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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2820658
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
313-256-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS ---------------------
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Common Stock, $.01 Par Value Per Share New York Stock Exchange
9 3/8% Cumulative Preferred Securities, Series A* New York Stock Exchange
8 5/8% Trust Originated Preferred Securities** New York Stock Exchange
8 3/4% Preferred Redeemable Increased Dividend Equity
Securities New York Stock Exchange
8% FELINE PRIDES New York Stock Exchange
8 5/8% Trust Preferred Securities*** New York Stock Exchange
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* Issued by MCN Michigan Limited Partnership. The payments of dividends and
payments on liquidation or redemption are guaranteed by MCN Energy Group
Inc.
** Issued by MCN Financing I. The payments of dividends and payments on
liquidation or redemption are guaranteed by MCN Energy Group Inc.
*** Issued by MCN Financing II. The payments of dividends and payments on
liquidation or redemption are guaranteed by MCN Energy Group Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.
The aggregate market value of MCN Energy Group Inc. Common Stock, $.01 par
value per share, held by non-affiliates as of February 26, 1999 was $1.421
billion based on 79,790,381 outstanding shares and the closing price on that day
(New York Stock Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of MCN's 1998 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5, 6, 7, 7A and 8 and portions of MCN's February
1999 definitive Proxy Statement are incorporated by reference in Part III.
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GLOSSARY
Antrim Gas............................ Natural gas produced from shallow
wells in the Devonian (Antrim) shale
formations.
Capital Investments................... MCN's consolidated capital
expenditures plus acquisitions and
MCN's share of capital expenditures
of joint ventures, less the minority
partners share of consolidated
capital expenditures.
Citizens.............................. Citizens Gas Fuel Company; a wholly
owned natural gas distribution
subsidiary of MCN in Adrian,
Michigan.
Coalbed Methane....................... Natural gas formed during the
transformation of plant material into
coal. Drilling a well into the coal
and dewatering the coal seam will
cause a reduction in pressure,
releasing natural gas.
Cogeneration.......................... The production of electricity and
another form of energy, usually
steam, from a single fuel source such
as natural gas.
Diversified Energy Group.............. MCN's pipeline and processing,
electric power, and energy marketing
businesses. MCN's exploration and
production business has been
classified as discontinued
operations.
End User Transportation............... A gas delivery service provided to
large-volume commercial and
industrial customers who purchase
natural gas directly from producers
or brokerage companies.
FERC.................................. Federal Energy Regulatory Commission;
a federal agency that determines the
interstate rates and regulations of
interstate pipelines.
Gas Gathering......................... The process of collecting natural gas
from gas wells and then transporting
the gas through pipelines to
processing plants or major pipelines.
Gas Processing........................ For MCN, the removal of carbon
dioxide and petroleum liquids from
natural gas so it meets market
quality standards.
Gas Storage........................... The process of injecting, storing and
withdrawing natural gas from a
depleted underground natural gas
field or salt cavern.
GCR................................... Gas Cost Recovery; a process, in
effect through 1998, by which
MichCon, through annual gas cost
proceedings before the Michigan
Public Service Commission, was
allowed to recover its reasonable and
prudent cost of gas sold.
Intermediate Transportation........... A gas delivery service provided to
producers, brokers and other gas
companies that own the natural gas,
but are not the ultimate consumers.
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GLOSSARY
(concluded)
Methanol.............................. A form of alcohol manufactured from
various feedstocks, including natural
gas, and used as a solvent,
antifreeze and high octane fuel.
MCN................................... MCN Energy Group Inc. and its
subsidiaries.
MCNIC................................. MCN Investment Corporation, a wholly
owned subsidiary of MCN and the
holding company of MCN's Diversified
Energy Group subsidiaries.
MichCon............................... Michigan Consolidated Gas Company; an
indirect wholly owned natural gas
distribution and intrastate
transmission subsidiary of MCN.
MichCon Pipeline...................... MichCon Pipeline Co., a wholly owned
subsidiary of MichCon that engages in
pipeline projects through its
subsidiaries.
MPSC.................................. Michigan Public Service Commission;
the regulator of intrastate aspects
of the natural gas industry within
the State of Michigan.
Normal Weather........................ The average annual degree days in
MCN's Gas Distribution service area
during a recent 30-year period.
Spot Market........................... Buying and selling natural gas on a
short-term basis, typically month to
month.
Units of Measurement
Bcf................................... Billion cubic feet of gas.
MBbl.................................. Thousand barrels, which is a unit of
measurement of oil and other
petroleum liquids.
Mcf................................... Thousand cubic feet of gas.
MMcf.................................. Million cubic feet of gas.
MW.................................... Megawatts, or million watts of
electricity.
Tcf................................... Trillion cubic feet of gas.
/d.................................... Added to various units of measurement
to denote units per day.
/e.................................... Added to various units of measurement
to facilitate comparison of the Btu
content between natural gas, crude
oil and condensate. It assumes a
ratio of 6 Mcf of natural gas per
barrel of oil or condensate.
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TABLE OF CONTENTS
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PAGE
CONTENTS NUMBER
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Executive Officers of the Registrant........................ 20
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions.............. 22
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 22
Signatures.............................................................. 28
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FORWARD-LOOKING STATEMENTS
This Form 10-K (including certain other documents incorporated by reference
into this Form 10-K) includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements. Factors that may impact forward-looking
statements include, but are not limited to, the following: (i) the effects of
weather and other natural phenomena; (ii) increased competition from other
energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, natural gas liquids, methanol, electricity and crude oil; (vii) the
nature, availability and projected profitability of potential projects and other
investments available to MCN; (viii) conditions of capital markets and equity
markets; (ix) changes in the economic and political climate and currencies of
foreign countries where MCN has invested or may invest in the future; (x) the
timing and results of major transactions, such as the sale of E&P properties;
(xi) the timing, nature and impact of Year 2000 activities; and (xii) the
effects of changes in governmental policies and regulatory actions, including
income taxes, environmental compliance and authorized rates.
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PART I
ITEM 1. BUSINESS
MCN, or the Company, is a diversified energy holding company with markets
and investments throughout North America and in India and Nepal. The operating
revenues, operating income, and identifiable assets of MCN's business segments
are included in the financial statements, incorporated by reference in Item 8,
"Financial Statements and Supplementary Data," on page 21. On December 31, 1998,
MCN and its subsidiaries had 2,986 employees.
MCN operates through two major business groups, Diversified Energy and Gas
Distribution.
- - Diversified Energy, operating through MCNIC, is involved in the following
segments: Pipelines & Processing with gathering, processing and transmission
facilities near areas of rapid reserve development and growing consumer
markets; Electric Power with investments in electric generation facilities in
operation and under construction with a combined 2,986 MW of gross capacity
and investments in electric distribution facilities; Energy Marketing with
total gas sales and exchange gas delivery markets of 465.7 Bcf for 1998 with
rights to 67 Bcf of storage capacity, of which 42 Bcf is currently under
development. Diversified Energy also has investments in Exploration &
Production (E&P) properties with 1.2 Tcf/e of proved gas and oil reserves at
December 31, 1998. MCN expects to sell its E&P properties in 1999, and
accordingly, has classified them as discontinued operations. See discussion on
page 16.
- - Gas Distribution consists principally of MichCon, a natural gas distribution
and transmission company serving 1.2 million customers in more than 500
communities throughout Michigan. MichCon is subject to the accounting
requirements and rate regulation of the MPSC with respect to the distribution
and intrastate transportation of natural gas. Slightly less than half of
MichCon's labor force is covered by five collective bargaining agreements. In
June 1998, MichCon successfully negotiated and signed three 3-year collective
bargaining agreements. The remaining two agreements will expire December 2000.
RESULTS OF OPERATIONS
MCN experienced a net loss of $279.0 million in 1998. As subsequently
discussed, 1998 results reflect losses from its discontinued E&P segment that
totaled $272.8 million as well as several unusual charges which totaled $114.6
million. MCN had a loss from continuing operations of $6.2 million that includes
the effect of the unusual charges. Excluding these charges, MCN had 1998
earnings of $108.4 million, a decrease of $3.8 million from 1997. The earnings
comparisons reflect the effects of low energy prices and abnormally warm
weather, partially offset by reduced operating costs in the Gas Distribution
segment. The charges for each business segment will be discussed further within
the related business segment information to follow.
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DIVERSIFIED ENERGY
The Diversified Energy group reported a loss of $77.9 million in 1998 due
to certain property write-downs and restructuring charges, which reduced 1998
earnings by $97.9 million. Excluding these unusual items, Diversified Energy's
earnings for 1998 declined by $11.1 million from 1997. These results reflect
reduced contributions from the Pipelines & Processing and the Energy Marketing
segments due to low energy prices. Additionally, the 1998 decrease is due to
higher financing costs as a result of additional capital needed to fund
investments. Partially offsetting the decreases for 1998 was increased operating
and joint venture income posted by the Electric Power segment. Earnings from
continuing operations for 1997 increased by $18.5 million from 1996, reflecting
increased operating and joint venture income from all of MCN's Diversified
Energy business segments. Higher financing costs in 1997 partially offset this
growth.
Diversified Energy -- Operating Statistics
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1998 1997 1996
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Pipelines & Processing*
Methanol Produced (thousand gallons)...................... 60,446 60,810 10,545
Transportation (MMcf)..................................... 175,466 115,975 86,391
Gas Processed (MMcf):
CO(2) Treatment........................................ 48,868 42,761 44,223
NGL Removal............................................ 45,082 21,764 7,446
Electric Power*
Electricity sales (thousands of MW hours)................. 3,805 1,843 709
======= ======= =======
Energy Marketing* (MMcf)
Gas Sales................................................. 454,681 343,719 218,952
Exchange Gas Deliveries................................... 11,061 15,109 22,586
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465,742 358,828 241,538
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* Includes MCN's share of joint ventures
PIPELINES & PROCESSING
Results for this business segment in 1998 were negatively affected by a
$133.8 million pre-tax ($87.0 million net of taxes) write-off of the coal fines
briquetting project and a $3.9 million pre-tax ($2.5 million net of taxes)
impairment related to a small Michigan pipeline. Excluding these charges,
operating and joint venture income was $21.4 million compared with $29.1 million
in 1997. The decrease in income reflects a $13 million reduction in revenues
resulting from an approximate 40% drop in methanol prices compared with 1997, as
well as $9.1 million of operating losses incurred by the coal fines project.
Including Pipelines & Processing's share of joint venture operations, gas
transportation volumes increased 51% to 175.5 Bcf in 1998 from 116.0 Bcf in
1997. Gas processed to remove carbon dioxide (CO(2)) increased 6.1 Bcf or 14% in
1998 and decreased slightly in 1997. Gas processed to remove natural gas liquids
(NGL) more than doubled, increasing 23.3 Bcf and 14.4 Bcf in 1998 and 1997,
respectively, due to the acquisition of processing facilities since 1996.
In June 1998, MCN placed into operation six plants designed to recover
particles of coal that are a waste by-product of coal mining and then process
those particles to create coal briquettes for sale. The economic viability of
the venture is dependent on the briquettes qualifying for synthetic fuel tax
credits and MCN's ability to utilize or sell such credits. Although the plants
were placed in service by June 30, 1998, the date specified to qualify for the
tax credits, operating delays at the plants in the third quarter have
significantly increased the possibility that the Internal Revenue Service will
challenge the project's eligibility for tax credits. In addition, there is
uncertainty as to whether MCN can utilize or sell the credits. Without the
credits, the project is expected to generate negative cash flows. These factors
led to MCN's decision to record an
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impairment loss of $133.8 million pre-tax ($87.0 million net of taxes), equal to
the carrying value of the plants and reflecting the likely inability to recover
such costs. The coal fines plants have been idled and are not expected to have
any significant impact on the company going forward. MCN is currently exploring
the sale of its interest in the coal fines project. Management does not expect
proceeds from the sale to be in excess of selling expenses and remediation
obligations.
MCN also recorded an impairment loss of $3.9 million pre-tax ($2.5 million
net of taxes) relating to an out-of-service pipeline in Michigan that was
acquired for future development, along with related easements and rights-of-way.
MCN reviewed the business alternatives for these assets, and has determined that
their development is unlikely. Accordingly, MCN has recorded an impairment loss
equal to the carrying value of these assets.
Pipelines & Processing intends to focus on investment opportunities in
North American producing regions that supply natural gas to meet growing demand.
This is a dynamic business, since gathering, transmission and processing
facilities continuously need to be built and expanded as new gas fields are
developed to replace and augment depleting reserves. Furthermore, much of the
growth in demand is expected within the Mid-Atlantic and New England regions.
These regions lack pipeline capacity and low-cost storage necessary to deliver
gas volumes to compete effectively with other fuels, primarily fuel oil, that
dominate these markets. The Portland Natural Gas Transmission System (PNGTS),
Millennium Pipeline (Millennium) and Vector Pipeline (Vector) interstate
pipeline projects are intended to fill a large portion of that need, and are
complemented by MCN's rights to significant storage capacity.
Pipelines & Processing anticipates investing $1.1 billion to $1.3 billion
during the next five years, growing this business segment to more than $1.5
billion of net capital investment by 2003. Approximately $150 million of capital
investments are planned for 1999, which compares with $320 million invested in
1998. Pipelines & Processing plans to grow its gathering and processing
portfolio primarily through acquisitions and expansions of existing supply-area
ventures, and to build a transmission portfolio mainly through the construction
of new pipelines into growing markets.
During 1998, the Dauphin Island Gathering Partners (DIGP) venture proceeded
with the second phase of its expansion, with completion expected in the 1999
first quarter. The project will raise this natural gas system's throughput
capacity to 1.1 Bcf/d, up from pre-expansion capacity of 680 MMcf/d. DIGP also
signed definitive agreements with producers in the Gulf of Mexico to commit
significant new deep-water natural gas supplies to the system. MCN owns 35% of
DIGP.
Pipelines & Processing's other offshore gathering system, the one-third
owned 40-mile Blue Dolphin Pipeline, had an average throughput of 75 MMcfe/d
during 1998, compared with 92 MMcfe/d in 1997. Acquisition opportunities in the
area indicate potential to increase this system's throughput during 1999 and
beyond.
Elsewhere in the Midcontinent/Gulf Coast region, Pipelines & Processing has
two natural gas gathering ventures with American Central Gas Companies, Inc.
Pipelines & Processing holds a 40% interest in each. In July 1997 the Foss Lake
Gathering System venture was created to own and operate a 150-mile low-pressure
system in the Anadarko Basin of western Oklahoma. This system currently gathers
approximately 47 MMcf/d and has a design capacity of 70 MMcf/d. In December 1997
the second venture was formed to own and operate the East Texas Gathering
system. This system primarily consists of 115 miles of gas gathering lines with
throughput capacity of about 200 MMcf/d. This system currently is gathering 102
MMcf/d with additional commitments of 70 MMcf/d to be added during 1999. It is
located in an area of significant drilling activity, providing opportunity for
rapid expansion.
The Cardinal States Pipeline, which gathers and transports coalbed methane
in Appalachia, constructed a second 30-mile pipeline in 1998, doubling
throughput capacity to 220 MMcf/d to handle increasing production in the region.
MCN owns 50% of this system.
Pipelines & Processing is a 50% partner in Copano Field Services L.P. In
mid-1998, Copano built a 15-mile lateral on its upper Gulf Coast system to
connect new gas production. Throughput capacity is
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290 MMcf/d, while gas processing capacity is 25 MMcf/d. The system now has 695
miles of pipe. Efforts are underway to acquire or build new pipeline sections to
link the various non-contiguous Copano systems.
Pipelines & Processing has a 33% interest in the Jonah Gas Gathering System
in Wyoming. This system has a capacity of 175 MMcf/d and had throughput of 18.2
Bcf during 1998, up from 12.6 Bcf in 1997.
In September 1997, Pipelines & Processing created a partnership with Petro
Source Corporation to develop a CO(2) pipeline, processing plant and marketing
projects in support of enhanced oil recovery projects. As its first initiative,
the partnership in 1998 constructed an 82-mile, 100 MMcf/d CO(2) pipeline that
connects four gas treating plants to a distribution system servicing enhanced
oil recovery projects in the Permian Basin of west Texas. Pipelines & Processing
has a 33% interest in this Val Verde CO(2) pipeline, which was placed in service
during the fourth quarter of 1998. This pipeline currently is transporting 32
MMcf/d.
At the DIGP system's onshore terminus in Alabama, the Mobile Bay Processing
Partnership (MBPP) joint venture has constructed a 600 MMcf/d gas processing
plant. Pipelines & Processing owns 43% of this venture, which is expected to be
in service in the first quarter of 1999. Related to but separate from this
processing plant, Pipelines & Processing holds a 7% interest in a newly
constructed, 210-mile, 80,000 barrel per day liquids pipeline that will deliver
natural gas liquids extracted by MBPP joint venture and other plants to southern
Louisiana markets.
In 1996, Pipelines & Processing acquired a 25% interest in Lyondell
Methanol Company, L.P., a limited partnership that owns a 248 million
gallon-per-year methanol production plant in Texas. Pipelines & Processing
supplies a portion of the natural gas for the methanol plant. Pipelines &
Processing's share of methanol production in 1998 and 1997 was 60.4 and 60.8
million gallons, respectively, compared with initial production of 10.5 million
gallons in 1996. Depressed methanol prices in 1998 resulted in a $13 million
decrease in revenues.
In Michigan, gas processing capacity was expanded to 195 MMcf/d, primarily
due to the acquisition of a new plant. Pipelines & Processing now has an average
interest of 89% in seven such plants that extract CO(2) from Antrim gas
production.
The 292-mile PNGTS project started construction in June 1998 and is
expected to be in service during the first quarter of 1999. MCN owns a 21.4%
interest in this $423 million venture, which has the capability to transport up
to 360 MMcf/d from the Canadian border to the northeastern United States.
Vector has become a front-runner among competing efforts to provide a new
strategic transportation link for 1 Bcf/d of new supply coming into the Chicago
area to growing markets in eastern Canada and along the Atlantic Seaboard.
Although this $450 million project's proposed completion has been delayed until
Fall 2000, a section of the system could be constructed this summer and placed
into service in late 1999. Pipelines & Processing holds a 25% interest in this
project. MichCon will lease a portion of its transmission system to the project,
thereby providing additional earnings to MCN while reducing Vector's cost and
environmental impact.
Pipelines & Processing has a 10.5% interest in the Millennium Pipeline,
which is designed to essentially link up with Vector through the Dawn, Ontario
hub and run to New York City. This 442-mile, $685 million pipeline will carry
700 MMcf/d to serve markets on the Atlantic Seaboard.
Pipelines & Processing formed the Crown Asphalt Distribution LLC joint
venture with Crown Energy Corp. in 1998. Pipelines & Processing has a 50%
interest in these asphalt distribution operations, which further enhances the
value of the MCN/Crown Energy Asphalt Ridge Joint Venture. The Asphalt Ridge
project, in which Pipelines & Processing holds a 75% interest, recently
completed construction of a 100,000 ton per year high-grade asphalt
manufacturing plant, at a total cost of $18 million, that is expected to begin
production in time for the 1999 paving season. Additional manufacturing plants
may be built if market conditions warrant.
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ELECTRIC POWER
The Electric Power unit operates through several wholly owned subsidiaries
of MCNIC, to pursue domestic and international power generation-related
opportunities. Power generation projects offer the potential for multiple
sources of income, such as long-term gas sales and transportation services, as
well as return on the investment in the facility itself, particularly in the
U.S.
Excluding a $2.5 million pre-tax ($1.6 million net of taxes) restructuring
charge related to exiting several early-stage international projects, this
segment's operating and joint venture income totaled $26.0 million in 1998,
compared with $18.1 million in 1997. The 1997 earnings included a favorable $2.8
million property tax adjustment related to the Midland Cogeneration Venture
Limited Partnership (MCV) in Michigan. Increased contributions from Torrent
Power in India and our purchase in June of an additional 5% interest in MCV
accounted for the improved results. Also, partial operation of Torrent Power's
new 655 MW plant in 1998 helped the Electric Power segment to more than double
its net electricity production to 3.8 million MWh from 1.8 million MWh in 1997.
Net generating capacity climbed to 732 MW in 1998 from 546 MW in 1997.
Electric Power is pursuing projects intended to meet growing demand for
electricity. The majority of new power generation facilities throughout North
America are expected to be gas-fired because of competitive and environmental
considerations, as well as the speed with which such facilities can be brought
on-line. Demand for new gas-fired generation facilities in the Midwest and along
the East Coast is being significantly increased by the shut-down of nuclear
plants in the United States and Canada that supply those areas. In addition,
U.S. electricity consumption has been growing at a 2.2% annual rate and is
estimated by government and industry sources to grow more than 30% by 2015. MCN
anticipates investing $1.2 billion to $1.5 billion in Electric Power during the
next five years. Approximately $400 million of capital investments by MCN are
planned in Electric Power for 1999, while $88 million was spent in 1998. The
Electric Power segment is not pursuing new international power projects in
developing countries, and it will move forward on a pending 330 MW project in
India only if expected returns remain strong.
In October 1998, Electric Power acquired an approximate 48% interest in an
operating 42 MW gas-fired cogeneration plant in Carson, California. The
eight-year-old plant has a long-term contract to sell electricity to the local
utility and steam to a nearby industrial customer.
During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a venture created to build, own and operate a 140 MW power plant
in Albuquerque, New Mexico. This gas-fired peaking plant is expected to be in
service by the summer of 2000 and is backed by a long-term power purchase
agreement with Public Service Company of New Mexico. The project will be
constructed at the site of a decommissioned power plant, keeping costs low and
accelerating its development.
Electric Power acquired an initial 18% general partnership interest in MCV
in 1997 and an additional 5% general partnership interest in June 1998. MCV is a
partnership that leases and operates a cogeneration facility in Midland,
Michigan. The MCV facility, the nation's largest cogeneration facility, can
produce up to 1,370 MW of electricity and 1.35 million pounds per hour of
process steam for industrial use. Electric Power's investment totals $73.0
million. MCV sells electricity to Consumers Energy Co. and The Dow Chemical Co.
under long-term contracts. Dow Chemical and Dow Corning Corp. also purchase
process steam from the facility under long-term contracts.
In 1997, Electric Power acquired an approximate 65% interest in Bhote Koshi
Power Company, a partnership that is constructing a 36 MW hydroelectric power
plant in Nepal. Construction of the plant began in early 1997 and is scheduled
to be completed in early 2000. At December 31, 1998, MCN had paid $7.2 million
of its total equity commitment of $20.1 million with the remainder to be paid in
1999 and 2000.
In 1997, Electric Power acquired a 40% interest in the common equity of
Torrent Power Limited (TPL), a joint venture that holds minority interests in
electric distribution companies and power generation facilities located in the
state of Gujarat, India. In 1997 and 1998, Electric Power acquired preference
shares in TPL, bringing the total cost of Electric Power's TPL holdings to
$121.2 million. The joint venture has a 36% interest in Ahmedabad Electricity
Company Limited (AEC), a 43% interest in Surat Electricity Company Limited
(SECL) and a 42% interest in Gujarat Torrent Energy Corporation (GTEC). AEC
serves the city of
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Ahmedabad and has 550 MW of electric generating capacity. SECL provides
electricity to the city of Surat. GTEC owns and operates a 655 MW power project
in Gujarat, India, that reached full commissioning during the fourth quarter of
1998.
In February 1999, MCN reached an agreement to sell its interest in TPL for
approximately $130 million. The sale is subject to certain regulatory approvals
and is expected to be completed by the third quarter of 1999.
The Mobile Bay cogeneration project is expected to be placed into service
along with the Mobile Bay Processing venture during the first quarter of 1999.
Electric Power owns 43% of this 40 MW, natural gas-fired plant, which will
provide electricity and thermal energy to the processing facility.
In addition to these power generation facilities, Electric Power continues
to pursue a number of other opportunities. Among them are: a 220 MW peaking
plant in Columbus, Ohio; a 150 MW to 300 MW baseload facility in West Virginia;
a 100 MW peaking plant in New Mexico; and a 150 MW to 200 MW baseload facility
in New England. The size, load characteristics and location of each of these
proposed projects could change based upon actual market needs. Furthermore, new
projects continue to come to our attention, some of which will ultimately
materialize.
Electric Power has a 50% interest in the Michigan Power Project, a 123 MW
cogeneration plant in Ludington, Michigan. The facility provides electricity to
Consumers Energy Corporation and steam to Dow Chemical under long-term
contracts. Electric Power also owns 50% of Ada Cogeneration, which owns and
operates a natural gas-fueled cogeneration facility in western Michigan. The Ada
facility generates up to 30 MW of electricity, which is sold to Consumers
Energy, and produces up to 50,000 pounds of steam per hour, which is sold to a
nearby commercial operation. Electric Power's business also includes a number of
small cogeneration units located at the operating facilities of large commercial
and industrial customers. Electric Power has long-term agreements for the sale
and transportation of natural gas to these units.
ENERGY MARKETING
Energy Marketing's operating and joint venture income decreased $3.7
million to $8.0 million in 1998. Earnings for 1997 included $2.2 million
contributed from Energy Marketing's 25% interest in a gas storage project that
was sold in December 1997. Additionally, 1998 earnings reflect higher storage
costs and a decline in natural gas sales margins as a result of the abnormally
warm 1997-1998 winter. The impact of higher storage costs and lower margins was
partially offset by a significant increase in gas sales volumes.
The Energy Marketing segment plans to grow primarily as a provider of
higher-valued energy supply and management services to markets in the Midwest
and eastern regions of the United States and Canada. These services generally
entail the bundling of energy supplies, transportation and often storage
capacity to provide energy to customers when and where needed in an efficient,
one-stop-shopping manner. Capital investments are anticipated to be immaterial
in 1999 as this segment is not capital intensive.
New independent power plants represent a significant growth opportunity for
Energy Marketing. More than 50,000 MW of new gas-fired generating capacity has
been proposed nationwide. While not all of the new proposals will be successful,
each 1,000 MW of baseload capacity represents about 60 Bcf of potential annual
gas consumption, so power generation will be a key area of growth. This is
particularly the case in the Northeast, where significant new generating
capacity is needed.
MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company (CTC). CTC, a wholly owned subsidiary of MCNIC, is engaged in
the purchase and sale of natural gas to more than 700 commercial and industrial
users, as well as gas and electric utilities and other large-volume customers
throughout the Midwest, Gulf Coast and Northeast regions of the United States
and Canada. Through its offices located in Detroit, Michigan and Hartford,
Connecticut, CTC is able to offer buyers a bundled service by making
arrangements for the acquisition of the required gas volumes and delivery to
customers' facilities, and for all the necessary services in between. This
bundled service is more in demand during the winter months, when interstate
pipeline capacity in certain areas of the Northeast and Midwest is either
constrained
6
<PAGE> 12
or uneconomical. CTC is able to better meet this demand through access to
storage fields and other physical assets owned by affiliates.
CTC and its joint venture/marketing alliances compete against numerous
marketing companies. A diverse portfolio of short-, medium- and long-term sales
and supply contracts combined with access to reliable gas suppliers, storage
facilities and multiple pipeline connections enhances its competitive position.
Approximately one-third of CTC's sales are to its joint venture/marketing
alliances and other MCNIC affiliated companies, with another one-third to
Midwest markets, and the final one-third to Northeast and Canadian markets.
Approximately 25% of CTC's natural gas supply originates in the Midcontinent
with another 25% purchased within Michigan.
CTC is involved in four joint venture/marketing alliances that expand its
market region and add other energy sources (e.g. electricity) to its market
portfolio. CTC's joint venture/marketing alliances are: 1) DTE-CoEnergy, L.L.C.;
2) U.S. CoEnergy Services; 3) Torch-CoEnergy, L.L.C.; and 4) Michigan Gas
Exchange, L.L.C. DTE-CoEnergy L.L.C. is jointly owned with DTE Energy Co.,
parent of Detroit Edison, and markets a wide range of energy services to
industrial, commercial and institutional customers. The alliance's target market
area spans the Great Lakes and Mid-Atlantic states, as well as the Province of
Ontario. Offerings include electricity and natural gas supplies, plus associated
energy and risk management services required to create cost-effective, bundled
energy packages tailored to meet individual customers' needs in a non-regulated
environment. U.S. CoEnergy Services is a partnership with U.S. Oil Company, Inc.
formed for the sale of natural gas, fuel oil and propane to target markets
within the State of Wisconsin. Torch-CoEnergy is a marketing alliance with Torch
Energy Advisors of Houston. This alliance links Torch's supply-aggregation and
marketing strengths in the Gulf Coast region with CTC's strong presence in
high-consumption markets. Michigan Gas Exchange, L.L.C. was formed with LaVanway
Capital & Trade Corporation to serve niche gas markets in the State of Michigan.
Assisting CTC's marketing efforts is strategically selected pipeline
capacity that is used to deliver gas to its markets. CTC has firm transportation
service contracts on various pipeline systems totaling 400 MMcf/d, which is
supplemented by interruptible service as needed. CTC expects to enhance its
reserved pipeline capacity by purchasing firm transportation services on future
Pipelines & Processing projects. CTC expects to capture significant marketing
opportunities utilizing these new pipelines, to further enhance and complement
business opportunities for other MCN/MCNIC entities. For example, the Northeast
is the primary target market of three interstate pipeline projects in which
Pipelines & Processing is participating. CTC holds significant capacity in PNGTS
and the proposed Vector and Millennium pipelines that will be used to market
bundled gas services to power plants and other large customers.
Storage provides a critical competitive ingredient to our bundled package
of gas marketing services, as it allows Energy Marketing to provide very
reliable service while keeping operating costs low. In southeast Michigan, the
development of Washington 10 Storage, which is strategically located in the
gateway to eastern Canada and the northeastern U.S., will significantly increase
the amount of gas storage capacity available to CTC to serve its markets. The
project is converting a depleted gas reservoir to a 42 Bcf storage facility.
Initial gas injection is scheduled for the spring of 1999, with the facility
expected to be fully operational in time for the 1999-2000 winter heating
season.
Energy Marketing has a 50% interest in the 10 Bcf Washington 28 storage
field, located northeast of Detroit in Macomb County. In December 1997, Energy
Marketing sold its 25% share of the 46 Bcf Blue Lake gas storage project located
in northern Michigan. MichCon expects to maintain its 25% interest in the Blue
Lake venture.
In total, with the addition of Washington 10, CTC will have rights to 67
Bcf of market-area storage capacity in 1999. CTC will use this storage in
conjunction with its 400 MMcf/d of firm and interruptible transportation
capacity on various pipelines to continue increasing its marketing presence in
the U.S. Midwest and Northeast, as well as in eastern Canada.
7
<PAGE> 13
RISK MANAGEMENT STRATEGY
MCN primarily manages commodity price risk by utilizing futures, options
and swap contracts to more fully balance its portfolio of gas and oil supply and
sales agreements. Energy Marketing coordinates all of MCN's hedging activities
to ensure compliance with risk management policies that are periodically
reviewed by MCN's Board of Directors. Certain hedging gains or losses related to
gas and oil production are recorded by MCN's discontinued E&P operations. Gains
and losses on gas and oil production-related hedging transactions that are not
recorded by MCN's E&P group are recorded by Energy Marketing. In late 1998, MCN
began entering into offsetting positions for existing hedges of gas and oil
production from properties that are expected to be sold in 1999. MCN's risk
management strategy is being revised to reflect the change in its business that
will result from selling its E&P properties.
8
<PAGE> 14
GAS DISTRIBUTION
GAS SALES AND TRANSPORTATION
Gas Distribution serves customers in the Detroit, Grand Rapids, Ann Arbor,
Traverse City, Muskegon and Adrian metropolitan areas and in various other
communities throughout the State of Michigan. The following services are
provided by Gas Distribution:
- Gas Sales -- Includes the sale and delivery of natural gas to residential
and small-volume commercial customers.
- End User Transportation -- Through this service, primarily large-volume
commercial and industrial customers who purchase natural gas directly
from producers or brokerage companies utilize the company's network to
transport the gas to their facilities.
- Intermediate Transportation -- Provides transportation service through
the company's gathering and high pressure transmission system to
producers, brokers and other local distribution companies that own the
natural gas, but are not the ultimate consumer.
RESULTS OF OPERATIONS
Gas Distribution's earnings for 1998 totaled $71.7 million, a decrease of
$9.4 million from 1997. Results for 1998 were affected by unusual charges
consisting of a property write-down and an investment loss as subsequently
discussed. Excluding the unusual charges, the Gas Distribution group reported
1998 earnings of $88.4 million, an improvement of $7.3 million over 1997.
Earnings comparisons were impacted by variations in weather and cost-saving
initiatives resulting in significantly lower operating costs. These cost-saving
initiatives allowed the Gas Distribution group to continue its record of solid
financial performance, producing returns on equity of 11.0% in 1998 and 13.2% in
1997.
Gas Distribution's earnings for 1998 were negatively affected by a property
write-down and an investment loss. Gas Distribution recorded a $24.8 million
pre-tax ($11.2 million, net of taxes and minority interest), write-down of
certain gas gathering properties. A new gas reserve analysis was performed to
determine the impact of the diversion of certain untreated gas away from the
gathering system. This analysis revealed that projected cash flows from the
gathering system were not sufficient to cover the system's carrying value.
Therefore, an impairment loss was recorded representing the amount by which the
carrying value of the system exceeded its estimated fair value. Also recorded
was an $8.5 million pre-tax ($5.5 million net of taxes) loss from the write-down
of an investment in a Missouri gas distribution company. As a result of MCN's
9
<PAGE> 15
refocused strategic direction, Gas Distribution expects to sell this investment
in 1999. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES (in millions of dollars)
Gas Sales................................................... $ 838.9 $1,080.1 $1,102.9
End User Transportation..................................... 82.3 84.7 82.5
Intermediate Transportation................................. 63.2 55.2 48.6
-------- -------- --------
Total Sales and Transportation............................ 984.4 1,220.0 1,234.0
Other....................................................... 67.4 51.3 42.3
-------- -------- --------
Total Operating Revenues.................................. $1,051.8 $1,271.3 $1,276.3
======== ======== ========
MARKETS (Bcf)
Gas Sales................................................... 172.2 209.1 221.0
End User Transportation..................................... 140.3 145.1 146.9
Intermediate Transportation................................. 537.5 586.5 527.5
-------- -------- --------
Total Sales and Transportation............................ 850.0 940.7 895.4
======== ======== ========
</TABLE>
NOTE: Intermediate transportation volumes include intercompany transactions.
Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which include appliance maintenance and home safety.
Additionally, Gas Distribution began participating in Michigan's $1.2 billion
per year heating, ventilation and air conditioning market with the October 1998
acquisition of three companies specializing in the sale, installation and
servicing of residential and commercial heating and cooling systems. The
acquired companies have total revenues of approximately $20 million per year.
EFFECT OF WEATHER: Gas Distribution's gas sales and end user transportation
volumes, revenues and net income are impacted by weather. Given the seasonal
nature of the business, revenues and net income tend to be higher in the first
and fourth quarters of the calendar year.
Effect of Weather on Gas Markets and Earnings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------ ---- -----
<S> <C> <C> <C>
Percentage Colder (Warmer) Than Normal...................... (19.3)% 0.8% 5.4%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf)...................................... (40.3) 0.6 10.9
Net Income (in millions).................................. $(35.3) $0.5 $ 9.9
</TABLE>
GAS SALES: Revenues decreased $241.2 million in 1998 due primarily to
weather which was 20.1% warmer in 1998, and a reduction in gas sales rates
resulting from lower gas costs. This market represents approximately 20% of
total deliveries and produced 64% of Gas Distribution's gross profit margin. The
average margin per Mcf from gas sales was improved significantly to $2.16 in
1998 from $2.07 in 1997.
Competition in the gas sales market comes primarily from alternative fuels
such as electricity, propane and, to a lesser degree, oil and wood, and other
natural gas providers in a few areas. Natural gas continues to be the preferred
fuel for Michigan residences and businesses. Nearly every residential and
commercial developer in MichCon's service territories selects natural gas in new
construction because of the convenience, cleanliness and price advantage of
natural gas compared to propane, fuel oil and other alternative fuels. Service
and price are the primary factors affecting this market.
Gas Distribution continues to take steps to become the preferred provider
of natural gas and high-value energy services within Michigan and to achieve
competitive financial results. To accomplish this, MichCon will increase
penetration of existing markets by focusing on meeting the needs of customers
and the
10
<PAGE> 16
marketplace, will continue efforts to reduce cost of gas and operating costs,
and will take advantage of profitable opportunities to expand to new geographic
areas.
The challenges and opportunities resulting from increased competition in
the natural gas industry have been a catalyst for MPSC action in the development
of major reforms in utility regulation aimed at giving all customers added
choices and greater price certainty. The overall package of regulatory changes
associated with the gas industry restructuring is expected to generate
additional revenue and cost savings opportunities. Gas Distribution is
positioning itself to respond to changes in regulation and increased competition
by reducing its cost of operations while maintaining a safe and reliable system
for customers. See "Regulation and Rates" on page 14 for a discussion regarding
Regulatory Reform.
Gas Distribution's Market Expansion Program is intended to spur demand for
natural gas in areas currently not served. The program primarily targets
residential and small-volume commercial markets. By financing the cost of main
extensions, this program makes it easier for users of higher-cost fuels, such as
propane and fuel oil, to switch to natural gas for space heat and other
applications. This program accounted for over 12,000 of the nearly 95,000 new
customers added during the past four years. In 1998, three new areas of Michigan
were served by MichCon, bringing the total number of new areas added since the
program's inception in 1984 to 140.
Cost of gas sold per Mcf for 1998 was $2.71, a decrease of $.40 (13%) from
1997. Cost of gas sold per Mcf for 1997 increased from 1996 by $.19 (7%).
Gas Distribution owns a 47.5% interest in Southern Missouri Gas Company,
L.P. which was formed in November 1996. The initial phase of system construction
was completed in 1997 at a cost of approximately $40 million. As of December 31,
1998 the system was comprised of a 441-mile pipeline system and served
approximately 7,000 customers. As a result of MCN's refocused strategic
direction, Gas Distribution has decided to sell this investment. Gas
Distribution recorded a $5.5 million, net of taxes, loss from the write-down of
this investment to reflect its estimated fair value. The write-down represents
the amount by which the carrying value exceeded the estimated fair value of the
investment.
END USER TRANSPORTATION: Deliveries decreased slightly to 140.3 Bcf in 1998
due to warmer weather. In 1998, this market accounted for approximately 17% of
total gas deliveries and produced approximately 14% of Gas Distribution's gross
profit margin.
At December 31, 1998, MichCon had end user transportation agreements
representing annual volumes of 154 Bcf. Approximately 53% of these volumes are
under contracts that extend to 2000 or beyond and include the majority of the
large, and most price-sensitive, customers. Contracts for the remaining volumes
are typically one-year contracts that expire at various times during 1999 and
relate to a large number of low-volume users with relatively low price
sensitivity.
Through technical and financial assistance, industrial and commercial
customers have been encouraged to increase their use of natural gas. The natural
gas-fueled power generation market accounted for approximately 31 Bcf of gas
deliveries in both 1998 and 1997. Gas engine driven technologies, along with
industrial process and heating, ventilation and air conditioning (HVAC)
conversion applications in certain businesses, also provide significant
opportunities for conversion to natural gas-powered equipment. The efficiencies
and price competitiveness of natural gas can significantly reduce operating
costs for customers, generally offsetting in a relatively short period of time
the typically higher initial cost of gas-burning equipment.
Gas Distribution continues to be successful in converting customers'
facilities to natural gas from alternative fuels and in retaining those
customers after conversion. Also, it has not experienced any significant fuel
switching by its customers in recent years. In 1998, approximately 23 Bcf of
MichCon's transportation deliveries were to customers who substituted natural
gas for coal.
The primary focus of competition in this market is cost. Some large
commercial and industrial customers have the capacity to switch to alternative
fuel sources such as coal, electricity, oil and steam. In addition, some of
these customers could bypass Gas Distribution's distribution system and obtain
gas directly from an
11
<PAGE> 17
interstate pipeline company. However, cost differentials must be sufficient to
offset the costs, risks and loss of service flexibility associated with fuel
switching or bypass. During 1998, none of Gas Distribution's industrial
customers bypassed its distribution system. Gas Distribution competes against
alternative fuel sources by providing competitive pricing and reliable supply
through the use of the Company's extensive storage capacity and multiple supply
sources. Almost all significant customers who could bypass MichCon are under
long-term transportation contracts.
The MPSC has approved a direct access program for the state's two largest
electric utilities, which began in mid-1998, and allows large electric users to
directly purchase lower priced electricity. The program is not expected to
materially impact the competitiveness of natural gas.
INTERMEDIATE TRANSPORTATION: This service accounts for approximately 63% of
total gas deliveries, however, due to the lower costs and therefore rates
applicable to this service, it represents only 11% of gross profit margin. The
decrease in intermediate transportation deliveries in 1998 reflects lower
off-system demand caused by the warmer weather and lower volumes transported for
fixed-fee customers. Although transported volumes for fixed-fee customers may
fluctuate, revenues from such customers are not affected.
In 1998, through efficient use of transmission and storage assets as well
as upstream supply, Gas Distribution sold significant short-term services
resulting in increased revenues from 1997. Gas Distribution's extensive
transmission pipeline system has enabled it to increase the volumes transported
for Michigan gas producers, marketers, distribution companies and other
pipelines. Gas Distribution operates in a pivotal geographic location with links
to major interstate pipelines that reach markets elsewhere in the Midwest, the
eastern United States and eastern Canada. Michigan Antrim gas production has
increased significantly over the past several years, resulting in a growing
demand by gas producers and brokers for intermediate transportation services.
In 1997, in order to meet the increased demand, Gas Distribution expanded
the transportation capacity of its northern Michigan gathering system. In
December 1997, MichCon Pipeline purchased Thunder Bay Pipeline for approximately
$13 million. During 1998, 175 Bcf was transported on this system, of which
Thunder Bay contributed 31.7 Bcf.
In January 1997, Gas Distribution placed into service a $91 million,
59-mile loop of its existing Milford-to-Belle River Pipeline. This new loop has
improved the overall reliability and efficiency of Gas Distribution's gas
storage and transmission system by mitigating the risk associated with the
disruption of the existing pipeline or other facilities used to supply gas to
Gas Distribution's customers. In addition, the pipeline provides significant
off-system transportation opportunities as discussed below.
Gas Distribution is in an excellent position to increase revenues through
providing transportation of new supplies of western Canadian gas, coming into
the Chicago area beginning in December 1998, to third-party pipelines serving
growing markets in eastern Canada and the northeast United States. In December
1997, MichCon entered into a long-term facility lease of its Milford-to-Belle
River Pipeline to the Vector Pipeline to effectuate transportation of Chicago
supplies to Dawn, Ontario, a significant Canadian natural gas market hub.
Currently, Vector is contemplating completing its proposed project in two
phases. Phase One would be the construction of approximately 19 miles of 42"
pipeline by November 1, 1999 from Gas Distribution's Belle River Mills
Compressor station to Dawn, Ontario. The remainder of Vector is scheduled to be
completed in October 2000. Gas Distribution is reviewing the possibility of
providing transportation service to Vector for Phase One services to be
delivered at Vector's proposed Belle River receipt point. Additional
opportunities for transportation services are being pursued which will further
maximize the use of Gas Distribution's transmission infrastructure.
Gas Distribution is negotiating with Washington 10 Storage Corporation to
provide transportation services to and from the storage field in southeastern
Michigan which is expected to be in service by mid-1999. In addition, Gas
Distribution has identified firm, long-term capacity, available in late 1999,
between its southern interconnections with ANR Pipeline Company (ANR) at Willow
Run and Consumers Energy at Northville to various interconnections at the
U.S./Canadian border near the St. Clair River. Gas Distribution
12
<PAGE> 18
is soliciting offers for this capacity in the first quarter of 1999. Gas
Distribution also is investigating other firm and interruptible transportation
services for incremental revenue opportunities.
ENERGY ASSISTANCE PROGRAMS
Energy assistance programs funded by the federal government and the State
of Michigan, including the Home Heating Credit for low-income customers and the
Family Independence Agency's State Emergency Relief Program, remain critical to
MichCon's ability to control its uncollectible gas account expenses. MichCon has
historically obtained favorable regulatory treatment of its uncollectible gas
account costs, including those related to these energy assistance programs.
MichCon receives a significant amount of its heating assistance funding
through the Federal Low-Income Home Energy Assistance Program (LIHEAP) which
funds the State of Michigan's Home Heating Credit program. In 1998 Congress
provided $1.1 billion for LIHEAP funding for the 1998 fiscal year and
supplemented it with a $300 million emergency fund that could be tapped only
upon order of the President. Michigan received $54 million of the total $1.1
billion that was released in 1998. MichCon received $13.4 million through this
program in 1998. Home Heating Credits assisted 73,000 MichCon customers in 1998.
Congress voted to continue LIHEAP for federal fiscal years 1999 and 2000. For
federal fiscal year 1999, which began October 1, 1998, Congress maintained
LIHEAP funding at $1.1 billion and again authorized a $300 million emergency
fund. In addition, Congress appropriated $1.1 billion for federal Fiscal Year
2000 which is subject to revision during budget deliberations.
GAS SUPPLY
Gas Distribution obtains its natural gas supply from various sources in
different geographic areas (the Gulf Coast, the Midcontinent, Canada, and
Michigan) under agreements that vary in both pricing and terms. Looking forward
to MichCon's Regulatory Reform Plan, in 1998 MichCon issued and signed new base
supply contracts with its suppliers, ensuring price stability and supply
reliability (see "Regulation and Rates" on page 14 for a discussion regarding
MichCon's plan). Gas Distribution's geographic diversity of supply ensures that
MichCon will be able to meet the requirements of its existing and future
customers with reliable supplies of natural gas at a known cost, free from the
potentially severe swings of a volatile gas market. Whereas prior to 1999, under
GCR regulation, gas supply costs were a non-profit passthrough of prudently
incurred costs. Beginning January 1, 1999, MichCon has the ability to take full
advantage of its assets and expertise to generate profits from gas supply
operations. By fixing the gas cost component of MichCon's sales rates at
$2.95/Mcf for three years, customers benefit from greater price certainty while
MichCon can take advantage of opportunities to secure lower priced gas supplies.
MichCon has secured 100% of its 1999 warmer than normal weather requirements and
approximately 90% of its 2000 and 2001 similar requirements at prices that help
ensure profit contributions from gas supply operations.
Citizens serves approximately 15,000 customers and is served by two
interstate pipelines, Panhandle Eastern Pipe Line Company (Panhandle) and ANR.
MCNIC Michigan Holdings, Inc., an affiliate intrastate pipeline company,
connects ANR to Citizens' distribution system. During 1998, nearly all of
Citizens' purchases were from CTC, an affiliated company.
Gas Distribution -- Sources of Gas Supply (Bcf)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Michigan Producers.......................................... 41.9 66.0 86.3
Interstate Suppliers........................................ 29.0 13.8 14.5
Canadian Suppliers.......................................... 31.7 31.3 37.3
Spot Market................................................. 76.3 89.1 94.0
----- ----- -----
178.9 200.2 232.1
===== ===== =====
</TABLE>
Gas Distribution purchased 23% of its 1998 supply from Michigan producers,
59% from producers in the southern and midcontinent regions of the United States
and 18% from Canadian producers. These supplies are
13
<PAGE> 19
complemented by 124 Bcf of working storage capacity from storage fields owned
and operated by MichCon in Michigan, of which 36 Bcf is leased to others,
including 17 Bcf with an affiliate.
MichCon has long-term firm transportation agreements, expiring on various
dates through 2011, with ANR, Panhandle, Viking Gas Transmission Company
(Viking) and Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR
is obligated to transport for MichCon 375 MMcf/d of supply from April through
October 1999. Effective November 1, 1999, MichCon's ANR capacity reduces to 285
MMcf/d. The capacity reduction results in roughly $13 million in annual cost
savings. ANR capacity delivers 117.5 MMcf/d of supply sourced in the Gulf, 117.5
MMcf/d sourced in the Midcontinent and 50 MMcf/d is Canadian supply. Viking
transports 50 MMcf/d of Canadian supply to the ANR system for delivery to
MichCon and Panhandle transports 2 MMcf/d of Gulf Coast supply from the ANR
system for delivery to MichCon. Additional Canadian supplies of 30 MMcf/d are
delivered through firm transport agreements with Great Lakes.
MichCon has supply contracts, expiring on various dates through 2007, with
independent Michigan producers. Many of these contracts originally tied prices
to spot market indices coupled with transport rates. MichCon, as a result of a
recent MPSC Order and individually negotiated settlements, has successfully
amended a number of these contracts that were previously at above market prices
to a more competitive level.
At December 31, 1998, MichCon owned and operated four natural gas storage
fields in Michigan with a working storage capacity of approximately 124 Bcf.
These facilities play an important role in providing reliable and cost-effective
service. MichCon uses its storage capacity to supplement its supply during the
winter months, replacing the gas in April through October when demand and prices
are generally at the lowest levels. The use of storage capacity also allows
MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline
charges during the winter months. During 1998, MichCon's maximum one-day sendout
exceeded 2.1 Bcf, of which approximately 68% came from its underground storage
fields. MichCon's gas distribution system has a maximum daily sendout capability
of 2.8 Bcf, with the capacity to supply nearly 70% from underground storage.
REGULATION AND RATES
MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales and transportation rates, service and
accounting. Citizens' rates are set by the Adrian Gas Rate Commission, a
municipal commission. Other various phases of its operations are subject to the
jurisdiction of the MPSC. Both MichCon and Citizens are subject to the
requirements of other regulatory agencies with respect to safety, the
environment and health.
REGULATORY REFORM PLAN: In April 1998, the MPSC approved MichCon's
Regulatory Reform Plan. The plan includes a comprehensive experimental
three-year customer choice program open to all of MichCon's 1.2 million
residential and commercial customers, subject to annual caps on the level of
participation. The customer choice program begins April 1, 1999, when up to
75,000 customers will have the option of purchasing natural gas from suppliers
other than MichCon. Up to 75,000 additional customers can be added April 1 of
each of the next two years, eventually allowing up to 225,000 customers the
option to choose a gas supplier other than MichCon. MCN's gas marketing
affiliates also participate as alternative suppliers under the program. In each
of the three plan years, there is also a volume limitation on commercial and
industrial participants. The volume limitation for these participants is 10 Bcf
in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport
and deliver the gas to the customers' premises at prices that maintain its
existing sales margins.
The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas price component of MichCon's sales
rates at $2.95 per Mcf for the three-year period beginning on January 1, 1999.
Prior to January 1999, MichCon did not generate any earnings nor generally incur
any unrecovered costs on the gas supply portion of its operations. However,
under this plan, changes in cost of gas will directly impact earnings. As part
of its gas acquisition strategy, MichCon has entered into firm-price contracts
for a substantial portion of its expected gas supply requirements for the next
three years. These
14
<PAGE> 20
contracts, coupled with the use of MichCon's storage facilities, will
substantially mitigate risks from winter price and volume fluctuations.
Also beginning in 1999, the plan established an income sharing mechanism
that will allow customers to share in profits if actual utility return on equity
exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing
and affirmed its approval of the plan. Various parties have appealed the MPSC's
decision to the Michigan Court of Appeals. While management believes that the
order will be upheld based upon applicable Michigan law, there can be no
assurance as to the outcome.
GENERAL RATE PROCEEDINGS: MichCon received authorization to defer
manufactured gas plant (MGP) investigation and remediation costs in excess of
the $11.7 million previously reserved by MichCon. The remaining balance of this
initial reserve at December 31, 1998 is approximately $0.1 million. Any excess
costs are to be deferred and amortized over a 10-year period beginning in the
year subsequent to the year environmental investigation and remediation costs
are paid. The recovery of any remediation costs incurred will be reviewed in a
future rate case.
MichCon filed an application with the MPSC in October 1996 requesting
authority to decrease depreciation rates from an average rate of 4.1% to 3.5%.
In December 1997, the MPSC issued an order approving a reduction in annual
depreciation costs by more than $16 million. While the Michigan Attorney General
has appealed the depreciation order, management believes the MPSC order
approving the lower depreciation rates without a corresponding gas rate
reduction will be upheld.
In 1994, Citizens entered into a rate agreement with the municipal
commission that sets Citizens' rates. Under the terms of this agreement which
went into effect in January 1995, Citizens received a 3% rate increase and its
rates were frozen for five years. The rate agreement which expires in January
2000, provides Citizens' customers with known prices and the company with an
opportunity to control costs and continue to earn a reasonable rate of return.
GAS COST RECOVERY (GCR): Prior to January 1, 1999, the GCR process allowed
MichCon to recover its cost of gas sold if the MPSC determined that such costs
were reasonable and prudent. As previously discussed, beginning January 1, 1999,
the MichCon plan suspends the GCR mechanism and fixes the gas commodity
component of MichCon's sales rate at $2.95 per Mcf for three years.
The GCR process included an annual Gas Supply and Cost Review, in which the
MPSC approved maximum monthly GCR factors. A subsequent annual GCR
reconciliation proceeding provided a review of gas costs incurred during the
year, determined whether approved gas costs had been overcollected or
undercollected and, as a result, whether a refund or surcharge, including
interest, was required to be returned to or collected from GCR customers. In
September 1998, a settlement regarding MichCon's 1997 GCR Reconciliation Case
was approved by the MPSC indicating a net underrecovery of approximately $13
million, including interest. In April 1998, the MPSC issued an order in
MichCon's 1998 GCR Plan Case approving a $3.20 per Mcf maximum GCR factor
including the net underrecovery for 1997 referred to above. MichCon's 1998 GCR
overrecovery is approximately $15 million, including interest of $2.3 million.
Pursuant to the terms of the plan that approved suspension of the GCR clause,
MichCon will refund the overrecovery through surcharge credits during January
through March 1999. In February 1997, MichCon filed its 1996 GCR reconciliation
case indicating a net underrecovery of approximately $28 million, including
interest. The total 1996 underrecovery was rolled into MichCon's 1997 GCR cost
recovery. In September 1997, the MPSC issued an order finding that all of
MichCon's 1996 gas costs were reasonable and prudent.
FERC RATE MATTERS: In February 1998, FERC approved a settlement agreement
in an ANR rate case entitling MichCon to refunds totaling $9.4 million. In April
1998, MichCon received $5.5 million relating to transportation services provided
by ANR to MichCon. In June 1998, MichCon received the remaining refund, which
was reflected as a reduction to MichCon's cost of gas.
ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former MGP sites.
15
<PAGE> 21
During the mid-1980s, preliminary environmental investigations were
conducted at these former MGP sites, and some contamination related to the
by-products of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Environmental Quality (MDEQ). None of
these former MGP sites is on the National Priorities List prepared by the U.S.
Environmental Protection Agency (EPA).
MCN is involved in an administrative proceeding before the EPA regarding
one of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive
investigations at four other former MGP sites. In 1998, MichCon completed the
remediation of one of the former MGP sites, which was confirmed by the MDEQ.
Additionally, the MDEQ has determined with respect to one other former MGP site
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.
In 1984, MCN established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that
the estimated total expenditures for investigation and remediation activities
for these sites could range from $30 million to $170 million based on
undiscounted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35 million during 1995.
MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MichCon filed suit against major
nonsettling carriers seeking recovery of incurred costs and a declaratory
judgment of the carriers' liability for future costs of environmental
investigation and remediation at former MGP sites. Discovery is ongoing in the
case, and a preliminary trial date has been scheduled for August 1999.
During 1998, 1997 and 1996, MCN spent $1.6 million, $0.8 million and $0.9
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1998, the reserve balance is $35.1 million, of which $0.1 million
was classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and, therefore, have an effect on MichCon's financial position and cash flows.
However, management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MichCon's results of operations.
In 1998, MichCon received written notification from ANR, alleging that
MichCon has responsibility for a portion of the costs associated with responding
to environmental conditions present at a natural gas storage field in Michigan
currently owned and operated by an affiliate of ANR. At least some portion of
the natural gas storage field was formerly owned by MichCon. MichCon is
evaluating ANR's allegations to determine whether and to what extent, if any, it
may have legal responsibility for these costs. Management does not believe that
this matter will have a material impact on MCN's financial statements.
FRANCHISES
MichCon operates in more than 530 cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year
maximum duration. In 1993, MichCon began a structured process to renew or
re-establish formal franchises in 233 municipalities. During the period between
January 1994 and December 1998, an additional 184 franchises expired. To date,
391 franchises have been renewed, including nine renewed in 1998 that account
for gas sales volumes of approximately 115 MMcf annually. Additionally, one new
franchise was acquired. There were no franchises lost during 1998.
16
<PAGE> 22
As for the 26 franchises that are currently expired, MichCon's gas
distribution systems are rightfully occupying the streets with the consent or
acquiescence of the municipalities. While MichCon could be ordered by any
municipality in which its franchise has expired to remove its property, it could
lose ownership only by its consent and the payment of an agreed upon price, or
by condemnation and the payment of the fair value of such property. Should any
of these municipalities seek to terminate MichCon's operations therein and
substitute another gas utility operation, publicly or privately owned, the
municipality must either (i) acquire and operate MichCon's system, (ii)
construct a new system or (iii) grant a franchise to another privately owned
utility to construct or acquire its own distribution system.
Citizens operates in cities and townships in and around Adrian, Michigan
under franchises or permits that are revocable, have a 30-year maximum duration,
and provide for municipal rate setting. In November 1995, the residents of
Adrian voted favorably on granting a 30-year renewal franchise to Citizens.
There were 3 franchise renewals during 1998.
DISCONTINUED OPERATIONS
MCNIC OIL & GAS COMPANY
During 1998, MCN recognized write-downs of its gas and oil properties held
by its E&P business unit, MCNIC Oil & Gas Company (MOG), totaling $417 million
pre-tax ($271 million net of taxes). Such properties were accounted for under
the full-cost method of accounting prior to being classified as a discontinued
operation. The write-downs were due primarily to lower oil and gas prices and
the under-performance of certain exploration properties. Under the full-cost
method of accounting as prescribed by the Securities and Exchange Commission,
MCN's capitalized exploration and development costs exceeded the full cost
"ceiling," resulting in the excess being written off to income. The ceiling is
the sum of discounted future net cash flows from the production of proved gas
and oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects. Future net cash flows are
required to be estimated based on end-of-quarter prices and costs, unless
contractual arrangements exist. A significant portion of the write-down was due
to lower-than-expected exploratory drilling results.
In 1998, MCN also recognized a $6.1 million pre-tax ($4.0 million net of
taxes) loss from the write-down of an investment in the common stock of an E&P
company. The loss is due to a decline in the fair value of the securities which
is not considered temporary.
MCN is in the process of selling substantially all of the gas and oil
properties, and expects the sale to be completed in 1999. Accordingly, E&P has
been accounted for as discontinued operations.
THE GENIX GROUP, INC.
In 1996, MCN completed the sale of its computer operations subsidiary, The
Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. for an adjusted
sales price of $132.9 million, resulting in an after-tax gain of $36.2 million.
Genix's 1996 income from operations totaled $1.6 million and has been accounted
for as a discontinued operation.
OTHER
MCN is involved in several residential and commercial community development
partnerships.
MCNIC Gas Storage Company, a 100% owned subsidiary of MCNIC, holds a 50%
limited partnership interest in The Orchards Golf Limited Partnership. The
Orchards golf course is above the Washington 28 storage field, located north of
Detroit. The partnership was formed in 1991 and developed approximately 450
acres of land in Washington Township, Michigan. The acreage consists of an
18-hole championship golf course of approximately 200 acres and residential
development of the remaining 250 acres.
MichCon Development Company, a 100% owned subsidiary of MichCon, holds
between a 33% and a 50% interest in various partnerships related to the
Harbortown development. The Harbortown development is
17
<PAGE> 23
a mixed use development consisting of a 60,000 square foot retail shopping
center, a 63 slip marina, 273 rental units and 80 low-rise condominiums located
in Detroit along the Detroit River. The development consists of 35 acres of
land, of which 12 are currently undeveloped.
ITEM 2. PROPERTIES
MCN, through its principal subsidiaries, owns or leases, under long-term
leases, office space in Detroit and Grand Rapids, Michigan, Houston, Texas,
Denver, Colorado, and Hartford, Connecticut. MCN's facilities are suitable and
adequate for their intended use. MCN's capital investments for 1998 totaled $791
million and for 1999 are anticipated to be approximately $750 million.
GAS DISTRIBUTION
MichCon operates natural gas distribution, transmission and storage
facilities in Michigan. At December 31, 1998, MichCon's distribution system
included 16,722 miles of distribution mains, 1,083,607 service lines and
1,202,722 active meters. MichCon owns 2,604 miles of transmission and production
lines that deliver natural gas to the distribution districts and interconnect
its storage fields with the sources of supply and the market areas. MichCon also
owns properties relating to four underground storage fields with an aggregate
storage capacity of approximately 124 Bcf. Additionally, MichCon owns district
office buildings, service buildings and gas receiving and metering stations. In
January 1998, MichCon purchased its principal office building in Detroit, the
Guardian Building, ending its long-term capital lease obligation. MichCon
occupies its principal office building in Grand Rapids under a long-term lease.
Portions of these buildings are subleased to affiliates and others.
Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending
beyond that date. The principal plants and properties of MichCon are held
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under
which MichCon's First Mortgage Bonds are issued. Some existing properties are
being fully utilized and new properties are being added to meet the requirements
of expansion into new areas. Gas Distribution's capital expenditures for 1998
totaled $159 million and for 1999 are anticipated to be approximately $170
million.
The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline, owns a 66 2/3% interest in the Saginaw Bay Area Limited Partnership,
which owns substantially all of the properties used in the conduct of its
business, primarily a 126-mile major gathering line. The Saginaw Bay Lateral
Company, a wholly owned subsidiary of MichCon Pipeline, owns a 46% interest in
the Saginaw Bay Lateral Limited Partnership, which owns substantially all of the
properties used in the conduct of its business, primarily lateral lines related
to the Saginaw Bay major gathering line. Westside Pipeline Company, a wholly
owned subsidiary of MichCon Pipeline, owns an 82.62% interest in Jordan Valley
Pipeline, a 14-mile major gathering line, and the Terra-Hayes Pipeline, an
18-mile major gathering line. MichCon Gathering Company, a wholly owned
subsidiary of MichCon Pipeline, owns substantially all of the properties used in
the conduct of its business, including 44.7-mile, 8.6-mile, 11-mile and
25.2-mile major gathering lines and a 2,400 horsepower compressor station.
Thunder Bay Gathering Company, a wholly owned subsidiary of MichCon
Pipeline, owns substantially all of the properties used in the conduct of its
business, including 44 miles of gathering lines.
Citizens owns all of the properties used in the conduct of its utility
business. Included in these properties is a gas distribution system, a two-story
office building in downtown Adrian and a one-story service center.
DIVERSIFIED ENERGY
In addition to Gas Distribution, MCN is involved in joint ventures that own
property primarily associated with gas gathering, processing, transmission and
storage, electric power generation and distribution and real estate. The
majority of these investments are in unconsolidated joint ventures and
partnerships in which Diversified Energy has an ownership interest of less than,
or equal to, 50%.
18
<PAGE> 24
During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a joint venture created to build, own and operate a 140 MW power
plant in Albuquerque, New Mexico. This $60 million gas-fired peaking plant is
expected to be in service by the summer of 2000 and is backed by a long-term
power purchase agreement with Public Service Company of New Mexico. The project
will be constructed at the site of a decommissioned power plant, keeping costs
low and accelerating its development.
ITEM 3. LEGAL PROCEEDINGS
In addition to Gas Distribution's regulatory proceedings and other matters
described in Item 1, "Business," MCN also is involved in a number of lawsuits
and administrative proceedings in the ordinary course of business with respect
to taxes, environmental matters, contracts, personal injury, property damage
claims and other matters.
ENVIRONMENTAL
In 1994, MichCon received a general notice of liability letter from the EPA
stating that it was one of two potentially responsible parties at the Lower
Ecorse Creek Superfund site in Wyandotte, Michigan. The EPA requested that
MichCon conduct a remedial investigation and feasibility study at that site.
MichCon investigated its prior activities in the area and the EPA's bases for
its conclusion, and concluded that it was not responsible for contamination
discovered at that site. MichCon informed the EPA of this belief and did not
undertake the requested activities.
In September 1996, the EPA sent MichCon a second general notice of
liability letter for the site and demanded reimbursement of approximately $2.3
million in past costs, plus interest. The EPA then issued MichCon and the other
potentially responsible party a unilateral administrative order under section
106 of the Comprehensive Environmental Response Compensation and Liability Act
to implement the remedy. The EPA estimates the cost of the remedy to be
approximately $650,000. MichCon again reviewed the EPA's bases for determining
that it is a potentially responsible party and concluded again that it was not
responsible for contamination discovered at that site and informed the EPA of
its decision. The EPA has not taken any subsequent action against MichCon. The
EPA may sue MichCon to force compliance with the order or may implement the
remedy and then sue MichCon for recovery of all incurred costs. If the EPA
institutes and prevails in such a suit and if the court determines that MichCon
did not have sufficient cause to comply with the order, the court may impose
civil penalties and punitive damages. Management believes that MichCon was not
responsible for contamination at the site and has sufficient cause not to comply
with this order and that the resolution of this matter will not have a material
adverse effect on MichCon's financial statements.
ENERGY CONSERVATION PROGRAMS
In July 1998, the Wayne County Michigan Circuit Court approved a settlement
of two class action lawsuits in relation to a discontinued energy conservation
program. There were 46,000 class members. The notice of settlement was sent in
June 1998 to the class members. Terms of the settlement included capped co-
payments for the repair of chimney damages or the installation of a chimney
liner and a reduced price for a carbon monoxide detector purchased from MichCon.
The request for reimbursement period ended on October 9, 1998, at which time
only 30 class members participated in the settlement. Claims totaling $3,105
were paid out in November 1998. MichCon is continuing its lawsuit against
certain of the manufacturers, contractors and installers of the plaintiffs'
furnaces.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE> 25
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to all executive officers of MCN as of February
26, 1999 is set forth below. Such officers are appointed by the Board of
Directors for terms expiring at the next annual meeting of shareholders,
scheduled to be held April 28, 1999.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
----------------- --- ------------------------------------------
<S> <C> <C>
Alfred R. Glancy III 60 Current position since September 1992; Chairman, Chief
Chairman, President, Chief Executive Officer and Director since August 1988;
Executive Officer and Director Chairman and Director of MCN Investment since 1988;
Chairman and Director of MichCon since 1984 and 1981,
respectively; Chief Executive Officer of MichCon from
1984 to September 1992.
Stephen E. Ewing 54 Current position since September 1992; President and
President and Chief Executive Chief Operating Officer from August 1988 to September
Officer of MichCon and Director 1992; Director since August 1988; President and
Director of MichCon since 1985 and 1984, respectively;
Chief Operating Officer of MichCon from 1985 to
September 1992.
Howard L. Dow III 43 Current position since September 1998; Senior Vice
Senior Vice President and Treasurer President, Treasurer, and Chief Financial Officer of
MichCon since April 1998; Vice President, Chief
Financial Officer, Finance and Regulatory Affairs of
MichCon since October 1996; Vice President Marketing
and Regulatory Affairs and Chief Financial Officer of
MichCon since 1995; Vice President of Marketing and
Regulatory Affairs since July 1993; Vice President
Rates and Regulatory Affairs of MichCon since March
1990; Director of MichCon since 1995.
William K. McCrackin 65 Current position since August 1988; Treasurer from
Vice Chairman, Chief Financial August 1988 to September 1992; Director of MCN
Officer and Director Investment since 1988; Vice Chairman of MichCon from
March 1986 to September 1992; Chief Financial Officer
of MichCon from 1985 to September 1992; Director of
MichCon since 1984.
Daniel L. Schiffer 55 Current position since September 1995; Vice President,
Senior Vice President, General General Counsel and Secretary of MCN since April 1989;
Counsel and Secretary General Counsel and Secretary of MCN since August 1988;
Vice President and General Counsel of MichCon from July
1991 to September 1992; Director of MichCon from
January 1989 to September 1998.
Joseph T. Williams 61 Current position since June 1998; President and Chief
President and Chief Executive Executive Officer of MCNIC Oil & Gas Company from July
Officer of MCNIC 1997 to June 1998; Vice Chairman and Chief Executive
Officer of Enserch Exploration Inc. from June 1995 to
February 1996; President and Chief Executive Officer of
PG&E Resources Company from March 1989 to June 1995;
Director of MCNIC since August 1997.
</TABLE>
20
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MCN Common Stock is traded on the New York Stock Exchange. On February 26,
1999 there were 21,714 holders of record of MCN Common Stock. Information
regarding the market price of MCN Common Stock and related security holder
matters is incorporated by reference herein from the section titled "Selected
Financial Data" in MCN's 1998 Annual Report to Shareholders, pages 62 and 63.
ITEM 6. SELECTED FINANCIAL DATA
Information required pursuant to this item is incorporated by reference
herein from the section titled "Selected Financial Data" in MCN's 1998 Annual
Report to Shareholders, pages 62 and 63.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required pursuant to this item is incorporated by reference
herein from the section titled "Management's Discussion and Analysis" in MCN's
1998 Annual Report to Shareholders, pages 23 through 35.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference
herein from the section titled "Management's Discussion and Analysis -- Market
Risk Information" in MCN's 1998 Annual Report to Shareholders, page 34.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required pursuant to this item is incorporated by reference
herein from the following sections of MCN's 1998 Annual Report to Shareholders.
The consolidated statement of operations, cash flows and shareholders' equity
are for each of the years ended December 31, 1998, 1997 and 1996 and the
consolidated statement of financial position is as of December 31, 1998 and
1997.
Consolidated Statement of Financial Position, page 37
Consolidated Statement of Operations, page 36
Consolidated Statement of Cash Flows, page 38
Consolidated Statement of Shareholders' Equity, page 39
Notes to Consolidated Financial Statements, pages 40 through 61
Selected Financial Data, pages 62 and 63
Independent Auditors' Report, page 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section titled "Proposal 1 -- Election of
Directors" in MCN's February 1999 definitive Proxy Statement is incorporated by
reference herein.
Information concerning the executive officers of MCN is set forth in the
section titled "Executive Officers of the Registrant" on page 20 in Part I of
this Report.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
The information set forth in the section titled "Filings Under Section 16
(a)" in MCN's February 1999 definitive Proxy Statement is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the sections titled "Compensation of Directors
and Executive Officers" and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation" in MCN's February 1999 definitive Proxy
Statement is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the section titled "Beneficial Security
Ownership of Directors, Nominees and Executive Officers" in MCN's February 1999
definitive Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the sections titled "Executive Compensation"
and "Other Compensation Matters" in MCN's February 1999 definitive Proxy
Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
1. For a list of financial statements incorporated by reference, see the
section titled "Financial Statements and Supplementary Data" on page 21
in Part II, Item 8 of this Report.
2. The Financial Statement Schedules for each of the three years in the
period ended December 31, 1998, unless otherwise noted, are included
herein in response to Part II, Item 8:
Independent Auditors' Report
SCHEDULE
II -- Valuation and Qualifying Accounts
Schedules other than those referred to above are omitted as not applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
22
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of MCN Energy Group Inc.:
We have audited the consolidated financial statements of MCN Energy Group
Inc. and subsidiaries (the "Company"), as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, and have issued
our report thereon dated February 25, 1999; such consolidated financial
statements and report are included in your 1998 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Company, listed in Item 14.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Detroit, Michigan
February 25, 1999
23
<PAGE> 29
SCHEDULE II
MCN ENERGY GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------
PROVISIONS DEDUCTIONS
CHARGED TO FOR PURPOSES BALANCE
BALANCE AT -------------------- FOR WHICH THE AT END
BEGINNING REGULATORY RESERVES WERE OF
DESCRIPTION OF PERIOD INCOME ASSET PROVIDED PERIOD
- ----------------------------------------------------- ---------- ------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $15,711 $13,302 $ 0 $19,348 $ 9,665
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
Deferred Credits and Other Liabilities -- Other in
Consolidated Statement of Financial Position:
Restructuring Charge (1)......................... $ 0 $10,390 $ 0 $ 660 $ 9,730
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing(2)......................... $36,741 $ 0 $ 0 $ 1,649 $35,092
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 4,838 $ (328) $ 438 $ 2,433 $ 2,515
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $18,487 $21,847 $ 0 $24,623 $15,711
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (2)........................ $37,576 $ 0 $ 0 $ 835 $36,741
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
Reserves deducted from assets in Consolidated
Statement of Financial Position:
Allowance for doubtful accounts.................. $13,765 $29,425 $ 0 $24,703 $18,487
======= ======= ======= ======= =======
Reserves included in Current Liabilities -- Other and
in Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (2)........................ $38,451 $ 0 $ 0 $ 875 $37,576
======= ======= ======= ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages............................. $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182
======= ======= ======= ======= =======
</TABLE>
- ---------------
NOTES:
(1) Reference is made to Note 3 to the Consolidated Financial Statements of
MCN's 1998 Annual Report to Shareholders, page 41.
(2) Reference is made to Note 13b to the Consolidated Financial Statements of
MCN's 1998 Annual Report to Shareholders, page 48.
24
<PAGE> 30
3. Exhibits, Including Those Incorporated by Reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3-1 Articles of Incorporation of MCN Energy Group Inc. (Exhibit
3-1 to March 31, 1998 Form 10-Q).
3-2 By-Laws of MCN Energy Group Inc., as amended (Exhibit 3-2 to
MCN's 1997 Form 10-K).
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
3-5 Certificate of Trust of MCN Financing III (Exhibit 4-16 to
Registration Statement No. 333-21175).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K and
Exhibit 4 to July 23, 1997 Form 8-K).
4-2 Senior Debt Securities Indenture between MCN Energy Group
Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
(Exhibit 4-4 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated June 4, 1997 (Exhibit 4-2 to
MCN's 1997 Form 10-K).
4-3 Subordinated Debt Securities Indenture between MCN Energy
Group Inc. and NBD Bank, N.A., as Trustee, dated September
1, 1994 (Exhibit 4-5 to Registration Statement No.
33-55665); First Supplemental Indenture, dated April 17,
1996 (Exhibit 4-18 to Amendment No. 2 to Registration
Statement No. 333-01521); and Second Supplemental Indenture,
dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
4-4 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-fourth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-5 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank, N.A., as Trustee, dated September 1, 1995 (Exhibit
4-1 to Registration Statement No. 33-63311).
4-6 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-7 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-8 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-9 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $100,000,000 (Exhibit
4-6 to October 26, 1994 Form 8-K).
4-10 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $1,100,000 (Exhibit
4-7 to October 26, 1994 Form 8-K).
4-11 Purchase Contract Agreement dated April 22, 1996 between MCN
Energy Group Inc. and The First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-12 Pledge Agreement dated April 22, 1996 among MCN Energy Group
Inc., Chemical Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent
(Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
25
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4-13 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit 4-13 to MCN's 1997 Form
10-K).
4-14 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-15 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
4-16 Form of Preferred Security of MCN Financing I (Exhibit 4-13
to MCN's 1997 Form 10-K).
4-17 Purchase Contract Agreement dated March 25, 1997 between MCN
and The First National Bank of Chicago, as Purchase Contract
Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
4-18 Pledge Agreement dated March 25, 1997 among MCN, Chase
Manhattan Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
March 19, 1997 Form 8-K).
4-19 Form of FELINE PRIDES Certificate (Exhibit 4-19 to MCN's
1997 Form 10-K).
4-20 Amended and Restated Declaration of Trust of MCN Financing
III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
1997 Form 8-K).
4-21 Preferred Securities Guarantee Agreement, dated as of March
19, 1997, between MCN and Wilmington Trust Company (Exhibit
5-4 to March 19, 1997 Form 8-K).
4-22 Form of Preferred Security of MCN Financing III (Exhibit
4-22 to MCN's 1997 Form 10-K).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1
(Registration Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
Form 10-Q).
10-3 MCN Energy Group Inc. Executive Annual Performance Plan (As
amended effective January 1, 1998).*
10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
March 31, 1995 Form 10-Q).
10-5 Special Retention Agreement between MCN Energy Group Inc.
and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
10-Q).
10-6 MCN Executive Deferred Compensation Plan, as amended
(Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-7 MichCon Supplemental Death Benefit and Retirement Income
Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
10-8 MichCon Supplemental Retirement Plan (Exhibit 10-3 to
September 30, 1996 Form 10-Q).
10-9 MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
as amended (Exhibit 10-11 to 1996 Form 10-K).
10-10 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
10-12 to 1996 Form 10-K).
10-11 MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
10-12 MCN Energy Group Inc. Long-Term Incentive Performance Share
Plan (As amended and restated October 1, 1997).*
10-13 Special Retention Agreement -- William K. McCrackin (Exhibit
10-1 to September 30, 1998 Form 10-Q).
10-14 MCN Energy Group Savings and Stock Ownership Plan (As
amended and restated effective as of January 1, 1998).*
10-15 MichCon Investment and Stock Ownership Plan (As amended and
restated effective as of January 1, 1998).*
</TABLE>
26
<PAGE> 32
<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.*
13-1 MCN Energy Group Inc. 1998 Annual Report to Shareholders.*
21-1 List of MCN Subsidiaries.*
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
(B) REPORTS ON FORM 8-K:
MCN filed a report on Form 8-K dated November 13, 1998, under Item 5, with
respect to the offering by MCN Financing II of its 8 5/8% Trust Preferred
Securities (TRUPS) pursuant to the registration statement of the registrant and
MCN Financing II, among others, on Form S-3 (No. 333-47139) filed with the
Securities and Exchange Commission under the Securities Act of 1933. The
following documents were filed as Exhibits thereto:
- Underwriting Agreement dated November 13, 1998 with respect to the TRUPS.
- Amended and Restated Declaration of Trust of MCN Financing II, dated as
of November 18, 1998.
- Fourth Supplemental Indenture, dated as of November 18, 1998, between MCN
and NBD Bank.
- Preferred Securities Guarantee Agreement, dated as of November 18, 1998,
between MCN and Wilmington Trust Company.
27
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
--------------------------------------
(Registrant)
By: /s/ Gerard F. Kabzinski
------------------------------------
Gerard F. Kabzinski
Vice President and Controller
March 11, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
* Director, Chairman, President and March 11, 1999
- --------------------------------------------- Chief Executive Officer
Alfred R. Glancy III
* Director, Vice Chairman and Chief March 11, 1999
- --------------------------------------------- Financial Officer
William K. McCrackin
/s/ Gerard F. Kabzinski Vice President and Controller March 11, 1999
- ---------------------------------------------
Gerard F. Kabzinski
* Director March 11, 1999
- ---------------------------------------------
James G. Berges
* Director March 11, 1999
- ---------------------------------------------
Stephen E. Ewing
* Director March 11, 1999
- ---------------------------------------------
Roger Fridholm
* Director March 11, 1999
- ---------------------------------------------
Frank M. Hennessey
* Director March 11, 1999
- ---------------------------------------------
Thomas H. Jeffs II
* Director March 11, 1999
- ---------------------------------------------
Helen O. Petrauskas
* Director March 11, 1999
- ---------------------------------------------
Howard F. Sims
* Director March 11, 1999
- ---------------------------------------------
Bill M. Thompson
*By: /s/ GERARD F. KABZINSKI
---------------------------------------
Gerard F. Kabzinski
Attorney-in-Fact
</TABLE>
28
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3-1 Articles of Incorporation of MCN Energy Group Inc. (Exhibit
3-1 to March 31, 1998 Form 10-Q).
3-2 By-Laws of MCN Energy Group Inc., as amended (Exhibit 3-2 to
MCN's 1997 Form 10-K).
3-3 Certificate of Limited Partnership of MCN Michigan Limited
Partnership (Exhibit 4-6 to Registration Statement No.
33-55665).
3-4 Certificate of Trust of MCN Financing I (Exhibit 4-11 to
Registration Statement No. 333-01521).
3-5 Certificate of Trust of MCN Financing III (Exhibit 4-16 to
Registration Statement No. 333-21175).
4-1 Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K and
Exhibit 4 to July 23, 1997 Form 8-K).
4-2 Senior Debt Securities Indenture between MCN Energy Group
Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
(Exhibit 4-4 to Registration Statement No. 33-55665); First
Supplemental Indenture, dated June 4, 1997 (Exhibit 4-2 to
MCN's 1997 Form 10-K).
4-3 Subordinated Debt Securities Indenture between MCN Energy
Group Inc. and NBD Bank, N.A., as Trustee, dated September
1, 1994 (Exhibit 4-5 to Registration Statement No.
33-55665); First Supplemental Indenture, dated April 17,
1996 (Exhibit 4-18 to Amendment No. 2 to Registration
Statement No. 333-01521); and Second Supplemental Indenture,
dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
4-4 MichCon's Indenture of Mortgage and Deed of Trust dated
March 1, 1944 (Exhibit 7-D to Registration Statement No.
2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
to September 27, 1991 Form 8-K); Thirty-first Supplemental
Indenture, dated December 15, 1991 (Exhibit 4-1 to February
28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
Thirty-third Supplemental Indenture, dated May 1, 1996
(Exhibit 4-2 to Registration Statement No. 33-59093); and
Thirty-forth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285).
4-5 Debt Securities Indenture between MCN Investment Corp. and
NBD Bank, N.A., as Trustee, dated September 1, 1995 (Exhibit
4-1 to Registration Statement No. 33-63311).
4-6 MCN hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of
long-term debt issued by MCN or its subsidiaries.
4-7 Form of Guarantee Agreement with Respect to Preferred
Securities of MCN Michigan Limited Partnership (Exhibit 4-8
to Registration Statement No. 33-55665).
4-8 Amended and Restated Limited Partnership Agreement of MCN
Michigan Limited Partnership (Exhibit 4-1 to October 26,
1994 Form 8-K).
4-9 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $100,000,000 (Exhibit
4-6 to October 26, 1994 Form 8-K).
4-10 Form of MCN Energy Group Inc. Series A Subordinated
Deferrable Interest Debt Security for $1,100,000 (Exhibit
4-7 to October 26, 1994 Form 8-K).
4-11 Purchase Contract Agreement dated April 22, 1996 between MCN
Energy Group Inc. and The First National Bank of Chicago, as
Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
8-K).
4-12 Pledge Agreement dated April 22, 1996 among MCN Energy Group
Inc., Chemical Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent
(Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4-13 Form of Preferred Redeemable Increased Dividend Equity
Securities Certificate (Exhibit 4-13 to MCN's 1997 Form
10-K).
4-14 Amended and Restated Declaration of Trust of MCN Financing
I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
Form 8-K).
4-15 Preferred Securities Guarantee Agreement, dated as of July
26, 1996, between MCN and Wilmington Trust Company (Exhibit
5-4 to July 24, 1996 Form 8-K).
4-16 Form of Preferred Security of MCN Financing I (Exhibit 4-13
to MCN's 1997 Form 10-K).
4-17 Purchase Contract Agreement dated March 25, 1997 between MCN
and The First National Bank of Chicago, as Purchase Contract
Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
4-18 Pledge Agreement dated March 25, 1997 among MCN, Chase
Manhattan Bank, as Collateral Agent, and The First National
Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
March 19, 1997 Form 8-K.)
4-19 Form of FELINE PRIDES Certificate (Exhibit 4-19 to MCN's
1997 Form 10-K).
4-20 Amended and Restated Declaration of Trust of MCN Financing
III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
1997 Form 8-K).
4-21 Preferred Securities Guarantee Agreement, dated as of March
19, 1997, between MCN and Wilmington Trust Company (Exhibit
5-4 to March 19, 1997 Form 8-K).
4-22 Form of Preferred Security of MCN Financing III (Exhibit
4-22 to MCN's 1997 Form 10-K).
10-1 MCN Stock Option Plan Post-Effective Amendment No. 1
(Registration Statement No. 33-21930-99).
10-2 Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
Form 10-Q).
10-3 MCN Energy Group Inc. Executive Annual Performance Plan (As
amended effective January 1, 1998).*
10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
March 31, 1995 Form 10-Q).
10-5 Special Retention Agreement between MCN Energy Group Inc.
and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
10-Q).
10-6 MCN Executive Deferred Compensation Plan, as amended
(Exhibit 10-1 to September 30, 1996 Form 10-Q).
10-7 MichCon Supplemental Death Benefit and Retirement Income
Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
10-8 MichCon Supplemental Retirement Plan (Exhibit 10-3 to
September 30, 1996 Form 10-Q).
10-9 MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
as amended (Exhibit 10-11 to 1996 Form 10-K).
10-10 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
10-12 to 1996 Form 10-K).
10-11 MCN Energy Group Inc. Nonemployee Directors' Compensation
Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
10-12 MCN Energy Group Inc. Long-Term Incentive Performance Share
Plan (As amended and restated October 1, 1997).*
10-13 Special Retention Agreement -- William K. McCrackin (Exhibit
10-1 to September 30, 1998 Form 10-Q).
10-14 MCN Energy Group Savings and Stock Ownership Plan (As
amended and restated effective as of January 1, 1998).*
10-15 MichCon Investment and Stock Ownership Plan (As amended and
restated effective as of January 1, 1998).*
</TABLE>
<PAGE> 36
<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.*
13-1 MCN Energy Group Inc. 1998 Annual Report to Shareholders.*
21-1 List of MCN Subsidiaries.*
23-1 Independent Auditors' Consent -- Deloitte & Touche LLP.*
24-1 Powers of Attorney.*
27-1 Financial Data Schedule.*
</TABLE>
- ---------------
* Indicates document filed herewith.
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
<PAGE> 1
EXHIBIT 10.3
MCN ENERGY GROUP INC.
EXECUTIVE ANNUAL PERFORMANCE PLAN
(AS AMENDED EFFECTIVE JANUARY 1, 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I - Title, Purpose and Effective Date ....................................................................1
1.1 Title ..........................................................................................1
1.2 Purpose ........................................................................................1
1.3 Effective Date .................................................................................1
ARTICLE 2 - Definitions...........................................................................................1
2.1 Affiliated Company .............................................................................1
2.2 Adjusted Standard Award Fund ...................................................................1
2.3 Average Common Stockholders Equity..............................................................1
2.4 Award ..........................................................................................1
2.5 Board of Directors or Board.....................................................................1
2.6 Cause ..........................................................................................2
2.7 Code ...........................................................................................2
2.8 Committee ......................................................................................2
2.9 Eligible Employee ..............................................................................2
2.10 EPS Growth Rate ................................................................................2
2.11 Executive Management ...........................................................................2
2.12 Net Income ....................................................................................2
2.13 Net Income Goal ................................................................................2
2.14 Operating Goal .................................................................................2
2.15 Participating Company ..........................................................................2
2.16 Plan Year ......................................................................................2
2.17 Return on Equity or ROE ........................................................................2
2.18 Standard Award Fund ............................................................................2
2.19 Tier............................................................................................2
ARTICLE 3 - Administration .......................................................................................3
ARTICLE 4 - Awards................................................................................................3
4.1 Eligibility For Awards .........................................................................3
4.2 Determination of Awards and Award Funds.........................................................3
4.3 Payment of Awards ..............................................................................4
4.4 Change in Employee Status ......................................................................4
ARTICLE 5 - Deferral of Receipt of Awards.........................................................................6
ARTICLE 6 - Beneficiary Designations .............................................................................6
6.1 Beneficiary Designation ........................................................................6
6.2 Change in Beneficiary Designation ..............................................................6
ARTICLE 7 - Amendment, Suspension or Termination .................................................................7
</TABLE>
i
<PAGE> 3
\
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
<CAPTION>
<S> <C> <C>
ARTICLE 8 - Miscellaneous ........................................................................................7
8.1 Assignment Prohibited ..........................................................................7
8.2 Effect on Employee Benefits ....................................................................7
8.3 No Right To An Award ...........................................................................7
8.4 No Employment Rights ...........................................................................7
8.5 Law Applicable .................................................................................7
8.6 Gender, Number and Heading .....................................................................8
8.7 Joint and Several Liability ....................................................................8
ARTICLE 9 - Change in Control ....................................................................................9
9.1 General ........................................................................................9
9.2 Joint and Several Liability ....................................................................9
9.3 Definition of Change in Control ................................................................9
Attachment I - Target Percentages................................................................................10
Attachment II - MCN CORPORATE Scaling............................................................................11
Attachment III - MCNIC Scaling...................................................................................12
Attachment IV - MICHCON Scaling..................................................................................13
Attachment V - CITIZENS Scaling..................................................................................14
Attachment VI - Beneficiary Designation Form.....................................................................15
</TABLE>
ii
<PAGE> 4
MCN ENERGY GROUP INC.
EXECUTIVE ANNUAL PERFORMANCE PLAN
(as amended and restated effective January 1, 1998)
ARTICLE I
TITLE, PURPOSE, AND EFFECTIVE DATE
1.1 TITLE. The title of this Plan shall be the "MCN Energy Group Inc.
Executive Annual Performance Plan" and is referred to in this document as the
"Plan."
1.2 PURPOSE. The purpose of the Plan is to provide a direct financial
incentive to employees of MCN Energy Group Inc. ("MCN") and its subsidiaries
(individually a "Company" and collectively the "Companies") who contribute to
the overall success of MCN and to its particular achievements in the areas of
earnings, operating efficiency, customer satisfaction, and employee
satisfaction. In addition, the Plan is designed to place the compensation of
Company employees at competitive levels with similar industries and thereby to
assist in motivating them, retaining them in the employ of the Company, and in
attracting new highly qualified personnel to the Companies.
1.3 EFFECTIVE DATE. The Plan is effective January 1, 1998.
ARTICLE 2
DEFINITIONS
The following terms have the meaning described below when used in the
Plan:
2.1 "AFFILIATED COMPANY" means any corporation while such corporation
is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Corporation or any other employing entity
while such entity is under common control (within the meaning of Section 414(c)
of the Code) of the Corporation.
2.2 "ADJUSTED STANDARD AWARD FUND" shall mean the total maximum dollar
amount that is required for the Final Award Fund which has been adjusted to
reflect the performance level regarding the financial and operating goals (if
applicable).
2.3 "AVERAGE COMMON STOCKHOLDERS EQUITY" shall mean the sum of (i) the
common stockholders equity of a Company at the end of the previous Plan Year,
less any adjustments specified on Attachments II though V, plus (ii) the common
stockholders equity at the end of the current Plan Year, less any adjustments
specified on Attachments II through V, divided by 2.
2.4 "AWARD" shall mean the payment of cash compensation under this
Plan.
2.5 "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors
of MCN.
2.6 "CAUSE" shall mean repeated material breaches of an employee's
duties of employment which are not cured after receipt by the employee of
written notice specifying such breaches or the employee's conviction of a felony
involving moral turpitude.
<PAGE> 5
2.7 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2.8 "COMMITTEE" shall mean the Compensation Committee of the Board.
2.9 "ELIGIBLE EMPLOYEE" shall mean any regular full-time or part-time
employee of a Participating Company who is in Tiers I through V.
2.10 "EPS GROWTH RATE" shall mean the simple average of the
year-to-year percentage change in earnings per share for MCN for each of any 3
consecutive years, which include the current Plan Year and the 2 preceding Plan
Years.
2.11 "EXECUTIVE MANAGEMENT" shall mean the Chief Executive Officer of
MCN, MCNIC and Michigan Consolidated Gas Company and any other individual so
designated by the MCN Chief Executive Officer.
2.12 "NET INCOME" shall mean the net income available for common stock
of a Company, as reported in the Income Statement of the Company for the Plan
Year, less any adjustments specified on Attachments II through V.
2.13 "NET INCOME GOAL" shall mean the net income approved as a goal by
the Board.
2.14 "OPERATING GOAL" shall mean the non-financial performance targets
related to the operating priorities of a Participating Company.
2.15 "PARTICIPATING COMPANY" shall mean MCN, an Affiliated Company, or
other affiliated entity (whether or not incorporated) designated by the Board of
Directors.
2.16 "PLAN YEAR" shall mean the period beginning January 1 and ending
December 31 of each year (the calendar year).
2.17 "RETURN ON EQUITY" OR "ROE" shall mean a rate for a Participating
Company, expressed as a percent, which represents Net Income, divided by Average
Common Stockholders Equity.
2.18 "STANDARD AWARD FUND" shall mean the total maximum dollar amount
which would be required for an award fund if the financial goal and the
operating goal (if applicable) for a Company is achieved exactly.
2.19 "TIER" shall mean the ranking assigned to each group of employees
defined by level of responsibility and contribution, not titling nomenclature.
The Tiers are set forth in Attachment I.
ARTICLE 3
ADMINISTRATION
The Vice Presidents of the Participating Companies' Human Resource
Departments ("HR Vice Presidents") shall administer the Plan. The HR Vice
Presidents shall have full authority and responsibility to
2
<PAGE> 6
interpret and administer the terms of the Plan and may develop guidelines or
adopt rules and regulations governing the administration of the Plan. The
administration of this Plan is subject to the annual approval of the Board.
Executive Management shall be responsible for making recommendations to
the Committee with respect to employees of the Companies who are to receive
Awards under the Plan and the amount of such Awards. In discharging this
responsibility, Executive Management may consult with individual members of the
Committee or the Board, with the management of MCN and any of the Companies, or
with such other persons as Executive Management may deem appropriate. The
Committee shall submit the recommendations to the Board for approval.
Any member of the Board who is also an employee eligible to receive
Awards under the Plan shall not vote or act on any matter relating solely to
such member during the period the member is eligible to participate in the Plan.
ARTICLE 4
AWARDS
4.1 ELIGIBILITY FOR AWARDS. All Eligible Employees shall participate in
the Plan. Each Participating Company may set minimum service and performance
requirements for its employees. The level of participation in the Plan is based
on position and relative contribution to a set of financial measures and other
strategic and operational objectives. The target percentages for each Tier and
business unit are set forth in Attachment I.
4.2 DETERMINATION OF AWARDS AND AWARD FUNDS. The following formula will
be used in determining respective bonus amounts recommended to be awarded to
Eligible Employees. The HR Vice Presidents will consider the results for each
Company separately:
(a) The HR Vice Presidents will first confirm the financial and
operating goals (if applicable) for the Plan Year.
(b) The HR Vice Presidents will then determine the size of the
Standard Award Fund. In determining the size of this fund, the HR Vice
Presidents will compile a report containing the salaries (in dollars) of
Eligible Employees for the Plan Year. Individual Standard Awards are calculated
using the percent of base salary Target Percentages, shown in Attachment I. The
ranges and percentages used in the computation of the Standard Award Fund may be
revised from time to time, in the discretion of the Committee or the Board.
(c) The Standard Award Fund is determined by adding the Individual
Standard Awards. The Individual Standard Award amounts used in computing the
Standard Award Fund will be adjusted upward or downward based on actual
performance on the Financial Goal and the Operating Goal (if applicable). See
Attachments II through V. The total of these adjusted Individual Standard Award
amounts is the Adjusted Award Fund.
The HR Vice Presidents will make their recommendations to the Executive
Management with respect to the employees who are to receive awards with respect
to the Plan Year and the amount of such awards. Such amounts shall be by
individual for Tiers I and II and in total for Tiers III through V. Executive
Management shall present such recommendations to the Committee for approval.
3
<PAGE> 7
The Committee will determine which employees shall receive awards with
respect to the Plan Year and the amount of the awards based upon the
recommendations of Executive Management and the Committee's own consideration of
the criteria established under the Plan for granting awards. The Committee shall
submit the recommendations to the Board for approval. Any member of the
Committee or Board who is also an Eligible Employee shall not vote.
Any determination concerning the establishment of any Award Fund, once
made, shall be conclusive and binding upon all employees eligible to participate
in the Plan and their beneficiaries or successor(s) in interest.
4.3 PAYMENT OF AWARDS. Payment of Awards to Eligible Employees shall be
made by the employing Company in the calendar year following the Plan Year for
which the Award is made and within a reasonable period following approval of the
award by the Board.
4.4 CHANGE IN EMPLOYEE STATUS. In the case of an employee who was
eligible at the beginning of the Plan Year, but whose status has changed during
the Plan Year so that the employee would not be eligible if eligibility for the
Plan Year were determined at the end of the Plan Year, the following guidelines
will apply, except where Executive Management proposes and the Committee
determines, in its sole discretion, that factors shall be considered with
respect to an Eligible Employee which make departure therefrom appropriate:
(A) DEATH, RETIREMENT. An Eligible Employee who dies or
retires during the Plan Year will be recommended for an Award in an amount that
reflects the proportionate part of the Plan Year in which the Eligible Employee
was an active employee.
(B) RESIGNATION. An Eligible Employee who resigns during the
Plan Year wherein the primary reason for the employee's resignation relates to
ill health in the employee's immediate family or other compelling personal
reasons, the Eligible Employee may be recommended for an Award in an amount
which reflects the proportionate part of the Plan Year in which the Eligible
Employee was an active employee. An Eligible Employee who resigns prior to the
payment of an Award for a Plan Year for other reasons will not normally receive
an Award.
(C) TERMINATION. An Eligible Employee who is terminated prior
to payment of an Award for a Plan Year for reasons related to organizational
changes, such as the discontinuation of an organization unit or redundancy, may
be recommended for an Award in an amount which reflects the proportionate part
of the Plan Year in which the Eligible Employee was an active employee. An
Eligible Employee who is terminated prior to the payment of an Award for a Plan
Year for other reasons will not normally receive an Award.
The Committee will not recommend an Eligible Employee who is terminated for
Cause for an Award.
(D) LEAVE OF ABSENCE - PAID. An Eligible Employee who is on a
paid leave of absence for a portion of the Plan Year will be recommended to
receive an Award in an amount that would have otherwise been recommended had the
Eligible Employee been an active employee through the date the Award is paid for
the Plan Year.
4
<PAGE> 8
(E) LEAVE OF ABSENCE - UNPAID. An Eligible Employee who is on
an unpaid leave of absence for health reasons for a portion of the Plan Year
will be recommended to receive an Award in an amount, which reflects the
proportionate part of the Plan Year in which the Eligible Employee was an active
employee. An Eligible Employee who is on an unpaid leave of absence for any
other reason during a portion of a Plan Year may be recommended for an Award in
an amount that reflects the proportionate part of the Plan Year in which the
Eligible Employee was an active employee.
(F) DEMOTION. An Eligible Employee who was demoted during the
Plan Year for poor performance will not be recommended for an Award. In the case
of an Eligible Employee demoted for any other reason during the Plan year, who
would not have been an Eligible Employee if eligibility for such Plan Year were
determined on the date(s) with respect to which the employee's changed status as
a result of the demotion or transfer applied, the employee may be recommended
for an Award which excludes the proportionate part of the Plan Year with respect
to which the employee's status was changed.
(G) TRANSFER TO A NON-PARTICIPATING AFFILIATED COMPANY. An
Eligible Employee who transfers during the Plan Year from a Company whose
employees are eligible for consideration to a Company whose employees are not
eligible for consideration may be recommended by the Committee to receive an
Award in an amount which reflects the proportionate part of the Plan Year in
which the Eligible Employee was an active employee of the Company whose
employees are eligible for consideration.
(H) TRANSFER TO A PARTICIPATING AFFILIATED COMPANY. An
Eligible Employee who transfers during the Plan Year from one Participating
Company to another participating Company wherein the plans are different may be
recommended for an Award in an amount which reflects the employee's performance
on behalf of the respective companies.
(I) NEW HIRE OR TRANSFER FROM A NON-PARTICIPATING AFFILIATED
COMPANY. An employee who is not an Eligible Employee at the beginning of the
Plan Year who subsequently becomes eligible by reason of being hired by or
transferred to a Participating Company may be recommended for an Award that
reflects the full Plan Year or the proportionate part of the Plan Year in which
the employee was an Eligible Employee.
(J) TERMINATION AFTER END OF PLAN YEAR AND PRIOR TO PAYMENT.
If an Eligible Employee ceases to be an active employee subsequent to the Plan
Year to which the Award relates but prior to distribution of the Award, the
Award may be payable to the employee, or the designated beneficiary, equal to
all, none, or a prorated amount of the Award the Eligible Employee would have
received if he were still employed.
ARTICLE 5
DEFERRAL OF RECEIPT OF AWARDS
An Eligible Employee may elect to defer receipt of all or a
percentage of an Award granted to him under the Plan under the terms and subject
to the provisions of the MCN Executive Deferred Compensation Plan in effect for
the Plan Year for which the Award is to be paid.
ARTICLE 6
5
<PAGE> 9
BENEFICIARY DESIGNATIONS
6.1 BENEFICIARY DESIGNATION. An Eligible Employee shall designate a
beneficiary on his Beneficiary Designation Form, as provided in Attachment VI.
The designation of a beneficiary other than the Eligible Employee's spouse must
be consented to in writing by the spouse. If an Eligible Employee has not
designated a beneficiary, or if a designated beneficiary is not living or in
existence at the time of the Eligible Employee's death, any death benefits
payable under the Plan shall be paid to the Eligible Employee's spouse, if then
living, and if the Eligible Employee's spouse is not then living, to the
Eligible Employee's estate.
6.2 CHANGE IN BENEFICIARY DESIGNATION. An Eligible Employee may change
the designated beneficiary, subject to the restriction in Section 6.1, from time
to time by filing a new written designation with the Committee or Board. Such
designation shall be effective upon receipt by the Committee or Board. Employees
eligible to participate in the Plan may designate to the Committee, on a form
approved by the Committee for that purpose, a beneficiary or beneficiaries to
receive any amounts due under the Plan to the employee upon death. Such
designation may be canceled or changed by the employee at the employee's
discretion, but no cancellation or change will be recognized by the Committee
unless effected in writing on a form approved by the Committee for that purpose
and filed with the Committee. In the absence of a valid beneficiary designation,
the amounts due hereunder shall be paid to the deceased employee's lawful
successor(s) in interest in a lump sum as soon as practicable, but in no event
later than one year following the employee's death.
ARTICLE 7
AMENDMENT, SUSPENSION OR TERMINATION
The Plan may be amended, suspended or terminated at any time by MCN
by action of its Board or the Committee. However, no amendment, suspension or
termination of the Plan shall affect the rights of employees to receive Awards
approved but unpaid as of the date of such amendment, suspension or termination.
ARTICLE 8
MISCELLANEOUS
8.1 ASSIGNMENT PROHIBITED. The rights and benefits under this Plan are
personal and shall not be subject to any voluntary or involuntary alienation,
assignment, pledge, transfer, or other disposition.
8.2 EFFECT ON EMPLOYEE BENEFITS. Awards under this Plan will not be
considered compensation under any other employee benefit plan maintained by MCN
or its subsidiaries, unless specifically included as compensation in such other
plan's written plan document.
8.3 NO RIGHT TO AN AWARD. No employee or other person shall have any
claim or right to be granted an Award under the Plan. The receipt of an Award
with respect to any Plan year shall not entitle an employee to an award with
respect to any subsequent Plan Year.
8.4 NO EMPLOYMENT RIGHTS. Neither the Plan nor any action taken
pursuant to the provisions of the Plan shall be construed as a contract of
employment between an employee and any Company, or as a right of any employee to
be continued in the employment of any Company, or as a limitation of the right
of any
6
<PAGE> 10
Company to discharge any employee at any time, with or without cause, or
as a limitation of the right of the employee to terminate employment at any
time.
8.5 LAW APPLICABLE. This Plan and all actions hereunder shall be
governed by and construed according to the laws of the State of Michigan.
8.6 GENDER, NUMBER AND HEADING. Whenever any words are used herein in
the masculine gender, they shall be construed as though they were also used in
the feminine gender in all cases where they would so apply. Whenever any words
used herein are in the singular form, they shall be construed as though they
were also used in the plural form in all cases where they would so apply.
Headings of sections and subsections as used herein are inserted solely for
convenience and reference and constitute no part of the Plan.
8.7 JOINT AND SEVERAL LIABILITY. The liability under the Plan for the
Companies shall be joint and several so that each Company shall be liable for
all obligations under the Plan to each employee covered by the Plan, regardless
of the entity by which such employee is employed.
ARTICLE 9
CHANGE IN CONTROL
9.1 GENERAL. Notwithstanding any other provision in this Plan, upon a
Change of Control in MCN, as that term is defined in Section 9.3, the following
shall be paid in cash to all Eligible Employees within twenty (20) days
following a Change of Control:
(a) Awards for the prior Plan Year if not then paid; and
(b) Awards for the current Plan Year, payable pro rata based upon
a fraction whose numerator is the number of days between December 31 of the
prior year and the date of the Change of Control and whose denominator is 365.
Each such Award shall be calculated based on the most recent performance
appraisal completed for each Eligible Employee prior to the Change of Control
and with respect to any pro rata Award, calculated as if the Company's earnings
were exactly equal to its Net Income Goal.
9.2 JOINT AND SEVERAL LIABILITY. Upon and at all times after a Change
in Control, the liability under the Plan of MCN and each Affiliated Company that
has adopted the Plan shall be joint and several so that MCN and each such
Affiliated Company 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.
9.3 DEFINITION OF CHANGE IN CONTROL. "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)
or 20 percent 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
7
<PAGE> 11
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 (a) of this Section 9.3 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 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 sixty percent (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 prior to such reorganization, merger or
consolidation, directly or indirectly, twenty percent (20%) or more of the
Outstanding Company Common Stock or Outstanding Voting Securities, as the case
may be) beneficially owns, directly or indirectly, twenty percent (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
8
<PAGE> 12
Company, other than to a corporation, with respect to which following such sale
or other disposition, (A) more than sixty percent (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, twenty percent (20%) or more of the Outstanding Company
Common Stock or Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, twenty percent (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, the undersigned officer of MCN has executed this Plan as of
this ____ day of December 1998.
MCN Energy Group Inc.
By:
---------------------------------
Alfred R. Glancy III
Chairman and Chief Executive Officer
9
<PAGE> 13
ATTACHMENT I
<TABLE>
<CAPTION>
1998 TARGET PERCENTAGES
-------------------------------------------------------------------------------------------------------
MCN MICHCON TARGET MCNIC* CITIZEN'S
TARGET% TARGET% TARGET% TARGET%
TIER DESCRIPTION BASE SALARY BASE SALARY BASE SALARY BASE SALARY
=======================================================================================================
<S> <C> <C> <C> <C>
I Chairman & CEO 60% N/A N/A N/A
-------------------------------------------------------------------------------------------------------
II Vice Chairman/Pres 50% 50% 55% N/A
-------------------------------------------------------------------------------------------------------
III VP/Officer 40% 35% 45% 35%
-------------------------------------------------------------------------------------------------------
IV Director 30% 25% 35% 25%
-------------------------------------------------------------------------------------------------------
V Director/Key Execs 20% 15% 25% 15%
=======================================================================================================
</TABLE>
Eligibility is defined by level of responsibility and contribution, not titling
nomenclature.
Actual awards may be from 0 to 125% of an Eligible Employee's Individual
Standard Award. However, the aggregate of all awards may not exceed the total
Adjusted Award Fund.
FUNDING
The 1998 Executive Annual Performance Plan Standard Award Fund is based on the
attainment of targeted ROE and then related to tier-target percents, shown
above, of base annual salaries of Eligible Employees.
<TABLE>
<CAPTION>
MEASURE WEIGHT TARGET
------- ------ ------
<S> <C> <C> <C>
MichCon ROE 100% 11.0%
MCNIC* ROE 100% 13%
MCN ROE 100% 12%
Citizens ROE 100% 13%
</TABLE>
* Includes Mobile Bay Gathering Company and Reed Holdings.
10
<PAGE> 14
ATTACHMENT II
MCN CORPORATE
EXECUTIVE ANNUAL PERFORMANCE PLAN
1998 SCALING OF AWARD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
RELATED
RANGE OF ROES SCALING FUNDING PERCENTAGE
==============================================================================================================================
<S> <C> <C>
Less than 10% No Award
- ------------------------------------------------------------------------------------------------------------------------------
10% to 12% Reduced 5% for each 0.1% ROE under 12% 0% to 100%
- ------------------------------------------------------------------------------------------------------------------------------
12% 100%
- ------------------------------------------------------------------------------------------------------------------------------
12% to 14% Increased 3% for each 0.1% ROE from 12% to 14% 100% to 160%
- ------------------------------------------------------------------------------------------------------------------------------
14% to 15% Increased 1.5% for each 0.1% ROE from 14% to 15% 160% to 175%
- ------------------------------------------------------------------------------------------------------------------------------
Above 15% Increased 0.4% for each 0.1% ROE above 15% Above 175%
==============================================================================================================================
</TABLE>
If ROE exceeds 12.5% and MCN attains a 3-year average EPS Growth Rate
of 12%, an additional 25% will be added to the fund resulting in 200% funding at
15% ROE.
ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY
Average Common Stockholders Equity shall be adjusted by:
1. Any gains or losses recorded to "Other Comprehensive Income
Within Equity".
11
<PAGE> 15
ATTACHMENT III
MCNIC
EXECUTIVE ANNUAL PERFORMANCE PLAN
1998 SCALING OF AWARD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
RELATED
RANGE OF ROES SCALING FUNDING PERCENTAGE
==============================================================================================================================
<S> <C> <C>
Less than 11% No Award
- ------------------------------------------------------------------------------------------------------------------------------
11% to 13% Reduced 5% for each 0.1% ROE under 13% 0% to 100%
- ------------------------------------------------------------------------------------------------------------------------------
13% 100%
- ------------------------------------------------------------------------------------------------------------------------------
13% to 15% Increased 3% for each 0.1% ROE from 13% to 15% 100% to 160%
- ------------------------------------------------------------------------------------------------------------------------------
15% to 16% Increased 1.5% for each 0.1% ROE from 15% to 16% 160% to 175%
- ------------------------------------------------------------------------------------------------------------------------------
Above 16% Increased 0.4% for each 0.1% ROE above 16% Above 175%
==============================================================================================================================
</TABLE>
If ROE exceeds 13.5% and MCN attains a 3-year average EPS Growth Rate
of 12%, an additional 25% will be added to the fund resulting in 200% funding at
16% ROE.
Note: These targets and scaling will also apply to Mobile Bay Gathering
Company and Reed Holdings.
ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY
Average Common Stockholders Equity shall be adjusted by:
- 1. Any gains or losses recorded to "Other Comprehensive Income
Within Equity".
12
<PAGE> 16
ATTACHMENT IV
MICHCON
EXECUTIVE ANNUAL PERFORMANCE PLAN
1998 SCALING OF AWARD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
RELATED
RANGE OF ROES SCALING FUNDING PERCENTAGE
==============================================================================================================================
<S> <C> <C>
Less than 9% No Award
- ------------------------------------------------------------------------------------------------------------------------------
9% to 11% Reduced 5% for each 0.1% ROE under 11% 0% to 100%
- ------------------------------------------------------------------------------------------------------------------------------
11% 100%
- ------------------------------------------------------------------------------------------------------------------------------
11% to 13% Increased 3% for each 0.1% ROE from 11% to 13% 100% to 160%
- ------------------------------------------------------------------------------------------------------------------------------
13% to 14% Increased 1.5% for each 0.1% ROE from 13% to 14% 160% to 175%
- ------------------------------------------------------------------------------------------------------------------------------
Above 14% Increased 0.4% for each 0.1% ROE above 14% Above 175%
==============================================================================================================================
</TABLE>
If ROE exceeds 11.5% and MCN attains a 3-year average EPS Growth Rate
of 12%, an additional 25% will be added to the fund resulting in 200% funding at
14% ROE.
ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY
Average Common Stockholders Equity shall be adjusted by:
1. Any gains or losses recorded to "Other Comprehensive Income Within
Equity".
13
<PAGE> 17
ATTACHMENT V
CITIZENS
EXECUTIVE ANNUAL PERFORMANCE PLAN
1998 SCALING OF AWARD
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
RELATED
RANGE OF ROES SCALING FUNDING PERCENTAGE
=============================================================================================================================
<S> <C> <C>
Less than 11% No Award
- -----------------------------------------------------------------------------------------------------------------------------
11% to 13% Reduced 5% for each 0.1% ROE under 13% 0% to 100%
- -----------------------------------------------------------------------------------------------------------------------------
13% 100%
- -----------------------------------------------------------------------------------------------------------------------------
13% to 15% Increased 3% for each 0.1% ROE from 13% to 15% 100% to 160%
- -----------------------------------------------------------------------------------------------------------------------------
15% to 16% Increased 1.5% for each 0.1% ROE from 15% to 16% 160% to 175%
- -----------------------------------------------------------------------------------------------------------------------------
Above 16% Increased 0.4% for each 0.1% ROE above 16% Above 175%
=============================================================================================================================
</TABLE>
If ROE exceeds 13.5% and MCN attains a 3-year average EPS Growth Rate
of 12%, an additional 25% will be added to the fund resulting in 200% funding at
16% ROE.
ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY
Average Common Stockholders Equity shall be adjusted by:
1. Any gains or losses recorded to "Other Comprehensive Income Within
Equity".
14
<PAGE> 18
ATTACHMENT VI
MCN ENERGY GROUP INC.
EXECUTIVE ANNUAL PERFORMANCE PLAN
BENEFICIARY DESIGNATION FORM
<TABLE>
<CAPTION>
============================================================================================================================
<S> <C> <C> <C>
Employee Name (Print) Social Security No. I. D. Number
- ----------------------------------------------------------------------------------------------------------------------------
Address (Number/Street) City State Zip Code
============================================================================================================================
</TABLE>
I hereby designate, pursuant to Article 6 of the above-referenced plan, the
below-designated person(s) as my beneficiary in the event of my death:
<TABLE>
============================================================================================================================
<S> <C>
Beneficiary's Name Address
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
I UNDERSTAND THAT THE DESIGNATION OF A BENEFICIARY OTHER THAN MY SPOUSE MUST BE
CONSENTED TO IN WRITING BY MY SPOUSE.
In the event any of the above-named beneficiaries should predecease me, or shall
survive me but die before receiving all amounts to be paid, I hereby name the
following as a contingent beneficiary to receive any such unpaid amounts:
<TABLE>
<CAPTION>
============================================================================================================================
<S> <C>
Beneficiary's Name Address
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the event none of the above-named beneficiaries survive me, any unpaid
amounts shall be paid to my lawful successor in interest. I reserve the right to
change this beneficiary designation at any time by filing with the Committee or
its designee a new beneficiary designation form.
I understand that my most recent election as to the beneficiary designation will
apply to all Deferrals by me under the plan.
<TABLE>
<CAPTION>
============================================================================================================================
<S> <C> <C>
Employee Signature Date
- ----------------------------------------------------------------------------------------------------------------------------
Receipt Acknowledged By Title Date
============================================================================================================================
</TABLE>
Spousal Consent: I hereby consent to the designation of beneficiary set forth
herein.
<TABLE>
<CAPTION>
============================================================================================================================
<S> <C>
Spouse's Signature Date
- ----------------------------------------------------------------------------------------------------------------------------
Witness Date
============================================================================================================================
</TABLE>
15
<PAGE> 1
EXHIBIT 10-12
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE
PERFORMANCE SHARE PLAN
(AS AMENDED AND RESTATED OCTOBER 1, 1997)
February 22, 1999
<PAGE> 2
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE
PERFORMANCE SHARE PLAN
Table of Contents
Page
----
Article 1 - Title, Purpose and Effective Date............................... 1
1.1 Title ........................................................ 1
1.2 Purpose ...................................................... 1
1.3 Effective Date................................................ 1
Article 2 - Definitions..................................................... 1
2.1 Affiliated Company............................................ 1
2.2 Award......................................................... 1
2.3 Board of Directors............................................ 1
2.4 Cause ........................................................ 2
2.5 Code ......................................................... 2
2.6 Committee..................................................... 2
2.7 Common Stock.................................................. 2
2.8 Corporation .................................................. 2
2.9 Deferred Account.............................................. 2
2.10 Disability ................................................... 2
2.11 Key Employee.................................................. 2
2.12 Nonemployee Director.......................................... 2
2.13 Participant .................................................. 2
2.14 Participating Corporation..................................... 2
2.15 Peer Group.................................................... 2
i
<PAGE> 3
Page
----
2.16 Plan Interest Rate............................................ 2
2.17 Performance Share............................................. 2
2.18 TSR or Total Shareholder Return............................... 2
Article 3 - Administration.................................................. 3
3.1 Committee and Board to Administer............................. 3
3.2 Authority of the Committee and Board.......................... 3
3.3 Decisions Binding............................................. 3
Article 4 - Awards.......................................................... 3
4.1 Eligibility for Awards........................................ 3
Article 5 - Performance Cycle and Performance Comparison.................... 4
5.1 Performance Cycle............................................. 4
5.2 Performance Comparison........................................ 4
Article 6 - Grant of Awards................................................. 4
6.1 Grant of Performance Shares................................... 4
6.2 Initial Individual Award...................................... 4
6.3 Initial Grant................................................. 4
6.4 Adjustment to Initial Grant................................... 5
Article 7 - Dividend Equivalents............................................ 6
7.1 Dividend Equivalents.......................................... 6
Article 8 - Vesting of Performance Shares................................... 6
8.1 Vesting Date of Performance Shares - General.................. 6
8.2 Death, Disability & Retirement - Prior to Vesting Date........ 6
ii
<PAGE> 4
Page
----
8.3 Common Stock Holding Requirement.............................. 6
Article 9 - Valuation and Payment of Final Awards........................... 7
9.1 Amount of Final Award - General............................... 7
9.2 Amount of Final Award - Death................................. 7
9.3 Payment of Final Award - General.............................. 7
9.4 Payment of Final Award - Death................................ 7
Article 10 - Deferral of Payments........................................... 7
10.1 Election to Defer............................................. 7
10.2 Deferral Election Agreement................................... 8
10.3 Establishment of Deferred Account............................. 8
10.4 Dividend Equivalents.......................................... 8
10.5 Timing of Retirement Distributions............................ 8
10.6 Form of Distributions......................................... 9
10.7 Termination Benefit........................................... 9
10.8 Change in Payment Option...................................... 9
10.9 Hardship Withdrawal Benefits.................................. 9
10.10 Interaction with the MCN Energy Group Mandatory Deferred
Compensation Plan............................................. 9
Article 11 - Funding of Benefits............................................ 9
11.1 Unfunded Plan................................................. 9
11.2 Non-ERISA Plan................................................ 10
Article 12 - Tax Withholdings............................................... 10
12.1 Tax Withholding............................................... 10
iii
<PAGE> 5
Page
----
Article 13 - Selection of and Payments to a Beneficiary..................... 11
13.1 Beneficiary Designation....................................... 11
13.2 Change in Beneficiary Designation............................. 11
13.3 Pre-Retirement Survivor Benefit ............................. 11
13.4 Post-Retirement Survivor Benefit.............................. 11
Article 14 - Amendment and Termination...................................... 11
14.1 Amendment, Modification, and Termination...................... 11
14.2 Awards Previously Granted..................................... 12
14.3 Right to Suspend.............................................. 12
14.4 Right to Accelerate........................................... 12
Article 15 - Miscellaneous.................................................. 12
15.1 No Right of Continued Employment.............................. 12
15.2 Delivery of Shares............................................ 12
15.3 Transfer and Leave of Absence................................. 12
15.4 Michigan Law to Govern........................................ 12
15.5 Forfeitures................................................... 12
15.6 Gender, Number and Heading ................................... 13
Article 16 - Change in Control.............................................. 13
16.1 Change in Control............................................. 13
16.2 Transfer to Rabbi Trust....................................... 14
16.3 Joint and Several Liability................................... 14
Attachments
Historical Background
v
<PAGE> 6
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE
PERFORMANCE SHARE PLAN
(AS AMENDED AND RESTATED OCTOBER 1, 1997)
ARTICLE 1
TITLE, PURPOSE AND EFFECTIVE DATE
1.1 TITLE. The title of the Plan, formerly the "MCN Energy Group
Long-Term Incentive Performance Unit Plan," shall be the "MCN Energy Group
Long-Term Incentive Performance Share Plan" and is referred to in this document
as the "Plan." This Plan is governed by the broader provisions set forth in the
MCN Corporation Stock Incentive Plan approved by shareholders on May 10, 1989.
Any conflicting provisions between such plan and this Plan shall be governed by
the MCN Corporation Stock Incentive Plan.
1.2 PURPOSE. The purpose of the Plan is to promote the success of MCN
Energy Group Inc. (the "Corporation" or "MCN") by providing financial incentives
to Key Employees of the Corporation and its affiliated companies, thereby
promoting the long-term growth and financial success of the Corporation by (i)
attracting and retaining outstanding ability, (ii) strengthening the
Corporation's capability to develop, maintain, and direct a competent management
team, (iii) providing an effective means for Key Employees to acquire and
maintain ownership of MCN stock, (iv) motivating Key Employees to achieve
long-range performance goals and objectives, and (v) providing incentive
compensation opportunities competitive with those of other major corporations.
1.3 EFFECTIVE DATE. The Plan is effective October 1, 1997.
ARTICLE 2
DEFINITIONS
The following terms have the meaning described below when used in the
Plan:
2.1 "AFFILIATED COMPANY" means any corporation while such corporation
is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Corporation or any other employing entity
while such entity is under common control (within the meaning of Section 414(c)
of the Code) of the Corporation.
2.2 "AWARD" shall mean a grant of Performance Shares under this Plan.
2.3 "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors
of the Corporation.
<PAGE> 7
2.4 "CAUSE" shall mean repeated material breaches of a Key Employee's
duties of employment which are not cured after receipt by the Key Employee of
written notice specifying such breaches or the Key Employee's conviction of a
felony involving moral turpitude.
2.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2.6 "COMMITTEE" shall mean not less than three Nonemployee Directors
of the Board, who, at the time of service on the Compensation Committee
hereunder, are, and at all times during the twelve month period prior to his or
her becoming a member shall have been, not eligible to receive an Award granted
by such Committee under the Plan.
2.7 "COMMON STOCK" shall mean common stock, par value $.01 of the
Corporation.
2.8 "CORPORATION" shall mean MCN Energy Group Inc. or any successor to
it in ownership of all or substantially all of its assets.
2.9 "DEFERRED ACCOUNT" shall mean an account established for a
Participant under Section 10.3.
2.10 "DISABILITY" shall have the meaning set forth in Section 22(e)(3)
of the Code.
2.11 "KEY EMPLOYEE" shall mean an employee of the Corporation who
occupies a responsible executive, professional, or administrative position and
who has the capacity to contribute to the success of the Corporation, as
determined by the Committee or Board.
2.12 "NONEMPLOYEE DIRECTOR" shall have the meaning ascribed to such
term in Rule 16b-3 of the Securities Exchange Act of 1934.
2.13 "PARTICIPANT" shall mean a Key Employee who has been granted an
Award.
2.14 "PARTICIPATING CORPORATION" shall mean the Corporation, Affiliated
Company, or other affiliated entity (whether or not incorporated) designated by
the Board of Directors.
2.15 "PEER GROUP" shall mean a peer group of 16 comparison companies as
reflected in Attachment I. The list may be revised as and when the Board deems
appropriate.
2.16 "PLAN INTEREST RATE" shall mean the average interest rate of
10-year U.S. Treasury Notes for the November of the prior calendar year, or such
other rate as set by the Committee or Board.
2.17 "PERFORMANCE SHARE" shall mean an award granted under Section 6.1.
2.18 "TSR" OR "TOTAL SHAREHOLDER RETURN" shall mean the percentage
increase in value at the end of a three year period of $100 invested in Common
Stock at the beginning of the
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period with all dividends being reinvested at the price of Common Stock at the
end of the month in which the dividend is paid. To determine the value at the
beginning and end of any period, a calculation is made of the average Common
Stock price for the trading days from December 17 through January 15.
ARTICLE 3
ADMINISTRATION
3.1 COMMITTEE AND BOARD TO ADMINISTER. The Committee and Board shall
administer the Plan. A majority of the members of the Committee or Board shall
constitute a quorum for the conduct of business at any meeting. They shall act
by majority vote of the members present at a duly convened meeting, which may
include a meeting by conference telephone call held in accordance with
applicable law. Action may be taken without a meeting if written consent thereto
is given in accordance with applicable law. The Committee or Board may delegate
its authority to administer the Plan.
3.2 AUTHORITY OF THE COMMITTEE AND BOARD. Except as limited by law or
by the Certificate of Incorporation or Bylaws of the Corporation, and subject to
the provisions herein, the Committee or Board shall have full power to select
employees who shall participate in the Plan; determine the sizes and types of
Awards; determine the terms and conditions of Awards in a manner consistent with
the Plan; construe and interpret the Plan and any agreement or instrument
entered into under the Plan as they apply to employees; establish, amend, or
waive rules and regulations for the Plan's administration as they apply to
employees; and (subject to the provisions of Article 14 herein) amend the terms
and conditions of any outstanding Award to the extent such terms and conditions
are within the discretion of the Committee or Board as provided in the Plan.
Further, they shall make all other determinations, which may be necessary or
advisable for the administration of the Plan, as the Plan applies to employees.
The Committee or Board may delegate its authority as identified herein.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee or Board pursuant to the provisions of the Plan and all related orders
and resolutions of the Board shall be final, conclusive, and binding on all
persons, including the Corporation, its stockholders, Directors, employees,
Participants and their estates and beneficiaries.
ARTICLE 4
AWARDS
4.1 ELIGIBILITY FOR AWARDS. An Award may be made to a Key Employee
selected by the Committee or Board. In making this selection, and in determining
the amount of the Award, consideration may be given to the functions and
responsibilities of the Key Employee, his present and potential contributions to
the success of the Corporation, the value of his services to the Corporation,
and such other factors deemed relevant.
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ARTICLE 5
PERFORMANCE CYCLE AND PERFORMANCE COMPARISON
5.1 PERFORMANCE CYCLE. The performance cycle is six years. Each
performance cycle is divided into two parts of three years each. Performance
cycles overlap.
5.2 PERFORMANCE COMPARISON. The performance results for the Peer Group
and MCN shall be arranged on the basis of TSR from highest to lowest. The Peer
Group shall be divided into equal fourths or quartiles, with I being the highest
quartile and IV the lowest.
ARTICLE 6
GRANT OF AWARDS
6.1 GRANT OF PERFORMANCE SHARES. Subject to the limitations of the MCN
Energy Group Inc. Stock Incentive Plan, the Committee or Board shall, after such
consultation with and consideration of the recommendations of management as the
Committee or Board considers desirable, select those Key Employees to whom
Performance Shares will be granted. The value of Performance Shares shall be
based in whole or in part, on the value of Common Stock. Subject to the
provisions of the Plan, Performance Shares shall be subject to such terms,
restrictions, conditions, vesting requirements, and payment rules (all of which
are sometimes hereinafter collectively referred to as "rules") as the Committee
or Board may determine in its sole discretion. All such rules applicable to a
particular award of Performance Shares shall be reflected in writing and
furnished to the Key Employee at the time of grant. The rules need not be
identical for each award of Performance Shares.
6.2 INITIAL INDIVIDUAL AWARD. Initial individual Awards will be
established for each Key Employee during the first quarter of the fourth year of
the performance cycle, in accordance with Table I of Attachment II. The major
factors considered in determining the level of an individual award include: (a)
prior contribution and accomplishments; (b) projected contribution and impact on
driving business performance and shareholder value over the next three years;
(c) career potential; and (d) retention.
6.3 INITIAL GRANT. Subject to the Committee's or the Board's
discretion, the initial grant shall be made in the first quarter of the fourth
year of the performance cycle, based on TSR in the first three years of the
performance cycle as compared to TSR of the Peer Group. Initial grants are
determined by adjusting the initial individual Award either upward or downward
based on MCN's TSR performance compared to the Peer Group, as reflected in Table
II on Attachment II. Other performance criteria may be used at the sole
discretion of the Board or Committee.
6.4 ADJUSTMENT TO INITIAL GRANT. An adjustment of initial grants may
be made at the sole discretion of (i) the Board or Committee for a Participant
in Tiers I and II; and (ii) the Chairman of
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MCN for any other Participant. In general, however, an initial grant shall be
adjusted as described below for the circumstances listed in 6.4(a) through (e).
(a) NORMAL RETIREMENT OR DISABILITY. In the event of the
retirement of a Participant at age 62 or older, or retirement due to Disability,
the initial grant will be unchanged unless prorated at the discretion of the
Board or the Chairman of the Board, as appropriate, according to the number of
whole months in the last half of the performance cycle that the Participant was
an active employee. Any proration of initial grants shall be effective as of the
date of retirement. Final awards, if any, will be given at the end of the
performance cycle and adjusted pursuant to Section 9.1.
(b) EARLY RETIREMENT. In the event of the retirement of a
Participant prior to age 62, the initial grant shall be prorated according to
the number of whole months in the last half of the performance cycle that the
Participant was an active employee. Any proration of initial grants shall be
effective as of the date of early retirement. Final awards, if any, will be
given at the end of the performance cycle and adjusted pursuant to Section 9.1.
(c) DEATH. In the event of the death of the Participant, the
initial grant for each performance cycle shall be prorated according to the
number of whole months in the last half of the performance cycle that the
Participant was an active employee. The proration of initial grants shall be
effective as of the date of death and such Award shall vest in accordance with
Section 8.2. The final Award for each performance cycle shall be valued and paid
in accordance with Sections 9.2 and 9.4.
(d) OTHER TERMINATIONS. In the event of termination for any
reason not described in Sections 6.4(a), (b) or (c), a Participant's initial
grants may be adjusted by all, none, or any portion of the initial grants that
have been given to the Participant, in accordance with subsection (e) of this
section 6.4. The reduction in initial grants is effective as of the date of
termination. Final awards, if any, will be given at the end of the performance
cycle and adjusted pursuant to Section 9.1.
(e) FOR PURPOSES OF INITIAL GRANTS ISSUED IN 1994 AND 1995
ONLY. If a Participant voluntarily terminates employment with MCN or a
Participating Corporation:
(i) In the first year of the second part of the
performance cycle (year four), the Participant's initial grant may be reduced to
zero;
(ii) In the second year of the second part of the
performance cycle (year five), the Participant's initial grant may be reduced to
an amount not less than 10 percent of the initial grant; and
(iii) In the third year of the second part of the
performance cycle (year six) up through the payment of the final award (in year
seven), the Participant's initial grant may be reduced to an amount not less
than 20 percent of the initial grant.
Final awards, if any, will be given at the end of the
performance cycle and adjusted pursuant to Section 9.1.
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ARTICLE 7
DIVIDEND EQUIVALENTS
7.1 DIVIDEND EQUIVALENTS. During the second part of the performance
cycle (years four through six) Participants will receive dividend equivalent
amounts based on the number of Performance Shares in the initial grant, as
adjusted pursuant to Section 6.4. Dividend equivalents for dividends with a
record date that is subsequent to a Participant's retirement or termination
date, will be paid to the Participant based on the reduced number of Performance
Shares, as determined under Section 6.4.
ARTICLE 8
VESTING OF PERFORMANCE SHARES
8.1 VESTING DATE OF PERFORMANCE SHARES - GENERAL. Subject to the
Committee's or the Board's discretion and the rules of Sections 6.4 and 16.1,
Performance Shares shall fully vest and be one hundred percent (100%)
nonforfeitable on the date the Board approves the final Award (the "Vesting
Date").
8.2 DEATH - PRIOR TO VESTING DATE. Subject to the Committee's or the
Board's discretion and the rules of Sections 6.4 and 16.1, upon termination of
employment prior to the Vesting Date by reason of the Participant's death, all
Performance Shares granted to such Participant shall become fully vested and
nonforfeitable as of the date of death.
8.3 COMMON STOCK HOLDING REQUIREMENT. Participants receiving Common
Stock as a final award under the Plan are required to hold such Common Stock
until they separate employment from the Company, to the extent the Participant
does not meet the Common Stock Ownership Guidelines described in Attachment III.
Participants must consult with MCN's Legal Department prior to
executing any sale of Common Stock. Compliance with the Common Stock Ownership
Guidelines will be determined at that time. A Participant's failure to comply
with this section 8.3 shall result in disciplinary action up to and including
termination of employment, at the discretion of the Board or Committee.
ARTICLE 9
VALUATION AND PAYMENT OF FINAL AWARDS
9.1 AMOUNT OF FINAL AWARD - GENERAL. Final Awards will be determined
by adjusting the initial grant units either upward or downward based on the
Corporation's performance in years four through six of the performance cycle as
compared to the TSR of the Peer Group. Calculation of TSR performance for the
final Award will follow that described in Section 5.2. Other performance
criteria may be used at the sole discretion of the Board or Committee. The Board
will authorize the size of the final Award based on Table III in Attachment II.
The
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value of the final Award shall be determined using the simple average of the
sales price of the shares of Common Stock, sold under the provisions of this
Plan, over the five trading-day period beginning with the trading day after the
day the MCN Board of Directors approves the final Award.
9.2 AMOUNT OF FINAL AWARD - DEATH. Final Awards will be determined by
adjusting the initial grant units either upward or downward based on the
midpoint percentage of the Corporation's TSR quartile compared to the TSR of the
Peer Group for the quarter immediately preceding the Participant's date of
death. The value of the final Award shall be determined using the simple average
of the reported high and low prices of Common Stock on the New York Stock
Exchange composite tape on the date of death. If the date of death is not a
trading day, the value of the final Award shall be determined using the simple
average of the reported high and low prices of Common Stock on the New York
Stock Exchange composite tape on the first trading day prior to the date of
death.
9.3 PAYMENT OF FINAL AWARD - GENERAL. Final Awards, in the form of
Common Stock, will be made in the first quarter following the end of the
six-year performance cycle.
9.4 PAYMENT OF FINAL AWARD - DEATH. The final Award, in the form of
Common Stock, shall be paid to the Beneficiary no later than 120 days after the
Participant's date of death.
ARTICLE 10
DEFERRAL OF PAYMENTS
10.1 ELECTION TO DEFER. A Participant in Tiers I through V may elect,
no later than October 31 of the calendar year preceding the calendar year in
which an Award would otherwise be payable to the Participant, to defer his
Award in an amount (i) not less than 50 percent, nor (ii) in excess of 100
percent of the Award less the Federal Insurance Contributions Act tax on such
Award, in 10 percent increments. The Award shall be deferred until termination
of employment with the Corporation (the "Deferral Period"). The Deferral
Period may not extend past the date the Participant terminates employment with
the Corporation for any reason.
10.2 DEFERRAL ELECTION AGREEMENT. The Committee or Board shall provide
to each Key Employee a form of Deferral Election Agreement (See Attachment IV),
which shall set forth the Key Employee'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 or
Board. The most recent Deferral Election Agreement shall be effective for all
payments made to a Participant under the Plan with regards to the Deferral
Period, payment of dividend equivalents and distribution elections.
10.3 ESTABLISHMENT OF DEFERRED ACCOUNT. The Committee or Board shall
establish a Deferred Account for each Participant in regards to the Awards the
Participant has elected to defer, as set forth on his Deferral Election
Agreement.
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(a) DENOMINATION OF DEFERRALS - GENERAL. During the Deferral
Period, a Participant's Deferred Account shall be denominated in common stock
equivalents equal to the number of shares of Common Stock the Participant would
have otherwise received ("Share Equivalents"), had he not made an election to
defer under Section 10.1 A Participant's Deferred Account shall earn dividend
equivalents during the Deferral Period in accordance with Section 10.4.
(b) DENOMINATION OF DEFERRALS -AFTER COMPLETION OF DEFERRAL
PERIOD OR AGE 65. On the earlier of the date (i) the Deferral Period ends or
(ii) the Participant turns age 65 ("Valuation Date"), the Participant's account
shall be valued on a cash basis, using the average of the high and low Common
Stock price on the New York Stock Exchange Composite Tape on the Valuation Date.
Such cash valuation shall be used for purposes of determining the amount of
interest to be credited to the Participant's account during the period annual
distributions are made to the Participant ("Payout Period") and for purposes of
determining the number of shares of Common Stock that will be distributed to a
Participant during the Payout Period, in accordance with Section 10.6. Interest
shall be credited annually on the Anniversary Date on the declining cash balance
at the Plan Interest Rate. The Human Resources Department shall notify each
Participant of his account balance within a reasonable time after the end of the
Participant's Deferral Period.
10.4 DIVIDEND EQUIVALENTS. Dividend equivalents equal to 50% of the
dividends payable on MCN Common Stock shall be credited to a Participant's
Account during the Deferral Period based on the Share Equivalents held in such
Participant's Account. Dividend equivalents shall be reinvested in Share
Equivalents based upon the average of the high and low Common Stock price on the
dividend payment date. Alternatively, a Participant may elect on his Deferral
Election Agreement to have all of such credited dividend equivalents paid
directly to him in cash during the Plan Year. A Participant's election regarding
dividend equivalents shall be effective for all Share Equivalents held in the
Participant's Account on the January 1 immediately following execution of his
Deferral Election Form and shall remain in effect until revoked by the
Participant. Revocation of a dividend equivalent election shall be effective on
the January 1 immediately following revocation.
10.5 TIMING OF RETIREMENT DISTRIBUTIONS. Upon completion of a
Participant's Deferral Period, the distribution of the Participant's Deferred
Account shall be made in accordance with the Participant's selection on his
Deferral Form; either (i) in annual payments over a period not less than one
year and not more than 15 years, in one year increments, or (ii) as a lump sum
distribution. If no Deferral Form is on file or no distribution option is
indicated on the Deferral Form, the Participant's Deferred Account shall be
distributed in one lump sum. All distributions shall be paid out at the end of
the quarter in which the Participant's retirement date occurs. If a Participant
has elected annual payments, the initial payment shall be made at the end of the
quarter in which the Participant's Deferral Period ends. All subsequent annual
payments shall be made at the end of the quarter in which the anniversary of the
Participant's Deferral Period ("Anniversary Date") occurs. Interest shall accrue
on the value of the Participant's account from the Valuation date to the end of
the quarter in which the initial payment is distributed.
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10.6 FORM OF DISTRIBUTIONS. Notwithstanding the fact that a
Participant's Deferred Account shall be valued on a cash basis as of the
Valuation Date, the distribution to a Participant shall be paid in MCN common
stock. The number of shares of Common Stock to be distributed shall equal the
number of shares (rounded up to the next whole number of shares) such
cash-valued Deferred Account, divided by the number of payments remaining in the
Payout Period, could have purchased based on the average of the high and low
Common Stock price on the New York Stock Exchange Composite Tape on the fifth
trading-day prior to the end of the quarter in which Valuation Date (or
Anniversary Date for all subsequent payments) occurs. The number of shares
distributed annually shall be determined by amortizing the cash value of the
Participant's Deferred Account over the Payout Period. Interest shall be
credited annually on the declining balance at the Plan Interest Rate. The number
of shares distributed annually to the Participant shall be recalculated on the
Participant's Anniversary Date to reflect changes in the Plan Interest Rate, the
decrease in the number of annual payments left to be made, and other changes to
the Participant's Deferred Account balance. The amortization schedule shall be
updated annually to reflect the average 10-year Treasury Note interest rate for
the fifth trading-day prior to the end of the quarter in which Valuation Date
(or Anniversary Date for all subsequent payments) in which the distribution is
to be made.
10.7 TERMINATION BENEFIT. A Participant who terminates employment prior
to completion of his Deferral Period shall receive payment of his Account
balance in accordance with the Participant's election on his Deferral Election
Agreement; either in annual payments over three years or as a lump sum
distribution. If no election is indicated on the Participant's Deferral Election
Agreement, the Participant's termination benefit shall be paid to him in annual
payments over three years beginning no later than 120 days after termination of
employment. If the Participant's account is to be paid in annual installments,
the account shall be valued in accordance with Section 10.3(b), using the
termination date as the Valuation Date, and the timing and form of payments
shall be determined in accordance with Sections 10.5 and 10.6.
10.8 CHANGE IN PAYMENT OPTION. A Participant's election regarding the
distribution of his account on his Deferral Election Agreement shall be
effective for all distributions from the Participant's account on the January 1
immediately following execution of his Deferral Election Form and shall remain
in effect until a different election is indicated by the Participant on a
subsequent Deferral Election Form. The payment options selected by the
Participant on his Deferral Election Agreement may be changed at any time by the
Participant submitting a new payment selection to the Committee or Board, but a
change shall be effective only if it is received by the Committee or Board at
least 12 months before payments under the Plan commence.
10.9 HARDSHIP WITHDRAWAL BENEFITS. At any time prior to a distribution
in accordance with Section 10.6, a Participant may request that the Committee or
Board make a distribution to him of all or part of his Deferred Account within
120 days. Such distribution shall be made only if the Committee or Board
determines that the Participant is suffering from a financial hardship that
cannot be satisfied from his normal sources of income, and the distribution
shall be limited to the amount required to meet the financial hardship. In
making these determinations, the Committee or Board shall utilize the
regulations proposed or adopted by the U.S. Department of Treasury pursuant to
Section 401(k) of the Code and the rules under the Savings Plan. A financial
hardship shall first be satisfied
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from (i) a loan under the provisions of the Savings Plan, (ii) the MCN Executive
Deferred Compensation Plan, and (iii) the Supplemental Savings Plan, before a
hardship distribution may be made from the Plan.
10.10 INTERACTION WITH THE MCN ENERGY GROUP MANDATORY DEFERRED
COMPENSATION PLAN. The portion of any Award required to be deferred under The
MCN Energy Group Mandatory Deferred Compensation Plan will be deemed to be
deferred in accordance with Section 10.1 of the Plan.
ARTICLE 11
FUNDING OF BENEFITS
11.1 UNFUNDED PLAN. The Plan shall be unfunded. All benefits payable
under the Plan shall be paid from the Corporation's general assets. The
Corporation 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 Corporation's obligation to make
benefit payments pursuant to the Plan. Any assets of the Corporation available
to pay Plan benefits shall be subject to the claims of the Corporation's general
creditors and may be used by the Corporation in its sole discretion for any
purpose. No employee shall have voting or other rights with respect to such
shares of Common Stock prior to the delivery of such shares. The Corporation
shall not, by any provisions of the Plan, be deemed to be a trustee of any
Common Stock or any other property under the Plan, and any liabilities of the
Corporation to any employee pursuant to the Plan shall be those of a debtor
pursuant to such contract obligations as are created by or pursuant to the Plan,
and the rights of any employee, former employee, or beneficiary under the Plan
shall be limited to those of a general creditor of the Corporation. In its sole
discretion, the Board may authorize the creation of trusts or other arrangements
to meet the obligations of the Corporation and each other Participating
Corporation under the Plan provided, however, that the existence of such trusts
or other arrangements is consistent with the unfunded status of the Plan.
11.2 NON-ERISA PLAN. The Plan is intended to provide benefits for "a
select group of management or highly compensated employees" within the meaning
of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and therefore to be exempt from Sections 2, 3 and 4
of Title 1 of ERISA. Accordingly, the Plan shall terminate and, existing account
balances and other benefits in pay status shall be paid in a single, actuarially
equivalent lump-sum and no further benefits, vested or non-vested, shall be paid
hereunder in the event it is determined by a court of competent jurisdiction or
by an opinion of counsel that the Plan constitutes an employee pension benefit
plan within the meaning of Section 3(2) of ERISA which is not so exempt.
ARTICLE 12
TAX WITHHOLDINGS
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12.1 TAX WITHHOLDING. The Corporation shall not make the delivery of
any shares of Common Stock until the Participant has made satisfactory
arrangements for the payment of any applicable withholding taxes. The
tax-withholding obligation may be satisfied by any of the following means, a
combination of such means, or any other means established by the Committee or
Board:
(a) tendering cash payment;
(b) authorizing the Corporation to (i) withhold 50% of the Common
Stock to be issued and (ii) facilitate the sale of such stock; or
(c) delivery to the Corporation by the Participant of owned and
unencumbered shares of Common Stock having an aggregate fair market value on the
date the withholding tax arises less than or equal to the amount of the
withholding tax obligation.
The Participant must satisfy the tax-withholding obligation no later than 30
days from the date the Award vests. The Committee or Board may establish
procedures it deems appropriate to assist a Participant in making such payment.
ARTICLE 13
SELECTION OF AND PAYMENTS TO A BENEFICIARY
13.1 BENEFICIARY DESIGNATION. A Participant shall designate a
beneficiary on his Beneficiary Designation Form, as provided in Attachment V.
The designation of a beneficiary other than the Participant's spouse 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 or in existence 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.
13.2 CHANGE IN BENEFICIARY DESIGNATION. A Participant may change
the designated beneficiary, subject to the restriction in Section 13.1, from
time to time by filing a new written designation with the Committee or Board.
Such designation shall be effective upon receipt by the Committee or Board.
13.3 PRE-RETIREMENT SURVIVOR BENEFIT. If a Participant dies prior to
completion of the Deferral Period, his Beneficiary shall be entitled to receive
a distribution of the Participant's Deferred Account. The distribution to a
beneficiary shall be paid in Common Stock equal to the number of shares of
Common Stock deemed to be held in the Participant's Deferred Account and valued
at the closing price of MCN Common Stock on the New York Stock Exchange
composite tape on the day of the Participant's death. The distribution shall be
paid in accordance with the Participant's selection on his Deferral Form; either
in annual installments over a three-year period, or as a lump sum distribution.
If the Participant's account is to be paid in annual installments, the account
shall be valued in accordance with Section 10.3(b), using the Participant's date
of death as the Valuation Date, and the timing and form of payments shall be
determined in accordance with Sections 10.5 and 10.6. Payments
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to the beneficiary shall begin as soon as practicable, but in no event later
than one year following the Participant's death.
13.4 POST-RETIREMENT SURVIVOR BENEFIT. If a Participant dies subsequent
to the start of his distribution payments under Section 10.5, his beneficiary
shall be entitled to continue to receive the distribution of the Participant's
Deferred Account for the remainder of the period over which benefits were being
paid to the deceased Participant.
ARTICLE 14
AMENDMENT AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Committee or Board
may at any time and from time to time, alter, amend, suspend, or terminate the
Plan in whole or in part; provided, however, that no amendment which requires
shareholder approval in order for the Plan to continue to comply with Rule 16b-3
under the Securities Exchange Act of 1934, including any successor to such Rule,
shall be effective unless such amendment shall be approved by the requisite vote
of shareholders of the Corporation entitled to vote thereon.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
14.3 RIGHT TO SUSPEND. If the Board determines that payments under
Sections 7.1, 9.3, 9.4 or 10.5 of the Plan would have a materially adverse
affect on the Company's ability to carry on its business, the Board may suspend
any or all such payments temporarily for such time as in it 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 distribution of (i) Common Stock
for payments under Sections 9.3, 9.4 and 10.6, and (ii) cash for payments under
Section 7.1, immediately upon the expiration of the period of suspension.
14.4 RIGHT TO ACCELERATE. The Board 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 distribution of Common
Stock.
ARTICLE 15
MISCELLANEOUS
15.1 NO RIGHT OF CONTINUED EMPLOYMENT. Neither the establishment of the
Plan, the granting of an Award, or the payment of any benefits hereunder or any
action of the Corporation or of the Board or of the Committee shall be held or
construed to confer upon any person any legal right to be continued in the
employ of the Corporation or its direct or indirect subsidiaries,
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each of which expressly reserves the right to discharge any employee whenever
the interest of any such Corporation in its sole discretion may so require
without liability to such Corporation, the Board or the Committee except as to
any rights which may be expressly conferred upon such employee under the Plan.
15.2 DELIVERY OF SHARES. No shares shall be delivered pursuant to the
payment of any Award unless the requirements of such laws and regulations, as
may be deemed by the Committee or Board to be applicable thereto, are satisfied.
15.3 TRANSFER AND LEAVE OF ABSENCE. A transfer of a Key Employee from a
Participating Corporation to an Affiliated Company and a leave of absence duly
authorized in writing by the Participating Corporation, for military service or
sickness, or for any other purpose approved by the Participating Corporation,
shall not be deemed a termination of employment.
15.4 MICHIGAN LAW TO GOVERN. All questions pertaining to the
construction, regulation, validity, and effect of the provisions of the Plan
shall be determined in accordance with the laws of the State of Michigan.
15.5 FORFEITURES. Notwithstanding any other provisions of this Plan, if
the Committee or Board finds by a majority vote, after full consideration of the
facts, that a Participant, before or after termination of his employment with
the Corporation or an Affiliated Company for any reason:
(a) committed or engaged in fraud, embezzlement, theft,
commission of a felony, or proven dishonesty in the course of his employment by
the Corporation or its subsidiaries, which conduct damaged the Corporation or
its subsidiaries, or disclosed trade secrets of the Corporation or its
subsidiaries;
(b) participated, engaged in, or had a financial or other
interest, whether as an employee, officer, director, consultant, contractor,
shareholder, owner, or otherwise, in any commercial endeavor in the United
States which has a significant competitive impact on the business of the
Corporation or its subsidiaries without the written consent of the Corporation
or its subsidiaries; or
(c) has taken any other action that has a significant adverse
impact in the Corporation or its subsidiaries,
the Participant shall forfeit all outstanding Awards, which are not vested. This
forfeiture requirement shall not apply to Awards that have been deferred under
Article 10. Clause (b) shall not be deemed to have been violated solely by
reason of the Participant's ownership of stock or securities of any publicly
owned corporation, if that ownership does not result in effective control of the
Corporation.
The decision of the Committee or Board as to the cause of the
Participant's discharge, the damage done to the Corporation or its subsidiaries,
and the extent of the
13
<PAGE> 19
Participant's competitive activity shall be final. No decision of the Committee
or Board, however, shall affect the finality of the discharge of the Participant
by the Corporation or its subsidiaries in any manner.
15.6 GENDER, NUMBER AND HEADING. Whenever any words are used herein in
the masculine gender, they shall be construed as though they were also used in
the feminine gender in all cases where they would so apply. Whenever any words
used herein are in the singular form, they shall be construed as though they
were also used in the plural form in all cases where they would so apply.
Headings of sections and subsections as used herein are inserted solely for
convenience and reference and constitute no part of the Plan.
ARTICLE 16
CHANGE IN CONTROL
16.1 CHANGE IN CONTROL. In the case of a Change in Control (as defined
in the MCN Energy Group Inc. Stock Incentive Plan), each Performance Share shall
immediately be fully vested and any restrictions on the transfer of previously
issued stock shall lapse. For this purpose, the number of Performance Shares
which shall vest shall in no event be less than one hundred percent (100%) of
the initial grant; provided, however, that for each outstanding award year, if
the Corporation is ranked in the first or second quartile of the peer group
during the second half of the performance cycle at the time of the Change in
Control, the number of Performance Shares which shall vest shall be two hundred
percent (200%) or one hundred fifty percent (150%), respectively, of the initial
grant. Such Award and all performance shares previously deferred shall be paid
within thirty (30) days of such Change in Control, either in shares of Common
Stock or if the Corporation no longer has common stock outstanding, the same
consideration received by the Corporation's shareholders upon the consummation
of the Change in Control transaction.
16.2 TRANSFER TO RABBI TRUST. The Corporation 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 of Control and
thereafter, assets are to be transferred to such Rabbi Trust to provide benefits
under the Plan. The Corporation 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. The transfer of funds required by this section shall be made in
shares of Common Stock.
16.3 JOINT AND SEVERAL LIABILITY. Upon and at all times after a Change
in Control, the liability under the Plan of the Corporation and each Affiliated
Company that has adopted the Plan shall be joint and several so that the
Corporation and each such Affiliated Company 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.
14
<PAGE> 20
IN WITNESS WHEREOF, the undersigned officer of the Corporation has
executed this Plan as of this 1st day of October, 1997, pursuant to the
resolution adopted by the Board of Directors of the Corporation.
MCN ENERGY GROUP INC.
BY:
--------------------------
Alfred R. Glancy III
Chairman and Chief Executive Officer
Dated as of , 1998
----------------
Effective October 1, 1997
15
<PAGE> 21
ATTACHMENT I
MCN ENERGY GROUP, INC.
COMPARISON COMPANIES
Due to MCN's continued transition from a utility holding company to a
diversified energy holding company, a change in the companies making up the peer
group for measuring Performance Share values and payouts was made beginning with
the 1996 plan year.
<TABLE>
<CAPTION>
PEER GROUP A PEER GROUP B
------------ ------------
<S> <C>
1. Atlanta Gas Light Company 1. CMS Energy Corporation
2. CMS Energy Corporation 2. Coastal Corporation
3. Columbia Gas System, Inc. 3. Columbia Gas System, Inc.
4. Consolidated Natural Gas Company 4. Consolidated Natural Gas Company
5. DTE Energy Company (Detroit Edison) 5. Enron Corporation
6. Equitable Resources, Inc. 6. Equitable Resources, Inc.
7. Laclede Gas Company 7. K N Energy, Inc.
8. Marketspan Corporation (Brooklyn Union) 8. Marketspan Corporation (Brooklyn Union)
9. MCN Energy Group Inc. 9. MCN Energy Group Inc.
10. National Fuel Gas Company 10. National Fuel Gas Company
11. NICOR Inc. 11. ONEOK Inc.
12. ONEOK Inc. 12. Questar Corporation
13. Peoples Energy Corporation 13. Sonat Inc.
14. Southwest Gas Corporation 14. Southwest Energy Company
15. Washington Gas Light Company 15. The Williams Companies
16. WICOR, Inc. 16. WICOR, Inc.
</TABLE>
<TABLE>
<CAPTION>
APPLICATION OF PEER GROUP TO PERFORMANCE CYCLES
INITIAL GRANTS FINAL AWARDS
-------------- ------------
Period Year Peer Group Period Year Peer Group
- ------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C>
1992 - 1994 1995 A 1995 - 1997 1998 A
1993 - 1995 1996 A/B 1996 - 1998 1999 B
1994 - 1996 1997 B 1997 - 1999 2000 B
</TABLE>
<PAGE> 22
ATTACHMENT II
<TABLE>
<CAPTION>
TABLE I - INITIAL INDIVIDUAL AWARD - 1997
=======================================================================================================
MCN MICHCON MCNIC* CITIZEN'S
TIER DESCRIPTION TARGET % TARGET % TARGET % TARGET %
BASE SALARY BASE SALARY BASE SALARY BASE SALARY
=======================================================================================================
<S> <C> <C> <C> <C> <C>
I Chairman & CEO 85% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
II Vice Chairman/Pres 50 - 70% 45 - 60% 50 - 70% N/A
- -------------------------------------------------------------------------------------------------------
III VP/Officer/Exec. 25 - 35% 25 - 35% 25 - 40% 25 - 35%
Dir.
- -------------------------------------------------------------------------------------------------------
IV Director 15 - 25% 15 - 25% 15 - 30% 15 - 30%
- -------------------------------------------------------------------------------------------------------
V Sr. Staff/Mgmt. 5 - 15% 5 - 15% 5 - 15% 5 - 15%
- -------------------------------------------------------------------------------------------------------
VI Discretionary Up to 20% Up to 20% Up to 20% Up to 20%
& Population Population Population Population
VII
Max. 5% of Max. 5% of Max. 5% of Max. 5% of
Salary Salary Salary Salary
=======================================================================================================
</TABLE>
* Includes Mobile Bay Gathering Company and Reed Holdings.
<TABLE>
<CAPTION>
TABLE II - INITIAL GRANT - 1997
===================================================================================================
INITIAL GRANT
===================================================================================================
% OF INITIAL
PEER RANKING INDIVIDUAL AWARDS
===================================================================================================
<S> <C>
1st Quartile 125 - 200%
2nd Quartile 75 - 150%
3rd Quartile 25 - 100%
4th Quartile 0 - 50%
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE III - FINAL AWARD - 1997
===================================================================================================
FINAL AWARD
===================================================================================================
% OF
PEER RANKING INITIAL GRANT
===================================================================================================
<S> <C>
1st Quartile 125 - 200%
2nd Quartile 75 - 150%
3rd Quartile 25 - 100%
4th Quartile 0 - 50%
===================================================================================================
</TABLE>
2
<PAGE> 23
ATTACHMENT II
<TABLE>
<CAPTION>
TABLE I - INITIAL INDIVIDUAL AWARD - 1998
=======================================================================================================
MCN MICHCON MCNIC* CITIZEN'S
TIER DESCRIPTION TARGET % TARGET % TARGET % TARGET %
BASE SALARY BASE SALARY BASE SALARY BASE SALARY
=======================================================================================================
<S> <C> <C> <C> <C> <C>
I Chairman & CEO 160% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
II Vice Chairman/Pres 100 - 120% 70 - 95% 110 - 130% N/A
- -------------------------------------------------------------------------------------------------------
III VP/Officer/Exec. 45 - 55% 35 - 45% 55 - 65% 30 - 40%
Dir.
- -------------------------------------------------------------------------------------------------------
IV Director 25 - 35% 25 - 35% 30 - 40% 20 - 30%
- -------------------------------------------------------------------------------------------------------
V Sr. Staff/Mgmt. 15 - 25% 15 - 25% 15 - 25% 10 - 20%
- -------------------------------------------------------------------------------------------------------
VI Discretionary Up to 20% Up to 20% Up to 20% Up to 20%
& Population Population Population Population
VII
Max. 5% of Max. 5% of Max. 5% of Max. 5% of
Salary Salary Salary Salary
=======================================================================================================
</TABLE>
* Includes Mobile Bay Gathering Company and Reed Holdings.
<TABLE>
<CAPTION>
TABLE II - INITIAL GRANT - 1998
===================================================================================================
INITIAL GRANT
===================================================================================================
% OF INITIAL
PEER RANKING INDIVIDUAL AWARDS
===================================================================================================
<S> <C>
1st Quartile 125 - 200%
2nd Quartile 75 - 150%
3rd Quartile 25 - 100%
4th Quartile 0 - 50%
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE III - FINAL AWARD - 1998
===================================================================================================
FINAL AWARD
===================================================================================================
% OF
PEER RANKING INITIAL GRANT
===================================================================================================
<S> <C>
1st Quartile 125 - 200%
2nd Quartile 75 - 150%
3rd Quartile 25 - 100%
4th Quartile 0 - 50%
===================================================================================================
</TABLE>
<PAGE> 24
ATTACHMENT III
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE
PERFORMANCE SHARE PLAN
COMMON STOCK OWNERSHIP GUIDELINES
-------------------------------------------------------
TIER GUIDELINE
-------------------------------------------------------
I 8 times salary
-------------------------------------------------------
II 5 times salary
-------------------------------------------------------
III 3 times salary
-------------------------------------------------------
IV and V 1 times salary
-------------------------------------------------------
VI and VII None
-------------------------------------------------------
For purposes of meeting these guidelines, the following shares of Common Stock
are included:
- - Actual shares owned outright
- - Shares held in the MCN Energy Group Savings and Stock Ownership Plan
- - Share equivalents in deferral plans
- - Unvested Performance Shares
For purposes of determining when shares received from the Plan may be sold,
unvested Performance Shares are excluded.
<PAGE> 25
ATTACHMENT IV
MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PLAN
PERFORMANCE SHARE PROGRAM
DEFERRAL ELECTION FORM
================================================================================
This Benefit Agreement is entered into between (the
"Company") and , (the "Employee"), pursuant to the MCN Energy
Group Inc. Long-Term Incentive Plan (the "Plan"), with an Effective Date
of .
================================================================================
ELECTION TO PARTICIPATE
By the execution of this Benefit Agreement, the Employee hereby elects to
participate in the Plan, and understands and agrees to the following:
I. Deferrals must be stated as a percentage of the Final Award to be received,
with a minimum deferral of 50% of the Final Award.
II. Up to 100% of the Final Award is eligible for deferral, less applicable
FICA tax on the Final Award.
III. The Deferral Period remains in effect until termination of employment.
IV. The most recent Deferral Period and Distribution election shall be
effective for all amounts payable to the Employee under the Plan.
V. All Deferral elections are irrevocable and can be modified only in
accordance with the Plan.
I ELECT TO DEFER % OF THE MCN ENERGY GROUP INC. COMMON STOCK I WILL
RECEIVE AS A FINAL AWARD OF THE PERFORMANCE SHARES INITIALLY GRANTED TO ME
ON . I UNDERSTAND THAT MY DEFERRAL PERIOD FOR ALL
SHARE EQUIVALENTS HELD FOR ME UNDER THE PLAN SHALL REMAIN IN EFFECT UNTIL
MY TERMINATION OF EMPLOYMENT WITH THE COMPANY.
================================================================================
DIVIDEND EQUIVALENT PAYMENT ELECTION
I elect to have the dividend equivalents (equal to 50% of the MCN Energy Group
Inc. common stock dividend rate) from my deferral account shares:
[ ] Paid to me in cash; or
[ ] Reinvested in my deferral account.
================================================================================
DISTRIBUTION ELECTIONS (PLEASE MAKE ONE (1) ELECTION PER BENEFIT CATEGORY)
A. Pre-Retirement Survivor Benefits:
[ ] Single Lump Sum Payment; OR
[ ] Annual Installments Over a Three (3) Year Period
B. Normal Retirement Benefits:
[ ] Single Lump Sum Payment; OR
[ ] Annual Installments Over a Year Period (not to exceed 15 years)
C. Termination Prior To Retirement:
[ ] Single Lump Sum Payment; OR
[ ] Annual Installments Over a Three (3) Year Period
NOTE: A Post-Retirement Survivor Benefit will continue payments which have
commenced under any of the Installment Payout Options until the full payment
period is satisfied.
================================================================================
ACCEPTANCE OF PLAN TERMS AND BENEFITS
The Employee hereby agrees to all of the terms and conditions of the Plan as set
forth in the Plan document. Participation in the Plan indicates the Employee's
acceptance on his/her own behalf and on the behalf of his/her designated
Beneficiary of the terms of entitlement to all Plan benefits whether payable to
the Employee or his/her survivor. The Employee further understands that no
assets of the Company are to be segregated to pay benefits under the Plan. No
officer, employee, or representative of the Company is authorized to vary such
terms and conditions verbally or in writing. The Plan may be modified only by an
amendment to the Plan adopted by the Committee or the Board of Directors. The
employee understands that a distribution election other than a lump sum will
result in a distribution of a set dollar amount, plus interest, and not a set
number of shares of Common Stock.
- ---------- --------------------- --------------------------
Date Print Employee's Name Employee's Signature
<PAGE> 26
ATTACHMENT V
================================================================================
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN
BENEFICIARY DESIGNATION FORM
================================================================================
- --------------------------- ----------------------- -----------------
Employee Name (Please Print) Social Security Number Employee I.D.#
DESIGNATION OF BENEFICIARY
The Plan provides certain death benefits to the Employee's designated
Beneficiary. You may change your beneficiary designation at any time by
executing a new Beneficiary Designation Form. Beneficiary Designation Forms
are available through the Plan Committee.
I hereby designate the following Beneficiary, in the event of my death, for
any and all survivor benefits payable under the MCN Energy Group Inc.
Long-Term Incentive Performance Share Plan:
Primary Beneficiary:
-------------------------------------------------------
Relationship to Employee: Address:
-------------------- ----------------------
----------------------
Contingent Beneficiary:
----------------------------------------------------
Relationship to Employee: Address:
-------------------- ----------------------
----------------------
In the event none of the above-named beneficiaries survive me, any unpaid
amounts shall be paid to my lawful successor in interest. I reserve the right to
change this beneficiary designation at any time by filing with the Committee or
its designee a new Beneficiary Designation Form. I understand that my most
recent election as to the beneficiary designation will apply to all award
amounts payable to me at any time.
- ---------- --------------------------
Date Employee's Signature
================================================================================
SPOUSAL CONSENT (REQUIRED FOR ALL NON-SPOUSAL PRIMARY BENEFICIARY
DESIGNATIONS)
I hereby consent to the above election of Beneficiary by my spouse for
survivor benefits payable under the MCN Energy Group Inc. Long-Term
Incentive Performance Share Plan. Further, I hereby acknowledge that I
understand (1) that the effect of my consent may be to forfeit benefits I
would be entitled to receive upon my spouse's death; (2) that my spouse's
designation is not valid unless I consent to it; and (3) that my consent is
irrevocable unless my spouse revokes the designation above.
---------- ------------------------ --------------------------
Date Print Spouse's Name Spouse's Signature
================================================================================
<PAGE> 27
MCN ENERGY GROUP INC.
LONG-TERM INCENTIVE
PERFORMANCE SHARE PLAN
Historical Background
2/25/93 Plan adopted.
5/23/96 Plan amended and restated.
10/1/97 Plan amended and restated
<PAGE> 1
EXHIBIT 10-14
MCN ENERGY GROUP
SAVINGS AND STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998)
<PAGE> 2
MCN ENERGY GROUP
SAVINGS AND STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE PLAN.................................................................................................1
1.1 Establishment and Amendment of the Plan.......................................................................1
1.2 Applicability of the Plan.....................................................................................1
1.3 Purpose and Type of Plan......................................................................................1
ARTICLE II DEFINITIONS..............................................................................................1
2.1 Actual Deferral Percentage....................................................................................2
2.2 Affiliated Company............................................................................................2
2.3 Anniversary Date..............................................................................................2
2.4 Annual Addition...............................................................................................2
2.5 Average Actual Deferral Percentage............................................................................2
2.6 Average Contribution Percentage...............................................................................2
2.7 Break in Service Year.........................................................................................2
2.8 Code..........................................................................................................2
2.9 Committee.....................................................................................................2
2.10 Company.......................................................................................................2
2.11 Compensation..................................................................................................2
2.12 Contribution Percentage.......................................................................................3
2.13 Disability Retirement Date....................................................................................4
2.14 Elective Deferrals............................................................................................4
2.15 Eligible Employee.............................................................................................4
2.16 Employee......................................................................................................4
2.17 Employee Post-1986 Voluntary Deduction Account................................................................4
2.18 Employee Pre-1987 Voluntary Deduction Account.................................................................4
2.19 Employee Salary Reduction Account.............................................................................4
2.20 Employer......................................................................................................4
2.21 Employer Salary Reduction Account.............................................................................5
2.22 Employer Voluntary Deduction Account..........................................................................5
2.23 ERISA.........................................................................................................5
2.24 ESOP..........................................................................................................5
2.25 ESOP Account..................................................................................................5
2.26 Excess Aggregate Contributions................................................................................5
2.27 Excess Contributions..........................................................................................5
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.28 Excess Deferrals..............................................................................................5
2.29 Highly Compensated Employee...................................................................................5
2.30 Hour of Employment............................................................................................5
2.31 MCN Stock.....................................................................................................5
2.32 Military Service..............................................................................................6
2.33 Nonhighly Compensated Employee................................................................................6
2.34 Normal Retirement Date........................................................................................6
2.35 Participant...................................................................................................6
2.36 Plan..........................................................................................................6
2.37 Plan Account..................................................................................................6
2.38 Plan Year.....................................................................................................6
2.39 Regulations...................................................................................................6
2.40 Salary Reduction..............................................................................................6
2.41 Salary Reduction Account......................................................................................6
2.42 Savings Plan Account..........................................................................................6
2.43 Suspense Account..............................................................................................6
2.44 Trust.........................................................................................................6
2.45 Trust Agreement...............................................................................................6
2.46 Trustee.......................................................................................................7
2.47 Valuation Date................................................................................................7
2.48 Vesting Requirement...........................................................................................7
2.49 Voluntary Deduction...........................................................................................7
2.50 Voluntary Deduction Account...................................................................................7
2.51 Years of Service..............................................................................................7
ARTICLE III PARTICIPATION AND SERVICE...............................................................................7
3.1 Eligibility Requirements......................................................................................7
3.2 Eligibility Upon Merger or Reemployment.......................................................................8
3.3 Collective Bargaining Agency..................................................................................8
3.4 Applications..................................................................................................9
3.5 Years of Service..............................................................................................9
3.6 Break in Service Year........................................................................................10
3.7 Hours of Employment..........................................................................................10
3.8 Employment by Related Entities...............................................................................11
3.9 Leased Employees.............................................................................................12
ARTICLE IV CONTRIBUTIONS..........................................................................................12
4.1 Employee Contributions.......................................................................................12
4.2 Employer Savings Plan Contributions..........................................................................13
4.3 Employer ESOP Contributions..................................................................................14
4.4 Additional Employer Contributions............................................................................15
4.5 Rollover Contributions.......................................................................................15
4.6 Transfers from the MichCon Investment and Stock Ownership Plan...............................................16
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.7 Limitations on Salary Reduction Contributions................................................................17
4.8 Distribution of Excess Deferrals.............................................................................18
4.9 Distribution or Recharacterization of Excess Contributions...................................................19
4.10 Limitations on Voluntary Deduction Contributions and Employer Contributions..................................20
4.11 Disposition of Excess Aggregate Contributions................................................................21
4.12 Statutory (Code Section 415) Limitations on Allocations to Accounts..........................................23
ARTICLE V VESTING IN ACCOUNTS......................................................................................25
5.1 Employee Salary Reduction Accounts,
Employee Post-1986 Voluntary Deduction Account,
and Employee Pre-1987 Voluntary Deduction Account..........................................................25
5.2 Employer Salary Reduction Account,
Employer Voluntary Deduction Account,
and ESOP Account...........................................................................................25
ARTICLE VI INVESTMENT PROVISIONS...................................................................................26
6.1 Investment of Contributions..................................................................................26
6.2 Change of Investment Direction...............................................................................26
6.3 Transfers Between Investment Funds...........................................................................27
ARTICLE VII INVESTMENT FUNDS.......................................................................................27
7.1 Investment Funds.............................................................................................27
7.2 Management of Investment Funds...............................................................................27
7.3 Voting of MCN Stock..........................................................................................27
7.4 Tender Offers................................................................................................28
7.5 Named Fiduciary Status.......................................................................................29
7.6 Expenses of Funds............................................................................................29
ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN......................................................................29
8.1 Committee to Maintain........................................................................................29
8.2 Plan Accounting..............................................................................................30
8.3 Valuation of Funds...........................................................................................30
8.4 Valuation of Savings Plan Account............................................................................30
8.5 Valuation of ESOP Account....................................................................................30
8.6 Valuation of Plan Account....................................................................................30
8.7 Committee to Furnish Annual Statements of Value of Plan Accounts.............................................30
8.8 Trust Agreement..............................................................................................30
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS....................................................................31
9.1 Distribution Upon Termination of Employment
Entitling Participant to Value of Plan Account.............................................................31
9.2 Distribution Upon Termination of Employment Under
Circumstances Resulting in Forfeiture of Employer Contributions............................................31
9.3 Certain Distributions from Participant Accounts..............................................................32
9.4 In-Service Withdrawals--General..............................................................................32
9.5 Withdrawal of Voluntary Deduction Contributions..............................................................32
9.6 Hardship Withdrawal of Salary Reduction Contributions........................................................33
9.7 Time of Distributions........................................................................................34
9.8 Distributions of Stock.......................................................................................36
9.9 Distributions from Fixed Income Fund.........................................................................36
9.10 Loans........................................................................................................38
9.11 Definition of Employee Contributions and Employer Contributions..............................................40
9.12 Spousal Consent to Payment...................................................................................40
9.13 Distributions Pursuant to a Qualified Domestic Relations Order...............................................40
9.14 Direct Rollovers of Eligible Distributions...................................................................41
9.15 Special Distribution Events..................................................................................42
ARTICLE X ADMINISTRATION...........................................................................................42
10.1 The MCN Energy Group Master Trust, Retirement and Savings Plan Committee.....................................42
10.2 Notice to Employees..........................................................................................44
10.3 Notices to Employers or Committee............................................................................44
10.4 Participants' Acceptance of the Provisions of the Plan.......................................................44
10.5 Audit of Plan Records........................................................................................44
10.6 Claims Procedure.............................................................................................45
10.7 Effect of a Mistake..........................................................................................45
ARTICLE XI AMENDMENT AND TERMINATION...............................................................................45
11.1 Amendment....................................................................................................45
11.2 Withdrawal...................................................................................................46
11.3 Termination..................................................................................................46
11.4 Allocation of Funds Between Employers........................................................................46
11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries.....................................46
ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES..................................................................46
12.1 Adoption of the Plan.........................................................................................47
12.2 Withdrawal from the Plan.....................................................................................47
12.3 Company as Agent for Employers...............................................................................47
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XIII TOP-HEAVY PLAN RULES...................................................................................47
13.1 Application of Top-Heavy Plan Rules..........................................................................47
13.2 Special Definitions..........................................................................................47
13.3 Determination of Top-Heavy Status............................................................................49
13.4 Superseding Rules............................................................................................51
13.5 Participants in More Than One Top-Heavy Plan of the Employer.................................................52
13.6 Changes in Applicable Vesting Schedule.......................................................................52
ARTICLE XIV SPECIAL PROVISIONS RELATING TO THE ESOP................................................................53
14.1 Establishment of ESOP........................................................................................53
14.2 ESOP Account.................................................................................................53
14.3 Discrimination Testing.......................................................................................53
14.4 Loans........................................................................................................53
14.5 Diversification..............................................................................................55
14.6 Put Option...................................................................................................55
14.7 Purchase of MCN Stock........................................................................................56
ARTICLE XV MISCELLANEOUS...........................................................................................56
15.1 Beneficiary Designation......................................................................................56
15.2 Incompetency.................................................................................................57
15.3 Expenses.....................................................................................................57
15.4 Nonassignability.............................................................................................57
15.5 Employment Noncontractual....................................................................................58
15.6 Merger or Consolidation with Another Plan....................................................................58
15.7 Continuance by a Successor...................................................................................58
15.8 USERRA Rights................................................................................................58
15.9 Construction.................................................................................................58
ARTICLE XVI REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS....................................................59
16.1 Redesignation of ESOP Portion of Plan........................................................................59
16.2 Allocation of Savings Plan Account Balances to ESOP Portion of Plan..........................................59
16.3 Distribution of Dividends on MCN Stock.......................................................................59
</TABLE>
v
<PAGE> 7
MCN ENERGY GROUP
SAVINGS AND STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998)
ARTICLE I THE PLAN
1.1 Establishment and Amendment of the Plan. MCN ENERGY GROUP INC.
(hereinafter referred to as the "Company") presently maintains a savings and
stock ownership plan for the benefit of its Eligible Employees and the Eligible
Employees of its participating Affiliated Companies. The plan was previously
sponsored by Michigan Consolidated Gas Company, a subsidiary of the Company. The
plan was last restated effective as of January 1, 1989 and was then known as the
MichCon Savings and Stock Ownership Plan, and was amended from time to time
thereafter.
The plan is hereby further amended and completely restated as set forth
herein effective as of January 1, 1998, except as otherwise provided herein or
required by law (for instance, certain provisions herein are legally required to
be effective as of January 1, 1997, and are therefore effective as of such
date), and shall be known as the "MCN Energy Group Savings and Stock Ownership
Plan" (the "Plan"). The ESOP provisions of the Plan became effective as of April
1, 1989.
1.2 Applicability of the Plan. Except as otherwise specified herein or
required by law, the provisions of the Plan as amended and restated herein
effective as of January 1, 1998, shall be applicable only with respect to
Eligible Employees of an Employer in current employment on or after January 1,
1998, and their beneficiaries.
Any person who was covered under the Plan as in effect prior to January 1,
1998, and whose employment terminated under the Plan prior to January 1, 1998,
shall continue to have his rights to receive benefits determined under the
provisions of the Plan in effect when his employment relationship so terminated,
subject to legally required changes prior to January 1, 1998 as described
herein.
1.3 Purpose and Type of Plan. The purpose of the Plan is to provide a
convenient way for Participants to save on a regular and long-term basis for
their retirement income needs; to recognize the contribution made to the
Employer's successful operation by its employees and to reward such contribution
for those employees who qualify as participants under the terms of the Plan; and
to facilitate ownership of MCN Stock by participating Eligible Employees.
The non-ESOP portion of the Plan is intended to qualify as a profit-sharing
plan and the ESOP portion of the Plan is intended to qualify as a stock bonus
and an employee stock ownership plan for purposes of Code sections 401(a), 402,
412, 417, 4975, and related provisions.
ARTICLE II DEFINITIONS
Whenever used in the Plan, the following words and phrases shall have the
respective meanings stated below unless a different meaning is plainly required
by the context:
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2.1 "Actual Deferral Percentage" means the ratio (expressed as a
percentage) of (a) the Elective Deferrals of an Employee who is eligible to
participate in the Plan for a Plan Year, to (b) the Compensation of that
Employee for such Plan Year.
2.2 "Affiliated Company" means--
(a) any corporation other than the Company, i.e., either a subsidiary
corporation or an affiliated or associated corporation of the Company, which
together with the Company is a member of a "controlled group" of corporations
(as defined in Code section 414(b));
(b) any organization which together with the Company is under "common
control" (as defined in Code section 414(c));
(c) any organization which together with the Company is an "affiliated
service group" (as defined in Code section 414(m)); or
(d) any other entity required to be aggregated with the Company
pursuant to Regulations under Code section 414(o).
2.3 "Anniversary Date" means with respect to each Employee, the
anniversary each year of the Employee's first Hour of Employment. If an Employee
whose employment was terminated is reemployed but prior to his reemployment he
incurs a Break in Service Year or following his reemployment he incurs a Break
in Service Year before completing a Year of Service, his Anniversary Date shall
be based upon his first Hour of Employment coincident with or next following his
date of reemployment; otherwise, his Anniversary Date shall not be changed.
2.4 "Annual Addition" means the amount allocated to a Participant's
account, as such term is defined in section 4.12(a).
2.5 "Average Actual Deferral Percentage" means the average (expressed as
a percentage) of the Actual Deferral Percentages of the Employees in a group who
are eligible to participate in the Plan for a Plan Year.
2.6 "Average Contribution Percentage" means the average (expressed as a
percentage) of the Contribution Percentages of the Employees in a group who are
eligible to participate in the Plan for a Plan Year.
2.7 "Break in Service Year" means a 12-month period described in section
3.6.
2.8 "Code" means the Internal Revenue Code of 1986, as amended.
2.9 "Committee" means the committee appointed pursuant to section 10.1 to
administer the Plan.
2.10 "Company" means MCN Energy Group Inc.
2.11 "Compensation" means a Participant's pay, determined as follows:
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(a) For all purposes of the Plan, except as otherwise specified in (b)
or (c) below or required by the context, Compensation includes and excludes the
following items paid to the Employee:
(i) Includible:
(A) regular basic salary or wage paid to an Employee by the
Employer before any payroll deduction for taxes, Salary
Reductions, cafeteria plan elections or any other purpose,
(B) shift differential (effective July 1, 1998);
(C) sales commissions (effective January 1, 1999); and
(D) For Employees who are participating in the cash balance
portion of the MCN Energy Group Retirement Plan (or any
successor plan), overtime and bonus payments (effective
January 1, 1999).
(i) Excludable: except to the extent specifically included in (i)(D)
above, merit, incentive and other similar payments made in the
form of a lump sum, bonuses, awards, shift differentials (prior to
July 1, 1998), commissions (prior to January 1, 1999), deferred
compensation, severance payments, differential payments made by
reason of the Employee's entry into Military Service, all amounts
paid for work in excess of 40 hours in any one week, all overtime
or other premium paid for work in excess of a maximum number of
hours in any one day, for work on holidays or for any other
reason, payments for so-called fringe benefits such as Employer
contributions to this Plan or any pension or retirement plan,
increased wages or salary resulting from temporary promotion,
upgrading or transfer, of whatever duration, to a higher paid job
or classification, and any other premium, auxiliary, or special
pay of any sort whatsoever.
(b) For purposes of satisfying the limits on contributions described in
sections 4.7 and 4.10 (ADP and ACP tests) and applying the limits of section 415
of the Code as described in section 4.12, Compensation shall mean "compensation"
as defined in Treas. Regulation ss. 1.415-2(d) or any successor regulation.
(c) For purposes of determining whether an individual is a Highly
Compensated Employee, Compensation means an Employee's Compensation as defined
in subsection (b) above but without regard to Code sections 125, 402(a)(8), and
402(h)(1)(B) (i.e., with the addition of elective deferrals pursuant to a
cafeteria plan, a cash-or-deferred arrangement, or a simplified employee pension
during periods in which such items are excluded under subsection (b)).
(d) In accordance with Code Section 401(a)(17), the Compensation of
each Employee that may be taken into account under the Plan, except for purposes
of section 4.10, shall not exceed the first $150,000 of an Employee's
Compensation (as adjusted pursuant to Code section 401(a)(17)).
2.12 "Contribution Percentage" means
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(a) with respect to the non-ESOP portion of the Plan, the ratio
(expressed as a percentage) of the sum of Voluntary Deduction contributions and
the Employer contributions under section 4.2 made on behalf of an Employee who
is eligible to participate for a Plan Year to the Compensation of the Employee
for such Plan Year; provided, however, that in accordance with Code section
401(m), the Company may elect to take into account Elective Deferrals in
computing such Contribution Percentage; and
(b) with respect to the ESOP portion of the Plan, the ratio (expressed
as a percentage) of the sum of the Employer contributions under section 4.3(a)
made on behalf of an Employee who is eligible to participate and the value of
the shares allocated under section 14.4(d) to the ESOP Account of the Employee
for a Plan Year to the Compensation of the Employee for such Plan Year.
2.13 "Disability Retirement Date" means the date a Participant (i)
becomes eligible to receive benefits under a long-term disability plan
maintained by the Employer, or (ii) is determined by the Committee to be totally
and permanently disabled. In determining whether a Participant is totally and
permanently disabled, the Committee may, in its discretion, rely on the opinion
of a physician selected by the Committee to assist it in making such a
determination.
2.14 "Elective Deferrals" means Salary Reduction contributions under
section 4.1(a) and contributions under other plans maintained by the Company or
an Affiliated Company that constitute elective deferrals within the meaning of
Code section 402(g)(3).
2.15 "Eligible Employee" means an Employee of an Employer, other than a
"leased employee" (whether or not described in section 3.9) or an Employee
covered by a collective bargaining agreement between Employee representatives
and the Employer.
2.16 "Employee" means an individual who is an employee of the Company or
an Affiliated Company (including, for certain purposes described in Section 3.9,
a "leased employee" as described in Section 3.9), but shall not include an
individual who enters into a formal or informal independent contractor agreement
with the Company or is otherwise treated as an independent contractor under the
payroll practices of the Company.
2.17 "Employee Post-1986 Voluntary Deduction Account" means an Employee's
Voluntary Deduction contributions after December 31, 1986, and investment gains
and losses therefrom.
2.18 "Employee Pre-1987 Voluntary Deduction Account" means an Employee's
Voluntary Deduction contributions before January 1, 1987, and investment gains
and losses therefrom.
2.19 "Employee Salary Reduction Account" means an Employee's Salary
Reduction contributions, and investment gains and losses therefrom.
2.20 "Employer" means the Company and any Affiliated Company which has
adopted the Plan with the consent of the Company and in the manner prescribed in
section 12.1 and any successor corporation which shall adopt the Plan pursuant
to section 15.7. If any such corporation shall withdraw from participation in
the Plan in accordance with section 12.2, the term Employer shall not thereafter
include such corporation.
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2.21 "Employer Salary Reduction Account" means the Employer contributions
to the Salary Reduction Account of an Employee pursuant to section 4.2, and
investment gains and losses therefrom.
2.22 "Employer Voluntary Deduction Account" means the Employer
contributions to the Voluntary Deduction Account of an Employee pursuant to
section 4.2, and investment gains and losses therefrom.
2.23 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.24 "ESOP" means the employee stock ownership plan established pursuant
to section 14.1, as modified by Article XVI.
2.25 "ESOP Account" means the account established and maintained on
behalf of each Participant in accordance with sections 8.1(c) and (d) and 14.2.
2.26 "Excess Aggregate Contributions" means the amount described in
section 4.11(a).
2.27 "Excess Contributions" means the amount described in section 4.9(a).
2.28 "Excess Deferrals" means the portion of Elective Deferrals for a
calendar year, if any, described in section 4.8.
2.29 "Highly Compensated Employee" with respect to any Plan Year
beginning on or after January 1, 1997, shall include highly compensated active
employees and highly compensated former employees. A highly compensated active
employee includes any Employee who performs service for an Employer during the
determination year and who, during the look-back year received Compensation from
the Employer in excess of $80,000 (as adjusted pursuant to Code Section 415(d)),
or who was a 5-percent owner at any time during the determination year or the
look-back year. For this purpose, the determination year shall be the Plan Year.
The look-back year shall be the twelve-month period immediately preceding the
determination year.
A highly compensated former employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performed no service for the Employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the employee's 55th
birthday.
The determination of who is a Highly Compensated Employee will be made
in accordance with Section 414(q) of the Code and the regulations thereunder.
2.30 "Hour of Employment" means an hour for which an individual receives
credit pursuant to section 3.7.
2.31 "MCN Stock" means common stock of MCN Energy Group Inc..
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2.32 "Military Service" means service (a) on active duty, in time of
national or local emergency, in the armed forces of the United States or of any
State thereof, (b) in the armed forces of the United States or of any State
thereof under any compulsory service law, or (c) in the armed forces of the
United States or any of its allies in time of war in which the United States is
engaged.
2.33 "Nonhighly Compensated Employee" means an Employee of the Employer
who is not a Highly Compensated Employee.
2.34 "Normal Retirement Date" means the Participant's sixty-fifth
birthday, if such birthday falls on the first day of the month; otherwise, the
first day of the month next following the month in which such birthday occurs.
2.35 "Participant" means an Employee who is participating in the Plan in
accordance with its provisions.
2.36 "Plan" means the MCN Energy Group Savings and Stock Ownership Plan
and any amendments thereto or restatements thereof from time to time adopted.
2.37 "Plan Account" means the total value of an Employee's Savings Plan
Account and ESOP Account.
2.38 "Plan Year" means the calendar year.
2.39 "Regulations" means regulations issued by the Department of Labor
construing Title I of ERISA or by the Internal Revenue Service construing the
Code.
2.40 "Salary Reduction" means an election by a Participant to have the
Compensation that would otherwise be payable reduced and contributed by the
Employer to the Plan as a regular contribution on behalf of the Participant.
2.41 "Salary Reduction Account" means an Employee's Salary Reduction
contributions, related Employer matching contributions, and investment gains and
losses therefrom.
2.42 "Savings Plan Account" means the total value of an Employee's Salary
Reduction Account and Voluntary Deduction Account.
2.43 "Suspense Account" means the account used to reflect MCN Stock
acquired with loan proceeds pursuant to section 14.4.
2.44 "Trust" means the Trust created by agreement between the Employers
and the Trustee, as from time to time amended.
2.45 "Trust Agreement" means the agreement between the Employers and the
Trustee referred to in section 8.8.
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2.46 "Trustee" means the Trustee hereinafter provided for in section 8.8
TRUSTEE UNDER THE TRUST AGREEMENT or any successor Trustee TRUSTEE.
2.47 "Valuation Date" means each business day on which the New York Stock
Exchange shall be open for business.
2.48 "Vesting Requirement" means the requirement for vesting described in
section 5.2.
2.49 "Voluntary Deduction" means an Employee's payroll deduction
contributions other than Salary Reduction contributions.
2.50 "Voluntary Deduction Account" means an Employee's Voluntary
Deduction contributions, related Employer matching contributions, and investment
gains and losses therefrom.
2.51 "Years of Service" means year(s) of employment of an Employee by an
Employer or nonparticipating Affiliated Company as such term is defined in
section 3.5.
ARTICLE III PARTICIPATION AND SERVICE
3.1 Eligibility Requirements.
(a) Each individual who was eligible to participate in the Plan on
December 31, 1997, in accordance with the terms of the Plan in effect on said
date shall continue to be eligible to participate, subject to the provisions of
this Plan. Each other Employee shall become eligible to participate on the
latest to occur of--
(i) Prior to February 1, 1999:
(A) the date he is employed as an Eligible Employee,
(B) the date on which he completes at least one year of
eligibility service (as defined in section 3.1(b)), or
(C) the date on which he attains age 21;
(ii) On and after February 1, 1999:
(A) the date he is employed as an Eligible Employee, or
(B) the date on which he completes at least three (3)
months of eligibility service (as defined in section
3.1(b));
provided he is employed as an Eligible Employee on such date.
(b) For purposes of this Article III, a year of eligibility service
shall mean the 12-month period beginning on the date of an Employee's first Hour
of Employment, or the 12-
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month period beginning on an Employee's Anniversary Date during which he
completes at least 1,000 Hours of Employment, and three months of eligibility
service shall mean the 3-month period beginning on the date of an Employee's
first Hour of Employment.
3.2 Eligibility Upon Merger or Reemployment.
(a) Merger. Any Employee who is a Participant in any plan which is
merged into this Plan shall become a Participant in this Plan immediately upon
the effective date of the merger. Such an Employee shall be eligible to actively
participate in this Plan in accordance with Section 3.4.
(b) Reemployment. In the event an Employee's employment is terminated
and such individual is later reemployed as an Eligible Employee:
(i) If the re-employed REEMPLOYED Eligible Employee had not met
the age and service requirements for participation in the Plan during his prior
period of employment but was re-employed REEMPLOYED before incurring a Break in
Service Year, his prior period of employment shall be included for purposes of
determining his eligibility for participation in the Plan.
(ii) If the re-employed REEMPLOYED Eligible Employee had not met
the age and service requirements for participation in the Plan during his prior
period of employment and incurred a Break in Service Year, he must meet the
participation requirements of Section 3.1 as if he were a new employee.
(iii) If the re-employed REEMPLOYED Eligible Employee met the age
and service requirements for participation in the Plan during his prior period
of employment and incurred a Break in Service Year, and, pursuant to the Break
in Service Year rules his years of eligibility service are disregarded, he must
meet the participation requirements of Section 3.1 as if he were a new employee.
(iv) If the re-employed REEMPLOYED Eligible Employee met the age
and service requirements for participation in the Plan during his prior period
of employment and incurred a Break in Service Year, but pursuant to the Break in
Service Year rules his years of eligibility service are not disregarded, he
shall again participate in the Plan on the date of his reemployment;
(v) If the re-employed REEMPLOYED Eligible Employee met the age
and service requirements for participation in the Plan during his prior period
of employment and did not incur a Break in Service Year, he shall again
participate as of the date of his reemployment or, if later, the date upon which
he would have begun participation if not for the termination and reemployment.
3.3 Collective Bargaining Agency. If any Employee shall become a Participant
in the Plan and shall thereafter be represented by a collective bargaining
agency pursuant to a collective bargaining agreement between his Employer and
the collective bargaining agency
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representing such Employee, but shall be eligible thereafter only if such
agreement shall expressly so provide.
If such an Employee becomes eligible to participate in the MichCon
Investment and Stock Ownership Plan or any successor plan, his entire Plan
Account shall be transferred to such plan and the Employee shall no longer be
eligible to participate in this Plan. The Participant's Plan Account shall be
fully vested upon such transfer.
3.4 Applications. An Employee who is eligible to participate on the date the
Plan becomes effective with respect to his Employer may become a Participant
commencing with such effective date by filing a written application with his
Employer in the form prescribed by the Committee. Thereafter, an Eligible
Employee may become a Participant by filing a written application with his
Employer in the form prescribed by the Committee, and his participation in the
Plan will commence within a reasonable time thereafter following processing of
his application. The Employee's application shall authorize the Employer to
deduct contributions from the Employee's Compensation in amounts specified by
the Employee pursuant to Article IV, and to have contributions made as a Salary
Reduction pursuant to Article IV. The application shall evidence the Employee's
acceptance of and agreement to all of the provisions of the Plan.
3.5 Years of Service. An Employee shall be credited for Years of Service for
his period of employment with the Employer and each nonparticipating Affiliated
Company, determined as follows:
(a) An Employee shall receive credit, for purposes of vesting, for all
Years of Service. An Employee shall have one "Year of Service" for each 12-month
period beginning on the date of the Employee's first Hour of Employment and on
each subsequent Anniversary Date, during which the Employee completes 1,000 or
more Hours of Employment.
(b) Years of Service shall not be interrupted (i) by any transfer of
employment of an Employee between Affiliated Companies regardless of whether the
Affiliated Company is an Employer hereunder; or (ii) during such period as an
Employee is receiving credit for Hours of Employment under section 3.7.
(c) If an Employee is reemployed following a Break in Service Year, he
shall be considered a new Employee for purposes of the Plan, except--
(i) If prior to such Break in Service Year he had a vested
interest in his ESOP Account, Employer Salary Reduction Account, or Employer
Voluntary Deduction Account, Years of Service he had prior to the Break in
Service Year shall be reinstated after such Employee completes a Year of Service
after such Break in Service Year.
(ii) If paragraph (i) is not applicable, and if the Employee's
number of consecutive Break in Service Years does not equal or exceed the
greater of five or the number of Years of Service he had before incurring a
Break in Service Year, the Years of Service he had prior to such Break in
Service Years shall be reinstated after such Employee completes a Year of
Service after such Break in Service Years.
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(d) Notwithstanding the foregoing provisions, an Employee's Years of
Service shall exclude any Years of Service completed before an Employee attains
age 18.
3.6 Break in Service Year. "Break in Service Year" shall mean a 12-month
period beginning on an Employee's Anniversary Date during which the Employee has
not completed more than 500 Hours of Employment (as defined in section 3.7).
Notwithstanding the foregoing, the following periods shall not be deemed to be
Break in Service Years:
(a) If a Participant retires on his Disability Retirement Date,
thereafter ceases to be totally and permanently disabled, and returns to the
employ of an Employer, the period between his Disability Retirement Date and the
date as of which he ceases to be totally and permanently disabled.
(b) If a Participant commences receiving benefits under a long-term
disability benefit program maintained by an Employer and thereafter ceases to
receive benefits under such program and returns to the employ of the Employer,
the period during which he was receiving benefits under such program.
If an Employee incurs a Break in Service Year and prior to such Break in
Service Year has not completed five Years of Service, his Years of Service
completed prior to such a Break in Service Year shall be disregarded unless he
completes a Year of Service after such Break in Service Year and before the
total of such Break in Service Year and any ensuing consecutive Break in Service
Years equals the greater of five or the number of his Years of Service (as
defined in section 3.5 but without excluding Years of Service completed prior to
attaining age 18) prior to such Break in Service Year.
3.7 Hours of Employment. "Hours of Employment" shall mean, for any
individual performing or who has performed services for one or more Employers or
nonparticipating Affiliated Companies, the sum of the following:
(a) All hours for which the individual is directly or indirectly paid
or entitled to payment by an Employer or nonparticipating Affiliated Company for
the performance of duties. These hours shall be credited to the individual for
the computation period or periods in which the duties are performed.
(b) Except as provided in section 3.7(e) below, all hours for which
the individual is directly or indirectly paid or entitled to payment by an
Employer or nonparticipating Affiliated Company for reasons (such as vacation,
holiday, sickness, incapacity, layoff, jury duty, leave of absence, Military
Service, or disability) other than for the performance of duties. These hours
shall be credited to the individual for the computation period or periods in
which the period during which no duties are performed occurs, beginning with the
first unit of time to which the payment relates.
(c) All hours for which back pay, irrespective of mitigation of
damages, has been awarded, agreed to, or paid by an Employer or nonparticipating
Affiliated Company, with no duplication of credit for hours. These hours shall
be credited to the individual for the computation period or periods to which the
award or agreement pertains rather than the computation period in which the
award, agreement, or payment is made.
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(d) Except as provided in section 3.7(e) below, eight Hours of
Employment per day for each working day that an individual is absent from work
without pay for an approved leave of absence, voluntary time, sick time,
disciplinary leave, or Military Service if the individual returns to the employ
of an Employer or nonparticipating Affiliated Company within 90 days after the
end of such period. These hours shall be credited to the individual for the
computation period or periods in which the period during which no duties are
performed occurs, beginning with the first such period.
(e) Eight Hours of Employment per day for each working day that an
individual is absent from work with or without pay because of pregnancy of the
individual, birth of a child to the individual, placement of a child with the
individual in connection with the adoption of such child by such individual, or
caring for such child for a period beginning immediately following such birth or
placement. The Committee may, in its discretion, request such information from
the individual as the Committee shall deem relevant in order to verify that an
absence is for the reasons described in this subsection (e).
Notwithstanding the foregoing, no more than 501 Hours of Employment
shall be credited under this subsection (e) on account of any such pregnancy or
placement if the individual does not return to the employ of an Employer or
participating Affiliated Company within 90 days after the end of the period
approved for such absence. Hours credited under this subsection (e) shall be
credited to the individual only in the year in which the absence begins if the
crediting is necessary to prevent a Break in Service Year for such year; or, in
any other case, in the immediately following year; provided, however, that if
more than 501 hours are credited under this subsection (e) on account of any
such pregnancy or placement, the excess over 501 hours shall be credited to the
period or periods to which it relates.
(f) Notwithstanding the foregoing, any individual whose compensation
is not computed on the basis of hours worked and who normally performs services
for any Employer or nonparticipating Affiliated Company during its entire work
day shall be credited with ten Hours of Employment for each working day in any
period during which he is entitled to receive compensation from the Employer or
nonparticipating Affiliated Company for the performance of services pursuant to
section 3.7(a) and eight Hours of Employment for each working day in any period
during which such individual performed no duties but is entitled to Hours of
Employment under section 3.7(b) or (c).
Hours of Employment credited under this section 3.7 shall comply with the
rules set forth in 29 C.F.R. section 2530.200b-2(b) and (c), which rules are
hereby incorporated by reference.
Notwithstanding anything herein to the contrary, Hours of Employment shall
be credited hereunder at all times in compliance with the requirements of the
Family and Medical Leave Act.
3.8 Employment by Related Entities. If an Employee's employer is a
nonparticipating Affiliated Company, any period in which the Employee is
employed by the nonparticipating Affiliated Company while an Affiliated Company,
shall be taken into account for purposes of satisfying the eligibility service
requirement set forth in section 3.1 and measuring such Employee's Years of
Service to the same extent it would have been had such period of employment been
employment by an Employer.
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3.9 Leased Employees. A person who is not an employee on the employee
payroll of an Employer or nonparticipating Affiliated Company and who performs
services for an Employer or a nonparticipating Affiliated Company pursuant to an
agreement between the Employer or nonparticipating Affiliated Company and a
leasing organization shall be considered a "leased employee" if such person
performed the services on a substantially full-time basis for a year and the
services are under the primary direction and control of the recipient. A person
who is considered a "leased employee" of an Employer or nonparticipating
Affiliated Company shall not be considered an Employee for purposes of
participating in this Plan or receiving any contribution or benefit under this
Plan. A leased employee shall be excluded from this Plan regardless of whether
the leased employee participates in any plan maintained by the leasing
organization. However, if a leased employee participates in the Plan as a result
of subsequent employment with an Employer, his previous service as a leased
employee shall be counted in calculating his Years of Service. Notwithstanding
the preceding provisions of this section 3.9, a leased employee will be included
as an Employee for purposes of applying the requirements described in Code
section 414(n)(3) and for purposes of determining the number and identity of
Highly Compensated Employees.
ARTICLE IV CONTRIBUTIONS
4.1 Employee Contributions.
(a) Amount of Contributions. Each Participant may make a regular
contribution to the Plan. Such contribution shall not be less than 1 percent nor
more than--
(i) for a Participant who is was a Highly Compensated Employee
during the immediately preceding Plan Year, 15 percent of his Compensation for a
pay period, in incremental percentages of 1 percent, or
(ii) for a Participant who was a Nonhighly Compensated Employee
during the immediately preceding Plan Year, 20 percent (or, effective April 1,
1998, 17%) of his Compensation for a pay period, in incremental percentages of 1
percent.
Contributions will be effected by Voluntary Deductions, Salary
Reductions, or any combination thereof, as elected by the Participant. The
amount of such Voluntary Deductions or Salary Reductions shall be transferred to
the Trustee after each pay period; provided, however, that a Participant's
Salary Reduction contributions shall not exceed 8 percent (12 percent effective
February 1, 1999) of the Participant's Compensation for a pay period (if the
Participant was a Highly Compensated Employee during the immediately preceding
Plan Year), or 9 percent (17 percent effective February 1, 1999) of the
Participant's Compensation for a pay period (if the Participant was not a Highly
Compensated Employee during the immediately preceding Plan Year); and further
provided, however, that Voluntary Deductions and Salary Reductions shall be
limited as provided in sections 4.7 and, 4.10 AND 4.12.
Notwithstanding the foregoing, the Committee may, in its sole
discretion, (1) reduce the Salary Reduction contributions permitted by a group
of Participants if, in the opinion of the Committee, it is advisable to do so in
order to satisfy the requirements of section 4.7 or 4.12; or (2) reduce the
Voluntary Deduction contributions permitted by a group of Participants if, in
the opinion of the Committee, it is advisable to do so in order to satisfy the
requirements of section 4.10 or 4.12.
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(b) Changes in Contributions. The contribution of Voluntary Deductions
and/or Salary Reductions designated by a Participant shall continue in effect,
notwithstanding any change in his Compensation rate, until the Participant shall
change such contribution; provided, however, that such contribution shall in no
event be less than 1 percent, nor more than (i) fifteen percent (15%) in the
case of a Participant who was a Highly Compensated Employee during the
immediately preceding Plan Year or (ii) twenty percent (20%) (17% effective
April 1, 1998) in the case of a Participant who was a Nonhighly Compensated
Employee during the immediately preceding Plan Year, each in incremental
percentages of 1 percent of the Participant's prevailing Compensation rate. A
Participant may change his contribution from time to time by giving directions
to his Employer in the form prescribed by the Committee, with such directions to
take effect within a reasonable period following processing.
(c) Voluntary Suspension of Contributions. Any Participant may, by
giving written notice to his Employer in the form and timing prescribed by the
Committee, suspend his contribution of Voluntary Deductions and/or Salary
Reductions either indefinitely or for any specified period, provided that in the
event of suspension of both such contributions the suspension shall be for at
least 12 full months. In case of any such suspension of any contributions, the
Employer's contributions on behalf of the Participant shall be automatically
suspended for a like period.
(d) Automatic Suspension of Contributions. A Participant's
contributions of Voluntary Deductions and Salary Reductions and the Employer's
contributions on behalf of the Participant shall be suspended automatically for
any period during which the Participant is absent without pay under any of the
circumstances described in section 3.7(c), (d), or (e), and such an absence
shall not constitute termination of service for purposes of any of the
provisions of Article IX. A Participant may, by giving notice to his Employer in
the form and timing prescribed by the Committee, suspend his contribution of
Voluntary Deductions and/or Salary Reductions for any period during which he is
absent from work under any of the circumstances described in section 3.7(b) or
(c) and receiving Compensation at a reduced Compensation rate, in which case the
Employer contributions on behalf of such Participant shall be automatically
suspended for a like period.
4.2 Employer Savings Plan Contributions. Each Employer shall contribute to
the Salary Reduction Account of each of its participating Eligible Employees who
would be eligible to participate under the requirements of Section 3.1(a)(i)
(without regard to Section 3.1(a)(ii)) HAS COMPLETED ONE YEAR OF ELIGIBILITY
SERVICE (AS DEFINED IN SECTION 3.1(B)) an amount equal to 25 percent of the
Salary Reduction contribution of such Participant; provided, however, that
Salary Reduction contributions in excess of four percent (4%) of the
Participant's Compensation per pay period shall be disregarded. In cases where
the Participant's Salary Reduction contribution is less than four percent (4%)
of his Compensation per pay period, the Employer shall contribute to the
Voluntary Deduction Account of such participating Employee an amount equal to 25
percent of the smaller of (a) his Voluntary Deduction contribution, or (b) 4
percent of his Compensation per pay period reduced by his Salary Reduction
contribution.
Effective as of the first pay period following the date on which a
Participant has completed ten (10) Years of Service (or nine (9) Years of
Service, beginning January 1, 1999), five percent (5%) shall be substituted for
four percent (4%) in each place that it appears in the preceding paragraph.
Effective as of the first pay period following the date on which a Participant
has completed twenty-three (23) Years of Service, six percent (6%) shall be
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<PAGE> 20
substituted for four percent (4%) in each place that it appears in the first
paragraph of this section 4.2.
4.3 Employer ESOP Contributions.
(a) Basic ESOP Contribution. Each Employer shall each pay period
contribute to the ESOP Account of each of its participating Eligible Employees
who would be eligible to participate under the requirements of Section 3.1(a)(i)
(without regard to Section 3.1(a)(ii)) HAS COMPLETED ONE YEAR OF ELIGIBILITY
SERVICE (AS DEFINED IN SECTION 3.1(B)) an amount equal to the difference, if
any, between (i) and (ii) below:
(i) seventy-five percent (75%) of the sum of the Salary
Reduction and Voluntary Deduction contributions of such Participant for such
pay period; provided, however, that Salary Reduction and Voluntary
Deduction contributions shall be disregarded to the extent that they exceed, in
the aggregate, four percent (4%) of such Participant Compensation per pay
period. The 4 percent shall be increased to five percent (5%) for Participants
who have completed ten (10) Years of Service (or, effective January 1, 1999,
nine (9) Years of Service), and shall be increased to six percent (6%) for
Participants who have completed twenty-three (23) Years of Service.
(ii) The value of the shares of MCN Stock allocated to the ESOP
Account of such Participant pursuant to section 14.4(d) for such pay period. The
value of shares allocated under section 14.4(d) shall be the market value
thereof as of the last day of the pay period for which the shares are allocated,
with the market value to be determined by the Committee in a nondiscriminatory
manner.
(b) Contribution of Principal, Interest, or Other Payments. Each
Employer also shall contribute to the ESOP its proportionate share of any
additional amount necessary to make principal, interest, or other payments
required by the terms of any loan made to the ESOP in accordance with section
14.4. Each Employer's proportionate share shall be equal to the proportion that
its contributions under section 4.3(a) bear BEARS to the total contributions
under section 4.3(a). Each Employer also may make additional contributions to
make principal, interest, or other payments in accordance with the terms of any
loan made to the ESOP in accordance with section 14.4.
(c) Dividend-Related Contributions. Each Employer also shall
contribute to the ESOP Account of each of its participating Employees such
amounts as may be necessary to acquire for the ESOP Account of such Participant
shares of MCN Stock having a fair market value equal to the amount of any
dividends on shares of MCN Stock allocated to the ESOP Account of such
Participant that were used to repay an ESOP loan in accordance with section
14.4(c). Such contributions shall be made on, or as soon as practicable after,
each date on which dividends on allocated shares of MCN Stock are used to repay
a loan. In no event shall the shares of MCN Stock acquired with contributions
under this subsection (c) be allocated to the ESOP Account of such Participant
later than the last day of the Plan Year during which (but for the use of the
dividend to repay the loan) the dividend giving rise to such contribution would
have been allocated to the ESOP Account of such Participant.
(d) Longevity Contributions. Within a reasonable time after March 1 of
each Plan Year (or April 1, prior to 1999 with regard to Employers other than
Michigan Consolidated Gas Company) (each a "Measurement Date") each Employer
shall contribute to the ESOP
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<PAGE> 21
Account of each of its participating Eligible Employees on active payroll as of
such Measurement Date who has at least 30 Years of Service as of such
Measurement Date:
(i) for periods prior to March 1, 1999 for Eligible Employees of
Employers other than Michigan Consolidated Gas Company, twenty-five (25) shares
of MCN Stock.
(ii) effective March 1, 1999 for Eligible Employees described in
paragraph (i) and effective March 1, 1998 for Eligible Employees of Michigan
Consolidated Gas Company, six hundred dollars ($600) in shares of MCN Stock, as
determined by the Committee in a nondiscriminatory manner.
4.4 Additional Employer Contributions. If a Participant receiving payments
(based upon 40 or more hours per week) under the terms of any Workers'
Compensation law does not have sufficient compensation to make Salary Reduction
or Voluntary Deduction contributions in an amount equal to the amount of the
Participant's contributions as in effect during the Participant's last period of
active service, then the Participant's Employer shall contribute on behalf of
the Participant such additional amount as would have been contributed by the
Employer under sections 4.2 and 4.3 on behalf of such Participant had the
Participant's contributions been continued at the rate in effect during the
Participant's last period of active service. Additional contributions under this
section 4.4 shall be treated for accounting purposes as if made under section
4.2 or 4.3, as applicable, except such contributions shall not be considered
when computing the Contribution Percentage. Contributions under this Section 4.4
shall be deemed contributions made under Code Section 415(c)(3)(C), and for
purposes of calculations under Section 415, "compensation" shall include the
compensation the Participant would have received if the Participant were paid at
the rate of compensation paid immediately before becoming disabled.
4.5 Rollover Contributions.
(a) From Qualified Plan. If an Employee receives, either before or
after becoming an Employee, an eligible rollover distribution (within the
meaning of Code section 402(c)(4)) from an employees' trust described in Code
section 401(a) which is exempt from tax under Code section 501(a) or from a
qualified annuity plan described in Code section 403(a) (other than an
employees' trust or an annuity plan under which the Employee was an Employee
within the meaning of Code section 401(c)(1) at the time contributions were made
on his behalf under such trust or annuity plan), then such Employee may transfer
and deliver to the Committee, to be credited to his Employee Salary Reduction
Account as if it were a Salary Reduction contribution, an amount which does not
exceed the amount of such qualified total distribution or eligible rollover
distribution (including any proceeds from the sale of any property received as a
part of such qualified total distribution or eligible rollover distribution)
less, in the case of a qualified total distribution, the amount considered
contributed to such trust or annuity plan by the Employee. Former Employees who
are Participants and who receive an eligible rollover distribution from another
plan sponsored by an Employer may make rollover contributions in accordance with
this section.
(b) From Individual Retirement Account or Annuity. If--
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<PAGE> 22
(i) an Employee receives, either before or after becoming an
Employee, a distribution or distributions from an individual retirement account
or individual retirement annuity (within the meaning of Code section 408) or
from a retirement bond (within the meaning of Code section 409); and
(ii) no amount in such account, no part of the value of such
annuity, or no part of the value of the proceeds of such bond is attributable to
any source other than an eligible rollover distribution (within the meaning of
Code section 402(c)(4)) from an employees' trust described in Code section
401(a) which is exempt from tax under Code section 501(a) or annuity plan
described in Code section 403(a) (other than an employees' trust or an annuity
plan under which the Employee was an Employee within the meaning of Code section
401(c) at the time contributions were made on his behalf under such trust or
annuity plan) and any earnings on such a qualified total distribution or
eligible rollover distribution;
then such Employee may transfer and deliver to the Committee, to be
credited to his Salary Reduction Account as if it were a Salary Reduction
contribution, such distribution or distributions.
(c) Timing and Substantiation. Any transfer and delivery pursuant to
this section 4.5 shall be delivered by the Employee to the Committee and by the
Committee to the Trustee on or before the sixtieth day after the day on which
the Employee receives the distribution or on or before such later date as may be
prescribed by law. Any such transfer and delivery must be accompanied by (i) a
statement of the Employee that to the best of his knowledge the amount so
transferred meets the conditions specified in this section 4.5, and (ii) a copy
of such documents as may have been received by the Employee advising him of the
amount and the character of such distribution. Notwithstanding the foregoing,
the Committee shall not accept a rollover contribution if, in its judgment, such
acceptance would cause the Plan to violate any provision of the Code or
Regulations.
(d) Deemed Contribution for Certain Purposes. A rollover contribution
pursuant to this section 4.5 shall be deemed to be a contribution of a
Participant for purposes of the value of a Participant's fund account as
provided in section 8.2 and in determining the amount distributable to a
Participant, the provisions of Article IX that are applicable to Salary
Reduction contributions will be used, pursuant to section 9.1, but not for
purposes of determining the amount of the contribution to be made on behalf of a
Participant by his Employer pursuant to section 4.2, 4.3, or 4.4 or calculating
the Annual Addition of such Participant.
(e) Deemed Participation for Certain Purposes. If the amount of
rollover contribution is made by an Employee prior to his becoming a
Participant, such Employee shall, until such time as he becomes a Participant,
be deemed to be a Participant for all purposes of the Plan except for purposes
of any determination of when he becomes a Participant pursuant to section 3.1
and the making of contributions pursuant to section 4.1(a).
4.6 Transfers from the MichCon Investment and Stock Ownership Plan. If
an Employee who previously had participated in the MichCon Investment and Stock
Ownership Plan (the "Investment Plan") becomes a Participant in the Plan and the
Participant's plan account in the Investment Plan (including any outstanding
Participant loans) is transferred to the Plan in accordance with section 3.3 of
the Investment Plan, the Plan shall accept such
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<PAGE> 23
transfer. Amounts transferred shall be 100 percent vested at all times and shall
be treated for all purposes in the same manner as they were treated under the
Investment Plan; that is:
(a) Amounts attributable to Employer salary reduction contributions
under the Investment Plan shall be allocated to the Participant's Employee
Salary Reduction Account;
(b) Amounts attributable to voluntary deduction contributions under
the Investment Plan shall be allocated to the Participant's Employee Voluntary
Deduction Account;
(c) Amounts attributable to Employer Investment Plan contributions
shall be allocated to the Participant's Employer Salary Reduction Account or
Employer Voluntary Deduction Account, as the case may be; and
(d) Amounts transferred from the ESOP Account of the Participant in
the Investment Plan shall be allocated to the Participant's ESOP Account.
Notwithstanding the foregoing, amounts transferred shall not be used for
purposes of determining the amount of the contribution to be made on behalf of a
Participant by the Employer pursuant to section 4.2, 4.3, or 4.4, or calculating
the Actual Deferral Percentage, Contribution Percentage, or Annual Addition of
the Participant.
4.7 Limitations on Salary Reduction Contributions.
(a) Dollar Limitation. In no event shall any Employer make Salary
Reduction contributions for any calendar year, with respect to any Participant
in excess of $10,000 (for 1998) (as adjusted by the Secretary of the Treasury to
reflect increases in the cost of living). This limit shall be applied by
aggregating all plans and arrangements maintained by the Company and all
Affiliated Companies that provide for elective deferrals (as defined in Code
section 402(g)).
(b) ADP Test. In addition to the limitations set forth elsewhere in
this Plan, effective January 1, 1997, one of the following tests must be
satisfied for the Plan Year:
(i) The Average Actual Deferral Percentage for Highly
Compensated Employees who are eligible to participate for the Plan Year shall
not exceed the Average Actual Deferral Percentage for the immediately preceding
Plan Year for Nonhighly Compensated Employees who were then eligible to
participate multiplied by 1.25; or
(ii) The Average Actual Deferral Percentage for Highly
Compensated Employees who are eligible to participate for the Plan Year shall
not exceed the Average Actual Deferral Percentage for the immediately preceding
Plan Year for Nonhighly Compensated Employees who were then eligible to
participate multiplied by two, provided that the Average Actual Deferral
Percentage for such Highly Compensated Employees does not exceed the Average
Actual Deferral Percentage for such Nonhighly Compensated Employees by more than
two percentage points or such lesser amount as the Secretary of Treasury shall
prescribe in accordance with Code section 401(m)(9) to prevent the multiple use
of this alternative limitation with respect to any Highly Compensated Employee.
Any such restriction on the multiple use of the alternative limit shall be
implemented pursuant to uniform rules adopted by the Committee.
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<PAGE> 24
(c) Determination of Actual Deferral Percentages. For purposes of the
Actual Deferral Percentage test described in this section 4.7--
(i) An Elective Deferral will be taken into account for a Plan
Year only if it relates to Compensation that either would have been received by
the Eligible Employee in the appropriate Plan Year (but for the deferral
election) or is attributable to services performed by the Eligible Employee in
the Plan Year and would have been received by the Eligible Employee within 2 1/2
months after the close of the Plan Year (but for the deferral election);
(ii) An Elective Deferral will be taken into account for a Plan
Year only if it is allocated to the Eligible Employee as of a date within that
Plan Year. For this purpose, an Elective Deferral is considered allocated as of
a date within a Plan Year if the allocation is not contingent on participation
or performance of services after such date and the Elective Deferral is actually
paid to the Trust no later than 12 months after the Plan Year to which the
contribution relates;
(iii) The Actual Deferral Percentage for an Employee who is
eligible to participate shall be computed by treating any Excess Deferral (as
defined in section 4.8) as an Elective Deferral, except to the extent provided
by Regulations;
(iv) The Actual Deferral Percentage for any Employee who is a
participant under two or more section 401(k) plans or arrangements that are
maintained by the Company or an Affiliated Company shall be determined as if all
such Elective Deferrals were made under a single arrangement; provided, however,
that no Elective Deferrals under an employee stock ownership plan (as defined in
Code section 4975(e)(7)) shall be taken into account for purposes of this
section 4.7;
(v) In the event that two or more plans which include
cash-or-deferred arrangements are considered as one plan for purposes of Code
section 401(a)(4) or 410(b), the cash-or-deferred arrangements included in such
plans shall be treated as one arrangement for purposes of this section 4.7;
(vi) The determination and treatment of the Elective Deferrals
and Actual Deferral Percentage of any Employee shall satisfy such other
requirements as may be prescribed by the Secretary of Treasury.
4.8 Distribution of Excess Deferrals. "Excess Deferrals" means excess
deferrals as defined under Code section 402(g). Notwithstanding any other
provision of the Plan, the Excess Deferral, if any, of each Employee with
respect to a calendar year plus any income and minus any loss allocable thereto
shall be distributed no later than April 15 of the following calendar year to
each Employee who claims an Excess Deferral for the preceding calendar year.
Excess Deferrals shall be treated as Annual Additions under the Plan.
The Employee's claim shall be in writing; shall be submitted to the
Committee no later than March 1; shall specify the Employee's Excess Deferral
for the preceding calendar year; and shall be accompanied by the Employee's
written statement that if such amount is not distributed, such Excess Deferral,
when added to amounts deferred under other plans or
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<PAGE> 25
arrangements described in Code section 401(k), 408(k), or 403(b), exceeds the
limit imposed on the Employee by Code section 402(g) for the year in which the
deferral occurred.
Notwithstanding the preceding paragraph, the Employer may notify the Plan on
behalf of the individual of Excess Deferrals to the extent that the individual
has Excess Deferrals for the calendar year calculated by taking into account
only elective deferrals under this Plan and other plans of the Company and any
Affiliated Company.
The Excess Deferral distributed to an Employee with respect to a calendar
year shall be adjusted for any income or loss thereon for such calendar year and
for the period between the end of such calendar year and the date of
distribution. The income or loss allocable to such calendar year shall be
determined by multiplying the income or loss for such calendar year allocable to
the Employee's Salary Reduction Account by a fraction, the numerator of which is
the Excess Deferral of the Employee for such calendar year and the denominator
of which is the Employee's Salary Reduction Account balance on the last day of
such calendar year. The income or loss allocable to the period between the end
of such calendar year and the date of distribution shall be equal to 10 percent
of the income or loss allocable to the Excess Deferral for the preceding
calendar year multiplied by the number of calendar months that have elapsed from
the end of the preceding calendar year to the date of distribution. A
distribution occurring on or before the fifteenth day of the month shall be
treated as having been made on the last day of the preceding month and a
distribution occurring after such fifteenth day shall be treated as having been
made on the first day of the following month.
In the event that an Employee's Salary Reduction contributions are
distributed to such Employee under this section 4.8, any Employer contributions
attributable thereto plus any income and minus any loss allocable thereto shall
be forfeited.
4.9 Distribution or Recharacterization of Excess Contributions.
(a) Determination of Excess Contributions. "Excess Contributions"
means, with respect to any Plan Year, the excess of (i) the aggregate amount of
Elective Deferrals actually paid over to the Trust on behalf of Highly
Compensated Employees for such Plan Year, over (ii) the maximum amount of such
Elective Deferrals permitted under the limitations of section 4.7(b), in
accordance with the provisions of Code Section 401(k)(8).
Excess Contributions shall be returned to the Highly Compensated
Employees, beginning with that Highly Compensated Employee who has the highest
dollar amount of Elective Deferrals. The Highly Compensated Employee shall
receive the portion of his Employee Deferrals (and income allocable thereto)
which will either enable the Plan to distribute the total Excess Contribution
(and thereby satisfy the ADP limit stated above) or cause such Highly
Compensated Employee's Elective Deferrals to equal the Elective Deferrals of the
Highly Compensated Employee with the next highest amount of Elective Deferrals.
This prior process must then be repeated until the plan has distributed the
total Excess Contributions described above.
Excess Contributions shall be treated as Annual Additions under the
Plan.
For purposes of this section 4.9, to the extent permitted by the Code,
the Excess Contributions shall be reduced by the amount of any Excess Deferrals
included in such Excess Contributions and distributed to the Employee pursuant
to section 4.8.
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<PAGE> 26
(b) Distribution or Recharacterization. Notwithstanding any other
provision of the Plan, either--
(i) Excess Contributions with respect to a calendar year plus
any income and minus any loss allocable thereto shall be distributed no later
than the last day of the following calendar year to Employees on whose behalf
such Excess Contributions were made for the preceding calendar year; or
(ii) at the election of the Employee and to the extent permitted
by the Code, the Excess Contributions shall be treated as distributed to the
Employee and then contributed by the Employee to the Plan as a Voluntary
Deduction contribution.
(c) Adjustment for Income and Loss. The Excess Contributions to be
distributed to an Employee with respect to a calendar year shall be adjusted for
any income or loss thereon for such calendar year and for the period between the
end of such calendar year and the date of distribution. The income or loss
allocable to such calendar year shall be determined by multiplying the income or
loss for such calendar year allocable to the Employee's Salary Reduction Account
by a fraction, the numerator of which is the Excess Contributions for such
calendar year and the denominator of which is the Employee's Salary Reduction
Account balance on the last day of such calendar year. The income or loss
allocable to the period between the end of such calendar year and the date of
distribution shall be equal to 10 percent of the income or loss allocable to the
Excess Contributions for the preceding calendar year multiplied by the number of
calendar months that have elapsed from the end of the preceding calendar year to
the date of distribution. A distribution occurring on or before the fifteenth
day of the month shall be treated as having been made on the last day of the
preceding month and a distribution occurring after such fifteenth day shall be
treated as having been made on the first day of the following month.
In the event that an Employee's Salary Reduction contributions are
distributed to such Employee under this section 4.9, any Employer contributions
attributable thereto plus any income and minus any loss allocable thereto shall
be forfeited.
4.10 Limitations on Voluntary Deduction Contributions and Employer
Contributions.
(a) ACP Test. In addition to the limitations set forth elsewhere in
this Plan, effective January 1, 1997, both the ESOP and the non-ESOP portions of
the Plan, tested separately, must satisfy one of the following tests for each
Plan Year:
(i) The Average Contribution Percentage for Highly Compensated
Employees who are eligible to participate for the Plan Year shall not exceed the
Average Contribution Percentage during the immediately preceding Plan Year for
Nonhighly Compensated Employees who are eligible to participate for the Plan
Year multiplied by 1.25; or
(ii) The Average Contribution Percentage for Highly Compensated
Employees who are eligible to participate for the Plan Year shall not exceed the
immediately preceding Plan Year's Average Contribution Percentage for Nonhighly
Compensated Employees who were then eligible to participate for the Plan Year
multiplied by two (2), and the Average Contribution Percentage for such Highly
Compensated Employees shall not exceed the previous Plan Year's Average
Contribution Percentage for such Nonhighly Compensated
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<PAGE> 27
Employees by more than two percentage points or such lesser amount as the
Secretary of Treasury shall prescribe by regulations in accordance with Code
Section 401(m)(9) to prevent the multiple use of this alternative limitation
with respect to any Highly Compensated Employees, which regulations are
incorporated herein by reference. Any such restriction on the multiple use of
the alternative limit shall apply to all affected Highly Compensated Employees
and shall be implemented pursuant to uniform rules adopted by the Committee.
(b) Determination of Contribution Percentages. For purposes of the
Average Contribution Percentage test described in this section 4.10--
(i) the Contribution Percentage for any Employee who is a Highly
Compensated Employee for the Plan Year and who is eligible to make Employee
contributions or to receive Employer contributions or Elective Deferrals
allocated to his account under two or more plans described in Code section
401(a) or arrangements described in Code section 401(k) that are maintained by
the Company or an Affiliated Company shall be determined as if all such
contributions and Elective Deferrals were made under a single plan; provided,
however, that contributions and Elective Deferrals under an employee stock
ownership plan (as defined in Code section 4975(e)(7)) shall not be combined
with contributions and Elective Deferrals under a plan that is not an employee
stock ownership plan.
(ii) In the event that this Plan satisfies the requirements of
Code section 410(b) only if aggregated with one or more other plans, or if one
or more other plans satisfy the requirements of Code section 410(b) only if
aggregated with either the ESOP or the non-ESOP portion of this Plan, then this
section 4.10 shall be applied by determining the Contribution Percentages of
Employees as if all such plans were a single plan. The ESOP portion of the Plan
will not be used in conjunction with any other plan to satisfy the requirements
of Code section 401(a)(4) or 410(b).
(iii) The determination and treatment of the Contribution
Percentage of any Employee shall satisfy such other requirements as may be
prescribed by the Secretary of Treasury.
4.11 Disposition of Excess Aggregate Contributions.
(a) Determination of Excess Aggregate Contributions. "Excess Aggregate
Contributions" means, with respect to any Plan Year, the excess of (i) the
aggregate amount of Employer contributions under section 4.2 or sections 4.3(a)
and 14.4(d) (as applicable) and Voluntary Deduction contributions (and any
Elective Deferrals taken in account in computing Contribution Percentages under
section 4.10(b)) (collectively "ACP Contributions") actually made on behalf of
Highly Compensated Employees for such Plan Year, over the maximum amount of such
contributions permitted under the limitations of section 4.10(a), in accordance
with the provisions of Code Section 401(m).
(i) First, the Contribution Percentage (as defined in section
4.10(b)) of the Highly Compensated Employee with the highest ACP Contributions
is reduced as described in the subsections (b), (c) and (d) of this section to
the extent necessary to remove all Excess Aggregate Contributions or to cause
such Highly Compensated Employee's ACP Contributions to equal the amount of ACP
Contribution of the Highly Compensated Employee with the next highest ACP
Contributions.
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<PAGE> 28
(ii) Second, this process is repeated until the test described
above is satisfied.
Excess Aggregate Contributions shall be treated as Annual Additions
under the Plan.
For purposes of this section 4.11, the determination of an Employee's
Excess Aggregate Contributions shall be made after first determining the Excess
Deferral (as defined in section 4.8) and the Excess Contribution (as defined in
section 4.9(a)) of such Employee.
(b) Distribution of Excess Voluntary Deduction Contributions. To the
extent necessary to satisfy the ACP Test specified in section 4.10, Voluntary
Deduction contributions with respect to a calendar year plus any income and
minus any loss allocable thereto for such calendar year and for the period
between the end of such calendar year and the date of distribution shall be
distributed no later than the last day of the following calendar year to the
Highly Compensated Employees who made such Voluntary Deduction contributions for
the preceding calendar year.
The income or loss allocable to the Voluntary Deduction contributions
for such calendar year returned to the Employee pursuant to this subsection
shall be determined by multiplying the income or loss for such calendar year
allocable to the Employee's Post-1986 Voluntary Deduction Account by a fraction,
the numerator of which is such Voluntary Deduction contributions returned to the
Employee and the denominator of which is the Employee's Post-1986 Voluntary
Deduction Account balance on the last day of such calendar year.
The income or loss allocable to the period between the end of such
calendar year and the date of distribution shall be equal to 10 percent of the
income or loss allocable to the Voluntary Deduction contributions for the
preceding calendar year returned to the Employee multiplied by the number of
calendar months that have elapsed from the end of the preceding calendar year to
the date of distribution.
A distribution occurring on or before the fifteenth day of the month
shall be treated as having been made on the last day of the preceding month and
a distribution occurring after such fifteenth day shall be treated as having
been made on the first day of the following month.
(c) Distribution of Excess Elective Deferrals Taken into Account. If,
after returning all Voluntary Deduction contributions made by Highly Compensated
Employees for the preceding calendar year, the contribution percentage test is
still not satisfied, then to the extent necessary to satisfy such test, any
Elective Deferrals taken into account for such test plus any income and minus
any loss allocable thereto for such calendar year and for the period between the
end of such calendar year and the date of distribution shall be distributed no
later than the last day of the following calendar year to the Highly Compensated
Employees on whose behalf such Elective Deferrals were made for the preceding
calendar year.
The income or loss allocable to the Elective Deferrals for such
calendar year returned to the Employee pursuant to this subsection shall be
determined by multiplying the income or loss for such calendar year allocable to
the Employee's Salary Reduction Account by a fraction, the numerator of which is
such Elective Deferrals returned to the Employee and the
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<PAGE> 29
denominator of which is the Employee's Salary Reduction Account balance on the
last day of such calendar year.
The income or loss allocable to the period between the end of such
calendar year and the date of distribution shall be equal to 10 percent of the
income or loss allocable to the Elective Deferrals for the preceding calendar
year returned to the Employee multiplied by the number of calendar months that
have elapsed from the end of the preceding calendar year to the date of
distribution.
A distribution occurring on or before the fifteenth day of the month
shall be treated as having been made on the last day of the preceding month and
a distribution occurring after such fifteenth day shall be treated as having
been made on the first day of the following month.
(d) Distribution of Other Excess Employer Contributions. If, after
returning all Voluntary Deduction contributions and Elective Deferrals included
in the Excess Aggregate Contributions, the contribution percentage test is still
not satisfied, to the extent necessary to satisfy such test, the Employer
contributions with respect to the calendar year made on behalf of Highly
Compensated Employees and shares of MCN Stock allocated to Highly Compensated
Employees under section 14.4(d) plus any income and minus any loss allocable
thereto for such calendar year and for the period between the end of such
calendar year and the date of distribution shall be forfeited and used to reduce
Employer contributions to the Plan.
The income or loss allocable to the Employer contributions under
section 4.2 forfeited for such calendar year pursuant to this subsection shall
be determined by multiplying the income or loss for such calendar year allocable
to the Employer's Voluntary Deduction Account and the Employer's Salary
Reduction Account by a fraction, the numerator of which is such Employer
contributions forfeited and the denominator of which is the sum of the
Employer's Voluntary Deduction Account balance and the Employer's Salary
Reduction Account balance, both determined on the last day of such calendar
year.
The income or loss allocable to the period between the end of such
calendar year and the date of distribution shall be equal to 10 percent of the
income or loss allocable to the Employer contributions under section 4.2 for the
preceding calendar year that were forfeited multiplied by the number of calendar
months that have elapsed from the end of the preceding calendar year to the date
of distribution.
The income or loss allocable to any Employer contribution under section
4.3(a) or any shares of MCN Stock allocated to a Highly Compensated Employee
under section 14.4(d) shall be calculated in a similar manner based upon the
ESOP Account of the Participant.
A distribution occurring on or before the fifteenth day of the month
shall be treated as having been made on the last day of the preceding month and
a distribution occurring after such fifteenth day shall be treated as having
been made on the first day of the following month.
4.12 Statutory (Code Section 415) Limitations on Allocations to Accounts.
Notwithstanding any other provision of the Plan, contributions under the Plan
shall be subject to the limitations set forth in Code section 415, which are
incorporated herein by reference. For
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purposes of applying such limitations to contributions under the Plan, the rules
set forth in this section 4.12 shall be applicable.
(a) Annual Addition. The term "Annual Addition" means the amount
allocated to a Participant's account during any calendar year that constitutes--
(i) Employer contributions;
(ii) Employee contributions;
(iii) forfeitures; and
(iv) amounts described in Code Sections 415(l)(2) and
419(A)(d)(3).
The compensation limitation referred to in Code section 415(c)(1)(B)
shall not apply to--
(1) any contribution for medical benefits (within the meaning of
Code section 419A(f)(2)) after separation from service which
is otherwise treated as an Annual Addition, or
(2) any amount otherwise treated as an Annual Addition under
Code Section 415(l)(2).
The Annual Addition for any calendar year before 1987 shall not be
recomputed to treat all Employee contributions as an Annual Addition.
(b) Combined-Plan Limits. Prior to January 1, 2000, in the case of an
individual who was a Participant in the Plan on December 31, 1986, an amount
shall be subtracted from the numerator of the defined contribution fraction (not
exceeding such numerator) as prescribed by the Secretary of Treasury so that the
sum of the defined benefit plan fraction and defined contribution plan fraction
does not exceed 1.0 as of such date.
Code section 415 shall be applied in such manner as to maximize the
permissible contributions and benefits thereunder and, in determining the
permissible amount of contributions under the Plan, any grandfathering
provisions heretofore or hereafter adopted pursuant to Code section 415 shall be
applicable. For purposes of applying the limitations set forth in Code section
415(e) prior to January 1, 2000, this Plan shall be the primary plan and any
required reductions shall be made from the MichCon MCN ENERGY GROUP Retirement
Plan (or other applicable defined benefit plan of the Employer).
(c) Reduction of Annual Additions.
(i) If the limitations of Code section 415 would be exceeded as
a result of a reasonable error in estimating a Participant's Compensation or on
account of such other limited facts and circumstances as the Commissioner of
Internal Revenue finds justify the application of the rules hereinafter set
forth, the Annual Additions to the Participant's account which exceed the
applicable limitation shall be returned to the Participant to the extent of all
or any portion of any Voluntary Deduction contributions which were made by him
pursuant to Article IV. Any net earnings and gains allocable to such
contributions for the period between
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the date of such contribution and the date returned shall also be repaid to the
Participant but such return of net earnings and gains will not be deemed a
further reduction of any excess Annual Additions.
(ii) If the Participant made no Voluntary Deduction contributions
or if, after returning all or part of such contributions in accordance with the
previous paragraph, his Annual Additions still exceed the limitations of Code
section 415, then such excess shall be returned to the Participant to the extent
of all or any portion of any Salary Reduction contributions made on behalf of
such Participant, together with any net earnings and gains on such contributions
as hereinabove described.
(iii) If, after returning all or any portion of Voluntary
Deduction and Salary Reduction contributions of a Participant in accordance with
the preceding paragraphs, his Annual Additions still exceed the limitations of
Code section 415, such portion of the Employer contributions under section 4.2
made on behalf of the Participant as must be removed to meet the limitations
shall be allocated and reallocated to other Participants' Savings Plan Accounts
as contributions by the Employer.
(iv) If, after reallocating all or any portion of Employer
contributions under section 4.2, a Participant's Annual Additions still exceed
the limitation of Code section 415, such portion of the Employer contributions
under section 4.3(a) made on behalf of the Participant and shares of MCN Stock
allocated to his ESOP Account under section 14.4(d) as must be removed to meet
the limitations shall be allocated and reallocated to other Participant's ESOP
Accounts as contributions by the Employer.
(v) If, as a result of the allocation of forfeitures, a
reasonable error in estimating a Participant's Compensation, or under other
limited facts and circumstances which the Commissioner of the Internal Revenue
Service finds justify the availability of the following rules, any amount cannot
be allocated during the Plan Year in accordance with the foregoing procedure
without exceeding the applicable limitations for one or more Participants, any
remaining amount shall be held unallocated in a special suspense account to be
allocated to Participants in the succeeding Plan Year or Plan Years; provided,
however, that (A) no Employer contributions and no Voluntary Deduction
contributions shall be made in such succeeding Plan Year or Plan Years until
such special suspense account is exhausted by allocations and reallocations; (B)
no investment gains (or losses) or other income shall be allocated to the
special suspense account; and (C) the amounts in the special suspense account
shall be allocated as soon as possible without violating the limitations of this
section 4.12.
ARTICLE V VESTING IN ACCOUNTS
5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary
Deduction Account, and Employee Pre-1987 Voluntary Deduction Account. The
Employee Salary Reduction Account, the Employee Post-1986 Voluntary Deduction
Account, and the Employee Pre-1987 Voluntary Deduction Account of each
Participant shall be fully vested and nonforfeitable at all times.
5.2 Employer Salary Reduction Account, Employer Voluntary Deduction
Account, and ESOP Account.
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(a) In General. A Participant shall have a vested and nonforfeitable
interest in his Employer Salary Reduction Account, Employer Voluntary Reduction
Account, and ESOP Account after he has completed at least five Years of Service.
Prior to that time he shall have no vested interest in such accounts.
(b) Accelerated Vesting. Notwithstanding section 5.2(a) above but
subject to Section 4.4, a Participant shall be fully vested and have a
nonforfeitable interest in his entire Employer Salary Reduction Account,
Employer Voluntary Deduction Account, and ESOP Account if--
(i) while still an Employee, he attains age 65;
(ii) the Participant terminates employment with his Employer for
reasons described in Section 9.1(a), (b) or (c); or
(iii) while he is an Employee, contributions to the Plan are
completely discontinued or the Plan is terminated, or the
Plan is partially terminated and such Participant is
affected by such partial termination; OR.
(iv) while he is an Employee, his account balance is transferred
to the MichCon Investment and Stock Ownership Plan in
accordance with Section 3.3 (in which case such account
balance shall be vested under the recipient plan).
ARTICLE VI INVESTMENT PROVISIONS
6.1 Investment of Contributions. Employer contributions under sections 4.2,
4.3, and 4.4 and Employee contributions shall be invested in accordance with the
following provisions:
(a) The Employer contributions made pursuant to section 4.3(a), (c),
and (d) shall be invested in the MCN Stock Fund (through each Participant's ESOP
Account), which fund is described in Article VII.
(b) Each Participant shall, by direction to the Committee in the form
prescribed by the Committee, direct that the Employer contributions made
pursuant to section 4.2 and Employee contributions, including those made as a
Salary Reduction, be invested in such funds offered by the Trustee as are
selected by the Committee.
Employee contributions, including those made as a Salary Reduction, and
the portion of Employer contributions referenced in section 6.1(b) above, need
not be invested in the same fund. A Participant shall direct the manner in which
the total of such Employee contributions and such Employer contributions
referenced in section 6.1(b) above shall be divided, equally or otherwise, among
the funds.
6.2 Change of Investment Direction. Any investment direction given by a
Participant under section 6.1 shall be deemed to be a continuing direction until
changed by the Participant.
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A Participant may change any such direction in accordance with such procedures
as the Committee may from time to time provide and apply in a nondiscriminatory
manner.
6.3 Transfers Between Investment Funds. A Participant may direct that all
or any part of the value of his interest in any investment fund be transferred
to one or more of the other funds except that a Participant may not transfer any
amount from the MCN Stock fund to the extent that the balance remaining in such
fund immediately after the transfer would be less than the value of his ESOP
Account.
A transfer of all or any part of the value of a Participant's interest in
the Fixed Income fund may from time to time be restricted by the terms of
agreements which govern the investment of assets in such fund, in which event
the Committee shall give notice of such restrictions to the Participants.
ARTICLE VII INVESTMENT FUNDS
7.1 Investment Funds. The Trustee shall establish, operate, and maintain
the following funds exclusively for the collective investment and reinvestment
of monies directed by the Committee to be invested in such funds on behalf of
Participants:
(a) MCN Stock Fund. An MCN Stock fund which shall be invested solely
in MCN Stock.
(b) Fixed Income Fund. A Fixed Income fund which shall be invested,
except as hereinafter provided, in marketable fixed income securities or
accounts maintained by financial institutions which provide for fixed or
variable rates of interest for specified periods of time. The terms of such
agreements and the selection of such institutions shall be determined by the
Company. Investment advisors for marketable fixed income securities may use
fixed income futures and options to reduce the effect of market volatility.
(c) Other Funds. Such other funds offered by the Trustee as the
Committee may select.
Notwithstanding the foregoing, the Trustee or the investment manager, as the
case may be, shall invest such portion of the assets of the funds as the
Committee may deem necessary or appropriate to facilitate the administration of
such funds in any short-term fixed income fund as may be established under any
common, commingled, or collective trust for employee benefit plans established
and maintained by the Trustee.
7.2 Management of Investment Funds. Except as otherwise provided in this
Article VII, the ownership of the assets and investments of the funds shall be
in the Trustee as such; and the Trustee shall have in respect of any and all
assets of the funds the same powers as if it were absolute owner thereof.
7.3 Voting of MCN Stock.
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(a) Instructions from Participants. The Trustee shall vote, in person
or by proxy, shares of MCN Stock held by the Trustee in the MCN Stock fund in
accordance with instructions obtained from Participants.
Each Participant shall be entitled to give voting instructions with
respect to the number of shares of such respective stock which bears the same
ratio to the total number of shares held by the Trustee on the record date as
the number of shares allocated to the respective stock fund account of such
Participant as of the Valuation Date preceding such record date bears to the
total number of shares allocated to the respective stock fund accounts of all
Participants as of such Valuation Date, excluding shares allocated to the
accounts of persons whose accounts have been distributed prior to such record
date.
Written notice of any meeting of stockholders of MCN Energy Group Inc.
and a request for voting instructions shall be given by the Committee or the
Trustee, at such time and in such manner as the Committee shall determine, to
each Participant entitled to give instructions for the voting of stock at such
meeting.
Shares with respect to which no voting instructions are received from
Participants and unallocated shares of the ESOP shall be voted by the Trustee in
the same proportion as shares for which voting instructions are received from
Participants. The Trustee shall combine and vote fractional shares to the extent
possible to reflect the voting instructions of Participants.
(b) Confidentiality. The instructions received by the Trustee from
Participants shall be held by the Trustee in strict confidence and shall not be
divulged or released to any person, including officers or employees of the
Company or any Affiliated Company.
7.4 Tender Offers.
(a) Rights of Participants. Notwithstanding any other provisions of
this instrument, in the event an offer is made generally to the shareholders of
MCN Energy Group Inc. to transfer all or a portion of the common stock of MCN
Energy Group Inc. in return for valuable consideration including, but not
limited to, offers regulated by section 14(D) of the Securities Exchange Act of
1934, as amended, each Participant owning a beneficial interest in the MCN Stock
fund shall have the sole and exclusive right to decide if the common stock
representing his interest in such fund shall be tendered. Each Participant shall
have the right, to the extent the terms of the tender offer so permit, to direct
the withdrawal of such shares from tender. A Participant shall not be limited as
to the number of instructions to tender or withdraw from tender which he can
give; provided, however, the Participant shall not have the right to give
instructions to tender or withdraw from tender after a reasonable time
established by the Trustee pursuant to section 7.4(c) below.
(b) Duties of the Committee. Within a reasonable time after the
commencement of a tender offer, the Committee shall provide to each Participant
having an ownership interest in the MCN Stock fund--
(i) the offer to purchase as distributed by the offeror to the
shareholders of MCN Energy Group Inc.,
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(ii) a statement of the shares representing his interest in the
MCN Stock fund as of the most recent information available from the Committee,
and
(iii) directions as to the means by which a Participant can give
confidential instructions to the Trustee with respect to the tender. The
Committee shall establish and pay for a means by which a Participant can
expeditiously deliver to the Trustee instructions with respect to the tender.
(c) Duties of the Trustee. The Trustee shall follow the instructions
of the Participants with respect to the tender offer. The Trustee shall not
tender shares for which no instructions are received. Unallocated shares of
MCN Stock of the ESOP shall be tendered or exchanged by the Trustee in the same
proportion as the allocated shares for which the Trustee has received direction
are tendered or exchanged, subject to the terms of any loan or pledge agreement
covering such shares. On the basis of its ability to comply with the terms of
the offer, the Trustee shall establish a reasonable time after which it shall
not accept the instructions of Participants.
(d) Confidentiality. The instructions received by the Trustee from
Participants shall be held by the Trustee in strict confidence and shall not be
divulged or released to any person, including officers or employees of the
Company or any Affiliated Company.
7.5 Named Fiduciary Status. For purposes of sections 7.3 and 7.4, each
Participant is hereby designated a "named fiduciary" within the meaning of ERISA
section 403(a)(1) with respect to shares of MCN Stock as to which he is entitled
to make voting or tender offer decisions.
7.6 Expenses of Funds. Brokerage commissions, transfer taxes, and other
charges and expenses in connection with the purchase and sale of securities for
a fund shall be charged to the fund. Any income and other taxes payable with
respect to a fund shall likewise be charged to the fund.
ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN
8.1 Committee to Maintain. The Committee shall maintain, or cause to be
maintained, for each Participant (i) a Savings Plan Account attributable to
Voluntary Deduction contributions and related Employer contributions under
section 4.2, and (ii) a separate account attributable to Salary Reduction
contributions and related Employer contributions under section 4.2, each of
which shall be composed, to the extent required by the investment directions of
the particular Participant, of a MCN Stock fund account, a Fixed Income fund
account, and an account for each other applicable fund in which his
contributions and related Employer contributions are invested.
The Committee also shall maintain, or cause to be maintained, for each
Participant (A) an ESOP Account attributable to Employer contributions under
section 4.3(a), (c) and (d), and (B) shares of MCN Stock allocated to the
Participant pursuant to section 14.4(d), each of which shall be composed of a
MCN Stock fund account and, to the extent diversification elections are
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made by the Participant under section 14.5, such other accounts as the Committee
or its delegate deems necessary or appropriate in giving effect to the
diversification requirements of section 14.5.
The Committee shall maintain, or cause to be maintained, all necessary
records.
8.2 Plan Accounting. The interests of each Participant in the funds shall
be his proportionate share of the value of such funds as of any Valuation Date.
The Participant's proportionate share may be determined under any accounting
method selected by the Committee that allocates fairly, in the opinion of the
Committee, the investment gains and losses by or on behalf of each Participant
to the fund and that complies with the requirements of the Code and the
Regulations thereunder. The value of Participants' fund accounts shall be
redetermined as of each Valuation Date.
8.3 Valuation of Funds. The value of a fund as of any Valuation Date shall
be the market value of all assets (including any uninvested cash) held by the
fund as determined by the Trustee reduced by the amount of any accrued
liabilities of the fund on such Valuation Date. The Trustee's determination of
market value shall be binding and conclusive upon all parties.
To the extent any Employer securities held by the Plan are not readily
tradable on an established securities market, valuation of such securities shall
be made by an independent appraiser who meets requirements similar to the
requirements of the regulations prescribed under Code Section 170(a)(1).
8.4 Valuation of Savings Plan Account. The value of a Participant's Savings
Plan Account as of any Valuation Date shall be the sum of the values of his MCN
Stock fund account, Fixed Income fund account, and any other of his fund
accounts attributable to Salary Reductions, Voluntary Deductions, and Employer
Contributions under section 4.2.
8.5 Valuation of ESOP Account. The value of a Participant's ESOP Account as
of any Valuation Date shall be the sum of (i) the value of his ESOP Account
attributable to Employer contributions on his behalf under section 4.3(a),(c)
and (d) and shares of MCN Stock allocated to his ESOP Account under section
14.4(d); and (ii) the sum of the values of his Fixed Income fund account and any
other of his fund accounts attributable to diversification elections under
section 14.5.
8.6 Valuation of Plan Account. The value of a Participant's Plan Account as
of any Valuation Date shall be the sum of the values of his MCN Stock fund
account, Fixed Income fund account, and any other investment fund accounts
maintained on his behalf under the Plan.
8.7 Committee to Furnish Annual Statements of Value of Plan Accounts. The
Committee shall, not less frequently than annually, distribute to each
Participant in the Plan a statement setting forth the Plan Account of such
Participant. Such statement shall be deemed to have been accepted as correct
unless written notice of objections thereto is received by the Committee or the
Employer within 30 days after the distribution of such statement to the
Participant.
8.8 Trust Agreement. A Trust has been established to fund benefits under
the Plan. The Employers may, without further reference to or action by any
Employee or Participant, from time to time enter into further agreements with
the Trustee and make such amendments to
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<PAGE> 37
such Trust Agreement or such further agreements as they may deem necessary or
desirable to carry out the Plan, and may take such other steps and execute such
other instruments as the Employers may deem necessary or desirable to put the
Plan into effect or to carry it out.
ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS
9.1 Distribution Upon Termination of Employment Entitling Participant to
Value of Plan Account. Upon--
(a) termination of a Participant's employment with his Employer due to
retirement on his Normal Retirement Date or his Disability Retirement Date,
(b) the death of the Participant,
(c) termination of a Participant's employment with his Employer or
placement on inactive payroll because of total and permanent disability or
legally established mental incompetency of the Participant not qualifying the
Participant for retirement hereunder, or
(d) termination of a Participant's employment with his Employer under
any circumstances after the Participant has satisfied the Vesting Requirement,
the Committee shall, subject to the provisions of section SECTIONS 9.7 AND 9.9,
direct the Trustee to distribute to the Participant, or, in a proper case his
designated beneficiary or legal representative, the value of the Participant's
Plan Account In a Lump Sum.
9.2 Distribution Upon Termination of Employment Under Circumstances
Resulting in Forfeiture of Employer Contributions. Upon termination of a
Participant's employment under circumstances other than those described in
sections 9.1 and 9.7(c)(ii), the Committee shall, subject to the provisions of
section 9.7, direct the Trustee to distribute to the Participant an amount equal
to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account,
Employee Post-1986 Voluntary Deduction Account, and Employee Salary Reduction
Account each of which shall be fully vested and nonforfeitable at all times.
Subject to Section 4.4, the Participant's Employer Voluntary Deduction Account,
Employer Salary Reduction Account, and ESOP Account shall be forfeited and
applied in reduction of the next succeeding contribution which the Participant's
Employer would otherwise contribute to the Trust; provided, however--
(a) If all or any portion of such account is vested as a result of the
application of the accelerated vesting schedule set forth in section 13.4(c),
the Committee shall direct the Trustee to distribute such portion to the
Participant; and
(b) If such Participant is reemployed prior to his incurring five
consecutive Break in Service Years, then following his date of reemployment, the
Participant's Employer shall contribute on behalf of such Participant an amount
equal to the amount that was forfeited upon his termination of employment, and
such contribution shall be credited to the same accounts from which it was
forfeited, in the same amounts.
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Contributions made pursuant to (b) shall not be taken into account in
determining under section 4.12 the Annual Additions to such Participant's
Savings Plan Account.
9.3 Certain Distributions from Participant Accounts.
(a) In General. Any Participant may, upon notice to the Committee in
the form and timing prescribed by the Committee, terminate his participation in
the Plan. Within a reasonable period of time following processing of such
termination, the Committee shall direct the Trustee to distribute to the
Participant an amount equal to the value of the Participant's Employee Pre-1987
Voluntary Deduction Account and Employee Post-1986 Voluntary Deduction Account.
[24 month requirement?], But only to the extent attributable to voluntary
deduction contributions that have been in the plan for at least 2 years.
(b) Withdrawals After Age 59 1/2. Upon notice to the Committee in the
form and timing prescribed by the Committee, any Participant who has attained
age 59 1/2 may make an election, not more frequently than once every calendar
year, to withdraw all or any portion of the vested amount of his Plan Account.
Within a reasonable period following the processing of such election, the
Committee shall direct the Trustee to distribute to the Participant the amount
the Participant has elected to withdraw.
(c) Limited Withdrawal in the Event of Hardship. If a Participant
incurs a financial hardship as defined in section 9.6, he may limit the amount
of a distribution from his Voluntary Deduction Account under section 9.3(a) to
the amount necessary to satisfy the hardship and to pay any taxes resulting from
such distribution.
9.4 In-Service Withdrawals--General. At its discretion, the Committee may
adopt rules limiting the number of withdrawals that may be made in any Plan Year
and prescribe a minimum amount that may be withdrawn. All requests for a
withdrawal shall be submitted in a form prescribed by the Committee. A
Participant may not rescind a request for withdrawal which has been submitted to
the Committee unless the Committee consents. A withdrawal shall be distributed
as soon as reasonably practicable after the withdrawal request is received.
9.5 Withdrawal of Voluntary Deduction Contributions. Any Participant who
shall have actively participated in the Plan for 24 or more calendar months (for
purposes of this section 9.5 active participation means the Participant shall
have made contributions to the Plan in each month in which compensation was
available) may, upon notice to the Committee in the form and timing prescribed
by the Committee, withdraw an amount not in excess of 100 percent of his
Voluntary Deduction contributions under the Plan (but only to the extent
attributable to Voluntary Deduction contributions that have been in the Plan for
at least 2 years), with such election to be given effect within a reasonable
time following processing.
Withdrawals under this section 9.5 shall be from the MCN Stock fund, the
Fixed Income fund, or such other investment funds offered by the Trustee as the
Committee shall make available for purposes of this section. If the Participant
has an account in more than one fund, he shall specify in his direction to the
Committee the amount to be withdrawn from each fund. The contributions in all
funds in the Employee Pre-1987 Voluntary Deduction Account must be withdrawn
before a withdrawal is permitted from a fund in the Employee Post-1986 Voluntary
Deduction Account. The amount of an in-service withdrawal from a specific fund
in a Voluntary Deduction Account shall not exceed the Employee's contributions
in such fund prior to the withdrawal.
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9.6 Hardship Withdrawal of Salary Reduction Contributions. A Participant
may request, upon written notice to the Committee in the form and timing
prescribed by the Committee, a withdrawal from his Salary Reduction
Account if the withdrawal is necessary to satisfy an immediate and heavy
financial need of a Participant as defined below, with such election to be
given effect within a reasonable time following processing. The amount of such
withdrawal shall be limited to the Participant's Salary Reduction contributions
or the total value of the Participant's Employee Salary Reduction Account as of
the latest Valuation Date for which information is available, whichever is
smaller. Withdrawals under this section 9.6 shall be from the MCN Stock fund,
the Fixed Income fund, or such other investment funds under the Plan as the
Participant specifies in his written request for a hardship withdrawal.
The determination of whether or not a distribution is necessary to satisfy
an immediate and heavy financial need and the amount required to be distributed
to meet the need shall be made by the Committee. All determinations regarding
financial need shall be made in accordance with written procedures established
by the Committee and applied in a uniform and nondiscriminatory manner based on
all of the applicable facts and circumstances. Such written procedures shall
specify the requirements for requesting and receiving distributions on account
of financial need, including the forms that must be submitted and to whom the
forms are to be submitted. All determinations regarding financial need must
comply with applicable Regulations under the Code.
For purposes of this section 9.6, a financial hardship withdrawal shall be
limited to the amount required to meet the need created by one of the following
situations:
(a) Expenses for medical care described in Code section 213(d)
previously incurred by the Participant, his spouse, or any dependents of the
Participant or necessary for these persons to obtain medical care described in
Code section 213(d).
(b) Costs directly related to the purchase (excluding mortgage
payments) of the principal residence for the Participant.
(c) Payment of tuition and related educational fees (including room
and board expenses) for the next 12 months of post-secondary education for the
Participant, his spouse, children, or dependents (as defined in Code section
152).
(d) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage on the Participant's
principal residence.
A distribution will be deemed necessary to satisfy an immediate and heavy
financial need of a Participant only if both of the following conditions are
met: (I) The distribution is not in excess of the amount of the immediate and
heavy financial need of the Participant. Prior to January 1, 1999, this amount
may be increased by the lesser of the amount withheld from the distribution
under Code section 3405(c) or the remaining Salary Reduction contributions or
total value of the Salary Reduction Account, if less, after subtracting the
amount of the immediate and heavy financial need; AND (II). The Participant has
obtained all distributions, other than hardship distributions, and all loans
available under this Plan and all other plans maintained by the Employer.
If a Participant receives a hardship distribution, (1) the Participant shall
not be entitled to make Salary Reduction contributions or Voluntary Deduction
contributions (or other employee contributions to qualified or nonqualified
plans of deferred compensation, as described in
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applicable regulations) for a period of one year after the hardship
distribution, and (2) the Participant may not make Salary Reduction
contributions for the Participant's taxable year immediately following the
taxable year of the hardship distribution in excess of the amount specified in
Code section 402(g) for such taxable year less the amount of the Participant's
Salary Reduction contributions for the taxable year of the hardship
distribution.
9.7 Time of Distributions.
(a) In General. Except as hereinafter provided and subject to the
provisions of section 9.9, distributions made pursuant to section 9.1 or
9.7(c)(ii) shall be made by the Trustee at the direction of the Committee on
such date as the Committee shall determine after consultation with the
Participant or his beneficiary, but in no event later than March 1 of the
calendar year following termination of the Participant's employment.
Except as hereinafter provided, all other distributions or withdrawals
under this Article IX shall be paid as soon as reasonably practicable by the
Trustee at the direction of the Committee. Notwithstanding any other provision
of the Plan--
(i) If the vested portion of a Participant's Plan Account has
ever exceeded $5,000 (or such greater amount as permitted under the Code), no
distribution shall be made to such Participant pursuant to Section 9.1, 9.2,
9.7(c)(ii), or 9.9 prior to the date the Participant attains the age of
sixty-five (65) without written consent of the Participant; and
(ii) if a distribution to a Participant is deferred pursuant to
(i), the amount that would otherwise have been distributed to such Participant
shall be invested in the Fixed Income fund or any other investment fund under
the Plan, as the Participant shall direct, except that the ESOP Account of such
Participant shall continue to be invested in the MCN Stock fund, subject to the
diversification rules set forth in section 14.5.
A former Participant whose distribution has been deferred pursuant to
(i) above will not thereafter be eligible for withdrawals under section 9.3 or
9.5 or loans under section 9.10 but shall continue to have the voting and tender
offer rights described sections 7.3 and 7.4 and to be treated as a Participant
for purposes of Article VIII.
A former Participant whose distribution has been deferred may initiate
a distribution upon reasonable prior written notice to the Committee and shall
receive an amount equal to the vested portion of his Plan Account within a
reasonable period following processing of such election, with such amount to be
distributed in a lump sum cash payment except that--
(A) amounts invested in the MCN Stock fund shall be distributed
in accordance with section 9.8,
(B) such former Participant may upon reasonable prior notice to
the Committee receive a partial distribution rather than a
total distribution, of the vested portion of his Account,
but not more frequently than four times per year, and
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(C) to the extent that such distribution comes from the Fixed
Income fund account, such distribution shall be subject to
the provisions of section 9.9.
Notwithstanding any other provision of this Plan, if a Participant
attains age 70 1/2 and still has a balance allocated to his or her Plan Account,
a distribution shall be made under section 9.1 as if the Participant had
terminated employment in the month in which the Participant attains age 70 1/2.
Such distribution shall in no event be later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2. Distributions to
such Participant shall be made annually thereafter no later than December 31 of
each year and shall be equal to at least the minimum amount required to be
distributed by Code section 401(a)(9). For purposes of this paragraph, the life
expectancy of a Participant and the Participant's spouse shall be redetermined
annually.
(b) Suspension of Participation. Prior to termination of his
employment, if a Participant shall cease to meet the eligibility requirements of
the Plan, his contributions and Employer contributions on his behalf shall be
suspended during the period of his ineligibility. Subject to section 3.1,
distribution of such Participant's Plan Account shall be deferred until
termination of his employment with the Company and any Affiliated Company. If
the provisions of section 3.3 relating to the transfer of a Participant's Plan
Account to the MichCon Investment and Stock Ownership Plan or its successor are
not applicable--
(i) with respect to Participants who cease to meet the
eligibility requirements of the Plan prior to January 1, 1987, the Committee
shall direct the Trustee to distribute the value of the Participant's Plan
Account in accordance with section 9.1 whether or not such termination of
employment shall be under the circumstances set forth in said section 9.1; and
(ii) with respect to Participants who cease to meet the
eligibility requirements of the Plan subsequent to December 31, 1986, such
distribution shall be in accordance with section 9.1 or 9.3, whichever is
applicable.
(c) Transfer of Employment.
(i) A transfer of employment from an Employer to an Affiliated
Company shall not be considered a termination of employment.
(ii) If a Participant shall be transferred to the employ of an
Affiliated Company which has not elected to participate in the Plan,
distribution of such Participant's Plan Account shall be deferred until the date
on which he is no longer in the employ of the Company or any Affiliated Company,
whereupon the Committee shall direct the Trustee to distribute the value of the
Participant's Plan Account in the manner prescribed in section 9.1, subject to
the provisions of section 9.7, whether or not termination of employment shall be
under circumstances set forth in said section 9.1.
(d) Special Rules Relating to Distributions in the Event of Death. In
the event that a Participant dies before a distribution of his Plan Account, the
Committee shall direct the Trustee to distribute the entire value of his Plan
Account to his beneficiary no later than March 1 of the calendar year following
the Participant's death, as provided in section 9.1. In the
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event of the death of the Participant after the distribution of his Plan Account
has begun, any remaining balance in his Plan Account at the time of death will
be distributed at least as rapidly as under the method of distribution in effect
at the date of the Participant's death.
(e) Distribution must begin not later than the sixtieth (60th) day
after the close of the Plan Year in which occurs the latest of (a) the
Participant's termination of employment, (b) the Participant's attainment of age
sixty-five (65), or (c) the tenth (10th) anniversary of the date the Participant
first became a Participant, unless (1) the Participant elects a later date by
submitting to the Committee a written statement signed by the Participant which
describes the benefit and the date on which payment of such benefit shall
commence, so long as such election does not violate the incidental benefit rule
prescribed by the Code; or (2) if the amount of the payment required to commence
on the date determined hereinabove cannot be ascertained by such date, or if it
is not possible to make such payment on such date because the Committee has been
unable to locate the Participant after making reasonable efforts to do so, a
payment retroactive to such date may be made no later than sixty (60) days after
the earliest date on which the amount of such payment can be ascertained under
the Plan or the date on which the Participant is located, whichever is
applicable. For purposes of this subsection, the failure of a Participant to
consent to a distribution shall be deemed an election to defer commencement of
payment of any benefit sufficient to satisfy this section.
9.8 Distributions of Stock. In the case of distributions under section 9.1,
9.2, 9.3(b), 9.7(a), or 9.7(c)(ii), the value of the Participant's MCN Stock
fund account, if any, shall be paid in full shares of stock except that cash
shall be distributed in lieu of fractional shares; provided, however, that a
Participant entitled to such a distribution may elect to receive cash in lieu of
MCN Stock. Except in the case of an election to receive cash in lieu of MCN
Stock, the total number of shares allocated to such account shall be distributed
from such account.
Any remaining value of such account and, subject to the provisions of section
9.9, the value of the Participant's accounts in other funds shall be distributed
in cash. Any transfer taxes payable with respect to the distribution of shares
of stock shall be charged to the respective MCN Stock fund. Distributions
pursuant to section 9.3(a) and withdrawals under sections 9.5 and 9.6 shall be
paid entirely in cash. The distribution requirements of Code Section 409(o)
shall be met by the Plan, to the extent applicable.
9.9 Distributions to Certain Participants from Fixed Income Fund. This
Section 9.9 shall apply only to Participants with at least one Hour of
Employment prior to May 31, 1988.
(a) Normal Form. Notwithstanding any provision of the Plan, other than
the final paragraph of section 9.7(a), if a distribution is to be made under
section 9.1(a) or (c) and the Participant has a Fixed Income fund account and at
least one Hour of Employment prior to May 31, 1988 and the Participant's first
Hour of Employment is prior to January 1, 1999, then unless the Participant or
legal representative shall make an election in the manner prescribed in section
9.9(b), the value of such account (exclusive of the portion thereof attributable
to diversification elections under section 14.5) shall be distributed by the
purchase of an immediately payable single premium annuity contract providing for
monthly payments during the Participant's lifetime and, if the Participant is
married on the date payment of his benefit commences and his spouse shall
survive him, for monthly payments during the remainder of such spouse's
lifetime, each such payment to such spouse being equal to one-half of the
monthly payment received by the Participant, commencing no later than March 1 of
the calendar year following the calendar year of the Participant's termination
of employment, and
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delivery of such contract to the Participant within a reasonable time after the
Participant's termination of employment.
If a distribution is to be made under section 9.1(b) because of a
Participant's death and the Participant had a Fixed Income fund account at the
time of his death and at least one Hour of Employment prior to May 31, 1988 and
the Participant's first Hour of Employment was prior to January 1, 1999, then
unless the Participant had made or the Participant's spouse or beneficiary, as
the case may be, makes an election at the time and in the manner prescribed in
section 9.9(b), the value of the Participant's Fixed Income fund account
(exclusive of the portion thereof attributable to diversification elections
under section 14.5) shall be distributed by purchase of an immediately payable
single premium annuity contract providing for monthly payments to the
Participant's spouse, or, if the Participant was not married on the day of his
death, to his beneficiary during such person's lifetime, commencing no later
than March 1 of the calendar year following the calendar year of the
Participant's death and delivery of such contract to such person within a
reasonable time after the date of Participant's death.
(b) Election to Reject Normal Form. Subject to the provisions of this
section 9.9(b), each Participant entitled to a distribution under section 9.9(a)
(or legal representative on behalf of such a Participant) may, at any time
during the 90-day period ending on the annuity starting date, elect to have the
value of the Participant's Fixed Income fund account (exclusive of the portion
thereof attributable to diversification elections under section 14.5)
distributed by one or more of the methods set forth in section 9.9(c).
Within 30 days after a Participant provides written notice to the
Committee of his intention to retire on his Normal Retirement Date or Disability
Retirement Date, or within 30 days after the Committee receives notice of a
Participant's death, or within five business days after determining, in
accordance herewith, that a Participant is totally and permanently disabled, or
within five business days after receiving notice of the legally established
mental incompetency of the Participant, if the Participant has a Fixed Income
fund account at such time, the Committee shall deliver to such Participant or
his legal representative, by mail or by personal delivery, written notice in
nontechnical language explaining the terms and conditions of the annuity
provided in section 9.9(a).
The notice shall explain the Participant's or legal representative's
right to elect an optional form of distribution and that such election may be
revoked by the Participant or legal representative at any time prior to the
annuity starting date or, if a lump sum payment is elected, prior to the first
day on which all events have occurred which entitle the Participant or legal
representative to the lump sum payment.
The notice shall explain that a married Participant may elect a
distribution pursuant to section 9.9(c) only if the spouse consents in writing
to such election. Such written consent shall acknowledge consent to the
designated beneficiary and the optional form of distribution, neither of which
may be changed thereafter without again obtaining written spousal consent (or
the consent of the spouse expressly permits changes by the Participant without
further consent by the spouse). Such written consent shall acknowledge the
effect of such election and shall be witnessed by a notary public or by a
representative of the Committee who is designated to act in such capacity by the
Committee.
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If the Participant establishes to the satisfaction of the Committee
that such written consent cannot be obtained because his spouse cannot be
located, the requirement of such written consent shall be waived. Any election,
change, or revocation under this section 9.9(b) shall be effective when written
notice is delivered to the Committee in a form approved by the Committee for
this purpose, provided such election, change, or revocation is delivered prior
to the annuity starting date or, if a lump sum payment is elected, prior to the
first day on which all events have occurred which entitle the Participant or
legal representative to the lump sum payment. The notice shall explain that an
effective revocation shall result in the benefit being provided as an annuity
described in section 9.9(a).
Subject to Section 9.14(C), such notice shall be provided no less than
thirty (30) days and no more than ninety (90) days prior to the annuity starting
date.
(c) Optional Forms. In addition to the form described in section
9.9(a), distribution of the value of a Participant's Fixed Income fund account
(exclusive of the portion thereof attributable to diversification elections
under section 14.5) may be made either--
(i) in a lump sum payment; or
(ii) by purchase of any form of single premium annuity contract
that satisfies Code section 401(a)(9) as may from time to time be offered by the
legal reserve life insurance companies with which the Trustee has agreements
governing the investment of assets in the Fixed Income fund and delivery of such
contract to the Participant or distributee within a reasonable time after the
Participant's termination of employment or death. Within five business days
after the Committee receives an election pursuant to this provision, the
Committee shall provide the same written notice provided under section 9.9(b).
An election pursuant to this provision shall be subject to the provisions of
section 9.9(b).
9.10 Loans. The Trustee is hereby authorized to establish a loan program in
accordance with this section 9.10. Upon application of a party in interest (as
defined in ERISA section 3(14)) who is a Participant or beneficiary under the
Plan, the Committee shall direct the Trustee to make a cash loan to such
Participant or beneficiary, secured by 50 percent of the nonforfeitable value of
the Participant's Employee and Employer Salary Reduction and ESOP Accounts
determined as of the date the loan is made. The loan program shall be
administered by the Committee subject to the following conditions and such other
conditions that are consistent with Labor Regulation section 2550.408b-1 and are
from time to time set forth in written administrative procedures which shall
constitute a part of the Plan and are hereby incorporated by reference:
(a) The term of a loan shall not extend beyond the earlier of four
years or the date upon which the Participant or beneficiary ceases to be a party
in interest; provided, however, that the four years shall be changed to eight
years where the proceeds of the loan are used by the Participant or beneficiary
to acquire the Participant's principal residence.
(b) A loan shall bear interest at a reasonable rate which shall be
based upon the prevailing interest rate charged by persons in the business of
lending money on similar commercial loans under comparable circumstances at the
time that such loan is granted, as determined by the Committee and uniformly
applied.
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(c) The amount of a loan (when added to the balance of other
outstanding loans) shall not exceed the lesser of--
(i) $50,000 reduced by the excess (if any) of--
(A) the highest outstanding balance of loans from the Plan
during the one-year period ending on the day before the
date on which such loan was made, over
(B) the outstanding balance of loans outstanding on the date
such loan was made, or
(ii) 50 percent of the nonforfeitable value of the Participant's
Employee and Employer Salary Reduction and ESOP Accounts under the Plan which
the Participant would have been entitled to receive if the Participant's
employment had terminated on the date such loan was made.
In no case shall a Participant be entitled to a loan under this Plan if
the amount of the proposed loan is less than $500.
(d) A loan shall be evidenced by a promissory note.
(e) Payments of principal and interest shall be made by approximately
equal payments not less frequently than monthly on a basis that would permit the
loan to be fully amortized over its term. Loan payments shall be made by payroll
deductions for Participants in active pay status.
(f) Appropriate disclosure shall be made pursuant to the Truth in
Lending Act to the extent applicable.
(g) Amounts of principal and interest received on a loan shall be
credited to the Participant's account and the outstanding loan balance shall be
considered an investment of the assets of the account. Payment of principal and
interest related to loans made from a Participant's ESOP Account shall be
credited to such Participant's ESOP Account. Payment of principal and interest
related to loans made from a Participant's Savings Plan Account shall be
credited to the Participant's Investment Plan Account and shall be invested in
the investment funds in the same proportions as the investment election then in
effect by the Participant under Article VI.
(h) The frequency of loans and the minimum amount for a loan shall be
determined through uniform rules prescribed by the Committee and at the sole
discretion of the Committee.
(i) All applications for a loan shall be submitted to the Committee on
a form prescribed by the Committee. Distribution shall be made as soon as
reasonably practicable after the application of the loan is received.
(j) If a Participant borrows from an account which is invested in more
than one fund, he shall instruct the Committee as to the funds from which the
loan is to be applied;
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provided, however, that no borrowing shall be applied from the MCN Stock fund
unless and until the Participant's ability to borrow from each of the other
funds has been exhausted.
(k) A married Participant may not borrow any amount from the Plan
unless his spouse executes a written consent as hereinafter provided. Such
consent must be executed during the 90-day period ending on the date on which
the loan is made and shall specifically provide that the spouse consents both to
the loan and to the use of the Participant's Salary Reduction and ESOP Accounts
as security for the loan. The consent shall acknowledge the effect of the use of
the Participant's accounts as security for the loan and shall be witnessed by a
notary public or a representative of the Committee who is designated to act in
such capacity by the Committee.
(l) In the event a Participant defaults on a loan, the entire
outstanding balance of and accrued interest on the loan shall be due and payable
in accordance with the Plan's loan procedures and applicable Regulations. The
Trustee and/or Committee may pursue collection on such defaulted loan by any
means generally available to a creditor where a promissory note is in default,
or if the entire amount due is not paid by such Participant following the
default, the amount of such loan default shall be charged against the "secured
portion" of the Participant's Plan Account and treated as a distribution with
respect to such Participant; provided, however, that such a charge against a
Participant's Plan Account shall not occur with respect to funds in his Employee
Salary Reduction Account at a time so as to cause a violation of Code section
401(k)(2)(B)(i).
9.11 Definition of Employee Contributions and Employer Contributions. For
the purposes of this Article IX, a Participant's Employee contributions shall
include only those contributions made either as a Voluntary Deduction or a
Salary Reduction which have not been previously withdrawn or distributed.
If a Participant has previously had a portion of his Plan Account forfeited
under section 9.2, the Employer contributions, exclusive of those made as a
Salary Reduction to the Plan on his behalf, shall include only such Employer
contributions made subsequent to such forfeiture.
9.12 Spousal Consent to Payment. Subject to section 9.7(a), the spouse of a
married Participant or former Participant shall be required to consent in
writing to any in-service withdrawal, loan, or distribution under the Plan to
the Participant or former Participant. The spouse's consent shall be in such
form as the Committee may prescribe.
9.13 Distributions Pursuant to a Qualified Domestic Relations Order. Upon
receipt of a domestic relations order, the Committee will notify the involved
Participant and any alternate payee that the order has been received and explain
the Plan's procedures for determining whether the order is a qualified domestic
relations order as defined in Code section 414(p). After determining that the
order is a qualified domestic relations order, the Committee shall direct the
Trustee to distribute or segregate the Participant's Account as provided in the
qualified domestic relations order. If required by the qualified domestic
relations order, the Trustee shall make distribution prior to the time that the
Participant, whose account is subject to distribution, could have received a
distribution.
In a case of a dispute regarding the validity of a domestic relations order
or the amounts or identities of parties to be paid thereunder, the Committee may
segregate the portion of the
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Participant's account in question, and may bring an action in a court of
competent jurisdiction to determine the proper amount and/or recipient of
benefits, or may submit such segregated amount to a court of competent
jurisdiction (through an interpleader action or otherwise) until resolution of
the matter.
Further, if the Committee receives notice that a domestic relations order is
forthcoming, the Committee may suspend payments from the Participant's Account
or may follow the procedures described in the preceding sentence, until
resolution of the matter.
9.14 Direct Rollovers of Eligible Distributions.
(a) General. Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a distributee's election under this section, a
distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a direct
rollover.
(b) Definitions.
(i) Eligible rollover distribution. An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under Code section 401(a)(9); any hardship distribution
after January 1, 1999; and the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(ii) Eligible retirement plan. An eligible retirement plan is an
individual retirement account described in Code section 408(a), an individual
retirement annuity described in Code section 408(b), an annuity plan described
in Code section 403(a), or a qualified trust described in Code section 401(a),
that accepts the distributee's eligible rollover distribution. However, in the
case of an eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual retirement
annuity.
(iii) Distributee. A distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's surviving spouse and
the Employee's or former Employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in Code section
414(p), are distributees with regard to the interest of the spouse or former
spouse.
(iv) Direct rollover. A direct rollover is a payment by the Plan
to the eligible retirement plan specified by the distributee.
(c) Waiver of 30-Day Notice Period. If a distribution is one to which
Code sections 401(a)(11) and 417 do not apply, such distribution may commence
less than 30 days after the notice required under section 1.411(a)-11(c) of the
Income Tax Regulations is given,
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provided that (i) the Committee clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (ii) the Participant,
after receiving the notice, affirmatively elects a distribution.
9.15 Special Distribution Events. Notwithstanding anything herein to the
contrary, a Participant's Salary Reduction contributions shall not be
distributed prior to the Employee's retirement, death, disability, termination
of employment, or hardship, except that a distribution of such amounts may be
made, in accordance with Code Section 401(k)(10), upon
(a) termination of the Plan without establishment of another defined
contribution plan other than an employee stock ownership plan (as defined in
Code Section 4975(e) or 409) or a simplified employee pension plan (as defined
in Code Section 408(k));
(b) the disposition by the Company to an unrelated corporation of
substantially all of the assets (as defined in Code Section 409(e)(2)) used in
the trade or business if the Company continues to maintain the Plan after the
disposition, but only with respect to Employees who continue employment with the
corporation acquiring such assets; or
(c) the disposition by the Company to an unrelated entity of its
interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if the
Company continues to maintain the Plan, but only with respect to Employees who
continue employment with such subsidiary.
ARTICLE X ADMINISTRATION
10.1 The MCN Energy Group Master Trust, Retirement and Savings Plan
Committee.
(a) The Company shall appoint a Committee consisting of at least three
members which shall be known as the MCN Energy Group Master Trust, Retirement
and Savings Plan Committee (the "Committee") and which shall be responsible
(except for duties specifically vested in the Trustee) for the administration of
the provisions of the Plan.
(b) At the Company's discretion, each Employer may be permitted one or
more representatives on the Committee who shall be appointed by and remain in
the office at the will of such Employer. Each Employer shall have the right at
any time, with or without cause, to remove its representative on the Committee.
A member of the Committee may resign and his resignation shall be effective upon
delivery of his written resignation to each Employer. Upon resignation, removal,
or failure or inability for any reason of any member of the Committee to act
hereunder, the Board of Directors of the Employer by whom such member was
appointed may be empowered to appoint a successor member. All successor members
of the Committee shall have all of the rights and privileges and all of the
duties of their predecessors but shall not be held accountable for the acts of
their predecessors. Two or more Employers may appoint the same individual as
their representative on the Committee, provided that the Committee shall consist
of at least three members.
(c) Any member of the Committee may, but need not, be a Participant or
a director, officer, or shareholder of any of the Employers, and such status
shall not disqualify him from taking any action hereunder or render him
accountable for any distribution or material
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advantage received by him under the Plan, provided that no member of the
Committee who is a Participant shall take part in any action of the Committee on
any matter involving solely his rights under the Plan.
(d) The Committee shall be responsible for the administration of the
Plan. The Committee shall have all such powers as may be necessary to carry out
the provisions of the Plan and may from time to time establish rules and
procedures for the administration of the Plan and the transaction of the Plan's
business.
The Committee shall have the exclusive right to make any finding of
fact necessary or appropriate for any purpose under the Plan. The Committee
shall have the maximum discretion permitted by law to interpret and construe the
terms of the Plan and to resolve all issues arising under the Plan including,
but not limited to the authority to--
(i) construe disputed or doubtful terms of the Plan;
(ii) determine the eligibility of an individual to participate in
the Plan;
(iii) determine the amount, if any, of benefits to which any
Participant, former Participant, beneficiary, or other person may be entitled
under the Plan;
(iv) determine the timing and manner of payment of benefits; and
(v) resolve all other issues arising under the Plan.
To the extent permitted by law, all findings of fact, determinations,
interpretations, and decisions of the Committee shall be conclusive and binding
upon all persons having or claiming to have any interest or right under the
Plan.
The Employers shall, from time to time, on request of the Committee,
furnish to the Committee such data and information as the Committee shall
require in the performance of its duties.
(e) The Committee shall each month collect Employee contributions and
Employer contributions from each Employer and shall deliver the amounts
collected to the Trustee, together with instructions concerning the portions of
such total amount to be invested in each fund.
(f) The Committee shall direct the Trustee to make payments of amounts
to be distributed or withdrawn from the Trust under Article IX and to make any
transfers from one fund to another directed by Participants under section 6.3.
(g) The Committee may act at a meeting, or by writing without a
meeting, by the vote or assent of a majority of its members. The Committee shall
elect a Secretary and such Secretary shall keep records of all meetings of the
Committee and shall forward all necessary communications to the Trustee. The
Committee may adopt such by-laws and regulations as it deems desirable for the
conduct of its affairs and the administration of the Plan, provided that any
such regulations shall be consistent with the provisions of the Plan.
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(h) The members of the Committee, and each of them, shall be free from
all liability, joint or several, for their acts, omissions, and conduct in
administration of the Plan herein embodied, and the Employers shall jointly and
severally indemnify them, and each of them, from the effects and consequences of
their acts, omissions, and conduct in their official capacity except to the
extent that such effects and consequences shall result from their own willful
misconduct.
(i) No member of the Committee shall receive any compensation or fee
for his services, unless otherwise agreed between such member of the Committee
and the Employers, but the Employers shall reimburse the Committee members for
any necessary expenditures incurred in the discharge of their duties as
Committee members.
(j) The Committee may employ such counsel (who may be of counsel for
any Employer) and agents, and may arrange for such clerical and other services
as it may require in carrying out the provisions of the Plan, and all fees,
charges, and costs so incurred shall be payable by the Plan except to the extent
the Employers elect to pay such fees, charges, and costs.
(k) The Committee shall maintain a record of all of its proceedings,
shall maintain or cause to be maintained the Plan Accounts prescribed by Article
VIII, and shall make the reports to Participants prescribed by section 8.7.
10.2 Notice to Employees. All notices, reports, and statements given, made,
delivered, or transmitted to a Participant shall be deemed to have been duly
given, made, or transmitted when mailed with postage prepaid and addressed to
the Participant at the address last appearing on the books of the Employer. A
Participant may record any change of his address from time to time by written
notice filed with the Employer.
10.3 Notices to Employers or Committee. Written directions, notices, and
other communications from Participants to the Employers or the Committee shall
be mailed by first class mail with postage prepaid or delivered to such location
as shall be specified upon the forms prescribed by the Committee for the giving
of such directions, notices, and other communications, and shall be deemed to
have been received by the addressee when received at such location. Any other
notice to the Employers or the Committee shall be addressed.
(a) If intended for the Committee:
Savings Plan Committee
c/o MCN Energy Group Inc.
500 Griswold Street
Detroit, Michigan 48226
(b) If intended for an Employer, at its principal place of business.
10.4 Participants' Acceptance of the Provisions of the Plan. Each
Participant at the time of becoming a Participant in the Plan and as a condition
of participation shall sign an instrument evidencing the fact that he accepts
and agrees to all provisions of the Plan.
10.5 Audit of Plan Records. The records of the Committee and the records of
the Employers in respect of the Plan shall be examined annually by a firm of
independent public
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accountants appointed by the Committee. Such accountants shall, on the basis of
such examination, make such reports to the Committee and to the Employers as
they may request. The audited records of the Committee and the Employers shall
be conclusive in respect of all matters involved in the administration of the
Plan.
10.6 Claims Procedure. If any Participant or distributee believes he is
entitled to benefits in an amount greater than those which he is receiving or
has received, he may file a claim with the Secretary of the Committee. Such a
claim shall be in writing and state the nature of the claim, the facts
supporting the claim, the amount claimed, and the address of the claimant.
The Secretary of the Committee shall review the claim and give written
notice by registered or certified mail to the claimant of his decision with
respect to the claim. Such notice shall be provided within 90 days after receipt
of the claim, unless special circumstances require an extension, in which event
the notice shall be provided within 180 days after receipt of the claim. Such
notice shall be written in a manner calculated to be understood by the claimant
and, if the claim is wholly or partially denied, set forth the specific reasons
for the denial, specific references to the pertinent Plan provisions on which
the denial is based, a description of any additional material or information
necessary for the claimant to perfect the claim, and an explanation of why such
material or information is necessary, and an explanation of the claim review
procedure under the Plan. The Secretary shall also advise the claimant that he
or his duly authorized representative may request a review by the full Committee
of the denial by filing with the Committee, within 60 days after notice of the
denial has been received by the claimant, a written request for such review. The
claimant shall be informed that he may have reasonable access to pertinent
documents and submit comments in writing to the Committee within the same 60-day
period. If a request is so filed, review of the denial shall be made by the full
Committee and the claimant shall be given written notice of the Committee's
final decision. Such notice shall be provided within 60 days after receipt of
such request, unless special circumstances require an extension, in which event
the notice shall be provided within 120 days after receipt of the request. Such
notice shall include specific reasons for the decision and specific references
to the pertinent Plan provisions on which the decision is based and shall be
written in a manner calculated to be understood by the claimant.
10.7 Effect of a Mistake. In the event of a mistake or misstatement as to
the eligibility, participation, or service of any Participant, or the amount of
payments made or to be made to a Participant or beneficiary, the Committee
shall, if possible, adjust the Plan's records and cause to be withheld or
accelerated or otherwise make adjustment of such amounts of payments as will in
its sole judgment result in the Participant or beneficiary receiving the proper
amount of payments under the Plan.
ARTICLE XI AMENDMENT AND TERMINATION
11.1 Amendment. The Company may at any time and from time to time amend or
modify the Plan by written instrument duly adopted by the Board of Directors of
the Company or by the Committee. Any such amendment or modification shall become
effective on such date as the Company shall determine, may apply to Participants
in the Plan at the time thereof as well as future Participants, but may not
reduce the Plan Account of any Participant as of the date of adoption of such
amendment or modification.
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<PAGE> 52
11.2 Withdrawal. If an Employer shall withdraw from the Plan under section
12.2, or if an Employer shall adopt an amendment to the Plan which shall render
impracticable the continued administration of the Plan as a joint plan of the
several Employers, the Committee shall determine the portions of the various
funds held by the Trustee which are applicable to the Participants of such
Employer and shall direct the Trustee to segregate such portions in a separate
trust. Such separate trust shall thereafter be held and administered as a part
of the separate plan of such Employer. After such portions of the funds have
been segregated in a separate trust, no such Participant or any distributee with
respect to such Participant shall have any right to any benefit under the Plan
or any claim against the Trust.
11.3 Termination. Any Employer may at any time terminate its participation
in the Plan by resolution of its Board of Directors. In the event of any such
termination, the Committee shall determine the portions of the various funds
held by the Trustee which are applicable to the Participants of such Employer
and shall direct the Trustee to distribute such portions to such Participants
ratably in proportion to the values of their respective fund accounts; provided,
however, amounts attributable to a Participant's Elective Deferrals shall not be
distributed on account of such termination if the Employer, after such
termination, maintains a defined contribution plan (other than an employee stock
ownership plan or a simplified employee pension). The portions of the MCN Stock
fund so distributed shall be distributed in kind except that cash shall be
distributed in lieu of fractional shares. The portions of the Fixed Income fund
and other investment funds so distributed shall be distributed in cash or in
kind, or partly in cash and partly in kind, as determined by the Committee.
Upon termination or partial termination of the Plan by any Employer or upon
the complete discontinuance of contributions by any Employer, the benefits under
the Plan of all affected Participants employed or formerly employed by such
Employer shall become nonforfeitable.
11.4 Allocation of Funds Between Employers. The portion of a fund applicable
to Participants of a particular Employer shall be an amount which bears the same
ratio to the value of the fund which the aggregate value of the fund accounts of
Participants employed by such Employer bears to the total value of the fund
accounts of all Participants.
11.5 Trust to be Applied Exclusively for Participants and Their
Beneficiaries. Subject to section 15.3, any provision of the Plan to the
contrary notwithstanding, it shall be impossible for any part of the Trust to be
used for or diverted to any purpose not for the exclusive benefit of
Participants and their beneficiaries either by operation or termination of the
Plan, by power of amendment, or by other means.
Notwithstanding the preceding paragraph, if a contribution is made to the
Trust by an Employer by a mistake of fact, then such contribution shall be
returned to such Employer within one year after the payment of the contribution;
and if any part or all of a contribution is disallowed as a deduction under Code
section 404, then to the extent such contribution is disallowed as a deduction
it shall be returned to such Employer within one year after the disallowance.
All Employer contributions are conditioned upon their deductibility under Code
section 404.
ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES
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<PAGE> 53
12.1 Adoption of the Plan. Any Affiliated Company may become a participating
Employer under the Plan by (a) taking such corporate action as shall be
necessary to adopt the Plan, and (b) executing and delivering such instruments
and taking such other action as may be necessary or desirable to put the Plan
into effect with respect to such Affiliated Company.
The Plan shall become effective with respect to each particular Affiliated
Company as of a date to be determined by the Board of Directors of such Employer
after complying with all legal requirements pertaining to the participation of
such Employer in the Plan.
12.2 Withdrawal from the Plan. Any Employer may withdraw from participation
in the Plan at any time by filing with the Committee a duly certified copy of a
resolution of its Board of Directors to that effect and giving notice of its
intended withdrawal to the Committee, the other Employers, and the Trustee at
least 30 days prior to the effective date of withdrawal.
12.3 Company as Agent for Employers. Each Employer other than the Company,
hereby appoints, and each other corporation which shall become an Employer
pursuant to section 12.1 or 15.7 by so doing shall be deemed to have appointed
the Company its agent to exercise on its behalf all of the powers and
authorities hereby conferred upon the Employers by the terms of the Plan,
including, but not by way of limitation, the power to amend, restate, and
terminate the Plan. The authority of the Company to act as agent shall continue
unless and until the portion of the Trust fund held for the benefit of Employees
of the particular Employer and their beneficiaries is set aside in a separate
trust as provided in section 11.2.
ARTICLE XIII TOP-HEAVY PLAN RULES
13.1 Application of Top-Heavy Plan Rules. If the Plan is top-heavy as
determined under section 13.3, then the requirements in section 13.4 shall apply
to the Plan to the extent indicated by that section 13.4.
13.2 Special Definitions. Any reference in this Article XIII to a "plan"
means a stock bonus, pension, or profit-sharing plan of the Company and any
Affiliated Company for the exclusive benefit of its employees or their
beneficiaries, including this Plan. For purposes of this Article XIII only, the
following terms shall have the meanings indicated:
(a) "Compensation" means a Participant's Compensation from the
Employer for any calendar year as defined in Article II.
(b) "Determination Date" means, with respect to any Plan Year, the
last day of the preceding Plan Year, except that in the case of the Plan's first
Plan Year, the Determination Date shall be the last day of that Plan Year. Where
one or more other plans are required or permitted to be aggregated with this
Plan under section 13.3 and where all plan years of all such plans do not
coincide, the "Key Employee Sum" and the "All Employee Sum" in section 13.3 each
shall be determined separately for each plan as of its appropriate Determination
Date and the results shall then be combined for the Determination Dates falling
within the same calendar year.
(c) "Employee" means a common law employee of the Employer who is or
once was a Participant, including his beneficiary, but excluding any employee
who is a member of a unit of employees covered by a collective bargaining
agreement under which retirement
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<PAGE> 54
benefits were the subject of good faith bargaining with the Employer unless a
member of such unit is a Key Employee. For purposes of making computations
involving the MichCon Employee Stock Ownership Plan, employee shall include any
common law employee of the Employer, including his beneficiary.
(d) "Employer" means the Company and any other employing unit which
would be included in the same controlled group as the Company (as defined in
Code section 414(b)) or which is under common control with the Company (as
defined in Code section 414(c)) or which is included in the same affiliated
service group (as defined in Code section 414(m)) or which is required to be
aggregated with the Company pursuant to Regulations under Code section 414(o).
(e) "Key Employee" means each Employee or former Employee (including
the beneficiary of either) who at any time during the Plan Year containing the
Determination Date or any of the four preceding Plan Years received Compensation
from the Employer and who--
(1) Is one of the fifty (50) (or if fewer, the greater of three
(3) or ten percent (10%) of all Employees) officers of the
Employer who had the largest Compensation in the five-year
period ending on the last day of the current Plan Year, but
only if such officer's Compensation exceeds one-half of the
dollar limitation of Code Section 415(b)(1)(A) for the
calendar year in which the Determination Date falls.
(2) is one of the ten Employees owning the largest interest in
the Employer and who has Compensation from the Employer in
the amount greater than the dollar limitation of Code
section 415(c)(1)(A) in effect for the calendar year in
which the Determination Date falls;
(3) owns 5 percent or more of the outstanding stock or voting
power of the Employer; or
(4) owns 1 percent or more of the outstanding stock or voting
power of all stock of the Employer and has annual
compensation from the Employer of more than $150,000.
For purposes of (2), (3), and (4), the constructive ownership rules of
Code section 318 shall apply with the modification that 5 percent shall be
substituted for 50 percent appearing in Code section 318(a)(2)(C). For purposes
of (2), an Employee shall be considered a Key Employee even if he is not among
the ten largest owners, if his ownership interest in the Employer is not less
than at least one of the top ten owners, and provided he has the requisite level
of Compensation described in (2); and in the event two Employees have the same
interest in the Employer, the Employee with the greater Compensation shall be
regarded as having the larger interest. For purposes of (2), (3), and (4), each
Employer that otherwise would be aggregated under this Article XIII's definition
of Employer shall be treated as a separate Employer to determine ownership
percentages.
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<PAGE> 55
(f) "Non-Key Employee" means any Employee or former Employee
(including the beneficiary of either) who is not a Key Employee.
(g) "Plan Year" means the calendar year.
(h) "Valuation Date" means the date used for computing plan costs for
minimum funding in the case of any defined benefit plan and the last day of the
plan year in the case of any defined contribution plan, including this Plan.
(i) "Years of Service" means an Employee's Years of Service determined
under section 3.5.
13.3 Determination of Top-Heavy Status. Determination of whether the Plan is
top-heavy for any Plan Year shall be made as follows:
(a) Required Plan Aggregation. First, there shall be aggregated with
the Plan (1) each plan of the Employer in which a Key Employee participates in
the plan year containing the Determination Date, or any of the four preceding
plan years, (2) each other plan of the Employer which, during this period,
enables any plan in which a Key Employee participates to meet the requirements
of Code section 401(a)(4) or 410, and (3) any terminated plan that was
maintained by the Employer during the five year period ending on the
Determination Date for the plan year in question if a Key Employee participated
in such plan.
(b) Key Employee Sum. Second, there shall be computed, as of the
Determination Date, the sum of the present values of the accrued benefits of all
Key Employees as determined by the Plan actuary under all defined benefit plans
required to be aggregated under section 13.3(a) and the account balances of all
Key Employees under all defined contribution plans, including this Plan,
required to be aggregated under section 13.3(a). For purposes of this
computation, the present value of an accrued benefit shall be determined as of
the most recent Valuation Date occurring within a 12-month period ending on the
Determination Date with the accrued benefit for a current Participant determined
as if the individual had terminated employment as of such Valuation Date.
For purposes of this computation, the accrued benefit of an Employee
other than a Key Employee shall be determined under (1) the method, if any, that
uniformly applies for accrual purposes under all plans maintained by the Company
and Affiliated Companies, or (2) if there is no such method, as if such benefit
accrued not more rapidly than the slowest accrual rate permitted under the
fractional accrual rate of Code section 411(b)(1)(C).
For purposes of this computation, account balance means the account
balance as of the most recent Valuation Date occurring within a 12-month period
ending on the Determination Date, plus an adjustment for contributions due as of
the Determination Date. In the case of a profit-sharing plan or other plan not
subject to the minimum funding requirements of Code section 412, the adjustment
is the amount of any contributions actually made after the Valuation Date but on
or before the Determination Date, except that in the first plan year after a
plan is adopted, the adjustment shall include any contributions made after the
Determination Date that are allocated as of a date within the first plan year.
In the case of a money purchase pension plan or other plan subject to the
minimum funding requirements of Code section 412, the adjustment is the amount
of any contributions that would be allocated as of a date not later than the
Determination Date, even though such amount is not yet required to be
contributed,
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<PAGE> 56
plus the amount of any contribution actually made (or due to be made) after the
Valuation Date but prior to the expiration of the extended payment period under
Code section 412(c)(10).
For purposes of this computation--
(A) there shall be included in the Key Employee Sum any
distribution (other than rollover amounts or plan-to-plan
transfers not initiated by the Employee or made to another
plan maintained by the Employer) made to an Employee from
the Plan, or from another plan required to be aggregated
under section 13.3(a), within the five-year period ending on
the Determination Date;
(B) there shall be excluded from the Sum any rollover
contribution and any plan-to-plan transfer initiated by the
Employee and accepted after December 31, 1983, by any plan
required to be aggregated under section 13.3(a) from a plan
other than one maintained by the Employer;
(C) there shall be excluded from the Sum the account balance and
present value of the accrued benefit of any Employee who
formerly was a Key Employee but who is not a Key Employee
for the year ending on the Determination Date; and
(D) there shall be excluded from the Sum any amounts
attributable to tax deductible employee contributions.
(E) The account balances and accrued benefits of a Participant
(1) who is not a Key Employee but who was a Key Employee in
a prior year or (2) who has not been credited with at least
one Hour of Service with any Employer at any time during the
five-year period ending on the Determination Date will be
disregarded.
(c) All Employee Sum. Third, under the same procedures as set forth in
section 13.3(b) above, including the special rules in (A), (B), and (C), there
shall be computed the sum of present values of accrued benefits and account
balances for all Employees of the Employer.
(d) Top-Heavy Test Fraction. Fourth, the Key Employee Sum computed in
section 13.3(b) shall be divided by the All Employee Sum computed in section
13.3(c), and if the resulting fraction is 0.60 or less, neither this Plan nor
any plan required to be aggregated under section 13.3(a) is top-heavy for the
Plan Year. If the fraction is greater than 0.60, both this Plan and any plan
required to be aggregated under section 13.3(a) are top-heavy for the Plan Year,
unless after the permissive plan aggregation described in section 13.3(e) below,
the recomputed fraction is 0.60 or less.
(e) Permissive Plan Aggregation. Fifth, at the election of the
Employer, plans of the Employer, other than those required to be aggregated
under section 13.3(a), but which provide benefits or contributions comparable to
this Plan, may be aggregated with this Plan and the plans required to be
aggregated under section 13.3(a), provided that such
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<PAGE> 57
aggregated group would meet the requirements of Code section 401(a)(4) and 410.
The computations under section 13.3 (b) to (d) above may then be repeated, based
on this permissively aggregated group, and if the fraction computed in section
13.3(d) is 0.60 or less for this group, then neither this Plan nor any plan
required to be aggregated under section 13.3(a) is top-heavy for the Plan Year.
If the fraction computed in section 13.3(d) is still greater than 0.60, both
this Plan and any plan required to be aggregated under section 13.3(a) are
top-heavy for the Plan Year but no plan which is permissively aggregated under
this section 13.3(e) will be deemed to be top-heavy for such reason.
13.4 Superseding Rules.
(a) Provisions Mandatory. For each Plan Year that the Plan is
top-heavy, the provisions of paragraphs (b), (c), (d), and (e) of this section
13.4 are mandatory and shall apply to the Plan for that Plan Year,
notwithstanding any other provision or provisions of the Plan that may conflict
with or vary from said mandatory provisions.
(b) Minimum Contributions for Non-Key Employee Participants.
Contributions by the Employer to the Plan Account of each Non-Key Employee
Participant who is employed by the Employer on the last day of the Plan Year and
who is eligible to have an Employer contribution made to his Plan Account under
section 4.2, 4.3, or 4.4 (without regard to any requirement of a minimum number
of Hours of Employment (as defined in section 3.7) during the Plan Year) shall
be equal to the lesser of (1) 3 percent of the Participant's Compensation for
that Plan Year or (2) the maximum percentage of the Employer's contributions (as
a percentage of Compensation not in excess of $150,000, as adjusted) allocated
to the account of any Participant who is a Key Employee for the Plan Year
multiplied by the Non-Key Employee Participant's Compensation for that Plan
Year. For purposes of this section 13.4(b), Employer contributions made under
any other defined contribution plan of the Employer in which any Key Employee
participates or which enables another defined contribution plan of the Employer
to meet the requirements of either Code section 401(a)(4) or 410 shall be
considered contributions made under this Plan. Salary Reduction contributions
will not be treated as Employer contributions for purposes of satisfying the
minimum allocation, but will be included for purposes of determining whether a
Key Employee has received an Employer contribution of at least three percent
(3%).
Notwithstanding the foregoing, in the event that the contribution to be
made to the Plan Account on behalf of the Non-Key Employee under the provisions
of sections 4.2, 4.3, and 4.4 is greater than the contribution which would be
made under this section 13.4(b), the provisions of Article IV shall prevail.
(c) Accelerated Vesting. A Participant's vested percentage in the
portion of his account balance derived from Employer contributions described
sections 4.2, 4.3, and 4.4 shall be determined in accordance with the following
schedule but only with respect to those who are Participants during part or all
of the Plan Year after the Plan becomes top-heavy and only if the following
schedule results in a higher vested percentage than the application of the
Plan's normal Vesting Requirement:
<TABLE>
<CAPTION>
Years of Vested Service Percentage
----------------------- ----------
<S> <C>
0 0%
</TABLE>
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<PAGE> 58
<TABLE>
<S> <C>
2 20%
3 40%
4 60%
5 80%
6 100%
</TABLE>
(d) Reduction in Multiple Plan Limitations. In order to reduce the
overall limitations on combined plan contributions and benefits under Code
section 415, the number 1.0 shall be substituted for 1.25 in determinations of
the maximum dollar amount which can be added to a Participant's account and of
the dollar amount of the maximum benefit allowable in section 4.3 of the Plan;
provided, however, that the foregoing sentence shall not apply if the top-heavy
test fraction or recomputed fraction of section 13.3(e) is .90 or less, in which
event each Non-Key Employee Participant shall receive an additional minimum
contribution to his account equal to 1 percent of the Participant's Compensation
for that Plan Year.
13.5 Participants in More Than One Top-Heavy Plan of the Employer. For each
Plan Year that the Plan is top-heavy--
(a) Subject to the provisions of section 13.4(b), in the event that a
Non-Key Employee is a Participant in both this Plan and another defined
contribution plan of the Employer in the same Plan Year, such Employee shall in
all events be entitled to have the portion of the contribution by the Employer
specified in section 4.2, 4.3, or 4.4 or the contribution by the Employer
specified in section 13.4(b), whichever is appropriate, allocated to his
account. This provision shall in no way limit the Employee's right to have a
contribution made on his behalf to such other defined contribution plan as shall
be maintained by the Employer and in which he is a participant.
(b) In the event that a Non-Key Employee is a Participant in both this
Plan and a defined benefit plan of the Employer in the same Plan Year, such
Employee shall not be entitled to have the contribution specified in section
13.4(b) made by the Employer to this Plan on his behalf. This provision shall in
no way limit the Employee's right to have the portion of the contribution by the
Employer specified in section 4.2, 4.3, or 4.4 allocated to his account. Such
Employee shall, however, receive the defined benefit minimum as specified in
Treasury Regulation section 1.416-1, M-12, and such minimum shall be increased,
if the Company uses a factor of 1.25 in computing the denominators of the
defined benefit and defined contribution factors under Code section 415(e), by
one percentage point (up to a maximum of ten percentage points) for each Year of
Service described in Treasury Regulation 1.416-1, M-2 (disregarding, as
permitted therein, any Year of Service if the Plan was not top-heavy for any
Plan Year ending during such Year of Service, or if the Year of Service was
completed in a Plan Year beginning before January 1, 1984) of the Participant's
average Compensation for the Plan Years described in Treasury Regulation section
1.416-1, M-2 (disregarding, as permitted therein, Compensation received for
years ending in Plan Years beginning before January 1, 1984 and Compensation
received for years beginning after the close of the last Plan Year in which the
Plan is top-heavy). Treasury Regulation sections 1.416-1, M-2, M-12 and M-14
shall govern how the multiple plan requirements are satisfied.
13.6 Changes in Applicable Vesting Schedule. In the case of any change in
the vesting provisions of the Plan, whether or not due to a change in the Plan's
status as a top-heavy plan determined pursuant to section 13.3, each Participant
whose nonforfeitable benefits
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<PAGE> 59
are adversely affected by the change may elect during the election period to
have his nonforfeitable benefits determined without regard to such change. The
election period shall begin on the date the change is adopted or becomes
effective, whichever is earlier, and end on the latest of (a) the date which is
60 days after the change is adopted, (b) the date which is 60 days after the
date such change becomes effective, or (c) the date which is 60 days after the
day the Participant is given written notice of such change.
ARTICLE XIV SPECIAL PROVISIONS RELATING TO THE ESOP
14.1 Establishment of ESOP. The MichCon Employee Stock Ownership Plan for
Non-Union Employees was originally established effective as of April 1, 1989.
Each Employer shall make contributions to the ESOP in accordance with section
4.3 hereof and the assets of the ESOP shall be invested at all times primarily
in MCN Stock. The Company from time to time may direct the Trustee to incur debt
in accordance with section 14.4 hereof to finance the acquisition of MCN Stock.
14.2 ESOP Account. The Committee shall establish an ESOP Account in the name
of each Participant to which there shall be credited or charged--
(a) the Employer contributions under section 4.3(a), (c) and (d)
hereof made on behalf of such Participant;
(b) the shares allocated to the Participant pursuant to section
14.4(d) hereof; and
(c) the investment gains and losses on such amounts.
A Participant's ESOP Account shall be invested only in the MCN Stock fund,
except to the extent that monies diversified under section 14.5 may, at the
Participant's election, be directed to the Equities fund, the Senior Securities
fund, or the Fixed Income fund.
14.3 Discrimination Testing. For purposes of the limitations on Salary
Reduction contributions set forth in section 4.7 and the limitations on
Voluntary Deduction contributions and Employer contributions set forth in
section 4.12 4.10, the ESOP and non-ESOP portions of the Plan shall be tested
separately. For purposes of such testing--
(a) the ESOP portion of the Plan shall mean Employer contributions
under section 4.3(a) made on behalf of the Participant and the shares allocated
to a Participant's ESOP Account pursuant to section 14.4(d); and
(b) the non-ESOP portion of the Plan shall mean all Elective
Deferrals, Voluntary Deductions and Employer contributions under section 4.2.
14.4 Loans.
(a) Stock Acquired with Exempt Loan. The Company may direct the
Trustee to incur a loan on behalf of the ESOP in a manner and under conditions
which will cause the loan to qualify as an "exempt loan" within the meaning of
Code section 4975(d)(3). A loan shall be used primarily for the benefit of
Participants and their beneficiaries. The proceeds of each
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<PAGE> 60
such loan shall be used, within a reasonable time after the loan is obtained,
only to purchase MCN Stock, to repay the loan, or to repay any prior loan.
Any such loan shall provide for a reasonable rate of interest and an
ascertainable period of maturity, and shall be without recourse against the
Plan. Any such loan shall be secured solely by shares of MCN Stock acquired with
the proceeds of the loan and shares of MCN Stock that were used as collateral on
a prior loan which was repaid with the proceeds of the current loan.
MCN Stock acquired with the proceeds of a loan, including shares
pledged as collateral, shall be placed in a Suspense Account and released in
accordance with subsection (b) below as the loan is repaid as if all shares in
the Suspense Account were pledged. MCN Stock released from the Suspense Account
shall be allocated in the manner described in subsection (d) below.
No person entitled to payment under a loan made pursuant to this
section 14.4 shall have recourse against any assets of the Plan other than the
MCN Stock used as collateral for the loan, Employer contributions under section
4.3 that are available to meet obligations under the loan, and earnings
attributable to such collateral and the investment of such contributions.
Employer contributions under section 4.3(b) made with respect to any Plan Year
during which the loan remains unpaid, and earnings on such contributions, shall
be deemed available to meet obligations under the loan, unless otherwise
provided by the Employer at the time such contributions are made.
(b) Release of Pledged Shares. Any pledge of MCN Stock as collateral
under this section 14.4 shall provide for the release of shares so pledged upon
the payment of any portion of the principal of the loan. Shares so pledged shall
be released in the proportion that the principal paid on the loan bears to the
total principal amount of the loan, as provided in Treasury Regulation
54.4975-7(b)(8)(ii). The number of shares of MCN Stock that shall be released
with each principal payment on the loan shall be equal to the number of shares
of MCN Stock held as collateral on the loan immediately prior to the release
multiplied by a fraction the numerator of which is the amount of principal of
the loan repaid on such date and the denominator of which is the sum of the
numerator plus the remaining outstanding principal amount of the loan after
giving effect to the repayment of principal of the loan on such date. Each loan
under this section 14.4 shall comply with the requirements of Treasury
Regulation 54.4975-7(b)(8)(ii). If such a loan provides for monthly principal
payments, shares of MCN Stock shall be released monthly.
(c) Repayment of Loan. Payments of principal and interest on any loan
under this section 14.4 shall be made by the Trustee at the direction of the
Company solely from--
(i) the proceeds of such loan, if any portion of such proceeds
are used for such purpose within a reasonable period of time after the loan is
obtained as provided in section 14.4(a) above;
(ii) Employer contributions under section 4.3(b) available to
meet obligations under the loan;
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<PAGE> 61
(iii) earnings from the investment of such contributions;
(iv) earnings attributable to MCN Stock acquired with the
proceeds of such loan, whether allocated or unallocated;
(v) the earnings on other allocated shares of MCN Stock held by
the ESOP if the Internal Revenue Service, by private letter ruling, advises the
Company that the use of such earnings to repay the loan will be deductible under
Code section 404(k)(2)(C) and will not violate the requirements of Code section
4975; and
(vi) the proceeds of a subsequent loan made to repay the loan.
The contributions and earnings available to pay a loan must be
accounted for separately by the Committee until all loans under this section
14.4 have been paid. If dividends on MCN Stock allocated to the ESOP Account of
any Participant are used to repay any loan, shares of MCN Stock with a fair
market value not less than the amount of such dividends shall be allocated in
accordance with section 4.3(c) to the ESOP Account of such Participant prior to
the end of the Plan Year during which (but for the use of the dividends to repay
the loan) such dividend would have been allocated to the ESOP Account of such
Participant.
(d) Allocation of Released Shares. Subject to the limitations in
section 4.12 on Annual Additions to a Participant's accounts, shares of MCN
Stock released from a Suspense Account described in section 14.4(a) shall be
allocated immediately to the ESOP Accounts of each Participant in the proportion
that the contribution that would be required to be made on behalf of such
Participant under section 4.3(a)(i) for the applicable period if no shares were
allocated under section 4.3(a)(ii) during such period bears to the total of all
Employer contributions that would be required under section 4.3(a)(i) hereof for
the applicable period if no shares were allocated under section 4.3(a)(ii)
during such period.
14.5 Diversification. Any Participant or any former Participant whose
distribution has been deferred pursuant to section 9.7(a), who, in either case,
has completed at least ten years of participation in the Plan, and who has
attained the age of 55 is a "Qualified Participant". Any Qualified Participant
shall have the right to make an election to direct the investment of a portion
of his ESOP Account. Such a Participant may elect within 90 days after the close
of each Plan Year in the six plan-year period beginning with the first Plan Year
in which the individual becomes a Qualified Participant to diversify 25 percent
of his ESOP Account, less any amount to which a prior election applies. In the
case of the last year to which an election applies, 50 percent shall be
substituted for 25 percent.
The portion of a Qualified Participant's ESOP Account which is eligible for
diversification may be invested in the Fixed Income fund and/or any other
investment funds under the Plan, in any combination thereof.
14.6 Put Option. If MCN Stock becomes not readily tradable on an established
market, then any Participant who is otherwise entitled to a distribution of his
ESOP Account, shall have the right (hereinafter referred to as "Put Option") to
require that his Employer repurchase any MCN Stock allocated to his ESOP Account
under a fair valuation formula. The Put Option shall be exercisable only by
written notice to the Participant's Employer during the 60-day period
immediately following the date of distribution and if the Put Option is not
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exercised within such 60-day period, then it can be exercised for an additional
period of 60 days in the following Plan Year. The period during which the Put
Option is exercisable shall not include any time when a Participant is unable to
exercise it because his Employer is prohibited from honoring it by applicable
federal or state law. This Put Option shall be nonterminable within the meaning
of Treasury Regulation 54.4975-(11)(a)(ii).
The amount paid for MCN Stock under the Put Option shall be paid in
substantially equal periodic payments (not less frequently than annually) over a
period beginning not later than 30 days after the exercise of the Put Option and
not exceeding five years. There shall be adequate security provided and
reasonable interest paid on the unpaid balance due under this section 14.6.
14.7 Purchase of MCN Stock. The ESOP may acquire shares of MCN Stock on a
national securities exchange, from the Company or any Affiliated Company or
otherwise; provided, however, that if any shares of MCN Stock are purchased from
the Company or any Affiliated Company, the price shall not exceed an amount
which constitutes adequate consideration (as defined in ERISA section 3(18) and
any Regulations thereunder) and such purchase shall satisfy all other
requirements of ERISA and the Code applicable to such purchases. Except as
provided in section 14.6 or as otherwise required by applicable law, no shares
of MCN Stock acquired by the ESOP shall be subject to a put, call, or other
option, or buy-sell or similar arrangement while held by and when distributed
from the Plan, whether or not any part of the Plan is then an ESOP. The
protection afforded to Participants in the preceding sentence is nonterminable
within the meaning of Treasury Regulation section 54.4975-(1)(a)(ii).
ARTICLE XV MISCELLANEOUS
15.1 Beneficiary Designation. Subject to the provisions of section 9.9 and
this section 15.1, each Participant shall have the right to designate a
beneficiary or beneficiaries to receive any distribution to be made under
section 9.1 upon the death of such Participant, or, in the case of a Participant
who dies subsequent to termination of his employment but prior to the
distribution of the entire amount to which he is entitled under the Plan, any
undistributed balance to which such Participant would have been entitled.
In the event of the death of a Participant whose spouse survives him, the
beneficiary of the Participant shall be his surviving spouse unless such spouse
has consented in writing to the designation of another beneficiary or
beneficiaries. Any such written consent shall acknowledge the effect of such
election and shall be witnessed by a notary public or by a representative of the
Committee who is designated to act in such capacity by the Committee. In the
event a Participant dies without a surviving spouse, or, in the event the
surviving spouse of a Participant has executed the written consent hereinabove
described, any distributions to be made under section 9.1 upon the death of the
Participant shall be made to his designated beneficiary or beneficiaries. If the
Participant establishes to the satisfaction of the Committee or its designated
representative that such written consent cannot be obtained because his spouse
cannot be located, the requirement of such written consent shall be waived.
If no beneficiary has been named by a Participant who dies without a
surviving spouse or if the beneficiary designated by such a Participant or by a
Participant whose surviving spouse has executed the written consent hereinabove
described has predeceased the
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Participant or such designated beneficiary has died prior to complete
disbursement of the Participant's Plan Account, the value of his account, or the
undistributed portion thereof, shall be paid by the Trustee at the direction of
the Committee--
(a) to the surviving spouse of such deceased Participant, if any;
(b) if there shall be no surviving spouse, to the surviving children
of such deceased Participant, if any, in equal shares;
(c) if there shall be no surviving spouse or surviving children, to
the executors or administrators of the estate of such deceased Participant; or
(d) if no executor or administrator shall have been appointed for the
estate of such deceased Participant, to the person or persons who would be
entitled to the personal estate of such deceased Participant under the laws of
his state of domicile if he had died leaving no will.
In the event that a Participant and his spouse die under circumstances such that
it is not clear whether the spouse survived the Participant, the Participant
shall be presumed to have survived the spouse.
15.2 Incompetency. Any distribution under this Plan which is payable to a
beneficiary who is a minor or to a Participant or beneficiary who, in the
opinion of the Committee, is unable to manage his affairs by reason of illness
or mental incompetency, may be made to or for the benefit of any such
Participant or beneficiary in such of the following ways as the Committee shall
direct:
(a) Directly to any such minor beneficiary, if, in the opinion of the
Committee, he is able to manage his affairs;
(b) To the legal representative of any such Participant or
beneficiary; or
(c) To some near relative of any such Participant or beneficiary to be
used for the latter's benefit.
15.3 Expenses. Except as otherwise provided in the Plan, all costs and
expenses incurred in administering the Plan, including the expenses of the
Committee, the fees and expenses of the Trustee, the fees of its counsel, and
other administrative expenses, shall be borne by the Plan except to the extent
the several Employers elect to bear such costs, fees, and expenses in such
proportions as the Committee shall determine to be equitable and proper having
regard to the nature of the particular expense.
15.4 Nonassignability. Except as may be required to comply with a qualified
domestic relations order (as defined in Code section 414(p)), it is a condition
of the Plan, and all rights of each Participant shall be subject thereto, that
no right or interest of any Participant in the Plan or in a Plan Account shall
be assignable or transferable in whole or in part, either directly or by
operation of law or otherwise, including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, or bankruptcy but excluding
devolution by death or mental
57
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incompetency, and no right or interest of any Participant in the Plan or in his
Plan Account shall be liable for, or subject to, any obligation or liability of
such Participant.
15.5 Employment Noncontractual. The Plan confers no right upon any Employee
to continue in employment.
15.6 Merger or Consolidation with Another Plan. A merger or consolidation
with, or transfer of assets or liabilities to, any other plan shall not be
effected unless the terms of such merger, consolidation, or transfer are such
that each Participant, distributee, beneficiary, or other person entitled to
receive benefits from the Plan would, if the Plan then terminated, receive a
benefit immediately after the merger, consolidation, or transfer which is equal
to or greater than the benefit such person would have been entitled to receive
immediately before the merger, consolidation, or transfer if the Plan had then
terminated. If any other plan shall be merged into and become a part of this
Plan, each Participant or the person entitled to receive a benefit under such
other plan shall be entitled to receive a benefit under this Plan which is equal
to the benefit such person would have been entitled to receive had such other
plan terminated immediately before the merger.
15.7 Continuance by a Successor. In the event that any Employer corporation
shall be reorganized by way of merger, consolidation, transfer of assets, or
otherwise, so that another Affiliated Company shall succeed to all or a portion
of such Employer's business, such successor corporation, with the consent of
each other participating Employer, may be substituted for such Employer under
the Plan by adopting the Plan and becoming a party to the Trust Agreement.
Employee contributions and Employer contributions shall be automatically
suspended from the effective date of any such reorganization until the date upon
which the substitution of such successor corporation for the Employer under the
Plan becomes effective. If, within 90 days from the effective date of any such
reorganization, such successor corporation shall not have become a party to the
Plan, or, if the Employer shall adopt a plan of complete liquidation other than
in connection with a reorganization, the Plan shall be automatically terminated
with respect to Employees of such Employer as of the close of business on the
ninetieth day following the effective date of such reorganization or as of the
close of business on the date of adoption of such plan of complete liquidation,
as the case may be, and the Trustee shall distribute the portion of the Trust
applicable to Participants of such Employer in the manner provided in section
11.3.
15.8 USERRA Rights. Notwithstanding any provision of the Plan to the
contrary, contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Code Section 414(u), to the
extent applicable. Loan repayments will be suspended under this Plan as
permitted under Code Section 414(u).
15.9 Construction. Unless the context clearly requires otherwise--
(a) the masculine pronoun whenever used shall include the feminine,
the singular shall include the plural, and vice versa, and
(b) headings of Articles and sections herein are included solely for
convenience, and if there is any conflict between such headings and the text of
the Plan, the text shall control.
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ARTICLE XVI REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS
This Article XVI designates that part of the non-ESOP portion of the Plan
which is invested in the MCN Stock Fund becomes part of the ESOP portion of the
Plan. This Article XVI also sets forth certain provisions regarding the
operation of the ESOP portion of the Plan, such provisions to supersede any
contrary provisions of the Plan. This Article XVI (including provisions
regarding distribution of dividends) shall become effective as of January 1,
1998 with regard to dividends distributed on or after that date.
Except as specifically provided in this Article XVI, the provisions of this
Article XVI, including the redesignation of the ESOP portion of the Plan
described herein, shall not affect any beneficiary designations or any other
applicable agreements, elections, or consents that Participants, spouses, or
beneficiaries validly executed under the terms of the Plan before the execution
date of the Plan amendment which first adopts this Article XVI, and such
designations, agreements, elections and consents shall continue to apply in the
same manner as they did prior to such amendment.
The ESOP, as set forth in this Article XVI, is intended to meet with
requirements of an employee stock ownership plan, as defined in Section
4975(e)(7) of the Code and the accompanying regulations, and Section 407(d)(6)
of ERISA. As provided below, the ESOP is designed to invest primarily in
qualifying employer securities of MCN Energy Group Inc..
16.1 Redesignation of ESOP Portion of Plan. Effective as of the effective
date described in the preamble to this Article XVI JANUARY 1, 1998, the ESOP
portion of the Plan shall consist of the ESOP Account of each Participant plus
the remaining part of each Participant's Plan Account that is invested in the
MCN Stock Fund. The put option provisions of Section 14.6 shall apply to the
entire ESOP portion of the Plan. However, only a Participant's ESOP Account
shall be subject to the restrictions described in the first sentence of Section
6.3.
16.2 Allocation of Savings Plan Account Balances to ESOP Portion of Plan.
All amounts contributed, transferred or designated as allocable to the Savings
Plan Account of any Participant shall be treated as part of the ESOP portion of
the Plan to the extent the Participant has directed the investment of such
amounts in the MCN Stock Fund in accordance with Article VI of the Plan.
16.3 Distribution of Dividends on MCN Stock. At the direction of the
Committee exercised in its sole discretion, the Trustee will, after dividends
are paid on MCN Stock held in the Trust, but in no event later than 90 days
following the end of the Plan Year in which such dividends are paid (to the
extent such dividends are not used to make payment on an exempt loan as provided
for in section 14.4(c) of the Plan), either (i) distribute to Participants such
portion of the dividends attributable to the interests in MCN Stock held in
their Plan Accounts (or, if so determined by the Committee, their ESOP Accounts)
as described below or, (ii) arrange to have such dividends distributed directly
to Participants by the Employer, or (iii) arrange to have such dividends
distributed to Participants by a dividend disbursement agent selected by the
Committee. In its sole discretion, the Committee may direct the Trustee to have
such dividends distributed only to Participants who elect (or fail not to elect)
to receive such dividend distributions in accordance with forms and procedures
established by the Committee (which such procedures may apply to all
Participants, or solely to a group or groups determined by the Committee).
Further, in its sole discretion, the Committee may establish procedures that
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would permit Participants to elect to have dividends distributed to them in a
single sum rather than over periods that might otherwise be determined by the
Committee to correspond with Employer payroll practices.
The distribution of dividends on MCN Stock held in a Participant's Plan
Account (or, if so determined by the Committee, a Participant's ESOP Account)
shall be in an amount equal to all of the dividends paid on the MCN Stock held
in such Participant's Plan Account (or, if so determined by the Committee, a
Participant's ESOP Account).
* * * * * * * * * *
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IN WITNESS WHEREOF, the Company has caused its corporate name to be
hereunto affixed by its duly authorized officers as of the 29th day of December,
1998.
MCN ENERGY GROUP INC.
By /s/ D. Nowakowski
-----------------------
61
<PAGE> 1
EXHIBIT 10.15
MICHCON
INVESTMENT AND STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998)
<PAGE> 2
MICHCON
INVESTMENT AND STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of January 1, 1998)
TABLE OF CONTENTS
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ARTICLE I The Plan......................................................................................... 1
1.1 Establishment and Amendment of the Plan............................................................ 1
1.2 Applicability of the Plan.......................................................................... 1
1.3 Purpose and Type of Plan........................................................................... 1
ARTICLE II Definitions..................................................................................... 1
2.1 Actual Deferral Percentage......................................................................... 2
2.2 Affiliated Company................................................................................. 2
2.3 Anniversary Date................................................................................... 2
2.4 Annual Addition.................................................................................... 2
2.5 Average Actual Deferral Percentage................................................................. 2
2.6 Break in Service Year.............................................................................. 2
2.7 Code............................................................................................... 2
2.8 Company............................................................................................ 2
2.9 Compensation....................................................................................... 2
2.10 Detroit Local Participants......................................................................... 3
2.11 Disability Retirement Date......................................................................... 3
2.12 Elective Deferrals................................................................................. 3
2.13 Eligible Employee.................................................................................. 3
2.14 Employee........................................................................................... 3
2.15 Employee Post-1986 Voluntary Deduction Account..................................................... 4
2.16 Employee Pre-1987 Voluntary Deduction Account...................................................... 4
2.17 Employee Salary Reduction Account.................................................................. 4
2.18 Employer........................................................................................... 4
2.19 Employer Salary Reduction Account.................................................................. 4
2.20 Employer Voluntary Deduction Account............................................................... 4
2.21 ERISA.............................................................................................. 4
2.22 ESOP............................................................................................... 4
2.23 ESOP Account....................................................................................... 4
2.24 Excess Contributions............................................................................... 4
2.25 Excess Deferrals................................................................................... 4
2.26 Greater Michigan Local Participants................................................................ 4
2.27 Highly Compensated Employee.........................................................................5
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2.28 Hour of Employment................................................................................. 5
2.29 Investment Plan Account............................................................................ 5
2.30 MCN Stock.......................................................................................... 5
2.31 Military Service................................................................................... 5
2.32 Nonhighly Compensated Employee..................................................................... 5
2.33 Normal Retirement Date............................................................................. 5
2.34 Participant........................................................................................ 5
2.35 Plan............................................................................................... 5
2.36 Plan Account....................................................................................... 5
2.37 Plan Year.......................................................................................... 6
2.38 Regulations........................................................................................ 6
2.39 Salary Reduction................................................................................... 6
2.40 Salary Reduction Account........................................................................... 6
2.41 Savings Plan....................................................................................... 6
2.42 Suspense Account................................................................................... 6
2.43 Trust.............................................................................................. 6
2.44 Trust Agreement.................................................................................... 6
2.45 Trustee............................................................................................ 6
2.46 Valuation Date..................................................................................... 6
2.47 Vesting Requirement................................................................................ 6
2.48 Voluntary Deduction................................................................................ 6
2.49 Voluntary Deduction Account........................................................................ 6
2.50 Years of Service................................................................................... 6
ARTICLE III Participation and Service..................................................................... 6
3.1 Eligibility Requirements........................................................................... 6
3.2 Eligibility Upon Merger or Reemployment............................................................ 7
3.3 Collective Bargaining Agency....................................................................... 8
3.4 Applications....................................................................................... 8
3.5 Years of Service................................................................................... 8
3.6 Break in Service Year.............................................................................. 9
3.7 Hours of Employment................................................................................ 9
3.8 Employment by Related Entities..................................................................... 10
3.9 Leased Employees................................................................................... 11
ARTICLE IV Contributions.................................................................................. 11
4.1 Employee Contributions............................................................................. 11
4.2 Employer Investment Plan Contributions............................................................. 12
4.3 Employer ESOP Contributions........................................................................ 14
4.4 Additional Employer Contributions.................................................................. 15
4.5 Rollover Contributions............................................................................. 15
4.6 Transfers from the Savings Plan.................................................................... 16
4.7 Limitations on Salary Reduction Contributions...................................................... 17
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4.8 Distribution of Excess Deferrals...................................................................18
4.9 Distribution or Recharacterization of Excess Contributions.........................................19
4.10 Statutory (Code Section 415) Limitations on Allocations to Accounts................................20
ARTICLE V Vesting in Accounts...............................................................................22
5.1 Employee Salary Reduction Accounts,
Employee Post-1986 Voluntary Deduction Account,
and Employee Pre-1987 Voluntary Deduction Account.................................................22
5.2 Employer Salary Reduction Account, Employer Voluntary
Deduction Account, and ESOP Account...............................................................22
ARTICLE VI Investment Provisions...........................................................................23
6.1 Investment of Contributions........................................................................23
6.2 Change of Investment Direction.....................................................................23
6.3 Transfers Between Investment Funds.................................................................23
ARTICLE VII Investment Funds................................................................................24
7.1 Investment Funds...................................................................................24
7.2 Management of Investment Funds.....................................................................24
7.3 Voting of MCN Stock................................................................................24
7.4 Tender Offers......................................................................................25
7.5 Named Fiduciary Status.............................................................................26
7.6 Expenses of Funds..................................................................................26
ARTICLE VIII Accounts and Records of the Plan..............................................................26
8.1 Company to Maintain Accounts.......................................................................26
8.2 Plan Accounting....................................................................................27
8.3 Valuation of Funds.................................................................................27
8.4 Valuation of Investment Plan Account...............................................................27
8.5 Valuation of ESOP Account..........................................................................27
8.6 Valuation of Plan Account..........................................................................27
8.7 Company to Furnish Annual Statements of Value of Plan..............................................27
8.8 Trust Agreement....................................................................................27
ARTICLE IX Distributions, Withdrawals and Loans............................................................28
9.1 Distribution Upon Termination of Employment
Entitling Participant to Value of Plan Account....................................................28
9.2 Distribution Upon Termination of Employment Under
Circumstances Resulting in Forfeiture of Employer Contributions...................................28
9.3 Certain Distributions from Participant Accounts....................................................28
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9.4 In-Service Withdrawals -- General..................................................................29
9.5 Withdrawal of Voluntary Deduction Contributions....................................................29
9.6 Hardship Withdrawal of Salary Reduction Contributions..............................................29
9.7 Time of Distributions..............................................................................31
9.8 Distributions of Stock.............................................................................33
9.9 Distributions from Fixed Income Fund...............................................................33
9.10 Loans..............................................................................................35
9.11 Definition of Employee Contributions and Employer Contributions....................................37
9.12 Spousal Consent to Payment.........................................................................37
9.13 Distributions Pursuant to a Qualified Domestic Relations Order.....................................37
9.14 Direct Rollovers of Eligible Distributions.........................................................37
9.15 Special Distribution Events........................................................................38
ARTICLE X Administration...................................................................................39
10.1 Plan Administration and Interpretation.............................................................39
10.2 Notice to Employees................................................................................40
10.3 Notices to Employers...............................................................................40
10.4 Participants' Acceptance of the Provisions of the Plan.............................................40
10.5 Audit of Plan Records..............................................................................40
10.6 Claims Procedure...................................................................................40
10.7 Effect of a Mistake................................................................................41
ARTICLE XI Amendment and Termination.......................................................................41
11.1 Amendment..........................................................................................41
11.2 Withdrawal.........................................................................................41
11.3 Termination........................................................................................41
11.4 Allocation of Funds Between Employers..............................................................42
11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries...........................42
ARTICLE XII Participation by Affiliated Companies..........................................................42
12.1 Adoption of the Plan...............................................................................42
12.2 Withdrawal from the Plan...........................................................................42
12.3 Company as Agent for Employers.....................................................................42
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ARTICLE XIII Special Provisions Relating to the ESOP........................................................43
13.1 Establishment of ESOP..............................................................................43
13.2 ESOP Account.......................................................................................43
13.3 Discrimination Testing.............................................................................43
13.4 Loans..............................................................................................43
13.5 Diversification....................................................................................45
13.6 Put Option.........................................................................................45
13.7 Purchase of MCN Stock..............................................................................46
ARTICLE XIV Miscellaneous..................................................................................46
14.1 Beneficiary Designation............................................................................46
14.2 Incompetency.......................................................................................47
14.3 Expenses...........................................................................................47
14.4 Nonassignability...................................................................................47
14.5 Employment Noncontractual..........................................................................48
14.6 Merger or Consolidation with Another Plan..........................................................48
14.7 Continuance by a Successor.........................................................................48
14.8 USERRA Rights......................................................................................48
14.9 Construction.......................................................................................48
ARTICLE XV Redesignation of ESOP and Distribution of Dividends..............................................48
15.1 Redesignation of ESOP Portion of Plan..............................................................49
15.2 Allocation of Investment Plan Account Balances to ESOP Portion of Plan.............................49
15.3 Distribution of Dividends on MCN Stock.............................................................49
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<PAGE> 7
MICHCON
INVESTMENT AND STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of January 1, 1998)
ARTICLE I THE PLAN
1.1 Establishment and Amendment of the Plan. Michigan Consolidated Gas
Company, which is also known as MichCon (hereinafter referred to as the
"Company"), presently maintains an investment and stock ownership plan for the
benefit of its Eligible Employees and the Eligible Employees of its
participating Affiliated Companies. The plan was last restated effective as of
April 1, 1989, and was amended from time to time thereafter.
The Company previously established the MichCon Employee Stock Ownership
Plan for Union Employees ("ESOP") and incorporated the ESOP into the Michigan
Consolidated Gas Company Union Employee's Investment Plan to form the MichCon
Investment and Stock Ownership Plan.
The plan is hereby further amended and completely restated as set forth herein
effective as of January 1, 1998, except as otherwise provided herein or required
by law (for instance, certain provisions herein are legally required to be
effective as of January 1, 1997, and are therefore effective as of such date),
and shall continue to be known as the "MichCon Investment and Stock Ownership
Plan" (the "Plan"). The ESOP provisions of the Plan became effective as of April
1, 1989.
1.2 Applicability of the Plan. Except as otherwise specified herein or
required by law, the provisions of the Plan as amended and restated herein
effective as of January 1, 1998, shall be applicable only with respect to
Eligible Employees of an Employer in current employment on or after January 1,
1998, and their beneficiaries.
Any person who was covered under the Plan as in effect prior to January 1, 1998,
and whose employment terminated under the Plan prior to January 1, 1998, shall
continue to have his rights to receive benefits determined under the provisions
of the Plan in effect when his employment relationship so terminated, subject to
legally required changes prior to January 1, 1998, as described herein.
1.3 Purpose and Type of Plan. The purpose of the Plan is to provide a
convenient way for Participants to save on a regular and long-term basis for
their retirement income needs; to recognize the contribution made to the
Employer's successful operation by its employees and to reward such contribution
for those employees who qualify as participants under the terms of the Plan; and
to facilitate ownership of MCN Stock by participating Eligible Employees.
The non-ESOP portion of the Plan is intended to qualify as a profit-sharing plan
and the ESOP portion of the Plan is intended to qualify as a stock bonus and an
employee stock ownership plan for purposes of Code sections 401(a), 402, 412,
417, 4975, and related provisions.
ARTICLE II DEFINITIONS
1
<PAGE> 8
Whenever used in the Plan, the following words and phrases shall have
the respective meanings stated below unless a different meaning is plainly
required by the context.
2.1 "Actual Deferral Percentage" means the ratio (expressed as a
percentage) of (A) the (a) Elective Deferrals of an Employee who is eligible to
participate in the Plan for a Plan Year, to (b) the Compensation of that
Employee for such Plan Year.
2.2 "Affiliated Company" means--
(a) any corporation other than the Company, i.e., either a
subsidiary corporation or an affiliated or associated corporation of the
Company, which together with the Company is a member of a "controlled group" of
corporations (as defined in Code section 414(b));
(b) any organization which together with the Company is under
"common control" (as defined in Code section 414(c));
(c) any organization which together with the Company is an
"affiliated service group" (as defined in Code section 414(m)); or
(d) any other entity required to be aggregated with the Company
pursuant to Regulations under Code section 414(o).
2.3 "Anniversary Date" means with respect to each Employee, the
anniversary each year of the Employee's first Hour of Employment. If an Employee
whose employment was terminated is reemployed but prior to his reemployment he
incurs a Break in Service Year or following his reemployment he incurs a Break
in Service Year before completing a Year of Service, his Anniversary Date shall
be based upon his first Hour of Employment coincident with or next following his
date of reemployment; otherwise, his Anniversary Date shall not be changed..
2.4 "Annual Addition" means the amount allocated to a Participant's
account as such term is defined in section 4.10(a).
2.5 "Average Actual Deferral Percentage" means the average (expressed
as a percentage) of the Actual Deferral Percentages of the Employees in a group
who are eligible to participate in the Plan for a Plan Year.
2.6 "Break in Service Year" means a 12-month period described in
section 3.6.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
2.8 "Company" means Michigan Consolidated Gas Company.
2.9 "Compensation" means a Participant's pay, determined as follows:
(a) For all purposes of the Plan, except as otherwise specified
in (b) or (c) below or required by the context, Compensation means the regular
basic salary or wage paid (plus, effective July 1, 1998, shift differential) to
an Employee by the Employer before any
2
<PAGE> 9
payroll deduction for taxes or any other purpose, and before any Salary
Reduction contribution or cafeteria plan election, but excluding merit,
incentive and other similar payments made in the form of a lump sum, bonuses,
awards, shift differentials (prior to July 1, 1998), severance payments,
differential payments made by reason of the Employee's entry into Military
Service, all amounts paid for work in excess of 40 hours in any one week, all
overtime or other premium paid for work in excess of a maximum number of hours
in any one day, for work on holidays or for any other reason, payments for
so-called fringe benefits such as Employer contributions to this Plan or any
pension or retirement plan, increased wages or salary resulting from temporary
promotion, upgrading or transfer, of whatever duration, to a higher paid job or
classification, and any other premium, auxiliary, or special pay of any sort
whatsoever.
(b) For purposes of satisfying the limits on contributions
described in section 4.7 (ADP test) and applying the limits of section 415 of
the Code as described in section 4.10, Compensation shall mean "compensation" as
defined in Treas. Regulation Section 1.415-2(d) or any successor regulation.
(c) For purposes of determining whether an individual is a Highly
Compensated Employee, Compensation means an Employee's Compensation as defined
in subsection (b) above but without regard to Code sections 125, 402(a)(8), and
402(h)(1)(B) (i.e., with the addition of elective deferrals pursuant to a
cafeteria plan, a cash-or-deferred arrangement, or a simplified employee pension
during years in which such items are excluded under subsection (b)).
(d) In accordance with Code Section 401(a)(17), the Compensation
of each Employee that may be taken into account under the Plan shall not exceed
the first $150,000 of an Employee's Compensation (as adjusted pursuant to Code
section 401(a)(17)).
2.10 "Detroit Local Participants" means Participants represented by (i)
Local #80 and Local #80 (P. T. & S.), Service Employees International Union and
(ii) Local #799C (P.T.& S.), International Chemical Workers Union Council,
United Food and Commercial Workers.
2.11 "Disability Retirement Date" means the date a Participant (i)
becomes eligible to receive benefits under a long-term disability plan
maintained by the Employer, or (ii) is determined by the Company to be totally
and permanently disabled. In determining whether a Participant is totally and
permanently disabled, the Company may, in its discretion, rely on the opinion of
a physician selected by the Company to assist it in making such a determination.
2.12 "Elective Deferrals" means Salary Reduction contributions under
section 4.1(a) and contributions under other plans maintained by the Company or
an Affiliated Company that constitute elective deferrals within the meaning of
Code section 402(g)(3).
2.13 "Eligible Employee" means an Employee of an Employer whose terms
and conditions of employment are covered by an agreement with a collective
bargaining agent which agreement permits participation in this Plan.
2.14 "Employee" means an individual who is an employee of the Company
or an Affiliated Company (including, for certain purposes described in Section
3.9, a "leased employee" as described in Section 3.9), but shall not include an
individual who enters into a
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<PAGE> 10
formal or informal independent contractor agreement with the Company or is
otherwise treated as an independent contractor under the payroll practices of
the Company.
2.15 "Employee Post-1986 Voluntary Deduction Account" means an
Employee's Voluntary Deduction contributions after December 31, 1986, and
investment gains and losses therefrom.
2.16 "Employee Pre-1987 Voluntary Deduction Account" means an
Employee's Voluntary Deduction contributions before January 1, 1987, and
investment gains and losses therefrom.
2.17 "Employee Salary Reduction Account" means an Employee's Salary
Reduction contributions, and investment gains and losses therefrom.
2.18 "Employer" means the Company and any Affiliated Company which has
adopted the Plan with the consent of the Company and in the manner prescribed in
section 12.1 and any successor corporation which shall adopt the Plan pursuant
to section 14.7. If any such corporation shall withdraw from participation in
the Plan in accordance with section 12.2, the term Employer shall not thereafter
include such corporation.
2.19 "Employer Salary Reduction Account" means the Employer
contributions to the Salary Reduction Account of an Employee pursuant to section
4.2, and investment gains and losses therefrom.
2.20 "Employer Voluntary Deduction Account" means the Employer
contributions to the Voluntary Deduction Account of an Employee pursuant to
section 4.2, and investment gains and losses therefrom.
2.21 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.22 "ESOP" means the employee stock ownership plan established
pursuant to section 13.1, as modified by Article XV.
2.23 "ESOP Account" means the account established and maintained on
behalf of each Participant in accordance with sections 8.1(c) and (d) and 13.2.
2.24 "Excess Contributions" means the amount described in section
4.9(a).
2.25 "Excess Deferrals" means the portion of Elective Deferrals for a
calendar year, if any, described in section 4.8.
2.26 "Greater Michigan Local Participants" means Participants who are
represented by (i) Local #799C Northern, International Chemical Workers Union
Council, United Food and Commercial Workers (ii) Local #70C, International
Chemical Workers Union Council, United Food and Commercial Workers and (iii)
Local #132C, International Chemical Workers Union Council, United Food and
Commercial Workers.
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<PAGE> 11
2.27 "Highly Compensated Employee" with respect to any Plan Year
beginning on or after January 1, 1997, shall include highly compensated active
employees and highly compensated former employees. A highly compensated active
employee includes any Employee who performs service for an Employer during the
determination year and who, during the look-back year received Compensation from
the Employer in excess of $80,000 (as adjusted pursuant to Code Section 415(d)),
or who was a 5-percent owner at any time during the determination year or the
look-back year. For this purpose, the determination year shall be the Plan Year.
The look-back year shall be the twelve-month period immediately preceding the
determination year.
A highly compensated former employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performed no service for the Employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the employee's 55th
birthday.
The determination of who is a Highly Compensated Employee will be made
in accordance with Section 414(q) of the Code and the regulations thereunder.
2.28 "Hour of Employment" means an hour for which an individual
receives credit pursuant to section 3.7.
2.29 "Investment Plan Account" means the total value of an Employee's
Salary Reduction Account and Voluntary Reduction Account.
2.30 "MCN Stock" means common stock of MCN Energy Group Inc..
2.31 "Military Service" means service (a) on active duty, in time of
national or local emergency, in the armed forces of the United States or of any
State thereof, (b) in the armed forces of the United States or of any State
thereof under any compulsory service law, or (c)in the armed forces of the
United States or any of its allies in time of war in which the United States is
engaged.
2.32 "Nonhighly Compensated Employee" means an Employee of the Employer
who is not a Highly Compensated Employee.
2.33 "Normal Retirement Date" means the Participant's sixty-fifth
(65th) birthday, if such birthday falls on the first day of the month;
otherwise, the first day of the month next following the month in which such
birthday occurs.
2.34 "Participant" means an Employee who is participating in the Plan
in accordance with its provisions.
2.35 "Plan" means MichCon Investment and Stock Ownership Plan and any
amendments thereto or restatements thereof from time to time adopted.
2.36 "Plan Account" means the total value of an Employee's Investment
Plan Account and ESOP Account.
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<PAGE> 12
2.37 "Plan Year" means the calendar year.
2.38 "Regulations" means regulations issued by the Department of Labor
construing Title I of ERISA or by the Internal Revenue Service construing the
Code.
2.39 "Salary Reduction" means an election by a Participant to have the
Compensation that would otherwise be payable reduced and contributed by the
Employer to the Plan as a regular contribution on behalf of the Participant.
2.40 "Salary Reduction Account" means an Employee's Salary Reduction
contributions, related Employer matching contributions, and investment gains and
losses therefrom.
2.41 "Savings Plan" means the MCN ENERGY GROUP Savings and Stock
Ownership Plan (formerly the MichCon Savings and Stock Ownership Plan.
2.42 "Suspense Account" means the account used to reflect MCN Stock
acquired with loan proceeds pursuant to section 13.4.
2.43 "Trust" means the Trust created by agreement between the Employers
and the Trustee, as from time to time amended.
2.44 "Trust Agreement" means the agreement between the Employers and
the Trustee referred to in section 8.8.
2.45 "Trustee" means the Trustee hereinafter provided for in section
8.8 TRUSTEE UNDER THE TRUST AGREEMENT or any successor Trustee TRUSTEE.
2.46 "Valuation Date" means each business day on which the New York
Stock Exchange shall be open for business.
2.47 "Vesting Requirement" means the requirement for vesting described
in section 5.2.
2.48 "Voluntary Deduction" means an Employee's payroll deduction
contributions other than Salary Reduction contributions.
2.49 "Voluntary Deduction Account" means an Employee's Voluntary
Deduction contributions, related Employer matching contributions, and investment
gains and losses therefrom.
2.50 "Years of Service" means year(s) of employment of an Employee by
an Employer or nonparticipating Affiliated Company as such term is defined in
section 3.5.
ARTICLE III PARTICIPATION AND SERVICE
3.1 Eligibility Requirements.
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<PAGE> 13
(a) Each individual who was eligible to participate in the Plan
on December 31, 1997, in accordance with the terms of the Plan in effect on said
date shall continue to be eligible to participate, subject to the provisions of
this Plan. Each other Employee shall become eligible to participate on the
latest to occur of--
(i) the date he is employed as an Eligible Employee,
(ii) the date on which he completes at least one year of
eligibility service (as defined in section 3.1(b)), or
(iii) the date on which he attains age 21;
provided he is employed as an Eligible Employee on such date.
(b) For purposes of this Article III, a year of eligibility
service shall mean the 12-month period beginning on the date of an Employee's
first Hour of Employment, or the 12-month period beginning on an Employee's
Anniversary Date during which he completes at least 1,000 Hours of Employment.
3.2 Eligibility Upon Merger or Reemployment.
(a) Merger. Any Employee who is a Participant in any plan which
is merged into this Plan shall become a Participant in this Plan immediately
upon the effective date of the merger. Such an Employee shall be eligible to
actively participate in this Plan in accordance with Section 3.4.
(b) Reemployment. In the event an Employee's employment is
terminated and such individual is later reemployed as an Eligible Employee:
(i) If the re-employed reemployed Eligible Employee had not
met the age and service requirements for participation in the Plan during his
prior period of employment but was re-employed reemployed before incurring a
Break in Service Year, his prior period of employment shall be included for
purposes of determining his eligibility for participation in the Plan.
(ii) If the re-employed reemployed Eligible Employee had not
met the age and service requirements for participation in the Plan during his
prior period of employment and incurred a Break in Service Year, he must meet
the participation requirements of Section 3.1 as if he were a new employee.
(iii) If the re-employed reemployed Eligible Employee met the
age and service requirements for participation in the Plan during his prior
period of employment, incurred a Break in Service Year, and, pursuant to the
Break in Service Year rules, his years of eligibility service are disregarded,
he must meet the participation requirements of Section 3.1 as if he were a new
employee.
(iv) If the re-employed reemployed Eligible Employee met the
age and service requirements for participation in the Plan during his prior
period of employment and incurred a Break in Service Year, but pursuant to the
Break in Service Year rules his years of eligibility
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<PAGE> 14
service are not disregarded, he shall again participate in the Plan on the date
of his reemployment;
(v) If the re-employed reemployed Eligible Employee met the
age and service requirements for participation in the Plan during his prior
period of employment and did not incur a Break in Service Year, he shall again
participate as of the date of his reemployment or, if later, the date upon which
he would have begun participation if not for the termination and reemployment.
3.3 Collective Bargaining Agency. If any Employee shall become a
Participant in the Plan and shall thereafter cease to be represented by a
collective bargaining agency pursuant to a collective bargaining agreement
between his Employer and a collective bargaining agency covered under this Plan,
he shall nevertheless continue to be eligible to actively participate in the
Plan until such time as the terms and conditions of his employment are no longer
governed by such a collective bargaining agreement. If such an Employee becomes
eligible to participate in the Savings Plan or any successor plan, his entire
Plan Account shall be transferred to such plan and the Employee shall no longer
be eligible to participate in this Plan. The Participant's Plan Account shall be
fully vested upon such transfer.
3.4 Applications. An Employee who is eligible to participate on the
date the Plan becomes effective with respect to his Employer may become a
Participant by filing a written application with his Employer in the form
prescribed by the Company. Thereafter, an Eligible Employee may become a
Participant by filing a written application with his Employer in the form
prescribed by the Company. Participation in the Plan will commence within a
reasonable time following processing of a Participant's application.
The Employee's application shall authorize the Employer to deduct
contributions from the Employee's Eligible Compensation in amounts specified by
the Employee pursuant to Article IV, and to have contributions made as a Salary
Reduction pursuant to Article IV. The application shall evidence the Employee's
acceptance of and agreement to all of the provisions of the Plan.
3.5 Years of Service. An Employee shall be credited for Years of
Service for his period of employment with the Employer and each nonparticipating
Affiliated Company, determined as follows:
(a) An Employee shall receive credit, for purposes of vesting,
for all Years of Service. An Employee shall have one "Year of Service" for each
12-month period beginning on the date of the Employee's first Hour of Employment
and on each subsequent Anniversary Date, during which the Employee completes
1,000 or more Hours of Employment.
(b) Years of Service shall not be interrupted (i) by any transfer
of employment of an Employee between Affiliated Companies regardless of whether
the Affiliated Company is an Employer hereunder; or (ii) during such period as
an Employee is receiving credit for Hours of Employment under section 3.7.
(c) If an Employee is reemployed following a Break in Service
Year, he shall be considered a new Employee for purposes of the Plan, except--
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<PAGE> 15
(i) If prior to such Break in Service Year he had a vested
interest in his ESOP Account, Employer Salary Reduction Account, or Employer
Voluntary Deduction Account, Years of Service he had prior to the Break in
Service Year shall be reinstated after such Employee completes a Year of Service
after such Break in Service Year.
(ii) If paragraph (i) is not applicable, and if the
Employee's number of consecutive Break in Service Years does not equal or exceed
the greater of five or the number of Years of Service he had before incurring a
Break in Service Year, the Years of Service he had prior to such Break in
Service Years shall be reinstated after such Employee completes a Year of
Service after such Break in Service Years.
(d) Notwithstanding the foregoing provisions, an Employee's Years
of Service shall exclude any Years of Service completed before an Employee
attains age 18.
3.6 Break in Service Year. "Break in Service Year" shall mean a
12-month period beginning on an Employee's Anniversary Date during which the
Employee has not completed more than 500 Hours of Employment (as defined in
section 3.7). Notwithstanding the foregoing, the following periods shall not be
deemed to be Break in Service Years:
(a) If a Participant retires on his Disability Retirement Date,
thereafter ceases to be totally and permanently disabled, and returns to the
employ of an Employer, the period between his Disability Retirement Date and the
date as of which he ceases to be totally and permanently disabled.
(b) If a Participant commences receiving benefits under a
long-term disability benefit program maintained by an Employer and thereafter
ceases to receive benefits under such program and returns to the employ of the
Employer, the period during which he was receiving benefits under such program.
If an Employee incurs a Break in Service Year and prior to such Break
in Service Year has not completed five Years of Service, his Years of Service
completed prior to such a Break in Service Year shall be disregarded unless he
completes a Year of Service after such Break in Service Year and before the
total of such Break in Service Year and any ensuing consecutive Break in Service
Years equals the greater of five or the number of his Years of Service (as
defined in section 3.5 but without excluding Years of Service completed prior to
attaining age 18) prior to such Break in Service Year.
3.7 Hours of Employment. "Hours of Employment" shall mean, for any
individual performing or who has performed services for one or more Employers or
nonparticipating Affiliated Companies, the sum of the following:
(a) All hours for which the individual is directly or indirectly
paid or entitled to payment by an Employer or nonparticipating Affiliated
Company for the performance of duties. These hours shall be credited to the
individual for the computation period or periods in which the duties are
performed.
(b) Except as provided in section 3.7(e) below, all hours for
which the individual is directly or indirectly paid or entitled to payment by an
Employer or nonparticipating Affiliated Company for reasons (such as vacation,
holiday, sickness, incapacity, layoff, jury duty, leave of absence, Military
Service, or disability) other than for the performance of duties.
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<PAGE> 16
These hours shall be credited to the individual for the computation period or
periods in which the period during which no duties are performed occurs,
beginning with the first unit of time to which the payment relates.
(c) All hours for which back pay, irrespective of mitigation of
damages, has been awarded, agreed to, or paid by an Employer or nonparticipating
Affiliated Company, with no duplication of credit for hours. These hours shall
be credited to the individual for the computation period or periods to which the
award or agreement pertains rather than the computation period in which the
award, agreement, or payment is made.
(d) Except as provided in section 3.7(e) below, eight Hours of
Employment per day for each working day that an individual is absent from work
without pay for an approved leave of absence, voluntary time, sick time,
disciplinary layoff, or Military Service if the individual returns to the employ
of an Employer or nonparticipating Affiliated Company within 90 days after the
end of such period. These hours shall be credited to the individual for the
computation period or periods in which the period during which no duties are
performed occurs, beginning with the first such period.
(e) Eight Hours of Employment per day for each working day that
an individual is absent from work with or without pay because of pregnancy of
the individual, birth of a child to the individual, placement of a child with
the individual in connection with the adoption of such child by such individual,
or caring for such child for a period beginning immediately following such birth
or placement. The Company may, in its discretion, request such information from
the individual as the Company shall deem relevant in order to verify that an
absence is for the reasons described in this subsection (e). Notwithstanding the
foregoing, no more than 501 Hours of Employment shall be credited under this
subsection (e) on account of any such pregnancy or placement if the individual
does not return to the employ of an Employer or participating Affiliated Company
within 90 days after the end of the period approved for such absence. Hours
credited under this subsection (e) shall be credited to the individual only in
the year in which the absence begins if the crediting is necessary to prevent a
Break in Service Year for such year; or, in any other case, in the immediately
following year; provided, however, that if more than 501 hours are credited
under this subsection (e) on account of any such pregnancy or placement, the
excess over 501 hours shall be credited to the period or periods to which it
relates.
Hours of Employment credited under this section 3.7 shall comply with
the rules set forth in 29 C.F.R. section 2530.200b-2(b) and (c), which rules are
hereby incorporated by reference.
Notwithstanding anything herein to the contrary, Hours of Employment
shall be credited hereunder at all times in compliance with the requirements of
the Family and Medical Leave Act.
3.8 Employment by Related Entities. If an Employee's employer is a
nonparticipating Affiliated Company, any period in which the Employee is
employed by the nonparticipating Affiliated Company (while an Affiliated
Company) shall be taken into account for purposes of satisfying the eligibility
service requirement set forth in section 3.1 and measuring such Employee's Years
of Service to the same extent it would have been had such period of employment
been employment by an Employer.
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<PAGE> 17
3.9 Leased Employees. A person who is not an Employee of an Employer
or nonparticipating Affiliated Company and who performs services for an Employer
or a nonparticipating Affiliated Company pursuant to an agreement between the
Employer or nonparticipating Affiliated Company and a leasing organization shall
be considered a "leased employee" if such person performed the services on a
substantially full-time basis for a year and the services are under the primary
direction and control of the recipient. A person who is considered a "leased
employee" of an Employer or nonparticipating Affiliated Company shall not be
considered an Employee for purposes of participating in this Plan or receiving
any contribution or benefit under this Plan. A leased employee shall be excluded
from this Plan regardless of whether the leased employee participates in any
plan maintained by the leasing organization. However, if a leased employee
participates in the Plan as a result of subsequent employment with an Employer,
his previous service as a leased employee shall be counted in calculating his
Years of Service. Notwithstanding the preceding provisions of this section 3.9,
a leased employee will be included as an Employee for purposes of applying the
requirements described in Code section 414(n)(3) and for purposes of determining
the number and identity of Highly Compensated Employees.
ARTICLE IV CONTRIBUTIONS
4.1 Employee Contributions.
(a) Amount of Contributions. Each Participant may make a regular
contribution to the Plan (not less than 1 percent) up to a percentage of his
Compensation for a pay period in incremental percentages of 1 percent,
determined as follows:
Group Percentage
----- ----------
For Highly Compensated Employees 15%
For Nonhighly Compensated Employees
who are Detroit Local Participants:
Prior to April 1, 1998 20%
April 1, 1998 and later 17%
For Nonhighly Compensated Employees
who are Greater Michigan Local
Participants:
Prior to July 1, 1998 20%
July 1, 1998 and later 17%
Contributions will be effected by Voluntary Deductions, Salary
Reductions, or any combination thereof, as elected by the Participant. The
amount of such Voluntary Deductions or Salary Reductions shall be transferred to
the Trustee after each pay period; provided, however, that a Participant's
Salary Reduction contributions shall not exceed 8 percent of the Participant's
Compensation for a pay period (if the Participant was a Highly Compensated
Employee during the immediately preceding Plan Year), or 9 percent of the
Participant's Compensation for a pay period (if the Participant was not a Highly
Compensated Employee
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<PAGE> 18
during the immediately preceding Plan Year); and further provided, however, that
Voluntary Deductions and Salary Reductions shall be limited as provided in
sections 4.7 and 4.10.
Notwithstanding the foregoing, the Company may, in its sole discretion,
(1) reduce the Salary Reduction contributions permitted by a group of
Participants if, in the opinion of the Company, it is advisable to do so in
order to satisfy the requirements of section 4.7 or 4.10; or (2) reduce the
Voluntary Deduction contributions permitted by a group of Participants if, in
the opinion of the Company, it is advisable to do so in order to satisfy the
requirements of section 4.10.
(b) Changes in Contributions. The contribution of Voluntary
Deductions and/or Salary Reductions designated by a Participant shall continue
in effect, notwithstanding any change in his Compensation rate, until the
Participant shall change such contribution; provided, however, that such
contribution shall in no event be less than 1 percent, nor more than the limits
of section 4.1(a), in incremental percentages of 1 percent of the Participant's
Compensation for a pay period. A Participant may change his contribution from
time to time by giving directions to his Employer in the form prescribed by the
Company, with such directions to take effect within a reasonable period
following processing.
(c) Voluntary Suspension of Contributions. Any Participant may,
by giving notice to his Employer in the form and timing prescribed by the
Company, suspend his contribution of Voluntary Deductions and/or Salary
Reductions, either indefinitely or for any specified period provided that in the
event of suspension of both such contributions the suspension shall be for at
least 12 full months. In case of any such suspension of any contributions, the
Employer's contributions on behalf of the Participant shall be automatically
suspended for a like period.
(d) Automatic Suspension of Contributions. A Participant's
contributions of Voluntary Deductions and Salary Reductions and the Employer's
contributions on behalf of the Participant shall be suspended automatically for
any period during which the Participant is absent without pay under any of the
circumstances described in section 3.7(c), (d), or (e), and such an absence
shall not constitute termination of service for purposes of any of the
provisions of Article IX. A Participant may, by giving notice to his Employer in
the form and timing prescribed by the Company, suspend his contribution of
Voluntary Deductions and/or Salary Reductions for any period during which he is
absent from work under any of the circumstances described in section 3.7(b) or
(c) and receiving Compensation at a reduced Compensation rate, in which case the
Employer contributions on behalf of such Participant shall be automatically
suspended for a like period.
4.2 Employer Investment Plan Contributions. Each Employer shall
contribute, to the Salary Reduction Account of each of its participating
Employees, an amount equal to 25 percent of the Salary Reduction contribution of
such Participant; provided, however, that Salary Reduction contributions shall
be disregarded to the extent that they exceed an amount determined by
multiplying the applicable contribution percentage shown in the following
schedules by the Participant's Compensation for a pay period:
(a) Prior to January 1, 1999, for all Participants except
Participants described in subsection (b) below:
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<PAGE> 19
Contribution
Years of Service Percentage
---------------- ------------
1 through 3 2%
More than 3 through 6 3%
More than 6 through 10 4%
More than 10 through 23 5%
More than 23 6%
(b) Prior to January 1, 1999, for (i) all Participants who became
Eligible Employees on or after July 1, 1995, who are Utility I employees
represented by I.C.W.U.C. U.F.C.W. Local 799C (Northern) or (ii) Participants
who became Eligible Employees on or after April 1, 1997 who are service
consumption technicians represented by Local 80 Detroit:
Contribution
Years of Service Percentage
---------------- ----------
0 through 3 0%
More than 3 through 6 3%
More than 6 through 10 4%
More than 10 through 23 5%
More than 23 6%
(c) On and after January 1, 1999, for all Participants except
Participants described in subsection (d) below:
Contribution
Years of Service Percentage
---------------- ----------
1 through 3 2%
More than 3 through 6 3%
More than 6 through 9 4%
More than 9 through 23 5%
More than 23 6%
(d) On and after January 1, 1999, for (i) all Participants who
became Eligible Employees on or after July 1, 1995, who are Utility I
employees represented by I.C.W.U.C. U.F.C.W. Local 799C (Northern) or (ii)
Participants who became Eligible Employees on or after April 1, 1997 who are
service consumption technicians represented by Local 80:
Contribution
Years of Service Percentage
---------------- ----------
0 through 3 0%
More than 3 through 6 3%
More than 6 through 9 4%
More than 9 through 23 5%
More than 23 6%
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<PAGE> 20
In addition, in cases where the Participant's Salary Reduction
contribution is less than the percentage of his Compensation rate allowed in the
above schedule for his Years of Service, the Employer shall contribute to the
Voluntary Deduction Account of such participating Employee an amount equal to 25
percent of the smaller of (1) the Participant's Voluntary Deduction
contribution, or (2) an amount equal to (A) the applicable contribution
percentage, per the above schedule, times the Participant's Compensation for a
pay period, minus (B) the Participant's Salary Reduction contribution. The
maximum Employer matching contributions on behalf of any Participant shall not
be increased until such Participant has provided notice to the Company in the
manner and timing prescribed by the Company.
4.3 Employer ESOP Contributions.
(a) Basic ESOP Contribution. Each Employer shall contribute to
the ESOP Account of each of its participating Employees each pay period an
amount equal to the difference, if any, between (i) and (ii) below:
(i) 75 percent of the sum of the Salary Reduction and
Voluntary Deduction contributions of such Participant for such pay period;
provided, however, that Salary Reduction and Voluntary Deduction contributions
shall be disregarded to the extent that they exceed, in the aggregate, an amount
determined by multiplying the applicable contribution percentage in the
schedules set forth in section 4.2 by such Participant Compensation for the pay
period.
(ii) The value of the shares of MCN Stock allocated to the
ESOP Account of such Participant pursuant to section 13.4(d) for such pay
period. The value of shares allocated under section 13.4(d) shall be the market
value thereof as of the last day of the pay period for which the shares are
allocated, with the market value to be determined by the Company in a
nondiscriminatory manner.
(b) Contribution of Principal, Interest, or Other Payments. Each
Employer also shall contribute to the ESOP its proportionate share of any
additional amount necessary to make principal, interest, or other payments
required by the terms of any loan made to the ESOP in accordance with section
13.4. Each Employer's proportionate share shall be equal to the proportion that
its contributions under section 4.3(a) bears to the total contributions under
section 4.3(a). Each Employer also may make additional contributions to make
principal, interest, or other payments in accordance with the terms of any loan
made to the ESOP in accordance with section 13.4.
(c) Dividend-Related Contributions. Each Employer also shall
contribute to the ESOP Account of each of its participating Employees such
amounts as may be necessary to acquire for the ESOP Account of such Participant
shares of MCN Stock having a fair market value equal to the amount of any
dividends on shares of MCN Stock allocated to the ESOP Account of such
Participant that were used to repay an ESOP loan in accordance with section
13.4(c). Such contributions shall be made on, or as soon as practicable after,
each date on which dividends on allocated shares of MCN Stock are used to repay
a loan. In no event shall the shares of MCN Stock acquired with contributions
under this subsection (c) be allocated to the ESOP Account of such Participant
later than the last day of the Plan Year during which (but for the use of the
dividend to repay the loan) the dividend giving rise to such contribution would
have been allocated to the ESOP Account of such Participant.
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<PAGE> 21
(d) Longevity Contributions. Within a reasonable time after each
March 1 (April 1 in the case of Greater Michigan Local Participants prior to
1999) of each Plan Year (in each case, the "Measurement Date"), each Employer
shall contribute to the ESOP Account of each of its participating Eligible
Employees on active payroll as of the Measurement Date who has at least 30 Years
of Service as of such Measurement Date:
(i) effective prior to March 1, 1999 for Greater Michigan
Local Participants, twenty-five (25) shares of MCN Stock
(ii) effective March 1, 1999 for Greater Michigan Local
Participants and effective March 1, 1998 for Detroit Local Participants, six
hundred dollars ($600) in shares of MCN Stock, as determined by the Company in a
nondiscriminatory manner.
4.4 Additional Employer Contributions. If a Participant receiving
payments (based upon 40 or more hours per week) under the terms of any Workers'
Compensation law does not have sufficient compensation to make Salary Reduction
or Voluntary Deduction contributions in an amount equal to the amount of the
Participant's contributions as in effect during the Participant's last period of
active service, then the Participant's Employer shall contribute on behalf of
the Participant such additional amount as would have been contributed by the
Employer under sections 4.2 and 4.3 on behalf of such Participant had the
Participant's contributions been continued at the rate in effect during the
Participant's last period of active service. Additional contributions under this
section 4.4 shall be treated for accounting purposes as if made under section
4.2 or 4.3, as applicable, except such contributions shall not be considered
when computing the Contribution Percentage. Contributions under this Section 4.4
shall be deemed contributions made under Code Section 415(c)(3)(C), and for
purposes of calculations under Section 415, "compensation" shall include the
compensation the Participant would have received if the Participant were paid at
the rate of compensation paid immediately before becoming disabled.
4.5 Rollover Contributions.
(a) From Qualified Plan. If an Employee receives, either before
or after becoming an Employee an eligible rollover distribution (within the
meaning of Code section 402(c)(4))from an employees' trust described in Code
section 401(a) which is exempt from tax under Code section 501(a) or from a
qualified annuity plan described in Code section 403(a) (other than an
employees' trust or an annuity plan under which the Employee was an Employee
within the meaning of Code section 401(c)(1) at the time contributions were made
on his behalf under such trust or annuity plan), then such Employee may transfer
and deliver to the Company, to be credited to his Employee Salary Reduction
Account as if it were a Salary Reduction contribution, an amount which does not
exceed the amount of such qualified total distribution or eligible rollover
distribution (including any proceeds from the sale of any property received as a
part of such qualified total distribution or eligible rollover distribution)
less, in the case of a qualified total distribution, the amount considered
contributed to such trust or annuity plan by the Employee. Former Employees who
are Participants and who receive an eligible rollover distribution from another
plan sponsored by an Employer may make rollover contributions in accordance with
this section.
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(b) From Individual Retirement Account or Annuity. If--
(i) an Employee receives, either before or after becoming
an Employee, a distribution or distributions from an individual retirement
account or individual retirement annuity (within the meaning of Code section
408) or from a retirement bond (within the meaning of Code section 409); and
(ii) no amount in such account, no part of the value of such
annuity, or no part of the value of the proceeds of such bond is attributable to
any source other than an eligible rollover distribution (within the meaning of
Code section 402(c)(4)) from an employees' trust described in Code section
401(a) which is exempt from tax under Code section 501(a) or annuity plan
described in Code section 403(a) (other than an employees' trust or an annuity
plan under which the Employee was an Employee within the meaning of Code section
401(c) at the time contributions were made on his behalf under such trust or
annuity plan) and any earnings on such a qualified total distribution or
eligible rollover distribution;
then such Employee may transfer and deliver to the Company, to be
credited to his Salary Reduction Account as if it were a Salary Reduction
contribution, such distribution or distributions.
(c) Timing and Substantiation. Any transfer and delivery pursuant
to this section 4.5 shall be delivered by the Employee to the Company and by the
Company to the Trustee on or before the sixtieth day after the day on which the
Employee receives the distribution or on or before such later date as may be
prescribed by law. Any such transfer and delivery must be accompanied by (i) a
statement of the Employee that to the best of his knowledge the amount so
transferred meets the conditions specified in this section 4.5, and (ii) a copy
of such documents as may have been received by the Employee advising him of the
amount and the character of such distribution. Notwithstanding the foregoing,
the Company shall not accept a rollover contribution if, in its judgment, such
acceptance would cause the Plan to violate any provision of the Code or
Regulations.
(d) Deemed Contribution for Certain Purposes. A rollover
contribution pursuant to this section 4.5 shall be deemed to be a contribution
of a Participant for purposes of the value of a Participant's fund account as
provided in section 8.2 and in determining the amount distributable to a
Participant, the provisions of Article IX that are applicable to Salary
Reduction contributions will be used, pursuant to section 9.1, but not for
purposes of determining the amount of the contribution to be made on behalf of a
Participant by his Employer pursuant to section 4.2, 4.3, or 4.4 or calculating
the Annual Addition of such Participant.
(e) Deemed Participation for Certain Purposes. If the amount of
rollover contribution is made by an Employee prior to his becoming a
Participant, such Employee shall, until such time as he becomes a Participant,
be deemed to be a Participant for all purposes of the Plan except for purposes
of any determination of when he becomes a Participant pursuant to section 3.1
and the making of contributions pursuant to section 4.1(a).
4.6 Transfers from the Savings Plan. If an Employee who previously had
participated in the Savings Plan becomes a Participant in the Plan and the
Participant's plan account in the Savings Plan (including any outstanding loans)
is transferred to the Plan in
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accordance with section 3.3 of the Savings Plan, the Plan shall accept such
transfer. Amounts transferred shall be 100 percent vested at all times and shall
be treated for all purposes in the same manner as they were treated under the
Savings Plan; that is:
(a) Amounts attributable to Employer salary reduction
contributions under the Savings Plan shall be allocated to the Participant's
Employee Salary Reduction Account;
(b) Amounts attributable to voluntary deduction contributions
under the Savings Plan shall be allocated to the Participant's Employee
Voluntary Deduction Account;
(c) Amounts attributable to Employer Savings Plan contributions
shall be allocated to the Participant's Employer Salary Reduction Account or
Employer Voluntary Deduction Account, as the case may be; and
(d) Amounts transferred from the ESOP Account of the Participant
in the Savings Plan shall be allocated to the Participant's ESOP Account.
Notwithstanding the foregoing, amounts transferred shall not be used
for purposes of determining the amount of the contribution to be made on behalf
of a Participant by the Employer pursuant to section 4.2, 4.3, or 4.4, or
calculating the Actual Deferral Percentage or Annual Addition of the
Participant.
4.7 Limitations on Salary Reduction Contributions.
(a) Dollar Limitation. In no event shall any Employer make Salary
Reduction contributions for any calendar year, with respect to any Participant
in excess of $10,000 (for 1998) (as adjusted by the Secretary of the Treasury to
reflect increases in the cost of living). This limit shall be applied by
aggregating all plans and arrangements maintained by the Company and all
Affiliated Companies that provide for elective deferrals (as defined in Code
section 402(g)).
(b) ADP Test. Effective for Plan Years beginning on or after
January 1, 1997, in addition to the limitations set forth elsewhere in this
Plan, one of the following tests must be satisfied for the Plan Year:
(i) The Average Actual Deferral Percentage for Highly
Compensated Employees who are eligible to participate for the Plan Year shall
not exceed the Average Actual Deferral Percentage for the immediately preceding
Plan Year for Nonhighly Compensated Employees who were then eligible to
participate multiplied by 1.25; or
(ii) The Average Actual Deferral Percentage for Highly
Compensated Employees who are eligible to participate for the Plan Year shall
not exceed the Average Actual Deferral Percentage for the immediately preceding
Plan Year for Nonhighly Compensated Employees who were then eligible to
participate multiplied by two, provided that the Average Actual Deferral
Percentage for such Highly Compensated Employees does not exceed the Average
Actual Deferral Percentage for such Nonhighly Compensated Employees by more than
two percentage points or such lesser amount as the Secretary of Treasury shall
prescribe in accordance with Code section 401(m)(9) to prevent the multiple use
of this alternative limitation with respect to any Highly Compensated Employee.
Any such restriction on the multiple use of the alternative limit shall be
implemented pursuant to uniform rules adopted by the Company.
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(c) Determination of Actual Deferral Percentages. For purposes of
the Actual Deferral Percentage test described in this section 4.7--
(i) An Elective Deferral will be taken into account for a
Plan Year only if it relates to Compensation that either would have been
received by the Eligible Employee in the appropriate Plan Year (but for the
deferral election) or is attributable to services performed by the Eligible
Employee in the Plan Year and would have been received by the Eligible Employee
within 2 1/2 months after the close of the Plan Year (but for the deferral
election);
(ii) An Elective Deferral will be taken into account for a
Plan Year only if it is allocated to the Eligible Employee as of a date within
that Plan Year. For this purpose, an Elective Deferral is considered allocated
as of a date within a Plan Year if the allocation is not contingent on
participation or performance of services after such date and the Elective
Deferral is actually paid to the Trust no later than 12 months after the Plan
Year to which the contribution relates;
(iii) The Actual Deferral Percentage for an Employee who is
eligible to participate shall be computed by treating any Excess Deferral (as
defined in section 4.8) as an Elective Deferral, except to the extent provided
by Regulations;
(iv) The Actual Deferral Percentage for any Employee who is
a participant under two or more section 401(k) plans or arrangements that are
maintained by the Company or an Affiliated Company shall be determined as if all
such Elective Deferrals were made under a single arrangement; provided, however,
that no Elective Deferrals under an employee stock ownership plan (as defined in
Code section 4975(e)(7)) shall be taken into account for purposes of this
section 4.7;
(v) In the event that two or more plans which include
cash-or-deferred arrangements are considered as one plan for purposes of Code
section 401(a)(4) or 410(b), the cash-or-deferred arrangements included in such
plans shall be treated as one arrangement for purposes of this section 4.7;
(vi) The determination and treatment of the Elective
Deferrals and Actual Deferral Percentage of any Employee shall satisfy such
other requirements as may be prescribed by the Secretary of Treasury.
4.8 Distribution of Excess Deferrals. "Excess Deferrals" means excess
deferrals as defined under Code section 402(g). Notwithstanding any other
provision of the Plan, the Excess Deferral, if any, of each Employee with
respect to a calendar year plus any income and minus any loss allocable thereto
shall be distributed no later than April 15 of the following calendar year to
each Employee who claims an Excess Deferral for the preceding calendar year.
Excess Deferrals shall be treated as Annual Additions under the Plan.
The Employee's claim shall be in writing; shall be submitted to the
Company no later than March 1; shall specify the Employee's Excess Deferral for
the preceding calendar year; and shall be accompanied by the Employee's written
statement that if such amount is not distributed, such Excess Deferral, when
added to amounts deferred under other plans or
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<PAGE> 25
arrangements described in Code section 401(k), 408(k), or 403(b), exceeds the
limit imposed on the Employee by Code section 402(g) for the year in which the
deferral occurred.
Notwithstanding the preceding paragraph, the Employer may notify the
Plan on behalf of the individual of Excess Deferrals to the extent that the
individual has Excess Deferrals for the calendar year calculated by taking into
account only elective deferrals under this Plan and other plans of the Company
and any Affiliated Company.
The Excess Deferral distributed to an Employee with respect to a
calendar year shall be adjusted for any income or loss thereon for such calendar
year and for the period between the end of such calendar year and the date of
distribution. The income or loss allocable to such calendar year shall be
determined by multiplying the income or loss for such calendar year allocable to
the Employee's Salary Reduction Account by a fraction, the numerator of which is
the Excess Deferral of the Employee for such calendar year and the denominator
of which is the Employee's Salary Reduction Account balance on the last day of
such calendar year. The income or loss allocable to the period between the end
of such calendar year and the date of distribution shall be equal to 10 percent
of the income or loss allocable to the Excess Deferral for the preceding
calendar year multiplied by the number of calendar months that have elapsed from
the end of the preceding calendar year to the date of distribution. A
distribution occurring on or before the fifteenth day of the month shall be
treated as having been made on the last day of the preceding month and a
distribution occurring after such fifteenth day shall be treated as having been
made on the first day of the following month.
In the event that an Employee's Salary Reduction contributions are
distributed to such Employee under this section 4.8, any Employer contributions
attributable thereto plus any income and minus any loss allocable thereto shall
be forfeited.
4.9 Distribution or Recharacterization of Excess Contributions.
(a) Determination of Excess Contributions. "Excess Contributions"
means, with respect to any Plan Year, the excess of (i) the aggregate amount of
Elective Deferrals actually paid over to the Trust on behalf of Highly
Compensated Employees for such Plan Year, over (ii) the maximum amount of such
Elective Deferrals permitted under the limitations of section 4.7(b), in
accordance with the provisions of Code Section 401(k)(8).
Excess Contributions shall be returned to the Highly Compensated
Employees, beginning with that Highly Compensated Employee who has the highest
dollar amount of Elective Deferrals. The Highly Compensated Employee shall
receive the portion of his Employee Deferrals (and income allocable thereto)
which will either enable the Plan to distribute the total Excess Contribution
(and thereby satisfy the ADP limit stated above) or cause such Highly
Compensated Employee's Elective Deferrals to equal the Elective Deferrals of the
Highly Compensated Employee with the next highest amount of Elective Deferrals.
This prior process must then be repeated until the plan has distributed the
total Excess Contributions described above.
Excess Contributions shall be treated as Annual Additions under
the Plan.
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For purposes of this section 4.9, to the extent permitted by the
Code, the Excess Contributions shall be reduced by the amount of any Excess
Deferrals included in such Excess Contributions and distributed to the Employee
pursuant to section 4.8.
(b) Distribution or Recharacterization. Notwithstanding any other
provision of the Plan, either--
(i) Excess Contributions with respect to a calendar year
plus any income and minus any loss allocable thereto shall be distributed no
later than the last day of the following calendar year to Employees on whose
behalf such Excess Contributions were made for the preceding calendar year; or
(ii) at the election of the Employee and to the extent
permitted by the Code, the Excess Contributions shall be treated as distributed
to the Employee and then contributed by the Employee to the Plan as a Voluntary
Deduction contribution.
(c) Adjustment for Income and Loss. The Excess Contributions to
be distributed to an Employee with respect to a calendar year shall be adjusted
for any income or loss thereon for such calendar year and for the period between
the end of such calendar year and the date of distribution. The income or loss
allocable to such calendar year shall be determined by multiplying the income or
loss for such calendar year allocable to the Employee's Salary Reduction Account
by a fraction, the numerator of which is the Excess Contributions for such
calendar year and the denominator of which is the Employee's Salary Reduction
Account balance on the last day of such calendar year. The income or loss
allocable to the period between the end of such calendar year and the date of
distribution shall be equal to 10 percent of the income or loss allocable to the
Excess Contributions for the preceding calendar year multiplied by the number of
calendar months that have elapsed from the end of the preceding calendar year to
the date of distribution. A distribution occurring on or before the fifteenth
day of the month shall be treated as having been made on the last day of the
preceding month and a distribution occurring after such fifteenth day shall be
treated as having been made on the first day of the following month.
In the event that an Employee's Salary Reduction contributions are
distributed to such Employee under this section 4.9, any Employer contributions
attributable thereto plus any income and minus any loss allocable thereto shall
be forfeited.
4.10 Statutory (Code Section 415) Limitations on Allocations to
Accounts. Notwithstanding any other provision of the Plan, contributions under
the Plan shall be subject to the limitations set forth in Code section 415,
which are incorporated herein by reference. For purposes of applying such
limitations to contributions under the Plan, the rules set forth in this section
4.10 shall be applicable.
(a) Annual Addition. The term "Annual Addition" means the amount
allocated to a Participant's account during any calendar year that constitutes--
(i) Employer contributions;
(ii) Employee contributions;
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(iii) forfeitures; and
(iv) amounts described in Code Sections 415(l)(2) and
419(A)(d)(3).
The compensation limitation referred to in Code section
415(c)(1)(B) shall not apply to--
(1) any contribution for medical benefits (within the
meaning of Code section 419A(f)(2)) after
separation from service which is otherwise
treated as an Annual Addition, or
(2) any amount otherwise treated as an Annual Addition
under Code Section 415(l)(2).
The Annual Addition for any calendar year before 1987 shall not be
recomputed to treat all Employee contributions as an Annual Addition.
(b) Combined-Plan Limits. Prior to January 1, 2000, in the case
of an individual who was a Participant in the Plan on December 31, 1986, an
amount shall be subtracted from the numerator of the defined contribution
fraction (not exceeding such numerator) as prescribed by the Secretary of
Treasury so that the sum of the defined benefit plan fraction and defined
contribution plan fraction does not exceed 1.0 as of such date.
Code section 415 shall be applied in such manner as to maximize the
permissible contributions and benefits thereunder and, in determining the
permissible amount of contributions under the Plan, any grandfathering
provisions heretofore or hereafter adopted pursuant to Code section 415 shall be
applicable. For purposes of applying the limitations set forth in Code section
415(e) prior to January 1, 2000, this Plan shall be the primary plan and any
required reductions shall be made from the Michigan Consolidated Gas Company
Retirement Plan for Employees Covered by Collective Bargaining Agreements (or
other applicable defined benefit plan of the Employer).
(c) Reduction of Annual Additions.
(i) If the limitations of Code section 415 would be exceeded
as a result of a reasonable error in estimating a Participant's Compensation or
on account of such other limited facts and circumstances as the Commissioner of
Internal Revenue finds justify the application of the rules hereinafter set
forth, the Annual Additions to the Participant's account which exceed the
applicable limitation shall be returned to the Participant to the extent of all
or any portion of any Voluntary Deduction contributions which were made by him
pursuant to Article IV. Any net earnings and gains allocable to such
contributions for the period between the date of such contribution and the date
returned shall also be repaid to the Participant but such return of net earnings
and gains will not be deemed a further reduction of any excess Annual Additions.
(ii) If the Participant made no Voluntary Deduction
contributions or if, after returning all or part of such contributions in
accordance with the previous paragraph, his Annual Additions still exceed the
limitations of Code section 415, then such excess shall be returned to the
Participant to the extent of all or any portion of any Salary Reduction
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contributions made on behalf of such Participant, together with any net earnings
and gains on such contributions as hereinabove described.
(iii) If, after returning all or any portion of Voluntary
Deduction and Salary Reduction contributions of a Participant in accordance with
the preceding paragraphs, his Annual Additions still exceed the limitations of
Code section 415, such portion of the Employer contributions under section 4.2
made on behalf of the Participant as must be removed to meet the limitations
shall be allocated and reallocated to other Participants' Investment Plan
Accounts as contributions by the Employer.
(iv) If, after reallocating all or any portion of Employer
contributions under section 4.2, a Participant's Annual Additions still exceed
the limitation of Code section 415, such portion of the Employer contributions
under section 4.3(a) made on behalf of the Participant and shares of MCN Stock
allocated to his ESOP Account under section 13.4(d) as must be removed to meet
the limitations shall be allocated and reallocated to other Participant's ESOP
Accounts as contributions by the Employer.
(v) If, as a result of the allocation of forfeitures, a
reasonable error in estimating a Participant's Compensation, or under other
limited facts and circumstances which the Commissioner of the Internal Revenue
Service finds justify the availability of the following rules, any amount cannot
be allocated during the Plan Year in accordance with the foregoing procedure
without exceeding the applicable limitations for one or more Participants, any
remaining amount shall be held unallocated in a special suspense account to be
allocated to Participants in the succeeding Plan Year or Plan Years; provided,
however, that (A) no Employer contributions and no Voluntary Deduction
contributions shall be made in such succeeding Plan Year or Plan Years until
such special suspense account is exhausted by allocations and reallocations; (B)
no investment gains (or losses) or other income shall be allocated to the
special suspense account; and (C) the amounts in the special suspense account
shall be allocated as soon as possible without violating the limitations of this
section 4.10.
ARTICLE V VESTING IN ACCOUNTS
5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary
Deduction Account, and Employee Pre-1987 Voluntary Deduction Account. The
Employee Salary Reduction Account, the Employee Post-1986 Voluntary Deduction
Account, and the Employee Pre-1987 Voluntary Deduction Account of each
Participant shall be fully vested and nonforfeitable at all times.
5.2 Employer Salary Reduction Account, Employer Voluntary Deduction
Account, and ESOP Account.
(a) In General. A Participant shall have a vested and
nonforfeitable interest in his Employer Salary Reduction Account, Employer
Voluntary Reduction Account, and ESOP Account after he has completed at least
five Years of Service. Prior to that time he shall have no vested interest in
such accounts.
(b) Accelerated Vesting. Notwithstanding section 5.2(a) above but
subject to Section 4.4, a Participant shall be fully vested and have a
nonforfeitable interest in his entire Employer Salary Reduction Account,
Employer Voluntary Deduction Account, and ESOP Account if--
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(i) while still an Employee, he attains age 65;
(ii) the Participant terminates employment with his Employer
for reasons described in Section 9.1(a), (b) or (c); or
(iii) while he is an Employee, contributions to the Plan are
completely discontinued or the Plan is terminated, or the Plan is partially
terminated and such Participant is affected by such partial termination; OR.
(iv) while he is an Employee, his account balance is
transferred to the Savings Plan in accordance with Section 3.3 (in which case
such account balance shall be vested under the recipient plan).
ARTICLE VI INVESTMENT PROVISIONS
6.1 Investment of Contributions. Employer contributions under sections
4.2, 4.3, and 4.4 and Employee contributions shall be invested in accordance
with the following provisions:
(a) The Employer contributions made pursuant to section 4.3(a),
(c), and (d) shall be invested in the MCN Stock Fund (through each Participant's
ESOP Account), which fund is described in Article VII.
(b) Each Participant shall, by direction to the Company in the
form prescribed by the Company, direct that the Employer contributions made
pursuant to section 4.2 and Employee contributions, including those made as a
Salary Reduction, be invested in such funds offered by the Trustee as are
selected by the Company.
Employee contributions, including those made as a Salary Reduction, and
the portion of Employer contributions referenced in section 6.1(b) above, need
not be invested in the same fund. A Participant shall direct the manner in which
the total of such contributions and such Employer contributions referenced in
section 6.1(b) above shall be divided, equally or otherwise, among the funds.
6.2 Change of Investment Direction. Any investment direction given by
a Participant under section 6.1 shall be deemed to be a continuing direction
until changed by the Participant. A Participant may change any such direction in
accordance with such procedures as the Company may from time to time provide and
apply in a nondiscriminatory manner.
6.3 Transfers Between Investment Funds. A Participant may direct that
all or any part of the value of his interest in any investment fund be
transferred to one or more of the other funds except that a Participant may not
transfer any amount from the MCN Stock fund to the extent that the balance
remaining in such fund immediately after the transfer would be less than the
value of his ESOP Account.
A transfer of all or any part of the value of a Participant's interest
in the Fixed Income fund may from time to time be restricted by the terms of
agreements which govern the
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investment of assets in such fund, in which event the Company shall give notice
of such restrictions to the Participants.
ARTICLE VII INVESTMENT FUNDS
7.1 Investment Funds. The Trustee shall establish, operate, and
maintain the following funds exclusively for the collective investment and
reinvestment of monies directed by the Company to be invested in such funds on
behalf of Participants:
(a) MCN Stock Fund. An MCN Stock fund which shall be invested
solely in MCN Stock.
(b) Fixed Income Fund. A Fixed Income fund which shall be
invested, except as hereinafter provided, in marketable fixed income securities
or accounts maintained by financial institutions which provide for fixed or
variable rates of interest for specified periods of time. The terms of such
agreements and the selection of such institutions shall be determined by the
Company. Investment advisors for marketable fixed income securities may use
fixed income futures and options to reduce the effect of market volatility.
(c) Other Funds. Such other funds offered by the Trustee as the
Company may select.
Notwithstanding the foregoing, the Trustee or the investment manager,
as the case may be, shall invest such portion of the assets of the funds as the
Company may deem necessary or appropriate to facilitate the administration of
such funds in any short-term fixed income fund as may be established under any
common, commingled, or collective trust for employee benefit plans established
and maintained by the Trustee.
7.2 Management of Investment Funds. Except as otherwise provided in
this Article VII, the ownership of the assets and investments of the funds shall
be in the Trustee as such; and the Trustee shall have in respect of any and all
assets of the funds the same powers as if it were absolute owner thereof.
7.3 Voting of MCN Stock.
(a) Instructions from Participants. The Trustee shall vote, in
person or by proxy, shares of MCN Stock held by the Trustee in the MCN Stock
fund in accordance with instructions obtained from Participants.
Each Participant shall be entitled to give voting instructions
with respect to the number of shares of such respective stock which bears the
same ratio to the total number of shares held by the Trustee on the record date
as the number of shares allocated to the respective stock fund account of such
Participant as of the Valuation Date preceding such record date bears to the
total number of shares allocated to the respective stock fund accounts of all
Participants as of such Valuation Date, excluding shares allocated to the
accounts of persons whose accounts have been distributed prior to such record
date. Written notice of any meeting of stockholders of MCN Energy Group Inc. and
a request for voting instructions shall be given by the Company or the Trustee,
at such time and in such manner as the Company shall determine, to each
Participant entitled to give instructions for the voting of stock at such
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<PAGE> 31
meeting. Shares with respect to which no voting instructions are received
from Participants and unallocated shares of the ESOP shall be voted by the
Trustee in the same proportion as shares for which voting instructions are
received from Participants. The Trustee shall combine and vote fractional shares
to the extent possible to reflect the voting instructions of Participants.
(b) Confidentiality. The instructions received by the Trustee
from Participants shall be held by the Trustee in strict confidence and shall
not be divulged or released to any person, including officers or employees of
the Company or any Affiliated Company
7.4 Tender Offers.
(a) Rights of Participants. Notwithstanding any other provisions of
this instrument, in the event an offer is made generally to the shareholders of
MCN Energy Group Inc. to transfer all or a portion of the common stock of MCN
Energy Group Inc. in return for valuable consideration including, but not
limited to, offers regulated by section 14(D) of the Securities Exchange Act of
1934, as amended, each Participant owning a beneficial interest in the MCN Stock
fund shall have the sole and exclusive right to decide if the common stock
representing his interest in such fund shall be tendered. Each Participant shall
have the right, to the extent the terms of the tender offer so permit, to direct
the withdrawal of such shares from tender. A Participant shall not be limited as
to the number of instructions to tender or withdraw from tender which he can
give; provided, however, the Participant shall not have the right to give
instructions to tender or withdraw from tender after a reasonable time
established by the Trustee pursuant to section 7.4(c) below.
(b) Duties of the Company. Within a reasonable time after the
commencement of a tender offer, the Company shall provide to each Participant
having an ownership interest in the MCN Stock fund--
(i) the offer to purchase as distributed by the offeror to
the shareholders of MCN Energy Group Inc.,
(ii) a statement of the shares representing his interest in
the MCN Stock fund as of the most recent information
available from the Company, and
(iii) directions as to the means by which a Participant can
give confidential instructions to the Trustee with
respect to the tender. The Company shall establish and
pay for a means by which a Participant can
expeditiously deliver to the Trustee instructions with
respect to the tender.
(c) Duties of the Trustee. The Trustee shall follow the
instructions of the Participants with respect to the tender offer. The Trustee
shall not tender shares for which no instructions are received. Unallocated
shares of MCN Stock of the ESOP shall be tendered or exchanged by the Trustee in
the same proportion as the allocated shares for which the Trustee has received
direction are tendered or exchanged, subject to the terms of any loan or pledge
agreement covering such shares. On the basis of its ability to comply with the
terms of the
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<PAGE> 32
offer, the Trustee shall establish a reasonable time after which it shall not
accept the instructions of Participants.
(d) Confidentiality. The instructions received by the Trustee from
Participants shall be held by the Trustee in strict confidence and shall not be
divulged or released to any person, including officers or employees of the
Company or any Affiliated Company.
7.5 Named Fiduciary Status. For purposes of sections 7.3 and 7.4, each
Participant is hereby designated a "named fiduciary" within the meaning of ERISA
section 403(a)(1) with respect to shares of MCN Stock as to which he is entitled
to make voting or tender offer decisions.
7.6 Expenses of Funds. Brokerage commissions, transfer taxes, and
other charges and expenses in connection with the purchase and sale of
securities for a fund shall be charged to the fund. Any income and other taxes
payable with respect to a fund shall likewise be charged to the fund.
ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN
8.1 Company to Maintain Accounts.
(a) The Company shall maintain, or cause to be maintained, for
each Participant--
(i) an Investment Plan Account attributable to Voluntary
Deduction contributions and related Employer contributions under section 4.2,
and
(ii) a separate account attributable to Salary Reduction
contributions and related Employer contributions under section 4.2, each of
which shall be composed, to the extent required by the investment directions of
the particular Participant, of a MCN Stock fund account, a Fixed Income fund
account, and an account for each other applicable fund in which his
contributions and related Employer contributions are invested.
(b) The Company also shall maintain, or cause to be maintained,
for each Participant--
(i) an ESOP Account attributable to Employer contributions
under section 4.3(a), (c) and (d), and
(ii) shares of MCN Stock allocated to the Participant
pursuant to section 13.4(d), each of which shall be composed of a MCN Stock fund
account and, to the extent diversification elections are made by the Participant
under section 13.5, such other accounts as the Company or its delegate deems
necessary or appropriate in giving effect to the diversification requirements of
section 13.5.
The Company shall maintain, or cause to be maintained, all necessary
records.
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8.2 Plan Accounting. The interests of each Participant in the funds
shall be his proportionate share of the value of such funds as of any Valuation
Date. The Participant's proportionate share may be determined under any
accounting method selected by the Company that allocates fairly, in the opinion
of the Company, the investment gains and losses by or on behalf of each
Participant to the fund and that complies with the requirements of the Code and
the Regulations thereunder. The value of Participants' fund accounts shall be
redetermined as of each Valuation Date.
8.3 Valuation of Funds. The value of a fund as of any Valuation Date
shall be the market value of all assets (including any uninvested cash) held by
the fund as determined by the Trustee reduced by the amount of any accrued
liabilities of the fund on such Valuation Date. The Trustee's determination of
market value shall be binding and conclusive upon all parties.
To the extent any Employer securities held by the Plan are not readily
tradable on an established securities market, valuation of such securities shall
be made by an independent appraiser who meets requirements similar to the
requirements of the regulations prescribed under Code Section 170(a)(1).
8.4 Valuation of Investment Plan Account. The value of a Participant's
Investment Plan Account as of any Valuation Date shall be the sum of the values
of his MCN Stock fund account, Fixed Income fund account, and any other of his
fund accounts attributable to Salary Reductions, Voluntary Deductions, and
Employer Contributions under section 4.2.
8.5 Valuation of ESOP Account. The value of a Participant's ESOP
Account as of any Valuation Date shall be the sum of--
(a) the value of his MCN Stock Fund account attributable to
Employer contributions on his behalf under section 4.3(a), (c) and (d) and
shares of MCN Stock allocated to his ESOP Account under section 13.4(d); and
(b) the sum of the values of his Fixed Income fund account and
any other of his fund accounts attributable to diversification elections under
section 13.5.
8.6 Valuation of Plan Account. The value of a Participant's Plan
Account as of any Valuation Date shall be the sum of the values of his MCN Stock
fund account, Fixed Income fund account, and any other investment fund accounts
maintained on his behalf under the Plan.
8.7 Company to Furnish Annual Statements of Value of Plan. The Company
shall, not less frequently than annually, distribute to each Participant in the
Plan a statement setting forth the Plan Account of such Participant. Such
statement shall be deemed to have been accepted as correct unless written notice
of objections thereto is received by the Company or the Employer within 30 days
after the distribution of such statement to the Participant.
8.8 Trust Agreement. A Trust has been established to fund benefits
under the Plan. The Employers may, without further reference to or action by any
Employee or Participant, from time to time enter into further agreements with
the Trustee and make such amendments to such Trust Agreement or such further
agreements as they may deem necessary or desirable to carry out the Plan, and
may take such other steps and execute such other instruments as the Employers
may deem necessary or desirable to put the Plan into effect or to carry it out.
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ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS
9.1 Distribution Upon Termination of Employment Entitling Participant
to Value of Plan Account. Upon--
(a) termination of a Participant's employment with his Employer
due to retirement on his Normal Retirement Date or his Disability Retirement
Date,
(b) the death of the Participant,
(c) termination of a Participant's employment with his Employer
or placement on inactive payroll because of total and permanent disability or
legally established mental incompetency of the Participant not qualifying the
Participant for retirement hereunder, or
(d) termination of a Participant's employment with his Employer
under any circumstances after the Participant has satisfied the Vesting
Requirement,
the Company shall, subject to the provisions of sections 9.7 and 9.9,
direct the Trustee to distribute to the Participant, or, in a proper case his
designated beneficiary or legal representative, the value of the Participant's
Plan Account in a lump sum.
9.2 Distribution Upon Termination of Employment Under Circumstances
Resulting in Forfeiture of Employer Contributions. Upon termination of a
Participant's employment under circumstances other than those described in
sections 9.1 and 9.7(c)(ii), the Company shall, subject to the provisions of
section 9.7, direct the Trustee to distribute to the Participant an amount equal
to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account,
Employee Post-1986 Voluntary Deduction Account, and Employee Salary Reduction
Account each of which shall be fully vested and nonforfeitable at all times.
Subject to Section 4.4,The Participant's Employer Voluntary Deduction Account,
Employer Salary Reduction Account, and ESOP Account shall be forfeited and
applied in reduction of the next succeeding contribution which the Participant's
Employer would otherwise contribute to the Trust; provided, however, if such
Participant is reemployed prior to his incurring five consecutive Break in
Service Years, then following his date of reemployment the Participant's
Employer shall contribute on behalf of such Participant an amount equal to the
amount that was forfeited upon his termination of employment, and such
contribution shall be credited to the same accounts from which it was forfeited,
in the same amounts. Such contributions shall not be taken into account in
determining under section 4.10 the Annual Additions to such Participant's
Savings INVESTMENT Plan Account.
9.3 Certain Distributions from Participant Accounts.
(a) In General. Any Participant may, upon notice to the Company
in the form and timing prescribed by the Company, terminate his participation in
the Plan. Within a reasonable period of time following processing of such
termination, the Company shall direct the Trustee to distribute to the
Participant an amount equal to the value of the Participant's Employee Pre-1987
Voluntary Deduction Account and Employee Post-1986 Voluntary Deduction Account;
but only to the extent attributable to Voluntary Deduction contributions that
have been in the Plan for at least 2 years.. Prior to July 1, 1998, such a
Participant, if a Greater
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Michigan Local Participants, shall be ineligible to again elect to make
contributions under the Plan for a period of 12 full months from the date of
termination of participation.
(b) Withdrawals After Age 59 1/2. Upon notice to the Company in
the form and timing prescribed by the Company, any Participant who has attained
age 59 1/2 may make an election, not more frequently than once every calendar
year, to withdraw all or any portion of the vested amount of his Plan Account.
Within a reasonable period of time following the processing of such election,
the Company shall direct the Trustee to distribute to the Participant as of such
Valuation Date the amount the Participant has elected to withdraw.
(c) Limited Withdrawal in the Event of Hardship. If a Participant
incurs a financial hardship as defined in section 9.6, he may limit the amount
of a distribution from his Voluntary Deduction Account under section 9.3(a) to
the amount necessary to satisfy the hardship and to pay any taxes resulting from
such distribution.
9.4 In-Service Withdrawals -- General. At its discretion, the Company
may adopt rules limiting the number of withdrawals that may be made in any Plan
Year and prescribe a minimum amount that may be withdrawn. All requests for a
withdrawal shall be submitted in a form prescribed by the Company. A Participant
may not rescind a request for withdrawal which has been submitted to the Company
unless the Company consents. A withdrawal shall be distributed as soon as
reasonably practicable after the withdrawal request is received.
9.5 Withdrawal of Voluntary Deduction Contributions. Any Participant
who shall have actively participated in the Plan for 24 or more calendar months
(for purposes of this section 9.5 active participation means the Participant
shall have made contributions to the Plan in each month in which compensation
was available), may, upon notice to the Company (in manner and timing prescribed
by the Company), withdraw an amount not in excess of 100 percent of his
Voluntary Deduction contributions under the Plan (but only to the extent
attributable to voluntary deduction contributions that have been in the plan for
at least 2 years), with such election to be given effect within a reasonable
period of time following processing.
Withdrawals under this section 9.5 shall be from the MCN Stock fund,
the Fixed Income fund, or such other investment funds offered by the Trustee as
the Company shall make available for purposes of this section. If the
Participant has an account in more than one fund, he shall specify in his
direction to the Company the amount to be withdrawn from each fund. The
contributions in all funds in the Employee Pre-1987 Voluntary Deduction Account
must be withdrawn before a withdrawal is permitted from a fund in the Employee
Post-1986 Voluntary Deduction Account. The amount of an in-service withdrawal
from a specific fund in a Voluntary Deduction Account shall not exceed the
Employee's contributions in such fund prior to the withdrawal.
9.6 Hardship Withdrawal of Salary Reduction Contributions. A
Participant may request, upon 20 days' written notice to the Company, a
withdrawal from his Salary Reduction Account if the withdrawal is necessary to
satisfy an immediate and heavy financial need of a Participant as defined below,
with such election to be given effect within a reasonable period following
processing. The amount of such withdrawal shall be limited to the Participant's
Salary Reduction contributions or the total value of the Participant's Employee
Salary Reduction Account as of the latest Valuation Date for which information
is available, whichever is smaller. Withdrawals under this section 9.6 shall be
from the MCN Stock fund, the Fixed Income fund,
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or such other investment funds under the Plan as the Participant specifies in
his written request for a hardship withdrawal.
The determination of whether or not a distribution is necessary to
satisfy an immediate and heavy financial need and the amount required to be
distributed to meet the need shall be made by the Company. All determinations
regarding financial need shall be made in accordance with written procedures
established by the Company and applied in a uniform and nondiscriminatory
manner, based on all applicable facts and circumstances. Such written procedures
shall specify the requirements for requesting and receiving distributions on
account of financial need, including the forms that must be submitted and to
whom the forms are to be submitted. All determinations regarding financial need
must comply with applicable Regulations under the Code.
For purposes of this section 9.6, a financial hardship withdrawal shall
be limited to the amount required to meet the need created by one of the
following situations:
(a) Expenses for medical care described in Code section 213(d)
previously incurred by the Participant, his spouse, or any dependents of the
Participant or necessary for these persons to obtain medical care described in
Code section 213(d).
(b) Costs directly related to the purchase (excluding mortgage
payments) of the principal residence for the Participant.
(c) Payment of tuition, related educational fees and room and
board expenses for the next 12 months of post-secondary education for the
Participant, his spouse, children, or dependents (as defined in Code section
152).
(d) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage on the Participant's
principal residence.
A distribution will be deemed necessary to satisfy an immediate and
heavy financial need of a Participant only if both of the following conditions
are met: (I)(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant. Prior to January 1, 1999, this
amount may be increased by the lesser of the amount withheld from the
distribution under Code section 3405(c) or the remaining Salary Reduction
contributions or total value of the Salary Reduction Account, if less, after
subtracting the amount of the immediate and heavy financial need; and (II).(2)
The Participant has obtained all distributions, other than hardship
distributions, and all loans available under this Plan and all other plans
maintained by the Employer.
If a Participant receives a hardship distribution, (A) the Participant
shall not be entitled to make Salary Reduction contributions or Voluntary
Deduction contributions (or other employee contributions to qualified or
nonqualified plans of deferred compensation, as described in applicable
regulations) for a period of one year after the hardship distribution, and (B)
the Participant may not make Salary Reduction contributions for the
Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the amount specified in Code section 402(g)
for such taxable year less the amount of the Participant's Salary Reduction
contributions for the taxable year of the hardship distribution.
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9.7 Time of Distributions.
(a) In General. Except as hereinafter provided and subject to the
provisions of section 9.9, distributions made pursuant to section 9.1 or
9.7(c)(ii) shall be made by the Trustee at the direction of the Company on such
date as the Company shall determine after consultation with the Participant or
his beneficiary, but in no event later than March 1 of the calendar year
following termination of the Participant's employment.
Except as hereinafter provided, all other distributions or withdrawals
under this Article IX shall be paid as soon as reasonably practicable by the
Trustee at the direction of the Company. Notwithstanding any other provision of
the Plan--
(i) if the vested portion of a Participant's Plan Account
has ever exceeded $5,000 (or such greater amount as permitted under the Code),
no distribution shall be made to such Participant pursuant to Section 9.1, 9.2,
9.7(c)(ii), or 9.9 prior to the date the Participant attains the age of
sixty-five (65) without written consent of the Participant; and
(ii) if a distribution to a Participant is deferred pursuant
to (i), the amount that would otherwise have been distributed to such
Participant shall be invested in the Fixed Income fund or any other investment
fund under the Plan, as the Participant shall direct, except that the ESOP
Account of such Participant shall continue to be invested in the MCN Stock fund,
subject to the diversification rules set forth in section 13.5.
A former Participant whose distribution has been deferred pursuant to
(i) above will not thereafter be eligible for withdrawals under section 9.3 or
9.5 or loans under section 9.10 but shall continue to have the voting and tender
offer rights described sections 7.3 and 7.4 and to be treated as a Participant
for purposes of Article VIII.
A former Participant whose distribution has been deferred may initiate
a distribution upon reasonable prior written notice to the Company and shall
receive an amount equal to the vested portion of his Plan Account within a
reasonable period following the processing of such election, with such amount to
be distributed in a lump sum cash payment except that--
(A) amounts invested in the MCN Stock fund shall be
distributed in accordance with section 9.8,
(B) such former Participant may upon reasonable prior
notice (as determined pursuant to procedures
established by the Company) to the Company receive a
partial distribution rather than a total distribution,
of the vested portion of his Account, but not more
frequently than four times per year, and
(C) to the extent that such distribution comes from the
Fixed Income fund account, such distribution shall be
subject to the provisions of section 9.9.
Notwithstanding any other provision of this Plan, if a Participant
attains age 70 1/2 and still has a balance allocated to his or her Plan Account,
a distribution shall be made under section 9.1 as if the Participant had
terminated employment in the month in which the
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Participant attains age 70 1/2. Such distribution shall in no event be later
than April 1 of the calendar year following the year in which the Participant
attains age 70 1/2. Distributions to such Participant shall be made annually
thereafter no later than December 31 of each year and shall be equal to at least
the minimum amount required to be distributed by Code section 401(a)(9). For
purposes of this paragraph, the life expectancy of the Participant and the
Participant's spouse shall be redetermined annually.
(b) Suspension of Participation. Prior to termination of his
employment, if a Participant shall cease to meet the eligibility requirements of
the Plan, his contributions and Employer contributions on his behalf shall be
suspended during the period of his ineligibility. Subject to section 3.1,
distribution of such Participant's Plan Account shall be deferred until
termination of his employment with the Company and any Affiliated Company. If
the provisions of section 3.3 relating to the transfer of a Participant's Plan
Account to the Savings Plan or its successor are not applicable--
(i) with respect to Participants who cease to meet the
eligibility requirements of the Plan prior to January 1, 1987, the Company shall
direct the Trustee to distribute the value of the Participant's Plan Account in
accordance with section 9.1 whether or not such termination of employment shall
be under the circumstances set forth in said section 9.1; and
(ii) with respect to Participants who cease to meet the
eligibility requirements of the Plan subsequent to December 31, 1986, such
distribution shall be in accordance with section 9.1 or 9.3, whichever is
applicable.
(c) Transfer of Employment.
(i) A transfer of employment from an Employer to an
Affiliated Company shall not be considered a termination of employment.
(ii) If a Participant shall be transferred to the employ of
an Affiliated Company which has not elected to participate in the Plan,
distribution of such Participant's Plan Account shall be deferred until the date
on which he is no longer in the employ of the Company or any Affiliated Company,
whereupon the Company shall direct the Trustee to distribute the value of the
Participant's Plan Account in the manner prescribed in section 9.1, subject to
the provisions of section 9.7, whether or not termination of employment shall be
under circumstances set forth in said section 9.1.
(d) Special Rules Relating to Distributions in the Event of
Death. In the event that a Participant dies before a distribution of his Plan
Account, the Company shall direct the Trustee to distribute the entire value of
his Plan Account to his beneficiary no later than March 1 of the calendar year
following the Participant's death, as provided in section 9.1. In the event of
the death of the Participant after the distribution of his Plan Account has
begun, any remaining balance in his Plan Account at the time of death will be
distributed at least as rapidly as under the method of distribution in effect at
the date of the Participant's death.
(e) Distribution must begin not later than the sixtieth (60th)
day after the close of the Plan Year in which occurs the latest of (a) the
Participant's termination of employment, (b) the Participant's attainment of age
sixty-five (65), or (c) the tenth (10th) anniversary of the date the Participant
first became a Participant, unless (1) the Participant
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elects a later date by submitting to the Company a written statement signed by
the Participant which describes the benefit and the date on which payment of
such benefit shall commence, so long as such election does not violate the
incidental benefit rule prescribed by the Code; or (2) if the amount of the
payment required to commence on the date determined hereinabove cannot be
ascertained by such date, or if it is not possible to make such payment on such
date because the Company has been unable to locate the Participant after making
reasonable efforts to do so, a payment retroactive to such date may be made no
later than sixty (60) days after the earliest date on which the amount of such
payment can be ascertained under the Plan or the date on which the Participant
is located, whichever is applicable. For purposes of this subsection, the
failure of a Participant to consent to a distribution shall be deemed an
election to defer commencement of payment of any benefit sufficient to satisfy
this section.
9.8 Distributions of Stock. In the case of distributions under section
9.1, 9.2, 9.3(b), 9.7(a), or 9.7(c)(ii), the value of the Participant's MCN
Stock fund account, if any, shall be paid in full shares of stock except that
cash shall be distributed in lieu of fractional shares; provided, however, that
a Participant entitled to such a distribution may elect to receive cash in lieu
of MCN Stock. Except in the case of an election to receive cash in lieu of MCN
Stock the total number of shares allocated to such account shall be distributed
from such account. Any remaining value of such account and, subject to the
provisions of section 9.9, the value of the Participant's accounts in other
funds shall be distributed in cash. Any transfer taxes payable with respect to
the distribution of shares of stock shall be charged to the respective MCN Stock
fund. Distributions pursuant to section 9.3(a) and withdrawals under sections
9.5 and 9.6 shall be paid entirely in cash. The distribution requirements of
Code Section 409(o) shall be met by the Plan, to the extent applicable.
9.9 Distributions to certain participants from Fixed Income Fund. This
Section 9.9 shall apply only to Participants with at least one Hour of
Employment prior to May 31, 1988.
(a) Normal Form. Notwithstanding any provision of the Plan, other
than the final paragraph of section 9.7(a), if a distribution is to be made
under section 9.1(a) or (c) and the Participant has a Fixed Income fund account
and at least one Hour of Employment prior to May 31, 1988 and the Participant's
first Hour of Employment is prior to January 1, 1999, then unless the
Participant or legal representative shall make an election in the manner
prescribed in section 9.9(b), the value of such account (exclusive of the
portion thereof attributable to diversification elections under section 13.5)
shall be distributed by the purchase of an immediately payable single premium
annuity contract providing for monthly payments during the Participant's
lifetime and, if the Participant is married on the date payment of his benefit
commences and his spouse shall survive him, for monthly payments during the
remainder of such spouse's lifetime, each such payment to such spouse being
equal to one-half of the monthly payment received by the Participant, commencing
no later than March 1 of the calendar year following the calendar year of the
Participant's termination of employment, and delivery of such contract to the
Participant within a reasonable time after the Participant's termination of
employment.
If a distribution is to be made under section 9.1(b) because of a
Participant's death and the Participant had a Fixed Income fund account at the
time of his death and at least one Hour of Employment prior to May 31, 1988 and
the Participant's first Hour of Employment was prior to January 1, 1999, then
unless the Participant had made or the Participant's spouse or beneficiary, as
the case may be, makes an election at the time and in the manner prescribed in
section 9.9(b), the value of the Participant's Fixed Income fund account
(exclusive of the portion thereof attributable to diversification elections
under section 13.5) shall be distributed by purchase of an immediately payable
single premium annuity contract providing
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for monthly payments to the Participant's spouse, or, if the Participant was not
married on the day of his death, to his beneficiary during such person's
lifetime, commencing no later than March 1 of the calendar year following the
calendar year of the Participant's death and delivery of such contract to such
person within a reasonable time after the date of Participant's death.
(b) Election to Reject Normal Form. Subject to the provisions of
this section 9.9(b), each Participant entitled to a distribution under section
9.9(a) (or legal representative on behalf of such a Participant) may, at any
time during the 90-day period ending on the annuity starting date, elect to have
the value of the Participant's Fixed Income fund account (exclusive of the
portion thereof attributable to diversification elections under section 13.5)
distributed by one or more of the methods set forth in section 9.9(c).
Within 30 days after a Participant provides notice to the Company (in
the manner and timing prescribed by the Company) of his intention to retire on
his Normal Retirement Date or Disability Retirement Date, or within 30 days
after the Company receives notice of a Participant's death, or within five
business days after determining, in accordance herewith, that a Participant is
totally and permanently disabled, or within five business days after receiving
notice of the legally established mental incompetency of the Participant, if the
Participant has a Fixed Income fund account at such time, the Company shall
deliver to such Participant or his legal representative, by mail or by personal
delivery, written notice in nontechnical language explaining the terms and
conditions of the annuity provided in section 9.9(a).
The notice shall explain the Participant's or legal representative's
right to elect an optional form of distribution and that such election may be
revoked by the Participant or legal representative at any time prior to the
annuity starting date or, if a lump sum payment is elected, prior to the first
day on which all events have occurred which entitle the Participant or legal
representative to the lump sum payment.
The notice shall explain that a married Participant may elect a
distribution pursuant to section 9.9(c) only if the spouse consents in writing
to such election. Such written consent shall acknowledge consent to the
designated beneficiary and the optional form of distribution, neither of which
may be changed thereafter without again obtaining written spousal consent (or
the consent of the spouse expressly permits changes by the Participant without
further consent by the spouse). Such written consent shall acknowledge the
effect of such election and shall be witnessed by a notary public or by a
representative of the Company who is designated to act in such capacity by the
Company.
If the Participant establishes to the satisfaction of the Company that
such written consent cannot be obtained because his spouse cannot be located,
the requirement of such written consent shall be waived. Any election, change,
or revocation under this section 9.9(b) shall be effective when notice is
delivered to the Company in a form approved by the Company for this purpose,
provided such election, change, or revocation is delivered prior to the annuity
starting date or, if a lump sum payment is elected, prior to the first day on
which all events have occurred which entitle the Participant or legal
representative to the lump sum payment. The notice shall explain that an
effective revocation shall result in the benefit being provided as an annuity
described in section 9.9(a).
Subject to Section 9.14(c), such notice shall be provided no less
than thirty (30) days and no more than ninety (90) days prior to the annuity
starting date.
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(c) Optional Forms. In addition to the form described in section
9.9(a), distribution of the value of a Participant's Fixed Income fund account
(exclusive of the portion thereof attributable to diversification elections
under section 13.5) may be made either--
(i) in a lump sum payment; or
(ii) by purchase of any form of single premium annuity
contract that satisfies Code section 401(a)(9) as may from time to time be
offered by the legal reserve life insurance companies with which the Trustee has
agreements governing the investment of assets in the Fixed Income fund and
delivery of such contract to the Participant or distributee within a reasonable
time after the Participant's termination of employment or death. Within five
business days after the Company receives an election pursuant to this provision,
the Company shall provide the same notice provided under section 9.9(b). An
election pursuant to this provision shall be subject to the provisions of
section 9.9(b).
9.10 Loans. The Trustee is hereby authorized to establish a loan
program in accordance with this section 9.10. Upon application of a party in
interest (as defined in ERISA section 3(14)) who is a Participant or beneficiary
under the Plan, the Company shall direct the Trustee to make a cash loan to such
Participant or beneficiary, secured by 50 percent of the nonforfeitable value of
the Participant's Employee and Employer Salary Reduction and ESOP Accounts
determined as of the date the loan is made. The loan program shall be
administered by the Company subject to the following conditions and such other
conditions that are consistent with Labor Regulation section 2550.408b-1 and are
from time to time set forth in written administrative procedures which shall
constitute a part of the Plan and are hereby incorporated by reference:
(a) The term of a loan shall not extend beyond the earlier of
four years or the date upon which the Participant or beneficiary ceases to be a
party in interest; provided, however, that the four years shall be changed to
eight years where the proceeds of the loan are used by the Participant or
beneficiary to acquire the Participant's principal residence.
(b) A loan shall bear interest at a reasonable rate which shall
be based upon the prevailing interest rate charged by persons in the business of
lending money on similar commercial loans under comparable circumstances at the
time that such loan is granted, as determined by the Company and uniformly
applied.
(c) The amount of a loan (when added to the balance of other
outstanding loans) shall not exceed the lesser of--
(i) $50,000 reduced by the excess (if any) of--
(A) the highest outstanding balance of loans from the
Plan during the one-year period ending on the day
before the date on which such loan was made, over
(B) the outstanding balance of loans outstanding on
the date such loan was made, or
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(ii) 50 percent of the nonforfeitable value of the
Participant's Employee and Employer Salary Reduction and ESOP Accounts under the
Plan which the Participant would have been entitled to receive if the
Participant's employment had terminated on the date such loan was made.
In no case shall a Participant be entitled to a loan under
this Plan if the amount of the proposed loan is less than $500.
(d) A loan shall be evidenced by a promissory note.
(e) Payments of principal and interest shall be made by
approximately equal payments not less frequently than monthly on a basis that
would permit the loan to be fully amortized over its term. Loan payments shall
be made by payroll deductions for Participants in active pay status.
(f) Appropriate disclosure shall be made pursuant to the Truth in
Lending Act to the extent applicable.
(g) Amounts of principal and interest received on a loan shall be
credited to the Participant's account and the outstanding loan balance shall be
considered an investment of the assets of the account. Payment of principal and
interest related to loans made from a Participant's ESOP Account shall be
credited to such Participant's ESOP Account. Payment of principal and interest
related to loans made from a Participant's Investment Plan Account shall be
credited to the Participant's Investment Plan Account and shall be invested in
the investment funds in the same proportions as the investment election then in
effect by the Participant under Article VI.
(h) The frequency of loans and the minimum amount for a loan
shall be determined through uniform rules prescribed by the Company and at the
sole discretion of the Company.
(i) All applications for a loan shall be submitted to the Company
on a form prescribed by the Company. Distribution shall be made as soon as
reasonably practicable after the application of the loan is received.
(j) If a Participant borrows from an account which is invested in
more than one fund, he shall instruct the Company as to the funds from which the
loan is to be applied; provided, however, that no borrowing shall be applied
from the MCN Stock fund unless and until the Participant's ability to borrow
from each of the other funds has been exhausted.
(k) A married Participant may not borrow any amount from the Plan
unless his spouse executes a written consent as hereinafter provided. Such
consent must be executed during the 90-day period ending on the date on which
the loan is made and shall specifically provide that the spouse consents both to
the loan and to the use of the Participant's Salary Reduction and ESOP Accounts
as security for the loan. The consent shall acknowledge the effect of the use of
the Participant's accounts as security for the loan and shall be witnessed by a
notary public or a representative of the Company who is designated to act in
such capacity by the Company.
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(l) In the event a Participant defaults on a loan, the entire
outstanding balance of and accrued interest on the loan shall be due and payable
in accordance with the Plan's loan procedures and applicable Regulations. The
Trustee and/or Company may pursue collection on such defaulted loan by any means
generally available to a creditor where a promissory note is in default, or if
the entire amount due is not paid by such Participant following the default, the
amount of such loan default shall be charged against the "secured portion" of
the Participant's Plan Account and treated as a distribution with respect to
such Participant; provided, however, that such a charge against a Participant's
Plan Account shall not occur with respect to funds in his Employee Salary
Reduction Account at a time so as to cause a violation of Code section
401(k)(2)(B)(i).
9.11 Definition of Employee Contributions and Employer Contributions.
For the purposes of this Article IX, a Participant's Employee contributions
shall include only those contributions made either as a Voluntary Deduction or a
Salary Reduction which have not been previously withdrawn or distributed. If a
Participant has previously had a portion of his Plan Account forfeited under
section 9.2, the Employer contributions, exclusive of those made as a Salary
Reduction to the Plan on his behalf, shall include only such Employer
contributions made subsequent to such forfeiture.
9.12 Spousal Consent to Payment. Subject to section 9.7(a), the spouse
of a married Participant or former Participant shall be required to consent in
writing to any in-service withdrawal, loan, or distribution under the Plan to
the Participant or former Participant. The spouse's consent shall be in such
form as the Company may prescribe.
9.13 Distributions Pursuant to a Qualified Domestic Relations Order.
Upon receipt of a domestic relations order, the Company will notify the involved
Participant and any alternate payee that the order has been received and explain
the Plan's procedures for determining whether the order is a qualified domestic
relations order as defined in Code section 414(p). After determining that the
order is a qualified domestic relations order, the Company shall direct the
Trustee to distribute or segregate the Participant's Account as provided in the
qualified domestic relations order. If required by the qualified domestic
relations order, the Trustee shall make distribution prior to the time that the
Participant, whose account is subject to distribution, could have received a
distribution.
In a case of a dispute regarding the validity of a domestic relations
order or the amounts or identities of parties to be paid thereunder, the Company
may segregate the portion of the Participant's account in question, and may
bring an action in a court of competent jurisdiction to determine the proper
amount and/or recipient of benefits, or may submit such segregated amount to a
court of competent jurisdiction (through an interpleader action or otherwise)
until resolution of the matter. Further, if the Company receives notice that a
domestic relations order is forthcoming, the Company may suspend payments from
the Participant's Account or may follow the procedures described in the
preceding sentence, until resolution of the matter.
9.14 Direct Rollovers of Eligible Distributions.
(a) General. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a distributee's election under this section,
a distributee may elect, at the time and in the manner prescribed by the
Company, to have any portion of an eligible rollover
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distribution paid directly to an eligible retirement plan specified by the
distributee in a direct rollover.
(b) Definitions.
(i) Eligible rollover distribution. An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary,; or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under Code section 401(a)(9), or, effective any
hardship distribution after January 1, 1999, a hardship distribution; and the
portion of any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
(ii) Eligible retirement plan. An eligible retirement plan
is an individual retirement account described in Code section 408(a), an
individual retirement annuity described in Code section 408(b), an annuity plan
described in Code section 403(a), or a qualified trust described in Code section
401(a), that accepts the distributee's eligible rollover distribution. However,
in the case of an eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account or individual
retirement annuity.
(iii) Distributee. A distributee includes an Employee or
former Employee. In addition, the Employee's or former Employee's surviving
spouse and the Employee's or former Employee's spouse or former spouse who is
the alternate payee under a qualified domestic relations order, as defined in
Code section 414(p), are distributees with regard to the interest of the spouse
or former spouse.
(iv) Direct rollover. A direct rollover is a payment by the
Plan to the eligible retirement plan specified by the distributee.
(c) Waiver of 30-Day Notice Period. If a distribution is one to
which Code sections 401(a)(11) and 417 do not apply, such distribution may
commence less than 30 days after the notice required under section
1.411(a)-11(c) of the Income Tax Regulations is given, provided that (i) the
Company clearly informs the Participant that the Participant has a right to a
period of at least 30 days after receiving the notice to consider the decision
of whether or not to elect a distribution (and, if applicable, a particular
distribution option), and (ii) the Participant, after receiving the notice,
affirmatively elects a distribution.
9.15 Special Distribution Events. Notwithstanding anything herein to
the contrary, a Participant's Salary Reduction contributions shall not be
distributed prior to the Employee's retirement, death, disability, termination
of employment, or hardship, except that a distribution of such amounts may be
made, in accordance with Code Section 401(k)(10), upon
(a) termination of the Plan without establishment of another
defined contribution plan other than an employee stock ownership plan (as
defined in Code Section 4975(e) or 409) or a simplified employee pension plan
(as defined in Code Section 408(k));
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(b) the disposition by MCN Energy Group Inc. or the Company to an
unrelated corporation of substantially all of the assets (as defined in Code
Section 409(e)(2)) used in the trade or business if the Company continues to
maintain the Plan after the disposition, but only with respect to Employees who
continue employment with the corporation acquiring such assets; or
(c) the disposition by MCN Energy Group Inc. or the Company to an
unrelated entity of its interest in a subsidiary (within the meaning of Code
Section 409(d)(3)) if the Company continues to maintain the Plan, but only with
respect to Employees who continue employment with such subsidiary.
ARTICLE X ADMINISTRATION
10.1 Plan Administration and Interpretation.
(a) The Company shall be responsible for the administration of
the Plan, or may designate all or a portion of such responsibility to a
committee for such purposes. The Company shall have all such powers as may be
necessary to carry out the provisions of the Plan and may from time to time
establish rules and procedures for the administration of the Plan and the
transaction of the Plan's business.
(b) The Company shall have the exclusive right to make any
finding of fact necessary or appropriate for any purpose under the Plan. The
Company shall have the maximum discretion permitted by law to interpret and
construe the terms of the Plan and to resolve all issues arising under the Plan
including, but not limited to the authority to--
(i) construe disputed or doubtful terms of the Plan;
(ii) determine the eligibility of an individual to
participate in the Plan;
(iii) determine the amount, if any, of benefits to which any
Participant, former Participant, beneficiary, or other person may be entitled
under the Plan;
(iv) determine the timing and manner of payment of benefits;
and
(v) resolve all other issues arising under the Plan.
To the extent permitted by law, all findings of fact,
determinations, interpretations, and decisions of the Company shall be
conclusive and binding upon all persons having or claiming to have any interest
or right under the Plan.
The Employers shall, from time to time, on request of the Company,
furnish to the Company such data and information as the Company shall require in
the performance of its duties.
(c) The Company shall each month collect Employee contributions
and Employer contributions from each Employer and shall deliver the amounts
collected to the Trustee, together with instructions concerning the portions of
such total amount to be invested in each fund.
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(d) The Company shall direct the Trustee to make payments of
amounts to be distributed or withdrawn from the Trust under Article IX and to
make any transfers from one fund to another directed by Participants under
section 6.3.
10.2 Notice to Employees. All notices, reports, and statements given,
made, delivered, or transmitted to a Participant shall be deemed to have been
duly given, made, or transmitted when mailed with postage prepaid and addressed
to the Participant at the address last appearing on the books of the Employer. A
Participant may record any change of his address from time to time by written
notice filed with the Employer.
10.3 Notices to Employers. Written directions, notices, and other
communications from Participants to the Employers shall be mailed by first class
mail with postage prepaid or delivered to such location as shall be specified
upon the forms prescribed by the Company for the giving of such directions,
notices, and other communications, and shall be deemed to have been received by
the addressee when received at such location. Any other notice to the Employers
shall be addressed--
(a) If intended for the Company:
MichCon Investment and Stock Ownership Plan
c/o Michigan Consolidated Gas Company
500 Griswold Street
Detroit, Michigan 48226
(b) If intended for any other Employer, at its principal place of
business.
10.4 Participants' Acceptance of the Provisions of the Plan. Each
Participant at the time of becoming a Participant in the Plan and as a condition
of participation shall sign an instrument evidencing the fact that he accepts
and agrees to all provisions of the Plan.
10.5 Audit of Plan Records. The records of the Company and the records
of the Employers in respect of the Plan shall be examined annually by a firm of
independent public accountants appointed by the Company. Such accountants shall,
on the basis of such examination, make such reports to the Company and to the
Employers as they may request. The audited records of the Company and the
Employers shall be conclusive in respect of all matters involved in the
administration of the Plan.
10.6 Claims Procedure. If any Participant or distributee believes he is
entitled to benefits in an amount greater than those which he is receiving or
has received, he may file a claim with the Secretary of the Company. Such a
claim shall be in writing and state the nature of the claim, the facts
supporting the claim, the amount claimed, and the address of the claimant.
The Secretary of the Company shall review the claim and, within a
reasonable period of time after receipt of the claim, give written notice by
registered or certified mail to the claimant of his decision with respect to the
claim. Such notice shall be written in a manner calculated to be understood by
the claimant and, if the claim is wholly or partially denied, set forth the
specific reasons for the denial, specific references to the pertinent Plan
provisions on which the denial is based, a description of any additional
material or information necessary for the claimant to
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perfect the claim, and an explanation of why such material or information is
necessary, and an explanation of the claim review procedure under the Plan.
The Secretary shall also advise the claimant that he or his duly
authorized representative may request a review by the Company of the denial by
filing with the Company, within 65 days after notice of the denial has been
received by the claimant, a written request for such review. The claimant shall
be informed that he may have reasonable access to pertinent documents and submit
comments in writing to the Company within the same 65-day period. If a request
is so filed, review of the denial shall be made by the Company and the claimant
shall be given written notice of the Company's final decision. Such notice shall
be provided within 60 days after receipt of such request. Such notice shall
include specific reasons for the decision and specific references to the
pertinent Plan provisions on which the decision is based and shall be written in
a manner calculated to be understood by the claimant.
10.7 Effect of a Mistake. In the event of a mistake or misstatement as
to the eligibility, participation, or service of any Participant, or the amount
of payments made or to be made to a Participant or beneficiary, the Company
shall, if possible, adjust the Plan's records and cause to be withheld or
accelerated or otherwise make adjustment of such amounts of payments as will in
its sole judgment result in the Participant or beneficiary receiving the proper
amount of payments under the Plan.
ARTICLE XI AMENDMENT AND TERMINATION
11.1 Amendment. The Company may at any time and from time to time amend
or modify the Plan by written instrument duly adopted by the Board of Directors
of the Company or by a designee of the Board. Any such amendment or modification
shall become effective on such date as the Company shall determine, may apply to
Participants in the Plan at the time thereof as well as future Participants, but
may not reduce the Plan Account of any Participant as of the date of adoption of
such amendment or modification.
11.2 Withdrawal. If an Employer shall withdraw from the Plan under
section 12.2, or if an Employer shall adopt an amendment to the Plan which shall
render impracticable the continued administration of the Plan as a joint plan of
the several Employers, the Company shall determine the portions of the various
funds held by the Trustee which are applicable to the Participants of such
Employer and shall direct the Trustee to segregate such portions in a separate
trust. Such separate trust shall thereafter be held and administered as a part
of the separate plan of such Employer. After such portions of the funds have
been segregated in a separate trust, no such Participant or any distributee with
respect to such Participant shall have any right to any benefit under the Plan
or any claim against the Trust.
11.3 Termination. Any Employer may at any time terminate its
participation in the Plan by resolution of its Board of Directors without
obtaining the consent of or giving notice to any Participant or collective
bargaining representative. In the event of any such termination, the Company
shall determine the portions of the various funds held by the Trustee which are
applicable to the Participants of such Employer and shall direct the Trustee to
distribute such portions to such Participants ratably in proportion to the
values of their respective fund accounts; provided, however, amounts
attributable to a Participant's Elective Deferrals shall not be distributed on
account of such termination if the Employer, after such termination, maintains a
defined contribution plan (other than an employee stock ownership plan or a
simplified
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employee pension). The portions of the MCN Stock fund so distributed shall be
distributed in kind except that cash shall be distributed in lieu of fractional
shares. The portions of the Fixed Income fund and other investment funds so
distributed shall be distributed in cash or in kind, or partly in cash and
partly in kind, as determined by the Company.
Upon termination or partial termination of the Plan by any Employer or
upon the complete discontinuance of contributions by any Employer, the benefits
under the Plan of all affected Participants employed or formerly employed by
such Employer shall become nonforfeitable.
11.4 Allocation of Funds Between Employers. The portion of a fund
applicable to Participants of a particular Employer shall be an amount which
bears the same ratio to the value of the fund which the aggregate value of the
fund accounts of Participants employed by such Employer bears to the total value
of the fund accounts of all Participants.
11.5 Trust to be Applied Exclusively for Participants and Their
Beneficiaries. Subject to section 13.3, any provision of the Plan to the
contrary notwithstanding, it shall be impossible for any part of the Trust to be
used for or diverted to any purpose not for the exclusive benefit of
Participants and their beneficiaries either by operation or termination of the
Plan, by power of amendment, or by other means.
Notwithstanding the preceding paragraph, if a contribution is made to
the Trust by an Employer by a mistake of fact, then such contribution shall be
returned to such Employer within one year after the payment of the contribution;
and if any part or all of a contribution is disallowed as a deduction under Code
section 404, then to the extent such contribution is disallowed as a deduction
it shall be returned to such Employer within one year after the disallowance.
All Employer contributions are conditioned upon their deductibility under Code
section 404.
ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES
12.1 Adoption of the Plan. Any Affiliated Company may become a
participating Employer under the Plan by (a) taking such corporate action as
shall be necessary to adopt the Plan, and (b) executing and delivering such
instruments and taking such other action as may be necessary or desirable to put
the Plan into effect with respect to such Affiliated Company.
The Plan shall become effective with respect to each particular
Affiliated Company as of a date to be determined by the Board of Directors of
such Employer after complying with all legal requirements pertaining to the
participation of such Employer in the Plan.
12.2 Withdrawal from the Plan. Any Employer may withdraw from
participation in the Plan at any time by filing with the Company a duly
certified copy of a resolution of its Board of Directors to that effect and
giving notice of its intended withdrawal to the Company, the other Employers,
and the Trustee at least 30 days prior to the effective date of withdrawal.
12.3 Company as Agent for Employers. Each Employer other than the
Company, hereby appoints, and each other corporation which shall become an
Employer pursuant to section 12.1 or 13.7 by so doing shall be deemed to have
appointed the Company its agent to
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exercise on its behalf all of the powers and authorities hereby conferred upon
the Employers by the terms of the Plan, including, but not by way of limitation,
the power to amend, restate, and terminate the Plan. The authority of the
Company to act as agent shall continue unless and until the portion of the Trust
fund held for the benefit of Employees of the particular Employer and their
beneficiaries is set aside in a separate trust as provided in section 11.2.
ARTICLE XIII SPECIAL PROVISIONS RELATING TO THE ESOP
13.1 Establishment of ESOP. The MichCon Employee Stock Ownership Plan
for Union Employees was originally established effective as of April 1, 1989.
Each Employer shall make contributions to the ESOP in accordance with section
4.3 hereof and the assets of the ESOP shall be invested at all times primarily
in MCN Stock. The Company from time to time may direct the Trustee to incur debt
in accordance with section 13.4 hereof to finance the acquisition of MCN Stock.
13.2 ESOP Account. The Company shall establish an ESOP Account in the
name of each Participant to which there shall be credited or charged--
(a) the Employer contributions under section 4.3(a), (c) and (d)
hereof made on behalf of such Participant;
(b) the shares allocated to the Participant pursuant to section
13.4(d) hereof; and
(c) the investment gains and losses on such amounts.
A Participant's ESOP Account shall be invested only in the MCN Stock fund,
except to the extent that monies diversified under section 13.5 may, at the
Participant's election, be directed to the Equities fund, the Senior Securities
fund, or the Fixed Income fund.
13.3 Discrimination Testing. For purposes of the limitations on Salary
Reduction contributions set forth in section 4.7, the ESOP and non-ESOP portions
of the Plan shall be tested separately. For purposes of such testing--
(a) the ESOP portion of the Plan shall mean Employer
contributions under section 4.3(a) made on behalf of the Participant and the
shares allocated to a Participant's ESOP Account pursuant to section 13.4(d);
and
(b) the non-ESOP portion of the Plan shall mean all Elective
Deferrals, Voluntary Deductions and Employer contributions under section 4.2.
13.4 Loans.
(a) Stock Acquired with Exempt Loan. The Company may direct the
Trustee to incur a loan on behalf of the ESOP in a manner and under conditions
which will cause the loan to qualify as an "exempt loan" within the meaning of
Code section 4975(d)(3). A loan shall be used primarily for the benefit of
Participants and their beneficiaries. The proceeds of each
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such loan shall be used, within a reasonable time after the loan is obtained,
only to purchase MCN Stock, to repay the loan, or to repay any prior loan.
Any such loan shall provide for a reasonable rate of interest and an
ascertainable period of maturity, and shall be without recourse against the
Plan. Any such loan shall be secured solely by shares of MCN Stock acquired with
the proceeds of the loan and shares of MCN Stock that were used as collateral on
a prior loan which was repaid with the proceeds of the current loan.
MCN Stock acquired with the proceeds of a loan, including shares
pledged as collateral, shall be placed in a Suspense Account and released in
accordance with subsection (b) below as the loan is repaid as if all shares in
the Suspense Account were pledged. MCN Stock released from the Suspense Account
shall be allocated in the manner described in subsection (d) below.
No person entitled to payment under a loan made pursuant to this
section 13.4 shall have recourse against any assets of the Plan other than the
MCN Stock used as collateral for the loan, Employer contributions under section
4.3 that are available to meet obligations under the loan, and earnings
attributable to such collateral and the investment of such contributions.
Employer contributions under section 4.3(b) made with respect to any Plan Year
during which the loan remains unpaid, and earnings on such contributions, shall
be deemed available to meet obligations under the loan, unless otherwise
provided by the Employer at the time such contributions are made.
(b) Release of Pledged Shares. Any pledge of MCN Stock as
collateral under this section 13.4 shall provide for the release of shares so
pledged upon the payment of any portion of the principal of the loan. Shares so
pledged shall be released in the proportion that the principal paid on the loan
bears to the total principal amount of the loan, as provided in Treasury
Regulation 54.4975-7(b)(8)(ii). The number of shares of MCN Stock that shall be
released with each principal payment on the loan shall be equal to the number of
shares of MCN Stock held as collateral on the loan immediately prior to the
release multiplied by a fraction the numerator of which is the amount of
principal of the loan repaid on such date and the denominator of which is the
sum of the numerator plus the remaining outstanding principal amount of the loan
after giving effect to the repayment of principal of the loan on such date. Each
loan under this section 13.4 shall comply with the requirements of Treasury
Regulation 54.4975-7(b)(8)(ii). If such a loan provides for monthly principal
payments, shares of MCN Stock shall be released monthly.
(c) Repayment of Loan. Payments of principal and interest on any
loan under this section 13.4 shall be made by the Trustee at the direction of
the Company solely from--
(i) the proceeds of such loan, if any portion of such
proceeds are used for such purpose within a reasonable period of time after the
loan is obtained as provided in section 13.4(a) above;
(ii) Employer contributions under section 4.3(b) available
to meet obligations under the loan;
(iii) earnings from the investment of such contributions;
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(iv) earnings attributable to MCN Stock acquired with the
proceeds of such loan, whether allocated or unallocated;
(v) the earnings on other allocated shares of MCN Stock
held by the ESOP if the Internal Revenue Service, by private letter ruling,
advises the Company that the use of such earnings to repay the loan will be
deductible under Code section 404(k)(2)(C) and will not violate the requirements
of Code section 4975; and
(vi) the proceeds of a subsequent loan made to repay the
loan.
The contributions and earnings available to pay a loan must be
accounted for separately by the Company until all loans under this section 13.4
have been paid. If dividends on MCN Stock allocated to the ESOP Account of any
Participant are used to repay any loan, shares of MCN Stock with a fair market
value not less than the amount of such dividends shall be allocated in
accordance with section 4.3(c) to the ESOP Account of such Participant prior to
the end of the Plan Year during which (but for the use of the dividends to repay
the loan) such dividend would have been allocated to the ESOP Account of such
Participant.
(d) Allocation of Released Shares. Subject to the limitations in
section 4.10 on Annual Additions to a Participant's accounts, shares of MCN
Stock released from a Suspense Account described in section 13.4(a) shall be
allocated immediately to the ESOP Accounts of each Participant in the proportion
that the contribution that would be required to be made on behalf of such
Participant under section 4.3(a)(i) for the applicable period if no shares were
allocated under section 4.3(a)(ii) during such period bears to the total of all
Employer contributions that would be required under section 4.3(a)(i) hereof for
the applicable period if no shares were allocated under section 4.3(a)(ii)
during such period.
13.5 Diversification. Any Participant or any former Participant whose
distribution has been deferred pursuant to section 9.7(a), who, in either case,
has completed at least ten years of participation in the Plan, and who has
attained the age of 55 is a "Qualified Participant". Any Qualified Participant
shall have the right to make an election to direct the investment of a portion
of his ESOP Account. Such a Participant may elect within 90 days after the close
of each Plan Year in the six plan-year period beginning with the first Plan Year
in which the individual becomes a Qualified Participant to diversify 25 percent
of his ESOP Account, less any amount to which a prior election applies. In the
case of the last year to which an election applies, 50 percent shall be
substituted for 25 percent.
The portion of a Qualified Participant's ESOP Account which is
eligible for diversification may be invested in the Fixed Income fund and/or any
other investment funds under the Plan, in any combination thereof.
13.6 Put Option. If MCN Stock becomes not readily tradable on an
established market, then any Participant who is otherwise entitled to a
distribution of his ESOP Account, shall have the right (hereinafter referred to
as "Put Option") to require that his Employer repurchase any MCN Stock allocated
to his ESOP Account under a fair valuation formula. The Put Option shall be
exercisable only by written notice to the Participant's Employer during the
60-day period immediately following the date of distribution and if the Put
Option is not exercised within such 60-day period, then it can be exercised for
an additional period of 60 days
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in the following Plan Year. The period during which the Put Option is
exercisable shall not include any time when a Participant is unable to exercise
it because his Employer is prohibited from honoring it by applicable federal or
state law. This Put Option shall be nonterminable within the meaning of Treasury
Regulation 54.4975-(11)(a)(ii).
The amount paid for MCN Stock under the Put Option shall be paid in
substantially equal periodic payments (not less frequently than annually) over a
period beginning not later than 30 days after the exercise of the Put Option and
not exceeding five years. There shall be adequate security provided and
reasonable interest paid on the unpaid balance due under this section 13.6.
13.7 Purchase of MCN Stock. The ESOP may acquire shares of MCN Stock on
a national securities exchange, from the Company or any Affiliated Company or
otherwise; provided, however, that if any shares of MCN Stock are purchased from
the Company or any Affiliated Company, the price shall not exceed an amount
which constitutes adequate consideration (as defined in ERISA section 3(18) and
any Regulations thereunder) and such purchase shall satisfy all other
requirements of ERISA and the Code applicable to such purchases. Except as
provided in section 13.6 or as otherwise required by applicable law, no shares
of MCN Stock acquired by the ESOP shall be subject to a put, call, or other
option, or buy-sell or similar arrangement while held by and when distributed
from the Plan, whether or not any part of the Plan is then an ESOP. The
protection afforded to Participants in the preceding sentence is nonterminable
within the meaning of Treasury Regulation section 54.4975-(1)(a)(ii).
ARTICLE XIV MISCELLANEOUS
14.1 Beneficiary Designation. Subject to the provisions of section 9.9
and this section 14.1, each Participant shall have the right to designate a
beneficiary or beneficiaries to receive any distribution to be made under
section 9.1 upon the death of such Participant, or, in the case of a Participant
who dies subsequent to termination of his employment but prior to the
distribution of the entire amount to which he is entitled under the Plan, any
undistributed balance to which such Participant would have been entitled.
In the event of the death of a Participant whose spouse survives him,
the beneficiary of the Participant shall be his surviving spouse unless such
spouse has consented in writing to the designation of another beneficiary or
beneficiaries. Any such written consent shall acknowledge the effect of such
election and shall be witnessed by a notary public or by a representative of the
Company who is designated to act in such capacity by the Company. In the event a
Participant dies without a surviving spouse, or, in the event the surviving
spouse of a Participant has executed the written consent hereinabove described,
any distributions to be made under section 9.1 upon the death of the Participant
shall be made to his designated beneficiary or beneficiaries. If the Participant
establishes to the satisfaction of the Company or its designated representative
that such written consent cannot be obtained because his spouse cannot be
located, the requirement of such written consent shall be waived.
If no beneficiary has been named by a Participant who dies without a
surviving spouse or if the beneficiary designated by such a Participant or by a
Participant whose surviving spouse has executed the written consent hereinabove
described has predeceased the Participant or such designated beneficiary has
died prior to complete disbursement of the
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Participant's Plan Account, the value of his account, or the undistributed
portion thereof, shall be paid by the Trustee at the direction of the Company--
(a) to the surviving spouse of such deceased Participant, if any;
(b) if there shall be no surviving spouse, to the surviving
children of such deceased Participant, if any, in equal shares;
(c) if there shall be no surviving spouse or surviving children,
to the executors or administrators of the estate of such deceased Participant;
or
(d) if no executor or administrator shall have been appointed for
the estate of such deceased Participant, to the person or persons who would be
entitled to the personal estate of such deceased Participant under the laws of
his state of domicile if he had died leaving no will.
In the event that a Participant and his spouse die under circumstances
such that it is not clear whether the spouse survived the Participant, the
Participant shall be presumed to have survived the spouse.
14.2 Incompetency. Any distribution under this Plan which is payable to
a beneficiary who is a minor or to a Participant or beneficiary who, in the
opinion of the Company, is unable to manage his affairs by reason of illness or
mental incompetency, may be made to or for the benefit of any such Participant
or beneficiary in such of the following ways as the Company shall direct:
(a) Directly to any such minor beneficiary, if, in the opinion of
the Company, he is able to manage his affairs;
(b) To the legal representative of any such Participant or
beneficiary; or
(c) To some near relative of any such Participant or beneficiary
to be used for the latter's benefit.
14.3 Expenses. Except as otherwise provided in the Plan, all costs and
expenses incurred in administering the Plan, including the expenses of the
Company, the fees and expenses of the Trustee, the fees of its counsel, and
other administrative expenses, shall be borne by the Employers in such
proportions as the Company shall determine to be equitable and proper having
regard to the nature of the particular expense.
14.4 Nonassignability. Except as may be required to comply with a
qualified domestic relations order (as defined in Code section 414(p)), it is a
condition of the Plan, and all rights of each Participant shall be subject
thereto, that no right or interest of any Participant in the Plan or in a Plan
Account shall be assignable or transferable in whole or in part, either directly
or by operation of law or otherwise, including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, or bankruptcy but excluding
devolution by death or mental incompetency, and no right or interest of any
Participant in the Plan or in his Plan Account shall be liable for, or subject
to, any obligation or liability of such Participant.
47
<PAGE> 54
14.5 Employment Noncontractual. The Plan confers no right upon any
Employee to continue in employment.
14.6 Merger or Consolidation with Another Plan. A merger or
consolidation with, or transfer of assets or liabilities to, any other plan
shall not be effected unless the terms of such merger, consolidation, or
transfer are such that each Participant, distributee, beneficiary, or other
person entitled to receive benefits from the Plan would, if the Plan then
terminated, receive a benefit immediately after the merger, consolidation, or
transfer which is equal to or greater than the benefit such person would have
been entitled to receive immediately before the merger, consolidation, or
transfer if the Plan had then terminated.
If any other plan shall be merged into and become a part of this Plan,
each Participant or the person entitled to receive a benefit under such other
plan shall be entitled to receive a benefit under this Plan which is equal to
the benefit such person would have been entitled to receive had such other plan
terminated immediately before the merger.
14.7 Continuance by a Successor. In the event that any Employer
corporation shall be reorganized by way of merger, consolidation, transfer of
assets, or otherwise, so that another Affiliated Company shall succeed to all or
a portion of such Employer's business, such successor corporation, with the
consent of each other participating Employer, may be substituted for such
Employer under the Plan by adopting the Plan and becoming a party to the Trust
Agreement. Employee contributions and Employer contributions shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of such successor corporation for the
Employer under the Plan becomes effective. If, within 90 days from the effective
date of any such reorganization, such successor corporation shall not have
become a party to the Plan, or, if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of such Employer as of the
close of business on the ninetieth day following the effective date of such
reorganization or as of the close of business on the date of adoption of such
plan of complete liquidation, as the case may be, and the Trustee shall
distribute the portion of the Trust applicable to Participants of such Employer
in the manner provided in section 11.3.
14.8 USERRA Rights. Notwithstanding any provision of the Plan to the
contrary, contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Code Section 414(u), to the
extent applicable. Loan repayments will be suspended under this Plan as
permitted under Code Section 414(u).
14.9 Construction. Unless the context clearly requires otherwise--
(a) the masculine pronoun whenever used shall include the
feminine, the singular shall include the plural, and vice versa, and
(b) headings of Articles and sections herein are included solely
for convenience, and if there is any conflict between such headings and the text
of the Plan, the text shall control.
ARTICLE XV REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS
48
<PAGE> 55
This Article XV designates that part of the non-ESOP portion of the
Plan which is invested in the MCN Stock Fund becomes part of the ESOP portion of
the Plan. This Article XV also sets forth certain provisions regarding the
operation of the ESOP portion of the Plan, such provisions to supersede any
contrary provisions of the Plan. This Article XV (including provisions regarding
distribution of dividends) shall become effective as of January 1, 1998 with
regard to dividends distributed on or after that date.
Except as specifically provided in this Article XV, the provisions of
this Article XV, including the redesignation of the ESOP portion of the Plan
described herein, shall not affect any beneficiary designations or any other
applicable agreements, elections, or consents that Participants, spouses, or
beneficiaries validly executed under the terms of the Plan before the execution
date of the Plan amendment which first adopts this Article XV, and such
designations, agreements, elections and consents shall continue to apply in the
same manner as they did prior to such amendment.
The ESOP, as set forth in this Article XV, is intended to meet with
requirements of an employee stock ownership plan, as defined in Section
4975(e)(7) of the Code and the accompanying regulations, and Section 407(d)(6)
of ERISA. As provided below, the ESOP is designed to invest primarily in
qualifying employer securities of MCN Energy Group Inc..
15.1 Redesignation of ESOP Portion of Plan. Effective as of the
effective date described in the preamble to this Article XV JANUARY 1, 1998, the
ESOP portion of the Plan shall consist of the ESOP Account of each Participant
plus the remaining part of each Participant's Plan Account that is invested in
the MCN Stock Fund. The put option provisions of Section 13.6 shall apply to the
entire ESOP portion of the Plan. However, only a Participant's ESOP Account
shall be subject to the restrictions described in the first sentence of Section
6.3.
15.2 Allocation of Investment Plan Account Balances to ESOP Portion of
Plan. All amounts contributed, transferred or designated as allocable to the
Investment Plan Account of any Participant shall be treated as part of the ESOP
portion of the Plan to the extent the Participant has directed the investment of
such amounts in the MCN Stock Fund in accordance with Article VI of the Plan.
15.3 Distribution of Dividends on MCN Stock. At the direction of the
Company exercised in its sole discretion, the Trustee will, after dividends are
paid on MCN Stock held in the Trust, but in no event later than 90 days
following the end of the Plan Year in which such dividends are paid (to the
extent such dividends are not used to make payment on an exempt loan as provided
for in section 13.4(c) of the Plan), either (i) distribute to Participants such
portion of the dividends attributable to the interests in MCN Stock held in
their Plan Accounts (or, if so determined by the Company, their ESOP Accounts)
as described below or, (ii) arrange to have such dividends distributed directly
to Participants by the Employer, or (iii) arrange to have such dividends
distributed to Participants by a dividend disbursement agent selected by the
Company. In its sole discretion, the Company may direct the Trustee to have such
dividends distributed only to Participants who elect (or fail not to elect) to
receive such dividend distributions in accordance with forms and procedures
established by the Company (which such procedures may apply to all Participants,
or solely to a group or groups determined by the Company). Further, in its sole
discretion, the Company may establish procedures that would permit Participants
to elect to have dividends distributed to them in a single sum rather
49
<PAGE> 56
than over periods that might otherwise be determined by the Company to
correspond with Employer payroll practices.
The distribution of dividends on MCN Stock held in a Participant's Plan
Account (or, if so determined by the Company, a Participant's ESOP Account)
shall be in an amount equal to all of the dividends paid on the MCN Stock held
in such Participant's Plan Account (or, if so determined by the Company, a
Participant's ESOP Account).
* * * * * * * * * *
50
<PAGE> 57
IN WITNESS WHEREOF, Michigan Consolidated Gas Company has caused its
corporate name to be hereunto affixed by its duly authorized officers as of the
29th day of December, 1998.
MICHIGAN CONSOLIDATED GAS COMPANY
By /s/ D. Nowokowski
--------------------------------
Its: VP,Human Resources
--------------------------------
51
<PAGE> 1
EXHIBIT 12-1
MCN ENERGY GROUP INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31,1994
----------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED (1) (5) (7)
Pre-tax income (2) (6) $ (52,347) $ 159,404 $ 142,229 $ 124,583 $ 95,888
Fixed charges (3) 125,767 103,674 79,087 61,683 50,093
--------- --------- --------- --------- ---------
Earnings (loss) as defined $ 73,420 $ 263,078 $ 221,316 $ 186,266 $ 145,981
========= ========= ========= ========= =========
FIXED CHARGES AS DEFINED (1) (4) (5) (7)
Interest, expensed $ 79,449 $ 64,981 $ 56,963 $ 46,357 $ 43,582
Interest, capitalized 10,832 5,709 6,413 2,710 2,928
Amortization of debt discounts, premium
and expense 2,869 2,357 2,173 1,626 1,325
Interest implicit in rentals 2,380 2,058 2,312 2,262 1,959
Preferred securities dividend requirements
of subsidiaries 36,370 31,090 12,390 9,702 2,203
--------- --------- --------- --------- ---------
Fixed charges as defined $ 131,900 $ 106,195 $ 80,251 $ 62,657 $ 51,997
========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 2.48 2.76 2.97 2.81
========= ========= ========= =========
Coverage Deficiency $ 58,480
=========
</TABLE>
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income from
continuing operations of MCN and its majority-owned subsidiaries, (b) MCN's
share of pre-tax income of its 50% owned companies, and (c) any income
actually received from less than 50% owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period for nonutility companies and the preferred
securities dividend requirements of MichCon included in fixed charges but
not deducted in the determination of pre-tax income.
(4) Fixed charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries, increased to reflect the pre-tax earnings
requirement for MichCon.
(5) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposes of calculating the Ratio of Earnings to
Fixed Charges, it has been classified as a discontinued operation and
therefore excluded from the ratio for all periods presented.
(6) In 1998, MCN recorded several unusual charges, consisting of property
write-downs, investment loss and restructuring charges, totaling
$183,841,000 pre-tax ($114,576,000 net of taxes and minority interest).
(7) MCN has decided to sell its E&P properties and accordingly has classified
this segment as a discontinued operation. Therefore, for purposes of
calculating the Ratio of Earnings to Fixed Charges, E&P is excluded from
the ratio for all periods presented.
(8) Earnings for the twelve-month period ended December 31, 1998, were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$58,480,000. The Ratio of Earnings to Fix Charges for 1998, excluding
unusual charges would have been 1.95.
<PAGE> 1
EXHIBIT 12-2
MCN INVESTMENT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED (1) (4) (6)
Pre-tax income (loss) (2) (5) $(159,111) $29,997 $17,702 $ 141 $(12,843)
Fixed charges (3) 41,340 27,571 13,368 8,408 838
--------- ------- ------- ------ --------
Earnings (loss) as defined $(117,771) $57,568 $31,070 $8,549 $(12,005)
========= ======= ======= ====== ========
FIXED CHARGES AS DEFINED (1) (4) (6)
Interest, expensed $ 39,393 $26,305 $12,332 $7,857 $ 513
Interest, capitalized 6,133 2,521 1,180 945 443
Amortization of debt discounts, premium
and expense 1,655 1,115 938 506 268
Interest implicit in rentals 292 151 98 45 57
--------- ------- ------- ------ --------
Fixed charges as defined $ 47,473 $30,092 $14,548 $9,353 $ 1,281
========= ======= ======= ====== ========
Ratio of Earnings to Fixed Charges $ 1.91 $ 2.14
====== ========
Coverage Deficiency (7) (8) $ 165,244 $ 804 $13,286
========= ====== =======
</TABLE>
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income from
continuing operations of MCN Investment and its majority-owned
subsidiaries, (b) MCN Investment's share of pre-tax income of its 50% owned
companies, and (c) any income actually received from less than 50% owned
companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period.
(4) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposes of calculating the Ratio of Earnings to
Fixed Charges, it has been classified as a discontinued operation and
therefore excluded from the ratio for all periods presented.
(5) In 1998, MCN Investment recorded two unusual charges, consisting of
property write-downs and restructuring charges, totaling $141,872,000
pre-tax ($92,217,000 net of taxes).
(6) MCN has decided to sell its E&P properties and accordingly has classified
this segment as a discontinued operation. Therefore, for purposes of
calculating the Ratio of Earnings to Fixed Charges, E&P is excluded from
the ratio for all periods presented.
(7) Earnings for the twelve-month period ended December 31, 1998, were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$165,244,000.
(8) Earnings for the twelve-month period ended December 31, 1995 and 1994, were
not adequate to cover fixed charges. The amount of the coverage deficiency
was $804,000 and $13,286,000 for the twelve-month period ended December 31,
1995 and 1994, respectively.
<PAGE> 1
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Results for 1998 reflect losses from discontinued operations and unusual charges
- - MCN experienced a net loss of $279.0 million or $3.54 per share in 1998. As
subsequently discussed, 1998 results reflect losses from its discontinued
Exploration & Production (E&P) segment that totaled $272.8 million or $3.46 per
share as well as several unusual charges that totaled $114.6 million or $1.46
per share.
MCN had a loss from continuing operations of $6.2 million or $.08 per share,
which includes the effect of the unusual charges. Excluding these charges, MCN
had 1998 earnings of $108.4 million or $1.38 per share, a decrease of $3.8
million or $.13 per diluted share from 1997. The earnings comparisons reflect
the effects of low energy prices and abnormally warm weather, partially offset
by reduced operating costs in the Gas Distribution segment. MCN's earnings from
continuing operations for 1997 increased $18.2 million or $.12 per diluted share
from 1996, reflecting improved contributions from the Diversified Energy group.
Per share comparisons were affected by an increase in the average number of
shares outstanding due to the June 1997 issuance of 9,775,000 shares of new
common stock.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in Millions) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss)
Continuing Operations:
Diversified Energy:
Before unusual charges $ 20.0 $ 31.1 $ 12.6
Unusual charges
(Notes 2a & 3) (97.9) - -
-------------------------------
(77.9) 31.1 12.6
-------------------------------
Gas Distribution:
Before unusual charges 88.4 81.1 81.4
Unusual charges (Note 2b) (16.7) - -
-------------------------------
71.7 81.1 81.4
-------------------------------
Total from Continuing Operations:
Before unusual charges 108.4 112.2 94.0
Unusual charges (Notes 2 & 3) (114.6) - -
-------------------------------
(6.2) 112.2 94.0
-------------------------------
Discontinued Operations (Note 4):
Income (loss) from operations (272.8) 30.1 20.2
Gain on sale - - 36.2
-------------------------------
(272.8) 30.1 56.4
-------------------------------
$(279.0) $ 142.3 $ 150.4
- ---------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Continuing Operations:
Diversified Energy:
Before unusual charges $ .26 $ .44 $ .19
Unusual charges
(Notes 2a & 3) (1.25) - -
-------------------------------
(.99) .44 .19
-------------------------------
Gas Distribution:
Before unusual charges 1.12 1.07 1.20
Unusual charges (Note 2b) (.21) - -
-------------------------------
.91 1.07 1.20
-------------------------------
Total from Continuing Operations:
Before unusual charges 1.38 1.51 1.39
Unusual charges (Notes 2 & 3) (1.46) - -
-------------------------------
(.08) 1.51 1.39
-------------------------------
Discontinued Operations (Note 4):
Income (loss) from operations (3.46) .40 .31
Gain on sale - - .53
-------------------------------
(3.46) .40 .84
-------------------------------
$ (3.54) $ 1.91 $ 2.23
- ---------------------------------------------------------------
</TABLE>
STRATEGIC DIRECTION - MCN's objective is to achieve competitive long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in this
portfolio-management strategy is the frequent review of internal and external
factors affecting the company's investments. Therefore, the pace of new
investments and the disposition of existing assets is subject to change.
Reflecting this strategy in 1998, MCN has: realigned the company in order to
improve operating efficiencies through a more streamlined organizational
structure; decided to sell its E&P oil and gas properties; and reduced its
planned capital investment levels to approximately $600 million to $750 million
annually, which will be invested primarily in North America. MCN will continue
to review the overall mix of its existing portfolio and the level of new
investments.
UNUSUAL CHARGES - As previously discussed, MCN recorded several unusual charges
in 1998, consisting of property write-downs, an investment loss and
restructuring charges, which reduced 1998 earnings by $114.6 million or $1.46
per share. A detailed discussion of each unusual charge by segment follows:
<TABLE>
<CAPTION>
UNUSUAL CHARGES 1998
- ---------------------------------------------------------------------------
(in Millions, Except Per Share Amounts) Net Diluted
Income EPS
- ---------------------------------------------------------------------------
<S> <C> <C>
Diversified Energy:
Pipelines & Processing (Note 2a) $ (89.5) $ (1.14)
Electric Power (Note 3) (1.6) (.02)
Corporate & Other (Note 3) (6.8) (.09)
- ---------------------------------------------------------------------------
(97.9) (1.25)
Gas Distribution (Note 2b) (16.7) (.21)
- ---------------------------------------------------------------------------
$ (114.6) $ (1.46)
- ---------------------------------------------------------------------------
</TABLE>
Pipelines & Processing recorded a $133.8 million pre-tax ($87.0 million net of
taxes) write-off of its coal fines project. In June 1998, MCN placed into
operation six plants designed to recover particles of coal that are a waste
by-product of coal mining and then process the particles to create coal
briquettes for sale. The economic viability of the venture is dependent on the
briquettes qualifying for synthetic fuel tax credits and MCN's ability to
utilize or sell such credits. Although the plants were placed in service by June
30, 1998, the date specified to qualify for the tax credits, operating delays at
the plants have significantly increased the possibility that the Internal
Revenue Service will challenge the project's eligibility for tax credits. In
addition, there is uncertainty as to whether MCN can utilize or sell the
credits. Without the credits, the project generates negative cash flows. These
factors led to MCN's decision to record an impairment loss equal to the carrying
value of the plants, reflecting the likely inability to recover such costs. MCN
is currently negotiating the sale of its interest in the coal fines project.
Management does not expect proceeds from the sale to be in excess of selling
expenses and remediation obligations.
MCN also recorded an impairment loss of $3.9 million pre-tax ($2.5 million
net of taxes) relating to an acquired out-of-service pipeline in Michigan. This
pipeline was acquired for future development, along with related easements and
rights-of-way. In connection with certain lease renewal options, MCN reviewed
the business alternatives for these assets and determined that their development
is unlikely. Accordingly, MCN has recorded an impairment loss equal to the
carrying value of these assets.
Electric Power recorded a $2.5 million pre-tax ($1.6 million net of taxes)
restructuring charge related to certain international power projects. The charge
was incurred as a result of refocusing MCN's strategic plan, particularly to
exit certain international power projects and to limit future capital
investments in developing countries to projects where it has existing
commitments.
<PAGE> 2
Management's Discussion and Analysis
Corporate & Other recorded a $10.4 million pre-tax ($6.8 million net of taxes)
restructuring charge related to the corporate realignment designed to improve
operating efficiencies through a more streamlined organizational structure. The
realignment includes cost saving initiatives expected to reduce future operating
expenses by approximately $15 million per year. The realignment includes the
reduction of 37 positions resulting in severance and termination benefits of
$4.7 million pre-tax. Also included in the charge was $5.7 million pre-tax
relating to net lease expenses and the write-down of fixed assets consisting of
leasehold improvements, office equipment and information systems, which are no
longer being used by MCN. As of December 31, 1998, payments of $.7 million have
been charged against the restructuring accruals relating to severance and
termination benefits. These benefits will continue to be paid through 2000. The
remaining restructuring costs, primarily for net lease expenses, are expected to
be paid over the related lease terms that expire through 2006.
Gas Distribution recorded a $24.8 million pre-tax ($11.2 million net of taxes
and minority interest) write-down of certain gas gathering properties. A new gas
reserve analysis was performed to determine the impact of the diversion of
certain untreated gas away from the gathering system. This analysis revealed
that projected cash flows from the gathering system were not sufficient to cover
the system's carrying value. Therefore, an impairment loss was recorded
representing the amount by which the carrying value of the system exceeded its
estimated fair value.
MCN also recorded an $8.5 million pre-tax ($5.5 million net of taxes) loss
from the write-down of an investment in a Missouri gas distribution company. As
a result of MCN's refocused strategic direction, MCN expects to sell this
investment in 1999. The write-down represents the amount by which the carrying
value exceeded the estimated fair value of the investment.
DIVERSIFIED ENERGY
Results impacted by unusual charges and low energy prices - The Diversified
Energy group reported a loss in 1998 due to the property write-downs and
restructuring charges, as previously discussed. Excluding these unusual items,
Diversified Energy's earnings for 1998 declined by $11.1 million from 1997.
These results reflect reduced contributions from the Pipelines & Processing and
Energy Marketing segments due to low energy prices. Additionally, the 1998
decrease is due to higher financing costs as a result of additional capital
needed to fund investments. Partially offsetting the decreases for 1998 was
increased operating and joint venture income posted by the Electric Power
segment.
Earnings for 1997 increased by $18.5 million from 1996, reflecting increased
operating and joint venture income from all of MCN's Diversified Energy business
segments. Higher financing costs partially offset this growth.
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY OPERATIONS
- --------------------------------------------------------------------------------
(in Millions) 1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Operating Revenues* $ 842.3 $ 807.2 $ 640.7
------------------------------------
Operating Expenses*
Property write-downs (Note 2a) 137.7 -- --
Restructuring charges (Note 3) 12.9 -- --
Other 856.7 799.2 633.1
------------------------------------
1,007.3 799.2 633.1
------------------------------------
Operating Income (Loss) (165.0) 8.0 7.6
------------------------------------
Equity in Earnings of Joint
Ventures 61.2 46.6 16.6
------------------------------------
Other Income & (Deductions)*
Interest income 4.8 6.6 2.8
Interest expense (21.9) (10.7) (7.9)
Dividends on preferred securities (17.6) (14.4) (5.0)
Other 12.2 10.1 5.5
------------------------------------
(22.5) (8.4) (4.6)
------------------------------------
Income (Loss) Before Income
Taxes (126.3) 46.2 19.6
Income Tax Provision (Benefit) (48.4) 15.1 7.0
------------------------------------
Net Income (Loss)
Before unusual charges 20.0 31.1 12.6
Unusual charges (Notes 2a & 3) (97.9) -- --
------------------------------------
$ (77.9) $ 31.1 $ 12.6
------------------------------------
</TABLE>
*Includes intercompany transactions
Operating and Joint Venture Income
Operating and joint venture results, excluding the unusual charges, declined
$7.7 million in 1998 and increased $30.4 million in 1997. A discussion of each
business segment, its contributions and its outlook follows:
<TABLE>
<CAPTION>
OPERATING AND JOINT VENTURE INCOME (LOSS)
- ---------------------------------------------------------------------
(in Millions) 1998 1997 1996
---------------------------------------
Before Unusual Charges:
<S> <C> <C> <C>
Pipelines & Processing $ 21.4 $ 29.1 $ 10.7
Electric Power 26.0 18.1 4.6
Energy Marketing 8.0 11.7 9.4
Corporate & Other (8.6) (4.3) (.5)
---------------------------------------
46.8 54.6 24.2
Unusual Charges (Notes 2a & 3) (150.6) -- --
---------------------------------------
$ (103.8) $ 54.6 $ 24.2
---------------------------------------
</TABLE>
Pipelines & Processing owns and invests in pipeline, gathering, processing and
related facilities in major supply areas, including the Midwest/Appalachia,
Midcontinent/Gulf Coast and Rocky Mountain regions.
Pipelines & Processing operating and joint venture income, excluding the
write-offs, decreased $7.7 million in 1998. This decrease reflects lower
contributions from MCN's 25% interest in Lyondell Methanol Company, L.P.
(Lyondell), a limited partnership that owns a 248 million gallon-per-year
methanol production plant in Texas. Earnings from Lyondell reflect an
approximate 40% decrease in methanol prices during 1998 resulting in a $13
million unfavorable impact on joint venture income as compared to 1997. In
addition, the Pipelines & Processing segment incurred $9.1 million of operating
losses in 1998 related to the start up of the coal fines project. As discussed
earlier, the coal fines project was written-off during 1998 and is not expected
to have a significant impact on future earnings. Partially offsetting the effect
of lower methanol prices and coal fines losses were increased contributions from
gas pipeline and processing ventures.
<PAGE> 3
EXHIBIT 13
Transportation volumes increased 59.5 Bcf or over 50% as a result of the
acquisition and expansion of pipeline facilities during 1997 and 1998. Gas
processed to remove carbon dioxide (CO2) increased 6.1 Bcf or 14% in 1998 and
decreased slightly in 1997. Gas processed to remove natural gas liquids (NGL)
more than doubled, increasing 23.3 Bcf and 14.4 Bcf in 1998 and 1997,
respectively, due to the acquisition of processing facilities since 1996.
<TABLE>
<CAPTION>
Pipelines & Processing Statistics*
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Methanol Produced (million gallons) 60.4 60.8 10.5
Transportation (Bcf) 175.5 116.0 86.4
Gas Processed (Bcf)
CO2 treatment 48.9 42.8 44.2
NGL removal 45.1 21.8 7.4
- --------------------------------------------------------------------------------
</TABLE>
* Includes MCN's share of joint ventures
Operating and joint venture income increased by $18.4 million in 1997, primarily
reflecting income from the late 1996 acquisition of MCN's interest in Lyondell.
Additionally, Lyondell benefited from strong methanol prices during 1997.
Results for 1997 also reflect income from a 29.6 Bcf or 34% increase in
transportation volumes resulting from the acquisition and expansion of pipeline
facilities.
METHANOL PRICES*
per Gallon
[BAR GRAPH]
<TABLE>
<CAPTION>
year
<S> <C> <C>
96 97 98
44 cents 58 cents 36 cents
</TABLE>
*Estimated U.S. Gulf average
Outlook - Pipelines & Processing's expansion strategy will continue to focus on
investing in natural gas and gas liquid gathering, processing and transmission
facilities near areas of rapid reserve development or growing consumer markets.
This business segment acquired or advanced several pipeline and processing
ventures in 1998 that are expected to contribute to future operating results.
MCN has a 35% joint venture interest in Dauphin Island Gathering Partners
(DIGP), which is proceeding with the second phase of its expansion. The
expansion is expected to be completed during the first quarter of 1999 and will
increase the throughput capacity of the system to 1.1 billion cubic feet per day
(Bcf/d). Also, the Mobile Bay Processing Partners joint venture has constructed
a 600 million cubic feet per day (MMcf/d) gas processing plant at the Dauphin
Island system's onshore terminus in Alabama. MCN owns 43% of this venture, which
is expected to be in service in the first quarter of 1999. In addition, MCN has
partnership interests in three interstate pipeline projects. Portland Natural
Gas Transmission System (Portland), Millennium Pipeline and Vector Pipeline will
transport Canadian and U.S. natural gas volumes into the Northeast and Southeast
U.S. markets. MCN has a 21.4% interest in the Portland system, a 292-mile
pipeline that will transport up to 360 MMcf/d and is expected to be in-service
in early 1999. MCN has a 10.5% interest in the 442-mile Millennium Pipeline that
will have the capacity to transport 700 MMcf/d. MCN also has a 25% interest in
the 343-mile Vector Pipeline that is expected to transport up to 1 Bcf/d. Both
the Millennium and Vector Pipelines are subject to regulatory approval and
sufficient market development.
MCN's Pipelines & Processing segment also has a 75% interest in an asphalt
manufacturing partnership that has completed construction of a plant designed to
produce annually up to 100,000 tons of high-quality asphalt. Additional
manufacturing plants may be built if market conditions warrant. During 1998, MCN
acquired a 49.9% interest in an asphalt distribution operation.
Pipelines & Processing's future operating results are expected to be
favorably affected by an increase in gas volumes transported and processed as
well as an increase in asphalt manufactured and sold. Future results will also
be impacted by changes in gas processing margins, methanol and asphalt prices,
and transportation and gathering rates. Gas processing margins and methanol
prices were significantly lower in 1998 than in the past few years.
ELECTRIC POWER holds joint venture interests in electric power generation and
distribution facilities in the United States, India and Nepal. Electric Power
also provides fuel management services and supplies gas to power generation
facilities under long-term sales contracts.
Electric Power operating and joint venture results, excluding restructuring
charges, increased $7.9 million in 1998 and $13.5 million in 1997. The increased
earnings for 1998 and 1997 reflect contributions from Midland Cogeneration
Venture L.P. (MCV), a limited partnership that owns a gas-fired cogeneration
facility capable of producing up to 1,370 megawatts (MW) of electricity and 1.35
million pounds per hour of process steam. MCN acquired an initial 18% interest
in MCV in the 1997 second quarter and an additional 5% interest in MCV in June
1998. In addition, earnings from MCV for 1997 include a favorable $2.8 million
pre-tax adjustment resulting from a change in accounting for property taxes.
MCN Energy Group Inc. Annual Report 1998
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
ELECTRICITY SALES*
In Thousands of MW Hours
[BAR GRAPH]
<TABLE>
<CAPTION>
year 96 97 98
----- ------- -------
<S> <C> <C> <C>
708.9 1,843.3 3,805.0
- - Domestic - International
</TABLE>
*Includes MCN's share of joint ventures
Also contributing to the 1998 and 1997 results were higher earnings from
MCN's 50%-owned, 123 MW Michigan Power cogeneration facility and contributions
from the 1997 acquisition of a 40% interest in Torrent Power Limited (TPL), an
Indian joint venture. Improved earnings from the Michigan Power facility are due
to a higher electricity sales rate under its long-term sales contract. TPL holds
minority interests in two electric distribution companies and a power generation
project in the state of Gujarat, India. The power generation project was formed
to build, own and operate a 655 MW dual-fuel facility. This facility began
partial operations in December 1997, and became fully operational in late 1998.
Outlook - MCN intends to expand its Electric Power business, primarily in
projects in North America. Under its refocused strategic plan, MCN has exited
certain international power projects and plans to limit future capital
investments in developing countries to projects where it has existing
commitments. In February 1999, MCN reached an agreement to sell its interest in
TPL for approximately $130 million (Note 5b). The sale is subject to certain
regulatory approvals and is expected to be completed by the third quarter of
1999. MCN will continue to pursue opportunities to acquire and sell properties
in order to optimize its portfolio.
The Michigan Public Service Commission (MPSC) has issued its final order
regarding electric restructuring, which is being appealed. MCN has investments
in three Michigan electric power generation facilities that could be impacted by
electric restructuring.
A number of projects were advanced or acquired in 1998 and are expected to
contribute to future results. In October 1998, MCN acquired a 48% interest in
the Carson cogeneration project, a 42 MW gas-fired cogeneration plant in
California. The plant sells electricity and steam under separate long-term
contracts. In addition, MCN has a 43% interest in the Mobile Bay cogeneration
project, a 40 MW natural gas-fired plant, which is expected to be placed into
service in the first quarter of 1999. In December 1997, MCN acquired a 65%
interest in a 36 MW hydroelectric power plant in Nepal. Construction on the $98
million project began in early 1997 and is scheduled to be completed in early
2000. MCN also has a 95% interest in the Cobisa-Person Power project, a joint
venture that will build, own and operate a 140 MW power plant in Albuquerque,
New Mexico. This gas-fired peaking plant is expected to be in service by
mid-2000.
Foreign currency translation adjustments relating to MCN's international
equity investments are included in Accumulated Other Comprehensive Loss, a
component of Common Shareholders' Equity. The foreign currency translation
adjustment through December 1998 primarily relates to the U.S. dollar and Indian
rupee exchange rate fluctuations from the TPL investment. MCN's financial
statements will continue to be affected by currency exchange rate fluctuations.
However, the expected sale of MCN's interest in TPL will significantly reduce
its foreign currency risk.
ENERGY MARKETING sells premium, reliable, primarily bundled energy services to
large-volume customers in the Midwest, Gulf Coast and Northeast United States
and eastern Canada. In addition, the segment holds market-area storage capacity
that adds value to its energy marketing activities.
Energy Marketing operating and joint venture income decreased $3.7 million in
1998. Earnings for 1997 included $2.2 million of contributions from Energy
Marketing's 25% interest in a gas storage project that was sold in December
1997. Additionally, 1998 earnings reflect higher storage costs and a decline in
natural gas sales margins as a result of the abnormally warm 1997-1998 winter.
The impact of higher storage costs and lower margins was partially offset by a
significant increase in gas sales volumes. Operating and joint venture income
for 1997 increased $2.3 million due primarily to higher gas sales and exchange
gas deliveries that were partially offset by a slight decrease in margins.
GAS SALES & EXCHANGE GAS
DELIVERIES*
In BcF
[BAR GRAPH]
<TABLE>
<CAPTION>
year 96 97 98
----- ----- -----
<S> <C> <C> <C>
241.5 358.8 465.7
</TABLE>
*Includes MCN's share of joint ventures
Energy Marketing's total gas sales and exchange deliveries increased 106.9
Bcf or 30% during 1998 and 117.3 Bcf or 49% for 1997. The increase in Energy
Marketing's gas sales volumes was driven by additional sales in each of the
company's market regions. Under exchange gas contracts, Energy Marketing accepts
gas from customers or delivers gas to customers, and gas is returned during a
subsequent period.
MCN Energy Group Inc. Annual Report 1998
2
<PAGE> 5
MCN has a 50% interest in a joint venture storage project that owns a 10 Bcf
storage facility. This storage facility is utilized by MCN's Energy Marketing
unit, in conjunction with third-party storage and pipeline capacity, to enhance
its ability to provide reliable gas sales and exchange gas services.
Outlook - MCN will focus on growing its Energy Marketing segment through
expansion of its coverage within existing markets as well as by entering new
markets through strategic alliances with other energy providers. Enhanced by its
ability to provide reliable and custom-tailored bundled services to large-volume
end users and utilities, MCN is positioned to capitalize on opportunities to
further expand its market base into the Northeast and Midwest United States and
eastern Canada.
MCN is in the process of converting a depleted natural gas reservoir into
a 42 Bcf storage facility. The storage field is expected to be completed by
mid-1999 and, therefore to be available for the 1999-2000 winter heating
season. The storage field will support Energy Marketing's operations by
enhancing its ability to offer a reliable gas supply during peak winter months.
RISK MANAGEMENT STRATEGY - MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its
portfolio of gas and oil supply and sales agreements. MCN's Energy Marketing
business coordinates all of MCN's hedging activities to ensure compliance with
risk management policies that are periodically reviewed by MCN's Board of
Directors. Certain hedging gains or losses related to gas and oil production are
recorded by MCN's discontinued E&P operations. Gains and losses on gas and oil
production-related hedging transactions that are not recorded by MCN's E&P unit
are recorded by Energy Marketing. In late 1998, MCN began entering into
offsetting positions for existing hedges of gas and oil production from
properties that are expected to be sold in 1999. MCN's risk management strategy
is being revised to reflect the change in its business that will result from
selling its E&P properties.
CORPORATE & OTHER operating and joint venture losses, excluding restructuring
charges, increased $4.3 million in 1998 and $3.8 million in 1997. The results
reflect increased administrative expenses associated with corporate management
activities. The Diversified Energy group was charged a larger portion of such
expenses beginning in 1997, to reflect its larger percentage of MCN. Operating
and joint venture losses in 1998 were partially offset by adjustments necessary
to reduce or eliminate accruals for employee incentive awards that are based on
MCN's operating or stock-price performance. The 1996 results benefited from a
$1.7 million pre-tax gain from the sale of land by a 50%-owned real estate joint
venture.
Other Income and Deductions
Other income and deductions increased $14.1 million in 1998 and $3.8 million in
1997. The increases reflect higher dividends resulting from the issuance of $332
million of preferred securities in 1997 and $80 million of preferred securities
in 1996. In addition, all periods reflect higher interest costs on increased
borrowings required to finance capital investments in the Diversified Energy
group.
Other income and deductions comparisons also were affected by several gains
from the sale of properties. In 1998, a $6.0 million pre-tax gain was recorded
from the sale of certain gas sales contracts and a $3.9 million pre-tax gain was
recorded from the sale of a 50% interest in the 30 MW Ada cogeneration facility.
Other income and deductions for 1997 included a $3.2 million pre-tax gain from
the December 1997 sale of Diversified Energy's 25% interest in a gas storage
project, a $2.5 million pre-tax gain from the sale of pipeline assets as well as
gains related to DIGP. In a series of transactions during 1996, MCN sold 64% of
its 99% interest in the DIGP partnership, resulting in pre-tax gains totaling
$8.8 million, of which $2.4 million was deferred until 1997 when a related
option agreement expired unexercised.
Income Taxes
Income taxes decreased in 1998 and increased in 1997. Income taxes were impacted
by variations in pre-tax earnings. Income tax comparisons were also affected by
tax credits and stock-related tax benefits recorded in 1998, as well as the
generation of foreign income in 1998 that was not subject to U.S. or foreign tax
provisions.
GAS DISTRIBUTION
Results reflect unusual charges, warmer weather and cost-saving initiatives -
Gas Distribution's earnings for 1998 were affected by the property write-down
and investment loss, as previously discussed. Excluding these unusual charges,
the Gas Distribution group reported 1998 earnings of $88.4 million, an
improvement of $7.3 million over 1997. Earnings for 1997 were $81.1 million,
representing a slight decrease from 1996. Earnings comparisons were impacted by
variations in weather and cost-saving initiatives resulting in significantly
lower operating costs. These cost-saving initiatives allowed the Gas
Distribution group to continue its record of solid financial performance,
producing returns on equity of 11.0% in 1998 and 13.2% in 1997.
<TABLE>
<CAPTION>
Gas Distribution Operations
- --------------------------------------------------------------------------------
(in Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues*
Gas sales $ 838.9 $ 1,080.1 $ 1,102.9
End user transportation 82.3 84.7 82.5
Intermediate transportation 63.2 55.2 48.6
Other 67.4 51.3 42.3
-------------------------------------------------
1,051.8 1,271.3 1,276.3
Cost of Gas 462.1 642.0 646.3
-------------------------------------------------
Gross Margin 589.7 629.3 630.0
-------------------------------------------------
Other Operating Expenses*
Operation and maintenance 256.6 286.7 298.4
Depreciation and depletion 93.8 104.4 98.8
Property and other taxes 56.0 61.3 62.3
Property write-down (Note 2b) 24.8 - -
-------------------------------------------------
431.2 452.4 459.5
-------------------------------------------------
Operating Income 158.5 176.9 170.5
-------------------------------------------------
Equity in Earnings of Joint
Ventures 1.0 2.5 1.3
-------------------------------------------------
Other Income and (Deductions)*
Interest income 5.7 4.7 4.0
Interest expense (57.5) (54.5) (48.9)
Investment loss (Note 2b) (8.5) - -
Minority interest 5.7 (1.9) (1.0)
Other (.2) .5 (1.8)
-------------------------------------------------
(54.8) (51.2) (47.7)
-------------------------------------------------
Income Before Income Taxes 104.7 128.2 124.1
Income Tax Provision 33.0 47.1 42.7
-------------------------------------------------
Net Income
Before unusual charges 88.4 81.1 81.4
Unusual charges (Note 2b) (16.7) - -
-------------------------------------------------
$ 71.7 $ 81.1 $ 81.4
-------------------------------------------------
</TABLE>
*Includes intercompany transactions
MCN Energy Group Inc. Annual Report 1998
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Margin
Gross margins reflect abnormally warm weather - Gas Distribution gross margin
(operating revenues less cost of gas) decreased $39.6 million and $.7 million in
1998 and 1997, respectively, reflecting changes in gas sales and end user
transportation deliveries due primarily to abnormally warm weather in 1998 and
significantly colder weather in 1996. Additionally, gross margins in 1998 and
1997 were favorably affected by the continued growth in intermediate
transportation services as well as increased other operating revenues resulting
from providing gas-related services.
<TABLE>
<CAPTION>
Effect of Weather on Gas Markets and Earnings
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Percentage Colder (Warmer)
Than Normal (19.3)% .8% 5.4%
Increase (Decrease) From Normal in:
Gas markets (in Bcf) (40.3) .6 10.9
Net income (in Millions) $ (35.3) $ .5 $ 9.9
Diluted earnings per share $ (.45) $ .01 $ .15
- --------------------------------------------------------------------------------
</TABLE>
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $243.6
million in 1998 and $20.6 million in 1997. Revenues were affected by
fluctuations in gas sales and end user transportation deliveries that decreased
by 41.7 Bcf to 312.5 Bcf in 1998 and decreased by 13.7 Bcf to 354.2 Bcf in 1997.
The decreases in gas sales and end user transportation deliveries for both
periods were due primarily to weather, which was 20.1% warmer in 1998 and 4.6%
warmer in 1997 compared to the previous years. The decrease in revenues in 1998
also reflects a reduction in gas sales rates resulting from lower gas costs. The
impact of reduced gas sales and transportation deliveries in 1997 was partially
offset by an increase in gas sales rates due to higher gas costs. As discussed
in the "Cost of Gas" section that follows, Gas Distribution's sales rates
through the end of 1998 were set to recover all of its reasonably and prudently
incurred gas costs. Therefore, the effect of any fluctuations in cost of gas
sold was substantially offset by a change in gas sales revenues.
End user transportation services are provided to large-volume commercial and
industrial customers who purchase gas directly from producers and brokers,
including MCN's Energy Marketing business, and contract with MichCon to
transport the gas to their facilities. Gas Distribution continues to enter into
multi-year, competitively priced transportation agreements with large-volume
users to maintain these gas markets over the long term.
GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON
[BAR GRAPH]
<TABLE>
<CAPTION>
Volumes Gross Margins
Year In Bcf In Millions
- ---- ------- -------------
<S> <C> <C>
96 895.4 $ 630.0
$ 614.8
97 940.7 $ 629.3
$ 628.6
98 850.0 $ 589.7
$ 644.0
</TABLE>
- - Gas Sales
- - End User Transportation
- - Intermediate Transportation
- - Other
Total Margins Weather Normalized
INTERMEDIATE TRANSPORTATION revenues increased by $8.0 million and $6.6 million
in 1998 and 1997, respectively, due in part to increased fees generated from the
transfer of gas title among and between intermediate transportation service
users and various gas owners. Intermediate transportation is a gas delivery
service provided to gas producers, gas brokers and other gas companies that own
the natural gas but are not the ultimate consumers.
Although intermediate transportation revenues increased in 1998, volumes
delivered decreased 49.0 Bcf to 537.5 Bcf. Intermediate transportation
deliveries increased in 1997 by 59.0 Bcf to 586.5 Bcf. The decrease in
intermediate transportation deliveries in 1998 reflects lower off-system demand
caused by the warmer weather and lower volumes transported for fixed-fee
customers. Although transported volumes for fixed-fee customers may fluctuate,
revenues from such customers are not affected. Intermediate transportation
revenues and volumes delivered for both 1998 and 1997 reflect additional Antrim
gas volumes transported for Michigan gas producers and brokers. There has been a
significant increase in Michigan Antrim gas production over the past several
years, resulting in a growing demand by gas producers and brokers for
intermediate transportation services. In order to meet the increased demand, Gas
Distribution expanded the transportation capacity of its northern Michigan
gathering system in 1996. In December 1997, MichCon purchased an existing
pipeline system and further expanded the capacity of this system. Although
intermediate transportation volumes are a significant part of Gas Distribution's
total markets, profit margins on this service are considerably less than margins
on gas sales or for end user transportation services.
OTHER OPERATING REVENUES increased $16.1 million in 1998 and $9.0 million in
1997. The improvement in both periods is due in part to an increase in late
payment fees, appliance maintenance services and other gas-related services. The
comparisons are also impacted by unfavorable adjustments in 1997 and 1996
related to the discontinuance of MichCon's energy conservation programs.
MCN Energy Group Inc. Annual Report 1998
4
<PAGE> 7
Cost of Gas
Cost of gas is affected by variations in sales volumes and the costs of
purchased gas as well as related transportation costs. Under the Gas Cost
Recovery (GCR) mechanism in effect through 1998 (Note 7b), MichCon adjusted its
sales rates to recover all of its reasonably and prudently incurred gas costs.
Therefore, fluctuations in cost of gas sold had little effect on gross margins .
Cost of gas sold decreased by $179.9 million in 1998 and by $4.3 million in
1997 as a result of lower sales volumes, primarily due to warmer weather. The
decrease in 1998 also reflects lower prices paid for gas purchased of $.40 (13%)
per thousand cubic feet (Mcf). Additionally, the decrease in 1997 was impacted
by supplier refunds, partially offset by higher prices paid for gas purchased of
$.19 per Mcf (7%).
Other Operating Expenses
OPERATION AND MAINTENANCE expenses declined by $30.1 million or 10% in 1998 and
$11.7 million or 4% in 1997. These reductions reflect management's continuing
efforts to control operating costs. More specifically, the reductions for both
1998 and 1997 reflect lower benefit costs, primarily pension and retiree
healthcare costs, as well as lower uncollectible gas accounts expense.
Gas Distribution has streamlined its organizational structure over the past
several years while increasing its customer base and expanding energy services
to customers. MichCon implemented an early retirement program in early 1998
that reduced its net workforce by approximately 175 employees or 6%. The cost
of the program and the related savings were largely offsetting in 1998 but will
contribute to lower operating costs in future years. Since 1995, the number of
Gas Distribution employees has declined by 410 or 13%, while the number of
customers has increased over 30,000 or 3%.
GAS DISTRIBUTION - NUMBER OF CUSTOMERS SERVED BY EMPLOYEE
[GRAPH]
<TABLE>
<CAPTION>
Year 96 97 98
<S> <C> <C> <C>
380 409 435
</TABLE>
Gas Distribution's uncollectible gas accounts expense declined by $8.7
million in 1998 and $5.7 million in 1997 reflecting the impact of warmer weather
on accounts receivable balances, the successful implementation of a more
aggressive collection program as well as increased home heating assistance
funding obtained by low-income customers.
Gas Distribution's uncollectible gas accounts expense is directly affected
by the level of government funded heating assistance its qualifying customers
receive. The State of Michigan provides this assistance in the form of Michigan
Home Heating Credits that are funded almost exclusively by the Federal
Low-Income Home Energy Assistance Program (LIHEAP). Congress approved funding
for the 1997 and 1998 fiscal years at $1 billion and $1.1 billion, respectively,
compared to funding of $.9 billion for the 1996 fiscal year. The State of
Michigan's share of LIHEAP funds was decreased from $64 million in fiscal year
1997 to $54 million in 1998. Gas Distribution received $13.4 million of these
funds in 1998, $.7 million more than in 1997. Home Heating Credits assisted
73,000 Gas Distribution customers in 1998, compared to 83,000 in 1997. During
1998, Congress approved a budget that maintains federal LIHEAP funding at $1.1
billion for fiscal year ending September 1999. Any future change in this funding
may impact Gas Distribution's uncollectible gas accounts expense.
DEPRECIATION AND DEPLETION decreased by $10.6 million in 1998 and increased by
$5.6 million in 1997. The decrease in 1998 resulted from lower depreciation
rates for MichCon's utility property, plant and equipment that became effective
in January 1998. Depreciation on higher plant balances partially offset the 1998
rate decrease and resulted in the increase in 1997. The higher plant balances
reflect capital expenditures of $158.0 million in 1998 and $157.7 million in
1997.
PROPERTY AND OTHER TAXES decreased by $5.3 million in 1998 and $1.0 million in
1997. The decreases for both 1998 and 1997 are attributable to lower property
taxes based on pending appeals of personal property tax assessments. If Gas
Distribution is unsuccessful in its appeals, that outcome is not expected to
have a significant adverse effect on its results of operations. The decrease in
1998 is also due to lower Michigan Single Business taxes resulting from a
decrease in taxable income. Property and other taxes increased in 1996 as a
result of higher plant balances.
PROPERTY WRITE-DOWN of $24.8 million in 1998 reflects the impairment of a
Michigan gas gathering system (Note 2b).
Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased $1.5 million in 1998 due to increased
losses from Gas Distribution's 47.5% interest in a Missouri gas distribution
company that is expected to be sold in 1999. Earnings from joint ventures in
1997 increased $1.2 million reflecting increased contributions from the Blue
Lake gas storage project as a result of reduced operating and financing costs.
Other Income and Deductions
Other income and deductions increased $3.6 million in 1998 and $3.5 million in
1997. The increases reflect higher interest costs on increased borrowings
required to finance capital investments. MichCon issued $150 million of first
mortgage bonds in 1998 and $85 million of first mortgage bonds in 1997.
Additionally, non utility subsidiaries of MichCon borrowed $40 million in 1997
under a nonrecourse credit agreement. Accordingly, interest expense increased
$3.0 million in 1998 and $5.6 million in 1997. Other income and deductions in
1998 were also impacted by an unusual charge to write-down the investment in a
small natural-gas distribution company located in Missouri. Partially offsetting
these increases in 1998 was a change in minority interest reflecting joint
venture partner's share of the write-down of certain gas gathering properties
(Note 2b). Other income and deductions in 1998 were also affected by a gain
recorded from the sale of land as well as by an increase in the capitalization
of the cost of equity funds used during construction resulting from higher
construction balances.
MCN Energy Group Inc. Annual Report 1998
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income Taxes
Income taxes decreased in 1998 and increased in 1997. Income tax comparisons
were affected by variations in pre-tax earnings and by 1998 tax credits and a
provision for tax issues. Income taxes in 1997 and 1996 include amounts for the
favorable resolution of prior years' tax issues and tax credits.
Environmental Matters
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were conducted
at these former MGP sites, and some contamination related to the by-products of
gas manufacturing was discovered at each site. The existence of these sites and
the results of the environmental investigations have been reported to the
Michigan Department of Environmental Quality (MDEQ). None of these former MGP
sites is on the National Priorities List prepared by the U.S. Environmental
Protection Agency (EPA).
MCN is involved in an administrative proceeding before the EPA regarding one
of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive
investigations at four other former MGP sites. In 1998, MichCon completed the
remediation of one of the former MGP sites, which was confirmed by the MDEQ.
Additionally, the MDEQ has determined with respect to one other former MGP site
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.
In 1984, MCN established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that
the estimated total expenditures for investigation and remediation activities
for these sites could range from $30 million to $170 million based on
undiscounted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35 million during 1995.
MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MCN filed suit against major nonsettling
carriers seeking recovery of incurred costs and a declaratory judgment of the
carriers' liability for future costs of environmental investigation and
remediation costs at former MGP sites. Discovery is ongoing in the case, and a
preliminary trial date has been scheduled for August 1999.
During 1998, 1997, and 1996, MCN spent $1.6 million, $.8 million and $.9
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1998, the reserve balance is $35.1 million, of which $.1 million is
classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and, therefore, have an effect on MCN's financial position and cash flows.
However, management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MCN's results of operations.
In 1998, MichCon received written notification from ANR Pipeline Company
(ANR) alleging that MichCon has responsibility for a portion of the costs
associated with responding to environmental conditions present at a natural gas
storage field in Michigan currently owned and operated by an affiliate of ANR.
At least some portion of the natural gas storage field was formerly owned by
MichCon. MichCon is evaluating ANR's allegations to determine whether and to
what extent, if any, it may have legal responsibility for these costs.
Management does not believe this matter will have a material impact on MCN's
financial statements.
Outlook
Gas Distribution's strategy is to expand its role as the preferred provider of
natural gas and high-value energy services within Michigan. Accordingly, Gas
Distribution's objectives are to grow its revenues and control its costs in
order to deliver strong shareholder returns and provide customers high-quality
service at competitive prices. Revenue growth will be achieved through
initiatives to expand Gas Distribution's 900 Bcf of gas markets, its 1.2 million
residential, commercial and industrial customer base, as well as by providing
new energy-related services that capitalize on its expertise, capabilities and
efficient systems.
Gas Distribution expects to provide natural gas to approximately 13,000 new
customers in 1999. Gas Distribution's market share for residential heating
customers in the communities it serves is approximately 80%. While this
saturation rate is high, growth opportunities exist through conversion of
existing homes from other fuels as well as from new construction. Gas
Distribution continues to expand industrial and commercial markets by
aggressively facilitating the use of existing gas technologies and equipment.
Management is continually assessing ways to improve cost competitiveness.
Among other cost saving initiatives, MichCon implemented an early retirement
incentive program in 1998 that reduced its net workforce by approximately 6%.
Although this program did not have a material impact on 1998 net income, the
early retirement of employees is expected to contribute toward reducing
operating costs in future years.
The challenges and opportunities resulting from increased competition in the
natural gas industry have been a catalyst for MPSC action in the development of
major reforms in utility regulation aimed at giving all customers added choices
and more price certainty. The overall package of regulatory changes connected
with the gas industry restructuring is expected to generate additional revenue
and cost savings opportunities. Gas Distribution is positioning itself to
respond to changes in regulation and increased competition by reducing its cost
of operations while maintaining a safe and reliable system for customers.
Gas Distribution plans to capitalize on opportunities resulting from the gas
industry restructuring by implementing MichCon's Regulatory Reform Plan, which
was approved by the MPSC in April 1998. The plan includes a comprehensive
experimental three-year customer choice program that offers all sales customers
added choices and greater price certainty. Beginning April 1, 1999, a limited
number of customers will have the option of purchasing natural gas from
suppliers other than MichCon. However, MichCon will continue to transport and
deliver the gas to the customers' premises at prices that maintain its existing
sales margins.
The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period beginning on January 1,
1999. Prior to
MCN Energy Group Inc. Annual Report 1998
6
<PAGE> 9
1999, MichCon did not generate earnings on the gas commodity portion of its
operations. However, under this plan, changes in the cost of gas will directly
impact gross margins and earnings. As part of its gas acquisition strategy,
MichCon has entered into firm-price contracts for a substantial portion of its
expected gas supply requirements for the next three years. These contracts,
coupled with the use of MichCon's storage facilities, will substantially
mitigate risks from winter price and volume fluctuations.
Also beginning in 1999 under the plan, an income sharing mechanism will allow
customers to share in profits when actual utility return on equity exceeds
predetermined thresholds. Although the plan increases MichCon's risk associated
with generating margins that cover its gas costs, management believes this
program will have a favorable impact on future earnings. In October 1998, the
MPSC denied a request for rehearing and affirmed its approval of the plan.
Various parties have appealed the MPSC's decision to the Michigan Court of
Appeals.
Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which includes appliance maintenance and home
safety. Additionally, Gas Distribution began participating in Michigan's $1.2
billion per year heating, ventilation and air conditioning market with the
October 1998 acquisition of three companies specializing in the sale,
installation and servicing of residential and commercial heating and cooling
systems. The acquired companies have total revenues of approximately $20 million
per year.
As described in Note 7a to the consolidated financial statements, MCN's Gas
Distribution segment complies with the provisions of Statement of Financial
Accounting Standards (SFAS), No. 71, "Accounting for the Effects of Certain
Types of Regulation." Future regulatory changes or changes in the competitive
environment could result in Gas Distribution discontinuing the application of
SFAS No. 71 for all or part of its business and require the write-off of the
portion of any regulatory asset or liability that was no longer probable of
recovery or refund. If Gas Distribution were to discontinue application of SFAS
No. 71 for all of its operations as of December 31, 1998, it would have an
extraordinary, noncash increase to net income of approximately $63.7 million.
Factors that could give rise to the discontinuance of SFAS No. 71 include (1)
increasing competition that restricts Gas Distribution's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. Based on a current evaluation of the various factors and conditions
that are expected to impact future regulation, management believes currently
available facts support the continued application of SFAS No. 71.
DISCONTINUED OPERATIONS
As part of its refocused strategic direction, MCN has decided to sell its E&P
properties and accordingly has classified this segment as a discontinued
operation. Bids on all gas and oil properties are expected to be received by
March 1999, with final agreements signed by mid-1999. The timing of any sales is
dependent upon receiving bids that reflect the long-term value of such
properties. The actual sales prices of the properties could be impacted by
changes in gas and oil prices. The anticipated net proceeds from the sale take
into account restructuring charges, including costs associated with employee
reductions and net lease expenses, as well as any anticipated gains or losses
from hedging contracts.
MCN's discontinued E&P segment had a 1998 net loss of $272.8 million,
compared with net income of $30.1 million in 1997 and $18.6 million in 1996. The
1998 results included a total of $275.0 million of write-downs (Note 4a).
In June 1996, MCN completed the sale of its computer operations subsidiary
for an adjusted sales price of $132.9 million, resulting in an after-tax gain of
$36.2 million (Note 4b).
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
CASH AND CASH EQUIVALENTS
- ----------------------------------------------------------------
(in Millions) 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Cash Flow Provided From
(Used For):
Operating activities $ 152.7 $ 343.4 $ 198.3
Financing activities 497.8 522.8 440.4
Investing activities (673.0) (857.2) (627.5)
----------------------------------------
Net Increase in Cash and
Cash Equivalents
$ (22.5) $ 9.0 $ 11.2
- ----------------------------------------------------------------
</TABLE>
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $190.7 million during 1998
and increased $145.1 million during 1997. The decrease during 1998 was due
primarily to higher working capital requirements and a decline in earnings,
after adjusting for noncash items (depreciation, unusual charges and deferred
taxes). The increase in 1997 was primarily the result of lower working capital
requirements, as well as higher net income, after adjusting for noncash items
and nonoperating gains (Notes 2, 3, 4b and 5e).
FINANCING ACTIVITIES
MCN's cash flow from financing activities decreased $25.1 million during 1998.
The decrease reflects lower debt and equity issuances, net of debt repayments,
in 1998 compared to 1997 as a result of lower capital expenditures and
acquisitions. Cash flow from financing activities increased $82.5 million in
1997 as a result of higher issuances of common stock and preferred securities,
offset slightly by lower borrowings of long-term debt. The proceeds from the
issuances were used to finance higher capital investments during 1997.
MCN typically relies on commercial paper and bank borrowings to finance
capital expenditures on a temporary basis until paid down with the proceeds from
the issuance of more permanent capital, such as long-term debt, preferred
securities and common stock. However, MCN will rely more on short-term financing
and less on permanent capital issuances during 1999. Proceeds from the expected
sale of MCN's E&P properties in 1999 will be used to repay commercial paper and
bank borrowings. A summary of MCN's significant financing activities for 1998
and financing plans for 1999 follows.
In late 1998, MCN issued $100 million of preferred securities and borrowed
$260 million under a one-year term loan (Note 9). Proceeds were used to reduce
commercial paper, to fund capital investments by Diversified Energy and for
general corporate purposes. MCN intends to repay the term loan with proceeds
from the sale of its E&P properties.
In 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 11a). In 1997, MCN issued $100
million of Private Institutional Trust Securities (PRINTS) and $100 million of
Single Point Remarketed Reset Capital Securities (SPRRCS) (Note 10a). In 1997,
MCN also issued 2,645,000 FELINE PRIDES, generating proceeds of $132.3 million
(Note 10a). The proceeds from these issuances were invested
MCN Energy Group Inc. Annual Report 1998
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
by MCN in its Diversified Energy group and were used to reduce short-term debt
incurred to fund capital investments.
During 1998, MCN retired the PRINTS early because it determined other forms
of financing provide greater flexibility.
In 1996, MCN issued $80 million of Trust Originated Preferred Securities
(TOPrS). Proceeds from the issuance were invested by MCN in its Diversified
Energy group and were used to reduce short-term debt incurred to fund capital
expenditures, for working capital requirements and for general corporate
purposes.
In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (Enhanced PRIDES) (Note 10c). The Enhanced PRIDES are
convertible securities that consist of a forward contract under which MCN is
obligated to sell, and the Enhanced PRIDES holders are obligated to purchase,
$135 million of MCN common stock in April 1999. It is anticipated that proceeds
from the conversion of the Enhanced PRIDES will be used to repay Diversified
Energy's medium-term notes that mature in May 1999.
MCN traditionally has issued new shares of common stock pursuant to its
Direct Stock Purchase and Dividend Reinvestment Plan and various employee
benefit plans. During the 1996-1998 period, MCN issued 3,281,000 shares and
generated $55.3 million. Beginning in 1999, shares issued under these plans will
be acquired by MCN through open market purchases.
As of December 1998, MCN had an outstanding shelf registration with
approximately $835.9 million remaining to be issued in the form of debt or
equity securities.
The following table sets forth the current ratings for securities issued by
MCN and its subsidiaries:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Standard Duff &
& Poor's Moody's Phelps Fitch
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
MCN:
FELINE PRIDES BBB- Ba1 BBB BBB
Enhanced PRIDES BBB- Baa3 BBB BBB
Preferred securities BBB- Ba1 BBB BBB
SPRRCS BBB+ Baa3 BBB+ BBB+
MCNIC:
Commercial paper* A2 P3 D2 F2
Medium-term notes* BBB Baa3 BBB+ BBB
MichCon:
Commercial paper A2 P1 D1 F1
First mortgage bonds A- A2 A+ A
- -------------------------------------------------------------
</TABLE>
*Ratings based on MCN support agreement
DIVERSIFIED ENERGY
In 1998, Diversified Energy issued remarketable debt securities totaling $300
million (Note 9). Proceeds from these issuances were used to reduce short-term
debt incurred by the Diversified Energy group to fund capital investments and
for general corporate purposes.
During 1998, a subsidiary of MCN Investment Corporation (MCNIC) retired early
a $100 million five-year term loan because it determined that other forms of
debt financing provide greater flexibility and lower costs.
In 1998, MCNIC renewed its credit lines, which now allow for borrowings of up
to $200 million under a 364-day revolving credit facility and up to $200 million
under a three-year revolving credit facility. These facilities support MCNIC's
$400 million commercial paper program, which is used to finance capital
investments of the Diversified Energy group and working capital requirements of
its Energy Marketing operations. At December 31, 1998, commercial paper and bank
borrowings of $225.7 million were outstanding under this program.
In 1997, MCNIC repaid $30 million of senior debt on its stated maturity date
and issued $150 million of medium-term notes, using the proceeds to repay
short-term debt and for general corporate purposes.
In 1996, MCNIC issued $330 million of medium-term notes, using the proceeds
to repay commercial paper balances and for general corporate purposes.
As of December 1998, MCNIC had an outstanding shelf registration with $620
million remaining to be issued in the form of debt securities.
GAS DISTRIBUTION
Gas Distribution maintains a relatively consistent amount of cash and cash
equivalents through the use of short-term borrowings. Short-term borrowings are
normally reduced in the first part of each year as gas inventories are depleted
and funds are received from winter heating sales. During the latter part of each
year, Gas Distribution's short-term borrowings normally increase as funds are
used to finance increases in gas inventories and customer accounts receivable.
To meet its seasonal short-term borrowing needs, Gas Distribution normally
issues commercial paper that is backed by credit lines with several banks.
MichCon has established credit lines to allow for borrowings of up to $150
million under a 364-day revolving credit facility and up to $150 million under a
three-year revolving credit facility, both of which were renewed in July 1998.
At December 31, 1998, commercial paper of $218.4 million was outstanding under
this program.
During 1998, MichCon issued $150 million of remarketable debt securities
(Note 9). Proceeds from these issuances were used to retire first mortgage
bonds, fund capital expenditures and for general corporate purposes. Also during
1998, MichCon redeemed through a tender offer $89.7 million and repaid $20
million of first mortgage bonds (note 9).
During 1997, MichCon issued $85 million of first mortgage bonds. The funds
from this issuance were used to retire first mortgage bonds, fund capital
expenditures and for general corporate purposes. During 1997, nonutility
subsidiaries of MichCon borrowed $40 million under a nonrecourse credit
agreement that matures in 2005. Proceeds were used to finance the expansion of
the northern Michigan gathering system.
During 1997, MichCon redeemed $17 million of long-term debt and also repaid
$50 million of first mortgage bonds
During 1996, MichCon issued first mortgage bonds totaling $70 million. The
proceeds were used to repay short-term obligations, finance capital expenditures
and for general corporate purposes. Also during 1996, MichCon repaid all amounts
owing under its Trust Demand Note program and did not renew this program which
allowed for borrowings of up to $25 million.
As of December 1998, MichCon had an outstanding shelf registration with $250
million remaining to be issued in the form of debt securities.
INVESTING ACTIVITIES
MCN's cash used for investing activities decreased $184.2 million in 1998 and
increased $229.7 million in 1997. The decrease in 1998 was due primarily to
lower capital expenditures and acquisitions, partially offset by the repayment
of an advance by a Philippine power producer. The 1997 increase reflects higher
acquisitions and joint venture investments compared to 1996.
Capital investments equaled $790.9 million in 1998 compared to $959.6 million
in 1997. The 1998 decrease reflects lower acquisitions as well as lower capital
expenditures for the
MCN Energy Group Inc. Annual Report 1998
8
<PAGE> 11
E&P properties. Partially offsetting this decrease were significantly higher
investments in Pipelines & Processing properties, as well as increased
investments in domestic and international power generation projects.
<TABLE>
<CAPTION>
CAPITAL INVESTMENTS
- -------------------------------------------------------------------
(in Millions) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Capital Expenditures:
Diversified Energy $ 124.4 $ 30.0 $ 13.1
Gas Distribution 158.0 157.7 215.3
Discontinued Operations 200.4 375.0 388.7
- -------------------------------------------------------------------
482.8 562.7 617.1
---------------------------------
MCN's Share of Joint
Venture Capital Expenditures:*
Pipelines & Processing 219.9 152.2 5.2
Electric Power 12.0 7.4 5.5
Energy Marketing .8 3.2 .2
Gas Distribution .8 2.6 4.8
Other .1 .5 .3
- -------------------------------------------------------------------
233.6 165.9 16.0
---------------------------------
Acquisitions:
Significant 66.8 231.0 133.2
Other 7.7 - 24.4
- -------------------------------------------------------------------
74.5 231.0 157.6
---------------------------------
Total Capital Investments $ 790.9 $ 959.6 $ 790.7
- -------------------------------------------------------------------
</TABLE>
* A portion of joint venture capital expenditures is financed with joint venture
project debt.
Total capital investments in 1998 were partially funded from the sale of
property and joint venture interests that totaled $47 million.
OUTLOOK
1999 capital investments estimated at $750 million - MCN's refocused
strategic direction will result in capital investments in future years of
approximately $600 million to $750 million annually, allocated approximately 35%
within Pipelines & Processing, 40% in Electric Power and 25% within Gas
Distribution. MCN intends to grow by investing in a diverse portfolio of
energy-related projects, primarily in North America.
The proposed level of investments for future years will increase capital
requirements materially in excess of internally generated funds and require the
issuance of additional debt and equity securities. MCN's actual capital
requirements will depend on proceeds received from the sale of assets. General
market conditions will dictate the timing and amount of future issuances. As it
expands its business, MCN's capitalization objective is to maintain its credit
ratings through a strong balance sheet. Its capitalization objective is a ratio
of 50% equity and 50% debt. It is management's opinion that MCN and its
subsidiaries will have sufficient capital resources, both internal and external,
to meet anticipated capital requirements.
YEAR 2000
Background - As a result of computer programs being written using two digits
rather than four digits to define the year, any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This Year 2000 issue, if not addressed, could cause computer
systems to malfunction and have a material adverse impact on MCN's operations
and business processes. The effects of the Year 2000 issue could be exacerbated
as a result of companies' dependence on partners, operators, suppliers and
government agencies.
PLAN AND STATE OF READINESS - MCN, aware of the Year 2000 potential impact,
initiated a business systems replacement program in 1995. Additionally, MCN
established a corporate-wide program in 1997 under the direction of a Year 2000
Project Office. The Year 2000 project is overseen by a vice president of the
company who reports regularly to the MCN Chairman and Board of Directors. MCN
has also retained the services of expert consultants to evaluate its Year 2000
program, and to independently assess and validate its processes. MCN has
implemented a four-phase Year 2000 approach consisting of: i) inventory -
identification of the components of MCN's systems, equipment and facilities;
ii) assessment - assessing Year 2000 readiness and prioritizing the risks of
items identified in the inventory phase; iii) remediation - upgrading, repairing
and replacing non-compliant systems, equipment and facilities; and iv) testing -
verifying items remediated. MCN is on schedule to have its mission critical
business systems, and measurement and control systems (including embedded
microprocessors) Year 2000 ready by mid-1999, as detailed below. MCN's business
systems primarily consist of general ledger, payroll, customer billing and
inventory control systems and their related hardware. MCN's measurement and
control systems primarily consist of the "SCADA" system, which measures and
monitors the transportation and distribution of gas, as well as regulators,
pressure controls and meters. The estimated completion status of these systems
and the projected status for the future follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Inventory Assessment Remediation Testing
----------------------------------------------
<S> <C> <C> <C> <C>
Business Systems
December 31, 1998 100% 95% 15% 15%
March 31, 1999 100% 100% 80% 70%
June 30, 1999 100% 100% 100% 100%
Measurement and
Control Systems
December 31, 1998 98% 90% 70% 60%
March 31, 1999 100% 100% 95% 90%
June 30, 1999 100% 100% 100% 100%
- ---------------------------------------------------------------
</TABLE>
MCN also has visited key partners, operators and suppliers to review their
Year 2000 issues and share information. To the extent that any of these parties
experience Year 2000 problems in their systems, MCN's operations may be
adversely affected. The majority of MCN's key partners, operators and suppliers
have represented to MCN that they have completed their Year 2000 inventory and
assessment phases. MCN is continuing to monitor the progress of these key
partners, operators and suppliers toward their completion of the remediation and
testing phases.
COST OF REMEDIATION - Costs associated with the Year 2000 issue are not
expected to have a material adverse effect on MCN's results of operation,
liquidity or financial condition. The total costs are estimated to be between $5
million and $6 million, of which approximately $3.7 million was incurred through
December 1998. This estimate does not include MCN's share of Year 2000 costs
that may be incurred by partnerships and joint ventures.
The anticipated costs are not higher due in part to the ongoing replacement
of significant older systems, particularly MichCon's customer information
system. MCN has made a substantial investment in new systems that are in process
of being installed, as well as those installed over the past few years. The
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of cus-
MCN Energy Group Inc. Annual Report 1998
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
tomer satisfaction and to respond to changes in regulation and increased
competition within the energy industry. While the system replacements were not
accelerated due to Year 2000 issues, MCN expects the new systems to be Year 2000
ready.
Risk and Contingency Planning - MCN anticipates a smooth transition to the Year
2000. However, the failure to correct a material Year 2000 problem could result
in an interruption in or a failure of certain business activities and operations
such as: i) delivery of gas to customers; ii) control and operation of the
distribution system by electronic devices; iii) communication with customers for
purposes of service calls or inquiries; and iv) timely billing and collection.
The risk and impact of such failures is largely dependent on critical vendors
and the external infrastructure that includes telecommunications providers, gas
suppliers and project partners. The most reasonably likely worst case scenarios
would be the extended inability to deliver gas due to the failure of embedded
systems in the distribution process or the extended inability to communicate
with and respond to customers due to the loss of telecommunications. Such
failures could have a material adverse effect on MCN's results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
key partners, operators, suppliers and government agencies, MCN cannot certify
that it will be unaffected by Year 2000 complications. MCN has addressed the
Year 2000 risks of its business by prioritizing such risks based on the worst
case scenarios and their impact on the business. Focusing first on the safety
and welfare of MCN's customers and employees, the following two mission-critical
processes were identified: gas supply and distribution, and leak management
emergency response.
While MCN believes it will be able to remediate and test all internal systems
that support these processes, it fully recognizes its dependence on partners,
operators, suppliers and government agencies. In order to reduce its Year 2000
risk, MCN is developing contingency plans for mission-critical processes in the
event of a Year 2000 complication. Through failure scenario identification,
MCN's approach is to develop reasonable and practical contingency plans to
maintain operations in case of non-performance. Ten contingency planning teams
have been established to address specific scenarios and mission critical
functions identified in support of the safety and welfare of customers and
employees. External suppliers have been contacted for their participation in the
contingency planning efforts for gas supply and transportation, and materials
management. Contingency plans for several essential gas transmission facilities
were tested during December 1998 under a "power outage" scenario and achieved
excellent results. Contingency plans will continue to be refined throughout 1999
as MCN works with partners, operators, suppliers and governmental agencies.
MARKET RISK INFORMATION
MCN's primary market risk arises from fluctuations in commodity prices, interest
rates and foreign exchange rates. MCN manages commodity price and interest rate
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. A further discussion of
MCN's risk management activities is included in Note 14 to the Consolidated
Financial Statements.
COMMODITY PRICE RISK
MCN's exposure to commodity price risk arises from changes in natural gas,
natural gas liquids, oil and methanol prices throughout the United States and in
eastern Canada where MCN conducts sales and purchase transactions. MCN closely
monitors and manages its exposure to commodity price risk through a variety of
risk management techniques. Natural gas and oil futures and swap agreements are
used to manage MCN's exposure to the risk of market price fluctuations on gas
sale and purchase contracts, natural gas and oil production and gas inventories.
A sensitivity analysis model was used to calculate the fair values of MCN's
natural gas and oil futures and swap agreements utilizing applicable forward
commodity rates in effect at December 31, 1998. The sensitivity analysis
involved increasing or decreasing the forward rates by a hypothetical 10% and
calculating the resulting unfavorable change in the fair values of the gas and
oil futures and swap agreements.
INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of
variable- and fixed-rate debt and preferred securities. In order to manage
interest costs, MCN uses interest rate swap agreements to exchange fixed- and
variable-rate interest payment obligations over the life of the agreements
without exchange of the underlying principal amounts. MCN's exposure to interest
rate risk arises primarily from changes in U.S. Treasury rates and London
Inter-Bank Offered Rates (LIBOR).
A sensitivity analysis model was used to calculate the fair values or cash
flows of MCN's debt and preferred securities, as well as its interest rate
swaps, utilizing applicable forward interest rates in effect at December 31,
1998. The sensitivity analysis involved increasing or decreasing the forward
rates by a hypothetical 10% and calculating the resulting unfavorable change in
the fair values or cash flows of the interest rate sensitive instruments.
The results of the sensitivity model calculations follow:
MARKET RISK
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Unfavorable
(in Millions) Amount Change in
- -----------------------------------------------------------------------------
<S> <C> <C>
Commodity Price Sensitive:*
Swaps - pay fixed/receive variable $ 66.0 Fair Value
- pay variable/receive fixed $ 39.8 Fair Value
- basis $ 5.2 Fair Value
Futures - Longs $ 1.9 Fair Value
- Shorts $ .1 Fair Value
Interest Rate Sensitive:
Debt - fixed rate $ 121.4 Fair Value
- variable rate $ .6 Cash Flow
Swaps - pay fixed/receive variable $ .2 Fair Value
- pay variable/receive fixed $ 2.8 Fair Value
- -----------------------------------------------------------------------------
</TABLE>
*Includes only the risk related to the derivative instruments that serve as
hedges and does not include the related underlying hedged item.
FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are primarily located in India. MCN's foreign
currency risk arises from changes in the U.S. dollar and Indian rupee exchange
rates. MCN does not hedge its foreign currency risk and therefore will continue
to be affected by foreign currency exchange rate fluctuations. However, the
expected sale of MCN's interest in an Indian joint venture will significantly
reduce its foreign currency risk (Note 5b).
MCN Energy Group Inc. Annual Report 1998
10
<PAGE> 13
NEW ACCOUNTING PRONOUNCEMENTS
COMPUTER SOFTWARE - In March 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires the
capitalization of internal-use software and specifically identifies which costs
should be capitalized and which costs should be expensed. The statement is
effective for fiscal years beginning after December 15, 1998. Management does
not expect the SOP to have a material impact on MCN's financial statements.
START-UP ACTIVITIES - In April 1998, the AcSEC issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." SOP 98-5 requires start-up and
organizational costs to be expensed as incurred and is effective for fiscal
years beginning after December 15, 1998. Management does not expect the SOP to
have a material impact on MCN's financial statements.
DERIVATIVE AND HEDGING ACTIVITIES - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 expands the definition of the types of contracts considered
derivatives, requires all derivatives to be recognized in the balance sheet as
either assets or liabilities measured at their fair value and sets forth
conditions in which a derivative instrument may be designated as a hedge. The
statement requires that changes in the fair value of derivatives be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to be recorded to other comprehensive income or to offset related results on
the hedged item in earnings.
MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Management cannot quantify the effects of adopting SFAS No.
133 at this time.
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements. Factors that may impact forward-looking
statements include, but are not limited to, the following: (i) the effects of
weather and other natural phenomena; (ii) increased competition from other
energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, natural gas liquids, methanol, electricity and crude oil; (vii) the
nature, availability and projected profitability of potential projects and other
investments available to MCN; (viii) conditions of capital markets and equity
markets; (ix) changes in the economic and political climate and currencies of
foreign countries where MCN has invested or may invest in the future; (x) the
timing and results of major transactions, such as the sale of E&P properties;
(xi) the timing, nature and impact of Year 2000 activities; and (xii) the
effects of changes in governmental policies and regulatory actions, including
income taxes, environmental compliance and authorized rates.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and other
interested parties: the Annual Report; the Form 10-K Annual Report; the Form
10-Q Quarterly Reports and the Annual and Quarterly Statistical Supplements. To
request these publications, shareholders and other interested parties are
instructed to contact: MCN Investor Relations, 500 Griswold Street, Detroit,
Michigan 48226, (800) 548-4655. Information also is available on MCN's website
at http://www.mcnenergy.com.
MCN Energy Group Inc. Annual Report 1998
11
<PAGE> 14
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in Thousands, Except Per Share Amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 1,669,676 $ 1,877,219 $ 1,737,373
Transportation 139,609 129,953 120,019
Other 70,909 56,662 46,086
-----------------------------------------
1,880,194 2,063,834 1,903,478
-----------------------------------------
OPERATING EXPENSES
Cost of gas 1,250,815 1,392,856 1,237,556
Operation and maintenance 301,961 314,894 321,372
Depreciation, depletion and amortization 98,914 107,703 101,522
Property and other taxes 59,503 63,483 64,970
Property write-downs and restructuring charges (Notes 2 and 3) 175,341 - -
-----------------------------------------
1,886,534 1,878,936 1,725,420
-----------------------------------------
OPERATING INCOME (LOSS) (6,340) 184,898 178,058
-----------------------------------------
EQUITY IN EARNINGS OF JOINT VENTURES (NOTE 6) 62,225 49,059 17,867
-----------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Interest income 10,467 11,006 7,027
Interest on long-term debt (60,643) (56,198) (47,799)
Other interest expense (18,806) (8,783) (9,164)
Dividends on preferred securities of subsidiaries (17,613) (14,433) (5,001)
Investment loss (Note 2b) (8,500) - -
Minority interest 5,992 (1,964) (1,059)
Other (Note 5e) 11,598 10,828 3,810
-----------------------------------------
(77,505) (59,544) (52,186)
-----------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (21,620) 174,413 143,739
INCOME TAX PROVISION (BENEFIT) (15,456) 62,266 49,796
-----------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (6,164) 112,147 93,943
DISCONTINUED OPERATIONS, NET OF TAXES (NOTE 4) (272,791) 30,159 56,397
-----------------------------------------
NET INCOME (LOSS) $ (278,955) $ 142,306 $ 150,340
- ------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations $ (.08) $ 1.54 $ 1.40
Discontinued operations (Note 4) (3.46) .41 .85
-----------------------------------------
$ (3.54) $ 1.95 $ 2.25
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations $ (.08) $ 1.51 $ 1.39
Discontinued operations (Note 4) (3.46) .40 .84
-----------------------------------------
$ (3.54) $ 1.91 $ 2.23
- ------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Basic 78,823 72,887 66,944
- ------------------------------------------------------------------------------------------------------------
Diluted 78,823 75,435 67,521
-----------------------------------------
DIVIDENDS DECLARED PER SHARE $ 1.0200 $ .9825 $ .9400
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
MCN Energy Group Inc. Annual Report 1998
12
<PAGE> 15
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31 (in Thousands) 1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents, at cost (which approximates market value) $ 17,039 $ 39,495
Accounts receivable, less allowance for doubtful accounts of
$9,665 and $15,711, respectively 397,298 404,448
Accrued unbilled revenues 87,888 93,010
Gas in inventory 149,797 56,777
Property taxes assessed applicable to future periods 72,551 67,879
Accrued gas cost recovery revenues - 12,862
Other 42,472 54,089
-----------------------
767,045 728,560
-----------------------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes (Note 17) 50,547 -
Investments in debt and equity securities 69,705 97,521
Deferred swap losses and receivables (Note 14a) 63,147 51,023
Deferred environmental costs 30,773 30,234
Prepaid benefit costs (Note 16) 111,775 80,242
Other 98,940 86,181
-----------------------
424,887 345,201
-----------------------
Investments in and Advances to Joint Ventures (Note 6)
Pipelines & Processing 521,711 323,597
Electric Power 231,668 180,127
Energy Marketing 29,435 25,159
Gas Distribution (Note 2b) 1,478 8,841
Other 18,939 19,252
-----------------------
803,231 556,976
-----------------------
Property, Plant and Equipment
Pipelines & Processing (Note 2a) 48,706 47,037
Gas Distribution (Note 2b) 2,916,540 2,813,434
Exploration & Production (Note 4a) 1,040,047 1,299,301
Other 36,124 27,002
-----------------------
4,041,417 4,186,774
Less - Accumulated depreciation and depletion 1,644,094 1,488,050
-----------------------
2,397,323 2,698,724
-----------------------
$4,392,486 $4,329,461
-----------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable $ 278,417 $ 326,756
Notes payable 618,851 401,726
Current portion of long-term debt and capital lease obligations 269,721 36,878
Federal income, property and other taxes payable 78,395 91,712
Deferred gas cost recovery revenues 14,980 -
Gas payable 42,669 8,317
Customer deposits 18,791 16,382
Other 108,310 101,630
-----------------------
1,430,134 983,401
-----------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes (Note 17) - 153,159
Unamortized investment tax credit 30,056 33,046
Tax benefits amortizable to customers 130,120 123,365
Deferred swap gains and payables (Note 14a) 62,956 41,717
Accrued environmental costs 35,000 35,000
Minority interest 10,898 19,188
Other 75,439 69,889
-----------------------
344,469 475,364
-----------------------
Commitments and Contingencies (Note 13)
CAPITALIZATION
Long-term debt, including capital lease obligations (Note 9) 1,307,168 1,212,564
MCN-obligated mandatorily redeemable preferred securities of subsidiaries
holding solely debentures of MCN (Note 10a) 502,203 505,104
Common shareholders' equity (see accompanying statement) 808,512 1,153,028
-----------------------
2,617,883 2,870,696
-----------------------
$4,392,486 $4,329,461
-----------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
MCN Energy Group Inc. Annual Report 1998
13
<PAGE> 16
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In Thousands) 1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (278,955) $ 142,306 $ 150,340
Adjustments to reconcile net income (loss) to net cash provided from
operating activities
Depreciation, depletion and amortization
Per statement of operations 98,914 107,703 101,522
Charged to discontinued operations and other accounts 88,576 81,637 55,494
Unusual charges from continuing and discontinued operations
(Notes 2, 3 and 4a) 389,598 - -
Deferred income taxes - current (2,587) (2,701) 8,061
Deferred income taxes and investment tax credit, net 14,565 11,660 23,892
Gain on sale of Genix, net of taxes (Note 4b) - - (36,176)
Equity in earnings of joint ventures, net of distributions (40,360) (16,511) (2,506)
Other (11,550) (5,456) (7,541)
(105,479) 24,746 (94,754)
Changes in assets and liabilities, exclusive of changes shown separately -------------------------------------------
152,722 343,384 198,332
Net cash provided from operating activities -------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net 307,482 68,000 87,491
Dividends paid (82,239) (72,851) (62,875)
Issuance of common stock (Note 11a) 20,192 294,402 17,264
Issuance of preferred securities (Note 10a) 96,850 326,521 77,218
Issuance of long-term debt (Note 9) 458,761 273,241 398,540
Long-term commercial paper and bank borrowings (Note 9) 17,299 (261,822) (62,835)
Retirement of long-term debt and preferred securities (Notes 9 and 10a) (328,810) (109,224) (8,139)
Other 8,243 4,612 (6,249)
-------------------------------------------
Net cash provided from financing activities 497,778 522,879 440,415
-------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (482,775) (561,354) (610,323)
Acquisitions (Note 5) (42,429) (166,553) (133,201)
Investment in debt and equity securities, net 17,831 (63,123) (26,903)
Investment in joint ventures (189,309) (152,642) (36,217)
Sale of property and joint venture interests 47,185 67,365 36,621
Sale of Genix (Note 4b) - - 132,889
Other (23,459) 19,077 9,590
-------------------------------------------
Net cash used for investing activities (672,956) (857,230) (627,544)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,456) 9,033 11,203
CASH AND CASH EQUIVALENTS, JANUARY 1 39,495 30,462 19,259
-------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 17,039 $ 39,495 $ 30,462
-------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Accounts receivable, net $ (5,307) $ (47,541) $ (66,183)
Accrued unbilled revenues 5,122 15,499 (16,099)
Gas in inventory (93,020) 22,384 (7,398)
Accrued/deferred gas cost recovery revenues, net 27,842 14,810 (28,250)
Prepaid/accrued benefit costs, net (31,490) (16,086) (50,972)
Accounts payable (46,090) 8,834 102,711
Federal income, property and other taxes payable (13,289) (5,934) (19,587)
Gas payable 34,352 5,524 (9,339)
Other current assets and liabilities, net 8,152 5,998 (5,146)
Other deferred assets and liabilities, net 8,249 21,258 5,509
-------------------------------------------
$(105,479) $ 24,746 (94,754)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
14
MCN Energy Group Inc. Annual Report 1998
<PAGE> 17
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31 (in Thousands) 1998 1997 1996
<S> <C> <C> <C>
COMMON SHAREHOLDERS' EQUITY (Note 11)
COMMON STOCK,
par value $.01 per share - 100,000,000 shares authorized,
79,724,542, 78,231,889 and 67,303,908 shares outstanding, respectively $ 797 $ 782 $ 673
-----------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of period 806,997 493,078 445,828
Common stock and performance units 25,969 313,485 47,326
Other - 434 (76)
-----------------------------------------
Balance - end of period 832,966 806,997 493,078
-----------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign Currency Translation Adjustment:
Balance - beginning of period (6,335) (43) (141)
Net change in foreign currency translation adjustment (a) (6,554) (6,292) 98
-----------------------------------------
Balance - end of period (12,889) (6,335) (43)
-----------------------------------------
Unrealized Losses on Securities:
Balance - beginning of period (1,184) - -
Net change in unrealized losses on securities (a) (2,503) (1,184) -
-----------------------------------------
Balance - end of period (3,687) (1,184) -
-----------------------------------------
(16,576) (7,519) (43)
-----------------------------------------
RETAINED EARNINGS
Balance - beginning of period 374,807 305,352 218,425
Net income (loss) (a) (278,955) 142,306 150,340
Cash dividends declared (82,239) (72,851) (62,875)
Other - - (538)
-----------------------------------------
Balance - end of period 13,613 374,807 305,352
-----------------------------------------
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS (22,288) (22,039) (14,492)
-----------------------------------------
$ 808,512 $ 1,153,028 $ 784,568
-------------------------------------------------------------------------------------------------------------------
(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS) (Note 1):
Net income (loss) $ (278,955) $ 142,306 $ 150,340
Other comprehensive income, net of taxes:
Foreign Currency Translation Adjustment:
Foreign currency translation gains (losses), net of taxes of
$3,529, $3,388 and $53 (6,554) (6,292) 98
Unrealized Losses on Securities:
Unrealized losses on securities, net of taxes of $3,495, $637 and $- (6,490) (1,184) -
Reclassification of losses recognized in net income, net of taxes
of $2,147 $- and $- 3,987 - -
- --------------------------------------------------------------------------------------------------------------------
$ (288,012) $ 134,830 $ 150,438
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
MCN Energy Group Inc. Annual Report 1998
15
<PAGE> 18
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION - MCN Energy Group Inc. (MCN) is a diversified energy
company with markets and investments throughout North America and in India and
Nepal. MCN operates through two major business groups, Diversified Energy and
Gas Distribution.
- - Diversified Energy, operating through MCN Investment Corporation (MCNIC), is
involved in the following segments: Pipelines & Processing with gathering,
processing and transmission facilities near areas of rapid reserve
development and growing consumer markets; Electric Power with investments in
electric generation facilities in operation and under construction with a
combined 2,986 megawatts (MW) of gross capacity and investments in electric
distribution facilities; Energy Marketing with total gas sales and exchange
gas delivery markets of 465.7 billion cubic feet (Bcf) for 1998 and rights to
67 Bcf of storage capacity, of which 42 Bcf is currently under development.
Diversified Energy also has investments in Exploration & Production (E&P)
properties with 1.2 trillion cubic feet equivalent of proved gas and oil
reserves at December 31, 1998. MCN expects to sell its E&P properties in
1999, and accordingly, has classified them as discontinued operations (Note
4a).
- - Gas Distribution consists principally of Michigan Consolidated Gas Company
(MichCon), a natural gas distribution and transmission company serving 1.2
million customers in more than 500 communities throughout Michigan. MichCon
is subject to the accounting requirements and rate regulation of the Michigan
Public Service Commission (MPSC) with respect to the distribution and
intrastate transportation of natural gas.
BASIS OF PRESENTATION - The accompanying consolidated financial statements were
prepared in conformity with generally accepted accounting principles. In
connection with their preparation, management was required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and the disclosure of contingent liabilities. Actual results could
differ from those estimates. Certain reclassifications have been made to prior
years' statements to conform to the 1998 presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of MCN and certain consolidated subsidiaries and partnerships.
Investments in entities in which MCN has a controlling influence that it intends
to maintain are consolidated. Generally, investments in 50% or less owned
entities in which MCN has significant but not controlling influence, and
entities where control is temporary, have been accounted for under the equity
method.
REVENUES AND COST OF GAS - Gas Distribution accrues revenues for gas service
provided but unbilled at month end. Through December 31, 1998, MichCon's accrued
revenues included a component for cost of gas sold that was recoverable through
the gas cost recovery (GCR) mechanism. Prior to 1999, GCR proceedings before the
MPSC permitted MichCon to recover the prudent and reasonable cost of gas sold.
The overcollection of gas costs totaling $14,980,000 at December 31, 1998,
including interest, will be refunded to customers through reduced future rates.
Beginning in 1999, MichCon implemented a Regulatory Reform Plan approved by
the MPSC. The plan suspends the GCR mechanism and fixes the gas commodity
component of MichCon's sales rates for the three-year period beginning
January 1, 1999.
SALES OF OWNERSHIP INTERESTS BY SUBSIDIARIES AND PARTNERSHIPS - MCN recognizes
gains or losses on the sale of stock by subsidiaries or the sale of partnership
interests. Such gains or losses represent the difference between MCN's share of
the consideration received and the historical book value of its investment.
COMPREHENSIVE INCOME - Effective January 1, 1998, MCN adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income. Comprehensive income is defined as the change in common shareholder's
equity during a period from transactions and events from nonowner sources,
including net income. Other items of comprehensive income include revenues,
expenses, gains and losses that are excluded from net income. Items of other
comprehensive income applicable to MCN and their accounting policies are as
follows:
- - Foreign Currency Translation Adjustments - MCN's foreign joint ventures use
the local currency as the functional currency. As a result, MCN's investments
in foreign entities are translated from foreign currencies into U.S. dollars
using end-of-period exchange rates. Equity in earnings of foreign entities is
translated at the average exchange rate prevailing during the month the
respective earnings occur. Translation adjustments, net of deferred taxes,
are excluded from net income and shown as a separate component of other
comprehensive income until realized in net income upon sale or upon complete
liquidation of the investment in the foreign entity.
- - Holding Gains and Losses on Available-for-Sale Securities - Unrealized
holding gains and losses resulting from temporary changes in the fair value
of MCN's available-for-sale securities are excluded from net income and
reported as a separate component of other comprehensive income until realized
in net income upon sale. If a fair value decline is judged to be other than
temporary, the decline is recorded to net income.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, excluding E&P
property of MCN's discontinued business unit (Note 4a), is stated at cost and
includes amounts for labor, materials, overhead and an allowance for funds used
during construction. Unit of production depreciation and depletion is used for
certain Gas Distribution production and transmission property. All other
property, plant and equipment of MCN, excluding E&P property, is depreciated
over its useful life using the straight-line method. Depreciation rates vary by
class of property.
The ratio of the provision for depreciation and depletion to the average cost
of depreciable property is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Pipelines & Processing 3.4% 3.5% 3.8%
Gas Distribution 3.5% 4.1% 4.4%
Other 12.2% 12.3% 10.1%
- ---------------------------------------------------------
</TABLE>
The unit of production method is used for calculating depreciation, depletion
and amortization (DD&A) on proved gas and oil properties related to MCN's
discontinued E&P segment. The average DD&A expense per thousand cubic feet
equivalent (Mcfe) was $.82, $.75 and $.70 in 1998, 1997 and 1996, respectively.
LONG-LIVED ASSETS - In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
MCN reviews its long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. MCN also reviews long-lived assets to be disposed
of to deter-
MCN Energy Group Inc. Annual Report 1998
16
<PAGE> 19
mine if the asset's carrying amount is in excess of its fair value
less the cost to sell.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - Gas Distribution capitalizes an
allowance for both debt and equity funds used during construction in the cost of
major additions to plant. Diversified Energy also capitalizes interest on debt
funds used during construction. The total amount capitalized was $19,938,000,
$18,190,000 and $14,631,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES AND INVESTMENT TAX CREDITS - Tax Benefits Amortizable to Customers
represents the net revenue equivalent of the difference in property-related
accumulated deferred income taxes computed in accordance with SFAS No. 109,
"Accounting for Income Taxes," as compared to the amounts previously reflected
in setting utility rates. This amount is primarily due to current tax rates
being lower than the rates in effect when the original deferred taxes were
recorded and because of temporary differences, including accumulated investment
tax credits, for which deferred income taxes were not previously recorded in
setting utility rates. These net tax benefits are being amortized in accordance
with the regulatory treatment over the life of the related plant, as the related
temporary differences reverse.
Investment tax credits relating to Gas Distribution property placed into
service were deferred and are being credited to income over the life of the
related property. Investment tax credits relating to Diversified Energy
operations were recorded to income in the year the related property was placed
into service.
DEFERRED DEBT COSTS - In accordance with MPSC regulations, MichCon defers
reacquisition and unamortized issuance costs of reacquired long-term debt when
such debt is refinanced. These costs are amortized over the term of the
replacement debt.
CONSOLIDATED STATEMENT OF CASH FLOWS - For purposes of this statement, MCN
considers all highly liquid investments, excluding restricted investments,
purchased with a maturity of three months or less to be cash equivalents. Other
cash and noncash investing and financing activities for the years ended
December 31 follow:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(in Thousands) 1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Cash Paid During the Year for:
Interest, net of
amounts capitalized $117,162 $ 97,659 $ 74,775
Federal income taxes 12,175 30,300 19,934
Noncash Activities:
Common stock and
performance units $ 288 $ 19,188 $ 6,210
Equity issued for acquisitions 5,409 - -
Foreign currency adjustment 6,554 6,292 98
Unrealized losses
on securities 6,490 1,184 -
Sale of joint ventures - 8,562 -
Yield enhancement
and contract costs - 2,702 8,243
Property purchased
under capital leases - 1,303 6,765
- -----------------------------------------------------------------------
</TABLE>
2. PROPERTY WRITE-DOWNS AND INVESTMENT LOSS
A. PIPELINES & PROCESSING
Property - During 1998, MCN recorded an impairment loss relating to its coal
fines project totaling $133,782,000 pre-tax ($86,959,000 net of taxes). In June
1998, MCN placed into operation six coal fines plants designed to recover
particles of coal that are a waste by-product of coal mining and then process
the particles to create coal briquettes for sale. The economic viability of the
venture is dependent on the briquettes qualifying for synthetic fuel tax credits
and MCN's ability to utilize or sell such credits. Although the plants were in
service by June 30, 1998, the date specified to qualify for the tax credits,
operating delays at the plants in the third quarter have significantly increased
the possibility that the Internal Revenue Service will challenge the project's
eligibility for tax credits. In addition, there is uncertainty as to whether MCN
can utilize or sell the credits. Without the credits, the project generates
negative cash flows. These factors led to MCN's decision to record an impairment
loss equal to the carrying value of the plants, reflecting the likely inability
to recover such costs. MCN is currently negotiating the sale of its interest in
the coal fines project. Management does not expect proceeds from the sale to be
in excess of selling expenses and remediation obligations.
In 1998, MCN also recorded an impairment loss of $3,899,000 pre-tax
($2,534,000 net of taxes) relating to an acquired out-of-service pipeline in
Michigan. This pipeline was acquired for future development, along with
easements and rights-of-way. In connection with certain lease renewal options,
MCN reviewed the business alternatives for these assets and determined that
their development is unlikely. Accordingly, MCN has recorded an impairment loss
equal to the carrying value of the assets.
B. GAS DISTRIBUTION
Property - During 1998, MichCon recognized a $24,800,000 pre-tax loss
($11,200,000 net of taxes and minority interest) from the write-down of a gas
gathering pipeline system. A new gas reserve analysis was performed in 1998 to
determine the impact of the diversion of certain untreated gas away from the
gathering system. This analysis revealed that projected cash flows from the
gathering system were not sufficient to cover the system's carrying value.
Therefore, an impairment loss was recorded representing the amount by which the
carrying value of the system exceeded its estimated fair value.
Investment - During 1998, MCN recognized an $8,500,000 pre-tax ($5,525,000 net
of taxes) write-down of a joint venture investment in a small gas distribution
company located in Missouri. As a result of MCN's refocused strategic direction,
MCN expects to sell this investment in 1999. The write-down represents the
amount by which the carrying value exceeded the estimated fair value of the
investment.
3. RESTRUCTURING CHARGES
During 1998, MCN initiated a two-part corporate restructuring and recorded a
combined restructuring charge totaling $12,860,000 pre-tax ($8,358,000 net of
taxes).
Corporate - The first part, totaling $10,390,000 pre-tax, consists of a
corporate realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment includes the reduction of
37 positions resulting in severance and termination benefits of $4,714,000
pre-tax. Also included in the charge was $5,676,000 pre-tax relating to net
lease expenses and the write-down of fixed assets consisting of leasehold
improvements, office equipment and information systems, which are no longer used
by MCN. As of December 31, 1998, payments of $660,000 have been charged against
the restructuring accruals relating to severance and termination benefits. These
benefits will continue to be paid through 2000. The remaining restructuring
costs, primarily for net lease expenses, are expected to be paid
MCN Energy Group Inc. Annual Report 1998
17
<PAGE> 20
over the related lease terms, which expire through 2006.
Electric Power - The second part of the corporate restructuring relates to a
revised international investment strategy whereby MCN will primarily limit
future capital investments in developing countries to amounts required to
fulfill existing commitments. As a result of this revised strategy, MCN exited
certain international projects and recorded a charge of $2,470,000 pre-tax,
primarily related to capitalized costs that had been incurred on these exited
projects.
4. DISCONTINUED OPERATIONS
A. MCNIC OIL & GAS COMPANY
During 1998, MCN recognized write-downs of its gas and oil properties held by
its E&P business unit, MCNIC Oil & Gas Company (MOG), totaling $416,977,000
pre-tax ($271,035,000 net of taxes). Prior to being classified as discontinued
operations, these properties were accounted for under the full cost method. The
write-downs were due primarily to lower oil and gas prices and the
under-performance of certain exploration properties. Under the full cost method
of accounting as prescribed by the Securities and Exchange Commission, MCN's
capitalized exploration and development costs exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum of
discounted future net cash flows from the production of proved gas and oil
reserves, and the lower of cost or estimated fair value of unproved properties,
net of related income tax effects. Future net cash flows are required to be
estimated based on end-of-quarter prices and costs, unless contractual
arrangements exist. A significant portion of the write-down was due to
lower-than-expected exploratory drilling results.
In 1998, MCN also recognized a $6,135,000 pre-tax ($3,987,000 net of taxes)
loss from the write-down of an investment in the common stock of an E&P company.
The loss is due to a decline in the fair value of the securities which is not
considered temporary.
As a result of its refocused strategic direction, MCN is committed to the
sale of its gas and oil properties, and expects the sale to be completed in
mid-1999. Bids on portions of its gas and oil properties were received in
January 1999, with bids on all properties expected by March 1999. Accordingly,
E&P has been accounted for as discontinued operations. Diversified Energy's
interest and preferred dividend expenses have been allocated to E&P based on its
ratio of total capital to that of Diversified Energy. The following financial
information summarizes E&P's operations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(in Thousands) 1998 1997
----------------------------
Assets
<S> <C> <C>
Accounts receivable, net $ 74,273 $ 53,675
Property, plant and equipment, net 815,252 1,149,286
Noncurrent deferred income taxes 96,006 -
Other 2,670 34,852
----------------------------
$ 988,201 $1,237,813
- ---------------------------------------------------------------------
Liabilities
Accounts payable $ 59,063 $ 69,266
Long-term debt and capital lease
obligations 929 112,784
Noncurrent deferred income taxes - 60,537
Other 9,458 15,905
-----------------------------
$ 69,450 $ 258,492
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(in Thousands) 1998 1997 1996
-------------------------------------
Operating Revenues
<S> <C> <C> <C>
Non-affiliates $ 150,504 $ 144,041 $ 94,615
Affiliates 56,598 71,787 43,326
-------------------------------------
207,102 215,828 137,941
Operating Expenses, including
property write-downs 595,057 164,373 104,706
-------------------------------------
Operating Income (Loss) (387,955) 51,455 33,235
-------------------------------------
Other Income and (Deductions)
Interest and preferred
dividend expense (51,058) (38,129) (28,191)
Other, including
investment loss 2,254 6,691 161
-------------------------------------
(48,804) (31,438) (28,030)
-------------------------------------
Income (Loss) Before
Income Taxes (436,759) 20,017 5,205
Income Taxes
Current and deferred (153,483) 7,655 2,457
Gas production tax credits (10,485) (17,797) (15,878)
-------------------------------------
(163,968) (10,142) (13,421)
-------------------------------------
Net Income (Loss) $ (272,791) $ 30,159 $ 18,626
- -----------------------------------------------------------------------------
</TABLE>
Intercompany transactions between MOG and other MCN subsidiaries are included in
the individual captions of the Consolidated Statement of Operations as
components of both continuing and discontinued operations.
B. THE GENIX GROUP, INC.
In 1996, MCN completed the sale of its computer operations subsidiary, The Genix
Group, Inc. (Genix), to Affiliated Computer Services, Inc. for an adjusted sales
price of $132,900,000, resulting in an after-tax gain of $36,176,000. Genix's
1996 income from operations totaled $1,595,000 and has been accounted for as a
discontinued operation.
5. ACQUISITIONS AND DISPOSITIONS
A. BHOTE KOSHI POWER COMPANY
In 1997, MCN acquired an approximate 65% interest in Bhote Koshi Power Company,
a partnership that is constructing a 36 MW hydroelectric power plant in Nepal.
Construction of the plant began in early 1997 and is scheduled to be completed
in early 2000. At December 31, 1998, MCN had paid $7,200,000 of its total equity
commitment of $20,100,000. The remaining equity commitment balance will be paid
in 1999 and 2000. The investment is accounted for under the equity method.
B. TORRENT POWER LIMITED
In 1997, MCN acquired a 40% interest in the common equity of Torrent Power
Limited (TPL), a joint venture that holds minority interests in electric
distribution companies and power generation facilities located in the state of
Gujarat, India. In 1997 and 1998, MCN acquired preference shares in TPL,
bringing the total cost of the acquisitions to $121,200,000. The joint venture
holds a 36% interest in Ahmedabad Electricity Company Limited (AEC), a 43%
interest in Surat Electricity Company Limited (SECL) and a 42% interest in
Gujarat Torrent Energy Corporation (GTEC). AEC serves the city of Ahmedabad and
has 550 MW of electric generating capacity. SECL provides electricity to the
city of Surat. GTEC owns and operates a 655 MW dual fuel generation facility
that became fully operational in December 1998. MCN accounts for its interest in
TPL under the equity method.
MCN Energy Group Inc. Annual Report 1998
18
<PAGE> 21
In February 1999, MCN reached an agreement to sell its interest in TPL for
approximately $130,000,000. The sale is subject to certain regulatory approvals
and is expected to be completed by the third quarter of 1999.
C. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
MCN acquired an 18% general partnership interest in Midland Cogeneration Venture
Limited Partnership (MCV) during 1997 and acquired an additional 5% general
partnership interest in 1998. MCV is 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.
MCN's total acquisition cost in MCV is $73,000,000 and is accounted for under
the equity method. During 1997, MCV changed its method of accounting for
property taxes. As a result, MCN's pre-tax income from MCV was favorably
impacted by $2,800,000.
D. LYONDELL METHANOL COMPANY, L.P.
In 1996, MCN acquired a 25% interest in Lyondell Methanol Company, L.P., a
limited partnership that owns a 248 million gallon-per-year methanol production
plant in Texas. MCNIC supplies a portion of the natural gas to the methanol
plant. The acquisition totaled $54,500,000 and is accounted for under the equity
method.
E. DAUPHIN ISLAND GATHERING PARTNERS
In early 1996, MCN acquired a 99% interest in Dauphin Island Gathering Partners
(DIGP) for $78,620,000. At the time of the acquisition, DIGP, the general
partnership, owned a 90-mile gas gathering system in the Mobile Bay area of
offshore Alabama. In mid-1996, MCN sold a 40% interest in the partnership to
PanEnergy Dauphin Island Company for $36,000,000. The sale resulted in a pre-tax
gain of $3,986,000.
In late 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 1997 when a related option agreement expired unexercised. The
three additional partners paid for their interests by contributing to DIGP the
Main Pass Gathering System, a 57-mile offshore gas gathering system in the Gulf
of Mexico. As a result of the sales, MCN's ownership interest in DIGP was
reduced to 35%. MCN accounts for its interest in DIGP under the equity method.
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MCN has equity interests in several joint ventures involved in the following
businesses: Pipelines & Processing - 10 1/2% to 80% owned; Electric Power - 23%
to 67 1/2% owned; Energy Marketing - 10% to 50% owned; Gas Distribution - 47
1/2% owned; and Real Estate & Other - 33% to 50% owned. MCN's share of
undistributed earnings in these joint ventures totaled $54,753,000 at December
31, 1998.
The following is the combined summarized financial information of the joint
ventures. No provision for income taxes has been included, since income taxes
are paid directly by the joint venture participants.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(in Thousands) 1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Operating Revenues $2,628,822 $1,598,208 $ 199,260
Operating Income 385,821 348,544 56,076
Income Before Taxes 205,961 197,453 30,194
- --------------------------------------------------------------------------
MCN's Share of Operating Revenues
Pipelines & Processing $ 276,613 $ 144,823 $ 36,927
Electric Power 315,516 168,051 40,731
Energy Marketing 317,342 249,954 23,864
Real Estate & Other 12,436 7,740 8,684
--------------------------------------
$ 921,907 $ 570,568 $ 110,206
- --------------------------------------------------------------------------
MCN's Share of Operating
Income (Loss)
Pipelines & Processing $ 15,714 $ 27,485 $ 11,584
Electric Power 73,590 48,671 8,280
Energy Marketing 6,214 9,933 9,253
Real Estate & Other (136) 645 1,387
--------------------------------------
$ 95,382 $ 86,734 $ 30,504
- --------------------------------------------------------------------------
MCN's Share of Income (Loss)
Before Taxes
Pipelines & Processing $ 29,987 $ 28,551 $ 10,590
Electric Power 28,546 12,655 (218)
Energy Marketing 4,681 7,379 6,197
Real Estate & Other (989) 474 1,298
--------------------------------------
$ 62,225 $ 49,059 $ 17,867
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
(in Thousands) 1998 1997
--------------------------------------
Assets
Current assets $ 612,023 $ 717,346
Noncurrent assets 3,959,716 3,677,595
--------------------------------------
$4,571,739 $4,394,941
--------------------------------------
Liabilities and Joint Ventures' Equity
Current liabilities $ 439,357 $ 590,234
Noncurrent liabilities 2,300,825 2,345,916
Joint ventures' equity 1,831,557 1,458,791
--------------------------------------
$4,571,739 $4,394,941
- --------------------------------------------------------------------------
MCN's Share of Total Assets
Pipelines & Processing $ 568,944 $ 296,670
Electric Power 722,038 691,202
Energy Marketing 86,135 84,939
Gas Distribution 23,149 22,626
Real Estate & Other 35,921 38,826
--------------------------------------
$1,436,187 $1,134,263
- --------------------------------------------------------------------------
MCN's Share of Joint Ventures' Equity
Pipelines & Processing $ 434,310 $ 259,116
Electric Power 191,627 164,361
Energy Marketing 27,748 21,715
Gas Distribution 7,832 8,363
Real Estate & Other 17,810 16,558
--------------------------------------
679,327 470,113
Goodwill and Other(1) 123,904 86,863
--------------------------------------
MCN's Investment In and
Advances to Joint Ventures $ 803,231 $ 556,976
- --------------------------------------------------------------------------
</TABLE>
1 Primarily represents differences between MCN's carrying value and its share
of the joint ventures' underlying equity interest that is amortized over the
estimated useful lives of the related assets, which on a weighted average
basis equaled 28 years.
7. REGULATORY MATTERS
A. REGULATORY ASSETS AND LIABILITIES
MCN's Gas Distribution operations are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result,
several regulatory assets and liabilities are recorded in MCN's financial
statements. Regulatory assets represent costs that will be recovered from
customers through the
MCN Energy Group Inc. Annual Report 1998
19
<PAGE> 22
ratemaking process. Regulatory liabilities represent benefits that will be
refunded to customers through reduced rates.
The following regulatory assets and liabilities were reflected in the
Consolidated Statement of Financial Position as of December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(in Thousands) 1998 1997
--------------------------
Regulatory Assets
<S> <C> <C>
Accrued gas cost recovery revenues $ - $ 12,862
Deferred environmental costs (Note 13b) 30,773 30,234
Unamortized loss on retirement of debt 15,548 10,181
Other 804 1,637
--------------------------
$ 47,125 $ 54,914
- -------------------------------------------------------------------------
Regulatory Liabilities
Deferred gas cost recovery revenues $ 14,980 $ -
Tax benefits amortizable to customers 130,120 123,365
--------------------------
$ 145,100 $ 123,365
- -------------------------------------------------------------------------
</TABLE>
Gas Distribution currently has regulatory precedents and orders in effect
that provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or changes in the competitive environment
could result in Gas Distribution discontinuing the application of SFAS No. 71
for all or part of its business and require the write-off of the portion of any
regulatory asset or liability that was no longer probable of recovery or refund.
If MCN were to have discontinued the application of SFAS No. 71 for all of its
operations as of December 31, 1998, it would have had an extraordinary noncash
increase to net income of approximately $63,700,000. Management believes
currently available facts support the continued application of SFAS No. 71.
B. REGULATORY REFORM PLAN
In April 1998, the MPSC approved MichCon's Regulatory Reform Plan. The plan
includes a comprehensive experimental three-year customer choice program, which
is subject to annual caps on the level of participation. The customer choice
program begins April 1, 1999, when up to 75,000 customers will have the option
of purchasing natural gas from suppliers other than MichCon. Up to 75,000
additional customers can be added April 1 of each of the next two years,
eventually allowing up to 225,000 customers the option to choose a gas supplier
other than MichCon. MCN's gas marketing affiliates also participate as
alternative suppliers under the program. In each of the three plan years, there
is also a volume limitation on commercial and industrial participants. The
volume limitation for these participants is 10 Bcf in 1999, 20 Bcf in 2000 and
30 Bcf in 2001. MichCon will continue to transport and deliver the gas to the
customers' premises at prices that maintain its existing sales margins.
The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period beginning on January 1,
1999. Prior to January 1999, MichCon did not generate earnings on the gas
commodity portion of its operations. However, under this plan, changes in cost
of gas will directly impact earnings. As part of its gas acquisition strategy,
MichCon has entered into firm-price contracts for a substantial portion of its
expected gas supply requirements for the next three years. These contracts,
coupled with the use of MichCon's storage facilities, will substantially
mitigate risks from winter price and volume fluctuations.
Also beginning in 1999, the plan established an income sharing mechanism that
will allow customers to share in profits if actual utility return on equity
exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing
and affirmed its approval of the plan. Various parties have appealed the MPSC's
decision to the Michigan Court of Appeals. While management believes that based
upon applicable Michigan law the order will be upheld on appeal, there can be no
assurance as to the outcome.
8. GAS IN INVENTORY
Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1998, the replacement cost exceeded the $149,797,000 LIFO cost by $150,004,000.
At December 31, 1997, the replacement cost exceeded the $56,777,000 LIFO cost by
$176,373,000.
9. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Detailed information on long-term debt, excluding current requirements, is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In Thousands) 1998 1997
--------------------
<S> <C> <C>
First Mortgage Bonds,
interest payable semi-annually
6.51% series due 1999 $ - $ 30,000
53/4% series due 2001 40,000 60,000
8% series due 2002 17,314 70,000
6.72% series due 2003 4,150 4,150
6.80% series due 2003 15,850 15,850
9 1/8% series due 2004 18,000 55,000
7.15% series due 2006 40,000 40,000
7.21% series due 2007 30,000 30,000
7.06% series due 2012 40,000 40,000
8 1/4% series due 2014 80,000 80,000
7.6% series due 2017 14,980 14,990
7 1/2% series due 2020 29,641 29,641
9 1/2% series due 2021 40,000 40,000
6 3/4% series due 2023 16,617 17,177
7% series due 2025 40,000 40,000
Unamortized discount (1,130) (1,235)
Remarketable Securities, interest
payable semi-annually
6.375% series due 2008 100,000 -
6.3% series due 2011 100,000 -
6.35% series due 2012 100,000 -
6.45% series due 2038 75,000 -
6.2% series due 2038 75,000 -
Unamortized premium 10,551 -
Medium-Term Notes, interest payable
semi-annually
5.84% series due 1999 - 80,000
6.82% series due 1999 - 130,000
6.03% series due 2001 60,000 60,000
6.89% series due 2002 90,000 90,000
6.32% series due 2003 60,000 60,000
7.12% series due 2004 60,000 60,000
Term Loan Due 2000,
interest payable quarterly - 100,000
Commercial Paper and Bank Borrowings 107,656 -
Project Loan Due 2006,
interest payable quarterly 12,320 14,080
Long-Term Capital Lease Obligations 5,345 7,702
Other Long-Term Debt 25,874 45,209
-----------------------
$1,307,168 $1,212,564
- -------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
20
<PAGE> 23
Substantially all of the net utility properties of MichCon, totaling
approximately $1,240,000,000, are pledged as security for the payment of
outstanding first mortgage bonds.
Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1998 are $267,400,000 in 1999,
$27,000,000 in 2000, $86,600,000 in 2001, $113,700,000 in 2002 and $86,000,000
in 2003.
Diversified Energy - At December 31, 1998, MCNIC had credit lines permitting
borrowings of up to $200,000,000 under a 364-day revolving credit facility and
up to $200,000,000 under a three-year revolving credit facility, both of which
were renewed in July 1998. These facilities support MCNIC's $400,000,000
commercial paper program. MCNIC usually issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper
and bank borrowings outstanding at December 31, 1998 and 1997 totaling
$118,000,000 and $147,358,000, respectively, were classified as short-term. The
remaining 1998 commercial paper and bank borrowings of $107,656,000 were
classified as long-term. Commercial paper and bank borrowings outstanding as of
December 31, 1998 and 1997 were at weighted average interest rates of 6.4% and
6.2%, respectively. Fees are paid to compensate banks for lines of credit.
In 1998, MCN issued $260,000,000 of debt under a one-year term loan facility,
due December 1999. Principal payments are required based on certain proceeds
received from the sale of E&P assets. Under the terms of the agreement, certain
alternative variable interest rates are available at the borrower's option. The
weighted average interest rate at December 31, 1998 was 6.2%.
In 1998, MCNIC issued a total of $300,000,000 of remarketable debt securities
with various interest rates and maturity dates. These securities are senior
unsecured obligations of MCNIC and are subject to an MCN support agreement. The
securities are structured such that at a specified future remarketing date the
remarketing agents may elect to remarket the securities whereby the annual
interest rate will be reset. MCNIC received option premiums in return for the
remarketing option. If the remarketing agents elect not to remarket the
securities, MCNIC will be required to repurchase the securities at their
principal amounts. The option premiums received, net of financing costs
incurred, totaled $5,709,000 and are being amortized to income over the life of
the debt. The remarketing dates are in April 2001, 2002 and 2003.
During 1998, MOG retired early a five-year $100,000,000 term loan.
Gas Distribution - At December 31, 1998, MichCon had credit lines permitting
borrowings of up to $150,000,000 under a 364-day revolving credit facility and
up to $150,000,000 under a three-year revolving credit facility, both of which
were renewed in July 1998. MichCon issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper
outstanding at December 31, 1998 and 1997 totaled $218,447,000 and $236,740,000
and was at weighted average interest rates of 5.6% and 5.8%, respectively. This
debt is classified as short-term. Fees are paid to compensate banks for lines of
credit.
In 1998, MichCon issued a total of $150,000,000 of remarketable debt
securities with various interest rates. These securities are "fall-away
mortgage" debt and, as such, are secured debt as long as MichCon's current first
mortgage bonds are outstanding and become senior unsecured debt thereafter. The
securities are structured such that the interest rates of the issues can be
reset at various remarketing dates over the life of the debt. The initial
remarketing dates are in June 2003 and 2008. MichCon received option premiums in
return for granting options to underwriters to reset the interest rate for a
period of ten years at the initial remarketing dates. The option premiums
received, net of financing costs incurred, totaled $3,052,000 and are being
amortized to income over the initial interest and corresponding option periods.
If the underwriters elect not to exercise their reset options, the securities
become subject to the remarketing feature. If MichCon and the remarketing agent
cannot agree on an interest rate or the remarketing agent is unable to remarket
the securities, MichCon will be required to repurchase the securities at their
principal amounts.
In 1998, MichCon redeemed through a tender offer $37,000,000 of the
outstanding $55,000,000 balance of 9 1/8% first mortgage bonds due 2004, and
$52,686,000 of the outstanding $70,000,000 balance of 8% first mortgage bonds
due 2002.
During 1997, nonutility subsidiaries of MichCon borrowed $40,000,000 under a
nonrecourse credit agreement. Under terms of the agreement, certain alternative
variable interest rates are available at the borrowers' option during the life
of the agreement. Quarterly principal payments commenced in 1997, with a final
installment due November 2005. The loan is secured by a pledge of stock of the
borrowers and a security interest in certain of their assets. MichCon may be
required to support the credit agreement through limited capital contributions
to the subsidiaries if certain cash flow and operating targets are not met. At
December 31, 1998 and 1997, $29,200,000 and $36,400,000 were outstanding at
weighted average interest rates of 5.8% and 6.4%, respectively.
MichCon has variable interest rate swap agreements with notional principal
amounts aggregating $92,000,000 in connection with its first mortgage bonds.
Swap agreements of $40,000,000 through May 2002 have reduced the average cost of
the related debt from 7.3% to 6.3% for the year ended December 31, 1998. Swap
agreements of $40,000,000 through May 2005 have reduced the average cost of the
related debt from 7.1% to 5.9% for the year ended December 31, 1998. Swap
agreements of $12,000,000 through April 2000 have reduced the average cost of
the related debt from 8.3% to 4.4% for the year ended December 31, 1998. A
nonutility subsidiary of MichCon has an interest rate swap agreement on the
$14,080,000 outstanding balance of its project loan agreement at December 31,
1998 that effectively fixes the interest rate at 7.5% through February 2003.
10. PREFERRED AND HYBRID SECURITIES
A. MCN-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARIES
MCN has established various trusts and a partnership formed for the sole purpose
of issuing preferred securities and lending the gross proceeds thereof to MCN.
The sole assets of the trusts and partnership are debentures of MCN with terms
similar to those of the related preferred securities.
Summarized information for MCN-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely debentures of MCN is as follows:
MCN Energy Group Inc. Annual Report 1998
21
<PAGE> 24
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(in Thousands of Dollars, Except Per Share Amounts Liquidation Maturity of Earliest
Value Underlying Redemption
1998 1997 Per Share Security Date
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MCN Financing I
8 5/8% Trust Originated Preferred Securities $ 77,068 $ 77,045 $ 25 2036 2001
(3,200,000 preferred securities)
Dividends payable quarterly.
MCN Financing II
8 5/8% Trust Preferred Securities 96,669 - 25 2038 2003
(4,000,000 preferred securities)
Dividends payable quarterly.
MCN Financing V
6.305% Private Institutional Trust Securities - 99,606 1,000 - -
(100,000 preferred securities)
Dividends payable semi-annually.
MCN Financing VI
6.85% Single Point Remarketed Reset Capital Securities 99,397 99,507 1,000 2037 1999
(100,000 preferred securities)
Dividends payable semi-annually.
MCN Michigan Ltd. Partnership
9 3/8% Redeemable Cumulative Preferred Securities, Series A 96,819 96,696 25 2024 1999
(4,000,000 preferred securities)
Dividends payable monthly.
MCN Financing III
8% FELINE PRIDES 132,250 132,250 50 2002 2002
---------- ----------
(2,645,000 FELINE PRIDES)
Dividends payable quarterly.
$ 502,203 $ 505,104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The preferred securities carry similar provisions as described below.
The preferred securities allow MCN the right to extend interest payment
periods on the debentures and, as a consequence, dividend payments on the
preferred securities can be deferred by the trusts and partnership 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 trusts' and partnership'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 and partnership documents,
provide full and unconditional guaranties of the trusts' and partnership's
obligations under the preferred securities to the extent of the funds available
therefor.
Financing costs for these issuances were deferred and are reflected as a
reduction in the carrying value of the preferred securities. These costs are
being amortized using the straight-line method over the estimated lives of the
related securities.
In addition to the similar provisions previously discussed, specific terms of
the securities follow:
- - 6.305% Private Institutional Trust Securities (PRINTS) - MCN redeemed the
6.305% PRINTS during 1998.
- - 6.85% Single Point Remarketed Reset Capital Securities - These 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 and the number of securities outstanding
would adjust to 4,000,000. The annual dividend payment rate will be reset to
reflect the lowest rate, less than or equal to a maximum rate, at which the
securities can be remarketed at a price equal to their liquidation preference
value. On the rate reset date, the terms of an equivalent amount of the MCN
senior debentures will change to reflect the new terms of the remarketed
preferred securities. The debentures will thereafter be subordinated and
junior in right of payment to all senior obligations of MCN. The rate reset
date for the securities is anticipated to be October 1999.
- - 8% FELINE PRIDES - 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 between 1.4132 and 1.7241 shares of MCN common stock in
May 2000 for $50. 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 also is obligated to pay
the FELINE PRIDES holders a quarterly contract adjustment payment at an
annual rate of .75% of the stated amount. MCN has recorded the present value
of the contract adjustment 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.
Holders of the preferred securities are entitled to receive cumulative
dividends at an annual rate of 7.25% of the liquidation preference value. 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, treasury securities or cash to satisfy the May 2000
purchase contract commitment. 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
MCN Energy Group Inc. Annual Report 1998
22
<PAGE> 25
FELINE PRIDES holder has the option to use the preferred securities, treasury
securities or cash to satisfy the May 2000 purchase contract commitment.
B. PREFERRED SECURITIES
MCN is authorized to issue 25,000,000 shares of no par value preferred stock,
and MichCon is authorized to issue 7,000,000 shares of preferred stock with a
par value of $1 per share and 4,000,000 shares of preference stock with a par
value of $1 per share. At December 31, 1998, no issuances of preferred or
preference stock were made under these authorizations.
C. ENHANCED PRIDES
MCN has issued 5,865,000 of Preferred Redeemable Increased Dividend Equity
Securities (Enhanced PRIDES) that yield 8-3/4% with a stated amount of $23.00
per security. Each security represents a contract to purchase MCN common stock
in April 1999, or earlier under certain limited circumstances. As subsequently
discussed, proceeds from the issuance totaling approximately $135,000,000 were
used to acquire 6.5% U.S. Treasury notes underlying the security. The interest
from the Treasury notes passes through to the Enhanced PRIDES holder.
Accordingly, MCN received no cash from issuing the Enhanced PRIDES.
Under each security, MCN is obligated to sell, and the Enhanced PRIDES holder
is obligated to purchase for $23.00, between .8333 of a share and one share of
MCN common stock. The exact number of MCN common shares to be sold is dependent
on the market value of a share in April 1999. However, the total number to be
sold will not be less than 4,887,500 shares or more than 5,865,000 shares.
MCN also is obligated to pay the Enhanced PRIDES holders, semi-annually, a
yield enhancement payment at an annual rate of 2 1/4% of the stated amount. MCN
has recorded the present value of the yield enhancement payments as a liability
and a reduction to Common Shareholders' Equity on MCN's Consolidated Statement
of Financial Position. The liability is reduced when the yield enhancement
payments are paid. MCN has the right to defer the yield enhancement payments, in
which case MCN cannot declare dividends on its common stock until the yield
enhancement payments have been made. In addition, MCN has incurred costs in
conjunction with the issuance of the Enhanced PRIDES and similarly has recorded
the costs as a reduction to Common Shareholders' Equity.
The Treasury notes underlying the securities are pledged as collateral to
secure the Enhanced PRIDES holders' obligation to purchase MCN common stock
under the stock purchase contract. At maturity in April 1999, the principal
received from the Treasury notes will be used to satisfy the Enhanced PRIDES
holders' obligation in full. Neither the Enhanced PRIDES nor the Treasury notes
are included on MCN's Consolidated Statement of Financial Position. However, the
issuance of common stock will be reflected when cash proceeds totaling
approximately $135,000,000 are received by MCN in April 1999.
11. COMMON STOCK AND EARNINGS
PER SHARE
A. COMMON STOCK
In 1998, MCN issued approximately 310,000 shares in conjunction with the
acquisition of heating, ventilating and air conditioning companies. In 1997, MCN
sold 9,775,000 shares of new common stock in a public offering, generating net
proceeds of $276,600,000.
MCN has traditionally issued new shares of common stock pursuant to its
Direct Stock Purchase and Dividend Reinvestment Plan and various employee
benefit plans. The number of shares issued was approximately 1,190,000 in 1998,
1,165,000 in 1997, and 926,000 in 1996, generating net proceeds of $20,200,000,
$17,800,000 and $17,300,000, respectively. Beginning in 1999, shares issued
under these plans will be acquired by MCN through open market purchases.
B. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units, stock
options, restricted stock or other stock-related awards to key employees,
primarily management. MCN's current policy is to issue performance units, which
encourages a strategic focus on long-term performance and has a high employee
retention value. The performance units are denominated in shares of MCN common
stock and issued to employees based on total shareholder return over a six-year
period, as compared to a group of peer companies. The initial number of
performance units granted is based on total shareholder return relative to the
peer group during the previous three-year period. Participants receive dividend
equivalents on the units granted. The initial grants will be adjusted upward or
downward based on total shareholder return relative to the peer group for the
subsequent three-year period. The final awards are then payable in shares of
common stock or can be deferred. Participants must retain 50% of any common
shares paid until certain stock ownership guidelines are met. The deferred units
must be retained by the participants until their employment with MCN ceases.
During 1998, 1997 and 1996, MCN granted 293,116, 245,340 and 301,616
performance units with a weighted average grant date fair value of $37.00,
$31.00 and $24.625 per unit, respectively. MCN accounts for stock-based
compensation awards under the fair value-based method as prescribed under SFAS
No. 123, "Accounting for Stock-Based Compensation," which was adopted in 1996.
Accordingly, the costs of performance units awarded, measured at their fair
value on the grant date, are being recorded as compensation expense and
Additional Paid-in Capital over their vesting period. MCN adjusts compensation
expense for changes in the number of performance units that are expected to
vest. A stock-based compensation benefit of $3,625,000 was recognized during
1998 for all awards outstanding as a result of a reduction in the number of
performance units expected to vest. Stock-based compensation costs recognized
during 1997 and 1996 for all awards outstanding totaled $15,070,000 and
$14,055,000, respectively. At December 31, 1998, there were 5,143,730 shares
available to be issued under the Stock Incentive Plan.
In February 1999, MCN revised its policy whereby a portion of any
stock-related awards under the Stock Incentive Plan will be in the form of stock
options. The remaining portion of any awards will continue to be in the form of
performance units.
C. SHAREHOLDERS' RIGHTS PLAN
One preferred share purchase right is attached to each outstanding share of MCN
common stock. The rights are exercisable only
MCN Energy Group Inc. Annual Report 1998
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon certain triggering events and expire in July 2007. The rights, which cannot
be traded separately from MCN's common stock, are intended to maximize
shareholders' value in the event that MCN is acquired.
D. EARNINGS PER SHARE
MCN reports both basic and diluted earnings per share. Basic earnings per share
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share assumes the issuance of potential dilutive common shares outstanding
during the period and adjusts for changes in income and the repurchase of common
shares that would have occurred with proceeds from the assumed issuance. A
reconciliation of both calculations for continuing operations is shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Wtd. Avg. Earnings
(in Thousands, Except Common (Loss) Per
Per Share Amounts) Income(Loss) Shares Share
1998
<S> <C> <C> <C>
Basic Loss Per Share $ (6,164) 78,823 $ (.08)
----------
Effect of Dilutive Securities - -
-------------------------
Diluted Loss Per Share $ (6,164) 78,823 $ (.08)
- --------------------------------------------------------------------------------
1997
Basic Earnings Per Share $ 112,147 72,887 $ 1.54
----------
Effect of Dilutive Securities
FELINE PRIDES 1,688 1,021
Enhanced PRIDES 222 623
Stock-based compensation plans - 904
-------------------------
Diluted Earnings Per Share $ 114,057 75,435 $ 1.51
- --------------------------------------------------------------------------------
1996
Basic Earnings Per Share $ 93,943 66,944 $ 1.40
----------
Effect of Dilutive Securities
Enhanced PRIDES 73 41
Stock-based compensation plans - 536
-------------------------
Diluted Earnings Per Share $ 94,016 67,521 $ 1.39
- --------------------------------------------------------------------------------
</TABLE>
12. LEASES
MCN leases certain property (principally a warehouse, office building and
parking structure) under lease arrangements expiring at various dates to 2006,
with renewal options extending beyond that date. Portions of the office
buildings and parking structure are subleased to various tenants.
In January 1998, MCN purchased one of its office buildings previously leased,
thereby eliminating the related long-term capital lease obligation. As a result,
the long-term capital lease obligation of $6,818,000 was reclassified as a
current capital lease obligation at December 31, 1997. Other long-term capital
lease obligations of MCN are not significant.
Minimum rental commitments related to noncancelable operating leases
outstanding at December 31, 1998 are $5,952,000 in 1999, $5,072,000 in 2000,
$4,887,000 in 2001, $4,632,000 in 2002, $3,111,000 in 2003 and $5,735,000
thereafter.
Total minimum lease payments for operating leases have not been reduced by
future minimum sublease rentals of $1,430,000 under noncancelable subleases.
Operating lease payments for the years ended December 31, 1998, 1997 and 1996
were $6,774,000, $5,007,000 and $5,243,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
A. GUARANTIES
MCN issued a guaranty in conjunction with a Genix building lease expiring no
later than 2010. The lease agreement does not allow MCN to transfer its
obligation under the guaranty to ACS, who acquired Genix in June 1996 (Note 4b).
However, ACS is obligated to reimburse MCN for any payments made as a result of
this guaranty. Obligations under the guaranty approximated $11,908,000 at
December 31, 1998.
MCN has a 47.5% interest in a partnership that owns and operates a natural
gas transmission and distribution system located in southern Missouri. MCN has
issued a guaranty for the full amount of construction financing obtained by the
partnership and one of the parties to the partnership is obligated to reimburse
MCN for 50% of any payments made as a result of this guaranty. Borrowings
outstanding under the construction loan totaled $29,000,000 at December 31,
1998.
A subsidiary of MichCon and an unaffiliated corporation have formed a series
of partnerships engaged in the construction and development of a residential
community on the Detroit riverfront (Harbortown). One of the partnerships
obtained $12,000,000 of tax-exempt financing due June 2004 through the Michigan
State Housing Development Authority. Both partners and their parent corporations
have issued guaranties for the full amount of this financing, and each parent
corporation has agreed to reimburse the other for 50% of any payments made as a
result of these guaranties.
B. ENVIRONMENTAL MATTERS
Prior to the construction of major natural gas pipelines, gas for heating and
other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
During the mid-1980s, preliminary environmental investigations were conducted
at these former MGP sites, and some contamination related to the by-products of
gas manufacturing was discovered at each site. The existence of these sites and
the results of the environmental investigations have been reported to the
Michigan Department of Environmental Quality (MDEQ). None of these former MGP
sites is on the National Priorities List prepared by the U.S. Environmental
Protection Agency (EPA).
MCN is involved in an administrative proceeding before the EPA regarding one
of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive
investigations at four other former MGP sites. In 1998, MichCon completed the
remediation of one of the former MGP sites, which was confirmed by the MDEQ.
Additionally, the MDEQ has determined with respect to one other former MGP site
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.
In 1984, MCN established an $11,700,000 reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that
the estimated total expenditures for investigation and remediation activities
for these sites could range from $30,000,000 to $170,000,000 based on
undis-
MCN Energy Group Inc. Annual Report 1998
24
<PAGE> 27
counted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35,000,000 during 1995.
MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MCN filed suit against major nonsettling
carriers seeking recovery of incurred costs and a declaratory judgment of the
carriers' liability for future costs of environmental investigation and
remediation costs at former MGP sites. Discovery is ongoing in the case, and a
preliminary trial date has been scheduled for August 1999.
During 1998, 1997 and 1996, MCN spent $1,649,000, $835,000 and $900,000,
respectively, investigating and remediating these former MGP sites. At December
31, 1998, the reserve balance was $35,092,000, of which $92,000 was classified
as current. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial action costs for the sites and, therefore,
have an effect on MCN's financial position and cash flows. However, management
believes that insurance coverage and the cost deferral and rate recovery
mechanism approved by the MPSC will prevent environmental costs from having a
material adverse impact on MCN's results of operations.
In 1998, MichCon received written notification from ANR Pipeline Company
(ANR), alleging that MichCon has responsibility for a portion of the costs
associated with responding to environmental conditions present at a natural gas
storage field in Michigan currently owned and operated by an affiliate of ANR.
At least some portion of the natural gas storage field was formerly owned by
MichCon. MichCon is evaluating ANR's allegations to determine whether and to
what extent, if any, that it may have legal responsibility for these costs.
Management does not believe that this matter will have a material impact on
MCN's financial statements.
C. COMMITMENTS
In 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership (W-10),
entered into a leveraged lease transaction to finance the conversion of a
depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000 to
develop. MCN has entered into a contract with W-10 to market 100% of the
capacity of the storage field through 2029. Under the terms of the marketing
contract, MCN is obligated to generate sufficient revenues to cover W-10's lease
payments and certain operating costs, which average approximately $16,000,000
annually. As of December 31, 1998, MCN had long-term contracts in place ranging
from 1999-2016 for approximately 40% of the field's capacity effectively
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 effectively enhancing its ability to offer a reliable gas
supply during peak winter months.
To ensure a reliable supply of natural gas at competitive prices, MCN has
entered into long-term purchase and transportation contracts with various
suppliers and producers. In general, purchase prices are under fixed price and
volume contracts or formulas based on market prices. MCN has firm purchase
commitments through 2001 for approximately 641 Bcf of gas, approximately 487 Bcf
of which are Gas Distribution purchase commitments. MCN expects that sales will
exceed its minimum purchase commitments. MCN has long-term transportation and
storage contracts with various companies expiring on various dates through the
year 2016. MCN is also committed to pay demand charges of approximately
$105,286,000 during 1999 related to firm purchase and transportation agreements.
Of this total, approximately $54,248,000 relates to Gas Distribution.
Capital investments for 1999 are expected to approximate $750,000,000.
Certain commitments have been made in connection with such capital investments.
D. OTHER
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.
14. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
MCN manages commodity price and interest rate risk through the use of various
derivative instruments and predominantly limits the use of such instruments to
hedging activities. If MCN did not use derivative instruments, its exposure to
such risks would be higher. Although this strategy reduces risk, it also limits
potential gains from favorable changes in commodity prices and interest rates.
Derivative instruments also give rise to credit risks due to nonperformance by
counterparties. MCN's control procedures are designed to minimize overall
exposure to credit risk. MCN closely monitors the financial condition and credit
ratings of counterparties, diversifies its risk by having a significant number
of counterparties, and limits its counterparties to investment grade
institutions. MCN generally requires cash collateral when exposure to each
counterparty exceeds certain limits, and its agreements with each counterparty
generally allow for the netting of positive and negative positions.
Commodity price and interest rate risks are actively monitored by a risk
control group to ensure compliance with MCN's risk management policies at both
the corporate and subsidiary levels. These policies, including related risk
limits, are regularly assessed to ensure their appropriateness given MCN's
objectives, strategies and current market conditions. MCN closely monitors and
manages its exposure to commodity price risk through a variety of risk
management techniques. MCN's objective is to manage its exposure to commodity
price risk to increase the likelihood of achieving targeted rates of return.
Derivative instruments are reviewed periodically to ensure they continue to
effectively reduce exposure to commodity price and interest rate risks, and,
therefore, high correlation is maintained between changes in the fair value of
derivative instruments and the underlying items or transactions being hedged. In
the event that a derivative is no longer deemed effective or does not qualify
for hedge accounting, the instruments are recorded as an asset or liability at
fair value, with changes in fair value recorded to income.
A. COMMODITY PRICE HEDGING
Natural gas and oil futures, options and natural gas and oil swap agreements are
used to manage Diversified Energy's exposure to
MCN Energy Group Inc. Annual Report 1998
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the risk of market price fluctuations on gas sale and purchase contracts, gas
and oil production and gas inventories. Changes in the market value of contracts
that hedge gas supply transactions are deferred and included in inventory costs
until the hedged transaction is completed, at which time the realized gain or
loss is included in the cost of gas. Market value changes of contracts that
hedge gas and oil sales transactions are also deferred and recorded as a
deferred credit or deferred charge until the hedged transaction is completed, at
which time the realized gain or loss is included as an adjustment to revenues.
Unrealized gains and losses on derivative contracts that are terminated or sold
continue to be deferred until such time as the initial hedged transactions are
completed. In the instance when a hedged item no longer exists or is no longer
probable of occurring, unrealized gains and losses would be included in income
unless the derivative is redesignated to a similar transaction and qualifies for
hedge accounting.
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position at
December 31.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred Swap Losses and Receivables
<S> <C> <C>
Unrealized losses $ 48,700 $ 34,736
Receivables 25,864 16,683
------------------------
74,564 51,419
Less - Current portion 11,417 396
------------------------
$ 63,147 $ 51,023
- --------------------------------------------------------------------------------
Deferred Swap Gains and Payables
Unrealized gains $ 24,126 $ 15,005
Payables 54,525 41,164
------------------------
78,651 56,169
Less - Current portion 15,695 14,452
------------------------
$ 62,956 $ 41,717
- --------------------------------------------------------------------------------
</TABLE>
The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received. Notional
amounts represent the volume of transactions valued at the fixed or variable
price that MCN has contracted to obtain. Notional amounts do not represent the
amounts exchanged by the parties to the swaps, and therefore do not reflect
MCN's exposure to commodity price or credit risks.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------
Fixed Price Receiver
<S> <C> <C>
Volumes (Bcf equivalent) 280.9 447.5
Notional value $ 675,671 $ 994,159
Latest maturity 2013 2013
- --------------------------------------------------------------------------------
Variable Price Receiver
Volumes (Bcf equivalent) 364.0 39.5
Notional value $ 816,414 $ 94,082
Latest maturity 2006 2006
- --------------------------------------------------------------------------------
</TABLE>
In addition, at December 31, 1998, MCN had futures contracts that permit
settlement by delivery of the underlying commodity of 113.5 Bcf with unrealized
gains of $4,699,000. Futures contracts of 73.3 Bcf with unrealized gains of
$2,031,000 and 21.7 Bcf with unrealized losses of $10,120,000 were outstanding
at December 31, 1997.
Collateral in the form of cash totaling $13,990,000 was provided under
hedging contracts at December 31, 1998.
B. INTEREST RATE HEDGING
In order to manage interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life of
the agreements without exchange of the underlying principal amounts. Interest
rate swaps are subject to market risk as interest rates fluctuate. The
difference to be received or paid on these agreements is accrued and recorded as
an adjustment to interest expense over the life of the agreements. The fair
value of the swap agreements and changes in the fair value as a result of
changes in market interest rates are not recognized in the financial statements.
In the event of an interest rate swap termination, any associated gains and
losses would be deferred and amortized as an adjustment to interest expense
related to the debt over the remaining term of the original contract life of the
terminated swap agreement. In the event of an early extinguishment of a
designated debt obligation, derivative gains and losses would be included in
income, unless the swap agreement is redesignated as a hedge of another
outstanding debt obligation with similar characteristics and qualifies for hedge
accounting.
At December 31, 1998, MCN had interest rate swap agreements with notional
principal amounts totaling $186,100,000 (Note 9) and a weighted average
remaining life of 3.6 years. At December 31, 1997, the notional principal amount
of outstanding interest rate swaps totaled $288,000,000. The notional principal
amounts are used solely to calculate amounts to be paid or received under the
interest rate swap agreements and approximate the principal amount of the
underlying debt being hedged.
15. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS
MCN has estimated the fair value of its financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment is required in developing the estimates of the fair value of financial
instruments and, therefore, the values are not necessarily indicative of the
amounts that MCN could realize in a current market exchange. The carrying
amounts of certain financial instruments, such as notes payable, customer
deposits and notes receivable, are assumed to approximate fair value due to
their short-term nature.
The carrying amount and fair value of other financial instruments consist of
the following:
MCN Energy Group Inc. Annual Report 1998
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in Thousands) 1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investment in debt
and equity
securities $ 69,705 $ 69,705 $ 97,521 $ 97,521
Liabilities and
Capitalization
Long-term debt,
excluding capital
lease obligations 1,301,823 1,358,371 1,204,862 1,251,883
Redeemable
preferred securities 502,203 476,443 505,104 550,197
Derivative Financial
and Other Similar
Instruments (Note 14)
Natural gas & oil swaps
with unrealized
gains 24,126 24,126 15,005 15,005
with unrealized
losses 48,700 48,700 34,736 34,736
Natural gas & oil futures
with unrealized
gains 914 914 2,031 2,031
with unrealized
losses 6,625 6,625 10,120 10,120
Interest rate swaps
with unrealized gains 9,033 5,006
with unrealized losses 696 415
- --------------------------------------------------------------------------------
</TABLE>
The fair values are determined based on the following:
Investment in debt and equity securities - carrying amount approximates fair
value taking into consideration interest rates available to MCN for investments
with similar assumptions.
Long-term debt - interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.
Redeemable cumulative preferred securities - quoted market prices on the New
York Stock Exchange and interest rates available to MCN for issuance of
preferred securities with similar terms.
Natural gas and oil swaps and futures, and interest rate swaps- estimated
amounts that MCN would receive or pay to terminate the swap agreements and
futures, taking into account current gas and oil prices, interest rates and the
creditworthiness of the counterparties.
Guaranties (Note 13a) - Management is unable to practicably estimate the fair
value of the Southern Missouri, Genix and Harbortown guaranties due to the
nature of the transactions.
The fair value estimates presented herein are based on information available
to management as of December 31, 1998 and 1997. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
16. RETIREMENT BENEFITS AND TRUSTEED ASSETS
In 1998, MCN adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which standardizes the disclosure requirements
for pensions and other postretirement benefits.
A. PENSION PLAN BENEFITS
Separate defined benefit retirement plans are maintained for union and nonunion
employees. The plans are noncontributory, cover substantially all employees and
generally provide for normal retirement at age 65, but with the option to retire
earlier or later under certain conditions. The plans provide pension benefits
that are based on each employee's compensation and years of credited service.
Currently these plans meet the full funding limitations of the Internal Revenue
Code. Accordingly, no contributions for the 1998, 1997 or 1996 plan years were
made, and none is expected to be made for the 1999 plan year.
Net pension credit for the years ended December 31 includes the following
components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in Thousands) 1998 1997 1996
<S> <C> <C> <C>
Service Cost $ 10,993 $ 10,380 $ 11,194
Interest Cost 38,046 36,059 34,223
Expected Return on Plan Assets (74,383) (63,879) (56,923)
Amortization of:
Net gain (6,572) (5,410) (1,682)
Prior service cost 1,044 (149) (156)
Net transition asset (5,023) (5,080) (5,040)
Special Termination Benefits 5,054 - -
Settlements (7,300) (3,266) -
------------------------------------
Net Pension Credit $(38,141) $ (31,345) $ (18,384)
- ----------------------------------------------------------------------
</TABLE>
The following table sets forth a reconciliation of the obligations, assets
and funded status of the plans as well as the amounts recognized as prepaid
pension cost in the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in Thousands) 1998 1997
- ----------------------------------------------------------------------
Measurement Date October 31 October 31
Accumulated Benefit Obligation at
<S> <C> <C>
the End of the Period $ 462,347 $ 413,280
------------------------
Projected Benefit Obligation at
the Beginning of the Period $ 489,779 $ 450,912
Service Cost 10,993 10,380
Interest Cost 38,046 36,059
Plan Amendments 22,564 -
Actuarial Loss 45,879 26,357
Special Termination Benefits 5,054 -
Settlements Due to Lump Sums (21,033) (8,844)
Regular Benefits (28,782) (25,085)
------------------------
Projected Benefit Obligation at
the End of the Period $ 562,500 $ 489,779
------------------------
Plan Assets at Fair Value at the
Beginning of the Period $ 844,107 $ 730,820
Actual Return on Plan Assets 106,300 143,859
Settlements Due to Lump Sums (16,333) (5,487)
Regular Benefits (28,782) (25,085)
------------------------
Plan Assets at Fair Value
at the End of the Period $ 905,292 $ 844,107
------------------------
Funded Status of the Plans $ 342,792 $ 354,328
Unrecognized
Net gain (221,245) (244,405)
Prior service cost 19,448 (1,275)
Net transition asset (29,220) (35,014)
------------------------
Prepaid Pension Cost $ 111,775 $ 73,634
------------------------
Prepaid Benefit Cost $ 114,275 $ 75,921
Accrued Benefit Liability (2,500) (2,287)
------------------------
Total Recognized $ 111,775 $ 73,634
- ----------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 6.5%, 7.5% and 8% for 1998,
1997 and 1996, respectively. The rate of increase in future compensation levels
used was 5% for 1998 and 1997. The expected long-term rate of return on plan
assets, which are invested primarily in equity and fixed income securities, was
9.5% for 1998 and 9.25% for 1997 and 1996.
In 1998, MichCon implemented an early retirement program under which
approximately 6% of its workforce retired in 1998 with incentives. The program
increased the projected benefit obligation and 1998 pension costs by $5,054,000.
MCN also sponsors defined contribution retirement savings plans.
Participation in one of these plans is available to substantially all union and
nonunion employees. MCN matches employee contributions up to certain predefined
limits based upon salary and years of credited service. The cost of these plans
for continuing operations was $5,600,000 in 1998, $6,200,000 in 1997 and
$6,100,000 in 1996.
B. OTHER POSTRETIREMENT BENEFITS
MCN provides certain healthcare and life insurance benefits for retired
employees who may become eligible for these benefits if they reach retirement
age while working for MCN. These benefits are being accounted for under SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires the use of accrual accounting. Upon adoption of SFAS No. 106, MCN
deferred its 1993 postretirement costs related to Gas Distribution in excess of
claims paid until 1994, when new rates to recover such costs became effective.
MCN's policy is to fund certain trusts to the extent its postretirement
benefit costs are recognized in Gas Distribution rates. Separate qualified
Voluntary Employees' Beneficiary Association (VEBA) trusts exist for union and
nonunion employees. Funding to the VEBA trusts totaled $2,200,000, $6,700,000
and $41,918,000 in 1998, 1997 and 1996, respectively. The expected long-term
rate of return on plan assets that are invested in life insurance policies,
equity securities and fixed income securities, was 9.8% for 1998 and 9.1% for
1997 and 1996.
Net postretirement cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(in Thousands) 1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Service Cost $ 4,044 $ 4,354 $ 4,541
Interest Cost 16,891 17,857 16,826
Expected Return on Plan Assets (13,570) (11,082) (9,872)
Amortization of:
Net gain (5,723) (4,933) (4,332)
Net transition obligation 12,898 13,587 13,587
Special Termination Benefits 1,186 - -
-----------------------------------
Total Postretirement Cost 15,726 19,783 20,750
Regulatory Adjustment 43 4,907 7,553
-----------------------------------
Net Postretirement Cost $ 15,769 $ 24,690 $ 28,303
- ---------------------------------------------------------------------
</TABLE>
The following table sets forth a reconciliation of the obligations, assets
and funded status of the plans as well as the amounts recorded as accrued
postretirement cost in the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(in Thousands) 1998 1997
Measurement Date October 31 October 31
Accumulated Postretirement Benefit
<S> <C> <C>
Obligation at the Beginning of the Period$ 229,337 $ 223,214
Service Cost 4,044 4,354
Interest Cost 16,891 17,857
Plan Amendments (8,269) -
Actuarial (Gain) Loss 24,660 (4,561)
Special Termination Benefits 1,186 -
Benefits Paid (11,702) (11,527)
-------------------------
Accumulated Postretirement Benefit
Obligation at the End of the Period $ 256,147 $ 229,337
-------------------------
Plan Assets at Fair Value at the
Beginning of the Period $ 152,405 $ 126,716
Actual Return on Plan Assets 25,848 26,251
Company Contributions 6,700 7,200
Regular Benefits (10,674) (7,762)
-------------------------
Plan Assets at Fair Value at
the End of the Period $ 174,279 $ 152,405
-------------------------
Funded Status of the Plan $ (81,868) $ (76,932)
Unrecognized
Net gain (116,959) (125,827)
Net transition obligation 190,776 203,674
Contributions Made After
Measurement Date 2,200 6,700
Regular Benefits Made After
Measurement Date (11,720) (1,007)
-------------------------
Accrued Postretirement Asset (Liability) $ (17,571) $ 6,608
- ------------------------------------------------------------------------
</TABLE>
The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 6% for 1999, and a rate that gradually declines each year until
it stabilizes at 5% in 2003. A one percentage point increase in the assumed
rates would increase the accumulated postretirement benefit obligation at
December 31, 1998 by $33,046,000 (13%) and increase the sum of the service and
interest rate cost by $3,057,000 (15%) for the year then ended. A one percentage
point decrease in the assumed rates would decrease the accumulated
postretirement benefit obligation at December 31, 1998 by $28,926,000 (11%) and
decrease the sum of the service and interest rate cost by $2,626,000 (13%) for
the year then ended.
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.5%, 7.5% and 8% for 1998, 1997 and 1996, respectively.
In 1998, MichCon implemented an early retirement program under which
approximately 6% of its workforce retired in 1998 with incentives. The program
increased the postretirement benefit obligation and 1998 postretirement costs by
$1,186,000.
C. GRANTOR TRUST
MichCon has established a Grantor Trust and contributed $28,200,000 in 1998 and
$31,300,000 in 1997 to the trust, which invested such proceeds in life insurance
contracts and income securities. By funding the Grantor Trust and VEBA trusts
(Note 16b), MichCon is complying with MPSC directives that it fund various
trusts to the extent its postretirement benefit costs are recognized in Gas
Distribution rates. Employees and retirees have no right, title or interest in
the assets of the Grantor Trust and MichCon can revoke the trust subject to
providing the MPSC with prior notification.
MCN Energy Group Inc. Annual Report 1998
28
<PAGE> 31
17. SUMMARY OF INCOME TAXES
MCN files a consolidated federal income tax return. The income tax provisions or
benefits of MCN's subsidiaries are determined on an individual company basis.
The subsidiaries record income tax payable to or receivable from MCN resulting
from the inclusion of its taxable income or loss in MCN's consolidated tax
return.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(in Thousands) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Effective Federal Income Tax Rate (72.3)% 35.5% 34.1%
- --------------------------------------------------------------------
Income Taxes Consist of:
Current $ 16,498 $ 35,983 37,229
Deferred, net (28,314) 28,256 14,445
Tax credits, net (3,640) (1,973) (1,878)
----------------------------------
$(15,456) $ 62,266 $ 49,796
----------------------------------
Reconciliation Between Statutory
and Actual Income Taxes
Statutory Federal Income
Taxes at a Rate of 35% $ (7,568) $ 61,044 $ 50,309
Adjustments to Federal Taxes
Book over tax depreciation 1,071 5,301 6,367
Adjustments to taxes provided in
prior periods (406) (1,405) (4,433)
Stock-related benefits (1,095) - -
Tax credits (3,640) (1,973) (1,878)
Allowance for funds used
during construction (1,900) (1,105) (245)
Undistributed foreign earnings (1,244) - -
Other, net (674) 404 (324)
----------------------------------
$(15,456) $ 62,266 $ 49,796
- --------------------------------------------------------------------
</TABLE>
No provision has been made for federal, state or foreign income taxes in 1998
related to approximately $3,553,000 of undistributed earnings of foreign
subsidiaries that are intended to be permanently reinvested. There were no
undistributed earnings of foreign subsidiaries in 1997 and 1996.
Deferred tax assets and liabilities are recognized for the estimated future
tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The alternative minimum tax
credits may be carried forward indefinitely.
The tax effect of temporary differences that gave rise to MCN's deferred tax
assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in Thousands) 1998 1997
- ------------------------------------------------------------------------------
Deferred Tax Assets
<S> <C> <C>
Alternative minimum tax credit carryforward $ 71,519 $ 60,121
Vacation and other benefits 17,745 20,846
Postretirement benefits 6,287 -
Uncollectibles 3,234 4,771
Restructuring charges 5,915 -
Other 20,257 11,985
--------------------------
124,957 97,723
- ------------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation and other property-related
basis differences, net 12,978 200,216
Pensions 36,751 24,027
Property taxes 13,072 12,931
Gas cost recovery undercollection 57 4,502
Postretirement benefits - 2,768
Other 20,959 18,432
-------------------------
83,817 262,876
-------------------------
Net Deferred Tax Asset (Liability) 41,140 (165,153)
Less: Net Deferred Tax Liability-Current (9,407) (11,994)
-------------------------
Net Deferred Tax Asset (Liability)-Noncurrent $ 50,547 $ (153,159)
- ------------------------------------------------------------------------------
</TABLE>
18. SEGMENT INFORMATION
MCN is a diversified energy holding company with natural gas markets and
investments primarily in North America. MCN is organized into two business
groups, Diversified Energy and Gas Distribution. The groups operate four major
business segments as described in the Summary of Significant Accounting Policies
- - Company Description (Note 1).
Information as to MCN's segments is set forth in the following tables. The
segments were determined based on the nature of their products and services and
how management reviews operating results. MCN evaluates segment performance
based on several factors, of which the primary measure is net income or loss.
Inter-segment sales are based on long-term fixed-price or index-price contracts.
MCN Energy Group Inc. Annual Report 1998
29
<PAGE> 32
<TABLE>
<CAPTION>
Diversified Energy
---------------------------------------------------------
Pipelines & Electric Energy Corporate &
(in Thousands) Processing Power Marketing Other (a)
- ----------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
Revenues From Unaffiliated Customers $ 20,856 $ 52,062 $ 767,068 $ --
Revenues From Affiliated Customers 345 (4,931) 105,543 --
--------------------------------------------------------
Total operating revenues 21,201 47,131 872,611 --
--------------------------------------------------------
Depreciation, Depletion and Amortization 1,705 208 1,229 1,998
Operating Income (Loss) (146,264) (5,021) 5,570 (19,162)
Equity in Earnings of Joint Ventures 29,987 28,546 2,401 308
--------------------------------------------------------
Operating and joint venture
income (loss) (116,277) 23,525 7,971 (18,854)
--------------------------------------------------------
Interest Income 1,001 944 1,676 53,100
Interest Expense (b) (14,382) (2,021) (5,726) (51,813)
Income Taxes (46,893) 8,212 3,534 (13,309)
Net Income (Loss) (82,240) 19,271 6,476 (21,405)
Total Assets 575,969 300,529 386,505 72,388
Investments In and Advances
to Joint Ventures 521,711 231,668 29,435 18,939
Capital Expenditures 113,229 1,602 2,596 6,966
Capital Investments 333,128 88,209 3,355 7,092
Significant Noncash Items:
Property write-downs and restructuring
charges (Notes 2 & 3) (137,681) (2,470) -- (10,390)
Investment loss (Note 2) -- -- -- --
Discontinued operations -- -- -- --
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Discontinued
Gas Operations Eliminations Consolidated
Distribution (Note 4) & Other Total
-----------------------------------------------------------
<C> <C> <C> <C>
Revenues From Unaffiliated Customers $ 1,040,208 $ -- $ -- $ 1,880,194
Revenues From Affiliated Customers 11,566 -- (112,523) --
-----------------------------------------------------------
Total operating revenues 1,051,774 -- (112,523) 1,880,194
-----------------------------------------------------------
Depreciation, Depletion and Amortization 93,774 -- -- 98,914
Operating Income (Loss) 158,537 -- -- (6,340)
Equity in Earnings of Joint Ventures 983 -- -- 62,225
-----------------------------------------------------------
Operating and joint venture
income (loss) 159,520 -- -- 55,885
-----------------------------------------------------------
Interest Income 5,716 -- (51,970) 10,467
Interest Expense (b) (57,477) -- 51,970 (79,449)
Income Taxes 33,000 -- -- (15,456)
Net Income (Loss) 71,734 (272,791) -- (278,955)
Total Assets 2,116,173 988,201 (47,279) 4,392,486
Investments In and Advances
to Joint Ventures 1,478 -- -- 803,231
Capital Expenditures 157,952 200,430 -- 482,775
Capital Investments 158,716 200,430 -- 790,930
Significant Noncash Items:
Property write-downs and restructuring
charges (Notes 2 & 3) (24,800) -- -- (175,341)
Investment loss (Note 2) (8,500) -- -- (8,500)
Discontinued operations -- (423,112) -- (423,112)
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Diversified Energy
--------------------------------------------------------
Pipelines & Electric Energy Corporate &
(in Thousands) Processing Power Marketing Other(a)
--------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Revenues From Unaffiliated Customers $ 6,971 $ 56,528 $ 743,793 $ --
Revenues From Affiliated Customers 397 (4,724) 92,921 --
--------------------------------------------------------
Total operating revenues 7,368 51,804 836,714 --
--------------------------------------------------------
Depreciation, Depletion and Amortization 1,153 (22) 915 1,220
Operating Income (Loss) 585 5,377 6,549 (4,433)
Equity in Earnings of Joint Ventures 28,551 12,653 5,182 139
--------------------------------------------------------
Operating and joint venture income 29,136 18,030 11,731 (4,294)
--------------------------------------------------------
Interest Income 109 278 2,332 37,202
Interest Expense (b) (8,436) (165) (4,920) (30,585)
Income Taxes 8,721 6,341 3,706 (3,638)
Net Income (Loss) 17,070 12,409 7,769 (6,186)
Total Assets 391,550 208,421 312,193 97,819
Investments In and Advances
to Joint Ventures 323,597 180,127 25,159 19,252
Capital Expenditures 19,491 4,823 663 4,951
Capital Investments 171,735 243,231 3,893 5,425
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Discontinued
Gas Operations Eliminations Consolidated
1997 Distribution (Note 4) & Other Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues From Unaffiliated Customers $ 1,256,542 $ - $ -- $ 2,063,834
Revenues From Affiliated Customers 14,744 -- (103,338) --
------------------------------------------------------------
Total operating revenues 1,271,286 -- (103,338) 2,063,834
------------------------------------------------------------
Depreciation, Depletion and Amortization 104,437 -- -- 107,703
Operating Income (Loss) 176,820 -- -- 184,898
Equity in Earnings of Joint Ventures 2,534 -- -- 49,059
------------------------------------------------------------
Operating and joint venture income 179,354 -- -- 233,957
------------------------------------------------------------
Interest Income 4,735 -- (33,650) 11,006
Interest Expense (b) (54,525) -- 33,650 (64,981)
Income Taxes 47,136 -- -- 62,266
Net Income (Loss) 81,085 30,159 -- 142,306
Total Assets 2,167,637 1,237,813 (85,972) 4,329,461
Investments In and Advances
to Joint Ventures 8,841 -- -- 556,976
Capital Expenditures 157,732 374,997 -- 562,657
Capital Investments 160,329 374,997 -- 959,610
- ------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
30
<PAGE> 33
\
<TABLE>
<CAPTION>
Diversified Energy
- -----------------------------------------------------------------------------------------------------
Pipelines & Electric Energy Corporate &
(in Thousands) Processing Power Marketing Other (a)
- -----------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Revenues From Unaffiliated Customers $ 5,928 $ 46,802 $ 589,036 $ --
Revenues From Affiliated Customers 441 (4,660) 84,126 --
----------------------------------------------------------
Total operating revenues 6,369 42,142 673,162 --
----------------------------------------------------------
Depreciation, Depletion and Amortization 944 (90) 916 938
Operating Income (Loss) 134 4,823 5,142 (2,525)
Equity in Earnings (Loss)
of Joint Ventures 10,590 (211) 4,208 2,026
----------------------------------------------------------
Operating and joint
venture income (loss) 10,724 4,612 9,350 (499)
----------------------------------------------------------
Interest Income 189 82 946 20,043
Interest Expense (b) (6,089) -- (3,426) (16,801)
Income Taxes 4,055 1,687 2,375 (1,058)
Net Income (Loss) 7,117 3,159 5,574 (3,303)
Total Assets 220,943 47,611 310,732 40,714
Investments In and Advances
to Joint Ventures 177,026 27,233 34,408 20,046
Capital Expenditures 6,865 2,086 1,114 2,987
Capital Investments 157,663 19,641 1,364 2,997
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Discontinued
Gas Operations Eliminations Consolidated
(in Thousands) Distribution (Note 4) & Other Total
- -----------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Revenues From Unaffiliated Customers $1,261,712 $ -- $ -- $1,903,478
Revenues From Affiliated Customers 14,542 -- (94,449) -
----------------------------------------------------------
Total operating revenues 1,276,254 -- (94,449) 1,903,478
----------------------------------------------------------
Depreciation, Depletion and Amortization 98,814 -- -- 101,522
Operating Income (Loss) 170,484 -- -- 178,058
Equity in Earnings (Loss)
of Joint Ventures 1,254 -- -- 17,867
----------------------------------------------------------
Operating and joint
venture income (loss) 171,738 -- -- 195,925
----------------------------------------------------------
Interest Income 3,967 -- (18,200) 7,027
Interest Expense (b) (48,847) -- 18,200 (56,963)
Income Taxes 42,737 -- -- 49,796
Net Income (Loss) 81,396 56,397 -- 150,340
Total Assets 2,086,325 963,273 (36,194) 3,633,404
Investments In and Advances
to Joint Ventures 6,675 -- -- 265,388
Capital Expenditures 215,317 388,719 -- 617,088
Capital Investments 220,393 388,690 -- 790,748
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Corporate & Other includes administrative and financing expenses associated
with corporate activities as well as development and management activities
of real estate partnerships.
(b) Interest expense is allocated from Corporate & Other to each Diversified
Energy segment based on an imputed debt structure reflective of the
segments' related industry, except for interest allocated to discontinued
operations.
MCN Energy Group Inc. Annual Report 1998
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY OPERATING RESULTS (UNAUDITED)
Due to the seasonal nature of MCN's Gas Distribution operations, revenues, net
income and earnings per share tend to be higher in the first and fourth quarters
of the calendar year. Quarterly earnings per share may not total for the years,
since quarterly computations are based on weighted average common shares
outstanding during each quarter. There were 21,858 and 22,160 holders of record
of MCN common shares at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(in Thousands of Dollars - Except Per Share Amounts) Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues $ 658,584 $ 367,74 $ 316,301 $ 537,569 $ 1,880,194
Operating Income (Loss):
Before unusual charges $ 110,397 $ 17,764 $ (7,540) $ 48,380 $ 169,001
Unusual charges -- -- (175,341) -- (175,341)
----------------------------------------------------------------------------
$ 110,397 $ 17,764 $ (182,881) $ 48,380 $ (6,340)
----------------------------------------------------------------------------
Operating and Joint Venture Income (Loss):
Before unusual charges $ 127,158 $ 29,601 $ 10,423 $ 64,044 $ 231,226
Unusual charges -- -- (175,341) -- (175,341)
----------------------------------------------------------------------------
$ 127,158 $ 29,601 $ (164,918) $ 64,044 $ 55,885
----------------------------------------------------------------------------
Net Income (Loss)
Continuing operations, before unusual charges $ 78,568 $ 7,032 $ (5,935) $ 28,747 $ 108,412
Unusual charges -- -- (114,576) -- (114,576)
Discontinued operations 1,942 (217,132) (56,640) (961) (272,791)
----------------------------------------------------------------------------
$ 80,510 $ (210,100) $ (177,151) $ 27,786 $ (278,955)
----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Continuing operations, before unusual charges $ 1.00 $ .09 $ (.07) $ .36 $ 1.38
Unusual charges -- -- (1.45) -- (1.46)
Discontinued operations .03 (2.76) (.72) (.01) (3.46)
----------------------------------------------------------------------------
$ 1.03 $ (2.67) $ (2.24) $ .35 $ (3.54)
----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Continuing operations, before unusual charges $ .95 $ .09 $ (.07) $ .36 $ 1.38
Unusual charges -- -- (1.45) -- (1.46)
Discontinued operations .02 (2.76) (.72) (.01) (3.46)
----------------------------------------------------------------------------
$ .97 $ (2.67) $ (2.24) $ .35 $ (3.54)
----------------------------------------------------------------------------
Dividends Paid Per Share $ .2550 $ .2550 $ .2550 $ .2550 $ 1.0200
Average Daily Trading Volume 195,997 328,005 530,228 395,530 364,558
Price Per Share:
High $ 39.8750 $ 39.8750 $ 26.8125 $ 20.8125 $ 39.8750
Low $ 36.2500 $ 24.7500 $ 16.4375 $ 16.8125 $ 16.4375
Close $ 37.3750 $ 25.0000 $ 17.0625 $ 19.0625 $ 19.0625
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Operating Revenues $ 753,728 $ 350,807 $ 287,508 $ 671,791 $ 2,063,834
Operating Income (Loss) $ 112,485 $ 14,508 $ (13,485) $ 71,390 $ 184,898
Operating and Joint Venture Income $ 122,146 $ 24,978 $ 2,239 $ 84,594 $ 233,957
Net Income (Loss):
Continuing operations $ 71,735 $ 3,261 $ (7,918) $ 45,069 $ 112,147
Discontinued operations 10,034 5,815 9,137 5,173 30,159
----------------------------------------------------------------------------
$ 81,769 $ 9,076 $ 1,219 $ 50,242 $ 142,306
----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Continuing operations $ 1.06 $ .05 $ (.10) $ .58 $ 1.54
Discontinued operations .15 .08 .12 .06 .41
----------------------------------------------------------------------------
$ 1.21 $ .13 $ .02 $ .64 $ 1.95
----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Continuing operations $ 1.04 $ .05 $ (.10) $ .56 $ 1.51
Discontinued operations .15 .08 .12 .06 .40
----------------------------------------------------------------------------
$ 1.19 $ .13 $ .02 $ .62 $ 1.91
----------------------------------------------------------------------------
Dividends Paid Per Share $ .2425 $ .2425 $ .2425 $ .2550 $ .9825
Average Daily Trading Volume 102,659 153,859 159,057 149,650 141,765
Price Per Share:
High $ 32.6250 $ 30.8125 $ 33.0000 $ 40.5000 $ 40.5000
Low $ 28.1250 $ 27.3750 $ 30.3750 $ 32.0000 $ 27.3750
Close $ 28.1250 $ 30.6250 $ 32.0000 $ 40.3750 $ 40.3750
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
32
<PAGE> 35
20. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC.
Restrictions in the support agreement prohibit recourse on the part of MCNIC's
investors against the stock and assets of MichCon. Under the terms of the
support agreement, the assets of MCN, other than MichCon, and the cash dividends
paid to MCN by any of its subsidiaries are available as recourse to holders of
MCNIC's securities. The carrying value of MCN's assets on an unconsolidated
basis, primarily investments in its subsidiaries other than MichCon, is
$970,072,000 at December 31, 1998.
The following MCN consolidating financial statements are presented and
include separately MCNIC, MichCon and MCN and other subsidiaries. MCN has
determined that separate financial statements and other disclosures concerning
MCNIC are not material to investors. The other MCN subsidiaries represent
Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I,
MCN Financing III, MCN Financing V, MCN Financing VI, MichCon Enterprises, Inc.
and Blue Lake Holdings, Inc. until its sale on December 31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF FINANCIAL POSITION MCN Eliminations
December 31, 1998 and Other and Consolidated
(in Thousands) Subsidiaries MCNIC MichCon Reclasses Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost $ 1,400 $ 9,036 $ 6,603 $ -- $ 17,039
Accounts receivable 10,039 262,490 151,746 (17,312) 406,963
Less - Allowance for doubtful accounts 84 653 8,928 -- 9,665
----------------------------------------------------------------------
Accounts receivable, net 9,955 261,837 142,818 (17,312) 397,298
Accrued unbilled revenues 1,121 -- 86,767 -- 87,888
Gas in inventory -- 92,828 56,969 -- 149,797
Property taxes assessed applicable to
future periods 214 1,172 71,165 -- 72,551
Other 5,143 11,872 30,169 (4,712) 42,472
----------------------------------------------------------------------
17,833 376,745 394,491 (22,024) 767,045
----------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities -- 3,548 65,556 601 69,705
Deferred swap losses and receivables -- 63,147 -- -- 63,147
Deferred environmental costs 2,604 -- 28,169 -- 30,773
Prepaid benefit costs -- -- 113,879 (2,104) 111,775
Other 9,401 26,870 59,007 3,662 98,940
----------------------------------------------------------------------
15,310 222,372 266,611 (79,406) 424,887
----------------------------------------------------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
AND SUBSIDIARIES 1,550,770 782,471 19,343 (1,549,353) 803,231
----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 48,681 1,103,716 2,889,020 -- 4,041,417
Less - Accumulated depreciation and depletion 17,210 229,944 1,396,940 -- 1,644,094
----------------------------------------------------------------------
31,471 873,772 1,492,080 -- 2,397,323
----------------------------------------------------------------------
$ 1,615,384 $ 2,255,360 $ 2,172,525 $(1,650,783) $ 4,392,486
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable $ 4,123 $ 192,919 98,891 $ (17,516) $ 278,417
Notes payable 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations -- 211,433 58,288 -- 269,721
Federal income, property and other taxes payable 1,441 15,895 61,059 -- 78,395
Deferred gas cost recovery revenues -- -- 14,980 -- 14,980
Gas payable -- 17,332 25,337 -- 42,669
Customer deposits 22 -- 18,769 -- 18,791
Other 18,337 25,276 67,222 (2,525) 108,310
----------------------------------------------------------------------
284,694 600,617 565,715 (20,892) 1,430,134
----------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers -- -- 130,120 -- 130,120
Deferred swap gains and payables -- 62,956 -- -- 62,956
Accrued environmental costs 3,000 -- 32,000 -- 35,000
Minority interest -- 2,697 8,201 -- 10,898
Other 10,435 15,741 51,460 (2,197) 75,439
----------------------------------------------------------------------
3,399 81,394 340,132 (80,456) 344,469
----------------------------------------------------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations -- 687,333 619,835 -- 1,307,168
Redeemable preferred securities of subsidiaries 502,203 -- -- -- 502,203
Common shareholders' equity 825,088 886,016 646,843 (1,549,435) 808,512
----------------------------------------------------------------------
1,327,291 1,573,349 1,266,678 (1,549,435) 2,617,883
----------------------------------------------------------------------
$ 1,615,384 $ 2,255,360 $ 2,172,525 $(1,650,783) $ 4,392,486
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF FINANCIAL POSITION MCN Eliminations
December 31, 1997 and Other and Consolidated
(in Thousands) Subsidiaries MCNIC MichCon Reclasses Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable 15,525 240,867 210,677 (46,910) 420,159
Less - Allowance for doubtful accounts 75 621 15,015 -- 15,711
----------------------------------------------------------------------
Accounts receivable, net 15,450 240,246 195,662 (46,910) 404,448
Accrued unbilled revenue 1,114 -- 91,896 -- 93,010
Gas in inventory -- 16,576 40,201 -- 56,777
Property taxes assessed applicable to future periods 217 2,835 64,827 -- 67,879
Accrued gas cost recovery revenues -- -- 12,862 -- 12,862
Other 3,745 17,612 33,361 (629) 54,089
----------------------------------------------------------------------
20,549 302,388 453,162 (47,539) 728,560
----------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Investments in debt and equity securities -- 62,060 35,110 351 97,521
Deferred swap losses and receivables -- 51,023 -- -- 51,023
Deferred environmental costs 2,535 -- 27,699 -- 30,234
Prepaid benefit costs (3,418) -- 85,790 (2,130) 80,242
Other 8,261 34,287 46,972 (3,339) 86,181
----------------------------------------------------------------------
7,378 147,370 195,571 (5,118) 345,201
----------------------------------------------------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES 1,641,421 528,492 19,643 (1,632,580) 556,976
----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 37,918 1,358,504 2,790,352 -- 4,186,774
Less - Accumulated depreciation and depletion 12,951 152,707 1,322,392 -- 1,488,050
----------------------------------------------------------------------
24,967 1,205,797 1,467,960 -- 2,698,724
----------------------------------------------------------------------
$ 1,694,315 $ 2,184,047 $ 2,136,336 $(1,685,237) $ 4,329,461
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable $ 4,385 $ 238,952 $ 130,267 $ (46,848) $ 326,756
Notes payable -- 163,113 241,691 (3,078) 401,726
Current portion of long-term debt and capital
lease obligations 365 1,557 34,956 -- 36,878
Federal income, property and other taxes payable 401 12,681 78,630 -- 91,712
Gas payable -- 6,254 2,063 -- 8,317
Customer deposits 19 -- 16,363 --
16,382
Other 13,599 22,944 65,717 (630) 101,630
----------------------------------------------------------------------
18,769 445,501 569,687 (50,556) 983,401
----------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes (4,642) 73,874 83,905 22 153,159
Unamortized investment tax credit 301 -- 32,745 -- 33,046
Tax benefits amortizable to customers 443 -- 122,922 -- 123,365
Deferred swap gains and payables -- 41,717 -- -- 41,717
Accrued environmental costs 3,000 -- 32,000 -- 35,000
Minority interest -- 1,905 17,283 -- 19,188
Other 10,792 16,586 44,663 (2,152) 69,889
----------------------------------------------------------------------
9,894 134,082 333,518 (2,130) 475,364
----------------------------------------------------------------------
CAPITALIZATION
Long-term debt, including capital lease obligations -- 595,457 617,107 -- 1,212,564
Redeemable preferred securities of subsidiaries 505,104 -- -- -- 505,104
Common shareholders' equity 1,160,548 1,009,007 616,024 (1,632,551) 1,153,028
----------------------------------------------------------------------
1,665,652 1,604,464 1,233,131 (1,632,551) 2,870,696
----------------------------------------------------------------------
$ 1,694,315 $ 2,184,047 $ 2,136,336 $(1,685,237) $ 4,329,461
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
34
<PAGE> 37
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF OPERATIONS MCN Eliminations
Twelve Months Ended December 31, 1998 and Other and Consolidated
(in Thousands) MCNIC MichCon Reclasses Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 18,262 $ 842,324 $ 1,033,658 $ (14,050) $ 1,880,194
-----------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 10,706 797,248 451,529 (8,668) 1,250,815
Operation and maintenance (10,207) 65,153 252,397 (5,382) 301,961
Depreciation, depletion and amortization 3,206 2,825 92,883 -- 98,914
Property and other taxes 1,719 2,346 55,438 -- 59,503
Property write-downs and restructuring charges 8,669 141,872 24,800 -- 175,341
-----------------------------------------------------------------------
14,093 1,009,444 877,047 (14,050) 1,886,534
-----------------------------------------------------------------------
OPERATING INCOME (LOSS) 4,169 (167,120) 156,611 -- (6,340)
-----------------------------------------------------------------------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES
AND SUBSIDIARIES (274,771) 61,242 1,946 273,808 62,225
-----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Interest income 18,651 6,183 5,688 (20,055) 10,467
Interest on long-term debt (641) (15,118) (44,884) -- (60,643)
Other interest expense (2,474) (24,275) (12,113) 20,056 (18,806)
Dividends on preferred securities of subsidiaries -- -- -- (17,613) (17,613)
Investment loss (8,500) -- -- -- (8,500)
Minority interest -- 265 5,727 -- 5,992
Other (605) 12,385 (182) -- 11,598
-----------------------------------------------------------------------
6,431 (20,560) (45,764) (17,612) (77,505)
-----------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (264,171) (126,438) 112,793 256,196 (21,620)
INCOME TAX PROVISION (BENEFIT) (2,829) (48,444) 35,817 -- (15,456)
-----------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (261,342) (77,994) 76,976 256,196 (6,164)
DISCONTINUED OPERATIONS, NET OF TAXES -- (272,791) -- -- (272,791)
-----------------------------------------------------------------------
NET INCOME (LOSS) (261,342) (350,785) 76,976 256,196 (278,955)
DIVIDENDS ON PREFERRED SECURITIES 17,613 -- -- (17,613) --
-----------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ (278,955) $ (350,785) $ 76,976 $ 273,809 $ (278,955)
- -------------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended December 31, 1997
(in Thousands)
-----------------------------------------------------------------------
OPERATING REVENUES $ 17,607 $ 807,236 $ 1,253,679 (14,688) $ 2,063,834
-----------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 9,749 760,968 632,229 (10,090) 1,392,856
Operation and maintenance 2,281 34,571 282,640 (4,598) 314,894
Depreciation, depletion and amortization 2,279 1,721 103,703 -- 107,703
Property and other taxes 1,679 1,060 60,744 -- 63,483
-----------------------------------------------------------------------
15,988 798,320 1,079,316 (14,688) 1,878,936
-----------------------------------------------------------------------
OPERATING INCOME 1,619 8,916 174,363 -- 184,898
-----------------------------------------------------------------------
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES 144,834 45,756 1,199 (142,730) 49,059
-----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Interest income 16,200 6,218 4,659 (16,071) 11,006
Interest on long-term debt 408 (11,080) (45,526) -- (56,198)
Other interest expense (1,253) (15,225) (8,664) 16,359 (8,783)
Dividends on preferred securities of subsidiaries -- -- -- (14,433) (14,433)
Minority interest -- (82) (1,882) -- (1,964)
Other 74 10,218 536 -- 10,828
-----------------------------------------------------------------------
15,429 (9,951) (50,877) (14,145) (59,544)
-----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 161,882 44,721 124,685 (156,875) 174,413
INCOME TAX PROVISION 2,573 14,028 45,665 -- 62,266
-----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 159,309 30,693 79,020 (156,875) 112,147
DISCONTINUED OPERATIONS, NET OF TAXES -- 30,159 -- -- 30,159
-----------------------------------------------------------------------
NET INCOME 159,309 60,852 79,020 (156,875) 142,306
DIVIDENDS ON PREFERRED SECURITIES 14,433 -- -- (14,433) --
-----------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON STOCK $ 144,876 $ 60,852 $ 79,020 $ (142,442) $ 142,306
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF OPERATIONS MCN Eliminations
Twelve Months Ended December 31, 1996 and Other and Consolidated
(in Thousands) Susidiaries MCNIC MichCon Reclasses Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 17,469 $ 640,651 $ 1,258,785 $ (13,427) $ 1,903,478
-----------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 9,655 601,318 636,594 (10,011) 1,237,556
Operation and maintenance 785 29,722 294,281 (3,416) 321,372
Depreciation, depletion and amortization 1,940 1,435 98,147 -- 101,522
Property and other taxes 2,134 1,074 61,762 -- 64,970
-----------------------------------------------------------------------
14,514 633,549 1,090,784 (13,427) 1,725,420
-----------------------------------------------------------------------
OPERATING INCOME 2,955 7,102 168,001 -- 178,058
-----------------------------------------------------------------------
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES 152,368 15,915 886 (151,302) 17,867
-----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Interest income 5,302 3,013 3,900 (5,188) 7,027
Interest on long-term debt 114 (7,210) (40,703) -- (47,799)
Other interest expense (1,218) (5,122) (8,012) 5,188 (9,164)
Dividends on preferred securities of subsidiaries -- -- -- (5,001) (5,001)
Minority interest -- (71) (988) -- (1,059)
Other 190 5,376 (1,756) -- 3,810
-----------------------------------------------------------------------
4,388 (4,014) (47,559) (5,001) (52,186)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 159,711 19,003 121,328 (156,303) 143,739
INCOME TAX PROVISION 1,814 6,496 41,486 -- 49,796
-----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 157,897 12,507 79,842 (156,303) 93,943
DISCONTINUED OPERATIONS, NET OF TAXES -- 56,397 -- -- 56,397
-----------------------------------------------------------------------
NET INCOME 157,897 68,904 79,842 (156,303) 150,340
DIVIDENDS ON PREFERRED SECURITIES 4,983 -- 18 (5,001) --
-----------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON STOCK $ 152,914 $ 68,904 $ 79,824 $ (151,302) $ 150,340
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Twelve Months Ended December 31, 1998
(in Thousands)
-----------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES $ 72,476 $ (68,749) $ 217,918 $ (68,923) $ 152,722
-----------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net 260,771 65,006 (20,522) 2,227 307,482
Capital contributions received from affiliates, net -- 236,851 -- (236,851) --
Dividends paid (82,239) -- (46,084) 46,084 (82,239)
Preferred securities dividends paid (17,613) -- -- 17,613 --
Issuance of common stock 20,192 -- -- -- 20,192
Issuance of preferred securities 96,850 -- -- -- 96,850
Issuance of long-term debt -- 305,709 153,052 -- 458,761
Long-term commercial paper and bank borrowings, net -- 17,299 -- -- 17,299
Retirement of long-term debt and preferred securities (100,365) (102,153) (126,292) -- (328,810)
Other -- 8,243 -- -- 8,243
-----------------------------------------------------------------------
Net cash provided from (used for) financing
activities 177,596 530,955 (39,846) (170,927) 497,778
-----------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (11,024) (318,276) (153,475) -- (482,775)
Acquisitions -- (42,429) -- -- (42,429)
Investment in debt and equity securities, net -- 48,527 (30,446) (250) 17,831
Investment in joint ventures and subsidiaries (238,951) (187,423) 214 236,851 (189,309)
Sale of property and joint venture interests 1,143 49,463 -- (3,421) 47,185
Other 137 (28,151) (2,115) 6,670 (23,459)
-----------------------------------------------------------------------
Net cash used for investing activities (248,695) (478,289) (185,822) 239,850 (672,956)
-----------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,377 (16,083) (7,750) -- (22,456)
CASH AND CASH EQUIVALENTS, JANUARY 1 23 25,119 14,353 -- 39,495
-----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 1,400 $ 9,036 $ 6,603 $ -- $ 17,039
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
36
<PAGE> 39
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MCN Eliminations
Twelve Months Ended December 31, 1997 and Other and Consolidated
(in Thousands) Susidiaries MCNIC MichCon Reclasses Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES $ 97,490 $ 148,242 $ 187,263 $ (89,611) $ 343,384
-------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net -- 94,513 (23,435) (3,078) 68,000
Capital contributions received from (distributions paid to)
affiliates, net (3,985) 603,150 -- (599,165) --
Dividends paid (72,851) -- (40,000) 40,000 (72,851)
Preferred securities dividends paid (31,090) -- -- 31,090 --
Issuance of common stock 294,402 -- -- -- 294,402
Issuance of preferred securities 326,521 -- -- -- 326,521
Issuance of long-term debt -- 149,190 124,051 -- 273,241
Long-term commercial paper and bank borrowings, net -- (261,822) -- -- (261,822)
Retirement of long-term debt and preferred securities (55) (32,315) (76,854) -- (109,224)
Other -- 4,612 -- -- 4,612
-------------------------------------------------------------
Net cash provided from (used for) financing activities 512,942 557,328 (16,238) (531,153) 522,879
-------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (6,559) (399,586) (155,208) (1) (561,354)
Acquisitions -- (166,553) -- -- (166,553)
Investment in debt and equity securities -- (48,441) (31,375) 16,693 (63,123)
Investment in joint ventures and subsidiaries (604,750) (151,360) (304) 603,772 (152,642)
Sale of property and joint venture interests -- 67,365 -- -- 67,365
Other 56 (1,484) 20,205 300 19,077
-------------------------------------------------------------
Net cash used for investing activities (611,253) (700,059) (166,682) 620,764 (857,230)
-------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (821) 5,511 4,343 -- 9,033
CASH AND CASH EQUIVALENTS, JANUARY 1 844 19,608 10,010 -- 30,462
-------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
- -------------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended December 31, 1996
(in Thousands)
-------------------------------------------------------------
Net Cash Flow From Operating Activities $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
-------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net -- 19,000 68,491 -- 87,491
Capital contributions received from (distributions paid to)
affiliates, net (3,069) 41,195 1,614 (39,740) --
Dividends paid (62,875) -- (11,263) 11,263 (62,875)
Preferred securities dividends paid (12,356) -- (54) 12,410 --
Issuance of common stock 17,264 -- -- -- 17,264
Issuance of preferred securities 77,218 -- -- -- 77,218
Issuance of long-term debt -- 328,895 69,645 -- 398,540
Long-term commercial paper and bank borrowings, net -- (62,835) -- -- (62,835)
Retirement of long-term debt and preferred securities (55) (1,701) (6,384) 1 (8,139)
Other (6,249) -- -- -- (6,249)
-------------------------------------------------------------
Net cash provided from financing activities 9,878 324,554 122,049 (16,066) 440,415
-------------------------------------------------------------
Cash Flow From Investing Activities
Capital expenditures (5,474) (392,181) (212,668) -- (610,323)
Acquisitions -- (133,201) -- -- (133,201)
Investment in debt and equity securities -- (11,313) (15,590) -- (26,903)
Investment in joint ventures and subsidiaries (42,809) (35,793) (278) 42,663 (36,217)
Sale of property and joint venture interest -- 36,621 -- -- 36,621
Sale of Genix -- 132,889 -- -- 132,889
Other 546 2,732 6,334 (22) 9,590
-------------------------------------------------------------
Net cash used for investing activities (47,737) (400,246) (222,202) 42,641 (627,544)
-------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 676 8,986 1,541 -- 11,203
CASH AND CASH EQUIVALENTS, JANUARY 1 168 10,622 8,469 -- 19,259
-------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 844 $ 19,608 $ 10,010 $ -- $ 30,462
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
37
<PAGE> 40
Selected Financial Data (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(in Thousands of Dollars - Except Per Share Amounts) 1998 1997 1996 1995 1994
NET INCOME (LOSS)
Continuing Operations:
<S> <C> <C> <C> <C> <C>
Before unusual charges $ 108,412 $ 112,147 $ 93,943 $ 82,638 $ 64,824
Unusual charges (114,576) -- -- -- --
----------------------------------------------------------------------
(6,164) 112,147 93,943 82,638 64,824
----------------------------------------------------------------------
Discontinued Operations (272,791) 30,159 56,397 14,118 12,944
----------------------------------------------------------------------
$ (278,955) $ 142,306 $ 150,340 $ 96,756 $ 77,768
----------------------------------------------------------------------
CASH DIVIDENDS DECLARED $ 82,239 $ 72,851 $ 62,875 $ 58,193 $ 51,492
----------------------------------------------------------------------
COMMON STOCK DATA
Basic Earnings Per Share:
Continuing operations:
Before unusual charges $ 1.38 $ 1.54 $ 1.40 $ 1.28 $ 1.09
Unusual charges (1.46) -- -- -- --
----------------------------------------------------------------------
(.08) 1.54 1.40 1.28 1.09
Discontinued operations (3.46) .41 .85 .21 .22
----------------------------------------------------------------------
$ (3.54) $ 1.95 $ 2.25 $ 1.49 $ 1.31
----------------------------------------------------------------------
Diluted Earnings Per Share:
Continuing operations:
Before unusual charges $ 1.38 $ 1.51 $ 1.39 $ 1.27 $ 1.09
Unusual charges (1.46) -- -- -- --
----------------------------------------------------------------------
(.08) 1.51 1.39 1.27 1.09
Discontinued operations (3.46) .40 .84 .21 .21
----------------------------------------------------------------------
$ (3.54) $ 1.91 $ 2.23 $ 1.48 $ 1.30
----------------------------------------------------------------------
Book Value Per Share $ 10.14 $ 14.74 $ 11.66 $ 10.02 $ 8.56
Return on Average Common Shareholders' Equity,
Excluding Gain on Sale of Genix (28.6)% 14.7% 15.8% 16.5% 15.8
Average Common Shares Outstanding (000):
Basic 78,823 72,887 66,944 64,743 59,394
Diluted 78,823 75,435 67,521 65,144 59,481
Actual Common Shares Outstanding (000) 79,725 78,232 67,304 66,370 59,788
PROPERTY, PLANT AND EQUIPMENT
Gas Distribution $ 2,916,540 $ 2,813,434 $ 2,689,039 $ 2,496,711 $ 2,267,187
Diversified Energy 84,830 74,039 46,617 36,926 15,103
Discontinued Operations 1,040,047 1,299,301 981,901 626,917 322,535
----------------------------------------------------------------------
4,041,417 4,186,774 3,717,557 3,160,554 2,604,825
Less - Accumulated Depreciation and Depletion 1,644,094 1,488,050 1,335,201 1,223,808 1,112,387
----------------------------------------------------------------------
$ 2,397,323 $ 2,698,724 $ 2,382,356 $ 1,936,746 $ 1,492,438
----------------------------------------------------------------------
ASSETS $ 4,392,486 $ 4,329,461 $ 3,633,404 $ 2,898,640 $ 2,240,973
----------------------------------------------------------------------
CAPITAL INVESTMENTS $ 790,930 $ 959,610 $ 790,748 $ 688,838 $ 401,969
----------------------------------------------------------------------
CAPITALIZATION
Long-Term Debt, Including Capital Lease Obligations $ 1,307,168 $ 1,212,564 $ 1,252,040 $ 993,407 $ 685,519
Redeemable Cumulative Preferred Securities 502,203 505,104 173,809 96,449 98,967
Common Shareholder's Equity 808,512 1,153,028 784,568 664,776 511,495
----------------------------------------------------------------------
$ 2,617,883 $ 2,870,696 $ 2,210,417 $ 1,754,632 $ 1,295,981
----------------------------------------------------------------------
OPERATING REVENUES
Diversified Energy $ 842,324 $ 807,236 $ 640,651 $ 368,014 $ 333,691
----------------------------------------------------------------------
Gas Distribution:
Gas sales 838,876 1,080,104 1,102,957 931,940 968,998
End user transportation 82,275 84,749 82,467 80,808 76,483
Intermediate transportation 63,218 55,221 48,570 41,985 39,391
Other 67,405 51,212 42,260 52,913 52,098
----------------------------------------------------------------------
1,051,774 1,271,286 1,276,254 1,107,646 1,136,970
----------------------------------------------------------------------
Less Intercompany Transactions 13,904 14,688 13,427 12,441 9,837
----------------------------------------------------------------------
$ 1,880,194 $ 2,063,834 $ 1,903,478 $ 1,463,219 $ 1,460,824
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MCN Energy Group Inc. Annual Report 1998
38
<PAGE> 41
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EFFECT OF WEATHER
DEGREE DAYS 5,471 6,818 7,170 6,777 6,489
Percent Colder (Warmer) Than Normal (19.3)% .8% 5.4% .3% (4.2)%
Increase (Decrease) From Normal in:
Gas markets (MMcf) (40,272) 589 10,909 1,488 (4,353)
Net income (000) $ (35,314) $ 467 $ 9,886 $ 1,415 $ (3,984)
Diluted earnings per share $ (.45) $ .01 $ .15 $ .02 $ (.07)
OPERATING STATISTICS
Diversified Energy(1):
Pipelines & Processing:
Gas processed (MMcf)
Carbon dioxide treatment 48,868 42,761 44,223 14,588 1,942
Natural gas liquids removal 45,082 21,764 7,446 -- --
----------------------------------------------------------------
93,950 64,525 51,669 14,588 1,942
----------------------------------------------------------------
Methanol produced (thousand gallons) 60,446 60,810 10,545 -- --
Transportation (MMcf) 175,466 115,975 86,391 4,994 1,194
Electric Power:
Electricity sales (thousands of MWh) 3,805 1,843 709 272 194
Energy marketing (MMcf):
Gas sales 454,681 343,719 218,952 170,668 142,352
Exchange gas deliveries 11,061 15,109 22,586 16,462 13,301
----------------------------------------------------------------
465,742 358,828 241,538 187,130 155,653
----------------------------------------------------------------
Gas distribution (MMcf):
Gas sales 172,177 209,092 220,958 209,816 204,384
End user transportation 140,315 145,101 146,895 145,761 140,020
Intermediate transportation 537,532 586,496 527,510 374,428 322,969
----------------------------------------------------------------
850,024 940,689 895,363 730,005 667,373
----------------------------------------------------------------
Discontinued Operations:
Exploration & Production:
Gas production (MMcf) 82,040 78,218 57,202 31,420 16,513
Oil production (Mbbl) 2,635 3,346 1,086 388 85
Gas and oil production (MMcf equivalent) 97,850 98,294 63,718 33,748 17,023
GAS DISTRIBUTION CUSTOMERS
Residential 1,117,977 1,105,749 1,100,101 1,090,039 1,073,306
Total 1,205,628 1,193,122 1,183,443 1,172,613 1,154,545
EMPLOYEES
Diversified Energy 213 289 243 219 190
Gas Distribution 2,773 2,920 3,117 3,183 3,328
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes MCN's share of joint ventures
MCN Energy Group Inc. Annual Report 1998
39
<PAGE> 42
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The consolidated financial statements of MCN Energy Group Inc. were prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Financial information elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
Management is further responsible for maintaining a system of internal
accounting controls, designed to provide reasonable assurance that the books and
records reflect the transactions of MCN and its subsidiaries and that
established policies and procedures are carefully followed. Perhaps the most
important feature in the system of internal control is that it is continually
reviewed for its effectiveness and is augmented by a strong internal audit
program.
Deloitte & Touche LLP, independent certified public accountants, is engaged to
audit the consolidated financial statements of MCN and issue reports thereon.
Their audit is conducted in accordance with generally accepted auditing
standards that comprehend a review of internal accounting controls and tests of
transactions.
MCN's Board of Directors, through its Audit Committee, is responsible for: (1)
ensuring that management fulfills its responsibilities in the preparation of the
consolidated financial statements, and (2) engaging the independent public
accountants. The Committee reviews the scope of the audits and the accounting
principles being applied in financial reporting. The independent public
accountants, representatives of management and the internal auditors meet
regularly (separately and jointly) with the Committee to review the activities
of each and to ensure that each is properly discharging its responsibilities.
Alfred R. Glancy III
Alfred R. Glancy III
Chairman, President and Chief Executive Officer
William K. McCrackin
William K. McCrackin
Vice Chairman and Chief Financial Officer
Gerard Kabzinski
Gerard Kabzinski
Vice President and Controller
TO THE BOARD OF DIRECTORS
We have audited the accompanying consolidated statements of financial position
of MCN Energy Group Inc. and subsidiaries (the "Corporation"), as of December
31, 1998 and 1997, and the related consolidated statements of operations, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 25, 1999
MCN Energy Group Inc. Annual Report 1998
40
<PAGE> 43
BOARD OF DIRECTORS AND MANAGEMENT
BOARD OF DIRECTORS
James G.Berges
Vice Chairman,
Emerson Electric Co.
Stephen E. Ewing
President and CEO,
Michigan Consolidated
Gas Company
Roger Fridholm
President, St. Clair Group
Alfred R. Glancy III
Chairman, President and CEO,
MCN Energy Group Inc.
Frank M. Hennessey
Vice Chairman and CEO,
MascoTech, Inc. and
Chairman, Emco Limited
Thomas H. Jeffs II
Retired Vice Chairman,
First Chicago NBD Corp.
William K. McCrackin
Vice Chairman and CFO,
MCN Energy Group Inc.
Helen O. Petrauskas
Vice President, Environmental
and Safety Engineering,
Ford Motor Co.
Howard F. Sims
Chairman and CEO,
Sims-Varner & Associates, PLLC.
Bill M. Thompson
Retired Vice Chairman,
Phillips Petroleum Co.
MANAGEMENT
MCN ENERGY GROUP INC.
Alfred R. Glancy III
Chairman, President
and CEO
William K. McCrackin
Vice Chairman
and CFO
Howard L. Dow III
Senior Vice President,
Treasurer
Daniel L. Schiffer
Senior Vice President,
General Counsel
and Secretary
Paul D. Geick
Vice President,
Corporate Planning
and Development
Gerard F. Kabzinski
Vice President, Controller
Richard G. Kennedy
Vice President, Finance
Thomas J. Connelly
General Auditor
MICHIGAN CONSOLIDATED
GAS COMPANY
Stephen E. Ewing
President and CEO
Steven E. Kurmas
Senior Vice President,
Regional Operations
Anne R. Cooke
Vice President,
Marketing and Sales
Ronald E. Christian
Vice President,
General Counsel
and Secretary
Mary A. Findlay
Vice President,
Customer Operations
Harold Gardner
Vice President,
Finance and
Regulatory Affairs
Joyce V. Hayes-Giles
Vice President,
Corporate Resources
David R. Nowakowski
Vice President,
Human Resources
Sharon E. O'Niel
Vice President,
Information Technology
Frederick E. Shell
Vice President,
Public Affairs
William J. Wolter
Vice President, Gas Supply,
Transmission and Storage
MichCon Enterprises
Carl J. Croskey
President
MCN Investment Corporation
and Subsidiaries
Joseph T. Williams
President and CEO
MCN Investment
Corporation
Joseph L. Roberts, Jr.
Senior Vice President,
MCN Investment Corporation
and President and CEO,
MCNIC Power Company
Bruce C. Schlansker
Senior Vice President,
MCN Investment Corporation
and President and CEO,
MCNIC Pipeline &
Processing Company
Glen D. Kinder
President and CEO,
CoEnergy Trading Company
MCN Energy Group Inc. Annual Report 1998
41
<PAGE> 44
SHAREHOLDER INFORMATION
ANNUAL MEETING
The 1999 annual meeting of shareholders will be held on Wednesday, April 28,
1999, 1:00 p.m., at MCN's Executive Offices.
COMMON STOCK LISTING
New York Stock Exchange
Ticker Symbol: MCN
PREFERRED SECURITIES
To receive information regarding MCN's various preferred securities, please
contact Investor Relations.
INVESTOR RELATIONS
Investors and securities analysts should contact:
Stewart Lawrence
Director, Investor Relations
500 Griswold Street
Detroit, Michigan 48226
(800) 548-4655
Information also is available on our website at www.mcnenergy.com.
STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust,
A Division of Equiserve
P. O. Box 2500
Jersey City, New Jersey 07303-2500
(800) 344-9713
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
600 Renaissance Center
Suite 900
Detroit, Michigan 48243
(313) 396-3000
EXECUTIVE OFFICES
MCN Energy Group Inc.
500 Griswold Street
Detroit, Michigan 48226
(313) 256-5500
SHAREHOLDER SERVICES
Inquiries regarding dividend payments, changes of address, lost dividend checks,
lost stock certificates or other administrative matters relating to MCN's common
stock should be directed to the stock transfer agent.
INVESTOR SERVICES
The following information is available without charge to shareholders and other
interested parties:
- - Annual Report
- - Form 10-K Annual Report and Form 10-Q Quarterly Reports filed with the
Securities and Exchange Commission
- - Annual and Quarterly Statistical Supplements
To request these publications, or if you have questions about MCN, please
contact Investor Relations.
COMMON STOCK DIVIDENDS
Common stock dividend checks are mailed to reach shareholders on or about the
25th of February, May, August, and November. The dividend amount is declared by
MCN's Board of Directors each quarter.
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
MCN Energy Group offers a Direct Stock Purchase and Dividend Reinvestment Plan
that provides investors a convenient and economical way to purchase shares of
MCN common stock directly from the company, at prevailing market prices and
without brokerage fees. Available options include: making an initial investment
in MCN common stock; purchasing additional shares through voluntary cash
payments; and reinvesting cash dividends on all or a portion of the shares. For
more information, call (800) 344-9713, write to the stock transfer agent or
visit MCN's web site at www.mcnenergy.com.
MCN(R) and MCNEnergy Group(R) are federally registered trademarks of MCN Energy
Group Inc. They may not be used without the written consent of MCN Energy Group
Inc.
This report is submitted for general information to the shareholders of MCN
Energy Group Inc. and not in connection with, or to induce, any sale or offer to
sell or buy any securities.
MCN Energy Group Inc. Annual Report 1998
42
<PAGE> 1
I. NATURE OF BUSINESS OF CLAIMANT AND EVERY SUBSIDIARY THEREOF
MCN ENERGY GROUP INC.: MCN Energy Group Inc. (MCN or the Corporation) is a
diversified energy holding company with markets and investments throughout North
America and in Asia. MCN is organized under the laws of the state of Michigan
and has its principal executive offices at 500 Griswold Street, Detroit,
Michigan 48226. Except where otherwise indicated, the Corporation owns directly
all of the outstanding common stock of MichCon Holdings, Inc., Citizens Gas Fuel
Company (Citizens), Southern Missouri Gas Company (SMGC), MCN Investment
Corporation (MCNIC) and various MCN financing companies. MCN's major business
groups are Gas Distribution and Diversified Energy. Except where otherwise
indicated, the companies set forth below are Michigan corporations located at
500 Griswold Street, Detroit, Michigan 48226.
GAS DISTRIBUTION
MCN, through the following subsidiaries, operates the largest natural gas
distribution and intrastate transmission system in Michigan and one of the
largest in the United States.
A. MICHCON HOLDINGS, INC. is the holding company (formed on September 9,
1998) for Michigan Consolidated Gas Company (MichCon) and MichCon Enterprises,
Inc. MichCon is a public utility engaged in the distribution and transmission of
natural gas in the state of Michigan. MichCon was organized in 1898 and, with
its predecessors, has been in business for nearly 150 years. MichCon serves 1.2
million residential, commercial and industrial customers in the Detroit, Grand
Rapids, Ann Arbor, Traverse City and Muskegon metropolitan areas and in various
other communities throughout the state of Michigan. MichCon conducts
substantially all of its business in the state of Michigan and is subject to the
jurisdiction of the Michigan Public Service Commission (MPSC) as to various
phases of its operations, including gas sales rates, service, and accounting.
MichCon Enterprises, Inc., ( A non-regulated affiliate) was formed on September
9, 1998 to engage in non-regulated activities.
Except where otherwise indicated, the companies set forth below are wholly
owned subsidiaries of MichCon.
1. MichCon Power Company, Inc., formerly MichCon Guardian Corporation, was
formed to participate in power generation projects. MichCon Power Company
and DQE Energy Services intend to enter into a partnership to provide
electricity, heating & cooling to the new Midfield terminal at the
Detroit Metropolitan Airport.
2. MichCon Development Corporation, through its various partnership
arrangements, is engaged in the design, construction and management of
Harbortown, a residential and small commercial development constructed
along the Detroit River in Detroit, Michigan.
3. Blue Lake Holdings, Inc. (Blue Lake), holds a 25% interest in Blue Lake
Gas Storage Company, a partnership that has converted a depleted natural
gas field in northern Michigan into a 46 Bcf natural gas storage field
which it now operates.
1
<PAGE> 2
4. MichCon Fuels Enterprises Company markets natural gas as a vehicular fuel
and markets natural gas to residential and commercial customers through
transportation pilot programs in Michigan. During the fourth quarter of
1998, Fuels Enterprises was transferred to MichCon Enterprises, Inc.
5. MichCon Pipeline Company, through the subsidiaries below, is engaged in
pipeline and gathering projects in Michigan.
a.MichCon Gathering Company owns and operates the Antrim Expansion
Pipeline.
b.Saginaw Bay Pipeline Company is the 66% general partner in Saginaw Bay
Area Limited Partnership, a partnership that operates a 126-mile
pipeline which transports natural gas and natural gas liquids from
reserves in east-central Michigan to natural gas processing plants in
northern Michigan.
c.Saginaw Bay Lateral Company is the 46% general partner in a partnership
which owns and operates lateral pipelines interconnecting with the
126-mile pipeline previously described.
d.Westside Pipeline Company invests in various pipeline and gathering
assets in Michigan.
e.Thunder Bay Gathering Company acquired a pipeline in December 1997,
consisting of 44 miles of gathering lines situated in Alpena and Alcona
Counties in northeast Michigan.
f.MichCon Lateral Company was formed in 1997 to own, operate and
construct natural gas pipelines and gathering systems in Michigan.
6. Huron Pipeline Company was formed in 1996 to acquire an ownership
interest in the ANR Link Pipeline, which transports natural gas to Canada
through a pipeline owned by Niagara Gas Transmission Limited, a
subsidiary of The Consumers Gas Co. Ltd.
a.Huron Gas Services Company, formed in 1996, markets pipeline
transportation services.
7. Kalkaska Gas Storage Limited Partnership holds a 53.5% general
partnership interest in the Cold Springs Gas Storage Limited Partnership
in Kalkaska County, Michigan.
Except where otherwise indicated, the companies set forth below are wholly
owned subsidiaries of MichCon Enterprises, Inc.:
1. MichCon HVAC 1 Company was formed on September 14, 1998 to participate
in the acquisition of Flame Furnace Company. MichCon HVAC 1 company is
a wholly owned subsidiary of MCN. The direct relationship with MCN was
done in order to qualify for tax advantage treatment under the
Internal Revenue Code. It is management's intent to transfer the
stock of MichCon HVAC 1 Company to MichCon Enterprises, Inc. in 1999.
a.Flame Furnace Company, is engaged in heating, ventilation and air
conditioning activities.
2. MichCon HVAC, L.L.C. was formed on December 14, 1998 and is a single
member L.L.C. and it's purpose is to hold the assets of HVAC 2 Company.
MichCon HVAC 2 Company is a wholly owned subsidiary of MCN. The direct
relationship with MCN was done in order to qualify for tax advantage
treatment under the Internal Revenue Code. It is management's intent to
transfer the stock of MichCon HVAC 2 Company to MichCon Enterprises, Inc.
in 1999.
a.MichCon HVAC 2 Company was formed to participate in the asset
acquisition of Kopke Heating & Cooling, Inc. and is engaged in heating,
ventilation and air conditioning activities.
3. MichCon HVAC 3 Company was formed on September 22, 1998 to participate
in the asset acquisition of Tri-Masters Heating & Cooling, Inc. and is
engaged in heating, ventilation and air conditioning activities.
a.Tri-Masters Heating & Cooling, Inc. is engaged in heating, ventilation
and air conditioning activities.
B. CITIZENS GAS FUEL COMPANY: Citizens is a public utility engaged in the
distribution of natural gas. Citizens' was organized in 1951 and, with its
predecessors, has been in business for more than 140 years. Citizens serves
approximately 15,000 residential, commercial and industrial customers in and
around Adrian, Michigan. Citizens' principal executive offices are located
at 127 N. Main Street, Adrian, Michigan 49221. Citizens' conducts all of its
business in the state of Michigan and its rates are set by the Adrian Gas
Rate Commission. Other various phases of its operations are subject to the
jurisdiction of the MPSC.
C. SOUTHERN MISSOURI GAS COMPANY: MCN owns a 47.5% interest in Southern
Missouri Gas Company, L.P. (SMGC) which is a public utility engaged in the
distribution of natural gas. SMGC was organized in 1996 and with its
2
<PAGE> 3
predecessors, has been in business since 1995. SMGC serves approximately
7,000 residential, commercial, and industrial customers in southern
Missouri. The principal executive offices of SMGC are located at 301 East
17th Street, Mountain Grove, Missouri 65711. SMGC conducts all of its
business in the state of Missouri. Its rates and other various phases of its
operations are subject to the jurisdiction of the Missouri Public Service
Commission.
DIVERSIFIED ENERGY
D. MCN INVESTMENT CORPORATION: Organized in 1986, MCNIC is the holding
company for MCN's various diversified energy subsidiaries. MCNIC, through
its subsidiaries and joint ventures, provides gathering, processing and
transmission services, invests in electric generation and distribution
facilities, engages in energy marketing activities, storage services,
engages in gas and oil exploration, development and production, and is
involved in other energy-related businesses. Except where otherwise
indicated, the companies set forth below are wholly owned subsidiaries of
MCNIC.
Pipelines & Processing
MCNIC's Pipelines & Processing businesses are involved in ventures that
gather and transport natural gas from producing fields to processing plants
and/or markets. This business also includes plants which process natural gas
to remove CO2 and other impurities and recover natural gas liquids.
Additionally this segment has an investment in a methanol production
facility and other energy-related businesses.
1. MCNIC Pipeline & Processing Company engages in pipeline and processing
projects through the following subsidiaries and partnerships.
a. MCNIC Offshore Pipeline & Processing Company holds a 33%
interest in the Blue Dolphin System.
b. MCNIC Michigan Holdings, Inc.
i. MCNIC CSG Pipeline Company holds a 50% interest in
Cardinal States Gathering.
ii. Bagley Processing Company (47% general partnership
interest)
iii. Warner Treating Limited Liability Company (95%
interest)
iv. Terra-Westside Processing Company (85% interest) v.
v. ThunderBay Pipeline Company, L.L.C. (90% interest)
holds CO2 Processing Plants.
c. MCNIC East Coast Pipeline Company holds a 20% interest in
the 250 mile Portland Pipeline Project.
d. MCNIC Jonah Pipeline Company holds a 33% partnership
interest in Jonah Gas Gathering Company.
e. MCNIC Gulf Coast Gathering Company holds a 1% general
partnership interest in Copano Field Services, L.P.
f. MCNIC Gulf Coast Limited, Inc. holds a 49% limited
partnership interest in Copano Field Services, L.P., and a
90% limited partnership interest in CFS/Upper Gulf Coast,
Copano Pipelines/Upper Gulf Coast, L.P., and CES/Upper Gulf
Coast, L.P.
g. MCNIC Mobile Bay Pipeline Company holds a 34.6% interest in
Dauphin Island Gathering Partners.
h. MCNIC Mobile Bay Processing Company holds a 42.8% interest
in Mobile Bay Processing Partners.
i. MCNIC South Texas Gathering Company holds a 1% general
partnership interest in each of CFS/Copano Bay, L.P.,
CFS/South Texas, L.P. and CFS/Agua Dulce, L.P.
j. MCNIC Upper Gulf Coast Pipeline & Processing Company holds a
1% interest in Copano Pipeline/ Upper Gulf Coast, L.P.
k. MCNIC General Methanol Company holds a 1% general
partnership interest in Lyondell Methanol Co. L.P.
l. MCNIC Methanol Holdings Company holds a 24% limited
partnership interest in Lyondell Methanol Co. L.P.
m. American Central Western Oklahoma Gas Company (40% interest)
n. Crown Asphalt Ridge, L.L.C. (75% interest)
o. Indiana Gathering, L.L.C. (69.5% interest)
p. MCNIC East Texas Gathering Company holds a 39.9% limited
partnership interest in American Central Eastern Texas Gas
Company, L.P.
q. MCNIC East Texas Pipeline & Processing Company holds a 0.1%
general partnership interest in American Central Eastern
Texas Gas Company, L.P.
r. MCNIC CO2 Investment Company holds a 41.5% limited
partnership interest in PSCO2, L.P., a CO2 pipeline project.
s. MCNIC Permian Basin Company holds a 0.99% general
partnership interest in PSCO2, L.P.
t. MCNIC Rodeo Gathering Inc. holds a 25% interest in Keyes
Helium Company, L.L.C.
3
<PAGE> 4
i. Keyes Helium Company, L.L.C. is a joint venture which
processes helium out of natural gas.
u. Crown Asphalt Distribution, L.L.C. was formed to own and
operate Asphalt Distribution & Processing Facilities.
v. Bitter Creek, L.L.C. was formed to own and operate a
gathering line in Campbell County.
w. MCNIC Millennium Company was formed to participate in the
Millenium Pipeline Project.
x. MCNIC Vector Pipeline was formed to hold a limited
partnership interest in Vector Pipeline, L.P., A Delaware
Limited Partnership, which will construct, own and operate
the Vector Pipeline Project.
y. CRC Holdings, L.L.C. was formed as a holding company for the
following companies:
i. CRC No. 1 L.L.C.
ii. CRC No. 2 L.L.C.
iii. CRC No. 3 L.L.C.
iv. CRC No. 4 L.L.C.
v. CRC No. 5 L.L.C.
vi. CRC No. 6 L.L.C.
Electric Power
MCNIC's Electric Power businesses pursue electric generation and
distribution opportunities throughout North America and in Asia.
2. MCNIC Power Company pursues domestic and international power generation
related opportunities.
a. CDC Ada, Inc. is a 49% limited partner in Ada Cogeneration Limited
Partnership, which owns and operates a 30 megawatt (MW) natural
gas-fueled cogeneration facility in western Michigan.
b. MCNIC Ada GP, Inc. was formed in 1996 and holds a 1% general
partnership interest in the Ada Cogeneration Limited Partnership.
c. Ludington Cogeneration Co. is the 1% general partner in Michigan Power
L.P., a joint venture that built and operates a 123 MW natural
gas-fueled cogeneration plant in western Michigan.
d. Ludington Cogeneration Holdings, Ltd. is a 49% limited partner in the
123 MW cogeneration plant mentioned above.
e. Summit Computing, Inc., a Delaware corporation, holds a 99% limited
partnership interest in Source Midland Limited Partnership. Source
Midland Limited Partnership has an 23.1% general partnership interest
in the Midland Cogeneration Venture Limited Partnership.
f. Source Cogeneration Company, a Delaware corporation, holds a 1%
general partnership interest in Source Midland Limited Partnership.
g. Mobile Bay Energy, L.L.C. is constructing a 40 MW cogeneration
facility in Alabama (50% interest).
h. MCNIC Person GP, Inc. was formed to hold a 94% interest in
Cobisa-Person Limited Partnership, a Delaware LP.
i. South Norwalk Power Partners, L.L.C. was formed on March 2, 1998.
The Michigan Limited Liability Company was formed to participate in
power projects.
Energy Marketing
MCNIC's Energy Marketing businesses pursue opportunities throughout the
Midwest, Gulf Coast and Northeast regions of the United States and eastern
Canada.
3. CoEnergy Trading Company is engaged in the purchase and sale of natural
gas to large-volume gas users and gas and electric utilities in Michigan,
the Midwest, the eastern United States and Canada. CoEnergy Trading
Company holds a 50% interest in the following:
a. U.S. CoEnergy Services, a Wisconsin general partnership
b. Torch CoEnergy, L.L.C.
c. DTE-CoEnergy, L.L.C.
4
<PAGE> 5
4. CoEnergy Canadian Holdings, Ltd., a New Brunswick corporation, was formed
to market and sell natural gas in Canada and the northeastern United
States.
5. CoEnergy Supply Company engages in the purchase and sale of natural gas,
a portion of which is produced by subsidiaries of MCNIC Oil & Gas
Company.
6. MCNIC Gas Storage Company engages in the storage of natural gas.
a.South Romeo Gas Storage Company, a Michigan partnership in which MCNIC
Gas Storage Company has a 50% interest, owns and operates the
Washington 28 Gas Storage Field, a 10 Bcf storage field in southeastern
Michigan which provides storage services to MCNIC's Energy Marketing
and Electric Power operations. South Romeo Gas Storage Company holds a
33% interest in South Romeo Gas Storage Corporation.
b.W-10 Holdings, Inc., holds a 40% interest in Washington 10 Storage
Partnership, a partnership that is developing and will operate the
Washington 10 Storage Field, a 42 Bcf storage field in southeastern
Michigan. Washington 10 Storage Partnership owns Washington 10 Storage
Corporation.
c.The Orchards Golf Limited Partnership, a Michigan partnership in which
MCNIC Gas Storage Company has a 50% interest, developed, owns and
operates a residential community and golf course on 520 acres of land
above the South Romeo gas storage field in southeastern Michigan.
Exploration & Production
7. MCNIC Oil & Gas Company (MOG) is engaged in natural gas and oil
exploration, development and production in the Midwest/Appalachia,
Midcontinent/Gulf Coast and Western regions of the U.S. MCN is committed
to the sale of its exploration and production properties and expects the
sale to be completed in mid-1999. Accordingly, MOG has been accounted
for as discontinued operations. The following companies are direct
subsidiaries of MOG:
a. Appalachia Acquisition Properties, Inc.
b. Elmira Antrim Company
c. GeoTrend Exploration, Inc.
d. Green Oak Development Company
e. Green River Antrim Company
f. Gulf Coast Acquisition Properties, Inc.
g. Otsego Exploration Company, L.L.C.
h. MCNIC Enhanced Production, Inc. has a 75% interest in Otsego
EOR, L.L.C.
i. MCNIC Oil & Gas Midcontinent, Inc.
j. MCNIC Oil & Gas Canada, Inc. (a New Brunswick corporation)
k. MCNIC Oil & Gas Properties, Inc.
i. SEM, a 50% owned joint venture, was established to buy
and sell E&P Properties.
l. MCNIC Oil & Gas Reid Properties, Inc. (a Delaware
corporation)
i. Appalachian Methane, Inc., a Delaware corporation,
holds a 50% interest Buchanan Production Co., a
Virginia general partnership.
ii. Appalachian Operators, Inc., (a Delaware corporation)
holds a 50% interest in Buchanan Production Co., a
Virginia general partnership.
iii. MCNIC Oakwood Gathering, Inc. (a Delaware corporation)
m. MCNIC West Coast Company
n. Warner Antrim Company
o. MCNIC Oil & Gas CV Company
p. Michigan Acquisition Properties, Inc.
q. Midcontinent Acquisition Properties, Inc.
r. Pageant Corporation
s. Rockies Acquisition Properties, Inc.
5
<PAGE> 6
Other
8. MCNIC International Holdings and MCNIC-GP International Holdings, each
of Grand Cayman, Cayman Islands, hold a 99% and 1% interest,
respectively, in IG-ONE LTD of Port-Louis, Mauritius. IG-ONE LTD. has a
40 percent interest in Torrent Power Limited, a joint venture with
Torrent Group of Ahmedabad, India. The joint venture is involved in the
electric generation and distribution business in western India. IG -ONE
LTD. also holds ownership interests in other power generation projects
in India. In February 1998, MCN has agreed to sell its interest in TPL
to Torrent Group of India.
9. MCNIC Nepal Limited holds a 90% ownership interest in a 36 MW
hydroelectric power project in Nepal.
10. Colombia Holdings was formed to be the shareholder of MCNIC Colombia
International, which had been expected to invest in an urea processing
plant in Colombia.
11. Bridgewater Holdings, Inc. holds a limited partnership interest in
Bridgewater Place, a Grand Rapids, Michigan office building.
12. Combustion Concepts, Inc. holds patents for the development of
pressurized combustion technologies which provide increased fuel
efficiency, heat uniformity and compactness of equipment.
Financing Companies
E. MCN MICHIGAN LIMITED PARTNERSHIP (MCN Michigan): MCN is the 1% general
partner in MCN Michigan, a Michigan limited partnership. MCN Michigan exists
for the sole purpose of issuing its limited partnership interests in the
form of preferred securities and investing the gross proceeds thereof in
MCN debt securities.
F. MCN FINANCING I: MCN is the sole owner of MCN Financing I, a Delaware
Business Trust. MCN Financing I exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities.
G. MCN FINANCING II: MCN is the sole owner of MCN Financing II, a Delaware
Business Trust. MCN Financing II exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities.
H. MCN FINANCING III: MCN is the sole owner of MCN Financing III, a Delaware
Business Trust. MCN Financing III exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities.
I. MCN FINANCING IV: MCN is the sole owner of MCN Financing IV, a Delaware
Business Trust. MCN Financing IV exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities.
J. MCN FINANCING V: MCN is the sole owner of MCN Financing V, a Delaware
Business Trust. MCN Financing V exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities. During 1998, MCN Financing V redeemed all outstanding shares of
the preferred securities.
K. MCN FINANCING VI: MCN is the sole owner of MCN Financing VI, a Delaware
Business Trust. MCN Financing VI exists for the sole purpose of issuing
preferred securities and investing the gross proceeds thereof in MCN debt
securities.
6
<PAGE> 1
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-02105 and 333-02107 on Form S-8; 333-47137, 333-47139, and 333-45281 on
Form S-3 and Post-Effective Amendment No. 1 to Registration Statement No.
33-21930-99 on Form S-8 on MCN Energy Group Inc., of our reports dated
February 25, 1999, appearing in and incorporated by reference in this
Annual Report on Form 10-K of MCN Energy Group Inc for the year ended
December 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
Detroit, Michigan
March 11, 1999
<PAGE> 1
EXHIBIT 24-1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Stephen E. Ewing
--------------------
Stephen E. Ewing
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ William K. McCrackin
------------------------
William K. McCrackin
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Roger Fridholm
------------------
Roger Fridholm
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Frank M. Hennessey
----------------------
Frank M. Hennessey
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998 including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Thomas H. Jeffs II
----------------------
Thomas H. Jeffs II
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998 including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Bill M. Thompson
--------------------
Bill M. Thompson
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1997, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ James G. Berges
-------------------
James G. Berges
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in her name and on her behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Helen O. Petrauskas
-----------------------
Helen O. Petrauskas
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III,
Daniel L. Schiffer and Gerard F. Kabzinski, and each of them, his true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the others) to execute in his name and on his behalf and to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Howard F. Sims
------------------
Howard F. Sims
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III
and Daniel L. Schiffer, and each of them, his true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in his name and on his behalf and to file with the Securities and
Exchange Commission an Annual Report on Form 10-K for the year ended December
31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Gerard F. Kabzinski
-----------------------
Gerard F. Kabzinski
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director or Officer of MCN Energy Group Inc., a
Michigan corporation, does hereby constitute and appoint, Daniel L. Schiffer and
Gerard F. Kabzinski, and each of them, his true and lawful attorneys and agents,
each with full power and authority (acting alone and without the other) to
execute in his name and on his behalf and to file with the Securities and
Exchange Commission an Annual Report on Form 10-K for the year ended December
31, 1998, including all amendments.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 24th
day of February, 1999.
/s/ Alfred R. Glancy III
------------------------
Alfred R. Glancy III
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,039
<SECURITIES> 0
<RECEIVABLES> 406,963
<ALLOWANCES> 9,665
<INVENTORY> 149,797
<CURRENT-ASSETS> 767,045
<PP&E> 4,041,417
<DEPRECIATION> 1,644,094
<TOTAL-ASSETS> 4,392,486
<CURRENT-LIABILITIES> 1,430,134
<BONDS> 1,307,168
502,203
0
<COMMON> 797
<OTHER-SE> 807,715
<TOTAL-LIABILITY-AND-EQUITY> 4,392,486
<SALES> 0
<TOTAL-REVENUES> 1,880,194
<CGS> 0
<TOTAL-COSTS> 1,886,534
<OTHER-EXPENSES> 11,598
<LOSS-PROVISION> 13,282
<INTEREST-EXPENSE> 79,449
<INCOME-PRETAX> (21,620)
<INCOME-TAX> (15,456)
<INCOME-CONTINUING> (6,164)
<DISCONTINUED> (272,791)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (278,955)
<EPS-PRIMARY> (3.54)
<EPS-DILUTED> (3.54)
</TABLE>
