<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997, 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)
<TABLE>
<S> <C>
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
</TABLE>
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 July 31, 1997:
Common Stock, par value $.01 per share: 77,961,899
================================================================================
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 1
PART II -- OTHER INFORMATION
Item 2. Changes in Securities............................... 28
Item 6. Exhibits and Reports on Form 8-K.................... 28
SIGNATURE................................................... 29
</TABLE>
ii
<PAGE> 3
MCN ENERGY GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second quarter earnings increase to record high -- MCN's earnings from
continuing operations for the 1997 quarter increased 75% or $3.9 million over
the second quarter of 1996. Earnings from continuing operations for the 1997
six- and twelve-month periods increased $6.6 million and $3.9 million,
respectively, over the comparable 1996 periods. As discussed below, this
performance primarily reflects the success of the strategies implemented by the
Diversified Energy group.
MCN's earnings comparisons were also affected by income from discontinued
operations. As discussed in the "Discontinued Operations" section that follows,
MCN sold The Genix Group, Inc. (Genix) during the second quarter of 1996.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
------------- --------------- ----------------
1997 1996 1997 1996 1997 1996
---- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (in Millions)
Continuing Operations:
Diversified Energy............................ $7.9 $ 4.4 $25.8 $ 12.2 $ 44.8 $ 22.0
Gas Distribution.............................. 1.2 .8 65.0 72.0 74.4 93.3
---- ----- ----- ------ ------ ------
9.1 5.2 90.8 84.2 119.2 115.3
---- ----- ----- ------ ------ ------
Discontinued Operations:
Income from operations........................ -- .6 -- 1.6 -- 3.4
Gain on sale.................................. -- 36.2 -- 36.2 -- 36.2
---- ----- ----- ------ ------ ------
-- 36.8 -- 37.8 -- 39.6
---- ----- ----- ------ ------ ------
$9.1 $42.0 $90.8 $122.0 $119.2 $154.9
==== ===== ===== ====== ====== ======
EARNINGS PER SHARE
Continuing Operations:
Diversified Energy............................ $.11 $ .07 $ .38 $ .18 $ .67 $ .33
Gas Distribution.............................. .02 .01 .96 1.08 1.10 1.40
---- ----- ----- ------ ------ ------
.13 .08 1.34 1.26 1.77 1.73
---- ----- ----- ------ ------ ------
Discontinued Operations:
Income from operations........................ -- .01 -- .03 -- .06
Gain on sale.................................. -- .54 -- .54 -- .54
---- ----- ----- ------ ------ ------
-- .55 -- .57 -- .60
---- ----- ----- ------ ------ ------
$.13 $ .63 $1.34 $ 1.83 $ 1.77 $ 2.33
==== ===== ===== ====== ====== ======
</TABLE>
Strategic direction -- MCN's objective is to achieve superior, long-term returns
for its shareholders. To accomplish this, MCN will aggressively invest in a
diverse portfolio of domestic and international energy-related projects. The
success of this strategy will be demonstrated by the growth of MCN's earnings
and the total return to its shareholders over time.
DIVERSIFIED ENERGY
Earnings continue to rise -- The Diversified Energy group reported an increase
in earnings of $3.5 million for the 1997 quarter from the comparable 1996
period. Earnings for the 1997 six- and twelve-month periods increased $13.6
million and $22.8 million, respectively. Increased earnings were driven
primarily by significantly higher levels of operating and joint venture income,
partially offset by increased financing costs
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
associated with additional capital needed to fund investments. Diversified
Energy continues to provide an increasing portion of MCN's earnings,
contributing 38% for the twelve months ended June 30, 1997, double the
contribution in the comparable 1996 period.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*......................... $177.1 $131.6 $437.3 $389.1 $782.7 $613.9
Operating Expenses*......................... 164.4 129.2 407.4 374.3 726.7 587.9
------ ------ ------ ------ ------ ------
Operating Income............................ 12.7 2.4 29.9 14.8 56.0 26.0
------ ------ ------ ------ ------ ------
Equity in Earnings of Joint Ventures........ 9.4 4.6 22.9 8.3 31.2 10.8
------ ------ ------ ------ ------ ------
Other Income & (Deductions)*
Interest income........................... 1.0 .9 2.0 1.8 3.2 3.4
Interest expense.......................... (9.5) (7.9) (19.6) (15.4) (32.9) (22.7)
Dividends on preferred securities of
subsidiaries........................... (7.4) (2.3) (11.6) (4.7) (19.3) (9.5)
Gains related to DIGP..................... -- 3.5 -- 3.5 2.9 3.5
Other..................................... (.1) (.3) 2.7 (.9) 2.6 .4
------ ------ ------ ------ ------ ------
(16.0) (6.1) (26.5) (15.7) (43.5) (24.9)
------ ------ ------ ------ ------ ------
Income Before Income Taxes.................. 6.1 .9 26.3 7.4 43.7 11.9
------ ------ ------ ------ ------ ------
Income Taxes
Current and deferred provision............ 2.3 .5 8.7 3.1 15.1 4.2
Federal tax credits....................... (4.1) (4.0) (8.2) (7.9) (16.2) (14.3)
------ ------ ------ ------ ------ ------
(1.8) (3.5) .5 (4.8) (1.1) (10.1)
------ ------ ------ ------ ------ ------
Net Income.................................. $ 7.9 $ 4.4 $ 25.8 $ 12.2 $ 44.8 $ 22.0
====== ====== ====== ====== ====== ======
</TABLE>
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture income increased $15.1 million for the 1997 quarter
and $29.7 million and $50.4 million for the six- and twelve-month periods,
respectively. The increases reflect improved contributions from all the
Diversified Energy operating businesses, particularly Exploration & Production
(E&P) operations.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
-------------- -------------- --------------
1997 1996 1997 1996 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME (in Millions)
Exploration & Production.......................... $12.9 $ 6.7 $31.0 $13.2 $51.0 $24.6
Pipelines & Processing............................ 6.1 1.9 13.3 4.4 19.7 5.1
Energy Marketing, Gas Storage & Power
Generation...................................... 3.7 (2.8) 10.7 4.7 20.0 7.3
Corporate & Other................................. (.6) 1.2 (2.2) .8 (3.5) (.2)
----- ----- ----- ----- ----- -----
$22.1 $ 7.0 $52.8 $23.1 $87.2 $36.8
===== ===== ===== ===== ===== =====
</TABLE>
EXPLORATION & PRODUCTION operating and joint venture income increased $6.2
million for the 1997 quarter and $17.8 million and $26.4 million for the six-and
twelve-month periods, respectively. The results reflect a significant increase
in the level of gas and oil produced due to the development and acquisition of
interests in properties during 1995 and 1996. Gas and oil production increased
9.7 billion cubic feet (Bcf) equivalent in
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
the quarter, nearly a 70% increase from the comparable 1996 level. Results in
the 1997 six- and twelve-month periods also include a $4.7 million gain related
to the sale of certain undeveloped properties.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf).................... 19.5 13.2 38.2 25.6 69.7 43.9
Oil Production (Mmbbl).................. .8 .2 1.3 .4 2.0 .6
Gas and Oil Production (Bcf
equivalent)........................... 24.0 14.3 46.0 27.8 81.9 47.5
Average Gas Selling Price (per Mcf)..... $ 1.93 $ 2.19 $ 2.31 $ 2.30 $ 2.31 $ 2.00
Effect of Hedging (per Mcf)............. (.04) (.29) (.34) (.31) (.36) .02
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per
Mcf).................................. $ 1.89 $ 1.90 $ 1.97 $ 1.99 $ 1.95 $ 2.02
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl)*...... $17.47 $18.80 $18.07 $18.04 $19.20 $17.40
</TABLE>
*Average oil sales prices have been adjusted for amounts received or paid under
financial hedging contracts
E&P operating and joint venture results were also affected by fluctuations in
natural gas and oil sales prices, which were mitigated by the effect of hedging
with swap and futures agreements. These hedging agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations.
Additionally, E&P's operating results were affected by higher average production
costs per Mcf equivalent.
PIPELINES & PROCESSING operating and joint venture income increased $4.2 million
for the 1997 quarter and increased $8.9 million and $14.6 million for the six-
and twelve-month periods, respectively. The increases primarily reflect income
from the December 1996 acquisition of a 25% interest in Lyondell Methanol
Company, L.P. (Lyondell), a limited partnership that owns and operates a 248
million gallon per year methanol production plant in Texas. Earnings from
Lyondell have benefited from higher than expected methanol prices during 1997.
Pipeline & Processing results also reflect a higher level of volumes treated
through gas processing plants, as well as increases in transportation deliveries
due to the acquisition of additional pipeline interests during late 1995 and
1996. These increases in transportation volumes were partially offset by reduced
volumes resulting from the sale of a portion of MCN's interest in Dauphin Island
Gathering Partners (DIGP) during 1996 (Note 2c).
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf)..................... 13.4 9.5 23.2 18.7 48.7 27.1
Methanol Produced (million gallons)..... 14.6 -- 29.9 -- 40.4 --
Transportation (Bcf).................... 29.4 19.2 48.3 40.3 94.4 44.6
</TABLE>
*Includes MCN's share of joint ventures
ENERGY MARKETING, GAS STORAGE & POWER GENERATION operating and joint venture
income increased $6.5 million for the 1997 quarter and increased $6.0 million
and $12.7 million for the six- and twelve-month periods, respectively. The
increase in earnings during the quarter resulted from a 55% increase in gas
sales and exchange deliveries as well as slightly higher gas sales margins. The
increases in earnings for the 1997 six- and twelve-month periods were due to
increases in gas sales and exchange deliveries of 33% and 24%, respectively,
partially offset by lower gas sales margins. Also contributing to the 1997
results were earnings from the April 1997 acquisition of an 18.1% interest in
Midland Cogeneration Venture L.P., a limited partnership that owns a gas-fired
cogeneration facility capable of producing approximately 1,370 megawatts (MW) of
electricity and 1.35 million pounds per hour of process steam (Note 2b).
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
------------ -------------- --------------
1997 1996 1997 1996 1997 1996
---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
ENERGY MARKETING STATISTICS (BCF)*
Gas Sales........................................... 72.4 42.7 160.6 113.5 266.0 208.1
Exchange Deliveries................................. 1.3 4.9 10.0 14.3 18.3 21.4
---- ---- ----- ----- ----- -----
73.7 47.6 170.6 127.8 284.3 229.5
==== ==== ===== ===== ===== =====
</TABLE>
* Includes MCN's share of joint ventures
Additionally, Power Generation experienced higher earnings from its investment
in the 50%-owned, 123 MW Michigan Power cogeneration facility due to an increase
in electricity sales rates under its long-term sales contract. Results for 1997
also reflect increased earnings from the 30 MW Ada cogeneration facility as a
result of Power Generation's acquisition of the 1% general partnership interest
in the fourth quarter of 1996.
RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more closely balance its
portfolio of supply and sales agreements. MCN has hedged most of its gas and oil
production not covered by long-term, fixed-price sales obligations. MCN's Energy
Marketing group coordinates all of MCN's hedging activities to ensure compliance
with risk management policies established by MCN's Board of Directors. Certain
hedging gains or losses related to gas and oil production are recorded by MCN's
E&P operations. Gains and losses on gas-related hedging transactions that are
not recorded by MCN's E&P group are absorbed by Energy Marketing.
CORPORATE & OTHER operating and joint venture losses reflect administrative
expenses associated with corporate management activities. The Diversified Energy
group has been charged a larger portion of such expenses, reflecting its growing
percentage of MCN. The 1996 periods include a $1.7 million gain from the sale of
land by a 50%-owned real estate joint venture.
OTHER INCOME AND DEDUCTIONS
The 1997 quarter, six- and twelve-month periods reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, the 1997 periods reflect dividends on $80 million of
preferred securities issued in July 1996, $132 million of preferred securities
issued in March 1997 and $200 million of preferred securities issued in June
1997.
Other income and deductions for the 1997 twelve-month period, as well as the
1996 quarter, six- and twelve-month periods, includes gains related to DIGP
(Note 2c). In a series of transactions during 1996, MCN sold 64% of its 99%
interest in the DIGP partnership, resulting in pre-tax gains totaling $8.8
million, of which $2.4 million was deferred until the third quarter of 1997 when
the related option agreement expired unexercised. Other income and deductions
for the 1997 six- and twelve- month periods also includes gains on the sale of
pipeline assets.
INCOME TAXES
The current and deferred income tax provisions for all periods reflect increases
in pre-tax earnings. These taxes were reduced by an increase in the level of gas
production tax credits generated from E&P projects.
OUTLOOK
MCN plans to continue aggressively growing its E&P reserve base in known
producing areas, generating attractive returns and developing reliable,
long-term gas supplies. MCN will also continue to make investments in natural
gas and gas liquid gathering and processing facilities near these known
producing areas, concentrating on those with the highest growth potential.
Additionally, MCN will focus on expanding its
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Energy Marketing coverage within existing markets as well as entering new
markets through strategic alliances with other energy providers. MCN's Power
Generation business is expected to make significant investments in international
projects over the next several years as evidenced by its acquisition of a 40%
interest in a joint venture in India (Note 2a). MCN is currently evaluating
various other projects that could add significantly to its international
portfolio.
GAS DISTRIBUTION
Results reflect solid financial performance -- The Gas Distribution group
reported an increase in earnings of $.4 million for the 1997 quarter, reflecting
improved gross margins resulting from higher gas sales and transportation
deliveries due in part to colder weather. Results for the 1997 quarter also
reflect lower operation and maintenance expenses, partially offset by higher
depreciation and financing costs. Earnings decreased $7.0 million and $18.9
million for the 1997 six- and twelve-month periods, respectively, reflecting
reduced gross margins due to warmer weather as well as higher operating expenses
and financing costs.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
---------------- ---------------- --------------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
Gas sales.............................. $168.3 $185.6 $649.9 $673.5 $1,079.5 $1,073.9
End user transportation................ 19.4 18.7 45.4 45.1 82.7 83.5
Intermediate transportation............ 13.3 11.4 28.1 22.8 53.9 44.6
Other.................................. 12.0 9.6 23.9 22.5 43.6 48.8
------ ------ ------ ------ -------- --------
213.0 225.3 747.3 763.9 1,259.7 1,250.8
Cost of Gas.............................. 84.7 101.2 391.7 403.7 634.3 609.0
------ ------ ------ ------ -------- --------
Gross Margin............................. 128.3 124.1 355.6 360.2 625.4 641.8
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.............. 70.6 72.3 145.8 142.2 302.0 289.3
Depreciation, depletion and
amortization........................ 26.6 25.0 52.3 49.5 101.6 94.8
Property and other taxes............... 16.2 15.5 34.1 33.9 62.6 61.2
------ ------ ------ ------ -------- --------
113.4 112.8 232.2 225.6 466.2 445.3
------ ------ ------ ------ -------- --------
Operating Income......................... 14.9 11.3 123.4 134.6 159.2 196.5
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures..... .9 .2 1.9 .6 2.6 1.3
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................ 1.3 .6 2.5 1.2 5.3 3.4
Interest expense....................... (13.8) (11.2) (28.0) (23.8) (53.1) (47.1)
Minority interest...................... (.6) (.4) (.9) (.7) (1.2) (1.9)
Other.................................. (.1) .6 .5 (.2) (1.0) (4.2)
------ ------ ------ ------ -------- --------
(13.2) (10.4) (25.9) (23.5) (50.0) (49.8)
------ ------ ------ ------ -------- --------
Income Before Income Taxes............... 2.6 1.1 99.4 111.7 111.8 148.0
Income Taxes............................. 1.4 .3 34.4 39.7 37.4 54.7
------ ------ ------ ------ -------- --------
Net Income............................... $ 1.2 $ .8 $ 65.0 $ 72.0 $ 74.4 $ 93.3
====== ====== ====== ====== ======== ========
</TABLE>
* Includes intercompany transactions
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GROSS MARGIN
Gross margin reflects varying weather -- Gas Distribution gross margin
(operating revenues less cost of gas) increased $4.2 million for the 1997
quarter and decreased $4.6 million and $16.4 million for the six- and
twelve-month periods, respectively. These varying results are primarily due to
fluctuations in gas sales and end user transportation deliveries that were
driven by the colder weather during the 1997 quarter and the warmer weather
during the 1997 six- and twelve-month periods. All periods were affected by
increased revenues as a result of the continued growth in intermediate
transportation services.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
--------------- ------------- --------------
1997 1996 1997 1996 1997 1996
----- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal........ 21.9% 13.6% 1.9 % 7.3 % 2.0 % 7.4%
Increase (Decrease) from Normal in:
Gas markets (in Bcf)........................ 4.6 3.2 1.5 8.6 3.8 14.8
Net income (in Millions).................... $ 4.1 $ 2.9 $1.3 $7.8 $3.4 $13.3
Earnings per share.......................... $ .06 $ .04 $.02 $.12 $.05 $ .20
</TABLE>
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $16.6 million
and $23.3 million in the 1997 quarter and six-month period and increased $4.8
million in the 1997 twelve-month period. The decrease in revenues for the
quarter reflects a reduction in gas sales rates driven by lower gas costs as
subsequently discussed. This decrease in revenues attributable to reduced gas
sales rates was partially offset by increased revenues from higher deliveries
due to the colder weather in the 1997 quarter. The decreased revenues for the
1997 six-month period reflect lower gas sales and end user transportation
deliveries primarily due to the warmer weather in the 1997 period as compared to
the same 1996 period, partially offset by an increase in the gas cost recovery
rate. The 1997 twelve-month period increase in revenues is primarily the result
of a gas cost recovery rate increase, substantially offset by lower volumes due
to warmer weather.
<TABLE>
<CAPTION>
QUARTER 6 MONTHS 12 MONTHS
-------------- -------------- --------------
1997 1996 1997 1996 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales......................................... 35.3 34.6 129.9 138.2 212.7 225.5
End User Transportation........................... 32.7 32.0 77.1 79.5 144.5 149.4
----- ----- ----- ----- ----- -----
68.0 66.6 207.0 217.7 357.2 374.9
Intermediate Transportation*...................... 141.6 110.3 282.2 258.3 551.4 448.3
----- ----- ----- ----- ----- -----
209.6 176.9 489.2 476.0 908.6 823.2
===== ===== ===== ===== ===== =====
</TABLE>
*Includes intercompany volumes
INTERMEDIATE TRANSPORTATION revenues increased $1.9 million in the quarter and
$5.3 million and $9.3 million in the 1997 six- and twelve-month periods,
respectively. Due primarily to the recent expansion of its northern Michigan
gathering system, MichCon was able to transport an additional 15.3 Bcf, 32.9 Bcf
and 108.8 Bcf in the 1997 quarter, six- and twelve-month periods, respectively.
Intermediate transportation volumes for the 1997 quarter and twelve-month period
were impacted by increased deliveries to two major fixed-fee customers. Volumes
transported in the six-month period for these two customers reflected a
decrease. Although volumes associated with these customers have varied, the
related revenues were not significantly affected.
OTHER OPERATING REVENUES increased $2.4 million in the 1997 quarter and $1.4
million in the six-month period due to increased gas processing revenues and
increased revenues associated with maintaining customers' natural gas furnaces
and appliances. Other operating revenues decreased $5.2 million in the 1997
twelve-month period due to
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
a reduction in conservation revenues resulting from the discontinuance of
MichCon's energy conservation programs which also impacted the quarter and
six-month period. As discussed in the "Operation and Maintenance" section that
follows, this decrease in revenues is offset by a corresponding decrease in
expenses related to the conservation programs.
COST OF GAS
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set to
recover 100% of prudently and reasonably incurred gas costs. Therefore,
fluctuations in total gas costs have little or no effect on gross margins and
earnings.
Cost of gas sold decreased in the 1997 quarter and six-month period and
increased in the twelve-month period. The decrease in market prices paid for gas
resulted in a decrease in the cost of gas sold per thousand cubic feet of $.49
(16%) in the 1997 three-month period. The increase in market prices paid for gas
resulted in an increase in the cost of gas sold per thousand cubic feet of $.15
(5%) and $.25 (9%) in the 1997 six- and twelve-month periods, respectively. The
rate increase in the 1997 six-month period was more than offset by lower volumes
due to warmer weather. The rate increase in the 1997 twelve-month period was
partially offset by lower volumes due to warmer weather.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses decreased for the 1997 quarter and increased
for the 1997 six- and twelve-month periods. Operation and maintenance expenses
were affected in all periods by lower benefit costs, primarily pension and
retiree healthcare costs. The 1997 quarter further benefited from a decrease in
uncollectible gas accounts expense, which was partially offset by an increase in
operating expenses related to the increase in intermediate transportation
volumes as previously discussed. For the 1997 six-month period, the decrease in
benefit costs was more than offset by increased operating expenses related to
intermediate transportation services. The increase in the 1997 twelve-month
period is due to higher uncollectible gas accounts expense as well as the
increased operating expenses related to intermediate transportation services. As
previously discussed, the discontinuance of MichCon's energy conservation
programs reduced expenses in all 1997 periods.
DEPRECIATION AND DEPLETION for the 1997 quarter, six- and twelve-month periods
increased due to higher plant balances reflecting capital expenditures of $456.8
million over the past two calendar years. Depreciation and depletion expenses
are expected to increase in future years due to additional capital investments.
MichCon filed an application with the MPSC to lower its depreciation rates,
which could partially offset the anticipated increase in depreciation expense in
future years.
PROPERTY AND OTHER TAXES increased in the 1997 periods due to an increase in the
Michigan single business tax which is partially offset by a reduction in
property taxes.
OTHER INCOME AND DEDUCTIONS
The 1997 quarter, six- and twelve-month periods reflect higher interest costs on
increased long-term debt required to finance capital investments in the Gas
Distribution group.
INCOME TAXES
Income taxes changed primarily as a result of variations in earnings. Income
taxes also were affected by the favorable resolution of prior years' tax issues.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OUTLOOK
Gas Distribution's strategy is to grow revenues and reduce its costs in order to
maintain strong returns and provide customers with quality service at
competitive prices. Revenue growth will be achieved through the expansion of its
residential, commercial and industrial customer base. In 1997, Gas Distribution
is concentrating on adding new customers in current service areas including
increased penetration of previous expansion areas. Gas Distribution will
continue initiatives to increase productivity and improve customer services in
order to strengthen its competitive position in the gas industry. Management is
continually assessing ways to improve cost competitiveness. Among the cost
savings initiatives, Gas Distribution and other Michigan utilities are exploring
opportunities to share the cost of common, duplicative functions in order to
obtain greater efficiencies and increase customer value.
DISCONTINUED OPERATIONS
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc., resulting in an after-tax gain of
$36.2 million. Although Genix had experienced significant growth in revenues and
operating income over the past several years, MCN's focused strategy is to
invest in energy-related projects that generate higher rates of return.
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
MCN's cash flow from operating activities increased $76.8 million during the
1997 six-month period from the comparable 1996 period. The increase was due
primarily to higher net income, after adjusting for depreciation, deferred taxes
and nonoperating gains and a decrease in working capital requirements.
FINANCING ACTIVITIES
In June 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 3d). Proceeds from this issuance
were used to fund capital expenditures, to repay short-term obligations and for
general corporate purposes.
In June 1997, MCN issued, through wholly owned trusts, 100,000 Private
Institutional Trust Securities and 100,000 Single Point Remarketed Reset Capital
Securities (Note 3c). Net proceeds of $199.1 million from these issuances were
invested by MCN in its Diversified Energy group and were used to reduce
short-term debt incurred to fund capital expenditures. The securities are
currently rated the equivalent of "A-"or "baa1" by the major rating agencies.
In March 1997, MCN issued 2,645,000 FELINE PRIDES generating net proceeds of
$127.4 million (Note 3b). Proceeds from the issuance were used to reduce
short-term debt incurred by the Diversified Energy group to fund capital
investments and for general corporate purposes. The FELINE PRIDES are currently
rated the equivalent of "BBB+" by the major rating agencies.
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. During 1997, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $19 million. During the first six months of 1997,
issuances under these plans generated proceeds of $9.4 million.
DIVERSIFIED ENERGY
In June 1997, MCNIC repaid $30 million of senior debt on its stated maturity
date.
In January 1997, MCNIC issued $150 million of medium-term notes using the
proceeds to repay short-term debt and for general corporate purposes.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MCNIC has established credit lines for borrowings of up to $100 million under a
364-day revolving credit facility and up to $300 million under a three-year
revolving credit facility, both of which expire in July 1998. These facilities
support MCNIC's $400 million commercial paper program, which is used to finance
capital investments of the Diversified Energy group and working capital
requirements of its gas marketing operations. During the first six months of
1997, MCNIC repaid $329.8 million of commercial paper. At June 30, 1997, there
were no borrowings outstanding under this program. A portion of the credit lines
equaling $42 million has been temporarily restricted in connection with a
potential acquisition by one of MCN's international joint ventures (Note 2a).
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 which is backed by
credit lines with several banks. MichCon has established credit lines to allow
for borrowings of up to $150 million under a 364-day revolving credit facility
and up to $150 million under a three-year revolving credit facility. During the
first six months of 1997, MichCon repaid $238.3 million of commercial paper. At
June 30, 1997, there were no borrowings outstanding under this program.
During May 1997, MichCon issued $85 million of first mortgage bonds under its
existing shelf registrations. The funds from this issuance were used to retire
first mortgage bonds, fund capital expenditures and for general corporate
purposes.
During April 1997, subsidiaries of MichCon borrowed $40 million under a
nonrecourse credit agreement that matures in 2005. Proceeds were used to finance
the expansion of the northern Michigan gathering system.
During May and June 1997, MichCon redeemed $17 million of long-term debt prior
to maturity. MichCon also repaid $50 million of first mortgage bonds on its
stated maturity date in May 1997.
MichCon has available a Trust Demand Note program that allows it to borrow up to
$25 million. At June 30, 1997, there were no borrowings outstanding under this
program.
INVESTING ACTIVITIES
Capital investments increased $120.6 million (39%) in the 1997 six-month period
over the same period in 1996. The 1997 investments include higher levels of
investments in E&P properties and joint venture pipeline facilities as well as
the acquisition of an interest in Indian power generation projects and a
domestic cogeneration facility. The 1996 investments include the DIGP
acquisition. In the third quarter of 1997, MCN
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
sold E&P assets for approximately $31 million. The proceeds from the sale will
be reinvested in E&P operations, primarily in offshore properties.
<TABLE>
<CAPTION>
6 MONTHS
---------------
1997 1996
------ ------
<S> <C> <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $173.9 $142.8
Gas Distribution.......................................... 59.1 74.6
Discontinued Operations................................... -- 6.5
------ ------
233.0 223.9
------ ------
MCN's Share of Joint Venture Capital Expenditures:
Pipelines & Processing.................................... 42.8 .4
Energy Marketing, Gas Storage & Power Generation.......... 2.4 .3
Other..................................................... 1.6 3.1
------ ------
46.8 3.8
------ ------
Acquisitions (Note 2)*...................................... 147.1 78.6
------ ------
Total Capital Investments................................... $426.9 $306.3
====== ======
</TABLE>
*Includes MCN's share of GTEC debt existing at the date of acquisition (Note 2a)
OUTLOOK
Capital investments in 1997 are expected to reach $1.1 billion -- MCN's
strategic direction is to grow significantly by investing in a portfolio of
energy-related projects. For 1997, MCN anticipates investing approximately $900
million in Diversified Energy and the remainder in Gas Distribution. Within
Diversified Energy, approximately $450 million will be invested in E&P projects
for drilling operations and the acquisition of additional reserves. Diversified
Energy will invest the remaining $450 million in gas gathering, gas processing
and power generation projects.
As MCN continues to pursue its strategy of diversifying through a portfolio of
energy-related projects, it will routinely evaluate the value and strategic
benefits of selling its assets. MCN is currently negotiating the sale of certain
Diversified Energy assets to unlock their appreciated value. Proceeds from any
sale will be used to acquire or develop other energy-related assets and
therefore capital investments would be increased accordingly.
The proposed level of investments for the remainder of 1997 increases capital
requirements materially in excess of internally generated funds and requires the
issuance of additional debt. MCN's actual capital requirements and general
market conditions will dictate the nature, timing and amount of future
issuances. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
In August 1997, President Clinton signed a bill that will reduce taxes collected
by the United States over the next five years. MCN is currently assessing the
exact impact of this legislation on its future tax liabilities. Although the
bill is not expected to significantly change MCN's tax expense, it will have an
impact on the timing of tax payments. It is anticipated that MCN will realize a
significant benefit in cash flows from a deferral in taxes paid over the next
five years as a result of this legislation.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure of Information about Capital Structure", which are
effective for MCN's year end 1997 financial statements. SFAS No. 128 simplifies
the standards for computing earnings per share (EPS), replaces primary EPS with
a newly defined basic EPS and modifies the computation of diluted EPS. SFAS No.
129 continues previous requirements to disclose certain information about an
entity's capital structure. MCN does not expect the application of these
statements to have a material effect on its financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which are effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting information about operating segments in annual and
interim financial statements. MCN is in the process of evaluating the effect of
applying these statements.
In 1996, the Emerging Issues Task Force of the FASB reached a consensus that the
cost associated with modifying internal use software for the year 2000 should be
expensed as incurred. MCN has established processes for evaluating and managing
the risks and costs associated with this issue on the financial position and
results of operations of MCN and its subsidiaries. MCN is assessing the extent
of necessary modifications to its computer software, as well as that of its
partners and operators.
FORWARD-LOOKING STATEMENTS
Statements included throughout the Quarterly Report on Form 10-Q which are not
historical in nature are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements including, among others, the following: (i) the
effects of weather and other natural phenomena; (ii) increased competition from
other energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, electricity and crude oil; (vii) the nature, availability and
projected profitability of potential projects and other investments available to
MCN; (viii) conditions of capital markets and equity markets and (ix) changes in
the economic and political climate in foreign countries where MCN has invested
or may invest in the future.
11
<PAGE> 14
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES............................. $387,925 $354,464 $1,176,686 $1,145,102 $2,028,852 $1,851,903
-------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of gas.................................. 200,020 199,068 699,565 711,497 1,181,646 1,084,415
Operation and maintenance.................... 95,265 88,080 193,686 174,432 391,234 346,426
Depreciation, depletion and amortization..... 45,484 35,520 88,941 70,318 164,613 129,338
Property and other taxes..................... 19,756 18,064 41,228 39,416 76,239 69,177
-------- -------- ---------- ---------- ---------- ----------
360,525 340,732 1,023,420 995,663 1,813,732 1,629,356
-------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME............................... 27,400 13,732 153,266 149,439 215,120 222,547
-------- -------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES........... 10,470 4,842 24,831 8,885 33,813 12,063
-------- -------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.............................. 2,164 1,604 4,376 3,149 8,461 6,576
Interest on long-term debt................... (21,069) (16,386) (40,051) (32,525) (74,043) (57,005)
Other interest expense....................... (1,894) (2,734) (6,624) (6,835) (11,053) (13,072)
Dividends on preferred securities of
subsidiaries............................... (7,329) (2,345) (11,558) (4,707) (19,225) (9,502)
Gains related to DIGP (Note 2c).............. -- 3,488 -- 3,488 2,896 3,488
Minority interest............................ (614) (371) (967) (736) (1,290) (2,059)
Other........................................ (441) 250 2,580 (995) 955 (3,263)
-------- -------- ---------- ---------- ---------- ----------
(29,183) (16,494) (52,244) (39,161) (93,299) (74,837)
-------- -------- ---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................... 8,687 2,080 125,853 119,163 155,634 159,773
INCOME TAX PROVISION (BENEFIT)................. (389) (3,127) 35,008 34,902 36,481 44,509
-------- -------- ---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.............. 9,076 5,207 90,845 84,261 119,153 115,264
-------- -------- ---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES (Note 2d)
Income from operations....................... -- 582 -- 1,595 -- 3,446
Gain on sale................................. -- 36,176 -- 36,176 -- 36,176
-------- -------- ---------- ---------- ---------- ----------
-- 36,758 -- 37,771 -- 39,622
-------- -------- ---------- ---------- ---------- ----------
NET INCOME..................................... $ 9,076 $ 41,965 $ 90,845 $ 122,032 $ 119,153 $ 154,886
======== ======== ========== ========== ========== ==========
EARNINGS PER SHARE
Continuing operations........................ $ .13 $ .08 $ 1.34 $ 1.26 $ 1.77 $ 1.73
-------- -------- ---------- ---------- ---------- ----------
Discontinued operations (Note 2d)
Income from operations..................... -- .01 -- .03 -- .06
Gain on sale............................... -- .54 -- .54 -- .54
-------- -------- ---------- ---------- ---------- ----------
-- .55 -- .57 -- .60
-------- -------- ---------- ---------- ---------- ----------
$ .13 $ .63 $ 1.34 $ 1.83 $ 1.77 $ 2.33
======== ======== ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING.............. 68,179 66,893 67,865 66,730 67,507 66,467
======== ======== ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE................... $ .2425 $ .2325 $ .4850 $ .4650 $ .9600 $ .9200
======== ======== ========== ========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- Beginning of period................. $370,361 $283,046 $ 305,352 $ 218,425 $ 309,467 $ 215,801
ADD -- Net income.............................. 9,076 41,965 90,845 122,032 119,153 154,886
-------- -------- ---------- ---------- ---------- ----------
379,437 325,011 396,197 340,457 428,620 370,687
DEDUCT -- Cash dividends declared on common
stock........................................ 16,499 15,544 32,832 30,990 64,717 61,220
Other.................................. 368 -- 795 -- 1,333 --
-------- -------- ---------- ---------- ---------- ----------
BALANCE -- End of period....................... $362,570 $309,467 $ 362,570 $ 309,467 $ 362,570 $ 309,467
======== ======== ========== ========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
12
<PAGE> 15
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------ ------------
1997 1996 1996
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 150,084 $ 55,489 $ 30,462
Accounts receivable, less allowance for doubtful accounts
of $24,186, $18,726 and $18,487, respectively........... 286,364 293,850 362,596
Accrued unbilled revenues................................. 16,369 16,692 108,509
Accrued gas cost recovery revenues........................ 14,072 42,026 27,672
Gas in inventory (Note 5)................................. 62,896 28,033 79,161
Property taxes assessed applicable to future periods...... 39,228 36,575 62,966
Gas receivable............................................ 21,465 24,533 18,062
Other..................................................... 31,617 26,425 34,800
---------- ---------- ----------
622,095 523,623 724,228
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investment in and advances to joint ventures.............. 410,437 189,479 265,388
Deferred swap losses and receivables (Note 6)............. 47,071 35,605 65,051
Deferred postretirement benefit costs..................... 2,559 10,060 5,559
Deferred environmental costs.............................. 30,680 31,016 31,233
Prepaid benefit costs..................................... 59,223 45,959 59,248
Other..................................................... 107,718 95,188 100,341
---------- ---------- ----------
657,688 407,307 526,820
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Exploration & Production.................................. 1,144,628 711,264 981,901
Pipelines & Processing.................................... 28,618 26,146 27,895
Gas Distribution.......................................... 2,729,303 2,559,713 2,689,039
Other..................................................... 20,307 15,968 18,722
---------- ---------- ----------
3,922,856 3,313,091 3,717,557
Less -- Accumulated depreciation and depletion............ 1,409,089 1,265,603 1,335,201
---------- ---------- ----------
2,513,767 2,047,488 2,382,356
---------- ---------- ----------
$3,793,550 $2,978,418 $3,633,404
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 199,422 $ 191,183 $ 317,922
Notes payable (Note 4).................................... 2,452 77,291 336,126
Current portion of long-term debt and capital lease
obligations............................................. 30,429 84,642 84,747
Gas inventory equalization (Note 5)....................... 66,679 53,955 --
Federal income, property and other taxes payable.......... 66,948 89,017 97,646
Customer deposits......................................... 12,005 9,864 12,881
Other..................................................... 78,608 93,622 97,873
---------- ---------- ----------
456,543 599,574 947,195
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes......................... 177,412 145,648 149,838
Unamortized investment tax credit......................... 33,982 35,858 34,919
Tax benefits amortizable to customers..................... 115,634 113,631 116,496
Deferred swap gains and payables (Note 6)................. 35,696 35,717 48,365
Accrued environmental costs............................... 35,000 35,000 35,000
Minority interest......................................... 18,308 18,440 17,911
Other..................................................... 67,501 93,186 73,263
---------- ---------- ----------
483,533 477,480 475,792
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations (Note
3a)....................................................... 1,219,141 1,048,268 1,252,040
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN (Notes 3b
and 3c)................................................... 504,993 96,511 173,809
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2a and 7)
COMMON SHAREHOLDERS' EQUITY (Note 3d)
Common stock.............................................. 779 670 673
Additional paid-in capital................................ 788,757 461,257 493,469
Retained earnings......................................... 362,570 309,467 305,352
Yield enhancement, contract and issuance costs (Notes 3b
and 3c)................................................. (22,035) (14,220) (14,492)
Unearned compensation..................................... (731) (589) (434)
---------- ---------- ----------
1,129,340 756,585 784,568
---------- ---------- ----------
$3,793,550 $2,978,418 $3,633,404
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
13
<PAGE> 16
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income................................................ $ 90,845 $ 122,032
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation, depletion and amortization
Per statement of income............................... 88,941 70,318
Charged to other accounts............................. 3,756 7,149
Deferred income taxes -- current........................ (18,552) 727
Deferred income taxes and investment tax credit, net.... 25,775 17,776
Gains on sale of Genix and DIGP (Notes 2c and 2d)....... -- (38,443)
Equity in earnings of joint ventures, net of
distributions.......................................... (4,127) (1,610)
Other................................................... (971) (1,496)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... 139,294 71,660
--------- ---------
Net cash provided from operating activities........ 324,961 248,113
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (331,274) (168,344)
Common stock dividends paid............................... (32,832) (30,990)
Issuance of common stock (Note 3d)........................ 286,018 8,848
Issuance of preferred securities (Notes 3b and 3c)........ 326,521 --
Issuance of long-term debt (Note 3a)...................... 273,241 398,434
Long-term commercial paper, net........................... (261,822) (264,007)
Retirement of long-term debt.............................. (102,969) (5,353)
Other..................................................... (532) (5,978)
--------- ---------
Net cash provided from (used for) financing
activities....................................... 156,351 (67,390)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (232,764) (217,088)
Acquisitions (Notes 2a, 2b and 2c)........................ (105,133) (78,620)
Sale of Genix (Note 2d)................................... -- 137,500
Investment in joint ventures.............................. (40,758) (8,151)
Sale of investment in joint ventures (Note 2c)............ -- 31,500
Return of investment in joint ventures.................... 4,000 --
Other..................................................... 12,965 (9,634)
--------- ---------
Net cash used for investing activities............. (361,690) (144,493)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 119,622 36,230
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 30,462 19,259
--------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30.......................... $ 150,084 $ 55,489
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 74,606 $ 1,191
Accrued unbilled revenues................................. 92,140 75,718
Accrued gas cost recovery revenues........................ 13,600 (42,026)
Gas in inventory.......................................... 16,265 43,730
Accounts payable.......................................... (118,500) (17,873)
Gas inventory equalization................................ 66,679 53,955
Federal income, property and other taxes payable.......... (30,698) (27,201)
Other current assets and liabilities...................... 21,315 13,298
Deferred assets and liabilities........................... 3,887 (29,132)
--------- ---------
$ 139,294 $ 71,660
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 40,966 $ 36,467
Federal income taxes.................................... 22,500 11,434
Noncash investing activities:
Property purchased under capital leases................. $ 273 $ 6,765
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
14
<PAGE> 17
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements should be read in conjunction
with MCN's 1996 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1997
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments (consisting of only recurring adjustments or
accruals) necessary for a fair presentation of the financial statements for the
periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. ACQUISITIONS AND DISPOSITIONS
a. TORRENT POWER PRIVATE LIMITED
In March 1997, MCN acquired a 40% interest in Torrent Power Private Limited
(TPPL), an India joint venture that holds minority interests in electric
companies and power generation facilities located in the state of Gujarat,
India. The total cost of the acquisition was approximately $57,000,000, of
which $50,400,000 was paid through June 1997. The remainder is expected to
be paid in the second half of 1997. Specifically, the joint venture has a
21% interest in Ahmedabad Electricity Company Limited (AEC), a 43% interest
in Surat Electricity Company Limited (SEC) and a 30% interest in Gujarat
Torrent Energy Corporation (GTEC). AEC serves the city of Ahmedabad and has
550 megawatts (MW) of electric generating capacity. SEC provides
electricity to the city of Surat. GTEC is currently constructing a 655 MW
dual fuel generation facility, the first phase of which is expected to be
operational in late 1997 and fully completed by the end of 1998. In
addition to equity investments, the construction of this facility will be
funded through nonrecourse project financing of which the portion
attributable to MCN's existing interest will be approximately $60,000,000.
In June 1997, MCN entered into an agreement to obtain a sufficient number
of preference shares in TPPL to meet TPPL's cash requirements to acquire
additional interests in AEC and GTEC. In August 1997, TPPL acquired an
additional 10% interest in AEC for $21,000,000. In the second half of 1997,
TPPL will make a public offer to AEC's shareholders to acquire up to an
additional 20% interest in AEC for approximately $42,000,000. TPPL is
currently negotiating to acquire further interests in AEC and GTEC.
b. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
During the second quarter of 1997, MCN purchased an 18.1% general
partnership interest in Midland Cogeneration Venture Limited Partnership
(MCV), a partnership that leases and operates a cogeneration facility in
Midland, Michigan. The facility can produce up to 1,370 MW of electricity,
as well as 1.35 million pounds per hour of process steam. The investment
totaled $54,750,000 and is accounted for under the equity method.
c. DAUPHIN ISLAND GATHERING PARTNERS
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN acquired in the
first quarter of 1996 a 99% interest in Dauphin Island Gathering Partners
(DIGP), a general partnership that owns a 90-mile gas gathering system in
the Mobile Bay area of offshore Alabama. In June of 1996, MCN sold a 35%
interest in DIGP for a pre-tax gain of $3,488,000. An additional 5%
interest was sold in the third quarter of 1996, generating a pre-tax gain
of $498,000. In December 1996, a 41% interest in the partnership was sold
to three additional partners resulting in a pre-tax gain of $4,796,000, of
which $2,398,000 was deferred until the third quarter of 1997 when the
related option agreement expired unexercised.
15
<PAGE> 18
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. THE GENIX GROUP, INC.
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN completed the
sale of its computer operations subsidiary, The Genix Group, Inc., to
Affiliated Computer Services, Inc. in June 1996. The sale resulted in an
after-tax gain of $36,176,000.
3. CAPITALIZATION
A. LONG-TERM DEBT
The following long-term debt was issued during the first half of 1997 (in
thousands):
<TABLE>
<CAPTION>
ISSUE DATE DESCRIPTION AMOUNT ISSUED
- ----------------------------------------------------------
<S> <C> <C>
January 1997 MCNIC Medium-Term Notes
6.89%, due January 2002 $90,000
7.12%, due January 2004 $60,000
- ----------------------------------------------------------
May 1997 MichCon First Mortgage Bonds
7.21%, due May 2007 $30,000
7.06%, due May 2012 $40,000
7.60%, due May 2017 $15,000
- ----------------------------------------------------------
</TABLE>
During April 1997, MichCon subsidiaries borrowed $40,000,000 under a
nonrecourse credit agreement at an average interest rate of 6.45%. Under
the terms of the agreement, certain alternative variable interest rates are
available at the borrowers' option during the life of the agreement.
Quarterly principal payments commenced in June 1997 with the final
installment due November 2005. The loan is secured by a pledge of the stock
of the borrowers and a security interest in certain of their assets.
MichCon entered into variable interest rate swap agreements with notional
principal amounts aggregating $80,000,000 in connection with the first
mortgage bonds issued in May 1997. Swap agreements of $40,000,000 through
May 2002 have reduced the average cost of debt from 7.31% to 6.30% for the
two months ended June 30, 1997. Swap agreements of $40,000,000 through May
2005 have reduced the average cost of debt from 7.06% to 5.90% for the two
months ended June 30, 1997.
In the second quarter of 1997, MichCon redeemed early $5,000,000 of 9.5%
first mortgage bonds and $12,000,000 of 9.75% unsecured notes. As discussed
in MCN's 1996 Annual Report on Form 10-K, MichCon had a variable interest
rate swap through April 2000 on the $12,000,000 unsecured notes. This
agreement reduced the cost of debt of the fixed-rate unsecured notes from
9.75% to 5.77% for the six months ended June 30, 1997. This swap has been
redesignated as a hedge of other outstanding first mortgage bonds.
B. FELINE PRIDES
In March 1997, MCN issued 2,645,000 FELINE PRIDES yielding 8% with a stated
amount of $50 per security. Each security initially consists of a stock
purchase contract and a preferred security of MCN Financing III.
Under each stock purchase contract, MCN is obligated to sell and the FELINE
PRIDES holder is obligated to purchase in May 2000 for $50, between 1.4132
and 1.7241 shares of MCN common stock. The exact number of MCN common
shares to be sold is dependent on the market value of a share in May 2000,
but will not be less than 3,737,988 or more than 4,560,345 shares. MCN is
also obligated to pay the FELINE PRIDES holders a quarterly contract
adjustment payment at an annual rate of .75% of
16
<PAGE> 19
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the stated amount. MCN has recorded the present value of the contract
adjustment payments, totaling $2,661,015, as a liability and a reduction to
Common Shareholders' Equity on MCN's Consolidated Statement of Financial
Position. The liability is reduced as the contract adjustment payments are
made. MCN has the right to defer the contract adjustment payments, in which
case MCN cannot declare dividends on its common stock until the contract
adjustment payments have been made. In addition, MCN has incurred costs of
approximately $4,900,000 in conjunction with the issuance and similarly has
recorded these costs as a reduction to Common Shareholders' Equity.
MCN Financing III, a business trust wholly owned by MCN, was formed for the
sole purpose of issuing preferred securities and lending the gross proceeds
thereof to MCN. In March 1997, the trust issued 2,645,000 shares of 7.25%
redeemable preferred securities, at the liquidation preference value of $50
per share. The trust invested the $132,250,000 of gross proceeds from the
issuance of the preferred securities, as well as $4,090,250 of proceeds
from the issuance of common securities to MCN, in an equivalent amount of
7.25% Junior Subordinated Debentures of MCN. The $136,340,250 of Junior
Subordinated Debentures are due May 2002 and are the sole assets of the
trust. Upon maturity of the debentures, the trust is required to redeem the
preferred securities.
Holders of the preferred securities are entitled to receive cumulative
dividends at an annual rate of 7.25% of the liquidation preference value.
Dividends are payable quarterly and in substance are tax deductible by MCN.
MCN has the right to extend interest payment periods on the debentures for
successive periods through the May 2002 maturity date. As a consequence,
quarterly dividend payments on the preferred securities can be deferred by
the trust during any such interest payment period. In the event that MCN
exercises this right, MCN may not declare dividends on its common stock.
In the event of default, holders of the preferred securities will be
entitled to exercise and enforce the trust's creditor rights against MCN,
which may include acceleration of the principal amount due on the
debentures. MCN has issued a guaranty with respect to payments on the
preferred securities. This guaranty, taken together with MCN's obligations
under the debentures, the related indenture, and the trust documents,
provides a full and unconditional guaranty of the trust's obligations under
the preferred securities to the extent the trust has funds available
therefor.
The preferred securities are pledged as collateral to secure the FELINE
PRIDES holders' obligation to purchase MCN common stock under the stock
purchase contracts. Each holder has the right after issuance of the FELINE
PRIDES to substitute for the preferred securities, zero coupon U.S.
Treasury Securities maturing in May 2000. Each FELINE PRIDES holder has the
option to use the preferred securities or the treasury securities to
satisfy the May 2000 purchase contract commitment.
C. PREFERRED SECURITIES
In 1997, MCN Financing V and MCN Financing VI, business trusts wholly owned
by MCN, were formed for the sole purpose of issuing preferred securities
and lending the gross proceeds thereof to MCN. In June 1997, MCN Financing
V issued 100,000 Private Institutional Trust Securities (PRINTS) and MCN
Financing VI issued 100,000 Single Point Remarketed Reset Capital
Securities (SPRRCS), both at their liquidation preference value of $1,000
per security. The trusts invested the $200,000,000 of gross proceeds from
the issuances of the preferred securities, as well as $6,186,000 of
proceeds from the issuances of common securities to MCN, in an equivalent
amount of senior debentures of MCN. The $206,186,000 of senior debentures
are due 2037, are on terms substantially the same as the preferred
securities and are the sole assets of the trusts.
The preferred securities are structured such that at a specified future
date, the rate reset date, the securities may be remarketed with a new
liquidation preference value of $25 per security. The annual dividend
payment rate will be reset to reflect the lowest rate, less than or equal
to a maximum rate, at which the securities can be remarketed at a price
equal to their liquidation preference value. On the rate
17
<PAGE> 20
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reset date, the terms of an equivalent amount of the MCN senior debentures
will change to reflect the new terms of the remarketed preferred
securities. The debentures will thereafter be subordinated and junior in
right of payment to all senior obligations of MCN. The rate reset dates for
the PRINTS and SPRRCS are anticipated to be June 1, 1998 and October 28,
1999, respectively.
Prior to the rate reset date, holders of the PRINTS and SPRRCS are entitled
to receive cumulative dividends at annual rates of 6.305% and 6.85% of the
liquidation preference value, respectively. Dividends are in substance tax
deductible by MCN and are payable semi-annually until the rate reset date,
after which they will become payable quarterly. Financing costs were
deferred and reflected as a reduction in the carrying value of the
preferred securities. These costs are being amortized using the
straight-line method over 40 years.
Subsequent to the rate reset date, MCN has the right to extend interest
payment periods on the debentures for up to 20 consecutive quarters through
the June 2037 maturity date. As a consequence, dividend payments on the
preferred securities can be deferred by the trusts during any such interest
payment period. In the event that MCN exercises this right, MCN may not
declare dividends on its common stock. With MCN's consent, the preferred
securities are redeemable at the option of the trusts, in whole or in part,
on the rate reset date or at any time after the fifth anniversary of the
rate reset date. In addition, upon maturity of the debentures, the trusts
are required to redeem the preferred securities.
In the event of default, holders of the preferred securities will be
entitled to exercise and enforce the trust's creditor rights against MCN,
which may include acceleration of the principal amount due on the
debentures. MCN has issued guaranties with respect to payments on the
preferred securities. These guaranties, when taken together with MCN's
obligations under the debentures, the related indenture, and the trust
documents, provide full and unconditional guaranties of the trusts'
obligations under the preferred securities.
In June 1997, MCN entered into a one-year variable interest rate swap
agreement with a notional amount of $100,000,000. The swap agreement
effectively reduced the PRINTS fixed dividend rate from 6.305% to 5.94%
through June 30, 1997.
D. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
In June 1997, MCN sold 9,775,000 shares of new common stock in a public
offering, generating net proceeds of $276,600,000.
Under the MCN Shareholder's Rights Plan, one preferred share purchase right
is attached to each outstanding share of common stock. In July 1997, the
MCN Board of Directors amended the Plan which, among other changes,
extended the expiration of the rights to July 2007. The rights, which
cannot be traded separately from MCN's common stock, are designed to
protect shareholders from coercive or unfair tactics and are therefore
exercisable only upon certain triggering events.
4. LINES OF CREDIT
As discussed in MCN's 1996 Annual Report on Form 10-K, MichCon and MCNIC
maintain credit lines that allow for borrowings of up to $250,000,000 under
364-day revolving credit facilities and up to $450,000,000 under three-year
revolving credit facilities. These credit lines, totaling $700,000,000, support
their commercial paper programs. No borrowings were outstanding under these
lines as of June 30, 1997. The 364-day revolving credit facilities were renewed
in July 1997. The three-year revolving credit facilities expire in July 1998.
In July 1997, the MCNIC Board of Directors approved a resolution to temporarily
restrict $42,000,000 of the MCNIC credit facility to support TPPL's public offer
to purchase additional interest in AEC (Note 2a).
18
<PAGE> 21
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation
that interim inventory reductions will be replaced prior to year end, the cost
of gas for net withdrawals from inventory is generally recorded at the estimated
average purchase rate for the calendar year. The excess of these charges over
the LIFO cost is credited to the gas inventory equalization account. During
interim periods when there are net injections to inventory, the equalization
account is reversed. Approximately 51.2 billion cubic feet (Bcf) and 49.7 Bcf of
gas was in inventory at June 30, 1997 and 1996, respectively.
6. COMMODITY SWAP AGREEMENTS
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN manages commodity
price risk through the use of various derivative instruments and limits the use
of such instruments to hedging activities. If MCN did not use derivative
instruments, its exposure to such risk would be higher. Although this strategy
reduces risk, it also limits potential gains from favorable changes in commodity
prices. Natural gas and oil swap agreements are used to manage exposure to the
risk of market price fluctuations on gas sale contracts and gas and oil
production. Market value changes of swap contracts are recorded as deferred
gains or losses until the hedged transactions are completed, at which time the
realized gains or losses are included as adjustments to revenues. The offsets to
the unrealized losses are recorded as deferred payables and the offsets to the
unrealized gains are recorded as deferred receivables.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------ ------------
1997 1996 1996
(in Thousands) ------- ------- ------------
<S> <C> <C> <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses......................................... $24,890 $17,734 $ 53,166
Deferred receivables...................................... 22,181 17,871 11,885
------- ------- ----------
$47,071 $35,605 $ 65,051
======= ======= ==========
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains.......................................... $18,504 $15,394 $ 5,519
Deferred payables......................................... 33,420 25,575 64,641
------- ------- ----------
51,924 40,969 70,160
Less -- Current portion................................... 16,228 5,252 21,795
------- ------- ----------
$35,696 $35,717 $ 48,365
======= ======= ==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
In July 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership
(W-10), entered into a leveraged lease transaction to finance the conversion of
a depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000. MCN
has entered into a contract with W-10 to market 100% of the capacity of the
storage field through 2029. Under the terms of the marketing contract, MCN is
obligated to generate sufficient revenues to cover W-10's lease payments and
certain operating costs, which average approximately $16,000,000 annually. As of
June 30, 1997, MCN has long-term contracts in place for approximately 40% of the
field's capacity thereby reducing its commitments under the marketing contract.
A significant portion of the remaining capacity is expected to be contracted by
MCN's Energy Marketing operations, thereby enhancing its ability to offer a
reliable gas supply during peak winter months.
19
<PAGE> 22
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.
8. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCNIC's securities. The carrying value of MCN's assets on
an unconsolidated basis, primarily investments in its subsidiaries other than
MichCon, is $1,075,459,000 at June 30, 1997.
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, Blue Lake Holdings, Inc., MCN Michigan Limited Partnership, MCN
Financing I, MCN Financing III, MCN Financing V and MCN Financing VI.
20
<PAGE> 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
THREE MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.............................. $ 3,153 $177,187 $209,800 $ (2,215) $387,925
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................... 1,616 117,061 83,031 (1,688) 200,020
Operation and maintenance..................... 602 25,796 69,394 (527) 95,265
Depreciation, depletion and amortization...... 575 18,485 26,424 -- 45,484
Property and other taxes...................... 331 3,284 16,141 -- 19,756
------- -------- -------- -------- --------
3,124 164,626 194,990 (2,215) 360,525
------- -------- -------- -------- --------
OPERATING INCOME................................ 29 12,561 14,810 -- 27,400
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 10,335 9,324 331 (9,520) 10,470
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 7,574 845 1,277 (7,532) 2,164
Interest on long-term debt.................... 71 (9,566) (11,574) -- (21,069)
Other interest expense........................ (268) (7,300) (1,858) 7,532 (1,894)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (7,329) (7,329)
Minority interest............................. -- (19) (595) -- (614)
Other......................................... 29 (166) (304) -- (441)
------- -------- -------- -------- --------
7,406 (16,206) (13,054) (7,329) (29,183)
------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES...................... 17,770 5,679 2,087 (16,849) 8,687
INCOME TAX PROVISION (BENEFIT).................. 624 (2,169) 1,156 -- (389)
------- -------- -------- -------- --------
NET INCOME...................................... 17,146 7,848 931 (16,849) 9,076
DIVIDENDS ON PREFERRED SECURITIES............... 7,329 -- -- (7,329) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK........... $ 9,817 $ 7,848 $ 931 $ (9,520) $ 9,076
======= ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.............................. $ 2,939 $131,643 $222,327 $ (2,445) $354,464
------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas................................... 1,540 99,905 99,681 (2,058) 199,068
Operation and maintenance..................... 628 16,628 71,212 (388) 88,080
Depreciation, depletion and amortization...... 480 10,300 24,740 -- 35,520
Property and other taxes...................... 302 2,379 15,004 379 18,064
------- -------- -------- -------- --------
2,950 129,212 210,637 (2,067) 340,732
------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......................... (11) 2,431 11,690 (378) 13,732
------- -------- -------- -------- --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 42,810 4,446 260 (42,674) 4,842
------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 2,393 946 634 (2,369) 1,604
Interest on long-term debt.................... (9) (6,153) (10,269) 45 (16,386)
Other interest expense........................ (96) (4,067) (940) 2,369 (2,734)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (2,345) (2,345)
Gains related to DIGP......................... -- 3,488 -- -- 3,488
Minority interest............................. -- (17) (354) -- (371)
Other......................................... 98 (336) 159 329 250
------- -------- -------- -------- --------
2,386 (6,139) (10,770) (1,971) (16,494)
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES........................... 45,185 738 1,180 (45,023) 2,080
INCOME TAX PROVISION (BENEFIT).................. 209 (3,665) 329 -- (3,127)
------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS............... 44,976 4,403 851 (45,023) 5,207
------- -------- -------- -------- --------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations........................ -- 582 -- -- 582
Gain on sale.................................. -- 36,176 -- -- 36,176
------- -------- -------- -------- --------
-- 36,758 -- -- 36,758
------- -------- -------- -------- --------
NET INCOME...................................... 44,976 41,161 851 (45,023) 41,965
DIVIDENDS ON PREFERRED SECURITIES............... 2,345 -- -- (2,345) --
------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK........... $42,631 $ 41,161 $ 851 $(42,678) $ 41,965
======= ======== ======== ======== ========
</TABLE>
21
<PAGE> 24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- -------- ----------------- ------------
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................................. $ 10,090 $437,341 $737,245 $ (7,990) $1,176,686
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 5,429 313,378 386,304 (5,546) 699,565
Operation and maintenance......................... 656 51,975 143,499 (2,444) 193,686
Depreciation, depletion and amortization.......... 1,127 35,889 51,925 -- 88,941
Property and other taxes.......................... 1,029 6,264 33,935 -- 41,228
-------- -------- -------- --------- ----------
8,241 407,506 615,663 (7,990) 1,023,420
-------- -------- -------- --------- ----------
OPERATING INCOME.................................... 1,849 29,835 121,582 -- 153,266
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 91,982 22,484 641 (90,276) 24,831
-------- -------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 11,922 1,814 2,486 (11,846) 4,376
Interest on long-term debt........................ 212 (17,949) (22,314) -- (40,051)
Other interest expense............................ (498) (13,223) (4,749) 11,846 (6,624)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (11,558) (11,558)
Minority interest................................. -- (34) (933) -- (967)
Other............................................. (27) 2,710 (103) -- 2,580
-------- -------- -------- --------- ----------
11,609 (26,682) (25,613) (11,558) (52,244)
-------- -------- -------- --------- ----------
INCOME BEFORE INCOME TAXES.......................... 105,440 25,637 96,610 (101,834) 125,853
INCOME TAX PROVISION (BENEFIT)...................... 1,566 (44) 33,486 -- 35,008
-------- -------- -------- --------- ----------
NET INCOME.......................................... 103,874 25,681 63,124 (101,834) 90,845
DIVIDENDS ON PREFERRED SECURITIES................... 11,558 -- -- (11,558) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $ 92,316 $ 25,681 $63,124 $ (90,276) $ 90,845
======== ======== ======== ========= ==========
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------------------
OPERATING REVENUES.................................. $ 10,146 $389,012 $753,719 $ (7,775) $1,145,102
-------- -------- -------- --------- ----------
OPERATING EXPENSES
Cost of gas....................................... 5,311 313,528 398,397 (5,739) 711,497
Operation and maintenance......................... 814 35,672 139,983 (2,037) 174,432
Depreciation, depletion and amortization.......... 948 20,237 49,133 -- 70,318
Property and other taxes.......................... 863 4,941 33,612 -- 39,416
-------- -------- -------- --------- ----------
7,936 374,378 621,125 (7,776) 995,663
-------- -------- -------- --------- ----------
OPERATING INCOME.................................... 2,210 14,634 132,594 1 149,439
-------- -------- -------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES...................................... 122,652 7,906 495 (122,168) 8,885
-------- -------- -------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................... 4,793 1,876 1,219 (4,739) 3,149
Interest on long-term debt........................ (19) (12,514) (19,925) (67) (32,525)
Other interest expense............................ (110) (7,689) (3,775) 4,739 (6,835)
Dividends on preferred securities of
subsidiaries.................................... -- -- -- (4,707) (4,707)
Gains related to DIGP............................. -- 3,488 -- -- 3,488
Minority interest................................. -- (34) (702) -- (736)
Other............................................. (190) (623) (249) 67 (995)
-------- -------- -------- --------- ----------
4,474 (15,496) (23,432) (4,707) (39,161)
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............................... 129,336 7,044 109,657 (126,874) 119,163
INCOME TAX PROVISION (BENEFIT)...................... 1,309 (5,173) 38,766 -- 34,902
-------- -------- -------- --------- ----------
INCOME FROM CONTINUING OPERATIONS................... 128,027 12,217 70,891 (126,874) 84,261
-------- -------- -------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations............................ -- 1,595 -- -- 1,595
Gain on sale...................................... -- 36,176 -- -- 36,176
-------- -------- -------- --------- ----------
-- 37,771 -- -- 37,771
-------- -------- -------- --------- ----------
NET INCOME.......................................... 128,027 49,988 70,891 (126,874) 122,032
DIVIDENDS ON PREFERRED SECURITIES................... 4,689 -- 18 (4,707) --
-------- -------- -------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............... $123,338 $ 49,988 $70,873 $(122,167) $ 122,032
======== ======== ======== ========= ==========
</TABLE>
22
<PAGE> 25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ -------- ---------- ----------------- ------------
TWELVE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.............................. $ 17,413 $782,770 $1,242,311 $ (13,642) $2,028,852
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas................................... 9,773 557,190 624,501 (9,818) 1,181,646
Operation and maintenance..................... 627 96,633 297,797 (3,823) 391,234
Depreciation, depletion and amortization...... 2,119 61,555 100,939 -- 164,613
Property and other taxes...................... 2,300 11,854 62,085 -- 76,239
-------- -------- ---------- --------- ----------
14,819 727,232 1,085,322 (13,641) 1,813,732
-------- -------- ---------- --------- ----------
OPERATING INCOME................................ 2,594 55,538 156,989 (1) 215,120
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 121,698 30,493 1,032 (119,410) 33,813
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 19,804 3,158 5,167 (19,668) 8,461
Interest on long-term debt.................... 345 (31,363) (43,092) 67 (74,043)
Other interest expense........................ (1,606) (20,129) (8,986) 19,668 (11,053)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (19,225) (19,225)
Gains related to DIGP......................... -- 2,896 -- -- 2,896
Minority interest............................. -- (71) (1,219) -- (1,290)
Other......................................... 353 2,279 (1,610) (67) 955
-------- -------- ---------- --------- ----------
18,896 (43,230) (49,740) (19,225) (93,299)
-------- -------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES...................... 143,188 42,801 108,281 (138,636) 155,634
INCOME TAX PROVISION (BENEFIT).................. 2,071 (1,796) 36,206 -- 36,481
-------- -------- ---------- --------- ----------
NET INCOME...................................... 141,117 44,597 72,075 (138,636) 119,153
DIVIDENDS ON PREFERRED SECURITIES............... 19,225 -- -- (19,225) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK........... $121,892 $ 44,597 $ 72,075 $(119,411) $ 119,153
======== ======== ========== ========= ==========
TWELVE MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
OPERATING REVENUES.............................. $ 16,827 $620,098 $1,227,752 $ (12,774) $1,851,903
-------- -------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas................................... 8,879 484,675 600,192 (9,331) 1,084,415
Operation and maintenance..................... 1,970 63,496 284,404 (3,444) 346,426
Depreciation, depletion and amortization...... 1,807 34,151 93,380 -- 129,338
Property and other taxes...................... 1,424 7,818 59,935 -- 69,177
-------- -------- ---------- --------- ----------
14,080 590,140 1,037,911 (12,775) 1,629,356
-------- -------- ---------- --------- ----------
OPERATING INCOME................................ 2,747 29,958 189,841 1 222,547
-------- -------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES.................................. 156,912 10,142 858 (155,849) 12,063
-------- -------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income............................... 9,589 3,582 3,203 (9,798) 6,576
Interest on long-term debt.................... (52) (17,825) (39,606) 478 (57,005)
Other interest expense........................ (139) (15,234) (7,177) 9,478 (13,072)
Dividends on preferred securities of
subsidiaries................................ -- -- -- (9,502) (9,502)
Gains related to DIGP......................... -- 3,488 -- -- 3,488
Minority interest............................. -- (1,356) (702) (1) (2,059)
Other......................................... (298) 725 (3,534) (156) (3,263)
-------- -------- ---------- --------- ----------
9,100 (26,620) (47,816) (9,501) (74,837)
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES........................... 168,759 13,480 142,883 (165,349) 159,773
INCOME TAX PROVISION (BENEFIT).................. 2,132 (10,054) 52,431 -- 44,509
-------- -------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS............... 166,627 23,534 90,452 (165,349) 115,264
-------- -------- ---------- --------- ----------
DISCONTINUED OPERATIONS, NET OF TAXES
Income from operations........................ -- 3,446 -- -- 3,446
Gain on sale.................................. -- 36,176 -- -- 36,176
-------- -------- ---------- --------- ----------
-- 39,622 -- -- 39,622
-------- -------- ---------- --------- ----------
NET INCOME...................................... 166,627 63,156 90,452 (165,349) 154,886
DIVIDENDS ON PREFERRED SECURITIES............... 9,377 -- 125 (9,502) --
-------- -------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK........... $157,250 $ 63,156 $ 90,327 $(155,847) $ 154,886
======== ======== ========== ========= ==========
</TABLE>
23
<PAGE> 26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
JUNE 30, 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost................. $ 34,834 $ 130,108 $ 18,355 $ (33,213) $ 150,084
Accounts receivable................................ 9,497 117,845 196,815 (13,607) 310,550
Less -- Allowance for doubtful accounts.......... 71 673 23,442 -- 24,186
---------- ---------- ---------- ----------- ----------
Accounts receivable, net........................... 9,426 117,172 173,373 (13,607) 286,364
Accrued unbilled revenue........................... 211 -- 16,158 -- 16,369
Accrued gas cost recovery revenues................. -- -- 14,072 -- 14,072
Gas in inventory................................... -- 26,397 36,499 -- 62,896
Property taxes assessed applicable to future
periods.......................................... 87 1,256 37,885 -- 39,228
Gas receivable..................................... -- 11,875 9,589 1 21,465
Other.............................................. 3,733 17,439 19,755 (9,310) 31,617
---------- ---------- ---------- ----------- ----------
48,291 304,247 325,686 (56,129) 622,095
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures and
subsidiaries..................................... 1,599,396 380,038 19,731 (1,588,728) 410,437
Deferred swap losses and receivables............... -- 47,071 -- -- 47,071
Deferred postretirement benefit costs.............. 673 -- 1,886 -- 2,559
Deferred environmental costs....................... 3,000 -- 27,680 -- 30,680
Prepaid benefit costs.............................. (3,607) -- 64,737 (1,907) 59,223
Other.............................................. 7,758 48,531 54,324 (2,895) 107,718
---------- ---------- ---------- ----------- ----------
1,607,220 475,640 168,358 (1,593,530) 657,688
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost............... 34,778 1,181,156 2,706,922 -- 3,922,856
Less -- Accumulated depreciation and depletion..... 12,016 115,016 1,282,057 -- 1,409,089
---------- ---------- ---------- ----------- ----------
22,762 1,066,140 1,424,865 -- 2,513,767
---------- ---------- ---------- ----------- ----------
$1,678,273 $1,846,027 $1,918,909 $(1,649,659) $3,793,550
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................... $ 2,720 $ 104,157 $ 105,822 $ (13,277) $ 199,422
Notes payable...................................... 1 600 38,366 (36,515) 2,452
Current portion of long-term debt and capital
lease obligations................................ 420 1,497 28,512 -- 30,429
Gas inventory equalization......................... -- (6) 66,685 -- 66,679
Federal income, property and other taxes payable... 955 1,439 73,638 (9,084) 66,948
Customer deposits.................................. 20 -- 11,985 -- 12,005
Other.............................................. 11,081 21,911 45,842 (226) 78,608
---------- ---------- ---------- ----------- ----------
15,197 129,598 370,850 (59,102) 456,543
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes.................. (2,453) 101,144 78,701 20 177,412
Unamortized investment tax credit.................. 316 -- 33,666 -- 33,982
Tax benefits amortizable to customers.............. 202 -- 115,432 -- 115,634
Deferred swap gains and payables................... -- 35,696 -- -- 35,696
Accrued environmental costs........................ 3,000 -- 32,000 -- 35,000
Minority interest.................................. -- 238 18,070 -- 18,308
Other.............................................. 11,933 16,897 40,578 (1,907) 67,501
---------- ---------- ---------- ----------- ----------
12,998 153,975 318,447 (1,887) 483,533
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, including capital lease
obligations........................................ -- 589,656 629,484 1 1,219,141
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES...... 504,993 -- -- -- 504,993
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock....................................... 780 5 10,300 (10,306) 779
Additional paid-in capital......................... 791,448 825,982 230,399 (1,059,072) 788,757
Retained earnings.................................. 375,623 146,811 359,429 (519,293) 362,570
Yield enhancement, contract and issuance costs..... (22,035) -- -- -- (22,035)
Unearned compensation.............................. (731) -- -- -- (731)
---------- ---------- ---------- ----------- ----------
1,145,085 972,798 600,128 (1,588,671) 1,129,340
---------- ---------- ---------- ----------- ----------
$1,678,273 $1,846,027 $1,918,909 $(1,649,659) $3,793,550
========== ========== ========== =========== ==========
</TABLE>
24
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
JUNE 30, 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost................ $ 33 $ 46,590 $ 8,866 $ -- $ 55,489
Accounts receivable............................... 3,269 104,273 211,071 (6,037) 312,576
Less -- Allowance for doubtful accounts......... 74 430 18,222 -- 18,726
-------- ---------- ---------- --------- ----------
Accounts receivable, net.......................... 3,195 103,843 192,849 (6,037) 293,850
Accrued unbilled revenue.......................... 138 -- 16,554 -- 16,692
Accrued gas cost recovery revenues................ -- -- 42,026 -- 42,026
Gas in inventory.................................. -- 2,794 25,238 1 28,033
Property taxes assessed applicable to future
periods......................................... 78 1,321 35,176 -- 36,575
Gas receivable.................................... -- 15,468 9,065 -- 24,533
Other............................................. 1,836 2,028 24,618 (2,057) 26,425
-------- ---------- ---------- --------- ----------
5,280 172,044 354,392 (8,093) 523,623
-------- ---------- ---------- --------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint ventures and
subsidiaries.................................... 875,107 160,597 20,377 (866,602) 189,479
Deferred swap losses and receivables.............. -- 35,605 -- -- 35,605
Deferred postretirement benefit costs............. 717 -- 9,342 1 10,060
Deferred environmental costs...................... 3,000 -- 28,016 -- 31,016
Prepaid benefit costs............................. -- -- 50,640 (4,681) 45,959
Other............................................. 8,940 36,540 48,341 1,367 95,188
-------- ---------- ---------- --------- ----------
887,764 232,742 156,716 (869,915) 407,307
-------- ---------- ---------- --------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost.............. 28,881 743,382 2,540,829 (1) 3,313,091
Less -- Accumulated depreciation and depletion.... 10,051 55,681 1,199,871 -- 1,265,603
-------- ---------- ---------- --------- ----------
18,830 687,701 1,340,958 (1) 2,047,488
-------- ---------- ---------- --------- ----------
$911,874 $1,092,487 $1,852,066 $(878,009) $2,978,418
======== ========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 6,405 $ 95,276 $ 94,102 $ (4,600) $ 191,183
Notes payable..................................... -- 19,000 58,291 -- 77,291
Current portion of long-term debt and capital
lease obligations............................... 55 31,409 53,177 1 84,642
Gas inventory equalization........................ -- 660 53,295 -- 53,955
Federal income, property and other taxes
payable......................................... (361) 24,663 64,715 -- 89,017
Customer deposits................................. 19 -- 9,845 -- 9,864
Other............................................. 6,596 33,999 55,084 (2,057) 93,622
-------- ---------- ---------- --------- ----------
12,714 205,007 388,509 (6,656) 599,574
-------- ---------- ---------- --------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes................. (1,087) 63,863 82,872 -- 145,648
Unamortized investment tax credit................. 346 -- 35,512 -- 35,858
Tax benefits amortizable to customers............. 183 -- 113,449 (1) 113,631
Deferred swap gains and payables.................. -- 35,717 -- -- 35,717
Accrued environmental costs....................... 3,000 -- 32,000 -- 35,000
Minority interest................................. -- 269 18,171 -- 18,440
Other............................................. 26,624 14,351 56,892 (4,681) 93,186
-------- ---------- ---------- --------- ----------
29,066 114,200 338,896 (4,682) 477,480
-------- ---------- ---------- --------- ----------
LONG-TERM DEBT, including capital lease
obligations....................................... 420 495,504 552,345 (1) 1,048,268
-------- ---------- ---------- --------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES..... 96,511 -- -- -- 96,511
-------- ---------- ---------- --------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock...................................... 670 5 10,300 (10,305) 670
Additional paid-in capital........................ 467,795 175,557 230,399 (412,494) 461,257
Retained earnings................................. 319,507 102,214 331,617 (443,871) 309,467
Yield enhancement, contract and issuance costs.... (14,220) -- -- -- (14,220)
Unearned compensation............................. (589) -- -- -- (589)
-------- ---------- ---------- --------- ----------
773,163 277,776 572,316 (866,670) 756,585
-------- ---------- ---------- --------- ----------
$911,874 $1,092,487 $1,852,066 $(878,009) $2,978,418
======== ========== ========== ========= ==========
</TABLE>
25
<PAGE> 28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ ---------- ---------- ----------------- ------------
DECEMBER 31, 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost.......... $ 844 $ 19,608 $ 10,010 $ -- $ 30,462
Accounts receivable......................... 19,824 198,777 187,143 (24,661) 381,083
Less -- Allowance for doubtful accounts... 70 710 17,707 -- 18,487
---------- ---------- ---------- --------- ----------
Accounts receivable, net.................... 19,754 198,067 169,436 (24,661) 362,596
Accrued unbilled revenue.................... 1,132 -- 107,377 -- 108,509
Accrued gas cost recovery revenues.......... -- -- 27,672 -- 27,672
Gas in inventory............................ -- 11,251 67,910 -- 79,161
Property taxes assessed applicable to future
periods................................... 195 2,179 60,592 -- 62,966
Gas receivable.............................. -- 16,045 2,017 -- 18,062
Other....................................... 1,973 12,270 21,008 (451) 34,800
---------- ---------- ---------- --------- ----------
23,898 259,420 466,022 (25,112) 724,228
---------- ---------- ---------- --------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Investments in and advances to joint
ventures and subsidiaries................. 954,479 236,057 19,479 (944,627) 265,388
Deferred swap losses and receivables........ -- 65,051 -- -- 65,051
Deferred postretirement benefit costs....... 696 -- 4,863 -- 5,559
Deferred environmental costs................ 3,000 -- 28,233 -- 31,233
Prepaid benefit costs....................... -- -- 64,307 (5,059) 59,248
Other....................................... 4,204 45,104 50,206 827 100,341
---------- ---------- ---------- --------- ----------
962,379 346,212 167,088 (948,859) 526,820
---------- ---------- ---------- --------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost........ 31,967 1,017,296 2,668,294 -- 3,717,557
Less -- Accumulated depreciation and
depletion................................. 10,983 81,158 1,243,060 -- 1,335,201
---------- ---------- ---------- --------- ----------
20,984 936,138 1,425,234 -- 2,382,356
---------- ---------- ---------- --------- ----------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
========== ========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................ $ 5,745 $ 205,073 $ 130,725 $ (23,621) $ 317,922
Notes payable............................... -- 71,000 265,126 -- 336,126
Current portion of long-term debt and
capital lease obligations................. 55 31,460 53,232 -- 84,747
Federal income, property and other taxes
payable................................... 280 12,578 84,788 -- 97,646
Customer deposits........................... 21 -- 12,860 -- 12,881
Other....................................... 9,315 25,701 63,309 (452) 97,873
---------- ---------- ---------- --------- ----------
15,416 345,812 610,040 (24,073) 947,195
---------- ---------- ---------- --------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes........... (1,625) 74,940 76,523 -- 149,838
Unamortized investment tax credit........... 331 -- 34,588 -- 34,919
Tax benefits amortizable to customers....... 183 -- 116,313 -- 116,496
Deferred swap gains and payables............ -- 48,365 -- -- 48,365
Accrued environmental costs................. 3,000 -- 32,000 -- 35,000
Minority interest........................... -- 306 17,604 1 17,911
Other....................................... 15,902 18,466 43,954 (5,059) 73,263
---------- ---------- ---------- --------- ----------
17,791 142,077 320,982 (5,058) 475,792
---------- ---------- ---------- --------- ----------
LONG-TERM DEBT, including capital lease
obligations................................. 365 701,357 550,318 -- 1,252,040
---------- ---------- ---------- --------- ----------
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES................................ 173,809 -- -- -- 173,809
---------- ---------- ---------- --------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock................................ 673 5 10,300 (10,305) 673
Additional paid-in capital.................. 497,472 231,389 230,399 (465,791) 493,469
Retained earnings........................... 316,661 121,130 336,305 (468,744) 305,352
Yield enhancement, contract and issuance
costs..................................... (14,492) -- -- -- (14,492)
Unearned compensation....................... (434) -- -- -- (434)
---------- ---------- ---------- --------- ----------
799,880 352,524 577,004 (944,840) 784,568
---------- ---------- ---------- --------- ----------
$1,007,261 $1,541,770 $2,058,344 $(973,971) $3,633,404
========== ========== ========== ========= ==========
</TABLE>
26
<PAGE> 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSIFICATIONS TOTALS
------------ --------- --------- ----------------- ------------
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES.... $ 65,486 $ 34,994 $ 273,766 $ (49,285) $ 324,961
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net....................... 1 (68,000) (226,760) (36,515) (331,274)
Capital contributions received from
(distributions paid to) affiliates,
net.................................... (1,058) 594,607 -- (593,549) --
Common stock dividends paid.............. (32,832) -- (40,000) 40,000 (32,832)
Preferred securities dividends paid...... (11,558) -- -- 11,558 --
Issuance of common stock................. 286,018 -- -- -- 286,018
Issuance of preferred securities......... 326,521 -- -- -- 326,521
Issuance of long-term debt............... -- 149,190 124,051 -- 273,241
Long-term commercial paper, net.......... -- (261,822) -- -- (261,822)
Retirement of long-term debt............. -- (30,740) (72,229) -- (102,969)
Other.................................... (532) -- -- -- (532)
--------- --------- --------- --------- ---------
Net cash provided from (used for)
financing activities................. 566,560 383,235 (214,938) (578,506) 156,351
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures..................... (3,050) (172,290) (57,423) (1) (232,764)
Acquisitions............................. -- (105,133) -- -- (105,133)
Investment in joint ventures and
subsidiaries........................... (595,107) (40,514) (184) 595,047 (40,758)
Return of investment in joint ventures
and subsidiaries....................... -- 4,468 -- (468) 4,000
Other.................................... 101 5,740 7,124 -- 12,965
--------- --------- --------- --------- ---------
Net cash used for investing
activities........................... (598,056) (307,729) (50,483) 594,578 (361,690)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 33,990 110,500 8,345 (33,213) 119,622
CASH AND CASH EQUIVALENTS, JANUARY 1....... 844 19,608 10,010 -- 30,462
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30......... $ 34,834 $ 130,108 $ 18,355 $ (33,213) $ 150,084
========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.... $ 21,924 $ 74,528 $ 163,577 $ (11,916) $ 248,113
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net....................... -- (30,000) (138,344) -- (168,344)
Capital contributions received from
(distributions paid to) affiliates,
net.................................... (524) (14,642) 1,614 13,552 --
Common stock dividends paid.............. (30,990) -- (7,000) 7,000 (30,990)
Preferred securities dividends paid...... (4,689) -- (54) 4,743 --
Issuance of common stock................. 8,848 -- -- -- 8,848
Issuance of long-term debt............... -- 328,789 69,645 -- 398,434
Long-term commercial paper, net.......... -- (264,007) -- -- (264,007)
Retirement of long-term debt............. -- (1,008) (4,347) 2 (5,353)
Other.................................... (5,978) -- -- -- (5,978)
--------- --------- --------- --------- ---------
Net cash provided from (used for)
financing activities................. (33,333) 19,132 (78,486) 25,297 (67,390)
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures..................... (2,216) (141,048) (73,823) (1) (217,088)
Acquisitions............................. -- (78,620) -- -- (78,620)
Sale of Genix............................ -- 137,500 -- -- 137,500
Investment in joint ventures and
subsidiaries........................... (1,614) (8,211) -- 1,674 (8,151)
Sale of investment in joint ventures..... -- 31,500 -- -- 31,500
Return of investment in joint ventures
and subsidiaries....................... 14,642 -- -- (14,642) --
Other.................................... 462 1,187 (10,871) (412) (9,634)
--------- --------- --------- --------- ---------
Net cash provided from (used for)
investing activities................. 11,274 (57,692) (84,694) (13,381) (144,493)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. (135) 35,968 397 -- 36,230
CASH AND CASH EQUIVALENTS, JANUARY 1....... 168 10,622 8,469 -- 19,259
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30......... $ 33 $ 46,590 $ 8,866 $ -- $ 55,489
========= ========= ========= ========= =========
</TABLE>
27
<PAGE> 30
OTHER INFORMATION
CHANGES IN SECURITIES
On July 23, 1997, MCN amended its Rights Agreement related to its Preferred
Share Purchase Rights. The amendment extends the expiration date of the Rights
Agreement from January 2000 to July 2007 and changes the purchase price for each
one one-hundredth of a preferred share purchasable pursuant to the exercise of a
right from $35 to $150. The amendment was filed on a Form 8-K dated July 23,
1997.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------
<S> <C>
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN Energy
Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation.
27-1 Financial Data Schedule.
99-1 MCN Energy Group Inc. Nonemployee Directors' Compensation Plan (as
amended and restated effective March 1, 1997).
99-2 MCN Energy Group Inc. Form of Employment Agreement (as amended and
restated effective July 1, 1997).
</TABLE>
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated June 24, 1997, under Item 5, with
respect to the offering of its Common Stock (par value $.01 per share)
in which the Form of U.S. Purchase Agreement and Form of International
Purchase Agreement were filed as Exhibits.
MCN filed an additional report on Form 8-K dated July 23, 1997, under
Item 5, with respect to the amendment of its Rights Agreement. The
following document was filed as an Exhibit thereto:
- Amendment, dated as of July 23, 1997, to the Rights Agreement,
dated as of December 20, 1989, between MCN Energy Group Inc. (then
doing business as MCN Corporation) and National Bank of Detroit, as
Rights Agent.
28
<PAGE> 31
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: August 8, 1997 By: /s/ Harold Gardner
------------------------------------
Harold Gardner
Vice President, Controller
and Chief Accounting Officer
29
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Investment Corporation.
27-1 Financial Data Schedule.
99-1 MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan (as amended and restated effective March 1, 1997).
99-2 MCN Energy Group Inc. Form of Employment Agreement (as
amended and restated effective July 1, 1997).
</TABLE>
<PAGE> 1
MCN ENERGY GROUP INC. AND SUBSIDIARIES EXHIBIT 12-1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (5)
Pre-tax income (2) $ 150,286 $ 146,607 $ 128,997
Fixed charges (3) 114,316 99,944 72,895
------------- ----------------- -----------------
Earnings as defined $ 264,602 $ 246,551 $ 201,892
============= ================= =================
FIXED CHARGES AS DEFINED (1) (4) (5)
Interest, expensed $ 85,111 $ 77,781 $ 57,675
Interest, capitalized 16,439 13,235 7,926
Amortization of debt discounts, premium
and expense 2,391 2,217 1,641
Interest implicit in rentals 2,367 2,339 2,325
Preferred securities dividend requirements
of subsidiaries 19,257 12,390 9,699
------------- ----------------- -----------------
Fixed charges as defined $ 125,565 $ 107,962 $ 79,266
============= ================= =================
Ratio of Earnings to Fixed Charges 2.11 2.28 2.55
============= ================= =================
</TABLE>
(1) Earnings and fixed charges are defined and computed in accordance with
Item 503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income from
continuing operations of MCN and its majority-owned subsidiaries, (b)
MCN's share of pre-tax income of its 50% owned companies, and (c) any
income actually received from less than 50% owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period for nonutility companies and the preferred
securities dividend requirements of MichCon included in fixed charges but
not deducted in the determination of pre-tax income.
(4) Fixed charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries, increased to reflect the pre-tax earnings
requirement for MichCon.
(5) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposes of calculating the Ratio of Earnings
to Fixed Charges, it has been classified as a discontinued operation and
therefore excluded from the ratio for all periods presented.
<PAGE> 1
MCN INVESTMENT CORPORATION AND SUBSIDIARIES EXHIBIT 12-2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- -----------------
<S> <C> <C> <C>
EARNINGS AS DEFINED (1) (4)
Pre-tax income (2) $ 38,241 $ 21,899 $ 13,163
Fixed charges (3) 52,831 41,628 24,748
------------- ----------------- -----------------
Earnings as defined $ 91,072 $ 63,527 $ 37,911
============= ================= =================
FIXED CHARGES AS DEFINED (1) (4)
Interest, expensed $ 51,507 $ 40,523 $ 24,151
Interest, capitalized 11,218 8,002 5,895
Amortization of debt discounts, premium
and expense 1,113 982 520
Interest implicit in rentals 211 123 77
------------- ----------------- -----------------
Fixed charges as defined $ 64,049 $ 49,630 $ 30,643
============= ================= =================
Ratio of Earnings to Fixed Charges 1.42 1.28 1.24
============= ================= =================
</TABLE>
(1) Earnings and fixed charges are defined and computed in accordance with
Item 503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income from
continuing operations of MCN Investment and its majority-owned
subsidiaries, (b) MCN Investment's share of pre-tax income of its 50%
owned companies, and (c) any income actually received from less than 50%
owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period.
(4) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposes of calculating the Ratio of
Earnings to Fixed Charges, it has been classified as a discontinued
operation and therefore excluded from the ratio for all periods
presented.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and the Consolidated Statement of Financial
Position and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 150,084
<SECURITIES> 0
<RECEIVABLES> 310,550
<ALLOWANCES> 24,186
<INVENTORY> 62,896
<CURRENT-ASSETS> 622,095
<PP&E> 3,922,856
<DEPRECIATION> 1,409,089
<TOTAL-ASSETS> 3,793,550
<CURRENT-LIABILITIES> 456,543
<BONDS> 1,219,141
504,993
0
<COMMON> 779
<OTHER-SE> 1,128,561
<TOTAL-LIABILITY-AND-EQUITY> 3,793,550
<SALES> 0
<TOTAL-REVENUES> 1,176,686
<CGS> 0
<TOTAL-COSTS> 1,023,420
<OTHER-EXPENSES> (2,580)
<LOSS-PROVISION> 13,733
<INTEREST-EXPENSE> 46,675
<INCOME-PRETAX> 125,853
<INCOME-TAX> 35,008
<INCOME-CONTINUING> 90,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,845
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MCN ENERGY GROUP INC.
NONEMPLOYEE DIRECTORS' COMPENSATION PLAN
(AS AMENDED AND RESTATED EFFECTIVE MARCH 1, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section Page
SECTION 1. TITLE 1..................................................... 1
Section 2. DEFINITIONS.......................................................... 1
2.01. "Account"............................................. 2
2.02. "Anniversary Date".................................... 2
2.03. "Beneficiary"......................................... 2
2.04. "Board of Directors".................................. 2
2.05. "Cash Deferral Account"............................... 2
2.06. "Code"................................................ 2
2.07. "Committee"........................................... 2
2.08. "Company"............................................. 2
2.09. "Covered Compensation"................................ 3
2.10. "Deferral"............................................ 3
2.11. "Deferral Election Agreement"......................... 3
2.12. "Effective Date"...................................... 3
2.13. "Eligible Board Member"............................... 3
2.14. "ERISA"............................................... 3
2.15. "In Pay Status"....................................... 3
2.16. "Participant"......................................... 3
2.17. "Performance Shares".................................. 3
2.18. "Performance Share Deferral Account".................. 3
2.19. "Plan"................................................ 4
2.20. "Plan Interest Rate".................................. 4
2.21. "Plan Year"........................................... 4
2.22. "Post-Retirement Survivor Benefit".................... 4
2.23. "Pre-Retirement Survivor Benefit"..................... 4
2.24. "Prior Plan".......................................... 4
2.25. "Retirement Date"..................................... 4
2.26. "Retirement Income Benefit"........................... 4
2.27. "SDBRIP Benefit"...................................... 5
2.28. "Spouse".............................................. 5
SECTION 3. PARTICIPATION......................................................... 5
3.01. Commencement of Participation......................... 5
SECTION 4. TRANSFER OF THE SDBRIP BENEFIT........................................ 5
4.01 Transfer of SDBRIP Benefit............................ 5
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
SECTION 5. TRANSFER OF PRIOR PLAN BALANCES........................................ 6
5.01. Transfer of Prior Plan Balances........................ 6
5.02. Election to Transfer Prior Plan Balance to Performance
Share Deferral Account................................. 6
SECTION 6. DEFERRAL OF PERFORMANCE SHARES......................................... 6
6.01. Award of Performance Shares............................ 6
6.02. Establishment of Performance Share Deferral Account.... 7
6.03. Shares Issuable Under the Plan......................... 7
6.04. Capital Adjustments.................................... 7
SECTION 7. DEFERRAL OF RETAINER FEE.............................................. 8
7.01. Election of Deferral................................... 8
7.02. Establishment of a Cash Deferral Account............... 8
7.03. Deferrals.............................................. 8
7.04. Deferrals Limited By Section 6.03...................... 8
SECTION 8. FUNDING OF BENEFITS.................................................... 9
8.01. Unfunded Plan.......................................... 9
8.02. Interest............................................... 9
8.03. Dividend Equivalents................................... 9
SECTION 9. CLAIMS PROCEDURE...................................................... 10
9.01. Benefit Claims Procedure.............................. 10
9.02. Appeals Procedure..................................... 10
SECTION 10. FORM AND TIMING OF PAYMENT.......................................... 11
10.01. Normal Retirement Benefit............................. 11
10.02. Change in Payment Option.............................. 12
10.03. Termination Benefit................................... 12
10.04. Hardship Withdrawal Benefit........................... 12
SECTION 11. PRE-RETIREMENT SURVIVOR BENEFITS..................................... 13
11.01. Pre-Retirement Survivor Benefit....................... 13
11.02. Proof of Insurability................................. 14
11.03. Exclusion for Suicide or Self-Inflicted Injury........ 15
SECTION 12. POST-RETIREMENT SURVIVOR BENEFITS.................................... 15
12.01. Post-Retirement Survivor Benefit...................... 15
SECTION 13. VESTING OF BENEFITS.................................................. 15
13.01. Participant's Account................................. 15
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
SECTION 14. ADMINISTRATION OF THE PLAN.......................................... 16
14.01. Duties and Powers..................................... 16
14.02. Benefit Statements.................................... 16
14.03. Deferral Election Agreement........................... 16
SECTION 15. AMENDMENT, SUSPENSION, AND TERMINATION............................... 16
15.01. Right to Amend or Terminate........................... 16
15.02. Right to Suspend...................................... 17
15.03. Non-ERISA Plan........................................ 17
15.04. Right to Accelerate.................................. 17
SECTION 16. MISCELLANEOUS....................................................... 17
16.01. Prohibition Against Alienation........................ 17
16.02. Savings Clause........................................ 18
16.03. Payment of Benefit of Incompetent..................... 18
16.04. Spouse's Interest..................................... 18
16.05. Successors............................................ 18
16.06. Compliance With Rule 16b-3............................ 18
16.07. Securities Law Restrictions........................... 19
16.08. Headings.............................................. 19
16.09. Choice of Law......................................... 19
SECTION 17. CHANGE IN CONTROL PROVISIONS........................................ 19
17.01. General............................................... 19
17.02. Transfer to Rabbi Trust............................... 19
17.03. Joint and Several Liability........................... 20
17.04. Dispute Procedures.................................... 20
17.05. Definition of Change in Control....................... 20
</TABLE>
iii
<PAGE> 5
MCN ENERGY GROUP INC.
NONEMPLOYEE DIRECTORS' COMPENSATION PLAN
(as amended and restated effective March 1, 1997)
WHEREAS, MCN ENERGY GROUP INC., a Michigan corporation (hereinafter
referred to as the "Company"), previously adopted the MCN Corporation Deferred
Fee Plan and the MCN Corporation Non-Officer Director Stock Award Plan and
desires to make certain changes to the plans.
NOW, THEREFORE, effective March 1, 1997, the MCN Corporation Deferred Fee
Plan and the MCN Corporation Non-Officer Director Stock Award Plan are hereby
amended and restated as follows:
SECTION 1
TITLE
The MCN Corporation Non-Officer Director Stock Award Plan is amended by
merging with the MCN Corporation Deferred Fee Plan. The title of the amended
plan shall be the "MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan" (hereinafter referred to as the "Plan")
It is intended that the Plan provide benefits exclusively for individuals
who are not employees of the Company and, therefore, the Plan shall be exempt
from all provisions of the Employee Retirement Income Security Act of 1974, as
amended (hereinafter referred to as "ERISA").
SECTION 2
DEFINITIONS
The following words and terms as used herein shall, unless the context
clearly requires a different meaning, have the respective meanings hereinafter
set forth. Except as otherwise
1
<PAGE> 6
expressly provided, the masculine gender includes the feminine and the singular
includes the plural.
2.01. "Account" means the record maintained by or for the Company of each
Participant's Cash Deferral Account, as defined in Section 2.05, and
Performance Share Deferral Account, as defined in Section 2.18, under the Plan.
2.02. "Anniversary Date" means any April 1 after the Effective Date, as
defined in Section 2.12.
2.03. "Beneficiary" means the person, persons or entity designated in
writing by the Participant on forms provided by the Company to receive
distribution of certain death benefits under the Plan in the event of the
Participant's death. A Participant may change the designated Beneficiary by
filing a new written designation with the Committee, as defined in Section
2.07, and such designation shall be effective upon receipt by the Committee.
The designation of a Beneficiary other than the Participant's Spouse, as
defined in Section 2.28, must be consented to in writing by the Spouse. If a
Participant has not designated a Beneficiary, or if a designated Beneficiary is
not living at the time of a Participant's death, any death benefits payable
under the Plan shall be paid to the Participant's Spouse, if then living, and
if the Participant's Spouse is not then living, to the Participant's estate.
2.04. "Board of Directors" means the Board of Directors of the Company, as
defined in Section 2.08.
2.05. "Cash Deferral Account" means the record maintained by or for the
Company of each Participant's Deferrals, as defined in Section 2.10, (including
deferrals from the Prior Plan, as defined in Section 2.24), credited interest
and distributions under the Plan. A Participant's Deferrals shall be credited
to his Account as of the end of the month in which the Deferral is withheld
from the Participant's Covered Compensation.
2.06 "Code" means the Internal Revenue Code of 1986, as amended.
2.07. "Committee" means the Compensation Committee of the Board of
Directors which is responsible for the administration of the Plan.
2.08. "Company" means MCN Energy Group Inc., a Michigan corporation, its
successors and assigns.
2
<PAGE> 7
2.09. "Covered Compensation" means the annual retainer fee payable
quarterly to an Eligible Board Member, as defined in Section 2.13, in the
current Plan Year, as defined in Section 2.21.
2.10. "Deferral" means the portion of a Participant's Covered Compensation
that has been deferred in accordance with Section 701. Deferral amounts are
retained by the Company as part of its general assets.
2.11. "Deferral Election Agreement" means the benefit agreement described
in Section 14.03 relating to a Participant's commitment to defer Covered
Compensation.
2.12. "Effective Date" means March 1, 1997.
2.13. "Eligible Board Member" means a member of the Board of Directors of
the Company who is not an employee of the Company.
2.14. "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.15 "In Pay Status" means, with respect to a benefit under the Plan, that
a Participant or Beneficiary has met all of the requirements to receive such
benefit and it is being paid or is about to be paid to such Participant or
Beneficiary.
2.16. "Participant" means an Eligible Board Member who has made a written
election to participate in the Plan in accordance with Section 3.01.
2.17 "Performance Shares" means the annual award of common stock
equivalents pursuant to Section 6.01 which shall (i) have a total value as
determined under Section 6.01, (ii) be rounded to the nearest 100, and (iii) be
credited quarterly to Eligible Board Members' Performance Share Deferral
Account, as defined in Section 2.18. Such Performance Shares will be valued at
an amount equal to the average of the high and low of the Company common stock
price on the New York Stock Exchange Composite Tape for the trading day
preceding the day on which a credit to this Plan is to be made.
2.18 "Performance Share Deferral Account" means the record maintained by
or for the Company of each Participant's (i) Deferrals (including deferrals
from the Prior Plan, as defined in Section 2.24 and the transfer of the
Participant's SDBRIP Benefit, as defined in Section 2.27, if any) which the
Participant has elected to be denominated in Company common stock equivalents
under Section 7.01, (ii) Performance Shares, (iii) credited dividend
equivalents, and (iv) distributions under the Plan. One fourth of a
Participant's annual award of Performance Shares
3
<PAGE> 8
shall be credited to his Performance Share Deferral Account as of the beginning
of each quarter in the Plan year. Dividend equivalents shall be credited to
the Participant's Performance Share Deferral Account in accordance with Section
8.03. As of the Valuation Date (defined in Section 10.01), the Participant's
Performance Share Deferral Account shall be valued on a cash basis with
interest credited monthly as provided in Section 8.02.
2.19. "Plan" means the MCN Energy Group Inc. Nonemployee Directors'
Compensation Plan, as described herein and as hereafter amended.
2.20. "Plan Interest Rate" for a Plan Year, as defined in Section 2.21,
means the average of the interest rates for the latest issue, as of the end of
the previous month, of ten-year U.S. Treasury Notes, or such other interest
rate as set by the Committee.
2.21. "Plan Year" means the period beginning April 1 and ending March 31
of each year (a fiscal year).
2.22. "Post-Retirement Survivor Benefit" means the benefit payable under
Section 12.01 to the Beneficiary of a Participant who dies after the
commencement of his Retirement Income Benefit, as defined in Section 2.26.
2.23. "Pre-Retirement Survivor Benefit" means the benefit payable, as
described in Section 11.01, to the Beneficiary of a Participant who dies prior
to the commencement of his Retirement Income Benefit, as defined in Section
2.26.
2.24. "Prior Plan" means the MCN Corporation Deferred Fee Plan and the MCN
Corporation Non-Officer Director Stock Award Plan as in effect prior to the
amendment and restatement of the Plan.
2.25. "Retirement Date" means the first day of the month following the
month in which a Participant ceases to be an Eligible Board Member for any
reason, but in no event later than the first day of the month following the
first annual Board meeting after the Participant attains age seventy (70). For
purposes of Section 11.01, the term Retirement Date shall mean the first day of
the month following the first annual Board meeting after the Participant
attains age seventy (70).
2.26. "Retirement Income Benefit" means the retirement benefit described
in Section 10.01.
2.27 "SDBRIP Benefit" means the actuarial value of an Eligible Board
Member's benefit under the MCN Energy Group Inc. Supplemental Death Benefit and
Retirement Income
4
<PAGE> 9
Plan as of March 31, 1997, which shall be credited to an Eligible Board
Member's Performance Share Deferral Account as of April 1, 1997, subject
Section 6.03
2.28. "Spouse" means an individual who is legally married to a Participant
under the laws of the State in which the Participant resides, on the day
immediately preceding the Participant's date of death.
SECTION 3
PARTICIPATION
3.01. Commencement of Participation. An Eligible Board Member shall
become a Participant hereunder upon execution of a Deferral Election Agreement
by the Eligible Board Member and the Committee, no later than the March 22
prior to the first day of a Plan Year, or upon election to the Board. A
properly executed Deferral Election Agreement shall be effective on the April 1
immediately following the execution of the Deferral Election Agreement, and
shall contain the items described in this Section and in Sections 5.02, 7.01,
10.01, 10.03, 11.01(C), and 14.03.
SECTION 4
TRANSFER OF THE SDBRIP BENEFIT
4.01. Transfer of SDBRIP Benefit. Effective March 31, 1997, the MCN
Energy Group Inc. Supplemental Death Benefit and Retirement Income Plan was
amended to remove the provisions which provide benefits to Eligible Board
Members. The actuarial value of an Eligible Board Member's SDBRIP Benefit as
of March 31, 1997, shall be credited to the Eligible Board Member's Performance
Share Deferral Account, which shall be established in accordance with Section
6.02. The transfer of such SDBRIP Benefit shall be phased into the Performance
Share Deferral Account, if necessary, to comply with Section 6.03. Any amount
subject to such a phase-in shall be credited to the Eligible Board Member's
Cash Deferral Account until such time as it may be transferred to the Eligible
Board Member's Performance Share Deferral Account, as provided under Section
7.04.
5
<PAGE> 10
SECTION 5
TRANSFER OF PRIOR PLAN BALANCES
5.01. Transfer of Prior Plan Balances. Effective April 1, 1997, an
Eligible Board Member's account balance in the Prior Plan, if any, shall be
credited to the Cash Deferral Account under the Plan, unless the Eligible Board
Member makes an election under Section 5.02 to have such Prior Plan balance
transferred to his Performance Share Deferral Account.
5.02 Election to Transfer Prior Plan Balance to Performance Share Deferral
Account. If an Eligible Board Member notifies the Company on or before March
31, 1997, the Eligible Board Member shall be permitted to elect to transfer any
balance in the Prior Plan to his Performance Share Deferral Account,
established in accordance with Section 6.02. Such election shall be made by
the Eligible Board Member on a properly executed Deferral Election Agreement.
The transfer of such Prior Plan balance shall be phased in, if necessary, to
comply with Section 6.03. Any amount subject to such a phase-in shall be
credited to the Eligible Board Member's Cash Deferral Account until such time
as it may be transferred to the Eligible Board Member's Performance Share
Deferral Account, as provided under Section 7.04.
SECTION 6
DEFERRAL OF PERFORMANCE SHARES
6.01. Award of Performance Shares. Each Eligible Board Member who was
elected at the Annual Meeting of the Shareholders or whose term continued
thereafter as an Eligible Board Member at such meeting shall be awarded
Performance Shares whose value shall be calculated at the beginning of the
fiscal year and rounded to the nearest 100 shares of Company common stock. The
total value of the award shall be established by the Board of Directors. The
number of shares to be awarded annually to each Eligible Board Member shall
initially be based on a total value of $30,000 per year, and that value may be
changed by a majority vote of the Board of Directors, provided, however, that
any changes shall be made no more often than once in any 12-month period. One
fourth of the total amount of the Performance Shares shall be credited
quarterly to the Participant's Performance Share Deferral Account as of July 1,
October 1, January 1 and April
6
<PAGE> 11
1. A Participant shall not have the option of receiving such Performance
Shares in cash or Company common stock prior to his Retirement Date. The shares
awarded pursuant to this Plan shall be in addition to, and not in lieu of, an
Eligible Board Member's annual retainer fee or other compensation payable to
each Eligible Board Member as a result of his or her service on the Board of
Directors.
6.02. Establishment of Performance Share Deferral Account. The Committee
shall establish a Performance Share Deferral Account for each Participant to
which (i) the Participant's Performance Shares shall be credited; (ii) the
Participant's SDBRIP Benefit, if any, shall be credited in accordance with
Section 4.01; and (iii) the Participant's account balance, if any, under the
Prior Plan shall be credited in accordance with Section 5.02.
6.03. Shares Issuable Under the Plan. Subject to adjustment as provided
in Section 6.04, the total number of Performance Shares which may be credited
under the Plan in each Plan Year during which the Plan is in effect shall be
the aggregate number of shares payable to the Eligible Board Members as set
forth in Section 6.01 of the Plan, not to exceed .03 percent of the total
number of outstanding shares of MCN Energy Group Inc. common stock as of the
first day of the Plan Year. Shares to be issued under the Plan may be
authorized and unissued shares or authorized and issued shares of common stock
which have been reacquired by the Company and held as treasury shares.
Provided, however, that the number of shares that may be issued under this Plan
may not exceed 1% of the number of shares issued and outstanding on March 1,
1994.
6.04. Capital Adjustments. The aggregate number and class of shares
subject to and authorized by the Plan shall be proportionately adjusted for any
increase or decrease in the number of issued shares of common stock resulting
from the payment of a stock dividend, stock split, recapitalization, merger,
consolidation, reorganization or any similar capital adjustment or other
increase or decrease in the number of outstanding shares effected without
receipt of consideration by the Company.
7
<PAGE> 12
SECTION 7
DEFERRAL OF RETAINER FEE
7.01. Election of Deferral. A Participant may elect, in his Deferral
Election Agreement, to defer all or a portion of his cash retainer fee for each
Plan Year in which he is a Participant. Such annual Deferral shall not exceed
the Participant's Covered Compensation. Except as provided in Section 10.04(C),
a Participant's election to defer all or a portion of his cash retainer fee for
a Plan Year shall be irrevocable for that Plan Year. A Participant shall
indicate on his Deferral Election Agreement whether his Deferral will be
credited to his Cash Deferral Account or his Performance Share Deferral
Account. Except as provided in Section 7.04, once an amount has been credited
to the Cash Deferral Account or the Performance Share Account, such amounts may
not subsequently be transferred to the other account.
7.02. Establishment of a Cash Deferral Account. If a Participant so
elects on his Deferral Election Agreement, the Committee shall establish a Cash
Deferral Account for such Participant to which (i) the Participant's Deferrals
shall be credited; and (ii) the Participant's account balance, if any, under
the Prior Plan shall be credited in accordance with Section 5.01.
7.03. Deferrals. A Participant may continue to make the annual Deferral
provided under Section 7.01 with respect to his Deferral Election Agreement
until he resigns or is otherwise removed from his membership on the Board of
Directors, or he receives a hardship withdrawal.
7.04 Deferrals Limited By Section 6.03. If a Participant elects in his
Deferral Election Agreement to have his Deferral credited to his Performance
Share Deferral Account and such election is limited due to Section 6.03, the
amount of the Participant's Deferral that cannot be credited to his Performance
Share Deferral Account due to Section 6.03 ("Limited Deferral") shall be
credited to the Participant's Cash Deferral Account. The amount of the Limited
Deferral shall be denoted by a bookkeeping entry. At such time as the limits
of Section 6.03 permit, the Limited Deferral, plus interest equivalents at the
Plan Interest Rate, shall be transferred from the Participant's Cash Deferral
Account to his Performance Share Deferral Account. The amount transferred
shall be converted to a number of common stock equivalents equal to the average
of
8
<PAGE> 13
the high and low of the Company common stock price on the New York Stock
Exchange Composite Tape for the trading day preceding the day on which a credit
to this Plan is to be made.
SECTION 8
FUNDING OF BENEFITS
8.01. Unfunded Plan. The Plan shall be unfunded. All benefits payable
under the Plan shall be paid from the Company's general assets. The Company
shall not be required to set aside or hold in trust any funds for the benefit
of a Participant or Beneficiary, who shall have the status of a general
unsecured creditor with respect to the Company's obligation to make benefit
payments pursuant to the Plan. Any assets of the Company available to pay Plan
benefits shall be subject to the claims of the Company's general creditors and
may be used by the Company in its sole discretion for any purpose.
8.02. Interest. Interest shall be credited and compounded monthly to each
Participant's Cash Deferral Account during each Plan Year based upon the Plan
Interest Rate in effect for such Plan Year for so long as there remains a Cash
Deferral Account balance.
8.03 Dividend Equivalents. Dividend equivalents equal to 50% of the
dividend rate payable on Company common stock shall be credited to a
Participant's Performance Share Deferral Account based on the number of
Performance Shares in such Participant's Performance Share Deferral Account.
Dividend equivalents shall be reinvested in Performance Shares based upon the
average of the high and low of the Company common stock price on the dividend
payment date.
SECTION 9
CLAIMS PROCEDURE
9.01. Benefit Claims Procedure. All applications for benefits under the
Plan shall be submitted to the Committee at the Company's principal place of
business. Applications for benefits must be in writing and must be signed by
the Participant or, in the case of a Pre-Retirement or Post-Retirement Survivor
Benefit, by the Beneficiary or legal representative of
9
<PAGE> 14
the deceased Participant. In the event of a Participant's death, a certified
copy of the death certificate will be required by the Committee. The Committee
reserves the right to require that the Participant furnish proof of his age
prior to processing any application. Each application shall be acted upon and
approved or disapproved within ninety (90) days following its receipt by the
Committee. In the event any application for benefits is denied in whole or in
part, the Committee shall notify the applicant in writing of such denial and of
his right to a review by the Committee and shall set forth, in a manner
calculated to be understood by the applicant, specific reasons for such denial,
specific references to pertinent Plan provisions on which the denial is based,
a description of any additional material or information necessary for the
applicant to perfect his application, an explanation of why such material or
information is necessary, and an explanation of the Plan's review procedure.
9.02. Appeals Procedure. Any person or his duly authorized representative
whose application for benefits is denied in whole or in part may appeal such
denial to the Committee for a review of the decision by submitting to the
Committee at the Company's principal place of business within ninety (90) days
after receiving written notice from the Committee of the denial of his claim, a
written statement:
(a) requesting a review by the Committee of his
application for benefits;
(b) setting forth all of the grounds upon which his
request for review is based and any facts in support thereof;
and
(c) setting forth any issues or comments that the
applicant deems pertinent to his application.
The Committee shall act upon each application within sixty (60) days after
receipt of the applicant's request for review by the Committee.
The Committee shall make a full and fair review of each such application
and any written materials submitted by the applicant or the Company in
connection therewith and may require the Company or the applicant to submit
such additional facts, documents, or other evidence as the Committee in its
sole discretion deems necessary or advisable in making such a review. On the
basis of its review, the Committee shall make an independent determination of
the applicant's eligibility for benefits under the Plan. The decision of the
Committee on any application for benefits shall be final and conclusive upon
all persons.
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<PAGE> 15
In the event that the Committee denies an application in whole or in part,
the Committee shall give written notice of the Committee's decision to the
applicant setting forth, in a manner calculated to be understood by the
applicant, the specific reasons for such denial and specific references to the
pertinent Plan provisions on which the Committee's decision was based.
SECTION 10
FORM AND TIMING OF PAYMENT
10.01. Normal Retirement Benefit. Each Participant who retires on his
Retirement Date shall be entitled to a Retirement Income Benefit commencing on
the first of the month following the month in which his Retirement Date occurs
("Valuation Date"). As of the Valuation Date, the Participant's Account shall
be valued on a cash basis, using the average of the high and low of the Company
common stock price on the New York Stock Exchange Composite Tape on the day
before valuation is made, with interest credited monthly at the Plan Interest
Rate. Notwithstanding the fact that a Participant's Account will be valued on
a cash basis as of the Valuation Date, the distribution to a Participant of the
amount in his Performance Share Deferral Account shall be paid in Company
common stock equal to the number of shares of Company common stock deemed to be
held in the Participant's Account and valued at the average of the high and low
price of MCN Energy Group Inc. common stock on the New York Stock Exchange
Composite Tape on the day before payment is made. Payment of the vested
portion of a Participant's accounts shall be made in accordance with the
Participant's selection on his Benefit Agreement in monthly payments in one
year increments not to exceed 15 years, or as a lump sum distribution of the
Participant's Account. The amount of the monthly payments shall be calculated
to pay out over the specified period the entire balance in the Participant's
Account as of his Retirement Date with interest credited monthly on the
declining balance at the Plan Interest Rate. The Participant's Account shall
continue to be credited monthly with interest at the Plan Interest Rate and
charged with the monthly payments to the Participant. The amount of the
monthly payments to the Participant shall be adjusted on January 1 of each year
to reflect changes in the Plan Interest Rate and other changes in the
Participant's Account balance.
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<PAGE> 16
10.02. Change in Payment Option. A Participant's payment election may be
changed at any time by the Participant submitting a new payment selection to
the Committee, but any change received by the Committee less than twelve months
prior to the Participant's Retirement Date shall be void.
10.03. Termination Benefit. A Participant who ceases to be an Eligible
Board Member prior to his Retirement Date shall receive payment of the
Participant's Account balance in accordance with the Participant's selection on
his Payment Election Form, either in monthly payments in one year increments
not to exceed 15 years, or as a lump sum distribution in an amount equal to the
Participant's Account. Payment of a Participant's termination benefit shall
begin no later than one hundred twenty (120) days after the Participant ceases
to an Eligible Board Member. After receiving a termination benefit, neither
the Participant, nor his spouse or Beneficiary shall be entitled to any further
benefit hereunder.
10.04. Hardship Withdrawal Benefit.
(A) At any time prior to the commencement of Retirement Income
Benefits hereunder, a Participant may request that the Committee make a
distribution to him of his Cash Deferral Account balance in a lump-sum
within 30 days. Such distribution shall be made only if the Committee
determines that the Participant is suffering from a financial hardship
that cannot be satisfied from his normal sources of income.
(B) Financial hardship is limited to the amount required to meet the
need created by any of the following situations:
1. Financial obligations incurred by the
Participant on account of death or disability in the
immediate family, which obligations the Participant is
not able to pay out of liquid assets or current cash
flow.
2. Inability to purchase out of liquid
assets, current cash flow, or otherwise reasonably
finance the purchase of necessary shelter, utilities,
equipment, furnishings and other necessities for the
Participant's immediate family.
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<PAGE> 17
3. Inability to pay out of liquid assets, current cash
flow or otherwise reasonably finance, educational
expenses for a member of the Participant's immediate
family.
(C) For the 24-month period beginning on the first of the month
after receiving the hardship distribution, a Participant shall not be
eligible to defer any portion of the retainer fee under Section 7.01.
After receiving a hardship distribution in a Plan Year, neither the
Participant, nor his Spouse or Beneficiary shall be entitled to any
further benefit hereunder unless the Participant completes two years of
participation after the hardship distribution, in which event the
Pre-Retirement Survivor Benefit shall be based solely on Deferrals after
the hardship distribution. If a Participant dies during the two years of
participation after the hardship distribution, the Pre-Retirement
Survivor Benefit shall be computed as provided in Section 11.01, except
that the projection forward shall include hypothetical annual Deferrals
equal to zero.
SECTION 11
PRE-RETIREMENT SURVIVOR BENEFITS
11.01. Pre-Retirement Survivor Benefit. If a Participant dies prior to
his Retirement Date, his Beneficiary shall be entitled to receive an amount
equal to the Participant's Account balance as follows:
(A) Cash Deferral Account. The benefit from the Cash Deferral Account
shall be equal to the present value, at the Participant's date of death, of the
Participant's Cash Deferral Account projected forward to his Retirement Date.
This projection forward will be accomplished by valuing the Participant's Cash
Deferral Account as of the date of the Participant's death, crediting to his
Cash Deferral Account balance as of his date of death the amount of his annual
Deferral, if any, for the year of his death and for all subsequent years
through and including the year in which his Retirement Date falls and crediting
interest on the Account balance and projected Deferrals at the Plan Interest
Rate on his date of death in order to arrive at the projected value of his Cash
Deferral Account balance as of his Retirement Date. This projected Cash
Deferral Account balance then will be converted to its present value on the
Participant's date of death using 70% of the Plan Interest Rate on the
Participant's date of death.
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<PAGE> 18
(B) Performance Share Deferral Account. The Participant's Performance
Share Deferral Account will be valued on a cash basis as of the date of the
Participant's death. Notwithstanding such cash valuation, the distribution to
a Beneficiary of the amount in the Participant's Performance Share Deferral
Account shall be paid in Company common stock equal to the number of shares of
Company common stock deemed to be held in the Participant's Account.
(C) Payment. The pre-retirement survivor benefit shall be paid, in
accordance with the Participant's selection in his Benefit Agreement, either in
equal monthly payments in one year increments not to exceed 15 years, or as a
lump sum distribution of the Participant's Account.
11.02 Proof of Insurability. If a new Participant is uninsurable, or does
not cooperate in the application for life insurance, such Participant's
Beneficiary shall not be entitled to receive a Pre-Retirement Survivor Benefit
under Section 11.01(A). The Beneficiary of such a Participant shall receive a
distribution of an amount equal to the Participant's Account balance as of the
Participant's date of death. Such distribution shall be paid in accordance
with the Participant's selection on his Benefit Agreement, either in monthly
payments in one year increments not to exceed 15 years, or as a lump sum
distribution.
If a Participant, who was insurable at the time participation in the Plan
commenced, elects to increase his Deferral, such increase shall not be
reflected in computing the Pre-Retirement Survivor Benefit under Section
11.01(A) if the Participant became uninsurable prior to electing the increased
Deferral or does not cooperate in the application for life insurance.
11.03. Exclusion for Suicide or Self-Inflicted Injury. Notwithstanding
any other provision of the Plan, no Pre-Retirement Survivor Benefits in excess
of a Participant's Account balance as of his date of death shall be paid to any
Participant or Beneficiary in the event the Participant dies as the result of
suicide or self-inflicted injury within two years after January 1 of the first
year of participation.
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<PAGE> 19
SECTION 12
POST-RETIREMENT SURVIVOR BENEFITS
12.01. Post-Retirement Survivor Benefit. The Beneficiary, other than the
Participant's estate, of a Participant who dies after commencement of his
Retirement Income Benefit shall be entitled to continue to receive the
Retirement Income Benefit payments being made to the Participant under Section
10.01 for the remainder of the period over which payments were being made to
the Participant. If the Beneficiary is the Participant's estate, the
Retirement Income Benefit shall be paid in a lump sum distribution to the
estate within 120 days after the date of the Participant's death.
SECTION 13
VESTING OF BENEFITS
13.01. Participant's Account. A Participant shall be 100% vested in his
Account balance at all times and shall rank as an unsecured creditor of the
Company for his entire Account balance.
SECTION 14
ADMINISTRATION OF THE PLAN
14.01. Duties and Powers. The Committee shall be responsible for the
general administration and interpretation of the Plan and the proper execution
of its provisions. It shall cause to be maintained all necessary books of
accounts and records. It shall have power to establish, interpret, enforce,
amend, and revoke, from time to time, such rules and regulations for the
administration of the Plan and the conduct of its business as it deems
appropriate, including the right to remedy ambiguities, inconsistencies and
omissions (provided such rules and regulations are uniformly applied to all
persons similarly situated). Any section that the Committee is required or
authorized to take shall be final and binding upon each and every person who is
or may become a Plan Participant or Beneficiary.
15
<PAGE> 20
14.02. Benefit Statements. No later than 120 days after the end of each
Plan Year, the Company will provide each Participant with a statement setting
forth the Participant's Account balance as of the last day of the immediately
preceding Plan Year.
14.03. Deferral Election Agreement. The Committee shall provide to each
Eligible Board Member a form of Deferral Election Agreement, which shall set
forth the Eligible Board Member's acceptance of the terms provided hereunder,
his agreement to be bound by the terms of the Plan and such other matters as
are set forth in this Plan or deemed advisable by the Committee.
SECTION 15
AMENDMENT, SUSPENSION, AND TERMINATION
15.01. Right to Amend or Terminate. The Plan may be amended or terminated
by the Board of Directors at any time. Such amendment or termination may
modify or eliminate any benefit hereunder other than a benefit that is In Pay
Status, or the vested portion of a benefit that is not In Pay Status.
15.02. Right to Suspend. If the Board of Directors determines that
payments under the Plan would have a material adverse affect on the Company's
ability to carry on its business, the Board of Directors may suspend such
payments temporarily for such time as in its sole discretion it deems
advisable, but in no event for a period in excess of one year. The Company
shall pay such suspended payments in a lump sum immediately upon the expiration
of the period of suspension.
15.03. Non-ERISA Plan. The Plan is intended to provide benefits for
Eligible Board Members who are not employees of the Company and, therefore, to
be exempt from ERISA. Accordingly, the Plan may be terminated and, except for
existing Account balances and other benefits In Pay Status (which, at the
option of the Board of Directors, may be accelerated and the balance paid in a
single, actuarially equivalent lump-sum), no further benefits shall be paid
hereunder in the event it is determined by a court of competent jurisdiction or
by an opinion of
16
<PAGE> 21
counsel that the Plan constitutes an employee pension benefit plan within the
meaning of Section 3(2) of ERISA which is not so exempt.
15.04. Right to Accelerate. The Board of Directors in its sole discretion
may accelerate all vested benefits upon termination of the Plan, and pay such
benefits in a single, actuarially equivalent lump-sum.
SECTION 16
MISCELLANEOUS
16.01. Prohibition Against Alienation. Except as otherwise provided in
the Plan, no right or benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to so anticipate, alienate, sell, transfer, assign,
pledge, encumber, or charge the same shall be void. No such right or benefit
shall be liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such right or benefit.
16.02. Savings Clause. If any provision of this instrument shall be
finally held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
16.03. Payment of Benefit of Incompetent. In the event the Committee
finds that a Participant, former Participant, or Beneficiary is unable to care
for his affairs because of his minority, illness, accident, or other reason,
any benefits payable hereunder may, unless other claim has been made therefor
by a duly appointed guardian, committee or other legal representative, be paid
to a spouse, child, parent, or other blood relative or dependent or to any
person found by the Committee to have incurred expenses for the support and
maintenance of such Participant, former Participant, or Beneficiary; and any
such payments so made shall be a complete discharge of all liability therefor.
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<PAGE> 22
16.04. Spouse's Interest. The interest in the benefits hereunder of a
spouse of a Participant who has predeceased the Participant shall automatically
pass to the Participant and shall not be transferable by such spouse in any
manner including but not limited to such spouse's will, nor shall such interest
pass under the laws of intestate succession.
16.05. Successors. In the event of any consolidation, merger, acquisition
or reorganization of the Company, the obligations of the Company under this
Plan shall continue and be binding upon the Company and its successors.
16.06. Compliance With Rule 16b-3. It is intended that the Plan be
applied and administered in compliance with Rule 16b-3 under the Securities and
Exchange Act of 1934. If any provision of the Plan would be in violation of
Rule 16b-3 if applied as written, such provision shall not have effect as
written and shall be given effect so as to comply with Rule 16b-3, as
determined by the Board of Directors.
16.07. Securities Law Restrictions. The Company may impose such other
restrictions on any shares of Company common stock granted pursuant to this
Plan as it may deem advisable including, but not limited to, restrictions
intended to achieve compliance with the Securities Act of 1933, as amended,
with the Securities and Exchange Act of 1934, as amended, with the requirements
of any stock exchange upon which the Company common stock is then listed, and
with any Blue Sky or state securities laws applicable to such Company common
stock.
16.08. Headings. Headings of sections and subsections as used herein are
inserted solely for convenience and reference and constitute no part of the
Plan.
16.09. Choice of Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Michigan to the extent not superseded
by applicable federal statutes or regulations.
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<PAGE> 23
SECTION 17
CHANGE IN CONTROL PROVISIONS
17.01. General. In the event of a Change in Control, as defined in
Section 17.05, then, notwithstanding any other provision of the Plan, the
provisions of this Section 17 shall be applicable and shall supersede any
conflicting provisions of the Plan.
17.02. Transfer to Rabbi Trust. The Company has established a trust
pursuant to a Trust Agreement dated January 3, 1991 (the "Rabbi Trust"). The
terms of the Rabbi Trust provide that, in the event of a Change in Control and
thereafter, assets are to be transferred to such Trust to provide benefits
under the Plan. The Company shall make all transfers of funds required by the
Rabbi Trust in a timely manner and shall otherwise abide by the terms of the
Rabbi Trust.
17.03. Joint and Several Liability. Upon and at all times after a Change
in Control, the liability under the Plan of the Company and each Affiliated
Employer that has adopted the Plan shall be joint and several so that the
Company and each such Affiliated Employer shall each be liable for all
obligations under the Plan to each employee covered by the Plan, regardless of
the corporation by which such employee is employed.
17.04. Dispute Procedures. In the event that, upon or at any time
subsequent to a Change in Control, a claim for benefits under the Plan of a
Participant or Beneficiary who has exhausted the claims and appeals procedures
set forth in Sections 9.01 and 9.02 is denied in whole or in part, the
following additional procedures shall be applicable:
(a) Any amount that is not in dispute shall be paid to the
Participant or Beneficiary at the time or times provided herein.
(b) The Company shall advance to such claimant from time to time
such amounts as shall be required to reimburse the claimant for reasonable
legal fees, costs and expenses incurred by such claimant in seeking a
judicial resolution of his or her claim, including reasonable fees, costs
and expenses relating to appeals; provided, however, that the Company
shall not be obligated to advance to the claimant any amounts under this
Section 17.04(b) unless and
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<PAGE> 24
until the claimant agrees in writing to repay to the Company, immediately upon
the occurrences of a final judicial determination with respect to such dispute,
any amount of such fees, costs and expenses that is not awarded to such
claimant in a final order of a court of competent jurisdiction.
17.05. Definition of Change in Control. A "Change of Control" means:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of
either: (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock"); or (ii) the
combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company
(excluding any acquisition by virtue of the exercise of a
conversion privilege); (B) any acquisition by the Company; (C) any
acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation
controlled by the Company; or (D) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation,
if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection
(c) of this Section 17.05 are satisfied; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11
of Regulation
20
<PAGE> 25
14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(c) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (i) more
than 60% of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation
in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation,
of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding
the Company, any employee benefit plan or related trust) of the
Company or such corporation resulting from such reorganization,
merger or consolidation and any Person beneficially owning,
immediately prior to such reorganization, mergers or
consolidation, directly or indirectly, 20% or more of the
Outstanding Company Common Stock or Outstanding Voting Securities,
as the case may be, beneficially owns, directly or indirectly, 20%
or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of
the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the
sale or other disposition of all or substantially all of the
assets of the Company, other than to a corporation, with
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<PAGE> 26
respect to which following such sale or other disposition, (A)
more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of
the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior
to such sale or other disposition in substantially the same
proportion as their ownership, immediately prior to such sale or
other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no
Person (excluding the Company and any employee benefit plan (or
related trust) of the Company or such corporation and any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the
Outstanding Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board
of directors of such corporation were members of the Incumbent
Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition
of assets of the Company.
IN WITNESS WHEREOF, MCN ENERGY GROUP INC. has caused this Plan to be
executed as of this 1st day of March, 1997.
MCN ENERGY GROUP INC.
BY /s/ Daniel L. Schiffer
-----------------------------
Daniel L. Schiffer,
Senior Vice President,
General Counsel and Secretary
22
<PAGE> 1
EXHIBIT 99.2
MCN ENERGY GROUP INC.
FORM OF EMPLOYMENT AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE
JULY 1,1997)
<PAGE> 2
EMPLOYMENT AGREEMENT
AGREEMENT by and between MCN Energy Group Inc., a Michigan corporation
(the "Company") and ____________(the "Executive"), dated as of the ____ day of
___________, 19__.
The Board of Directors of the Company (the "Board"), has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined in Section 2) of the Company. The Board believes it is imperative
to diminish the inevitable distraction of the Executive by virtue of the
personal uncertainties and risks created by a pending or threatened Change of
Control and to encourage the Executive's full attention and dedication to the
Company currently and in the event of any threatened or pending Change of
Control, and to provide the Executive with compensation and benefits
arrangements upon a Change of Control which ensure that the compensation and
benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Company to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's
employment with the Company is terminated prior to the date on which the Change
of Control occurs, and if it is reasonably demonstrated by the Executive that
such termination of employment (i) was at the request of a third party who has
taken steps reasonably calculated to effect the Change of Control or (ii)
otherwise arose in connection with or anticipation of the Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the
date immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of such date; provided,
however, that commencing on the date one year after the date hereof, and on
each annual anniversary of such date (such date and each annual anniversary
thereof shall be hereinafter referred to as the "Renewal Date"), the Change of
Control Period shall be automatically extended so as to terminate three years
from such Renewal Date, unless at least 60 days prior to the Renewal Date the
Company shall give notice to the Executive that the Change of Control Period
shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
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<PAGE> 3
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a
Change of Control: (i) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (ii) any
acquisition by the Company, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (iv) any acquisition by any corporation pursuant
to a reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions described in clauses
(i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or
(b) The appointment or election to the Board subsequent to the date hereof
of new directors with the result that the individuals who, as of the date
hereof, constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be considered an though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding the Company,
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation and any Person
beneficially owning, immediately
-2-
<PAGE> 4
prior to such reorganization, merger or consolidation, directly or indirectly,
20% or more of the Outstanding Company Common Stock or Outstanding Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 20%
or more of, respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation or the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and (iii)
at least a majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition,
(A) more than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock and
outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (B)
no Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or indirectly,
20% or more of the Outstanding Company Common Stock or Outstanding Company
voting securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors and (C) at least a majority of the members of the board
of directors of such corporation were members of the Incumbent Board at the
time of the execution of the initial agreement or action of the Board providing
for such sale or other disposition of assets of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, in accordance with the terms and provisions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period"); provided, however, that if the Change of
Control is pursuant to Sections 2(c) or (d) hereof, the Employment Period shall
end on the earlier of: (i) the third anniversary of the consummation of any
transaction approved by the shareholders of the Company; or (ii) the
abandonment of such transaction without consummation and before the occurrence
of any other subsequent event constituting a Change of Control.
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4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities
shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 90-day
period immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was employed
immediately preceding the Effective Date or any office which is the
headquarters of the Company and is less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid no less frequently than on a monthly basis, at least equal to
twelve times the highest monthly base salary paid or payable to the Executive
by the Company and its affiliated companies in respect of the twelve-month
period immediately preceding the month in which the Effective Date occurs.
During the Employment Period, the Annual Base Salary shall be reviewed at least
annually and shall be increased at any time and from time to time as shall be
substantially consistent with increases in base salary generally awarded in the
ordinary course of business to other peer executives of the Company and its
affiliated companies. Any increase in Annual Base Salary shall not serve to
limit or reduce any other obligation to the Executive under this Agreement.
Annual Base Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to Annual Base
Salary as so increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by, controlling or under common
control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus
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<PAGE> 6
(the "Annual Bonus") in cash at least equal to the average annualized (for any
fiscal year consisting of less than twelve full months or with respect to which
the Executive has been employed by the Company for less than twelve full
months) bonus paid or payable, including by reason of any deferral, to the
Executive by the Company and its affiliated companies in respect of the three
fiscal years immediately preceding the fiscal year in which the Effective Date
occurs (the "Recent Average Bonus"). Each such Annual Bonus shall be paid no
later than the end of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless the Executive shall
elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Sayings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
savings and retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its affiliated companies,
but in no event shall such plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with respect to both regular
and special incentive opportunities, to the extent, if any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at
any time during the 90-day period immediately preceding the Effective Date or
if more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable
generally to other peer executives of the Company and its affiliated companies,
but in no event shall such plans, practices, policies and programs provide the
Executive with benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs in effect for
the Executive at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company
and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in effect
for the Executive at any time during the 90-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
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<PAGE> 7
(vi) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated companies in
effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its affiliated companies at any
time during the 90-day period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability sat forth below), it may give to the Executive written
notice in accordance with Section 12(b) of its intention to terminate the
Executive's employment. In such event, the Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such notice
by the Executive (the "Disability Effective Date"), provided that, within the
30 days after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's
duties with the Company on a full-time basis for 180 consecutive business days
as a result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company or its
insurers and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withhold
unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean (i) repeated violations by the Executive of the Executive's obligations
under Section 4(a) (other than as a result of incapacity due to physical or
mental illness) which are demonstrably willful and deliberate on the
Executive's part, which are committed in bad faith
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