Company, and DTE Enterprises,
Inc., pursuant to which MCN and DTE Enterprises, Inc. will merge, with DTE
Enterprises, Inc. as the surviving corporation in the merger. The following
documents were filed as Exhibits thereto:
- Agreement and Plan of Merger, dated as of October 4, 1999, by and
among MCN Energy Group Inc., DTE Energy Company, and DTE Enterprises,
Inc.
- Press Release, dated October 5, 1999
MCN filed a report on Form 8-K dated October 15, 1999, under Item 5, with
respect to management's decision, in August 1999, to retain its natural gas
producing properties in Michigan. In the 1998 MCN Annual Report on Form
10-K/A, MCN accounted for its Exploration & Production (E&P) segment, which
included these properties, as a discontinued operation. Accordingly, E&P's
operating results for prior periods have been reclassified from
discontinued operations to continuing operations. The decision to retain
these properties was based on the interaction of two factors. MCN
significantly revised its strategic direction. Key aspects of the new
corporate strategy include a Midwest-to-Northeast regional focus rather
than a North American focus, and an emphasis on achieving operational
efficiencies and growth through the integration of existing businesses.
Shortly thereafter, the bid for the Michigan properties was lowered
significantly. The lower price was unacceptable, especially in light of
MCN's new strategic direction. The following documents were filed as
Exhibits thereto:
- MCN Energy Group Inc. 1998 Annual Report reflecting the E&P segment
reclassified as a continuing operation
- March 31, 1999 and June 30, 1999 Quarterly Operating Results and
Common Stock Prices
- MCN 1998 Financial Data Schedule
- MCN 1997 Financial Data Schedule
- MCN 1996 Financial Data Schedule
42
45
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, 1999 By: /s/ XXXXXX XXXXXXXXX
----------------------------------
Xxxxxx Xxxxxxxxx
Vice President and Controller
43
