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As filed with the Securities and Exchange Commission on November 24, 1999
File No. 70-____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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DTE Energy Company
2000 Second Avenue
Detroit, MI 48226-1279
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(Name of company filing this statement
and address of principal executive offices)
N/A
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(Name of top registered holding company)
Susan M. Beale
DTE Energy Company
2000 Second Avenue
Detroit, MI 48226-1279
Tel. (313) 235-4000
Fax (313) 235-7098
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(Name and address of agent for service)
The Commission is also requested to send copies of all
notices, orders and communications in connection with
this Application to:
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Christopher C. Nern Daniel L. Schiffer
Raymond O. Sturdy Michael J. Way
DTE Energy Company MCN Energy Group Inc.
2000 Second Avenue 500 Griswold Street
Detroit, MI 48226-1279 Detroit, MI 48226
Tel. (313) 235-4000 Tel. (313) 256-5206
Fax (313) 235-8500 Fax (313) 965-0009
Arnold H. Quint William S. Lamb
Laurence E. Skinner(1) Markian Melnyk
Ted J. Murphy LeBoeuf, Lamb, Greene &
Hunton & Williams MacRae, L.L.P.
1900 K Street, N.W. 125 West 55th Street
Washington, D.C. 20006 New York, N.Y. 10019-5389
Tel. (202) 955-1500 Tel. (212) 424-8000
Fax (202) 778-2201 Fax (212) 424-8500
INTRODUCTION AND REQUEST FOR COMMISSION ACTION
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act"),(2) DTE Energy Company ("DTE"), which is an
exempt intrastate holding company under Section 3(a)(1) of the Act, hereby
requests that the Securities and Exchange Commission (the "Commission")
authorize DTE's acquisition of all of the issued and outstanding common stock of
MCN Energy Group Inc. ("MCN"), which is also an exempt intrastate holding
company under Section 3(a)(1) of the Act (the "Merger"). DTE also requests an
order under Section 3(a)(1) of the Act declaring it and each of its subsidiary
companies exempt from all provisions of the Act, except Section 9(a)(2),
following consummation of the Merger.
The Merger will be governed by the terms of an Agreement and Plan of
Merger dated as of October 4, 1999, and as amended on November 12, 1999 (the
"Merger Agreement"), by and among DTE, DTE Enterprises, Inc., a Michigan
corporation and a wholly-owned subsidiary of DTE ("Merger Sub"), and MCN. Under
the terms of the Merger Agreement, MCN will be merged into Merger Sub with
Merger Sub surviving as a wholly-owned subsidiary of DTE. The Merger Agreement
is appended to this application as Exhibit B-1.
MCN's board of directors unanimously approved the Merger on October 4,
1999, and DTE's board of directors approved the Merger, by a unanimous vote of
all directors present, on
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(1) Admitted in Virginia.
(2) 15 U.S.C. Section 79a et. seq. (1994).
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October 4, 1999.(3) MCN's shareholders will be asked to consider and to vote on
a proposal to approve the Merger Agreement on December 20, 1999. DTE's
shareholders will be asked to consider and to vote on a proposal to approve the
issuance of DTE Common Stock in connection with the Merger on December 20, 1999.
A registration statement on Form S-4, which includes a Joint Proxy/Prospectus
(the "Registration Statement"), was filed with the Commission on October 15,
1999 and amended and declared effective on November 12, 1999.
The Michigan Public Service Commission ("MPSC") does not have
jurisdiction to review utility mergers. A letter from the MPSC confirming its
lack of merger review authority, but endorsing the Merger and stating that the
Merger will not adversely affect its ability to fulfill its regulatory
responsibilities, will be mailed by the MPSC to the Commission concurrent with
this filing.(4)
In addition, the Merger is subject to the 30-day waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) (the "HSR
Act"). On November 22, 1999, DTE and MCN each filed a pre-merger notification
and report form for the Merger required pursuant to the HSR Act with the
Department of Justice ("DOJ") and the Federal Trade Commission ("FTC").
DTE is the parent holding company of The Detroit Edison Company
("Detroit Edison"), a public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in southeastern Michigan.
MCN is the parent holding company of Michigan Consolidated Gas Company
("MichCon"), a natural gas utility serving approximately 1.2 million customers
in more than 500 communities throughout Michigan and Citizens Gas Fuel Company,
a natural gas utility serving approximately 15,000 residential, commercial and
industrial customers in and around Adrian, Michigan. MCN also owns a 47.5%
interest in Southern Missouri Gas Company, L.P., a natural gas utility which
serves approximately 7,000 residential, commercial, and industrial customers in
southern Missouri.
The Merger will create a fully integrated electric and natural gas
company and a premier regional energy provider with operations spanning the
energy value chain.
For the Commission to approve the Merger, Section 10 of the Act
requires the Commission to find that the Merger will tend towards the economical
and efficient development of an integrated public-utility system and that state
laws have been complied with. As is set forth in detail below, the Merger
clearly satisfies these requirements. While Section 10 also permits
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(3) The two DTE directors who were unavailable on October 4, 1999
subsequently indicated their respective approval of the merger agreement, and
the Merger, after reviewing all material information regarding the transaction.
(4) In addition, the Missouri Public Service Commission, which has
jurisdiction over the rates of MCN's Southern Missouri Gas Company, L.P.,
subsidiary has no authority to review the Merger.
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the Commission to disapprove an acquisition if certain adverse circumstances
would result, such as undue concentration of control or other harm to the public
interest or the interests of investors or consumers, as is explained below, no
such adverse circumstances are present here. Accordingly, DTE respectfully
submits that the Merger satisfies all of the requirements of Section 10.
In addition, DTE requests that the Commission allow it to retain its
Section 3(a)(1) exemption, and grant Merger Sub a Section 3(a)(1) exemption of
its own, after the consummation of the Merger. To qualify for an exemption under
Section 3(a)(1), a holding company system must meet the specific intrastate
requirements of the exemption and the Commission must not find that granting the
exemption would be detrimental to the public interest or to the interests of
investors or consumers. DTE submits that these criteria are clearly satisfied as
well.
Consequently, DTE requests expedited treatment of this application, so
that the Merger may be consummated as rapidly as possible. DTE anticipates that
the Commission's approval under Section 10 will be the final regulatory approval
required prior to the completion of the Merger.
Unless otherwise indicated, all financial information set forth herein
is current as of September 30, 1999.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. DESCRIPTION OF THE PARTIES TO THE TRANSACTION
1. DTE
DTE is a public utility holding company incorporated under the laws of
the state of Michigan,(5) which is exempt from regulation by the Commission
under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1)
of the Act and Rule 2.(6) Although DTE itself has no employees or operations of
its own, it directly or indirectly holds the stock of its various subsidiaries
that provide electric utility services and other energy-related products and
services.
The common stock of DTE, which is without par value ("DTE Common
Stock"), is listed on the New York Stock Exchange (the "NYSE"). As of the close
of business on November 5, 1999, there were 145,041,324 shares of DTE Common
Stock issued and outstanding. For the nine months ended September 30, 1999,
DTE's operating revenues on a consolidated basis were
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(5) DTE was incorporated on January 26, 1995 pursuant to a corporate
reorganization under which it became the holding company for Detroit Edison and
various other subsidiaries, previously owned by Detroit Edison, effective
January 1, 1996.
(6) 17 C.F.R. Section 250.2 (1998).
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approximately $3.6 billion, of which approximately $486 million were
attributable to non-utility activities.(7) Total assets of DTE and its
subsidiaries as of September 30, 1999 were approximately $12.3 billion, of which
approximately $ 7.065 billion consisted of net electric plant and equipment.
DTE's principal executive office is located at 2000 2nd Avenue, Detroit,
Michigan, 48226-1279. As of December 31, 1998, Detroit Edison, DTE's principal
operating subsidiary, had 8,482 employees while DTE's other subsidiaries had 299
employees. More detailed information concerning DTE and its subsidiaries is
contained in DTE's Annual Report on Form 10-K for the year ended December 31,
1998, and in its Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, which are incorporated herein by reference as Exhibits G-1 and G-2
respectively.
A. UTILITY SUBSIDIARIES
Detroit Edison accounted for approximately 91% and 87% of DTE's assets
and revenues, respectively, as of September 30, 1999.(8) Detroit Edison has been
incorporated in Michigan since 1967, and its corporate predecessors have
provided electric utility service in the state for a century. Detroit Edison is
a Michigan public utility subject to general regulation by the MPSC regarding
its conditions of service, rates and recovery of certain costs, accounting and
various other matters and to regulation by the Federal Energy Regulatory
Commission ("FERC") under the Federal Power Act. In addition, the Nuclear
Regulatory Commission ("NRC") has regulatory jurisdiction over all phases of the
operation, construction (including plant modifications), licensing and
decommissioning of Detroit Edison's Fermi 2 nuclear power plant. Detroit Edison
is also subject to extensive state and federal environmental regulation.
Detroit Edison is engaged in the generation, purchase, transmission,
distribution and sale of electric energy in a 7,600 square-mile area in
southeastern Michigan. Detroit Edison's service area includes about 13% of
Michigan's total land area and about half of the state's population
(approximately five million people). Detroit Edison's residential customers
reside in urban and rural areas, including an extensive shoreline along the
Great Lakes and connecting waters. Detroit Edison's service area is depicted on
the map submitted as Exhibit E-1 (which shall be filed in paper under cover of)
Form SE.
Detroit Edison generally experiences its peak load and highest total
system sales during the third quarter of the year as a result of air
conditioning and cooling-related loads. During 1998, sales to automotive and
automotive-related customers accounted for approximately 9% of
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(7) By comparison, for the year ended December 31, 1998, DTE has
consolidated operating revenues of $4.2 billion, approximately $319 million of
which were attributable to non-utility activities.
(8) Specifically, for the twelve months ended September 30, 1999, Detroit
Edison's operating revenues and net income available for common shares were
approximately $4.032 billion and $ 448 million, respectively. As of September
30, 1999, Detroit Edison's assets were valued at $ 11.191 billion.
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total Detroit Edison operating revenues. Detroit Edison's 30 largest industrial
customers accounted for approximately 17% of total operating revenues in 1998,
1997 and 1996, but no one customer accounted for more than 3% of total operating
revenues.
As reported in DTE's Annual Report on Form 10-K for the year ended
December 31, 1998, during 1998, 75.5% of Detroit Edison's net system output came
from fossil-fueled plants, 12.2% from the Fermi 2 nuclear plant and 12.3% from
power purchased from other sources such, as cogeneration facilities and other
small power producers. As of December 31, 1998, Detroit Edison had a summer net
rated capability of approximately 10,200 MW.
Detroit Edison's electric generating plants are interconnected by a
transmission system operating at up to 345 kilovolts through 35 transmission
stations. As of December 31, 1998, electric energy was being distributed in
Detroit Edison's service area through 610 substations over 3,658 distribution
circuits.
Detroit Edison and Consumers Energy Company ("Consumers") are parties
to an Electric Coordination Agreement providing for emergency assistance,
coordination of operations and planning for bulk power supply, with energy
interchanged at nine interconnections. Detroit Edison and Consumers also have
interchange agreements to exchange electric energy through interconnections with
First Energy, Indiana Michigan Power Company, Northern Indiana Public Service
Company and Ontario Hydro. In addition, Detroit Edison has interchange
agreements for the exchange of electric energy with Michigan South Central Power
Agency, Rouge Steel Company and the City of Wyandotte.
B. NON-UTILITY SUBSIDIARIES
DTE and Detroit Edison are engaged in numerous non-utility businesses,
as well as certain other utility businesses that are not jurisdictional under
the Act, through various subsidiaries.
Midwest Energy Resources Company, a Michigan corporation, is a
wholly-owned subsidiary of Detroit Edison and is engaged in operating a
coal-transshipment facility in Superior, Wisconsin.
The Edison Illuminating Company of Detroit, a Michigan corporation, is
a wholly-owned subsidiary of Detroit Edison and holds real estate.
St. Clair Energy Corporation, a Michigan corporation, is a wholly-owned
subsidiary of Detroit Edison and is engaged in fuel procurement.
DTE Energy Resources, Inc.("DTE ER"), formerly DE Energy Services,
Inc., a Michigan corporation, is a DTE subsidiary and is engaged in energy
services and landfill gas projects.
DTE Energy Trading, Inc.("DTE Energy Trading"), formerly Huron Energy
Services, Inc., a Michigan corporation, is a wholly-owned subsidiary of DTE ER
and is engaged in wholesale and retail energy marketing.
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DTE Engineering Services, Inc. ("DTE Engineering Services"), formerly
UTS Systems, Inc., a Michigan corporation, is a wholly-owned subsidiary of DTE
Energy Solutions, Inc. and is engaged in professional engineering services.
DTE Energy Marketing, Inc. ("DTE EM"), a Michigan corporation, is a
wholly-owned subsidiary of DTE ER and is engaged in equity investment.
DTE Biomass Energy, Inc. ("DTE Biomass"), formerly Biomass Energy
Systems, Inc., a Michigan corporation, is a wholly-owned subsidiary of DTE ER
and is engaged in landfill gas projects.
RES Power, Inc., Sonoma Energy Systems, Riverview Gas Producers, Inc.,
DTE Arbor Gas Producers, Inc., Plainville Gas Producers, Inc., Belleville Gas
Producers, Inc., Escambia Gas Producers, Inc., Fayetteville Gas Producers,
L.L.C., Lycoming Gas Producers, Inc., Roxana Gas Producers, Inc., Orlando Gas
Producers, Inc., Adrian Gas Producers, L.L.C., Crimson Gas Producers, L.L.C.,
Birmingham Gas Producers, L.L.C., Montgomery Gas Producers, L.L.C., Oklahoma Gas
Producers, L.L.C., Phoenix Gas Producers, L.L.C., and Wake Gas Producers, L.L.C.
are all Michigan corporations, are all wholly-owned subsidiaries of DTE Biomass
and are all engaged in landfill gas projects.
DTE Energy Services, Inc. ("DTE ES"), formerly Edison Energy Services,
Inc., a Michigan corporation, is a wholly-owned subsidiary of DTE ER and is
engaged in energy services activities.
PCI Enterprises Company, a Michigan corporation, is a wholly-owned
subsidiary of DTE ES and operates a pulverized coal facility.
EES Coke Battery Company, Inc., a Michigan corporation, is a
wholly-owned subsidiary of DTE ES and operates a coke battery facility.
DTE Indiana Harbor, L.L.C. ("Indiana Harbor"), a Delaware corporation,
is 75% owned by DTE ES and 25% owned by DTE ES Holdings, Inc. and is itself a
holding company.
DTE BH Holdings, Inc. ("DTE BH"), a Delaware corporation, is a
wholly-owned subsidiary of DTE ES and is a holding company.
Burns Harbor Coke Energy Company, Inc. ("Burns Harbor"), a Delaware
corporation, is a wholly-owned subsidiary of DTE BH and is a holding company.
DTE Burns Harbor, L.L.C. ("DTE Burns Harbor"), a Delaware corporation,
is 88% owned by Burns Harbor and 12% owned by DTE BH, and operates a coke
battery facility.
DTE Coal Services, Inc. ("DTE Coal"), a Michigan corporation, is a
wholly-owned subsidiary of DTE ER and is engaged in selling and transporting
coal to third parties.
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DTE Rail Services, Inc. ("DTE Rail"), formerly DTE CS Rail Services,
Inc., a Michigan Corporation, is a wholly-owned subsidiary of DTE Coal and is
engaged in rail car repair and maintenance.
DTE Transportation Services, Inc. ("DTE Transportation"), a Michigan
corporation, is a wholly-owned subsidiary of DTE Rail and is engaged in rail
shipment management and logistics, short line railroad management, rail car
trading and brokering, and rail car leasing.
DTE Capital Corporation ("DTE Capital"), a Michigan corporation, is a
wholly-owned subsidiary of DTE and provides financial services for DTE's
non-utility subsidiaries.
Syndeco Realty Corporation, a Michigan corporation, is a wholly-owned
subsidiary of DTE and is engaged in real estate projects.
Edison Development Corporation ("EDC"), a Michigan corporation, is a
wholly-owned subsidiary of DTE and is engaged in business development.
EdVenture Capital Corp. a Michigan Corporation, is a wholly-owned
subsidiary of EDC and is engaged in equity investment.
Wolverine Energy Services, Inc. ("Wolverine"), a Michigan corporation,
is a wholly-owned subsidiary of DTE and is a holding company.
DTE Edison America Catalog Sales, Inc. ("Catalog"), a Michigan
corporation, is a wholly-owned subsidiary of Wolverine and is engaged in a
multi-state retail catalog business for energy related products.
DTE Edison America, Inc. ("Edison America"), a Michigan corporation, is
a wholly-owned subsidiary of Wolverine and is engaged in energy and energy
related products.
DTE Energy Solutions, Inc. ("Solutions"), a Michigan corporation, is a
wholly-owned subsidiary of Wolverine and is engaged in system based energy
related products and services.
DTE Energy Technologies, Inc. ("Technologies"), a Michigan corporation,
is a wholly-owned subsidiary of Wolverine and is engaged in energy solutions for
industrial, commercial and small businesses.
2. MCN
MCN is an integrated energy holding company primarily involved in
natural gas production, gathering, processing, transmission, storage and
distribution, electric power generation and energy marketing. MCN is organized
under the laws of the state of Michigan and claims its exemption from regulation
by the Commission under the Act (except for Section 9(a)(2) thereof) under
Section 3(a)(1) of the Act pursuant to Rule 2. Through its subsidiaries,
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MCN operates the largest natural gas distribution and intrastate transmission
system in Michigan and provides natural gas service in the state. It also has
extensive diversified energy holdings through various subsidiaries, including
interests in a number of electric generating facilities.
The common stock of MCN par value $0.01 per share ("MCN Common Stock"),
is listed on the NYSE. As of the close of business on November 5, 1999 there
were 85,655,381 shares of MCN Common Stock issued and outstanding. For the
twelve months ended September 30, 1999, MCN's operating revenues on a
consolidated basis were approximately $2.3 billion, of which approximately $1.1
billion were attributable to utility activities. Consolidated assets of MCN and
its subsidiaries as of September 30, 1999 were more than $4.0 billion, of which
approximately $1.5 billion consisted of net gas utility plant and equipment.
MCN's principal executive office is located at 500 Griswold Street, Detroit,
Michigan, 48226. As of December 31, 1998, MichCon, had 2,724 employees while MCN
itself and the other MCN subsidiaries had 262 employees. More detailed
information concerning MCN and its subsidiaries is contained in MCN's Current
Report on Form 8-K, dated October 15, 1999, and its quarterly report on Form
10-Q for the quarter ended September 30, 1999, which are incorporated herein by
reference as Exhibits G-3 and G-4 respectively.
A. UTILITY SUBSIDIARIES
MCN's regulated utility operations are operated by its Gas Distribution
business segment and consist of three natural gas utility subsidiaries. MichCon
is MCN's principal utility subsidiary. A natural gas distribution and
transmission company serving approximately 1.2 million customers in more than
500 communities throughout Michigan, MichCon owns integrated distribution,
transmission, production and storage properties and facilities. As of 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. It 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's compressor facilities related to
transmission and production, have a total rated capacity of 28,500 horsepower
and 2,285 horsepower, respectively. Properties relating to four underground
natural gas storage fields with an aggregate working gas storage capacity of
approximately 124 Bcf consist principally of 297 gas storage wells (61 of which
are observation wells), approximately 105 miles of field lines, dehydration
plants and compressor facilities with a total rated capacity of 69,000
horsepower.
MichCon's rates are regulated by the MPSC. It is also subject to the
requirements of various other regulatory agencies with respect to safety, the
environment and health. For the twelve months ended September 30, 1999,
MichCon's operating revenues and income were approximately $1.1 billion and $109
million, respectively. As of September 30, 1999, MichCon's assets were valued at
$2.2 billion.
Citizens Gas Fuel Company ("Citizens") is a public utility engaged in
the distribution of natural gas, also in Michigan. 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
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executive offices are located at 127 N. Main Street, Adrian, Michigan 48921.
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.
For the twelve months ended September 30, 1999, Citizens' operating
revenues and income were approximately $16.2 million and $1.7 million,
respectively. As of September 30, 1999, Citizens' assets were valued at $23.3
million.
MCN owns a 46.5% limited partnership interest, and a 1.0% general
partnership 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 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.
For the twelve months ended September 30, 1999, SMGC's operating
revenues were approximately $5.7 million and its net losses were approximately
$2.4 million. As of September 30, 1999, SMGC's assets were valued at $49.1
million.
B. NON-UTILITY SUBSIDIARIES
MCN is engaged in numerous non-utility businesses, as well as certain
other regulated businesses that are not jurisdictional under the Act. These
operations are operated primarily through MCN's Diversified Energy group and
consist of the following segments: Pipelines and 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 having a combined
2,986 MW of gross capacity as of December 31, 1998; and 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. Diversified Energy also has investments in
Exploration and Production properties with 1.2 Tcf/e of proved gas and oil
reserves as of December 31, 1998. MCN has sold substantially all of its E&P
properties in the Western and Mid-continent/Gulf Coast regions and expects to
sell its Appalachian E&P properties by mid-2000.
MCN Energy Enterprises Inc. ("MCNEE") is a wholly-owned subsidiary of
MCN and serves as the holding company for MCN's various diversified energy
subsidiaries. MCNEE, 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.
MCNEE's wholly-owned subsidiaries include MCNIC Pipeline & Processing
Company ("MCNIC Pipeline"), which is engaged in pipeline and processing projects
through subsidiaries
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and partnerships. Major subsidiaries of MCNIC Pipeline include: MCNIC Offshore
Pipeline & Processing Company, which holds a 33% interest in the Blue Dolphin
Pipeline System; MCNIC East Coast Pipeline Company, which holds a 16% interest
in the 292 mile Portland Natural Gas Transmission System Project; MCNIC Jonah
Pipeline Company which holds a 35% partnership interest in Jonah Gas Gathering
Company; MCNIC Gulf Coast Gathering Corporation, which holds a 1% general
partnership interest in Copano Pipeline & Processing Group, L.P.; MCNIC Gulf
Coast Limited, Inc., which holds a 49% limited partnership interest in Copano
Pipeline & Processing Group, L.P., and a 90% limited partnership interest in
Copano Field Services/Upper Gulf Coast, L.P., Copano Pipelines/Upper Gulf Coast,
L.P., and Copano Energy Service/Upper Gulf Coast, L.P.; MCNIC Mobile Bay
Gathering Company, which holds a 34.5% interest in Dauphin Island Gathering
Partners; and MCNIC Mobile Bay Processing L.L.C. ("Mobile Bay Processing") which
holds a 29% interest in Mobile Bay Processing Partners; MCNIC Millennium
Company, which was formed to hold a limited partnership interest in the
Millenium Pipeline Company, a Delaware limited partnership which will construct,
own and operate the Millennium Pipeline Project; and MCNIC Vector Company, which
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.
MCNIC Pipeline owns 100% of the stock on MCNIC General Methanol
Company, which holds a 1% general partnership interest in Lyondell Methanol Co.
L.P., a partnership that owns a methanol production plant in Texas, and 100% of
the stock of MCNIC Methanol Holdings company which holds a 24% limited
partnership in Lyondell Methanol Co. L.P.
MCNIC CSG Pipeline Company, a wholly-owned subsidiary of MCNIC
Pipeline, owns a 50% partnership interest in Cardinal States Gathering, a
partnership that owns a gathering system that gathers and transports coalbed
methane in Appalachia.
MCNIC Pipeline owns 100% of MCNIC Michigan Holdings, Inc., a holding
company for Bagley Processing Company (47% general partnership interest), Warner
Treating Limited Liability Company (95% interest), Terra-Westside Processing
Company (85% interest), and Thunder Bay Pipeline Company, L.L.C. (95% interest)
which all own carbon dioxide processing plants.
Crown Asphalt Ridge, L.L.C., 75% owned by MCNIC Pipeline, owns an
asphalt manufacturing plant. Crown Asphalt Distribution, L.L.C., which is 50%
owned by MCNIC Pipeline, owns and operates asphalt distribution facilities.
MCNIC Pipeline owns a 43% interest in the KCI Compression Company,
L.P., which provides natural gas compression service.
MCNIC Rodeo Gathering, Inc., a wholly-owned subsidiary of MCNIC
Pipeline, owns a 25% interest in Keyes Helium Company, L.L.C., which processes
and sells helium.
MCNIC Pipeline also holds 100% of the interest in six plants designed
to recover particles of coal that are a waste by-product of coal mining and
process those particles into coal
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briquettes for sale. An agreement to sell four of the six coal fine plants to
DTE in an arms' length transaction was reached in November 1999.
MCN Power Company ("MCN Power"), formerly known as MCNIC Power Company,
another wholly-owned subsidiary of MCNEE, was formed to participate in domestic
and international power generation related opportunities through its
wholly-owned subsidiaries. Its major subsidiaries are listed below.
CDC Ada, Inc., a wholly-owned subsidiary of MCN Power, 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.
MCNIC Ada GP, Inc., a wholly-owned subsidiary of MCN Power, holds a 1% general
partnership interest in the Ada Cogeneration Limited Partnership.
Ludington Cogeneration Company, a wholly-owned subsidiary of MCN Power,
is a 1% general partner in Michigan Power Limited Partnership, which built and
operates a 123 MW natural gas-fueled cogeneration plant in western Michigan.
Ludington Cogeneration Holdings, Ltd., a wholly-owned subsidiary of MCN Power,
is a 49% limited partner in the Michigan Power Limited Partnership.
Summit Computing, Inc., a Delaware corporation and a wholly-owned
subsidiary of MCN Power, 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, that leases and operates the nation's largest cogeneration
facility. Source Cogeneration Company, a Delaware corporation, holds a 1%
general partnership interest in Source Midland Limited Partnership.
MCNIC Mobile Bay Power Co., a wholly-owned subsidiary of MCN Power,
held a 29% interest in Mobile Bay Energy, L.L.C. ("Mobile Bay Energy"), which
owns a 40 MW generation facility in Alabama. MCNIC Mobile Bay Power Co.'s
interest was assigned to Mobile Bay Processing. Mobile Bay Energy was recently
consolidated into Mobile Bay Processing Partners.
MCNIC Person GP, Inc., a wholly-owned subsidiary of MCN Power, was
formed to hold a 94% general partnership interest in Cobisa-Person Limited
Partnership, a Delaware limited partnership which was created to build, own and
operate a 140 MW power plant in Albuquerque, New Mexico which is currently in
construction. MCN Power owns a 1% limited partnership interest in Cobisa-Person
Limited Partnership.
MCNIC Carson Corporation, a wholly-owned subsidiary of MCN Power, has a
33 1/3% interest in a 42 MW gas-fired cogeneration plant in Carson, California.
Through MCN International Corporation, its wholly-owned subsidiary,
MCNEE holds its international projects, including a 75% interest in Bhote Koshi
Power Company, a partnership that is constructing a 36 MW plant in Nepal. A 40%
interest in Torrent Power Limited, a joint
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venture that holds minority interests in electric distribution and power
generation facilities in Gujarat, India, was sold in August 1999.
MCNIC Gas Storage Company ("MCNIC Gas Storage"), another wholly-owned
subsidiary of MCNEE, engages in the storage of natural gas. South Romeo Gas
Storage Company, a Michigan partnership in which MCNIC Gas Storage has a 50%
interest, owns the Washington 28 Gas Storage Field, a 10 Bcf storage field in
southeastern Michigan which provides storage services to MCNEE's Energy
Marketing and Electric Power operations. South Romeo Gas Storage Company holds a
33% interest in South Romeo Gas Storage Corporation.
W-10 Holdings, Inc., a wholly-owned subsidiary of MCNIC Gas Storage,
holds a 50% interest in Washington 10 Storage Partnership, a partnership that
developed and leased the Washington 10 Storage Field, a 42 Bcf storage field in
southeastern Michigan.
The Orchards Golf Limited Partnership, a Michigan partnership in which
MCNIC Gas Storage 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.
MCNIC Oil & Gas Company ("MOG"), a wholly-owned subsidiary of MCNEE, is
engaged in natural gas and oil exploration, development and production,
primarily in the Midwest and Appalachia. MCN has sold its E&P properties in the
Western and Mid-Continent/Gulf regions and expects to sell its Appalachian
properties by mid-2000. The following companies are wholly-owned, direct
subsidiaries of MOG: Appalachia Acquisition Properties, Inc.; Elmira Antrim
Company; GeoTrend Exploration, Inc.; Green Oak Development Company; Green River
Antrim Company; Otsego Exploration Company, L.L.C.; MCNIC Enhanced Production,
Inc. (which has a 75% interest in Otsego EOR, L.L.C.); MCNIC Oil & Gas
Mid-continent, Inc.; MCNIC Oil & Gas Properties, Inc.(which holds a 50% in SEM,
a joint venture established to buy and sell E&P Properties); MCNIC Reid
Holdings, Inc.; MCNIC West Coast Company; Warner Antrim Company; MCNIC Oil & Gas
CV Company; Michigan Acquisition Properties, Inc.; and Pageant Corporation.
MCN's non-regulated energy marketing activities are directed by
CoEnergy Trading Company ("CTC"), a wholly-owned subsidiary of MCNEE. CTC 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. CTC holds a 50% interest in U.S. CoEnergy Services, a Wisconsin
general partnership; a 50% interest in Torch CoEnergy, L.L.C., a Delaware
Limited Liability Company, and a 50% interest in the Michigan Gas Exchange,
L.L.C., a Michigan limited liability company. Wholly-owned subsidiaries of CTC
are CoEnergy Development Company and SEMCO Energy Services, Inc.
CoEnergy Supply Company, is a wholly-owned subsidiary of MCNEE, which
engages in the purchase and sale of natural gas.
MCN is the 1% general partner in MCN Michigan Limited Partnership, a
Michigan limited partnership. MCN Michigan, Limited Partnership., exists for the
sole purpose of issuing
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<PAGE> 14
its limited partnership interests in the form of preferred securities and
investing the gross proceeds thereof in MCN debt securities. MCN is also the
sole owner of a number of Delaware Business Trusts, which were created for the
sole purpose of issuing preferred securities and investing the gross proceeds
thereof in MCN debt securities.
MichCon Holdings is the holding company for MichCon and MichCon
Enterprises, Inc. ("MichCon Enterprises"), a non-regulated affiliate. MichCon
Enterprises is the holding company for MichCon Home Services Company ("MichCon
Home Services") and MichCon Fuels Services Company ("MichCon Fuels Services").
MichCon Home Services is engaged in heating, ventilation and air conditioning
activities. MichCon Fuel Services markets natural gas as a vehicular fuel and
markets natural gas to residential and commercial customers through
transportation pilot programs in Michigan.
In addition to being an operating utility, MichCon is also the holding
company for various subsidiaries, including MichCon Development Corporation
which, through its various partnership arrangements, owns and manages
Harbortown, a residential and small commercial development located along the
Detroit River in Detroit, Michigan; Blue Lake Holdings, Inc., which holds a 25%
interest in Blue Lake Gas Storage Company, a partnership that owns and operates
a 46 Bcf natural gas storage field, and MichCon Pipeline Company ("MichCon
Pipeline.")
MichCon Pipeline is engaged in pipeline and gathering projects in
Michigan through various subsidiaries. MichCon Gathering Company owns and
operates the Antrim Expansion Pipeline. 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. Saginaw Bay Lateral Company is the 46% general partner in
a partnership, the Saginaw Bay Lateral Limited Partnership, which owns and
operates lateral pipelines interconnecting with the 126-mile pipeline previously
described. Westside Pipeline Company invests in various pipeline and gathering
assets in Michigan. 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. MichCon Lateral Company was formed in
1997 to own, operate and construct natural gas pipelines and gathering systems
in Michigan.
Huron Pipeline Company, another wholly-owned subsidiary of MichCon, 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., and owns 100%
of Huron Gas Services Company, which was formed in 1996 and markets pipeline
transportation services.
MichCon holds a 31% interest in Kalkaska Gas Storage Limited
Partnership, which holds a 53.5% general partnership interest in the Cold
Springs Gas Storage Limited Partnership in Kalkaska County, Michigan.
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<PAGE> 15
3. MERGER SUB
Merger Sub is a direct, wholly-owned subsidiary of DTE, organized under
the laws of the state of Michigan, for the purpose of merging with MCN. Merger
Sub is not currently engaged in any business operations. After the consummation
of the Merger, Merger Sub will carry on MCN's businesses as a holding company
exempt under Section 3(a)(1). The mailing address for Merger Sub is the same as
that for DTE.
B. DESCRIPTION OF THE MERGER
1. REASONS FOR THE MERGER
The merger of DTE and MCN will create a fully integrated electric and
natural gas company with a strong regional energy infrastructure and competitive
operations spanning the energy value chain. By combining DTE's experience in
power plant operations, coal management and marketing with MCN's experience in
natural gas purchasing, transportation, storage and marketing, the combined
company will be positioned to market coal, gas, and electricity in the region
and to compete more effectively in the development of new power plants and
distributed generation. DTE and MCN believe this will generate significant
opportunities to deliver greater value to shareholders. The DTE board of
directors and the MCN board of directors each considered a number of factors in
deciding to adopt the merger agreement and recommend it to their shareholders.
The material factors considered are those set forth below:
In reaching their decision, the DTE board of directors and the MCN
board of directors considered the complementary nature of the businesses of DTE
and MCN in terms of their commercial strengths and the ability to combine these
strengths to pursue more effectively growth and expansion opportunities
available in the region spanning the corridor from the Great Lakes to the
northeast area of the United States. The area from the Great Lakes to the
northeast area of the United States generates a substantial portion of the
nation's energy consumption, and has a high concentration of large industrial
customers. This geographic area is playing an increasingly important role as a
gas pricing and transportation hub, and is central to the growing west-to-east
coal, gas and electric flows. The merger will combine in one enterprise DTE's
position as a leading regional coal marketer and MCN's participation in
pipelines and gas reserves in the regional gas corridor and will allow the
combined company to offer attractive energy supply options to large customers,
and develop as a major regional multi-fuel and power marketer. The DTE board of
directors and the MCN board of directors also believe that DTE's existing
interconnections to the Canadian and Midwest electricity systems create an
ability to sell electricity to eastern locations through Ontario and to
mid-western locations, which have relatively low capacity, through Michigan's
southern interconnections. These existing electricity interconnections make the
combined company well-positioned to build a regional marketing business that
complements DTE's and MCN's existing coal, electricity and gas marketing
businesses.
Other positive factors considered by the DTE board of directors and the
MCN board of directors include: (1) the new enterprise's ability to provide
expanded product offerings to its customers, and an enhanced ability to develop
onsite energy facilities and services for business
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<PAGE> 16
customers; (2) the terms and conditions of the merger agreement, including the
fixed exchange ratio and the lack of any conditions to the merger considered
likely to impede or delay successful completion; (3) the expectation that the
merger will generally be a tax-free exchange to shareholders of MCN who exchange
all their shares of MCN Common Stock solely for shares of DTE Common Stock in
the merger and that no gain or loss will be recognized by DTE or MCN for U.S.
federal income tax purposes; (4) the combined companies' improved ability to
compete against integrated gas and electric companies; and (5) the current
environment in the electric and gas industries and the advantage to each company
of proceeding with a transaction now which offers an opportunity to generate
value for shareholders.
Each company's board of directors also considered certain
countervailing factors in their respective deliberations concerning the merger
including (1) the fact that the exchange ratio will not be adjusted even if the
two companies' share prices diverge in the period prior to completion of the
merger and (2) the possibility of encountering difficulties in integrating the
operations of DTE and MCN and in achieving cost savings to the extent currently
estimated or in the time currently contemplated.
2. MERGER AGREEMENT
The Merger Agreement provides that, as soon as practicable following
the satisfaction or waiver of the conditions to each party's obligation to
consummate the Merger, MCN will be merged with and into Merger Sub, the separate
corporate existence of MCN will cease, and Merger Sub will continue as the
surviving corporation in the merger, operating as a wholly-owned subsidiary of
DTE.
As is described in detail in the Merger Agreement, each share of MCN
Common Stock, including the associated right to purchase Series A Junior
Participating Preferred Stock, outstanding prior to the merger will be converted
into the right to receive either $28.50 in cash or .775 shares of DTE Common
Stock, which had a closing price of $37 per share on October 4, 1999, the last
trading day prior to the announcement of the merger, subject to allocation and
proration procedures that ensure that the aggregate number of shares of MCN
common stock that will be converted into cash and DTE common stock will be equal
to 55% and 45%, respectively, of the total number of shares of MCN common stock
outstanding immediately prior to the merger. MCN Common Stock shareholders will
become DTE shareholders, and DTE will become the sole holder of all of the
outstanding common stock of MCN.
3. BACKGROUND AND NEGOTIATIONS LEADING TO THE MERGER
In recent years, the management of each of DTE and MCN has periodically
reviewed its company's competitive position in the electric and gas utility
industry, industry trends and strategic initiatives to seek to improve its
competitive position.
In this context, and after several meetings between Warburg Dillon Read
LLC and DTE's senior management team and after several presentations by Warburg
Dillon Read to the DTE
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<PAGE> 17
board of directors regarding possible strategic opportunities, DTE engaged
Warburg Dillon Read in late 1998 as its financial advisor for a possible
combination with MCN.
In the fall of 1998 and continuing into early 1999, Mr. Anthony Earley,
Jr., Chairman and Chief Executive Officer of DTE, and Mr. Alfred R. Glancy III,
Chairman and Chief Executive Officer of MCN, had several discussions initiated
by Mr. Earley with respect to a combination of DTE and MCN. In March 1999, Mr.
Earley, on behalf of the DTE board of directors, sent a letter to Mr. Glancy
expressing DTE's belief that a business combination of DTE and MCN could be
beneficial to both of the companies and their respective shareholders, and to
indicate that, based on a review of MCN's public documents and subject to a due
diligence review of MCN, DTE believed that it could offer MCN's shareholders a
substantial premium over MCN's then-current stock price. After considering the
DTE proposal and determining that it was in the best interests of MCN's
shareholders for MCN to pursue its business plan as an independent company, Mr.
Glancy, on behalf of the MCN board of directors, declined Mr. Earley's offer to
engage in further discussions.
On June 22, 1999, the DTE board of directors met and received
presentations from Warburg Dillon Read, McKinsey and Company and Goldman, Sachs
& Co. on recent developments and opportunities in the electric utility industry.
Members of DTE's senior management also presented their views on various
potential business acquisitions, including an acquisition of MCN.
On July 28, 1999, the MCN board of directors approved a significantly
revised strategic direction for MCN, the key aspects of which included a
regional rather than North American focus and an emphasis on achieving
operational efficiencies and growth through integration of existing businesses.
The MCN board of directors requested that Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("Merrill Lynch"), assist it with a review and analysis of MCN's strategic
alternatives.
On July 28, 1999, at a regular meeting of the DTE board of directors,
the DTE board of directors authorized management to pursue a negotiated
acquisition of MCN.
In August 1999, at the request of Mr. Earley, Mr. Earley and Mr. Larry
G. Garberding, Chief Financial Officer of DTE, met with Mr. Glancy and Mr.
Howard L. Dow III, Chief Financial Officer of MCN, to discuss a transaction
between DTE and MCN. At this meeting, Mr. Earley proposed that DTE and MCN
pursue a transaction at a price of $27.00 per MCN share subject to adjustment
based on further information from MCN. Mr. Glancy said he would discuss the
proposal with the MCN board of directors.
On August 24, 1999, the MCN board of directors met and Merrill Lynch
reviewed with it recent developments in the gas utility industry. Merrill Lynch
also reviewed with the MCN board of directors preliminary observations with
regard to the range of values that MCN might reasonably expect to realize in an
acquisition or business combination transaction. At that meeting, MCN authorized
management to work with Merrill Lynch in connection with a
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<PAGE> 18
potential transaction with DTE. At this meeting, the MCN board of directors also
reviewed the DTE proposal.
Later in August 1999, Mr. Earley met with Mr. Glancy to consider
further the financial terms of a merger and shortly thereafter, Mr. Earley
reported to the DTE board of directors on the progress of discussions with MCN.
On August 30, 1999, the parties entered into a customary form of confidentiality
agreement. In early September 1999, after MCN provided preliminary information
to DTE, Mr. Earley and Mr. Glancy had several conversations to discuss further
the financial terms of the proposed transaction between the companies. These
discussions focused on price, an exclusive negotiating arrangement and whether
the consideration to be paid to MCN shareholders would be in cash or in shares
of DTE Common Stock. On September 7, 1999, the MCN board of directors met and
was briefed on the discussions between the parties and authorized further
discussions.
Thereafter, in September 1999, Mr. Earley and Mr. Glancy discussed a
price of $28.50 per share of MCN Common Stock, subject to DTE's due diligence
review of MCN, and an informal understanding was reached that MCN would inform
DTE prior to engaging in negotiations with a third party. The parties commenced
their respective due diligence investigations of each other and the senior
executives of DTE and MCN, along with outside financial advisors, began to meet
to discuss the possible combination of the two companies. These discussions
focused on the mutual due diligence, allocation of management responsibilities
and regulatory issues. The parties' senior managements also discussed the
immediate sale of MCN's coal fines properties and other assets to DTE and the
potential financial impact of MCN severance agreements and the acceleration of
certain MCN employee benefits. On September 16, 1999 and September 22, 1999, the
DTE board of directors and the MCN board of directors, respectively, were
briefed on the discussions between the parties; at its meeting, the DTE board of
directors also reviewed relevant financial and legal considerations.
In late September, Mr. Earley and Mr. Glancy met to discuss allocation
of management responsibility and discussed the terms under which Mr. Glancy
would be willing to enter into a consulting arrangement with DTE to ensure his
availability after the completion of the proposed transaction. In addition, the
companies' respective legal advisors engaged in extensive meetings and
negotiations in New York to establish the terms of the transaction; among the
principal issues discussed were matters relating to preserving the status of the
proposed transaction as a reorganization under the Internal Revenue Code,
termination of the merger agreement and the fees that would be payable in the
event of termination, and conditions to the parties' respective obligations to
consummate the merger.
On September 29, 1999, Mr. Earley met with Mr. Glancy and agreed that,
subject to final resolution of certain unresolved matters, the consideration to
be received by MCN shareholders would consist of cash and stock, and that the
terms of the merger agreement would permit MCN shareholders to elect to receive
$28.50 in cash or a fraction of a share of DTE Common Stock. On October 3, 1999,
Mr. Earley and Mr. Glancy met with their respective financial advisors and
agreed that MCN shareholders would be able to elect to receive 0.775 shares of
DTE Common Stock in lieu of $28.50 in cash, subject to allocation and proration
mechanisms and tax
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<PAGE> 19
adjustments necessary to preserve the status of the merger as a reorganization
under the Internal Revenue Code.
On October 4, 1999, the DTE board of directors met to consider and to
approve the terms of the merger agreement. Members of DTE management and
representatives of Warburg Dillon Read and Sullivan & Cromwell, special counsel
to DTE, updated the DTE board of directors on developments since its September
16, 1999, meeting. Sullivan & Cromwell reviewed the fiduciary obligations of the
DTE board of directors and described the definitive documentation and its
effect. Warburg Dillon Read made a financial presentation and delivered its
opinion to the effect that, based upon and subject to the considerations set
forth in such opinion, as of October 4, 1999, the consideration to be paid to
MCN shareholders in the merger was fair, from a financial point of view, to DTE.
After further discussion and deliberation, the DTE board of directors adopted
the merger agreement, the merger and the transactions contemplated thereby, and
resolved to recommend that DTE shareholders vote to approve the issuance of
shares of DTE Common Stock in the merger.
On October 4, 1999, the MCN board of directors met to consider the
proposed merger. Members of MCN's senior management and representatives of
Merrill Lynch and Wachtell, Lipton, Rosen & Katz, special counsel to MCN, made
presentations to the MCN board of directors and discussed with the MCN board of
directors their views and analyses of various business, financial, legal and
regulatory aspects of the proposed transaction, including a review of the terms
and conditions of the definitive agreements. In addition the MCN board of
directors received a presentation from a nuclear consulting firm regarding DTE's
nuclear plants. Wachtell, Lipton reviewed the fiduciary obligations of the MCN
board of directors and described the definitive documentation and its effect.
Merrill Lynch orally delivered its fairness opinion, which was subsequently
confirmed in writing, to the MCN board of directors to the effect that, as of
such date, the merger consideration to be received by MCN shareholders in the
merger was fair, from a financial point of view, to MCN shareholders. The
non-management directors met in an executive session at which the directors were
given an opportunity to ask questions and discuss their views of the transaction
and discussed management's interests in the merger. After further discussion and
deliberation, the full MCN board of directors reconvened and discussed the
presentations received from management, MCN's financial advisor and its legal
counsel. The MCN board of directors also discussed the potential sale of MCN's
coal fines properties to DTE. The MCN board of directors authorized management
to negotiate definitive documentation containing arms-length terms, including
those set forth in the merger agreement, relating to the sale of the coal fines
properties independent of the merger transaction. The MCN board of directors
then adopted by unanimous vote the merger agreement and authorized its execution
and resolved to recommend that MCN shareholders vote to approve the merger
agreement and the other related transactions.
C. MANAGEMENT AND OPERATIONS OF THE COMPANY FOLLOWING THE MERGER
Upon completion of the Merger, Merger Sub will become a subsidiary of
DTE, which will own all of the issued and outstanding common stock of Merger
Sub. Merger Sub will own
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<PAGE> 20
and operate the existing subsidiaries of MCN, i.e., MichCon, MCNIC, et. al.
Following the Merger, the officers, directors, corporate charter and bylaws of
MCN immediately before the merger will become the officers, directors, corporate
charter and bylaws of Merger Sub, the surviving corporation. DTE's principal
corporate and executive offices will not change as a result of the Merger.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by both DTE and MCN, in connection with the Merger, including
registration of securities of DTE under the Securities Act of 1933, and other
related matters, are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Filing fee for DTE's Registration Statement
on Form S-4 ........................................................ $ 219,969
HSR filing fee .............................................................. $ 90,000
Accountants' fees ........................................................... $ 850,000
Shareholder communication (including prospectus
printing and distribution) ........................................ $ 1,800,000
Exchanging, printing, and engraving of stock certificates ................... $ 235,000
Investment bankers' fees and expenses ....................................... $20,250,000
Legal fees and expenses (including regulatory and antitrust) ............... $ 7,500,000
Miscellaneous (including consultants) ....................................... $ 460,000
TOTAL (estimated) ........................................................... $31,404,969
</TABLE>
DTE believes that the foregoing fees are reasonable and consistent with
fees the Commission has approved in prior cases involving utility combinations
of similar size and complexity.(9)
ITEM 3. APPLICABLE STATUTORY PROVISIONS
A. STATEMENT OF APPLICABLE PROVISIONS
- -------------------------
(9) See infra, n. 32.
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<PAGE> 21
DTE believes that all or portions of Sections 9(a)(2), 10, 11 and
3(a)(1) of the Act are directly or indirectly applicable to the proposed Merger.
Under Section 9(a)(2), it is unlawful, without the Commission's
approval, under the standards of Section 10, for any person to acquire, directly
or indirectly, the securities of a public utility company, if that person will,
by virtue of the acquisition, become an affiliate of that public utility and any
other public utility or holding company. The term "affiliate" for this purpose
means any person that directly or indirectly owns, controls, or holds with power
to vote, five percent or more of the outstanding voting securities of the
specified company.
DTE currently owns the securities of, and is therefore an affiliate of,
Detroit Edison, a public utility company. As a result of the Merger, DTE will
acquire, indirectly through its ownership of Merger Sub, more than five percent
of the securities of three additional public utility companies, MichCon,
Citizens, and SMGC, and will thus become an affiliate of all three.
Consequently, the Merger requires Commission approval under the standards of
Section 10.
Following the Merger, DTE believes, for the reasons set forth below,
that it will qualify for the intrastate exemption under Section 3(a)(1) of the
Act, and requests an order granting such exemption. Under Section 3(a)(1), the
Commission shall exempt from registration, by rule or order, any holding company
if that holding company, and each material public utility subsidiary company
from which the holding company derives any material part of its income, are
predominantly intrastate in character, and carry on their business in the state
in which they are organized, unless and except insofar as the Commission finds
the exemption detrimental to the public interest or the interest of investors or
consumers. DTE requests that Merger Sub also be granted an exemption under
Section 3(a)(1) of the Act.
B. THE STANDARDS OF SECTION 10
The statutory standards to be considered by the Commission in
evaluating the Merger are set forth in Sections 10(b), 10(c) and 10(f) of the
Act.
1. SECTION 10(B)
Under Section 10(b) of the Act, the Commission shall approve the
Merger unless it finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions and other remuneration,
to whomsoever paid, to be given, directly or indirectly, in connection
with the acquisition is not reasonable or does not bear a fair relation
to the sums invested in or the earning
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<PAGE> 22
capacity of the utility assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding-company system of the applicant or will be detrimental to
the public interest or the interest of investors or consumers or the
proper functioning of such holding company system.
For the reasons set forth below, none of the factors identified above
should be of concern in this case and the Commission should approve the Merger
as being consistent with Section 10.
A. DETRIMENTAL "INTERLOCKING RELATIONS" OR
"CONCENTRATION OF CONTROL"
The Merger will not result in detrimental interlocking relations or
concentration of control. There are currently no common director(s) of the DTE
and MCN and following consummation of the Merger there will be an increase in
the number of common directors and may be an increase in the number of common
officers of DTE and MCN.(10) These interlocking relationships will, however,
only serve to help integrate the DTE and MCN, and their respective utility
systems. Such management interlocks are characteristic of virtually every merger
transaction subject to Section 9(a)(2).(11) The interlocking relationships
established by the Merger will be of the kind routinely approved by the
Commission in the past and will not be detrimental to interests of consumers,
investors or the public. They will not be the types of relationships
historically targeted by Section 10(b)(1), which was aimed at preventing
business combinations that bore no relation to operating efficiencies.(12)
The Merger will also not result in a concentration of control
detrimental to the interest of shareholders or consumers. Section 10(b)(1) is
intended to prevent combinations that would result in "huge, complex and
irrational systems" and to avoid an "excess of concentration and
- -----------------------------------
(10) Specifically, it is contemplated that Mr. Alfred R.Glancy, currently
the Chairman and Chief Executive Officer of MCN, and two other MCN directors
will join the DTE board after the consummation of the Merger. DTE, MCN and their
respective utility subsidiaries currently have no common officers but may
appoint them in the future.
(11) See, e.g., Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), as
modified, HCAR No. 25273 (March 15, 1991), aff'd sub nom., City of Holyoke
v. SEC, 972 F.2d 358 (D.C. Cir. 1992)("interlocking relationships are necessary
to integrate [the two merging entities].")
(12) See Section 1(b)(4) of the Act (finding that the public interest and
interests of consumers are adversely affected "when the growth and extension of
holding companies bears no relation to economy of management and operation or
the integration and coordination of related operating properties . . . .")
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<PAGE> 23
bigness" while still allowing beneficial combinations to take place.(13)
Although DTE and MCN are both sizable companies the Merger will nevertheless
create a company that is comparable to, or smaller than, the regional and
national energy market participants DTE will compete with. The Commission has
approved combinations resulting in companies larger than DTE will be after the
Merger,(14)and is currently considering, or will soon receive, applications to
create much larger holding companies.15 Indeed, given the widespread expectation
that gas and electric companies will continue to converge and combine, the
post-Merger DTE will not be counted among the largest utility companies.
Most trade press articles that describe the Merger depict it as a combination of
companies with complementary businesses that will emerge from the Merger better
able to compete in regional energy markets, but there is clearly no concern in
the industry that the post-merger DTE will be in a position to dominate those
markets.(16)
The following table compares the post-merger DTE, on an asset and revenue basis,
with some of its likely competitors.
<TABLE>
<CAPTION>
COMPANY TOTAL ASSETS TOTAL REVENUES FOR
9/30/99 NINE MONTH PERIOD
ENDING 9/30/99
(all figures in millions)
<S> <C> <C>
DTE Energy Company (Pro $18,327 $5,362
Forma)
CMS Energy Corporation $14,594 $4,379
American Electric Power $20,438 $5,251
Company
Public Service Enterprise Group $18,590 $4,837
Incorporated
</TABLE>
Moreover, although the Merger will not be subject to FERC or MPSC
review it will be scrutinized by the DOJ or the FTC in connection with DTE's and
MCN's HSR Act filings. In prior cases, the Commission has indicated that it will
"watchfully defer" to market power determinations made by the federal antitrust
agencies, state commissions and FERC.(17) There is no reason for the Commission
to give the reviewing federal antitrust agency less deference in this case
simply because FERC and the MPSC do not have jurisdiction to review the Merger.
The Commission has previously approved mergers that were not subject to direct
FERC or state regulatory review without conducting a hearing of its own.(18)
- --------------------------
(13) American Electric Power Co., HCAR No. 20633 (July 21, 1978).
(14) After the Merger, DTE will have total assets of approximately $18.3
billion. By contrast, the Commission has previously allowed the Entergy
Corporation to acquire Gulf State Utilities, leaving Entergy with $21 billion
worth of assets (in 1993), Entergy Corp., HCAR No. 25952 (Dec. 17, 1993). The
Commission also approved the Southern Company's acquisition of Savannah Electric
and Power Company, leaving Southern with almost $20 billion worth of assets (in
1988), The Southern Company, HCAR No. 24579 (Feb. 12, 1988). Of course, both
Entergy and Southern are even larger today.
(15) For example, on September 23, 1999, Unicom Corporation and PECO Energy
Company announced plans to merge. The new holding company would have a total
market value of $31.8 billion and total annual revenues of $12.4 billion. By
contrast, DTE and MCN had combined revenues of $6.252 billion for the year
ending December 31, 1998.
(16) See, e.g., Howard Buskirk, DTE, MCN Converge to Create Biggest Michigan
Utility, THE ENERGY DAILY, Oct. 6, 1999.
(17) See, e.g., Sempra Energy, HCAR No.26890 (June 26, 1998); citing City of
Holyoke v. SEC, 972 F.2d at 363 (affirming "watchful deference" policy.)
(18) See TUC Holding Co. et. al., HCAR No. 26749 (Aug. 1, 1997).
-23-
<PAGE> 24
FERC has previously found that Detroit Edison does not possess market
power in any of the electric energy generation markets in which it competes, and
that it cannot exercise transmission market power(19) because it has filed an
open access transmission tariff pursuant to FERC Order No. 888 and its
progeny.(20) FERC has also signaled in numerous cases, including a case
involving a DTE subsidiary,(21) that it retains the ability to prevent electric
utility entities that are affiliated with entities that own and operate natural
gas distribution facilities from abusing their control over such facilities.(22)
It follows that FERC will have ample authority to ensure that DTE will not be
able to use its control over MichCon's distribution system to unfairly advantage
Detroit Edison or other DTE electric generation subsidiaries. More importantly,
gas-fired generation projects in Michigan have available a wide range of gas
supply alternatives other than MCN.
The Merger has also been endorsed by the MPSC, which has concluded that
it will not adversely affect its ability to protect consumers, or impede the
development of gas or electric retail competition, in the state of Michigan.(23)
The MPSC will have all of the authority necessary to regulate DTE's distribution
of electricity and gas at retail in the state.
Consequently, there is no reason for the Commission to depart from its
established policy of watchful deference in this case. Once the federal
antitrust agencies have completed their review and determined that the Merger
will not lead to a detrimental concentration of control there will be no need
for the Commission to conduct a concentration analysis of its own.(24)
- --------------------------
(19) Detroit Edison Co., 77 FERC Para. 61,279 (1996).
(20) Promoting Wholesale Competition Through Open Access Non-Discriminatory
Transmission Services by Public Utilities and Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, 61 Fed. Reg. 21,540 (1996), FERC
Stats. & Regs. Para. 31,036 (1996) (Order No. 888), order on reh'g, Order No.
888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. & Regs. Para. 31,048 (1997),
order on reh'g, Order No. 888-B, 62 Fed. Reg. 64,688, 81 FERC Para. 61,248
(1997), order on reh'g, Order No. 888-C, 82 FERC Para. 61,046 (1998), appeal
docketed, Transmission Access Policy Study Group, et al. v. FERC, Nos. 97-1715
et al.(D.C. Cir.).
(21) DTE Edison America, Inc., 84 FERC Para. 61,028 (1998).
(22) DTE Edison America, Inc., 84 FERC at 61,128 (warning that FERC would
strip DTE Edison America of its authority to make market-based sales if it or
any of its affiliates "deny, delay or require unreasonable terms, conditions or
rates for natural gas service to a potential electric competitor of DTE Edison
America in bulk power markets . . . .")
(23) See, the MPSC's letter, to be submitted concurrent with this
application/declaration.
(24) The Commission has adopted this approach in other
cases involving non-FERC jurisdictional mergers. See, e.g., NIPSCO Industries,
Inc., at HCAR No. 26975 (Feb. 10, 1999) (concluding that there was no basis for
an adverse Section 10(b)(1) finding even though there was no FERC review of the
acquisition.)
-24-
<PAGE> 25
Indeed, the Merger will provide important competitive benefits. By
expanding its customer base, entering into gas markets, and acquiring the
expertise and experience of MCN in gas markets, DTE will be better positioned to
compete with other integrated regional and national energy companies, thus
enhancing competition in already increasingly competitive energy markets. The
Merger will enable the post-Merger DTE to provide its customers with an expanded
range of energy choices, while producing economies of scope and integration that
will benefit consumers and investors. These are the kinds of benefits which the
Commission has found to outweigh concerns about concentration of control in
previous cases.(25)
For all of the foregoing reasons, DTE believes that the Merger will not
result in a concentration of control detrimental to the public interest.
B. FAIRNESS OF CONSIDERATION
Section 10(b)(2) dictates the Commission shall approve the Merger
unless it finds that the consideration paid by DTE to the shareholders of MCN is
not reasonable or does not bear a fair relation to the earning capacity of the
utility assets underlying the MCN shares. In its determination as to whether or
not consideration for an acquisition meets the fair and reasonable test of
Section 10(b)(2), the Commission has considered whether the price was decided as
the result of arm's-length negotiations(26) and whether each party's board of
directors has approved the purchase price.(27) The Commission also considers the
opinions of investment bankers(28) and the earnings, dividends, and book and
market value of the shares of the company to be acquired.(29)
Upon consummation of the Merger, MCN Common Stock shareholders will
receive either $28.50 in cash or .775 shares of DTE Common Stock. The aggregate
value of the consideration to be issued upon consummation of the Merger is
expected to be approximately $2.4 billion.
The consideration to be paid by DTE was the result of extensive and
vigorous arm's-length negotiations between the management and financial and
legal advisors of DTE and MCN. The boards of directors of each of DTE and MCN
approved the Merger in separate meetings held on October 4,1999.
In addition, nationally-recognized investment banking firms for each of
DTE and MCN have reviewed extensive information concerning the companies and
analyzed the consideration
- --------------------------
(25) American Electric Power Co., HCAR No. 20663 (July 21, 1978).
(26) American Natural Gas Co., HCAR No. 15620 (Dec. 12, 1966).
(27) Consolidated Natural Gas Co., HCAR No. 25040 (Feb. 14, 1990).
(28) Id.
(29) In re: Northeast Utilities, HCAR No. 15448 (April 13, 1966).
-25-
<PAGE> 26
to be paid using several valuation methodologies. In connection with the
approval of the Merger Agreement, (i) DTE's board of directors considered the
opinion of its financial advisor, Warburg Dillon Read, to the effect that the
consideration to be paid by DTE upon consummation of the Merger is fair to DTE
from a financial point of view, and (ii) MCN's board of directors considered the
opinion of its financial advisor, Merrill Lynch, to the effect that the
consideration to be received by MCN common shareholders in connection with the
Merger is fair to such holders from a financial point of view. Each financial
advisor reaffirmed its conclusion on November 12, 1999. Copies of their
respective fairness opinions are attached hereto as Exhibits H-1 and H-2,
respectively, and are incorporated herein by reference.(30)
1. OPINION OF DTE'S FINANCIAL ADVISOR
In connection with rendering its opinions, Warburg Dillon Read
considered a variety of valuation methods. Warburg Dillon Read considered the
valuation of MCN both as a consolidated entity and as the summation of distinct
segments. The following discussion summarizes the material valuation methods
considered by Warburg Dillon Read. Certain numbers in the following discussion
may not add due to rounding.
The consolidated entity valuation consists of a comparable company
trading analysis and a comparable acquisition analysis for MCN.
COMPARABLE COMPANY TRADING ANALYSIS: Using publicly available
information, Warburg Dillon Read compared multiples of certain financial
criteria for MCN to multiples based upon market trading values at the time for
certain other companies which, in Warburg Dillon Read's judgment, were generally
comparable to MCN for the purpose of this analysis. The factors considered in
selecting companies for comparison included size, geographic location, financial
condition and scope of business operations. The companies used in the comparison
were Columbia Energy Group, National Fuel Gas Company, CMS Energy Corporation,
Consolidated Natural Gas Company and Questar Corporation.
In evaluating the current market value of MCN common stock, Warburg
Dillon Read determined ranges of multiples for selected measures of financial
performance for the comparable companies, including the market value of
outstanding common stock as a multiple of:
- - Net income per share of common stock for the latest 12-month period, and
estimated net income per share of common stock for the current and the
following fiscal years as projected
- --------------------------
(30) Both financial advisors reached their decisions solely on the basis of
information provided them by DTE and MCN, which they did not attempt to
independently verify. The conclusions reached in both fairness
opinions are subject to a number of disclaimers, as noted in the DTE's
Registration Statement (Exhibit C-1).
-26-
<PAGE> 27
by I/B/E/S, a data service that monitors and publishes a compilation of
earnings estimates produced by selected research analysts on companies of
interest to investors; and
- - Book value of common equity for the most recently available fiscal quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value of MCN (defined as the market value of
outstanding common stock plus total debt, preferred and minority interests, less
cash and equivalents) as a multiple of:
- - Operating income, or earnings before interest and taxes ("EBIT"), for the
latest 12-month period; and
- - Operating cash flow, or earnings before interest, taxes, depreciation and
amortization ("EBITDA"), for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding
data for MCN. This analysis produced a range of values per share for MCN. The
results are summarized in the following table, which shows the range of
valuations produced for each of the measures of MCN's financial performance:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MEASURE OF FINANCIAL PERFORMANCE COMPARABLE LOW END HIGH END
- -------------------------------- COMPANY MULTIPLES OF RANGE OF RANGE
----------------- -------- --------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Latest 12 Months Earnings Per Share 15.0x - 20.0x $19.20 $25.60
- --------------------------------------------------------------------------------------------------------------
1999 Estimated Earnings Per Share 14.0x - 16.0x $16.80 $19.20
- --------------------------------------------------------------------------------------------------------------
2000 Estimated Earnings Per Share 12.5x - 14.5x $19.25 $22.33
- --------------------------------------------------------------------------------------------------------------
Book Value of Equity 1.6x - 2.5x $17.90 $27.97
- --------------------------------------------------------------------------------------------------------------
Latest Twelve Months EBIT 12.5x - 15.0x $16.41 $24.01
- --------------------------------------------------------------------------------------------------------------
Latest Twelve Months EBITDA 7.0x - 9.0x $13.17 $23.11
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Mean Value $17.12 $23.70
- --------------------------------------------------------------------------------------------------------------
Median Value $17.35 $23.56
- --------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above, this analysis produced values of $17.12 to $23.70 per
share for MCN. MCN's closing price of $17.69 on October 4, 1999, was near the
low end of this range.
Warburg Dillon Read then added to the trading value of MCN the value of
certain cost synergies as estimated by the management of DTE using a discounted
cash flow analysis. With respect to the estimates of cost synergies, Warburg
Dillon Read assumed that such estimates were reasonably prepared upon bases
reflecting the best available estimates and judgments of the management of DTE.
Utilizing these estimates of cost synergies, Warburg Dillon Read discounted to
present value, under assumed discount rates ranging from 6.65% to 7.65%, the
after-tax cash flows to shareholders from cost synergies through the year 2010.
Present values
-27-
<PAGE> 28
were derived both with and without a terminal value, which was determined based
on the midpoint of the multiple range of EBITDA of 7.0x to 9.0x, or 8.0x, based
on the comparable company trading analysis. The implied value per share of cost
synergies based upon this analysis was $3.59 to $7.29.
Combining the present value of cost synergies with the trading value of
MCN provided a value range of $20.71 to $30.99 per share of MCN common stock.
COMPARABLE NATURAL GAS COMPANY ACQUISITION ANALYSIS: Warburg Dillon
Read reviewed comparable transactions involving acquisitions of regulated
natural gas companies or holding companies for regulated natural gas companies.
Two sets of comparable transactions were selected. The first set, involving
seven comparable transactions, was selected based on size and included only
those companies with equity valued in excess of $1 billion.
The first set of comparable transactions included the following
proposed transactions:
- - Wisconsin Energy Corporation and Wicor Inc.;
- - NiSource Inc. and Columbia Energy Group;
- - El Paso Energy Corporation and Sonat Inc.;
- - Southern Union Company and Southwest Gas Corporation;
- - Dominion Resources, Inc. and Consolidated Natural Gas Company;
- - Duke Power Company and PanEnergy Corporation; and
- - Houston Industries Inc. and NorAm Energy Corporation
The second set of comparable transactions included an additional
seventeen transactions over the last four years. This set of comparables was
reviewed because it includes the acquisition of regulated natural gas companies
by much larger acquirors which is analogous to DTE's acquisition of MCN.
Warburg Dillon Read calculated the equity consideration to be received
by the second company's shareholders for each of the comparable transactions as
a multiple of various measures of financial performance for that company
including:
-28-
<PAGE> 29
- - Net income per share of common stock for the latest 12-month period as of
the date of each respective transaction announcement, and projected net
income per share of common stock for the then current and the following
fiscal years as projected by I/B/E/S; and
- - Book value of common equity for the most recently available fiscal quarter
prior to each respective transaction announcement.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value as a multiple of:
- - Operating income, or EBIT, for the latest 12-month period; and
- - Operating cash flow, or EBITDA, for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding data
for MCN. This analysis produced a range of values per share for MCN. The
results are summarized in the following table, which shows the range of
valuations produced for each of the measures of MCN's financial performance:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MEASURE OF FINANCIAL PERFORMANCE COMPARABLE LOW END HIGH END
- -------------------------------- TRANSACTION MULTIPLES OF RANGE OF RANGE
--------------------- -------- --------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months Earning Per Share 20.0x - 24.0x $25.60 $30.72
- -----------------------------------------------------------------------------------------------------------------
Current Year Est. Earnings Per Share 18.0x - 22.0x $21.60 $26.40
- -----------------------------------------------------------------------------------------------------------------
Forward Year Est. Earnings Per Share 16.0x - 22.0x $24.64 $32.34
- -----------------------------------------------------------------------------------------------------------------
Book Value of Equity 2.3x - 2.9x $25.74 $32.46
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months EBIT 13.5x - 15.5x $19.44 $25.52
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months EBITDA 8.0x - 10.0x $18.13 $28.07
- -----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Mean Value $22.53 $29.25
- -----------------------------------------------------------------------------------------------------------------
Median Value $23.12 $29.40
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above, this analysis produced values of $22.53 to $29.40 per
share for MCN.
Warburg Dillon Read then averaged the values produced by the Comparable
Company Trading Analysis with the value produced by the Comparable Natural Gas
Company Acquisition Analysis, producing values of $21.62 to $30.19 per MCN share
of common stock.
To this range of values, Warburg Dillon Read added the value of MCN's
coal fines projects, estimated at $40 million per plant based upon recent
transactions. The range of value for the coal fines projects of $1.76 to $2.63
per MCN share of common stock is based upon four operating coal fines projects
(at the low end of the range) to six operating coal fines projects (at the high
end of the range). Combining this range of values with the range of values
included above results in a total consolidated valuation range per MCN share of
common stock of $23.37 to $32.82.
Warburg Dillon Read also performed a segment analysis of MCN, which
consisted of valuation analyses for MCN's two distinct segments: the natural gas
distribution company,
-29-
<PAGE> 30
MichCon, and the diversified energy business. For MichCon, the valuation
analysis was based upon a discounted cash flow analysis, a comparable company
trading analysis and a comparable acquisition analysis.
VALUATION OF MCN'S NATURAL GAS DISTRIBUTION COMPANY: Warburg Dillon
Read performed valuation analyses of MichCon based on a discounted cash flow
analysis, a comparable company trading analysis, and a comparable acquisition
analysis. Warburg Dillon Read performed a discounted cash flow analysis
valuation of MichCon based upon projections furnished by DTE. Utilizing these
projections, Warburg Dillon Read discounted to present value, under assumed
discount rates ranging from 6.65% to 7.65%, the free unleveraged cash flows
through the year 2004 for MichCon. Terminal values were determined utilizing
multiples of EBITDA of 7.0x to 9.0x, based on the EBITDA multiples of public
companies deemed comparable to MichCon. These were the same companies used by
Warburg Dillon Read in its comparable company trading analysis of MichCon
summarized below. The present value of the discounted cash flow of MichCon
ranged from $14.99 to $21.14. Warburg Dillon Read added to the discounted cash
flow valuation of MichCon the value of certain cost synergies as discussed
previously in "Comparable Company Trading Analysis." The implied value per share
of cost synergies of $3.59 to $7.29 was added to the results of the discounted
cash flow analysis, producing a value range of $18.58 to $28.43 per share of MCN
common stock.
Using publicly available information, Warburg Dillon Read also
performed a comparable company trading analysis for MichCon. Warburg Dillon Read
compared multiples of certain financial criteria for MichCon to multiples based
upon market trading values at the time for certain other companies which, in
Warburg Dillon Read's judgment, were generally comparable to MichCon for the
purpose of this analysis. The factors Warburg Dillon Read considered in
selecting companies for this comparison included size, geographic location,
financial condition and scope of business operations. The companies used in the
comparison were Eastern Enterprises, Nicor Inc., Peoples Energy Corporation,
Piedmont Natural Gas Company, Inc., Washington Gas Light Company and New Jersey
Resources Corporation.
In evaluating an implied market value of MichCon, were it a separate
publicly traded company, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the market value of outstanding common stock as a multiple of:
- - Net income available to common stock for the latest 12-month period; and
- - Book value of common equity for the most recently available fiscal quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value as a multiple of:
- - Operating income, or EBIT, for the latest 12-month period; and
-30-
<PAGE> 31
- - Operating cash flow, or EBITDA, for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding
data for MichCon. This analysis produced a range of values per share for
MichCon. The results are summarized in the following table, which shows the
range of valuations produced for each of the measures of MichCon's financial
performance:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MEASURE OF FINANCIAL PERFORMANCE COMPARABLE LOW END HIGH END
TRANSACTION MULTIPLES OF RANGE OF RANGE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Latest 12 Months Net Income Avail. to 16.0x - 21.0x $20.03 $26.29
Common Stock
- ----------------------------------------------------------------------------------------------------------------------
Book Value of Common Equity 1.8x - 2.2x $14.25 $17.41
- ----------------------------------------------------------------------------------------------------------------------
Latest Twelve Months EBIT 11.0x - 12.5x $18.13 $21.74
- ----------------------------------------------------------------------------------------------------------------------
Latest Twelve Months EBITDA 7.0x - 9.0x $15.97 $22.91
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Mean Value $17.10 $22.09
- ----------------------------------------------------------------------------------------------------------------------
Median Value $17.05 $22.32
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above, this analysis produced values of $17.05 to $22.32 per
share for MichCon. Warburg Dillon Read added to the comparable company trading
analysis valuation of MichCon the value of certain cost synergies as discussed
previously in "Comparable Company Trading Analysis." The implied value per share
of cost synergies of $3.59 to $7.29 was added to the results of the comparable
company trading analysis, producing a value range of $20.64 to $29.61 per share
of MCN common stock.
Warburg Dillon Read reviewed comparable transactions involving
regulated natural gas companies or holding companies for regulated natural gas
companies as previously discussed in "Comparable Natural Gas Company Acquisition
Analysis." Warburg Dillon Read calculated the equity consideration to be
received the acquired company's shareholders for each of the comparable
transactions as a multiple of various measures of financial performance for that
company, including:
- - Net income available to common stock for the latest 12-month period as of
the date of each respective transaction announcement; and
- - Book value of common equity for the most recently available fiscal quarter
prior to each respective transaction announcement.
In addition, Warburg Dillon Read calculated the adjusted market value
for each of the comparable transactions as a multiple of each acquired
company's:
-31-
<PAGE> 32
- - Operating income, or EBIT, for the latest 12-month period as of the date of
each respective transaction announcement; and
- - Operating cash flow, or EBITDA, for the latest 12-month period as of the
date of each respective transaction announcement.
Warburg Dillon Read then applied such multiples to the corresponding
data for MichCon. This analysis produced a range of values per MCN share for
MichCon. The results are summarized in the following table, which shows the
range of valuations produced for each of the measures of MichCon financial
performance:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
MEASURE OF FINANCIAL PERFORMANCE COMPARABLE LOW END HIGH END
TRANSACTION MULTIPLES OF RANGE OF RANGE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Latest 12 Months Net Income Avail. for Common Stock 20.0x - 24.0x $25.04 $30.05
- ------------------------------------------------------------------------------------------------------------
Book Value of Common Equity 2.3x - 2.9x $18.21 $22.96
- ------------------------------------------------------------------------------------------------------------
Latest 12 months EBIT 13.5x - 15.5x $24.14 $28.95
- ------------------------------------------------------------------------------------------------------------
Latest 12 months EBITDA 8.0x - 10.0x $19.44 $26.38
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Mean Value $21.71 $27.08
- ------------------------------------------------------------------------------------------------------------
Median Value $21.79 $27.26
- ------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above, this analysis produced a range of values for MichCon of
$21.71 to $27.67 per share of MCN common stock.
The valuation analysis of MichCon can be summarized as shown in the
following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
VALUATION METHODOLOGY LOW END OF RANGE HIGH END OF RANGE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Discounted Cash Flow Analysis $18.58 $28.43
- -----------------------------------------------------------------------------------------------
Comparable Company Trading Analysis $20.64 $29.61
- -----------------------------------------------------------------------------------------------
Comparable Acquisition Analysis $21.74 $27.67
- -----------------------------------------------------------------------------------------------
Mean Value $20.31 $28.56
- -----------------------------------------------------------------------------------------------
</TABLE>
As shown above, the valuation analysis produced a range of values for
MichCon of $20.31 to $28.56 per share of MCN common stock.
VALUATION OF MCN'S DIVERSIFIED ENERGY BUSINESS: Warburg Dillon Read
performed valuation analysis of MCN's diversified energy business based on
various valuation methodologies, including discounted cash flow analysis,
comparable acquisition analysis and expected proceeds from pending asset sales,
where appropriate. Warburg Dillon Read performed discounted cash flow analyses
of MCN's diversified energy businesses based upon forecasts
-32-
<PAGE> 33
provided by MCN management, with adjustments deemed appropriate by DTE
management and Warburg Dillon Read. Warburg Dillon Read discounted to present
value, under assumed discount rates ranging from 10.0% to 15.0%, the free
unleveraged cash flows for varying periods for MCN's diversified energy
businesses. Terminal values were determined, where appropriate, utilizing
multiples of net income of 16.0x to 24.0x. Where appropriate, Warburg Dillon
Read also compared the discounted cash flow analysis results with the results of
comparable acquisitions and the expected proceeds from pending asset sales. This
analysis produced values ranging from $1,109 million to $1,372 million. After
adjusting this value for the forecast debt level of $1,223 million (as of
December 31, 1999) for MCN's diversified energy businesses, the implied equity
value for MCN's diversified energy businesses ranges from negative $114 million
to positive $149 million, or negative $1.25 to positive $1.64 per share of MCN
common stock. To this range of values, Warburg Dillon Read added the range of
value for MCN's coal fines projects of $1.76 to $2.63 per share of MCN common
stock, producing a total valuation range for MCN's diversified businesses of
$0.50 to $4.27 per share of MCN common stock.
The segment analysis of MCN can be summarized as shown in the following
table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SEGMENT LOW END OF RANGE HIGH END OF RANGE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
MichCon $20.31 $28.56
- -----------------------------------------------------------------------------------------------------------------------
Diversified Energy Business $(1.25) $ 1.64
- -----------------------------------------------------------------------------------------------------------------------
Coal Fines 1.76 $ 2.63
- -----------------------------------------------------------------------------------------------------------------------
Total $20.81 $32.83
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above the segment valuation analysis produced a range of
values for MCN of $20.81 to $32.83 per share of MCN common stock.
DTE COMPARABLE COMPANY TRADING ANALYSIS: Using publicly available
information, Warburg Dillon Read compared multiples of certain financial
criteria for DTE to multiples based upon market trading values at the time for
certain other electric utilities or holding companies for electric utilities
which, in Warburg Dillon Read's judgment, were generally comparable to DTE for
the purpose of this analysis. The factors Warburg Dillon Read considered in
selecting companies for comparison included size, geographic location, financial
condition and scope of business operations. The companies used in the comparison
were Constellation Energy Group Inc., FirstEnergy Corporation, PECO Energy
Company, PP&L Resources, Inc., Unicom Corporation and Wisconsin Energy
Corporation.
In evaluating the current market value of DTE common stock, Warburg
Dillon Read determined ranges of multiples for selected measures of financial
performance for the comparable companies including the market value of
outstanding common stock as a multiple of:
- - Net income per share of common stock for the latest 12-month period, and
estimated net income per share of common stock for the current and the
following fiscal years as projected by I/B/E/S; and
-33-
<PAGE> 34
- - Book value of common equity for the most recently available fiscal quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value of DTE as a multiple of:
- - Operating income, or EBIT, for the latest 12-month period; and
- - Operating cash flow, or EBITDA, for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding
data for DTE. The results are summarized in the following table, which shows the
range of valuations produced for each of the measures of DTE's financial
performance:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MEASURE OF FINANCIAL PERFORMANCE COMPARABLE LOW END HIGH END
COMPANY MULTIPLES OF RANGE OF RANGE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months Earnings Per Share 12.3x - 14.5x $39.88 $46.26
- -----------------------------------------------------------------------------------------------------------------
1999 Estimated Earnings Per Share 11.5x - 12.5x $36.92 $40.13
- -----------------------------------------------------------------------------------------------------------------
2000 Estimated Earnings Per Share 10.5x - 12.0x $35.28 $40.32
- -----------------------------------------------------------------------------------------------------------------
Book Value of Equity 1.4x - 1.6x $36.40 $41.60
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months EBIT 9.0x - 10.0x $20.74 $26.82
- -----------------------------------------------------------------------------------------------------------------
Latest 12 Months EBITDA 6.0x - 7.5x $31.37 $47.71
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Mean Value $33.43 $40.47
- -----------------------------------------------------------------------------------------------------------------
Median Value $35.84 $40.96
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As shown above, this analysis produced values of $33.43 to $40.96 per
share for DTE. DTE's closing price on October 4, 1999, was $37.00. This analysis
was performed by Warburg Dillon Read to determine if the DTE common stock
comprising 45% of the total consideration of the merger was appropriately
valued. Based on this analysis, Warburg Dillon Read determined that DTE common
stock was appropriately valued.
ACCRETION/DILUTION ANALYSIS: Warburg Dillon Read analyzed certain pro
forma effects of the transaction on the estimated earnings per share of DTE for
2001 and 2002. This analysis was performed based upon both I/B/E/S estimates and
forecasts provided by DTE management for DTE's estimated earnings and upon MCN
forecasts provided by MCN management, with adjustments deemed appropriate by DTE
management and Warburg Dillon Read. The analysis also included the effect of
potential cost synergies as estimated by DTE management. Utilizing I/B/E/S
estimates for DTE and the MCN forecasts as adjusted by DTE and Warburg Dillon
Read for 2001 and 2002 resulted in pro forma earnings per share accretion in
these two years of $0.02 and $0.10, respectively. Utilizing the DTE forecasted
earnings and
-34-
<PAGE> 35
the MCN forecasts as adjusted by DTE and Warburg Dillon Read for 2001 and 2002
resulted in no change in pro forma earnings per share and $0.06 accretion,
respectively.
The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to particular circumstances. Therefore, the opinion
and analysis are not readily susceptible to summary description. Accordingly,
notwithstanding the separate factors and analyses summarized above, Warburg
Dillon Read believes that its analysis must be considered as a whole and that
selecting only portions of its analysis and the factors it considered, without
considering all factors and analyses, could create a misleading view of the
evaluation process underlying the opinions. Warburg Dillon Read did not assign
any particular weight to any analyses or factors it considered. Rather, Warburg
Dillon Read made qualitative judgments based on its experience in rendering
these opinions and on economic, monetary and market conditions then present as
to the significance and relevance of each analysis and factor. In its analyses,
Warburg Dillon Read assumed relatively stable industry performance, regulatory
environments and general business and economic conditions, all of which are
beyond DTE's control. Any estimates contained in Warburg Dillon Read's analyses
do not necessarily indicate actual value, which may be significantly more or
less favorable than those suggested by such estimates. Estimates of the
financial value of companies do not purport to be appraisals or to reflect
necessarily the prices at which companies actually may be sold.
Warburg Dillon Read is an internationally recognized investment banking
firm. As part of its investment banking business, Warburg Dillon Read is
regularly engaged in evaluating businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. DTE's board of
directors selected Warburg Dillon Read on the basis of the firm's expertise and
reputation.
2. OPINION OF MCN'S FINANCIAL ADVISOR
A. MCN ANALYSIS
DISCOUNTED CASH FLOW ANALYSIS: Merrill Lynch performed separate
discounted cash flow, or "DCF", analyses for MCN on a consolidated basis and on
a segment-by-segment basis, using projections provided by MCN's management.
The DCF for MCN on a consolidated basis was calculated assuming
discount rates ranging from 7.5% to 8.5% and was comprised of the sum of the
present values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 7.5x
to 8.5x estimated 2004 earnings before interest, taxes, depreciation
and amortization, which is referred to as "EBITDA."
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<PAGE> 36
The segment-by-segment DCF valued MCN as the sum of the DCF values of
its gas distribution business segment and its diversified energy segment. The
DCF for the diversified energy business segment was calculated assuming discount
rates ranging from 8.5% to 9.5% and was comprised of the sum of the present
values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 8.0x
to 9.0x estimated 2004 EBITDA.
The DCF for the gas distribution business segment was calculated
assuming discount rates ranging from 7.0% to 8.0% and was comprised of the sum
of the present values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 7.0x
to 8.0x estimated 2004 EBITDA.
These analyses resulted in the following ranges of implied equity value
per share of MCN common stock, excluding any value attributable to synergies
that may be realized from the merger:
MCN IMPLIED EQUITY VALUE PER SHARE
<TABLE>
<CAPTION>
DCF Method Low High
---------- --- ----
<S> <C> <C>
Segment-by-segment $17.75 $24.00
Consolidated $19.00 $25.25
</TABLE>
COMPARABLE TRANSACTIONS ANALYSIS: In order to value MCN, Merrill Lynch
reviewed certain publicly available information regarding 12 selected business
combinations in the natural gas industry since October 19, 1998 (collectively,
the "Natural Gas Comparable Merger Transactions") that Merrill Lynch deemed to
be relevant in evaluating the merger. The Natural Gas Comparable Merger
Transactions and the dates these transactions were announced are as follows:
- Energy North, Inc./Eastern Enterprises (July 1999);
- CTG Resources, Inc./Energy East Corporation (June 1999);
- WICOR, Inc./Wisconsin Energy Corporation (June 1999);
- Yankee Energy System, Inc./Northeast Utilities (June 1999);
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<PAGE> 37
- Columbia Energy Group/Nisource, Inc. (June 1999);
- Pennsylvania Enterprises, Inc./Southern Union Company (June 1999);
- Southwest Gas Corporation/ONEOK, Inc. (April 1999);
- Connecticut Energy Corporation/Energy East Corporation (April
1999);
- Consolidated Natural Gas Company/Dominion Resources, Inc. (February
1999);
- Public Service Company of North Carolina, Incorporated /SCANA
Corporation (February 1999);
- North Carolina Natural Gas Corporation/Carolina Power & Light
Company (November 1998); and
- Colonial Gas Company/Eastern Enterprises (October 1998).
With respect to the Natural Gas Comparable Merger Transactions, Merrill
Lynch compared the "offer value" of each such transaction:
- (1) As a multiple of the next four quarters' estimated earnings
per share of the target company at the date of announcement
("Forward EPS"); and
- (2) As a multiple of the book value of the target company.
Merrill Lynch also compared the "transaction value" of each of the
Natural Gas Comparable Merger Transactions as a multiple of the latest twelve
months' EBITDA ("LTM EBITDA") of the target company.
The "offer value" is generally defined as the per share offer price for
the target company multiplied by the sum of the number of target company shares
outstanding and the number of target company options outstanding, net of option
proceeds. The "transaction value" is generally defined as the sum of the offer
value, the preferred equity at liquidation value, the short term debt, the long
term debt and any minority interests, less cash, marketable securities and
exercisable options proceeds.
The results of these analyses were as follows:
<TABLE>
<CAPTION>
Low High Mean Median
--- ---- ---- ------
<S> <C> <C> <C> <C>
Multiples of offer value to:
Forward EPS 17.9x 31.6x 22.8x 22.9x
Book value 1.9x 3.1x 2.6x 2.7x
Multiples of transactions value to
</TABLE>
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<PAGE> 38
<TABLE>
<S> <C> <C> <C> <C>
LTM EBITDA 7.6x 13.0x 10.5x 10.8x
</TABLE>
Based on these analyses, Merrill Lynch derived the following ranges of
per-share value of MCN common stock, based on approximately 90.4 million shares
of MCN common stock outstanding and net debt and preferred equity of $884.5
million and $0 respectively, for the gas distribution segment and $932.1 million
and $270.6 million, respectively, for the diversified energy segment:
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
Gas Distribution
2000 EPS (1) $23.34 $28.46
1999 Book Value $21.27 $23.82
1999 EBITDA (2) $23.02 $30.41
Diversified Energy
2000 EPS $2.52 $3.15
1999 Book Value $3.65 $4.87
1999 EBITDA ($4.17) ($1.56)
Total
2000 EPS $25.86 $31.61
1999 Book Value $24.92 $28.69
1999 EBITDA $18.85 $28.85
</TABLE>
- -----------------------------------------
(1) Includes amounts attributable to pension earnings.
(2) Includes amounts attributable to pension contributions.
COMPARABLE PUBLIC COMPANY ANALYSIS: Using publicly available
information, Merrill Lynch compared selected historical stock, financial and
operating data and ratios for MCN with corresponding data and ratios of similar
publicly traded companies. These companies were selected by Merrill Lynch based
upon Merrill Lynch's views as to the comparability of the financial and
operating characteristics of these companies to MCN.
The companies selected for the comparable company analysis included the
following local distribution companies (LDCs):
- Atlanta Gas Light Company;
- Indiana Energy, Inc.;
- New Jersey Resources Corporation;
- Northwest Natural Gas Company;
- Peoples Energy Corporation;
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<PAGE> 39
- Washington Gas Light Company; and
- WICOR, Inc.
The companies selected for the comparable company analysis also
included the following integrated energy companies:
- Columbia Energy Group;
- Consolidated Natural Gas Company;
- Equitable Resources, Inc.;
- KN Energy, Inc.;
- National Fuel Gas Company; and
- Questar Corporation.
In addition, the following companies selected by MCN management were
included in the comparable company analysis:
- CMS Energy Corporation;
- DTE Energy Company;
- El Paso Energy Company;
- Enbridge, Inc.;
- MDU Resources Group, Inc.;
- National Fuel Gas Company;
- ONEOK Inc.;
- Sempra Energy; and
- WestCoast Energy, Inc.
Merrill Lynch derived an estimated per-share valuation range for MCN
common stock by comparing market value as a multiple of estimated 2000 earnings
per share and comparing "firm value" as a multiple of estimated 1999 earnings
before interest, taxes and depreciation. The earnings estimates were obtained
from I/B/E/S, a data service that monitors and publishes a
-39-
<PAGE> 40
compilation of earnings estimates produced by selected research analysts on
companies of interest to investors, as of October 1, 1999.
COMPARABLE LOCAL DISTRIBUTION COMPANIES
<TABLE>
<CAPTION>
Low High Mean Median MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of 12.1x 15.8x 14.0x 14.2x 11.1x
estimated 2000 EPS
Firm value as a multiple of 6.7x 8.6x 7.4x 7.1x 9.3x
estimated 1999 EBITDA
</TABLE>
COMPARABLE INTEGRATED ENERGY COMPANIES
<TABLE>
<CAPTION>
Low High Mean Median MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of 12.7x 23.4x 15.9x 15.1x 11.1x
estimated 2000 EPS
Firm value as a multiple of 7.1x 10.2x 8.6x 8.5x 9.3x
estimated 1999 EBITDA
</TABLE>
COMPARABLE COMPANIES SELECTED BY MCN'S MANAGEMENT
<TABLE>
<CAPTION>
Low High Mean Median MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of estimated 2000 EPS 10.2x 16.5x 13.1x 13.1x 11.1x
Firm Value as a multiple of estimated 1999
EBITDA 4.4x 9.8x 7.8x 7.6x 9.5x
</TABLE>
Based upon these analyses, Merrill Lynch derived the following ranges
of per share values of the MCN common stock, based on approximately 90.4 million
shares of MCN common stock outstanding and assuming net debt of $1,816.6
million, and preferred equity of $270.6 million as of December 31, 1999:
<TABLE>
<CAPTION>
Low High
--- ----
<C> <C> <C>
2000 EPS $18.25 $21.75
1999 EBITDA $14.50 $19.50
</TABLE>
B. DTE ANALYSIS
DISCOUNTED CASH FLOW ANALYSIS: Merrill Lynch performed a DCF analysis
for DTE, using projections provided by the DTE management.
The DCF for DTE was calculated assuming discount rates ranging from
7.5% to 8.5% and was comprised of the sum of the present values of:
(1) The projected cash flows for the years 2000 through 2004; and
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<PAGE> 41
(2) The 2004 terminal value based upon a range of multiples from 6.5x
to 7.5x estimated 2004 EBITDA, less $496 million of accelerated
depreciation attributable to DTE's nuclear power plant.
This analysis resulted in a range of implied equity values per share of
DTE common stock from $40.23 to $51.36, as compared to the closing price per
share of DTE common stock on October 1, 1999 of $36.63.
COMPARABLE PUBLIC COMPANY ANALYSIS: Using publicly available
information, Merrill Lynch compared selected historical stock, financial and
operating data and ratios for DTE with corresponding data and ratios of similar
publicly traded companies. These companies were selected by Merrill Lynch based
upon Merrill Lynch's views as to the comparability of the financial and
operating characteristics of these companies to DTE.
The companies included in the DTE comparable company analysis were:
- - Ameren Corporation;
- - American Electric Power Company, Inc.;
- - Cinergy Corp.;
- - CMS Energy Corp.;
- - DPL Inc.; and
- - First Energy.
Merrill Lynch derived an estimated valuation range for DTE by comparing
market value as a multiple of estimated 2000 earnings per share and estimated
1999 book value. Merrill Lynch also compared firm value as a multiple of
estimated EBITDA. The earnings estimates were obtained from I/B/E/S as of
October 1, 1999. The results of these analyses were as follows:
<TABLE>
<CAPTION>
COMPARABLE DTE COMPANIES
Low High Mean Median DTE
<S> <C> <C> <C> <C> <C>
Market value as a multiple of
estimated 2000 EPS 10.2x 14.4x 12.2x 12.5x 10.9x
estimated 1999 book value 1.34x 2.08x 1.69x 1.76x 1.41x
Firm value as a multiple of
estimated 1999 EBITDA 6.3x 7.7x 7.1x 7.4x 6.5x
</TABLE>
41
<PAGE> 42
This analysis resulted in a range of implied equity values per share of
DTE common stock from $34.00 to $47.50. This compares to the closing per share
price of DTE common stock on October 1, 1999 of $36.63.
PRO FORMA COMBINATION ANALYSIS: Merrill Lynch also analyzed certain
pro forma effects resulting from the merger. Using the projected earnings for
DTE for the years 2000 through 2005 provided by the management of DTE, and the
projected earnings for MCN for the years 2000 through 2001 provided by
management of MCN and for years 2002 through 2005 based upon guidance provided
by the management of MCN, Merrill Lynch compared the projected earnings per
share of DTE on a stand-alone basis, assuming the merger did not occur, to the
per-share earnings of a DTE shareholder, assuming the merger were to occur.
Using the assumptions detailed above, and further assuming no synergies
and aggregate merger consideration consisting of 55% cash and 45% DTE stock, the
analysis indicated that the merger would be neutral to projected earnings per
share of DTE if DTE realized pre-tax synergies as follows:
<TABLE>
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.4 million
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . $63.5 million
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . $55.7 million
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . $24.6 million
</TABLE>
c. CONCLUSION
Based on the foregoing it is clear that the consideration paid
by DTE is a reasonable product of extensive arms-length bargaining. Providing
further assurance of the fairness of the agreed upon consideration is the fact
that MCN's shareholders will receive DTE Common Stock, which is listed on the
NYSE, thus providing them with a public market for the securities. Moreover, the
stock consideration to be received by MCN shareholders upon consummation of the
Merger is expected to be tax-free, although shareholders that opt for cash
consideration will recognize gain. In light of these fairness opinions and
considering all relevant factors, DTE believes that the consideration to be paid
for the MCN shares is reasonable and bears a fair relation to the earnings
capacity of the utility assets underlying the MCN shares. Accordingly, the
consideration to be paid by DTE meets the standards of Section 10(b)(2).
C. REASONABLENESS OF FEES
DTE believes that the overall fees, commissions, and expenses incurred
and to be incurred in connection with the Merger are reasonable and fair in
light of the size and complexity of the Merger relative to other transactions
and the anticipated benefits of the Merger to the public, investors, and
consumers; that they are consistent with recent precedent; and that they meet
the standards of Section 10(b)(2). As stated at Item 2 above, DTE and MCN
together expect to incur a combined total of approximately $31.4 million in
fees, commissions, and expenses in connection with the Merger. This amount is in
keeping with the fees associated with
42
<PAGE> 43
recent transactions approved by the Commission,(31) and is consistent with the
standards of Section 10(b)(2).
D. CAPITAL STRUCTURE AND THE PUBLIC INTEREST
Section 10 (b)(3) requires the Commission to determine whether the
Merger will unduly complicate DTE's capital structure or would be detrimental to
the public interest, the interests of investors or consumers, or the proper
functioning of DTE's system. Following the Merger, DTE will have a capital
structure which is substantially similar to capital structures which the
Commission has approved in other orders.(32) After consummation of the Merger,
DTE will own 100 percent of the shares of Merger Sub Common Stock, and
indirectly will own 100 percent of Merger Sub's wholly-owned public utility
subsidiaries, i.e., MichCon and Citizens, and a 47.5% interest in SMGC. Merger
Sub and its subsidiaries may continue to hold their debt, which will have no
material effect on DTE's capital structure. The only issued and outstanding
voting securities of DTE will be its Common Stock. For these reasons, DTE
believes that the Merger will not unduly complicate its capital structure.
Set forth below are summaries of the historical capital structures
(excluding short-term debt) of the DTE and MCN as of September 30, 1999 and the
pro forma consolidated capital structure of DTE as of the same date:
CAPITAL STRUCTURE
SEPTEMBER 30, 1999
(MILLIONS)
<TABLE>
<CAPTION>
DTE MCN Pro Forma Pro Forma
Adjustments Combined
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt $ 3,985 51% $ 1,461 54% $ -- $ 5,446 51%
Preferred stock of -- -- 403 15% -- 403 4%
subsidiaries
Common 3,858 49% 847 31% 151 4,856 45%
shareholders' equity
Total $ 7,843 100% $ 2,711 100% $ 151 $10,705 100%
</TABLE>
The ratio of consolidated common equity to total capitalization of the
DTE will be, on an unaudited pro forma basis, 45 percent. This is in keeping
with the equity ratios that the Commission has traditionally found to be
consistent with the public interest.(33) As discussed earlier in Item 1(B)(1),
DTE believes that the Merger will achieve efficiencies, economies and synergies
that will generate net (after-tax) cost savings and cost avoidances of $60
million/year over a ten year period. It will thus benefit the interests of the
public, consumers and investors and will not lead to a capital structure that
impairs the proper functioning of a holding company system or allows for abuses.
- ----------------------
(31) See TUC Holding Co. et. al., supra (estimated fees and expenses of $37
million); Kansas Power & Light Co., HCAR No. 25465 (Feb. 5, 1992) (estimated
fees and expenses of approximately $30 million); New Century Energies, Inc.,
HCAR No. 26748 (Aug. 1, 1997) (estimated fees and expenses of $23.5 million);
AES Corporation, HCAR No. 27063 (Aug. 20, 1999) (estimated fees and expenses of
$28 million).
(32) See, e.g., TUC Holding Co., supra; CINergy Corp., HCAR No. 26146 (Oct. 21,
1994); Entergy Corp., HCAR No. 25952 (Dec. 17, 1993). In all three orders, the
Commission approved mergers which resulted in a holding company acquiring 100
percent of a utility operating company's common stock.
(33) See, e.g., Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990).
43
<PAGE> 44
2. SECTION 10(C)
A. SECTION 10(C)(1)
Under Section 10(c)(1), the Commission may not approve an acquisition
which is "unlawful under the provisions of Section 8" or "detrimental to the
carrying out of the provisions of Section 11." Section 8 prohibits an
acquisition by a registered holding company of an interest in an electric
utility and a gas utility serving substantially the same territory without the
express approval of the state commission when state law prohibits or requires
approval of the acquisition. Section 8 applies only to registered holding
companies and is thus inapplicable to the Merger. Even if Section 8 were
applicable, however, the Merger would be entirely consistent with Michigan's
laws and regulatory policies.
Section 11(b)(1) requires a registered holding company, with limited
exceptions, to limit its operations to a "single integrated public-utility
system." Although this requirement is facially applicable only to registered
holding companies, the Commission has held that it applies "by analogy" to
exempt holding companies, such as DTE, as well.(34)
Section 2(a)(29) provides separate definitions of an "integrated
public-utility system" for gas and electric companies. For electric utility
companies, the term means:
[A] system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art, and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation . . . .
For gas utilities, the term means:
[A] system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system. With respect to either
type of company, the system must be confined in its operations to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region
- -----------------------------
(34) See, e.g., NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999),
citing, Union Electric Co., 45 S.E.C. 489, 506 n .63, aff'd without opinion sub.
nom., City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1970).
-44-
<PAGE> 45
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation. Provided, That gas utility
companies deriving natural gas from a common source of supply may be
deemed to be included in a single area or region.(35)
In large part because the Act contains different definitions of
integrated gas and electric utility systems the Commission has previously
established that electric and gas utilities may not together constitute a single
integrated utility system.(36) Thus, to complete the Merger, DTE must obtain the
Commission's permission to own more than one integrated utility system, i.e.,
Detroit Edison's integrated electric utility system and MCN's integrated gas
utility system.(37) Section 11(b)(1), which is facially applicable to registered
holding companies, permits the acquisition and retention of more than one
integrated utility system only if the requirements of Section 11(b)(1)(A)-(C)
are satisfied. The Commission has consistently held that full compliance with
these standards is not required of holding companies that will be exempt under
Section 3.(38)
Instead, in determining whether an exempt holding company may own
multiple integrated systems, the Commission focuses on whether the acquisition
would be detrimental to the "core concerns" of Section 11, namely the protection
of the public interest and the interests of investors and consumers.(39) Thus,
the Commission has determined that an exempt utility holding company may,
consistent with Section 11(b)(1), own more than one integrated utility system if
the merger will result in the "de facto integration" of contiguous utility
properties.(40)
The Merger is fully consistent with the standards of Sections 10(c)(1)
and 11 as applied to exempt holding companies and the de facto integration
requirement. Detroit Edison's, MichCon's and Citizens service territories are
located in adjacent or nearby geographic areas,
- -----------------------------
(35) Thus, gas utilities that derive natural gas from a common source of
supply may be deemed to be included in a single area or region. See, e.g.,
Sempra Energy, HCAR No. 26971 (Feb. 1, 1999) (holding that California and North
Carolina based gas utilities could constitute an integrated system because they
obtained gas from common sources of supply).
(36) See, e.g., Sempra Energy, HCAR No. 26890 (June 26, 1998), and the cases
cited therein.
(37) The Commission has previously made it clear that an exempt utility
holding company may consist of more than one integrated utility system. See,
e.g., Gaz Metropolitain, et. al., HCAR No. 26170 (Nov. 23, 1994).
(38) See, e.g., NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999); TUC
Holding Co., et. al., supra.
(39) See, e.g., WPL Holdings, HCAR No. 26856 (April 14, 1988), aff'd in part
and rev'd in part sub. nom., Wisconsin Environmental Decade, Inc. v. S.E.C., 882
F.2d 523 (D.C. Cir. 1989).
(40) See, e.g., NIPSCO Industries, supra, citing TUC Holding Co., et. al.,
HCAR No. 26749 (Aug. 1, 1997), citing Gaz Metropolitain, Inc., HCAR No. 26170
(Nov. 23, 1994).
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<PAGE> 46
are entirely within a single state, and will overlap to a significant degree.
(41) Moreover, 37.75% of DTE's residential customers and 27.83% of its
non-residential customers take gas service from MCN, while 59.62% of MCN's
residential gas customers and 46.71% of its non-residential gas customers take
electric service from DTE. Although SMGC's territory will not be contiguous with
Detroit Edison, the Commission has previously established that MCN, Citizens and
SMGC constitute a single integrated system.(42) Thus, consistent with Commission
precedent, the fact that Detroit Edison will generally overlap with the Michigan
portion of MCN's integrated gas utility system should satisfy the de facto
integration doctrine.(43)
As discussed below, the utility systems of DTE and Merger Sub will be
further integrated with respect to a number of operational, administrative, and
support functions. The Merger will produce a combined enterprise which will
better serve the needs of its customers and the interests of its investors by
offering a range of energy supply alternatives in competitive markets. The
Merger will not impede the ability of the MPSC to carry out its statutory
responsibilities with respect to the utility activities of DTE or Merger Sub.
Nor will the Merger give rise to any of the abuses, such as ownership of
scattered utility properties, inefficient operations, lack of local management
or evasion of state regulation, that Section 11(b)(1), and, more generally, the
Act as a whole, were intended to address.(44)
Accordingly, the Commission should find that the Merger would not be
detrimental to the interests protected by Section 11, and satisfies the
requirements of Section 10(c)(1).
B. SECTION 10(C)(2)
Section 10(c)(2) requires that the Commission not approve an
acquisition unless "the Commission finds that such acquisition will serve the
public interest by tending towards the economical and efficient development of
an integrated public-utility system." The Commission has interpreted Section
10(c)(2) to permit the approval of acquisitions resulting in more than one
integrated system when the acquisition "tends towards the economical and the
efficient
- -----------------------------
(41) The relationship between DTE and MCN's respective territories is
clearly illustrated in the map appended to this application as Exhibit E-1.
(42) MCN Corp., 1996 SEC LEXIS 2502 (Sept. 17, 1996).
(43) For example, in NIPSCO Industries, Inc., supra, the SEC determined that
a holding company which had gas and electric properties in Indiana, and
additional gas properties in Massachusetts, and thus owned an integrated Indiana
electric utility system and an integrated Indiana-Massachusetts natural as
utility system satisfied the de facto integration test because the "portions of
the two integrated systems located in Indiana will generally overlap."
(44) See, e.g., TUC Holding Co. et. al., supra.
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<PAGE> 47
development of an integrated public-utility system."(45) The Commission has held
that "where a holding company will be exempt from registration under Section 3
of the Act following an acquisition of non-integrating utility assets, it
suffices for purposes of Section 10(c)(2) to find benefits to one integrated
system."(46)
In this case, however, both integrated utility systems will realize a
number of benefits from the Merger. The Merger will combine two companies with
complementary operations and expertise, and provide important strategic,
financial and other benefits to the merging companies, their shareholders and
customers. As was discussed above, the Merger will create a fully integrated
electric and natural gas company with a strong energy infrastructure and
competitive operations spanning the energy value chain. By combining DTE's
experience in power plant operations, coal management and marketing with MCN's
experience in natural gas purchasing, transportation, storage and marketing, the
combined company will be positioned to market coal, gas, and electricity as
alternative or complementary energy sources and to compete more effectively in
the development of new power plants and distributed generation. The Merger will
also combine DTE's coal marketing expertise with MCN's participation in
pipelines and gas reserves and will thus allow the combined company to offer
attractive energy supply options to large customers, and develop as a major
multi-fuel and power marketer.
The Merger will have a number of operational benefits that will result
in economic efficiencies for DTE as a whole and for its integrated utility
subsidiaries. DTE will realize economies by combining and coordinating
operations with MCN with respect to accounting, finance, information systems,
environmental management, gas marketing, and procurement. Indeed, DTE expects
that the Merger will result in various direct operational cost reductions and
estimates that approximately $60 million in annual savings will result from the
integration of the merging companies' operations for each of the first ten
years. These synergies will result from reductions of corporate administration
and executive management, and elimination of the MCN board of directors, reduced
costs associated with procurement and other operations support functions, and
savings from consolidation of MCN's answering services into DTE's call center.
The Merger will also allow DTE to offer a greater range of services to customers
and will provide significantly increased financial and other resources to MCN's
integrated gas utility system, making it better able to meet customer needs.
Although the amount of such benefits cannot be specifically quantified
in every case, the Commission has recognized that "specific dollar forecasts of
future savings are not necessarily required; a demonstrated potential for
economies will suffice even when these are not precisely
- -----------------------------
(45) Gaz Metropolitan, Inc., supra (quoting Union Electric Company, 45
S.E.C. 489, 504-06 (1974), aff'd without op. sub nom. City of Cape Girardeau v.
SEC, 521 F.2d 324 (D.C. Cir. 1975)).
(46) See, e.g., Sempra Energy, supra; TUC Holding Co., et. al., supra.
-47-
<PAGE> 48
quantifiable."(47) The Commission has previously found that benefits similar to
those enumerated above satisfied the affirmative finding required under Section
10(c)(2).(48) Accordingly, the Commission should find that the requirements of
Section 10(c)(2) are satisfied with regard to the Merger.
3. SECTION 10(F) -- COMPLIANCE WITH STATE REQUIREMENTS
Prior to approving an acquisition, the Commission is required, under
Section 10(f), to find that the acquisition has complied with all applicable
state laws. In this case, the MPSC does not have jurisdiction over the proposed
merger, but has made its support for the Merger clear, as will be confirmed in a
letter from the MPSC. In addition. the Missouri Public Service Commission does
not have jurisdiction over the merger. Therefore, the Commission should
determine that the requirements of this section will be met.
C. SECTION 3(A)(1)
DTE believes that, following consummation of the Merger, it and each of
its subsidiary companies, will be entitled to exemption under Section 3(a)(1)
from all provisions of the Act (except for Section 9(a)(2) thereof).
Importantly, DTE and MCN are both already exempt under Section 3(a)(1) and
because they are based in the same state there is no reason why such status
would not be available to the post-Merger entity. Section 3(a)(1) authorizes the
Commission to exempt any holding company:
[I]f such holding company, and every subsidiary company thereof which
is a public-utility company from which such holding company derives,
directly or indirectly, any material part of its income are
predominantly intrastate in character and will carry on their
businesses substantially within a single State in which such holding
company and every such subsidiary company thereof are organized . . .
Following the Merger, DTE and each of its public utility subsidiaries,
with the exception of SMGC,(49) will be organized in Michigan. Each of these
public utility subsidiaries will earn
- -----------------------------
(47) Centerior Energy Corp., HCAR Nol. 24073 (April 29, 1986). See also,
Bangor Hydro-Electric Co., et, al., 1999 SEC LEXIS 2282 at *16 n. 11 (same).
(48) See, e.g., Union Electric Company, supra, (provision of substantial
resources made available by acquiring entity to acquired company demonstrated
"efficiencies and economies by virtue of the affiliation."); WPL Holdings, Inc.,
HCAR No. 24590 (Feb. 26, 1988) (benefits supporting Section 10(c)(2) finding
include "[a] structure that could more effectively address the growing national
competition in the energy industry, refocus various utility activities,
facilitate selective diversification into non-utility business . . . and provide
additional flexibility for financing . . . .")
(49) The Commission previously held that MCN could acquire its interest in
Southern Missouri Gas Co. while retaining its Section 3(a)(1) exemption. See MCN
Corp., HCAR No.
(continued ...)
-48-
<PAGE> 49
virtually all of its utility income from operations within the state of
Michigan, while DTE as a whole will be "predominantly intra-state in nature."
Under the circumstances, DTE will qualify as an exempt holding company, "unless
and except insofar as [the Commission] finds the exemption detrimental to the
public interest or the interest of investors or consumers . . . ." As discussed
in Item 1(B)(1), DTE believes that the Merger will result in efficiencies and
economies which will benefit the interest of the public, investors and
consumers. As noted above, the combination of electric and gas utility business
resulting from the Merger raises no public interest concerns. Therefore, DTE
believes it will qualify for the Section 3(a)(1) exemption upon consummation of
the Merger, and requests an order from the Commission granting such exemption.
In addition, DTE asks the Commission to issue an order finding that
Merger Sub will also be an exempt utility holding company pursuant to Section
3(a)(1). Because Merger Sub will have the same corporate structure, and will
have the same public utility subsidiaries as MCN, which currently enjoys a
Section 3(a)(1) exemption, it follows that Merger Sub should be eligible for
that exemption as well. The Commission has previously allowed holding company
structures in which an exempt holding company has another exempt holding company
as a subsidiary.(50)
ITEM 4. REGULATORY APPROVAL
The Merger is subject to the expiration or termination of the 30-day
waiting period under the HSR Act and no action having been instituted by the DOJ
or the FTC that is not withdrawn, terminated or otherwise resolved prior to the
effective time of the Merger. The HSR Act, and the rules and regulations
thereunder, provide that certain acquisitions (including the Merger) may not be
consummated until required information and materials have been furnished to the
DOJ and the FTC and specified waiting periods have expired or been terminated.
On November 22, 1999, DTE and MCN made their separate filings with the DOJ and
the FTC.
As noted above, the MPSC does not have jurisdiction over the proposed
merger, but has nevertheless carefully considered and endorsed it.(51)
Similarly, FERC will not have jurisdiction over the Merger because MCN will not
have any FERC-jurisdictional assets at the time of
- -----------------------------
26576 (Sept. 17, 1996). Consequently, there is no reason why DTE's ownership of
Southern Missouri Gas Co. after the consummation of the merger would be
inconsistent with DTE's possession of a Section 3(a)(1) exemption.
(50) See, e.g., AES Corp., HCAR No. 27063 (Aug. 20, 1999) (Holding company
exempt under Section 3(a)(5) authorized to own a holding company exempt under
Section 3(a)(1).); PP&L Resources, Inc., HCAR No. 26905 (Aug. 12, 1998) (Holding
company exempt under Section 3(a)(1) authorized to own a holding company exempt
under Section 3(a)(2)).
(51) See Exhibit D-1.
-49-
<PAGE> 50
closing.(52) Thus, DTE does not currently contemplate filing an application at
FERC seeking its approval of the Merger.
DTE holds a license issued by the Nuclear Regulatory Commission to own
and operate its Fermi 2 nuclear power plant. Under the Atomic Energy Act and NRC
regulations, nuclear licensees must seek and obtain prior NRC consent for any
changes that would constitute a transfer of an NRC license, directly or
indirectly, through transfer of control of the license to any person.
Additionally, the NRC has expressed concern over the potential of certain
mergers to affect the basis for prior NRC decisions related to the financial
qualifications of an NRC licensee. DTE does not believe that the merger would
constitute a transfer of control of its NRC license or that the merger will
affect the basis for prior NRC decisions relating to its financial
qualifications as an NRC licensee. DTE has requested confirmation that the NRC
concurs with its belief. In the event that the NRC determines that the merger
constitutes a transfer of the license, DTE and Detroit Edison believe that the
NRC's approval of such transfer can be obtained in a timely manner.
Except as set forth above, no other state or federal agency has
jurisdiction over the transactions described herein.
ITEM 5 PROCEDURE
The Commission is respectfully requested to issue and publish not later
than December 1, 1999 the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than two
weeks from the notice date by which comments may be entered and a date not later
than 1/31/2000 as a date after which an order of the Commission granting and
permitting this Application to become effective may be entered by the
Commission. Expeditious action is justified because the Merger is expected to be
accretive to DTE's earnings per share in its first full year of implementation.
In addition, the sooner the Merger is approved, the sooner DTE and MCN will be
able to take advantage of new economies of scale with regard to financing. In
short, because delay will be quite costly, DTE respectfully asks that the
Commission review and approve the Merger as rapidly as is reasonably possible.
- ----------------
(52) The MCN facilities that would trigger FERC jurisdiction over the merger
are not considered to be a part of the core assets that DTE desires to retain.
As a result, they will be divested or canceled (in the case of certain contracts
or rate schedules) prior to closing. DTE understands that FERC precedent allows
such divestitures and cancellations without requiring a filing, except as may be
required in connection with the divestiture or cancellation itself, even when
those actions have been challenged as a means of avoiding FERC review, and does
not expect that FERC will alter this policy in response to the Merger. Ensource,
78 FERC P. 61,064 at 61,231 (1997).
-50-
<PAGE> 51
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger. The Division of Investment Management, Office of Public Utility
Regulation, may assist in the preparation of the Commission's decision. There
should be no waiting period between the issuance of the Commission's order and
the date on which it is to become effective.
ITEM 6 EXHIBITS AND FINANCIAL STATEMENTS
A-1: DTE's Articles of Incorporation
A-2: DTE's Bylaws
A-3: MCN's Articles of Incorporation
A-4: MCN's Bylaws
A-5: DTE's Rights Agreement
A-6: MCN's Rights Agreement
B-1: Merger Agreement (included as an attachment to Exhibit C-1)
C-1: Registration Statement
D-1: Letter from the MPSC endorsing the Merger
(to be filed by the MPSC)
E-1: Map depicting the utility service territories of Detroit Edison and
MichCon
F-1: Present-Tense Opinion of Counsel
F-2: Past-Tense Opinion of Counsel (to be filed by amendment)
G-1: Annual Report of DTE on Form 10-K for the year ended December 31, 1998
G-2 Quarterly Report of DTE on Form 10-Q for the Quarter ended September
30, 1999
G-3: MCN's Current Report on Form 8-K, dated October 15, 1999
G-4: Quarterly Report of MCN on Form 10-Q for the quarter ended September
30, 1999
G-5a: DTE's Income Statement
G-5b: DTE's Balance Sheet
G-5c: Statement of Retained Earnings
-51-
<PAGE> 52
G-6a: DTE's Financial Data Schedule
G-6b: DTE's Financial Data Schedule (Pro Forma)
G-7: Detroit Edison's Financial Data Schedule
G-8: MCN's Financial Data Schedule
G-9: MichCon's Financial Data Schedule
G-10: MCNEE's Financial Data Schedule
H-1: Fairness Opinion of Warburg Dillon Read LLC (included in Exhibit C-1)
H-2: Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc.
(included in Exhibit C-1)
I-1: Proposed Form of Notice
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
DTE believes that the Merger will not involve major federal action
significantly affecting the quality of the human environment as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Section 4321 et seq. ("NEPA"). First, no major federal action within the meaning
of NEPA is involved. Second, consummation of the Merger will not result in
changes in the operations of the subsidiaries of DTE or MCN that would have any
significant impact on the environment. To DTE's knowledge, no federal agency is
preparing an environmental impact statement with respect to this matter.
-52-
<PAGE> 53
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this statement to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 24, 1999 /s/ Larry G. Garbarding
----------------------------------
Larry G. Garbarding
Executive Vice President and Chief
Financial Officer
-53-
<PAGE> 54
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
A-1: DTE's Articles of Incorporation
A-2: DTE's Bylaws
A-3: MCN's Articles of Incorporation
A-4: MCN's Bylaws
A-5: DTE's Rights Agreement
A-6: MCN's Rights Agreement
B-1: Merger Agreement (included as an attachment to Exhibit C-1)
C-1: Registration Statement
D-1: Letter from the MPSC endorsing the Merger
(to be filed by the MPSC)
E-1: Map depicting the utility service territories of Detroit Edison and
MichCon
F-1: Present-Tense Opinion of Counsel
F-2: Past-Tense Opinion of Counsel (to be filed by amendment)
G-1: Annual Report of DTE on Form 10-K for the year ended December 31, 1998
G-2 Quarterly Report of DTE on Form 10-Q for the Quarter ended September
30, 1999
G-3: MCN's Current Report on Form 8-K, dated October 15, 1999
G-4: Quarterly Report of MCN on Form 10-Q for the quarter ended September
30, 1999
G-5a: DTE's Income Statement
G-5b: DTE's Balance Sheet
G-5c: Statement of Retained Earnings
G-6a: DTE's Financial Data Schedule
G-6b: DTE's Financial Data Schedule (Pro Forma)
G-7: Detroit Edison's Financial Data Schedule
G-8: MCN's Financial Data Schedule
G-9: MichCon's Financial Data Schedule
G-10: MCNEE's Financial Data Schedule
H-1: Fairness Opinion of Warburg Dillon Read LLC (included in Exhibit C-1)
H-2: Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc.
(included in Exhibit C-1)
I-1: Proposed Form of Notice
</TABLE>
<PAGE> 1
EXHIBIT 99.A1
C&S 510 (8/93) CONFORMED COPY
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
Date Received
FILED
DEC 15 1995
DEC 15 1995
ADMINISTRATOR
MICHIGAN DEPARTMENT OF COMMERCE
CORPORATION & SECURITIES BUREAU
RESTATED ARTICLES OF INCORPORATION
For use by Domestic Profit Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Articles:
1. The present name of the corporation is:
DTE ENERGY COMPANY
2. The identification number assigned by the Bureau is: 232-099
3. All former names of the corporation are:
DTE HOLDINGS, INC.
4. The date of filing the original Article of Incorporation was:
January 26, 1995
The following Restated Articles of Incorporation supersede the Articles of
Incorporation as amended and shall be the Articles of Incorporation for
the corporation.
SEE ATTACHED AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE> 2
COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATORS BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS; OTHERWISE, COMPLETE SECTION (b).
a.[ ] These Restated Articles of Incorporation were duly adopted on the ______
day of ______________ 19___, in accordance with the provisions of
Section 642 of the Act by the unanimous consent of the incorporators
before the first meeting of the Board of Directors.
Signed this day of , 19
----------- ------------------------ ----------------------
- ------------------------------------- ---------------------------------------
- ------------------------------------- ---------------------------------------
(Signatures of Incorporators; type or print name under each signature)
b.[ ] These Restated Articles of Incorporation were duly adopted on 11 day of
December 1995 in accordance with the provisions of Section 642 of the
Act and: (check one of the following)
[ ] were duly adopted by the Board of Directors without a vote of
the shareholders. These Restated Articles of Incorporation
only restate and integrate and do not further amend the
provisions of the Articles of Incorporation as heretofore
amended and there is no material discrepancy between those
provisions and the provisions of these Restated Articles.
[ ] were duly adopted by the shareholders. The necessary number
of shares as required by statute were voted in favor of these
Restated Articles.
[ ] were duly adopted by the written consent of the shareholders
having not less than the minimum number of votes required by
statute in accordance with Section 407(1) of the Act.
Written notice to shareholders who have not consented in
writing has been given. (Note: Written consent by less than
all of the shareholders is permitted only if such provision
appears in the Articles of Incorporation.)
[X] were duly adopted by the written consent of all the
shareholders entitled to vote in accordance with Section
407(2) of the Act.
Signed this 13th day of December , 1995
---- --------------------- --------
By: John E. Lobbia/s/
-----------------------------------------------------
(Signature)
John E. Lobbia Chairman of the Board
---------------------------------------------------------
(Type or Print Name) (Type or Print Title)
<PAGE> 3
C&S 510
<TABLE>
<S><C>
DOCUMENT WILL BE RETURNED TO NAME AND MAILING ADDRESS Name of person or organization
INDICATED IN THE BOX BELOW. Include name, street and number remitting fees:
(or P.O. Box), city, state and ZIP code. E. M. Godfrey
------------------------------
(313) 235-8670
------------------------------
Preparer's name and business
Elaine M. Godfrey telephone number:
2000 2nd Avenue, Room 2412
Detroit MI 48226 E. M. Godfrey
------------------------------
(313) 237-8670
------------------------------
</TABLE>
INFORMATION AND INSTRUCTIONS
<TABLE>
<S><C>
1. The articles of incorporation cannot be restated until this form, or a comparable document, is submitted.
2. Submit one original copy of this document. Upon filing, the document will be added to the records of the Corporation and
Securities Bureau. The original copy will be returned to the address appearing in the box on front as evidence of filing.
Since this document will be maintained on optical disk media, it is important that the filing be legible. Documents with
poor black and white contrast, or otherwise illegible, will be rejected.
3. This document is to be used pursuant to sections 641 through 643 of the Act for the purpose of restating the articles of
incorporation of a domestic profit corporation. Restated articles of incorporation area an integration into a single
instrument of the current provisions of the corporation's articles of incorporation, along with any desired amendments to
those articles.
4. Restated articles of incorporation which do not amend the articles of incorporation may be adopted by the board of
directors without a vote of the shareholders. Restated articles of incorporation which amend the articles of
incorporation require adoption by the shareholders. Restated articles of incorporation submitted before the first
meeting of the board of directors require adoption by all of the incorporators.
5. Item 2 - Enter the identification number previously assigned by the Bureau. If this number is unknown, leave it blank.
6. The duration of the corporation should be stated in the restated articles of incorporation only if it is not perpetual.
7. This document is effective on the date endorsed"filed" by the Bureau. A later effective date, no more than 90 days after
the date of delivery, may be stated as an additional article.
8. If the restated articles are adopted before the first meeting of the board of directors, item 5(a) must be signed in ink
by all of the incorporators. Other restated articles must be signed by the president, vice-president, chairperson or
vice-chairperson.
9. FEES: NON-REFUNDABLE FEE (Make remittance payable to the State of Michigan.
Include corporation name and identification number on check or money order)................. $10.00
Franchise fee --- payable only if authorized shares is increased:
each additional 20,000 authorized shares or portion thereof....................... $30.00
10. Mail form and fee to:
Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P.O. Box 30054
Lansing, Michigan 48909-7554
Telephone: (517) 334-6302
</TABLE>
<PAGE> 4
Michigan Department of Consumer and Industry Services
Filing Endorsement
This is to Certify that the CERTIFICATE OF AMENDMENT - CORPORATION
for
DTE ENERGY COMPANY
ID NUMBER., 232099
received by facsimile transmission on September 25, 1997 is hereby endorsed
Filed an September 25, 1997 by the Administrator.
In testimony whereof, I have
hereunto set my hand and affixed the
Seal of the Department, in the City
of Lansing,, this 25th day of
September, 1997.
STATE
SEAL
Julie Croll/s/ Director
Corporation, Securities and Land Development Bureau
<PAGE> 5
CONFORMED COPY
AMENDED AND RESTATED ARTICLES OF INCORPORATION
PURSUANT TO THE PROVISIONS OF ACT 284, PUBLIC ACTS OF 1972, THE
UNDERSIGNED CORPORATION EXECUTES THE FOLLOWING ARTICLES:
ARTICLE I
THE NAME OF THE CORPORATION IS DTE ENERGY COMPANY.
ARTICLE 11
THE PURPOSES FOR WHICH THE CORPORATION (THE "COMPANY") IS FORMED ARE TO
ENGAGE IN ANY ACTIVITY WITHIN THE PURPOSES FOR WHICH CORPORATIONS MAY BE FORMED
UNDER THE MICHIGAN BUSINESS CORPORATION ACT (THE "ACT").
ARTICLE III
THE LOCATION AND POST OFFICE ADDRESS OF THE PRINCIPAL OFFICE OF THE
COMPANY AT THE TIME OF FILING THESE ARTICLES IS 2000 2ND AVENUE, DETROIT, WAYNE
COUNTY, MICHIGAN 48226-1279 AND IT IS HEREBY DESIGNATED AS THE LOCATION AND
POST OFFICE ADDRESS OF THE REGISTERED OFFICE OF THE COMPANY IN MICHIGAN UNDER
THESE ARTICLES.
ARTICLE IV
THE NAME OF THE COMPANY'S RESIDENT AGENT IN MICHIGAN AT THE TIME OF FILING
THESE ARTICLES IS SUSAN M. BEALE AND SHE IS HEREBY DESIGNATED AS THE RESIDENT
AGENT OF THE COMPANY IN MICHIGAN UNDER THESE ARTICLES.
ARTICLE V
A. THE AGGREGATE NUMBER OF SHARES WHICH THE COMPANY IS AUTHORIZED TO ISSUE
IS FOUR HUNDRED AND FIVE MILLION (405,000,000) SHARES, DIVIDED INTO AND
CONSISTING OF (A) FOUR HUNDRED MILLION (400,000,000) SHARES OF COMMON STOCK,
WITHOUT PAR VALUE, AND (B) FIVE MILLION (5,000,000) SHARES OF PREFERRED STOCK,
WITHOUT PAR VALUE, ISSUABLE IN ONE OR MORE SERIES AS HEREINAFTER PROVIDED.
B. THE AUTHORIZED PREFERRED STOCK MAY BE ISSUED, IN ONE OR MORE SERIES,
FROM TIME TO TIME AS THE BOARD OF DIRECTORS MAY DETERMINE. EACH SERIES OF
PREFERRED STOCK SHALL BEAR A DISTINCTIVE DESIGNATION, SHALL BE ISSUED IN SUCH
NUMBER OF SHARES AND SHALL HAVE SUCH RELATIVE VOTING, DISTRIBUTION, DIVIDEND,
LIQUIDATION AND OTHER RIGHTS, PREFERENCES AND LIMITATIONS AND REDEMPTION AND/OR
CONVERSION PROVISIONS (INCLUDING PROVISIONS FOR THE REDEMPTION OR CONVERSION OF
SHARES AT THE OPTION OF THE
2
<PAGE> 6
SHAREHOLDER OR THE COMPANY OR UPON THE HAPPENING OF A SPECIFIED EVENT) AS SHALL
BE PRESCRIBED, AND THE BOARD OF DIRECTORS IS EXPRESSLY AUTHORIZED TO FIX SUCH
TERMS, BY A RESOLUTION OF THE BOARD OF DIRECTORS. SUCH RESOLUTIONS, WHEN
FILED, SHALL CONSTITUTE AMENDMENTS TO THESE ARTICLES OF INCORPORATION TO THE
EXTENT PROVIDED BY THE ACT.
C. EACH HOLDER OF COMMON STOCK OF THE COMPANY SHALL BE ENTITLED TO ONE
VOTE FOR EACH SHARE OF SUCH STOCK STANDING IN SUCH SHAREHOLDER'S NAME ON THE
BOOKS OF THE COMPANY AND EACH HOLDER OF PREFERRED STOCK OF THE COMPANY SHALL BE
ENTITLED TO SUCH VOTING RIGHTS AS SHALL BE ESTABLISHED BY THE BOARD OF
DIRECTORS PURSUANT TO PARAGRAPH B OF THIS ARTICLE V; PROVIDED THAT NO SHARE OF
PREFERRED STOCK MAY BE ENTITLED TO MORE THAN ONE VOTE PER SHARE.
D. IN ALL ELECTIONS OF DIRECTORS EVERY HOLDER OF COMMON STOCK, AND EVERY
HOLDER OF PREFERRED STOCK ENTITLED TO VOTE FOR THE ELECTION OF DIRECTORS WHOSE
PREFERRED STOCK HAS BEEN GRANTED THE RIGHT TO CUMULATE VOTES IN THE ELECTION OF
DIRECTORS, SHALL HAVE THE RIGHT TO VOTE THE NUMBER OF SHARES OF STOCK OWNED BY
SUCH SHAREHOLDER FOR AS MANY PERSONS AS THERE ARE DIRECTORS TO BE ELECTED AND
FOR WHOSE ELECTION SUCH SHAREHOLDER HAS THE RIGHT TO VOTE, OR TO CUMULATE ALL
THE VOTES SUCH SHAREHOLDER COULD CAST FOR ELECTION OF DIRECTORS AND CAST THEM
ALL FOR ONE CANDIDATE OR DISTRIBUTE THEM AMONG CANDIDATES FOR WHOM SUCH
SHAREHOLDER IS ENTITLED TO VOTE, AS SUCH SHAREHOLDER SHALL THINK FIT.
E. NO SHAREHOLDER SHALL HAVE ANY PREEMPTIVE OR PREFERENTIAL RIGHT TO
SUBSCRIBE FOR OR PURCHASE ANY PART OF ANY NEW OR ADDITIONAL ISSUE OF STOCK OF
ANY CLASS WHATSOEVER, OR OF SECURITIES CONVERTIBLE INTO OR EXCHANGEABLE FOR ANY
STOCK OF ANY CLASS WHATSOEVER, OR OF SECURITIES CARRYING OPTIONS, WARRANTS OR
OTHER RIGHTS TO PURCHASE OR OTHERWISE ACQUIRE STOCK OF ANY CLASS WHATSOEVER,
WHETHER NOW OR HEREAFTER AUTHORIZED AND WHETHER ISSUED FOR CASH OR OTHER
CONSIDERATION OR BY WAY OF DIVIDEND OR OTHERWISE, OR TO HAVE ANY OTHER
PREEMPTIVE OR PREFERENTIAL RIGHT AS NOW OR HEREAFTER DEFINED BY THE LAWS OF THE
STATE OF MICHIGAN.
ARTICLE VI
TO THE FULL EXTENT PERMITTED BY THE ACT OR ANY OTHER APPLICABLE LAWS
PRESENTLY OR HEREAFTER IN EFFECT NO DIRECTOR OF THE COMPANY SHALL BE PERSONALLY
LIABLE TO THE COMPANY OR ITS SHAREHOLDERS FOR OR WITH RESPECT TO ANY ACTS OR
OMISSIONS IN THE PERFORMANCE OF HIS OR HER DUTIES AS A DIRECTOR OF THE COMPANY.
ANY REPEAL OR MODIFICATION OF THIS ARTICLE VI SHALL NOT ADVERSELY AFFECT ANY
RIGHT OR PROTECTION OF A DIRECTOR OF THE COMPANY EXISTING HEREUNDER IMMEDIATELY
PRIOR TO SUCH REPEAL OR MODIFICATION.
3
<PAGE> 7
ARTICLE VII
EACH PERSON WHO IS OR WAS OR HAD AGREED TO BECOME A DIRECTOR OR OFFICER OF
THE COMPANY, OR EACH SUCH PERSON WHO IS OR WAS SERVING OR WHO HAD AGREED TO
SERVE AT THE REQUEST OF THE BOARD OF DIRECTORS AS AN EMPLOYEE OR AGENT OF THE
COMPANY OR AS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF ANOTHER CORPORATION,
PARTNERSHIP, JOINT VENTURE, TRUST OR OTHER ENTERPRISE (INCLUDING THE HEIRS,
EXECUTORS, ADMINISTRATORS OR ESTATE OF SUCH PERSON), SHALL BE INDEMNIFIED BY
THE COMPANY TO THE FULL EXTENT PERMITTED BY THE ACT OR ANY OTHER APPLICABLE
LAWS AS PRESENTLY OR HEREAFTER IN EFFECT. WITHOUT LIMITING THE GENERALITY OR
THE EFFECT OF THE FOREGOING, THE COMPANY MAY ENTER INTO ONE OR MORE AGREEMENTS
WITH ANY PERSON WHICH PROVIDES FOR INDEMNIFICATION GREATER OR DIFFERENT THAN
THAT PROVIDED IN THIS ARTICLE. ANY REPEAL OR MODIFICATION OF THIS ARTICLE VII
SHALL NOT ADVERSELY AFFECT ANY RIGHT OR PROTECTION EXISTING HEREUNDER
IMMEDIATELY PRIOR TO SUCH REPEAL OR MODIFICATION.
ARTICLE VIII
THE TERM OF THE CORPORATE EXISTENCE OF THE COMPANY IS PERPETUAL.
ARTICLE IX
THE NAME AND ADDRESS OF THE SOLE INCORPORATOR IS AS FOLLOWS:
SUSAN M. BEALE
2000 2ND AVENUE
DETROIT, MICHIGAN 48226-1279
DATED THIS 13TH DAY OF DECEMBER, 1995.
JOHN E. LOBBIA /S/
CHAIRMAN OF THE BOARD
<PAGE> 8
CONFORMED COPY
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK
of
DTE ENERGY COMPANY
(Pursuant to Section 450.1302 of the
Business Corporation Act of the State of Michigan)
DTE Energy Company, a Michigan corporation (the "Company"), DOES HEREBY
CERTIFY:
That, pursuant to authority vested in the Board of Directors of the
Company by its Amended and Restated Articles of Incorporation, and pursuant to
the provisions of Section 450.1302 of the Michigan Business Corporation Act,
the Board of Directors of the Company has adopted the following resolution
providing for the issuance of a series of Preferred Stock:
RESOLVED, that pursuant to the authority expressly granted to and vested
in the Board of Directors of the Company (hereinafter called the "Board of
Directors" or the "Board") by the Amended and Restated Articles of
Incorporation of the Company, a series of Preferred Stock, without par value
(the "Preferred Stock"), of the Company be, and it hereby is, created, and that
the designation and amount thereof and the powers, designations, preferences
and relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof are as
follows:
I. Designation and Amount
The shares of such series will be designated as Series A Junior
Participating Preferred Stock (the "Series A Preferred") and the number of
shares constituting the Series A Preferred is 1,500,000.
1
<PAGE> 9
II. Dividends and Distributions
(a) Subject to the rights of the holders of any shares of any series of
Preferred Stock ranking prior to the Series A Preferred with respect to
dividends, the holders of shares of Series A Preferred, in preference to the
holders of Common Stock, without par value (the "Common Stock"), of the
Company, and of any other junior stock, will be entitled to receive, when, as
and if declared by the Board out of funds legally available for the purpose,
dividends payable in cash (except as otherwise provided below) on such dates as
are from time to time established for the payment of dividends on the Common
Stock (each such date being referred to herein as a "Dividend Payment Date"),
commencing on the first Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred (the "First Dividend Payment
Date"), in an amount per share (rounded to the nearest cent) equal to the
greater of (i) $1.00 or (ii) subject to the provision for adjustment
hereinafter set forth, one hundred times the aggregate per share amount of all
cash dividends, and one hundred times the aggregate per share amount (payable
in kind) of all non-cash dividends, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Dividend Payment Date or, with respect to the First
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Preferred. In the event that the Company at any time (i)
declares a dividend on the outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivides the outstanding shares of Common Stock, (iii)
combines the outstanding shares of Common Stock into a smaller number of
shares, or (iv) issues any shares of its capital stock in a reclassification of
the outstanding shares of Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), then, in each such case and regardless of
whether any shares of Series A Preferred are then issued or outstanding, the
amount to which holders of shares of Series A Preferred would otherwise be
entitled immediately prior to such event under clause (ii) of the preceding
sentence will be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Company will declare a dividend on the Series A Preferred as
provided in the immediately preceding paragraph immediately after it declares a
dividend on the Common Stock (other than a dividend payable in shares of Common
Stock). Each such dividend on the Series A Preferred will be payable
immediately prior to the time at which the related dividend on the Common Stock
is payable.
(c) Dividends will accrue on outstanding shares of Series A Preferred from
the Dividend Payment Date next preceding the date of issue of such shares,
unless (i) the date of issue of such shares is prior to the record date for the
First Dividend Payment Date, in which case dividends on such shares will accrue
from the date of
2
<PAGE> 10
the first issuance of a share of Series A Preferred or (ii) the date of issue
is a Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred entitled to receive a
dividend and before such Dividend Payment Date, in either of which events such
dividends will accrue from such Dividend Payment Date. Accrued but unpaid
dividends will cumulate from the applicable Dividend Payment Date but will not
bear interest. Dividends paid on the shares of Series A Preferred in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares will be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board may fix a record date for the
determination of holders of shares of Series A Preferred entitled to receive
payment of a dividend or distribution declared thereon, which record date will
be not more than 60 calendar days prior to the date fixed for the payment
thereof.
III. Voting Rights
The holders of shares of Series A Preferred will have the following voting
rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred will entitle the holder thereof to one
vote on all matters submitted to a vote of the stockholders of the
Company.
(b) Except as otherwise provided herein, in any other Preferred
Stock Designation creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred and the
holders of shares of Common Stock and any other capital stock of the
Company having general voting rights will vote together as one class on
all matters submitted to a vote of stockholders of the Company.
(c) Except as set forth in the Amended and Restated Articles of
Incorporation or herein, or as otherwise provided by law, holders of
shares of Series A Preferred will have no voting rights.
IV. Certain Restrictions
(a) Whenever dividends or other dividends or distributions payable on the
Series A Preferred are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Preferred outstanding have been paid in full, the Company will not:
(i) Declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the shares of Series A
Preferred;
(ii) Declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation,
3
<PAGE> 11
dissolution, or winding up) with the shares of Series A Preferred, except
dividends paid ratably on the shares of Series A Preferred and all such
parity stock on which dividends are payable or in arrears in proportion
to the total amounts to which the holders of all such shares are then
entitled;
(iii) Redeem, purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the shares of Series A Preferred; provided,
however, that the Company may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any
stock of the Company ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the shares of Series A
Preferred; or
(iv) Redeem, purchase or otherwise acquire for consideration any
shares of Series A Preferred, or any shares of stock ranking on a parity
with the shares of Series A Preferred, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board) to all holders of such shares upon such terms as the Board, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, may
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Company will not permit any majority-owned subsidiary of the
Company to purchase or otherwise acquire for consideration any shares of stock
of the Company unless the Company could, under paragraph (a) of this Article
IV, purchase or otherwise acquire such shares at such time and in such manner.
V. Reacquired Shares
Any shares of Series A Preferred purchased or otherwise acquired by the
Company in any manner whatsoever will be retired and canceled promptly after
the acquisition thereof. All such shares will upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock subject to the conditions and restrictions
on issuance set forth herein, in the Amended and Restated Articles of
Incorporation of the Company, or in any other Preferred Stock Designation
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
4
<PAGE> 12
VI. Liquidation, Dissolution or Winding Up
Upon any liquidation, dissolution or winding up of the Company, no
distribution will be made (a) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution, or winding up) to the
shares of Series A Preferred unless, prior thereto, the holders of shares of
Series A Preferred have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided, however, that the holders of
shares of Series A Preferred will be entitled to receive an aggregate amount
per share, subject to the provision for adjustment hereinafter set forth, equal
to one hundred times the aggregate amount to be distributed per share to
holders of shares of Common Stock or (b) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution,
or winding up) with the shares of Series A Preferred, except distributions made
ratably on the shares of Series A Preferred and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution, or winding up. In the event the
Company at any time (i) declares a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares
of Common Stock, (iii) combines the outstanding shares of Common Stock into a
smaller number of shares, or (iv) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), then, in each such case
and regardless of whether any shares of Series A Preferred are then issued or
outstanding, the aggregate amount to which each holder of shares of Series A
Preferred would otherwise be entitled immediately prior to such event under the
proviso in clause (a) of the preceding sentence will be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
5
<PAGE> 13
VII. Consolidation, Merger, Etc.
In the event that the Company enters into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then, in each such case, each share of Series A Preferred will at the
same time be similarly exchanged for or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to one
hundred times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Company at any
time (a) declares a dividend on the outstanding shares of Common Stock payable
in shares of Common Stock, (b) subdivides the outstanding shares of Common
Stock, (c) combines the outstanding shares of Common Stock in a smaller number
of shares, or (d) issues any shares of its capital stock in a reclassification
of the outstanding shares of Common Stock (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), then, in each such case and regardless of
whether any shares of Series A Preferred are then issued or outstanding, the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred will be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
VIII. Redemption
The shares of Series A Preferred are not redeemable.
IX. Rank
The Series A Preferred rank, with respect to the payment of dividends and
the distribution of assets, junior to all other series of the Company's
Preferred Stock.
X. Amendment
Notwithstanding anything contained in the Amended and Restated Articles of
Incorporation of the Company to the contrary and in addition to any other vote
required by applicable law, the Amended and Restated Articles of Incorporation
of the Company may not be amended in any manner that would materially alter or
change the powers, preferences or special rights of the Series A Preferred so
as to affect them adversely without the affirmative vote of the holders of at
least 80% of the outstanding shares of Series A Preferred, voting together as a
single series.
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<PAGE> 14
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Company by its Chairman and Chief Executive Officer and attested by its
Vice President and Secretary this 23rd day of September, 1997.
/s/ John E. Lobbia
----------------------------
John E. Lobbia
Chairman and Chief Executive
Officer
Attest:
/s/ Susan M. Beale
- ----------------------------
Susan M. Beale
Vice President and Secretary
7
<PAGE> 1
EXHIBIT 99.A2
BYLAWS
of
DTE ENERGY COMPANY
As amended through September 22, 1999
<PAGE> 2
BYLAWS
of
DTE ENERGY COMPANY
INDEX
<TABLE>
<CAPTION>
Page
----
ARTICLE I
<S> <C>
Shareholders............................................................................................1
SECTION 1. Annual Meeting..............................................................1
SECTION 2. Special Meetings.............................................................1
SECTION 3. Notice of Meetings..........................................................1
SECTION 4. Quorum......................................................................2
SECTION 5. Voting and Inspectors........................................................2
SECTION 6. Record of Shareholders......................................................2
SECTION 7. List of Shareholders.........................................................2
SECTION 8. Order of Business............................................................3
ARTICLE II
Board of Directors and Committees.......................................................................4
SECTION 1 Number, Time of Holding Office, and Limitation on
Age..........................................................................4
SECTION 2. Vacancies...................................................................5
SECTION 3. Nominations of Directors; Elections.........................................5
SECTION 4. Meetings of the Board.......................................................6
SECTION 5. Quorum......................................................................6
SECTION 6. Annual Meeting of Directors.................................................7
SECTION 7. Executive Committee.........................................................7
SECTION 8. Committees..................................................................7
SECTION 9. Participation in Meetings...................................................7
SECTION 10. Compensation................................................................8
ARTICLE III
Officers................................................................................................8
SECTION 1. Officers and Agents.........................................................8
SECTION 2. Term of Office..............................................................8
SECTION 3. Chairman of the Board.......................................................8
SECTION 4. President...................................................................8
SECTION 5. Other Officers...............................................................9
SECTION 6. Compensation................................................................9
SECTION 7. Voting of Shares and Securities
of Other Corporations........................................................9
</TABLE>
<PAGE> 3
<TABLE>
ARTICLE IV
<S> <C>
Capital Stock...........................................................................................9
SECTION 1. Certificates of Shares.......................................................9
SECTION 2. Transfer of Shares...........................................................9
SECTION 3. Lost or Destroyed Stock Certificates.........................................9
ARTICLE V
Checks, Notes, Bonds, Debentures, etc..................................................................10
ARTICLE VI
Corporate Seal........................................................................................10
ARTICLE VII
Control Share Acquisitions............................................................................10
ARTICLE VIII
Amendment of Bylaws...................................................................................10
</TABLE>
ii
<PAGE> 4
BYLAWS
OF
DTE ENERGY COMPANY
AS AMENDED THROUGH SEPTEMBER 22, 1999
ARTICLE I
SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the shareholders of
the Company shall be held on the fourth Wednesday of April in each year (or if
said day be a legal holiday, then on the next succeeding day not a legal
holiday) or at such other date, and at such time and at such place as may be
fixed by the Board of Directors and stated in the notice of meeting, for the
purpose of electing directors and transacting such other business as may
properly be brought before the meeting as determined by Article I, Section 8
hereof.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be held upon call of the Board of Directors or the Chairman of the Board or the
President or the holders of record of three-quarters of the outstanding shares
of stock of the Company entitled to vote at such meeting, at such time as may be
fixed by the Board of Directors or the Chairman of the Board or the President or
such shareholders and stated in the notice of meeting. All such meetings shall
be held at the office of the Company in the City of Detroit unless some other
place is specified in the notice.
Section 3. NOTICE OF MEETINGS. Written notice of the date, time, place
and purpose or purposes of every meeting of the shareholders, signed by the
Corporate Secretary or an Assistant Corporate Secretary, shall be given either
personally or by mail, within the time prescribed by law, to each shareholder of
record entitled to vote at such meeting and to any shareholder who, by reason of
any action proposed to be taken at such meeting, might be entitled to receive
payment for such stock if such action were taken. If mailed, such notice is
given when deposited in the United States mail, with postage prepaid, directed
to the shareholder at the address as it appears on the record of shareholders,
or, if the shareholders shall have filed with the Corporate Secretary of the
Company a written request that notices intended for such shareholder be mailed
to some other address, then directed to the address designated in such request.
Further notice shall be given by mail, publication, or otherwise, if and as
required by law.
Notice of meeting need not be given to any shareholder who submits a
signed waiver of notice, in person or by proxy, whether before or after the
meeting. The
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<PAGE> 5
attendance of any shareholder at the meeting, in person or by proxy, without
protesting at the beginning of the meeting the lack of notice of such meeting,
shall constitute a waiver of notice by such shareholder.
Notice of a special meeting shall also indicate that it is being issued
by or at the direction of the person or persons calling the meeting.
Section 4. QUORUM. At every meeting of the shareholders, the holders of
record of a majority of the outstanding shares of stock of the Company entitled
to vote at such meeting, whether present in person or represented by proxy,
shall constitute a quorum. If at any meeting there shall be no quorum, the
holders of a majority of the outstanding shares of stock so present or
represented may adjourn the meeting from time to time, without notice (unless
otherwise required by statute) other than announcement at the meeting, until a
quorum shall have been obtained, when any business may be transacted which might
have been transacted at the meeting as first convened had there been a quorum.
When a quorum is once present to organize a meeting, it is not broken by the
subsequent withdrawal of any shareholder.
Section 5. VOTING AND INSPECTORS. Except as provided in the Articles of
Incorporation, each holder of record of outstanding shares of stock of the
Company entitled to vote at a meeting of shareholders shall be entitled to one
vote for each share of stock standing in the shareholder's name on the record of
shareholders, and may so vote either in person or by proxy appointed by
instrument in writing executed by such holder or by the shareholder's duly
authorized attorney-in-fact. No proxy shall be valid after the expiration of
three years from the date of its execution unless the shareholder executing it
shall have specified the length of time it is to continue in force which shall
be for some limited period. The authority of the holder of a proxy to act shall
not be revoked by the incompetence or death of the shareholder who executed the
proxy unless, before the authority is exercised, written notice of an
adjudication of such incompetence or of such death is received by the Corporate
Secretary or an Assistant Corporate Secretary.
In advance of any meeting of shareholders, the Board of Directors may
appoint one or more inspectors for the meeting. If inspectors are not so
appointed, the chairman of the meeting shall appoint such inspectors. Before
entering upon the discharge of their duties, the inspectors shall take and
subscribe an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of their ability, and shall
take charge of the polls and after balloting shall make a certificate of the
result of the vote taken. No officer or director of the Company or candidate for
office of director shall be appointed as an inspector. At all elections of
directors the voting shall be by ballot and a plurality of the votes cast shall
elect.
Section 6. RECORD OF SHAREHOLDERS. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a
2
<PAGE> 6
meeting, or for the purpose of determining shareholders entitled to receive
payment of any dividend or the allotment of any rights, or for the purpose of
any other action, the Board of Directors may fix, in advance, a date as the
record date for any such determination of shareholders. The record date shall
not precede the date upon which it is fixed and shall not be less than 10 days
nor more than the maximum number of days permitted by law before the date of the
meeting, or taking of any other action.
Section 7. LIST OF SHAREHOLDERS. A list of shareholders of record,
arranged alphabetically within each class and series of stock, as of the record
date, certified by the Corporate Secretary or any Assistant Corporate Secretary
or by a transfer agent, shall be produced at any meeting of shareholders and may
be inspected by any shareholder at any time during the meeting. If the right to
vote at any meeting is challenged, the inspectors, or the chairman presiding at
the meeting, shall require such list of shareholders to be produced as evidence
of the right of the persons challenged to vote at such meeting, and all persons
who appear on such list to be shareholders entitled to vote thereat may vote at
such meeting.
SECTION 8. ORDER OF BUSINESS. (a) The Chairman, or such other officer
of the Company designated by a majority of the total number of directors that
the Company would have if there were no vacancies on the Board of Directors
(such number being referred to as the "Whole Board"), will call meetings of
shareholders to order and will act as presiding officer thereof. Unless
otherwise determined by the Board of Directors prior to the meeting, the
presiding officer of the meeting of shareholders will also determine the order
of business and have the authority in his or her sole discretion to regulate the
conduct of any such meeting including, without limitation, by imposing
restrictions on the persons (other than shareholders of the Company or their
duly appointed proxies) who may attend any such shareholders' meeting, by
ascertaining whether any shareholder or his proxy may be excluded from any
meeting of shareholders based upon any determination by the presiding officer,
in his or her sole discretion, that any such person has unduly disrupted or is
likely to disrupt the proceedings of the meeting, and by determining the
circumstances in which any person may make a statement or ask questions at any
meeting of shareholders.
(b) At an annual meeting of the shareholders, only such business will
be conducted or considered as is properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Chairman, the President, a Vice President, the Corporate Secretary or an
Assistant Corporate Secretary in accordance with Section 3 of this Article I;
(ii) otherwise properly brought before the meeting by the presiding officer or
by or at the direction of a majority of the Whole Board; or (iii) otherwise
properly requested to be brought before the meeting by a shareholder of the
Company in accordance with Section 8(c) below.
(c) For business to be properly requested by a shareholder to be
brought before an annual meeting, the shareholder must (i) be a shareholder of
the Company
3
<PAGE> 7
of record at the time of the giving of the notice for such annual meeting
provided for in these Bylaws; (ii) be entitled to vote at such meeting; and
(iii) have given timely notice thereof in writing to the Corporate Secretary. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Company not less than 60 nor more than 90
calendar days prior to the annual meeting; provided, however, that in the event
public announcement of the date of the annual meeting is not made at least 100
calendar days prior to the date of the annual meeting, notice by the shareholder
to be timely must be so received not later than the close of business on the
10th calendar day following the day on which public announcement is first made
of the date of the annual meeting. A shareholder's notice to the Corporate
Secretary must set forth as to each matter the shareholder proposes to bring
before the annual meeting: (a) a description in reasonable detail of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (b) the name and address, as
they appear on the Company's books, of the shareholder proposing such business
and of the beneficial owner, if any, on whose behalf the proposal is made; (c)
the class and number of shares of the Company that are owned beneficially and of
record by the shareholder proposing such business and by the beneficial owner,
if any, on whose behalf the proposal is made; and (d) any material interest in
such business of such shareholder proposing such business and the beneficial
owner, if any, on whose behalf the proposal is made. Notwithstanding the
foregoing provisions of this Section 8(c), a shareholder must also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 8(c). For purposes of this Section 8(c) and Section 3 of Article
II, "public announcement" means disclosure in a press release reported by the
Dow Jones News Service, Associated Press, or comparable national news service or
in a document publicly filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13, 14, or 15(d) of the Securities Exchange Act
of 1934, as amended, or publicly filed by the Company with any national
securities exchange or quotation service through which the Company's stock is
listed or traded, or furnished by the Company to its shareholders. Nothing in
this Section 8(c) will be deemed to affect any rights of shareholders to request
inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended.
(d) At a special meeting of shareholders, only such business may be
conducted or considered as is properly brought before the meeting. To be
properly brought before a special meeting, business must be (i) specified in the
notice of the meeting (or any supplement thereto) given by or at the direction
of the Chairman, the President, a Vice President, the Corporate Secretary or an
Assistant Corporate Secretary (or in case of their failure to give any required
notice, the other persons entitled to give notice) in accordance with Section 3
of Article I or (ii) otherwise brought before the meeting by the presiding
officer or by or at the direction of a majority of the Whole Board.
(e) The determination of whether any business sought to be brought
before
4
<PAGE> 8
any annual or special meeting of the shareholders is properly brought before
such meeting in accordance with this Section 8 will be made by the presiding
officer of such meeting. If the presiding officer determines that any business
is not properly brought before such meeting, he or she will so declare to the
meeting and any such business will not be conducted or considered.
ARTICLE II
BOARD OF DIRECTORS AND COMMITTEES
Section 1. NUMBER, TIME OF HOLDING OFFICE AND LIMITATION ON AGE. The
business and affairs of the Company shall be managed by or under the direction
of a Board of Directors. The number of directors constituting the Whole Board
shall be determined from time to time by resolution of the Board so long as the
total number of directors is not less than ten nor more than eighteen; provided,
however, that the minimum and maximum number of directors may be increased or
decreased from time to time by vote of a majority of the Whole Board; and,
further provided that no change in the number of directors shall serve to
shorten the term of office of any incumbent director. The directors shall be
divided into three classes, as nearly equal in number as possible, and the term
of the office of the first class shall expire at the 1996 annual meeting of
shareholders, the term of office of the second class shall expire at the 1997
annual meeting of shareholders and the term of office of the third class shall
expire at the 1998 annual meeting of shareholders, or, in each case, until their
successors shall be duly elected and qualified. At each annual meeting
commencing in 1996, a number of directors equal to the number of the class whose
term expires at the time of the meeting shall be elected to hold office until
the third succeeding annual meeting of shareholders. If at any time the holders
of any series of the Company's Preferred Stock are entitled to elect directors
pursuant to the Articles of Incorporation of the Company, then the provisions of
such series of Preferred Stock with respect to their rights shall apply and such
directors shall be elected in a manner and for terms expiring consistent with
the Articles of Incorporation.
Except as hereinafter provided, each director shall be a holder of
Common Stock of the Company at the time of initial election to the Board or
shall become a holder within 30 days after such election (to the extent of at
least one share, owned beneficially). Any director who thereafter ceases to be
such a holder, shall thereupon cease to be a director. The Board shall have the
authority to waive the requirement to hold shares in individual situations upon
presentation of evidence that a nominee or director is unable to hold shares for
legal or religious reasons.
No person who shall have served as an employee of the Company or an
affiliate shall be elected a director after retiring from employment with the
Company or an affiliate; provided, however, that if such person was the Chief
Executive Officer of the Company at the time of such retirement, such person
shall be eligible for election as a director until attaining age 70. No other
person shall be elected a director after
5
<PAGE> 9
attaining age 70; provided, however, the Board shall have the authority to waive
this provision for no more than one three-year term upon a determination that
circumstances exist which make it prudent to continue the service of a director
who possesses special and unique expertise clearly beneficial to the Company.
Section 2. VACANCIES. Whenever any vacancy shall occur in the Board of
Directors by death, resignation, or any other cause, it shall be filled without
undue delay by a majority vote of the remaining members of the Board of
Directors (even if constituting less than a quorum), and the person who is to
fill any such vacancy shall hold office for the unexpired term of the director
to whom such person succeeds, or for the term fixed by the Board of Directors
acting in compliance with Section l of this Article II in case of a vacancy
created by an increase in the number of directors, and until a successor shall
be elected and shall have qualified; provided, however, that no vacancy need be
filled if, after such vacancy shall occur, the number of directors remaining on
the Board shall be not less than a majority of the Whole Board. During the
existence of any vacancy or vacancies, the surviving or remaining directors
shall possess and may exercise all the powers of the full Board of Directors,
when action by a larger number is not required by law.
SECTION 3. NOMINATIONS OF DIRECTORS; ELECTION. (a) Except as may be
otherwise provided in any resolution establishing any Preferred Stock, only
persons who are nominated in accordance with this Section 3 will be eligible for
election at a meeting of shareholders to be members of the Board of Directors of
the Company.
(b) Nominations of persons for election as directors of the Company may
be made only at an annual meeting of shareholders (i) by or at the direction of
the Board of Directors or a committee thereof or (ii) by any shareholder who is
a shareholder of record at the time of giving of notice provided for in this
Section 3, who is entitled to vote for the election of directors at such
meeting, and who complies with the procedures set forth in this Section 3. All
nominations by shareholders must be made pursuant to timely notice in proper
written form to the Corporate Secretary.
(c) To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal executive offices of the Company not less than 60
nor more than 90 calendar days prior to the annual meeting of shareholders;
provided, however, that in the event that public announcement of the date of the
annual meeting is not made at least 100 calendar days prior to the date of the
annual meeting, notice by the shareholder to be timely must be so received not
later than the close of business on the 10th calendar day following the day on
which public announcement (as defined in Section 8(c ) of Article I) is first
made of the date of the annual meeting. To be in proper written form, such
shareholder's notice must set forth or include: (i) the name and address, as
they appear on the Company's books, of the shareholder giving the notice and of
the beneficial owner, if any, on whose behalf the nomination is made; (ii) a
representation that the shareholder giving the notice is a holder of record of
stock of the Company entitled to vote at such annual meeting and intends to
appear in person or by proxy at the annual meeting to nominate the person or
persons specified in the
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notice; (iii) the class and number of shares of stock of the Company owned
beneficially and of record by the shareholder giving the notice and by the
beneficial owner, if any, on whose behalf the nomination is made; (iv) a
description of all arrangements or understandings between or among any of (A)
the shareholder giving the notice, (B) the beneficial owner on whose behalf the
notice is given, (C) each nominee, and (D) any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder giving the notice; (v) such other information
regarding each nominee proposed by the shareholder giving the notice as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (vi) the signed consent
of each nominee to serve as a director of the Company if so elected. The
presiding officer of any annual meeting may, if the facts warrant, determine
that a nomination was not made in accordance with this Section 3, and if he or
she should so determine, he or she will so declare to the meeting, and the
defective nomination will be disregarded. Notwithstanding the foregoing
provisions of this Section 3, a shareholder must also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this Section
3.
Section 4. MEETINGS OF THE BOARD. Regular meetings of the Board of
Directors shall be held at such times and at such places as may from time to
time be fixed by the Board of Directors.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, the President, or, in the event of the incapacity of the
Chairman of the Board and the President, the Executive Committee by giving
reasonable notice of the time and place of such meetings or by obtaining written
waivers of notice, before or after the meeting, from each absent director. All
such meetings shall be held at the office of the Company in the City of Detroit
unless some other place is specified in the notice.
A notice, or waiver of notice, need not specify the purpose of the
meeting.
Section 5. QUORUM. A majority of the directors in office at the time of
a meeting of the Board, shall constitute a quorum for the transaction of
business. If at any meeting of the Board of Directors there shall be less than a
quorum present, a majority of the directors present may adjourn the meeting
without notice other than announcement at the meeting, until a quorum shall have
been obtained, when any business may be transacted which might have been
transacted at the meeting as first convened had there been a quorum. The acts of
a majority of the directors present at any meeting at which there is a quorum
shall be the acts of the Board, unless otherwise provided by law, by the
Articles of Incorporation or by the Bylaws.
Section 6. ANNUAL MEETING OF DIRECTORS. A meeting of the Board of
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Directors, known as the directors' annual meeting, shall be held without notice
each year after the adjournment of the annual shareholders' meeting and on the
same day. At such meeting the officers of the Company for the ensuing year shall
be elected. If a quorum of the directors is not present on the day appointed for
the directors' annual meeting, the meeting shall be adjourned to some convenient
day.
Section 7. EXECUTIVE COMMITTEE. The Board of Directors may, by
resolution or resolutions passed by a majority of the Whole Board, designate an
Executive Committee to consist of the Chief Executive Officer and two or more of
the other directors, and alternates, and shall designate the Chairman thereof.
The Executive Committee shall have and may exercise, when the Board is not in
session, all of the powers of the Board in the management of the business and
affairs of the Company, and shall have power to authorize the seal of the
Company to be affixed to all papers which may require it. The Executive
Committee shall not have power to (a) amend these Bylaws, (b) change the number
of directors constituting the Whole Board or fill vacancies in the Board, (c)
declare dividends, (d) establish, change the membership of, or fill vacancies
in, any committee, (e) fix the compensation of the directors or committee
members, (f) submit matters for action by shareholders, or (g) amend or repeal a
resolution of the Board which by its terms may not be changed by the Executive
Committee. The Board shall have the power at any time to fill vacancies in, to
change the membership of, or to dissolve, the Executive Committee. The Executive
Committee may make rules for the conduct of its business and may appoint such
subcommittees and assistants as it shall from time to time deem necessary. A
majority of the members of the Executive Committee shall constitute a quorum.
All action taken by the Executive Committee shall be reported to the Board at
its next meeting succeeding such action. The Corporate Secretary or an Assistant
Corporate Secretary shall attend and act as the secretary of all meetings of the
Committee and keep the minutes thereof.
Meetings of the Executive Committee may be called by the Chairman of
the Board, or, the President, or, in the event of the incapacity of the Chairman
of the Board and the President, by two or more members of the Executive
Committee by giving reasonable notice of the time and place of such meetings.
All such meetings shall be held at the office of the Company in the City of
Detroit unless some other place is specified in the notice.
Section 8. COMMITTEES. The Board of Directors may, by resolution,
create a committee or committees of one or more directors, and alternates, to
consider and report upon or to carry out such matters (not excepted by Article
II, Section 7) as may be entrusted to them by the Board of Directors, and shall
designate the Chairman of each such committee.
Section 9. PARTICIPATION IN MEETINGS. One or more members of the Board
of Directors or any committee may participate in any meeting of such Board or
such committee by means of a conference telephone or similar communications
equipment
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which enables all persons participating in such a meeting to hear each other at
the same time. Participation in the manner so described shall constitute
presence in person at such meetings.
Section 10. COMPENSATION. Each director of the Company who is not a
salaried officer or employee of the Company may receive reasonable compensation
for services as a director, including a reasonable fee for attendance at
meetings of the Board and committees thereof, and attendance at the Company's
request at other meetings or similar activities related to the Company.
ARTICLE III
OFFICERS
Section 1. OFFICERS AND AGENTS. The officers of the Company to be
elected by the Board of Directors, as soon as practicable after the election of
directors each year, shall be Chairman of the Board, the President, a Corporate
Secretary and a Treasurer. The Board of Directors may also from time to time
elect one or more Vice Presidents, a Controller, a General Auditor, a General
Counsel, and such other officers and agents as it may deem proper. The Chairman
of the Board and the President shall be chosen from among the directors. The
persons holding the offices of Chairman of the Board or President may not also
hold the office of General Auditor. The Board of Directors may, in its
discretion, leave vacant any office other than that of Chairman of the Board,
President, Corporate Secretary, or Treasurer.
Section 2. TERM OF OFFICE. The term of office of all officers shall be
until the next directors' annual meeting or until their respective successors
are chosen and qualified. Any officer or agent elected by the Board of Directors
may be removed by the Board at any time, with or without cause.
Section 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be
the Chief Executive Officer of the Company and, shall preside at all meetings of
the Board of Directors and, subject to Section 8(a) of Article I, meetings of
shareholders, at which the Chairman is present, and shall make the annual report
to the shareholders. The Chairman shall have general charge of the business and
affairs of the Company subject to the control of the Board of Directors, may
create in the name of the Company any authorized corporate obligation or other
instrument and shall perform such other functions as may be prescribed by the
Board from time to time.
The Chairman of the Board shall manage or supervise the conduct of the
corporate finances and relations of the Company with its shareholders, with the
public, and with regulatory authorities, and in addition to the President, may
exercise all powers elsewhere in the Bylaws conferred upon the President. The
Chairman may delegate from time to time to
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the President or to other officers, employees or positions of the Company, such
powers as the Chairman may specify in writing, with such terms and conditions,
if any, as the Chairman may set forth. A copy of each such delegation and of any
revocation or change shall be filed with the Corporate Secretary.
Section 4. PRESIDENT. The President shall be the chief operating
officer of the Company, subject to the control of the Board of Directors and the
Chairman of the Board, shall have power to authorize the employment of such
subordinate employees as may, in the President's judgment, be advisable for the
operations of the Company, may execute in the name of the Company any authorized
corporate obligation or other instrument, and shall perform all other acts
incident to the President's office or prescribed by the Board of Directors or
the Chairman of the Board, or authorized or required by law. During the absence
or disability of the Chairman of the Board, the President shall assume the
duties and authority of the Chairman of the Board and shall be the Chief
Executive Officer of the Company.
Section 5. OTHER OFFICERS. The other officers, agents, and employees of
the Company shall each have such powers and perform such duties in the
management of the property and affairs of the Company, subject to the control of
the Board of Directors, as generally pertain to their respective offices, as
well as such powers and duties as from time to time may be prescribed by the
Board of Directors, by the Chairman of the Board, or by the President.
Section 6. COMPENSATION. The Board of Directors shall determine the
compensation to be paid to the Chairman of the Board, the President, and each
Vice President above the level of Assistant Vice President.
Section 7. VOTING OF SHARES AND SECURITIES OF OTHER CORPORATIONS.
Unless the Board of Directors otherwise directs, the Company's Chairman of the
Board and President shall each be entitled to vote or designate a proxy to vote
all shares and other securities which the Company owns in any other corporation
or entity.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATES OF SHARES. The interest of each shareholder
shall be evidenced by a certificate or certificates for shares of stock of the
Company in such form as the Board of Directors may from time to time prescribe.
The certificates of stock shall be signed by the Chairman of the Board, the
President or a Vice President and by the Treasurer, an Assistant Treasurer, the
Corporate Secretary, or an Assistant Corporate Secretary of the Company, and
shall be countersigned by a transfer agent for the stock and registered by a
registrar for such stock. The signatures of the officers and the transfer agent
and the registrar upon such
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certificates may be facsimiles, engraved, or printed, subject to the provisions
of applicable law. In case any officer, transfer agent, or registrar shall cease
to serve in that capacity after their facsimile signature has been placed on a
certificate, the certificates may be issued with the same effect as if the
officer, transfer agent, or registrar were still in office.
Section 2. TRANSFER OF SHARES. Shares in the capital stock of the
Company shall be transferred on the books of the Company upon surrender and
cancellation of certificates for a like number of shares, with duly executed
power to transfer endorsed on or attached to the certificate.
Section 3. LOST OR DESTROYED STOCK CERTIFICATES. No certificate for
shares of stock of the Company shall be issued in place of any certificate
alleged to have been lost, stolen or destroyed, except upon production of such
evidence of the loss, theft or destruction, and upon indemnification of the
Company and its agents to such extent and in such manner as the Board of
Directors may from time to time prescribe.
ARTICLE V
CHECKS, NOTES, BONDS, DEBENTURES, ETC.
All checks and drafts on the Company's bank accounts, all bills of
exchange and promissory notes, and all acceptances, obligations, and other
instruments for the payment of money, shall be signed by such officer or
officers or agent or agents, either manually or by facsimile signature or
signatures, as shall be thereunto authorized from time to time by the Board of
Directors either generally or in specific instances; provided that bonds,
debentures, and other evidences of indebtedness of the Company bearing facsimile
signatures of officers of the Company shall be issued only when authenticated by
a manual signature on behalf of a trustee or an authenticating agent appointed
by the Board of Directors. In case any such officer of the Company shall cease
to be such after such officer's facsimile signature has been placed thereon,
such bonds, debentures or other evidences of indebtedness may be issued with the
same effect as if such person were still in office.
ARTICLE VI
CORPORATE SEAL
The Board of Directors shall provide a suitable seal containing the
name of the Company.
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ARTICLE VII
CONTROL SHARE ACQUISITIONS
The Stacey, Bennett, and Randall Shareholder Equity Act (Chapter 7B of
the Michigan Business Corporation Act) shall not apply to any control share
acquisitions (as defined in such Act) of shares of the Company.
This Article VII of the Bylaws may not be amended, altered, or repealed
with respect to any control share acquisition of shares of the Company effected
pursuant to a tender offer or other transaction commenced prior to the date of
such amendment, alteration, or repeal.
ARTICLE VIII
AMENDMENT OF BYLAWS
Those provisions of these Bylaws providing for a classified Board of
Directors (currently the third, fourth and fifth sentences of the first
paragraph of Section 1 of Article II) and the provisions of this sentence may be
amended or repealed only by the affirmative vote of the holders of a majority of
shares of Common Stock of the Company. Except as provided in the immediately
preceding sentence, Bylaws of the Company may be amended, repealed or adopted by
vote of the holders of a majority of shares at the time entitled to vote in the
election of any directors or by vote of a majority of the directors in office.
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EXHIBIT 99.A3
STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
CORPORATION AND SECURITIES BUREAU
CORPORATION DIVISION
LANSING, MICHIGAN
MCN CORPORATION
ARTICLES OF INCORPORATION
FILED
AUGUST 12, 1988
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
IDENTIFICATION NUMBER 381-153
<PAGE> 2
ARTICLES OF INCORPORATION
OF
MCN CORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the
undersigned corporation executes the following Articles:
FIRST. The name of the corporation is MCN Corporation
SECOND. The purpose or purposes for which the Corporation is organized is
to engage in any activity with in the purposes for which corporations may be
organized under the Michigan Business Corporation Act.
THIRD. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 75,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 50,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
The designations, voting powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions of the above classes of stock and other general provisions
relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
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(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other
series of Preferred Stock, the terms and conditions upon which
and the periods in respect of which dividends shall be payable,
whether and upon what conditions such dividends shall be
cumulative and, if cumulative, the date or dates from which
dividends shall accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or
rate or rates at which, the adjustments with which and the manner
in which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution
or winding up of the Corporation, which rights may vary depending
on whether such liquidation, dissolution, distribution or winding
up is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of capital stock of the Corporation, and, if
so convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
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adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of the
shares of such series, and whether and under what conditions the
shares of such series (along or together with the shares of one
or more other series having similar provisions) shall be entitled
to vote separately as a single class, for the election of one or
more additional directors of the Corporation in case of dividend
arrearages, or other specified events, or upon other matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to
restrictions as to issuance or as to the powers, preferences or
rights of any such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as
the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or
provided in the resolution or resolutions of the Board of Directors creating
any series of Preferred Stock pursuant to this Part I, the holders of the
shares of Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged,
purchased, retired or surrendered to the Corporation, or which have been issued
and reacquired in any manner, may, upon compliance with any applicable
provisions of the Michigan Business Corporation Act, be given the status of
authorized and unissued shares of Preferred Stock and may be reissued by the
Board of Directors as part of the series of which they were originally a part
or may be reclassified into and reissued as part of a new series or as a part
of any other series, all subject to the protective conditions or restrictions
of any outstanding series of Preferred Stock.
PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
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(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable requirements, if any, with
respect to the setting aside of sums of purchase, retirement or sinking funds
for Preferred Stock, the holders of Common Stock shall be entitled to receive,
to the extent permitted by law, such dividends as may be declared from time to
time by the Board of Directors.
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PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
FOURTH.
(a) The address of the registered office of the Corporation is 500
Griswold Street, Detroit, Michigan 48226.
(b) The name of the registered agent at the registered office is
Daniel L. Schiffer.
FIFTH. The name and address of the incorporator is as follows;
Name Address
- ---- -------
Michigan Consolidated Gas Company 500 Griswold Street
Detroit, Michigan 48226
SIXTH.
(a) The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors. The number of directors of the
Corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
Corporation, except that the minimum number of directors shall be fixed at not
fewer than seven and the maximum number of directors shall be fixed at not more
than ten. The directors shall be divided into three classes, designated as
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. At the 1989 annual meeting of shareholders and at each
succeeding annual meeting of shareholders, successors to the class of directors
whose terms of office expire at that annual meeting shall be elected to hold
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office for a three-year term, so that the term of office of one class of
directors shall expire in each year.
Any vacancy occurring on the Board of Directors through death,
resignation, retirement, disqualification, removal or other cause, or resulting
from an increase, the number of directors, may be filled by the affirmative
vote of a majority of the then remaining directors, through less than a quorum,
or by the sole remaining director for a term of office continuing only until
the next election of directors by the shareholders.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly created directorships are filled by the Board of Directors, there shall
be no classification of the additional directors until the next election of
directors by the shareholders.
(b) Any director may be removed from office at any time either (i) by vote
of the holders of two-thirds of the shares entitled to vote at an election of
directors, but only for cause, or (ii) by vote of two-thirds of the other
directors, with or without cause.
(c) Notwithstanding the foregoing paragraphs, whenever the holders of any
one or more class or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of the Articles of Incorporation applicable thereto. The then
authorized number of directors of the Corporation shall be increased by the
number of additional directors to be elected, and such directors so elected
shall not be divided into classes pursuant to this Article SIXTH unless
expressly provided by such terms.
(d) Nominations for election to the Board of Directors of the Corporation
at a meeting of shareholders may be made by the Board of Directors, on behalf
of the Board of Directors by any nominating committee appointed by the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of directors at a meeting. Nominations, other than those made by or
on behalf of the Board of Directors, shall be made by notice in writing
delivered to or mailed, postage prepaid, and received by the Secretary of the
Corporation at least 90 days but no more than 120 days prior to the anniversary
date of the immediately preceding annual meeting of shareholders. The notice
shall set forth (i) the name and address of the shareholder who intends to make
the nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the number of shares of stock of the Corporation which are
beneficially owned by each nominee and by the nominating
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shareholder; (v) any other information concerning the nominee that must be
disclosed of nominees in proxy solicitations pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (or any subsequent provisions replacing such
Regulation); and (vi) the executed consent of each nominee to serve as a
director of the Corporation, if elected. The chairman of the meeting of
shareholders may, if the facts warrant, determine that a nomination was not
made in accordance with the foregoing procedures, and if the chairman should so
determine, the chairman shall so declare to the meeting and the defective
nomination shall be disregarded.
SEVENTH. Any action required to permitted to be taken by any shareholders
of the Corporation must be effected at a duly called annual or special meeting
of such shareholders and may not be effected by any consent in writing by such
shareholders. Except as may be otherwise required by law, special meetings of
shareholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution approved by a majority of the Board of Directors.
EIGHTH. The Board of Directors shall not approve, adopt or recommend any
proposal to enter into a Business Combination (as hereinafter defined) or any
offer of any person or entity, other than the Corporation, to make a tender or
exchange offer for any capital stock of the Corporation, unless and until the
Board of Directors shall first establish a procedure for evaluating, and shall
have evaluated, the proposal or offer and determine that it would be in
compliance with all applicable laws and in the best interests of the
Corporation and its shareholders. In connection with its evaluation, the Board
of Directors may seek and obtain the advice of independent investment counsel,
may seek and rely upon an opinion of legal counsel and other independent
advisers, and may test such compliance with laws in any state or federal court
or before any state or federal administrative agency which may have appropriate
jurisdiction. In connection with its evaluation as to the best interests of
the Corporation and its shareholders, the Board of Directors shall consider all
factors which it deems relevant, including without limitation: (i) the adequacy
and fairness of the consideration to be received by the Corporation and/or its
shareholders considering the future prospects for the Corporation and its
business, historical trading prices of the Corporation capital stock, the price
that might be achieved in a negotiated sale of the Corporation as a whole, and
premiums over trading prices which have been proposed or offered with respect
to the securities of other companies in the past in connection with similar
offers; (ii) the business, financial condition and earnings prospects of the
acquiring person or entity and the competence, experience and integrity of the
acquiring person or entity and its management; and (iii) the potential social
and economic impact of the offer and its consummation upon the Corporation's
customers, the communities in which the Corporation operates or is located and
upon the Corporation's employees, other than its officers.
The term "Business Combination" shall mean any merger or consolidation of
the Corporation with any other person or entity.
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NINTH. A director of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Corporation or its shareholders, (ii) acts or
omissions not in good faith or that involve international misconduct or a
knowing violation of law, (iii) a violation of Section 551(1) of the Michigan
Business Corporation Act, or (iv) any transaction from which the director
derived an improper personal benefit. If the Michigan Business Corporation Act
is amended after the date of these Articles of Incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Michigan Business
Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
TENTH. The Corporation shall have perpetual existence.
ELEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by the laws of Michigan, and all rights
conferred herein upon shareholders and directors are granted subject to this
reservation. Notwithstanding the foregoing as well as any other provision
contained in these Articles of Incorporation, any agreement with any national
securities exchange or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote required by any
other provision of these Articles of Incorporation, any agreement with any
national securities exchange or any provision of law, the affirmative vote of
the holders of at least two-thirds of the votes entitled to be cast by the
holders of all the then outstanding shares of the Corporation, voting together
as a single class, shall be required to amend or repeal Articles SIXTH,
SEVENTH, EIGHTH, or this Article ELEVENTH of these Articles of Incorporation or
adopt any provision inconsistent therewith.
The incorporator signs its name this 12th day of August, 1988.
MICHIGAN CONSOLIDATED GAS COMPANY
By:
-----------------------------------------
Alfred R. Glancy III
Chairman and Chief Executive Officer
9
<PAGE> 10
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
FILED
DECEMBER 28, 1989
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is: MCN
Corporation
2. The corporation identification
number (CID) assigned by the Bureau is: 381-153
3. The location of its registered office is:
500 Griswold Detroit, Michigan 48226
----------------------------- -----
4. Article Third of the Articles of Incorporation is hereby
------------
amended to read
add thereto the Certificate of Establishment and Designation of Junior
Participating Preferred Stock, Series A of MCN Corporation in the form attached
hereto as Exhibit A.
<PAGE> 11
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B)
b. X The foregoing amendment to the Articles of Incorporation was duly
adopted on the 20th day of December, 1989. The amendment:
(check one of the following)
X was duly adopted in accordance with Section 302 of the Act by the
Board of Directors.
Signed this 28th day of December , 1989
------ ------------
By
---------------------------------------
Stephen E. Ewing, President
---------------------------------------
<PAGE> 12
Exhibit A
FORM
of
CERTIFICATE OF ESTABLISHMENT AND DESIGNATION
of
JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A
of
MCN CORPORATION
(Pursuant to Section 450.1302 of the
Michigan Business Corporation Act)
MCN Corporation, a corporation organized and existing under the Business
Corporation Act of the State of Michigan (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 450.1302 of
the Michigan Business Corporation Act at a meeting duly called and held on
December 20, 1989;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") by the provisions of the Articles of Incorporation
of the Corporation, the Board of Directors hereby establishes a series of
Preferred Stock, without par value (the "Preferred Stock"), of the Corporation
and hereby states the designation and number of shares, and prescribes the
relative rights and preferences thereof as follows:
Junior Participating Preferred Stock, Series A:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Junior Participating Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 250,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number shares then outstanding plus the number of shares reserved for issuance
upon the exercise of outstanding options, rights or warrants, or the conversion
of any outstanding securities, issued by the Corporation exercisable for or
convertible into Series A Preferred Stock.
A-1
<PAGE> 13
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $.01 per share (the "Common Stock"), of the Corporation,
and of any other junior stock, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commending on
the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event
the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such even under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided,
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend
of $1 per share on the Series A Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
A-2
<PAGE> 14
(C) The Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior
to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the stockholders
of the Corporation.
(B) Except as otherwise provided herein, in any other Certificate of
Establishment and Designation establishing a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote together
as one class on all matters submitted to a vote of the stockholders of the
Corporation.
(C) Except as otherwise provided herein, or by law, holders of
shares of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are
entitled to vote with holders of shares of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in
A-3
<PAGE> 15
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series
A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A
Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a party (either as
to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except dividends paid ratably on the
Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock; provided, that the Corporation may at any
time redeem, purchase or otherwise acquire shares of such junior
stock in exchange for shares of stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders
of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. Required Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition
A-4
<PAGE> 16
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Articles of Incorporation, or in any other Certificate of
Establishment and Designation establishing a series of Preferred Stock or any
similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided, that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior
to such event under the provisio to clause (1) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of
A-5
<PAGE> 17
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
A-6
<PAGE> 18
EXHIBIT A
THIRD. 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 125,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 100,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
2. The designations, voting powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the above classes of stock and other general
provisions relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other series
of Preferred
<PAGE> 19
Stock, the terms and conditions upon which and the periods in
respect of which dividends shall be payable, whether and upon
what conditions such dividends shall be cumulative and, if
cumulative, the date or dates from which dividends shall
accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or
rate or rates at which, the adjustments with which and the manner
in which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution
or winding up of the Corporation, which rights may vary depending
on whether such liquidation, dissolution, distribution or winding
up is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of capital stock of the Corporation, and, if
so convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of
<PAGE> 20
the shares of such series, and whether and under what conditions
the shares of such series (along or together with the shares of
one or more other series having similar provisions) shall be
entitled to vote separately as a single class, for the election
of one or more additional directors of the Corporation in case of
dividend arrearages, or other specified events, or upon other
matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to
restrictions as to issuance or as to the powers, preferences or
rights of any such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as
the Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock pursuant to this Part I, the holders of the shares of
Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any applicable provisions
of the Michigan Business Corporation Act, be given the status of authorized and
unissued shares of Preferred Stock and may be reissued by the Board of
Directors as part of the series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as a part of any
other series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.
PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable
<PAGE> 21
requirements, if any, with respect to the setting aside of sums of purchase,
retirement or sinking funds for Preferred Stock, the holders of Common Stock
shall be entitled to receive, to the extent permitted by law, such dividends as
may be declared from time to time by the Board of Directors.
PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
<PAGE> 22
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
FILED
May 4, 1994
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is:
MCN Corporation
2. The corporation
identification number (CID)
assigned by the Bureau is: 381-153
3. The location of its registered office is:
500 Griswold Detroit, Michigan 48226
------------------------------- -----
4. Article Third of the Articles of Incorporation is hereby
-------------
amended to read
(See attached Exhibit A)
<PAGE> 23
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B)
b. X The foregoing amendment to the Articles of Incorporation was duly
adopted on the 28th day of April , 1994. The amendment:
(check one of the following)
X was duly adopted in accordance with Section 611(2) of the Act by the
vote of the shareholders if a profit corporation, or by the vote of
the shareholders or members if a nonprofit corporation, or by the
vote of the directors if a nonprofit corporation organized on a
nonstock directorship basis. The necessary votes were cast in favor
of the amendment.
Signed this 2nd day of May, 1994
----- ---- --
By
-------------------------------------
Alfred R. Glancy III, Chairman, President and CEO
-------------------------------------------------
<PAGE> 24
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
- --------------------------------------------------------------------------------
Date Received
FILED
APR 23, 1997
Administrator
- ------------------------------ MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
Name CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU
- ------------------------------
Address
- ------------------------------
City State Zip Code
EFFECTIVE DATE:
- ------------------------------
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is: MCN CORPORATION
2. The identification number assigned by the Bureau is: 381-153
3. The location of the registered office is:
500 Griswold Street Detroit ,Michigan 48226
- --------------------------------------------------------------------------------
(Street Address) (City) (Zip Code)
4. Article I of the Articles of Incorporation is hereby amended to read as
-------
follows:
The name of the corporation shall be MCN Energy Group Inc.
The effective date of this Certificate of Amendment to the Articles
of Incorporation shall be April 28, 1997.
<PAGE> 25
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (B). DO NOT COMPLETE
BOTH.
b. [ ] The foregoing amendment to the Articles of Incorporation was duly
adopted on the 22nd day of April, 1997.
[ ] was duly adopted in accordance with Section 611(2) of the Act by the
vote of the shareholders if a profit corporation, or by the
shareholders or members if a nonprofit corporation, or by the vote of
the directors if a nonprofit corporation organized on a nonstock
directorship basis. The necessary votes were cast in favor of the
amendment.
Signed this 22nd day of April, 1997
By /s/
----------------------------------------------------------------
(Only Signature of President, Vice-President, Chairperson, or Vice
Chairperson)
Daniel Schiffer, Senior Vice President, General Counsel and
Secretary
------------------------------------------------------------------
(Type or Print Name) (Type or Print Title)
<PAGE> 26
EXHIBIT A
THIRD. 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 275,000,000 shares, which shall be
divided into two classes as follows:
(a) 25,000,000 shares of Preferred Stock, no par value (Preferred
Stock); and
(b) 250,000,000 shares of Common Stock of the par value of $.01
per share (Common Stock).
2. The designations, voting powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of the above classes of stock and other general
provisions relating thereto shall be as follows:
PART I
PREFERRED STOCK
(a) Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration or considerations as the Board of
Directors may determine. All shares of any one series shall be of equal rank
and identical in all respects expect that the dates from which dividends accrue
or accumulate with respect thereto may vary.
(b) The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited, or without voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and as are not stated and expressed in these Articles of Incorporation, or any
amendment thereto, including (but without limiting the generality of the
foregoing) the following:
(i) The distinctive designation and number of shares
comprising such series, which number may (except where otherwise
provided by the Board of Directors in creating such series) be
increased or decreased (but not below the number of shares then
outstanding) from time to time by action of the Board of
Directors.
<PAGE> 27
(ii) The dividend rate or rates on the shares of such series and
the relation which such dividends shall bear to the dividends
payable on any other class of capital stock or on any other series
of Preferred Stock, the terms and conditions upon which and the
periods in respect of which dividends shall be payable, whether and
upon what conditions such dividends shall be cumulative and, if
cumulative, the date or dates from which dividends shall
accumulate.
(iii) Whether the shares of such series shall be redeemable, and,
if redeemable, whether redeemable for cash, property or rights,
including securities of any other corporation, at the option of
either the holder or the Corporation or upon the happening of a
specified event, the limitations and restrictions with respect to
such redemption, the time or times when, the price or prices or rate
or rates at which, the adjustments with which and the manner in
which such shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less than all
shares are to be redeemed.
(iv) The rights to which the holders of shares of such series
shall be entitled, and the preferences, if any, over any other
series (or of any other series over such series), upon the
voluntary or involuntary liquidation, dissolution, distribution or
winding up of the Corporation, which rights may vary depending on
whether such liquidation, dissolution, distribution or winding up
is voluntary or involuntary, and, if voluntary, may vary at
different dates.
(v) Whether the shares of such series shall be subject to
the operation of a purchase, retirement or sinking fund and, if
so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or noncumulative, the extent to
which and the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms and
provisions relative to the operation thereof.
(vi) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or of any other
series of any class of
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convertible or exchangeable, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of such
conversion or exchange.
(vii) The voting powers, full and/or limited, if any, of the
shares of such series, and whether and under what conditions the
shares of such series (along or together with the shares of one or
more other series having similar provisions) shall be entitled to
vote separately as a single class, for the election of one or more
additional directors of the Corporation in case of dividend
arrearages, or other specified events, or upon other matters.
(viii) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions
as to issuance or as to the powers, preferences or rights of any
such other series.
(ix) Any other preferences, privileges and powers and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series, as the
Board of Directors may deem advisable and as shall not be
inconsistent with the provisions of these Articles of
Incorporation.
(c) Unless the except to the extent otherwise required by law or provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock pursuant to this Part I, the holders of the shares of
Preferred Stock shall have no voting power with respect to any matter
whatsoever. In no event shall the Preferred Stock be entitled to more than one
vote in respect to each share of Preferred Stock.
(d) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any applicable provisions
of the Michigan Business Corporation Act, be given the status of authorized and
unissued shares of Preferred Stock and may be reissued by the Board of
Directors as part of the series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as a part of any
other series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.
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PART II
COMMON STOCK
(a) Except as otherwise required by law or by any amendment to these
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by such holder on all matters voted upon by the
shareholders.
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable requirements, if any, with
respect to the setting aside of sums of purchase, retirement or sinking funds
for Preferred Stock, the holders of Common Stock shall be entitled to receive,
to the extent permitted by law, such dividends as may be declared from time to
time by the Board of Directors.
PART III
GENERAL PROVISIONS
No holder of stock of any class of the Corporation shall be entitled as a
matter of right to purchase or subscribe for any part of any unissued stock of
any class, or of any additional stock of any class of capital stock of the
Corporation, or of any bonds, certificates of indebtedness, debentures, or
other securities, whether or not convertible into stock of the Corporation, now
or hereafter authorized, but any such stock or other securities may be issued
and disposed of pursuant to resolution by the Board of Directors to such
persons, firms, corporations or associations and upon such terms and for such
consideration (not less than the par value or stated value thereof) as the
Board of Director in the exercise of its discretion may determine and as may be
permitted by law without action by the shareholders. The Board of Directors
may provide for payment therefor to be received by the Corporation in cash,
personal property, real property (or leases thereof) or services. Any and all
shares of stock so issued for which the consideration so fixed has been paid or
delivered, shall be deemed fully paid and not liable to any further call or
assessment.
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EXHIBIT B
SIXTH.
(a) The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors. The number of directors of the
Corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
Corporation, except that the minimum number of directors shall be fixed at not
fewer than nine and the maximum number of directors shall be fixed at not more
than twelve. The directors shall be divided into three classes, designated as
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. At the 1989 annual meeting of shareholders and at each
succeeding annual meeting of shareholders, successors to the class of directors
whose terms of office expire at that annual meeting shall be elected to hold
office for a three-year term, so that the term of office of one class of
directors shall expire in each year.
Any vacancy occurring on the Board of Directors through death,
resignation, retirement, disqualification, removal or other cause, or resulting
from an increase, the number of directors, may be filled by the affirmative
vote of a majority of the then remaining directors, through less than a quorum,
or by the sole remaining director for a term of office continuing only until
the next election of directors by the shareholders.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly created directorships are filled by the Board of Directors, there shall
be no classification of the additional directors until the next election of
directors by the shareholders.
(b) Any director may be removed from office at any time either (i) by vote
of the holders of two-thirds of the shares entitled to vote at an election of
directors, but only for cause, or (ii) by vote of two-thirds of the other
directors, with or without cause.
(c) Notwithstanding the foregoing paragraphs, whenever the holders of any
one or more class or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special
<PAGE> 31
meeting of shareholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of the
Articles of Incorporation applicable thereto. The then authorized number of
directors of the Corporation shall be increased by the number of additional
directors to be elected, and such directors so elected shall not be divided
into classes pursuant to this Article SIXTH unless expressly provided by such
terms.
(d) Nominations for election to the Board of Directors of the Corporation
at a meeting of shareholders may be made by the Board of Directors, on behalf
of the Board of Directors by any nominating committee appointed by the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of directors at a meeting. Nominations, other than those made by or
on behalf of the Board of Directors, shall be made by notice in writing
delivered to or mailed, postage prepaid, and received by the Secretary of the
Corporation at least 90 days but no more than 120 days prior to the anniversary
date of the immediately preceding annual meeting of shareholders. The notice
shall set forth (i) the name and address of the shareholder who intends to make
the nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the number of shares of stock of the Corporation which are
beneficially owned by each nominee and by the nominating shareholder; (v) any
other information concerning the nominee that must be disclosed of nominees in
proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act
of 1934 (or any subsequent provisions replacing such Regulation); and (vi) the
executed consent of each nominee to serve as a director of the Corporation, if
elected. The chairman of the meeting of shareholders may, if the facts
warrant, determine that a nomination was not made in accordance with the
foregoing procedures, and if the chairman should so determine, the chairman
shall so declare to the meeting and the defective nomination shall be
disregarded.
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EXHIBIT 99.A4
BY-LAWS
OF
MCN ENERGY GROUP INC.
ARTICLE I
OFFICES
SECTION 1.1. Registered Office. The registered office of the
corporation shall be in Detroit, Michigan, at such place as the Board of
Directors may from time to time designate.
SECTION 1.2. Other Offices. The corporation may also have
offices at such other places both within and without the State of Michigan as
the Board of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS
OF SHAREHOLDERS
SECTION 2.1. Annual Meeting. The annual meeting of
shareholders shall be held each year on such day during the month of May, or
such day during any other month, and at such hour of the day as shall be
designated by the Board of Directors. At such meeting, the shareholders shall
elect Directors and transact such other business as may come before the meeting
pursuant to the provisions of Section 2.11 of Article II below. The day, place
and hour of each annual meeting shall be specified in the notice of the annual
meeting. The meeting may be adjourned by the chairman of the meeting from time
to time and place to place. At any adjourned meeting the Corporation may
transact any business which might have been transacted at the original meeting.
The Board of Directors acting by resolution may postpone and reschedule any
previously scheduled annual or special meeting of shareholders.
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SECTION 2.2. Special Meetings. Except as otherwise prescribed
by law, special meetings of the shareholders, for any purpose or purposes, may
be called only by the Board of Directors pursuant to a resolution approved by a
majority of the Board of Directors. The notice of the special meeting shall
state the time, place, and purposes of the special meeting. Business transacted
at a special meeting shall be confined to the purposes stated in the notice.
SECTION 2.3. Place of Meetings. The Board of directors may
designate any place either within or without the State of Michigan as the Place
of meeting for any annual meeting or for any special meeting of shareholders. If
no designation is made, the place of meeting shall be the registered office of
the corporation in the State of Michigan.
SECTION 2.4. Notice of Meetings. Except as otherwise provided
by law, written notice of the time, place and purpose or purposes for which a
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting to each shareholder of record entitled to vote at
the meeting. If mailed, such notice shall be deemed to be given when deposited
in the United States mail by the corporation or its duly authorized agent,
addressed to the shareholder at his or her address as it appears on the stock
transfer books of the corporation, with postage prepaid.
SECTION 2.5. Shareholder List. Before every meeting of
shareholders, the officer or agent having charge of the stock transfer books
shall prepare and certify a complete list of the shareholders entitled to vote
at the meeting, arranged in alphabetical order within each class, if any, the
address of, and number of voting shares registered in the name of each
shareholder. Such list shall be produced at the time and place of the meeting.
SECTION 2.6. Quorum. At each meeting of shareholders, the
holders of record of a majority of the issued and outstanding stock of the
corporation entitled to vote at such meeting, present in person or by proxy,
shall constitute a quorum for the transaction of business, except where
otherwise provided by law, the Articles of Incorporation or these By-Laws.
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SECTION 2.7. Proxies. At every meeting of shareholders, each
shareholder has the right to vote in person or by proxy. Such proxy shall be
appointed by an instrument in writing subscribed by the shareholder or his or
her authorized agent or representative, and bearing a date not more than three
years prior to such meeting, unless the proxy provides for a longer period. Each
proxy shall be filed with the Secretary of the corporation prior to or at the
time of the meeting.
SECTION 2.8. Voting. Except as otherwise provided in the
Articles of Incorporation, at every meeting of shareholders each holder of
record of the issued and outstanding stock of the corporation entitled to vote
thereat shall be entitled to one vote, in person or by proxy, for each share of
stock held by such shareholder. At all meetings of shareholders, a quorum being
present, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide all matters presented to
the shareholders except as otherwise required by law or the Articles of
Incorporation.
SECTION 2.9. Action Without Meeting. Any action required or
permitted to be taken at an annual or special meeting of shareholders may be
taken without a meeting; without prior notice and without a vote, if all the
shareholders entitled to vote thereon consent thereto in writing.
SECTION 2.10. Adjournments. Any annual or special meeting of
shareholders, whether or not a quorum is present, may be adjourned from time to
time by a majority vote of the shares present in person or by proxy. Unless the
Board of Directors fixes a new record date for the adjourned meeting, it shall
not be necessary to give notice of the adjourned meeting if the date, time and
place to which the meeting is adjourned are announced at the meeting at which
the adjournment is taken and at the adjourned meeting only such business is
transacted as might have been transacted at the original meeting.
SECTION 2.11. Shareholder Business By-Law.
(A) Annual Meeting of Shareholders. (1) The proposal of
business to be considered by the shareholders at an annual meeting of
shareholders may be made (a) pursuant to the Corporation's notice of meetings,
(b) by or at the direction of the Board of Directors or (c) by any shareholder
of the Corporation who was a shareholder of record at the time of giving of
notice provided for in this
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By-Law, who is entitled to vote at the meeting and who complied with the notice
procedures set forth in this By-Law.
(2) For business to be properly brought before an annual
meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of the
By-Law, the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
received by the Secretary at the principal executive offices of the Corporation
not less than 60 days no more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than 30 days from such
anniversary date, notice by the shareholder to be timely must be so received not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. Such shareholder's notice shall set forth (a) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; (b) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the proposal is made (i) the name and
address of such shareholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
(3) The Corporation shall set forth in its proxy statement for
each annual meeting of shareholders the date by which notice of nominations by
shareholders of persons for election as directors or of other business proposed
to be brought by shareholders at the next annual meeting of shareholders must be
received by the Corporation to be considered timely pursuant to paragraph (d) of
Article Seven of the Corporation's Articles of Incorporation and this By-Law.
With respect to the first annual meeting of shareholders after the adoption of
this By-Law, the Corporation shall issue a public announcement setting forth
such information not less than 30 days prior to the applicable date.
(B) Special Meetings of Shareholders. Only such business shall
be conducted at a special meeting of
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shareholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting.
(C) General. (1) Only such business shall be conducted at a
meeting of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-Law. The Chairman of the
meeting shall have the power and duty to determine whether notice of any
business proposed to be brought before the meeting was given in accordance with
the procedures set forth in this By-Law, and, if not given in compliance with
this By-Law, to declare that such proposal shall not be considered at the
meeting.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14, 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(3) Notwithstanding the foregoing provisions of this By-Law, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights of shareholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 Management Responsibility. The business and
affairs of the corporation shall be managed by the Board of Directors except as
otherwise provided by law or by the Articles of Incorporation.
SECTION 3.2. Number; Election; Term. The number of Directors
of the corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
corporation, except that the minimum number of Directors shall be fixed at not
fewer than seven and the maximum number of Directors shall be fixed at not more
than ten. The Directors shall be divided into three classes, designated as Class
I, Class II and Class III. Each class
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shall consist, as nearly as may be possible, of one-third of the total number of
Directors constituting the entire Board of Directors. At the 1989 annual meeting
of shareholders and at each succeeding annual meeting of shareholders,
successors to the class of Directors whose terms of office expire at that annual
meeting shall be elected to hold office for a three-year term, so that the term
of office of one class of Directors shall expire in each year.
If the number of Directors is changed, any increase or
decrease shall be apportioned among the classes of Directors so as to maintain
the number of Directors in each class as nearly equal as possible, but in no
case will a decrease in the number of Directors shorten the term of any
incumbent Director. When the number of Directors is increased by the Board of
Directors and any newly created directorships are filled by the Board of
Directors, there shall be no classification of the additional Directors until
the next election of Directors by the shareholders.
SECTION 3.3. Resignation and Vacancies. Any Director may
resign at any time by giving written notice to the corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. Any
vacancy occurring on the Board of Directors through death, resignation,
retirement, removal or other cause, or resulting from an increase in the number
of Directors, may be filled by the affirmative vote of a majority of the then
remaining Directors, though less than a quorum, or by the sole remaining
Director, for a term of office continuing only until the next election of
Directors by the shareholders.
SECTION 3.4. Removal. Any Director may be removed from office
at any time either (i) by vote of the holders of two-thirds of the shares
entitled to vote at an election of Directors, but only for cause, or (ii) by
vote of two-thirds of the other Directors, with or without cause.
SECTION 3.5. Meetings.
(A) Annual Meetings. As soon as practicable after each annual
election of Directors, the Board of Directors shall meet for the purpose of
organization and the transaction of other business.
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(B) Other Meetings. Other meetings of the Board of Directors
shall be held at such times and places as the Board shall from time to time
determine or upon call by the Chairman of the corporation.
SECTION 3.6. Notice of Meetings. The Secretary of the
corporation shall give notice to each Director of the time and place of such
meeting. Notice of each meeting shall be mailed to each Director at his or her
residence or usual place of business, at least three days before the day on
which such meeting is to be held, or shall be sent by telegraph, cable, or other
form of recorded communication or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held. The
attendance of a Director at any meeting shall constitute a waiver of notice of
such meeting, except where a Director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened. A written waiver of notice, signed by a Director,
whether before or after the time stated therein, shall be deemed equivalent to
adequate notice.
SECTION 3.7. Quorum and Manner of Acting. At each meeting of
the Board of Directors, the presence of not less than a majority of the whole
Board shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the Directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by law. If a quorum
shall not be present at any meeting of Directors, the Directors present thereat
may adjourn the meeting from time to time, without notice until a quorum shall
be present.
SECTION 3.8. Action By Consent. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent thereto is signed by all members of the
Board and such written consent is filed with the minutes of proceedings of the
Board. Such consent shall have the same effect as a vote of the Board for all
purposes.
SECTION 3.9. Meetings By Telephone. Members of the Board of
Directors, or of any committee thereof, may participate in a meeting of the
Board, or of such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting
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pursuant to this section shall constitute presence in person at such meeting.
SECTION 3.10. Compensation. Each Director, in consideration of
his or her serving as such, shall be entitled to receive from the corporation
such amount per annum or such fees for attendance at meetings of the Board of
Directors or of any committee thereof, or both, as the Board shall from time to
time determine. The Board may likewise provide that the corporation shall
reimburse each Director or member of a committee for any expenses incurred by
him or her on account of attendance at any such meeting. Nothing contained in
this Section shall be construed to preclude any Director from serving the
corporation in any other capacity and receiving compensation thereof.
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ARTICLE IV
OFFICERS
SECTION 4.1. Officers. The officers of the corporation shall
be a Chairman, President, a Secretary, and a Treasurer. The Board of Directors
may elect or appoint such other officers of the corporation, including a Vice
Chairman, a Controller, and one or more Vice Presidents, Assistant Secretaries
and Assistant Treasurers, as it deems necessary for the proper conduct and
regulation of the business of the corporation and who shall have such authority
and shall perform such duties as the Board of Directors, the Chairman or the
President shall prescribe.
SECTION 4.2. Election and Term of Office. The officers of the
corporation shall be elected by the Board of Directors at the annual meeting of
the Board of Directors. If the election of officers shall not be held at such
meeting of the Board, such election shall be held at a regular or special
meeting of the Board of Directors as soon thereafter as may be convenient. Each
officer shall hold office for the term for which he or she is elected and until
his or her successor is elected and qualified, or until his or her earlier
resignation or removal.
SECTION 4.3. Removal or Resignation. Any officer may be
removed, with or without cause, by the Board of Directors. Any officer may
resign at any time by giving written notice to the corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 4.4. Vacancies. Any vacancy occurring in any office of
the corporation because of death, resignation, removal or any other cause may be
filled for the unexpired portion of the term by the Board of Directors.
SECTION 4.5. Chairman. The Chairman shall be the Chief
Executive Officer of the corporation and shall preside at all meetings of the
shareholders and of the Board of Directors. Subject only to the Board of
Directors, the Chairman shall have direct and general control of the management,
business and affairs of the corporation, including the power and authority to
make final decisions of policy relating to the corporation's goals and plans or
which have a substantial effect upon the operations of the corporation, its
financial position or results, or its
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relations with governmental bodies, consumers and the public generally.
SECTION 4.6. President. The President, subject to the
direction of the Board of Directors and Chairman, shall be the Chief Operating
Officer of the corporation and shall be responsible for directing and overseeing
the administration and operations of the corporation. In the event that the
offices of Chairman and President are held by the same person, the Board of
Directors may designate an officer to serve as Chief Operating Officer. In the
event of the Chairman's absence or inability to act, the President shall perform
the duties of the Chairman. In the absence or disability of the President, the
officer designated by the Chairman or the Board of Directors shall perform the
duties and have the authority and exercise the powers of the President.
SECTION 4.7. Secretary. The Secretary shall keep the minutes
of the meetings of the shareholders, the Board of Directors and committees of
Directors, in one or more books provided for that purpose; see that all notices
are duly given in accordance with the provisions of these By-Laws or as required
by law; have charge of the corporate records and of the seal of the corporation
and shall affix the seal to any instrument requiring it, and when so affixed,
shall attest to it by his or her signature. The Secretary shall perform such
other duties and have such other authority and powers as the Board of Directors,
the Chairman or President may from time to time prescribe.
SECTION 4.8. Treasurer. The Treasurer shall be responsible to
the Board of Directors for the receipt, custody and disbursement of all funds
and securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever and deposit all such
moneys in the name of the corporation in such banks, trust companies, or other
depositories as the Board of Directors shall designate; disburse the funds of
the corporation as ordered by the Board of Directors, the Chairman or the
President or as required in the ordinary conduct of the business of the
corporation; render to the Chairman, the President or the Board of Directors,
upon request, an account of all transactions as Treasurer and a report on the
financial condition of the corporation; and in general, perform all the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to the Treasurer by the Board of Directors, the Chairman, the
President, or these By-Laws.
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SECTION 4.9. Vice President, Controller, Assistant Treasurers,
Assistant Secretaries and Assistant Controllers. The Vice President, the
Controller, the Assistant Treasurers, Assistant Secretaries and Assistant
Controllers shall, in general, perform such duties as shall be assigned to them
by the Treasurer, Secretary or Controller, respectively, or by the Chairman,
President or the Board of Directors.
ARTICLE V
COMMITTEES
SECTION 5.1. Audit Committee. There shall be an Audit
Committee which shall have the authority to (1) cause the books and records of
the corporation and its subsidiaries to be audited by a nationally recognized
firm of independent auditors on an annual basis and at any other time it deems
appropriate; (2) recommend the selection or discharge by the Board of Directors,
as the case may be, of said firm of independent auditors; (3) meet with said
firm of independent auditors and the Corporate Auditor of the corporation as
often as necessary to review the audit plans and scope of audit procedures, the
results of the respective audits and recommendations to management of the
corporation and its subsidiaries; (4) review the accounting principles and
policies and reporting practices followed by the corporation and its
subsidiaries with management and with the independent auditors; (5) review the
adequacy of the accounting and financial systems and internal controls of the
corporation and its subsidiaries with the Corporate Auditor; (6) request the
Corporate Auditor to conduct such other audits, investigations, or reviews of
such books and records, accounting and internal control systems as the Audit
Committee deems appropriate; and (7) review periodically the corporation's
policies relating to the corporation's Code of Conduct including conflicts of
interest, political contributions and sensitive payments and, if it deems it
appropriate, investigate any alleged violations of such policies. The Audit
Committee shall report to the Board of Directors at any time it deems
appropriate or whenever called upon to do so.
SECTION 5.2. Compensation Committee. There shall be a
Compensation Committee which shall, subject to approval of the Board of
Directors, (1) fix the salaries and other direct compensation for all officers
of the corporation or its subsidiaries or affiliates who are also Directors of
the corporation; (2) have the authority to
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review and make recommendations with respect to the salary policies for other
officers of the corporation and its subsidiaries and other management and
supervisory personnel thereof; (3) have the authority to annually review and
make recommendations to the Board of Directors with respect to the compensation
to be paid to outside Directors of the corporation; (4) administer any executive
stock incentive plan which may be approved by the shareholders; (5) administer
any incentive bonus compensation plan approved for officers of the corporation
or its subsidiaries or affiliates; and (6) report to the Board of Directors at
the regular meeting of the Board immediately following any action taken by such
Committee, or whenever it shall be called upon or believes it desirable to do
so.
SECTION 5.3. Corporate Governance and Nominating Committee.
There shall be a Corporate Governance and Nominating Committee which shall (1)
screen and recommend candidates for the Board of Directors of the Corporation;
(2) review matters of corporate governance to ensure continued alignment with
shareholder interests; (3) review the Corporation's efforts to meet its
responsibilities to its non-owner stakeholders; (4) make recommendations
regarding the ongoing effectiveness of the Board and the duties of the
committees of the Board; and (5) consult with management with respect to
policies affecting involvement of the Corporation and its subsidiaries in
community affairs as well as philanthropic contributions by the Corporation, its
subsidiaries, and the foundations sponsored by the Corporation and its
subsidiaries.
SECTION 5.4. Finance Committee. There shall be a Finance
Committee which shall have the authority to review and consult with management
regarding the financial affairs of the corporation and its subsidiaries and to
make recommendations thereon to the Board of Directors, including without
limitation (1) the review of action regarding financial plans for the
corporation and its subsidiaries submitted by the management; (2) the review of
action regarding the timing and amount of debt and equity securities to be
issued and sold by the corporation and its subsidiaries; (3) the semi-annual
review of the investment performance under the Trusteed Benefit Plans and any
recommended changes of investment policy for such plans; and (4) review of the
investment policy for corporate funds.
SECTION 5.5. Membership. Each Committee of the Board shall
consist of two or more Directors appointed by the Board of Directors. Each
member of a Committee shall hold office until the annual meeting of the Board of
- 12 -
<PAGE> 13
Directors, except as hereinafter provided. Vacancies which occur in the
membership of a Committee shall be filled by the Board of Directors. Any member
of a Committee may be removed at any time by the Board of Directors upon a
majority vote of the whole Board when, in the judgment of the Board of
Directors, the best interests of the corporation will be served thereby. The
Board of Directors shall designate the Committee member who shall serve as
Chairman of the Committee and its presiding officer. The Committee shall select
a Secretary who need not be a member of the Committee but may be an officer or
employee of the corporation.
SECTION 5.6. Meetings. The date, time and place of each
meeting of a Committee shall be specified in a notice to be given by the
Secretary of the Committee to each Committee member not less than 24 hours prior
to the meeting. Notice shall be given by oral, telegraph or telephone, or sent
by mail to each Committee member at his or her usual place of business or at
such address as the member may request in writing. At all meetings, the
Secretary of the Committee shall take minutes of the proceedings and shall keep
such minutes in the corporation's records. The Chairman of the Committee shall
make an oral or a written report of all action taken by the Committee at the
next regular meeting of the Board of Directors.
SECTION 5.7. Quorum. A majority of the members of a Committee
shall constitute a quorum for the transaction of business, but if less than a
quorum shall be present at any meeting, a majority of those present may adjourn
the meeting from time to time. The vote of a majority of the members of the
Committee present at any meeting of such Committee at which a quorum is present
constitutes the action of such Committee.
SECTION 5.8. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of a Committee may be taken without a
meeting if prior to or after such action a written consent thereto is signed by
all members of the Committee, and such written consent is filed with the minutes
of proceedings of the Committee. Any such consent shall have the same effect as
a vote of the Committee for all purposes.
SECTION 5.9. Rules of Procedure. Each Committee shall
determine its own rules of procedure consistent with these By-Laws.
- 13 -
<PAGE> 14
SECTION 5.10. Other Committees. The Board of Directors may by
resolution establish such other committees as may be desirable, the
responsibilities and duties of which may be prescribed by the Board, subject to
such limitations as provided by law.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 6.1. Indemnification. Any Director or officer of the
corporation who is or was a party or is threatened to be made a party or is
otherwise involved in any threatened, pending or completed action (including any
civil, criminal, administrative or investigative suit or proceeding) by reason
of the fact that he or she is or was a Director or officer of the corporation or
is or was serving another corporation, partnership, joint venture, trust or
other enterprise at the request of the corporation, including service with
respect to employee benefit plans, shall be indemnified by the corporation
against expenses, including attorneys' fees, judgments, penalties, fines and
amounts paid or to be paid in settlement reasonably incurred by such person in
connection with the action. Such indemnification shall include the right to be
paid by the corporation any reasonable expenses incurred by such person in
defending such action in advance of its final disposition.
Indemnification hereunder shall be to the fullest extent now
or hereafter authorized by the Michigan Business Corporation Act, and shall be
determined in the manner provided therein; provided, however, that the
corporation shall indemnify any person seeking indemnity in connection with an
action (or part thereof) initiated by such person only if the action (or part
thereof) was authorized by the Board of Directors. It shall be a defense to any
claim for indemnity hereunder that the claimant has not met the applicable
standard of conduct for which indemnification is permitted under the Michigan
Business Corporation Act.
The corporation may, by action of its Board of Directors,
provide indemnification to employees and agents to the same or a lesser extent
as the foregoing indemnification of Directors and officers.
Indemnification provided hereunder shall be a contract right
between the corporation and each Director or officer of the corporation who
serves in such capacity at
- 14 -
<PAGE> 15
any time while this Section 6.1 is in effect; shall continue to a person who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, personal representatives and administrators of such person; and shall not
be exclusive of any other right which any person may have or hereafter acquire
under any other written contractual agreement.
Neither the corporation nor its Directors or officers nor any
person acting on its behalf shall be liable to anyone for any determination as
to the existence or absence of conduct which would provide a basis for making or
refusing to make any payment hereunder or for taking or omitting to take any
other action hereunder, in reliance upon advice of counsel.
- 15 -
<PAGE> 16
ARTICLE VII
CERTIFICATES FOR SHARES AND
THEIR TRANSFER
SECTION 7.1. Certificates for Shares. The certificates for
shares of the capital stock of the corporation, shall be in such form as shall
from time to time be approved by the Board of Directors. The certificate shall
be signed by the Chairman, President or a Vice President and by the Secretary or
Treasurer, and may be sealed with the seal of the corporation or a facsimile
thereof. The signatures of the officers may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
corporation itself or its employees. In case an officer who has signed or whose
facsimile signature has been placed on a certificate ceases to be such officer
before the certificate is issued, it may be issued by the corporation with the
same effect as if he or she were such officer at the date of issue.
SECTION 7.2. Transfer of Shares. Shares shall be transferable
only on the books of the corporation by the holder thereof in person or by his
or her duly authorized attorney.
SECTION 7.3. Fixing Record Date. The record date for
determining shareholders for any purpose shall be established by resolution of
the Board of Directors and shall be not more than 60 days before any meeting,
payment date, or any other action and, in the case of a meeting, shall not be
less than 10 days before such meeting.
SECTION 7.4. Lost, Destroyed or Mutilated Certificate. In case
of the alleged loss or destruction or the mutilation of a certificate
representing stock of the corporation, a new certificate may be issued in place
thereof, in the manner and upon such terms as the Board of Directors may
prescribe.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Books and Records. The corporation shall keep
current and complete books and records of account and shall keep minutes of the
proceedings of the shareholders and Board of Directors, and shall keep at its
registered office or principal place of business, or
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<PAGE> 17
at the office of its transfer agent or registrar, a record of the names and
addresses of all shareholders and the number and class of shares held by each.
SECTION 8.2. Fiscal Year. The fiscal year of the corporation
shall commence on the first day of January, and end the thirty-first day in
December of each year.
SECTION 8.3. Corporate Seal. The corporate seal of the
corporation shall be circular in form, one and seven-eighths inches in diameter,
with the name of the corporation engraved around the margin, and the figures
"1988", the year of its incorporation, engraved in the center.
SECTION 8.4. Voting of Stock. Unless otherwise ordered by the
Board of Directors, the Chairman, the President or any Vice President of the
corporation shall have full power and authority to act and vote, in the name and
on behalf of this corporation, at any meeting of shareholders of any corporation
in which this corporation may hold stock, and at any such meeting shall possess
and may exercise any and all of the rights and powers incident to the ownership
of such stock, and shall have full power and authority to execute, in the name
and on behalf of this corporation, proxies authorizing any suitable person or
persons to act and to vote at any meeting of shareholders of any corporation in
which this corporation may hold stock, and at any such meeting the person or
persons so designated shall possess and may exercise any and all of the rights
and powers incident to the ownership of such stock.
SECTION 8.5. Amendment of By-Laws. Subject to applicable law,
the Board of Directors shall have power to make, amend and repeal the By-laws of
the corporation, at any regular or special meeting of the Board by a majority
vote of the Board. Nothing in this Section shall be construed to limit the power
of the shareholders to amend, alter or rescind any of the By-laws of the
corporation.
- 17 -
<PAGE> 1
EXHIBIT 99.A5
================================================================================
RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 23, 1997
BY AND BETWEEN
DTE ENERGY COMPANY
AND
THE DETROIT EDISON COMPANY,
AS RIGHTS AGENT
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
3. Issue of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
4. Form of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . . . -9-
8. Cancellation and Destruction of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
9. Company Covenants Concerning Securities and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
10. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
11. Adjustment of Purchase Price, Number and Kind of Securities or Number of Rights . . . . . . . . . . . . . . . -13-
12. Certificate of Adjusted Purchase Price or Number of Securities . . . . . . . . . . . . . . . . . . . . . . . . -24-
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . . . . . . . . . . . . . . . . . . . . . -24-
14. Fractional Rights and Fractional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
15. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
17. Right Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
22. Issuance of New Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
23. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
24. Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
25. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
27. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
28. Successors; Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
29. Benefits of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
30. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
31. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
32. Descriptive Headings, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
33. Determinations and Actions by the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
34. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
</TABLE>
Exhibit A-1
Exhibit B-1
Exhibit C-1
(ii)
<PAGE> 4
RIGHTS AGREEMENT
This RIGHTS AGREEMENT, dated as of September 23, 1997 (this
"Agreement"), is made and entered into by and between DTE Energy Company, a
Michigan corporation (the "Company"), and The Detroit Edison Company, a
Michigan corporation (the "Rights Agent").
RECITALS
WHEREAS, on September 22, 1997, the Board of Directors of the Company
authorized and declared a dividend distribution of one right (a "Right") for
each share of Common Stock, without par value, of the Company (a "Common
Share") outstanding as of the Close of Business (as hereinafter defined) on
October 6, 1997 (the "Record Date"), each Right initially representing the
right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), on the terms and subject to the conditions herein set forth, and
further authorized and directed the issuance of one Right (subject to
adjustment as provided herein) with respect to each Common Share issued or
delivered by the Company (whether originally issued or delivered from the
Company's treasury) after the Record Date but prior to the earlier of the
Distribution Date (as hereinafter defined) and the Expiration Date (as
hereinafter defined) or as provided in Section 22.
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto hereby agree as follows:
1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" means any Person (other than the Company or
any Related Person) who or which, together with all Affiliates and Associates
of such Person, is the Beneficial Owner of 10% or more of the then-outstanding
Common Shares; provided, however, that a Person will not be deemed to have
become an Acquiring Person solely as a result of a reduction in the number of
Common Shares outstanding unless and until such time as (i) such Person or any
Affiliate or Associate of such Person thereafter becomes the Beneficial Owner
of additional Common Shares representing 1% or more of the then-outstanding
Common Shares, other than as a result of a stock dividend, stock split or
similar transaction effected by the Company in which all holders of Common
Shares are treated equally, or (ii) any other Person who is the Beneficial
Owner of Common Shares representing 1% or more of the then-outstanding Common
Shares thereafter becomes an Affiliate or Associate of such Person; provided
further, however, that a Person permitted by Rule 13d-1(b)(1) promulgated under
the Exchange Act to report the beneficial ownership of all Common Shares
Beneficially Owned by it on Schedule 13G under the Exchange Act and which
properly reports all Common Shares Beneficially Owned by it on Schedule 13G
shall not be deemed to have become an Acquiring Person
<PAGE> 5
unless such Person, together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of 20% or more of the Common Shares then
outstanding; provided, however, the foregoing proviso shall not apply to any
Person who formerly was eligible to report its holdings on Schedule 13G under
the Exchange Act but who thereafter becomes ineligible to report holdings
on Schedule 13G and who at such time is the Beneficial Owner of 10% or more of
the then-outstanding Common Shares. Notwithstanding the foregoing, if the
Board of Directors of the Company determines in good faith that a Person who
would otherwise be an Acquiring Person, as defined pursuant to the foregoing
provisions of this paragraph (a), has become such inadvertently, and such
Person divests as promptly as practicable a sufficient number of Common Shares
so that such Person would no longer be an Acquiring Person, as defined pursuant
to the foregoing provisions of this paragraph (a), then such Person shall not
be deemed to be an Acquiring Person for any purposes of this Agreement.
(b) "Affiliate" and "Associate" will have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of this Agreement.
(c) A Person will be deemed the "Beneficial Owner" of, and to
"Beneficially Own," any securities:
(i) the beneficial ownership of which such Person or any
of such Person's Affiliates or Associates, directly or indirectly, has
the right to acquire (whether such right is exercisable immediately or
only after the passage of time) pursuant to any agreement, arrangement
or understanding (whether or not in writing), or upon the exercise of
conversion rights, exchange rights, warrants, options or other rights
(in each case, other than upon exercise or exchange of the Rights);
provided, however, that a Person will not be deemed the Beneficial
Owner of, or to Beneficially Own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has or shares the right to vote
or dispose of, including pursuant to any agreement, arrangement or
understanding (whether or not in writing); or
(iii) of which any other Person is the Beneficial Owner, if
such Person or any of such Person's Affiliates or Associates has any
agreement, arrangement, or understanding (whether or not in writing)
with such other Person (or any of such other Person's Affiliates or
Associates) with respect to acquiring, holding, voting or disposing of
any securities of the Company;
-2-
<PAGE> 6
provided, however, that a Person will not be deemed the Beneficial Owner of, or
to Beneficially Own, any security (A) if such Person has the right to vote such
security pursuant to an agreement, arrangement or understanding (whether or not
in writing) which (1) arises solely from a revocable proxy given to such Person
in response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations of the Exchange Act and
(2) is not also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report), or (B) if such beneficial ownership arises
solely as a result of such Person's status as a "clearing agency," as defined
in Section 3(a)(23) of the Exchange Act; provided further, however, that
nothing in this paragraph (c) will cause a Person engaged in business as an
underwriter of securities to be the Beneficial Owner of, or to Beneficially
Own, any securities acquired through such Person's participation in good faith
in an underwriting syndicate until the expiration of 40 calendar days after the
date of such acquisition, or such later date as the Board of Directors of the
Company may determine in any specific case.
(d) "Business Day" means any day other than a Saturday, Sunday or
a day on which banking institutions in the State of New York (or such other
state in which the principal office of the Rights Agent is located) are
authorized or obligated by law or executive order to close.
(e) "Close of Business" on any given date means 5:00 P.M., Eastern
time, on such date; provided, however, that if such date is not a Business Day
it means 5:00 P.M., Eastern time, on the next succeeding Business Day.
(f) "Common Shares" when used with reference to the Company means
the shares of Common Stock, without par value, of the Company; provided,
however, that, if the Company is the continuing or surviving corporation in a
transaction described in Section 13(a)(ii), "Common Shares" when used with
reference to the Company means shares of the capital stock or units of the
equity interests with the greatest aggregate voting power of the Company.
"Common Shares" when used with reference to any corporation or other legal
entity other than the Company, including an Issuer, means shares of the capital
stock or units of the equity interests with the greatest aggregate voting power
of such corporation or other legal entity.
(g) "Company" means DTE Energy Company, a Michigan corporation.
(h) "Distribution Date" means the earlier of: (i) the Close of
Business on the tenth calendar day after the Share Acquisition Date, or (ii)
the Close of Business on the tenth Business Day (or, unless the Distribution
Date shall have previously occurred, such later date as may be specified by the
Board of Directors of the Company) after the date of the commencement of a
tender or exchange
-3-
<PAGE> 7
offer by any Person (other than the Company or any Related Person), if upon the
consummation thereof such Person would be the Beneficial Owner of 10% or more
of the then-outstanding Common Shares.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Expiration Date" means the earliest of (i) the Close of
Business on the Final Expiration Date, (ii) the time at which the Rights are
redeemed as provided in Section 23, and (iii) the time at which all exercisable
Rights are exchanged as provided in Section 24.
(k) "Final Expiration Date" means the tenth anniversary of the
Record Date.
(l) "Flip-in Event" means any event described in clauses (A), (B)
or (C) of Section 11(a)(ii).
(m) "Flip-over Event" means any event described in clauses (i),
(ii) or (iii) of Section 13(a).
(n) "Issuer" has the meaning set forth in Section 13(b).
(o) "Nasdaq" means The NASDAQ Stock Market.
(p) "Person" means any individual, firm, corporation or other
legal entity, and includes any successor (by merger or otherwise) of such
entity.
(q) "Preferred Shares" means shares of Series A Junior
Participating Preferred Stock, without par value, of the Company having the
rights and preferences set forth in the form of Certificates of Designation of
Series A Junior Participating Preferred Stock attached as Exhibit A.
(r) "Purchase Price" means initially $90.00 per one one-hundredth
of a Preferred Share, subject to adjustment from time to time as provided in
this Agreement.
(s) "Record Date" has the meaning set forth in the Recitals to
this Agreement.
(t) "Redemption Price" means $.01 per Right, subject to adjustment
by resolution of the Board of Directors of the Company to reflect any stock
split, stock dividend or similar transaction occurring after the Record Date.
(u) "Related Person" means (i) any Subsidiary of the Company or
(ii) any employee benefit or stock ownership plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant
to the terms of any such plan.
-4-
<PAGE> 8
(v) "Right" has the meaning set forth in the Recitals to this
Agreement.
(w) "Right Certificates" means certificates evidencing the Rights,
in substantially the form attached as Exhibit B.
(x) "Rights Agent" means The Detroit Edison Company, a Michigan
corporation, unless and until a successor Rights Agent has become such pursuant
to the terms of this Agreement, and thereafter, "Rights Agent" means such
successor Rights Agent.
(y) "Securities Act" means the Securities Act of 1933, as amended.
(z) "Share Acquisition Date" means the first date of public
announcement by the Company (by press release, filing made with the Securities
and Exchange Commission or otherwise) that an Acquiring Person has become such.
(aa) "Subsidiary" when used with reference to any Person means any
corporation or other legal entity of which a majority of the voting power of
the voting equity securities or equity interests is owned, directly or
indirectly, by such Person; provided, however, that for purposes of Section
13(b), "Subsidiary" when used with reference to any Person means any
corporation or other legal entity of which at least 20% of the voting power of
the voting equity securities or equity interests is owned, directly or
indirectly, by such Person.
(bb) "Trading Day" means any day on which the principal national
securities exchange on which the Common Shares are listed or admitted to
trading is open for the transaction of business or, if the Common Shares are
not listed or admitted to trading on any national securities exchange, a
Business Day.
(cc) "Triggering Event" means any Flip-in Event or Flip-over Event.
2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3, will also be, prior to the Distribution
Date, the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment and
hereby certifies that it complies with the requirements of the New York Stock
Exchange governing transfer agents and registrars. The Company may from time
to time act as Co-Rights Agent or appoint such Co-Rights Agent or Agents
(including The Detroit Edison Company if it is not the Rights Agent) as it may
deem necessary or desirable. Any actions which may be taken by the Rights
Agent pursuant to the terms of this Agreement may be taken by any such
Co-Rights Agent. To the extent that any Co-Rights Agent takes any action
pursuant to this Agreement, such Co-Rights Agent will be entitled to all of the
-5-
<PAGE> 9
rights and protections of, and subject to all of the applicable duties and
obligations imposed upon, the Rights Agent pursuant to the terms of this
Agreement.
3. Issue of Right Certificates. (a) Until the Distribution Date,
(i) the Rights will be evidenced by the certificates representing Common Shares
registered in the names of the record holders thereof (which certificates
representing Common Shares will also be deemed to be Right Certificates), (ii)
the Rights will be transferable only in connection with the transfer of the
underlying Common Shares, and (iii) the surrender for transfer of any
certificates evidencing Common Shares in respect of which Rights have been
issued will also constitute the transfer of the Rights associated with the
Common Shares evidenced by such certificates. On or as promptly as practicable
after the Record Date, the Company will send by first class, postage prepaid
mail, to each record holder of Common Shares as of the Close of Business on the
Record Date, at the address of such holder shown on the records of the Company
as of such date, a copy of a Summary of Rights to Purchase Preferred Stock in
substantially the form attached as Exhibit C.
(b) Rights will be issued by the Company in respect of all Common
Shares (other than Common Shares issued upon the exercise or exchange of any
Right) issued or delivered by the Company (whether originally issued or
delivered from the Company's treasury) after the Record Date but prior to the
earlier of the Distribution Date and the Expiration Date. Certificates
evidencing such Common Shares will have stamped on, impressed on, printed on,
written on, or otherwise affixed to them the following legend or such similar
legend as the Company may deem appropriate and as is not inconsistent with the
provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or transaction reporting system on
which the Common Shares may from time to time be listed or quoted, or to
conform to usage:
This Certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between DTE Energy
Company, a Michigan corporation, and The Detroit Edison Company, dated
as of September 23, 1997, as the same may be amended from time to time
(the "Rights Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal
executive offices of DTE Energy Company. The Rights are not
exercisable prior to the occurrence of certain events specified in the
Rights Agreement. Under certain circumstances, as set forth in the
Rights Agreement, such Rights may be redeemed, may expire, may be
amended, or may be evidenced by separate certificates and no longer be
evidenced by this Certificate. DTE Energy Company will mail to the
holder of this Certificate a copy of the Rights
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<PAGE> 10
Agreement, as in effect on the date of mailing, without charge
promptly after receipt of a written request therefor. Under certain
circumstances as set forth in the Rights Agreement, Rights
beneficially owned by an Acquiring Person or any Affiliate or
Associate of an Acquiring Person (as such terms are defined in the
Rights Agreement) may become null and void.
(c) As promptly as practicable after the Distribution Date, the
Company will prepare and execute, the Rights Agent will countersign and the
Company will send or cause to be sent (and the Rights Agent will, if requested,
send), by first class, insured, postage prepaid mail, to each record holder of
Common Shares as of the Close of Business on the Distribution Date, at the
address of such holder shown on the records of the Company, a Right Certificate
evidencing one Right for each Common Share so held, subject to adjustment as
provided herein. As of and after the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
(d) In the event that the Company purchases or otherwise acquires
any Common Shares after the Record Date but prior to the Distribution Date, any
Rights associated with such Common Shares will be deemed canceled and retired
so that the Company will not be entitled to exercise any Rights associated with
the Common Shares so purchased or acquired.
4. Form of Right Certificates. The Right Certificates (and the
form of election to purchase, the form of assignment and the form of election
to purchase without the payment of cash to be printed on the reverse thereof)
will be substantially in the form attached as Exhibit B with such changes and
marks of identification or designation, and such legends, summaries or
endorsements printed thereon, as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required
to comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or transaction
reporting system on which the Rights may from time to time be listed or quoted,
or to conform to usage. Subject to the provisions of Section 22, the Right
Certificates, whenever issued, on their face will entitle the holders thereof
to purchase such number of one one-hundredths of a Preferred Share as are set
forth therein at the Purchase Price set forth therein, but the Purchase Price,
the number and kind of securities issuable upon exercise of each Right and the
number of Rights outstanding will be subject to adjustment as provided herein.
5. Countersignature and Registration. (a) The Right Certificates
will be executed on behalf of the Company by its Chairman of the Board, any
Vice Chairman, its President or any Vice President, either manually or by
facsimile signature, and will have affixed thereto the Company's seal or a
facsimile thereof which
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<PAGE> 11
will be attested by the Secretary or an Assistant Secretary of the Company,
either manually or by facsimile signature. The Right Certificates will be
countersigned by the Rights Agent and will not be valid for any purpose unless
so countersigned by the manual, or if permitted by applicable law and stock
exchange regulations, facsimile signature of the Rights Agent. In case any
officer of the Company who signed any of the Right Certificates ceases to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless,
may be countersigned by the Rights Agent, and issued and delivered by the
Company with the same force and effect as though the person who signed such
Right Certificates had not ceased to be such officer of the Company; and any
Right Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Right Certificate, is a proper officer
of the Company to sign such Right Certificate, although at the date of the
execution of this Rights Agreement any such person was not such officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at the principal office of the Rights Agent designated for
such purpose and at such other offices as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or any transaction reporting system on
which the Rights may from time to time be listed or quoted, books for
registration and transfer of the Right Certificates issued hereunder. Such
books will show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a)
Subject to the provisions of Sections 7(d) and 14, at any time after the Close
of Business on the Distribution Date and prior to the Expiration Date, any
Right Certificate or Right Certificates representing exercisable Rights may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number
of one one-hundredths of a Preferred Share (or other securities, as the case
may be) as the Right Certificate or Right Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.
Any registered holder desiring to transfer, split up, combine or exchange any
such Right Certificate or Rights Certificates must make such request in a
writing delivered to the Rights Agent and must surrender the Right Certificate
or Right Certificates to be transferred, split up, combined or exchanged at the
principal office of the Rights Agent designated for such purpose. Thereupon or
as promptly as practicable thereafter, subject to the provisions of Sections
7(d) and 14, the Company will prepare, execute and deliver to the Rights Agent,
and the Rights Agent will countersign
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<PAGE> 12
and deliver, a Right Certificate or Right Certificates, as the case may be, as
so requested. The Company may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Right Certificate and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, if requested by the Company,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will prepare, execute and
deliver a new Right Certificate of like tenor to the Rights Agent and the
Rights Agent will countersign and deliver such new Right Certificate to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed
or mutilated.
7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date and prior to the Expiration Date, upon
surrender of the Right Certificate, with the form of election to purchase on
the reverse side thereof duly executed, to the Rights Agent at the office or
offices of the Rights Agent designated for such purpose, together with payment
in cash, in lawful money of the United States of America by certified check or
bank draft payable to the order of the Company, equal to the sum of (i) the
exercise price for the total number of securities as to which such surrendered
Rights are exercised and (ii) an amount equal to any applicable transfer tax
required to be paid by the holder of such Right Certificate in accordance with
the provisions of Section 9(c).
(b) Upon receipt of a Right Certificate representing exercisable
Rights with the form of election to purchase duly executed, accompanied by
payment as described above, the Rights Agent will promptly (i) requisition from
any transfer agent of the Preferred Shares (or make available, if the Rights
Agent is the transfer agent) certificates representing the number of one
one-hundredths of a Preferred Share to be purchased (and the Company hereby
irrevocably authorizes and directs its transfer agent to comply with all such
requests), or, if the Company elects to deposit Preferred Shares issuable upon
exercise of the Rights hereunder with a depositary agent, requisition from the
depositary agent depositary receipts representing such number of one
one-hundredths of a Preferred Share as are to be purchased (and the Company
hereby irrevocably authorizes and directs such depositary agent to comply with
all such requests), (ii) after receipt of such certificates (or depositary
receipts, as the case may be), cause the same to be delivered to or upon the
order of the registered holder of such Right Certificate, registered in such
name or names
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<PAGE> 13
as may be designated by such holder, (iii) when appropriate, requisition from
the Company or any transfer agent therefor (or make available, if the Rights
Agent is the transfer agent) certificates representing the number of equivalent
common shares to be issued in lieu of the issuance of Common Shares in
accordance with the provisions of Section 11(a)(iii), (iv) when appropriate,
after receipt of such certificates, cause the same to be delivered to or upon
the order of the registered holder of such Right Certificate, registered in
such name or names as may be designated by such holder, (v) when appropriate,
requisition from the Company the amount of cash to be paid in lieu of the
issuance of fractional shares in accordance with the provisions of Section 14
or in lieu of the issuance of Common Shares in accordance with the provisions
of Section 11(a)(iii), (vi) when appropriate, after receipt, deliver such cash
to or upon the order of the registered holder of such Right Certificate, and
(vii) when appropriate, deliver any due bill or other instrument provided to
the Rights Agent by the Company for delivery to the registered holder of such
Right Certificate as provided by Section 11(l).
(c) In case the registered holder of any Right Certificate
exercises less than all the Rights evidenced thereby, the Company will prepare,
execute and deliver a new Right Certificate evidencing Rights equivalent to the
Rights remaining unexercised and the Rights Agent will countersign and deliver
such new Right Certificate to the registered holder of such Right Certificate
or to his duly authorized assigns, subject to the provisions of Section 14.
(d) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company will be obligated to undertake any
action with respect to any purported transfer, split up, combination or
exchange of any Right Certificate pursuant to Section 6 or exercise of a Right
Certificate as set forth in this Section 7 unless the registered holder of such
Right Certificate has (i) completed and signed the certificate following the
form of assignment or the form of election to purchase, as applicable, set
forth on the reverse side of the Right Certificate surrendered for such
transfer, split up, combination, exchange or exercise and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company may
reasonably request.
8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange will, if surrendered to the Company or to any of its
stock transfer agents, be delivered to the Rights Agent for cancellation or in
canceled form, or, if surrendered to the Rights Agent, will be canceled by it,
and no Right Certificates will be issued in lieu thereof except as expressly
permitted by the provisions of this Agreement. The Company will deliver to the
Rights Agent for cancellation and
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<PAGE> 14
retirement, and the Rights Agent will so cancel and retire, any other Right
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent will deliver all canceled Right
Certificates to the Company, or will, at the written request of the Company,
destroy such canceled Right Certificates, and in such case will deliver a
certificate of destruction thereof to the Company.
9. Company Covenants Concerning Securities and Rights. The
Company covenants and agrees that:
(a) It will cause to be reserved and kept available out
of its authorized and unissued Preferred Shares or any Preferred
Shares held in its treasury, a number of Preferred Shares that will be
sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7.
(b) So long as the Preferred Shares (and, following the
occurrence of a Triggering Event, Common Shares and/or other
securities) issuable upon the exercise of the Rights may be listed on
a national securities exchange, it will endeavor to cause, from and
after such time as the Rights become exercisable, all securities
reserved for issuance upon the exercise of Rights to be listed on such
exchange upon official notice of issuance upon such exercise.
(c) It will take all such action as may be necessary to
ensure that all Preferred Shares (and, following the occurrence of a
Triggering Event, Common Shares and/or other securities) delivered
upon exercise of Rights, at the time of delivery of the certificates
for such securities, will be (subject to payment of the Purchase
Price) duly authorized, validly issued, fully paid and nonassessable
securities.
(d) It will pay when due and payable any and all federal
and state transfer taxes and charges that may be payable in respect of
the issuance or delivery of the Right Certificates and of any
certificates representing securities issued upon the exercise of
Rights; provided, however, that the Company will not be required to pay
any transfer tax or charge which may be payable in respect of any
transfer or delivery of Right Certificates to a person other than, or
the issuance or delivery of certificates or depositary receipts
representing securities issued upon the exercise of Rights in a name
other than that of, the registered holder of the Right Certificate
evidencing Rights surrendered for exercise, or to issue or deliver any
certificates or depositary receipts representing securities issued upon
the exercise of any Rights until any such tax or charge has been paid
(any such tax or charge being payable by the holder of such Right
Certificate at the time of surrender) or until it has been established
to the Company's reasonable satisfaction that no such tax is due.
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<PAGE> 15
(e) It will use its best efforts (i) to file on an
appropriate form, as soon as practicable following the later of the
Share Acquisition Date and the Distribution Date, a registration
statement under the Securities Act with respect to the securities
issuable upon exercise of the Rights, (ii) to cause such registration
statement to become effective as soon as practicable after such
filing, and (iii) to cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities and (B) the
Expiration Date. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend,
for a period of time after the date set forth in clause (i) of the
first sentence of this Section 9(e), the exercisability of the Rights
in order to prepare and file such registration statement and to permit
it to become effective. Upon any such suspension, the Company will
issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
In addition, if the Company determines that a registration statement
should be filed under the Securities Act or any state securities laws
following the Distribution Date, the Company may temporarily suspend
the exercisability of the Rights in each relevant jurisdiction until
such time as a registration statement has been declared effective and,
upon any such suspension, the Company will issue a public announcement
stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the
suspension is no longer in effect. Notwithstanding anything in this
Agreement to the contrary, the Rights will not be exercisable in any
jurisdiction if the requisite registration or qualification in such
jurisdiction has not been effected or the exercise of the Rights is
not permitted under applicable law.
(f) Notwithstanding anything in this Agreement to the
contrary, after the later of the Share Acquisition Date and the
Distribution Date it will not take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably
foreseeable that such action will eliminate or otherwise diminish the
benefits intended to be afforded by the Rights.
(g) In the event that the Company is obligated to issue
other securities of the Company and/or pay cash pursuant to Sections
11, 13, 14 or 24 it will make all arrangements necessary so that such
other securities and/or cash are available for distribution by the
Rights Agent, if and when appropriate.
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<PAGE> 16
10. Record Date. Each Person in whose name any certificate
representing Preferred Shares (or Common Shares and/or other securities, as the
case may be) is issued upon the exercise of Rights will for all purposes be
deemed to have become the holder of record of the Preferred Shares (or Common
Shares and/or other securities, as the case may be) represented thereby on, and
such certificate will be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the transfer books of
the Company for the Preferred Shares (or Common Shares and/or other securities,
as the case may be) are closed, such Person will be deemed to have become the
record holder of such securities on, and such certificate will be dated, the
next succeeding Business Day on which the transfer books of the Company for the
Preferred Shares (or Common Shares and/or other securities, as the case may be)
are open. Prior to the exercise of the Rights evidenced thereby, the holder of
a Right Certificate will not be entitled to any rights of a holder of any
security for which the Rights are or may become exercisable, including without
limitation the right to vote, to receive dividends or other distributions, or
to exercise any preemptive rights, and will not be entitled to receive any
notice of any proceedings of the Company, except as provided herein.
11. Adjustment of Purchase Price, Number and Kind of Securities or
Number of Rights. The Purchase Price, the number and kind of securities
issuable upon exercise of each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event that the Company at any time after the
Record Date (A) declares a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivides the outstanding Preferred Shares, (C)
combines the outstanding Preferred Shares into a smaller number of
Preferred Shares, or (D) issues any shares of its capital stock in a
reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification and/or the
number and/or kind of shares of capital stock issuable on such date
upon exercise of a Right, will be proportionately adjusted so that the
holder of any Right exercised after such time is entitled to receive
upon payment of the Purchase Price then in effect the aggregate number
and kind of shares of capital stock which, if such Right had been
exercised immediately prior to such date and at a time when the
transfer books of the Company for the Preferred Shares were open, the
holder of such Right would have owned upon such exercise (and, in the
case of a
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<PAGE> 17
reclassification, would have retained after giving effect to such
reclassification) and would have been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification; provided,
however, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate par value of the
shares of capital stock issuable upon exercise of one Right. If an
event occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii) or Section 13, the adjustment provided
for in this Section 11(a)(i) will be in addition to, and will be made
prior to, any adjustment required pursuant to Section 11(a)(ii) or
Section 13.
(ii) Subject to the provisions of Section 24, if:
(A) any Person becomes an Acquiring Person; or
(B) any Acquiring Person or any Affiliate or Associate of any
Acquiring Person, directly or indirectly, (1) merges into the Company
or otherwise combines with the Company and the Company is the
continuing or surviving corporation of such merger or combination
(other than in a transaction subject to Section 13), (2) merges or
otherwise combines with any Subsidiary of the Company, (3) in one or
more transactions (otherwise than in connection with the exercise,
exchange or conversion of securities exercisable or exchangeable for
or convertible into shares of any class of capital stock of the
Company or any of its Subsidiaries) transfers cash, securities or any
other property to the Company or any of its Subsidiaries in exchange
(in whole or in part) for shares of any class of capital stock of the
Company or any of its Subsidiaries or for securities exercisable or
exchangeable for or convertible into shares of any class of capital
stock of the Company or any of its Subsidiaries, or otherwise obtains
from the Company or any of its Subsidiaries, with or without
consideration, any additional shares of any class of capital stock of
the Company or any of its Subsidiaries or securities exercisable or
exchangeable for or convertible into shares of any class of capital
stock of the Company or any of its Subsidiaries (otherwise than as
part of a pro rata distribution to all holders of shares of any class
of capital stock of the Company, or any of its Subsidiaries), (4)
sells, purchases, leases, exchanges, mortgages, pledges, transfers or
otherwise disposes (in one or more transactions) to, from, with or of,
as the case may be, the Company or any of its Subsidiaries (otherwise
than in a transaction subject to Section 13), any property, including
securities, on terms and conditions less favorable to the Company than
the Company would be able to obtain in an arm's-length transaction
with an unaffiliated third party, (5) receives any compensation from
the Company or any of its Subsidiaries other than compensation as a
director or a regular full-time employee, in either case at rates
consistent with the Company's (or its Subsidiaries')
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<PAGE> 18
past practices, or (6) receives the benefit, directly or indirectly
(except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits
or other tax advantage provided by the Company or any of its
Subsidiaries; or
(C) during such time as there is an Acquiring Person,
there is any reclassification of securities of the Company (including
any reverse stock split), or any recapitalization of the Company, or
any merger or consolidation of the Company with any of its
Subsidiaries, or any other transaction or series of transactions
involving the Company or any of its Subsidiaries (whether or not with
or into or otherwise involving an Acquiring Person), other than a
transaction subject to Section 13, which has the effect, directly or
indirectly, of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities of the
Company or any of its Subsidiaries, or of securities exercisable or
exchangeable for or convertible into equity securities of the Company
or any of its Subsidiaries, of which an Acquiring Person, or any
Affiliate or Associate of any Acquiring Person, is the Beneficial
Owner;
then, and in each such case, proper provision will be made so that
each holder of a Right, except as provided below, will thereafter have
the right to receive, upon exercise thereof in accordance with the
terms of this Agreement at an exercise price per Right equal to the
product of the then-current Purchase Price multiplied by the number of
one one-hundredths of a Preferred Share for which a Right was
exercisable immediately prior to the date of the occurrence of such
Flip-in Event (or, if any other Flip-in Event shall have previously
occurred, the product of the then-current Purchase Price multiplied by
the number of one one-hundredths of a Preferred Share for which a
Right was exercisable immediately prior to the date of the first
occurrence of a Flip-in Event), in lieu of Preferred Shares, such
number of Common Shares as equals the result obtained by (x)
multiplying the then-current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to the date of the occurrence of such Flip- in Event
(or, if any other Flip-in Event shall have previously occurred,
multiplying the then-current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to the date of the first occurrence of a Flip-in
Event), and dividing that product by (y) 50% of the current per share
market price of the Common Shares (determined pursuant to Section
11(d)) on the date of the occurrence of such Flip-in Event.
Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Flip-in Event, any Rights that are
Beneficially Owned by (A) any Acquiring Person (or any Affiliate or
Associate of any Acquiring Person), (B) a
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<PAGE> 19
transferee of any Acquiring Person (or any such Affiliate or
Associate) who becomes a transferee after the occurrence of a Flip-in
Event, or (C) a transferee of any Acquiring Person (or any such
Affiliate or Associate) who became a transferee prior to or
concurrently with the occurrence of a Flip-in Event pursuant to either
(1) a transfer from an Acquiring Person to holders of its equity
securities or to any Person with whom it has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (2) a
transfer which the Board of Directors of the Company has determined is
part of a plan, arrangement or understanding which has the purpose or
effect of avoiding the provisions of this Section 11(a)(ii), and
subsequent transferees of any of such Persons, will be void without
any further action and any holder of such Rights will thereafter have
no rights whatsoever with respect to such Rights under any provision
of this Agreement. The Company will use all reasonable efforts to
ensure that the provisions of this Section 11(a)(ii) are complied
with, but will have no liability to any holder of Right Certificates
or any other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder. Upon the occurrence of a Flip-in
Event, no Right Certificate that represents Rights that are or have
become void pursuant to the provisions of this Section 11(a)(ii) will
thereafter be issued pursuant to Section 3 or Section 6, and any Right
Certificate delivered to the Rights Agent that represents Rights that
are or have become void pursuant to the provisions of this Section
11(a)(ii) will be canceled. Upon the occurrence of a Flip-over Event,
any Rights that shall not have been previously exercised pursuant to
this Section 11(a)(ii) shall thereafter be exercisable only pursuant
to Section 13 and not pursuant to this Section 11(a)(ii).
(iii) Upon the occurrence of a Flip-in Event, if there are
not sufficient Common Shares authorized but unissued or issued but not
outstanding to permit the issuance of all the Common Shares issuable
in accordance with Section 11(a)(ii) upon the exercise of a Right, the
Board of Directors of the Company will use its best efforts promptly
to authorize and, subject to the provisions of Section 9(e), make
available for issuance additional Common Shares or other equity
securities of the Company having equivalent voting rights and an
equivalent value (as determined in good faith by the Board of
Directors of the Company) to the Common Shares (for purposes of this
Section 11(a)(iii), "equivalent common shares"). In the event that
equivalent common shares are so authorized, upon the exercise of a
Right in accordance with the provisions of Section 7, the registered
holder will be entitled to receive (A) Common Shares, to the extent
any are available, and (B) a number of equivalent common shares, which
the Board of Directors of the Company has determined in good faith to
have a value equivalent to the excess of (x) the aggregate current
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<PAGE> 20
per share market value on the date of the occurrence of the most
recent Flip-in Event of all the Common Shares issuable in accordance
with Section 11(a)(ii) upon the exercise of a Right (the "Exercise
Value") over (y) the aggregate current per share market value on the
date of the occurrence of the most recent Flip-in Event of any Common
Shares available for issuance upon the exercise of such Right;
provided, however, that if at any time after 90 calendar days after
the latest of the Share Acquisition Date, the Distribution Date and
the date of the occurrence of the most recent Flip-in Event, there are
not sufficient Common Shares and/or equivalent common shares
available for issuance upon the exercise of a Right, then the Company
will be obligated to deliver, upon the surrender of such Right and
without requiring payment of the Purchase Price, Common Shares (to the
extent available), equivalent common shares (to the extent available)
and then cash (to the extent permitted by applicable law and any
agreements or instruments to which the Company is a party in
effect immediately prior to the Share Acquisition Date), which
securities and cash have an aggregate value equal to the excess of
(1) the Exercise Value over (2) the product of the then-current
Purchase Price multiplied by the number of one one-hundredths of a
Preferred Share for which a Right was exercisable immediately prior to
the date of the occurrence of the most recent Flip-in Event (or,
if any other Flip-in Event shall have previously occurred, the product
of the then-current Purchase Price multiplied by the number of
one one-hundredths of a Preferred Share for which a Right would have
been exercisable immediately prior to the date of the occurrence
of such Flip-in Event if no other Flip-in Event had previously
occurred). To the extent that any legal or contractual restrictions
prevent the Company from paying the full amount of cash payable in
accordance with the foregoing sentence, the Company will pay to
holders of the Rights as to which such payments are being made all
amounts which are not then restricted on a pro rata basis and will
continue to make payments on a pro rata basis as promptly as funds
become available until the full amount due to each such Rights
holder has been paid.
(b) In the event that the Company fixes a record date for the
issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or securities having
equivalent rights, privileges and preferences as the Preferred Shares (for
purposes of this Section 11(b), "equivalent preferred shares")) or securities
convertible into Preferred Shares or equivalent preferred shares at a price per
Preferred Share or equivalent preferred share (or having a conversion price per
share, if a security convertible into Preferred Shares or equivalent preferred
shares) less than the current per share market price of the Preferred Shares
(determined pursuant to Section 11(d)) on such record date, the Purchase Price
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<PAGE> 21
to be in effect after such record date will be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which is the number of Preferred Shares outstanding on such
record date plus the number of Preferred Shares which the aggregate offering
price of the total number of Preferred Shares and/or equivalent preferred
shares so to be offered (and/or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at such current per
share market price and the denominator of which is the number of Preferred
Shares outstanding on such record date plus the number of additional Preferred
Shares and/or equivalent preferred shares to be offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible); provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock issuable upon exercise of
one Right. In case such subscription price may be paid in a consideration part
or all of which is in a form other than cash, the value of such consideration
will be as determined in good faith by the Board of Directors of the Company,
whose determination will be described in a statement filed with the Rights
Agent. Preferred Shares owned by or held for the account of the Company will
not be deemed outstanding for the purpose of any such computation. Such
adjustment will be made successively whenever such a record date is fixed, and
in the event that such rights, options or warrants are not so issued, the
Purchase Price will be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) In the event that the Company fixes a record date for the
making of a distribution to all holders of Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness, cash (other than a regular periodic cash dividend), assets, stock
(other than a dividend payable in Preferred Shares) or subscription rights,
options or warrants (excluding those referred to in Section 11(b)), the
Purchase Price to be in effect after such record date will be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which is the current per share market price of
the Preferred Shares (as determined pursuant to Section 11(d)) on such record
date or, if earlier, the date on which Preferred Shares begin to trade on an
ex-dividend or when issued basis for such distribution, less the fair market
value (as determined in good faith by the Board of Directors of the Company,
whose determination will be described in a statement filed with the Rights
Agent) of the portion of the evidences of indebtedness, cash, assets or stock
so to be distributed or of such subscription rights, options or warrants
applicable to one Preferred Share, and the denominator of which is such current
per share market price of the Preferred Shares; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par
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<PAGE> 22
value of the shares of capital stock issuable upon exercise of one Right. Such
adjustments will be made successively whenever such a record date is fixed; and
in the event that such distribution is not so made, the Purchase Price will
again be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of Common Shares on any date will be
deemed to be the average of the daily closing prices per share of such
Common Shares for the 30 consecutive Trading Days immediately prior to
such date; provided, however, that in the event that the current per
share market price of the Common Shares is determined during a period
following the announcement by the issuer of such Common Shares of (A)
a dividend or distribution on such Common Shares payable in such
Common Shares or securities convertible into such Common Shares (other
than the Rights) or (B) any subdivision, combination or
reclassification of such Common Shares, and prior to the expiration of
30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share
market price will be appropriately adjusted to take into account
ex-dividend trading or to reflect the current per share market price
per Common Share equivalent. The closing price for each day will be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Common
Shares are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the Common Shares are listed or
admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the- counter market, as reported by Nasdaq or
such other system then in use, or, if on any such date the Common
Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market
maker making a market in the Common Shares selected by the Board of
Directors of the Company. If the Common Shares are not publicly held
or not so listed or traded, or are not the subject of available bid
and asked quotes, "current per share market price" will mean the fair
value per share as determined in good faith by the Board of Directors
of the Company, whose determination will be described in a statement
filed with the Rights Agent.
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<PAGE> 23
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares will be
determined in the same manner as set forth above for Common Shares in
Section 11(d)(i), other than the last sentence thereof. If the
current per share market price of the Preferred Shares cannot be
determined in the manner provided above, the "current per share market
price" of the Preferred Shares will be conclusively deemed to be an
amount equal to the current per share market price of the Common
Shares multiplied by one hundred (as such number may be appropriately
adjusted to reflect events such as stock splits, stock dividends,
recapitalizations or similar transactions relating to the Common
Shares occurring after the date of this Agreement). If neither the
Common Shares nor the Preferred Shares are publicly held or so listed
or traded, or the subject of available bid and asked quotes, "current
per share market price" of the Preferred Shares will mean the fair
value per share as determined in good faith by the Board of Directors
of the Company, whose determination will be described in a statement
filed with the Rights Agent. For all purposes of this Agreement, the
current per share market price of one one-hundredth of a Preferred
Share will be equal to the current per share market price of one
Preferred Share divided by one hundred.
(e) Except as set forth below, no adjustment in the Purchase Price
will be required unless such adjustment would require an increase or decrease
of at least 1% in such price; provided, however, that any adjustments which by
reason of this Section 11(e) are not required to be made will be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 11 will be made to the nearest cent or to the nearest one
one-millionth of a Preferred Share or one ten-thousandth of a Common Share or
other security, as the case may be. Notwithstanding the first sentence of this
Section 11(e), any adjustment required by this Section 11 will be made no later
than the earlier of (i) three years from the date of the transaction which
requires such adjustment and (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a), the holder of any Right thereafter exercised becomes entitled to receive
any securities of the Company other than Preferred Shares, thereafter the
number and/or kind of such other securities so receivable upon exercise of any
Right (and/or the Purchase Price in respect thereof) will be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Shares (and the
Purchase Price in respect thereof) contained in this Section 11, and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares
(and the Purchase Price in respect thereof) will apply on like terms to any
such other securities (and the Purchase Price in respect thereof).
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<PAGE> 24
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder will evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share issuable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company has exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price pursuant to Section
11(b) or Section 11(c), each Right outstanding immediately prior to the making
of such adjustment will thereafter evidence the right to purchase, at the
adjusted Purchase Price, that number of one one-hundredths of a Preferred Share
(calculated to the nearest one one-millionth of a Preferred Share) obtained by
(i) multiplying (x) the number of one one-hundredths of a Preferred Share
issuable upon exercise of a Right immediately prior to such adjustment of the
Purchase Price by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect, on or after the date of any adjustment
of the Purchase Price, to adjust the number of Rights in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share issuable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights will be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights will become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company will make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. Such record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, will be at least 10 calendar
days later than the date of the public announcement. If Right Certificates
have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company will, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date
Right Certificates evidencing, subject to the provisions of Section 14, the
additional Rights to which such holders are entitled as a result of such
adjustment, or, at the option of the Company, will cause to be distributed to
such holders of record in substitution and replacement for the Right
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof if required by the Company, new Right Certificates evidencing
all the Rights to which such holders are entitled after such adjustment. Right
Certificates so to be
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<PAGE> 25
distributed will be issued, executed, and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and will be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.
(j) Without respect to any adjustment or change in the Purchase
Price and/or the number and/or kind of securities issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number and kind of securities
which were expressed in the initial Right Certificate issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Preferred Shares or below the then par value, if any, of any other
securities of the Company issuable upon exercise of the Rights, the Company
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid
and nonassessable Preferred Shares or such other securities, as the case may
be, at such adjusted Purchase Price.
(l) In any case in which this Section 11 otherwise requires that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of Preferred Shares or other securities of the Company, if any,
issuable upon such exercise over and above the number of Preferred Shares or
other securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company delivers to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional Preferred Shares or other securities upon the occurrence of the
event requiring such adjustment.
(m) Notwithstanding anything in this Agreement to the contrary,
the Company will be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in its good faith judgment the Board of Directors of the
Company determines to be advisable in order that any (i) consolidation or
subdivision of the Preferred Shares, (ii) issuance wholly for cash of Preferred
Shares at less than the current per share market price therefor, (iii) issuance
wholly for cash of Preferred Shares or securities which by their terms are
convertible into or exchangeable for Preferred Shares, (iv) stock dividends, or
(v) issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to holders of its Preferred Shares is not taxable
to such stockholders.
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<PAGE> 26
(n) Notwithstanding anything in this Agreement to the contrary, in
the event that the Company at any time after the Record Date prior to the
Distribution Date (i) pays a dividend on the outstanding Common Shares payable
in Common Shares, (ii) subdivides the outstanding Common Shares, (iii) combines
the outstanding Common Shares into a smaller number of shares, or (iv) issues
any shares of its capital stock in a reclassification of the outstanding Common
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation), the
number of Rights associated with each Common Share then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, will be
proportionately adjusted so that the number of Rights thereafter associated
with each Common Share following any such event equals the result obtained by
multiplying the number of Rights associated with each Common Share immediately
prior to such event by a fraction the numerator of which is the total number of
Common Shares outstanding immediately prior to the occurrence of the event and
the denominator of which is the total number of Common Shares outstanding
immediately following the occurrence of such event. The adjustments provided
for in this Section 11(n) will be made successively whenever such a dividend is
paid or such a subdivision, combination or reclassification is effected.
12. Certificate of Adjusted Purchase Price or Number of
Securities. Whenever an adjustment is made as provided in Section 11 or
Section 13, the Company will promptly (a) prepare a certificate setting forth
such adjustment and a brief statement of the facts accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for the
Preferred Shares and the Common Shares a copy of such certificate, and (c) if
such adjustment is made after the Distribution Date, mail a brief summary of
such adjustment to each holder of a Right Certificate in accordance with
Section 26.
13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. (a) In the event that:
(i) at any time after a Person has become an Acquiring
Person, the Company consolidates with, or merges with or into, any
other Person and the Company is not the continuing or surviving
corporation of such consolidation or merger; or
(ii) at any time after a Person has become an Acquiring
Person, any Person consolidates with the Company, or merges with or
into the Company, and the Company is the continuing or surviving
corporation of such merger or consolidation and, in connection with
such merger or consolidation, all or part of the Common Shares is
changed into or exchanged for stock or other securities of any other
Person or cash or any other property; or
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<PAGE> 27
(iii) at any time after a Person has become an Acquiring
Person, the Company, directly or indirectly, sells or otherwise
transfers (or one or more of its Subsidiaries sells or otherwise
transfers), in one or more transactions, assets or earning power
(including without limitation securities creating any obligation
on the part of the Company and/or any of its Subsidiaries)
representing in the aggregate more than 50% of the assets or
earning power of the Company and its Subsidiaries (taken as a
whole) to any Person or Persons other than the Company or one or
more of its wholly owned Subsidiaries;
then, and in each such case, proper provision will be made so that
from and after the later of the Distribution Date and the date of the
occurrence of such Flip-over Event (A) each holder of a Right
thereafter has the right to receive, upon the exercise thereof in
accordance with the terms of this Agreement at an exercise price per
Right equal to the product of the then-current Purchase Price
multiplied by the number of one one-hundredths of a Preferred Share
for which a Right was exercisable immediately prior to the Share
Acquisition Date, such number of duly authorized, validly issued,
fully paid, nonassessable and freely tradeable Common Shares of the
Issuer, free and clear of any liens, encumbrances and other adverse
claims and not subject to any rights of call or first refusal, as
equals the result obtained by (x) multiplying the then-current
Purchase Price by the number of one one-hundredths of a Preferred
Share for which a Right is exercisable immediately prior to the Share
Acquisition Date and dividing that product by (y) 50% of the current
per share market price of the Common Shares of the Issuer (determined
pursuant to Section 11(d)), on the date of the occurrence of such
Flip-over Event; (B) the Issuer will thereafter be liable for, and
will assume, by virtue of the occurrence of such Flip-over Event, all
the obligations and duties of the Company pursuant to this Agreement;
(C) the term "Company" will thereafter be deemed to refer to the
Issuer; and (D) the Issuer will take such steps (including without
limitation the reservation of a sufficient number of its Common Shares
to permit the exercise of all outstanding Rights) in connection with
such consummation as may be necessary to assure that the provisions
hereof are thereafter applicable, as nearly as reasonably may be
possible, in relation to its Common Shares thereafter deliverable upon
the exercise of the Rights.
(b) For purposes of this Section 13, "Issuer" means (i) in
the case of any Flip-over Event described in Sections 13(a)(i) or (ii)
above, the Person that is the continuing, surviving, resulting or
acquiring Person (including the Company as the continuing or surviving
corporation of a transaction described in Section 13(a)(ii) above), and
(ii) in the case of any Flip-over Event described in Section 13(a)(iii)
above, the Person that is the party receiving the greatest portion of
the assets or earning power (including without limitation securities
creating any obligation on the part of the Company and/or any of its
Subsidiaries) transferred
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<PAGE> 28
pursuant to such transaction or transactions; provided, however, that, in any
such case, (A) if (1) no class of equity security of such Person is, at the
time of such merger, consolidation or transaction and has been continuously
over the preceding 12-month period, registered pursuant to Section 12 of the
Exchange Act, and (2) such Person is a Subsidiary, directly or indirectly, of
another Person, a class of equity security of which is and has been so
registered, the term "Issuer" means such other Person; and (B) in case such
Person is a Subsidiary, directly or indirectly, of more than one Person, a
class of equity security of two or more of which are and have been so
registered, the term "Issuer" means whichever of such Persons is the issuer of
the equity security having the greatest aggregate market value.
Notwithstanding the foregoing, if the Issuer in any of the Flip-over Events
listed above is not a corporation or other legal entity having outstanding
equity securities, then, and in each such case, (x) if the Issuer is directly
or indirectly wholly owned by a corporation or other legal entity having
outstanding equity securities, then all references to Common Shares of the
Issuer will be deemed to be references to the Common Shares of the corporation
or other legal entity having outstanding equity securities which ultimately
controls the Issuer, and (y) if there is no such corporation or other legal
entity having outstanding equity securities, (I) proper provision will be made
so that the Issuer creates or otherwise makes available for purposes of the
exercise of the Rights in accordance with the terms of this Agreement, a kind
or kinds of security or securities having a fair market value at least equal to
the economic value of the Common Shares which each holder of a Right would have
been entitled to receive if the Issuer had been a corporation or other legal
entity having outstanding equity securities; and (II) all other provisions of
this Agreement will apply to the issuer of such securities as if such
securities were Common Shares.
(c) The Company will not consummate any Flip-over Event if, (i) at
the time of or immediately after such Flip-over Event, there are or would be any
rights, warrants, instruments or securities outstanding or any agreements or
arrangements in effect which would eliminate or substantially diminish the
benefits intended to be afforded by the Rights, (ii) prior to, simultaneously
with or immediately after such Flip-over Event, the stockholders of the Person
who constitutes, or would constitute, the Issuer for purposes of Section 13(a)
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates or Associates, or (iii) the form or nature of the
organization of the Issuer would preclude or limit the exercisability of the
Rights. In addition, the Company will not consummate any Flip-over Event unless
the Issuer has a sufficient number of authorized Common Shares (or other
securities as contemplated in Section 13(b) above) which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior to such consummation the Company and the
Issuer have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in subsections (a) and
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<PAGE> 29
(b) of this Section 13 and further providing that as promptly as practicable
after the consummation of any Flip-over Event, the Issuer will:
(A) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities issuable
upon exercise of the Rights on an appropriate form, and use its best
efforts to cause such registration statement to (A) become effective
as soon as practicable after such filing and (B) remain effective
(with a prospectus at all times meeting the requirements of the
Securities Act) until the Expiration Date;
(B) take all such action as may be appropriate under, or
to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights;
and
(C) deliver to holders of the Rights historical financial
statements for the Issuer and each of its Affiliates which comply in
all respects with the requirements for registration on Form 10 under
the Exchange Act.
(d) The provisions of this Section 13 will similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Flip-over Event occurs at any time after the occurrence of a Flip-in
Event, except for Rights that have become void pursuant to Section 11(a)(ii),
Rights that shall not have been previously exercised will cease to be
exercisable in the manner provided in Section 11(a)(ii) and will thereafter be
exercisable in the manner provided in Section 13(a).
14. Fractional Rights and Fractional Securities. (a) The Company
will not be required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, the Company will pay as promptly as practicable to the registered
holders of the Right Certificates with regard to which such fractional Rights
otherwise would be issuable, an amount in cash equal to the same fraction of
the current market value of one Right. For the purposes of this Section 14(a),
the current market value of one Right is the closing price of the Rights for
the Trading Day immediately prior to the date on which such fractional Rights
otherwise would have been issuable. The closing price for any day is the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to
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<PAGE> 30
trading or, if the Rights are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported
by Nasdaq or such other system then in use, or, if on any such date the Rights
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If the Rights are
not publicly held or are not so listed or traded, or are not the subject of
available bid and asked quotes, the current market value of one Right will mean
the fair value thereof as determined in good faith by the Board of Directors of
the Company, whose determination will be described in a statement filed with
the Rights Agent.
(b) The Company will not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-hundredth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-hundredth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts pursuant to an appropriate agreement between
the Company and a depositary selected by it, provided that such agreement
provides that the holders of such depositary receipts have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one
one-hundredth of a Preferred Share, the Company may pay to any Person to whom
or which such fractional Preferred Shares would otherwise be issuable an amount
in cash equal to the same fraction of the current market value of one Preferred
Share. For purposes of this Section 14(b), the current market value of one
Preferred Share is the closing price of the Preferred Shares (as determined in
the same manner as set forth for Common Shares in the second sentence of
Section 11(d)(i)) for the Trading Day immediately prior to the date of such
exercise; provided, however, that if the closing price of the Preferred Shares
cannot be so determined, the closing price of the Preferred Shares for such
Trading Day will be conclusively deemed to be an amount equal to the closing
price of the Common Shares (determined pursuant to the second sentence of
Section 11(d)(i)) for such Trading Day multiplied by one hundred (as such
number may be appropriately adjusted to reflect events such as stock splits,
stock dividends, recapitalizations or similar transactions relating to the
Common Shares occurring after the date of this Agreement); provided further,
however, that if neither the Common Shares nor the Preferred Shares are
publicly held or listed or admitted to trading on any national securities
exchange, or the subject of available bid and asked quotes, the current market
value of one Preferred Share will mean the fair value thereof as determined in
good faith by the Board of Directors of the Company, whose
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<PAGE> 31
determination will be described in a statement filed with the Rights Agent.
(c) Following the occurrence of a Triggering Event, the Company
will not be required to issue fractions of Common Shares or other securities
issuable upon exercise or exchange of the Rights or to distribute certificates
which evidence any such fractional securities. In lieu of issuing any such
fractional securities, the Company may pay to any Person to whom or which such
fractional securities would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of one such security. For
purposes of this Section 14(c), the current market value of one Common Share or
other security issuable upon the exercise or exchange of Rights is the closing
price thereof (as determined in the same manner as set forth for Common Shares
in the second sentence of Section 11(d)(i)) for the Trading Day immediately
prior to the date of such exercise or exchange; provided, however, that if
neither the Common Shares nor any such other securities are publicly held or
listed or admitted to trading on any national securities exchange, or the
subject of available bid and asked quotes, the current market value of one
Common Share or such other security will mean the fair value thereof as
determined in good faith by the Board of Directors of the Company, whose
determination will mean the fair value thereof as be described in a statement
filed with the Rights Agent.
15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
the Common Shares); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the holder of any Common Shares), may in his own
behalf and for his own benefit enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, his right to exercise the Rights evidenced by such Right
Certificate in the manner provided in such Right Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations under this
Agreement, and injunctive relief against actual or threatened violations of the
obligations of any Person subject to this Agreement.
16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
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(a) Prior to the Distribution Date, the Rights are
transferable only in connection with the transfer of the Common Shares;
(b) After the Distribution Date, the Right Certificates
are transferable only on the registry books of the Rights Agent if
surrendered at the principal office of the Rights Agent designated for
such purpose, duly endorsed or accompanied by a proper instrument of
transfer;
(c) The Company and the Rights Agent may deem and treat
the person in whose name the Right Certificate (or, prior to the
Distribution Date, the associated Common Share certificate) is
registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the
Right Certificate or the associated Common Share certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent will be
affected by any notice to the contrary;
(d) Such holder expressly waives any right to receive any
fractional Rights and any fractional securities upon exercise or
exchange of a Right, except as otherwise provided in Section 14.
(e) Notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent will have any
liability to any holder of a Right or other Person as a result of its
inability to perform any of its obligations under this Agreement by
reason of any preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, or
any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, that
the Company will use its best efforts to have any such order, decree
or ruling lifted or otherwise overturned as soon as possible.
17. Right Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Right Certificate will be entitled to vote, receive dividends,
or be deemed for any purpose the holder of Preferred Shares or any other
securities of the Company which may at any time be issuable upon the exercise
of the Rights represented thereby, nor will anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of Directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except
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as provided in Section 25), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Right Certificate shall
have been exercised in accordance with the provisions of this Agreement or
exchanged pursuant to the provisions of Section 24.
18. Concerning the Rights Agent. (a) The Company will pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company will also indemnify the Rights Agent for, and hold it
harmless against, any loss, liability, suit, action, proceeding or expense,
incurred without negligence, bad faith, or willful misconduct on the part of
the Rights Agent, for anything done or omitted to be done by the Rights Agent
in connection with the acceptance and administration of this Agreement,
including the costs and expenses of defending against any claim of liability
arising therefrom, directly or indirectly.
(b) The Rights Agent will be protected and will incur no liability
for or in respect of any action taken, suffered, or omitted by it in connection
with its administration of this Agreement in reliance upon any Right
Certificate or certificate evidencing Preferred Shares or Common Shares or
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed, and, where necessary, verified or acknowledged, by
the proper Person or Persons.
19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent is a party, or any corporation succeeding to the
corporate trust business of the Rights Agent or any successor Rights Agent,
will be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21. If
at the time such successor Rights Agent succeeds to the agency created by this
Agreement any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of
the predecessor Rights Agent and deliver such Right Certificates so
countersigned; and if at that time any of the Right Certificates shall not have
been countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights
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<PAGE> 34
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates will have the full force provided in the Right Certificates
and in this Agreement.
(b) If at any time the name of the Rights Agent changes and at
such time any of the Right Certificates have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and if at that time any of the
Right Certificates have not been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates will have the full force
provided in the Right Certificates and in this Agreement.
20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, will be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such counsel
will be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent deems it necessary or desirable that any
fact or matter be proved or established by the Company prior to taking
or suffering any action hereunder, such fact or matter (unless other
evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate
signed by any one of the Chairman of the Board, the President, any
Vice President, the Secretary or the Treasurer of the Company and
delivered to the Rights Agent, and such certificate will be full
authorization to the Rights Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance
upon such certificate.
(c) The Rights Agent will be liable hereunder only for
its own negligence, bad faith or willful misconduct.
(d) The Rights Agent will not be liable for or by reason
of any of the statements of fact or recitals contained in this
Agreement or in the Right Certificates (except its countersignature
thereof) or be required to verify the same, but all such statements
and recitals are and will be deemed to have been made by the Company
only.
(e) The Rights Agent will not be under any responsibility
in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution and delivery hereof by the
Rights Agent) or in respect of the
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<PAGE> 35
validity or execution of any Right Certificate (except its
countersignature thereof); nor will it be responsible for any breach
by the Company of any covenant contained in this Agreement or in any
Right Certificate; nor will it be responsible for any adjustment
required under the provisions of Sections 11 or 13 (including any
adjustment which results in Rights becoming void) or responsible for
the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such
adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor
will it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of stock
or other securities to be issued pursuant to this Agreement or any
Right Certificate or as to whether any shares of stock or other
securities will, when issued, be duly authorized, validly issued,
fully paid and nonassessable.
(f) The Company will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or
performing by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from any one of the Chairman of the Board, the President,
any Vice President, the Secretary or the Treasurer of the Company, and
to apply to such officers for advice or instructions in connection
with its duties, and it will not be liable for any action taken or
suffered to be taken by it in good faith in accordance with
instructions of any such officer.
(h) The Rights Agent and any stockholder, director,
officer, or employee of the Rights Agent may buy, sell, or deal in any
of the Rights or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested,
or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein will preclude the Rights Agent from acting
in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents, and the Rights
Agent will not be answerable or accountable for any act, default,
neglect or misconduct of any such attorneys or agents or for any loss
to the Company resulting from any such act, default, neglect or
misconduct,
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provided reasonable care was exercised in the selection and continued
employment thereof. The Rights Agent will not be under any duty or
responsibility to ensure compliance with any applicable federal or
state securities laws in connection with the issuance, transfer or
exchange of Right Certificates.
(j) If, with respect to any Right Certificate surrendered
to the Rights Agent for exercise, transfer, split up, combination or
exchange, either (i) the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has
either not been completed or indicates an affirmative response to
clause 1 or 2 thereof, or (ii) any other actual or suspected
irregularity exists, the Rights Agent will not take any further action
with respect to such requested exercise, transfer, split up,
combination or exchange without first consulting with the Company, and
will thereafter take further action with respect thereto only in
accordance with the Company's written instructions.
21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 calendar days' notice in writing mailed to the Company and to each
transfer agent of the Preferred Shares or the Common Shares by registered or
certified mail, and to the holders of the Right Certificates by first class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 calendar days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Preferred Shares and the Common Shares by registered or certified mail, and to
the holders of the Right Certificates by first class mail. If the Rights Agent
resigns or is removed or otherwise becomes incapable of acting, the Company
will appoint a successor to the Rights Agent. If the Company fails to make
such appointment within a period of 30 calendar days after giving notice of
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (who will, with such notice, submit his Right Certificate for
inspection by the Company), then the registered holder of any Right Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or
by such a court, will be a corporation or other legal entity organized and
doing business under the laws of the United States or of any State, in good
standing, having an office or agency in the State of New York or elsewhere as
may then be required under any applicable stock exchange or other rule or
regulation, which is authorized under such laws to exercise corporate trust or
stock transfer powers and is subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent will be vested with the same powers, rights, duties, and
responsibilities as if it had
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been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent will deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act, or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company will file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Preferred Shares or the Common Shares, and mail a notice thereof
in writing to the registered holders of the Right Certificates. Failure to
give any notice provided for in this Section 21, however, or any defect
therein, will not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price per share and the number or kind of securities
issuable upon exercise of the Rights made in accordance with the provisions of
this Agreement. In addition, in connection with the issuance or sale by the
Company of Common Shares following the Distribution Date and prior to the
Expiration Date, the Company (a) will, with respect to Common Shares so issued
or sold pursuant to the exercise, exchange or conversion of securities (other
than Rights) issued prior to the Distribution Date which are exercisable or
exchangeable for, or convertible into Common Shares, and (b) may, in any other
case, if deemed necessary, appropriate or desirable by the Board of Directors
of the Company, issue Right Certificates representing an equivalent number of
Rights as would have been issued in respect of such Common Shares if they had
been issued or sold prior to the Distribution Date, as appropriately adjusted
as provided herein as if they had been so issued or sold; provided, however,
that (i) no such Right Certificate will be issued if, and to the extent that,
in its good faith judgment the Board of Directors of the Company determines
that the issuance of such Right Certificate could have a material adverse tax
consequence to the Company or to the Person to whom or which such Right
Certificate otherwise would be issued and (ii) no such Right Certificate will
be issued if, and to the extent that, appropriate adjustment otherwise has been
made in lieu of the issuance thereof.
23. Redemption. (a) Prior to the Expiration Date, the Board of
Directors of the Company may, at its option, redeem all but not less than all
of the then-outstanding Rights at the Redemption Price at any time prior to the
Close of Business on the later of (i) the date of the first occurrence of a
Triggering Event and (ii) the Distribution Date. Any such redemption will be
effective immediately upon the action of the Board of Directors of the Company
ordering the same, unless such action of the Board of Directors of the Company
expressly provides that such redemption
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<PAGE> 38
will be effective at a subsequent time or upon the occurrence or nonoccurrence
of one or more specified events (in which case such redemption will be
effective in accordance with the provisions of such action of the Board of
Directors of the Company).
(b) Immediately upon the effectiveness of the redemption of the
Rights as provided in Section 23(a), and without any further action and without
any notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights will be to receive the Redemption Price,
without interest thereon. Promptly after the effectiveness of the redemption
of the Rights as provided in Section 23(a), the Company will publicly announce
such redemption and, within 10 calendar days thereafter, will give notice of
such redemption to the holders of the then-outstanding Rights by mailing such
notice to all such holders at their last addresses as they appear upon the
registry books of the Company; provided, however, that the failure to give, or
any defect in, any such notice will not affect the validity of the redemption
of the Rights. Any notice which is mailed in the manner herein provided will
be deemed given, whether or not the holder receives the notice. The notice of
redemption mailed to the holders of Rights will state the method by which the
payment of the Redemption Price will be made. The Company may, at its option,
pay the Redemption Price in cash, Common Shares (based upon the current per
share market price of the Common Shares (determined pursuant to Section 11(d))
at the time of redemption), or any other form of consideration deemed
appropriate by the Board of Directors of the Company (based upon the fair
market value of such other consideration, determined by the Board of Directors
of the Company in good faith) or any combination thereof. The Company may, at
its option, combine the payment of the Redemption Price with any other payment
being made concurrently to holders of Common Shares and, to the extent that any
such other payment is discretionary, may reduce the amount thereof on account
of the concurrent payment of the Redemption Price. If legal or contractual
restrictions prevent the Company from paying the Redemption Price (in the form
of consideration deemed appropriate by the Board of Directors) at the time of
redemption, the Company will pay the Redemption Price, without interest,
promptly after such time as the Company ceases to be so prevented from paying
the Redemption Price.
24. Exchange. (a) The Board of Directors of the Company may, at
its option, at any time after the later of the Share Acquisition Date and the
Distribution Date, exchange all or part of the then-outstanding and exercisable
Rights (which will not include Rights that have become void pursuant to the
provisions of Section 11(a)(ii)) for Common Shares at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the Record Date (such
exchange ratio being hereinafter referred to as the "Exchange Ratio"). Any
such exchange will be effective immediately upon the action of the Board of
Directors of the Company ordering the same, unless such action of the Board of
Directors of the
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Company expressly provides that such exchange will be effective at a subsequent
time or upon the occurrence or nonoccurrence of one or more specified events
(in which case such redemption will be effective in accordance with the
provisions of such action of the Board of Directors of the Company).
Notwithstanding the foregoing, the Board of Directors of the Company will not
be empowered to effect such exchange at any time after any Person (other than
the Company or any Related Person), who or which, together with all Affiliates
and Associates of such Person, becomes the Beneficial Owner of 50% or more of
the then-outstanding Common Shares.
(b) Immediately upon the effectiveness of the exchange of any
Rights as provided in Section 24(a), and without any further action and without
any notice, the right to exercise such Rights will terminate and the only right
with respect to such Rights thereafter of the holder of such Rights will be to
receive that number of Common Shares equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. Promptly after the effectiveness
of the exchange of any Rights as provided in Section 24(a), the Company will
publicly announce such exchange and, within 10 calendar days thereafter, will
give notice of such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent; provided,
however, that the failure to give, or any defect in, such notice will not
affect the validity of such exchange. Any notice which is mailed in the manner
herein provided will be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Common Shares for Rights will be effected and, in the event of
any partial exchange, the number of Rights which will be exchanged. Any
partial exchange will be effected pro rata based on the number of Rights (other
than Rights which have become void pursuant to the provisions of Section
11(a)(ii)) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at
its option, may substitute for any Common Share exchangeable for a Right (i)
equivalent common shares (as such term is used in Section 11(a)(iii)), (ii)
cash, (iii) debt securities of the Company, (iv) other assets, or (v) any
combination of the foregoing, in any event having an aggregate value, as
determined in good faith by the Board of Directors of the Company (whose
determination will be described in a statement filed with the Rights Agent),
equal to the current market value of one Common Share (determined pursuant to
Section 11(d)) on the Trading Day immediately preceding the date of the
effectiveness of the exchange pursuant to this Section 24.
25. Notice of Certain Events. (a) If, after the Distribution
Date, the Company proposes (i) to pay any dividend payable in stock of any
class to the holders of Preferred Shares or to make any other distribution to
the holders of Preferred Shares (other than a regular periodic cash dividend),
(ii) to offer to the holders of Preferred Shares rights, options or warrants to
subscribe for or to
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purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights, or options, (iii) to effect any reclassification of
its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one
or more transactions, of assets or earning power (including without limitation
securities creating any obligation on the part of the Company and/or any of its
Subsidiaries) representing more than 50% of the assets and earning power of the
Company and its Subsidiaries, taken as a whole, to any other Person or Persons
other than the Company or one or more of its wholly owned Subsidiaries, (v) to
effect the liquidation, dissolution or winding up of the Company, or (vi) to
declare or pay any dividend on the Common Shares payable in Common Shares or to
effect a subdivision, combination or reclassification of the Common Shares
then, in each such case, the Company will give to each holder of a Right
Certificate, to the extent feasible and in accordance with Section 26, a notice
of such proposed action, which specifies the record date for the purposes of
such stock dividend, distribution or offering of rights, options or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice will be so given, in
the case of any action covered by clause (i) or (ii) above, at least 10
calendar days prior to the record date for determining holders of the Preferred
Shares for purposes of such action, and, in the case of any such other action,
at least 10 calendar days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of the Common Shares
and/or Preferred Shares, whichever is the earlier.
(b) In case any Triggering Event occurs, then, in any such case,
the Company will as soon as practicable thereafter give to the Rights Agent and
each holder of a Right Certificate, in accordance with Section 26, a notice of
the occurrence of such event, which specifies the event and the consequences of
the event to holders of Rights.
26. Notices. (a) Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company will be sufficiently given or made if sent by
first class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
DTE Energy Company
2000 2nd Avenue
Detroit, Michigan 48226-1279
Attention: Vice President and General Counsel
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<PAGE> 41
(b) Subject to the provisions of Section 21 hereof, any notice or
demand authorized by this Agreement to be given or made by the Company or by
the holder of any Right Certificate to or on the Rights Agent will be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
The Detroit Edison Company
2000 2d Avenue
Detroit, Michigan 48226-1277
Attention: Vice President and General Counsel
(c) Notices or demands authorized by this Agreement to be given or
made by the Company or the Rights Agent to the holder of any Right Certificate
(or, if prior the Distribution Date, to the holder of any certificate
evidencing Common Shares) will be sufficiently given or made if sent by first
class mail, postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Company.
27. Supplements and Amendments. Prior to the time at which the
Rights cease to be redeemable pursuant to Section 23, and subject to the last
sentence of this Section 27, the Company may in its sole and absolute
discretion, and the Rights Agent will if the Company so directs, supplement or
amend any provision of this Agreement in any respect without the approval of
any holders of Rights or Common Shares. From and after the time at which the
Rights cease to be redeemable pursuant to Section 23, and subject to the last
sentence of this Section 27, the Company may, and the Rights Agent will if the
Company so directs, supplement or amend this Agreement without the approval of
any holders of Rights or Common Shares in order (i) to cure any ambiguity, (ii)
to correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, (iii) to shorten or lengthen
any time period hereunder, or (iv) to supplement or amend the provisions
hereunder in any manner which the Company may deem desirable; provided that no
such supplement or amendment shall adversely affect the interests of the
holders of Rights as such (other than an Acquiring Person or an Affiliate or
Associate of an Acquiring Person), and no such supplement or amendment shall
cause the Rights again to become redeemable or cause this Agreement again to
become supplementable or amendable otherwise than in accordance with the
provisions of this sentence. Without limiting the generality or effect of the
foregoing, this Agreement may be supplemented or amended to provide for such
voting powers for the Rights and such procedures for the exercise thereof, if
any, as the Board of Directors of the Company may determine to be appropriate.
Upon the delivery of a certificate from an officer of the Company which states
that the proposed supplement or amendment is in compliance with the terms of
this Section 27, the Rights Agent will execute such supplement or amendment;
provided, however, that the failure or refusal of the Rights Agent to execute
such supplement or amendment will not affect the validity of any supplement or
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amendment adopted by the Board of Directors of the Company, any of which will
be effective in accordance with the terms thereof. Notwithstanding anything in
this Agreement to the contrary, no supplement or amendment may be made which
decreases the stated Redemption Price to an amount less than $0.01 per Right.
28. Successors; Certain Covenants. All the covenants and
provisions of this Agreement by or for the benefit of the Company or the Rights
Agent will be binding on and inure to the benefit of their respective
successors and assigns hereunder.
29. Benefits of This Agreement. Nothing in this Agreement will be
construed to give to any Person other than the Company, the Rights Agent, and
the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement. This Agreement will be for the sole and exclusive
benefit of the Company, the Rights Agent, and the registered holders of the
Right Certificates (or prior to the Distribution Date, the Common Shares).
30. Governing Law. This Agreement, each Right and each Right
Certificate issued hereunder will be deemed to be a contract made under the
internal substantive laws of the State of Michigan and for all purposes will be
governed by and construed in accordance with the internal substantive laws of
such State applicable to contracts to be made and performed entirely within
such State.
31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement will remain in full
force and effect and will in no way be affected, impaired or invalidated;
provided, however, that nothing contained in this Section 31 will affect the
ability of the Company under the provisions of Section 27 to supplement or
amend this Agreement to replace such invalid, void or unenforceable term,
provision, covenant or restriction with a legal, valid and enforceable term,
provision, covenant or restriction.
32. Descriptive Headings, Etc. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and will
not control or affect the meaning or construction of any of the provisions
hereof. Unless otherwise expressly provided, references herein to Articles,
Sections and Exhibits are to Articles, Sections and Exhibits of or to this
Agreement.
33. Determinations and Actions by the Board. For all purposes of
this Agreement, any calculation of the number of Common Shares outstanding at
any particular time, including for purposes of determining the particular
percentage of such outstanding Common Shares of which any Person is the
Beneficial Owner, will be made in
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accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act. The Board of Directors of the Company
will have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board of Directors
of the Company or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including without limitation the right and
power to (i) interpret the provisions of this Agreement and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including any determination as to whether particular Rights shall
have become void). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, any omission with
respect to any of the foregoing) which are done or made by the Board of
Directors of the Company in good faith will (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties and (y) not subject the Board of Directors of the Company to any
liability to any Person, including without limitation the Rights Agent and the
holders of the Rights.
34. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts will for all purposes be deemed to
be an original, and all such counterparts will together constitute but one and
the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
[SEAL]
Attest: DTE ENERGY COMPANY
By:
- -------------------------------------- -----------------------
Susan M. Beale John E. Lobbia
Vice President and Secretary Chairman and Chief
Executive Officer
[SEAL]
Attest: THE DETROIT EDISON COMPANY
By:
- -------------------------------------- -----------------------
Susan M. Beale [NAME]
Vice President and Secretary [TITLE]
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<PAGE> 45
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK
of
DTE ENERGY COMPANY
(Pursuant to Section 450.1302 of the
Business Corporation Act of the State of Michigan)
DTE Energy Company, a Michigan corporation (the "Company"), DOES
HEREBY CERTIFY:
That, pursuant to authority vested in the Board of Directors of the
Company by its Amended and Restated Articles of Incorporation, and pursuant to
the provisions of Section 450.1302 of the Michigan Business Corporation Act,
the Board of Directors of the Company has adopted the following resolution
providing for the issuance of a series of Preferred Stock:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company (hereinafter called the "Board
of Directors" or the "Board") by the Amended and Restated Articles of
Incorporation of the Company, a series of Preferred Stock, without par value
(the "Preferred Stock"), of the Company be, and it hereby is, created, and that
the designation and amount thereof and the powers, designations, preferences
and relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof are as
follows:
I. Designation and Amount
The shares of such series will be designated as Series A Junior
Participating Preferred Stock (the "Series A Preferred") and the number of
shares constituting the Series A Preferred is 1,500,000.
II. Dividends and Distributions
(a) Subject to the rights of the holders of any shares of any
series of Preferred Stock ranking prior to the Series A Preferred with respect
to dividends, the holders of shares of Series A Preferred, in preference to the
holders of Common Stock, without
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<PAGE> 46
par value (the "Common Stock"), of the Company, and of any other junior stock,
will be entitled to receive, when, as and if declared by the Board out of funds
legally available for the purpose, dividends payable in cash (except as
otherwise provided below) on such dates as are from time to time established
for the payment of dividends on the Common Stock (each such date being referred
to herein as a "Dividend Payment Date"), commencing on the first Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred (the "First Dividend Payment Date"), in an amount per share
(rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject
to the provision for adjustment hereinafter set forth, one hundred times the
aggregate per share amount of all cash dividends, and one hundred times the
aggregate per share amount (payable in kind) of all non-cash dividends, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Dividend Payment Date or,
with respect to the First Dividend Payment Date, since the first issuance of
any share or fraction of a share of Series A Preferred. In the event that the
Company at any time (i) declares a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares
of Common Stock, (iii) combines the outstanding shares of Common Stock into a
smaller number of shares, or (iv) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), then, in each such case
and regardless of whether any shares of Series A Preferred are then issued or
outstanding, the amount to which holders of shares of Series A Preferred would
otherwise be entitled immediately prior to such event under clause (ii) of the
preceding sentence will be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Company will declare a dividend on the Series A Preferred
as provided in the immediately preceding paragraph immediately after it
declares a dividend on the Common Stock (other than a dividend payable in
shares of Common Stock). Each such dividend on the Series A Preferred will be
payable immediately prior to the time at which the related dividend on the
Common Stock is payable.
(c) Dividends will accrue on outstanding shares of Series A
Preferred from the Dividend Payment Date next preceding the date of issue of
such shares, unless (i) the date of issue of such shares is prior to the record
date for the First Dividend Payment Date, in which case dividends on such
shares will accrue from the date of the first issuance of a share of Series A
Preferred or (ii) the
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<PAGE> 47
date of issue is a Dividend Payment Date or is a date after the record date for
the determination of holders of shares of Series A Preferred entitled to
receive a dividend and before such Dividend Payment Date, in either of which
events such dividends will accrue from such Dividend Payment Date. Accrued but
unpaid dividends will cumulate from the applicable Dividend Payment Date but
will not bear interest. Dividends paid on the shares of Series A Preferred in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares will be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board may fix a record date
for the determination of holders of shares of Series A Preferred entitled to
receive payment of a dividend or distribution declared thereon, which record
date will be not more than 60 calendar days prior to the date fixed for the
payment thereof.
III. Voting Rights
The holders of shares of Series A Preferred will have the following
voting rights:
(a) Subject to the provision for adjustment hereinafter
set forth, each share of Series A Preferred will entitle the holder
thereof to one vote on all matters submitted to a vote of the
stockholders of the Company.
(b) Except as otherwise provided herein, in any other
Preferred Stock Designation creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred and the holders of shares of Common Stock and any other
capital stock of the Company having general voting rights will vote
together as one class on all matters submitted to a vote of
stockholders of the Company.
(c) Except as set forth in the Amended and Restated
Articles of Incorporation or herein, or as otherwise provided by law,
holders of shares of Series A Preferred will have no voting rights.
IV. Certain Restrictions
(a) Whenever dividends or other dividends or distributions payable
on the Series A Preferred are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Preferred outstanding have been paid in full, the Company will not:
(i) Declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
shares of Series A Preferred;
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(ii) Declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution, or winding up) with the
shares of Series A Preferred, except dividends paid ratably on the
shares of Series A Preferred and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) Redeem, purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
shares of Series A Preferred; provided, however, that the Company may
at any time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the Company
ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the shares of Series A Preferred; or
(iv) Redeem, purchase or otherwise acquire for
consideration any shares of Series A Preferred, or any shares of stock
ranking on a parity with the shares of Series A Preferred, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board) to all holders of such shares upon such terms
as the Board, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, may determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Company will not permit any majority-owned subsidiary of
the Company to purchase or otherwise acquire for consideration any shares of
stock of the Company unless the Company could, under paragraph (a) of this
Article IV, purchase or otherwise acquire such shares at such time and in such
manner.
V. Reacquired Shares
Any shares of Series A Preferred purchased or otherwise acquired by
the Company in any manner whatsoever will be retired and canceled promptly
after the acquisition thereof. All such shares will upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Amended and Restated Articles
of Incorporation of the Company, or in any other Preferred Stock Designation
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
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<PAGE> 49
VI. Liquidation, Dissolution or Winding Up
Upon any liquidation, dissolution or winding up of the Company, no
distribution will be made (a) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution, or winding up) to the
shares of Series A Preferred unless, prior thereto, the holders of shares of
Series A Preferred have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided, however, that the holders of
shares of Series A Preferred will be entitled to receive an aggregate amount
per share, subject to the provision for adjustment hereinafter set forth, equal
to one hundred times the aggregate amount to be distributed per share to
holders of shares of Common Stock or (b) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution,
or winding up) with the shares of Series A Preferred, except distributions made
ratably on the shares of Series A Preferred and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution, or winding up. In the event the
Company at any time (i) declares a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivides the outstanding shares
of Common Stock, (iii) combines the outstanding shares of Common Stock into a
smaller number of shares, or (iv) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), then, in each such case
and regardless of whether any shares of Series A Preferred are then issued or
outstanding, the aggregate amount to which each holder of shares of Series A
Preferred would otherwise be entitled immediately prior to such event under the
proviso in clause (a) of the preceding sentence will be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
VII. Consolidation, Merger, Etc.
In the event that the Company enters into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then, in each such case, each share of Series A Preferred will at the
same time be similarly exchanged for or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to one
hundred times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Company at any
time (a) declares a dividend on the outstanding shares of Common Stock
A-5
<PAGE> 50
payable in shares of Common Stock, (b) subdivides the outstanding shares of
Common Stock, (c) combines the outstanding shares of Common Stock in a smaller
number of shares, or (d) issues any shares of its capital stock in a
reclassification of the outstanding shares of Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), then, in each such case
and regardless of whether any shares of Series A Preferred are then issued or
outstanding, the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred will be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
VIII. Redemption
The shares of Series A Preferred are not redeemable.
IX. Rank
The Series A Preferred rank, with respect to the payment of dividends
and the distribution of assets, junior to all other series of the Company's
Preferred Stock.
X. Amendment
Notwithstanding anything contained in the Amended and Restated
Articles of Incorporation of the Company to the contrary and in addition to any
other vote required by applicable law, the Amended and Restated Articles of
Incorporation of the Company may not be amended in any manner that would
materially alter or change the powers, preferences or special rights of the
Series A Preferred so as to affect them adversely without the affirmative vote
of the holders of at least 80% of the outstanding shares of Series A Preferred,
voting together as a single series.
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Company by its Chairman and Chief Executive Officer and attested
by its Vice President and Secretary this 23rd day of September, 1997.
____________________________
John E. Lobbia
Chairman and Chief Executive
Officer
Attest:
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<PAGE> 51
_________________________________
Susan M. Beale
Vice President and Secretary
A-7
<PAGE> 52
EXHIBIT B
FORM OF RIGHT CERTIFICATE
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER OCTOBER 6, 2007 (SUBJECT TO POSSIBLE EXTENSION
AT THE OPTION OF THE COMPANY) OR EARLIER IF REDEEMED, EXCHANGED OR
AMENDED. THE RIGHTS ARE SUBJECT TO REDEMPTION, EXCHANGE AND AMENDMENT
AT THE OPTION OF THE COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES SPECIFIED IN THE RIGHTS
AGREEMENT, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
AFFILIATE OR AN ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) OR A TRANSFEREE THEREOF MAY BECOME
NULL AND VOID.
Right Certificate
DTE ENERGY COMPANY
This certifies that _______________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions, and conditions of
the Rights Agreement, dated as of September 23, 1997 (the "Rights Agreement"),
between DTE Energy Company, a Michigan corporation (the "Company"), and The
Detroit Edison Company, a Michigan corporation (the "Rights Agent"), to
purchase from the Company at any time after the Distribution Date (as such term
is defined in the Rights Agreement) and prior to 5:00 P.M. (Eastern time) on
the Expiration Date (as such term is defined in the Rights Agreement) at the
principal office or offices of the Rights Agent designated for such purpose,
one one-hundredth of a fully paid nonassessable share of Series A Junior
Participating Preferred Stock, no par value per share (the "Preferred Shares"),
of the Company, at a purchase price of $90.00 per one one-hundredth of a
Preferred Share (the "Purchase Price"), upon presentation and surrender of this
Right Certificate with the Form of Election to Purchase and related Certificate
duly executed. If this Right Certificate is exercised in part, the holder will
be entitled to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised. The number of
Rights evidenced by this Right Certificate (and the number of one
one-hundredths of a Preferred Share which may be purchased upon exercise
thereof) set forth above, and the Purchase Price set forth above, are the
number and Purchase Price as of the date of the Rights Agreement, based on the
Preferred Shares as constituted at such date.
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<PAGE> 53
As provided in the Rights Agreement, the Purchase Price and/or the
number and/or kind of securities issuable upon the exercise of the Rights
evidenced by this Right Certificate are subject to adjustment upon the
occurrence of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities of the Rights Agent,
the Company and the holders of the Right Certificates, which limitations of
rights include the temporary suspension of the exercisability of the Rights
under the circumstances specified in the Rights Agreement. Copies of the
Rights Agreement are on file at the above-mentioned office of the Rights Agent
and can be obtained from the Company without charge upon written request
therefor. Terms used herein with initial capital letters and not defined
herein are used herein with the meanings ascribed thereto in the Rights
Agreement.
Pursuant to the Rights Agreement, from and after the occurrence of a
Flip-in Event, any Rights that are Beneficially Owned by (i) any Acquiring
Person (or any Affiliate or Associate of any Acquiring Person), (ii) a
transferee of any Acquiring Person (or any such Affiliate or Associate) who
becomes a transferee after the occurrence of a Flip-in Event, or (iii) a
transferee of any Acquiring Person (or any such Affiliate or Associate) who
became a transferee prior to or concurrently with the Flip-in Event pursuant to
either (a) a transfer from an Acquiring Person to holders of its equity
securities or to any Person with whom it has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (b) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has the purpose or effect of avoiding
certain provisions of the Rights Agreement, and subsequent transferees of any
of such Persons, will be void without any further action and any holder of such
Rights will thereafter have no rights whatsoever with respect to such Rights
under any provision of the Rights Agreement. From and after the occurrence of
a Flip-in Event, no Right Certificate will be issued that represents Rights
that are or have become void pursuant to the provisions of the Rights
Agreement, and any Right Certificate delivered to the Rights Agent that
represents Rights that are or have become void pursuant to the provisions of
the Rights Agreement will be canceled.
This Right Certificate, with or without other Right Certificates, may
be transferred, split up, combined or exchanged for another Right Certificate
or Right Certificates entitling the holder to purchase a like number of one
one-hundredths of a Preferred Share (or other securities, as the case may be)
as the Right Certificate or Right Certificates surrendered entitled such holder
(or former holder in the case of a transfer) to purchase,
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<PAGE> 54
upon presentation and surrender hereof at the principal office of the Rights
Agent designated for such purpose, with the Form of Assignment (if appropriate)
and the related Certificate duly executed.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right or may be exchanged in whole or in part.
The Rights Agreement may be supplemented and amended by the Company, as
provided therein.
The Company is not required to issue fractions of Preferred Shares
(other than fractions which are integral multiples of one one- hundredth of a
Preferred Share, which may, at the option of the Company, be evidenced by
depositary receipts) or other securities issuable upon the exercise of any
Right or Rights evidenced hereby. In lieu of issuing such fractional Preferred
Shares or other securities, the Company may make a cash payment, as provided in
the Rights Agreement.
No holder of this Right Certificate, as such, will be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable upon the exercise of the Right or Rights represented hereby, nor will
anything contained herein or in the Rights Agreement be construed to confer
upon the holder hereof, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in the Rights Agreement), or
to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Right Certificate have been exercised in accordance
with the provisions of the Rights Agreement.
This Right Certificate will not be valid or obligatory for any purpose
until it has been countersigned by the Rights Agent.
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<PAGE> 55
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of __________, ____.
[SEAL]
ATTEST: DTE ENERGY COMPANY
By:
_________________________________________ _______________________
[Assistant] Secretary [Name]
[Title]
Countersigned:
THE DETROIT EDISON COMPANY
By: ________________________
Authorized Signature
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<PAGE> 56
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED, _______________ hereby sells, assigns and
transfers unto ________________________________________________________________
_______________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
________________________________________________________________ this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint _______________ Attorney, to transfer
the within Right Certificate on the books of the within-named Company, with
full power of substitution.
Dated: __________, ____
___________________
Signature
Signature Guaranteed:
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<PAGE> 57
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ]
are not being sold, assigned, transferred, split up, combined or exchanged by
or on behalf of a Person who is or was an Acquiring Person or an Affiliate or
Associate of any such Person (as such terms are defined in the Rights
Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Right Certificate from any Person who is, was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person.
Dated: __________, ____
_____________________
Signature
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<PAGE> 58
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate)
To DTE Energy Company:
The undersigned hereby irrevocably elects to exercise __________
Rights represented by this Right Certificate to purchase the one one-
hundredths of a Preferred Share or other securities issuable upon the exercise
of such Rights and requests that certificates for such securities be issued in
the name of and delivered to:
Please insert social security
or other identifying number:
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights is not all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
will be registered in the name of and delivered to:
Please insert social security
or other identifying number:___________________________________________________
_______________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated: __________, ____
_______________________
Signature
Signature Guaranteed:
B-7
<PAGE> 59
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Right Certificate from any Person who is, was, or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person.
Dated: __________, ____
__________________________
Signature
NOTICE
SIGNATURES ON THE FOREGOING FORM OF ASSIGNMENT AND FORM OF ELECTION TO
PURCHASE AND IN THE RELATED CERTIFICATES MUST CORRESPOND TO THE NAME AS WRITTEN
UPON THE FACE OF THIS RIGHT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE PROGRAM) PURSUANT TO RULE 17AD-15
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
B-8
<PAGE> 60
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
The Board of Directors (the "Board") of DTE Energy Company, a Michigan
corporation (the "Company"), has declared a dividend distribution of one right
(a "Right") for each outstanding share of Common Stock, without par value (the
"Common Shares"), of the Company. The distribution is payable on October 6,
1997 the "Record Date") to the stockholders of record as of the close of
business on the Record Date. Each Right entitles the registered holder thereof
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, without par value (the "Preferred Shares"), of
the Company at a price (the "Purchase Price") of $90.00 per one one-hundredth
of a Preferred Share, subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement, dated as of September 23, 1997 (the
"Rights Agreement"), between the Company and The Detroit Edison Company, as
Rights Agent (the "Rights Agent").
Under the Rights Agreement, the Rights will be evidenced by the
certificates evidencing Common Shares until the earlier (the "Distribution
Date") of: (i) the close of business on the tenth calendar day (or such later
date as may be specified by the Board) following the first date (the "Share
Acquisition Date") of public announcement that a person (other than the
Company, a subsidiary or employee benefit or stock ownership plan of the
Company or any of its affiliates or associates), together with its affiliates
and associates, has acquired beneficial ownership of 10% or more of the
outstanding Common Shares (any such person being hereinafter called an
"Acquiring Person") or (ii) the close of business on the tenth business day (or
such later date as may be specified by the Board) following the commencement of
a tender offer or exchange offer by a person (other than the Company, a
subsidiary or employee benefit or stock ownership plan of the Company or any of
its affiliates or associates), the consummation of which would result in
beneficial ownership by such person 10% or more of the outstanding Common
Shares.
The Rights Agreement provides that, until the Distribution Date, the
Rights may be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), any
certificate evidencing Common Shares of the Company issued upon transfer or new
issuance of the Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates
evidencing Common Shares will also constitute the transfer of the Rights
associated with such certificates. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of Common Shares as of the
close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights. No Right is exercisable at any
time prior to the Distribution Date. The
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<PAGE> 61
Rights will expire on the tenth anniversary of the Record Date (the "Final
Expiration Date") unless earlier redeemed, exchanged or amended by the Company
as described below. Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including the right to
vote or to receive dividends.
The Purchase Price payable, and the number of the Preferred Shares or
other securities issuable, upon exercise of the Rights will be subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of Preferred Shares of certain
rights or warrants to subscribe for or purchase the Preferred Shares at a
price, or securities convertible into the Preferred Shares with a conversion
price, less than the then-current market price of the Preferred Shares, or
(iii) upon the distribution to holders of the Preferred Shares of evidences of
indebtedness, cash (excluding regular periodic cash dividends), assets, stock
(excluding dividends payable in the Preferred Shares) or subscription rights or
warrants (other than those referred to above). The number of outstanding
Rights and the number of one one-hundredths of the Preferred Shares issuable
upon exercise of each Right will be subject to adjustment in the event of a
stock dividend on the Common Shares payable in Common Shares or a subdivision,
combination or reclassification of Common Shares occurring, in any such case,
prior to the Distribution Date.
The Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled, in connection with the
declaration of a dividend on the Common Shares, to a preferential dividend
payment equal to the greater of (i) $1.00 per share and (ii) an amount equal to
100 times the related dividend declared per Common Share. Subject to customary
anti-dilution provisions, in the event of liquidation, the holders of Preferred
Shares will be entitled to a preferential liquidation payment equal to the
greater of (a) $100 per share and (b) an amount equal to 100 times the
liquidation payment made per Common Share. Because of the nature of the
Preferred Shares' dividend and liquidation rights, the value of the one
one-hundredth interest in a Preferred Share purchasable upon exercise of a
Right should approximate the value of one Common Share.
Rights will be exercisable to purchase Preferred Shares only after the
Distribution Date occurs and prior to the occurrence of a Flip-in Event as
described below. A Distribution Date resulting from the commencement of a
tender offer or exchange offer described in clause (ii) of the second paragraph
of this summary could precede the occurrence of a Flip-in Event and thus result
in the Rights being exercisable to purchase Preferred Shares. A Distribution
Date resulting from any occurrence described in clause (i) of the second
paragraph of this summary would necessarily follow the occurrence of a Flip-in
Event and thus result in the
C-2
<PAGE> 62
Rights being exercisable to purchase Common Shares or other securities as
described below.
Under the Rights Agreement, in the event (a "Flip-in Event") that (i)
any person, together with its affiliates and associates, becomes the beneficial
owner of 10% or more of the outstanding Common Shares, (ii) any Acquiring
Person or any affiliate or associate thereof merges into or combines with the
Company and the Company is the surviving corporation, (iii) any Acquiring
Person or any affiliate or associate thereof effects certain other transactions
with the Company, or (iv) during such time as there is an Acquiring Person the
Company effects certain transactions, in each case as described in the Rights
Agreement, then, in each such case, proper provision will be made so that from
and after the latest of the Share Acquisition Date, the Distribution Date and
the date of the occurrence of such Flip-in Event each holder of a Right, other
than Rights that are or were owned beneficially by an Acquiring Person (which,
from and after the date of a Flip-in Event, will be void), will have the right
to receive, upon exercise thereof at the then-current exercise price of the
Right, that number of Common Shares (or, under certain circumstances, an
economically equivalent security or securities of the Company) that at the time
of such Flip-in Event have a market value of two times the exercise price of
the Right.
In the event (a "Flip-over Event") that, at any time after a person
has become an Acquiring Person, (i) the Company merges with or into any person
and the Company is not the surviving corporation, (ii) any person merges with
or into the Company and the Company is the surviving corporation, but all or
part of the Common Shares are changed or exchanged for stock or other
securities of any other person or cash or any other property, or (iii) 50% or
more of the Company's assets or earning power, including securities creating
obligations of the Company, are sold, in each case as described in the Rights
Agreement, then, in each such case, proper provision will be made so that from
and after the later of the Distribution Date and the date of the occurrence of
such Flip-over Event each holder of a Right, other than Rights which have
become void, will have the right to receive, upon the exercise thereof at the
then-current exercise price of the Right, that number of shares of common stock
(or, under certain circumstances, an economically equivalent security or
securities) of such other person that at the time of such Flip-over Event have
a market value of two times the exercise price of the Right.
From and after the later of the Share Acquisition Date and the
Distribution Date, Rights (other than any Rights that have become void) will be
exercisable as described above, upon payment of the aggregate exercise price in
cash. In addition, at any time after the later of the Share Acquisition Date
and the Distribution Date and prior to the acquisition by any person or group
of affiliated or associated persons of 50% or more of the outstanding Common
Shares, the Company may exchange the Rights (other than any rights
C-3
<PAGE> 63
that have become void), in whole or in part, at an exchange ratio of one Common
Share per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment in the Purchase
Price of at least 1%. The Company will not be required to issue fractional
Preferred Shares (other than fractions that are integral multiples of one
one-hundredth of a Preferred Share, which may, at the option of the Company, be
evidenced by depositary receipts) or fractional Common Shares or other
securities issuable upon the exercise of Rights. In lieu of issuing such
securities, the Company may make a cash payment, as provided in the Rights
Agreement.
The Company may, at its option, redeem the Rights in whole, but not in
part, at a price of $.01 per Right, subject to adjustment (the "Redemption
Price"), at any time prior to the close of business on the later of (i) the
date of the first occurrence of any Flip-in Event or Flip-over Event and (ii)
the Distribution Date. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price.
The Rights Agreement may be amended by the Company without the
approval of any holders of Rights Certificates, including amendments that
increase or decrease the Purchase Price, that add other events requiring
adjustment to the Purchase Price payable and the number of the Preferred Shares
or other securities issuable upon the exercise of the Rights or that modify
procedures relating to the redemption of the Rights, except that no amendment
may be made that decreases the stated Redemption Price to an amount less than
$.01 per Right.
The Board will have the exclusive power and authority to administer
the Rights Agreement and to exercise all rights and powers specifically granted
to the Board or to the Company therein, or as may be necessary or advisable in
the administration of the Rights Agreement, including without limitation the
right and power to interpret the provisions of the Rights Agreement and to make
all determinations deemed necessary or advisable for the administration of the
Rights Agreement (including any determination to redeem or not redeem the
Rights or to amend or not amend the Rights Agreement). All such actions,
calculations, interpretations and determinations (including any omission with
respect to any of the foregoing) which are done or made by the Board in good
faith will be final, conclusive and binding on the Company, the Rights Agent,
the holders of the Rights and all other parties and will not subject the Board
to any liability to any person, including without limitation the Rights Agent
and the holders of the Rights.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an exhibit to a Registration
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<PAGE> 64
Statement on Form 8-A. A copy of the Rights Agreement is available free of
charge from the Company.
This summary description of the Rights is as of the Record Date, does
not purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated herein by this reference.
C-5
<PAGE> 1
EXHIBIT 99.A6
MCN CORPORATION
FIRST AMENDMENT TO RIGHTS AGREEMENT
FIRST AMENDMENT, dated as of September 19, 1994 (the "Amendment"), to
the Rights Agreement, dated as of December 20, 1989 (the "Rights Agreement"),
between MCN CORPORATION, a Michigan corporation (the "Company"), and NBD BANK,
N.A. ("NBD") as successor in interest to NATIONAL BANK OF DETROIT.
W I T N E S S E T H:
--------------------
WHEREAS, NBD is currently the Rights Agent under the Rights Agreement;
and
WHEREAS, NBD desires to resign as Rights Agent and the Company desires
to appoint First Chicago Trust Company of New York as the successor Rights
Agent;
NOW, THEREFORE, pursuant to Section 27 of the Rights Agreement and in
consideration of the premises and mutual agreements set forth in the Rights
Agreement and this Amendment, the parties hereby agree as follows:
1. Resignation and Succession. NBD hereby resigns as the Rights Agent
under the Rights Agreement effective as of the date hereof. The Company
hereby appoints First Chicago Trust Company of New York as the
successor Rights Agent under the Rights Agreement. First Chicago Trust
Company of New York hereby accepts the appointment as the Rights Agent
and agrees to the terms of the Rights Agreement.
2. Change of Rights Agent. The fifth sentence of Section 21 of the Rights
Agreement is hereby amended to read as follows:
"Any successor Rights Agent, whether appointed by the Company or by
such a court, shall be a corporation organized and doing business under
the laws of the United States or of any State of the United States, in
good standing, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision
or examination by federal or state authority and which, at the time of
its appointment as Rights Agent, (a) has a combined capital and surplus
of at least $50 million or (b) is an affiliate of a corporation with a
combined capital and surplus of at least $50 million."
3. Notices. Section 26 of the Rights Agreement relating to notices is
hereby amended to delete the address of NBD and to substitute in its
place the following address:
<PAGE> 2
First Amendment to Rights Agreement
page 2
First Chicago Trust Company of New York
Tenders & Exchanges Administration
Suite 4660
525 Washington Blvd.
Jersey City, N.J. 07310
4. The term "Agreement" as used in the Rights Agreement shall be deemed to
refer to the Rights Agreement as amended hereby.
5. Except as set forth herein, the Rights Agreement shall remain in full
force and effect and shall be otherwise unaffected hereby.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
MCN CORPORATION
By: /s/ Daniel L. Schiffer
-----------------------------
Daniel L. Schiffer
Vice President, General Counsel and
Secretary
NBD Bank, N.A.
By: /s/ Ernest J. Beck
-----------------------------
Ernest J. Beck
Second Vice President
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By: /s/ James Gorostiola
-----------------------------
James Gorostiola
Assistant Vice President
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<PAGE> 3
MCN ENERGY GROUP INC.
SECOND AMENDMENT TO RIGHTS AGREEMENT
(July 23, 1997)
This Amendment (the "Amendment"), dated this 23rd day of July 1997,
amends the Rights Agreement (the "Rights Agreement") by and between MCN Energy
Group Inc., a Michigan corporation (formerly MCN Corporation) (the "Company"),
and First Chicago Trust Company of New York (the "Rights Agent"), as successor
to National Bank of Detroit. All terms not otherwise defined herein shall have
the meaning given such terms in the Rights Agreement.
WHEREAS, the Board of Directors of the Company has determined that
it is in the best interest of the Company and its stockholders to effect
certain amendments to the Rights Agreement;
WHEREAS, pursuant to Section 27 of the Rights Agreement the Company
may, subject to certain limitations, amend the Rights Agreement without the
approval of any holders of Rights Certificates to make any provisions with
respect to the Rights which the Company deems necessary or desirable.
NOW, THEREFORE, upon all of the terms and conditions set forth
hereinafter, the Company and the Rights Agent agree as follows:
1. Amendment.
(a) Subsection (a) of Section 1 of the Rights Agreement is hereby
amended to add the following sentence to the end of the definition of
"Acquiring Person":
"Notwithstanding the foregoing, if the Board of Directors
of the Company determines in good faith that a Person who
would otherwise be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph
(a), has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of
Common Shares so that such Person would no longer be an
"Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall
not be deemed to be an "Acquiring Person" for any purpose
of this Agreement."
(b) Subclause (i) of Section 7(a) of the Rights Agreement is hereby
amended to change the Final Expiration Date (as defined therein) from January
11, 2000 to July 23, 2007 by deleting the reference to "January 11, 2000" in
such subclause (i) and replacing it with "July 23, 2007".
(c) Section 7(b) of the Rights Agreement is hereby amended to read
in its entirety as follows:
<PAGE> 4
"The Purchase Price for each one one-hundredth of a Preferred Share purchasable
pursuant to the exercise of a Right shall initially be $300, and shall be
subject to adjustment from time to time as provided in Section 11 or 13 hereof
and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below."
(d) Subclause (iii) of Section 11(a) is hereby amended to read in
its entirety as follows:
"In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but
unissued to permit the exercise in full of the Rights in
accordance with the foregoing subclause (ii), the Company
shall take all such action as may be necessary to
authorize additional Common Shares for issuance upon
exercise of the Rights. In the event the Company shall,
after good faith effort, be unable to take all such
action as may be necessary to authorize such additional
Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon
exercise of a Right, a number of Preferred Shares or
fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or
fraction is equal to the current per share market price
of one Common Share as of the date of issuance of such
Preferred Shares or fraction thereof."
(e) The first sentence of Section 13 of the Rights Agreement is
hereby amended by adding the words "at any time after a Person becomes an
Acquiring Person," immediately following the words "directly or indirectly,"
such that Section 13 shall read in its entirety, as follows:
Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. In the event, directly or indirectly, at
any time after a Person has become an Acquiring Person,
(a) the Company shall consolidate with, or merge with and
into, any other Person, (b) any Person shall consolidate
with the Company, or merge with and into the Company and
the Company shall be the continuing or surviving
corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed
into or exchanged for stock or other securities of any
other Person (or the Company) or cash or any other
property, or (c) the Company shall sell or otherwise
transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one or more transactions,
assets or earning power aggregating 50% or more of the
assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person other
than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper
provision shall be made so that (i) each holder of a
2
<PAGE> 5
Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise
thereof at a price equal to the then current Purchase
Price multiplied by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu
of Preferred Shares, such number of Common Shares of such
other Person (including the Company as successor thereto
or as the surviving corporation) as shall equal the
result obtained by (A) multiplying the then current
Purchase Price by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per
share market price of the Common Shares of such other
Person (determined pursuant to Section 11(d) hereof) on
the date of consummation of such consolidation, merger,
sale or transfer; (ii) the issuer of such Common Shares
shall thereafter be liable for, and shall assume, by
virtue of such consolidation, merger, sale or transfer,
all the obligations and duties of the Company pursuant to
this Agreement; (iii) the term "Company" shall thereafter
be deemed to refer to such issuer; and (iv) such issuer
shall take such steps (including, but not limited to, the
reservation of a sufficient number of its Common Shares
in accordance with Section 9 hereof) in connection with
such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as
nearly as reasonably may be, in relation to the Common
Shares thereafter deliverable upon the exercise of the
Rights. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior
thereto the Company and such issuer shall have executed
and delivered to the Rights Agent a supplemental
agreement so providing. The Company shall not enter into
any transaction of the kind referred to in this Section
13 if at the time of such transaction there are any
rights, warrants, instruments or securities outstanding
or any agreements or arrangements which, as a result of
the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be
afforded by the Rights. The provisions of this Section
13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
(f) The Form of Right Certificate, set forth as Exhibit B to the
Rights Agreement, shall be amended by deleting from the front side thereof the
first sentence of the legend appearing thereon and replacing such first
sentence in its entirety with the following:
NOT EXERCISABLE AFTER JULY 23, 2007 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS.
3
<PAGE> 6
(g) The Form of Right Certificate, set forth as Exhibit B to the
Rights Agreement, shall be amended as follows:
(i) by deleting from the front side thereof the words "MCN
CORPORATION" which follow the words "Right Certificate" and replacing such
words with the words "MCN ENERGY GROUP INC."; and
(ii) by deleting the first sentence of the first paragraph
following the words "MCN ENERGY GROUP INC." and replacing such sentence in
its entirety as follows:
This certifies that _________, or registered assigns, is
the registered owner of the number of Rights set forth above,
each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement, dated as of
December 20, 1989, as amended as of July 23, 1997, between MCN
Energy Group Inc., a Michigan corporation (the "Company"), and
First Chicago Trust Company of New York (the "Rights Agent"), to
purchase from the Company at any time after the Distribution
Date (as such term is defined in the Rights Agreement) and prior
to 5:00 P.M., Detroit time, on July 23, 2007, at the principal
office of the Rights Agent or at its office or agency in New
York, New York or at the office of its successor as Rights
Agent, one one-hundredth of a fully paid non-assessable share of
Junior Participating Preferred Stock, Series A, without par
value (the "Preferred Shares") of the Company, at a purchase
price of $300 per one one-hundredth of a Preferred Share (the
"Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed.
(h) The Summary of Rights to Purchase Preferred Shares, set forth
as Exhibit C to the Rights Agreement, shall be amended by deleting from the
second sentence of the first paragraph thereof the word "$70" and
replacing it with the word "$300".
(i) The Summary of Rights to Purchase Preferred Shares, set forth
as Exhibit C to the Rights Agreement, shall be amended by deleting from the
fourth paragraph thereof the words "January 11, 2000" and replacing
them in their entirety with the words "July 23, 2007".
(j) The Summary of Rights to Purchase Preferred Shares, set
forth as Exhibit C to the Rights Agreement, shall be amended by deleting
in its entirety the fifteenth paragraph thereof and replacing such paragraph
with the following:
A copy of the Rights Agreement has been filed with the Securities
and Exchange Commission as an Exhibit to a Registration Statement on Form
8-A dated December 28, 1989, and a copy of this Amendment will be filed
with the Securities and Exchange Commission as an Exhibit to a
Registration Statement on Form 8-A/A dated July 28, 1997. A copy of the
Rights Agreement, as amended, is available free of charge from the
Company. This summary description of the Rights does not
4
<PAGE> 7
purport to be complete and is qualified in its entirety by reference to
the Rights Agreement, as amended, which is hereby incorporated herein by
reference.
2. Miscellaneous.
(a) Choice of Law. This Amendment shall be deemed to be a contract
made under the laws of the State of Michigan and for all purposes shall be
governed and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
(b) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
(c) Severability. If any term or provision of this Amendment is
held by a court of competent jurisdiction or other authority to be invalid,
void or unenforceable, the remainder of the terms and provisions of this
Amendment shall in no way be affected, impaired or invalidated.
(d) Existing Terms. The existing terms and conditions of the
Rights Agreement shall remain in full force and effect except as such terms
and conditions are specifically amended or conflict with the terms of this
Amendment.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed and delivered by its duly authorized officer on the
day and year first above written.
The Company: Rights Agent:
MCN ENERGY GROUP INC. FIRST CHICAGO TRUST COMPANY OF NEW YORK
By: /s/ Daniel L. Schiffer By: /s/ Craig Broomfield
----------------------------- ----------------------------
Its:Senior Vice President, Its: Assistant Vice President
----------------------------- ----------------------------
General Counsel and Secretary
5
<PAGE> 8
MCN ENERGY GROUP INC.
THIRD AMENDMENT
to
RIGHTS AGREEMENT
(October 4, 1999)
--------------------------------
THIS THIRD AMENDMENT dated as of October 4, 1999 (the "Amendment")
amends the Rights Agreement as amended (the "Rights Agreement") by and between
MCN Energy Group Inc., a Michigan corporation (formerly MCN Corporation) (the
"Company") and First Chicago Trust Company of New York, a New York corporation,
(the "Rights Agent"), as successor to National Bank of Detroit. All terms not
otherwise defined herein shall have the meaning given such terms in the
Agreement.
WHEREAS, the above-mentioned parties have previously entered into that
certain Rights Agreement dated as of December 20, 1989, as amended by an
Amendment dated as of September 19, 1994, and an Amendment dated as of July 23,
1997;
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interest of the Company and its stockholders to effect certain
amendments to the Rights Agreement;
WHEREAS, pursuant to Section 27 of the Rights Agreement the Company
may, subject to certain limitations, amend the Rights Agreement without the
approval of any holders of Rights Certificates to make any provisions with
respect to the Rights which the Company deems necessary or desirable;
WHEREAS, the Company will be entering into an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of October 4, 1999, among the Company,
DTE Energy Company, a Michigan corporation ("Parent") and DTE Enterprises, Inc.,
a Michigan corporation and a direct, wholly owned subsidiary of Parent ("Merger
Subsidiary"), whereby the Company will merge with and into Merger Subsidiary
(the "Merger") upon the terms and subject to the conditions set forth in the
Merger Agreement;
WHEREAS, the Board of Directors deems it desirable and in the best
interests of its shareholders that the transactions contemplated by the Merger
Agreement be consummated;
WHEREAS, Section 5.1.(p) of the Merger Agreement provides that, the
Company shall amend the Rights Agreement to provide that no "Distribution Date"
shall occur, that the Rights will not separate from the shares, that Parent
shall not become an "Acquiring Person" by reason or as a result of the
consummation of the Merger or any other transactions contemplated by the Merger
Agreement and that the Rights Agreement will expire immediately prior to the
consummation of the Merger;
<PAGE> 9
WHEREAS, such parties wish to amend the Rights Agreement in the manner
set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment.
(a) All capitalized terms used herein, unless otherwise defined herein,
shall have the meanings given them in the Rights Agreement, and each reference
in the Rights Agreement to "this Agreement," "hereof," "herein," "hereunder" or
"hereby" and each other similar reference shall be deemed to refer to the Rights
Agreement as amended hereby. All references to the Rights Agreement in any other
agreement between or among any of the parties hereto relating to the
transactions contemplated by the Rights Agreement shall be deemed to refer to
the Rights Agreement as amended hereby.
(b) The definition of "Acquiring Person" in Section 1(a) is hereby
amended by replacing it in its entirety with the following:
"(a) "Acquiring Person" shall mean any Person (as hereinafter defined)
who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as hereinafter defined) of 20% or more of the Common Shares of
the Company then outstanding, but shall not include the Company, any
Subsidiary (as hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any
entity holding Common Shares for or pursuant to the terms of any such
plan. Notwithstanding the foregoing, no Person shall become an
Acquiring Person as the result of an acquisition of Common Shares by
the Company which, by reducing the number of shares outstanding,
increases the proportionate number of shares beneficially owned by such
Person to 20% or more of the Common Shares of the Company then
outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 20% or more of the Common Shares of the Company
then outstanding by reason of share purchases by the Company and shall,
after such share purchases by the Company, become the Beneficial Owner
of any additional Common Shares of the Company, then such Person shall
be deemed to be an Acquiring Person; PROVIDED FURTHER that neither
Parent nor Merger Subsidiary nor any of Parent's affiliates shall
become an Acquiring Person by reason or as a result of the Merger or
any other transactions contemplated by the Merger Agreement.
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of
this paragraph (a), has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of Common Shares
so that such person would no longer be an "Acquiring Person," as
defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an "Acquiring Person" for
any purpose of this Rights Agreement."
(c) The definition of "Distribution Date" in Section 1(g) is hereby
amended by replacing
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<PAGE> 10
it in its entirety with the following:
"(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof; PROVIDED HOWEVER that no Distribution Date shall occur by
reason or as a result of the Merger or any other transactions
contemplated by the Merger Agreement."
(d) The definition of "Shares Acquisition Date" in Section 1(l) is
hereby amended by replacing it in its entirety with the following:
"(l) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring
Person has become such; PROVIDED THAT no Shares Acquisition Date shall
occur by reason or as a result of the Merger or any other transactions
contemplated by the Merger Agreement."
(e) The following difinitions are hereby added to Section 1:
"Merger" means the merger of the Company with and into Merger
Subsidiary upon the terms and subject to the conditions set forth in the Merger
Agreement."
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
October 4, 1999, among the Company, Merger Subsidiary and Parent as the same may
be amended pursuant to its terms."
"Merger Subsidiary" means DTE Enterprises, Inc., a Michigan
corporation and a direct, wholly owned subsidiary of DTE Energy Company, a
Michigan corporation."
"Parent" means DTE Energy Company, a Michigan corporation."
(f) Section 3(a) is hereby amended by replacing it in its entirety with
the following:
"Section 3. Issue of Right Certificates. (a) Until the earlier of (i)
the tenth day after the Shares Acquisition Date or (ii) the tenth
business day (or such later date as may be determined by action of the
Board of Directors prior to such time as any Person becomes an
Acquiring Person) after the date of the commencement by any Person
(other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any
entity holding Common Shares for or pursuant to the terms of any such
plan) of, or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the
terms of any such plan) to commence, a tender or exchange offer the
consummation of which would result in any Person becoming the
Beneficial Owner of Common Shares aggregating 20% or more of the then
outstanding Common Shares (including any such date which is after the
date of this Agreement and prior to the issuance of the Rights; the
earlier of such dates being herein referred to as the "Distribution
Date"), (x) the Rights will be
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<PAGE> 11
evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders
thereof or by the entries in the Company's registrar for Common Shares
which are evidenced by book-entry register only (which certificates or
entries shall also be deemed to be Right Certificates) and not by
separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer
of Common Shares; PROVIDED HOWEVER that no Distribution Date shall
occur by reason or as a result of the Merger or any other transactions
contemplated by the Merger Agreement. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights
Agent will countersign, and the Company will send or cause to be sent
(and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares
as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate,
in substantially the form of Exhibit B hereto (a "Right Certificate")
evidencing one Right for each Common Share so held. Notwithstanding the
foregoing, but subject to Section 14 hereof, Right Certificates will be
issued directly to participants in the Company's Dividend Reinvestment
Plan and not to the agent of the Company for such plan based on the
number of Common Shares beneficially owned by each participant pursuant
to such plan. As of the Distribution Date, the Rights will be evidenced
solely by such Right Certificates.
(g) Section 13 of the Agreement is hereby amended by replacing it in
its entirety as follows:
"Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. In the event, directly or indirectly, at any time after
a Person has become an Acquiring Person, (a) the Company shall
consolidate with, or merge with and into, any other Person, (b) any
Person shall consolidate with the Company, or merge with and into the
Company and the Company shall be the continuing or surviving
corporation of such merger and, in connection with such merger, all or
part of the Common Shares shall be changed into or exchanged for stock
or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or
one or more of its Subsidiaries shall sell or otherwise transfer), in
one or more transactions, assets or earning power aggregating 50% or
more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person other than the Company or one or
more of its wholly-owned Subsidiaries, then, and in each such case,
proper provision shall be made so that (i) each holder of a Right
(except as otherwise provided herein) shall thereafter have the right
to receive, upon the exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred
Shares, such number of Common Shares of such other Person (including
the Company as successor thereto or as the surviving corporation) as
shall equal the result obtained by (A) multiplying the then current
Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (B)
50% of the then current per share market price of the
-4-
<PAGE> 12
Common Shares of such other Person (determined pursuant to Section
11(d) hereof) on the date of consummation of such consolidation,
merger, sale or transfer; (ii) the issuer of such Common Shares shall
thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, sale or transfer, all the obligations and duties
of the Company pursuant to this Agreement; (iii) the term "Company"
shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the
reservation of a sufficient number of its Common Shares in accordance
with Section 9 hereof) in connection with such consummation as may be
necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to the Common
Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not consummate any such consolidation, merger, sale or
transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind
referred to in this Section 13 if at the time of such transaction there
are any rights, warrants, instruments or securities outstanding or any
agreements or arrangements which, as a result of the consummation of
such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights. The provisions of this
Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers; PROVIDED HOWEVER that the
provisions of this Section 13 shall not apply to Parent, Merger
Subsidiary, the Merger or the transactions contemplated by the Merger
Agreement.
(h) Section 7(a) of the Agreement is hereby amended by replacing it in
its entirety as follows:
"Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) The registered holder of any Right Certificate may exercise
the Rights evidenced thereby (except as otherwise provided herein) in
whole or in part at any time after the Distribution Date upon surrender
of the Right Certificate, with the form of election to purchase on the
reverse side thereof duly executed, to the Rights Agent at the
principal office of the Rights Agent or the office or agency of the
Rights Agent in New York, New York, together with payment of the
Purchase Price for each one one-hundredth of a Preferred Share as to
which the Rights are exercised, at or prior to the earliest of (i) the
close of business on July 23, 2007 (the "Final Expiration Date"), (ii)
the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), (iii) the time at which the Rights are
exchanged as provided in Section 24 hereof, or (iv) immediately prior
to the consummation of the merger of the Company with and into Merger
Subsidiary as contemplated by and in accordance with the Merger
Agreement.
2. Miscellaneous.
(a) Choice of Law. This Amendment shall be deemed to be a contract made
under the laws of the State of Michigan and for all purposes shall be governed
and construed in accordance with the laws of such State applicable to contracts
to be made and performed entirely within such State.
-5-
<PAGE> 13
(b) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(c) Severability. If any term or provision of this Amendment is held by
a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms and provisions of this Amendment shall
in no way be affected, impaired or invalidated.
(d) Existing Terms. The existing terms and conditions of the Agreement
shall remain in full force and effect except as such terms and conditions are
specifically amended or conflict with the terms of this Amendment.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
respective authorized officers of the parties hereto, in each case as of the day
and year first above written.
The Company:
MCN ENERGY GROUP INC.
By: /s/ Daniel L. Schiffer
----------------------------------
Name: Daniel L. Schiffer
Title: Senior Vice President,
General Counsel and Secretary
Rights Agent:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By: /s/ Michael S. Duncan
----------------------------------
Name: Michael S. Duncan
Title: Director, Corporate Actions
-6-
<PAGE> 1
EXHIBIT 99.C1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-89175
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DTE ENERGY COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
MICHIGAN 4911 38-3217752
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
2000 2ND AVENUE
DETROIT, MICHIGAN 48226-1279
(313) 235-4000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------
SUSAN M. BEALE
2000 2ND AVENUE
DETROIT, MICHIGAN 48226-1279
(313) 235-4000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------
Copies to:
<TABLE>
<S> <C> <C> <C>
JOSEPH B. FRUMKIN CHRISTOPHER C. NERN DANIEL L. SCHIFFER SETH A. KAPLAN
SULLIVAN & CROMWELL DTE ENERGY COMPANY MCN ENERGY GROUP INC. WACHTELL, LIPTON, ROSEN &
125 BROAD STREET 2000 2ND AVENUE 500 GRISWOLD STREET KATZ
NEW YORK, NEW YORK 10004 DETROIT, MICHIGAN 48226-1279 DETROIT, MICHIGAN 48226 51 WEST 52ND STREET
(212) 558-4000 (313) 235-4000 (313) 256-5500 NEW YORK, NEW YORK 10019
(212) 403-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[DTE ENERGY LOGO] [MCN ENERGY GROUP INC. LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Dear Fellow Shareholders:
On October 5, 1999, our companies announced the proposed merger of DTE
Energy Company and MCN Energy Group Inc. This merger will create the largest
electric and gas utility in Michigan and a premier regional energy provider with
operations spanning the energy value chain.
In order to complete our merger, the boards of directors of DTE Energy
Company and MCN Energy Group have each called special shareholders meetings for
Monday, December 20, 1999, 2:00 p.m. local time, at which MCN shareholders will
be asked to approve the merger agreement and DTE shareholders will be asked to
approve the issuance of shares of DTE common stock to be issued in the merger.
In the merger, MCN shareholders will have the right to elect to receive
either $28.50 in cash or 0.775 shares of DTE common stock in exchange for each
share of MCN common stock that they hold, subject to allocation and proration
procedures that ensure that 45% of the MCN shares are converted into shares of
DTE common stock and 55% are converted into cash.
Anthony F. Earley, Jr. Signature
- ------------------------------------------------------
Anthony F. Earley, Jr.
Chairman of the Board and
Chief Executive Officer
DTE Energy Company
There is also a possibility that some MCN shares that otherwise would be
converted into $28.50 in cash will be converted into shares of DTE common stock
in order to preserve tax-free treatment for MCN shareholders who exchange all
their shares of MCN common stock solely for shares of DTE common stock in the
merger.
An MCN shareholder who receives cash in the merger or who receives cash
instead of fractional shares of DTE common stock may recognize gain for tax
purposes.
YOUR VOTE IS VERY IMPORTANT. We cannot complete the merger unless we
receive the necessary approvals from our shareholders at the shareholders
meetings.
Whether or not you plan to attend your shareholders meeting, please take
the time to submit your proxy with voting instructions by mail, by telephone or
through the Internet in accordance with the instructions contained in this
document.
This document describes the shareholders meetings, the merger and other
related matters. Please read this entire document carefully.
Anthony F. Earley, Jr. Signature
- ------------------------------------------------------
Alfred R. Glancy III
Chairman of the Board and
Chief Executive Officer
MCN Energy Group Inc.
PLEASE SEE PAGE 10 FOR RISK FACTORS RELATING TO THE MERGER WHICH YOU SHOULD
CONSIDER.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
document or determined if this document is truthful or complete. Any
representation to the contrary is a criminal offense.
This Joint Proxy Statement/Prospectus is dated November 12, 1999, and is first
being mailed to shareholders on or about November 15, 1999.
<PAGE> 3
[DTE ENERGY LOGO]
DTE ENERGY COMPANY
2000 2ND AVENUE
DETROIT, MICHIGAN 48226-1279
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
To the Shareholders of DTE Energy Company:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of DTE Energy
Company, a Michigan corporation, will be held on Monday, December 20, 1999, at
2:00 p.m., local time, at the DTE Energy Building at 660 Plaza Drive, Detroit,
Michigan. The purpose of the DTE special meeting is to consider and to vote upon
the following matters:
1. A proposal to approve the issuance of shares of common stock,
without par value, of DTE Energy Company pursuant to the Agreement and Plan
of Merger, dated as of October 4, 1999 (as such agreement may be amended,
supplemented or otherwise modified from time to time), among DTE Energy
Company, MCN Energy Group Inc. and DTE Enterprises, Inc., a wholly owned
subsidiary of DTE, pursuant to which MCN will be merged with and into DTE
Enterprises and will become a wholly owned subsidiary of DTE.
2. Such other business as may properly come before the DTE special
meeting or any adjournment or postponements thereof.
The DTE board of directors has fixed the close of business on November 5,
1999, as the record date for the DTE special meeting, and only DTE shareholders
of record at such time will be entitled to notice of, and to vote at, the DTE
special meeting or any adjournment or postponements thereof. A complete list of
DTE shareholders entitled to vote at the DTE special meeting will be made
available for inspection by any DTE shareholder at the time and place of the DTE
special meeting.
A form of proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the DTE
special meeting accompany and form a part of this notice.
All shareholders entitled to notice of, and to vote at, the DTE special
meeting are cordially invited to attend the DTE special meeting in person.
However, whether or not you plan to attend the DTE special meeting, please
submit your proxy with voting instructions. You may submit your proxy with
voting instructions by mail if you promptly complete, sign, date and return the
accompanying proxy card in the enclosed self-addressed, stamped envelope. You
may also submit your proxy with voting instructions by telephone or through the
Internet in accordance with the instructions on the accompanying proxy card. Any
record holder who is present at the DTE special meeting may vote in person
instead of by proxy, thereby canceling any previous proxy. In any event, a proxy
may be revoked in writing, by telephone or through the Internet at any time
before the DTE special meeting.
ii
<PAGE> 4
THE DTE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
RECOMMENDS THAT DTE SHAREHOLDERS VOTE "FOR" THE ISSUANCE OF SHARES OF DTE ENERGY
COMPANY COMMON STOCK IN THE MERGER.
By Order of the Board of Directors,
Susan Beale Signature
Vice President and Corporate Secretary
Detroit, Michigan
November 12, 1999
THE INFORMATION AGENT FOR THE MERGER IS:
MORROW & CO., INC.
445 PARK AVENUE
NEW YORK, NY 10022
CALL TOLL FREE (800) 566-9061
------------------------
Your vote is important. Please submit a proxy with your voting instructions
by telephone, through the Internet or by returning your signed and dated proxy
by mail.
iii
<PAGE> 5
[MCN ENERGY GROUP INC. LOGO]
MCN ENERGY GROUP INC.
500 GRISWOLD STREET
DETROIT, MICHIGAN 48226
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
To the Shareholders of MCN Energy Group Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of MCN Energy
Group Inc., a Michigan corporation, will be held on Monday, December 20, 1999,
at 2:00 p.m., local time, on the 32nd floor of MCN's main office at 500 Griswold
Street, Detroit, Michigan. The purpose of the MCN special meeting is to consider
and to vote upon the following matters:
1. A proposal to approve the Agreement and Plan of Merger, dated as of
October 4, 1999 (as such agreement may be amended, supplemented or
otherwise modified from time to time), among DTE Energy Company, MCN Energy
Group Inc. and DTE Enterprises, Inc., pursuant to which MCN will be merged
with and into DTE Enterprises, a wholly owned subsidiary of DTE, and will
become a wholly owned subsidiary of DTE. In the merger, each outstanding
share of MCN common stock will, subject to allocation and proration
procedures, and tax adjustments necessary to preserve the status of the
merger as a reorganization under the Internal Revenue Code, be converted
into the right to receive either (i) $28.50 in cash or (ii) 0.775 shares of
DTE common stock.
2. Such other business related to the foregoing proposal as may
properly come before the MCN special meeting or any adjournments or
postponements thereof.
The MCN board of directors has fixed the close of business on November 5,
1999 as the record date for the MCN special meeting, and only MCN shareholders
of record at such time will be entitled to notice of, and to vote at, the MCN
special meeting or adjournments or postponements thereof. A complete list of MCN
shareholders entitled to vote at the MCN special meeting will be made available
for inspection by any MCN shareholder at the time and place of the MCN special
meeting.
A form of proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the MCN
special meeting accompany and form a part of this notice.
All shareholders entitled to notice of and to vote at the MCN special
meeting are cordially invited to attend the MCN special meeting in person.
However, whether or not you plan to attend the MCN special meeting, please
submit your proxy with voting instructions. You may submit your proxy with
voting instructions by mail if you promptly complete, sign, date and return the
accompanying proxy card in the enclosed self-addressed, stamped envelope. You
may also submit your proxy with voting instructions by telephone or through the
Internet in accordance with the instructions on the accompanying proxy card. Any
record holder who is present at the MCN special meeting may vote in person
instead of by proxy, thereby canceling any previous proxy. In any event, a proxy
may be revoked in writing, by telephone or through the Internet at any time
before the MCN special meeting.
iv
<PAGE> 6
THE MCN BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
RECOMMENDS THAT MCN SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT.
By Order of the Board of Directors,
Daniel Schiffer Signature
Senior Vice President, General Counsel
and Secretary
Detroit, Michigan
November 12, 1999
THE INFORMATION AGENT FOR THE MERGER IS:
CORPORATE INVESTOR COMMUNICATIONS INC.
111 COMMERCE ROAD
CARLSTADT, NJ 07072-2586
CALL MCN INVESTOR RELATIONS AT (800) 548-4655
------------------------
Your vote is important. Please submit a proxy with your voting instructions
by telephone, through the Internet or by returning your signed and dated proxy
by mail.
v
<PAGE> 7
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about DTE from other documents that are not included in or delivered with this
document. This information is available to you without charge upon your written
or oral request. You can obtain documents incorporated by reference in this
document, other than exhibits to those documents, by requesting them in writing
or by telephone from DTE at the following address:
DTE Energy Company
2000 2nd Avenue
Detroit, Michigan 48226-1279
(313) 235-7093
Attention: Corporate Secretary
If you would like to request documents, please do so by December 15, 1999,
in order to receive them before the DTE shareholder meeting.
See "Where You Can Find More Information" on page 118.
vi
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REFERENCES TO ADDITIONAL INFORMATION........................ vi
QUESTIONS AND ANSWERS ABOUT VOTING PROCEDURES FOR THE
MERGER.................................................... 1
SUMMARY..................................................... 2
The Companies............................................. 2
DTE Energy Company..................................... 2
MCN Energy Group Inc. ................................. 2
The Merger............................................. 2
What MCN Shareholders Will Receive..................... 2
MCN Shareholders Will Be Asked to Elect the Form of
Merger Consideration.................................. 3
Recommendations to Shareholders........................ 3
DTE Energy Company................................... 3
MCN Energy Group Inc. ............................... 3
Opinions of Financial Advisors......................... 3
The DTE Special Meeting................................ 3
Time, Place and Matters to Be Voted Upon............. 3
Record Date and Vote Required........................ 3
The MCN Special Meeting................................ 4
Time, Place and Matters to Be Voted Upon............. 4
Record Date and Vote Required........................ 4
The Merger Agreement................................... 4
Effective Time of the Merger......................... 4
Conditions of the Merger............................. 4
Termination.......................................... 4
Termination Fees and Expenses........................ 5
Other.................................................. 5
Interests of Management and Directors in the
Merger.............................................. 5
Dissenters' Rights................................... 6
Accounting Treatment................................. 6
Material Federal Income Tax Consequences of the
Merger.............................................. 6
Comparison of Shareholders' Rights................... 6
Listing of DTE Common Stock.......................... 6
Regulatory Filings, Approvals and Clearances........... 6
MARKET PRICE AND DIVIDEND INFORMATION....................... 7
Dividend Information...................................... 7
Recent Closing Prices..................................... 7
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 8
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL DATA............................................ 9
RISK FACTORS................................................ 10
MCN shareholders cannot be sure of the market value of the
shares of DTE common stock that will be issued in the
merger................................................. 10
The merger is subject to the receipt of consents and
approvals from governmental entities that may impose
conditions that could have a material adverse effect on
DTE or cause the abandonment of the merger............. 10
We may not be able to realize fully the cost savings and
other benefits expected to be realized in connection
with the merger, which may adversely affect earnings
and financial condition................................ 10
Changes in regulatory environment and increased
competition may result in decreased earnings........... 11
For MCN shareholders, an investment in DTE is subject to
risks related to the electric utility industry......... 11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 12
</TABLE>
vii
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE DTE SPECIAL MEETING..................................... 13
General................................................... 13
Voting.................................................... 13
Proxies................................................... 14
Solicitation of Proxies................................... 15
THE MCN SPECIAL MEETING..................................... 16
General................................................... 16
Voting.................................................... 16
Proxies................................................... 17
Solicitation of Proxies................................... 18
THE COMPANIES............................................... 19
DTE Energy Company........................................ 19
MCN Energy Group Inc. .................................... 19
THE MERGER.................................................. 21
General................................................... 21
Background to the Merger.................................. 22
DTE's and MCN's Reasons for the Merger.................... 24
Recommendation and Additional Considerations of the DTE
Board of Directors..................................... 25
Recommendation and Additional Considerations of the MCN
Board of Directors..................................... 26
Opinion of DTE's Financial Advisor........................ 28
Opinion of MCN's Financial Advisor........................ 36
Interests of Management and Directors in the Merger....... 43
Public Trading Markets.................................... 48
Absence of Dissenters' Rights............................. 48
Resale of DTE Common Stock................................ 49
REGULATORY FILINGS, APPROVALS AND CLEARANCES................ 50
Hart-Scott-Rodino Act..................................... 50
Public Utility Holding Company Act of 1935................ 50
Federal Power Act......................................... 50
State Approvals........................................... 51
Atomic Energy Act......................................... 51
THE MERGER AGREEMENT........................................ 52
Introduction.............................................. 52
Terms of the Merger....................................... 52
Election Procedures and Distribution of Certificates of
DTE Common Stock....................................... 54
Fractional Shares......................................... 55
Closing and Effective Time of the Merger.................. 55
Corporate Governance...................................... 55
Conditions of the Merger.................................. 55
Representations and Warranties............................ 57
Covenants................................................. 57
Additional Agreements..................................... 60
Termination............................................... 63
Modification, Amendment and Waiver........................ 64
ACCOUNTING TREATMENT........................................ 65
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER...... 66
Tax Consequences of the Merger Generally.................. 66
Exchange of MCN Common Stock Solely for Cash.............. 66
Exchange of MCN Common Stock Solely for DTE Common
Stock.................................................. 67
Exchange of MCN Common Stock for DTE Common Stock and
Cash................................................... 67
Cash Received Instead of a Fractional Interest of DTE
Common Stock........................................... 68
</TABLE>
viii
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Backup Withholding and Information Reporting................ 68
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS...................................... 69
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS...................................... 73
DESCRIPTION OF DTE CAPITAL STOCK............................ 74
Authorized Capital Stock.................................. 74
DTE Common Stock.......................................... 74
COMPARISON OF SHAREHOLDERS' RIGHTS.......................... 74
General................................................... 74
Comparison of Shareholders' Rights........................ 75
RIGHTS AGREEMENTS........................................... 80
DTE....................................................... 80
MCN....................................................... 80
DIRECTORS AND EXECUTIVE OFFICERS OF MCN ENERGY GROUP INC.... 82
Directors of MCN.......................................... 82
Executive Officers of MCN................................. 84
Compensation of Directors of MCN.......................... 84
Compensation of Executives of MCN......................... 85
BENEFICIAL SECURITY OWNERSHIP OF MCN DIRECTORS AND EXECUTIVE
OFFICERS.................................................. 93
COMMON STOCK AND TOTAL STOCK-BASED HOLDINGS................. 93
DESCRIPTION OF MCN ENERGY GROUP INC......................... 94
DIVERSIFIED ENERGY........................................ 95
GAS DISTRIBUTION.......................................... 104
DISCONTINUED OPERATIONS................................... 113
OTHER..................................................... 113
PROPERTIES.................................................. 113
MCN....................................................... 113
Gas Distribution.......................................... 113
Diversified Energy........................................ 114
Exploration & Production Activities....................... 115
LEGAL PROCEEDINGS........................................... 116
General................................................... 116
Environmental............................................. 116
EXPERTS..................................................... 117
SHAREHOLDER PROPOSALS....................................... 117
DTE....................................................... 117
MCN....................................................... 117
WHERE YOU CAN FIND MORE INFORMATION......................... 118
VALIDITY OF SHARES.......................................... 119
FINANCIAL STATEMENTS OF MCN ENERGY GROUP INC................ F-1
APPENDIX A Agreement and Plan of Merger, dated as of
October 4, 1999 and as amended as of November
12, 1999, among DTE Energy Company, MCN Energy
Group Inc. and DTE Enterprises, Inc............ A-1
APPENDIX B Opinion of Warburg Dillon Read LLC, dated
November 12, 1999.............................. B-1
APPENDIX C Opinion of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, dated November 12, 1999.... C-1
</TABLE>
ix
<PAGE> 11
QUESTIONS AND ANSWERS ABOUT VOTING
PROCEDURES FOR THE MERGER
Q: WHAT SHOULD I DO?
A: After you have carefully read this document, either mail your signed proxy
card in the enclosed envelope or submit your proxy with voting instructions
by telephone or through the Internet in accordance with the instructions on
the accompanying proxy card so that your shares will be represented at the
DTE special meeting or the MCN special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. You should instruct your broker to vote your shares, following the
directions provided by your broker. If you are an MCN shareholder, your
failure to instruct your broker to vote your shares will be the equivalent
of voting against the approval of the merger agreement. If you are a DTE
shareholder, your failure to instruct your broker to vote your shares will
result in those shares not being represented at the DTE special meeting and
will have the effect of reducing the aggregate number of shares voting at
the DTE special meeting and the number of shares of DTE common stock
required to approve the issuance of shares of DTE common stock in the
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY WITH VOTING
INSTRUCTIONS?
A: Yes. There are three ways in which you may revoke your proxy and change your
vote. First, you may send a written notice to the party to whom you
submitted your proxy stating that you would like to revoke your proxy.
Second, you may complete and submit a new proxy card by mail or submit your
proxy with new voting instructions by telephone or through the Internet. The
latest vote actually received by DTE or MCN, as the case may be, before the
shareholders meeting will be counted and any earlier votes will be revoked.
Third, you may attend the DTE special meeting or the MCN special meeting and
vote in person. SIMPLY ATTENDING THE SHAREHOLDERS MEETING, HOWEVER, WILL NOT
REVOKE YOUR PROXY. If you have instructed a broker to vote your shares, you
must follow directions received from your broker to change or revoke your
proxy.
Q: IF I AM AN MCN SHAREHOLDER, HOW DO I ELECT TO RECEIVE CASH OR SHARES OF DTE
COMMON STOCK IN THE MERGER?
A: Approximately one month before the completion of the merger, MCN
shareholders will receive written instructions for exchanging MCN stock
certificates and making a choice as to the form of consideration you wish to
receive; that is, shares of DTE common stock, cash or both.
Q: IF I AM AN MCN SHAREHOLDER, WHEN SHOULD I SEND IN MY INSTRUCTIONS AND MY
STOCK CERTIFICATES?
A: Approximately one month before the completion of the merger, MCN
shareholders will receive written instructions for exchanging MCN stock
certificates. Your stock certificates and your instructions regarding
whether you would like to receive cash, shares of DTE common stock or both,
must be received by the exchange agent no later than 9:00 a.m. on the date
of the merger.
MCN shareholders should not send in their stock certificates before
receiving instructions.
Q: WHOM SHOULD SHAREHOLDERS CALL WITH QUESTIONS?
A: If you are a DTE shareholder you should call Morrow & Co., Inc. at (800)
566-9061 with any questions about the merger and related transactions.
If you are an MCN shareholder you should call MCN Investor Relations at
(800) 548-4655 with any questions about the merger and related transactions.
1
<PAGE> 12
SUMMARY
This summary, together with the preceding Question and Answer section,
highlights selected information contained in this document and may not contain
all of the information that is important to you. We urge you to read carefully
this entire document and the other documents to which this document refers to
understand fully the merger and other related transactions. See "Where You Can
Find More Information" on page 118. Each item in this summary includes a page
reference directing you to a more complete description of that item.
THE COMPANIES
DTE ENERGY COMPANY (PAGE 19)
DTE Energy Company, a Michigan corporation organized in 1995, is the parent
holding company of The Detroit Edison Company and other subsidiaries engaged in
energy-related businesses.
DTE's principal operating subsidiary, Detroit Edison, is a Michigan public
utility engaged in the generation, purchase, transmission, distribution and sale
of electric energy in a 7,600 square mile area in Southeastern Michigan. Detroit
Edison's service area includes about 13% of Michigan's total land area and
approximately five million people, which is about half of Michigan's population.
DTE also has affiliates engaged in non-regulated businesses, including
energy-related services and products.
MCN ENERGY GROUP INC. (PAGE 19)
MCN Energy Group Inc., a Michigan corporation organized in 1988, is an
integrated energy company primarily involved in natural gas production,
gathering, processing, transmission, storage and distribution, electric power
generation and energy marketing.
MCN's largest subsidiary is Michigan Consolidated Gas Company, a natural
gas utility serving 1.2 million customers in more than 500 communities
throughout Michigan. MCN Energy Enterprises Inc. is a wholly owned subsidiary of
MCN and serves as a holding company for MCN's nonutility businesses.
THE MERGER (PAGE 21)
We are proposing a merger of MCN with and into DTE Enterprises, Inc., a
Michigan corporation and wholly owned subsidiary of DTE. After the merger, MCN
will be a wholly owned subsidiary of DTE.
DTE and MCN believe that the merger offers both MCN shareholders who
receive DTE common stock in the merger and DTE shareholders the opportunity to
benefit from the growth opportunity expected to result from combining the two
companies. For a more detailed discussion of the reasons for the merger, see
pages 21 through 28.
WHAT MCN SHAREHOLDERS WILL RECEIVE (PAGE 52)
As a result of the merger, MCN shareholders will be entitled to elect to
receive either $28.50 in cash or 0.775 shares of DTE common stock in exchange
for each share of MCN common stock they hold. This right to elect to receive
either cash or DTE common stock or both is subject to allocation and proration
procedures that ensure that the aggregate number of shares of MCN common stock
that will be converted into cash and DTE common stock will be equal to 55% and
45%, respectively, of the total number of shares of MCN common stock outstanding
immediately prior to the merger.
EXAMPLE: IF YOU HOLD 1000 SHARES OF MCN COMMON STOCK, YOU MAY ELECT TO RECEIVE
775 SHARES OF DTE COMMON STOCK, $28,500 IN CASH, OR SOME COMBINATION OF THE TWO.
THE AMOUNT OF EITHER STOCK OR CASH THAT YOU ACTUALLY RECEIVE WILL DEPEND UPON
THE ELECTION OF OTHER MCN SHAREHOLDERS. FOR EXAMPLE, IF YOU ELECT TO RECEIVE
ONLY STOCK AND ALL OTHER MCN SHAREHOLDERS MAKE THE SAME ELECTION, 45% OF YOUR
SHARES WOULD BE CONVERTED INTO STOCK AND 55% OF YOUR SHARES WOULD BE CONVERTED
INTO CASH, SO YOU WOULD RECEIVE A TOTAL OF 348 SHARES OF DTE COMMON STOCK AND
$15,675 IN CASH PLUS ADDITIONAL CASH PAID INSTEAD OF FRACTIONAL SHARES.
SIMILARLY, EVEN IF YOU ELECT TO RECEIVE CASH, YOU MAY RECEIVE A MIX OF CASH AND
SHARES OF DTE COMMON STOCK IN THE MERGER.
Further, we have agreed to additional adjustments if necessary in order to
preserve the status of the merger as a "reorganization" under the Internal
Revenue Code. These tax adjustments would decrease below 55% the number of
shares of MCN common stock that will be converted into cash and increase above
45% the number of shares of MCN common stock that will be converted into DTE
common stock. If the tax adjustment is necessary, each share of MCN common stock
that would have been converted into cash in the absence of this tax adjustment
will be converted into a number of
2
<PAGE> 13
shares of DTE common stock having a value of
$28.50 instead of being converted at the 0.775 exchange ratio. Conversion of
shares of MCN common stock at this conversion rate will continue to the extent
that the conversion is necessary so that the value of the DTE common stock paid
as consideration for shares of MCN common stock is not less than 41% of the
value of the total consideration paid for shares of MCN common stock. Any
additional shares of MCN common stock converted into DTE common stock instead of
cash in connection with the tax adjustment will be converted at the 0.775 rate.
MCN SHAREHOLDERS WILL BE ASKED TO ELECT THE FORM OF MERGER CONSIDERATION (PAGE
52)
If you are an MCN shareholder, approximately one month before the
completion of the merger, we will send you an election form which you may use to
indicate your preference to receive shares of DTE common stock, cash or both, in
exchange for your shares of MCN common stock. Alternatively, you may decide to
make no election, in which case the form of consideration you receive will be
determined by the elections of other MCN shareholders. After the deadline for
submitting election forms -- 9:00 a.m. on the date of the merger -- has passed,
an exchange agent chosen by DTE will allocate the consideration to comply with
the requirement that, subject to the adjustments necessary to preserve the
status of the merger as a reorganization under the Internal Revenue Code, in the
aggregate, 55% of the outstanding shares of MCN common stock will be converted
into cash and the other 45% will be converted into shares of DTE common stock.
RECOMMENDATIONS TO SHAREHOLDERS (PAGE 25)
Each of the DTE board of directors and the MCN board of directors have
determined that the merger and the consideration to be received by MCN
shareholders are fair to, and in the best interests of, its respective
shareholders.
DTE (PAGE 25)
The DTE board of directors recommends that you vote "FOR" the issuance of
shares of DTE common stock in the merger.
MCN (PAGE 26)
The MCN board of directors recommends that you vote "FOR" the approval of
the merger agreement.
OPINIONS OF FINANCIAL ADVISORS (PAGES 28 AND 36)
In deciding whether to approve the merger agreement, the DTE board of
directors considered the opinion of its financial advisor, Warburg Dillon Read
LLC, and the MCN board of directors considered the opinion of its financial
advisor, Merrill Lynch, Pierce, Fenner & Smith Incorporated. The opinions, dated
October 4, 1999, were updated as of November 12, 1999, and these updated
opinions are attached as Appendices B and C to this document. We encourage you
to read these opinions carefully and in their entirety.
THE DTE SPECIAL MEETING
TIME, PLACE AND MATTERS TO BE VOTED UPON (PAGE 13)
The DTE special meeting will be held on Monday, December 20, 1999, at 2:00
p.m., local time, at the DTE Energy Building, 660 Plaza Drive, Detroit,
Michigan. At the DTE special meeting, you will be asked:
1. To approve the issuance of shares of DTE common stock in the merger; and
2. To act on other matters relating to the foregoing proposal that may be
brought properly before the DTE special meeting.
RECORD DATE AND VOTE REQUIRED (PAGE 13)
You may cast one vote at the DTE special meeting for each share of DTE
common stock that you owned at the close of business on November 5, 1999.
On November 5, 1999, there were approximately 122,683 shareholders of
record and 145,041,324 shares of DTE common stock outstanding and entitled to
vote. To approve the issuance of shares of DTE common stock in the merger, a
majority of the shares voting at the DTE special meeting must vote in favor of
doing so.
As of November 5, 1999, directors and executive officers of DTE and its
affiliates owned an aggregate of less than 0.1% of the outstanding shares of DTE
common stock. The directors and
3
<PAGE> 14
executive officers have indicated their intention to
vote the shares they hold in favor of the issuance of shares of DTE common stock
in the merger.
THE MCN SPECIAL MEETING
TIME, PLACE AND MATTERS TO BE VOTED UPON (PAGE 16)
The MCN special meeting will be held on Monday, December 20, 1999, at 2:00
p.m., local time, on the 32nd Floor of MCN's main office at 500 Griswold Street,
Detroit, Michigan. At the MCN special meeting, you will be asked:
1. To approve the merger agreement; and
2. To act on other matters relating to the foregoing proposal that may be
brought properly before the MCN special meeting.
RECORD DATE AND VOTE REQUIRED (PAGE 16)
You may cast one vote at the MCN special meeting for each share of MCN
common stock that you owned at the close of business on November 5, 1999.
On November 5, 1999, there were approximately 24,000 shareholders of record
and 85,655,381 shares of MCN common stock outstanding and entitled to vote. To
approve the merger agreement, the holders of a majority of the shares of MCN
common stock issued and outstanding on November 5, 1999 must vote in favor of
doing so.
As of November 5, 1999, directors and executive officers of MCN and their
affiliates owned an aggregate of approximately 0.5% of the outstanding shares of
MCN common stock, which they have indicated they intend to vote in favor of
approval of the merger agreement.
THE MERGER AGREEMENT
The merger agreement is attached to this document as Appendix A. Please
read the merger agreement carefully and in its entirety. It is the legal
document that governs the merger.
EFFECTIVE TIME OF THE MERGER (PAGE 55)
The merger will occur shortly after all the conditions to the completion of
the merger have been satisfied or waived. Although no assurances can be given,
it is currently expected that the merger will be completed in six to nine months
from the date of the merger agreement. The merger may be completed sooner or
later depending on the satisfaction of the conditions of the merger.
CONDITIONS OF THE MERGER (PAGE 55)
The completion of the merger depends on a number of conditions being
satisfied or waived, including the following:
- Approval of the merger agreement by MCN shareholders and approval of the
issuance of shares of DTE common stock in the merger by DTE shareholders;
- The receipt of all governmental and other consents and approvals that are
necessary to complete the merger;
- The absence of any injunction or legal restraint blocking the merger or
any threatened or pending litigation by certain governmental entities;
- MCN's sale of its interests in various electric facilities;
- The representations and warranties of each of us being true in all
material respects and each of us having performed in all material
respects our obligations under the merger agreement;
- The receipt by each of us of legal opinions that the merger will be
treated as a "reorganization" under the Internal Revenue Code and that
DTE, MCN and DTE Enterprises will each be a party to that reorganization;
and
- The absence of any material adverse change in the condition of MCN or
DTE.
If the law permits, either of us could choose to waive a condition to our
obligation to complete the merger even though that condition has not been
satisfied. However, neither of us may waive the condition relating to the
receipt of the tax opinions after the requisite approval of either DTE
shareholders or MCN shareholders has been obtained unless further shareholder
approval is obtained with appropriate disclosure. We cannot be certain when, or
if, the conditions to the merger will be satisfied or waived, or that the merger
will be completed.
TERMINATION (PAGE 63)
We may agree in writing to terminate the merger agreement at any time
without completing the merger, even after the approval of our respective
shareholders has been obtained.
4
<PAGE> 15
In addition, either of us may decide, without the consent of the other, to
terminate the merger agreement, even after the approval of our respective
shareholders has been obtained, if:
- The merger has not been completed by July 15, 2000, although we have
agreed to extend that date for an additional nine months if the reason
the merger has not been completed is that we have not obtained all
governmental consents;
- MCN shareholders fail to approve the merger agreement or DTE shareholders
fail to approve the issuance of shares of DTE common stock in the merger;
- Any legal restriction permanently prohibiting completion of the merger
has become final and non-appealable;
- The other party materially breaches its representations, warranties,
covenants or agreements contained in the merger agreement and does not,
or cannot, correct the breach within 30 days;
- The board of directors of either of us withdraws, adversely modifies, or
fails to reconfirm its recommendation of the merger agreement; or
- Either of us decides to enter into a transaction with a third party that
is superior to the proposed merger.
We have also agreed that, if Federal Energy Regulatory Commission approval of
the merger is not required, either one of us may terminate the merger agreement
after one year from the date of the merger agreement by making a reasonable
determination that it is more likely than not that the governmental consents
needed to complete the merger on terms that satisfy the merger agreement will
not be obtained prior to April 15, 2001, which is approximately 18 months from
the date of the merger agreement. If FERC approval of the merger is required,
however, this right to terminate the merger agreement by making such a
reasonable determination exists only after 15 months from the date of the merger
agreement.
TERMINATION FEES AND EXPENSES (PAGE 64)
We have agreed that if MCN terminates the merger agreement in order to
accept a superior proposal from a third party, MCN will pay DTE a termination
fee of $55 million, and reimburse DTE's charges and expenses up to $15 million.
We have further agreed that if DTE terminates the merger agreement in order to
accept a superior proposal from a third party, DTE will pay MCN a termination
fee of $85 million, and reimburse MCN's charges and expenses up to $15 million.
We have further agreed that if the merger agreement is terminated under certain
other circumstances involving either the failure to obtain the necessary
shareholder approval or the modification or withdrawal of a board of directors'
recommendation of the merger agreement, then we will reimburse the other's
charges and expenses up to $15 million and, if we thereafter execute an
agreement or complete a transaction with a third party within 12 months after
termination, we will pay the other party a termination fee which, in the case of
DTE, will be $85 million, and, in the case of MCN, will be $55 million.
Except as provided in the termination fees and expenses provisions
described above, whether or not the merger is completed, we will each pay our
own fees and expenses, except that we will divide evenly the costs and expenses
that we have incurred in printing and mailing this document and the fees that we
have paid to the Securities and Exchange Commission in connection with the
merger.
OTHER
INTERESTS OF MANAGEMENT AND DIRECTORS IN THE MERGER (PAGE 43)
In considering the recommendations of the MCN board of directors and the
DTE board of directors with respect to the merger, you should be aware that
certain officers and directors of MCN and DTE have interests in the merger that
are in addition to, or different from, the interests of shareholders of MCN and
DTE generally. These interests exist because of:
- The terms of change in control agreements that provide various MCN
officers with severance benefits if their employment is terminated under
certain conditions after the merger; and
- Rights the MCN officers have pursuant to the terms of benefit and
compensation plans maintained by MCN which will allow cash-and
stock-based awards to be available earlier.
Further, DTE, MCN and DTE Enterprises have entered into a termination and
consulting agreement with Alfred R. Glancy III, MCN's
5
<PAGE> 16
Chairman and Chief Executive Officer, which will go into effect if and when the
merger is completed.
The members of both the DTE board of directors and the MCN board of
directors knew about these additional interests, and considered them, when they
adopted the merger agreement and the related transactions.
DISSENTERS' RIGHTS (PAGE 48)
Both companies are incorporated under Michigan law. Under Michigan law,
neither DTE shareholders nor MCN shareholders have any right to a court
determination, in a proceeding known as an appraisal, of the fair value of their
shares in connection with the merger.
ACCOUNTING TREATMENT (PAGE 65)
DTE will account for the merger as a purchase for financial reporting
purposes.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE 66)
We expect that for U.S. federal income tax purposes, MCN shareholders who
exchange all their shares of MCN common stock solely for shares of DTE common
stock will not recognize any gain or loss. We also expect that MCN shareholders
who receive cash, as well as shares of DTE common stock, in the merger may
recognize gain, but not in excess of the amount of cash received.
We have conditioned the merger on our receipt of legal opinions that the
merger will be treated as a "reorganization" for federal income tax purposes.
This tax treatment may not apply to certain MCN shareholders and may depend
on your specific situation and on variables not within our control. We urge you
to consult your own tax advisor for a full understanding of the tax consequences
of the merger.
COMPARISON OF SHAREHOLDERS' RIGHTS (PAGE 74)
DTE and MCN are both incorporated in Michigan, so the rights of MCN
shareholders who become DTE shareholders will continue to be governed by
Michigan law. There are some differences in the rights of the shareholders under
the respective articles of incorporation and other documents relating to DTE and
MCN.
LISTING OF DTE COMMON STOCK (PAGE 48)
The shares of DTE common stock to be issued in connection with the merger
will be listed on the NYSE and the Chicago Stock Exchange under the symbol
"DTE."
REGULATORY FILINGS, APPROVALS AND CLEARANCES (PAGE 50)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules and
regulations there-under, provide that the merger may not be completed until
premerger notification filings have been made, by which means information is
submitted to the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission, and the specified HSR Act waiting period has expired.
Even after the waiting period expires or is terminated, the Antitrust Division
and the Federal Trade Commission will have the authority to challenge the merger
on antitrust grounds before or after the merger is completed.
DTE and MCN each intends to file a notification and report form for the
merger with the Antitrust Division and the Federal Trade Commission in
mid-November, 1999.
Although both DTE and MCN are exempt holding companies under the Public
Utility Holding Company Act of 1935, the Securities and Exchange Commission must
approve the merger pursuant to Section 9(a)(2) of the 1935 Act, which requires
SEC approval of some acquisitions of public utility company securities.
Under the merger agreement, MCN will use its best efforts to promptly
dispose of various electric facilities that it owns. If MCN is successful in
disposing of those facilities, the merger should not require FERC approval under
the Federal Power Act, although such dispositions may require FERC approval
under the Power Act. If MCN is not successful in disposing of those facilities
the merger itself is likely to require FERC approval under the Power Act.
We cannot predict whether we will obtain the required regulatory clearances
and approvals, the time frame within which such clearances and approvals may be
received or whether any such clearances and approvals would contain conditions
that would be detrimental to DTE.
6
<PAGE> 17
MARKET PRICE AND DIVIDEND INFORMATION
This table sets forth, for the calendar quarters indicated, the high and
low sales prices per share of DTE common stock and MCN common stock, as reported
on the NYSE Composite Tape, and the dividends per share declared on DTE common
stock and MCN common stock.
<TABLE>
<CAPTION>
DTE MCN
COMMON STOCK COMMON STOCK
---------------------------------------------- ---------------------------------------------
CALENDAR QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---------------- ---- --- --------- -------------- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
First Quarter............... $37 1/4 $33 1/8 $0.51500 $25 1/2 $21 5/8 $0.23250
Second Quarter.............. 34 1/4 28 0.51500 25 5/8 22 3/4 0.23250
Third Quarter............... 31 27 5/8 0.51500 27 5/8 22 3/4 0.23250
Fourth Quarter.............. 33 1/8 27 7/8 0.51500 30 1/2 26 5/8 0.24250
1997
First Quarter............... 32 7/8 26 1/4 0.51500 32 5/8 28 1/8 0.24250
Second Quarter.............. 28 3/8 26 1/8 0.51500 30 13/16 27 3/8 0.24250
Third Quarter............... 32 7/8 27 1/2 0.51500 33 30 3/8 0.24250
Fourth Quarter.............. 34 3/4 28 1/16 0.51500 40 1/2 32 0.25500
1998
First Quarter............... 39 5/8 33 7/16 0.51500 39 7/8 36 1/4 0.25500
Second Quarter.............. 42 37 11/16 0.51500 39 7/8 24 3/4 0.25500
Third Quarter............... 45 5/16 39 3/16 0.51500 26 13/16 16 7/16 0.25500
Fourth Quarter.............. 49 1/4 41 7/16 0.51500 20 13/16 16 13/16 0.25500
1999
First Quarter............... 43 3/4 37 15/16 0.51500 19 9/16 15 13/16 0.25500
Second Quarter.............. 44 11/16 38 1/4 0.51500 22 5/8 15 15/16 0.25500
Third Quarter............... 41 7/8 35 3/16 0.51500 22 1/4 17 0.25500
Fourth Quarter (through
November 11, 1999)....... 37 5/16 31 7/16 -- 25 3/8 17 0.25500
</TABLE>
DIVIDEND INFORMATION
DTE intends to continue its dividend rate of $2.06 per share annually,
although the DTE board of directors may change this practice at any time.
RECENT CLOSING PRICES
Shares of DTE common stock are listed on the NYSE and the Chicago Stock
Exchange under the symbol "DTE." Shares of MCN common stock are listed on the
NYSE under the symbol "MCN."
The following table sets forth the closing sales prices per share of DTE
common stock and MCN common stock on the NYSE on October 4, 1999, the last
trading day before public announcement of the merger, and on November 11, 1999,
the last practicable trading day prior to the date of this document. The table
also presents implied equivalent per share values for MCN common stock by
multiplying the price per share of DTE common stock on the dates indicated by
the exchange ratio of 0.775.
<TABLE>
<CAPTION>
MCN EQUIVALENT PER SHARE
DTE COMMON OF MCN
COMMON STOCK STOCK COMMON STOCK
------------ ------ --------------------
<S> <C> <C> <C> <C>
October 4, 1999....................................... $37 $17 11/16 $28.675
November 11, 1999..................................... $33 11/16 $24 9/16 $ 26.11
</TABLE>
The market price of both DTE common stock and MCN common stock is likely to
fluctuate prior to the merger and cannot be predicted. You should obtain current
market quotations for DTE common stock and MCN common stock. The future prices
for DTE common stock after the merger cannot be predicted.
7
<PAGE> 18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
DTE and MCN are providing the following financial information to assist you
in your analysis of the financial aspects of the merger. This information is
only a summary and you should read it in conjunction with the historical
consolidated financial statements of DTE and MCN, and the related notes
contained in DTE's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q
that DTE has previously filed with the Securities and Exchange Commission and
MCN's 1998 Annual Report and September 30, 1999 Quarterly Report that are
included herein. See "Where You Can Find More Information" on page 118.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DTE ENERGY COMPANY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------------------------- ------------------
1994 1995 1996 1997 1998 9/30/98 9/30/99
---- ---- ---- ---- ---- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenues................... $3,519 $3,636 $3,645 $3,764 $4,221 $ 3,208 $3,614
Net Income........................... $ 390 $ 406 $ 309 $ 417 $ 443 $ 337 $ 386
Earnings Per Common Share -- Basic
and Diluted........................ $ 2.67 $ 2.80 $ 2.13 $ 2.88 $ 3.05 $ 2.32 $ 2.66
Dividends Declared Per Share of
Common Stock....................... $ 2.06 $ 2.06 $ 2.06 $ 2.06 $ 2.06 $ 1.545 $1.545
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total Assets............................ $10,993 $11,131 $11,015 $11,223 $12,088 $11,812 $12,316
Long-Term Debt Obligations (including
capital leases) and Redeemable
Preferred and Preference Stock
Outstanding........................... $ 3,980 $ 4,004 $ 4,038 $ 4,058 $ 4,323 $ 4,177 $ 4,103
Book Value Per Share of Common Stock.... $ 22.89 $ 23.62 $ 23.69 $ 24.51 $ 25.49 $ 25.65 $ 26.61
</TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MCN ENERGY GROUP INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------------------------- -----------------
1994 1995 1996 1997 1998 9/30/98 9/30/99
---- ---- ---- ---- ---- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data(a)
Operating Revenues.................... $1,474 $1,495 $1,997 $2,208 $2,031 $ 1,459 $ 1,748
Net Income (Loss)..................... $ 75 $ 93 $ 113 $ 133 $ (286) $ (310) $ (29)
Earnings (Loss) Per Common Share --
Basic............................... $ 1.26 $ 1.44 $ 1.68 $ 1.82 $(3.63) $ (3.95) $ (0.35)
Earnings (Loss) Per Common Share --
Diluted............................. $ 1.25 $ 1.43 $ 1.67 $ 1.79 $(3.63) $ (3.95) $ (0.35)
Dividends Declared Per Share of Common
Stock............................... $ 0.87 $ 0.90 $ 0.94 $ 0.98 $ 1.02 $0.7650 $0.7650
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total Assets........................... $2,241 $2,899 $3,633 $4,331 $4,393 $4,127 $4,056
Long-Term Debt Obligations (including
capital leases) and Redeemable
Cumulative Preferred Securities...... $ 784 $1,090 $1,426 $1,718 $1,809 $1,808 $1,864
Book Value Per Share of Common Stock... $ 8.56 $10.02 $11.66 $14.62 $ 9.93 $ 9.74 $ 9.89
</TABLE>
- -------------------------
(a) Income statement data excludes the cumulative effect of the 1999 change in
accounting for start-up activities and the operations of MCN's discontinued
computer services segment which was sold in 1996.
See "Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements" on page 73.
8
<PAGE> 19
SELECTED UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma combined condensed consolidated
financial data give effect to the merger. The pro forma adjustments are based
upon available information and certain assumptions that DTE and MCN believe are
reasonable. The selected unaudited pro forma combined condensed consolidated
financial data are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial condition of the
combined company that would have occurred had the merger occurred at the
beginning of the periods presented, nor are the selected unaudited pro forma
combined condensed consolidated financial data necessarily indicative of future
operating results or financial position of the combined company. The selected
unaudited pro forma combined condensed consolidated financial data have been
derived from and should be read in conjunction with the "Unaudited Pro Forma
Combined Condensed Consolidated Financial Statements" on page 69 and the related
notes included herein and should be read in conjunction with the consolidated
financial statements of DTE which are incorporated herein by reference, and of
MCN, which are included herein on pages F-1 to F-123.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Income Statement Data(a)
Operating Revenues....................................... $6,252 $5,362
Net Income............................................... $ 80 $ 299
Earnings Per Common Share
Basic................................................. $ 0.46 $ 1.71
Diluted............................................... $ 0.44 $ 1.67
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
<S> <C>
Balance Sheet Data
Total Assets.............................................. $18,327
Long-Term Debt Obligations (including capital leases) and
Redeemable Cumulative Preferred Securities............. $ 5,967
Book Value Per Share of Common Stock...................... $ 27.75
</TABLE>
- -------------------------
(a) Income statement data excludes the cumulative effect of the 1999 change in
MCN's accounting for start-up activities.
See "Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements" on page 73.
9
<PAGE> 20
RISK FACTORS
MCN SHAREHOLDERS CANNOT BE SURE OF THE MARKET VALUE OF THE SHARES OF DTE COMMON
STOCK THAT WILL BE ISSUED IN THE MERGER
As a result of the merger, subject to adjustments necessary to preserve the
status of the merger as a reorganization under the Internal Revenue Code, 45% of
the total number of shares of MCN common stock outstanding immediately prior to
the merger will be converted into shares of DTE common stock. Because the
exchange ratio is fixed at 0.775, the market value of DTE common stock issued in
the merger will depend upon the market price of DTE common stock prior to the
merger. This market value of DTE common stock is likely to fluctuate prior to
the completion of the merger and therefore may be different at the time the
merger is completed than it was at the time the merger agreement was signed and
at the time of the shareholders meetings. Accordingly, MCN shareholders cannot
be sure of the market value of the DTE common stock that they will receive in
the merger.
THE MERGER IS SUBJECT TO THE RECEIPT OF CONSENTS AND APPROVALS FROM GOVERNMENTAL
ENTITIES THAT MAY IMPOSE CONDITIONS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
DTE OR CAUSE THE ABANDONMENT OF THE MERGER
Before we can complete the merger, we must obtain final approvals from the
Securities and Exchange Commission under the Public Utility Holding Company Act
of 1935, as well as complying with premerger notification requirements under the
antitrust laws that apply to business combinations generally. Approvals from
other governmental entities, including the Federal Energy Regulatory Commission,
may also be required. Obtaining these regulatory approvals is likely to delay
the merger for a period of time after the necessary approvals of the DTE
shareholders and MCN shareholders have been obtained at the special meetings.
Approval of the merger by the Michigan Public Service Commission (the "MPSC") is
not required under Michigan law, although the MPSC may seek to examine aspects
of the merger. We cannot assure you that we will obtain these and other
regulatory approvals, or if we obtain them, whether the terms and conditions of
the approvals will be satisfactory. The terms and conditions of such regulatory
approvals may require the divestiture of divisions, operations, or assets of the
combined company and such required divestitures may have a material adverse
effect on the business, financial condition or results of operations of the
combined company. We also cannot give any assurance on whether third parties
will appeal any final orders approving the merger, which could further delay the
merger.
We will use commercially reasonable efforts to obtain any required consent,
registration, authorization, approval or permit of any governmental entity in
connection with the merger and related transactions. However, DTE is not
required to complete the merger if the governmental entities impose conditions
which, in its reasonable judgment, are reasonably likely to have a material
adverse effect on DTE, MCN or DTE Enterprises. See "The Merger
Agreement -- Conditions of the Merger" on page 55 and "Regulatory Filings,
Approvals and Clearances" on page 50.
In addition, the merger agreement permits either of us to terminate the
merger agreement after specific dates if the required governmental approvals
have not been obtained or if one of us reasonably determines that it is more
likely than not that such approvals will not be obtained on terms that satisfy
the merger agreement.
WE MAY NOT BE ABLE TO REALIZE FULLY THE COST SAVINGS AND OTHER BENEFITS EXPECTED
TO BE REALIZED IN CONNECTION WITH THE MERGER, WHICH MAY ADVERSELY AFFECT
EARNINGS AND FINANCIAL CONDITION
Significant benefits are expected to result from the merger. The merger is
expected to be accretive to DTE's earnings per share within the first full year
of operation, based on anticipated results of future operations, and assuming
timely realization of the estimated cost savings and avoidances expected to
result from the merger and no adverse regulatory treatment. However, the merger
involves the integration of two large companies that have previously operated
independently of each other and the successful combination of
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<PAGE> 21
the two business enterprises may take an extended period of time. Further,
coordinating the operations will involve a number of risks including:
- Difficulties in combining operations and systems, including combining or
coordinating utility operations;
- Difficulties in retaining employees, customers and suppliers;
- Potentially adverse short-term effects on operating results; and
- The possibility that we will not achieve anticipated cost savings, or
that any savings will be partially or fully offset by utility rate
reductions or other actions and so will not benefit the shareholders.
Inability to realize the full extent of, or any of, the anticipated benefits of
the merger, as well as delays encountered in the transition process, could have
a material adverse effect upon the revenues, level of expenses, operating
results and financial condition of DTE, which may affect the value of DTE common
stock. See "The Merger -- DTE's and MCN's Reasons for the Merger" on page 24,
"-- Recommendation and Additional Considerations of the DTE Board of Directors"
on page 25 and "-- Recommendation and Additional Considerations of the MCN Board
of Directors" on page 26.
CHANGES IN REGULATORY ENVIRONMENT AND INCREASED COMPETITION MAY RESULT IN
DECREASED EARNINGS
The merger will combine two companies that to a large extent share a common
regulatory environment and currently are affected by a number of similar
factors, including deregulation and increased competition. There are initiatives
in Michigan addressing competition in the electric industry and the impact, if
any, of the adoption and implementation of one or more of these initiatives is
currently unknown. In addition, the impact of the merger on deregulation issues,
if any, is currently unknown. Furthermore, the utility industry has been
undergoing dramatic structural change for several years, resulting in increasing
competitive pressures faced by electric and natural gas utility companies.
Increased competition may create greater risks to the stability of utility
earnings generally and may in the future reduce DTE's earnings from retail
electric and natural gas sales. In a deregulated environment, formerly regulated
utility companies that are not responsive to a competitive energy marketplace
may suffer erosion in market share, revenues and profits as competitors gain
access to their customers.
FOR MCN SHAREHOLDERS, AN INVESTMENT IN DTE IS SUBJECT TO RISKS RELATED TO THE
ELECTRIC UTILITY INDUSTRY
DTE operates numerous electric generating facilities, including fossil and
nuclear fueled plants. Some of the risks associated with the operation and cost
of operation of electric generating facilities differ from those relating to
MCN's utility and non-utility businesses, including risks relating to
unscheduled outages and changing environmental requirements. MCN shareholders
who after the merger hold DTE common stock will be exposed to risks arising from
the electric utility industry that did not significantly affect their investment
in MCN.
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<PAGE> 22
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements with respect to
the financial condition, results of operations and business of each of DTE and
MCN. These statements may be made directly in this document referring to DTE or
MCN or, with respect to DTE only, may be made part of this document by reference
to other documents filed with the Securities and Exchange Commission, which is
known as "incorporation by reference," and may include statements for the period
following the completion of the merger. You can find many of these statements by
looking for words such as "believes," "expects," "anticipates," "estimates" or
similar expressions in this document or in documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ from those
contemplated by the forward-looking statements include, among others, the
following possibilities:
- General economic or business conditions, both domestic and foreign, may
be less favorable than expected, resulting in, among other things, lower
than expected revenues.
- Costs or difficulties related to the integration of the businesses of DTE
and MCN may be greater than expected.
- Legislative or regulatory changes may adversely affect the businesses in
which DTE and MCN are engaged. This includes any effect which the utility
industry restructuring in Michigan may have on the combined entity.
- The capital intensive nature of MCN's and DTE's businesses.
- The uncertainty of gas reserve estimates.
- The timing and extent of changes in commodity prices for natural gas,
natural gas liquids, methanol, coal and electricity.
- The timely completion and functioning of modifications made to address
"Year 2000" issues.
- The effects of weather and other natural phenomena.
- The effects of environmental regulations.
- The performance of non-regulated lines of business.
- Adverse changes may occur in the securities markets.
- Changes in the interest rate environment may adversely affect profit
margins.
Because such forward-looking statements are subject to assumptions, risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. DTE shareholders and MCN
shareholders are cautioned not to place undue reliance on such statements, which
speak only as of the date of this document or the date of any document
incorporated by reference.
All subsequent written and oral forward-looking statements attributable to
DTE or MCN or any person acting on their behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
Neither DTE nor MCN undertakes any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date of this document or to reflect the occurrence of unanticipated events.
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<PAGE> 23
THE DTE SPECIAL MEETING
GENERAL
This document is being furnished to DTE shareholders in connection with the
solicitation of proxies by the DTE board of directors for use at the DTE special
meeting, to be held on Monday, December 20, 1999, at 2:00 p.m., local time, at
the DTE Energy Building, 660 Plaza Drive, Detroit, Michigan. The proxy card
enclosed with this document is being mailed to shareholders on or about November
15, 1999.
The purpose of the DTE special meeting is:
(1) To consider and to vote upon the issuance of shares of DTE common
stock in the merger; and
(2) To transact such other business related to such proposal as may
properly come before the DTE special meeting.
THE DTE BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT. THE DTE BOARD
OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ISSUANCE OF SHARES OF
DTE COMMON STOCK IN THE MERGER.
VOTING
RECORD DATE
The DTE board of directors has fixed the close of business on November 5,
1999 as the DTE record date for the determination of the holders of DTE common
stock entitled to receive notice of and to vote at the DTE special meeting. You
may vote at the DTE special meeting only if you owned DTE common stock at that
time.
As of the DTE record date, there were 145,041,324 shares of DTE common
stock issued and outstanding. Each share of DTE common stock outstanding on the
DTE record date is entitled to one vote upon each matter properly submitted at
the DTE special meeting.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares voting at
the DTE special meeting, assuming the total number of shares voting represents a
majority of all shares entitled to vote, is required to approve the issuance of
shares of DTE common stock in the merger.
Any failure to be present at the DTE special meeting, in person or by
proxy, any abstention and any failure to inform a broker as to how to vote
shares held by such broker, as explained below, will have the effect of reducing
the aggregate number of shares voting at the DTE special meeting and,
accordingly, the number of shares of DTE common stock required to approve the
issuance of shares of DTE common stock in the merger. Under the rules of the
NYSE, brokers who hold shares in street name for customers will not have
authority to vote on the issuance of shares of DTE common stock in the merger
unless they receive specific instructions from the beneficial owners of such
shares.
The presence, in person or represented by proxy, of a majority of the
shares of DTE common stock entitled to vote at the DTE special meeting will
constitute a quorum for the transaction of business. Abstentions will be counted
as present for purposes of determining a quorum. The failure by a beneficial
owner of shares to provide a broker with voting instructions with respect to
such shares will result in those shares not being present for purposes of
determining a quorum.
As of November 5, 1999, directors and executive officers of DTE owned
beneficially an aggregate of 422,538 shares of DTE common stock, including
shares which may be acquired within 60 days upon exercise of employee stock
options, or less than 0.1%, of the shares of DTE common stock outstanding on
such date. The directors and executive officers of DTE have indicated their
intention to vote their shares of DTE common stock in favor of the issuance of
shares of DTE common stock in the merger.
As of November 5, 1999, the directors and executive officers of DTE owned
no shares of MCN common stock.
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<PAGE> 24
PROXIES
Each copy of this document mailed to DTE shareholders is accompanied by a
form of proxy with voting instructions for submission by mail. In addition, DTE
shareholders entitled to vote at the DTE special meeting may submit their
proxies by telephone or through the Internet, in accordance with the
instructions set forth on the accompanying proxy card. However, submission of
proxies with voting instructions by telephone or through the Internet may not be
available to shareholders who hold their shares through a broker, nominee,
fiduciary or other custodian. DTE shareholders should contact such person to
determine whether they may submit their proxy by telephone or through the
Internet. Shares of DTE common stock represented by a proxy properly submitted
as described below and received at or prior to the DTE special meeting, unless
subsequently revoked, will be voted in accordance with the instructions thereon.
DTE has been advised by counsel that submitting proxies by telephone or through
the Internet in the manner described in this document is consistent with the
requirements of applicable law.
Submitting Proxies by Mail. To submit a written proxy by mail, holders of
DTE common stock should complete, sign, date and mail the proxy card provided
with this document in accordance with the instructions set forth on such card.
If a proxy card is signed and returned without indicating any voting
instructions, shares of DTE common stock represented by the proxy will be voted
"FOR" the issuance of shares of DTE common stock in the merger.
Submitting Proxies by Telephone or Internet. Shareholders may also submit
proxies with voting instructions by telephone by calling (800) 250-9081, or
through the Internet at http://www.votefast.com. In each case, shareholders
should follow the instructions that are set forth on the reverse side of the
accompanying proxy card. Each DTE shareholder has been assigned a unique control
number which has been printed on each holder's proxy card. Shareholders who
submit proxies by telephone or through the Internet will be required to provide
their assigned control number before their proxy will be accepted. In addition
to the instructions that appear on the proxy card, step-by-step instructions
will be provided by a recorded telephone message for those shareholders
submitting proxies by telephone, or at the designated Web site for those
shareholders submitting proxies through the Internet. Shareholders submitting
their proxies with voting instructions by telephone or through the Internet will
receive confirmation on the telephone or through the Internet, as applicable,
that their proxies have been successfully submitted.
Your vote is confidential, whether you submit your proxy by mail, by
telephone or through the Internet. The tabulator and inspectors of election are
not employees of DTE nor are they affiliated with DTE in any way. However, DTE
may be advised of whether you have voted. Also, your vote may be disclosed to
DTE if a contested proxy solicitation occurs or if a disclosure is required by
law.
REVOCATION
Any person who submits a proxy may revoke it any time before it is voted:
- By giving written notice of revocation to DTE, addressed to Corporate
Election Services, P.O. Box 535600, Pittsburgh, Pennsylvania 15253;
- By submitting a later-dated proxy with voting instructions by mail, by
telephone or through the Internet, if the proxy is received by DTE prior
to the DTE special meeting; or
- By VOTING in person at the DTE special meeting; a proxy is not revoked by
simply ATTENDING the DTE special meeting.
DTE shareholders who have instructed a broker to vote their shares must
follow directions received from their broker to change or revoke their proxy.
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<PAGE> 25
SPECIAL PROCEDURES FOR THE DETROIT EDISON SAVINGS & INVESTMENT PLANS
PARTICIPANTS
Participants in the Detroit Edison Savings & Investment Plans may not vote
their shares using the procedures described above. Such participants must follow
the procedures described below.
Participants in the Detroit Edison Savings & Investment Plan are entitled
to direct Fidelity Management Trust Company, as trustee, to vote on their behalf
at the DTE special meeting. Only Fidelity can vote shares of participants in the
Detroit Edison Savings & Investment Plans and Fidelity only votes shares for
which it has received voting instructions. Participants cannot vote these shares
in person at the DTE special meeting. How participants vote these shares is
confidential. Fidelity will not disclose how participants have instructed it to
vote unless required by law. DTE shareholders who are participants in this plan
must follow the instructions received from Fidelity in order to change or revoke
their voting instructions.
OTHER MATTERS
The DTE board of directors is not currently aware of any business to be
acted upon at its special meeting, other than as described herein. If, however,
other matters related to the proposal at the DTE special meeting are properly
brought before the DTE special meeting, the persons appointed as proxies will
have discretion to vote or to act thereon according to their best judgment,
unless otherwise indicated on any particular proxy. The persons appointed as
proxies also will have discretion to vote on adjournment of the DTE special
meeting. Such adjournment may be for the purpose of soliciting additional
proxies, although shares represented by proxies voting against the issuance of
shares of DTE common stock in the merger will be voted against a proposal to
adjourn the DTE special meeting for the purpose of soliciting additional
proxies.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
DTE, none of whom will be specifically compensated for such services but may be
reimbursed for reasonable out-of-pocket expenses in connection therewith, may
solicit proxies from the shareholders of DTE personally or by telephone,
telecopy or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending such materials to beneficial owners.
In addition, DTE has retained Morrow & Co., Inc. to assist in the
solicitation of proxies from its shareholders. The fees to be paid by DTE to
Morrow & Co., Inc. for such services will be equal to approximately $10,000,
plus reasonable out-of-pocket costs and expenses. DTE will bear its own expenses
in connection with the solicitation of proxies for the DTE special meeting,
except DTE and MCN will share equally all expenses incurred in connection with
the filing of the registration statement filed by DTE with the Securities and
Exchange Commission to register the shares of DTE common stock to be issued to
MCN shareholders in the merger, and the printing and mailing of this document.
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<PAGE> 26
THE MCN SPECIAL MEETING
GENERAL
This document is being furnished to MCN shareholders in connection with the
solicitation of proxies by the MCN board of directors for use at the MCN special
meeting, to be held on Monday, December 20, 1999, at 2:00 p.m., local time, on
the 32nd floor of MCN's main office at 500 Griswold Street, Detroit, Michigan.
This document is also furnished to MCN shareholders as a prospectus in
connection with the issuance by DTE of shares of DTE common stock pursuant to
the merger agreement.
The purpose of the MCN special meeting is:
(1) To consider and to vote upon the approval of the merger agreement;
and
(2) To transact such other business related to such proposal as may
properly come before the MCN special meeting.
THE MCN BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS
THAT THE MCN SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT.
VOTING
RECORD DATE
The MCN board of directors has fixed the close of business on November 5,
1999 as the MCN record date for the determination of the holders of MCN common
stock entitled to receive notice of and to vote at the MCN special meeting. You
may vote at the MCN special meeting only if you owned MCN common stock at that
time.
As of the MCN record date, there were 85,655,381 shares of MCN common stock
issued and outstanding. Each share of MCN common stock outstanding on the MCN
record date is entitled to one vote on each matter properly submitted at the MCN
special meeting.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of MCN
common stock issued and outstanding on the MCN record date is required for
approval of the merger agreement.
Any failure to be present at the MCN special meeting, in person or by
proxy, any abstention and any failure to instruct a broker as to how to vote
shares held by such broker, as explained below, will have the same effect as a
vote against approval of the merger agreement. Under the rules of the NYSE,
brokers who hold shares in street name for customers will not have authority to
vote on the approval of the merger agreement unless they receive specific
instructions from the beneficial owners of such shares.
The presence, in person or represented by proxy, of a majority of the
shares of MCN common stock entitled to vote at the MCN special meeting will
constitute a quorum for the transaction of business. Abstentions will be counted
as present for purposes of determining a quorum. The failure by a beneficial
owner of shares to provide a broker with voting instructions with respect to
such shares will result in those shares not being present for purposes of
determining a quorum.
As of November 5, 1999, directors and executive officers of MCN owned
beneficially an aggregate of 445,929 shares of MCN common stock, including
shares which may be acquired within 60 days upon exercise of employee stock
options, or approximately 0.5% of the shares of MCN common stock outstanding on
such date. The directors and executive officers of MCN have indicated their
intention to vote their shares of MCN common stock in favor of the approval of
the merger agreement.
As of November 5, 1999 the directors and executive officers of MCN owned no
shares of DTE common stock.
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<PAGE> 27
PROXIES
Each copy of this document mailed to MCN shareholders is accompanied by a
form of proxy with voting instructions for submission by mail. In addition, MCN
shareholders entitled to vote at the MCN special meeting may submit their
proxies by telephone or through the Internet in accordance with the instructions
set forth on the accompanying proxy card. However, submission of proxies with
voting instructions by telephone or through the Internet may not be available to
shareholders who hold their shares through a broker, nominee, fiduciary or other
custodian. MCN shareholders should contact such person to determine whether they
may submit their proxies by telephone or through the Internet. Shares of MCN
common stock represented by a proxy properly submitted as described below and
received at or prior to the MCN special meeting, unless subsequently revoked,
will be voted in accordance with the instructions thereon. MCN has been advised
by counsel that submitting proxies by telephone or through the Internet in the
manner described in this document is consistent with the requirements of
applicable law.
Submitting Proxies by Mail. To submit a written proxy by mail, holders of
MCN common stock should complete, sign, date and mail the proxy card provided
with this document in accordance with the instructions set forth on such card.
If a proxy card is signed and returned without indicating any voting
instructions, shares of MCN common stock represented by the proxy will be voted
"FOR" the approval of the merger agreement.
Submitting Proxies by Telephone or Internet. Shareholders may also submit
proxies with voting instructions by telephone by calling (877) PRX-VOTE ((877)
779-8683), or through the Internet at http://www.eproxyvote.com/mcn. In each
case, shareholders should follow the instructions that are set forth on the
reverse side of the accompanying proxy card. Each shareholder has been assigned
a unique control number which has been printed on each holder's proxy card.
Shareholders who submit proxies by telephone or through the Internet will be
required to provide their assigned control number before their proxy will be
accepted. In addition to the instructions that appear on the proxy card,
step-by-step instructions will be provided by a recorded telephone message for
those shareholders submitting proxies by telephone, or at the designated Web
site for those shareholders submitting proxies through the Internet.
Shareholders submitting their proxies with voting instructions by telephone or
through the Internet will receive confirmation on the telephone or through the
Internet, as applicable, that their proxies have been successfully submitted.
REVOCATION
Any person who submits a proxy may revoke it any time before it is voted:
- By giving written notice of revocation to MCN, addressed to: Investor
Relations, MCN Energy Group Inc., 500 Griswold Street, Detroit, Michigan
48226;
- By submitting a later dated proxy with voting instructions by mail, by
telephone or through the Internet, if the proxy is received by MCN prior
to the MCN special meeting; or
- By VOTING in person at the MCN special meeting; a proxy is not revoked by
simply ATTENDING the MCN special meeting.
MCN shareholders who have instructed a broker to vote their shares must follow
directions received from their broker to change and revoke their proxy.
OTHER MATTERS
The MCN board of directors is not currently aware of any business to be
acted upon at its special meeting, other than as described herein. If, however,
other matters related to the proposal to approve the merger agreement are
properly brought before the MCN special meeting, the persons appointed as
proxies will have discretion to vote or to act thereon according to their best
judgment, unless otherwise indicated on any particular proxy. The persons
appointed as proxies also will have discretion to vote on adjournment of the MCN
special meeting. Such adjournment may be for the purpose of soliciting
additional proxies, although shares represented by proxies voting against the
approval of the merger agreement will be voted against a proposal to adjourn the
MCN special meeting for the purpose of soliciting additional proxies.
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<PAGE> 28
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
MCN, none of whom will be specifically compensated for such services but may be
reimbursed for reasonable out-of-pocket expenses in connection therewith, may
solicit proxies from the shareholders of MCN personally or by telephone,
telecopy or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending such materials to beneficial owners.
In addition, MCN has retained Corporate Investor Communications Inc. to
assist in the solicitation of proxies from its shareholders. The fees to be paid
by MCN to Corporate Investor Communications Inc. for such services will be equal
to approximately $6,500, plus reasonable out-of-pocket costs and expenses. MCN
will bear its own expenses in connection with the solicitation of proxies for
the MCN special meeting, except that MCN and DTE will share equally all expenses
incurred in connection with the filing of the registration statement to register
the shares of DTE common stock to be issued to MCN shareholders in the merger
and the printing and mailing of this document.
MCN SHAREHOLDERS SHOULD NOT SEND MCN COMMON STOCK CERTIFICATES WITH THEIR
PROXY CARDS. Instructions for delivering stock certificates can be found under
"The Merger Agreement -- Election Procedures and Distribution of Certificates of
DTE Common Stock," on page 54.
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<PAGE> 29
THE COMPANIES
DTE ENERGY COMPANY
DTE Energy Company, a Michigan corporation organized in 1995, is the parent
holding company of The Detroit Edison Company and other subsidiaries engaged in
energy-related businesses.
DTE's principal operating subsidiary, Detroit Edison, is a public utility
engaged in the generation, purchase, transmission, distribution and sale of
electric energy in a 7,600 square mile area in southeastern Michigan. Detroit
Edison's service area includes about 13% of Michigan's total land area and
approximately five million people, which is about half of Michigan's population.
Detroit Edison's residential customers reside in urban and rural areas,
including an extensive shoreline along the Great Lakes and connecting waters.
DTE also has affiliates that engage in non-regulated businesses, including
the following energy-related services and products:
- The operation of a pulverized coal facility and coke oven batteries;
- Coal sourcing, blending and transportation;
- Landfill gas-to-energy facilities;
- Providing expertise in the application of new energy technologies;
- Real estate development;
- Power marketing; and
- Specialty engineering services and retail marketing of energy and other
products.
DTE Capital Corporation, another affiliate of DTE, provides financial
services to DTE's non-regulated affiliates.
The mailing address of DTE Energy Company's principal executive offices is
2000 2nd Avenue, Detroit, Michigan, 48226-1279, and its telephone number is
(313) 235-4000.
MCN ENERGY GROUP INC.
MCN Energy Group Inc., a Michigan corporation organized in 1988, is an
integrated energy company with more than $4.0 billion in assets at September 30,
1999 and revenues of over $2.3 billion for the twelve months ended September 30,
1999. MCN is primarily involved in natural gas production, gathering,
processing, transmission, storage and distribution, electric power generation
and energy marketing. MCN's largest subsidiary is Michigan Consolidated Gas
Company ("MichCon"), a natural gas utility serving approximately 1.2 million
customers in more than 500 communities throughout Michigan. MCN Energy
Enterprises Inc. is a wholly owned subsidiary of MCN and serves as a holding
company for MCN's nonutility businesses.
On August 2, 1999, MCN announced a significantly revised strategic
direction. MCN's revised strategy includes:
- Focusing on the Midwest-to-Northeast region rather than on North America;
and
- Emphasizing operational efficiencies and growth through the integration
of existing businesses rather than building a portfolio of diverse,
non-operated energy investments.
Consistent with its new strategic direction, MCN announced on August 2,
1999, that it would retain its natural gas producing properties in Michigan and
that it would go forward with the sale of its other exploration and production
oil and gas properties. MCN also announced that it had reduced its capital
investment levels to approximately $500 million in 1999 and $300 million in
2000.
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<PAGE> 30
As a part of its revised strategic direction, MCN is reorganizing into four
primary business segments and an investment arm: Gas Distribution; Midstream &
Supply; Energy Marketing; Power; and Energy Holdings.
- Gas Distribution is responsible for MCN's regulated utilities operations.
Gas Distribution consists principally of MichCon, a Michigan corporation
organized in 1898 that, with its predecessors, has been in business for
over 150 years. MichCon is subject to the accounting requirements and
rate regulation of the MPSC with respect to the distribution and
transportation of natural gas.
- Midstream & Supply develops and manages MCN's gas producing, gathering,
processing, storage and transmission facilities within the
Midwest-to-Northeast target region.
- Energy Marketing consists of MCN's non-regulated marketing activities to
industrial, commercial and residential customers, both inside and outside
the Gas Distribution segment's service areas.
- Power develops and manages independent electric power projects.
- Energy Holdings manages and seeks to maximize the value of existing
ventures outside MCN's target region. It primarily consists of gas
gathering and processing investments in major U.S. producing basins.
Until MCN's reorganization into the four business segments and investment
arm described above is complete, MCN will continue to operate through two major
business groups: Diversified Energy and Gas Distribution.
- Diversified Energy, operating through MCNEE, 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 at December 31, 1998; 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. Diversified Energy also has investments in
Exploration & Production properties with 1.2 Tcf/e of proved gas and oil
reserves at December 31, 1998. Consistent with its new strategic
direction, MCN will retain its natural gas producing properties in
Michigan. MCN has sold its E&P properties in the Western and
Midcontinent/Gulf Coast regions and expects to sell other non-Michigan
E&P properties by mid-2000.
- Gas Distribution consists principally of MichCon. MichCon is subject to
the accounting requirements and rate regulation of the MPSC with respect
to the distribution and intrastate transportation of natural gas.
MCN has its principal executive offices at 500 Griswold Street, Detroit,
Michigan 48226, and its telephone number is (313) 256-5500.
For additional information about MCN, see "Description of MCN Energy Group
Inc." on page 94.
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THE MERGER
The discussion in this document of the merger of DTE and MCN and the
principal terms of the Agreement and Plan of Merger, dated as of October 4, 1999
and as amended as of November 12, 1999, among DTE, MCN and DTE Enterprises, Inc.
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the merger agreement which is incorporated into this document
by reference. A copy of the merger agreement is attached as Appendix A to this
document.
GENERAL
We are furnishing this document to DTE shareholders and MCN shareholders in
connection with the solicitation of proxies by the boards of directors of DTE
and MCN for use at their respective special meetings of shareholders and at any
adjournments or postponements thereof.
At the DTE special meeting, DTE shareholders will be asked to consider and
to vote on a proposal to issue shares of DTE common stock in the merger. At the
MCN special meeting, MCN shareholders will be asked to consider and to vote upon
a proposal to approve the merger agreement. Approval of the merger agreement
will also constitute approval of the transactions contemplated thereby,
including, among others, the merger.
The merger agreement provides that MCN will be merged with and into DTE
Enterprises, with DTE Enterprises as the surviving corporation. In the merger,
each share of MCN common stock issued and outstanding immediately prior to the
merger, other than shares of MCN common stock owned by DTE or MCN (except for
those owned on behalf of third parties), will be converted into the right to
receive $28.50 in cash or 0.775 shares of DTE common stock. The merger agreement
also contains proration and allocation procedures that ensure that:
- The aggregate number of shares of MCN common stock that will be converted
into cash will be equal to 55% of the total number of shares of MCN
common stock outstanding immediately prior to the merger; and
- The aggregate number of shares of MCN common stock that will be converted
into shares of DTE common stock will be equal to 45% of the total number
of shares of MCN common stock outstanding immediately prior to the
merger.
In addition, as discussed in further detail under "The Merger
Agreement -- Terms of the Merger" on page 52, the percentage of shares of MCN
common stock converted into cash and shares of DTE common stock also may be
further adjusted in order to preserve the status of the merger as a
reorganization under the Internal Revenue Code.
The merger will become effective when the certificate of merger is duly
endorsed by the Department of Consumer and Industry Services of the State of
Michigan.
DTE will account for the merger as a purchase for financial reporting
purposes. The merger is intended to qualify as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, for federal
income tax purposes.
Based on the $37 closing price per share of DTE common stock on the NYSE on
October 4, 1999, the last trading day prior to public announcement of the
merger, and the exchange ratio of 0.775, the implied per share value of each
share of MCN common stock converted into shares of DTE common stock in the
merger was $28.675 as of such date. Based on the $33 11/16 closing price per
share of DTE common stock on the NYSE on November 11, 1999, the last practicable
trading day prior to the date of this document, and the exchange ratio of 0.775,
the implied per share value of each share of MCN common stock converted into
shares of DTE common stock in the merger was $26.11 as of such date.
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BACKGROUND TO THE MERGER
In recent years, the management of each of DTE and MCN has periodically
reviewed its company's competitive position in the electric and gas utility
industry, industry trends and strategic initiatives to seek to improve its
competitive position.
In this context, and after several meetings between Warburg Dillon Read LLC
and DTE's senior management team and after several presentations by Warburg
Dillon Read to the DTE board of directors regarding possible strategic
opportunities, DTE engaged Warburg Dillon Read in late 1998 as its financial
advisor for a possible combination with MCN.
In the fall of 1998 and continuing into early 1999, Mr. Anthony F. Earley,
Jr., Chairman and Chief Executive Officer of DTE, and Mr. Alfred R. Glancy III,
Chairman and Chief Executive Officer of MCN, had several discussions initiated
by Mr. Earley with respect to a combination of DTE and MCN. In March 1999, Mr.
Earley, on behalf of the DTE board of directors, sent a letter to Mr. Glancy
expressing DTE's belief that a business combination of DTE and MCN could be
beneficial to both of the companies and their respective shareholders, and to
indicate that, based on a review of MCN's public documents and subject to a due
diligence review of MCN, DTE believed that it could offer MCN's shareholders a
substantial premium over MCN's then-current stock price. After considering the
DTE proposal and determining that it was in the best interests of MCN's
shareholders for MCN to pursue its business plan as an independent company, Mr.
Glancy, on behalf of the MCN board of directors, declined Mr. Earley's offer to
engage in further discussions.
On June 22, 1999, the DTE board of directors met and received presentations
from Warburg Dillon Read, McKinsey and Company and Goldman, Sachs & Co. on
recent developments and opportunities in the electric utility industry. Members
of DTE's senior management also presented their views on various potential
business acquisitions, including an acquisition of MCN.
On July 28, 1999, the MCN board of directors approved a significantly
revised strategic direction for MCN, the key aspects of which included a
regional rather than North American focus and an emphasis on achieving
operational efficiencies and growth through integration of existing businesses.
The MCN board of directors requested that Merrill Lynch assist it with a review
and analysis of MCN's strategic alternatives.
On July 28, 1999, at a regular meeting of the DTE board of directors, the
DTE board of directors authorized management to pursue a negotiated acquisition
of MCN.
In August 1999, at the request of Mr. Earley, Mr. Earley and Mr. Larry G.
Garberding, Chief Financial Officer of DTE, met with Mr. Glancy and Mr. Howard
L. Dow III, Chief Financial Officer of MCN, to discuss a transaction between DTE
and MCN. At this meeting, Mr. Earley proposed that DTE and MCN pursue a
transaction at a price of $27.00 per MCN share subject to adjustment based on
further information from MCN. Mr. Glancy said he would discuss the proposal with
the MCN board of directors.
On August 24, 1999, the MCN board of directors met and Merrill Lynch
reviewed with it recent developments in the gas utility industry. Merrill Lynch
also reviewed with the MCN board of directors preliminary observations with
regard to the range of values that MCN might reasonably expect to realize in an
acquisition or business combination transaction. At that meeting, MCN authorized
management to work with Merrill Lynch in connection with a potential transaction
with DTE. At this meeting, the MCN board of directors also reviewed the DTE
proposal.
Later in August 1999, Mr. Earley met with Mr. Glancy to consider further
the financial terms of a merger and shortly thereafter, Mr. Earley reported to
the DTE board of directors on the progress of discussions with MCN. On August
30, 1999, the parties entered into a customary form of confidentiality
agreement. In early September 1999, after MCN provided preliminary information
to DTE, Mr. Earley and Mr. Glancy had several conversations to discuss further
the financial terms of the proposed transaction between the companies. These
discussions focused on price, an exclusive negotiating arrangement and whether
the consideration to be paid to MCN shareholders would be in cash or in shares
of DTE common stock. On September 7, 1999, the MCN board of directors met and
was briefed on the discussions between the parties and authorized further
discussions.
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<PAGE> 33
Thereafter, in September 1999, Mr. Earley and Mr. Glancy discussed a price
of $28.50 per share of MCN common stock, subject to DTE's due diligence review
of MCN, and an informal understanding was reached that MCN would inform DTE
prior to engaging in negotiations with a third party. The parties commenced
their respective due diligence investigations of each other and the senior
executives of DTE and MCN, along with outside financial advisors, met to discuss
the possible combination of the two companies. These discussions focused on the
mutual due diligence, allocation of management responsibilities and regulatory
issues. The parties' senior managements also discussed the immediate sale of
MCN's coal fines properties and other assets to DTE and the potential financial
impact of MCN severance agreements and the acceleration of certain MCN employee
benefits. On September 16, 1999 and September 22, 1999, the DTE board of
directors and the MCN board of directors, respectively, were briefed on the
discussions between the parties; at its meeting, the DTE board of directors also
reviewed relevant financial and legal considerations.
In late September, Mr. Earley and Mr. Glancy met to discuss allocation of
management responsibility and discussed the terms under which Mr. Glancy would
be willing to enter into a consulting arrangement with DTE to ensure his
availability after the completion of the proposed transaction. In addition, the
companies' respective legal advisors engaged in extensive meetings and
negotiations in New York to establish the terms of the transaction; among the
principal issues discussed were matters relating to preserving the status of the
proposed transaction as a reorganization under the Internal Revenue Code,
termination of the merger agreement and the fees that would be payable in the
event of termination and conditions to the parties' respective obligations to
consummate the merger.
On September 29, 1999, Mr. Earley met with Mr. Glancy and agreed that,
subject to final resolution of certain unresolved matters, the consideration to
be received by MCN shareholders would consist of cash and stock, and that the
terms of the merger agreement would permit MCN shareholders to elect to receive
$28.50 in cash or a fraction of a share of DTE common stock. On October 3, 1999,
Mr. Earley and Mr. Glancy met with their respective financial advisors and
agreed that MCN shareholders would be able to elect to receive 0.775 shares of
DTE common stock in lieu of $28.50 in cash, subject to allocation and proration
mechanisms and tax adjustments necessary to preserve the status of the merger as
a reorganization under the Internal Revenue Code.
On October 4, 1999, the DTE board of directors met to consider and to
approve the terms of the merger agreement. Members of DTE management and
representatives of Warburg Dillon Read and Sullivan & Cromwell, special counsel
to DTE, updated the DTE board of directors on developments since its September
16, 1999, meeting. Sullivan & Cromwell reviewed the fiduciary obligations of the
DTE board of directors and described the definitive documentation and its
effect. Warburg Dillon Read made a financial presentation and delivered its
opinion to the effect that, based upon and subject to the considerations set
forth in such opinion, as of October 4, 1999, the consideration to be paid to
MCN shareholders in the merger was fair, from a financial point of view, to DTE.
After further discussion and deliberation, the DTE board of directors adopted
the merger agreement, the merger and the transactions contemplated thereby, and
resolved to recommend that DTE shareholders vote to approve the issuance of
shares of DTE common stock in the merger.
On October 4, 1999, the MCN board of directors met to consider the proposed
merger. Members of MCN's senior management and representatives of Merrill Lynch
and Wachtell, Lipton, Rosen & Katz, special counsel to MCN, made presentations
to the MCN board of directors and discussed with the MCN board of directors
their views and analyses of various business, financial, legal and regulatory
aspects of the proposed transaction, including a review of the terms and
conditions of the definitive agreements. In addition, the MCN board of directors
received a presentation from a nuclear consulting firm regarding DTE's nuclear
plants. Wachtell, Lipton reviewed the fiduciary obligations of the MCN board of
directors and described the definitive documentation and its effect. Merrill
Lynch orally delivered its fairness opinion, which was subsequently confirmed in
writing, to the MCN board of directors to the effect that, as of such date, the
merger consideration to be received by MCN shareholders in the merger was fair,
from a financial point of view, to MCN shareholders. The nonmanagement directors
met in an executive session at which the directors were given an opportunity to
ask questions and discuss their views of the transaction and discussed
management's interests in the merger. After further discussion and deliberation,
the full MCN board of directors reconvened and discussed the presentations
received from management, MCN's financial advisor
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and its legal counsel. The MCN board of directors also discussed the potential
sale of MCN's coal fines properties to DTE. The MCN board of directors
authorized management to negotiate definitive documentation containing
arms-length terms, including those set forth in the merger agreement, relating
to the sale of the coal fines properties independent of the merger. The MCN
board of directors then adopted by unanimous vote the merger agreement and
authorized its execution and resolved to recommend that MCN shareholders vote to
approve the merger agreement and the other related transactions.
DTE'S AND MCN'S REASONS FOR THE MERGER
The merger of DTE and MCN will create a fully integrated electric and
natural gas company with a strong regional energy infrastructure and competitive
operations spanning the energy value chain. By combining DTE's experience in
power plant operations, coal management and marketing with MCN's experience in
natural gas purchasing, transportation, storage and marketing, the combined
company will be positioned to market coal, gas and electricity in the region and
to compete more effectively in the development of new power plants and
distributed generation. DTE and MCN believe this will generate significant
opportunities to deliver greater value to shareholders. The DTE board of
directors and the MCN board of directors each considered a number of factors in
deciding to adopt the merger agreement and recommend it to their shareholders.
The material factors considered are those set forth below.
In reaching their decision, the DTE board of directors and the MCN board of
directors considered the complementary nature of the businesses of DTE and MCN
in terms of their commercial strengths and the ability to combine these
strengths to pursue more effectively growth and expansion opportunities
available in the region spanning the corridor from the Great Lakes to the
northeast area of the United States. The area from the Great Lakes to the
northeast area of the United States generates a substantial portion of the
nation's energy consumption and has a high concentration of large industrial
customers. This geographic area is playing an increasingly important role as a
gas pricing and transportation hub and is central to the growing west-to-east
coal, gas and electric flows. The merger will combine in one enterprise DTE's
position as a leading regional coal marketer and MCN's participation in
pipelines and gas reserves in the regional gas corridor and will allow the
combined company to offer attractive energy supply options to large customers
and develop as a major regional multifuel and power marketer. The DTE board of
directors and the MCN board of directors also believe that DTE's existing
interconnections to the Canadian and midwest electricity systems create an
ability to sell electricity to eastern locations through Ontario and to
midwestern locations, which have relatively low capacity, through Michigan's
southern interconnections. These existing electricity interconnections make the
combined company well-positioned to build a regional marketing business that
complements DTE's and MCN's existing coal, electricity and gas marketing
businesses.
Other positive factors considered by the DTE board of directors and the MCN
board of directors include (1) the new enterprise's ability to provide expanded
product offerings to its customers, and the enhanced ability to develop onsite
energy facilities and services for business customers; (2) the terms and
conditions of the merger agreement, including the fixed exchange ratio and the
lack of any conditions to the merger considered likely to impede or delay
successful completion; (3) the expectation that the merger will generally be a
tax-free exchange to shareholders of MCN who exchange all their shares of MCN
common stock solely for shares of DTE common stock in the merger and that no
gain or loss will be recognized by DTE or MCN for U.S. federal income tax
purposes; (4) the combined companies' improved ability to compete against
integrated gas and electric companies; and (5) the current environment in the
electric and gas industries and the advantage to each company of proceeding with
a transaction now that offers an opportunity to generate value for shareholders.
Each company's board of directors also considered certain countervailing
factors in their respective deliberations concerning the merger including (1)
the fact that the exchange ratio will not be adjusted even if the two companies'
share prices diverge in the period prior to completion of the merger and (2) the
possibility of encountering difficulties in integrating the operations of DTE
and MCN and in achieving cost savings to the extent currently estimated or in
the time currently contemplated.
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RECOMMENDATION AND ADDITIONAL CONSIDERATIONS OF THE DTE BOARD OF DIRECTORS
At its meeting on October 4, 1999, the DTE board of directors, by unanimous
vote of the directors present (which did not include Messrs. Lobbia and Pryor,
each of whom was unavailable on October 4, 1999, but who subsequently indicated
their respective adoption of the merger agreement and the merger after review of
all material information regarding the transaction), determined that the merger
agreement and the transactions contemplated thereby, including the merger, are
fair to and in the best interests of DTE and the DTE shareholders. Accordingly,
the DTE board of directors has unanimously adopted the merger agreement, and the
DTE board of directors recommends that the DTE shareholders vote "FOR" approval
of the proposal to issue shares of DTE common stock in the merger.
In the course of reaching its decision to approve the merger agreement, the
DTE board of directors consulted with DTE's management, as well as its outside
legal counsel and its financial advisor, and considered the following factors,
in addition to those set forth above under "-- DTE's and MCN's Reasons for the
Merger" on page 24:
- FAIRNESS OPINION. The DTE board of directors considered the analysis and
presentation prepared by Warburg Dillon Read and its oral opinion, which
was subsequently confirmed in writing, to the effect that, as of October
4, 1999, and based upon and subject to the various considerations set
forth in its opinion, the consideration to be paid by DTE to the MCN
shareholders is fair, from a financial point of view, to DTE.
- SYNERGIES. The DTE board of directors considered that the merged
enterprise would be able to achieve an average of $60 million in
(after-tax) cost savings per year over the first ten years of the merger,
enhancing the earnings potential of the merged enterprise over the
earnings potential of DTE and MCN as separate companies. The estimated
cost savings are expected to come from operating cost synergies created
by economies of scale, skill benefits and other operating efficiencies.
- ACCRETIVE TRANSACTION. The DTE board of directors considered that the
merger is expected to be accretive to DTE's earnings per share in 2001.
In addition, DTE's board of directors considered management's belief that
the merger with MCN will strongly support DTE's commitment to a long-
term earnings growth rate of 6%.
- MANAGEMENT OF DTE AFTER THE MERGER. The DTE board of directors considered
the management arrangements agreed to between DTE and MCN that will
provide for a strong management team drawn from both companies that will
work together to integrate the two companies to realize growth
opportunities, to achieve synergistic benefits and to successfully
implement strategies of DTE.
- TAX TREATMENT. The DTE board of directors considered that the intended
treatment of the merger will be a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code.
- REGULATORY APPROVALS AND CLEARANCES. The DTE board of directors
considered its belief, after consultation with its legal counsel, that
the regulatory approvals and clearances necessary to complete the merger
could be obtained.
The DTE board of directors weighed these advantages and opportunities
against the following risks associated with the merger:
- The DTE board of directors considered the challenges inherent in the
combination of two business enterprises of the size and scope of DTE and
MCN and the possible resulting diversion of management attention for an
extended period of time.
- The DTE board of directors considered the obligations of DTE under the
circumstances set forth in the merger agreement to pay MCN a termination
fee of $85 million and reimburse MCN's charges and expenses in connection
with the merger up to a maximum amount of $15 million. On balance, the
DTE board of directors determined that agreement to these provisions,
which are often used in transactions of this nature, was a necessary part
of inducing MCN's commitment to enter into the merger agreement.
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The foregoing discussion of the information and factors which were given
weight by the DTE board of directors is not exhaustive, but includes all
material factors considered by the DTE board of directors. In view of the wide
variety of factors considered by the DTE board of directors in connection with
its evaluation of the merger and the complexity of such matters, the DTE board
of directors did not consider it practical to, nor did it attempt to, quantify,
rank or otherwise assign relative weights to the specific factors it considered
in reaching its decision. The DTE board of directors conducted a discussion of
the factors described above, including asking questions of DTE's management and
DTE's legal and financial advisors, and reached a general consensus that the
merger was fair to and in the best interests of DTE and the DTE shareholders. In
considering the factors described above, individual members of the DTE board of
directors may have given different weight to different factors. The DTE board of
directors relied on the experience and expertise of its financial advisor for
quantitative analysis of the financial terms of the merger. See "-- Opinion of
DTE's Financial Advisor" on page 28.
DTE's board of directors also considered that members of DTE's and MCN's
management and members of each party's board of directors have interests in the
merger that are different from, or in addition to, the interests of DTE's
shareholders generally. These interests are discussed in detail under "--
Interests of Management and Directors in the Merger" on page 43.
THE DTE BOARD OF DIRECTORS, AT A MEETING DULY CALLED AND HELD, HAS, BY A
UNANIMOUS VOTE OF THE DIRECTORS PRESENT, ADOPTED THE MERGER AGREEMENT, AND HAS
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF DTE AND THE DTE
SHAREHOLDERS. ACCORDINGLY, THE DTE BOARD OF DIRECTORS RECOMMENDS THAT DTE
SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO APPROVE THE ISSUANCE OF SHARES OF
DTE COMMON STOCK IN THE MERGER.
RECOMMENDATION AND ADDITIONAL CONSIDERATIONS OF THE MCN BOARD OF DIRECTORS
At a special meeting held on October 4, 1999, having determined that the
merger is fair to and in the best interests of MCN and its shareholders, the MCN
board of directors unanimously adopted the merger agreement. In adopting the
merger agreement and in reaching its recommendation, the MCN board of directors
consulted with and relied upon information and reports prepared or presented by
MCN's management and MCN's legal and financial advisors. The following are the
material factors that the MCN board of directors considered, some of which
contain both positive and negative elements:
- The MCN board of directors' consideration of the financial condition,
recent results of operations, prospects and businesses of MCN and the
recent stock price performance of MCN shares;
- The MCN board of directors' consideration of the prospects and businesses
of MCN and DTE, the revenues of the companies, their complementary
businesses, the recent stock price performance of DTE shares and the
percentage of the combined company to be owned by MCN shareholders
following the merger;
- The other strategic options potentially available to MCN including
mergers with other parties, sales of additional assets and share
repurchases;
- The MCN board of directors' understanding of the present and anticipated
environment in the utility industry, and how possible consolidation
within the utility industry could affect MCN's competitive position in
relation to integrated gas and electric companies;
- Current industry, economic and market conditions;
- The risks and rewards of the alternative of continuing as an independent
entity. Such risks include, among others, the risks associated with
remaining independent amidst industry-wide consolidation and with raising
capital to fund growth on satisfactory terms. The potential rewards
include, among others, the ability of existing MCN shareholders to
partake fully in the potential future growth and profitability of MCN;
- The financial and business prospects for the combined company;
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- The expectation that MCN shareholders who receive cash as well as shares
of DTE common stock in the merger may recognize gain but not in excess of
the amount of cash they receive. It is also expected that those MCN
shareholders who exchange their MCN shares for cash will generally be
eligible for capital gains treatment;
- Subject to tax adjustments necessary to preserve the status of the merger
as a reorganization under the Internal Revenue Code, the consideration to
be paid by DTE in the merger of $28.50 in cash to be received for 55% of
the MCN shares in the merger, and 0.775 shares of DTE stock (which had a
value of approximately $28.50 at the date of the merger agreement) for
the other 45% of the MCN shares, representing a substantial premium over
the then-current market price of MCN stock;
- The fact that the merger agreement provides MCN shareholders an
opportunity to receive cash for their MCN shares (subject to allocation
and proration and to tax adjustments necessary to preserve the status of
the merger as a reorganization under the Internal Revenue Code);
- The value of the merger consideration relative to then-current market
prices and historical trading prices of MCN and DTE stock;
- The dividends payable in respect of 0.775 shares of DTE common stock
being 56.5% higher than the dividend on a share of MCN common stock;
- The corporate governance aspects of the merger, including the fact that
Mr. Glancy and two other MCN directors selected by MCN in consultation
with DTE will be appointed to the DTE board of directors;
- The role that MCN's current management is expected to play in the
management of the combined company;
- The interests of MCN management, including Mr. Glancy, in the merger;
- The opinion of Merrill Lynch to the MCN board of directors to the effect
that, as of October 4, 1999, and subject to the matters described in that
opinion, the consideration to be received by the MCN shareholders was
fair from a financial point of view to MCN shareholders;
- The other advice from MCN management and the MCN board of directors'
financial and legal advisors, and the discussions of the MCN board of
directors concerning the proposed merger agreement;
- The ability to obtain regulatory approvals for the merger;
- The fact that the merger agreement permits MCN to provide information and
enter into negotiations if another party makes an unsolicited proposal,
if the board of directors determines that failure to take such action
would likely result in a breach of its fiduciary duties, and that MCN can
terminate the merger agreement to accept a superior proposal if it pays a
termination fee of $55 million and reimburses DTE's charges and expenses
up to $15 million; and
- In light of the board of directors' obligation under the MCN articles of
incorporation to consider the impact of the offer on certain of MCN's
constituencies, the fact that DTE made significant commitments in the
merger agreement, including, among others, a statement of intention to
maintain MCN's and DTE's normal aggregate level of charitable
contributions and community involvement, and a commitment to maintain for
a period of one year MCN's current aggregate level of compensation and
benefits for its employees, as well as stating that it was DTE's
intention not to make any involuntary reductions in workforce, but that
if such reductions become necessary, that they would be made on a fair
and equitable basis.
The MCN board of directors also considered (1) the risk that the benefits
sought in the merger would not be obtained; (2) the risk that the merger would
not be completed; (3) the effect of the public announcement of the merger on
MCN's sales, customer, supplier and creditor relationships, operating results
and ability to retain employees and the trading price of MCN shares; (4) the
substantial management time and effort that
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will be required to complete the merger and integrate the operations of the two
companies; (5) the possibility that various provisions of the merger agreement
might have the effect of discouraging other persons potentially interested in a
combination with MCN from pursuing such an opportunity; (6) the risk that the
value of MCN shares will decline; and (7) other matters described under "Risk
Factors" on page 10 and "Cautionary Statement Regarding Forward-Looking
Statements" on page 12."
This discussion of the information and factors considered by the MCN board
of directors is not intended to be exhaustive. In view of the wide variety of
factors considered, the MCN board of directors did not assign relative weights
to the factors discussed above or determine that any factor was of particular
importance. Rather, the MCN board of directors based its recommendation upon the
totality of the information presented.
THE MCN BOARD OF DIRECTORS, AT A MEETING DULY CALLED AND HELD, HAS, BY A
UNANIMOUS VOTE OF THE DIRECTORS, ADOPTED THE MERGER AGREEMENT, AND HAS
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF MCN AND THE MCN
SHAREHOLDERS. ACCORDINGLY, THE MCN BOARD OF DIRECTORS RECOMMENDS THAT MCN
SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
OPINION OF DTE'S FINANCIAL ADVISOR
On October 4, 1999, the DTE Energy Company board of directors received
Warburg Dillon Read's oral opinion, which was subsequently followed by a written
opinion as of the same date, that, as of that date and subject to the various
considerations, assumptions, limitations and qualifications described in the
opinion, the consideration to be paid by DTE to shareholders of MCN and holders
of options to purchase MCN common stock is fair, from a financial point of view,
to DTE. Warburg Dillon Read has delivered to the DTE board of directors an
update of its opinion, which is dated as of the date of this document, which
confirms Warburg Dillon Read's opinion of October 4, 1999, as of November 12,
1999, and which is attached as Appendix B.
Each DTE shareholder is urged to read the actual Warburg Dillon Read
opinion, dated November 12, 1999, which is attached as Appendix B to this proxy
statement. The Warburg Dillon Read opinion does not constitute a recommendation
as to how any DTE shareholder should vote at the special meeting.
In arriving at its opinion, Warburg Dillon Read, among other things:
- Reviewed certain publicly available business and historical financial
information relating to DTE and MCN;
- Reviewed certain internal financial information and other data relating
to the business and financial prospects of DTE and MCN, including
estimates and financial forecasts prepared by the managements of DTE and
MCN as provided to Warburg Dillon Read by DTE and MCN and not publicly
available;
- Conducted discussions with members of the senior management of DTE and
MCN with respect to the business and prospects of DTE and MCN;
- Reviewed publicly available financial and stock market data of
diversified natural gas companies which are, in the opinion of Warburg
Dillon Read, generally comparable to MCN;
- Reviewed publicly available financial and stock market data of certain
natural gas distribution companies which are, in the opinion of Warburg
Dillon Read, generally comparable to MichCon;
- Compared the financial terms of the merger agreement with the publicly
available financial terms of certain transactions which are, in the
opinion of Warburg Dillon Read, generally comparable;
- Performed a segment analysis of MCN;
- Performed a discounted cash flow analysis of certain business operations
of MCN based on financial forecasts provided by the managements of DTE
and MCN;
- Reviewed publicly available financial and stock market data of certain
electric utilities which are, in the opinion of Warburg Dillon Read,
generally comparable to DTE;
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<PAGE> 39
- Considered certain pro forma effects of this transaction on DTE's
financial statements and reviewed certain estimates of synergies prepared
by DTE management;
- Considered the strategic advantages of this transaction;
- Reviewed the merger agreement; and
- Conducted other financial studies, analyses and investigations, and
considered such other information as Warburg Dillon Read deemed necessary
or appropriate.
Warburg Dillon Read did not independently verify any of the above
information and relied, with DTE's consent, on the information being materially
complete and accurate. Warburg Dillon Read has not made any independent
evaluation or appraisal of any of the assets or liabilities of MCN or DTE, and
no one has furnished Warburg Dillon Read with any such evaluation or appraisal.
Warburg Dillon Read assumed that the financial forecasts referred to above were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of DTE's and MCN's managements as to the future financial
performance of DTE and MCN. Warburg Dillon Read also assumed that those
estimates would be materially achieved in the amounts and at the times stated.
DTE did not limit Warburg Dillon Read regarding the procedures to be followed or
factors to be considered in rendering its opinions.
Warburg Dillon Read's opinion is based on economic, monetary, market and
other conditions existing on, and the information made available to Warburg
Dillon Read as of, the date thereof.
The Warburg Dillon Read opinion does not address DTE's underlying business
decision to effect the merger or constitute a recommendation to any shareholder
of DTE or MCN as to how such shareholder should vote with respect to the merger.
DTE did not ask Warburg Dillon Read to, and Warburg Dillon Read did not, offer
any opinion as to the material terms of the merger agreement or the form of the
merger.
No company, transaction or business used in the analysis described below
under "Comparable Company Trading Analysis" and "Comparable Natural Gas Company
Acquisition Analysis" is identical to MCN or the proposed merger. Accordingly,
the analysis of the results necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors.
In connection with rendering its opinions, Warburg Dillon Read considered a
variety of valuation methods. Warburg Dillon Read considered the valuation of
MCN both as a consolidated entity and as the summation of distinct segments. The
following discussion summarizes the material valuation methods considered by
Warburg Dillon Read. Certain numbers in the following discussion may not add due
to rounding.
The consolidated entity valuation consists of a comparable company trading
analysis and a comparable acquisition analysis for MCN.
Comparable Company Trading Analysis. Using publicly available information,
Warburg Dillon Read compared multiples of certain financial criteria for MCN to
multiples based upon market trading values at the time for certain other
companies which, in Warburg Dillon Read's judgment, were generally comparable to
MCN for the purpose of this analysis. The factors Warburg Dillon Read considered
in selecting companies for comparison included size, geographic location,
financial condition and scope of business operations. The companies used in the
comparison were Columbia Energy Group, National Fuel Gas Company, CMS Energy
Corporation, Consolidated Natural Gas Company and Questar Corporation.
In evaluating the current market value of MCN common stock, Warburg Dillon
Read determined ranges of multiples for selected measures of financial
performance for the comparable companies, including the market value of
outstanding common stock as a multiple of:
- Net income per share of common stock for the latest 12-month period, and
estimated net income per share of common stock for the current and the
following fiscal years as projected by I/B/E/S, a data service that
monitors and publishes a compilation of earnings estimates produced by
selected research analysts on companies of interest to investors; and
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<PAGE> 40
- Book value of common equity for the most recently available fiscal
quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value of MCN (defined as the market value of
outstanding common stock plus total debt, preferred and minority interests, less
cash and equivalents) as a multiple of:
- Operating income, or earnings before interest and taxes ("EBIT"), for the
latest 12-month period; and
- Operating cash flow, or earnings before interest, taxes, depreciation and
amortization ("EBITDA"), for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding data
for MCN. This analysis produced a range of values per share for MCN. The results
are summarized in the following table, which shows the range of valuations
produced for each of the measures of MCN's financial performance:
<TABLE>
<CAPTION>
COMPARABLE LOW END HIGH END
MEASURE OF FINANCIAL PERFORMANCE COMPANY MULTIPLES OF RANGE OF RANGE
-------------------------------- ----------------- -------- --------
<S> <C> <C> <C>
Latest Twelve Months Earnings Per Share................... 15.0x - 20.0x $19.20 $25.60
1999 Estimated Earnings Per Share......................... 14.0x - 16.0x $16.80 $19.20
2000 Estimated Earnings Per Share......................... 12.5x - 14.5x $19.25 $22.33
Book Value of Equity...................................... 1.6x - 2.5x $17.90 $27.97
Latest Twelve Months EBIT................................. 12.5x - 15.0x $16.41 $24.01
Latest Twelve Months EBITDA............................... 7.0x - 9.0x $13.17 $23.11
Mean Value................................................ $17.12 $23.70
Median Value.............................................. $17.35 $23.56
</TABLE>
As shown above, this analysis produced values of $17.12 to $23.70 per share
for MCN. MCN's closing price of $17.69 on October 4, 1999, was near the low end
of this range.
Warburg Dillon Read then added to the trading value of MCN the value of
certain cost synergies as estimated by the management of DTE using a discounted
cash flow analysis. With respect to the estimates of cost synergies, Warburg
Dillon Read assumed that such estimates were reasonably prepared upon bases
reflecting the best available estimates and judgments of the management of DTE.
Utilizing these estimates of cost synergies, Warburg Dillon Read discounted to
present value, under assumed discount rates ranging from 6.65% to 7.65%, the
after-tax cash flows to shareholders from cost synergies through the year 2010.
Present values were derived both with and without a terminal value, which was
determined based on the midpoint of the multiple range of EBITDA of 7.0x to
9.0x, or 8.0x, based on the comparable company trading analysis. The implied
value per share of cost synergies based upon this analysis was $3.59 to $7.29.
Combining the present value of cost synergies with the trading value of MCN
provided a value range of $20.71 to $30.99 per share of MCN common stock.
Comparable Natural Gas Company Acquisition Analysis. Warburg Dillon Read
reviewed comparable transactions involving acquisitions of regulated natural gas
companies or holding companies for regulated natural gas companies. Two sets of
comparable transactions were selected. The first set, involving seven comparable
transactions, was selected based on size and included only those companies with
equity valued in excess of $1 billion.
The first set of comparable transactions included the following proposed
transactions:
- Wisconsin Energy Corporation and Wicor Inc.;
- NiSource Inc. and Columbia Energy Group;
- El Paso Energy Corporation and Sonat Inc.;
- Southern Union Company and Southwest Gas Corporation;
- Dominion Resources, Inc. and Consolidated Natural Gas Company;
- Duke Power Company and PanEnergy Corporation; and
- Houston Industries Inc. and NorAm Energy Corporation.
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<PAGE> 41
The second set of comparable transactions included an additional seventeen
transactions over the last four years. This set of comparables was reviewed
because it includes the acquisition of regulated natural gas companies by much
larger acquirors which is analogous to DTE's acquisition of MCN.
Warburg Dillon Read calculated the equity consideration to be received by
the second company's shareholders for each of the comparable transactions as a
multiple of various measures of financial performance for that company
including:
- Net income per share of common stock for the latest 12-month period as of
the date of each respective transaction announcement, and projected net
income per share of common stock for the then current and the following
fiscal years as projected by I/B/E/S; and
- Book value of common equity for the most recently available fiscal
quarter prior to each respective transaction announcement.
In addition, Warburg Dillon Read calculated the adjusted market value for
each of the comparable transactions as a multiple of each acquired company's:
- Operating income, or EBIT, for the latest 12-month period as of the date
of each respective transaction announcement; and
- Operating cash flow, or EBITDA, for the latest 12-month period as of the
date of each respective transaction announcement.
Warburg Dillon Read then applied such multiples to the corresponding data
for MCN. This analysis produced a range of values per share for MCN. The results
are summarized in the following table, which shows the range of valuations
produced for each of the measures of MCN financial performance:
<TABLE>
<CAPTION>
COMPARABLE LOW END HIGH END
MEASURE OF FINANCIAL PERFORMANCE TRANSACTION MULTIPLES OF RANGE OF RANGE
-------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Latest Twelve Months Earnings Per Share................. 20.0x - 24.0x $25.60 $30.72
Current Year Estimated Earnings Per Share............... 18.0x - 22.0x $21.60 $26.40
Forward Year Estimated Earnings Per Share............... 16.0x - 21.0x $24.64 $32.34
Book Value of Equity.................................... 2.3x - 2.9x $25.74 $32.46
Latest Twelve Months EBIT............................... 13.5x - 15.5x $19.44 $25.52
Latest Twelve Months EBITDA............................. 8.0x - 10.0x $18.13 $28.07
Mean Value.............................................. $22.53 $29.25
Median Value............................................ $23.12 $29.40
</TABLE>
As shown above, this analysis produced values of $22.53 to $29.40 per share
for MCN.
Warburg Dillon Read then averaged the values produced by the Comparable
Company Trading Analysis with the value produced by the Comparable Natural Gas
Company Acquisition Analysis, producing values of $21.61 to $30.19 per MCN share
of common stock.
To this range of values, Warburg Dillon Read added the value of MCN's coal
fines projects, estimated at $40 million per plant based upon recent
transactions. The range of value for the coal fines projects of $1.76 to $2.63
per MCN share of common stock is based upon four operating coal fines projects
(at the low end of the range) to six operating coal fines projects (at the high
end of the range). Combining this range of values with the range of values
included above results in a total consolidated valuation range per MCN share of
common stock of $23.37 to $32.82.
Warburg Dillon Read also performed a segment analysis of MCN, which
consisted of valuation analyses for MCN's two distinct segments: the natural gas
distribution company, MichCon, and the diversified energy business. For MichCon,
the valuation analysis was based upon a discounted cash flow analysis, a
comparable company trading analysis and a comparable acquisition analysis.
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<PAGE> 42
Valuation of MCN's Natural Gas Distribution Company. Warburg Dillon Read
performed valuation analyses of MichCon based on a discounted cash flow
analysis, a comparable company trading analysis, and a comparable acquisition
analysis. Warburg Dillon Read performed a discounted cash flow analysis
valuation of MichCon based upon projections furnished by DTE. Utilizing these
projections, Warburg Dillon Read discounted to present value, under assumed
discount rates ranging from 6.65% to 7.65%, the free unleveraged cash flows
through the year 2004 for MichCon. Terminal values were determined utilizing
multiples of EBITDA of 7.0x to 9.0x, based on the EBITDA multiples of public
companies deemed comparable to MichCon. These were the same companies used by
Warburg Dillon Read in its comparable company trading analysis of MichCon
summarized below. The present value of the discounted cash flow of MichCon
ranged from $14.99 to $21.14. Warburg Dillon Read added to the discounted cash
flow valuation of MichCon the value of certain cost synergies as discussed
previously in "Comparable Company Trading Analysis." The implied value per share
of cost synergies of $3.59 to $7.29 was added to the results of the discounted
cash flow analysis, producing a value range of $18.58 to $28.43 per share of MCN
common stock.
Using publicly available information, Warburg Dillon Read also performed a
comparable company trading analysis for MichCon. Warburg Dillon Read compared
multiples of certain financial criteria for MichCon to multiples based upon
market trading values at the time for certain other companies which, in Warburg
Dillon Read's judgment, were generally comparable to MichCon for the purpose of
this analysis. The factors Warburg Dillon Read considered in selecting companies
for this comparison included size, geographic location, financial condition and
scope of business operations. The companies used in the comparison were Eastern
Enterprises, Nicor Inc., Peoples Energy Corporation, Piedmont Natural Gas
Company, Inc., Washington Gas Light Company and New Jersey Resources
Corporation.
In evaluating an implied market value of MichCon, were it a separate
publicly traded company, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the market value of outstanding common stock as a multiple of:
- Net income available to common stock for the latest 12-month period; and
- Book value of common equity for the most recently available fiscal
quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value as a multiple of:
- Operating income, or EBIT, for the latest 12-month period; and
- Operating cash flow, or EBITDA, for the latest 12-month period.
Warburg Dillon Read then applied such multiples to the corresponding data
for MichCon. This analysis produced a range of values per share for MichCon. The
results are summarized in the following table, which shows the range of
valuations produced for each of the measures of MichCon's financial performance:
<TABLE>
<CAPTION>
COMPARABLE LOW END HIGH END
MEASURE OF FINANCIAL PERFORMANCE COMPANY MULTIPLES OF RANGE OF RANGE
-------------------------------- ----------------- -------- --------
<S> <C> <C> <C>
Latest Twelve Months Net Income Available to Common
Stock..................................................... 16.0x - 21.0x $20.03 $26.29
Book Value of Common Equity............................... 1.8x - 2.2x $14.25 $17.41
Latest Twelve Months EBIT................................. 11.0x - 12.5x $18.13 $21.74
Latest Twelve Months EBITDA............................... 7.0x - 9.0x $15.97 $22.91
Mean Value................................................ $17.10 $22.09
Median Value.............................................. $17.05 $22.32
</TABLE>
As shown above, this analysis produced values of $17.05 to $22.32 per share
for MichCon. Warburg Dillon Read added to the comparable company trading
analysis valuation of MichCon the value of certain cost synergies as discussed
previously in "Comparable Company Trading Analysis." The implied value per share
of cost synergies of $3.59 to $7.29 was added to the results of the comparable
company trading analysis, producing a value range of $20.64 to $29.61 per share
of MCN common stock.
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<PAGE> 43
Warburg Dillon Read reviewed comparable transactions involving regulated
natural gas companies or holding companies for regulated natural gas companies
as previously discussed in "Comparable Natural Gas Company Acquisition
Analysis." Warburg Dillon Read calculated the equity consideration to be
received the acquired company's shareholders for each of the comparable
transactions as a multiple of various measures of financial performance for that
company, including:
- Net income available to common stock for the latest 12-month period as of
the date of each respective transaction announcement; and
- Book value of common equity for the most recently available fiscal
quarter prior to each respective transaction announcement.
In addition, Warburg Dillon Read calculated the adjusted market value for
each of the comparable transactions as a multiple of each acquired company's:
- Operating income, or EBIT, for the latest 12-month period as of the date
of each respective transaction announcement; and
- Operating cash flow, or EBITDA, for the latest 12-month period as of the
date of each respective transaction announcement.
Warburg Dillon Read then applied such multiples to the corresponding data
for MichCon. This analysis produced a range of values per MCN share for MichCon.
The results are summarized in the following table, which shows the range of
valuations produced for each of the measures of MichCon financial performance:
<TABLE>
<CAPTION>
COMPARABLE LOW END HIGH END
MEASURE OF FINANCIAL PERFORMANCE TRANSACTION MULTIPLES OF RANGE OF RANGE
-------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Latest Twelve Months Net Income Available for Common
Stock................................................... 20.0x - 24.0x $25.04 $30.05
Book Value of Common Equity............................. 2.3x - 2.9x $18.21 $22.96
Latest Twelve Months EBIT............................... 13.5x - 15.5x $24.14 $28.95
Latest Twelve Months EBITDA............................. 8.0x - 10.0x $19.44 $26.38
Mean Value.............................................. $21.71 $27.08
Median Value............................................ $21.79 $27.67
</TABLE>
As shown above, this analysis produced a range of values for MichCon of
$21.71 to $27.67 per share of MCN common stock.
The valuation analysis of MichCon can be summarized as shown in the
following table:
<TABLE>
<CAPTION>
LOW END HIGH END
VALUATION METHODOLOGY OF RANGE OF RANGE
--------------------- -------- --------
<S> <C> <C>
Discounted Cash Flow Analysis............................... $18.58 $28.43
Comparable Company Trading Analysis......................... $20.64 $29.61
Comparable Acquisition Analysis............................. $21.71 $27.67
Mean Value.................................................. $20.31 $28.56
</TABLE>
As shown above, the valuation analysis produced a range of values for
MichCon of $20.31 to $28.56 per share of MCN common stock.
Valuation of MCN's Diversified Energy Business. Warburg Dillon Read
performed valuation analysis of MCN's diversified energy business based on
various valuation methodologies, including discounted cash flow analysis,
comparable acquisition analysis and expected proceeds from pending asset sales,
where appropriate. Warburg Dillon Read performed discounted cash flow analyses
of MCN's diversified energy businesses based upon forecasts provided by MCN
management, with adjustments deemed appropriate by DTE management and Warburg
Dillon Read. Warburg Dillon Read discounted to present value, under assumed
discount rates ranging from 10.0% to 15.0%, the free unleveraged cash flows for
varying periods for MCN's diversified energy businesses. Terminal values were
determined, where appropriate, utilizing multiples of net income of 16.0x to
24.0x. Where appropriate, Warburg Dillon Read also compared the discounted cash
flow analysis results with
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<PAGE> 44
the results of comparable acquisitions and the expected proceeds from pending
asset sales. This analysis produced values ranging from $1,109 million to $1,372
million. After adjusting this value for the forecast debt level of $1,223
million (as of December 31, 1999) for MCN's diversified energy businesses, the
implied equity value for MCN's diversified energy businesses ranges from
negative $114 million to positive $149 million, or negative $1.25 to positive
$1.64 per share of MCN common stock. To this range of values, Warburg Dillon
Read added the range of value for MCN's coal fines projects of $1.76 to $2.63
per share of MCN common stock, producing a total valuation range for MCN's
diversified businesses of $0.50 to $4.27 per share of MCN common stock.
The segment analysis of MCN can be summarized as shown in the following
table:
<TABLE>
<CAPTION>
LOW END HIGH END
SEGMENT OF RANGE OF RANGE
------- -------- --------
<S> <C> <C>
MichCon..................................................... $20.31 $28.56
Diversified Energy Business................................. (1.25) 1.64
Coal Fines.................................................. 1.76 2.63
Total....................................................... $20.81 $32.83
</TABLE>
As shown above the segment valuation analysis produced a range of values
for MCN of $20.81 to $32.83 per share of MCN common stock.
DTE Comparable Company Trading Analysis. Using publicly available
information, Warburg Dillon Read compared multiples of certain financial
criteria for DTE to multiples based upon market trading values at the time for
certain other electric utilities or holding companies for electric utilities
which, in Warburg Dillon Read's judgment, were generally comparable to DTE for
the purpose of this analysis. The factors Warburg Dillon Read considered in
selecting companies for comparison included size, geographic location, financial
condition and scope of business operations. The companies used in the comparison
were Constellation Energy Group Inc., FirstEnergy Corporation, PECO Energy
Company, PP&L Resources, Inc., Unicom Corporation and Wisconsin Energy
Corporation.
In evaluating the current market value of DTE common stock, Warburg Dillon
Read determined ranges of multiples for selected measures of financial
performance for the comparable companies including the market value of
outstanding common stock as a multiple of:
- Net income per share of common stock for the latest 12-month period, and
estimated net income per share of common stock for the current and the
following fiscal years as projected by I/B/E/S; and
- Book value of common equity for the most recently available fiscal
quarter.
In addition, Warburg Dillon Read determined ranges of multiples for
selected measures of financial performance for the comparable companies,
including the adjusted market value of DTE as a multiple of:
- Operating income, or EBIT, for the latest 12-month period; and
- Operating cash flow, or EBITDA, for the latest 12-month period.
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<PAGE> 45
Warburg Dillon Read then applied such multiples to the corresponding data
for DTE. The results are summarized in the following table, which shows the
range of valuations produced for each of the measures of DTE's financial
performance:
<TABLE>
<CAPTION>
COMPARABLE LOW END HIGH END
MEASURE OF FINANCIAL PERFORMANCE COMPANY MULTIPLES OF RANGE OF RANGE
-------------------------------- ----------------- -------- --------
<S> <C> <C> <C>
Latest Twelve Months Earnings Per Share................... 12.3x - 14.5x $39.88 $46.26
1999 Estimated Earnings Per Share......................... 11.5x - 12.5x $36.92 $40.13
2000 Estimated Earnings Per Share......................... 10.5x - 12.0x $35.28 $40.32
Book Value of Equity...................................... 1.4x - 1.6x $36.40 $41.60
Latest Twelve Months EBIT................................. 9.0x - 10.0x $20.74 $26.82
Latest Twelve Months EBITDA............................... 6.0x - 7.5x $31.37 $47.71
Mean Value................................................ $33.43 $40.47
Median Value.............................................. $35.84 $40.96
</TABLE>
As shown above, this analysis produced values of $33.43 to $40.96 per share
for DTE. DTE's closing price on October 4, 1999, was $37.00. This analysis was
performed by Warburg Dillon Read to determine if the DTE common stock comprising
45% of the total consideration of the merger was appropriately valued. Based on
this analysis, Warburg Dillon Read determined that DTE common stock was
appropriately valued.
Accretion/Dilution Analysis. Warburg Dillon Read analyzed certain pro forma
effects of the transaction on the estimated earnings per share of DTE for 2001
and 2002. This analysis was performed based upon both I/B/E/S estimates and
forecasts provided by DTE management for DTE's estimated earnings and upon MCN
forecasts provided by MCN management, with adjustments deemed appropriate by DTE
management and Warburg Dillon Read. The analysis also included the effect of
potential cost synergies as estimated by DTE management. Utilizing I/B/E/S
estimates for DTE and the MCN forecasts as adjusted by DTE and Warburg Dillon
Read for 2001 and 2002 resulted in pro forma earnings per share accretion in
these two years of $0.02 and $0.10, respectively. Utilizing the DTE forecasted
earnings and the MCN forecasts as adjusted by DTE and Warburg Dillon Read for
2001 and 2002 resulted in no change in pro forma earnings per share and $0.06
accretion, respectively.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of these methods to particular circumstances. Therefore, the opinion
and analysis are not readily susceptible to summary description. Accordingly,
notwithstanding the separate factors and analyses summarized above, Warburg
Dillon Read believes that its analysis must be considered as a whole and that
selecting only portions of its analysis and the factors it considered, without
considering all factors and analyses, could create a misleading view of the
evaluation process underlying the opinions. Warburg Dillon Read did not assign
any particular weight to any analyses or factors it considered. Rather, Warburg
Dillon Read made qualitative judgments based on its experience in rendering
these opinions and on economic, monetary and market conditions then present as
to the significance and relevance of each analysis and factor. In its analyses,
Warburg Dillon Read assumed relatively stable industry performance, regulatory
environments and general business and economic conditions, all of which are
beyond DTE's control. Any estimates contained in Warburg Dillon Read's analyses
do not necessarily indicate actual value, which may be significantly more or
less favorable than those suggested by such estimates. Estimates of the
financial value of companies do not purport to be appraisals or to reflect
necessarily the prices at which companies actually may be sold.
Warburg Dillon Read is an internationally recognized investment banking
firm. As part of its investment banking business, Warburg Dillon Read is
regularly engaged in evaluating businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. DTE's board of
directors selected Warburg Dillon Read on the basis of the firm's expertise and
reputation.
Pursuant to the engagement letter between DTE and Warburg Dillon Read, DTE
paid Warburg Dillon Read $2.5 million upon the rendering of Warburg Dillon
Read's fairness opinion. In addition, Warburg Dillon
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Read received a $125,000 payment on July 1, 1999, and has been and will continue
to receive a $75,000 quarterly retainer. At the completion of the merger,
Warburg Dillon Read will receive a fee of $7.0 million. DTE has agreed to
indemnify Warburg Dillon Read against certain liabilities, including liabilities
under federal securities laws, relating to or arising out of its engagement.
In the ordinary course of business, Warburg Dillon Read trades the debt and
equity securities of DTE and MCN for its own account and the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
OPINION OF MCN'S FINANCIAL ADVISOR
On October 4, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated
delivered its oral opinion, which opinion was subsequently confirmed in a
written opinion dated as of October 4, 1999, to the MCN board of directors to
the effect that, as of such date, and based upon the assumptions made, matters
considered and limits of review set forth in such opinion, the proposed
consideration to be received by the holders of MCN common stock in the merger
was fair from a financial point of view to the holders of MCN common stock.
Merrill Lynch has delivered to the MCN board of directors an update of its
opinion, which is dated as of the date of this document, which confirms Merrill
Lynch's opinion of October 4, 1999, as of November 12, 1999, and which is
attached as Appendix C.
THE MERRILL LYNCH OPINIONS SET FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY MERRILL
LYNCH. EACH HOLDER OF MCN COMMON STOCK IS URGED TO READ THE MERRILL LYNCH
OPINION, DATED AS OF THE DATE OF THIS DOCUMENT, WHICH IS ATTACHED AS APPENDIX C,
IN ITS ENTIRETY. THE MERRILL LYNCH OPINIONS WERE INTENDED FOR THE USE AND
BENEFIT OF THE MCN BOARD OF DIRECTORS, WERE DIRECTED ONLY TO THE FAIRNESS OF THE
MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF MCN COMMON
STOCK, DID NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY MCN TO ENGAGE IN
THE MERGER AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW
THAT SHAREHOLDER SHOULD VOTE ON THE PROPOSED MERGER OR ANY RELATED MATTER. THE
MERGER CONSIDERATION WAS DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN MCN AND
DTE AND WAS APPROVED BY THE MCN BOARD OF DIRECTORS. THIS SUMMARY OF THE MERRILL
LYNCH OPINION, DATED AS OF THE DATE OF THIS DOCUMENT, IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED AS APPENDIX C.
In arriving at its opinions, Merrill Lynch, among other things:
- Reviewed certain publicly available business and financial information
relating to MCN and DTE that Merrill Lynch deemed to be relevant;
- Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
MCN and DTE, as well as the amount and timing of the cost savings and
related expenses expected to result from the merger furnished to Merrill
Lynch by MCN and DTE, respectively;
- Conducted discussions with members of senior management and
representatives of MCN and DTE concerning the matters described in the
previous two bullets, as well as their respective businesses and
prospects before and after giving effect to the merger;
- Reviewed the market prices and valuation multiples for MCN common stock
and DTE common stock and compared them with those of certain publicly
traded companies that Merrill Lynch deemed to be relevant;
- Reviewed the results of operations of MCN and DTE and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to
be relevant;
- Compared the proposed financial terms of the merger with the financial
terms of certain other transactions that Merrill Lynch deemed to be
relevant;
- Participated in certain discussions and negotiations among
representatives of MCN and DTE and their financial and legal advisors;
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<PAGE> 47
- Reviewed the potential pro forma impact of the merger;
- Reviewed the merger agreement; and
- Reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.
In preparing its opinions, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or made
publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying that information or for undertaking an independent
evaluation or appraisal of any of the assets or liabilities of MCN or DTE and
was not furnished with any such evaluation or appraisal. In addition, Merrill
Lynch did not assume any obligation to conduct any physical inspection of the
properties or facilities of MCN or DTE. With respect to the financial forecast
information furnished to or discussed with Merrill Lynch by MCN or DTE, Merrill
Lynch assumed that they were reasonably prepared and reflected the best
currently available estimates and judgment of MCN's or DTE's management as to
the expected future financial performance of MCN or DTE, as the case may be.
Merrill Lynch further assumed that the merger would qualify as a tax free
reorganization for U.S. federal income tax purposes.
Merrill Lynch's opinions were necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of the dates of the opinions.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals, contractual or otherwise, for the merger, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the merger.
In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch was not authorized by MCN or the MCN board of directors to solicit, nor
did Merrill Lynch solicit, third-party indications of interest for the
acquisition of or business combination involving all or any part of MCN. In
addition, Merrill Lynch expressed no opinion as to the prices at which shares of
MCN common stock or DTE common stock would trade following the announcement or
completion of the merger, as the case may be.
The following is a summary of the material portions of the financial and
comparative analyses performed by Merrill Lynch which were presented to MCN's
board of directors in connection with the opinion delivered to MCN's board of
directors, dated October 4, 1999.
MCN ANALYSIS:
Discounted Cash Flow Analysis. Merrill Lynch performed separate discounted
cash flow, or "DCF", analyses for MCN on a consolidated basis and on a
segment-by-segment basis, using projections provided by MCN's management.
The DCF for MCN on a consolidated basis was calculated assuming discount
rates ranging from 7.5% to 8.5% and was comprised of the sum of the present
values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 7.5x
to 8.5x estimated 2004 earnings before interest, taxes, depreciation and
amortization, which is referred to as "EBITDA."
The segment-by-segment DCF valued MCN as the sum of the DCF values of its
gas distribution business segment and its diversified energy segment. The DCF
for the diversified energy business segment was
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<PAGE> 48
calculated assuming discount rates ranging from 8.5% to 9.5% and was comprised
of the sum of the present values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 8.0x
to 9.0x estimated 2004 EBITDA.
The DCF for the gas distribution business segment was calculated assuming
discount rates ranging from 7.0% to 8.0% and was comprised of the sum of the
present values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 7.0x
to 8.0x estimated 2004 EBITDA.
These analyses resulted in the following ranges of implied equity value per
share of MCN common stock, excluding any value attributable to synergies that
may be realized from the merger:
MCN IMPLIED EQUITY VALUE PER SHARE
<TABLE>
<CAPTION>
DCF METHOD LOW HIGH
---------- --- ----
<S> <C> <C>
Segment-by-segment......................................... $17.75 $24.00
Consolidated............................................... $19.00 $25.25
</TABLE>
Comparable Transactions Analysis. In order to value MCN, Merrill Lynch
reviewed certain publicly available information regarding 12 selected business
combinations in the natural gas industry since October 19, 1998 (collectively,
the "Natural Gas Comparable Merger Transactions") that Merrill Lynch deemed to
be relevant in evaluating the merger. The Natural Gas Comparable Merger
Transactions and the dates these transactions were announced are as follows:
- Energy North, Inc./Eastern Enterprises (July 1999);
- CTG Resources, Inc./Energy East Corporation (June 1999);
- WICOR, Inc./Wisconsin Energy Corporation (June 1999);
- Yankee Energy System, Inc./Northeast Utilities (June 1999);
- Columbia Energy Group/Nisource, Inc. (June 1999);
- Pennsylvania Enterprises, Inc./Southern Union Company (June 1999);
- Southwest Gas Corporation/ONEOK, Inc. (April 1999);
- Connecticut Energy Corporation/Energy East Corporation (April 1999);
- Consolidated Natural Gas Company/Dominion Resources, Inc. (February
1999);
- Public Service Company of North Carolina, Incorporated /SCANA Corporation
(February 1999);
- North Carolina Natural Gas Corporation/Carolina Power & Light Company
(November 1998); and
- Colonial Gas Company/Eastern Enterprises (October 1998).
With respect to the Natural Gas Comparable Merger Transactions, Merrill
Lynch compared the "offer value" of each such transaction:
(1) As a multiple of the next four quarters' estimated earnings per
share of the target company at the date of announcement ("Forward EPS");
and
(2) As a multiple of the book value of the target company.
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<PAGE> 49
Merrill Lynch also compared the "transaction value" of each of the Natural
Gas Comparable Merger Transactions as a multiple of the latest twelve months'
EBITDA ("LTM EBITDA") of the target company.
The "offer value" is generally defined as the per share offer price for the
target company multiplied by the sum of the number of target company shares
outstanding and the number of target company options outstanding, net of option
proceeds. The "transaction value" is generally defined as the sum of the offer
value, the preferred equity at liquidation value, the short term debt, the long
term debt and any minority interests, less cash, marketable securities and
exercisable options proceeds.
The results of these analyses were as follows:
<TABLE>
<CAPTION>
LOW HIGH MEAN MEDIAN
--- ---- ---- ------
<S> <C> <C> <C> <C>
Multiples of offer value to:
Forward EPS.............................................. 17.9x 31.6x 22.8x 22.9x
Book value............................................... 1.9x 3.1x 2.6x 2.7x
Multiples of transaction value to:
LTM EBITDA............................................... 7.6x 13.0x 10.5x 10.8x
</TABLE>
Based on these analyses, Merrill Lynch derived the following ranges of
per-share value of MCN common stock, based on approximately 90.4 million shares
of MCN common stock outstanding and net debt and preferred equity of $884.5
million and $0 respectively, for the gas distribution segment and $932.1 million
and $270.6 million, respectively, for the diversified energy segment:
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
Gas Distribution
2000 EPS(1)............................................... $23.34 $28.46
1999 Book Value........................................... $21.27 $23.82
1999 EBITDA(2)............................................ $23.02 $30.41
Diversified Energy
2000 EPS.................................................. $ 2.52 $ 3.15
1999 Book Value........................................... $ 3.65 $ 4.87
1999 EBITDA............................................... $(4.17) $(1.56)
Total
2000 EPS.................................................. $25.86 $31.61
1999 Book Value........................................... $24.92 $28.69
1999 EBITDA............................................... $18.85 $28.85
</TABLE>
- -------------------------
(1) Includes amounts attributable to pension earnings.
(2) Includes amounts attributable to pension contributions.
Comparable Public Company Analysis. Using publicly available information,
Merrill Lynch compared selected historical stock, financial and operating data
and ratios for MCN with corresponding data and ratios of similar publicly traded
companies. These companies were selected by Merrill Lynch based upon Merrill
Lynch's views as to the comparability of the financial and operating
characteristics of these companies to MCN.
The companies selected for the comparable company analysis included the
following local distribution companies (LDCs):
- Atlanta Gas Light Company;
- Indiana Energy, Inc.;
- New Jersey Resources Corporation;
- Northwest Natural Gas Company;
- Peoples Energy Corporation;
39
<PAGE> 50
- Washington Gas Light Company; and
- WICOR, Inc.
The companies selected for the comparable company analysis also included
the following integrated energy companies:
- Columbia Energy Group;
- Consolidated Natural Gas Company;
- Equitable Resources, Inc.;
- KN Energy, Inc.;
- National Fuel Gas Company; and
- Questar Corporation.
In addition, the following companies selected by MCN management were
included in the comparable company analysis:
- CMS Energy Corporation;
- DTE Energy Company;
- El Paso Energy Company;
- Enbridge, Inc.;
- MDU Resources Group, Inc.;
- National Fuel Gas Company;
- ONEOK Inc.;
- Sempra Energy; and
- WestCoast Energy, Inc.
Merrill Lynch derived an estimated per-share valuation range for MCN common
stock by comparing market value as a multiple of estimated 2000 earnings per
share and comparing "firm value" as a multiple of estimated 1999 earnings before
interest, taxes and depreciation. The earnings estimates were obtained from
I/B/E/S, a data service that monitors and publishes a compilation of earnings
estimates produced by selected research analysts on companies of interest to
investors, as of October 1, 1999.
COMPARABLE LOCAL DISTRIBUTION COMPANIES (LDCS)
<TABLE>
<CAPTION>
LOW HIGH MEAN MEDIAN MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of
estimated 2000 EPS..................................... 12.1x 15.8x 14.0x 14.2x 11.1x
Firm value as a multiple of
estimated 1999 EBITDA.................................. 6.7x 8.6x 7.4x 7.1x 9.3x
</TABLE>
COMPARABLE INTEGRATED ENERGY COMPANIES
<TABLE>
<CAPTION>
LOW HIGH MEAN MEDIAN MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of
estimated 2000 EPS..................................... 12.7x 23.4x 15.9x 15.1x 11.1x
Firm value as a multiple of
estimated 1999 EBITDA.................................. 7.1x 10.2x 8.6x 8.5x 9.3x
</TABLE>
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<PAGE> 51
COMPARABLE COMPANIES SELECTED BY MCN'S MANAGEMENT
<TABLE>
<CAPTION>
LOW HIGH MEAN MEDIAN MCN
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of
estimated 2000 EPS..................................... 10.2x 16.5x 13.1x 13.1x 11.1x
Firm value as a multiple of
estimated 1999 EBITDA.................................. 4.4x 9.8x 7.8x 7.6x 9.3x
</TABLE>
Based upon these analyses, Merrill Lynch derived the following ranges of
per share values of the MCN common stock, based on approximately 90.4 million
shares of MCN common stock outstanding and assuming net debt of $1,816.6
million, and preferred equity of $270.6 million as of December 31, 1999:
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
2000 EPS................................ $18.25 $21.75
1999 EBITDA............................. $14.50 $19.50
</TABLE>
DTE ANALYSIS:
Discounted Cash Flow Analysis. Merrill Lynch performed a DCF analysis for
DTE, using projections provided by the DTE management.
The DCF for DTE was calculated assuming discount rates ranging from 7.5% to
8.5% and was comprised of the sum of the present values of:
(1) The projected cash flows for the years 2000 through 2004; and
(2) The 2004 terminal value based upon a range of multiples from 6.5x
to 7.5x estimated 2004 EBITDA, less $496 million of accelerated
depreciation attributable to DTE's nuclear power plant.
This analysis resulted in a range of implied equity values per share of DTE
common stock from $40.23 to $51.36, as compared to the closing price per share
of DTE common stock on October 1, 1999 of $36.63.
Comparable Public Company Analysis. Using publicly available information,
Merrill Lynch compared selected historical stock, financial and operating data
and ratios for DTE with corresponding data and ratios of similar publicly traded
companies. These companies were selected by Merrill Lynch based upon Merrill
Lynch's views as to the comparability of the financial and operating
characteristics of these companies to DTE.
The companies included in the DTE comparable company analysis were:
- Ameren Corporation;
- American Electric Power Company, Inc.;
- Cinergy Corp.;
- CMS Energy Corp.;
- DPL Inc.; and
- First Energy.
Merrill Lynch derived an estimated valuation range for DTE by comparing
market value as a multiple of estimated 2000 earnings per share and estimated
1999 book value. Merrill Lynch also compared firm value as
41
<PAGE> 52
a multiple of estimated EBITDA. The earnings estimates were obtained from
I/B/E/S as of October 1, 1999. The results of these analyses were as follows:
COMPARABLE DTE COMPANIES
<TABLE>
<CAPTION>
LOW HIGH MEAN MEDIAN DTE
--- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C>
Market value as a multiple of
estimated 2000 EPS..................................... 10.2x 14.4x 12.2x 12.5x 10.9x
estimated 1999 book value.............................. 1.34x 2.08x 1.69x 1.76x 1.41x
Firm value as a multiple of
estimated 1999 EBITDA.................................. 6.3x 7.7x 7.1x 7.4x 6.5x
</TABLE>
This analysis resulted in a range of implied equity values per share of DTE
common stock from $34.00 to $47.50. This compares to the closing per share price
of DTE common stock on October 1, 1999 of $36.63.
Pro Forma Combination Analysis. Merrill Lynch also analyzed certain pro
forma effects resulting from the merger. Using the projected earnings for DTE
for the years 2000 through 2005 provided by the management of DTE, and the
projected earnings for MCN for the years 2000 through 2001 provided by
management of MCN and for years 2002 through 2005 based upon guidance provided
by the management of MCN, Merrill Lynch compared the projected earnings per
share of DTE on a stand-alone basis, assuming the merger did not occur, to the
per-share earnings of a DTE shareholder, assuming the merger were to occur.
Using the assumptions detailed above, and further assuming no synergies and
aggregate merger consideration consisting of 55% cash and 45% DTE stock, the
analysis indicated that the merger would be neutral to projected earnings per
share of DTE if DTE realized pre-tax synergies as follows:
<TABLE>
<S> <C>
2000............................................. $69.4 million
2001............................................. $63.5 million
2002............................................. $55.7 million
2003............................................. $24.6 million
</TABLE>
The summary of analyses performed by Merrill Lynch set forth above does not
purport to be a complete description of the analyses performed by Merrill Lynch
in arriving at its opinions. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial or summary description.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
Merrill Lynch, without considering all analyses and factors, could create an
incomplete view of the processes underlying the Merrill Lynch opinions. Merrill
Lynch did not assign relative weights to any of its analyses in preparing its
opinions. The matters considered by Merrill Lynch in its analyses were based on
numerous macroeconomic, operating and financial assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond MCN's and Merrill Lynch's control and involve
the application of complex methodologies and educated judgment. Any estimates
contained in the Merrill Lynch analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more or less
favorable than the estimates. Estimated values do not purport to be appraisals
and do not necessarily reflect the prices at which businesses or companies may
be sold in the future. The estimates are inherently subject to uncertainty.
No company utilized as a comparison in the analyses described above is
identical to MCN or DTE and none of the comparable transactions utilized as a
comparison is identical to the proposed merger. In addition, various analyses
performed by Merrill Lynch incorporate projections prepared by research analysts
using only publicly available information. These estimates may or may not prove
to be accurate. An analysis of publicly traded comparable companies and
comparable business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies to which they are being
compared.
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<PAGE> 53
The MCN board selected Merrill Lynch to act as its financial advisor
because of Merrill Lynch's reputation as an internationally recognized
investment banking firm with substantial experience in transactions similar to
the merger and because Merrill Lynch is familiar with MCN and its business. As
part of Merrill Lynch's investment banking businesses, Merrill Lynch is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
Pursuant to the terms of a letter agreement between MCN and Merrill Lynch
dated August 24, 1999, MCN agreed to pay Merrill Lynch a fee in the amount of
approximately $10.3 million. This fee is payable in three installments as
follows:
(1) 1/4 of such fee was paid upon execution of the merger agreement;
(2) 1/4 of such fee is payable upon the vote of MCN shareholders approving
the merger; and
(3) The balance of the fee is payable upon the completion of the merger.
MCN has agreed to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of legal counsel) and to indemnify Merrill Lynch and
related parties from and against specified liabilities, including liabilities
under the federal securities laws, arising out of its engagement.
Merrill Lynch has, in the past, provided financial advisory and financing
services to MCN and/or its affiliates and may continue to do so and are
currently providing financing services to an affiliate of DTE and has received,
and may receive additional fees for the rendering of those services. In
addition, in the ordinary course of Merrill Lynch's business, Merrill Lynch and
its affiliates may actively trade MCN shares and other securities of MCN, as
well as DTE shares and other securities of DTE, for their own accounts and for
the accounts of customers. Accordingly, Merrill Lynch and its affiliates may at
any time hold a long or short position in such securities.
INTERESTS OF MANAGEMENT AND DIRECTORS IN THE MERGER
In considering the respective recommendations of the DTE board of directors
and the MCN board of directors with respect to the merger, it should be noted
that members of DTE's management and MCN's management and of DTE's board of
directors and MCN's board of directors have interests in the merger that are in
addition to, or different from, the interests of shareholders of DTE and MCN
generally. The DTE board of directors and the MCN board of directors were aware
of these interests and considered them along with other matters when they
adopted the merger agreement. These interests are described below.
CHANGE IN CONTROL AND SEVERANCE AGREEMENTS
MCN maintains change in control agreements with 22 of its officers,
including executive officers. The purpose of the agreements is to assure the
objective judgment and to retain the loyalty of these individuals in the event
of a change in control of MCN. For purposes of the agreements, shareholder
approval of the merger will constitute a change in control and the beginning of
the three-year employment period covered by the agreements.
The agreements entitle the officers to employment in commensurate positions
with responsibilities similar to those held within 90 days prior to the change
in control, with compensation and benefits at least equal to the compensation
and benefits they were receiving prior to the change in control. Under the
agreements, the officers are entitled to receive severance benefits upon
termination of an officer's employment within 3 years after the change in
control if the termination is without cause, as defined in the agreements, or is
by the officers for "good reason." "Good reason" includes among other things,
relocation without consent beyond a certain distance, a material diminution in
duties or position or a reduction in compensation.
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<PAGE> 54
Severance benefits provided under the agreements include the following:
- A payment equal to three times the individual's annual base salary and
average annual bonus for the past three years;
- Credit for up to three additional years of service under the MCN Energy
Group Retirement Plan and the MCN Supplemental Retirement Plan; and
- Continuation of medical and other welfare benefits for up to three years
following termination.
MCN and DTE have agreed that if MCN shareholders approve the merger
agreement in 1999, for purposes of calculating the recent average bonus under
the employment agreements, the parties will take into account bonuses for MCN's
fiscal years of 1997, 1998 and 1999 for any executive who: 1) agrees, to the
extent requested by DTE, to the payment in 1999 of any cash severance payments
that would be due under the employment agreement upon termination, or payments
in lieu thereof; and 2) agrees that a) all non-medical welfare benefits under
the employment agreements may be provided through applicable MCN or DTE benefit
plans; b) all medical benefits pursuant to the employment agreement will,
through the COBRA continuation period, be provided under the applicable DTE or
MCN medical plan; and c) thereafter, medical benefits will be provided through
the applicable MCN or DTE medical plan for employees eligible for retiree health
care, or through a lump sum cash payment of $25,000 in lieu of such medical
benefits for employees not eligible for retiree health care. DTE has agreed that
it will make supplementary payments to the executives to the extent any benefits
so provided are less than those required by the employment agreements. MCN has
agreed it will make the severance payments referenced in clause 1 above, to the
extent it is asked by DTE. DTE has agreed it will reimburse MCN for any payments
so made if the merger is not consummated.
The following table sets forth the estimated cash severance amounts payable
to each of the Chief Executive Officer of MCN and the next four most highly
compensated MCN officers and to the remaining 17 MCN officers as a group and the
value of the additional retirement benefits under each individual's agreement
assuming MCN's obligations thereunder are triggered immediately after the
completion of the merger. The estimates are based on current base salary and
either the average annual bonus for the years 1996, 1997 and 1998 or the average
annual bonus for the years 1997, 1998 and 1999 (projected).
<TABLE>
<CAPTION>
VALUE OF
ESTIMATED CASH ADDITIONAL
SEVERANCE SUPPLEMENTAL
NAME AMOUNT PAYABLE RETIREMENT BENEFIT
---- -------------- ------------------
<S> <C> <C>
Alfred R. Glancy III................................. $ 3,000,000 - 3,600,000 $533,000
Stephen E. Ewing..................................... $ 2,200,000 - 2,500,000 $337,000
Howard L. Dow III.................................... $ 1,200,000 - 1,500,000 $ 46,000
Daniel L. Schiffer................................... $ 1,000,000 - 1,200,000 $182,000
Steven E. Kurmas..................................... $ 1,000,000 - 1,200,000 $ 37,000
17 other officers.................................... $10,500,000 - 12,100,000 $933,000
</TABLE>
In addition, six former officers of MCN have severance agreements which provide
for payments upon a change in control that in the aggregate are approximately
$2,000,000.
The agreements also provide that executives and key officers who are
subject to excise tax under the Internal Revenue Code section 4999 as a result
of the severance and certain other payments they receive are entitled to receive
a tax reimbursement payment which would put the affected individuals in the same
financial position after-tax that they would have been in if the excise tax did
not apply to such amounts. Based upon the assumption set forth above and on a
$28.50 share price, the estimated amount of this tax reimbursement payment for
the above listed current and former officers would be up to: Alfred R. Glancy
III -- $3,400,000; Stephen E. Ewing -- $1,800,000; Howard L. Dow
III -- $800,000; Steven E. Kurmas -- $660,000 and the 17 other officers --
$6,140,000.
44
<PAGE> 55
STOCK INCENTIVE PLANS
All of the executive officers and key employees of MCN participate in the
MCN Energy Group Long Term Incentive Plan. Under this plan, in the event of a
change in control of MCN, 100%, or 150% or 200% depending on MCN's ranking
within its designated peer group, of all performance shares granted under the
plan and then outstanding would automatically be considered earned and would be
payable in shares of unrestricted common stock. Approval of the merger agreement
by MCN shareholders will constitute a change in control for purposes of this
plan. The following chart reflects the performance shares held as of the date of
the merger agreement, by the Chief Executive Officer of MCN and the next four
most highly compensated MCN officers and all other officers holding performance
share grants, and the value of the grants at 100%, 150% and 200% payouts based
on a $28.50 share price. Depending on when MCN shareholder approval of the
merger agreement is obtained, some of the grants may become vested in the
ordinary course of business and additional grants may be made, although any
grants made after the signing of the merger agreement will not vest as a result
of MCN shareholder approval of the merger.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF VALUE OF VALUE OF
PERFORMANCE OUTSTANDING OUTSTANDING OUTSTANDING
SHARES PERFORMANCE PERFORMANCE PERFORMANCE
NAME OUTSTANDING SHARES @ 100% SHARES @ 150% SHARES @ 200%
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Alfred R. Glancy III..................... 81,000 $2,308,500 $3,462,750 $4,617,000
Stephen E. Ewing......................... 31,350 $ 893,475 $1,340,213 $1,786,950
Howard L. Dow III........................ 8,375 $ 238,688 $ 358,031 $ 477,375
Daniel L. Schiffer....................... 11,000 $ 313,500 $ 470,250 $ 627,000
Steven E. Kurmas......................... 7,375 $ 210,188 $ 315,281 $ 420,375
16 other officers........................ 73,590 $2,097,315 $3,145,973 $4,194,630
</TABLE>
There is an additional 1999 special incentive plan under which one-year
performance units were granted to certain officers of MCN in lieu of an annual
cash bonus for 1999. The following chart reflects the special performance shares
held as of the date of the merger agreement, by the Chief Executive Officer of
MCN and the next four most highly compensated MCN officers and all other
officers holding performance share grants, and the value of the grants at 100%,
150% and 200% payouts based on a $28.50 share price. Under the terms of the
special incentive plan, upon a change in control, not less than 100%, and up to
200% depending on MCN's performance relative to its peer group, of such
performance units will vest and will be payable. Approval of the merger
agreement by MCN shareholders will constitute a change in control for purposes
of this plan.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF VALUE OF VALUE OF
1999 SPECIAL OUTSTANDING OUTSTANDING OUTSTANDING
PERFORMANCE 1999 SPECIAL 1999 SPECIAL 1999 SPECIAL
SHARES PERFORMANCE PERFORMANCE PERFORMANCE
NAME OUTSTANDING SHARES @ 100% SHARES @ 150% SHARES @ 200%
---- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Alfred R. Glancy III..................... 20,250 $577,125 $ 865,688 $1,154,250
Stephen E. Ewing......................... -- -- -- --
Howard L. Dow III........................ 5,870 $167,295 $ 250,943 $ 334,590
Daniel L. Schiffer....................... 4,800 $136,800 $ 205,200 $ 273,600
Steven E. Kurmas......................... -- -- -- --
9 Other Officers......................... 23,730 $676,305 $1,014,458 $1,352,610
</TABLE>
Pursuant to the MCN Stock Incentive Plan, all outstanding MCN stock options
will also vest upon a change in control. Shareholder approval of the merger
agreement will result in a change in control of MCN for these purposes. Of the
591,330 options outstanding on the date of the signing of the merger agreement,
the
45
<PAGE> 56
officers held a total of 299,780 options on MCN stock with an exercise price of
$17.25. The options currently held by the officers are reflected in the
following chart:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF OPTIONS
NAME OUTSTANDING OPTIONS $28.50 PER SHARE
---- ------------------- ----------------
<S> <C> <C>
Alfred R. Glancy III.......................... 100,000 $1,125,000
Stephen E. Ewing.............................. 48,300 $ 543,375
Howard L. Dow III............................. 14,000 $ 157,500
Daniel L. Schiffer............................ 12,950 $ 145,687
Steven E. Kurmas.............................. 11,725 $ 131,906
16 other officers............................. 112,805 $1,269,056
</TABLE>
During the 60-day period beginning on the date MCN shareholders approve the
merger, the option holders will have the right to receive cash in a per-share
amount equal to the excess of the higher of the price paid to MCN shareholders
in the merger (assuming the closing occurs within 60 days of the shareholder
approval) or the highest trading price of the MCN shares during the 60-day
period ending on the date MCN shareholders approve the merger over $17.25.
MCN EXECUTIVE ANNUAL PERFORMANCE PLAN
The MCN Executive Annual Performance Plan provides for the payment of a
pro-rated target bonus, based on the level of attainment of performance targets
as of the end of the last measurement date prior to the change in control and
assuming earnings were equal to net income goals. Shareholder approval of the
merger agreement also will result in a change in control of MCN for purposes of
the annual performance plan. MCN executives were granted special performance
shares for their 1999 annual bonus (as previously described), and as such do not
participate in the Executive Annual Performance Plan for 1999. Only MichCon
employees participate in this plan for 1999. As such, assuming no change in the
plan and approval of the merger agreement by MCN shareholders in December 1999,
MichCon officers will be vested under the Annual Performance Plan for 1999 as
follows:
<TABLE>
<CAPTION>
ESTIMATED PORTION OF ANNUAL BONUS
NAME PAYABLE ON CHANGE IN CONTROL
---- ---------------------------------
<S> <C>
Stephen E. Ewing.................................. $260,000 - 360,000
Steven E. Kurmas.................................. $ 93,000 - 130,000
8 other officers.................................. $400,000 - 620,000
</TABLE>
INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE
The merger agreement provides that after the completion of the merger, DTE
will indemnify and hold harmless each present and former director and officer of
MCN (when acting in such capacity) for any and all costs incurred in connection
with any claims arising out of matters prior to the completion of the merger to
the fullest extent that MCN would have been permitted to do so under Michigan
law and its articles of incorporation and its bylaws in effect on the date of
the merger agreement. The merger agreement also provides that DTE will advance
expenses as incurred to the fullest extent permitted under applicable law as
long as the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to such indemnification.
The merger agreement further provides that, for a period of six years
following the merger, DTE will maintain MCN's existing officers' and directors'
liability insurance so long as the annual premium therefor is not in excess of
200% of the last annual premium paid prior to the date of the merger agreement.
However, the merger agreement permits DTE to substitute such policy with
policies (which may be "tail" policies) containing terms with respect to such
coverage and amount no less favorable to such directors and officers. In
addition, if the existing directors' and officers' liability insurance expires,
is terminated or is canceled during such six-year period, DTE will use its best
efforts to obtain as much directors' and officers' insurance as can be obtained
for the remainder of such period for a premium not in excess of 200% of the
current premium.
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BOARD OF DIRECTORS AND SENIOR MANAGEMENT FOLLOWING THE MERGER
The merger agreement provides that at the completion of the merger, DTE
will promptly increase the size of its board of directors or exercise its best
efforts to secure the resignation of its present directors in order to cause Mr.
Alfred R. Glancy III and two additional persons selected by MCN after
consultation with DTE from among MCN's directors as of the date of the merger
agreement to be appointed to DTE's board of directors.
Set forth below is a table of the persons expected to serve as senior
officers of DTE immediately following the merger.
<TABLE>
<CAPTION>
NAME POSITION IN DTE
---- ---------------
<S> <C>
Anthony F. Earley, Jr. ........... Chairman of the Board, President and Chief Executive Officer
Stephen E. Ewing.................. President and Chief Operating Officer of DTE Gas
Robert J. Buckler................. President and Chief Operating Officer of DTE Energy
Distribution
Gerard M. Anderson................ President and Chief Operating Officer of DTE Energy
Resources
Larry G. Garberding............... Executive Vice President and Chief Financial Officer
</TABLE>
If any officer listed above ceases to be a full-time employee of either DTE
or MCN at or before the merger, or shall be unable or unwilling to serve as an
officer of DTE, DTE will appoint another individual to serve in such
individual's place.
DTE AND MCN STOCK-BASED RIGHTS
In the merger agreement, MCN has agreed that before the merger is
completed, it will take all action necessary to permit DTE to assume all
unexercised MCN options and DTE has agreed that it will take all corporate
action necessary to reserve for issuance a sufficient number of shares of DTE
common stock for delivery upon exercise of MCN options assumed by DTE. As a
result of the merger, each MCN option will cease to represent a right to acquire
shares of MCN common stock and will be converted automatically into options to
acquire shares of DTE common stock, and DTE will assume each such stock option
subject to the terms of the applicable MCN stock-based compensation plan or
agreement. The number of shares of DTE common stock purchasable upon exercise of
each such MCN stock option will be equal to the number of MCN shares that were
purchasable under such MCN stock option immediately prior to the merger
multiplied by the "conversion ratio", which fraction is set forth below,
rounding to the nearest whole share, and the per share exercise price for such
MCN stock option will be obtained by dividing the per share exercise price for
such MCN stock option by the conversion ratio, rounding to the nearest whole
cent. Any MCN option which is intended to be an "incentive stock option," as
defined in Section 422 of the Internal Revenue Code, will be adjusted in
accordance with the requirements of Section 424 of the Internal Revenue Code.
The "conversion ratio" means a fraction, the numerator of which is the
average of the high and low sales price of one share of MCN common stock on the
NYSE on the trading day immediately preceding the completion of the merger and
the denominator of which is the average of the high and low sales price of one
share of DTE common stock on the NYSE on the trading day immediately preceding
the completion of the merger.
CONSULTING AGREEMENT
DTE, MCN and DTE Enterprises have entered into a termination and consulting
agreement with Mr. Glancy, which will become effective at the completion of the
merger and will terminate upon Mr. Glancy's 65th birthday. The consulting
agreement provides that Mr. Glancy will resign from his employment immediately
following the completion of the merger. At the time of such resignation, Mr.
Glancy will be entitled to the payments and benefits provided under his change
in control agreement as described above. DTE has agreed that it will cause Mr.
Glancy to be nominated to its board of directors for a term beginning at the
completion of the merger, and renominated in accordance with normal board
procedures until he reaches mandatory retirement age for members of the board of
directors. During the term of the consulting agreement,
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Mr. Glancy agrees to render 50 hours of services per month, upon request by the
board of directors or the chief executive officer of DTE, on matters including,
but not limited to, advice regarding natural gas industry matters,
diversification strategy, public and civic relations, and merger transition
issues. In return for rendering such services, Mr. Glancy will receive the
following payments and benefits:
- A $25,000 monthly consulting fee, plus $500 for each hour of service he
renders exceeding fifty hours per month;
- For as long as Mr. Glancy remains a member of the board of directors of
DTE, a home security system shall be provided to him, on terms and
conditions no less favorable than those on which such system is provided
to the chief executive officer of DTE; and
- An office or offices of a size and with furnishings and other
appointments, and exclusive personal secretarial assistance at least
equal to that provided to Mr. Glancy as of the effective date of the
consulting agreement, or if more favorable, as provided generally at any
time thereafter to senior executives of DTE.
DTE may terminate the consulting agreement for "cause," as such term is
defined in the agreement, in which case Mr. Glancy's services will no longer be
required and no further fees shall be paid. During the term of the consulting
agreement, Mr. Glancy may not compete with DTE or its subsidiaries; and, if Mr.
Glancy violates this covenant or his duty not to divulge confidential
information relating to DTE, MCN or any of their affiliated companies, DTE may
withhold payments under the consulting agreement but not under Mr. Glancy's
change in control agreement. In the event that the Internal Revenue Service
determines or claims that any payments or benefits provided to Mr. Glancy
constitute "excess parachute payments" within the meaning of Section 280G of the
Internal Revenue Code, Mr. Glancy will receive a tax reimbursement payment in
accordance with the terms of his agreement. DTE and MCN will indemnify Mr.
Glancy from any actions, suits or proceedings in connection with the agreement
or his services thereunder, including reimbursement of reasonable attorney's
fees, provided that any consulting services giving rise to such indemnification
were performed by Mr. Glancy in good faith and, to Mr. Glancy's knowledge, in a
lawful manner.
PUBLIC TRADING MARKETS
DTE common stock is currently listed on the NYSE and the Chicago Stock
Exchange under the symbol "DTE." An application will be made for the listing on
the NYSE and the Chicago Stock Exchange of the shares of DTE common stock to be
issued in the merger. MCN common stock is currently listed on the NYSE under the
symbol "MCN." Upon completion of the merger, MCN common stock will be de-listed
from the NYSE and de-registered under the Securities Exchange Act of 1934.
ABSENCE OF DISSENTERS' RIGHTS
Dissenters' rights are statutory rights that enable shareholders who object
to certain extraordinary transactions, such as mergers, to demand that the
corporation pay the fair value for their shares, as determined by a court in a
judicial appraisal proceeding, instead of receiving the consideration offered to
shareholders in connection with the extraordinary transaction. Dissenters'
rights are not available in all circumstances.
DTE shareholders are not entitled to dissenters' rights under Michigan law
in connection with the merger or the issuance of shares of DTE common stock
pursuant to the merger because DTE is not a party to the merger and DTE
shareholders are not voting to approve the merger agreement.
MCN shareholders are not entitled to dissenters' rights under Michigan law
in connection with the merger because MCN common shares were listed on a
national securities exchange, the NYSE, on the record date fixed for the MCN
special meeting.
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RESALE OF DTE COMMON STOCK
The shares of DTE common stock issuable to MCN shareholders in the merger
have been registered under the Securities Act of 1933. Such shares may be traded
freely and without restriction by those shareholders not deemed to be
"affiliates" of MCN at the time of the MCN special meeting, as that term is
defined in the rules under the Securities Act. "Affiliates" are generally
defined as persons who control, are controlled by or are under common control
with, MCN at the time of the MCN special meeting. Shares of DTE common stock
received by those shareholders of MCN who are deemed to be "affiliates" of MCN
may be resold without registration as provided for by Rule 145 under the
Securities Act, or as otherwise permitted under the Securities Act.
The registration statement to register the shares of DTE common stock to be
issued in the merger, of which this document is a part, does not cover any
resales of DTE common stock received by affiliates of MCN in the merger or by
some of their family members or related interests. In the merger agreement, MCN
has agreed to use its best efforts to cause each of its affiliates as of the
date of its special meeting to deliver to DTE a written agreement in the form
attached to the merger agreement acknowledging and agreeing to such resale
restrictions under the Securities Act.
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REGULATORY FILINGS, APPROVALS AND CLEARANCES
Under the merger agreement, DTE and MCN each have agreed to use its
commercially reasonable efforts to take all actions and do all things necessary,
proper or advisable to complete the merger and the other transactions
contemplated by the merger agreement as soon as practicable. This includes
preparing and filing all required documentation and obtaining all consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any governmental entity in order to
complete the merger.
The completion of the merger is conditioned upon the expiration of
applicable federal and state waiting periods and the receipt of all governmental
consents except for those the failure of which to obtain is not reasonably
likely to have a material adverse effect on DTE or MCN or provide a reasonable
basis to conclude that the parties or any of their affiliates or advisors would
be subject to criminal or material financial liability. In addition, completion
of the merger is conditioned on receipt of all governmental approvals on terms
that are, in the reasonable judgment of DTE, not reasonably likely to have a
material adverse effect on DTE, MCN or DTE Enterprises.
If Federal Energy Regulatory Commission approval of the merger is not
required, either DTE or MCN may terminate the merger agreement after one year
from the date of the merger agreement, if either party reasonably determines
that it is more likely than not that the governmental consents necessary to
complete the merger on terms that satisfy the conditions to DTE's and MCN's
obligation to complete the merger will not be obtained prior to April 15, 2001,
which is approximately 18 months from the date of the merger agreement. If FERC
approval of the merger is required, however, then the right to terminate the
merger agreement by making such reasonable determination exists only after 15
months from the date of the merger agreement. In any event, either DTE or MCN
may terminate the merger agreement if any regulatory approvals necessary to
complete the merger have not been obtained or waived by April 15, 2001.
HART-SCOTT-RODINO ACT
The Hart-Scott-Rodino Act provides that the merger may not be completed
until premerger notification filings have been made, by which means information
is submitted to the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission, and the specified HSR Act waiting period has expired
or has terminated. Even after the waiting period expires or is terminated, the
Antitrust Division and the Federal Trade Commission will have the authority to
challenge the merger on antitrust grounds before or after the merger is
completed.
DTE and MCN each intends to file a premerger notification and report form
for the merger with the Antitrust Division and the Federal Trade Commission in
mid-November 1999.
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
DTE and MCN are both exempt holding companies under the 1935 Act. As exempt
holding companies, DTE and MCN are exempt from all provisions of the 1935 Act,
except for Section 9(a)(2), which prohibits any "affiliate" of a "public utility
company" or a "holding company," as such terms are defined in the 1935 Act, from
acquiring the securities of any other public utility company of which it is an
affiliate, or will become an affiliate after the acquisition, unless the
acquisition is approved by the SEC. Under the 1935 Act, DTE is an affiliate of
The Detroit Edison Company and, after completion of the merger, will be an
affiliate of MichCon; accordingly, approval of the SEC under the 1935 Act is
required. Nonetheless, after the merger, DTE will continue to be an exempt
holding company under the 1935 Act by filing its annual exemption statement
pursuant to Rule 2 under the 1935 Act.
FEDERAL POWER ACT
Under the merger agreement, MCN has agreed to use its best efforts promptly
to dispose of various electric facilities. If MCN is successful in disposing of
those facilities, the merger should not be subject to FERC approval under the
Federal Power Act, although such dispositions may be subject to FERC approval
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<PAGE> 61
under the Power Act. If MCN is not successful in disposing of those facilities,
FERC approval of the merger itself is likely to be required under the Power Act.
STATE APPROVALS
While there are no formal state approvals for the merger, DTE and MCN will
continue their practice of constructively working with state regulators that
have ongoing jurisdiction over Detroit Edison and MichCon.
ATOMIC ENERGY ACT
Detroit Edison holds a license issued by the Nuclear Regulatory Commission
to own and operate Fermi 2, a nuclear generating plant. Under the Atomic Energy
Act and NRC regulations, nuclear licensees must seek and obtain prior NRC
consent for any changes that would constitute a transfer of an NRC license,
directly or indirectly, or of any right thereunder, to any person. Additionally,
the NRC has expressed concern over the potential of certain mergers to affect
the basis for prior NRC decisions related to the financial qualifications as an
NRC licensee. DTE does not believe that the merger would constitute a transfer
of the NRC license or that the merger will affect the basis for prior NRC
decisions relating to the financial qualifications as an NRC licensee. DTE has
requested confirmation that the NRC concurs with its belief. In the event that
the NRC determines that the merger constitutes a transfer of the license, DTE
and Detroit Edison believe that the NRC's approval for such transfer can be
obtained in a timely manner.
While DTE and MCN believe that the requisite regulatory approvals and
clearances for the merger will be received, DTE and MCN cannot give any
assurance regarding the timing of the required approvals or clearances or the
ability to obtain the required approvals and clearances on satisfactory terms or
otherwise, or that no action will be brought challenging the merger or the
governmental or other actions.
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THE MERGER AGREEMENT
The following describes certain aspects of the proposed merger, including
material provisions of the merger agreement. The following description of the
merger agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the merger agreement, which is
attached as Appendix A to this document and is incorporated in this document by
reference. All DTE shareholders and MCN shareholders are urged to read the
merger agreement carefully and in its entirety.
INTRODUCTION
The merger agreement provides, among other things, for a merger of MCN with
and into DTE Enterprises, a wholly owned subsidiary of DTE, with DTE Enterprises
as the surviving corporation in the merger. The transaction is intended to
qualify as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code for federal income tax purposes.
TERMS OF THE MERGER
GENERAL
Subject to the allocation and proration procedures and the adjustments
necessary to preserve the status of the merger as a reorganization under the
Internal Revenue Code set forth in the merger agreement and more fully described
below, in the merger, each share of MCN common stock, par value $0.01 per share,
including the associated right to purchase Series A Junior Participating
Preferred Stock issued pursuant to the Rights Agreement, dated as of December
20, 1989, as amended by amendments dated as of September 19, 1994, July 23,
1997, and October 4, 1999, by and between MCN and First Chicago Trust Company of
New York, as Rights Agent, issued and outstanding immediately prior to the
merger, other than shares owned by DTE or MCN (except on behalf of third
parties), will be converted into the right to receive either (1) $28.50 in cash
or (2) 0.775 shares of DTE common stock.
The merger agreement provides that each record holder of shares of MCN
common stock will be entitled to (1) elect to receive shares of DTE common stock
for all or some of its MCN shares ("Stock Election Shares"), (2) elect to
receive cash for all or some of its MCN shares ("Cash Election Shares") or (3)
make no election for all or some of its MCN shares ("Non-Election Shares"). Any
shares of MCN common stock for which the record holder has not submitted a
properly completed election form to the exchange agent by 9:00 a.m. on the date
of the completion of the merger, will be treated as Non-Election Shares.
ALLOCATION AND PRORATION PROCEDURES
The merger agreement provides for allocation and proration procedures that
ensure that, subject to adjustments necessary to preserve the status of the
merger as a reorganization under the Internal Revenue Code, the aggregate number
of shares of MCN common stock that will be converted into cash will be equal to
55% of the total number of shares of MCN common stock outstanding immediately
prior to the merger and the aggregate number of shares of MCN common stock that
will be converted into shares of DTE common stock will be equal to 45% of the
total number of shares of MCN common stock outstanding immediately prior to the
merger. The following explains these allocation and election procedures.
If the number of Cash Election Shares exceeds 55% of the total number of
shares of MCN common stock outstanding immediately prior to the merger,
excluding those owned by DTE or MCN (except on behalf of third parties), (the
"Cash Election Number"), then the following will occur:
(1) All Non-Election Shares will be deemed to be Stock Election
Shares;
(2) All Stock Election Shares, including those deemed to be Stock
Election Shares, will be converted into the right to receive 0.775 shares
of DTE common stock; and
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(3) Each Cash Election Share will be converted into:
- An amount in cash equal to $28.50 multiplied by a fraction, the
numerator of which is the Cash Election Number, and the denominator
of which is the total number of Cash Election Shares (the "Cash
Fraction"); and
- A number of shares of DTE common stock equal to the product of
0.775 and a fraction equal to one minus the Cash Fraction.
Alternatively, if the number of Stock Election Shares exceeds 45% of the
total number of shares of MCN common stock outstanding immediately prior to the
merger, excluding those owned by DTE or MCN (except on behalf of third parties)
(the "Stock Election Number"), then the following will occur:
(1) All Non-Election Shares will be deemed to be Cash Election Shares;
(2) All Cash Election Shares, including those deemed to be Cash
Election Shares, will be converted into the right to receive $28.50 in
cash; and
(3) Each Stock Election Share will be converted into:
- A number of shares of DTE common stock equal to the product of
0.775 and a fraction, the numerator of which is the Stock Election
Number, and the denominator of which is the total number of Stock
Election Shares (the "Stock Fraction"); and
- An amount in cash equal to the product of $28.50 and a fraction
equal to one minus the Stock Fraction.
In the event that the number of Cash Election Shares does not exceed the
Cash Election Number and the number of Stock Election Shares does not exceed the
Stock Election Number, then Non-Election Shares will be deemed Stock Election
Shares such that the total Stock Election Shares equals the Stock Election
Number and any remaining Non-Election Shares will be deemed Cash Election
Shares. If this occurs:
- All Stock Election Shares, including those deemed Stock Election
Shares, will be converted into the right to receive 0.775 shares of
DTE common stock and cash instead of fractional shares; and
- All Cash Election Shares, including those deemed Cash Election Shares,
will be converted into the right to receive $28.50 in cash.
TAX OPINION ADJUSTMENT
It is a condition to the merger that DTE and MCN each receive an opinion of
their respective outside counsel that the merger will be treated as a
"reorganization" under the Internal Revenue Code. It is possible, depending upon
the value of DTE common stock on the date the merger is completed, that such
counsel will not be able to render their respective opinions unless the number
of shares of MCN common stock that will be converted into cash is decreased
below 55% of the total number of issued and outstanding shares of MCN common
stock and the number of shares of MCN common stock that will be converted into
DTE common stock is increased above 45% of the total number of issued and
outstanding shares of MCN common stock. In such a case, the number of shares of
MCN common stock that will be converted into DTE common stock in the merger will
be increased, and the number of shares of MCN common stock to be converted into
cash will be correspondingly decreased, to the extent necessary to enable
outside counsel to render their respective tax opinions. Each share of MCN
common stock that would have been converted into cash but is instead converted
into DTE common stock in order to enable such outside counsel to render their
respective tax opinions will be converted into a number of shares of DTE common
stock having a value of $28.50 to the extent that the conversion is necessary so
that the value of the DTE common stock, as determined for tax purposes, paid as
consideration for shares of MCN common stock is not less than 41% of the value
of the total consideration, as determined for tax purposes, for shares of MCN
common stock. Any shares of MCN common stock that are otherwise converted into
DTE common stock in order to enable outside counsel to render their respective
tax opinions will be converted into DTE common stock at the exchange ratio of
0.775. Shares of MCN common stock converted into shares of DTE common stock in
order to enable outside
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<PAGE> 64
counsel to render their respective tax opinions are nonetheless deemed to be
converted into the right to receive cash, and the shares of DTE common stock
issued are deemed to be cash, for purposes of the allocation and proration
procedures of the merger agreement.
ELECTION PROCEDURES AND DISTRIBUTION OF CERTIFICATES OF DTE COMMON STOCK
Approximately one month before the completion of the merger, MCN
shareholders will be sent transmittal materials for use in making the election
to receive cash, shares of DTE common stock, or both with respect to shares of
MCN common stock canceled in the merger and for exchanging certificates
representing shares of MCN common stock. The form on which this choice is to be
made is referred to in this document as the "election form."
Stock certificates representing shares of MCN common stock and a duly
completed election form must be received by the exchange agent no later than
9:00 a.m. on the date of the merger, which time is referred to in this document
as the "election deadline." MCN SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK
CERTIFICATES BEFORE THEY RECEIVE THE ELECTION FORM. Before the completion of the
merger, DTE will select an exchange agent, with MCN's prior approval, to
administer the exchange of shares of MCN common stock for the cash, shares of
DTE common stock, cash instead of fractional shares and dividends and other
distributions, if any, to which MCN shareholders are entitled to receive in the
merger.
A record holder who holds shares of MCN common stock in a representative
capacity may submit multiple election forms, but such record holder must certify
that each election form submitted to the exchange agent covers all the shares of
MCN common stock held by such record holder on behalf of a particular beneficial
owner.
In addition, as soon as practicable after the completion of the merger the
exchange agent will mail to each record holder who did not submit an election
form or did not submit certificates with a duly completed election form, a
letter of transmittal and instructions for surrendering certificates of MCN
common stock. This mailing is solely to facilitate the exchange of the
certificates representing shares of MCN common stock for the cash, shares of DTE
common stock into which such MCN shares have been converted in the merger and
cash instead of fractional shares; after the election deadline, former MCN
shareholders will not be able to elect the form of consideration.
Upon surrender of a certificate representing shares of MCN common stock and
a duly completed election form or letter of transmittal to the exchange agent,
the holder will be entitled to receive:
- A certificate representing shares of DTE common stock into which the
shares of MCN common stock have been converted or, if DTE establishes
procedures for book-entry transfer of shares of DTE common stock prior to
the completion of the merger, evidence of the certificates pursuant to
the book-entry system;
- Cash to which the holder is entitled;
- Cash instead of fractional shares, if any, to which the holder has the
right to receive; and
- Any dividends or other distribution to which the holder has the right to
receive.
After completion of the merger, there will be no transfers on MCN's stock
transfer books of shares outstanding immediately prior to that time. No party
will be liable to any MCN shareholder for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
All shares of DTE common stock to be issued in the merger will be deemed
issued and outstanding as of the completion of the merger. Accordingly, if DTE
declares a dividend or other distribution after the completion of the merger,
that declaration will include all shares of DTE common stock issued in the
merger. Nonetheless, DTE will not pay any dividends or other distributions with
respect to the shares of DTE common stock with a record date after the
completion of the merger, to any former MCN shareholder who has not exchanged
his or her certificates representing shares of MCN common stock.
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FRACTIONAL SHARES
DTE will not issue any fractional shares of DTE common stock in the merger.
Instead, an MCN shareholder who otherwise would have received a fraction of a
share of DTE common stock will receive cash (without interest). The amount of
cash received will be equal to the holder's proportionate interest in the net
proceeds from the sale on the NYSE by the exchange agent of the aggregate
fractional shares of DTE common stock issued to the exchange agent on behalf of
MCN shareholders.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The merger agreement provides that unless DTE and MCN agree to another date
or time, the closing of the merger will take place on the fifth business day
after fulfillment or waiver of the conditions set forth in the merger agreement,
other than those conditions that by their nature are to be satisfied at the
closing, but subject to the fulfillment or waiver of those conditions. As soon
as practicable on the closing date, MCN and DTE will cause a certificate of
merger to be executed and filed with the Department of Consumer and Industry
Services of the State of Michigan. The merger will become effective at the time
when the certificate of merger is duly endorsed by the Department of Consumer
and Industry Services of the State of Michigan.
CORPORATE GOVERNANCE
In the merger agreement, DTE has agreed that at the completion of the
merger, it will cause Mr. Glancy and two other persons who are currently members
of MCN's board of directors, and who will be chosen by MCN in consultation with
DTE, to be appointed to its board of directors.
The merger agreement provides that the directors of DTE Enterprises at the
effective time of the merger will be the directors of the surviving corporation
and the officers of MCN at the time of the completion of the merger will be the
officers of the surviving corporation.
CONDITIONS OF THE MERGER
Other than the condition relating to the receipt of tax opinions from
counsel, which may not be waived after DTE shareholders have approved the
issuance of shares of DTE common stock or MCN shareholders have approved the
merger agreement unless further shareholder approval is obtained with
appropriate disclosure, the respective obligations of each of DTE and MCN to
effect the merger are subject to the satisfaction or waiver, at or prior to the
merger, by each party of the following conditions:
- The representations and warranties of the other party with respect to
capitalization, corporate authority, brokers and, with respect to MCN
only, the rights agreement and utility regulation, being true and correct
in all material respects both as of the date of the merger agreement and
as of the closing date, as though made on and as of such time (except to
the extent any representation or warranty expressly speaks of another
date or time);
- The representations and warranties of the other party with respect to all
other matters being true and correct both as of the date of the merger
agreement and as of the closing date, as though made on and as of such
time (except to the extent any representation or warranty expressly
speaks of another date or time), except for such failures to be true and
correct which are not, individually or in the aggregate, reasonably
likely to have a material adverse effect on the representing party;
- The approval of the merger agreement by MCN shareholders and the approval
of the issuance of shares of DTE common stock by DTE shareholders;
- The shares of DTE common stock issuable to MCN shareholders pursuant to
the merger agreement having been authorized for listing on the NYSE, upon
official notice of issuance;
- The expiration of applicable federal and state waiting periods and the
receipt of all governmental consents in connection with the merger
agreement except for those the failure of which to obtain are not
reasonably likely to have a material adverse effect on DTE or MCN or
provide reasonable basis to
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conclude that the parties or any of their affiliates or advisors would be
subject to criminal or material financial liability;
- The absence of any legal restriction that prohibits completion of the
merger;
- The registration statement registering the shares of DTE common stock to
be issued in the merger having become effective and no stop order
suspending the effectiveness or proceedings for that purpose shall have
been initiated or be threatened by the SEC;
- DTE shall have received all state securities and "blue sky" permits and
approvals necessary to consummate the transactions contemplated by the
merger agreement;
- MCN shall have completed any required dispositions of its interests in
various electric facilities and all FERC-jurisdictional assets or
facilities;
- The other party having performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the closing date;
- The receipt of consents or approvals of each person whose consent or
approval is required under any material contract to which the other party
or any of its subsidiaries is a party;
- DTE and MCN having received "comfort letters" from the other party's
independent public accounting firm;
- Such party having received from its counsel opinions dated the closing
date, stating that:
(1) The merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code; and
(2) That each of DTE, MCN and DTE Enterprises will be a party to that
reorganization within the meaning of Section 368(b) of the
Internal Revenue Code; and
- There shall not have occurred a material adverse effect on the other
party.
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF DTE AND DTE ENTERPRISES
The obligations of DTE and DTE Enterprises are subject to the further
satisfaction or waiver by DTE of the following conditions:
- The receipt by DTE of affiliate letters from persons identified as
affiliates of MCN; and
- That all governmental consents have been obtained without imposing any
terms or conditions that, individually or in the aggregate, in the
reasonable judgment of DTE, are reasonably likely to have a material
adverse effect on any of the parties to the merger agreement.
For purposes of the merger agreement, "material adverse effect" means, with
respect to DTE or MCN a material adverse effect on the condition (financial or
otherwise), properties, business, operations, results of operations or prospects
of the party and its subsidiaries taken as a whole, OTHER THAN ANY CHANGE OR
EFFECT ARISING OUT OF:
(1) Any divestiture by MCN of various electric facilities or
FERC-jurisdictional assets as required by the merger agreement;
(2) MCN's recognition of a write-down of its gas and oil properties
under the full cost method of accounting as prescribed by Rule
4-10 of Regulation S-X under the Securities Act and Exchange Act;
(3) General economic conditions; or
(4) Conditions generally affecting the electric or gas utility
industries.
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REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties made
by DTE, DTE Enterprises and MCN, some of which are qualified as to materiality,
regarding the following matters, among others:
- Corporate existence and capitalization;
- Ownership of the shares of capital stock of its material subsidiaries;
- Corporate power and authority to execute, deliver and perform its
obligations under the merger agreement, and to complete the merger;
- Consents and regulatory approvals necessary to complete the merger;
- No violation of any party's organizational documents or the
organizational documents of any of their subsidiaries, contracts to which
any party is a signatory, and no violation of any law, rule or
regulation;
- Accuracy of documents filed with the Securities and Exchange Commission
and applicable regulatory authorities, including financial statements;
- Absence of certain material adverse changes or events;
- Pending or threatened suits, actions or other proceedings, obligations or
liabilities;
- Employee benefits;
- Compliance with laws and required licenses and permits;
- Environmental matters;
- Tax matters;
- Intellectual property;
- Insurance;
- Regulation as a utility;
- Absence of beneficial ownership of each other's shares; and
- Year 2000 compliance.
MCN has also made certain representations and warranties with respect to
regulatory proceedings and its FERC-jurisdictional assets.
COVENANTS
INTERIM OPERATIONS
DTE and MCN have each agreed as to itself and each of its subsidiaries,
from the date of the merger agreement and prior to the completion of the merger,
unless the other party otherwise approves, and except as otherwise expressly
contemplated by the merger agreement, that, among other things:
(1) It will conduct its businesses in the ordinary and usual course
and will use best reasonable efforts to preserve intact its
business organization and maintain existing relations and goodwill
with various business relations and maintain and keep material
properties and assets in as good repair and condition as such are
in as of the date of the merger agreement, subject to ordinary
wear and tear;
(2) It will not amend its articles of incorporation or bylaws;
(3) It will not make any distributions with respect to its common
stock (other than quarterly cash dividends not in excess of $.255
per share in the case of MCN and of $.515 per share in the case of
DTE) or change in capital structure;
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(4) Other than in the ordinary and usual course of business, it will
not make acquisitions or investments in any other person in excess
of $100,000,000 in the aggregate or $30,000,000 in respect of any
transaction or series of related transactions, in the case of MCN,
or in excess of $250,000,000 in the aggregate, in the case of DTE;
(5) It will not change any accounting principle, practice or method in
a manner that is inconsistent with past practice, except to the
extent required by U.S. generally accepted accounting principles
as advised by its regular independent accountants; and
(6) It will not take or fail to take any action that is reasonably
likely to make any representation or warranty of it inaccurate in
any material respect at, or as of any time prior to, the
completion of the merger, or that is, individually or in the
aggregate, reasonably likely to have a material adverse effect on
it.
In addition, MCN has agreed as to itself and each of its subsidiaries, from
the date of the merger agreement and prior to the completion of the merger,
unless DTE otherwise approves, and except as otherwise expressly contemplated by
the merger agreement, that, among other things:
(1) It will not make or authorize or commit for any capital
expenditures or operation and maintenance expenditures in excess
of 110% of those contemplated to be spent pursuant to the year
1999, 2000 or 2001 capital appropriations spending budgets;
(2) It will not incur, assume or prepay any long-term debt or incur or
assume any short-term debt other than in the ordinary and usual
course of business in amounts and for purposes consistent with
past practice under existing lines of credit, and except for the
incurrence of long-term indebtedness in connection with the
refinancing of existing indebtedness either at its stated maturity
or at a lower cost of funds;
(3) It will not assume, guarantee, endorse or otherwise become liable
or responsible for the obligations of any third-party, except in
the ordinary and usual course of business;
(4) It will not accelerate or delay collection of notes or accounts
receivable in advance of or beyond their regular due dates or the
dates consistent with past practice;
(5) Except as required by law, an existing collective bargaining
agreement or other contract identified to DTE, neither it nor any
of its subsidiaries will:
- Terminate, establish, adopt, enter into, make any new grants or
awards under, amend or otherwise modify, any compensation and
benefit plans, or except as required by any existing contract with
a non-officer employee, increase the salary, wage, bonus or other
compensation of any employees, except increases occurring in the
ordinary and usual course of business; or
- Grant any severance or termination pay to, or enter into any
employment or severance agreement with, any director or officer of
it or such subsidiaries, provided, that MCN is not required to
violate any of its obligations existing prior to the date of the
merger agreement;
(6) It will not settle or compromise any material claims or litigation
or amend or terminate any of its material contracts or waive,
release or assign any material rights or claims; and
(7) It will not make any material tax election, other than in the
ordinary and usual course or as is required by law, or permit any
insurance policy naming it as a beneficiary or loss-payable payee
to be canceled or terminated except in the ordinary and usual
course of business.
In addition, DTE has agreed as to itself and each of its subsidiaries, from
the date of the merger agreement and prior to the completion of the merger,
unless MCN otherwise approves, and except as otherwise expressly contemplated by
the merger agreement, that, among other things:
(1) It will not enter into any agreement with respect to a merger,
reorganization, share exchange, consolidation or similar
transaction involving, or any purchase of all or substantially all
of the
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equity securities of it or any of its significant subsidiaries (as
defined in Rule 1-02 of Regulation S-X under the Exchange Act); and
(2) Other than pursuant to the year 1999, 2000 or 2001 capital
appropriations/spending budgets and other than in the ordinary and
usual course of business, it will not dispose of or encumber any
property or assets, other than sales not in excess of $250,000,000
in the aggregate.
ACQUISITION PROPOSALS
In the merger agreement, each of DTE and MCN has agreed that it will not,
directly or indirectly, initiate, solicit, encourage or otherwise facilitate any
inquiries or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any purchase of all or any of the assets or any equity securities of, it or
any of its subsidiaries. These limitations do not apply, however, to those
transactions in the ordinary course of business or those transactions that are
expressly contemplated by the merger agreement that could not interfere with the
merger. In addition, these limitations only apply to DTE to the extent such
proposal or offer is conditioned on DTE's failure to obtain the approval of its
shareholders of the issuance of shares of DTE common stock in the merger or
could reasonably be expected to result in a failure to consummate the merger. In
this document, a proposal related to MCN is referred to as a "Company
Acquisition Proposal," and a proposal related to DTE that satisfies the test set
forth above is referred to as a "Parent Adverse Proposal."
Each of MCN and DTE has further agreed that it will not negotiate with,
provide confidential information or data to, or discuss with any person, a
Company Acquisition Proposal or Parent Adverse Proposal, respectively, or
otherwise facilitate any effort or attempt to make or implement a Company
Acquisition Proposal or Parent Adverse Proposal.
Despite this agreement, nothing contained in the merger agreement prohibits
either party or its board of directors from:
(a) Complying with Rule 14e-2 under the Securities Exchange Act of
1934;
(b) Providing information in response to a request therefor by a
person who has made an unsolicited bona fide written Company
Acquisition Proposal or Parent Adverse Proposal so long as its
board of directors receives from the person so requesting the
information an executed confidentiality agreement with terms with
respect to confidentiality substantially similar to those
contained in the confidentiality agreement, dated August 30, 1999,
between DTE and MCN;
(c) Engaging in any negotiations or discussions with any person who
has made an unsolicited bona fide written Company Acquisition
Proposal or Parent Adverse Proposal; or
(d) Recommending the Company Acquisition Proposal or Parent Adverse
Proposal to its shareholders.
In order to engage in any of the activities described above in (b), (c) and (d)
above, however, such activities must occur prior to the time of that party's
shareholder vote and the board of directors must determine in good faith after
consultation with outside legal counsel and its financial advisor and based upon
such other matters as it deems relevant that failure to take such action would
likely result in a breach of its fiduciary duties under applicable law. In
addition, the board of directors must determine that the Company Acquisition
Proposal or Parent Adverse Proposal, if accepted, is reasonably likely to be
completed, taking into account all legal, financial and regulatory aspects of
the proposal and the person making the proposal and would, if completed be
reasonably likely to result in a transaction more favorable to its shareholders
from a financial point of view than the transaction contemplated by the merger
agreement. With respect to MCN, any more favorable Company Acquisition Proposal
described above is referred to as a "Superior Proposal" in this document.
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ADDITIONAL AGREEMENTS
STOCK OPTIONS
In the merger agreement, DTE has agreed to assume each outstanding option
to purchase shares of MCN common stock in accordance with the terms of the MCN
stock plans and the stock option agreement by which it is evidenced. See "The
Merger -- Interests of Management and Directors in the Merger" on page 43.
EMPLOYEE BENEFITS
In the merger agreement, DTE has agreed that for one year after the closing
date, it will continue to provide the employees of MCN and its subsidiaries with
compensation and benefits under employee benefit plans that are no less
favorable in the aggregate than those currently provided by MCN and its
subsidiaries. This covenant does not apply to plans involving the issuance of
shares of MCN common stock.
In addition, DTE has agreed to cause DTE Enterprises and The Detroit Edison
Company, from and after the completion of the merger, to honor:
(a) Each existing employment, change of control, severance and
termination agreement between MCN or any of its subsidiaries, and
any officer, director or employee of MCN or its subsidiaries; and
(b) All compensation and benefit plans of MCN and its subsidiaries as
in effect immediately before the closing date of the merger,
although DTE can amend or terminate any such plan in accordance
with its terms.
The merger agreement provides that with respect to those employee benefit
plans of DTE and its affiliates that after the merger will provide benefits to
any current MCN employees, which we refer to in this document as the "new
plans," each MCN employee will be credited with his or her years of service with
MCN and its affiliates before the completion of the merger, to the same extent
as the employee was entitled to credit for such purposes under any similar MCN
plan. This right to credit does not apply if the credit would result in a
duplication of benefits. In addition:
(a) Each MCN employee will be immediately eligible to participate,
without any waiting time, in any and all new plans to the extent
coverage under such new plan replaces coverage under a comparable
MCN employee plan in which such MCN employee participated
immediately before the completion of the merger, which we refer to
in this document as the "old plans"; and
(b) For purposes of each new plan providing medical, dental,
pharmaceutical and/or vision benefits to any MCN employee:
- DTE will cause all pre-existing condition exclusions of the new
plan to be waived for the employee and his or her covered
dependents to the extent that such exclusions and requirements were
waived under the corresponding MCN plan; and
- DTE will cause any eligible expenses incurred by the employee and
his or her covered dependents during the portion of the plan year
of the old plan ending on the date that such employee's
participation in the corresponding new plan begins to be taken into
account under such new plan for purposes of satisfying all
deductible, coinsurance and maximum out-of-pocket requirements
applicable to such employee and his or her covered dependents for
the applicable plan-year as if such amounts had been paid in
accordance with such new plan.
EMPLOYEES
The merger agreement provides that DTE and MCN presently intend that there
will be no involuntary reductions in workforce at the surviving corporation or
its subsidiaries, and that DTE will continue DTE's and MCN's present strategy of
achieving workforce reductions through attrition or other voluntary means after
the merger; however, if any reductions in workforce become necessary, DTE has
agreed that such reductions will
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be made on a fair and equitable basis, in light of the circumstances and the
objectives to be achieved, giving consideration to previous work history, job
experience, qualifications, and business needs without regard to whether
employment prior to the completion of the merger was with MCN or its
subsidiaries or DTE or its subsidiaries.
Any employees whose employment is terminated or jobs are eliminated by DTE
or any of its subsidiaries will be entitled to participate on a fair and
equitable basis in the job opportunity and employment placement programs offered
by DTE. Any workforce reductions carried out following the completion of the
merger by DTE or its subsidiaries will be done in accordance with all applicable
collective bargaining agreements, and all laws and regulations governing the
employment relationship and termination thereof including, without limitation,
the Worker Adjustment and Retraining Notification Act and regulations
promulgated thereunder, and any comparable state or local law.
EXPENSES
DTE or DTE Enterprises will pay all charges and expenses of MCN, DTE or DTE
Enterprises, including those of the exchange agent, in connection with the
transactions contemplated by the provisions of the merger agreement related to
MCN shareholders' exchange of their shares.
Except as otherwise provided in the termination provisions of the merger
agreement, whether or not the merger is completed, all costs and expenses
incurred in connection with the merger agreement and the merger and the other
transactions contemplated by the merger agreement will be paid by the party
incurring such expense, except that expenses incurred in connection with the
filing fee for the registration statement, of which this document is a part, and
printing and mailing this document and the registration statement will be shared
equally by DTE and MCN.
INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE
In the merger agreement, DTE and MCN have agreed to provisions relating to
indemnification of officers and directors of MCN and the provision of directors
and officers' liability insurance, which are described in "The Merger --
Interests of Management and Directors in the Merger" on page 43.
DIVIDENDS
MCN has agreed to coordinate with DTE the declaration, setting of record
dates and payment dates of dividends on shares of MCN common stock. This
coordination is to ensure that MCN shareholders do not receive dividends on both
shares of MCN common stock and shares of DTE common stock received in the merger
in respect of any calendar quarter or fail to receive a dividend on either
shares of MCN common stock or shares of DTE common stock received in the merger
in respect of any calendar quarter.
RATE MATTERS
Other than currently pending rate filings, MCN has agreed, and has agreed
to cause its subsidiaries, to discuss with DTE any material changes in its or
its subsidiaries regulated rates or charges (other than pass-through fuel rates
or charges), standards of service or accounting, and MCN has agreed to consult
with DTE prior to making any filing or effecting any agreement or consent with
respect to such matters.
TRANSITION MATTERS
In the merger agreement, DTE and MCN have agreed to establish a transition
committee consisting of three people from each company. The purpose of this
committee is to facilitate a full exchange of information concerning the
business, operations, capital spending and budgets and financial results of DTE
and MCN and to identify ways in which the operations of DTE and MCN can be
consolidated or coordinated.
In the merger agreement, MCN and DTE agreed to use reasonable best efforts
to enter into a definitive agreement for the sale to DTE of all of MCN's
membership interest in each of several limited liability companies that own and
operate synthetic fuel manufacturing facilities. On November 1, 1999, DTE Energy
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Services, Inc., a subsidiary of DTE, and MCNIC Pipeline & Processing Company, a
subsidiary of MCN, executed a definitive agreement providing for the sale of
MCN's interest in synthetic fuel manufacturing companies, which are sometimes
referred to throughout this document as "coal fines," to DTE. The agreement
provides that, on December 1, 1999, DTE will acquire all of MCN's interest in
each of the following four synthetic fuel manufacturing companies: CRC No. 1
LLC, CRC No. 3 LLC, CRC No. 5 LLC, CRC No. 6 LLC. DTE has agreed to pay
$11,250,000 per interest in each company, or a total of $45,000,000, at the
completion of the sale, subject to a post-closing purchase price adjustment with
respect to the companies, which adjustment will be based upon the average
productivity of the coal recovery system facilities owned by each company during
a 36-month period set forth in the agreement. This post-closing adjustment could
result in an increase of the purchase price for all the interests up to
$152,000,000 or a decrease down to zero. The transfer of these companies will
not be effected until after the HSR Act and the regulations under the HSR Act
have been complied with, and all waiting periods under the HSR Act have been
expired or have been terminated. The agreement contains customary
representations and warranties regarding each company, and customary covenants
regarding the operations of each company prior to the completion of the sale.
The agreement also provides that each party will indemnify the other for losses
arising out of breaches or inaccuracies of its representations or warranties,
failures to perform its obligations contained in the agreement and third party
claims made against the other party, although the total amount of MCN's
liability under such indemnification obligation is limited to the total amount
paid by DTE to MCN for its interests in all the companies. The agreement also
contains customary closing conditions and provides that the agreement may be
terminated by the mutual written agreement of both parties at any time before
the completion of the sale, or by either party upon the failure of any condition
to that parties' obligation to complete the sale. This purchase and sale of
MCN's interests in these synthetic fuel manufacturing companies is independent
of the completion of the merger.
In the merger agreement, MCN has agreed to use its best efforts promptly to
enter into, or to cause its subsidiaries promptly to enter into, agreements to
dispose of:
(a) Such of its interests as are necessary so that the transactions
contemplated by the merger agreement will not jeopardize the status of any
facilities in which MCN directly or indirectly owns any interest as
"Qualifying Facilities" under the Public Utility Regulatory Policies Act of
1978, as amended; and
(b) All FERC-jurisdictional assets or facilities whether directly or
indirectly owned or wholly or partially owned that would give rise to a
requirement for approval of the merger by the FERC.
MCN has agreed to complete these dispositions prior to the date when all
governmental consents are obtained and to use commercially reasonable efforts to
maximize the after-tax proceeds from such sales or dispositions. However, the
obligation to use best efforts to dispose of such assets does not require MCN to
take any action that would cause, alone or together with other events, any
failure to satisfy any condition to closing. MCN has agreed to keep DTE informed
on a current basis regarding the status and terms of the dispositions and any
other asset dispositions contemplated by MCN and its subsidiaries and to work
cooperatively with DTE to maximize the mutual benefit to the parties of such
dispositions.
COMMUNITY INVOLVEMENT
It is the present intention of DTE that after the merger, DTE will continue
to make aggregate annual charitable contributions to the communities served by
DTE and otherwise maintain a substantial level of involvement in community
activities in Michigan that is similar to, or greater than, the normal aggregate
annual level of charitable contributions, community development and related
activities carried on by DTE and MCN prior to the date of the merger agreement.
STOCK EXCHANGE LISTING AND DELISTING
DTE has agreed to use its best efforts to cause the shares of DTE common
stock to be issued in the merger to be approved for listing on the NYSE. The
surviving corporation shall use its best efforts to cause the
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shares of MCN common stock to be de-listed from the NYSE and de-registered under
the Exchange Act as soon as practicable following the completion of the merger.
OTHER AGREEMENTS
The merger agreement contains additional agreements relating to the conduct
of the parties prior to the merger, including the following:
- To promptly make their respective filings with applicable governmental
entities and to use commercially reasonable efforts in obtaining all
necessary regulatory approvals and consents;
- To afford the other party reasonable access to its properties, books,
contracts and records; and
- Not to take or cause to be taken any action, whether before or after the
completion of the merger, that would disqualify the merger as a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code.
TERMINATION
The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after the approval by DTE shareholders of the
issuance of shares of DTE common stock in the merger or by MCN shareholders of
the merger agreement:
(a) By the mutual written consent of DTE and MCN,
(b) By either DTE or MCN:
(1) If the merger is not completed by July 15, 2000, although DTE
and MCN have agreed to extend that date for an additional nine
months if the reason the merger has not been completed is that
the parties have not obtained all governmental consents; this
termination right is not available to a party if it has
materially breached its obligations under the merger agreement
and such breach is proximately related to the failure to
complete the merger;
(2) If MCN shareholders fail to approve the merger agreement or DTE
shareholders fail to approve the issuance of shares of DTE
common stock;
(3) If any legal restriction permanently prohibiting completion of
the merger has become final and non-appealable;
(4) If the other party materially breaches its representations,
warranties, covenants or agreements contained in the merger
agreement in a manner that cannot be cured, or, if curable, is
not cured within 30 days after written notice from the
non-breaching party;
(5) Pursuant to the terms of the merger agreement relating to the
receipt of a Superior Proposal or a Parent Adverse Proposal; or
(6) If the other party's board of directors withdraws or adversely
modifies its approval or recommendation of the merger
agreement, or fails to reconfirm its recommendation of the
merger agreement within 5 business days after a written request
by the other party to do so.
In addition, DTE and MCN have agreed that if FERC approval of the merger is
not required, either party may terminate the merger agreement after one year
from the date of the merger agreement, if either party reasonably determines
that it is more likely than not that the governmental consents necessary to
complete the merger on terms that satisfy the conditions to DTE's and MCN's
obligation to complete the merger will not be obtained prior to April 15, 2001,
which is approximately 18 months from the date of the merger agreement. If FERC
approval of the merger is required, however, this right to terminate the merger
agreement by making such a reasonable determination exists only after 15 months
from the date of the merger agreement.
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TERMINATION FEE AND REIMBURSEMENT OF EXPENSES
In the merger agreement, DTE and MCN have agreed to the payment of
termination fees and the reimbursement of expenses as follows:
(1) If DTE terminates the merger agreement in order to accept a Parent
Adverse Proposal, DTE will pay MCN a termination fee of $85
million and will reimburse MCN for its charges and expenses
incurred in connection with the merger agreement up to a maximum
amount of $15 million;
(2) If MCN terminates the merger agreement in order to accept a
Superior Proposal, MCN will pay DTE a termination fee of $55
million and will reimburse DTE for its charges and expenses
incurred in connection with the merger agreement up to a maximum
amount of $15 million;
(3) If DTE or MCN terminates the merger agreement after the other
party's board of directors withdraws or adversely modifies its
recommendation of the merger agreement, or fails to reconfirm its
recommendation of the merger agreement within 5 business days
after a written request by the other party to do so, then the
party whose board takes such action will:
- Promptly reimburse the other party for its charges and expenses
incurred in connection with the merger agreement up to a maximum
amount of $15 million; and
- If such party enters into a definitive agreement or completes a
Superior Proposal or Parent Adverse Proposal, as applicable, within
12 months of such termination, pay the other party a termination
fee which, in the case of DTE, will be $85 million and, in the case
of MCN, will be $55 million;
(4) If DTE or MCN terminates the merger agreement after a Parent
Adverse Proposal or a Superior Proposal, as the case may be, has
been made and the vote of the shareholders of the party to which
such proposal has been made has not been obtained, the party whose
shareholder vote was not obtained will:
- Promptly reimburse the other party for its charges and expenses
incurred in connection with the merger agreement up to a maximum
amount of $15 million; and
- If such party enters into a definitive agreement or completes a
Superior Proposal or Parent Adverse Proposal, as applicable, within
12 months of such termination, pay the other party a termination
fee which, in the case of DTE will be $85 million and, in the case
of MCN will be $55 million.
MODIFICATION, AMENDMENT AND WAIVER
DTE and MCN may modify or amend the merger agreement at any time prior to
the completion of the merger, by written agreement executed and delivered by
duly authorized officers of DTE or MCN. Other than the condition relating to the
receipt of tax opinions from counsel, which may not be waived after the
requisite approval from DTE shareholders or MCN shareholders has been obtained,
unless further shareholder approval is obtained with appropriate disclosure,
each of DTE or MCN may waive the conditions to its obligations to complete the
merger, in whole or in part.
On November 12, 1999, DTE and MCN executed a first amendment to the merger
agreement to provide that the transmittal materials to be sent to MCN
shareholders for use in making the election to receive cash, shares of DTE
common stock or both, with respect to shares of MCN common stock canceled in the
merger, will be sent to such shareholders approximately one month before the
completion of the merger.
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ACCOUNTING TREATMENT
The merger will be accounted for by the purchase method of accounting.
Under the purchase method of accounting, MCN's properties and investments which
are not regulated will be recorded at their fair values. MCN's regulated
operations will be recorded at historical amounts, except for gas inventory,
which will be recorded at fair value with a corresponding credit recorded as a
regulatory liability, and pension and other postretirement benefit assets and
liabilities, which will be recorded at the current funded status of the related
plans in accordance with the provisions of SFAS Nos. 87 and 106. The remaining
difference between the purchase price of MCN, including direct costs of the
acquisition, and the amounts assigned to identifiable assets and liabilities
will be allocated between an acquisition adjustment in accordance with
accounting for regulated public utilities and goodwill.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material U.S. federal income tax
consequences of the merger to holders of MCN common stock who hold such stock as
a "capital asset" within the meaning of Section 1221 of the Internal Revenue
Code. Special tax consequences may be applicable to particular classes of
taxpayers, such as financial institutions, insurance companies, tax-exempt
organizations, broker-dealers, traders in securities that elect to mark to
market, persons that hold MCN common stock as part of a hedge, constructive
sale, straddle or conversion transaction, persons who are not citizens or
residents of the United States, other non-United States persons, and
shareholders who acquired their shares of MCN common stock through the exercise
of an employee stock option or otherwise as compensation. The following
represents general information only and is based upon the Internal Revenue Code,
its legislative history, existing and proposed regulations thereunder, published
rulings and decisions, all as currently in effect as of the date hereof, and all
of which are subject to change, possibly with retroactive effect. Tax
considerations under state, local and foreign laws, or under federal laws other
than federal income tax laws, are not addressed in this proxy
statement/prospectus. ALL SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL OR
FOREIGN INCOME AND OTHER TAX LAWS AND OF CHANGES IN SUCH TAX LAWS.
TAX CONSEQUENCES OF THE MERGER GENERALLY
It is a condition to the merger that DTE receive an opinion of its special
counsel, Sullivan & Cromwell, and MCN receive an opinion of its special counsel,
Wachtell, Lipton, Rosen & Katz, each dated the closing date and each to the
effect that the merger will be treated as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code and that each of DTE, DTE
Enterprises and MCN will be a party to that reorganization within the meaning of
Section 368(b) of the Internal Revenue Code. In rendering such opinions, counsel
may require and rely upon customary representations contained in letters to be
received from DTE, DTE Enterprises, MCN and others. Neither of these tax
opinions will be binding on the Internal Revenue Service, and neither DTE nor
MCN intends to request any ruling from the Internal Revenue Service as to the
U.S. federal income tax consequences of the merger.
Assuming the merger is a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, for U.S. federal income tax purposes:
(1) No gain or loss will be recognized by DTE, DTE Enterprises, MCN or
shareholders of DTE pursuant to the merger;
(2) A shareholder of MCN who exchanges all of its shares of MCN common
stock solely for cash in the merger will recognize gain or loss in
an amount equal to the difference between the cash received and
the shareholder's adjusted tax basis in the shares surrendered;
(3) A shareholder of MCN who receives solely DTE common stock in
exchange for its shares in the merger will not recognize any gain
or loss, except, as discussed below, in respect of cash received
instead of fractional shares; and
(4) A shareholder of MCN who receives a combination of cash and DTE
common stock in the merger will not recognize loss but will
recognize gain, if any, on the shares so exchanged in an amount
that does not exceed the amount of any cash received, as described
in more detail below.
EXCHANGE OF MCN COMMON STOCK SOLELY FOR CASH
In general, a shareholder of MCN who exchanges all of its shares of MCN
common stock for cash in the merger will recognize capital gain or loss equal to
the difference between the amount of cash received and its adjusted tax basis in
the shares of MCN common stock surrendered. The gain or loss will be long-term
capital gain or loss if, as of the date of the merger, the holding period for
such shares is greater than one year.
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<PAGE> 77
EXCHANGE OF MCN COMMON STOCK SOLELY FOR DTE COMMON STOCK
A shareholder of MCN who receives solely DTE common stock in exchange for
its shares of MCN common stock in the merger will not recognize any gain or loss
upon such exchange. Such shareholder may recognize gain or loss, however, in
respect of cash received in lieu of a fractional share of MCN common stock, as
discussed below. The aggregate adjusted tax basis of the shares of DTE common
stock received in the exchange will be equal to the aggregate adjusted tax basis
of the shares surrendered therefor, and the holding period of the DTE common
stock will include the holding period of the shares of MCN common stock
surrendered therefor.
EXCHANGE OF MCN COMMON STOCK FOR DTE COMMON STOCK AND CASH
A shareholder of MCN who receives a combination of cash and shares of DTE
common stock in the merger will not recognize loss but will recognize gain if
the shareholder's adjusted basis in the shares of MCN common stock exchanged in
the transaction is less than the fair market value, on the date of completion of
the merger, of the DTE common stock and the cash received. The gain, if any,
that the holder will recognize will equal the lesser of:
(1) The excess of the cash and the fair market value on the date of
completion of the merger of the DTE common stock received by the shareholder
over such shareholder's adjusted tax basis in the shares of MCN common stock
exchanged therefor and,
(2) The amount of cash received in the exchange.
Any such recognized gain will be treated as capital gain unless the receipt of
the cash has the effect of the distribution of a dividend for U.S. federal
income tax purposes, in which case such gain will be treated as ordinary
dividend income to the extent of such shareholder's ratable share of accumulated
earnings and profits. Any capital gain will be long-term capital gain if, as of
the date of the merger, the holding period for such shares is greater than one
year. The following is a brief discussion of such potential tax treatment;
however, MCN shareholders should consult their own tax advisors as to the
possibility that all or a portion of any cash received in exchange for their
shares of MCN common stock will be treated as a dividend.
The stock redemption provisions of Section 302 of the Internal Revenue Code
apply in determining whether cash received by a shareholder of MCN pursuant to
the merger has the effect of a distribution of a dividend under Section
356(a)(2) of the Internal Revenue Code. Under this analysis, called the
"hypothetical redemption analysis," a shareholder of MCN will be treated as if
the portion of the shares of MCN common stock exchanged for cash in the merger
had been instead exchanged for shares of DTE common stock (the "hypothetical
shares") followed immediately by a redemption of the hypothetical shares by DTE
for cash. Under the principles of Section 302 of the Internal Revenue Code, a
shareholder of MCN will recognize capital gain rather than dividend income with
respect to the cash received if the hypothetical redemption is "not essentially
equivalent to a dividend" or is "substantially disproportionate" with respect to
such shareholder. In applying the principles of Section 302, the constructive
ownership rules of Section 318 of the Internal Revenue Code will apply in
comparing the shareholder's ownership interest in DTE both immediately after the
merger, but before the hypothetical redemption, and after the hypothetical
redemption.
Whether the hypothetical redemption by DTE of the hypothetical shares for
cash is "not essentially equivalent to a dividend" with respect to a shareholder
of MCN will depend upon such shareholder's particular circumstances. However,
the hypothetical redemption must, in any event, result in a "meaningful
reduction" in such shareholder's percentage ownership of DTE stock. In
determining whether the hypothetical redemption by DTE results in a meaningful
reduction in the shareholder's percentage ownership of DTE stock, and therefore,
does not have the effect of a distribution of a dividend, a shareholder of MCN
should compare his or her share interest in DTE, including interests owned
actually, hypothetically and constructively, immediately after the merger, but
before the hypothetical redemption, to his or her interest after the
hypothetical redemption. The IRS has indicated, in Revenue Ruling 76-385, that a
shareholder in a publicly held corporation whose relative stock interest in the
corporation is minimal and who exercises no "control" over corporate affairs is
generally treated as having had a meaningful reduction in his or her stock after
a
67
<PAGE> 78
redemption transaction if his or her percentage stock ownership in the
corporation has been reduced to any extent, taking into account the
shareholder's actual and constructive ownership before and after the
hypothetical redemption. In Revenue Ruling 76-385, the IRS found a reduction
from .0001118% to .0001081% to be a meaningful reduction.
The hypothetical redemption transaction would be "substantially
disproportionate," and therefore, would not have the effect of a distribution of
a dividend with respect to a shareholder of MCN who owns less than 50% of the
total combined voting power of all classes of outstanding DTE stock entitled to
vote, if the percentage of DTE common stock actually and constructively owned by
such shareholder immediately after the hypothetical redemption is less than 80%
of the percentage of DTE common stock actually, hypothetically and
constructively owned by such shareholder immediately before the hypothetical
redemption, and, if there are outstanding voting shares of DTE other than DTE
common stock, the shareholder also meets the 80% test with respect to all shares
of outstanding DTE voting stock, including the DTE common stock.
The aggregate adjusted tax basis of the shares of DTE common stock received
in such exchange will be equal to the aggregate tax basis of the shares
surrendered therefor, decreased by the cash received and increased by the amount
of gain recognized, if any. The holding period of DTE common stock will include
the holding period of the shares of MCN common stock surrendered therefor.
CASH RECEIVED INSTEAD OF A FRACTIONAL INTEREST OF DTE COMMON STOCK
A shareholder of MCN who receives cash instead of a fractional share of DTE
common stock will be treated as having received such fractional share pursuant
to the merger and then as having exchanged such fractional share for cash in a
redemption by DTE subject to Section 302 of the Internal Revenue Code. Such a
deemed redemption will be treated as a sale of the fractional share, provided
that it is "not essentially equivalent to a dividend" or is "substantially
disproportionate" with respect to the MCN shareholder. (See the preceding
section.) If the deemed redemption is treated as a sale of a fractional share,
an MCN shareholder will recognize gain or loss equal to the difference between
the amount of cash received and the portion of the basis of the shares of DTE
common stock allocable to such fractional interest. Such gain or loss will be
capital gain or loss if, as of the date of the merger, the holding period for
such shares is greater than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of cash to a holder surrendering shares of MCN common stock will
be subject to information reporting and "backup" withholding (whether or not the
holder also receives DTE common stock) at a rate of 31% of the cash payable to
the holder, unless the holder furnishes its taxpayer identification number in
the manner prescribed in applicable Treasury Regulations, certifies that such
number is correct, certifies as to no loss of exemption from backup withholding
and meets certain other conditions. Any amounts withheld from payments to a
holder under the backup withholding rules will be allowed as a refund or credit
against the holder's U.S. federal income tax liability, provided the required
information is furnished to the Internal Revenue Service.
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<PAGE> 79
UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma information reflects the historical
combined condensed consolidated financial statements of DTE and MCN after
accounting for the merger as a purchase business combination. Accordingly, the
following information should be read together with the historical consolidated
financial statements and the related notes thereto, of DTE, which are
incorporated into this document by reference and of MCN, which are included
herein. The unaudited pro forma combined condensed consolidated balance sheet
assumes the merger became effective as of September 30, 1999. The unaudited pro
forma combined condensed consolidated statements of income from continuing
operations assume the merger became effective on January 1, 1998.
The information presented below is not necessarily indicative of the
results of operations that might have occurred had the merger actually closed on
January 1, 1998, or the actual financial position that might have resulted had
the merger actually closed on September 30, 1999. The information is not
necessarily indicative of the future results of operations or financial position
of DTE after the merger. Due to the effect of seasonal fluctuations and other
factors on the operation of DTE and MCN, financial results for the nine months
ended September 30, 1999 are not necessarily indicative of results for the year
ending December 31, 1999. The information does not reflect the disposition of
MCN's investments in various electric facilities which is planned to occur prior
to the merger.
The unaudited pro forma combined condensed consolidated financial
statements do not reflect the non-recurring costs and expenses associated with
integrating the operations of the two companies, nor any of the anticipated
recurring expense savings arising from the integration. Costs of integration may
result in significant non-recurring charges to the combined results of
operations after completion of the merger; however, the actual amount of such
charges cannot be determined until the transition plan relating to the
integration of operations is completed.
The pro forma combined condensed consolidated financial statements assume
that all MCN shares were exchanged for either consideration of $28.50 in cash or
0.775 shares of DTE common stock, subject to allocation and proration procedures
that ensure that 45% of the MCN shares of common stock are converted into shares
of DTE common stock and 55% of the MCN shares of common stock are converted into
cash. The total consideration for the transaction using this value is
approximately $2.4 billion based on the number of shares of common stock of MCN
outstanding on September 30, 1999 and transaction costs associated with the
merger.
Allocations included in the pro forma statements are based on analyses
which are not yet completed. Accordingly, the final value of the purchase price
and its allocation may differ, perhaps significantly, from the amounts shown in
the unaudited pro forma combined condensed consolidated financial statements
that follow.
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<PAGE> 80
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(1)(2) (4)
DTE MCN PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENT COMBINED
------------- ------------- ---------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating Revenues......................... $4,221 $2,031 $ -- $6,252
------ ------ ----- ------
Operating Expenses
Fuel, purchased power and gas............ 1,063 1,206 -- 2,269
Operation and maintenance................ 1,288 389 -- 1,677
Depreciation, depletion and
amortization.......................... 661 180 29(c)(d) 870
Taxes other than income.................. 272 70 -- 342
Property write-downs and restructuring
charges............................... -- 592 -- 592
------ ------ ----- ------
Total Operating Expenses......... 3,284 2,437 29 5,750
Operating Income (Loss).................... 937 (406) (29) 502
Interest Expense and Other
Interest expense......................... 319 112 77(b) 508
Preferred stock dividends of
subsidiary............................ 6 36 -- 42
Equity in earnings of joint ventures..... -- (62) -- (62)
Other -- net............................. 15 (22) -- (7)
------ ------ ----- ------
Total Interest Expense and
Other.......................... 340 64 77 481
Income (Loss) Before Income Taxes.......... 597 (470) (106) 21
Income Taxes (Benefit)..................... 154 (184) (29)(g) (59)
------ ------ ----- ------
Net Income (Loss).......................... $ 443 $ (286) $ (77) $ 80
====== ====== ===== ======
Average Common Shares Outstanding
Basic.................................... 145 79 173
------ ------ ------
Diluted.................................. 145 79 181
------ ------ ------
Earnings (Loss) per Common Share
Basic.................................... $ 3.05 $(3.63) $ 0.46
------ ------ ------
Diluted.................................. $ 3.05 $(3.63) $ 0.44
------ ------ ------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements" on page 73.
70
<PAGE> 81
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FROM CONTINUING OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(1)(2) (4)
DTE MCN PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating Revenues............................ $3,614 $1,748 $ -- $5,362
------ ------ ------
Operating Expenses
Fuel, purchased power and gas............... 1,063 1,118 -- 2,181
Operation and maintenance................... 1,086 298 -- 1,384
Depreciation, depletion and amortization.... 547 126 22(c)(d) 695
Taxes other than income..................... 211 53 -- 264
Property write-downs and restructuring
charges.................................. -- 52 -- 52
------ ------ ---- ------
Total Operating Expenses............ 2,907 1,647 22 4,576
Operating Income (Loss)....................... 707 101 (22) 786
Interest Expense and Other
Interest expense............................ 260 87 58(b) 405
Preferred stock dividends of subsidiary..... -- 31 -- 31
Equity in earnings of joint ventures........ -- (40) -- (40)
Loss on sale of exploration and production
properties............................... -- 75 -- 75
Other -- net................................ 13 (11) -- 2
------ ------ ---- ------
Total Interest Expense and Other.... 273 142 58 473
Income (Loss) Before Income Taxes............. 434 (41) (80) 313
Income Taxes (Benefit)........................ 48 (12) (22)(g) 14
------ ------ ---- ------
Income (Loss) Before Cumulative Effect of
Accounting Change........................... $ 386 $ (29) $(58) $ 299
====== ====== ==== ======
Average Common Shares Outstanding
Basic....................................... 145 83 175
------ ------ ------
Diluted..................................... 145 83 179
------ ------ ------
Earnings (Loss) per Common Share Before
Cumulative Effect of Accounting Change
Basic....................................... $ 2.66 $(0.35) $ 1.71
------ ------ ------
Diluted..................................... $ 2.66 $(0.35) $ 1.67
------ ------ ------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements" on page 73.
71
<PAGE> 82
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(1) (4)
DTE MCN PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................... $ 54 $ 30 $ -- $ 84
Restricted cash............................... 317 -- -- 317
Accounts receivable, net...................... 534 301 -- 835
Accrued unbilled revenues..................... 154 22 -- 176
Inventories
Fuel........................................ 148 -- -- 148
Gas......................................... -- 238 187(a) 425
Materials and supplies...................... 160 15 -- 175
Other......................................... 87 82 -- 169
------- ------ ------ -------
1,454 688 187 2,329
Investments
Nuclear decommissioning trust funds........... 337 -- -- 337
Other......................................... 229 763 (35)(c) 957
------- ------ ------ -------
566 763 (35) 1,294
Property
Property, plant and equipment................. 11,688 3,816 195(c) 15,699
Property under capital leases................. 222 -- -- 222
Nuclear fuel under capital lease.............. 662 -- -- 662
------- ------ ------ -------
12,572 3,816 195 16,583
Less accumulated depreciation, depletion and
amortization................................ 5,507 1,688 -- 7,195
------- ------ ------ -------
7,065 2,128 195 9,388
Acquisition adjustment/goodwill................. -- -- 1,308(d) 1,308
Regulatory Assets............................... 2,972 48 -- 3,020
Other Assets.................................... 259 429 300(e) 988
------- ------ ------ -------
Total Assets........................... $12,316 $4,056 $1,955 $18,327
======= ====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................. $ 215 $ 291 $ -- $ 506
Dividends payable............................. 75 -- -- 75
Short-term borrowings......................... 296 371 1,372(b) 2,039
Current portion long-term debt................ 566 131 -- 697
Current portion capital leases................ 87 -- -- 87
Other......................................... 452 164 60(f) 676
------- ------ ------ -------
1,691 957 1,432 4,080
Other Liabilities
Deferred income taxes......................... 1,902 -- 133(g) 2,035
Capital leases................................ 118 -- -- 118
Regulatory liabilities........................ 230 166 187(a) 583
Other......................................... 532 222 52(h) 806
------- ------ ------ -------
2,782 388 372 3,542
Long-Term Debt.................................. 3,985 1,461 -- 5,446
Preferred Stock of Subsidiaries................. -- 403 -- 403
Shareholders' Equity
Common stock.................................. 1,950 1 997(i) 2,948
Additional paid-in capital.................... -- 945 (945) --
Retained earnings (deficit)................... 1,908 (99) 99 1,908
------- ------ ------ -------
3,858 847 151 4,856
------- ------ ------ -------
Total Liabilities and Shareholders'
Equity............................... $12,316 $4,056 $1,955 $18,327
======= ====== ====== =======
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements" on page 73.
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<PAGE> 83
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Certain revenues, expenses, assets and liabilities of MCN have been
reclassified to conform with DTE's presentation.
2. Sales and purchases between DTE and MCN are not material and have not
been eliminated in the Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements.
3. DTE applies the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, for its incentive compensation
plans. MCN applies the provisions of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation, for its incentive
compensation plans. The impact of adjusting MCN's recorded compensation expense
under FASB No. 123 to the provisions of APB No. 25 is not material, and
therefore, is not reflected in the pro forma adjustments.
4. The Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements are based on the following assumptions:
a. DTE utilizes the average cost method to account for its
inventories. MCN prices its gas inventory on a last-in, first-out
basis. The pro forma data reflects an adjustment to the estimated
fair value of the gas inventory and a corresponding regulatory
liability at September 30, 1999.
b. Reflects the issuance of $1.372 billion in short-term debt of DTE
upon completion of the merger. Interest expense is assumed to be
at 6%. This amount represents the purchase of 55% of the
outstanding shares of MCN at $28.50 per share and $30 million of
estimated direct costs of DTE related to the merger, including
fees of financial advisors, legal counsel and independent
auditors. A 1/8% variance in the assumed interest rate is
approximately $2 million annually. DTE anticipates replacing all
of the short-term debt with proceeds from issuance of long-term
debt and divestiture of certain non-core assets.
c. Other Investments and Property, Plant and Equipment include
adjustments to reflect the estimated fair value of MCN's
investment in various non-regulated joint ventures, exploration
and production properties and other energy-related properties and
the related effect on depreciation, depletion and amortization
expense.
d. The purchase price in excess of the amounts assigned to
identifiable assets and liabilities of MCN will be allocated
between an "acquisition adjustment" related to the property,
plant and equipment of MCN's regulated utility operations and
goodwill. However, this allocation has not yet been determined
and accordingly, is shown in the pro forma financial statements
as acquisition adjustment/goodwill. Pro forma income statement
adjustments reflect the amortization of this amount using the
straight-line method over an estimated weighted-average 37 years.
e. Other Assets reflects an adjustment of $300 million for MCN's
pension assets to reflect the funded status of the plans at
September 30, 1999.
f. Pursuant to the terms of various change in control agreements
with MCN's executives and other key employees, and other
incentive compensation plans in place, certain payments will be
required to be made upon a change in control. MCN will incur
charges to compensation expense resulting from the completion of
the merger. The amount of the charge is expected to be
approximately $45 million. Also included is $15 million of
estimated direct costs of MCN related to the merger. As these
charges are pre-acquisition, they are reflected in retained
earnings and are not included in the unaudited pro forma income
statements.
g. The estimated provision for income taxes related to the pro forma
adjustments is based on an assumed statutory federal income tax
rate of 35%. Amortization of acquisition adjustment/goodwill has
not been tax affected.
h. Other Liabilities reflects an adjustment for MCN's other
post-retirement benefit obligations at September 30, 1999.
i. Reflects the issuance of 30 million shares of DTE common stock in
exchange for 45% of the outstanding shares of MCN common stock
upon completion of the merger.
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<PAGE> 84
DESCRIPTION OF DTE CAPITAL STOCK
The following description of material terms of the capital stock of DTE
does not purport to be complete and is qualified in its entirety by reference to
the DTE Amended and Restated Articles of Incorporation, as amended, which is
incorporated herein by reference to the DTE articles of incorporation filed as
an exhibit to the registration statement of which this document is a part.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of DTE currently consists of 400,000,000
shares of DTE common stock, without par value, and 5,000,000 shares of preferred
stock, without par value. As of the record date for the DTE special meeting,
there were issued and outstanding 145,041,324 shares of DTE common stock, with
zero shares reserved for issuance. As of such date, there were no shares of
preferred stock issued and outstanding and 1,500,000 million shares of Series A
Junior Participating Preferred Stock were reserved for issuance pursuant to the
Rights Agreement, dated September 23, 1997, between DTE and The Detroit Edison
Company.
Pursuant to the DTE articles of incorporation, the DTE board of directors
may cause the issuance of one or more new series of the authorized shares of the
preferred stock, to determine the number of shares constituting any such new
series and to fix the voting, distribution, dividend, liquidation and all other
rights and limitations of the preferred stock. These rights may be superior to
those of the DTE common stock. To the extent any of DTE's preferred stock have
voting rights, no share or preferred stock may be entitled to more than one vote
per share, except with respect to election of directors in which case cumulative
voting may be available.
DTE COMMON STOCK
Subject to any special voting rights which may vest in the holders of
preferred stock, the holders of DTE common stock are entitled to vote as a class
and are entitled to one vote per share for each share held of record on all
matters voted on by shareholders, except with respect to the election of
directors, in which case cumulative voting is available, and are entitled to
participate equally among holders of common stock in respect of dividends as and
when dividends are declared by the DTE board of directors out of funds legally
available therefor. As a Michigan corporation, DTE is subject to statutory
limitations on the declaration and payment of dividends. In the event of a
liquidation, dissolution or winding-up of DTE, holders of DTE common stock have
the right to DTE's assets remaining after satisfaction in full of the prior
rights of creditors, and all liabilities and the aggregate liquidation
preferences of any outstanding shares of DTE preferred stock. The holders of DTE
common stock have no conversion, redemption or preemptive rights. All
outstanding shares of DTE common stock are validly issued, fully paid and
non-assessable.
The transfer agent and registrar for DTE common stock is The Detroit Edison
Company, 2000 2nd Avenue, Detroit, Michigan 48226-1279.
COMPARISON OF SHAREHOLDERS' RIGHTS
GENERAL
DTE and MCN are incorporated under the laws of the State of Michigan and,
accordingly, the rights of DTE shareholders and MCN shareholders are governed by
the laws of the State of Michigan. As a result of the merger, MCN shareholders
have the option to elect to become shareholders of DTE. Thus, following the
merger, the rights of the DTE shareholders and of the MCN shareholders who
become DTE shareholders in the merger will be governed by the DTE articles of
incorporation, the DTE bylaws and the laws of the State of Michigan. The DTE
articles of incorporation and the DTE bylaws will be unaltered by the merger.
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<PAGE> 85
COMPARISON OF SHAREHOLDERS' RIGHTS
Set forth on the following pages is a summary comparison of material
differences between the rights of a DTE shareholder under the DTE articles of
incorporation, DTE bylaws and Michigan law (left column) and the rights of an
MCN shareholder under the MCN articles of incorporation, MCN bylaws and Michigan
law (right column). The summary set forth below is not intended to provide a
comprehensive summary of Michigan law or of each company's governing documents.
This summary is qualified in its entirety by reference to the full text of the
DTE articles of incorporation and DTE bylaws, and the MCN articles of
incorporation and MCN bylaws.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DTE MCN
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL STOCK
AUTHORIZED CAPITAL
- ------------------------------------------------------------------------------------------------
400 million shares of common stock, without 250 million shares of common stock, par
par value, 5 million shares of preferred value $0.01 per share, 25 million shares of
stock, without par value. As of November 5, preferred stock, no par value. As of
1999, there were 145,041,324 shares of DTE November 5, 1999, there were 85,655,381
common stock issued and outstanding and no shares of MCN common stock issued and
shares reserved for issuance and no shares outstanding and 4,560,345 shares reserved
of preferred stock issued and outstanding. for issuance and no shares of preferred
stock issued and outstanding.
- ------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
CLASSIFICATION
- ------------------------------------------------------------------------------------------------
Directors are divided into three classes. Each class serves a three-year term and the
classes are as nearly equal in size as possible.
- ------------------------------------------------------------------------------------------------
NUMBER OF DIRECTORS
- ------------------------------------------------------------------------------------------------
Such number as is fixed by the board of Under Michigan law, the number of directors
directors from time to time but not less is fixed by the bylaws, unless the articles
than 10 nor more than 18, subject to the of incorporation fix the number. MCN's
board of director's authority to change the articles of incorporation state that the
minimum and maximum number of directors. board of directors shall have no fewer than
DTE currently has 12 directors. nine and no more than 12 directors. MCN
currently has nine directors.
- ------------------------------------------------------------------------------------------------
REMOVAL
- ------------------------------------------------------------------------------------------------
Under Michigan law, the shareholders are Under Michigan law the shareholders are
permitted to remove a director with or permitted to remove a director with or
without cause by a vote of the majority of without cause by a vote of the majority of
shareholders entitled to vote at an shareholders entitled to vote at an
election of directors, unless the articles election of directors, unless the articles
of incorporation provide that directors may of incorporation provide that directors may
be removed only for cause or that a higher be removed only for cause or that a higher
vote is required for removal without cause. vote is required for removal without cause.
The DTE articles of incorporation and DTE MCN's articles of incorporation provide
bylaws do not contain any specific that directors may be removed at any time
provisions regarding removal of directors. (1) by vote of the holders of two-thirds of
the shares entitled to vote at an election
of directors, but only for cause; or (2) by
vote of two-thirds of the other directors,
with or without cause.
- ------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 86
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DTE MCN
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VACANCIES AND NEWLY CREATED DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------
Filled by a majority vote of the directors Filled by a majority vote of the directors
then in office. The person who fills any then in office, even if less than a quorum,
such vacancy holds office for the unexpired or by the sole remaining director for a
term of the director to whom such person term of office continuing until the next
succeeds. election of directors by the shareholders.
If the number of directors changes, any
increase or decrease is apportioned among
the classes of directors so as to maintain
the number of directors in each class as
nearly equal as possible, but a decrease in
the number of directors does not shorten
the term of any incumbent director. When
the number of directors is increased by the
board of directors, there is no
classification of the additional directors
until the next election of directors by
shareholders.
- ------------------------------------------------------------------------------------------------
QUALIFICATIONS
- ------------------------------------------------------------------------------------------------
Each director must be a holder of common No specific provision in the MCN articles
stock of DTE at the time of initial of incorporation and MCN bylaws regarding
election to the board of directors, or must qualifications of directors.
become a holder within 30 days after such
election. Any director who thereafter
ceases to be such a holder shall thereupon
cease to be a director. A person shall not
be elected as a director after attaining
the age of 70. Retired employees of DTE or
its affiliates, except an employee who has
retired from the position of Chief
Executive Officer, may not be elected as
directors.
- ------------------------------------------------------------------------------------------------
COMMITTEES
- ------------------------------------------------------------------------------------------------
Under Michigan law, if the articles of Under Michigan law, if the articles of
incorporation or bylaws do not provide incorporation or bylaws do not provide
otherwise, the board may designate one or otherwise, the board may designate one or
more committees, each committee consisting more committees, each committee consisting
of one or more directors. The DTE bylaws of one or more directors. The MCN bylaws
create an Executive Committee and permit create an Audit Committee, a Compensation
the creation of other committees. Committee, a Corporate Governance and
Nominating Committee and a Finance
Committee.
- ------------------------------------------------------------------------------------------------
SPECIAL MEETINGS OF THE BOARD
- ------------------------------------------------------------------------------------------------
Special meetings of the board of directors Special meetings of the board of directors
may be called by the Chairman of the Board may be held at such times and places as the
or the President, or in the event of their board of directors may determine or upon
incapacity, by the Executive Committee. call by the Chairman of MCN.
- ------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 87
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DTE MCN
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDERS
SHAREHOLDER ACTION BY WRITTEN CONSENT
- ------------------------------------------------------------------------------------------------
Under Michigan law, shareholders may act by unanimous written consent.
- ------------------------------------------------------------------------------------------------
SPECIAL MEETINGS OF SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
The DTE bylaws provide that special The MCN bylaws provide that only the board
meetings of shareholders may be held upon of directors, pursuant to a resolution
call of the board of directors, the adopted by a majority of the board of
Chairman of the Board, the President or the directors, may call a special meeting of
holders of record of three-quarters of the the shareholders, unless otherwise provided
outstanding shares of the stock of the by law. In addition, under Michigan law, a
company, at such time as may be fixed by court may order a special meeting of
the board of directors, the Chairman of the shareholders upon a showing of good cause
Board, the President or such shareholders if at least 10% of all shares entitled to
and stated in the notice of meeting. In vote at a meeting apply to the court for
addition, under Michigan law, a court may such an order.
order a special meeting of shareholders
upon a showing of good cause if at least
10% of all shares entitled to vote at a
meeting apply to the court for such an
order.
- ------------------------------------------------------------------------------------------------
VOTING
- ------------------------------------------------------------------------------------------------
All questions other than election of Elections for the board of directors are
directors are decided by a majority of the decided by a plurality of the votes cast.
votes cast by the holders of shares All other questions are decided by a
entitled to vote thereon unless a greater majority of the votes entitled to be cast
vote is required by the articles of by the holders of stock represented and
incorporation or Michigan law. Directors entitled to vote at a meeting, except as
are elected by a plurality of the votes otherwise required by law. On all matters,
cast. On all matters other than the every holder of common stock and every
election of directors, every holder of holder of preferred stock is entitled to
common stock and every holder of preferred one vote per share.
stock is entitled to one vote per share. In
the election of directors, every holder of
common stock and every holder of preferred
stock entitled to vote for the election of
directors whose preferred stock has been
granted the rights to cumulative votes in
the election of directors has cumulative
voting rights.
- ------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE> 88
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DTE MCN
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER PROPOSALS AND NOMINATIONS OF DIRECTORS
- ------------------------------------------------------------------------------------------------
Shareholders may nominate directors or Shareholders may nominate directors or
submit proposals at any annual meeting. In submit proposals at any annual meeting. In
order to do so, a shareholder must (1) be a order to nominate directors, a shareholder
shareholder of the company of record at the must provide written notice at least 90
time of the giving of the notice for such days, but not more than 120 days, prior to
annual meeting; (2) be entitled to vote at the anniversary date of the preceding
such meeting; and (3) give notice of year's annual meeting. Shareholder
director nominations or proposals to the proposals must be received by the Corporate
Corporate Secretary between 60 and 90 days Secretary not less than 60 days, and not
prior to the date of the annual meeting. more than 90 days, prior to the first
However, if the public announcement of the anniversary of the preceding year's annual
date of the annual meeting is not made at meeting; however, if the date of the annual
least 100 days prior to the date of the meeting is advanced by more than 30 days
annual meeting, notice by the shareholder from the anniversary date, notice must be
must be received not later than the close received not earlier than the 90th day
of business on the 10th calendar day prior to such date, and not later than the
following the day on which public close of business on the later of the 60th
announcement is first made of the date of day prior to the meeting and the 10th day
the annual meeting. following the date on which public
announcement of the date of the meeting is
first made.
- ------------------------------------------------------------------------------------------------
AMENDMENT OF ARTICLES INCORPORATION
- ------------------------------------------------------------------------------------------------
Under Michigan law, articles of The MCN articles of incorporation provide
incorporation may be amended by the that amendment of those provisions relating
affirmative vote of a majority of the to the classification of the board of
outstanding shares entitled to vote on the directors, vacancy on the board of
proposed amendment, and, in addition, if directors, changes in the number of
any class or series of shares is entitled directors, removal of directors,
to vote on the proposed amendment as a nominations to the board of directors,
class, the affirmative vote of a majority shareholder action by written consent,
of the outstanding shares of each such procedures for board approval of business
class. The DTE articles of incorporation do combinations and amendment of the articles
not contain any specific provisions of incorporation requires the affirmative
regarding amendment of the articles of vote of at least two-thirds of the votes
incorporation. entitled to be cast by the holders of all
of the then outstanding shares of MCN.
- ------------------------------------------------------------------------------------------------
AMENDMENT OF BYLAWS
- ------------------------------------------------------------------------------------------------
The provisions of the bylaws providing for The bylaws provide that the board of
a classified board of directors may be directors has the power to make, amend and
amended or repealed only by the vote of the repeal the bylaws at any regular or special
holders of a majority of shares of common meeting of the board of directors by a
stock. majority vote. This provision does not
limit the power of the shareholders to
In all other cases, the bylaws may be amend, alter or rescind any of the bylaws.
amended, repealed or adopted by (1) a vote
of the holders of a majority of shares at
the time entitled to vote in the election
of any directors; or (2) a vote of a
majority of the directors then in office.
- ------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 89
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DTE MCN
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISSENTERS' RIGHTS
- ------------------------------------------------------------------------------------------------
Under Michigan Law, a shareholder is entitled to dissent from and obtain payment for the
fair value of his or her shares in the event of certain corporate actions, including,
among others:
(a) Consummation of a plan of merger in which the corporation is a party, if shareholder
approval is required for the merger and the shareholders are entitled to vote on the
merger;
(b) Consummation of a plan of share exchange to which the corporation is a party as the
corporation whose shares will be acquired, if the shareholders are entitled to vote on
the plan; and
(c) Consummation of a sale or exchange of all, or substantially all, of the property of
the corporation other than in the usual and regular course of business, if the
shareholder is entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order.
However, the right to dissent is not available to holders of shares which, as of the
applicable record date, are listed on a national securities exchange.
- ------------------------------------------------------------------------------------------------
OTHER CONSTITUENCIES
- ------------------------------------------------------------------------------------------------
No specific provisions in the articles of The articles of incorporation provide that
incorporation or bylaws. the board of directors may not approve,
adopt or recommend any proposal to enter
into any merger unless the board of
directors has evaluated the proposal,
determined that it would be in compliance
with all applicable laws and in the best
interest of MCN and its shareholders and
considered the effects of the transaction
upon employees, customers, suppliers and
the communities in which MCN's offices are
located.
- ------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 90
RIGHTS AGREEMENTS
The following is a description of the rights issued under each of the DTE
rights agreement and the MCN rights agreement, as amended. The following
description of the DTE rights and the DTE rights agreement does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
the text of the DTE rights agreement, which is incorporated herein by reference
to the DTE rights agreement filed as an exhibit to the registration statement of
which this document is a part. The following description of the MCN rights and
the MCN rights agreement does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the text of the MCN rights
agreement, which is incorporated herein by reference to the MCN rights agreement
filed as an exhibit to the registration statement of which this document is a
part.
DTE
The DTE rights agreement provides for the issuance of a right to the holder
of each share of DTE common stock. Shares of DTE common stock issued to MCN
shareholders in the merger will have rights attached to such shares. Under DTE's
rights agreement, each right entitles the holder of the DTE right to purchase
from DTE one one-hundredth of a share of Series A Junior Participating Preferred
Stock, without par value, of DTE at a price of $90.00 per one one-hundredth of a
preferred share, subject to adjustment as provided for in the DTE rights
agreement. The rights, which are attached to and trade with the shares of DTE
common stock until they are exercisable, may not be exercised until the close of
business 10 calendar days, or such later time as the DTE board of directors may
specify, after the earlier of:
- The date of the first public announcement that a person, together with
its affiliates and associates, has acquired beneficial ownership of 10%
or more of the outstanding shares of DTE common stock; or
- Any person commences a tender offer or exchange offer, the consummation
of which would result in beneficial ownership by such person of 10% or
more of the outstanding shares of DTE common stock.
DTE, its subsidiaries, employee benefit or stock ownership plans, and
affiliates or associates of DTE are not persons whose ownership triggers the
exercisability of the rights. The rights will expire on October 6, 2007, unless
earlier redeemed, exchanged or amended by DTE.
MCN
The MCN rights agreement provides for the issuance of a right to the holder
of each share of MCN common stock. Under MCN's rights agreement, each right
entitles the holder to purchase from MCN one one-hundredth of a share of Junior
Participating Preferred Stock, Series A, without par value, of MCN at a price of
$300 per one one-hundreth of a preferred share, subject to adjustment as
provided for in the MCN rights agreement. The rights, which are attached to and
trade with the shares of MCN common stock until they are exercisable, may not be
exercised until the earlier to occur of:
- 10 days after the public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of 20%
or more of the outstanding shares of MCN common stock; or
- Unless the MCN board of directors specifies a later date, 10 business
days after any person commences, or makes an announcement of an intention
to make, a tender offer or exchange offer, the consummation of which
would result in such person's beneficial ownership of 20% or more of the
outstanding shares of MCN common stock.
The MCN rights agreement further provides that if MCN is acquired in a
merger or other business combination transaction, or 50% or more of its
consolidated assets or earning power are sold, then each holder of a right is
entitled to receive, upon exercise, that number of shares of common stock of the
acquiring company which at the time of such transaction has a market value of
two times the purchase price of one one-hundredth of a preferred share.
80
<PAGE> 91
On October 4, 1999, MCN amended the MCN rights agreement to provide that:
(1) DTE will not be treated as an Acquiring Person, as defined in the MCN
rights agreement;
(2) As a result of entering into the merger agreement or consummating the
merger or other transactions contemplated by the merger agreement (a)
no Distribution Date, as defined in the MCN rights agreement, will
occur and (b) the rights will not separate from the shares of MCN
common stock; and
(3) The rights will expire at or prior to the earliest of (a) the close of
business on July 23, 2007 or (b) immediately prior to the consummation
of the merger in accordance with the merger agreement.
81
<PAGE> 92
DIRECTORS AND EXECUTIVE OFFICERS OF MCN ENERGY GROUP INC.
DIRECTORS OF MCN
Alfred R. Glancy III and two additional persons who are currently MCN
directors will be appointed to the DTE board of directors at the time of the
merger. The current MCN directors are listed below.
Alfred R. Glancy III, 61, MCN director since 1988
Mr. Glancy has been Chairman and Chief Executive Officer of MCN since
August 1988 and served as its President from September 1992 until July 1999. He
has been Chairman of MCN Energy Enterprises Inc. since 1988. Mr. Glancy has been
Chairman of MichCon since 1984 and served as its Chief Executive Officer from
1984 until September 1992. He has been a Director of MichCon since 1981.
Mr. Glancy is Chairman Emeritus of Detroit Symphony Orchestra, Inc., and
past Chairman of The Detroit Medical Center, Detroit Renaissance, Detroit
Economic Growth Corporation and New Detroit, Inc. He is also a Director of the
Detroit Institute of Arts, United Way Community Services, Community Foundation
for Southeastern Michigan, Morton Industrial Group, Greater Downtown
Partnership, Interstate Natural Gas Association, National Petroleum Council and
the Hudson-Webber Foundation. He is Vice Chairman of UNICO Investment in
Seattle, Washington.
Frank M. Hennessey, 61, MCN director since 1988
Mr. Hennessey has been Vice Chairman of the board of directors and Chief
Executive Officer of MascoTech, Inc. since January 1998. He was formerly
Executive Vice President of Masco Corporation. Mr. Hennessey is Chairman of Emco
Limited, a leading Canadian manufacturer and distributor of plumbing-related
products, roofing and other building products. He was previously Vice President
for Strategic Planning at Masco Corporation, and President, Chief Executive
Officer and Director of Emco Limited from December 1990 through August 1995.
Mr. Hennessey is a Trustee of the Hudson-Webber Foundation and a Director
of New Detroit, Inc. He is a Director and Treasurer of United Way Community
Services, and Trustee of the Citizens Research Council of Michigan, as well as,
past Chairman of the Greater Detroit and Windsor Japan America Society.
Howard F. Sims, 66, MCN director since 1988
Mr. Sims is Chairman and Chief Executive Officer of Sims-Varner &
Associates, PLLC, an architecture, engineering and planning firm, and has been a
practicing architect since 1963. He also serves as Chairman of The SVA Group and
SV Associates, LLC, both engaged in architecture and planning.
Mr. Sims is a Director of Comerica Incorporated. He is a Trustee of
Citizens Research Council of Michigan, the W.K. Kellogg Foundation, The
Community Foundation of Southeastern Michigan and the Karmanos Cancer Institute.
Mr. Sims is a member of the Executive Board of the Detroit Area Council, Boy
Scouts of America, United Way Community Services of Southeast Michigan and the
NAACP.
James G. Berges, 52, MCN director since 1998
Mr. Berges has been President of Emerson Electric Co., a manufacturer of
electrical, electromechanical, and electronic products and systems, since May,
1999 and Vice Chairman since April 1997. He was previously Executive Vice
President from 1990 through March 1997. Mr. Berges is Chairman of Astec (BSR)
Plc, a manufacturer of power conversion products and electronic components, and
EGS Electrical Group, a joint venture with SPX, a manufacturer of specialty
service tools and engineered components for the global motor vehicle industry.
He is a Director of Emerson Electric.
Mr. Berges is a Board Member of the St. Louis Regional Housing Alliance and
has been active in various roles with the United Way of Greater St. Louis.
82
<PAGE> 93
Thomas H. Jeffs II, 61, MCN director since 1991
Mr. Jeffs retired as Vice Chairman of First Chicago NBD Corporation and
First National Bank of Chicago in October 1998. Mr. Jeffs was President and
Chief Operating Officer of its subsidiary, NBD Bank Michigan, from January 1994
to October 1998.
Mr. Jeffs is Chairman of New Detroit, Inc. and a Director of The Economic
Club of Detroit, Detroit Renaissance, Inc. and Local Initiatives Support
Corporation of New York, New York. He is also a Director of Intermet
Corporation. Mr. Jeffs serves as Vice Chairman and a member of the Executive
Committee of the Detroit Symphony Orchestra, Inc. He is a Director of the
Detroit Institute of Arts. Mr. Jeffs is a member of the Visiting Committee of
the University of Michigan, School of Business Administration.
Bill M. Thompson, 67, MCN director since 1996
Mr. Thompson retired from Phillips Petroleum Company in December 1992 after
38 years of service. He was Chairman of the Board, President and Chief Executive
Officer of GPM Gas Corporation, a wholly owned subsidiary of Phillips Petroleum
Company, from February 1992 until December 1992. He had been Vice Chairman of
Phillips Petroleum Company from his election in December 1991 until February
1992. Prior to that, he was Executive Vice President of Phillips' downstream
operations from September 1988 until December 1991. He was elected a member of
the board of directors of Phillips Petroleum Company in 1988.
Mr. Thompson serves on the board of directors of The University of Texas
College of Engineering Foundation Advisory Council. He is a past member of the
board of directors of the American Petroleum Institute, The National Association
of Manufacturers, and The Chemical Manufacturers Association.
Stephen E. Ewing, 55, MCN director since 1988
Mr. Ewing has been President and Chief Operating Officer of MCN since July
1999 and also served in these offices from August 1988 until September 1992. Mr.
Ewing has been President of MichCon since 1985, Chief Executive Officer since
September 1992 and Chief Operating Officer from 1985 to September 1992. Mr.
Ewing has been a Director of MichCon since 1984.
Mr. Ewing is Chairman of the Detroit Economic Growth Corporation, the
Natural Gas Vehicle Coalition and Oakwood Healthcare, Inc. and Vice Chairman of
United Way Community Services. He is past Chairman of the 1997 United Way
Community Services Torch Drive, Greater Detroit Area Health Council,
Metropolitan Affairs Corporation and the Midwest Gas Association. He is a board
member of the Michigan Jobs Commission, Detroit Renaissance, Michigan Opera
Theater, Institute of Gas Technology, the American Gas Association, the Skillman
Foundation and AAA Michigan. Mr. Ewing is also a member of Leadership Detroit,
the NAACP and Boy Scouts of America's Detroit Area Council Executive Board.
Roger Fridholm, 58, MCN director since 1988
Mr. Fridholm has been President of the St. Clair Group, a private
investment company, since 1991. He has been Chairman of Ad Hoc Legal Resources,
LLC since 1995 and President of IPG Services Corporation since 1996, both of
which are staffing service companies. In 1998, Mr. Fridholm became President of
the Business, Technology, and Staffing Services Group of MSX International. He
previously served as President and Chief Executive Officer of Counsel,
Enterprises, Inc. from February through July 1994 and as Senior Vice President
of Corporate Development of Kelly Services, Inc. from March 1992 through January
1994.
Mr. Fridholm serves as a Director of The Stroh Brewery Company, Comerica
Bank-Michigan, and MascoTech, Inc.
Helen O. Petrauskas, 55, MCN director since 1990
Ms. Petrauskas has been Vice President for Environmental and Safety
Engineering with Ford Motor Company since 1983.
83
<PAGE> 94
Ms. Petrauskas is a Director of The Sherwin-Williams Company, a member of
the Board of Governors of Argonne National Laboratory and a member of the
Society of Automotive Engineers. Ms. Petrauskas is also on the Advisory Boards
of the Center for Risk Analysis, Harvard School of Public Health, and Resources
for the Future in Washington, D.C.
EXECUTIVE OFFICERS OF MCN
Alfred R. Glancy III, 61, Chairman and Chief Executive Officer
Mr. Glancy's biographical information appears in the section "-- Directors
of MCN" on page 82.
Stephen E. Ewing, 55, President and Chief Operating Officer
Mr. Ewing's biographical information appears in the section "-- Directors
of MCN" on page 83.
Howard L. Dow III, 44, Executive Vice President, Chief Financial Officer and
Treasurer
Mr. Dow has been Executive Vice President of MCN since July 1999, Chief
Financial Officer of MCN since April 1999, Treasurer of MCN since September 1998
and Senior Vice President of MCN from September 1998 until July 1999. Mr. Dow
has been Senior Vice President and Treasurer of MichCon since April 1998, Chief
Financial Officer of MichCon since October 1996, Vice President of MichCon from
March 1990 until April 1998 and a director of MichCon since 1995.
Daniel L. Schiffer, 55, Senior Vice President, General Counsel and Secretary
Mr. Schiffer has been Senior Vice President of MCN since September 1995,
General Counsel and Secretary of MCN since August 1988 and served as its Vice
President from August 1988 until September 1995. Mr. Schiffer has been Vice
President and General Counsel of MichCon from July 1991 to September 1992 and
Director of MichCon from January 1989 to September 1998.
COMPENSATION OF DIRECTORS OF MCN
As of April 1, 1997, non-officer directors receive an annual fee of
$30,000. Additionally, each year non-officer directors receive performance
shares worth approximately $30,000, calculated at the beginning of the fiscal
year and rounded to the nearest 100 shares. Each performance share is equivalent
to one share of MCN common stock. Non-officer directors are permitted to defer
all or a portion of their cash retainer fee in performance shares. The
performance shares will be credited to deferral accounts established for each
non-officer director. The value of the performance shares held in each
non-officer director's account will increase/decrease as the value of the
underlying MCN common stock increases/decreases and the account will be credited
with dividend equivalents equal to one-half of the common stock dividend rate.
Upon the non-officer director's death or retirement, the value of the
performance shares will be paid out in shares of MCN common stock over a period
of one to fifteen years as elected by the non-officer director. Based on the
elections of the non-officer directors, 100% of their compensation will be in
the form of performance shares, further aligning the interests of each
non-officer director and shareholders by tying compensation to the value of MCN
common stock. Directors who are employees of MCN do not receive additional
compensation for service as directors of MCN.
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<PAGE> 95
COMPENSATION OF EXECUTIVES OF MCN
The following table sets forth the aggregate compensation paid or awarded
for performance from 1996 through 1998 to the Named Executive Officers of MCN
who are currently executive officers of MCN.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1) LONG-TERM COMPENSATION
-------------------- ------------------------------------------
SECURITIES
UNDERLYING ALL OTHER
BONUS OPTIONS LTIP PAY-OUT COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(2) (#)(3) ($)(1)(4) ($)(5)
--------------------------- ---- --------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alfred R. Glancy III............. 1998 667,800 0 100,000 0 66,326
Chairman and 1997 620,833 500,000 -- 2,382,016 61,110
Chief Executive Officer 1996 575,000 520,000 -- 1,984,000 42,069
Stephen E. Ewing................. 1998 412,500 450,000 48,300 0 37,356
President and Chief 1997 356,667 240,000 -- 1,339,884 33,818
Operating Officer 1996 335,625 136,000 -- 1,240,000 23,404
Howard L. Dow III................ 1998 211,539 180,000 14,000 0 13,312
Executive Vice President, 1997 205,000 98,200 -- 558,285 11,675
Chief Financial Officer and 1996 168,750 47,200 -- 446,400 9,228
Treasurer
</TABLE>
- -------------------------
(1) Includes amounts received or deferred.
(2) Amounts under the MCN Energy Group Inc. Annual Performance Plan are shown
for the year upon which performance is measured. They are paid in February
or March of the subsequent year. Messrs. Ewing and Dow earned bonuses based
upon MichCon's performance.
(3) Stock options are granted in the February subsequent to the fiscal year
indicated in the table.
(4) Amounts shown in this column represent the dollar value of final payouts of
previous awards pursuant to the Performance Share Plan for the 6 year
periods 1991 through 1996, 1992 through 1997, and 1993 through 1998,
respectively. See "-- Report of the Compensation Committee of the Board of
Directors on Executive Compensation" on page 88 for a detailed description
of the plan. The current value of awards for the years 1996 and 1997 that
were paid in stock or deferred under the Mandatory Deferred Compensation
Plan are significantly less than shown due to the decline in the price of
MCN common stock.
(5) Amounts shown in this column represent MCN's contributions to defined
contribution plans and its payment of life insurance premiums.
LONG-TERM COMPENSATION
Beginning with the 1998 performance year, MCN determined that 50% of its
long-term incentive awards should be in the form of stock options (See
"-- Report of the Compensation Committee of the Board of Directors on Executive
Compensation" on page 88). The stock options granted on February 24, 1999 to the
Named Executive Officers who are currently executive officers of MCN are
indicated in the table below.
OPTIONS GRANTED
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
PERCENT OF APPRECIATION FOR
NUMBER OF TOTAL OPTIONS EXERCISE OF OPTION TERM
SECURITIES UNDERLYING GRANTED TO BASE PRICE EXPIRATION ------------------------
NAME OPTIONS GRANTED(#) EMPLOYEES ($/SHARE) DATE 5%($) 10%($)
---- --------------------- ------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Alfred R. Glancy III.. 100,000 15.4 17.25 2/24/09 1,084,840 2,749,210
Stephen E. Ewing...... 48,300 7.4 17.25 2/24/09 523,978 1,327,868
Howard L. Dow III..... 14,000 2.2 17.25 2/24/09 151,878 384,889
</TABLE>
85
<PAGE> 96
The options have a strike price of $17.25, which was the market price of
MCN common stock on February 24, 1999 (the grant date). The options vest ratably
over three years following the date of grant and are exercisable from the time
of vesting until the tenth anniversary of the grant.
Beginning with the 1992 performance year, MCN adopted a performance share
plan pursuant to the Stock Incentive Plan approved by its shareholders. In 1998,
MCN determined that 50%, rather than 100%, of the long-term incentive awards
should be in the form of performance shares. Performance shares are granted in
February subsequent to the three-year period upon which performance is measured.
Performance shares granted February 24, 1999 for the 1996 to 1998 performance
period to the Named Executive Officers who are currently executive officers of
MCN are indicated in the table below.
PERFORMANCE UNITS
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OTHER PERIOD NON-STOCK PRICE-BASED PLANS
NUMBER OF UNTIL MATURATION ---------------------------------------
NAME SHARES(#) OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
---- --------- ---------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Alfred R. Glancy III............. 14,250 3 years 0 14,250 28,500
Stephen E. Ewing................. 6,900 3 years 0 6,900 13,800
Howard L. Dow III................ 2,000 3 years 0 2,000 4,000
</TABLE>
Each performance share is equivalent to a share of MCN common stock. The
number of performance shares initially granted is based on MCN's total
shareholder return for the previous three years compared to the total
shareholder return for a group of peer companies (identified under "-- Report of
the Compensation Committee of the Board of Directors on Executive Compensation"
on page 88) over the same period. Once initially granted, dividend equivalents
are paid on performance shares. The initial grants are adjusted upward or
downward after a three-year period based on MCN's total shareholder return for
this subsequent period compared to the total shareholder return for a group of
peer companies over the same period. (See the discussion of peer groups and
award periods under "-- Report of the Compensation Committee of the Board of
Directors on Executive Compensation" on page 88) The final award, which will be
payable in MCN common stock, will range from 0% to 200% of the initial grant.
Alternatively, participants are provided the option of deferring their
awards until their employment terminates. The deferrals are in the form of
common stock equivalents that earn dividend equivalents equal to one-half of the
common stock dividend. Final awards are included as Long-Term Incentive Payouts
in the Summary Compensation Table above in the year they are paid out.
INDEBTEDNESS OF MANAGEMENT
In order to encourage executives to maintain their holdings in shares
purchased under a stock option plan, which was replaced by the MCN Stock
Incentive Plan in May 1989, MCN provided loans at an interest rate in accordance
with IRS guidelines based on the market yield of U.S. short-term marketable
securities. Pursuant to this provision, Mr. Glancy initiated a loan in 1992 at
an interest rate of 4.43%, which was renewed in 1995 and again in 1998 at the
then current interest rates of 5.65% and 5.41%, respectively. The loan covered a
maximum outstanding amount of $725,014, including interest, during 1998. A
balance of $581,981, including interest, was outstanding as of December 31,
1998. The loan is secured by 169,628 shares of MCN common stock with a year-end
market value of $3,233,534.
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<PAGE> 97
RETIREMENT PLANS
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL RETIREMENT BENEFIT AT AGE 65 FOR YEARS OF SERVICE
--------------------------------------------------------------------
FINAL AVERAGE 20 25 30 35 40 45
ANNUAL EARNINGS YEARS YEARS YEARS YEARS YEARS YEARS
--------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
$150,000........................ $ 54,700 $ 68,400 $ 82,100 $ 95,700 $105,700 $115,600
200,000........................ 73,000 91,300 109,500 127,800 141,000 154,300
250,000........................ 91,300 114,100 137,000 159,800 176,400 193,000
300,000........................ 109,600 137,000 164,400 191,800 211,700 231,600
350,000........................ 127,900 159,900 191,900 223,800 247,100 270,300
400,000........................ 146,200 182,800 219,300 255,900 282,400 309,000
450,000........................ 164,500 205,600 246,800 287,900 317,800 347,700
500,000........................ 182,800 228,500 274,200 319,900 353,100 386,300
550,000........................ 241,800 276,100 301,600 351,900 388,500 425,000
600,000........................ 263,800 301,300 329,100 383,900 423,800 463,700
650,000........................ 285,800 326,400 356,500 415,900 459,100 502,400
700,000........................ 307,800 351,500 384,000 447,900 494,500 541,000
</TABLE>
All salaried employees of MCN and certain of its subsidiaries (the
"Participating Companies") participate in a noncontributory, defined benefit
retirement plan (the "Retirement Plan"), under which benefits have been based
upon the final average salary. Specifically, the monthly pension at normal
retirement (age 65) is calculated using a formula providing a single life
monthly benefit equal to (1) 1.33% of final average monthly earnings multiplied
by the number of total years of credited service with the Participating
Companies; plus (2) 0.5% of final average monthly earnings that exceed a 35-year
average Social Security wage base multiplied by the number of years of credited
service up to 35 years. Early retirement benefits (at a reduced benefit if such
retirement is before the participant attains age 62) are permitted under the
plan, (1) on or after the date a participant attains age 55, if the
participant's age plus years of credited service (as defined in the plan) equals
or exceeds 70; or (2) when the participant has attained 30 years of credited
service. An employee's final average monthly earnings is defined as his or her
highest average monthly earnings for a consecutive 60-month period during the
participant's last 15 years of employment. Average monthly earnings are
calculated based on an individual's base salary only. An employee is not vested
under the Retirement Plan until he or she has completed five years of credited
service or has attained age 65.
The table above illustrates the total estimated annual normal retirement
pension benefits including the Supplemental Retirement Plan amounts (discussed
below), if applicable, that will be payable upon normal retirement at age 65 to
participants for the specified remuneration and years of credited service
classifications. Retirement benefits are not subject to any deduction for social
security or other offset amounts. The table does not reflect any reductions in
retirement benefits that would result from the selection of one of various
available survivorship options or the election to retire prior to age 62.
Benefit amounts are computed on a straight life annuity basis.
As of December 31, 1998, the credited years of service (rounded to the
nearest whole year) for the Named Executive Officers participating in the final
average salary plan are as follows: Mr. Ewing, 27 years and Mr. Dow, 20 years.
In 1998, MCN adopted a cash balance plan feature within its defined benefit
plan to better attract and retain employees. The cash balance plan will be the
defined benefit plan for all new hires at MCN and MCNEE and was offered as a
one-time option to all current employees of MCN and MCNEE. For employees
electing to switch from the final average salary to the cash balance plan, a
retirement annuity as of January 1, 1998 was calculated under the "traditional"
defined benefit plan formula described above and present-valued using a 6.11%
interest rate, the average interest rate on 30-year Treasury Bills for November
1997. This amount represented the opening account balance under the cash balance
feature. Under the cash balance plan, at the beginning of each year, each
participant's account is credited with 8% of the
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<PAGE> 98
individual's salary and bonus plus an additional 5% of such compensation over
the Social Security wage base. In addition, each participant's account is
credited with interest based on the 30-year Treasury Bill rate as of November of
the prior year. All vested participants in the cash balance plan are entitled to
receive a lump sum payment in lieu of monthly pension annuities. Mr. Glancy and
248 other incumbent employees out of an eligible group of 330 opted to
participate in the cash balance plan. Had Mr. Glancy retired effective January
1, 1999, he could have elected to receive an immediate annual annuity under the
cash balance plan of $379,000.
MCN also maintains the Supplemental Retirement Plan, which provides for the
payment of benefits that would otherwise be payable under the Retirement Plan
but for limitations imposed by Federal tax law on benefits paid by qualified
plans.
SUPPLEMENTAL DEATH BENEFIT AND RETIREMENT INCOME PLAN
MCN's Named Executive Officers and certain other officers of the
Participating Companies currently participate in a Supplemental Death Benefit
and Retirement Income Plan. Under this plan, the pre-retirement death benefits
payable to an employee's surviving spouse are 50% of the employee's final salary
until such time as the employee would have reached age 65. Thereafter, payments
are 20% of salary until the employee would have reached age 75. At retirement an
employee may elect to receive (1) annual supplemental retirement income equal to
20% of the employee's final annual salary payable for a period of 10 years after
age 62; or (2) other available post retirement benefits that are actuarially
equivalent to the 10-year payment option.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee (the "Committee") establishes MCN's strategic
compensation objectives. The Committee then monitors and evaluates the design
and effectiveness of MCN's executive pay programs against those objectives.
Under Committee review, MCN's executive compensation programs are administered
to link executive pay with MCN's strategic direction and business objectives. In
light of 1998's disappointing financial results, the Committee reviewed each
element of executive compensation to assure itself that MCN's programs taken as
a whole continue to support its business strategy.
OBJECTIVE:
The Committee's primary and overriding objective continues to be to provide
a total compensation package that allows MCN to attract, retain, and motivate
executive employees. In doing so, MCN establishes total compensation opportunity
(base salary, annual incentive, and long-term incentive) at competitive levels.
- Base salary levels are generally set between the 40th and 65th
percentile.
- Total cash compensation (base salary and annual incentive) is targeted
for the 65th percentile with the opportunity to exceed or fall short of
that level when warranted by company and individual performance.
- Long-term incentives are also targeted for the 65th percentile with the
opportunity to exceed or fall short of that level when MCN performance
warrants.
METHODOLOGY:
The methodology used to determine market competitiveness is an annual
survey of comparable companies as well as analysis of national and industry
executive compensation data. Three separate sets of comparable companies have
been identified to best match the three distinct business environments of MCN,
MichCon, and MCNEE.
- Performance, both MCN and individual, drive total compensation levels.
The relationship of an executive's current salary in relation to the
specific marketplace data, along with an assessment of the individual's
performance against a set of objectives, determines base pay increases.
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<PAGE> 99
Annual incentives relate to attaining financial and individual
objectives.
Long-term incentives relate to creating shareholder value.
- Variable ("incentive") compensation opportunities are set at levels to
put a significant percentage of executive compensation at risk relative
to MCN performance, thus linking executive and shareholder interests. At
target payout projections, the short-term and long-term incentive
programs put more than 60% of the Chairman & CEO's total direct
compensation at-risk.
- Program design encourages and increases stock ownership by executives to
better align their interests with those of shareholders. Currently, any
final awards under the performance share aspect of the long-term
incentive plan are paid out 100% in MCN common stock or common stock
equivalents.
- All components of executive compensation programs are communicated to
participating employees annually to ensure they understand the
opportunity (and the risks) available based on performance, thus
increasing the motivational impact of the plans. The status of actual
performance relative to the targets is communicated throughout the year
to maintain focus on the targets.
ROLE OF THE COMMITTEE:
The Committee makes recommendations to the MCN board of directors on the
compensation levels of all officers of MCN, MCNEE, and MichCon and reviews the
aggregate recommendations for base pay, annual incentive awards, and long-term
incentive awards for the other senior executives of MCN. In addition, the
Committee has oversight responsibility for all MCN's compensation programs to
ensure that they are aligned with the strategic direction and objectives of MCN.
In fulfilling these responsibilities, the Committee utilizes MCN's internal
compensation function and outside consultants to research and summarize pay and
incentive practices of comparable companies, industry averages, and other
benchmarks. This year the Committee, in addition to MCN's executive compensation
staff, utilized Hewitt Associates LLC to assist in this process.
SPECIFIC DISCUSSION ON THE COMPONENTS OF EXECUTIVE COMPENSATION:
Short-Term Incentives -- The MCN Energy Group Inc. Annual Performance Plan
provides for annual incentive payments to executives based on the accomplishment
of corporate goals established by the Committee prior to the start of the fiscal
year. The target award opportunity for the Chairman and Chief Executive Officer
is 60% of base salary. Target awards for all other executives range from 15% to
55%. The adjusted award can be more or less than the target award depending on
the achievement of the corporate goals. An executive's individual final award
may vary from 0% to 125% of the adjusted award amount based on individual
performance measured using a combination of criteria including:
- the performance assessment measured by specific accomplishments;
- leadership abilities; and
- the executive's fiscal responsibility.
1998 Results -- For 1998 the goals were defined as Return on Equity
("ROE"), calculated separately for MCN, MCNEE, and MichCon, and also included a
factor for growth in earnings per share.
MichCon's performance in 1998 resulted in a calculated award fund equal to
190% of the target payout. Based on 1998 results, there was no award fund for
MCN or MCNEE. Neither Mr. Glancy, nor any other employee at MCN or MCNEE,
received any bonus award. Mr. Dow, who moved to MCN from MichCon in late 1998,
received a bonus based on MichCon results.
1999 Plan Design -- As a result of the overall compensation review of the
market, the Committee, determined that the target awards for all executives,
including the Chairman and Chief Executive Officer of MCN at 60% of base salary,
remain unchanged.
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<PAGE> 100
In order to better focus employees on the need to rebuild shareholder value
and to address retention concerns, the plan for 1999 for MCN and MCNEE was
completely revised. Employees at MCN and MCNEE were granted special performance
units ("Units") that will be adjusted after one year based on total shareholder
return during 1999 versus the new peer group, as described in the long-term
incentive section of this report. Final payouts, which will occur in early 2000,
will be in the form of MCN common stock, with the final number of shares being
anywhere from 0% to 200% of the initial Units granted based on peer group
ranking. For executives, one-half of the final payout will occur in early 2000
with the second half paid in early 2001. The number of Units granted was
calculated using the existing base salary targets divided by an assumed share
price of $20. For Mr. Glancy this resulted in an initial grant of 20,250 Units.
For MichCon, the goal for 1999 continues to be based on ROE with an
additional 25% funding available if MCN finishes in the top half of the peer
group as measured by total shareholder return during 1999.
Long-Term Incentives -- The MCN Energy Group Inc. Stock Incentive Plan is
designed to provide a significant level of executives' total compensation in a
format that encourages them to remain in the employment of the corporation and
matches their interests with those of shareholders. The plan is an omnibus plan
that allows the corporation to issue a variety of long-term incentives. The
total economic value delivered to executives is designed to provide competitive
compensation, regardless of the long-term incentive methodology. The Committee
determined that the range of target awards as a percent of base salary should
remain basically unchanged from 1998 to 1999.
Stock Options -- In 1999 the Committee determined that 50% of the long-term
economic value should be delivered using standard stock options. Specifically,
the number of options granted was determined based on a value of $3.83 per
option utilizing the Black-Scholes model. The options have a strike price of
$17.25, which was the market price of MCN common stock on February 24, 1999 (the
grant date). The options will vest ratably over three years following the date
of grant and are exercisable from the time of vesting until the 10th anniversary
of the grant. The remaining 50% of the long-term award was granted in the form
of performance shares subject to the same vesting and adjustment procedures used
in the past as described below.
The Committee's decision to utilize stock options was primarily based on
three reasons. First, stock options directly support MCN's goal of rebuilding
shareholder value since they have value only if MCN's stock price increases. In
contrast, performance shares focus on growing and preserving shareholder value.
Second, stock options are purely future-oriented, while the performance share
plan looks both back and forward three years. Third, most of MCN's peer
companies use two or more long-term incentive vehicles, including stock options.
The Committee is persuaded that substituting stock options for a portion of the
performance shares more closely aligns shareholder and executive interest while
furthering MCN's ability to retain and attract needed talent.
Mr. Glancy received a grant of 100,000 stock options on February 24, 1999.
Performance Shares -- Performance shares are awarded to executives based on
total shareholder return covering a six-year period, as compared to a peer group
of companies. This period is divided into two parts. The first three years
determine the initial grant of performance shares. Participants receive dividend
equivalents on the performance shares during the subsequent three-year period.
The initial grant is adjusted upward or downward based upon performance over the
subsequent three-year period. The final award, if any, is paid 100% in MCN
common stock or may be deferred in common stock equivalents. One half of any
shares not deferred may be sold to satisfy tax-withholding obligations. The
remaining shares must be retained until the recipient meets or exceeds specified
stock ownership guidelines, retires, or terminates employment with
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<PAGE> 101
MCN. Both the initial grant and the final award are based on MCN's performance
ranking within its peer group using the following parameters:
<TABLE>
<CAPTION>
PERFORMANCE
RANKING
(QUARTILE) PERCENT OF AWARD
----------- ----------------
<S> <C>
First....................................................... 125% - 200%
Second...................................................... 75% - 150%
Third....................................................... 25% - 100%
Fourth...................................................... 0% - 50%
</TABLE>
Individual standard awards are based on the impact of the executive's
position to corporate success and to the size of the standard grant (at current
market value) compared to base salary to achieve an appropriate market-based
relationship between base pay and incentive opportunity. The target award
levels, which are expressed as a percentage of base salary, are reviewed
annually as part of the overall compensation survey analysis and were adjusted
in 1999 to reflect the issuance of stock options. As a result, the standard
award for the Chairman & CEO for 1999 was approximately 55% of base salary. In
1999 this equated to 28,500 performance shares (based on a value of $13.44 per
performance unit as determined through the use of Hewitt's proprietary model)
for Mr. Glancy. Standard awards for other executives were consistently
calculated.
In 1999 the Committee adopted a new peer group to recognize MCN's new
portfolio of businesses without the E&P business. The new peer group will be
used as the basis for final awards of performance shares granted in 1999 and
subsequent years. The old peer group was used as the basis for issuing final
awards of performance shares initially granted in 1996 and will also be used for
the 1997 and 1998 grants. Total shareholder return for the new peer group was
75.1% for 1996 through 1998 versus 73.8% for the old peer group. The companies
currently included in the respective peer groups are identified below:
<TABLE>
<CAPTION>
NEW PEER GROUP OLD PEER GROUP
-------------- --------------
<S> <C>
CMS Energy Corporation Brooklyn Union (Keyspan Energy)
Columbia Energy Group CMS Energy Corporation
Consolidated Natural Gas Company Columbia Energy Group
DTE Energy Company Consolidated Natural Gas Company
El Paso Energy Corporation Enron Corporation
Enbridge Inc. Equitable Resources, Inc.
Equitable Resources, Inc. KN Energy, Inc.
KN Energy, Inc. National Fuel Gas Company
MDU Resources Group, Inc. ONEOK, Inc.
National Fuel Gas Company Questar Corporation
ONEOK, Inc. Sonat, Inc.
Peoples Energy Corporation Southwestern Energy Company
Questar Corporation The Coastal Corporation
Sempra Energy The Williams Companies, Inc.
WestCoast Energy, Inc. WICOR, Inc.
</TABLE>
For the three-year period 1996-1998, MCN's total return to shareholders was
(7.9)%, which placed MCN 16th in the new peer group. Using the program
guidelines above, and considering MCN's ranking, the need to motivate and retain
employees, and the significant discretion reserved for the MCN board of
directors when making a final adjustment in 2002; the Committee granted 1999
performance shares at 50% of the standard award level. For Mr. Glancy the
Committee granted 14,250 performance shares. These units may as much as double
or be forfeited completely based on how MCN's total shareholder return compares
to peer companies using the above scale for the 1999-2001 period.
The performance shares initially granted in February 1996 vested in
February 1999. MCN finished 14th in the old peer group for the 1996-1998 period.
Based on MCN's disappointing performance, the Committee determined that the
performance shares granted in 1996 should be completely forfeited.
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Base Salary -- The base salary of an executive is established when entering
the position based on the individual's experience in relation to external market
comparisons for that position. Annually, each executive's salary is reviewed
relative to the specific marketplace data and adjustments are made with
consideration of the individual's level of performance, scope and role within
the organization, and recent salary history.
For 1999, the Committee found that Mr. Glancy's base salary was slightly
below the 50th percentile of the diversified energy company market. The
Committee determined to leave Mr. Glancy's current base salary of $675,000
unchanged. Mr. Glancy's base salary was last increased on March 1, 1998. Using
similar methodology, the committee determined that 20 other officers of MCN,
MichCon, and MCNEE should receive base salary increases averaging 7.8%. Five
other officers did not receive any increase in base salary. Overall, base
salaries were increased by a total of 5.7% for the 25 officers other than Mr.
Glancy.
TREATMENT OF INDIVIDUAL EXECUTIVE WITH COMPENSATION EXCEEDING $1 MILLION
ANNUALLY:
In 1994, MCN adopted a plan requiring covered executives whose total
compensation in any calendar year exceeded the $1 million limitation on
deductibility set forth on Section 162(m) of the Internal Revenue Code of 1986
to defer the excess until he or she leaves MCN. This excess amount is placed in
an account in which the value is adjusted in terms of MCN common stock at
prevailing market prices. Executives receive dividend equivalents on 50% of the
common stock units deferred.
CONCLUSION:
The Committee reviewed all executive compensation programs in light of
1998's disappointing results along with MCN's need to attract and retain the
management talent to rebuild shareholder value. The tie between MCN performance
and executive compensation, coupled with the stock ownership guidelines, clearly
balanced these competing interests. The Committee believes that MCN's executive
compensation programs clearly align each executive's total compensation
potential with individual and MCN performance as well as shareholder returns,
while providing a balanced compensation mix between base pay and incentives that
is based on market and performance factors. It is the Committee's intent to
ensure that this alignment continues into the future and to review and refine
MCN's pay and incentive programs to reflect this objective.
THE COMPENSATION COMMITTEE
Thomas H. Jeffs II, Chairman
Roger Fridholm
Howard F. Sims
Bill M. Thompson
PERFORMANCE TABLE
COMPARISON OF $100 INVESTED IN MCN STOCK SINCE
DECEMBER 1993 WITH DIVIDENDS REINVESTED
<TABLE>
<CAPTION>
DATE MCN S&P 500 OLD PEER GROUP NEW PEER GROUP
---- --- ------- -------------- --------------
<S> <C> <C> <C> <C>
12/93.......................................... $100.00 $100.00 $100.00 $100.00
12/94.......................................... $108.38 $101.32 $ 98.30 $ 91.28
12/95.......................................... $146.64 $139.34 $137.86 $122.02
12/96.......................................... $188.80 $171.32 $176.36 $149.88
12/97.......................................... $272.23 $228.46 $215.52 $197.75
12/98.......................................... $133.99 $293.74 $239.59 $213.65
</TABLE>
- -------------------------
(1) The above table compares the performance of MCN with that of a broad equity
market index, the S&P 500 Composite. Also included is the performance of the
old peer group of companies, which is used in connection with the payout for
the vesting of Performance units initially granted in 1996 through 1998. In
1999, MCN changed to the new peer group of companies to be used in
connection with its Performance Share Plan to better reflect its current
business mix. (See the discussion of peer groups and award periods above.)
(2) The returns for each company included in the peer group are weighted
according to MCN's stock market capitalization at the beginning of each
month.
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BENEFICIAL SECURITY OWNERSHIP OF
MCN DIRECTORS AND EXECUTIVE OFFICERS
The following table includes MCN common stock and stock-based holdings of
MCN's chief executive officer and its four most highly compensated executive
officers in 1998 (collectively, the "Named Executive Officers") and its
directors as of November 5, 1999 and the percent of DTE common stock that such
persons will hold at the time of the merger assuming that 45% of such person's
MCN common stock is exchanged for DTE common stock in the merger, consistent
with the overall ratio of MCN common stock that, subject to adjustments
necessary to preserve the status of the merger as a reorganization under the
Internal Revenue Code, will be converted into DTE common stock in the merger. As
of November 5, 1999, no person is known to MCN to be the beneficial owner of
more than five percent of any class of MCN's voting securities.
COMMON STOCK AND TOTAL STOCK-BASED HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF DTE
GIVING EFFECT TO
NAME SHARES(1) EQUIVALENTS(2) TOTAL PERCENT(3) THE MERGER(4)
---- --------- -------------- ----- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Alfred R. Glancy III............... 307,255(5) 101,250 408,505 0.5% 0.1%
Stephen E. Ewing................... 35,715(5) 31,350 67,065 0.1 *
Joseph T. Williams................. 51,495(5) 10,025 61,520 0.1 *
William K. McCrackin............... 140(5) 26,250 26,390 * *
Howard L. Dow III.................. 28,808(5) 14,245 43,053 0.1 *
James G. Berges.................... 100 -- 100 * *
Roger Fridholm..................... 10,300(6) -- 10,300 * *
Frank M. Hennessey................. 11,140 -- 11,140 * *
Thomas H. Jeffs II................. 5,000 -- 5,000 * *
Helen O. Petrauskas................ 3,166 -- 3,166 * *
Howard F. Sims..................... 3,145 -- 3,145 * *
Bill M. Thompson................... 3,429 -- 3,429 * *
Directors, nominees and executive
officers as a group.............. 497,564 198,920 696,484 0.8% 0.1%
</TABLE>
- -------------------------
* Less than 0.1%
(1) This column lists voting securities, including shares of restricted stock in
which the beneficial owners have voting power but do not have investment
power until the shares vest. In many instances, voting power and investment
power are shared with another as joint tenants.
(2) This column includes certain non-voting common stock equivalents, such as
performance shares granted under the Stock Incentive Plan and special
performance shares granted under the 1999 special provisions of the
Long-Term Incentive Performance Share Plan which will vest upon a change in
control of MCN under the plans.
(3) Includes the total of shares and equivalents as listed in the third column
of this table.
(4) This calculation assumes (a) that the equivalents listed in the second
column of this table are paid out in MCN shares at a value of 100% upon MCN
shareholder approval of the merger agreement as described under "The
Merger -- Interests of Management and Directors in the Merger" on page 43
and (b) that 45% of the MCN shares paid out as described in clause (a) above
and 45% of the MCN shares listed in the first column of this table are
exchanged for DTE common stock in the merger.
(5) Includes shares held in the MCN Energy Group Savings and Stock Ownership
Plan (the "Savings Plan"). The beneficial owners of the shares have sole
voting power on all shares. Beneficial owners have investment power on all
shares except those purchased by MCN and held as restricted under provisions
of the Savings Plan.
(6) Includes 2,100 shares held in the St. Clair Charitable Trust, of which Roger
Fridholm is a Trustee. Mr. Fridholm has shared voting and investment power
on these shares.
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DESCRIPTION OF MCN ENERGY GROUP INC.
MCN Energy Group Inc., a Michigan corporation organized in 1988, is an
integrated energy company with more than $4.0 billion in assets at September 30,
1999 and revenues of over $2.3 billion for the twelve months ended September 30,
1999. MCN is primarily involved in natural gas production, gathering,
processing, transmission, storage and distribution, electric power generation
and energy marketing. MCN's largest subsidiary is Michigan Consolidated Gas
Company ("MichCon"), a natural gas utility serving approximately 1.2 million
customers in more than 500 communities throughout Michigan. MCN Energy
Enterprises Inc. ("MCNEE") is a wholly owned subsidiary of MCN and serves as a
holding company for MCN's non-utility businesses.
On August 2, 1999, MCN announced a significantly revised strategic
direction. MCN's revised strategy includes:
- Focusing on the Midwest-to-Northeast region rather than on North America;
and
- Emphasizing operational efficiencies and growth through the integration
of existing businesses rather than building a portfolio of diverse,
non-operated energy investments.
Consistent with its new strategic direction, MCN announced on August 2,
1999 that it would retain its natural gas producing properties in Michigan and
that it is going forward with the sale of its other exploration and production
oil and gas properties. MCN also announced that it had reduced its capital
investment levels to approximately $500 million in 1999 and $300 million in
2000.
As a part of its revised strategic direction, MCN is reorganizing into four
primary business segments and an investment arm: Gas Distribution; Midstream &
Supply; Energy Marketing; Power; and Energy Holdings.
- Gas Distribution is responsible for MCN's regulated utilities operations.
Gas Distribution consists principally of MichCon, a Michigan corporation
organized in 1898 that, with its predecessors, has been in business for
over 150 years. MichCon is subject to the accounting requirements and
rate regulation of the MPSC with respect to the distribution and
transportation of natural gas.
- Midstream & Supply develops and manages MCN's gas producing, gathering,
processing, storage and transmission facilities within the
Midwest-to-Northeast target region.
- Energy Marketing consists of MCN's non-regulated marketing activities to
industrial, commercial and residential customers, both inside and outside
the Gas Distribution segment's service areas.
- Power develops and manages independent electric power projects.
- Energy Holdings manages and seeks to maximize the value of existing
ventures outside MCN's target region. It primarily consists of gas
gathering and processing investments in major U.S. producing basins.
Until MCN's reorganization into the four business segments and investment
arm described above is complete, MCN will continue to operate through two major
business groups: Diversified Energy and Gas Distribution.
- Diversified Energy, operating through MCNEE, 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 at December 31, 1998; 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. 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. Consistent with its new strategic
direction, MCN will retain its natural gas producing properties in
Michigan. MCN has sold its E&P properties in the Western and
Midcontinent/Gulf Coast regions and expects to sell other non-Michigan
E&P properties by mid-2000.
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- Gas Distribution consists principally of MichCon. 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.
The operating revenues, operating income, and identifiable assets of these
business segments are included in "Financial Statements of MCN Energy Group
Inc." on page F-1. On December 31, 1998, MCN and its subsidiaries had 2,986
employees.
MCN has its principal executive offices at 500 Griswold Street, Detroit,
Michigan 48226 (telephone number (313) 256-5500).
RESULTS OF OPERATIONS
MCN had a net loss for the nine months ended September 30, 1999 of $31.9
million, compared with a net loss of $310.5 million for the same 1998 period.
For the year ended December 31, 1998, MCN experienced a net loss of $286.5
million compared with net income of $133.2 million in 1997. As subsequently
discussed, the results reflect non-recurring items consisting of an accounting
change and several unusual charges. The non-recurring items totaled $90.1
million for the nine months ended September 30, 1999, $389.6 million for the
nine months ended September 30, 1998, and $389.6 million for the year ended
December 31, 1998. The unusual charges include losses on the sale of properties,
property write-downs, investment losses and restructuring charges. The 1999
period was affected by an accounting change that reduced net income by $2.9
million. Excluding these non-recurring items, MCN had earnings of $58.2 million
for the nine months ended September 30, 1999, a decrease of $20.9 million from
the corresponding 1998 period, and earnings of $103.1 million for the year ended
December 31, 1998, a decrease of $30.1 million from 1997. The charges for each
business segment will be discussed further within the related business segment
information to follow and in "Financial Statements of MCN Energy Group Inc." on
page F-1.
DIVERSIFIED ENERGY
The Diversified Energy group had a net loss of $105.0 million in the
nine-month period ended September 30, 1999, compared with a loss of $351.3
million in the corresponding 1998 period. Excluding unusual charges, Diversified
Energy had a loss of $17.8 million for the 1999 nine-month period compared to
earnings of $21.6 million for the 1998 nine-month period. These results reflect
the impact of lower E&P gas and oil production on operating and joint venture
income, losses from the Energy Marketing segment due to higher gas costs, higher
financing costs and the impact of lower methanol prices and production at the
Pipelines & Processing segment for 1999. The earnings comparison was also
affected by gains recorded in 1998 from the sale of certain assets.
The Diversified Energy group reported a loss of $358.2 million in 1998 due
to certain property write-downs and restructuring charges, which reduced 1998
earnings by $372.9 million. Excluding these unusual items, Diversified Energy's
earnings for 1998 declined by $37.4 million from 1997. These results reflect
reduced contributions from the Pipelines & Processing and E&P segments due to
low energy prices as well as higher losses from the Energy Marketing segment.
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 $20.9 million from
1996, reflecting increased operating and joint venture income from the Pipelines
& Processing, Electric Power and E&P segments. Reduced Energy Marketing
contributions and higher financing costs in 1997 partially offset this growth.
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DIVERSIFIED ENERGY -- OPERATING STATISTICS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pipelines & Processing*
Methanol Produced (thousand gallons)... 40,551 45,563 60,446 60,810 10,545
Transportation (MMcf).................. 153,491 129,428 175,466 115,975 86,391
Gas Processed (MMcf):
CO(2) Treatment..................... 38,212 36,236 48,868 42,761 44,223
NGL Removal......................... 54,082 34,051 45,082 21,764 7,446
Electric Power*
Electricity sales (MW hours)........... 2,084,214 2,729,552 3,804,957 1,843,302 708,867
--------- --------- --------- --------- -------
Energy Marketing* (MMcf)
Gas Sales.............................. 423,140 333,051 454,681 343,719 218,952
Exchange Gas Deliveries................ 5,566 6,755 11,061 15,109 22,586
--------- --------- --------- --------- -------
428,706 339,806 465,742 358,828 241,538
========= ========= ========= ========= =======
Exploration & Production
Gas Production (MMcf).................. 48,146 62,375 82,040 78,218 57,202
Oil Production (Mbbl).................. 1,012 2,134 2,635 3,346 1,086
Gas and Oil Production (MMcf
equivalent)......................... 54,218 75,179 97,850 98,294 63,718
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
PIPELINES & PROCESSING
The comparability of operating results for the Pipelines & Processing
segment is 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 (discussed
below). Excluding these unusual charges, operating and joint venture results
decreased by $5.4 million for the nine months ended September 30, 1999, to $13.7
million for the 1999 period from $19.1 million for the 1998 period. The
comparison reflects start-up expenditures associated with new projects and a
decline in the allowance for funds used during construction ("AFUDC") associated
with MCN's 16%-owned Portland Natural Gas Transmission System ("PNGTS"), as it
was placed in service in the first quarter of 1999. The results also reflect the
impact of a 9% decline in average methanol sales prices and a 5.0 million gallon
decline in methanol production primarily due to the shutdown of the methanol
plant for scheduled maintenance in March 1999. Additionally, Pipelines &
Processing results for the 1998 period were impacted by operating losses related
to the start-up of the coal fines plants. Including Pipelines & Processing's
share of joint venture operations, gas transportation volumes increased 19%
during the nine months ended September 30, 1999, to 153.5 Bcf. Gas processed to
remove carbon dioxide ("CO(2)") increased 5% to 38.2 Bcf, while gas processed to
remove natural gas liquids ("NGL") increased 59% to 54.1 Bcf.
Operating and joint venture income in 1998, excluding unusual charges, 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 CO(2)
increased 6.1 Bcf or 14% in 1998 and decreased slightly in 1997. Gas processed
to remove 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
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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 1998 third quarter
significantly increased the possibility that the Internal Revenue Service
("IRS") would challenge the project's eligibility for tax credits. In addition,
there was uncertainty as to whether MCN could utilize or sell the credits. These
factors led to MCN's decision in the third quarter of 1998 to record an
impairment loss of $133.8 million pre-tax ($87.0 million net of taxes), equal to
the carrying value of the plants, reflecting the likely inability to recover
such costs.
MCN sought to maximize the value of its investment in the coal fines
project, and in May 1999 filed a request with the IRS seeking a factual
determination that its coal fines plants were in service on June 30, 1998. In
September 1999, MCN received "in-service" determination letters from the IRS
with respect to the coal plants. In the determination letters, the IRS ruled
that four of the plants were in-service by the June 30, 1998 deadline in order
to qualify for synthetic fuel tax credits. The IRS also ruled that two other
plants did not meet the in-service requirements. MCN continues to believe these
two plants also meet the requirements and intends to appeal the unfavorable
rulings.
In November 1999, MCN reached an agreement to sell four of its coal fines
plants to DTE in an arms-length transaction that is independent of the pending
merger. The sales price will depend on total production performance of the four
plants. DTE will initially make a $45 million payment that will be adjusted up
to $152 million or down to zero based on the results of a 36-month production
test period. The sale is expected to be finalized in December 1999. Beginning in
2001, Pipelines & Processing results are expected to be favorably affected by
the recording of gains from the sale of the plants as increasing production
levels are achieved. In the third quarter of 1998, MCN 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 determined that their development is
unlikely. Accordingly, MCN recorded an impairment loss equal to the carrying
value of these assets.
Upon completion of the reorganization associated with the revised strategic
direction (discussed previously), the current strategies, functions and
responsibilities of the Pipelines & Processing business segment, as described
below, will become the responsibility of the new Midstream & Supply business
segment. Pipelines & Processing intends to focus on opportunities in the
Midwest-to-Northeast region that supply natural gas to meet growing demand. Much
of the growth in the demand for natural gas is expected within the Mid-Atlantic
and New England regions. These regions lack the pipeline capacity and low-cost
storage necessary to deliver gas volumes to compete effectively with other fuels
(primarily fuel oil) that dominate these markets. 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.
Under MCN's refocused strategic direction, Pipelines & Processing
anticipates capital investments of approximately $300 million through 2001. Of
this amount, approximately $130 million of capital investments are planned for
1999, which compares with $333 million invested in 1998. Under MCN's new
Midstream & Supply segment, Pipelines & Processing's assets and operations will
be integrated with MCN's other gas supply functions required to deliver the gas
to the Gas Distribution, Energy Marketing and Power segments, and to other
non-affiliated wholesale customers.
During 1998, the Dauphin Island Gathering Partners ("DIGP") venture
proceeded with the second phase of its expansion, which was completed in the
1999 first quarter. The project raised 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 48-mile Blue Dolphin Pipeline, had an average throughput of 75 MMcfe/d
during 1998, compared with 92 MMcfe/d in 1997. During the first quarter of 1999,
this venture acquired the 75-mile offshore Black Marlin Pipeline located near
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Galveston, Texas that is capable of transporting up to 160 MMcf/d of gas and
2,000 barrels per day ("Bpd") of liquids.
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 130 miles of gas gathering lines with
throughput capacity of about 225 MMcf/d. This system currently is gathering 165
MMcf/d with additional commitments of 30 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 225 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 415 MMcf/d, while gas
processing capacity is 25 MMcf/d. The system now has 867 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 35% interest in the Jonah Gas Gathering System
in Wyoming. This system has a capacity of 250 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 CO(2) pipelines and marketing projects in support
of enhanced oil recovery projects. As its first initiative, in 1998 the
partnership 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 60 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, which was placed in service in the first quarter of 1999. Effective
October 1999, Pipelines & Processing sold a 14% interest in the venture,
bringing its ownership to 29%. 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 in 1998.
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 was placed
in service during the first quarter of 1999. MCN owns a 16.4% interest in this
$425 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 in the Midwest and Northeast
regions of the U.S. This $500 million project is expected to be in service by
October 2000. Pipelines & Processing holds a 25% interest in this project.
MichCon will lease a portion of its
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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 Millennium which will link
up with Vector through the Dawn, Ontario hub and run to the New York City area.
This 442-mile, $685 million pipeline will carry 700 MMcf/d to serve markets on
the Atlantic Seaboard.
During the first quarter of 1999, the Volunteer Pipeline project was
announced. This 160-mile pipeline will facilitate the movement of natural gas
entering Chicago from Western Canada. Located in Tennessee, the pipeline will
have a capacity of 250 MMcf/d and has an expected in-service date of November
2001. Pipelines & Processing owns a 33% interest in this project.
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. Currently, the plant is
experiencing difficulties in producing economical quantities of asphalt, and MCN
is aggressively working to resolve the issues.
During the first quarter of 1999, the KCI Compression Company L.P. was
formed to provide a full range of natural gas compression services. MCN owns a
43% interest in the partnership, which complements its diverse energy-related
businesses.
In 1998, MCN advanced approximately $18 million to a developer of a
fertilizer project in the United Arab Emirates. The advance was structured as an
interest-bearing loan with the possibility of being converted into an equity
investment in the project. The advance, which was due in September 1999, is
being extended for an additional year. The project is being developed more
slowly than initially anticipated, and MCN's continuing role in the project is
under negotiation.
ELECTRIC POWER
The Electric Power unit operates through several wholly owned subsidiaries
of MCNEE to pursue power generation-related opportunities in the
Midwest-to-Northeast region. 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.
Results for the 1998 period were impacted by a $2.5 million pre-tax ($1.6
million net of taxes) restructuring charge in the third quarter related to
certain international power projects. Excluding these charges, operating and
joint venture income decreased by $3.0 million in the nine months ended
September 30, 1999 to $18.0 million compared with $21.0 million for the same
1998 period. The results also reflect an uncollectible expense provision
associated with a customer in bankruptcy, higher start-up expenditures
associated with new ventures as well as reduced contributions from the 30
megawatt Ada cogeneration facility, reflecting the sale of a 50% interest in the
project in the first quarter of 1998. The results also reflect lower
contributions from an investment in the Torrent Power Limited ("TPL") venture in
India; MCN sold this investment in August 1999. Earnings for the nine months
ended September 30, 1999 include increased contributions from the Midland
Cogeneration Venture ("MCV") reflecting an increase in MCN's interest in the MCV
partnership from 18% to 23% in June 1998, as well as increased contributions
from MCN's 50%-owned Michigan Power cogeneration facility.
Excluding the $2.5 million pre-tax ($1.6 million net of taxes)
restructuring charge described above, 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 MCV. Increased contributions from TPL in India and the purchase in June 1998
of an additional 5% interest in MCV accounted for the improved results. Also,
partial operation of TPL'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.
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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 has significantly increased. 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 approximately $50 million annually in Electric Power during 2000 and
2001. Approximately $140 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 October 1998, Electric Power acquired an interest in an operating 42 MW
gas-fired cogeneration plant in Carson, California. Electric Power currently
owns a 33 1/3% interest in the Carson plant. 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 in 2000 and is backed by a long-term power purchase agreement with the
Public Service Company of New Mexico. The project is being 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 initial investment totals
$73.0 million. MCV sells electricity to Consumers Energy Co. and 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 by mid-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") and a 43% interest in Surat Electricity Company Limited
("SECL"). TPL recently sold its 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 power project in Gujarat, India, that reached
full commissioning during the fourth quarter of 1998. In August 1999, MCN
completed the sale of its entire interest in TPL for approximately $130 million,
resulting in a small gain.
The Mobile Bay cogeneration project was placed into service along with the
Mobile Bay Processing venture during the first quarter of 1999. Electric Power
owns 29% of this 40 MW, natural gas-fired plant, which will provide electricity
and thermal energy to the processing facility.
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 plant 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.
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Electric Power is a 50% general partner in Metro Energy, L.L.C. This
venture, formed in 1999, will design, construct and operate an energy facility
to provide all of the heating, chilling and energy requirements for the new
Midfield Terminal at Detroit Metropolitan Wayne County Airport under a 30-year
contract. The 17 MW facility is expected to be in full service by the end of
2001.
In addition to these power generation facilities, Electric Power continues
to pursue a number of other opportunities, including a 220 MW peaking plant in
Columbus, Ohio. New projects continue to come to our attention, some of which
will ultimately materialize.
As part of the merger agreement with DTE, MCN has agreed to use its best
efforts to enter into agreements to dispose of some or all of its interests in
certain Electric Power assets or facilities. MCN may sell all or a portion of
several "Qualifying Facilities" as defined by the Public Utility Regulatory
Policies Act of 1978, as amended. MCN's investments in these "Qualifying
Facilities" include its investments in MCV, the Michigan Power Project, the Ada
facility and the Carson plant. Furthermore, under the terms of the merger
agreement, MCN will dispose of all or a portion of its interest in the
Cobisa-Person Power Project. See "The Merger Agreement -- Additional
Agreements -- Transition Matters" on page 61.
ENERGY MARKETING
Operating and joint venture results for the nine months ended September 30,
1999 decreased $6.7 million over the comparable 1998 period to a loss of $6.0
million in the 1999 period from income of $0.7 million in the 1998 period. The
1999 results reflect the accounting effect of anticipated temporary high gas
prices on gas in inventory and cost of gas sold. During the third quarter of
each year, Energy Marketing normally increases gas in inventory and depletes
such inventories in the colder fourth and first quarters of the year when gas
demand and gas prices typically are at their highest. In anticipation that third
quarter inventory injections will be withdrawn prior to year-end, Energy
Marketing prices the gas inventory injections at the estimated average purchase
rate for the calendar year. For the 1999 third quarter, the actual average
purchase rate incurred exceeded the estimated average purchase rate for the
year. This resulted in a higher cost of gas sold in the 1999 third quarter, the
impact of which is expected to reverse in the 1999 fourth quarter.
The impact of the higher cost of gas sold as well as the higher costs for
gas transportation and storage capacity more than offset the improved margins
resulting from an increase in total gas sales and exchange deliveries. Gas sales
and exchange deliveries totaled 428.7 Bcf for the nine months ended September
30, 1999, an increase of 88.9 Bcf over the corresponding 1998 period. The
increase in gas sales is due in part to the April 1999 acquisition of existing
marketing operations that significantly increased sales to large commercial and
industrial customers in the Midwest. Earnings were also affected by losses
recorded in 1998 associated with trading activities. Results for the 1999 period
were also impacted by higher costs for natural gas transportation and storage
capacity, higher uncollectible expense and higher costs associated with the June
1999 dissolution of the DTE-CoEnergy joint venture.
Energy Marketing's operating and joint venture loss increased $1.3 million
to $3.6 million in 1998. The increased loss in 1998 primarily reflects
unrealized losses associated with trading activities and higher gas storage
costs, partially offset by higher earnings from a significant increase in gas
sales volumes. Additionally, the earnings comparison was affected as a result of
1997 including $2.2 million of contributions from Energy Marketing's 25%
interest in a gas storage project that was sold in December 1997.
Upon completion of the reorganization associated with the revised strategic
direction (discussed previously), the Energy Marketing business segment will
consist of MCN's non-regulated marketing activities to industrial, commercial
and residential customers, both inside and outside the Gas Distribution
segment's service area. Gas supply functions performed by Energy Marketing prior
to the reorganization will become the responsibility of the new Midstream &
Supply business segment upon completion of the reorganization. The description
of Energy Marketing's business below reflects its strategies, functions and
responsibilities prior to completion of the reorganization. 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-
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shopping manner. Given the level of energy consumed in the region, and
persistent electric supply, cost and reliability challenges customers face,
distributed power generation is expected to be a key area of growth for Energy
Marketing. Capital investments are anticipated to be immaterial in 1999 as this
segment is not capital intensive.
MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company ("CTC"). CTC, a wholly owned subsidiary of MCNEE, is engaged in
the purchase and sale of natural gas to 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. CTC
offers buyers a bundled service by making arrangements for the acquisition of
the required gas volumes and delivery to customers' facilities, and for all the
necessary services in between. This bundled service is more in demand during the
winter months, when interstate pipeline capacity in certain areas of the
Northeast and Midwest is either constrained or uneconomical. CTC is able to
better meet this demand through 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 1998 sales were to its joint venture/marketing
alliances and other MCNEE 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 in 1998 originated in the
Midcontinent with another 25% purchased within Michigan.
CTC is involved in a joint venture that expands its market region and adds
other energy sources to its market portfolio. The joint venture, 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.
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 over 500 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/MCNEE 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 Pipeline and Millennium Pipeline 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 and flexible 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 United States, has
significantly increased the amount of gas storage capacity available to CTC to
serve its markets. The project has converted a depleted gas reservoir to a 42
Bcf storage facility. Initial gas injection occurred in the spring of 1999, and
the facility reached completion in July 1999, 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 has rights to 67 Bcf of
market-area storage capacity in 1999. CTC will use this storage in conjunction
with its over 500 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.
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<PAGE> 113
EXPLORATION & PRODUCTION
In December 1998, MCN accounted for its E&P segment as a discontinued
operation as a result of its decision to sell all of its gas and oil properties.
In August 1999, management announced its intention to retain its natural gas
producing properties in Michigan. Accordingly, E&P's operating results for prior
periods have been reclassified from discontinued operations to continuing
operations. The decision to retain these properties was based on the interaction
of two factors. As previously discussed, MCN significantly revised its strategic
direction in the third quarter of 1999. Key aspects of the new corporate
strategy include a Midwest-to-Northeast regional focus rather than a North
American focus, and an emphasis on achieving operational efficiencies and growth
through the integration of existing businesses. Shortly thereafter, a bid which
had previously been received for the Michigan properties was lowered
significantly. The lower price was unacceptable, especially in light of MCN's
new strategic direction.
During the second quarter of 1999, MCN completed the sale of its E&P
properties located in the Western and Midcontinent/Gulf Coast regions and
expects to sell other non-Michigan E&P properties by mid-2000. At December 31,
1998 Western and Midcontinent/Gulf Coast had 360 Bcfe of proven reserves.
Results for this segment for the nine months ended September 30, 1999 were
negatively impacted by a $52.0 million pre-tax ($33.8 million net of tax)
write-down in the second quarter 1999 of its gas and oil properties under the
full cost method of accounting, due primarily to an unfavorable revision in the
timing of production of proved gas and oil reserves as well as reduced
expectations of sales proceeds on unproved acreage. Under the full-cost method
of accounting as prescribed by the Securities and Exchange Commission, MCN's
capitalized exploration and production costs at June 30, 1999 exceeded the full
cost "ceiling," resulting in the excess being written-off to income. The ceiling
is the sum of discounted future net cash flows from the production of proved gas
and oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects.
The operating results for the nine months ended September 30, 1999 were
also impacted by losses on the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $74.7 million pre-tax ($48.5 million net of taxes) and
by a $7.5 million pre-tax write-down ($4.9 million net of taxes) of an
investment in the common stock of an E&P company. MCN had previously recognized
a $6.1 million pre-tax loss ($4.0 million net of taxes) from the write-down of
this investment during the second quarter of 1998.
In the second and third quarters of 1998, MCN recognized write-downs of its
gas and oil properties totaling $333.0 million pre-tax ($216.5 million net of
taxes) and $83.9 million pre-tax ($54.6 million net of taxes), respectively. The
write-downs were also the result of MCN's capitalized exploration and production
costs exceeding the full cost ceiling due primarily to lower oil and gas prices
and lower-than-expected exploratory drilling results.
Excluding the unusual charges discussed above, operating and joint venture
income decreased by $13.4 million for the nine months ended September 30, 1999
to $10.0 million, compared to $23.4 million for the corresponding 1998 period.
This result reflects a decline in overall gas and oil production of 21.0 Bcf
equivalent due primarily to the sale of MCN's Western and MidContinent/Gulf
Coast properties during 1999. Gas and oil production for future periods will
also be lower due to the expected sale of other non-Michigan E&P properties by
mid-2000. The results for the nine months ended September 30, 1999 were also
impacted by an increase in production related expenses of $0.12 per Mcf
equivalent, by an increase in gas sales prices of $0.16 per Mcf, and by a
decline in oil sales prices of $0.61 per Bbl. The impact of fluctuations in
natural gas and oil sales prices was mitigated by hedging with swaps and futures
agreements.
Excluding the unusual charges discussed above, operating and joint venture
income decreased by $29.1 million, to $29.0 million, in 1998 compared to 1997.
The decrease was due primarily to a sharp decline in oil sales prices of $4.29
per Bbl, an increase in production-related expenses of $0.11 per Mcf equivalent
and a slight decline in the level of oil and gas produced. These factors were
partially offset by an increase in average gas sales prices. Operating and joint
venture income increased in 1997 by $24.9 million over 1996 to $58.1 million,
reflecting a significant increase in gas and oil production and $6.6 million of
pretax gains from the sale of undeveloped properties by an unconsolidated joint
venture during 1997. Production-related
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<PAGE> 114
expenses in 1997 decreased by $0.06 per Mcf equivalent from the 1996 level. The
average oil sales rate in 1997 was $16.87 per Bbl, down $3.31 per Bbl from 1996.
At December 31, 1998, proved gas reserves totaled 1,093.0 Bcf and proved oil
reserves were 77.9 Bcf equivalent, down a combined 150.3 Bcf equivalent from
December 1997 levels.
MCN's strategy for the E&P business is to aggressively manage the Michigan
E&P assets and optimize returns by efficiently integrating production with the
Pipeline & Processing and Energy Marketing segments. Approximately 23% of the
segment's 1998 production and 40% of proved reserves were related to the
Michigan Antrim properties. MCN has accumulated the industry's largest Antrim
gas reserve base, accounting for approximately 20% of the total Michigan Antrim
gas production. During 1998, MCN participated in the drilling of 167 wells (103
net) in the Antrim formation, bringing the total drilled to 1,305 wells (859
net). Even though the potential natural gas recovery from the average Antrim
well is less than the recovery from wells drilled in other formations, wells
drilled in the Antrim shale formations have a high success rate and low drilling
costs, and are therefore considered relatively low risk. Additional information
regarding E&P's exploration and production activities is reported under
"Description of MCN Energy Group Inc. -- Properties," located on pages 113
through 115 under this section.
It is anticipated that MCN will invest approximately $90 million in E&P
during 1999, and approximately $30 million in each of 2000 and 2001.
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. In late 1998, MCN began entering into offsetting positions for
existing hedges of gas and oil production from properties that have been or were
expected to be sold in 1999. MCN's risk management strategy has been revised to
reflect the change in its business that will result from its new strategic
direction. Additionally, as a result of the special investigation (see
discussion in "Management's Discussion and Analysis," on page F-2), MCN is
taking additional steps to ensure compliance with risk management policies that
are periodically reviewed by the Board of Directors.
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 MCN's
network to transport the gas to their facilities.
-- Intermediate Transportation -- Provides transportation service
through MCN'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 consumers.
RESULTS OF OPERATIONS
Gas Distribution's earnings were $76.0 million for the nine months ended
September 30, 1999, resulting in an increase of $35.2 million from the
comparable 1998 period. Earnings in the 1998 period were unfavorably affected by
a property write-down and an investment loss in the third quarter. 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
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<PAGE> 115
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
that MCN intends to sell in 2000. The write-down represents the amount by which
the carrying value exceeded the fair value of the investment. Excluding the
unusual charges, Gas Distribution's earnings improved by $18.5 million in the
1999 nine-month period to $76.0 million from $57.5 million in the 1998 period.
This improvement reflects contributions from the new gas sales program and the
impact of more favorable weather.
Gas Distribution's earnings for 1998 totaled $71.7 million, a decrease of
$9.4 million from 1997. Results for 1998 were affected by the unusual charges
discussed above. 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.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- --------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES (in millions of dollars)
Gas Sales....................................... $653.5 $579.1 $ 838.9 $1,080.1 $1,102.9
End User Transportation......................... 72.6 60.0 82.3 84.7 82.5
Intermediate Transportation..................... 42.8 48.4 63.2 55.2 48.6
------ ------ -------- -------- --------
Total Sales and Transportation................ 768.9 687.5 984.4 1,220.0 1,234.0
Other........................................... 62.7 47.2 67.4 51.3 42.3
------ ------ -------- -------- --------
Total Operating Revenues...................... $831.6 $734.7 $1,051.8 $1,271.3 $1,276.3
====== ====== ======== ======== ========
MARKETS (BCF)
Gas Sales....................................... 127.3 117.5 172.2 209.1 221.0
End User Transportation......................... 107.0 102.2 140.3 145.1 146.9
Intermediate Transportation..................... 390.8 430.8 537.5 586.5 527.5
------ ------ -------- -------- --------
Total Sales and Transportation................ 625.1 650.5 850.0 940.7 895.4
====== ====== ======== ======== ========
</TABLE>
NOTE: Intermediate Transportation includes intercompany transactions.
Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which include appliance sales, installation and
maintenance. 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.
EFFECT OF WEATHER
Gas Distribution's gas sales, end user transportation and intermediate
transportation volumes, revenues and net income are impacted by weather. Given
the seasonal nature of the business, revenues and net income are concentrated in
the first and fourth quarters of the calendar year. By the end of the first
quarter, the heating season is largely over, and Gas Distribution typically
incurs substantially reduced revenues and earnings in the second quarter and
losses in the third quarter. The seasonal nature of Gas Distribution's
operations is expected to be more pronounced as a result of MichCon's new gas
sales program.
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<PAGE> 116
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage Colder (Warmer) Than Normal.... (8.5)% (21.6)% (19.3)% 0.8% 5.4%
Increase (Decrease) From Normal in:
Gas Markets (in Bcf).................... (11.1) (26.7) (40.3) 0.6 10.9
Net Income (in millions)................ $(11.0) $(23.1) $(35.3) $0.5 $ 9.9
</TABLE>
GAS SALES
Revenue increased $74.4 million for the nine months ended September 30,
1999, primarily due to weather which was approximately 13% colder than in the
comparable 1998 period. Revenues were also impacted by a $0.23 per Mcf (8%)
increase in the gas commodity component of MichCon's sales rate. As subsequently
discussed, the gas commodity component was fixed under MichCon's new gas sales
program at $2.95 per Mcf beginning in January 1999. MichCon's three-year
customer choice program, which is a part of its Regulatory Reform Plan
subsequently discussed, had the effect of decreasing gas sales revenues for the
nine months ended September 30, 1999, partially offset by an increase in end
user transportation revenues. This resulted in a net decrease in total operating
revenues due to the gas commodity component included in gas sales rates.
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 represented approximately 20% of total deliveries in 1998
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 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 109 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 1995-1998. 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.
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<PAGE> 117
Cost of gas sold per Mcf for the nine months ended September 30, 1999 was
$2.72 per Mcf, unchanged from the comparable 1998 period. 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 for the nine months ended September 30, 1999 increased slightly
from the comparable 1998 period due to colder weather and the migration of
volumes from gas sales under MichCon's customer choice program. 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.
As of September 1999, MichCon had end user transportation agreements
representing annual volumes of 162 Bcf. Approximately 77% 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
2000 and relate to a large number of low-volume users with relatively low price
sensitivity.
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 and reliability.
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 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 MCN'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
impact materially the competitiveness of natural gas.
INTERMEDIATE TRANSPORTATION
Intermediate transportation deliveries were 40.0 Bcf lower in the nine
months ended September 30, 1999 compared to the same period in 1998. A
significant portion of the decrease was for customers who pay a fixed fee for
intermediate transportation capacity regardless of actual usage.
This service accounted for approximately 63% of total gas deliveries in
1998, 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.
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<PAGE> 118
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 by
providing transportation of new supplies of western Canadian gas, coming into
the Chicago area which began 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 Vector to effectuate transportation of Chicago supplies to
Dawn, Ontario, a significant Canadian natural gas market hub. Vector is
scheduled to be completed in October 2000. Additional opportunities for
transportation services are being pursued which will further maximize the use of
Gas Distribution's transmission infrastructure.
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 110 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.
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<PAGE> 119
Whereas prior to 1999, under Gas Cost Recovery ("GCR") regulation, gas supply
costs were a non-profit passthrough of prudently incurred costs, beginning
January 1, 1999, MichCon has had 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 secured 100% of
its 1999 warmer than normal weather requirements and has secured approximately
90% of its 2000 and 2001 similar requirements at prices that help ensure profit
contributions from gas supply operations.
Citizens Gas Fuel Company ("Citizens") serves approximately 15,000
customers and is served by two interstate pipelines, Panhandle Eastern Pipe Line
Company ("Panhandle") and ANR Pipeline Company ("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>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- -----------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Michigan Producers......................... 41.9 23.9 41.9 66.0 86.3
Interstate Suppliers....................... 18.6 34.4 29.0 13.8 14.5
Canadian Suppliers......................... 23.4 23.7 31.7 31.3 37.3
Spot Market................................ 63.1 56.5 76.3 89.1 94.0
----- ----- ----- ----- -----
147.0 138.5 178.9 200.2 232.1
===== ===== ===== ===== =====
</TABLE>
For the nine months ended September 30, 1999, Gas Distribution purchased
28% of its supply from Michigan producers, 56% from producers in the Southern
and Midcontinent regions of the United States and 16% from Canadian producers.
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 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 was obligated to transport for MichCon 375 MMcf/d of supply through October
1999. Effective November 1, 1999, MichCon's ANR capacity reduced 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 from Canada. 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 1998, MichCon's maximum one-day sendout exceeded 2.1 Bcf, of
which approximately 68% came from its underground storage fields. Year to date
1999, MichCon's maximum one-day sendout
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<PAGE> 120
exceeded 2.3 Bcf, of which approximately 73% came from storage. 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 began
April 1, 1999, with approximately 70,000 customers choosing to purchase natural
gas from suppliers other than MichCon. Plan years begin April 1 of each year and
the number of customers allowed to participate in the plan is limited to 75,000
in 1999, 150,000 in 2000 and 225,000 in 2001. MCN's gas marketing affiliates
also participate as alternative suppliers under the program when profitable
opportunities exist. 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 on these services.
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 that began in January 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 fixed-price contracts
at costs below $2.95 per Mcf for a substantial portion of its expected gas
supply requirements through 2001. This strategy has produced favorable margins
through September 1999 and is likely to continue producing favorable margins
through 2001. The level of margins generated from selling gas will be affected
by the number of customers choosing to purchase gas from suppliers other than
MichCon under the three-year customer choice program.
Also beginning in 1999, an income sharing mechanism allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. 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 was approximately $0.1 million. In February 1999, MichCon depleted this
initial reserve. The excess costs are being 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. The Michigan Attorney General
appealed the depreciation order. In June 1999, MichCon received a favorable
ruling to this appeal by the
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Michigan Court of Appeals which affirmed the MPSC order approving the lower
depreciation rates without a corresponding gas rate reduction.
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 MCN with an opportunity
to control costs and continue to earn a reasonable rate of return.
GAS COST RECOVERY
Prior to January 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, MichCon's Regulatory Reform
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
February 1999, MichCon filed its final GCR reconciliation case covering gas
costs incurred during 1998, which indicates an overrecovery of $18 million,
including interest. Management believes that the 1998 gas costs were reasonable
and prudent and that the MPSC will approve the gas costs incurred. However,
management cannot predict the outcome of this proceeding. During the first
quarter of 1999, MichCon refunded the overrecovery to customers as a reduction
in gas sales rates.
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, excluding interest. Pursuant to the
terms of the plan that approved suspension of the GCR clause, MichCon refunded
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, the 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.
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.
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
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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 tentative trial date has been scheduled for February 2000.
During the nine months ended September 30, 1999 and the years 1998, 1997
and 1996, MCN spent $0.5 million, $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 was $35.1 million, of which $0.1 million was
classified as current. At September 30, 1999, the reserve balance was $34.6
million, $4.2 million of which 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 October 1999, an additional 193 franchises expired. To date,
399 franchises have been renewed, including nine renewed in 1998, accounting for
gas sales volumes of approximately 115 MMcf annually, and 8 renewed to date in
1999 (161 MMcf annually). Additionally, one new franchise was acquired in 1998.
There were no franchises lost during 1998 or 1999.
As for the 27 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 (1) acquire
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and operate MichCon's system, (2) construct a new system or (3) 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 three franchise renewals during 1998.
DISCONTINUED OPERATIONS
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 MCNEE, 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 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.
PROPERTIES
MCN
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 $500 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
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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
investments for 1998 totaled $159 million and for 1999 are anticipated to be
approximately $140 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%.
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 in 2000 and is backed by a long-term power purchase
agreement with Public Service Company of New Mexico. The project is being
constructed at the site of a decommissioned power plant, keeping costs low and
accelerating its development.
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EXPLORATION & PRODUCTION ACTIVITIES
MCNIC Oil & Gas Company (MOG), an indirect subsidiary of MCN, is engaged in
natural gas and oil exploration, development and production. The following data,
together with the financial information detailed in Note 1a to the MCN
Consolidated Financial Statements located on page F-34, and the general
information provided under "Description of MCN Energy Group Inc. -- Diversified
Energy -- Exploration and Production" on page 103, provide additional
information regarding the activity. Information on estimated gas and oil
reserves that follows was obtained by MOG from the independent petroleum
engineering consultants Ryder Scott Company, Miller and Lents, Ltd.,
Holditch-Reservoir Technologies, Netherland, Sewell & Associates, Inc., and
Williamson Petroleum Consultants, Inc.
<TABLE>
<CAPTION>
PRODUCTION
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average Gas Sales Price (per Mcf)........................... $ 2.04 $ 1.95 $ 1.96
Average Oil Sales Price (per Bbl)........................... $12.58 $16.87 $20.18
Average Production Cost (per Mcf equivalent)................ $ .81 $ .70 $ .76
</TABLE>
<TABLE>
<CAPTION>
DRILLING ACTIVITY
1998 1997 1996
------------ ------------ ------------
GROSS Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Working Interest Well Completions:
Exploratory:
Productive............................................. 58 26 63 30 63 28
Dry.................................................... 37 14 39 19 37 15
--- --- --- --- --- ---
Total Exploratory................................. 95 40 102 49 100 43
--- --- --- --- --- ---
Development:
Productive............................................. 536 335 574 354 355 230
Dry.................................................... 15 6 20 9 12 6
--- --- --- --- --- ---
Total Development................................. 551 341 594 363 367 236
--- --- --- --- --- ---
Total Working Interest Well Completions.................. 646 381 696 412 467 279
=== === === === === ===
Wells in Process of Drilling at End of Year.............. 77 30 150 92 167 108
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
PRODUCING WELLS AND ACREAGE
1998 1997 1996
---------------------- ---------------------- --------------------
GROSS Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
PRODUCING WELLS
United States.................. 3,143 1,782 2,917 1,677 2,890 1,481
========= ========= ========= ========= ========= =======
DEVELOPED LEASE ACREAGE
United States.................. 623,076 352,315 663,767 344,818 519,107 287,964
========= ========= ========= ========= ========= =======
UNDEVELOPED LEASE ACREAGE
United States.................. 2,693,767 1,148,920 2,592,915 1,239,908 1,701,063 970,873
</TABLE>
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LEGAL PROCEEDINGS
GENERAL
In addition to Gas Distribution's regulatory proceedings and other matters
described above, 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. 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 condition or results of operations.
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 basis 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 not 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.
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EXPERTS
The financial statements of MCN Energy Group Inc. as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements and the related financial statement schedule of
DTE Energy Company incorporated in this prospectus by reference from the DTE
Energy Company's Annual Report on Form 10-K for the year ended December 31, 1998
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
With respect to the unaudited interim financial information of DTE Energy
Company for the periods ended March 31, 1999 and 1998, June 30, 1999 and 1998
and September 30, 1999 and 1998 which is incorporated herein by reference,
Deloitte & Touche LLP have applied limited procedures in accordance with
professional standards for a review of such information. However, as stated in
their reports included in DTE Energy Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999 and
incorporated by reference herein, they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their reports on such information should be restricted in light of
the limited nature of the review procedures applied. Deloitte & Touche LLP are
not subject to the liability provisions of Section 11 of the Securities Act of
1933 for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Act.
This prospectus includes various oil and gas reserve information summarized
from reports prepared by the independent petroleum consultants Ryder Scott
Company; Miller and Lents, Ltd.; Holditch-Reservoir Technologies; Netherland,
Sewell & Associates, Inc.; and Williamson Petroleum Consultants, Inc. This
reserve information and related schedules have been included in this prospectus
in reliance upon such reports given upon the authority of said firms as experts
in oil and gas reserve estimation.
SHAREHOLDER PROPOSALS
DTE
DTE will hold its annual meeting of DTE shareholders on April 14, 2000.
Shareholder proposals intended to be presented at the 2000 annual meeting of DTE
shareholders pursuant to Rule 14a-8 promulgated under the Exchange Act must be
received by the Corporate Secretary of DTE not later than November 29, 1999, in
order to be included in the proxy materials sent by management of DTE for such
meeting. Shareholders interested in proposing business from the floor or
nominating a person for the position of director from the floor at the 2000
annual meeting of DTE shareholders must give notice and certain information to
the Corporate Secretary of DTE, not earlier than January 14, 2000, and not later
than February 14, 2000, in order to be considered at the 2000 annual meeting.
MCN
If the merger is not completed, MCN will hold a 2000 annual meeting of its
shareholders. If such a meeting is held, shareholder proposals intended to be
presented at that meeting pursuant to Rule 14a-8 must be received by the
Secretary of MCN a reasonable time prior to the time MCN begins to print and
mail proxy materials for such meeting in order to be included in the proxy
materials sent by management of MCN for the 2000 annual meeting. Shareholder
proposals intended to be presented at the 2000 annual meeting of MCN
shareholders that are not intended to be included in management's proxy
materials pursuant to Rule 14a-8 must be received by the Secretary of MCN not
less than 60 days and not more than 90 days prior to such meeting in order to be
considered at the 2000 annual meeting.
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WHERE YOU CAN FIND MORE INFORMATION
DTE has filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act of 1933 that registers the distribution to
the MCN shareholders of the DTE common stock to be issued in the merger. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about DTE and its common stock. The rules and
regulations of the Securities and Exchange Commission allow us to omit certain
information included in the registration statement from this document.
In addition, DTE and MCN file reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy this information at the following
locations of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. Further
information on the operation of the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. can be obtained by calling the Securities and
Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains an Internet worldwide
Web site that contains reports, proxy statements and other information about
issuers, such as DTE and MCN, who file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov.
You can also inspect reports, proxy statements and other information about
DTE and MCN at the offices of the NYSE, 20 Broad Street, New York, New York
10005 and, in the case of DTE, the offices of the Chicago Stock Exchange, 440
South LaSalle Street, Chicago, Illinois 60605.
The Securities and Exchange Commission allows DTE to "incorporate by
reference" information into this document, which means that DTE can disclose
important information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This document
incorporates by reference the documents set forth below that DTE has previously
filed with the Securities and Exchange Commission. These documents contain
important information about DTE and its finances.
<TABLE>
<CAPTION>
DTE COMMISSION FILINGS (FILE NO. 1-11607) PERIOD OR DATE FILED
----------------------------------------- --------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1998.
Quarterly Reports on Form 10-Q Quarters ended March 31, 1999, June 30, 1999
and
September 30, 1999.
Current Report on Form 8-K Filed October 5, 1999.
Annual Proxy Statement on Schedule 14-A Filed March 26, 1999.
The description of the DTE common stock set Filed January 2, 1996.
forth in the Registration Statement on Form
8-B
Description of the DTE Rights Agreement set Filed September 23, 1997.
forth in the registration statement on Form
8-A
</TABLE>
DTE is also incorporating by reference additional documents that it may
file with the Securities and Exchange Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of
this document and the date of the DTE special meeting. These documents include
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periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements.
DTE has supplied all information contained or incorporated by reference in
this document relating to DTE, and MCN has supplied all such information
relating to MCN.
VALIDITY OF SHARES
The validity of the DTE common stock to be issued to MCN shareholders
pursuant to the merger will be passed upon for DTE by Christopher C. Nern. As of
the date of this document, Mr. Nern owned less than 0.1% of the shares
(including options representing certain rights to purchase shares) of DTE common
stock.
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INDEX TO FINANCIAL STATEMENTS OF MCN ENERGY GROUP INC.
<TABLE>
<S> <C>
MCN ENERGY GROUP INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... F-2
Consolidated Statement of Operations...................... F-29
Consolidated Statement of Financial Position.............. F-30
Consolidated Statement of Cash Flows...................... F-32
Consolidated Statement of Shareholders' Equity............ F-33
Notes to Consolidated Financial Statements................ F-34
Independent Auditors Report............................... F-80
MCN ENERGY GROUP INC. SEPTEMBER 30, 1999 QUARTERLY REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... F-81
Consolidated Statement of Operations...................... F-102
Consolidated Statement of Financial Position.............. F-103
Consolidated Statement of Cash Flows...................... F-105
Notes to Consolidated Financial Statements................ F-106
</TABLE>
F-1
<PAGE> 131
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
RESULTS OF OPERATIONS
Special investigation results in restatement -- Subsequent to the issuance
of MCN's December 31, 1998 financial statements, certain matters came to
management's attention and resulted in a special investigation of prior years'
operations of CoEnergy Trading Company (CTC), MCN's non-utility energy marketing
subsidiary. As a result of the investigation, MCN identified that its internal
controls had been overridden and that certain transactions had not been properly
accounted for. Specifically, the investigation concluded that CTC had entered
into gas supply contracts and agreed to pay significantly less than market
prices in one period in return for above-market prices to be paid in subsequent
periods through March 2000. The effect of these transactions was to improperly
delay the accrual of cost of gas expenses, resulting in the overstatement of the
1998 net loss by $.5 million and the overstatement of 1997 net income by $8.6
million.
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly marking to market these
transactions was the understatement of the 1998 net loss by $7.1 million and the
overstatement of 1997 net income by $.4 million. However, net income of $2.6
million and $1.8 million was realized and recorded in connection with these
trading activities in 1998 and 1997, respectively, resulting in a net loss of
$4.5 million in 1998 and net income of $1.4 million in 1997 from such
activities. From the inception of these trading activities in March 1997 through
March 1999, $5.7 million of net income was realized and recorded in connection
with these trading activities. However, marking these contracts to market, as
required, results in a previously unrecorded net unrealized loss of $8.4 million
through March 1999, indicating a net loss of $2.7 million from such activities.
Other items identified during the investigation resulted in the
understatement of the 1998 net loss by $.9 million and the overstatement of 1997
net income by $.1 million.
As described in Note 1b to the Consolidated Financial Statements, the
accompanying consolidated financial statements for 1998 and 1997 have been
restated from those originally reported to properly account for the transactions
identified, resulting in an increase in the 1998 net loss of $7.5 million or
$.09 per diluted share and a decrease in 1997 net income of $9.1 million or $.12
per diluted share. The corrections did not have an impact on the liquidity or
cash flows of MCN. The financial information contained in Management's
Discussion and Analysis herein has been revised to reflect the impact of such
restatement.
Discontinued operations subsequently retained -- In the 1998 MCN Annual
Report on Form 10-K/A, MCN accounted for its Exploration & Production (E&P)
segment as a discontinued operation as a result of its decision to sell all of
its gas and oil properties. In August 1999, management announced its intention
to retain its natural gas producing properties in Michigan. Accordingly, E&P's
operating results for all periods included herein have been reclassified from
discontinued operations to continuing operations. The decision to retain these
properties was based on the interaction of two factors. MCN significantly
revised its strategic direction. Key aspects of the new corporate strategy
include a Midwest-to-Northeast regional focus rather than a North American
focus, and an emphasis on achieving operational efficiencies and growth through
the integration of existing businesses. Shortly thereafter, the bid for the
Michigan properties was lowered significantly. The lower price was unacceptable,
especially in light of MCN's new strategic direction.
Results for 1998 reflect unusual charges -- MCN experienced a net loss of
$286.5 million or $3.63 per share in 1998. As subsequently discussed, 1998
results reflect several unusual charges that totaled $389.6 million or $4.94 per
share. Excluding these charges, MCN had 1998 earnings of $103.1 million or $1.31
per share compared to 1997 earnings of $133.2 million or $1.79 per diluted
share. The earnings
F-2
<PAGE> 132
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
comparisons reflect the effects of low energy prices, abnormally warm weather
and higher financing costs, partially offset by reduced operating costs in the
Gas Distribution segment. MCN's earnings from continuing operations for 1997
increased $20.6 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS) (in Millions)
Continuing Operations:
Diversified Energy:
Before unusual charges................................. $ 14.7 $ 52.1 $ 31.2
Unusual charges (Notes 2a, 2b & 3)..................... (372.9) -- --
------- ------ ------
(358.2) 52.1 31.2
------- ------ ------
Gas Distribution:
Before unusual charges................................. 88.4 81.1 81.4
Unusual charges (Note 2c).............................. (16.7) -- --
------- ------ ------
71.7 81.1 81.4
------- ------ ------
Total from Continuing Operations:
Before unusual charges.................................... 103.1 133.2 112.6
Unusual charges (Notes 2 & 3)............................. (389.6) -- --
------- ------ ------
(286.5) 133.2 112.6
------- ------ ------
Discontinued Operations (Note 4):
Income from operations.................................... -- -- 1.6
Gain on sale.............................................. -- -- 36.2
------- ------ ------
-- -- 37.8
------- ------ ------
$(286.5) $133.2 $150.4
======= ====== ======
DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations:
Diversified Energy:
Before unusual charges................................. $ .19 $ .72 $ .47
Unusual charges (Notes 2a, 2b & 3)..................... (4.73) -- --
------- ------ ------
(4.54) .72 .47
------- ------ ------
Gas Distribution:
Before unusual charges................................. 1.12 1.07 1.20
Unusual charges (Note 2c).............................. (.21) -- --
------- ------ ------
.91 1.07 1.20
------- ------ ------
Total from Continuing Operations:
Before unusual charges.................................... 1.31 1.79 1.67
Unusual charges (Notes 2 & 3)............................. (4.94) -- --
------- ------ ------
(3.63) 1.79 1.67
------- ------ ------
Discontinued Operations (Note 4):
Income from operations.................................... -- -- .03
Gain on sale.............................................. -- -- .53
------- ------ ------
-- -- .56
------- ------ ------
$ (3.63) $ 1.79 $ 2.23
======= ====== ======
</TABLE>
F-3
<PAGE> 133
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
STRATEGIC DIRECTION -- MCN's objective is to achieve competitive long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in this
portfolio-management strategy is the frequent review of internal and external
factors affecting the company's investments. Therefore, the pace of new
investments and the disposition of existing assets 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 a significant portion of 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, investment losses and
restructuring charges, which reduced 1998 earnings by $389.6 million or $4.94
per share. A detailed discussion of each unusual charge by segment follows:
<TABLE>
<CAPTION>
1998
--------------------
NET DILUTED
INCOME EPS
------ -------
<S> <C> <C>
UNUSUAL CHARGES (in Millions, Except Per Share Amounts)
Diversified Energy:
Pipelines & Processing (Note 2a).......................... $ (89.5) $(1.13)
Electric Power (Note 3)................................... (1.6) (.02)
Exploration & Production (Note 2b)........................ (275.0) (3.49)
Corporate & Other (Note 3)................................ (6.8) (.09)
------- ------
(372.9) (4.73)
Gas Distribution (Note 2c).................................. (16.7) (.21)
------- ------
$(389.6) $(4.94)
======= ======
</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.
F-4
<PAGE> 134
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Exploration & Production recorded write-downs in the second and third
quarter of 1998 totaling $416.9 million pre-tax ($271.0 million net of taxes) to
reflect the impact of low oil and gas prices as well as the under-performance of
certain oil and gas properties. The E&P business recognized the write-downs
under the full cost method of accounting as prescribed by the Securities and
Exchange Commission (SEC). Under the full cost method of accounting, E&P's
capitalized exploration and development costs at September 30, 1998 and June 30,
1998 exceeded the full cost "ceiling," resulting in the excess being written off
to income. The ceiling is the sum of discounted future net cash flows from the
production of proved gas and oil reserves and the lower of cost or estimated
fair value of unproved properties, net of related income tax effects. Future net
cash flows are required to be estimated based on end-of-quarter prices and
costs, unless contractual arrangements exist, even if any price decline is
temporary. A significant portion of the write-down was due to
lower-than-expected exploratory drilling results.
In 1998, MCN also recognized a $6.1 million pre-tax loss ($4.0 million net
of taxes) from the write-down of an investment in the common stock of an E&P
company. The loss was due to a decline in the fair value of the securities that
is not considered temporary.
Subsequent to the issuance of the 1998 Annual Report on Form 10-K/A, the
E&P segment recorded several unusual charges in 1999 (Note 4a). Included in
these unusual charges for 1999 was the $68.8 million pre-tax ($44.7 million net
of taxes) loss on the sale of the Western and Midcontinent/Gulf Coast
properties. Proceeds from the sale of these properties totaled approximately
$265 million. At December 31, 1998, the Western and Midcontinent/Gulf Coast
properties had 360 billion cubic feet equivalent of proven reserves. MCN will
continue selling other non-Michigan E&P oil and gas properties. Additionally, in
the second quarter of 1999, MCN recognized a $52.0 million pre-tax ($33.8
million net of taxes) write-down of its gas and oil properties under the full
cost method of accounting, due primarily to an unfavorable revision in the
timing of production of proved gas and oil reserves as well as reduced
expectations of sales proceeds on unproved acreage. Also, MCN recognized an
additional $7.5 million pre-tax ($4.9 million net of taxes) write-down of its
investment in the common stock of an E&P company during the second quarter of
1999. MCN has no carrying value in this investment after this write-down.
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.
F-5
<PAGE> 135
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
DIVERSIFIED ENERGY
Results impacted by unusual charges, financing costs 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 $37.4 million from 1997. These results reflect higher financing costs,
reduced contributions from the Pipelines & Processing and E&P segments due to
low energy prices as well as increased losses from the Energy Marketing segment.
Partially offsetting the decreases for 1998 was increased operating and joint
venture income posted by the Electric Power segment.
Earnings for 1997 increased by $20.9 million from 1996, reflecting
increased operating and joint venture income from the Pipelines & Processing,
Electric Power and E&P segments. Reduced Energy Marketing contributions and
higher financing costs partially offset this growth.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*......................................... $ 992.8 $951.3 $734.4
-------- ------ ------
Operating Expenses*
Property write-downs (Notes 2a & 2b)...................... 554.6 -- --
Restructuring charges (Note 3)............................ 12.9 -- --
Other..................................................... 989.6 905.7 693.6
-------- ------ ------
1,557.1 905.7 693.6
-------- ------ ------
Operating Income (Loss)..................................... (564.3) 45.6 40.8
-------- ------ ------
Equity in Earnings of Joint Ventures........................ 61.2 53.1 16.6
-------- ------ ------
Other Income & (Deductions)*
Interest income........................................... 5.2 6.7 3.0
Interest expense.......................................... (54.3) (32.2) (28.7)
Dividends on preferred securities......................... (36.4) (31.1) (12.4)
Investment loss (Note 2b)................................. (6.1) -- --
Other..................................................... 20.2 10.1 5.5
-------- ------ ------
(71.4) (46.5) (32.6)
-------- ------ ------
Income (Loss) Before Income Taxes........................... (574.5) 52.2 24.8
Income Tax Provision (Benefit).............................. (216.3) .1 (6.4)
-------- ------ ------
Net Income (Loss)
Before unusual charges.................................... 14.7 52.1 31.2
Unusual charges (Notes 2a, 2b & 3)........................ (372.9) -- --
-------- ------ ------
$ (358.2) $ 52.1 $ 31.2
======== ====== ======
</TABLE>
- -------------------------
* Includes intercompany transactions
F-6
<PAGE> 136
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results, excluding the unusual charges,
declined $34.5 million in 1998 and increased $41.3 million in 1997. A discussion
of each business segment, its contributions and its outlook follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME (LOSS) (in Millions)
Before Unusual Charges:
Pipelines & Processing.................................... $ 21.4 $ 29.1 $ 10.7
Electric Power............................................ 26.0 18.1 4.6
Energy Marketing.......................................... (3.6) (2.3) 9.4
Exploration & Production.................................. 29.0 58.1 33.2
Corporate & Other......................................... (8.6) (4.3) (.5)
-------- ------ ------
64.2 98.7 57.4
Unusual Charges (Notes 2a, 2b & 3).......................... (567.3) -- --
-------- ------ ------
$ (503.1) $ 98.7 $ 57.4
======== ====== ======
</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.
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 (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.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (million gallons)......................... 60.4 60.8 10.5
Transportation (Bcf)........................................ 175.5 116.0 86.4
Gas Processed (Bcf)
CO(2) 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.
F-7
<PAGE> 137
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
METHANOL PRICES*
per Gallon
[METHANOL PRICE CHART]
<TABLE>
<CAPTION>
YEAR METHANOL PRICES
- ---- ---------------
<S> <C>
96 0.44
97 0.58
98 0.36
</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.
F-8
<PAGE> 138
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
ELECTRICITY SALES*
[ELECTRICITY SALES GRAPH]
<TABLE>
<CAPTION>
DOMESTIC AND INTERNATIONAL
--------------------------
<S> <C>
96 708.9
97 1843.3
98 3805
</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.
F-9
<PAGE> 139
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 loss increased $1.3 million in
1998. The increased loss in 1998 primarily reflects unrealized losses associated
with trading activities (Note 1b) and higher gas storage costs, partially offset
by higher earnings from a significant increase in gas sales volumes.
Additionally, the earnings comparison was affected as a result of 1997 including
$2.2 million of contributions from Energy Marketing's 25% interest in a gas
storage project that was sold in December 1997. Operating and joint venture
income for 1997 decreased $11.7 million due to lower gas sales margins as well
as higher costs for storage capacity, which enhances Energy Marketing's ability
to offer reliable gas supply during peak winter months.
GAS SALES & EXCHANGE GAS DELIVERIES*
in Bcf
[GAS SALES & EXCHANGE GAS DELIVERIES GRAPH]
<TABLE>
<CAPTION>
YEAR GAS SALES & EXCHANGE GAS DELIVERIES*
- ---- ------------------------------------
<S> <C>
96 241.5
97 358.8
98 465.7
</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
F-10
<PAGE> 140
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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.
EXPLORATION & PRODUCTION is engaged in natural gas and oil exploration,
development and production.
E&P operating and joint venture income, excluding the write-downs,
decreased by $29.1 million in 1998 and increased $24.9 million in 1997. Earnings
for the 1998 period reflects a sharp decline in average oil sales prices,
partially offset by an increase in average gas sales prices, and a slight
decline in the level of gas and oil produced. The 1997 period reflects a
significant increase in gas and oil produced due to the development and
acquisition of properties, partially offset by a decline in oil sales prices.
Results for 1997 also include income from MCN's unconsolidated joint venture
which contributed $6.6 million of pre-tax gains from the sale of undeveloped
properties.
GAS & OIL PRODUCTION
(in Bcf equivalent)
[GAS & OIL PRODUCTION GRAPH]
GAS & OIL PRODUCTION
(in Bcf equivalent)
[GAS & OIL PRODUCTION GRAPH]
<TABLE>
<CAPTION>
YEAR GAS AND OIL
- ---- -----------
<S> <C>
96 63.7
97 98.3
98 97.9
</TABLE>
Gas and oil production declined .4 billion cubic feet equivalent (Bcfe) in
1998 and increased 34.6 Bcfe or 54% in 1997. E&P operating results reflect
average oil sales rates per barrel of $12.58 in 1998, $16.87 in 1997 and $20.18
in 1996. E&P experienced average gas sale rates per thousand cubic feet (Mcf) of
$2.04 in 1998, $1.95 in 1997 and $1.96 in 1996. The average gas and oil sales
rates include the effect of hedging with
F-11
<PAGE> 141
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
commodity swap and futures agreements, which are used to manage Diversified
Energy's exposure to the risk of market price fluctuations as discussed in the
"Risk Management Strategy" section that follows.
E&P operating and joint venture income for 1998 also reflects higher
production-related expenses and depletion costs which increased per Mcf
equivalent by $.11 and $.07, respectively.
E&P operations have supplemented Diversified Energy's earnings through the
generation of gas production tax credits, primarily from production of coalbed
methane and Antrim shale gas properties. Tax credits decreased 41% to $10.5
million in 1998, compared to $17.8 million in 1997 and $15.9 million in 1996.
The decline in 1998 reflects the sale of Antrim tax credits in mid-1998, whereby
the income from such sale is recorded as other income as the credits are
generated.
Outlook -- In August 1999, MCN announced a significantly revised strategic
direction. Consistent with this revised strategy, as well as the result of the
lowering of the bid for the Michigan E&P properties, MCN will retain its natural
gas producing properties in Michigan and continue selling other E&P oil and gas
properties. The timing of any sales is dependent upon receiving bids that
reflect the long-term value of such properties.
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 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 a significant portion of 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 $24.9 million in 1998 and $13.9
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. All periods also reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, 1998 reflects an unusual charge of $6.1 million
representing the write-down of an investment in the common stock of an E&P
company, as previously discussed.
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%
F-12
<PAGE> 142
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
Additionally, other income and deductions in 1998 include $7.4 million of
income from a tax credit sale transaction, whereby MCN records income from such
sale as the credits are generated by the purchaser.
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 recorded in all periods 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
F-13
<PAGE> 143
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS (in Millions)
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 2c)............................. 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 2c)................................. (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 2c)................................. (16.7) -- --
-------- -------- --------
$ 71.7 $ 81.1 $ 81.4
======== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
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
F-14
<PAGE> 144
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
the continued growth in intermediate transportation services as well as
increased other operating revenues resulting from providing gas-related
services.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
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
[GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON GRAPH]
[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
* Total Margins Weather Normalized
F-15
<PAGE> 145
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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%.
F-16
<PAGE> 146
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
GAS DISTRIBUTION -- NUMBER OF CUSTOMERS SERVED PER EMPLOYEE
[GAS DISTRIBUTION/NUMBER OF CUSTOMERS SERVED PER EMPLOYEE GRAPH]
<TABLE>
<CAPTION>
GAS DISTRIBUTION - NUMBER OF CUSTOMERS SERVED
YEAR PER EMPLOYEE
- ---- ---------------------------------------------
<S> <C>
96 380
97 409
98 435
</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 2c).
F-17
<PAGE> 147
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 2c). 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.
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
F-18
<PAGE> 148
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
F-19
<PAGE> 149
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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
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).
F-20
<PAGE> 150
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS (in Millions)
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 (Decrease) 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 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 a significant portion 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 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 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.
F-21
<PAGE> 151
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 ratings for securities issued by MCN and
its subsidiaries as of June 1999:
<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), currently
operating as MCN Energy Enterprises, 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.
F-22
<PAGE> 152
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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 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.
F-23
<PAGE> 153
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $324.8 $405.0 $395.3
Gas Distribution.......................................... 158.0 157.7 215.3
Discontinued Operations................................... -- -- 6.5
------ ------ ------
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.
F-24
<PAGE> 154
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 customer 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
F-25
<PAGE> 155
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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
F-26
<PAGE> 156
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
UNFAVORABLE
AMOUNT CHANGE IN
------ -----------
<S> <C> <C>
MARKET RISK (in millions)
Commodity Price Sensitive:*
Swaps -- pay fixed/receive variable....................... $ 53.6 Fair Value
-- pay variable/receive fixed...................... $ 54.0 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.
As discussed in Note 1b to the Consolidated Financial Statements, MCN's
non-utility energy marketing subsidiary entered into unauthorized gas purchase
and sale contracts for trading purposes. MCN is exposed to natural gas price
risk on such contracts that have not been effectively closed. At December 31,
1998, a 10% unfavorable change in basis would have reduced the fair value of
such open contracts that totaled 44 Bcf by $1.2 million. A 10% favorable change
in basis would have increased the fair value of such contracts by a
corresponding amount.
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).
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
F-27
<PAGE> 157
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONCLUDED)
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.
Energy Trading Activities -- In November 1998, the Emerging Issues Task
Force reached consensus on Issue No. 98-10, "Accounting for Energy Trading and
Risk Management Activities" (EITF 98-10), effective for fiscal years beginning
after December 15, 1998. EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their fair value, with changes in fair value recognized currently in earnings.
Management does not expect EITF 98-10 to have a material impact on MCN's
financial statements.
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.
F-28
<PAGE> 158
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Gas and oil sales...................................... $1,813,343 $2,014,418 $1,827,198
Transportation......................................... 139,609 129,953 120,019
Other.................................................. 77,746 63,496 50,051
---------- ---------- ----------
2,030,698 2,207,867 1,997,268
---------- ---------- ----------
OPERATING EXPENSES
Cost of gas............................................ 1,205,774 1,335,033 1,193,578
Operation and maintenance.............................. 389,415 393,341 371,980
Depreciation, depletion and amortization............... 179,490 181,612 145,990
Property and other taxes............................... 69,553 75,491 74,427
Property write-downs and restructuring charges (Notes 2
and 3).............................................. 592,318 -- --
---------- ---------- ----------
2,436,550 1,985,477 1,785,975
---------- ---------- ----------
OPERATING INCOME (LOSS).................................. (405,852) 222,390 211,293
---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES (Note 6)............ 62,225 55,659 17,867
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income........................................ 10,893 11,166 7,234
Interest on long-term debt............................. (87,346) (75,170) (66,517)
Other interest expense................................. (24,404) (11,283) (11,264)
Dividends on preferred securities of subsidiaries...... (36,370) (31,090) (12,374)
Investment losses (Notes 2b and 2c).................... (14,635) -- --
Minority interest...................................... 5,992 (1,964) (1,059)
Other (Note 5e)........................................ 19,561 10,759 3,764
---------- ---------- ----------
(126,309) (97,582) (80,216)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.................................................. (469,936) 180,467 148,944
INCOME TAX PROVISION (BENEFIT)........................... (183,468) 47,238 36,375
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS................. (286,468) 133,229 112,569
DISCONTINUED OPERATIONS, NET OF TAXES (Note 4)........... -- -- 37,771
---------- ---------- ----------
NET INCOME (LOSS)........................................ $ (286,468) $ 133,229 $ 150,340
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations.................................. $ (3.63) $ 1.82 $ 1.68
Discontinued operations (Note 4)....................... -- -- .57
---------- ---------- ----------
$ (3.63) $ 1.82 $ 2.25
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations.................................. $ (3.63) $ 1.79 $ 1.67
Discontinued operations (Note 4)....................... -- -- .56
---------- ---------- ----------
$ (3.63) $ 1.79 $ 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.
F-29
<PAGE> 159
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B
---------- ----------
(IN THOUSANDS)
<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.................... 400,120 405,924
Accrued unbilled revenues................................. 87,888 93,010
Gas in inventory.......................................... 147,387 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
---------- ----------
767,457 730,036
---------- ----------
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 2c)................................ 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 2c)................................ 2,916,540 2,813,434
Exploration & Production (Note 2b)........................ 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
---------- ----------
$4,392,898 $4,330,937
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-30
<PAGE> 160
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable.......................................... $ 304,349 $ 342,195
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.......... 69,465 86,826
Deferred gas cost recovery revenues....................... 14,980 --
Gas payable............................................... 42,669 8,317
Customer deposits......................................... 18,791 16,382
Other..................................................... 108,310 101,630
---------- ----------
1,447,136 993,954
---------- ----------
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)............................................. 791,922 1,143,951
---------- ----------
2,601,293 2,861,619
---------- ----------
$4,392,898 $4,330,937
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-31
<PAGE> 161
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(286,468) $ 133,229 $ 150,340
Adjustments to reconcile net income (loss) to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of operations........................... 179,490 181,612 145,990
Charged to other accounts............................. 8,000 7,728 11,026
Unusual charges (Notes 2 and 3)......................... 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)
Changes in assets and liabilities, exclusive of changes
shown separately...................................... (97,966) 33,823 (94,754)
--------- --------- ---------
Net cash provided from operating activities........... 152,722 343,384 198,332
--------- --------- ---------
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.................................. $ (6,653) $ (49,017) $ (66,183)
Accrued unbilled revenues................................. 5,122 15,499 (16,099)
Gas in inventory.......................................... (90,610) 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.......................................... (35,597) 24,273 102,711
Federal income, property and other taxes payable.......... (17,333) (10,820) (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
--------- --------- ---------
$ (97,966) $ 33,823 $ (94,754)
========= ========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-32
<PAGE> 162
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS)
<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........................... 365,730 305,352 218,425
Net income (loss)(a)..................................... (286,468) 133,229 150,340
Cash dividends declared.................................. (82,239) (72,851) (62,875)
Other.................................................... -- -- (538)
--------- ---------- --------
Balance -- end of period................................. (2,977) 365,730 305,352
--------- ---------- --------
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS............. (22,288) (22,039) (14,492)
--------- ---------- --------
$ 791,922 $1,143,951 $784,568
========= ========== ========
(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS)(Note 1a):
Net income (loss)........................................ $(286,468) $ 133,229 $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 -- --
--------- ---------- --------
$(295,525) $ 125,753 $150,438
========= ========== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-33
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1a. 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),
currently operating as MCN Energy Enterprises, 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; Exploration & Production (E&P) properties with 1.2
trillion cubic feet equivalent of proved gas and oil reserves at December
31, 1998.
- 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.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION -- The full-cost accounting
method prescribed by the Securities and Exchange Commission (SEC) is followed
for investments in gas and oil properties. Under the full cost method
substantially all acquisition, exploration and development costs are
capitalized. To the extent such capitalized costs exceed the "ceiling," the
excess is written off to income. The ceiling is the sum of discounted future net
cash flows from proved gas and oil reserves (using unescalated prices and costs
unless contractual arrangements exist), and the costs of unproved properties
after income tax effects. The ceiling test is applied at the end of each quarter
and requires a write-down of gas and oil properties if the ceiling is exceeded,
even if any price decline is temporary. Management's investment and operating
decisions are based upon prices, costs and production assumptions that are
different from those used to compute the ceiling. As a
F-34
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result, it is possible that future fluctuations in key forecast assumptions
could result in impairments being recorded for accounting purposes, when the
long-term economics of such properties have not changed.
The unit of production method is used for calculating depreciation,
depletion and amortization (DD&A) on proved gas and oil properties. The average
DD&A expense per thousand cubic feet equivalent (Mcfe) was $.82, $.75, and $.70
in 1998, 1997 and 1996, respectively. Costs directly associated with the
acquisition and evaluation of unproved gas and oil properties are excluded from
the amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically, and a provision for impairment is made to
the full-cost amortization base when appropriate.
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, 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>
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 determine if the asset's carrying amount is in excess of its fair value
less the cost to sell.
F-35
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
1b. RESTATEMENT
Subsequent to the issuance of MCN's December 31, 1998 financial statements,
certain matters came to management's attention and resulted in a special
investigation of prior years' operations of CoEnergy Trading Company (CTC),
MCN's non-utility energy marketing subsidiary. As a result of the investigation,
MCN identified that its internal controls had been overridden and that certain
transactions had not been properly accounted for. Specifically, the
investigation concluded that CTC had entered into gas supply contracts and
agreed to pay significantly less than market prices in one period in return for
above-market prices to be paid in subsequent periods through March 2000. The
effect of these transactions was to improperly delay the accrual of cost of gas
expenses, resulting in the overstatement of the 1998 net loss by $478,000 and
the overstatement of 1997 net income by $8,585,000.
F-36
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly accounting for these
transactions was the understatement of the 1998 net loss by $7,112,000 and the
overstatement of 1997 net income by $385,000. However, net income of $2,574,000
and $1,824,000 was realized and recorded in connection with these trading
activities in 1998 and 1997, respectively, resulting in a net loss of $4,538,000
in 1998 and net income of $1,439,000 in 1997 from such activities. From the
inception of these trading activities in March 1997 through March 1999,
$5,721,000 of net income was realized and recorded in connection with these
trading activities. However, marking these contracts to market, as required,
results in a previously unrecorded net unrealized loss of $8,435,000 through
March 1999, indicating a net loss of $2,714,000 from such activities.
Other items identified during the investigation resulted in the
understatement of the 1998 net loss by $879,000 and the overstatement of 1997
net income by $107,000.
The accompanying consolidated financial statements have been restated from
amounts originally reported to properly account for the transactions identified.
Additionally, amounts have been reclassified to reflect E&P as a continuing
operation. A summary of the significant effects of the restatement and
reclassification on MCN's 1998 and 1997 financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
RECLASSIFIED RECLASSIFIED
AND AND
PREVIOUSLY RESTATED PREVIOUSLY RESTATED
REPORTED RESTATED (NOTE 4A) REPORTED RESTATED (NOTE 4A)
---------- -------- ------------ ---------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
Cost of Gas....................... $1,250,815 $1,262,372 $1,205,774 $1,392,856 $1,406,819 $1,335,033
Income (Loss)From Continuing
Operations Before Income
Taxes........................... $ (21,620) $ (33,177) $ (469,936) $ 174,413 $ 160,450 $ 180,467
Income Tax Provision (Benefit).... $ (15,456) $ (19,500) $ (183,468) $ 62,266 $ 57,380 $ 47,238
Income (Loss) From Continuing
Operations...................... $ (6,164) $ (13,677) $ (286,468) $ 112,147 $ 103,070 $ 133,229
Net Income (Loss)................. $ (278,955) $ (286,468) $ (286,468) $ 142,306 $ 133,229 $ 133,229
Basic Earnings (Loss) Per Share
Continuing Operations........... $ (.08) $ (.17) $ (3.63) $ 1.54 $ 1.41 $ 1.82
Continuing and Discontinued
Operations.................... $ (3.54) $ (3.63) $ (3.63) $ 1.95 $ 1.82 $ 1.82
Diluted Earnings (Loss) Per Share
Continuing Operations........... $ (.08) $ (.17) $ (3.63) $ 1.51 $ 1.39 $ 1.79
Continuing and Discontinued
Operations.................... $ (3.54) $ (3.63) $ (3.63) $ 1.91 $ 1.79 $ 1.79
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
Accounts Receivable............... $ 397,298 $ 400,120 $ 400,120 $ 404,448 $ 405,924 $ 405,924
Gas in Inventory.................. $ 149,797 $ 147,387 $ 147,387 $ 56,777 $ 56,777 $ 56,777
Accounts Payable.................. $ 278,417 $ 304,349 $ 304,349 $ 326,756 $ 342,195 $ 342,195
Federal Income, Property and Other
Taxes Payable................... $ 78,395 $ 69,465 $ 69,465 $ 91,712 $ 86,826 $ 86,826
Common Shareholders' Equity....... $ 808,512 $ 791,922 $ 791,922 $1,153,028 $1,143,951 $1,143,951
</TABLE>
F-37
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. EXPLORATION & PRODUCTION
PROPERTY --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). 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.
INVESTMENT --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.
C. 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.
F-38
<PAGE> 168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In the 1998 MCN Annual Report on Form 10-K/A, MCN accounted for its
E&P segment as a discontinued operation as a result of its decision to sell
all of its gas and oil properties. In August 1999, management announced its
intention to retain its natural gas producing properties in Michigan.
Accordingly, E&P's operating results for prior periods have been
reclassified from discontinued operations to continuing operations. The
decision to retain these properties was based on the interaction of two
factors. MCN significantly revised its strategic direction. Key aspects of
the new corporate strategy include a Midwest-to-Northeast regional focus
rather than a North American focus, and an emphasis on achieving
operational efficiencies and growth through the integration of existing
businesses. Shortly thereafter, the bid for the Michigan properties was
lowered significantly. The lower price was unacceptable, especially in
light of MCN's new strategic direction.
WRITE-DOWN OF E&P PROPERTIES: In the second quarter of 1999, MCN
recognized a $52,000,000 pre-tax ($33,800,000 net of taxes) write-down of
its gas and oil properties under the full cost method of accounting, due
primarily to an unfavorable revision in the timing of production of proved
gas and oil reserves as well as reduced expectations of sales proceeds on
unproved acreage. Under the full cost method of accounting as prescribed by
the Securities and Exchange Commission, MCN's capitalized exploration and
production costs at June 30, 1999 exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum
of discounted future net cash flows from the production of proved gas and
oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects.
LOSS ON INVESTMENT OF E&P COMPANY: MCN recognized an additional
$7,456,000 pre-tax loss ($4,846,000 net of taxes) from the write-down of an
investment in the common stock of an E&P company during the second quarter
of 1999. MCN has no carrying value in this investment after this
write-down.
LOSSES ON SALE OF PROPERTIES: In the second quarter of 1999, MCN
recognized losses from the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $68,798,000 pre-tax ($44,719,000 net of taxes).
F-39
<PAGE> 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-40
<PAGE> 170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-41
<PAGE> 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<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
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
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.
F-42
<PAGE> 172
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Regulatory Assets
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
F-43
<PAGE> 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $147,387,000 LIFO cost by
$152,961,000. At December 31, 1997, the replacement cost exceeded the
$56,777,000 LIFO cost by $176,373,000.
F-44
<PAGE> 174
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Detailed information on long-term debt, excluding current requirements, is
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
First Mortgage Bonds, interest payable semi-annually
6.51% series due 1999..................................... $ -- $ 30,000
5 3/4 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>
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.
F-45
<PAGE> 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-46
<PAGE> 176
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-47
<PAGE> 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized information for MCN-obligated mandatorily redeemable
preferred securities of subsidiaries holding solely debentures of MCN is as
follows:
<TABLE>
<CAPTION>
LIQUIDATION MATURITY OF EARLIEST
VALUE UNDERLYING REDEMPTION
1998 1997 PER SHARE SECURITY DATE
---- ---- ----------- ----------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<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.
F-48
<PAGE> 178
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-49
<PAGE> 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
F-50
<PAGE> 180
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
COMMON (LOSS) PER
INCOME (LOSS) SHARES SHARE
------------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
1998
Basic Loss Per Share..................................... $(286,468) 78,823 $(3.63)
------
Effect of Dilutive Securities............................ -- --
--------- ------
Diluted Loss Per Share................................... $(286,468) 78,823 $(3.63)
========= ====== ======
1997
Basic Earnings Per Share................................. $ 133,229 72,887 $ 1.82
------
Effect of Dilutive Securities
FELINE PRIDES.......................................... 1,688 1,021
Enhanced PRIDES........................................ 222 623
Stock-based compensation plans......................... -- 904
--------- ------
Diluted Earnings Per Share............................... $ 135,139 75,435 $ 1.79
========= ====== ======
1996
Basic Earnings Per Share................................. $ 112,569 66,944 $ 1.68
------
Effect of Dilutive Securities
Enhanced PRIDES........................................ 73 41
Stock-based compensation plans......................... -- 536
--------- ------
Diluted Earnings Per Share............................... $ 112,642 67,521 $ 1.67
========= ====== ======
</TABLE>
F-51
<PAGE> 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
F-52
<PAGE> 182
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 undiscounted 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
F-53
<PAGE> 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-54
<PAGE> 184
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred Swap Losses and Receivables
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>
1998 1997
---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Fixed Price Receiver
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.
F-55
<PAGE> 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. TRADING ACTIVITIES
As discussed in Note 1b to the Consolidated Financial Statements, a
special investigation of MCN's non-utility energy marketing operations
identified certain unauthorized gas purchase and sale contracts that were
entered into for trading purposes. The unauthorized transactions violate
MCN's risk-management policy that requires all such activities to be
reviewed and approved by a risk committee that reports regularly to the MCN
Board of Directors. The purchase and sale contracts entered into in
connection with trading activities run through March 2000 and are accounted
for using the mark-to-market method, with unrealized gains and losses
recorded as an adjustment to cost of gas.
C. 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.
F-56
<PAGE> 186
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and fair value of other financial instruments consist
of the following:
<TABLE>
<CAPTION>
1998 1997
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<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................... 4,699 4,699 2,031 2,031
with unrealized losses.................. -- -- 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 terms.
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
F-57
<PAGE> 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
F-58
<PAGE> 188
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Measurement Date............................................ October 31 October 31
Accumulated Benefit Obligation at 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>
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.
F-59
<PAGE> 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
F-60
<PAGE> 190
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Measurement Date..................................... October 31 October 31
Accumulated Postretirement Benefit
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
F-61
<PAGE> 191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Effective Federal Income Tax Rate........................... (38.8)% 25.1% 23.4%
========= ======== ========
Income Taxes Consist of:
Current................................................... $ 7,002 $ 18,280 $ 603
Deferred, net............................................. (176,995) 48,728 53,528
Gas production tax credits................................ (10,485) (17,797) (15,878)
Other tax credits, net.................................... (2,990) (1,973) (1,878)
--------- -------- --------
$(183,468) $ 47,238 $ 36,375
========= ======== ========
Reconciliation Between Statutory and Actual Income Taxes
Statutory Federal Income Taxes at a Rate of 35%............. $(164,477) $ 63,165 $ 52,130
Adjustments to Federal Taxes
Book over tax depreciation................................ 1,071 5,301 6,367
Adjustments to taxes provided in prior periods............ (412) (162) (3,369)
Stock-related benefits.................................... (1,095) -- --
Gas production tax credits................................ (10,485) (17,797) (15,878)
Other tax credits......................................... (2,990) (1,973) (1,878)
Allowance for funds used during construction.............. (1,900) (1,105) (245)
Undistributed foreign earnings............................ (1,244) -- --
Other, net................................................ (1,936) (191) (752)
--------- -------- --------
$(183,468) $ 47,238 $ 36,375
========= ======== ========
</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.
F-62
<PAGE> 192
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that gave rise to MCN's deferred
tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
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
In 1998, MCN adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the reporting of business
segments based on the organizational structure used by management to assess
performance and make resource allocation decisions.
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 five major
business segments as described in the Summary of Significant Accounting
Policies -- Company Description (Note 1a).
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.
Under Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest
to Discontinued Operations," Diversified Energy's interest and preferred
dividend expenses were allocated to the E&P segment previously presented as
discontinued operations based on its ratio of total capital to that of
Diversified Energy (Note 4a). As discussed in Note 4a, the E&P segment is no
longer a discontinued operation, and the allocation of the interest and
preferred dividend expenses to the E&P segment has been changed to be based on
an imputed debt structure reflective of its industry as is done with MCN's other
segments.
F-63
<PAGE> 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION
----------- -------- --------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues From Unaffiliated
Customers................... $ 20,856 $ 47,131 $767,068 $ 150,504 $ -- $1,045,139
Revenues From Affiliated
Customers................... 345 -- 105,543 56,598 -- 6,635
--------- -------- -------- --------- -------- ----------
Total operating
revenues................ 21,201 47,131 872,611 207,102 -- 1,051,774
========= ======== ======== ========= ======== ==========
Depreciation, Depletion and
Amortization................ 1,705 208 1,229 80,576 1,998 93,774
Operating Income (Loss)....... (146,264) (5,021) (5,987) (387,955) (19,162) 158,537
Equity in Earnings of Joint
Ventures.................... 29,987 28,546 2,401 -- 308 983
--------- -------- -------- --------- -------- ----------
Operating and joint
venture income (loss)... (116,277) 23,525 (3,586) (387,955) (18,854) 159,520
========= ======== ======== ========= ======== ==========
Interest Income............... 1,001 944 1,676 426 53,100 5,716
Interest Expense(b)........... (14,382) (2,021) (5,726) (21,154) (62,960) (57,477)
Income Taxes.................. (46,893) 8,212 (510) (160,900) (16,377) 33,000
Net Income (Loss)............. (82,240) 19,271 (1,037) (253,353) (40,843) 71,734
Total Assets.................. 575,969 300,529 386,917 988,201 72,388 2,116,173
Investments In and Advances to
Joint Ventures.............. 521,711 231,668 29,435 -- 18,939 1,478
Capital Expenditures.......... 113,229 1,602 2,596 200,430 6,966 157,952
Capital Investments........... 333,128 88,209 3,355 200,430 7,092 158,716
Significant Noncash Items:
Property write-downs and
restructuring charges
(Notes 2 & 3)............. (137,681) (2,470) -- (416,977) (10,390) (24,800)
Investment losses (Notes 2b
and 2c)................... -- -- -- (6,135) -- (8,500)
<CAPTION>
ELIMINATIONS CONSOLIDATED
& OTHER TOTAL
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1998
Revenues From Unaffiliated
Customers................... $ -- $2,030,698
Revenues From Affiliated
Customers................... (169,121) --
--------- ----------
Total operating
revenues................ (169,121) 2,030,698
========= ==========
Depreciation, Depletion and
Amortization................ -- 179,490
Operating Income (Loss)....... -- (405,852)
Equity in Earnings of Joint
Ventures.................... -- 62,225
--------- ----------
Operating and joint
venture income (loss)... -- (343,627)
========= ==========
Interest Income............... (51,970) 10,893
Interest Expense(b)........... 51,970 (111,750)
Income Taxes.................. -- (183,468)
Net Income (Loss)............. -- (286,468)
Total Assets.................. (47,279) 4,392,898
Investments In and Advances to
Joint Ventures.............. -- 803,231
Capital Expenditures.......... -- 482,775
Capital Investments........... -- 790,930
Significant Noncash Items:
Property write-downs and
restructuring charges
(Notes 2 & 3)............. -- (592,318)
Investment losses (Notes 2b
and 2c)................... -- (14,635)
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS ELIMINATIONS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION & OTHER
----------- -------- --------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Revenues From Unaffiliated
Customers................... $ 6,971 $ 51,804 $743,793 $ 144,033 $ -- $1,261,266 $ --
Revenues From Affiliated
Customers................... 397 -- 92,921 71,795 -- 10,020 (175,133)
-------- -------- -------- ---------- -------- ---------- ---------
Total operating
revenues................ 7,368 51,804 836,714 215,828 -- 1,271,286 (175,133)
======== ======== ======== ========== ======== ========== =========
Depreciation, Depletion and
Amortization................ 1,153 (22) 915 73,909 1,220 104,437 --
Operating Income (Loss)....... 585 5,377 (7,414) 51,455 (4,433) 176,820 --
Equity in Earnings of Joint
Ventures.................... 28,551 12,653 5,182 6,600 139 2,534 --
-------- -------- -------- ---------- -------- ---------- ---------
Operating and joint
venture income (loss)... 29,136 18,030 (2,232) 58,055 (4,294) 179,354 --
======== ======== ======== ========== ======== ========== =========
Interest Income............... 109 278 2,332 160 37,202 4,735 (33,650)
Interest Expense(b)........... (8,436) (165) (4,920) (13,937) (38,120) (54,525) 33,650
Income Taxes.................. 8,721 6,341 (1,180) (1,675) (12,105) 47,136 --
Net Income (Loss)............. 17,070 12,409 (1,308) 45,884 (21,911) 81,085 --
Total Assets.................. 391,550 208,421 313,669 1,237,813 97,819 2,167,637 (85,972)
Investments In and Advances to
Joint Ventures.............. 323,597 180,127 25,159 -- 19,252 8,841 --
Capital Expenditures.......... 19,491 4,823 663 374,997 4,951 157,732 --
Capital Investments........... 171,735 243,231 3,893 374,997 5,425 160,329 --
<CAPTION>
CONSOLIDATED
TOTAL
------------
<S> <C>
1997
Revenues From Unaffiliated
Customers................... $2,207,867
Revenues From Affiliated
Customers................... --
----------
Total operating
revenues................ 2,207,867
==========
Depreciation, Depletion and
Amortization................ 181,612
Operating Income (Loss)....... 222,390
Equity in Earnings of Joint
Ventures.................... 55,659
----------
Operating and joint
venture income (loss)... 278,049
==========
Interest Income............... 11,166
Interest Expense(b)........... (86,453)
Income Taxes.................. 47,238
Net Income (Loss)............. 133,229
Total Assets.................. 4,330,937
Investments In and Advances to
Joint Ventures.............. 556,976
Capital Expenditures.......... 562,657
Capital Investments........... 959,610
</TABLE>
F-64
<PAGE> 194
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
-----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION
----------- -------- --------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Revenues From Unaffiliated
Customers.................. $ 5,928 $ 42,142 $589,036 $ 93,790 $ -- $1,266,372
Revenues From Affiliated
Customers.................. 441 -- 84,126 44,151 -- 9,882
-------- -------- -------- -------- -------- ----------
Total operating
revenues............... 6,369 42,142 673,162 137,941 -- 1,276,254
======== ======== ======== ======== ======== ==========
Depreciation, Depletion and
Amortization............... 944 (90) 916 44,468 938 98,814
Operating Income (Loss)...... 134 4,823 5,142 33,235 (2,525) 170,484
Equity in Earnings (Loss) of
Joint Ventures............. 10,590 (211) 4,208 -- 2,026 1,254
-------- -------- -------- -------- -------- ----------
Operating and joint
venture income
(loss)................. 10,724 4,612 9,350 33,235 (499) 171,738
======== ======== ======== ======== ======== ==========
Interest Income.............. 189 82 946 207 20,043 3,967
Interest Expense(b).......... (6,089) -- (3,426) (8,376) (29,243) (48,847)
Income Taxes................. 4,055 1,687 2,375 (6,487) (7,992) 42,737
Net Income (Loss)............ 7,117 3,159 5,574 31,506 (16,183) 81,396
Total Assets................. 220,943 47,611 310,732 963,273 40,714 2,086,325
Investments In and Advances
to Joint Ventures.......... 177,026 27,233 34,408 -- 20,046 6,675
Capital Expenditures......... 6,865 2,086 1,114 388,719 2,987 215,317
Capital Investments.......... 157,663 19,641 1,364 388,690 2,997 220,393
<CAPTION>
ELIMINATIONS CONSOLIDATED
& OTHER(C) TOTAL
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1996
Revenues From Unaffiliated
Customers.................. $ -- $1,997,268
Revenues From Affiliated
Customers.................. (138,600) --
--------- ----------
Total operating
revenues............... (138,600) 1,997,268
========= ==========
Depreciation, Depletion and
Amortization............... -- 145,990
Operating Income (Loss)...... -- 211,293
Equity in Earnings (Loss) of
Joint Ventures............. -- 17,867
--------- ----------
Operating and joint
venture income
(loss)................. -- 229,160
========= ==========
Interest Income.............. (18,200) 7,234
Interest Expense(b).......... 18,200 (77,781)
Income Taxes................. -- 36,375
Net Income (Loss)............ 37,771 150,340
Total Assets................. (36,194) 3,633,404
Investments In and Advances
to Joint Ventures.......... -- 265,388
Capital Expenditures......... -- 617,088
Capital Investments.......... -- 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.
(c) Eliminations and other includes MCN's discontinued computer operations (Note
4b).
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.
F-65
<PAGE> 195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the issuance of the December 31, 1998 financial statements,
MCN management determined that certain transactions were improperly recorded.
Certain amounts have been restated primarily to record cost of gas expense,
including trading losses, in the appropriate accounting periods as described in
Note 1b. The effects of this restatement on each of the quarterly periods in the
years ended December 31, 1998 and 1997 are presented below. The effect of
reclassifying E&P from a discontinued operation to a continuing operation is
also presented below (Note 4a).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $701,460 $ 406,214 $ 351,145 $571,879 $2,030,698
Operating Income (Loss):
Before unusual charges............... $116,626 $ 22,040 $ (346) $ 48,146 $ 186,466
Unusual charges...................... -- (333,022) (259,296) -- (592,318)
-------- --------- --------- -------- ----------
$116,626 $(310,982) $(259,642) $ 48,146 $ (405,852)
======== ========= ========= ======== ==========
Operating and Joint Venture Income
(Loss):
Before unusual charges............... $133,387 $ 33,877 $ 17,617 $ 63,810 $ 248,691
Unusual charges...................... -- (333,022) (259,296) -- (592,318)
-------- --------- --------- -------- ----------
$133,387 $(299,145) $(241,679) $ 63,810 $ (343,627)
======== ========= ========= ======== ==========
Net Income (Loss)
Before unusual charges............... $ 78,882 $ 7,829 $ (7,578) $ 23,997 $ 103,130
Unusual charges...................... -- (220,452) (169,146) -- (389,598)
-------- --------- --------- -------- ----------
$ 78,882 $(212,623) $(176,724) $ 23,997 $ (286,468)
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Before unusual charges............... $ 1.01 $ .10 $ (.10) $ .31 $ 1.31
Unusual charges...................... -- (2.80) (2.14) -- (4.94)
-------- --------- --------- -------- ----------
$ 1.01 $ (2.70) $ (2.24) $ .31 $ (3.63)
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Before unusual charges............... $ .95 $ .10 $ (.10) $ .30 $ 1.31
Unusual charges...................... -- (2.80) (2.14) -- (4.94)
-------- --------- --------- -------- ----------
$ .95 $ (2.70) $ (2.24) $ .30 $ (3.63)
======== ========= ========= ======== ==========
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
</TABLE>
F-66
<PAGE> 196
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED, NOTE 1B
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $658,584 $ 367,740 $ 316,301 $537,569 $1,880,194
Operating Income (Loss):
Before unusual charges............... $107,893 $ 13,883 $ (6,883) $ 42,551 $ 157,444
Unusual charges...................... -- -- (175,341) -- (175,341)
-------- --------- --------- -------- ----------
$107,893 $ 13,883 $(182,224) $ 42,551 $ (17,897)
======== ========= ========= ======== ==========
Operating and Joint Venture Income
(Loss):
Before unusual charges............... $124,654 $ 25,720 $ 11,080 $ 58,215 $ 219,669
Unusual charges...................... -- -- (175,341) -- (175,341)
-------- --------- --------- -------- ----------
$124,654 $ 25,720 $(164,261) $ 58,215 $ 44,328
======== ========= ========= ======== ==========
Net Income (Loss)
Continuing operations, before unusual
charges........................... $ 76,940 $ 4,509 $ (5,508) $ 24,958 $ 100,899
Unusual charges...................... -- -- (114,576) -- (114,576)
Discontinued operations.............. 1,942 (217,132) (56,640) (961) (272,791)
-------- --------- --------- -------- ----------
$ 78,882 $(212,623) $(176,724) $ 23,997 $ (286,468)
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Continuing operations, before unusual
charges........................... $ .98 $ .06 $ (.07) $ .32 $ 1.28
Unusual charges...................... -- -- (1.45) -- (1.45)
Discontinued operations.............. .03 (2.76) (.72) (.01) (3.46)
-------- --------- --------- -------- ----------
$ 1.01 $ (2.70) $ (2.24) $ .31 $ (3.63)
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Continuing operations, before unusual
charges........................... $ .93 $ .06 $ (.07) $ .31 $ 1.28
Unusual charges...................... -- -- (1.45) -- (1.45)
Discontinued operations.............. .02 (2.76) (.72) (.01) (3.46)
-------- --------- --------- -------- ----------
$ .95 $ (2.70) $ (2.24) $ .30 $ (3.63)
======== ========= ========= ======== ==========
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
</TABLE>
F-67
<PAGE> 197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS PREVIOUSLY REPORTED, NOTE 1B
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $658,584 $ 367,740 $ 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
</TABLE>
F-68
<PAGE> 198
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Operating Revenues..................... $788,761 $ 387,925 $ 327,817 $703,364 $2,207,867
Operating Income....................... $123,020 $ 24,485 $ 889 $ 73,996 $ 222,390
Operating and Joint Venture Income..... $137,381 $ 34,955 $ 18,238 $ 87,475 $ 278,049
Income from Continuing Operations...... $ 79,919 $ 7,181 $ 1,242 $ 44,887 $ 133,229
Earnings Per Share from Continuing
Operations:
Basic................................ $ 1.18 $ .10 $ .02 $ .57 $ 1.82
Diluted.............................. $ 1.16 $ .10 $ .02 $ .55 $ 1.79
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>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED, NOTE 1B
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Operating Revenues..................... $753,728 $ 350,807 $ 287,508 $671,791 $2,063,834
Operating Income (Loss)................ $109,639 $ 11,593 $ (13,449) $ 63,152 $ 170,935
Operating and Joint Venture Income..... $119,300 $ 22,063 $ 2,275 $ 76,356 $ 219,994
Net Income (Loss):
Continuing operations................ $ 69,885 $ 1,366 $ (7,895) $ 39,714 $ 103,070
Discontinued operations.............. 10,034 5,815 9,137 5,173 30,159
-------- --------- --------- -------- ----------
$ 79,919 $ 7,181 $ 1,242 $ 44,887 $ 133,229
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Continuing operations................ $ 1.03 $ .02 $ (.10) $ .51 $ 1.41
Discontinued operations.............. .15 .08 .12 .06 .41
-------- --------- --------- -------- ----------
$ 1.18 $ .10 $ .02 $ .57 $ 1.82
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Continuing operations................ $ 1.01 $ .02 $ (.10) $ .49 $ 1.39
Discontinued operations.............. .15 .08 .12 .06 .40
-------- --------- --------- -------- ----------
$ 1.16 $ .10 $ .02 $ .55 $ 1.79
======== ========= ========= ======== ==========
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>
F-69
<PAGE> 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS PREVIOUSLY REPORTED, NOTE 1B
<S> <C> <C> <C> <C> <C>
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:
Continued 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>
20. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities" and related SEC accounting
rules.
CAPITALIZED COSTS
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Proved Properties........................................... $1,357,413 $1,033,492
Unproved Properties......................................... 99,611 265,809
---------- ----------
1,457,024 1,299,301
SEC Ceiling Test Write-downs (Note 2b)...................... 416,977 --
Accumulated Depreciation, Depletion and Amortization........ 224,795 150,015
---------- ----------
Net Capitalized Costs....................................... $ 815,252 $1,149,286
========== ==========
</TABLE>
F-70
<PAGE> 200
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION
Unproved properties held by MCN are excluded from amortization until they
have been evaluated. A summary of costs excluded from amortization at December
31, 1998, and the year in which they were incurred, follows:
<TABLE>
<CAPTION>
YEAR COSTS INCURRED
---------------------------------------
1995 &
TOTAL 1998 1997 1996 PRIOR
----- ---- ---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Acquisition..................................... $43,131 $14,254 $17,119 $ 9,321 $2,437
Exploration..................................... 56,480 13,757 32,655 9,935 133
======= ======= ======= ======= ======
$99,611 $28,011 $49,774 $19,256 $2,570
======= ======= ======= ======= ======
</TABLE>
The acquisition amount includes all costs incurred to purchase or lease
property with unproved reserves.
COST INCURRED
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition:
Proved properties......................................... $ 53,377 $ 35,695 $ 60,340
Unproved properties....................................... 7,498 66,721 136,142
-------- -------- --------
60,875 102,416 196,482
Exploration................................................. 52,948 143,580 65,160
Development................................................. 86,607 129,001 120,569
======== ======== ========
$200,430 $374,997 $382,211
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues:
Unaffiliated customers.................................... $ 150,504 $144,041 $ 94,615
Affiliated customers...................................... 56,598 71,787 43,326
--------- -------- --------
207,102 215,828 137,941
--------- -------- --------
Production Costs............................................ 79,245 68,364 48,255
SEC Ceiling Test Write-downs................................ 416,977 -- --
Depreciation, Depletion and Amortization.................... 80,576 73,910 44,469
--------- -------- --------
576,798 142,274 92,724
--------- -------- --------
Income (Loss) Before Income Taxes........................... (369,696) 73,554 45,217
--------- -------- --------
Income Taxes:
Income tax provision (benefit)............................ (129,698) 26,997 16,438
Gas production tax credits................................ (10,485) (17,797) (15,878)
--------- -------- --------
(140,183) 9,200 560
--------- -------- --------
Results of Operations, Excluding Corporate and Interest
Costs..................................................... $(229,513) $ 64,354 $ 44,657
========= ======== ========
</TABLE>
F-71
<PAGE> 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE QUANTITY INFORMATION
MCN's proved reserves are located in the United States. The estimated
quantities of proved reserves disclosed below are based upon estimates by MCN's
independent petroleum engineers.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Proved Developed and Undeveloped Reserves:
Beginning of year.................................... 1,166,174 25,843 1,137,729 17,214
Revisions of previous estimates................... (66,188) (2,865) (30,260) (430)
Extensions and discoveries........................ 59,729 534 165,283 4,435
Production........................................ (82,040) (2,635) (78,218) (3,346)
Sales of minerals in place........................ (37,661) (8,389) (51,465) (1,019)
Purchases of minerals in place.................... 52,959 499 23,105 8,989
--------- ------ --------- ------
End of year.......................................... 1,092,973 12,987 1,166,174 25,843
========= ====== ========= ======
Proved Developed Reserves:
Beginning of year.................................... 590,299 12,601 688,995 9,554
End of year.......................................... 630,130 6,367 590,299 12,601
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following presentation of the standardized measure of discounted future
net cash flows is intended to be neither a measure of the fair market value of
MCN's gas and oil properties, nor an estimate of the present value of actual
future cash flows to be obtained as a result of their development and
production. It is based upon subjective estimates of proved reserves only and
attributes no value to categories of reserves other than proved reserves, such
as probable or possible reserves, or to unproved acreage. Furthermore, as it is
based on year-end prices and costs adjusted only for existing contractual
arrangements and assumes an arbitrary annual discount rate of 10%, it does not
reflect the impact of future price and cost changes. Future income tax expenses
were computed by applying statutory tax rates, adjusted for permanent
differences and tax credits, to estimated future pre-tax net cash flows.
The standardized measure is intended to provide a better means for
comparing the value of MCN's proved reserves at a given time with those of other
gas and oil producing companies than is provided by a simple comparison of raw
proved reserve quantities.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future Revenues.......................................... $2,795,786 $3,121,124 $3,867,785
Future Production Costs.................................. 984,042 1,155,734 1,322,108
Future Development Costs................................. 264,631 328,739 340,190
---------- ---------- ----------
Future Net Cash Flows Before Income Taxes................ 1,547,113 1,636,651 2,205,487
Discount to Present Value at 10%......................... 806,746 812,605 1,139,507
---------- ---------- ----------
Present Value of Future Net Cash Flows Before Income
Taxes.................................................. 740,367 824,046 1,065,980
Future Income Taxes Discounted at 10%.................... -- 105,371 226,913
Future Tax Credits Discounted at 10%..................... -- (50,889) (62,207)
---------- ---------- ----------
Standardized Measure of Discounted Future Net Cash
Flows.................................................. $ 740,367 $ 769,564 $ 901,274
========== ========== ==========
</TABLE>
Future income taxes and tax credits have been excluded from the 1998
calculation since MOG is in a net operating loss position, and it is more likely
than not that these tax benefits would not be realized by MOG on a stand-alone
basis. However, MCN files a consolidated federal income tax return, which
includes the taxable
F-72
<PAGE> 202
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income or loss of MOG as well as MOG's tax credits. Accordingly, it is
management's opinion that any tax benefits earned by MOG will be utilized by MCN
in its consolidated tax returns.
The principal sources of change in the standardized measure of discounted
future net cash flows were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of Year........................................... $ 769,564 $ 901,274 $521,907
Net changes in sales prices and production costs.......... (67,085) (261,154) 126,526
Net change due to revisions in quantity estimates......... (59,106) (26,015) 5,061
Extensions, discoveries, additions and improved recovery,
net of related costs................................... 46,739 153,291 200,026
Development costs incurred, previously estimated.......... 86,607 103,201 86,810
Changes in estimated future development costs............. (26,573) (120,219) (81,069)
Sales, net of production costs............................ (127,857) (147,464) (89,686)
Net change in future income taxes......................... 105,371 116,366 (85,616)
Net change in federal tax credits......................... (41,997) (17,797) (15,878)
Sales of reserves in place................................ (56,924) (83,985) --
Purchases of reserves in place............................ 41,525 48,685 193,550
Accretion of discount and other........................... 70,103 103,381 39,643
--------- --------- --------
End of Year................................................. $ 740,367 $ 769,564 $901,274
========= ========= ========
</TABLE>
21. 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.
F-73
<PAGE> 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<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............................ 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts...... 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues...................... 1,121 -- 86,767 -- 87,888
Gas in inventory............................... -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods...................................... 214 1,172 71,165 -- 72,551
Other.......................................... 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes.......................... 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities...... -- 3,548 65,556 601 69,705
Deferred swap losses and receivables........... -- 63,147 -- -- 63,147
Deferred environmental costs................... 2,604 -- 28,169 -- 30,773
Prepaid benefit costs.......................... -- -- 113,879 (2,104) 111,775
Other.......................................... 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES................................... 1,550,770 782,471 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 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable............................... $ 4,123 $ 218,851 98,891 $ (17,516) $ 304,349
Notes payable.................................. 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations............................ -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable...................................... 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues............ -- -- 14,980 -- 14,980
Gas payable.................................... -- 17,332 25,337 -- 42,669
Customer deposits.............................. 22 -- 18,769 -- 18,791
Other.......................................... 18,337 25,276 67,222 (2,525) 108,310
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit.............. 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers.......... -- -- 130,120 -- 130,120
Deferred swap gains and payables............... -- 62,956 -- -- 62,956
Accrued environmental costs.................... 3,000 -- 32,000 -- 35,000
Minority interest.............................. -- 2,697 8,201 -- 10,898
Other.......................................... 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
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.................... 825,088 869,426 646,843 (1,549,435) 791,922
---------- ---------- ---------- ----------- ----------
1,327,291 1,556,759 1,266,678 (1,549,435) 2,601,293
---------- ---------- ---------- ----------- ----------
$1,615,384 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
</TABLE>
F-74
<PAGE> 204
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1997
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............. $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable............................ 15,525 242,343 210,677 (46,910) 421,635
Less -- Allowance for doubtful accounts...... 75 621 15,015 -- 15,711
---------- ---------- ---------- ----------- ----------
Accounts receivable, net....................... 15,450 241,722 195,662 (46,910) 405,924
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
---------- ---------- ---------- ----------- ----------
20,549 303,864 453,162 (47,539) 730,036
---------- ---------- ---------- ----------- ----------
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 $2,185,523 $2,136,336 $(1,685,237) $4,330,937
========== ========== ========== =========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable............................... $ 4,385 $ 254,391 $ 130,267 $ (46,848) $ 342,195
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 7,795 78,630 -- 86,826
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
---------- ---------- ---------- ----------- ----------
18,769 456,054 569,687 (50,556) 993,954
---------- ---------- ---------- ----------- ----------
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.................... 1,160,548 999,930 616,024 (1,632,551) 1,143,951
---------- ---------- ---------- ----------- ----------
1,665,652 1,595,387 1,233,131 (1,632,551) 2,861,619
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,185,523 $2,136,336 $(1,685,237) $4,330,937
========== ========== ========== =========== ==========
</TABLE>
F-75
<PAGE> 205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 18,262 $ 992,828 $1,033,658 $ (14,050) $2,030,698
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.................................... 10,706 752,207 451,529 (8,668) 1,205,774
Operation and maintenance...................... (10,207) 152,607 252,397 (5,382) 389,415
Depreciation, depletion and amortization....... 3,206 83,401 92,883 -- 179,490
Property and other taxes....................... 1,719 12,396 55,438 -- 69,553
Property write-downs and restructuring
charges...................................... 8,669 558,849 24,800 -- 592,318
--------- ---------- ---------- --------- ----------
14,093 1,559,460 877,047 (14,050) 2,436,550
--------- ---------- ---------- --------- ----------
OPERATING INCOME (LOSS).......................... 4,169 (566,632) 156,611 -- (405,852)
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (282,284) 61,242 1,946 281,321 62,225
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 37,408 6,609 5,688 (38,812) 10,893
Interest on long-term debt..................... (641) (41,821) (44,884) -- (87,346)
Other interest expense......................... (2,474) (48,630) (12,113) 38,813 (24,404)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (36,370) (36,370)
Investment losses.............................. (8,500) (6,135) -- -- (14,635)
Minority interest.............................. -- 265 5,727 -- 5,992
Other.......................................... (605) 20,348 (182) -- 19,561
--------- ---------- ---------- --------- ----------
25,188 (69,364) (45,764) (36,369) (126,309)
--------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (252,927) (574,754) 112,793 244,952 (469,936)
INCOME TAX PROVISION (BENEFIT)................... (2,829) (216,456) 35,817 -- (183,468)
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS)................................ (250,098) (358,298) 76,976 244,952 (286,468)
DIVIDENDS ON PREFERRED SECURITIES................ 36,370 -- -- (36,370) --
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $(286,468) $ (358,298) $ 76,976 $ 281,322 $ (286,468)
========= ========== ========== ========= ==========
TWELVE MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------
OPERATING REVENUES............................... $ 17,607 $ 951,269 $1,253,679 $ (14,688) $2,207,867
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.................................... 9,749 703,145 632,229 (10,090) 1,335,033
Operation and maintenance...................... 2,281 113,018 282,640 (4,598) 393,341
Depreciation, depletion and amortization....... 2,279 75,630 103,703 -- 181,612
Property and other taxes....................... 1,679 13,068 60,744 -- 75,491
--------- ---------- ---------- --------- ----------
15,988 904,861 1,079,316 (14,688) 1,985,477
--------- ---------- ---------- --------- ----------
OPERATING INCOME................................. 1,619 46,408 174,363 -- 222,390
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES................................... 135,757 52,356 1,199 (133,653) 55,659
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 32,857 6,378 4,659 (32,728) 11,166
Interest on long-term debt..................... 408 (30,052) (45,526) -- (75,170)
Other interest expense......................... (1,253) (34,382) (8,664) 33,016 (11,283)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (31,090) (31,090)
Minority interest.............................. -- (82) (1,882) -- (1,964)
Other.......................................... 74 10,149 536 -- 10,759
--------- ---------- ---------- --------- ----------
32,086 (47,989) (50,877) (30,802) (97,582)
--------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES....................... 169,462 50,775 124,685 (164,455) 180,467
INCOME TAX PROVISION............................. 2,573 (1,000) 45,665 -- 47,238
--------- ---------- ---------- --------- ----------
NET INCOME....................................... 166,889 51,775 79,020 (164,455) 133,229
DIVIDENDS ON PREFERRED SECURITIES................ 31,090 -- -- (31,090) --
--------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............ $ 135,799 $ 51,775 $ 79,020 $(133,365) $ 133,229
========= ========== ========== ========= ==========
</TABLE>
F-76
<PAGE> 206
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................................... $ 17,469 $ 734,441 $1,258,785 $ (13,427) $1,997,268
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas......................................... 9,655 557,340 636,594 (10,011) 1,193,578
Operation and maintenance........................... 785 80,330 294,281 (3,416) 371,980
Depreciation, depletion and amortization............ 1,940 45,903 98,147 -- 145,990
Property and other taxes............................ 2,134 10,531 61,762 -- 74,427
--------- ---------- ---------- --------- ----------
14,514 694,104 1,090,784 (13,427) 1,785,975
--------- ---------- ---------- --------- ----------
OPERATING INCOME...................................... 2,955 40,337 168,001 -- 211,293
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES........................................ 152,368 15,915 886 (151,302) 17,867
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income..................................... 12,675 3,220 3,900 (12,561) 7,234
Interest on long-term debt.......................... 114 (25,928) (40,703) -- (66,517)
Other interest expense.............................. (1,218) (14,595) (8,012) 12,561 (11,264)
Dividends on preferred securities of subsidiaries... -- -- -- (12,374) (12,374)
Minority interest................................... -- (71) (988) -- (1,059)
Other............................................... 190 5,330 (1,756) -- 3,764
--------- ---------- ---------- --------- ----------
11,761 (32,044) (47,559) (12,374) (80,216)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................... 167,084 24,208 121,328 (163,676) 148,944
INCOME TAX PROVISION.................................. 1,814 (6,925) 41,486 -- 36,375
--------- ---------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS..................... 165,270 31,133 79,842 (163,676) 112,569
DISCONTINUED OPERATIONS, NET OF TAXES................. -- 37,771 -- -- 37,771
--------- ---------- ---------- --------- ----------
NET INCOME............................................ 165,270 68,904 79,842 (163,676) 150,340
DIVIDENDS ON PREFERRED SECURITIES..................... 12,356 -- 18 (12,374) --
--------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................. $ 152,914 $ 68,904 $ 79,824 $(151,302) $ 150,340
========= ========== ========== ========= ==========
</TABLE>
F-77
<PAGE> 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
TWELVE MONTHS ENDED DECEMBER 31, 1997
----------------------------------------------------------------------
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
========= ========= ========= ========= =========
</TABLE>
F-78
<PAGE> 208
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES............... $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
--------- --------- ---------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.................................. -- 19,000 68,491 -- 87,491
Capital contributions received from (distributions
paid to) affiliates, net.......................... (3,069) 41,195 1,614 (39,740) --
Dividends paid...................................... (62,875) -- (11,263) 11,263 (62,875)
Preferred securities dividends paid................. (12,356) -- (54) 12,410 --
Issuance of common stock............................ 17,264 -- -- -- 17,264
Issuance of preferred securities.................... 77,218 -- -- -- 77,218
Issuance of long-term debt.......................... -- 328,895 69,645 -- 398,540
Long-term commercial paper and 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>
F-79
<PAGE> 209
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of MCN Energy Group Inc.:
We have audited the accompanying consolidated statements of financial
position of MCN Energy Group Inc. and subsidiaries (the "Company"), 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 Company'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, such financial statements 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.
As discussed in Note 1b, the accompanying 1998 and 1997 financial
statements have been restated.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 25, 1999
(June 7, 1999 as to the effects of the matters described in Note 1b.)
(October 15, 1999 as to effects of the matters described in Note 4a.)
F-80
<PAGE> 210
MCN ENERGY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
Results reflect reduced Diversified Energy and Gas Distribution
contributions -- MCN had a net loss for the 1999 third quarter of $31.2 million
or $.37 per share compared with a net loss of $176.7 million or $2.24 per share
in the same 1998 quarter. MCN experienced a net loss in the 1999 nine- and
twelve-month periods of $31.9 million or $.39 per share and $7.9 million or $.10
per share, respectively, compared with a net loss of $310.5 million or $3.95 per
share and $265.6 million or $3.38 per share for the same 1998 periods. As
subsequently discussed, the comparability in earnings was affected by
non-recurring items consisting of an accounting change and several unusual
charges. The unusual charges include losses on the sale of properties, property
write-downs, investment losses and restructuring charges.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
----------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)
Diversified Energy:
Before unusual charges............... $(12.7) $ .2 $ (17.8) $ 21.6 $ (24.6) $ 33.9
Unusual charges (Note 3)............. (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- ------- ------- -------
(16.5) (152.2) (105.0) (351.3) (111.8) (339.0)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e)............ -- (16.7) -- (16.7) -- (16.7)
------ ------- ------- ------- ------- -------
(14.7) (24.5) 76.0 40.8 106.8 73.4
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (27.4) (7.6) 58.2 79.1 82.2 124.0
Unusual charges (Note 3)............. (3.8) (169.1) (87.2) (389.6) (87.2) (389.6)
------ ------- ------- ------- ------- -------
(31.2) (176.7) (29.0) (310.5) (5.0) (265.6)
Cumulative Effect of Accounting Change,
Net of Taxes (Note 6)................ -- -- (2.9) -- (2.9) --
------ ------- ------- ------- ------- -------
$(31.2) $(176.7) $ (31.9) $(310.5) $ (7.9) $(265.6)
====== ======= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE -- BASIC AND
DILUTED
Diversified Energy:
Before unusual charges............... $ (.15) $ -- $ (.22) $ .27 $ (.30) $ .43
Unusual charges (Note 3)............. (.05) (1.93) (1.05) (4.74) (1.07) (4.75)
------ ------- ------- ------- ------- -------
(.20) (1.93) (1.27) (4.47) (1.37) (4.32)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (.17) (.10) .92 .73 1.31 1.15
Unusual charges (Note 3e)............ -- (.21) -- (.21) -- (.21)
------ ------- ------- ------- ------- -------
(.17) (.31) .92 .52 1.31 .94
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (.32) (.10) .70 1.00 1.01 1.58
Unusual charges (Note 3)............. (.05) (2.14) (1.05) (4.95) (1.07) (4.96)
------ ------- ------- ------- ------- -------
(.37) (2.24) (.35) (3.95) (.06) (3.38)
Cumulative Effect of Accounting Change
(Note 6)............................. -- -- (.04) -- (.04) --
------ ------- ------- ------- ------- -------
$ (.37) $ (2.24) $ (.39) $ (3.95) $ (.10) $ (3.38)
====== ======= ======= ======= ======= =======
</TABLE>
F-81
<PAGE> 211
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Excluding the non-recurring items, MCN had a net loss of $27.4 million for
the 1999 quarter and earnings of $58.2 million and $82.2 million for the 1999
nine-and twelve-month periods, respectively, resulting in decreases of $19.8
million, $20.9 million and $41.8 million from the corresponding 1998 periods.
The comparisons reflect losses in the Diversified Energy group resulting from
the decline in earnings in the Energy Marketing and Exploration & Production
(E&P) segments as well as increased financing costs. The 1999 quarter also
reflects higher seasonal losses in the Gas Distribution segment. The decline in
Diversified Energy's results in the 1999 nine- and twelve-month periods was
partially offset by increased contributions from the Gas Distribution segment
resulting from its new gas sales program and the favorable impact of more normal
weather. Also affecting the comparability for the nine- and twelve-month periods
were gains recorded by the Diversified Energy group in 1998 from the sale of
certain assets.
RESTATEMENT -- As discussed in Note 5 to the Consolidated Financial
Statements and in MCN's 1998 Annual Report included herein, MCN conducted a
special investigation of prior years' operations of CoEnergy Trading Company,
its non-utility energy marketing subsidiary, subsequent to the issuance of its
December 31, 1998 financial statements. As a result of the investigation, MCN
identified that its internal control systems had been overridden, and that
certain transactions had not been properly accounted for. The accompanying
consolidated financial statements for the 1998 periods have been restated from
those originally reported to properly account for the transactions identified.
The restatements result in a decrease in net loss of $.4 million for the 1998
quarter and an increase in net loss of $3.7 million or $.05 per share and $9.1
million or $.11 per share for the 1998 nine- and twelve-month periods,
respectively. The corrections did not have an impact on the liquidity or cash
flows of MCN. The financial information contained in Management's Discussion and
Analysis herein has been revised to reflect the impact of such restatement.
STRATEGIC DIRECTION -- MCN announced in August 1999 a significantly revised
strategic direction that includes: focusing on the Midwest-to-Northeast region
rather than on North America; emphasizing operational efficiencies and growth
through the integration of existing businesses rather than building a portfolio
of diverse, non-operated energy investments; retaining its natural gas producing
properties in Michigan while going forward with the sale of its other
exploration and production oil and gas properties; and reducing capital
investment levels to approximately $500 million in 1999 and to $300 million in
2000.
PENDING MERGER -- MCN and DTE Energy Company (DTE) have signed a definitive
merger agreement dated October 4, 1999 under which DTE will acquire all
outstanding shares of MCN common stock. The boards of directors of both
companies have unanimously approved the merger agreement. The transaction is
subject to the approval of the shareholders of both companies, regulatory
approvals and other customary merger conditions. The transaction is expected to
close in six to nine months from the date of the merger agreement and will be
accounted for as a purchase by DTE. The combined company, which will be named
DTE Energy Company and headquartered in Detroit, will be the largest electric
and gas utility in Michigan. In the 1999 fourth quarter and 2000 first quarter,
MCN will record legal, accounting, employee benefit and other expenses
associated with the merger. Further information regarding the merger agreement
is included in Note 2 to the Consolidated Financial Statements included herein.
UNUSUAL CHARGES -- MCN recorded several unusual charges in the 1999 second
and third quarters as well as the 1998 second and third quarters, consisting of
losses on the sale of properties, property write-downs, investment losses and
restructuring charges (Note 3).
F-82
<PAGE> 212
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A discussion of each unusual charge by segment follows:
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ----------------- -----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
UNUSUAL CHARGES
Diversified Energy:
Pipelines & Processing........... $ -- $ (89.5) $ -- $ (89.5) $ -- $ (89.5)
Electric Power................... -- (1.6) -- (1.6) -- (1.6)
Exploration & Production......... (3.8) (54.5) (87.2) (275.0) (87.2) (275.0)
Corporate & Other................ -- (6.8) -- (6.8) -- (6.8)
----- ------- ------ ------- ------ -------
(3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
Gas Distribution................... -- (16.7) -- (16.7) -- (16.7)
----- ------- ------ ------- ------ -------
$(3.8) $(169.1) $(87.2) $(389.6) $(87.2) $(389.6)
===== ======= ====== ======= ====== =======
Loss Per Share..................... $(.05) $ (2.14) $(1.05) $ (4.95) $(1.07) $ (4.96)
===== ======= ====== ======= ====== =======
</TABLE>
PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a $133.8
million pre-tax ($87.0 million net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal briquettes
produced from six coal fines plants qualifying for synthetic fuel tax credits
and MCN's ability to utilize or sell such credits. Although the plants were in
service by June 30, 1998, the date specified to qualify for the tax credits,
operating delays at the plants in the 1998 third quarter significantly increased
the possibility that the Internal Revenue Service (IRS) would challenge the
project's eligibility for tax credits. In addition, there was uncertainty as to
whether MCN could utilize or sell the credits. These factors led to MCN's
decision to record an impairment loss equal to the carrying value of the plants,
reflecting the likely inability to recover such costs. MCN sought to maximize
the value of its investment in the coal fines project, and in May 1999 filed a
request with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, MCN received favorable
determination letters from the IRS ruling that four of the six plants were in
service by June 30, 1998 (Note 4a).
In the third quarter of 1998, MCN also recorded an impairment loss of $3.9
million pre-tax ($2.5 million net of taxes) relating to an acquired
out-of-service pipeline in Michigan. MCN reviewed the business alternatives for
this asset and determined that its development is unlikely. Accordingly, MCN
recorded an impairment loss equal to the carrying value of this asset.
ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $2.5
million pre-tax ($1.6 million net of taxes) restructuring charge related to
certain international power projects. The charge was incurred as a result of
refocusing MCN's strategic plan, particularly the decision to exit certain
international power projects.
EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a $52.0
million pre-tax ($33.8 million net of taxes) write-down of its gas and oil
properties under the full cost method of accounting, due primarily to an
unfavorable revision in the timing of production of proved gas and oil reserves
as well as reduced expectations of sales proceeds on unproved acreage. Under the
full cost method of accounting as prescribed by the Securities and Exchange
Commission (SEC), MCN's capitalized exploration and
F-83
<PAGE> 213
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
production costs at June 30, 1999 exceeded the full cost "ceiling," resulting in
the excess being written off to income. The ceiling is the sum of discounted
future net cash flows from the production of proved gas and oil reserves, and
the lower of cost or estimated fair value of unproved properties, net of related
income tax effects.
In the second and third quarters of 1998, MCN recognized write-downs of its
gas and oil properties totaling $333.0 million pre-tax ($216.5 million net of
taxes) and $83.9 million pre-tax ($54.5 million net of taxes), respectively. The
write-downs were also the result of MCN's capitalized exploration and production
costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN recognized
losses from the sale of its Western and Midcontinent/Gulf Coast E&P properties
totaling $68.8 million pre-tax ($44.7 million net of taxes). In the third
quarter of 1999, MCN recognized additional losses relating to the sale of these
properties totaling $5.9 million pre-tax ($3.8 million net of taxes).
Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5
million pre-tax loss ($4.9 million net of taxes) from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a $6.1
million pre-tax loss ($4.0 million net of taxes) from the write-down of this
investment during the second quarter of 1998. The losses were due to declines in
the fair value of the securities that are not considered temporary. MCN has no
carrying value in this investment after the write-downs.
CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $10.4
million pre-tax ($6.8 million net of taxes) restructuring charge related to the
corporate realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment included cost saving
initiatives expected to reduce future operating expenses.
GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a $24.8
million pre-tax ($11.2 million net of taxes and minority interest) write-down of
certain gas gathering properties. An analysis revealed that projected cash flows
from the gathering system were not sufficient to cover the system's carrying
value. Therefore, an impairment loss was recorded representing the amount by
which the carrying value of the system exceeded its estimated fair value.
Loss on Investment: In the third quarter of 1998, MCN also recorded an $8.5
million pre-tax loss ($5.5 million net of taxes) from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell in
2000. The write-down represents the amount by which the carrying value exceeded
the estimated fair value of the investment.
DIVERSIFIED ENERGY
Results reflect reduced Energy Marketing and E&P contributions -- The
Diversified Energy group had a net loss of $16.5 million for the 1999 third
quarter compared to a net loss of $152.2 million for the same 1998 period.
Diversified Energy had net losses of $105.0 million and $111.8 million in the
1999 nine- and twelve-month periods, respectively, compared to losses of $351.3
million and $339.0 million in the corresponding 1998 periods. As previously
discussed, results for all 1999 and 1998 periods were impacted by the unusual
charges. Excluding the unusual charges, Diversified Energy had losses of $12.7
million, $17.8 million and $24.6 million for the 1999 quarter, nine- and
twelve-month periods, respectively, compared to earnings of $.2 million, $21.6
million and $33.9 million for the same 1998 periods. The results for all 1999
periods reflect losses from the Energy Marketing segment due to higher gas
costs. Additionally, all 1999 periods reflect the impact of lower E&P gas and
oil production on operating and joint venture income as well as higher financing
costs. The earnings comparisons for the nine- and twelve-month periods were also
affected by gains recorded in 1998 from the sale of certain assets.
Additionally, Diversified Energy's results for the 1999 nine- and
F-84
<PAGE> 214
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods reflect the impact of lower methanol prices and methanol
production on the Pipelines & Processing segment.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ------------------ -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS
Operating Revenues*...................... $335.5 $ 228.9 $ 927.0 $ 734.0 $1,185.8 $1,039.3
------ ------- ------- -------- -------- --------
Operating Expenses*
Property write-downs and restructuring
charges (Note 3).................... -- 234.5 52.0 567.5 52.0 567.5
Other.................................. 347.9 227.5 929.6 721.4 1,198.0 1,018.2
------ ------- ------- -------- -------- --------
347.9 462.0 981.6 1,288.9 1,250.0 1,585.7
------ ------- ------- -------- -------- --------
Operating Loss........................... (12.4) (233.1) (54.6) (554.9) (64.2) (546.4)
------ ------- ------- -------- -------- --------
Equity in Earnings of Joint Ventures..... 15.0 17.9 38.5 46.1 53.8 59.2
------ ------- ------- -------- -------- --------
Other Income & (Deductions)*
Interest income........................ 1.1 .9 3.1 5.3 3.0 7.4
Interest expense....................... (14.4) (16.4) (46.6) (38.1) (62.8) (43.5)
Dividends on preferred securities of
subsidiaries........................ (10.3) (8.2) (31.0) (27.2) (40.2) (37.0)
Loss on sale of E&P properties (Note
3c)................................. (5.9) -- (74.7) -- (74.7) --
Loss on E&P investment (Note 3c)....... -- -- (7.5) (6.1) (7.5) (6.1)
Other.................................. 3.8 (.1) 13.8 13.1 20.9 16.0
------ ------- ------- -------- -------- --------
(25.7) (23.8) (142.9) (53.0) (161.3) (63.2)
------ ------- ------- -------- -------- --------
Loss Before Income Taxes................. (23.1) (239.0) (159.0) (561.8) (171.7) (550.4)
------ ------- ------- -------- -------- --------
Income Taxes
Current and deferred benefit........... (6.6) (84.3) (54.0) (199.5) (59.9) (195.8)
Federal tax credits.................... -- (2.5) -- (11.0) -- (15.6)
------ ------- ------- -------- -------- --------
(6.6) (86.8) (54.0) (210.5) (59.9) (211.4)
------ ------- ------- -------- -------- --------
Net Income (Loss)
Before unusual charges................. (12.7) .2 (17.8) 21.6 (24.6) 33.9
Unusual charges (Note 3)............... (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- -------- -------- --------
$(16.5) $(152.2) $(105.0) $ (351.3) $ (111.8) $ (339.0)
====== ======= ======= ======== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1999 quarter, nine- and
twelve-month periods (excluding the unusual charges) decreased from the
comparable 1998 periods by $16.7 million, $22.8 million and $38.7 million,
respectively. Results for all 1999 periods reflect reduced contributions from
the Energy Marketing, E&P and Electric Power segments. Pipelines & Processing
results improved in the 1999 quarter,
F-85
<PAGE> 215
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
but declined in the 1999 nine- and twelve-month periods. Additionally, lower
Corporate & Other expenses in the 1999 nine- and twelve-month periods favorably
impacted operating and joint venture income.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
--------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME
(LOSS)
Before Unusual Charges:
Pipelines & Processing................ $ 4.1 $ 3.5 $ 13.7 $ 19.1 $ 16.0 $ 27.1
Electric Power........................ 6.6 8.6 18.0 21.0 23.0 25.8
Energy Marketing...................... (8.8) .4 (6.0) .7 (10.2) (1.5)
Exploration & Production.............. 1.8 6.5 10.0 23.4 15.6 34.5
Corporate & Other..................... (1.1) .3 .2 (5.5) (2.8) (5.6)
----- ------- ------ ------- ------ -------
2.6 19.3 35.9 58.7 41.6 80.3
Unusual Charges (Note 3)................ -- (234.5) (52.0) (567.5) (52.0) (567.5)
----- ------- ------ ------- ------ -------
$ 2.6 $(215.2) $(16.1) $(508.8) $(10.4) $(487.2)
===== ======= ====== ======= ====== =======
</TABLE>
PIPELINES & PROCESSING operating and joint venture results (excluding the
write-offs) increased $.6 million for the 1999 quarter, and decreased $5.4
million and $11.1 million for the 1999 nine- and twelve-month periods,
respectively. All 1999 periods reflect start-up expenditures associated with new
projects and a decline in the "allowance for funds used during construction"
(AFUDC) associated with MCN's 16%-owned Portland Natural Gas Transmission
System, as it was placed in service in the first quarter of 1999. The 1999 nine-
and twelve-month periods also reflect reduced earnings from MCN's 25%-owned
methanol production business resulting from lower methanol margins as well as
lower methanol volumes produced. Earnings from the methanol production business
benefited from strong methanol prices during 1997 and early 1998, but prices and
margins have since weakened. Pipelines & Processing's average methanol sales
prices declined 9% for the 1999 nine-month period and 23% for the 1999
twelve-month period. Methanol production declined 5.0 million gallons for the
1999 nine-month period and 5.2 million gallons for the 1999 twelve-month period
due primarily to the shutdown of the methanol plant for scheduled maintenance in
March 1999. Additionally, Pipelines & Processing results for the 1998 periods
were impacted by operating losses related to the start-up of the coal fines
plants (Note 3a).
Pipelines & Processing operating and joint venture income was also affected
by an increase in transportation volumes for all 1999 periods due to new gas
gathering ventures and the expansion of existing pipeline projects. Volumes
transported increased for the 1999 quarter, nine- and twelve-month periods by
7.1 billion cubic feet (Bcf), 24.1 Bcf and 35.0 Bcf, respectively. Pipelines &
Processing results were also impacted in all 1999 periods by an increase in gas
processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs
increased 11.0 Bcf, 20.0 Bcf and 23.2 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively, reflecting volumes associated with the
acquisition and development of additional processing facilities. Pipelines &
Processing operations include variations in the level of gas processed to remove
carbon dioxide (CO(2)). The volume of CO(2) gas treated decreased .3 Bcf in the
1999 quarter, and increased 2.0 Bcf and 6.7 Bcf in the 1999 nine- and
twelve-month periods, respectively. However, earnings were not significantly
affected by these variations, since under the terms of Pipelines & Processing's
CO(2) processing contracts, revenues are not volume sensitive.
In November 1999, MCN reached an agreement to sell four of its coal fines
plants to DTE in an arms-length transaction that is independent of the pending
merger (Note 4b). The sales price will depend on total production performance of
the four plants. DTE will initially make a $45 million payment that will be
adjusted up to $152 million or down to zero based on the results of a 36-month
production test period. The sale is expected to be finalized in December 1999.
Beginning in 2001, Pipelines & Processing results are expected to
F-86
<PAGE> 216
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
be favorably affected by the recording of gains from the sale of the plants as
increasing production levels are achieved.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------ -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (Million Gallons)........ 15.7 15.2 40.6 45.6 55.4 60.6
==== ==== ===== ===== ===== =====
Transportation (Bcf)....................... 52.4 45.3 153.5 129.4 199.5 164.5
==== ==== ===== ===== ===== =====
Gas Processed (Bcf):
Carbon Dioxide Treatment................ 12.4 12.7 38.2 36.2 50.9 44.2
Natural Gas Liquids Removal............. 22.6 11.6 54.1 34.1 65.1 41.9
---- ---- ----- ----- ----- -----
35.0 24.3 92.3 70.3 116.0 86.1
==== ==== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
Pipelines & Processing has also recorded earnings from certain joint
venture investments where it is allocated income based on its share of the
ventures' earnings but not less than a predetermined fixed amount. Joint venture
income recorded from these investments through September 1999 was based on the
fixed amount. Under the joint venture agreements, the fixed amount will be
lowered or eliminated in 2000.
Pipelines & Processing has a 75% interest in an asphalt manufacturing
partnership that recently completed construction of a plant designed to produce
up to 100,000 tons of high-quality asphalt annually. Currently, the plant is
experiencing difficulties in producing economical quantities of asphalt, and MCN
is aggressively working to resolve the issues.
In 1998, MCN advanced approximately $18 million to a developer of a
fertilizer project in the United Arab Emirates. The advance was structured as an
interest-bearing loan with the possibility of being converted into an equity
investment in the project. The advance, which was due in September 1999, is
being extended for an additional year. The project is being developed more
slowly than initially anticipated, and MCN's continuing role in the project is
under negotiation.
ELECTRIC POWER operating and joint venture results (excluding the
restructuring charges) decreased by $2.0 million, $3.0 million and $2.8 million
in the 1999 quarter, nine- and twelve-month periods, respectively. Results for
all 1999 periods were unfavorably affected by higher start-up expenditures
associated with new ventures as well as reduced contributions from MCN's
international power investments, specifically the Torrent Power Limited (TPL)
venture. In August 1999, MCN completed the sale of its 40% interest in TPL for
approximately $130 million, resulting in a small gain. TPL holds minority
interests in electric distribution companies and power generation facilities in
the state of Gujarat, India. Earnings from TPL for 1999 were deferred due to the
pending sale. Additionally, the nine- and twelve-month periods comparison was
impacted by an uncollectible expense provision recorded in the second quarter of
1999 associated with a customer in bankruptcy as well as reduced contributions
from the 30 megawatt (MW) Ada cogeneration facility, reflecting the sale of a
50% interest in the project in the first quarter of 1998.
Electric Power's earnings comparison for the nine- and twelve-month periods
also was impacted by increased contributions from the 1,370 MW Midland
Cogeneration Venture (MCV) facility, reflecting an increase in MCN's interest in
the MCV partnership from 18% to 23% in June 1998. Earnings from the MCV
partnership for the 1999 nine- and twelve-month periods include a favorable $2.1
million pre-tax adjustment for the resolution of a number of contract issues
with the electricity purchaser. Also contributing favorably to
F-87
<PAGE> 217
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
the 1999 results were higher earnings from MCN's 50%-owned, 123 MW Michigan
Power cogeneration facility due to higher electricity capacity payments received
under its long-term power purchase agreement.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(THOUSANDS OF MW HOURS)*
<S> <C> <C> <C> <C> <C> <C>
ELECTRIC POWER
Electricity Sales -- Domestic...... 692.3 651.5 2,084.2 1,855.4 2,745.4 2,498.0
Electricity
Sales -- International.......... -- 336.5 -- 874.2 414.2 874.4
----- ----- ------- ------- ------- -------
692.3 988.0 2,084.2 2,729.6 3,159.6 3,372.4
===== ===== ======= ======= ======= =======
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
ENERGY MARKETING operating and joint venture results decreased $9.2
million, $6.7 million and $8.7 million for the 1999 quarter, nine- and
twelve-month periods, respectively. The 1999 periods reflect the accounting
effect of anticipated temporary high gas prices on gas in inventory and cost of
gas sold. During the third quarter of each year, Energy Marketing normally
increases gas in inventory and depletes such inventories in the colder fourth
and first quarters of the year when gas demand and gas prices typically are at
their highest. In anticipation that third quarter inventory injections will be
withdrawn prior to year-end, Energy Marketing prices the gas inventory
injections at the estimated average purchase rate for the calendar year. For the
1999 third quarter, the actual average purchase rate incurred exceeded the
estimated average purchase rate for the year. This resulted in a higher cost of
gas sold in the 1999 third quarter, the impact of which is expected to reverse
in the 1999 fourth quarter.
Results for all 1999 periods were also impacted by higher costs for natural
gas transportation and storage capacity. The Washington 10 storage project, for
which MCN markets 100% of the 42 Bcf of storage capacity, was completed and
placed into operation in July 1999. Completion of the storage field in time for
the 1999-2000 winter heating season enhances Energy Marketing's ability to offer
a reliable gas supply during peak winter months.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)*
<S> <C> <C> <C> <C> <C> <C>
ENERGY MARKETING
Gas Sales................................ 140.5 114.5 423.1 333.0 544.7 435.8
Exchange Gas Deliveries.................. -- -- 5.6 6.8 9.9 11.9
----- ----- ----- ----- ----- -----
140.5 114.5 428.7 339.8 554.6 447.7
===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
The impact of the higher cost of gas sold as previously discussed, as well
as the higher costs for gas transportation and storage capacity more than offset
the improved margins resulting from an increase in total gas sales and exchange
deliveries. Gas sales and exchange deliveries in total increased 26.0 Bcf, 88.9
Bcf and 106.9 Bcf during the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in gas sales is due in part to the April 1999
acquisition of existing marketing operations that significantly increased Energy
Marketing's level of sales to large commercial and industrial customers in the
Midwest. The comparisons of earnings for the nine- and twelve-month periods were
also affected by losses recorded in 1998 associated with trading activities
(Note 5) as well as higher 1999 uncollectible expenses and costs associated with
the June 1999 dissolution of the DTE-CoEnergy joint venture.
EXPLORATION & PRODUCTION operating and joint venture results (excluding the
unusual charges) decreased by $4.7 million, $13.4 million and $18.9 million for
the 1999 quarter, nine- and twelve-month periods, respectively. These results
reflect a decline in overall gas and oil production of 10.1 billion cubic feet
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<PAGE> 218
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
equivalent (Bcfe) in the 1999 quarter, 21.0 Bcfe in the 1999 nine-month period
and 25.0 Bcfe in the 1999 twelve-month period. The decrease in gas and oil
production is due primarily to the sale of MCN's Western and Midcontinent/Gulf
Coast E&P properties recorded in the second quarter of 1999. Gas and oil
production in future periods will also be lower due to the expected sale of
other non-Michigan E&P properties by mid-2000.
E&P results for all 1999 periods were also impacted by an increase in
production-related expenses and variations in gas and oil sales prices.
Production expenses increased per thousand cubic feet (Mcf) equivalent by $.22,
$.12 and $.09 for the 1999 quarter, nine- and twelve-month periods,
respectively, reflecting the higher costs of operating the E&P properties
retained. Gas prices increased by $.17 per Mcf in the 1999 third quarter, by
$.16 per Mcf in the current nine-month period and by $.13 per Mcf in the 1999
twelve-month period. Oil prices increased by $1.44 per barrel (Bbl) in the 1999
quarter, but declined by $.61 per Bbl and $1.82 per Bbl in the current nine-and
twelve-month periods, respectively. The impact of fluctuations in natural gas
and oil sales prices on E&P operating and joint venture income was mitigated by
hedging with swap and futures agreements, as discussed in the "Risk Management
Strategy" section that follows.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
--------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf)........................... 12.9 21.3 48.1 62.4 67.8 83.0
Oil Production (million Bbl)................... .2 .5 1.0 2.1 1.5 3.1
Gas and Oil Production (Bcf equivalent)........ 14.2 24.3 54.2 75.2 76.9 101.9
Average Gas Selling Price (per Mcf)............ $ 2.59 $ 2.03 $ 2.15 $ 2.07 $ 2.13 $ 2.23
Effect of Hedging (per Mcf).................... (.37) .02 .05 (.03) .02 (.21)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per Mcf)...... $ 2.22 $ 2.05 $ 2.20 $ 2.04 $ 2.15 $ 2.02
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl).............. $13.20 $10.64 $11.77 $11.55 $11.27 $12.99
Effect of Hedging (per Bbl).................... -- 1.12 .45 1.28 .72 .82
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per Bbl)...... $13.20 $11.76 $12.22 $12.83 $11.99 $13.81
====== ====== ====== ====== ====== ======
</TABLE>
RISK MANAGEMENT STRATEGY -- MCN manages commodity price risk by utilizing
futures, options and swap contracts to more fully balance its portfolio of gas
and oil supply and sales agreements. In late 1998, MCN began entering into
offsetting positions for existing hedges of gas and oil production from
properties that have been or were expected to be sold in 1999. MCN's risk
management strategy has been revised to reflect the change in its business that
will result from its new strategic direction as previously discussed.
Additionally, as a result of the special investigation, MCN is taking additional
steps to ensure compliance with risk management policies that are periodically
reviewed by the Board of Directors.
CORPORATE & OTHER operating and joint venture results (excluding the
restructuring charges) declined $1.4 million in the 1999 quarter, and improved
$5.7 million and $2.8 million for the 1999 nine- and twelve-month periods,
respectively. The variations primarily reflect adjustments that reduced or
eliminated accruals for employee incentive awards based on MCN's operating or
stock price performance.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for the 1999 quarter, nine- and twelve-month
periods reflect unfavorable changes of $1.9 million, $89.9 and $98.1 million,
respectively. The comparability of other income and deductions for all periods
is affected by unusual charges consisting of losses from the sale of E&P
properties and the write-down of an E&P investment. Other income and deductions
for the 1999 nine- and twelve-month periods reflect higher interest and
preferred dividend expense due to an increase in debt and preferred securities
required to finance capital investments in the Diversified Energy group. The
1999 nine- and
F-89
<PAGE> 219
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods include lower interest income due to the collection in
March 1998 of a $46 million advance made to a Philippine independent power
producer.
Other income in the 1999 nine- and twelve-month periods includes a $3.1
million pre-tax gain recorded in the 1999 second quarter from the sale of a
pipeline facility. Other income in the 1998 nine- and twelve-month periods
includes $9.9 million of pre-tax gains recorded in the 1998 first quarter from
the sale of certain gas sales contracts and a 50% interest in the 30 MW Ada
cogeneration facility. Other income for the 1998 twelve-month period includes a
$3.2 million pre-tax gain from the December 1997 sale of Diversified Energy's
25% interest in a gas storage project.
Additionally, other income in all 1999 periods include income from a third
quarter 1998 tax credit sale transaction, whereby MCN records income from such
sale as the credits are generated by the purchaser. MCN recorded pre-tax income
of $3.3 million, $9.4 million and $13.6 million in the 1999 quarter, nine- and
twelve-month periods, respectively, from such sale.
INCOME TAXES
The variations in income taxes for all 1999 periods reflect fluctuations in
pre-tax results. Income tax comparisons were also affected by tax credits and
stock-related tax benefits recorded in 1998, as well as the generation of
foreign income in 1998 that was not subject to U.S. or foreign tax provisions.
Gas production tax credits have not been recorded in the 1999 periods as a
result of the 1998 tax credit sale transaction and MCN's current net operating
loss tax position.
OUTLOOK
MCN's new strategic direction emphasizes achieving operational efficiencies
and growth through integration of existing businesses. MCN will continue
pursuing new pipeline, electric power and energy marketing ventures, with an
emphasis on operating projects that enhance MCN businesses within the
Midwest-to-Northeast corridor.
To achieve the operating efficiencies expected from the new strategic
direction, MCN is working to reorganize its Diversified Energy group into the
segments detailed below:
- Midstream & Supply develops and manages MCN's gas producing, gathering,
processing, storage and transmission facilities within the
Midwest-to-Northeast target region.
- Energy Marketing consists of MCN's non-regulated marketing activities to
industrial, commercial and residential customers, both inside and outside
the Gas Distribution segment's service area.
- Power develops and manages independent electric power projects.
- Energy Holdings manages and seeks to maximize the value of existing
ventures outside MCN's target region. It primarily consists of gas
gathering and processing investments in major U.S. producing basins.
F-90
<PAGE> 220
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GAS DISTRIBUTION
Results reflect seasonal loss and higher operating costs -- Gas
Distribution had a net loss of $14.7 million for the 1999 third quarter compared
to a net loss of $24.5 million from the same 1998 period. The Gas Distribution
segment typically records third quarter losses due to seasonally lower demand
for natural gas during the summer months. Gas Distribution had earnings of $76.0
million and $106.8 million for the 1999 nine- and twelve-month periods,
respectively, resulting in increases of $35.2 million and $33.4 million from the
comparable 1998 periods. Earnings in all three 1998 periods were unfavorably
affected by $16.7 million of unusual charges as previously discussed. Excluding
the unusual charges, Gas Distribution's earnings declined by $6.9 million for
the 1999 quarter, and improved by $18.5 million and $16.7 million in the 1999
nine- and twelve-month periods, respectively. The 1999 quarter reflects higher
operating costs. The earnings improvements for the 1999 nine- and twelve-month
periods reflect contributions from the new gas sales program as subsequently
discussed. Additionally, all 1999 periods reflect the impact of more favorable
weather.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ---------------- --------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS
Operating Revenues*
Gas sales.............................. $ 74.9 $ 80.2 $653.5 $579.1 $ 913.3 $ 929.7
End user transportation................ 22.4 16.7 72.6 60.0 94.9 83.1
Intermediate transportation............ 14.2 14.5 42.8 48.4 57.6 62.6
Other.................................. 17.9 12.7 62.7 47.2 82.9 62.3
------ ------ ------ ------ -------- --------
129.4 124.1 831.6 734.7 1,148.7 1,137.7
Cost of Sales............................ 33.2 32.1 354.6 311.6 505.1 533.0
------ ------ ------ ------ -------- --------
Gross Margin............................. 96.2 92.0 477.0 423.1 643.6 604.7
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.............. 65.3 58.3 203.5 184.2 275.9 260.3
Depreciation, depletion and
amortization........................ 24.4 23.2 74.4 69.5 98.7 95.2
Property and other taxes............... 12.3 12.2 43.8 43.7 56.0 58.1
Property write-down (Note 3e).......... -- 24.8 -- 24.8 -- 24.8
------ ------ ------ ------ -------- --------
102.0 118.5 321.7 322.2 430.6 438.4
------ ------ ------ ------ -------- --------
Operating Income (Loss).................. (5.8) (26.5) 155.3 100.9 213.0 166.3
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures..... .4 .1 1.5 .5 1.9 .9
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................ .9 1.6 2.7 3.6 4.8 4.6
Interest expense....................... (13.8) (13.1) (40.3) (41.1) (56.7) (55.6)
Investment loss (Note 3e).............. -- (8.5) -- (8.5) -- (8.5)
Minority interest...................... (.3) 7.1 (.8) 5.9 (1.0) 5.5
Other.................................. (.8) .5 (.7) 1.1 (2.1) .9
------ ------ ------ ------ -------- --------
(14.0) (12.4) (39.1) (39.0) (55.0) (53.1)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes........ (19.4) (38.8) 117.7 62.4 159.9 114.1
Income Taxes............................. (4.7) (14.3) 41.7 21.6 53.1 40.7
------ ------ ------ ------ -------- --------
Net Income (Loss)
Before unusual charges................. (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e).............. -- (16.7) -- (16.7) -- (16.7)
------ ------ ------ ------ -------- --------
$(14.7) $(24.5) $ 76.0 $ 40.8 $ 106.8 $ 73.4
====== ====== ====== ====== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
F-91
<PAGE> 221
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GROSS MARGIN
Gross margin (operating revenues less cost of sales) increased $4.2
million, $53.9 million and $38.9 million in the 1999 quarter, nine- and
twelve-month periods, respectively. The increase is due primarily to margins
generated under Michigan Consolidated Gas Company's (MichCon) new three-year gas
sales program, which is part of its Regulatory Reform Plan (Note 7a). Under the
gas sales program that began in January 1999, MichCon's gas sales rates include
a gas commodity component that is fixed at $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy is likely to continue producing
favorable margins in each of the three years.
Gross margins for all three 1999 periods also reflect higher gas sales
resulting from more normal weather, especially the 1999 nine-month period that
was 13.1% colder than the same 1998 period. Additionally, gross margins for all
1999 periods reflect revenues from the continued growth in other gas-related
services as well as revenues and cost of sales associated with three heating and
cooling firms acquired in October 1998.
Gas Distribution's operations are seasonal, with gross margins and earnings
concentrated in the first and fourth quarters of each calendar year. By the end
of the first quarter, the heating season is largely over, and Gas Distribution
typically incurs substantially reduced gross margins and earnings in the second
quarter and losses in the third quarter. The seasonal nature of Gas
Distribution's operations is expected to be more pronounced as a result of
MichCon's new gas sales program.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percent Warmer Than Normal................ N/M N/M (8.5)% (21.6)% (10.7)% (14.5)%
Decrease From Normal in:
Gas Markets (Bcf)...................... (.7) (1.5) (11.1) (26.7) (24.6) (27.4)
Net Income (Millions).................. $ (.7) $(1.1) $(11.0) $(23.1) $(23.2) $(23.7)
Diluted Earnings Per Share............. $(.01) $(.01) $ (.13) $ (.29) $ (.28) $ (.30)
</TABLE>
- -------------------------
N/M -- not meaningful
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $.4
million and $87.0 million for the 1999 quarter and nine-month period,
respectively, and decreased by $4.6 million for the 1999 twelve-month period.
Revenues were affected by fluctuations in gas sales and end user transportation
deliveries that increased in total by 1.9 Bcf, 14.6 Bcf and 3.0 Bcf in the
current quarter, nine- and twelve-month periods, respectively. The higher gas
sales and end user transportation deliveries were due primarily to weather,
which was colder in all the 1999 periods compared to the corresponding 1998
periods.
Revenues were also impacted by variations in the cost of the gas commodity
component of gas sales rates. As previously discussed, this gas commodity
component was fixed under MichCon's new gas sales program at $2.95 per Mcf
beginning in January 1999. Prior to 1999, MichCon's sales rates were set to
recover all of its reasonably and prudently incurred gas costs. The gas
commodity component of MichCon's sales rate increased
F-92
<PAGE> 222
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
$.58 per Mcf (24%) and $.23 per Mcf (8%) for the 1999 quarter and nine-month
period, respectively, and decreased $.08 per Mcf (3%) for the 1999 twelve-month
period.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------- ------------- -------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION MARKETS
Gas Sales..................................... 10.6 12.8 127.3 117.5 182.0 182.6
End User Transportation....................... 32.7 28.6 107.0 102.2 145.1 141.5
----- ----- ----- ----- ----- -----
43.3 41.4 234.3 219.7 327.1 324.1
Intermediate Transportation*.................. 128.3 133.9 390.8 430.8 497.5 570.2
----- ----- ----- ----- ----- -----
171.6 175.3 625.1 650.5 824.6 894.3
===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes intercompany volumes
Additionally, gas sales and end user transportation revenues in total were
impacted by MichCon's three-year customer choice program, which is also part of
its Regulatory Reform Plan. Under the customer choice program that began in
April 1999, approximately 70,000 or 6% of its customers are purchasing natural
gas from suppliers other than MichCon. However, MichCon continues to transport
and deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services. MichCon's customers who
have chosen to purchase their gas from other suppliers are reflected as end user
transportation customers rather than gas sales customers. Accordingly, gas sales
revenues have decreased, partially offset by an increase in end user
transportation revenues, resulting in a net decrease in total operating revenues
due to the gas commodity component included in gas sales rates.
INTERMEDIATE TRANSPORTATION revenues decreased $.3 million, $5.6 million
and $5.0 million in the 1999 quarter, nine- and twelve-month periods,
respectively. Intermediate transportation revenues reflect lower off-system
volumes of 5.6 Bcf, 40.0 Bcf and 72.7 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively. A significant portion of the volume decrease
was for customers who pay a fixed fee for intermediate transportation capacity
regardless of actual usage. Although volumes associated with these fixed-fee
customers may vary, the related revenues are not affected. The decrease for all
1999 periods is due to customers shifting volumes from a higher rate to a lower
rate transportation route. The decrease in intermediate transportation revenues
for the 1999 nine- and twelve-month periods is also due in part to an adjustment
in 1998 of revenues related to fees generated from tracking the transfer of gas
title on MichCon's transportation system.
OTHER OPERATING REVENUES increased $5.2 million, $15.5 million and $20.6
million in the 1999 quarter, nine- and twelve-month periods, respectively. The
improvements are due to an increase in facility development and appliance
maintenance services, late payment fees and other gas-related services.
Additionally, all 1999 periods reflect revenues from the acquisition of three
heating and cooling firms in October 1998.
COST OF SALES
Cost of sales is affected by variations in gas sales volumes and the cost
of purchased gas as well as related transportation costs. Under the Gas Cost
Recovery (GCR) mechanism that was in effect through December 1998 (Note 7b),
MichCon's sales rates were set to recover all of its reasonably and prudently
incurred gas costs. Therefore, fluctuations in cost of gas sold had little
effect on gross margins. Under MichCon's new gas sales program, the gas
commodity component of its sales rates is fixed. Accordingly, beginning in
January 1999, changes in cost of gas sold directly impact gross margins and
earnings.
Cost of sales increased $1.1 million and $43.0 million in the 1999 quarter
and nine-month periods, respectively, and decreased $27.9 million in the 1999
twelve-month period. Cost of sales for all 1999 periods
F-93
<PAGE> 223
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
was affected by a reduction in gas sales volumes as a result of customers who
have chosen to purchase their gas from other suppliers under MichCon's customer
choice program. As previously discussed, MichCon maintains its previously
existing sales margins on these services by continuing to transport and deliver
the gas to the customers' premises.
The increase in the current nine-month period was due primarily to higher
weather-driven sales volumes. Cost of sales was also impacted by average prices
paid for gas, which increased $.42 per Mcf (18%) in the current quarter and
decreased $.25 per Mcf (8%) in the current twelve-month period. Prices paid for
gas sold in the 1999 nine-month period were flat compared to the same 1998
period. Additionally, all 1999 periods reflect cost of sales associated with the
operations of the three heating and cooling firms acquired in October 1998.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses increased $7.0 million, $19.3 million
and $15.6 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in the 1999 quarter and nine-month period is due to
higher employee benefit costs. The increase in all 1999 periods also reflects
additional computer system support costs associated with MichCon's new customer
information system as well as advertising costs associated with MichCon's new
gas sales program. The 1998 nine- and twelve-month periods benefited from an
interstate pipeline company refund.
DEPRECIATION AND DEPLETION increased $1.2 million, $4.9 million and $3.5
million in the 1999 quarter, nine- and twelve-month periods, respectively.
Depreciation on higher plant balances impacted all 1999 periods. The increase in
all 1999 periods was tempered by the effect of lower depreciation rates for
MichCon's utility property, plant and equipment that became effective in January
1998.
PROPERTY AND OTHER TAXES decreased $2.1 million in the 1999 twelve-month
period. The improvement is attributable to lower Michigan Single Business Taxes
resulting from an increase in capital acquisition deductions.
PROPERTY WRITE-DOWN of $24.8 million in the 1998 periods represents the
impairment of a Michigan gas gathering system (Note 3e).
EQUITY IN EARNINGS OF JOINT VENTURES
Equity in earnings of joint ventures increased $.3 million in the 1999
quarter, and $1.0 million in the 1999 nine- and twelve-month periods. The
comparability is affected by losses recorded in the 1998 periods from Gas
Distribution's 47.5% interest in a Missouri gas distribution company. The
investment was written down to fair value in the third quarter of 1998, and no
additional losses have since been recorded as a result of the intended sale of
the investment in 2000.
OTHER INCOME AND DEDUCTIONS
Other income and deductions changed unfavorably by $1.6 million, $.1
million and $1.9 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The 1998 nine- and twelve-month periods were impacted by gains
from the sale of property. The 1999 quarter and twelve-month periods include
slightly higher interest costs. Other income and deductions in all 1998 periods
also reflect an unusual charge to write down the investment in a small natural
gas distribution company located in Missouri (Note 3e). Also impacting other
income and deductions in all 1998 periods was a change in minority interest
reflecting the joint venture partners' share of the write-down of the Michigan
gas gathering properties (Note 3e).
INCOME TAXES
Income taxes increased $9.6 million, $20.1 million and $12.4 million in the
1999 quarter, nine- and twelve-month periods, respectively, reflecting an
increase in pre-tax earnings. The increase for all 1999 periods
F-94
<PAGE> 224
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
is also due to the flow-through effect of certain book-to-tax temporary
differences. Additionally, income tax comparisons for the 1999 nine- and
twelve-month periods were affected by the favorable resolution of prior years'
tax issues.
OUTLOOK
Gas Distribution's strategy is to aggressively expand its role as the
preferred provider of natural gas and high-value energy services within
Michigan. Accordingly, Gas Distribution's objectives are to increase revenues
and control costs in order to deliver strong shareholder returns and provide
customers with high-quality service at competitive prices.
Gas Distribution has begun and plans to continue capitalizing on
opportunities resulting from the gas industry restructuring. MichCon is
currently implementing its Regulatory Reform Plan, which includes a
comprehensive experimental three-year customer choice program designed to offer
all sales customers added choices and greater price certainty. The customer
choice program began in April 1999, with approximately 70,000 customers choosing
to purchase natural gas from suppliers other than MichCon. Plan years begin
April 1 of each year, and the number of customers allowed to participate in the
plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is
also a volume limitation on commercial and industrial participants of 10 Bcf in
1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon continues to transport and
deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services.
The Plan also suspended the GCR mechanism for customers who continue to
purchase gas from MichCon and fixed the gas commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period that began in January
1999. The suspension of the GCR mechanism allows MichCon to profit from its
ability to purchase gas at less than $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy has produced favorable margins through
September 1999 and is likely to continue producing favorable margins through
2001. The level of margins generated from selling gas will be affected by the
number of customers choosing to purchase gas from suppliers other than MichCon
under the three-year customer choice program.
Also beginning in 1999, an income sharing mechanism allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. The impact of weather and expenses incurred in the
fourth quarter of 1999 will determine the actual amount of profit, if any, to be
shared with customers.
Gas Distribution also plans to grow revenues and earnings by offering a
variety of energy-related services, which include appliance sales, installation
and maintenance. Growth in revenues is expected from the three heating and
cooling firms acquired in October 1998 that have been integrated under MichCon
Home Services, which is expanding its customer base and range of services.
CHANGES IN ACCOUNTING
In the 1999 first quarter, MCN adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants. SOP 98-5 requires start-up and organizational costs to be expensed
as incurred. This change in accounting principle resulted in the write-off of
start-up and organization costs capitalized as of December 31, 1998. The
cumulative effect of the change was to decrease earnings by $2.9 million for the
1999 nine- and twelve-month periods.
In the 1999 first quarter, MCN adopted the Emerging Issues Task Force
consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their
F-95
<PAGE> 225
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
fair value, with changes in fair value recognized in earnings. Adoption of EITF
98-10 did not have a material impact on MCN's financial statements.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
9 MONTHS
-----------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash Flow Provided From (Used For):
Operating activities...................................... $ 211.5 $ 237.5
Financing activities...................................... (270.4) 306.9
Investing activities...................................... 72.2 (523.9)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 13.3 $ 20.5
======= =======
</TABLE>
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $26.0 million during
the 1999 nine-month period as compared to the same 1998 period. The decrease was
due primarily to higher working capital requirements, substantially offset by
increased earnings, after adjusting for non-cash items (depreciation, unusual
charges and deferred taxes).
FINANCING ACTIVITIES
MCN's cash flow related to financing activities decreased $577.3 million
during the 1999 nine-month period compared to the same 1998 period. The change
primarily reflects lower debt issuances and higher debt repayments, partially
offset by an increase in equity issuances, in the 1999 nine-month period. A
summary of MCN's significant financing activities and financing plans during
1999 follows.
Prior to mid-February 1999, MCN issued new shares of common stock pursuant
to its Dividend Reinvestment and Stock Purchase Plan and various employee
benefit plans. MCN generated $.2 million in the 1999 nine-month period and $14.7
million in the same 1998 period from common stock issuances under these plans.
Beginning in mid-February 1999, shares issued under these plans are being
acquired by MCN through open market purchases.
MCN's 5,865,000 of Preferred Redeemable Increased Dividend Equity
Securities (Enhanced PRIDES) matured in April 1999. Each security represented a
contract to purchase one share of MCN common stock. Upon conversion of the
Enhanced PRIDES, MCN received cash proceeds totaling approximately $135.0
million. The proceeds were used to repay a $130.0 million medium-term note of
Diversified Energy that came due in May 1999.
In March 1999, MCN entered into a $150 million revolving credit agreement
that expired in October 1999. There was no balance outstanding under this credit
agreement at September 30, 1999. MCN effectively replaced this agreement in
October 1999 by entering into a $290 million revolving credit agreement that
expires in July 2000. Borrowings under the credit agreement were used to
refinance $100 million of Single Point Remarketed Reset Capital Securities that
were redeemed in October 1999. The credit agreement will also be used to repay
debt, fund capital investments and for general corporate purposes.
DIVERSIFIED ENERGY
The Diversified Energy group maintains credit lines that allow for
borrowings of up to $200 million under a 364-day revolving credit facility and
up to $200 million under a three-year revolving credit facility. These
facilities support Diversified Energy's commercial paper program, which is used
to finance capital investments and working capital requirements. The 364-day
facility was renewed in July 1999. During the first nine months
F-96
<PAGE> 226
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
of 1999, Diversified Energy's commercial paper and bank borrowings outstanding
increased by $129.6 million, leaving borrowings of $355.3 million outstanding
under this program at September 30, 1999.
MCN received approximately $270 million through September 1999 from the
sale of various non-Michigan E&P properties. MCN also received approximately
$130 million in August 1999 from the sale of its interest in TPL. Proceeds from
these sales were used to repay outstanding debt at the MCN Corporate and
Diversified Energy levels. Proceeds from the sale of additional non-Michigan E&P
properties are expected by mid-2000 and will be used to repay outstanding
borrowings and for general corporate purposes.
MCN repaid $80 million and $130 million of medium-term notes that came due
in February 1999 and May 1999, respectively.
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon normally issues commercial paper that is backed by
credit lines with several banks. MichCon has established credit lines that allow
for borrowings of up to $150 million under a 364-day revolving credit facility
and up to $150 million under a three-year revolving credit facility. The 364-day
facility was renewed in July 1999. During the first nine months of 1999, MichCon
repaid $88.7 million of commercial paper, leaving borrowings of $129.6 million
outstanding under this program at September 30, 1999.
During 1999, MichCon issued approximately $110 million of debt (Note 10)
and repaid $68 million of first mortgage bonds.
INVESTING ACTIVITIES
MCN's cash flow related to investing activities increased $596.1 million in
the 1999 nine-month period as compared to the same 1998 period. The increase was
due primarily to proceeds from the sale of property and investments and lower
capital investments.
F-97
<PAGE> 227
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Capital investments equaled $391.6 million in the 1999 nine-month period
compared to $636.6 million for the same period in 1998. The 1999 amounts include
significantly lower levels of investments in E&P properties and Pipelines &
Processing ventures.
<TABLE>
<CAPTION>
9 MONTHS
----------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
CAPITAL INVESTMENTS
Consolidated Capital Expenditures:
Diversified Energy........................................ $138.5 $283.8
Gas Distribution.......................................... 94.9 106.3
------ ------
233.4 390.1
------ ------
MCN's Share of Joint Venture Capital Expenditures:(1)
Pipelines & Processing.................................... 76.6 166.1
Electric Power............................................ 52.0 19.7
Energy Marketing.......................................... -- .6
Other..................................................... .1 .8
------ ------
128.7 187.2
------ ------
Acquisitions:(2)............................................ 29.5 59.3
------ ------
Total Capital Investments................................... $391.6 $636.6
====== ======
</TABLE>
- -------------------------
(1) A portion of joint venture capital expenditures is financed with joint
venture debt
(2) Includes MCN's share of certain debt existing at the date of acquisitions
Total capital investments were partially funded from the sale of certain
E&P properties and joint venture investments that totaled approximately $400
million in the 1999 nine-month period.
OUTLOOK
1999 capital investments to approximate $500 million -- MCN's strategic
direction is to grow in its targeted region by investing in energy-related
projects. For 1999, MCN anticipates investing approximately $500 million, of
which 70% is expected to be within the Diversified Energy group.
The proposed level of investments for 2000 and each of the next several
years approximates $300 million and is expected to be financed primarily with
internally generated funds, including proceeds received from the sale of assets.
No issuance of incremental equity securities is expected for the next few years.
It is management's opinion that MCN and its subsidiaries will have sufficient
capital resources to meet anticipated capital and operating requirements.
YEAR 2000
As discussed in MCN's 1998 Annual Report included herein, MCN has
implemented a corporate-wide, four-phase Year 2000 approach consisting of: i)
inventory -- identification of the components of MCN's systems, equipment and
facilities; ii) assessment -- assessing Year 2000 readiness and prioritizing the
risks of items identified in the inventory phase; iii) remediation -- upgrading,
repairing and replacing non-compliant systems, equipment and facilities; and iv)
testing -- verifying items remediated. MCN has completed the Year 2000
implementation plan for its mission critical business systems and measurement
and control systems
F-98
<PAGE> 228
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(including embedded microprocessors), and therefore considers these systems Year
2000 ready. The completion status of these systems follows:
<TABLE>
<CAPTION>
INVENTORY ASSESSMENT REMEDIATION TESTING
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Business Systems:
- ------------------------------------------------------
September 30, 1999.................................. 100% 100% 98% 98%
October 31, 1999.................................... 100% 100% 100% 100%
Measurement and Control Systems:
- ------------------------------------------------------
September 30, 1999.................................. 100% 100% 99% 99%
October 31, 1999.................................... 100% 100% 100% 100%
</TABLE>
Costs associated with the Year 2000 issue are not expected to have a
material adverse effect on MCN results of operations, liquidity and financial
condition. The total costs are estimated to be between $5 million and $6
million, of which approximately $4.6 million was incurred through September
1999. This estimate does not include MCN's share of Year 2000 costs that may be
incurred by partnerships and joint ventures. The anticipated costs are not
higher due in part to the ongoing replacement of significant old systems. MCN
has made a substantial investment in new systems that were installed over the
past few years that are Year 2000 ready, particularly MichCon's customer
information system which was installed and functional in April 1999. The
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of customer satisfaction and to respond
to changes in regulation and increased competition within the energy industry.
MCN anticipates a smooth transition to the Year 2000. However, the failure
to correct a material Year 2000 problem could result in an interruption in or a
failure of certain business activities and operations. Such interruptions or
failures could have a material adverse effect on MCN's results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
key partners, operators, suppliers and government agencies, MCN cannot certify
that it will be unaffected by Year 2000 complications.
In order to reduce its Year 2000 risk, MCN has completed the development of
contingency plans for mission-critical processes in the event of a Year 2000
complication. Contingency plans for several essential gas transmission
facilities were tested under a "power outage" scenario and have achieved
excellent results. Completed contingency plans will continue to be enhanced
throughout the remainder of 1999 as MCN works with partners, operators,
suppliers and governmental agencies.
MARKET RISK INFORMATION
As discussed in MCN's 1998 Annual Report included herein, MCN manages
commodity price and interest rate risk through the use of various derivative
instruments and generally limits the use of such instruments to hedging
activities. A discussion and analysis of the events and factors that have
changed MCN's commodity price, interest rate and foreign currency risk during
the 1999 nine-month period follows.
COMMODITY PRICE RISK
HEDGING ACTIVITIES
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts and gas inventories. As a result of changes in
commodity prices that occurred during the 1999 nine-month period, there have
been significant changes in the outcome of the sensitivity analysis performed
for commodity price risk at September 30, 1999 as compared to December 31, 1998.
F-99
<PAGE> 229
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A sensitivity analysis calculates the change in fair values of MCN's
natural gas and oil futures and swap agreements given a hypothetical 10%
increase or decrease in commodity prices utilizing applicable forward commodity
rates in effect at the end of the reporting period.
Changes in fair values resulting from sensitivity analysis calculations
follow:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Commodity Price Sensitive:*
Swaps: Pay fixed/receive variable................. $ 79.6 $(79.6) $ 53.6 $(53.6)
Pay variable/receive fixed................ $(91.0) $ 91.0 $(54.0) $ 54.0
Futures: Longs.................................... $ 5.3 $ (5.3) $ 1.9 $ (1.9)
Shorts................................... $ (3.5) $ 3.5 $ (.1) $ .1
</TABLE>
- -------------------------
* Includes only the risk related to the derivative instruments that serve as
hedges and does not include the risk associated with the related underlying
hedged item.
NON-HEDGING ACTIVITIES
During 1999, MCN sold its Western and Midcontinent/Gulf Coast E&P
properties, but has not yet fully exited the natural gas and oil swap agreements
and futures contracts that served as hedges of the price risk associated with
the gas and oil produced from these properties. As a result, these natural gas
and oil swap agreements and futures contracts are no longer considered hedges
under definitions prescribed by the SEC and generally accepted accounting
principles. Accordingly, these swap agreements and futures contracts are
accounted for using the mark-to-market method, with unrealized gains and losses
recorded in earnings. At September 30, 1999, these swap agreements and futures
contracts total 14.1 Bcf, have a notional value of $33.0 million and mature
through 2000.
Changes in fair values resulting from sensitivity analysis calculations
previously discussed follow:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Commodity Price Sensitive:*
Swaps: Pay variable/receive fixed................. $(2.3) $2.3 N/A N/A
Futures: Shorts................................... $(1.3) $1.3 N/A N/A
</TABLE>
INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of
variable and fixed-rate debt and preferred securities. In order to manage
interest costs and risk, MCN uses interest rate swap agreements to exchange
fixed and variable-rate interest payment obligations over the life of the
agreements without exchange of the underlying principal amounts. During the 1999
nine-month period, there have not been any events or factors that have caused
any significant changes to MCN's interest rate risk.
F-100
<PAGE> 230
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONCLUDED)
FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are located in India, Nepal and the United Arab
Emirates. During August 1999, MCN completed the sale of its interest in TPL that
is located in India for approximately $130 million. This sale has reduced MCN's
foreign currency risk to an insignificant level.
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE AND HEDGING ACTIVITIES -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000.
SFAS No. 133 requires all derivatives to be recognized in the balance sheet
as either assets or liabilities measured at their fair value and sets forth
conditions in which a derivative instrument may be designated as a hedge. The
Statement requires that changes in the fair value of derivatives be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to be
recorded to other comprehensive income or to offset related results on the
hedged item in earnings.
MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Accordingly, management cannot quantify the effects of
adopting SFAS No. 133 at this time.
FORWARD-LOOKING STATEMENTS
This Quarterly 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 as set forth in MCN's 1998
Annual Report included herein.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act. Therefore, MCN claims the full
protections established by the Act.
F-101
<PAGE> 231
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------- -----------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
-------- --------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of sales.................................. 329,339 201,006 1,118,172 853,551 1,470,395 1,309,153
Operation and maintenance...................... 98,159 90,712 298,586 277,215 410,786 386,192
Depreciation, depletion and amortization....... 38,611 44,231 125,948 135,478 169,960 182,245
Property and other taxes....................... 14,921 15,542 52,849 54,255 68,147 72,277
Property write-downs and restructuring charges
(Note 3 ).................................... -- 259,296 52,000 592,318 52,000 592,318
-------- --------- ---------- ---------- ---------- ----------
481,030 610,787 1,647,555 1,912,817 2,171,288 2,542,185
-------- --------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................... (18,171) (259,642) 100,674 (453,998) 148,820 (380,002)
-------- --------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES............. 15,396 17,963 40,020 46,561 55,684 60,040
-------- --------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 1,909 2,496 5,774 8,659 8,008 13,136
Interest on long-term debt..................... (22,540) (24,392) (66,046) (62,345) (91,047) (79,336)
Other interest expense......................... (5,541) (4,991) (20,858) (16,654) (28,608) (20,981)
Dividends on preferred securities of
subsidiaries................................. (10,335) (8,178) (31,004) (27,162) (40,212) (36,916)
Loss on sale of E&P properties (Note 3c)....... (5,877) -- (74,675) -- (74,675) --
Investment losses (Notes 3c and 3e)............ -- (8,500) (7,456) (14,635) (7,456) (14,635)
Minority interest (Note 3e).................... (632) 7,275 (1,371) 6,030 (1,409) 5,580
Other.......................................... 3,281 134 13,655 14,095 19,121 17,040
-------- --------- ---------- ---------- ---------- ----------
(39,735) (36,156) (181,981) (92,012) (216,278) (116,112)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES......................... (42,510) (277,835) (41,287) (499,449) (11,774) (436,074)
INCOME TAX BENEFIT............................... (11,356) (101,111) (12,308) (188,984) (6,792) (170,496)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE......................................... (31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES (NOTE 6)................................. -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
NET LOSS......................................... $(31,154) $(176,724) $ (31,851) $(310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
LOSS PER SHARE -- BASIC AND DILUTED (NOTE 11)
Before cumulative effect of accounting
change....................................... $ (0.37) $ (2.24) $ (.35) $ (3.95) $ (.06) $ (3.38)
Cumulative effect of accounting change (Note
6)........................................... -- -- (.04) -- (.04) --
-------- --------- ---------- ---------- ---------- ----------
$ (0.37) $ (2.24) $ (0.39) $ (3.95) $ (0.10) $ (3.38)
======== ========= ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING -- BASIC AND
DILUTED........................................ 85,282 78,938 82,724 78,689 81,840 78,531
======== ========= ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................... $ .2550 $ .2550 $ .7650 $ .7650 $ 1.0200 $ 1.0200
======== ========= ========== ========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- ---------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- BEGINNING OF PERIOD................. $(45,400) $ 190,548 $ (2,977) $ 365,730 $ (6,622) $ 340,767
ADD -- NET LOSS................................ (31,154) (176,724) (31,851) (310,465) (7,854) (265,578)
-------- --------- -------- --------- -------- ---------
(76,554) 13,824 (34,828) 55,265 (14,476) 75,189
DEDUCT -- CASH DIVIDENDS DECLARED.............. 22,009 20,446 63,735 61,887 84,087 81,811
-------- --------- -------- --------- -------- ---------
BALANCE -- END OF PERIOD....................... $(98,563) $ (6,622) $(98,563) $ (6,622) $(98,563) $ (6,622)
======== ========= ======== ========= ======== =========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
F-102
<PAGE> 232
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)...................................... $ 30,353 $ 60,031 $ 17,039
Accounts receivable, less allowance for doubtful
accounts of $16,216, $9,515 and $9,665,
respectively....................................... 301,243 280,496 400,120
Accrued unbilled revenues............................. 21,499 17,359 87,888
Gas in inventory...................................... 238,366 197,799 147,387
Property taxes assessed applicable to future
periods............................................ 39,505 33,115 72,551
Other................................................. 56,799 56,120 42,472
---------- ---------- ----------
687,765 644,920 767,457
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes................................. 11,144 53,519 50,547
Investments in debt and equity securities............. 72,494 42,986 69,705
Deferred swap losses and receivables (Note 15)........ 96,539 45,033 63,147
Deferred environmental costs.......................... 31,291 30,655 30,773
Prepaid benefit costs................................. 140,295 97,169 111,775
Other................................................. 125,569 96,719 98,940
---------- ---------- ----------
477,332 366,081 424,887
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing................................ 581,515 488,536 521,711
Electric Power........................................ 134,298 228,960 231,668
Energy Marketing...................................... 25,496 24,944 29,435
Gas Distribution...................................... 2,478 628 1,478
Other................................................. 18,695 19,354 18,939
---------- ---------- ----------
762,482 762,422 803,231
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Pipelines & Processing................................ 46,094 38,703 48,706
Exploration & Production (Note 3c).................... 690,760 1,013,778 1,040,047
Gas Distribution...................................... 3,001,638 2,869,897 2,916,540
Other................................................. 77,937 34,747 36,124
---------- ---------- ----------
3,816,429 3,957,125 4,041,417
Less -- Accumulated depreciation and depletion........ 1,688,186 1,603,223 1,644,094
---------- ---------- ----------
2,128,243 2,353,902 2,397,323
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-103
<PAGE> 233
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................... $ 291,176 $ 318,129 $ 304,349
Notes payable......................................... 370,995 414,957 618,851
Current portion of long-term debt, preferred
securities and capital lease obligations........... 131,302 269,499 269,721
Federal income, property and other taxes payable...... 5,249 48,130 69,465
Deferred gas cost recovery revenues (Note 7b)......... -- 23,899 14,980
Gas payable........................................... 36,073 50,302 42,669
Customer deposits..................................... 15,766 16,829 18,791
Interest payable...................................... 26,459 30,095 30,314
Other................................................. 80,355 62,305 77,996
---------- ---------- ----------
957,375 1,234,145 1,447,136
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credit..................... 28,510 31,641 30,056
Tax benefits amortizable to customers................. 136,906 132,676 130,120
Deferred swap gains and payables (Note 15)............ 76,810 38,556 62,956
Accrued environmental costs........................... 30,373 35,000 35,000
Minority interest..................................... 10,928 11,948 10,898
Other................................................. 104,076 64,454 75,439
---------- ---------- ----------
387,603 314,275 344,469
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations
(Note 10)............................................. 1,460,941 1,402,526 1,307,168
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES HOLDING SOLELY DEBENTURES
OF MCN................................................ 402,900 405,481 502,203
---------- ---------- ----------
CONTINGENCIES (NOTE 14)
COMMON SHAREHOLDERS' EQUITY
Common stock (Note 10)................................ 855 791 797
Additional paid-in capital (Note 10).................. 967,356 813,809 832,966
Retained earnings (deficit)........................... (98,563) (6,622) (2,977)
Accumulated other comprehensive loss (Note 13)........ (357) (14,792) (16,576)
Yield enhancement, contract and issuance costs........ (22,288) (22,288) (22,288)
---------- ---------- ----------
847,003 770,898 791,922
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-104
<PAGE> 234
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998
(RESTATED)
1999 NOTE 5
---- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss.................................................. $ (31,851) $(310,465)
Adjustments to reconcile net loss to net cash provided
from operating activities
Depreciation, depletion and amortization:
Per statement of operations........................... 125,948 135,478
Charged to other accounts............................. 6,676 5,990
Unusual charges, net of taxes (Note 3).................. 87,185 389,598
Cumulative effect of accounting change, net of taxes
(Note 6)............................................... 2,872 --
Deferred income taxes -- current........................ (9,791) (11,994)
Deferred income taxes and investment tax credit, net.... 82,738 14,779
Equity in earnings of joint ventures, net of
distributions.......................................... (15,176) (30,344)
Other................................................... (790) (9,331)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... (36,312) 53,787
--------- ---------
Net cash provided from operating activities........... 211,499 237,498
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (247,856) 103,588
Dividends paid............................................ (63,735) (61,887)
Issuance of common stock (Note 10)........................ 132,544 14,742
Reacquisition of common stock............................. (780) --
Issuance of long-term debt (Note 10)...................... 106,535 458,761
Long-term commercial paper and bank borrowings, net....... 92,344 109,643
Retirement of long-term debt and preferred securities
(Note 10)............................................... (289,439) (326,194)
Other..................................................... -- 8,243
--------- ---------
Net cash provided from (used for) financing
activities........................................... (270,387) 306,896
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (233,410) (390,067)
Acquisitions.............................................. (33,071) (36,731)
Investment in debt and equity securities, net............. (4,572) 46,286
Investment in joint ventures.............................. (62,572) (166,977)
Sale of property and joint venture interests.............. 409,616 44,034
Other..................................................... (3,789) (20,403)
--------- ---------
Net cash provided from (used for) investing
activities........................................... 72,202 (523,858)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 13,314 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 17,039 39,495
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30..................... $ 30,353 $ 60,031
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 98,192 $ 113,476
Accrued unbilled revenues................................. 66,389 75,651
Accrued/deferred gas cost recovery revenues, net.......... (15,153) 36,761
Gas in inventory.......................................... (90,979) (141,022)
Property taxes assessed applicable to future periods...... 33,046 34,764
Accounts payable.......................................... (8,373) (22,576)
Federal income, property and other taxes payable.......... (64,216) (38,668)
Gas payable............................................... (6,596) 41,985
Interest payable.......................................... (3,855) 1,635
Prepaid benefit costs, net................................ (28,487) (16,276)
Other current assets and liabilities, net................. (2,193) (10,845)
Other deferred assets and liabilities, net................ (14,087) (21,098)
--------- ---------
$ (36,312) $ 53,787
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 97,395 $ 90,088
========= =========
Federal income taxes.................................... $ 3,550 $ 11,700
========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-105
<PAGE> 235
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
MCN Energy Group Inc. (MCN) is a diversified energy company that operates
two major business groups, Diversified Energy and Gas Distribution. Diversified
Energy, operating through MCN Energy Enterprises Inc. (MCNEE), was previously
doing business as MCN Investment Corporation. Gas Distribution principally
consists of Michigan Consolidated Gas Company (MichCon).
The accompanying consolidated financial statements should be read in
conjunction with MCN's 1998 Annual Report included herein. Additionally, certain
reclassifications have been made to the prior year's financial statements to
conform to the 1999 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary for a fair
presentation of the financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. MERGER AGREEMENT WITH DTE ENERGY COMPANY
MCN and DTE Energy Company (DTE) have signed a definitive merger agreement,
dated October 4, 1999, under which DTE will acquire all outstanding shares of
MCN common stock. Under the terms of the agreement, MCN shareholders will have
the right to elect to receive either $28.50 in cash or 0.775 shares of DTE
common stock in exchange for each share of MCN common stock that they hold. The
acquisition of shares is subject to an allocation and proration that is intended
to result in 45% of the MCN shares being converted into shares of DTE common
stock and 55% being converted into cash.
The boards of directors of both companies have unanimously approved the
merger agreement. The transaction is subject to the approval of the shareholders
of both companies, regulatory approvals and other customary merger conditions.
The transaction is expected to close in six to nine months from the date of the
merger agreement and will be accounted for as a purchase by DTE. The combined
company, which will be named DTE Energy Company and headquartered in Detroit,
will be the largest electric and gas utility in Michigan.
DTE is a diversified energy provider. Its principal subsidiary is The
Detroit Edison Company, Michigan's largest electric utility serving 2.1 million
customers in southeastern Michigan. DTE's non-regulated subsidiaries and
ventures sell methane gas from landfills, coal, metallurgical coke and other
energy-related products and services.
Additionally, as part of the merger agreement, MCN has agreed to use its
best efforts to enter into agreements to dispose of some or all of its interests
in certain assets or facilities. MCN may sell all or a portion of several
"Qualifying Facilities" as defined by the Public Utility Regulatory Policies Act
of 1978, as amended. MCN's investments in these "Qualifying Facilities" include:
a 23% interest in the Midland Cogeneration Venture, a 1,370 megawatt (MW)
cogeneration facility located in Michigan; a 50% interest in the Michigan Power
Project, a 123 MW cogeneration plant located in Michigan; a 33 1/3% interest in
the Carson Cogeneration facility, a 42 MW cogeneration plant located in
California; and a 50% interest in the Ada Cogeneration facility, a 30 MW
cogeneration plant located in Michigan. Furthermore, under the terms of the
merger agreement, MCN will dispose of all or a portion of its 95% interest in
the Cobisa-Person facility, a 140 MW power plant in New Mexico that is currently
under construction.
F-106
<PAGE> 236
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNUSUAL CHARGES
As discussed in MCN's 1998 Annual Report included herein, MCN recorded
several unusual charges in 1998, consisting of property write-downs, investment
losses, and restructuring charges. In 1999, MCN recorded additional unusual
charges. A discussion of each unusual charge by segment follows:
A. PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$133,782,000 pre-tax ($86,959,000 net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal
briquettes produced from six coal fines plants qualifying for synthetic
fuel tax credits and MCN's ability to utilize or sell such credits.
Although the plants were in service by June 30, 1998, the date specified to
qualify for the tax credits, operating delays at the plants in the 1998
third quarter significantly increased the possibility that the Internal
Revenue Service (IRS) would challenge the project's eligibility for tax
credits. In addition, there was uncertainty as to whether MCN could utilize
or sell the credits. These factors led to MCN's decision to record an
impairment loss equal to the carrying value of the plants, reflecting the
likely inability to recover such costs. MCN sought to maximize the value of
its investment in the coal fines project, and in May 1999 filed a request
with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, MCN received favorable
determination letters from the IRS ruling that four of the six plants were
in service by June 30, 1998 (Note 4a).
In the third quarter of 1998, MCN also recorded an impairment loss of
$3,899,000 pre-tax ($2,534,000 net of taxes) relating to an acquired
out-of-service pipeline in Michigan. MCN reviewed the business alternatives
for this asset and determined that its development is unlikely.
Accordingly, MCN recorded an impairment loss equal to the carrying value of
this asset.
B. ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, MCN recorded a
$2,470,000 pre-tax ($1,605,000 net of taxes) restructuring charge related
to certain international power projects. The charge was incurred as a
result of refocusing MCN's strategic plan, particularly the decision to
exit certain international power projects.
C. EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a
$52,000,000 pre-tax ($33,800,000 net of taxes) write-down of its gas and
oil properties under the full cost method of accounting, due primarily to
an unfavorable revision in the timing of the production of proved gas and
oil reserves as well as reduced expectations of sales proceeds on unproved
acreage. Under the full cost method of accounting as prescribed by the
Securities and Exchange Commission, MCN's capitalized exploration and
production costs at June 30, 1999 exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum
of discounted future net cash flows from the production of proved gas and
oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects.
In the second and third quarters of 1998, MCN recognized write-downs
of its gas and oil properties totaling $333,022,000 pre-tax ($216,465,000
net of taxes) and $83,955,000 pre-tax ($54,570,000 net of taxes),
respectively. The write-downs were also the result of MCN's capitalized
exploration and production costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN
recognized losses from the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $68,798,000 pre-tax ($44,719,000 net of taxes). In
the third quarter of 1999, MCN recognized additional losses relating to the
sale of these properties totaling $5,877,000 pre-tax ($3,820,000 net of
taxes).
F-107
<PAGE> 237
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loss on Investment: In the second quarter of 1999, MCN recognized a
$7,456,000 pre-tax ($4,846,000 net of taxes) loss from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a
$6,135,000 pre-tax ($3,987,000 net of taxes) loss from the write-down of
this investment during the second quarter of 1998. The losses were due to
declines in the fair value of the securities that are not considered
temporary. MCN has no carrying value in this investment after the
write-downs.
D. CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a
$10,390,000 pre-tax ($6,753,000 net of taxes) restructuring charge related
to the corporate realignment designed to improve operating efficiencies
through a more streamlined organizational structure. The realignment
includes cost saving initiatives expected to reduce future operating
expenses. As of September 30, 1999, payments of $3,087,000 have been
charged against the restructuring accruals relating to severance and
termination benefits. These benefits will continue to be paid through 2000.
The remaining restructuring costs, primarily for net lease expenses, are
expected to be paid over the related lease terms that expire through 2006.
E. GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$24,800,000 pre-tax ($11,200,000 net of taxes and minority interest)
write-down of certain gas gathering properties. An analysis revealed that
projected cash flows from the gathering system were not sufficient to cover
the system's carrying value. Therefore, an impairment loss was recorded
representing the amount by which the carrying value of the system exceeded
its estimated fair value.
Loss on Investment: In the third quarter of 1998, MCN also recorded an
$8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell
in 2000. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.
4. COAL FINES PLANTS
A. IRS DETERMINATION
During the third quarter of 1998, MCN recorded an impairment loss of
$133,782,000, pre-tax, which equaled the carrying value of its coal fines
plants and reflected the likely inability to recover such costs (Note 3a).
In September 1999, MCN received "in-service" determination letters from the
IRS with respect to its six coal fines plants, which were built to produce
briquettes that qualify for synthetic fuel tax credits. In the
determination letters, the IRS ruled that four of the plants were in
service by the June 30, 1998 deadline in order to qualify for synthetic
fuel tax credits. The IRS ruled that two other plants did not meet the
in-service requirements. The company continues to believe these two plants
also meet the requirements and intends to appeal the unfavorable rulings.
B. DISPOSITION
In November 1999, MCN reached an agreement to sell four of its coal
fines plants to DTE in an arms-length transaction that is independent of
the pending merger. The sales price will depend on total production
performance of the four plants. DTE will initially make a $45,000,000
payment that will be adjusted up to $152,000,000 or down to zero based on
the results of a 36-month production test period. The sale is expected to
be finalized in December 1999.
5. RESTATEMENT
As discussed in MCN's 1998 Annual Report included herein, subsequent to the
issuance of MCN's December 31, 1998 financial statements, certain matters came
to management's attention and resulted in a
F-108
<PAGE> 238
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
special investigation of prior years' operations of CoEnergy Trading Company
(CTC), MCN's non-utility energy marketing subsidiary. As a result of the
investigation, MCN identified that its internal controls had been overridden,
and that certain transactions had not been properly accounted for. Specifically,
the investigation concluded that CTC had entered into gas supply contracts and
agreed to pay significantly less than market prices in one period in return for
above-market prices to be paid in subsequent periods through March 2000. The
effect of these transactions was to improperly delay the accrual of cost of gas
expenses, resulting in the overstatement of net loss for the 1998 third quarter
and nine-month periods by $3,044,000 and $1,680,000, respectively, and an
understatement of net loss for the 1998 twelve-month period by $3,991,000.
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities were not accounted for
properly using the required mark-to-market method, under which unrealized gains
and losses are recorded as an adjustment to cost of gas. The effect of not
properly accounting for these transactions was the understatement of net loss
for the 1998 third quarter, nine- and twelve-month periods by $1,801,000,
$4,545,000 and $4,208,000, respectively. However, net income of $403,000,
$1,590,000 and $2,682,000 was realized and recorded in connection with these
trading activities in the 1998 third quarter, nine- and twelve-month periods,
respectively, resulting in a net loss from such activities for the 1998 third
quarter, nine- and twelve-month periods of $1,398,000, $2,955,000 and
$1,526,000, respectively. From the inception of these trading activities in
March 1997 through June 1999, $2,714,000 of net loss was realized and recorded
in connection with these trading activities. All of the contracts were
effectively closed by the end of June 1999.
Other items identified during the investigation resulted in the
understatement of net loss for the 1998 third quarter, nine- and twelve-month
periods by $816,000, $859,000 and $880,000, respectively.
The 1998 information in the accompanying consolidated financial statements
has been restated from amounts originally reported to properly account for the
transactions identified. A summary of the significant effects of the restatement
on MCN's September 30, 1998 financial statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------- ---------------------- -----------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS
Cost of Sales............... $ 201,663 $ 201,006 $ 847,823 $ 853,551 $1,295,187 $1,309,153
Loss Before Income Taxes.... $(278,492) $(277,835) $(493,721) $(499,449) $ (422,108) $ (436,074)
Income Tax Benefit.......... $(101,341) $(101,111) $(186,980) $(188,984) $ (165,609) $ (170,496)
Net Loss.................... $(177,151) $(176,724) $(306,741) $(310,465) $ (256,499) $ (265,578)
Loss Per Share -- Basic and
Diluted................... $ (2.24) $ (2.24) $ (3.90) $ (3.95) $ (3.27) $ (3.38)
</TABLE>
F-109
<PAGE> 239
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
PREVIOUSLY
REPORTED RESTATED
---------- --------
<S> <C> <C>
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
Accounts Receivable......................................... $277,229 $280,496
Gas in Inventory............................................ $200,399 $197,799
Accounts Payable............................................ $297,771 $318,129
Federal Income, Property and Other Taxes Payable............ $ 55,020 $ 48,130
Common Shareholders' Equity................................. $783,699 $770,898
</TABLE>
6. ACCOUNTING FOR START-UP ACTIVITIES
In January 1999, MCN adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-up Activities," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants.
SOP 98-5 requires start-up and organizational costs to be expensed as incurred.
This change in accounting principle resulted in the write-off of start-up and
organization costs capitalized as of December 31, 1998. The cumulative effect of
the change was to decrease earnings by $4,418,000 pre-tax ($2,872,000 net of
taxes) for the nine- and twelve-month periods ended September 30, 1999.
7. REGULATORY MATTERS
A. REGULATORY REFORM PLAN
As discussed in MCN's 1998 Annual Report included herein, MichCon
implemented its Regulatory Reform Plan in January 1999. The plan includes a
new three-year gas sales program under which MichCon's gas sales rates
include a gas commodity component that is fixed at $2.95 per thousand cubic
feet (Mcf). As part of its gas acquisition strategy, MichCon has entered
into fixed-price contracts at costs below $2.95 per Mcf for a substantial
portion of its expected gas supply requirements through 2001.
The plan also includes a comprehensive experimental three-year
customer choice program, which is subject to annual caps on the level of
participation. The customer choice program began in April 1999, with
approximately 70,000 customers choosing to purchase natural gas from
suppliers other than MichCon. Plan years begin April 1 of each year, and
the number of customers allowed to participate in the plan is limited to
75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume
limitation on commercial and industrial participants. The volume limitation
for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in
2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the
gas to the customers' premises at prices that maintain its previously
existing sales margins on these services. Various parties have appealed the
Michigan Public Service Commission's (MPSC) approval of the plan. While
management believes the plan will be upheld on appeal, there can be no
assurance as to the outcome.
B. GAS COST RECOVERY PROCEEDINGS
Prior to January 1999, the Gas Cost Recovery (GCR) process allowed
MichCon to recover its cost of gas sold if the MPSC determined that such
costs were reasonable and prudent. An annual GCR reconciliation proceeding
provided a review of gas costs incurred during the previous year and
determined whether gas costs had been overcollected or undercollected, and
as a result, whether a refund or surcharge, including interest, was
required to be returned to or collected from GCR customers. The GCR process
was suspended with the implementation of MichCon's Regulatory Reform Plan
in January 1999.
In February 1999, MichCon filed its final GCR reconciliation case
covering gas costs incurred during 1998 which indicates an overrecovery of
$18,000,000, including interest. Management believes
F-110
<PAGE> 240
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that 1998 gas costs were reasonable and prudent and that the MPSC will
approve the gas costs incurred. However, management cannot predict the
outcome of this proceeding. During the first quarter of 1999, MichCon
refunded the overrecovery to customers as a reduction in gas sales rates.
8. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In December 1998, MCN accounted for its E&P segment as a discontinued
operation as a result of its decision to sell all of its gas and oil properties.
In August 1999, management announced its intention to retain its natural gas
producing properties in Michigan. Accordingly, E&P's operating results for prior
periods have been reclassified from discontinued operations to continuing
operations. The decision to retain these properties was based on the interaction
of two factors. MCN significantly revised its strategic direction. Key aspects
of the new corporate strategy include a Midwest-to-Northeast regional focus
rather than a North American focus, and an emphasis on achieving operational
efficiencies and growth through the integration of existing businesses. Shortly
thereafter, the bid for the Michigan properties was lowered significantly. The
lower price was unacceptable, especially in light of MCN's new strategic
direction.
9. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
In October 1999, MCN entered into a $290,000,000 revolving credit agreement
that expires in July 2000. Borrowings under the credit agreement are at variable
rates. This agreement replaced the March 1999 $150,000,000 revolving credit
agreement.
MCNEE and MichCon maintain credit lines that allow for borrowings of up to
$350,000,000 under 364-day revolving credit facilities and up to $350,000,000
under three-year revolving credit facilities. These credit lines totaling
$700,000,000 support their commercial paper programs. The 364-day revolving
credit facilities were renewed in July 1999. The three-year revolving credit
facilities expire in July 2001.
As discussed in MCN's 1998 Annual Report included herein, MCN borrowed
$260,000,000 under a one-year term loan facility, due December 2, 1999.
Principal payments are required based on certain proceeds received from the sale
of E&P assets. As of September 30, 1999, MCN had repaid $203,000,000 of
borrowings under the facility.
10. ENHANCED PRIDES, LONG-TERM DEBT AND PREFERRED SECURITIES
As discussed in MCN's 1998 Annual Report included herein, MCN issued
5,865,000 of Preferred Redeemable Increased Dividend Equity Securities (Enhanced
PRIDES) in 1996. Each security represented a contract to purchase one share of
MCN common stock. The Enhanced PRIDES were converted into MCN common stock in
April 1999, and as a result MCN received cash proceeds totaling approximately
$135,000,000.
In October 1999, MCN borrowed from its $290,000,000 revolving credit
agreement and redeemed, at par, $100,000,000 of Single Point Remarketed Reset
Capital Securities which were due in 2037.
In September 1999, MichCon redeemed $18,000,000 of 9.125% first mortgage
bonds, which were due September 2004.
In June 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due
June 2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. The
notes are insured by a financial guaranty insurance policy and are rated AAA or
its equivalent by the major rating agencies. The notes are redeemable at par on
or after June 1, 2004.
11. EARNINGS PER SHARE COMPUTATION
MCN reports both basic and diluted earnings per share (EPS). Basic EPS is
computed by dividing income or loss before cumulative effect of accounting
change by the weighted average number of common
F-111
<PAGE> 241
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares outstanding during the period. Diluted EPS assumes the issuance of
potential dilutive common shares outstanding during the period and adjusts for
changes in income and the repurchase of common shares that would have occurred
with proceeds from the assumed issuance. Potentially dilutive securities have
been excluded from the diluted EPS calculation since their inclusion would have
been antidilutive.
12. SHAREHOLDERS' RIGHTS PLAN
As discussed in MCN's 1998 Annual Report included herein, MCN has a
Shareholders' Rights Plan that is designed to maximize shareholders' value in
the event that MCN is acquired. The rights are attached to and trade with shares
of MCN common stock until they are exercisable upon certain triggering events.
The plan has been amended, in connection with the pending merger with DTE (Note
2), so that DTE's acquisition of MCN will not represent a triggering event.
13. COMPREHENSIVE INCOME
MCN reports comprehensive income, which is defined as the change in common
shareholder's equity during a period from transactions and events from non-owner
sources, including net income. Total comprehensive income for the applicable
periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- -----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPREHENSIVE INCOME (LOSS)
Net Loss...................... $(31,154) $(176,724) $(31,851) $(310,465) $(7,854) $(265,578)
-------- --------- -------- --------- ------- ---------
Other Comprehensive Income
(Loss), Net of Taxes:
Foreign currency
translation adjustment:
Foreign currency
translation
adjustment.......... 16 (85) (600) (5,898) (1,256) (11,423)
Less: Reclassification
for losses
recognized in net
income.............. 13,132 -- 13,132 -- 13,132 --
-------- --------- -------- --------- ------- ---------
13,148 (85) 12,532 (5,898) 11,876 (11,423)
-------- --------- -------- --------- ------- ---------
Unrealized loss on
securities:
Unrealized losses
during period....... -- (2,559) (1,159) (5,362) (2,287) (6,546)
Less: Reclassification
for losses
recognized in net
income.............. -- -- 4,846 3,987 4,846 3,987
-------- --------- -------- --------- ------- ---------
-- (2,559) 3,687 (1,375) 2,559 (2,559)
-------- --------- -------- --------- ------- ---------
Total Other Comprehensive
Income (Loss), Net of
Taxes.................... 13,148 (2,644) 16,219 (7,273) 14,435 (13,982)
-------- --------- -------- --------- ------- ---------
Total Comprehensive Income
(Loss)................... $(18,006) $(179,368) $(15,632) $(317,738) $ 6,581 $(279,560)
======== ========= ======== ========= ======= =========
</TABLE>
14. CONTINGENCIES
MCN is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. These proceedings include certain contract disputes
between Gas Distribution and gas producers. Management cannot predict the final
F-112
<PAGE> 242
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disposition of such proceedings, but believes that adequate provision has been
made for probable losses. It is management's belief, after discussion with legal
counsel, that the ultimate resolution of those proceedings still pending will
not have a material adverse effect on MCN's financial statements.
15. COMMODITY SWAP AGREEMENTS
MCN's Diversified Energy and Gas Distribution groups manage commodity price
risk through the use of various derivative instruments and predominately limit
the use of such instruments to hedging activities. The following assets and
liabilities related to the use of gas and oil swap agreements are reflected in
the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- ------------
1999 1998 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses..................................... $ 64,940 $31,923 $48,700
Receivables........................................... 43,989 13,776 25,864
-------- ------- -------
108,929 45,699 74,564
Less -- Current portion............................... 12,390 666 11,417
-------- ------- -------
$ 96,539 $45,033 $63,147
======== ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains...................................... $ 34,884 $13,024 $24,126
Payables.............................................. 72,707 36,890 54,525
-------- ------- -------
107,591 49,914 78,651
Less -- Current portion............................... 30,781 11,358 15,695
-------- ------- -------
$ 76,810 $38,556 $62,956
======== ======= =======
</TABLE>
F-113
<PAGE> 243
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION
MCN is organized into two business groups, Diversified Energy and Gas
Distribution. The groups operate five major business segments as set forth in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED
CUSTOMERS:
Pipelines & Processing............ $ 6,416 $ 6,238 $ 17,747 $ 14,677 $ 23,927 $ 15,948
Electric Power.................... 14,624 12,727 39,747 34,972 51,905 47,797
Energy Marketing.................. 305,405 184,926 813,594 592,491 1,029,471 858,348
Exploration & Production.......... 9,292 23,810 51,167 87,261 73,109 110,688
Gas Distribution.................. 127,122 123,444 825,974 729,418 1,141,696 1,129,402
-------- --------- ---------- ---------- ---------- ----------
462,859 351,145 1,748,229 1,458,819 2,320,108 2,162,183
-------- --------- ---------- ---------- ---------- ----------
REVENUES FROM AFFILIATED CUSTOMERS:
Pipelines & Processing............ 507 62 1,609 298 1,656 396
Energy Marketing.................. 17,940 15,356 49,466 47,432 66,276 64,696
Exploration & Production.......... 22,538 27,205 68,081 72,467 93,513 108,579
Gas Distribution.................. 2,318 618 5,652 5,328 6,959 8,326
-------- --------- ---------- ---------- ---------- ----------
43,303 43,241 124,808 125,525 168,404 181,997
-------- --------- ---------- ---------- ---------- ----------
Eliminations........................ (43,303) (43,241) (124,808) (125,525) (168,404) (181,997)
-------- --------- ---------- ---------- ---------- ----------
Consolidated Operating Revenues..... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
======== ========= ========== ========== ========== ==========
NET INCOME (LOSS):
Pipelines & Processing............ $ (99) $ (89,332) $ 3,358 $ (82,089) $ 3,207 $ (78,036)
Electric Power.................... 4,311 2,627 11,682 15,290 15,663 18,660
Energy Marketing.................. (7,158) (197) (7,545) 2,646 (11,228) 2,610
Exploration & Production.......... (4,034) (51,017) (83,742) (258,408) (78,687) (249,752)
Gas Distribution.................. (14,671) (24,516) 75,962 40,854 106,842 73,418
Corporate & Other................. (9,503) (14,289) (28,694) (28,758) (40,779) (32,478)
-------- --------- ---------- ---------- ---------- ----------
(31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
Cumulative effect of accounting
change.......................... -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
Consolidated Net Loss............... $(31,154) $(176,724) $ (31,851) $ (310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
</TABLE>
F-114
<PAGE> 244
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- ------- -------
(IN THOUSANDS OF DOLLARS -- EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
1999
Operating revenues.......................................... $796,586 $488,784 $462,859
Operating income (loss):
Before unusual charges.................................... $153,918 $ 16,927 $(18,171)
Unusual charges........................................... -- (52,000) --
-------- -------- --------
$153,918 $(35,073) $(18,171)
======== ======== ========
Operating and joint venture income (loss):
Before unusual charges.................................... $166,376 $ 29,093 $ (2,775)
Unusual charges........................................... -- (52,000) --
-------- -------- --------
$166,376 $(22,907) $ (2,775)
======== ======== ========
Income (loss) before cumulative effect of accounting change:
Before unusual charges.................................... $ 88,415 $ (2,875) $(27,334)
Unusual charges........................................... -- (83,365) (3,820)
-------- -------- --------
$ 88,415 $(86,240) $(31,154)
======== ======== ========
Net income (loss):
Before unusual charges.................................... $ 85,543 $ (2,875) $(27,334)
Unusual charges........................................... -- (83,365) (3,820)
-------- -------- --------
$ 85,543 $(86,240) $(31,154)
======== ======== ========
Basic earnings (loss) per share:
Before unusual charges and cumulative effect of accounting
change................................................. $ 1.11 $ (.03) $ (.32)
Unusual charges........................................... -- (1.00) (.05)
Cumulative effect of accounting change.................... (.04) -- --
-------- -------- --------
$ 1.07 $ (1.03) $ (.37)
======== ======== ========
Diluted earnings (loss) per share:
Before unusual charges and cumulative effect of accounting
change................................................. $ 1.06 $ (.03) $ (.32)
Unusual charges........................................... -- (1.00) (.05)
Cumulative effect of accounting change.................... (.04) -- --
-------- -------- --------
$ 1.02 $ (1.03) $ (.37)
======== ======== ========
Dividends paid per share.................................... $ .2550 $ .2550 $ .2550
Average daily trading volume................................ 265,050 306,259 326,253
Price per share:
High...................................................... $19.5625 $22.6250 $22.2500
Low....................................................... $15.8125 $15.9375 $17.0000
Close..................................................... $16.0625 $20.7500 $17.1875
</TABLE>
18. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNEE are subject to a support agreement between
MCN and MCNEE, under which MCN has committed to make payments of interest and
principal on MCNEE's securities in the event of failure to pay by MCNEE. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders
F-115
<PAGE> 245
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of MCNEE's securities. The carrying value of MCN's assets on an unconsolidated
basis, which primarily consists of investments in subsidiaries other than
MichCon, is $736,335,000 at September 30, 1999.
The following MCN consolidating financial statements are presented and
include separately MCNEE, MichCon and MCN and other subsidiaries. MCN has
determined that separate financial statements and other disclosures concerning
MCNEE are not material to investors. The other MCN subsidiaries represent
Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I,
MCN Financing II, MCN Financing III, MCN Financing V, MCN Financing VI, MichCon
Enterprises, Inc. and Blue Lake Holdings, Inc., until its sale on December 31,
1997.
F-116
<PAGE> 246
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 6,847 $ 335,539 $122,635 $ (2,162) $ 462,859
--------- --------- --------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 5,047 298,054 28,187 (1,949) 329,339
Operation and maintenance........................ (752) 36,612 62,486 (187) 98,159
Depreciation, depletion and amortization......... 1,044 13,375 24,192 -- 38,611
Property and other taxes......................... 349 2,397 12,175 -- 14,921
--------- --------- --------- -------- ---------
5,688 350,438 127,040 (2,136) 481,030
--------- --------- --------- -------- ---------
OPERATING INCOME (LOSS)............................ 1,159 (14,899) (4,405) (26) (18,171)
--------- --------- --------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (30,454) 14,952 444 30,454 15,396
--------- --------- --------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 10,841 1,100 916 (10,948) 1,909
Interest on long-term debt....................... 245 (10,248) (12,537) -- (22,540)
Other interest expense........................... (2,304) (13,000) (1,184) 10,947 (5,541)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (10,335) (10,335)
Loss on sale of E&P properties................... -- (5,877) -- -- (5,877)
Minority interest................................ -- (350) (282) -- (632)
Other............................................ (813) 4,657 (590) 27 3,281
--------- --------- --------- -------- ---------
7,969 (23,718) (13,677) (10,309) (39,735)
--------- --------- --------- -------- ---------
LOSS BEFORE INCOME TAXES........................... (21,326) (23,665) (17,638) 20,119 (42,510)
INCOME TAX BENEFIT................................. (507) (6,751) (4,098) -- (11,356)
--------- --------- --------- -------- ---------
NET LOSS........................................... (20,819) (16,914) (13,540) 20,119 (31,154)
DIVIDENDS ON PREFERRED SECURITIES.................. 10,335 -- -- (10,335) --
--------- --------- --------- -------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK....... $ (31,154) $ (16,914) $(13,540) $ 30,454 $ (31,154)
========= ========= ========= ======== =========
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
OPERATING REVENUES................................. $ 1,634 $ 228,949 $122,428 $ (1,866) $ 351,145
--------- --------- --------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 931 170,039 31,143 (1,107) 201,006
Operation and maintenance........................ (8,742) 42,791 57,422 (759) 90,712
Depreciation, depletion and amortization......... 696 20,562 22,973 -- 44,231
Property and other taxes......................... 360 3,095 12,087 -- 15,542
Property write-downs and restructuring charges... 8,669 225,827 24,800 -- 259,296
--------- --------- --------- -------- ---------
1,914 462,314 148,425 (1,866) 610,787
--------- --------- --------- -------- ---------
OPERATING LOSS..................................... (280) (233,365) (25,997) -- (259,642)
--------- --------- --------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (171,089) 17,896 511 170,645 17,963
--------- --------- --------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 8,447 1,149 1,639 (8,739) 2,496
Interest on long-term debt....................... 91 (13,508) (10,975) -- (24,392)
Other interest expense........................... (445) (11,244) (2,001) 8,699 (4,991)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (8,178) (8,178)
Investment loss.................................. (8,500) -- -- -- (8,500)
Minority interest................................ -- 225 7,050 -- 7,275
Other............................................ 17 (412) 529 -- 134
--------- --------- --------- -------- ---------
(390) (23,790) (3,758) (8,218) (36,156)
--------- --------- --------- -------- ---------
LOSS BEFORE INCOME TAXES........................... (171,759) (239,259) (29,244) 162,427 (277,835)
INCOME TAX BENEFIT................................. (3,254) (86,951) (10,906) -- (101,111)
--------- --------- --------- -------- ---------
NET INCOME......................................... (168,505) (152,308) (18,338) 162,427 (176,724)
DIVIDENDS ON PREFERRED SECURITIES.................. 8,178 -- -- (8,178) --
--------- --------- --------- -------- ---------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(176,683) $(152,308) $(18,338) $170,605 $(176,724)
========= ========= ========= ======== =========
</TABLE>
F-117
<PAGE> 247
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 25,419 $ 927,018 $806,280 $(10,488) $1,748,229
--------- --------- --------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 17,685 771,091 336,948 (7,552) 1,118,172
Operation and maintenance........................ (1,586) 109,108 193,974 (2,910) 298,586
Depreciation, depletion and amortization......... 2,851 49,539 73,558 -- 125,948
Property and other taxes......................... 1,126 8,386 43,337 -- 52,849
Property write-downs and restructuring charges... -- 52,000 -- -- 52,000
--------- --------- --------- -------- ----------
20,076 990,124 647,817 (10,462) 1,647,555
--------- --------- --------- -------- ----------
OPERATING INCOME (LOSS)............................ 5,343 (63,106) 158,463 (26) 100,674
--------- --------- --------- -------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (29,894) 38,563 1,457 29,894 40,020
--------- --------- --------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 32,470 3,088 2,861 (32,645) 5,774
Interest on long-term debt....................... 706 (31,724) (35,028) -- (66,046)
Other interest expense........................... (9,616) (38,867) (5,020) 32,645 (20,858)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (31,004) (31,004)
Loss on sale of E&P properties................... -- (74,675) -- -- (74,675)
Investment loss.................................. -- (7,456) -- -- (7,456)
Minority interest................................ -- (566) (805) -- (1,371)
Other............................................ (1,071) 15,003 (303) 26 13,655
--------- --------- --------- -------- ----------
22,489 (135,197) (38,295) (30,978) (181,981)
--------- --------- --------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (2,062) (159,740) 121,625 (1,110) (41,287)
INCOME TAX PROVISION (BENEFIT)..................... (1,215) (54,120) 43,027 -- (12,308)
--------- --------- --------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................................ (847) (105,620) 78,598 (1,110) (28,979)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES............................................ -- (2,872) -- -- (2,872)
--------- --------- --------- -------- ----------
NET INCOME (LOSS).................................. (847) (108,492) 78,598 (1,110) (31,851)
DIVIDENDS ON PREFERRED SECURITIES.................. 31,004 -- -- (31,004) --
--------- --------- --------- -------- ----------
NET (LOSS) AVAILABLE FOR COMMON STOCK.............. $ (31,851) $(108,492) $ 78,598 $ 29,894 $ (31,851)
========= ========= ========= ======== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
OPERATING REVENUES................................. $ 10,303 $ 734,031 $724,442 $ (9,957) $1,458,819
--------- --------- --------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 5,374 547,775 306,244 (5,842) 853,551
Operation and maintenance........................ (8,502) 108,320 181,512 (4,115) 277,215
Depreciation, depletion and amortization......... 2,035 64,533 68,910 -- 135,478
Property and other taxes......................... 1,531 9,382 43,342 -- 54,255
Write-down of E&P properties..................... 8,669 558,849 24,800 -- 592,318
--------- --------- --------- -------- ----------
9,107 1,288,859 624,808 (9,957) 1,912,817
--------- --------- --------- -------- ----------
OPERATING INCOME (LOSS)............................ 1,196 (554,828) 99,634 -- (453,998)
--------- --------- --------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES..................................... (305,927) 46,062 1,461 304,965 46,561
--------- --------- --------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 28,019 5,314 3,573 (28,247) 8,659
Interest on long-term debt....................... 494 (29,145) (33,694) -- (62,345)
Other interest expense........................... (1,104) (36,647) (7,149) 28,246 (16,654)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (27,162) (27,162)
Loss on sale of E&P properties................... -- -- -- -- --
Investment loss.................................. (8,500) (6,135) -- -- (14,635)
Minority interest................................ -- 123 5,907 -- 6,030
Other............................................ (490) 13,350 1,235 -- 14,095
--------- --------- --------- -------- ----------
18,419 (53,140) (30,128) (27,163) (92,012)
--------- --------- --------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (286,312) (561,906) 70,967 277,802 (499,449)
INCOME TAX PROVISION (BENEFIT)..................... (3,010) (210,601) 24,627 -- (188,984)
--------- --------- --------- -------- ----------
NET INCOME (LOSS).................................. (283,302) (351,305) 46,340 277,802 (310,465)
DIVIDENDS ON PREFERRED SECURITIES.................. 27,162 -- -- (27,162) --
--------- --------- --------- -------- ----------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(310,464) $(351,305) $ 46,340 $304,964 $ (310,465)
========= ========= ========= ======== ==========
</TABLE>
F-118
<PAGE> 248
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 33,378 $1,185,815 $1,115,496 $(14,581) $2,320,108
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 23,017 975,523 482,233 (10,378) 1,470,395
Operation and maintenance...................... (3,291) 153,395 264,859 (4,177) 410,786
Depreciation, depletion and amortization....... 4,022 68,407 97,531 -- 169,960
Property and other taxes....................... 1,314 11,400 55,433 -- 68,147
Property write-downs and restructuring
charges...................................... -- 52,000 -- -- 52,000
--------- ---------- ---------- -------- ----------
25,062 1,260,725 900,056 (14,555) 2,171,288
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 8,316 (74,910) 215,440 (26) 148,820
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (6,251) 53,743 1,942 6,250 55,684
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 41,859 4,383 4,976 (43,210) 8,008
Interest on long-term debt..................... (429) (44,400) (46,218) -- (91,047)
Other interest expense......................... (10,986) (50,850) (9,984) 43,212 (28,608)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (40,212) (40,212)
Loss on sale of E&P properties................. -- (74,675) -- -- (74,675)
Investment loss................................ -- (7,456) -- -- (7,456)
Minority interest.............................. -- (424) (985) -- (1,409)
Other.......................................... (1,186) 22,001 (1,720) 26 19,121
--------- ---------- ---------- -------- ----------
29,258 (151,421) (53,931) (40,184) (216,278)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ 31,323 (172,588) 163,451 (33,960) (11,774)
INCOME TAX PROVISION (BENEFIT)................... (1,034) (59,975) 54,217 -- (6,792)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............................. 32,357 (112,613) 109,234 (33,960) (4,982)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES.......................................... -- (2,872) -- -- (2,872)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ 32,357 (115,485) 109,234 (33,960) (7,854)
DIVIDENDS ON PREFERRED SECURITIES................ 40,212 -- -- (40,212) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $ (7,855) $ (115,485) $ 109,234 $ 6,252 $ (7,854)
========= ========== ========== ======== ==========
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------
OPERATING REVENUES............................... $ 15,967 $1,039,310 $1,121,762 $(14,856) $2,162,183
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 8,644 785,533 524,321 (9,345) 1,309,153
Operation and maintenance...................... (8,094) 142,953 256,844 (5,511) 386,192
Depreciation, depletion and amortization....... 2,609 85,107 94,529 -- 182,245
Property and other taxes....................... 1,860 12,933 57,484 -- 72,277
Property write-downs and restructuring
charges...................................... 8,669 558,849 24,800 -- 592,318
--------- ---------- ---------- -------- ----------
13,688 1,585,375 957,978 (14,856) 2,542,185
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 2,279 (546,065) 163,784 -- (380,002)
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (260,893) 58,974 1,807 260,152 60,040
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 38,135 8,418 4,602 (38,019) 13,136
Interest on long-term debt..................... 602 (34,691) (45,247) -- (79,336)
Other interest expense......................... (1,607) (47,616) (10,031) 38,273 (20,981)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (36,916) (36,916)
Investment loss................................ (8,500) (6,135) -- -- (14,635)
Minority interest.............................. -- 99 5,481 -- 5,580
Other.......................................... (417) 16,349 1,108 -- 17,040
--------- ---------- ---------- -------- ----------
28,213 (63,576) (44,087) (36,662) (116,112)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (230,401) (550,667) 121,504 223,490 (436,074)
INCOME TAX PROVISION (BENEFIT)................... (2,166) (211,562) 43,232 -- (170,496)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ (228,235) (339,105) 78,272 223,490 (265,578)
DIVIDENDS ON PREFERRED SECURITIES................ 36,916 -- -- (36,916) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $(265,151) $ (339,105) $ 78,272 $260,406 $ (265,578)
========= ========== ========== ======== ==========
</TABLE>
F-119
<PAGE> 249
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
Accounts receivable.............................. 5,450 239,004 111,434 (38,429) 317,459
Less -- Allowance for doubtful accounts........ 168 1,652 14,396 -- 16,216
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,282 237,352 97,038 (38,429) 301,243
Accrued unbilled revenues........................ 321 -- 21,178 -- 21,499
Gas in inventory................................. -- 128,196 110,170 -- 238,366
Property taxes assessed applicable to future
periods........................................ 284 1,529 37,692 -- 39,505
Other............................................ 6,171 59,589 38,609 (47,570) 56,799
---------- ---------- ---------- ----------- ----------
12,138 445,059 316,567 (85,999) 687,765
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 9,248 106,934 -- (105,038) 11,144
Investments in debt and equity securities........ -- 5,217 66,653 624 72,494
Deferred swap losses and receivables............. -- 96,539 -- -- 96,539
Deferred environmental costs..................... 2,769 -- 28,522 -- 31,291
Prepaid benefit costs............................ 783 -- 146,534 (7,022) 140,295
Other............................................ 16,273 41,802 64,528 2,966 125,569
---------- ---------- ---------- ----------- ----------
29,073 250,492 306,237 (108,470) 477,332
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,372,832 740,237 19,766 (1,370,353) 762,482
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,697 793,985 2,973,747 -- 3,816,429
Less -- Accumulated depreciation and depletion... 19,537 203,718 1,464,931 -- 1,688,186
---------- ---------- ---------- ----------- ----------
29,160 590,267 1,508,816 -- 2,128,243
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 5,845 $ 213,448 $ 112,090 $ (40,207) $ 291,176
Notes payable.................................... 57,751 181,748 132,465 (969) 370,995
Current portion of long-term debt and capital
lease obligations.............................. 103,094 149 28,059 -- 131,302
Federal income, property and other taxes
payable........................................ (4,359) 2,016 51,591 (43,999) 5,249
Gas payable...................................... -- 30,310 5,763 -- 36,073
Customer deposits................................ 4 -- 15,762 -- 15,766
Interest payable................................. 2,270 12,259 11,930 -- 26,459
Other............................................ 12,548 21,078 47,834 (1,105) 80,355
---------- ---------- ---------- ----------- ----------
177,153 461,008 405,494 (86,280) 957,375
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ -- -- 104,778 (104,778) --
Unamortized investment tax credit................ 252 -- 28,258 -- 28,510
Tax benefits amortizable to customers............ -- -- 136,906 -- 136,906
Deferred swap gains and payables................. -- 76,810 -- -- 76,810
Accrued environmental costs...................... 3,000 -- 27,373 -- 30,373
Minority interest................................ -- 2,358 8,570 -- 10,928
Other............................................ 12,538 45,894 48,757 (3,113) 104,076
---------- ---------- ---------- ----------- ----------
15,790 125,062 354,642 (107,891) 387,603
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 777,455 683,486 -- 1,460,941
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 402,900 -- -- -- 402,900
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 855 5 10,300 (10,305) 855
Additional paid-in capital....................... 967,356 956,767 230,399 (1,187,166) 967,356
Retained earnings (deficit)...................... (98,563) (293,885) 467,065 (173,180) (98,563)
Accumulated other comprehensive loss............. -- (357) -- -- (357)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
847,360 662,530 707,764 (1,370,651) 847,003
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
</TABLE>
F-120
<PAGE> 250
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
Accounts receivable.............................. 5,185 185,364 108,135 (8,673) 290,011
Less -- Allowance for doubtful accounts........ 70 533 8,912 -- 9,515
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,115 184,831 99,223 (8,673) 280,496
Accrued unbilled revenues........................ 214 -- 17,145 -- 17,359
Gas in inventory................................. -- 101,334 96,465 -- 197,799
Property taxes assessed applicable to future
periods........................................ 121 1,593 31,401 -- 33,115
Other............................................ 3,904 24,980 136,736 (109,500) 56,120
---------- ---------- ---------- ----------- ----------
10,727 360,785 391,581 (118,173) 644,920
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 3,387 131,597 -- (81,465) 53,519
Investments in debt and equity securities........ -- 5,464 37,171 351 42,986
Deferred swap losses and receivables............. -- 45,033 -- -- 45,033
Deferred environmental costs..................... 2,603 -- 28,052 -- 30,655
Prepaid benefit costs............................ 619 -- 103,814 (7,264) 97,169
Other............................................ 4,891 33,671 58,429 (272) 96,719
---------- ---------- ---------- ----------- ----------
11,500 215,765 227,466 (88,650) 366,081
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,282,571 741,335 20,458 (1,281,942) 762,422
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 44,295 1,067,113 2,845,717 -- 3,957,125
Less -- Accumulated depreciation and depletion... 14,889 211,170 1,377,164 -- 1,603,223
---------- ---------- ---------- ----------- ----------
29,406 855,943 1,468,553 -- 2,353,902
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 2,894 $ 259,081 $ 67,591 $ (11,437) $ 318,129
Notes payable.................................... 107,440 211,348 204,313 (108,144) 414,957
Current portion of long-term debt and capital
lease obligations.............................. -- 211,433 58,066 -- 269,499
Federal income, property and other taxes
payable........................................ 703 6,204 41,223 -- 48,130
Deferred gas cost recovery revenues.............. -- -- 23,899 -- 23,899
Gas payable...................................... -- 21,782 28,520 -- 50,302
Customer deposits................................ 26 -- 16,803 -- 16,829
Interest payable................................. 2,873 13,697 13,525 -- 30,095
Other............................................ 16,680 9,534 38,112 (2,021) 62,305
---------- ---------- ---------- ----------- ----------
130,616 733,079 492,052 (121,602) 1,234,145
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ (6,574) -- 84,652 (78,078) --
Unamortized investment tax credit................ 279 -- 31,362 -- 31,641
Tax benefits amortizable to customers............ -- -- 132,676 -- 132,676
Deferred swap gains and payables................. -- 38,556 -- -- 38,556
Accrued environmental costs...................... 3,000 -- 32,000 -- 35,000
Minority interest................................ -- 2,599 9,349 -- 11,948
Other............................................ 15,712 14,148 41,858 (7,264) 64,454
---------- ---------- ---------- ----------- ----------
12,417 55,303 331,897 (85,342) 314,275
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 780,781 621,745 -- 1,402,526
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 405,481 -- -- -- 405,481
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 791 5 10,300 (10,305) 791
Additional paid-in capital....................... 813,809 797,852 230,399 (1,028,251) 813,809
Retained earnings (deficit)...................... (6,622) (178,400) 421,665 (243,265) (6,622)
Accumulated other comprehensive loss............. -- (14,792) -- -- (14,792)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
785,690 604,665 662,364 (1,281,821) 770,898
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
</TABLE>
F-121
<PAGE> 251
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<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.............................. 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts........ 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues........................ 1,121 -- 86,767 -- 87,888
Gas in inventory................................. -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods........................................ 214 1,172 71,165 -- 72,551
Other............................................ 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities........ -- 3,548 65,556 601 69,705
Deferred swap losses and receivables............. -- 63,147 -- -- 63,147
Deferred environmental costs..................... 2,604 -- 28,169 -- 30,773
Prepaid benefit costs............................ -- -- 113,879 (2,104) 111,775
Other............................................ 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,534,180 782,471 19,343 (1,532,763) 803,231
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,681 1,103,716 2,889,020 -- 4,041,417
Less -- Accumulated depreciation and depletion... 17,210 229,944 1,396,940 -- 1,644,094
---------- ---------- ---------- ----------- ----------
31,471 873,772 1,492,080 -- 2,397,323
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 4,123 $ 218,851 $ 98,891 $ (17,516) $ 304,349
Notes payable.................................... 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations.............................. -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable........................................ 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues.............. -- -- 14,980 -- 14,980
Gas payable...................................... -- 17,332 25,337 -- 42,669
Customer deposits................................ 22 -- 18,769 -- 18,791
Interest payable................................. 2,835 16,519 10,960 -- 30,314
Other............................................ 15,502 8,757 56,262 (2,525) 77,996
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit................ 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers............ -- -- 130,120 -- 130,120
Deferred swap gains and payables................. -- 62,956 -- -- 62,956
Accrued environmental costs...................... 3,000 -- 32,000 -- 35,000
Minority interest................................ -- 2,697 8,201 -- 10,898
Other............................................ 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 687,333 619,835 -- 1,307,168
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 502,203 -- -- -- 502,203
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 797 5 10,300 (10,305) 797
Additional paid-in capital....................... 832,966 1,071,390 230,399 (1,301,789) 832,966
Retained earnings (deficit)...................... (2,977) (185,393) 406,144 (220,751) (2,977)
Accumulated other comprehensive loss............. -- (16,576) -- -- (16,576)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
808,498 869,426 646,843 (1,532,845) 791,922
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
</TABLE>
F-122
<PAGE> 252
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES.......... $ 51,563 $ 30,059 $ 177,343 $(47,466) $ 211,499
--------- --------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net............................. (203,020) 43,986 (88,704) (118) (247,856)
Capital contributions paid to affiliates,
net.......................................... -- (114,623) -- 114,623 --
Dividends paid................................. (63,735) -- (17,500) 17,500 (63,735)
Preferred securities dividends paid............ (31,004) -- -- 31,004 --
Issuance of common stock....................... 132,544 -- -- -- 132,544
Reacquisition of common stock.................. (780) -- -- -- (780)
Issuance of long-term debt..................... -- -- 106,535 -- 106,535
Long-term commercial paper and bank
borrowings, net.............................. -- 92,344 -- -- 92,344
Retirement of long-term debt and preferred
securities................................... -- (212,960) (76,479) -- (289,439)
--------- --------- --------- -------- ---------
NET CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES................................. (165,995) (191,253) (76,148) 163,009 (270,387)
--------- --------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures........................... (882) (138,232) (94,296) -- (233,410)
Acquisitions................................... -- (33,071) -- -- (33,071)
Investment in debt and equity securities,
net.......................................... -- (3,452) (1,097) (23) (4,572)
Investment in joint ventures and
subsidiaries................................. 113,623 (61,558) (14) (114,623) (62,572)
Sale of property and joint venture interests... -- 411,867 -- (2,251) 409,616
Other.......................................... 371 (5,003) (511) 1,354 (3,789)
--------- --------- --------- -------- ---------
Net cash provided from (used for) investing
activities................................. 113,112 170,551 (95,918) (115,543) 72,202
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................... (1,320) 9,357 5,277 -- 13,314
CASH AND CASH EQUIVALENTS, JANUARY 1............. 1,400 9,036 6,603 -- 17,039
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.......... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
========= ========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES.......... $ 37,775 $ 11,228 $ 218,035 $(29,540) $ 237,498
--------- --------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net............................. 107,440 138,592 (37,378) (105,066) 103,588
Capital contributions paid to affiliates,
net.......................................... -- (38,554) -- 38,554 --
Dividends paid................................. (61,887) -- -- -- (61,887)
Preferred securities dividends paid............ (27,162) -- -- 27,162 --
Issuance of common stock....................... 14,742 -- -- -- 14,742
Issuance of long-term debt..................... -- 305,709 153,052 -- 458,761
Long-term commercial paper, net................ -- 109,643 -- -- 109,643
Retirement of long-term debt................... (100,365) (101,192) (124,637) -- (326,194)
Other.......................................... -- 8,243 -- -- 8,243
--------- --------- --------- -------- ---------
Net cash provided from (used for) financing
activities................................. (67,232) 422,441 (8,963) (39,350) 306,896
--------- --------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures........................... (6,632) (278,256) (105,179) -- (390,067)
Acquisitions................................... -- (36,731) -- -- (36,731)
Investment in debt and equity securities,
net.......................................... -- 48,347 (2,061) -- 46,286
Investment in joint ventures and
subsidiaries................................. (1,250) (165,776) 49 -- (166,977)
Sale of property and investment in joint
ventures..................................... -- 46,060 -- (2,026) 44,034
Other.......................................... 38,689 (24,385) (105,623) 70,916 (20,403)
--------- --------- --------- -------- ---------
Net cash provided from (used for) investing
activities................................. 30,807 (410,741) (212,814) 68,890 (523,858)
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,350 22,928 (3,742) -- 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1............. 23 25,119 14,353 -- 39,495
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.......... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
========= ========= ========= ======== =========
</TABLE>
F-123
<PAGE> 253
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
DTE ENERGY COMPANY
MCN ENERGY GROUP INC.
AND
DTE ENTERPRISES, INC.
DATED AS OF OCTOBER 4, 1999
AS AMENDED AS OF NOVEMBER 12, 1999
<PAGE> 254
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
RECITALS............................................................. 1
ARTICLE I
The Merger; Closing; Effective Time................................ 1
1.1. The Merger.................................................. 1
1.2. Closing..................................................... 1
1.3. Effective Time.............................................. 1
ARTICLE II
Articles of Incorporation and By-Laws of the Surviving
Corporation..................................................... 1
2.1. The Articles of Incorporation............................... 1
2.2. The By-Laws................................................. 2
ARTICLE III
Officers and Directors of the Surviving Corporation................ 2
3.1. Directors................................................... 2
3.2. Officers.................................................... 2
ARTICLE IV
Effect of the Merger on Capital Stock; Election Procedures......... 2
4.1. Effect on Capital Stock..................................... 2
(a) Merger Consideration.................................... 2
(b) Cancellation of Shares.................................. 2
(c) Merger Sub.............................................. 2
4.2. Allocation of Merger Consideration; Election Procedures;
Exchange Procedures......................................... 3
(a) Allocation.............................................. 3
(b) Election Procedures..................................... 3
(c) Exchange and Payment Procedures......................... 5
(d) Distributions with Respect to Unexchanged Shares;
Voting.................................................. 5
(e) Transfers............................................... 5
(f) Fractional Shares....................................... 5
(g) Termination of Exchange Fund............................ 6
(h) Lost, Stolen or Destroyed Certificates.................. 6
(i) Affiliates.............................................. 6
4.3. Dissenters' Rights.......................................... 6
4.4. Adjustments to Prevent Dilution............................. 6
4.5. Tax Opinion Adjustment...................................... 7
4.6. Uncertificated Shares of Parent Common Stock................ 7
ARTICLE V
Representations and Warranties..................................... 7
5.1. Representations and Warranties of the Company, Parent and
Merger Sub.................................................. 7
(a) Organization, Good Standing and Qualification........... 7
(b) Capital Structure....................................... 8
(c) Corporate Authority; Approval and Fairness.............. 9
(d) Governmental Filings; No Violations..................... 10
(e) Reports; Financial Statements........................... 11
(f) Absence of Certain Changes.............................. 11
(g) Litigation and Liabilities.............................. 11
(h) Employee Benefits....................................... 12
(i) Compliance with Laws; Permits........................... 13
(j) Takeover Statutes....................................... 13
</TABLE>
A-i
<PAGE> 255
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(k) Environmental Matters................................... 13
(l) Taxes................................................... 14
(m) Labor Matters........................................... 15
(n) Intellectual Property................................... 15
(o) Insurance............................................... 15
(p) Rights Plan............................................. 15
(q) Brokers and Finders..................................... 16
(r) Year 2000............................................... 16
(s) Regulatory Proceedings.................................. 16
(t) FERC Jurisdiction....................................... 16
(u) Regulation as a Utility................................. 16
(v) Ownership of Shares..................................... 16
ARTICLE VI
Covenants.......................................................... 17
6.1. Interim Operations.......................................... 17
6.2. Acquisition Proposals....................................... 19
6.3. Information Supplied........................................ 21
6.4. Shareholders Meetings....................................... 21
6.5. Filings; Other Actions; Notification........................ 21
6.6. Access...................................................... 22
6.7. Affiliates.................................................. 23
6.8. Stock Exchange Listing and De-listing....................... 23
6.9. Publicity................................................... 23
6.10. Benefits.................................................... 23
(a) Stock Options........................................... 23
(b) Employee Benefits....................................... 24
(c) Election to Parent's Board of Directors; Management
Executive Committee..................................... 25
(d) Employees............................................... 25
6.11. Expenses.................................................... 25
6.12. Indemnification; Directors' and Officers' Insurance......... 25
6.13. Takeover Statutes........................................... 26
6.14. Dividends................................................... 26
6.15. Rate Matters................................................ 26
6.16. Taxation.................................................... 26
6.17. Transition Matters.......................................... 26
6.18. Community Involvement....................................... 27
6.19. 1935 Act and Power Act...................................... 27
6.20. Feline Prides............................................... 27
ARTICLE VII
Conditions......................................................... 28
7.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................... 28
(a) Shareholder Approval.................................... 28
(b) NYSE Listing............................................ 28
(c) Regulatory Consents..................................... 28
(d) Litigation.............................................. 28
(e) S-4..................................................... 28
(f) Blue Sky Approvals...................................... 28
(g) Certain Transactions.................................... 28
7.2. Conditions to Obligations of Parent and Merger Sub.......... 28
(a) Representations and Warranties.......................... 28
</TABLE>
A-ii
<PAGE> 256
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(b) Performance of Obligations of the Company............... 29
(c) Consents Under Agreements............................... 29
(d) Accountants Letter...................................... 29
(e) Affiliates Letters...................................... 29
(f) Material Adverse Effect................................. 29
(g) Tax Opinion............................................. 29
(h) Governmental Consents................................... 29
7.3. Conditions to Obligation of the Company..................... 29
(a) Representations and Warranties.......................... 29
(b) Performance of Obligations of Parent and Merger Sub..... 30
(c) Consents Under Agreements............................... 30
(d) Accountants Letter...................................... 30
(e) Material Adverse Effect................................. 30
(f) Tax Opinion............................................. 30
ARTICLE VIII
Termination........................................................ 30
8.1. Termination by Mutual Consent............................... 30
8.2. Termination by Either Parent or the Company................. 30
8.3. Termination by the Company.................................. 31
8.4. Termination by Parent....................................... 31
8.5. Effect of Termination and Abandonment....................... 32
ARTICLE IX
Miscellaneous and General.......................................... 33
9.1. Survival.................................................... 33
9.2. Modification or Amendment................................... 33
9.3. Waiver of Conditions........................................ 33
9.4. Counterparts................................................ 33
9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL............... 33
9.6. Notices..................................................... 34
9.7. Entire Agreement............................................ 34
9.8. No Third Party Beneficiaries................................ 34
9.9. Obligations of Parent and of the Company.................... 35
9.10. Severability................................................ 35
9.11. Interpretation.............................................. 35
9.12. Assignment.................................................. 35
</TABLE>
A-iii
<PAGE> 257
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated
as of October 4, 1999 and as amended as of November 12, 1999, among DTE Energy
Company, a Michigan corporation ("Parent"), MCN Energy Group Inc., a Michigan
corporation (the "Company"), and DTE Enterprises, Inc., a Michigan corporation
and wholly owned subsidiary of Parent ("Merger Sub," the Company and Merger Sub
sometimes being hereinafter collectively referred to as the "Constituent
Corporations").
RECITALS
WHEREAS, the respective boards of directors of each of Parent, Merger Sub
and the Company have approved the merger of the Company with and into Merger Sub
(the "Merger") and approved the Merger upon the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
WHEREAS, the Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3) the Company
shall be merged with and into Merger Sub and the separate corporate existence of
the Company shall thereupon cease. Merger Sub shall be the surviving corporation
in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"), and the separate corporate existence of Merger Sub with all its
rights, privileges, immunities, powers and franchises shall continue unaffected
by the Merger, except as set forth in Article III. The Merger shall have the
effects specified in the Michigan Business Corporation Act, as amended (the
"MBCA").
1.2. Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York
at 9:00 A.M. on the fifth business day after the last to be fulfilled or waived
of the conditions set forth in Article VII (other than those conditions that by
their nature are to be satisfied at the Closing, but subject to the fulfillment
or waiver of those conditions) shall be satisfied or waived in accordance with
this Agreement or (ii) at such other place and time and/or on such other date as
the Company and Parent may agree in writing (the "Closing Date").
1.3. Effective Time. As soon as practicable following the Closing, the
Company and Parent will cause a Certificate of Merger (the "Michigan Certificate
of Merger") to be executed and filed with the Department of Commerce of the
State of Michigan as provided in Section 450.1707 of the MBCA. The Merger shall
become effective at the time when the Michigan Certificate of Merger has been
duly endorsed by the Department of Commerce of the State of Michigan (the
"Effective Time").
ARTICLE II
ARTICLES OF INCORPORATION AND BY-LAWS
OF THE SURVIVING CORPORATION
2.1. The Articles of Incorporation. The articles of incorporation of the
Surviving Corporation shall be the articles of incorporation of Merger Sub as in
effect immediately prior to the Effective Time (the "Articles"), until duly
amended as provided therein or by applicable law.
A-1
<PAGE> 258
2.2. The By-Laws. The by-laws of Merger Sub in effect at the Effective Time
shall be the by-laws of the Surviving Corporation (the "By-Laws"), until
thereafter amended as provided therein or by applicable law.
ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1. Directors. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Articles and the By-Laws.
3.2. Officers. The officers of the Company at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Articles and the By-Laws.
ARTICLE IV
EFFECT OF THE MERGER ON CAPITAL STOCK;
ELECTION PROCEDURES
4.1. Effect on Capital Stock. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any capital stock of
the Company:
(a) Merger Consideration. Subject to the allocation and election procedures
in Section 4.2 and subject to Section 4.5, each share of the common stock, par
value $0.01 per share, of the Company (the "Common Stock"), including the
associated right to purchase Series A Junior Participating Preferred Stock (each
a "Right" and together with the Common Stock, a "Share" and, collectively, the
"Shares") issued pursuant to the Rights Agreement, dated as of December 20,
1989, as amended by an amendment dated as of July 23, 1997, by and between the
Company and First Chicago Trust Company of New York, as Rights Agent, (the
"Rights Agreement"), issued and outstanding immediately prior to the Effective
Time (other than Shares owned by Parent or Shares that are owned by the Company
or any direct or indirect Subsidiary of the Company and in each case not held on
behalf of third parties (each, an "Excluded Share" and collectively, "Excluded
Shares")) shall be converted into the right to receive either (i) $28.50 in cash
(the "Cash Consideration") or (ii) .775 shares of common stock, without par
value, of Parent (the "Parent Common Stock") (the "Stock Consideration" and,
together with the Cash Consideration, the "Merger Consideration"). All
references in this agreement to Parent Common Stock to be issued pursuant to the
Merger shall be deemed to include the corresponding rights ("Parent Rights") to
purchase Series A Junior Participating Preferred Stock of Parent pursuant to the
Parent Rights Agreement (as defined in Section 5.1(b)(ii)), except where the
context otherwise requires. At the Effective Time, all Shares shall no longer be
outstanding and shall be canceled and retired and shall cease to exist, and each
certificate (a "Certificate") representing any of such Shares (other than
Excluded Shares) shall thereafter represent only the right to receive the Merger
Consideration and the right, if any, to receive pursuant to Section 4.2(f) cash
in lieu of fractional shares into which such Shares have been converted pursuant
to this Section 4.1(a) and any dividends or other distributions pursuant to
Section 4.2(d).
(b) Cancellation of Shares. Each Excluded Share shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to be
outstanding, shall be canceled and retired without payment of any consideration
therefor and shall cease to exist.
(c) Merger Sub. At the Effective Time, each share of common stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain
outstanding and each certificate therefor shall continue to evidence one share
of common stock of the Surviving Corporation.
A-2
<PAGE> 259
4.2. Allocation of Merger Consideration; Election Procedures; Exchange
Procedures.
(a) Allocation. Subject to Section 4.5, notwithstanding anything in this
Agreement to the contrary, the number of Shares (the "Cash Election Number") to
be converted into the right to receive Cash Consideration in the Merger shall be
equal to 55 percent of the number of Shares issued and outstanding immediately
prior to the Effective Time of the Merger (not including any Excluded Shares).
Subject to Section 4.5, the number of Shares to be converted into the right to
receive Stock Consideration in the Merger (the "Stock Election Number") shall be
equal to the number of Shares issued and outstanding immediately prior to the
Effective Time of the Merger (not including any Excluded Shares) less the Cash
Election Number.
(b) Election Procedures.
(i) As of the Effective Time, Parent shall deposit, or shall cause to be
deposited, with an exchange agent selected by Parent, with the Company's prior
approval, which shall not be unreasonably withheld (the "Exchange Agent"), for
the benefit of the holders of Shares, (A) certificates representing the shares
of Parent Common Stock, (B) cash and (C) any dividends or other distributions
with respect to the Parent Common Stock to be issued or paid pursuant to
Sections 4.1 and 4.2(d) in exchange for outstanding Shares upon due surrender of
the Certificates pursuant to the provisions of this Article IV (such cash and
certificates for shares of Parent Common Stock, together with the amount of any
dividends or other distributions payable with respect thereto, being hereinafter
referred to as the "Exchange Fund").
(ii) Subject to allocation and proration in accordance with the provisions
of this Section 4.2 and Section 4.5, if appropriate, each record holder of
Shares (other than Excluded Shares) issued and outstanding immediately prior to
the Election Deadline (as defined below) shall be entitled (A) to elect to
receive in respect of each such Share (x) Cash Consideration (a "Cash Election")
or (y) Stock Consideration (a "Stock Election") or (B) to indicate that such
record holder has no preference as to the receipt of Cash Consideration or Stock
Consideration for such Shares (a "Non-Election"). Shares in respect of which a
Non-Election is made (including shares in respect of which such an election is
deemed to have been made pursuant to this Section 4.2 and Section 4.3
(collectively, "Non-Election Shares")) shall be deemed by Parent, in its sole
and absolute discretion, subject to Section 4.2(a), to be, in whole or in part,
Shares in respect of which Cash Elections or Stock Elections have been made.
(iii) Elections pursuant to Section 4.2(b)(ii) shall be made on a form with
such other provisions to be reasonably agreed upon by the Company and Parent (a
"Form of Election") to be provided by the Exchange Agent for that purpose to
holders of record of Shares (other than holders of Excluded Shares), together
with appropriate transmittal materials, at a time approximately one month prior
to the anticipated Closing Date (as defined in Section 1.2) or on such other
date as the Company and Parent shall mutually agree. Elections shall be made by
mailing to the Exchange Agent a duly completed Form of Election. To be
effective, a Form of Election must be (x) properly completed, signed and
submitted to the Exchange Agent at its designated office, by 9:00 a.m., on the
Closing Date (which date shall be publicly announced by Parent as soon as
practicable but in no event less than five trading days prior to the Closing
Date) (the "Election Deadline") and (y) accompanied by the Certificate(s)
representing the Shares as to which the election is being made (or by an
appropriate guarantee of delivery of such Certificate(s) by a commercial bank or
trust company in the United States or a member of a registered national security
exchange or of the National Association of Securities Dealers, Inc., provided
that such Certificates are in fact delivered to the Exchange Agent within three
trading days after the date of execution of such guarantee of delivery). A
holder of record of Shares who holds such shares as nominee, trustee or in
another representative capacity (a "Holder Representative") may submit multiple
Forms of Election, provided that such Holder Representative certifies that each
such Form of Election delivered to the Exchange Agent covers all the Shares held
by such Holder Representative on behalf of a particular beneficial owner. The
Company shall use its best efforts to make a Form of Election available to all
Persons (as defined below) who become holders of record of Shares (other than
Excluded Shares) between the date of mailing described in the first sentence of
this Section 4.2(b)(iii) and the Election Deadline. Parent shall determine, in
its sole and absolute discretion, which authority it may delegate in whole or in
part to the Exchange Agent, whether Forms of Election have been properly
completed, signed and submitted or revoked. The decision of Parent (or the
Exchange Agent, as the case may be) in such matters
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shall be conclusive and binding. Neither Parent nor the Exchange Agent will be
under any obligation to notify any Person of any defect in a Form of Election
submitted to the Exchange Agent. A holder of Shares that does not submit an
effective Form of Election prior to the Election Deadline shall be deemed to
have made a Non-Election. For the purposes of this Agreement, the term "Person"
shall mean any individual, corporation (including not-for-profit), general or
limited partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined in Section 5.1(d)) or
other entity of any kind or nature organized or existing under the laws of any
jurisdiction.
(iv) An election may be revoked, but only by written notice received by the
Exchange Agent prior to the Election Deadline. Any Certificate(s) representing
Shares that have been submitted to the Exchange Agent in connection with an
election shall be returned without charge to the holder thereof in the event
such election is revoked as aforesaid and such holder requests in writing the
return of such Certificate(s). Upon any such revocation, unless a duly completed
Form of Election is thereafter submitted in accordance with paragraph (b)(ii),
such Shares shall be Non-Election Shares. In the event that this Agreement is
terminated pursuant to the provisions hereof, any Shares that have been
transmitted to the Exchange Agent pursuant to the provisions hereof shall
promptly be returned without charge to the Person submitting the same.
(v) If the aggregate number of Shares covered by Cash Elections (the "Cash
Election Shares") exceeds the Cash Election Number, all Non-Election Shares
shall be deemed to be Shares in respect of which Stock Elections have been made
and (x) each Cash Election Share shall be converted into (i) the right to
receive an amount in cash, without interest, equal to the product of (A) the
Cash Consideration and (B) a fraction (the "Cash Fraction"), the numerator of
which shall be the Cash Election Number and the denominator of which shall be
the total number of Cash Election Shares, and (ii) a number of shares of Parent
Common Stock equal to the product of (A) the Exchange Ratio and (B) a fraction
equal to one minus the Cash Fraction and (y) each Stock Election Share
(including those deemed to be Stock Election Shares (as defined below) pursuant
to this Section 4.2(b)(v)) shall be converted into the right to receive the
Stock Consideration.
(vi) If the aggregate number of Shares covered by Stock Elections (the
"Stock Election Shares") exceeds the Stock Election Number, all Non-Election
Shares shall be deemed to be Shares in respect of which Cash Elections have been
made and (x) each Stock Election Share shall be converted into (i) the right to
receive a number of shares of Parent Common Stock, equal to the product of (A)
the Exchange Ratio and (B) a fraction (the "Stock Fraction"), the numerator of
which shall be the Stock Election Number and the denominator of which shall be
the total number of Stock Election Shares, and (ii) an amount in cash, without
interest, equal to the product of (A) the Cash Consideration and (B) a fraction
equal to one minus the Stock Fraction and (y) each Cash Election Share
(including those deemed to be Cash Election Shares) shall be converted into the
right to receive the Cash Consideration.
(vii) In the event that neither clause (v) nor clause (vi) of this Section
4.2(b) is applicable, a number of Non-Election Shares shall be deemed Stock
Election Shares such that the total Stock Election Shares equals the Stock
Election Number and any remaining Non-Election Shares shall be deemed Cash
Election Shares and (x) all Cash Election Shares and all Non-Election Shares in
respect of which Cash Elections are deemed to have been made shall be converted
into the right to receive Cash Consideration, and (y) all Stock Election Shares
and all Non-Election Shares in respect of which Stock Elections are deemed to
have been made shall be converted into the right to receive Stock Consideration
(and cash in lieu of fractional interests).
(viii) Each record holder of Shares immediately prior to the Effective Time
shall be entitled to elect to receive the Stock Consideration for part of such
holder's Shares and the Cash Consideration for the remaining part of such
holder's Shares (a "Mixed Election" and, collectively with a Stock Election and
a Cash Election, an "Election"). Mixed Elections shall be made on a Form of
Election. With respect to each holder of Shares who makes a Mixed Election, the
Shares such holder elects to be converted into the right to receive Cash
Consideration shall be treated as Cash Election Shares for purposes of this
Section 4.2 and Section 4.5, and the Shares such holder elects to be converted
into the right to receive shares of Parent Common Stock shall be treated as
Stock Election Shares for purposes of this Section 4.2 and Section 4.5.
(ix) The Exchange Agent, in consultation with Parent and the Company, shall
make all computations to give effect to this Section 4.2.
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(c) Exchange and Payment Procedures. As soon as practicable after the
Election Deadline, Parent shall cause the Exchange Agent to mail to each record
holder of Shares who did not submit a Form of Election or who did not submit a
Certificate or Certificates to the Exchange Agent with such holder's properly
submitted Form of Election: (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon actual delivery of the Certificates to the Exchange Agent)
and (ii) instructions for effecting the surrender of the Certificates and
receiving the Merger Consideration to which such holder shall be entitled
therefor pursuant to this Article IV. Upon surrender of a Certificate (or
affidavits of loss in lieu thereof) to the Exchange Agent for cancellation,
together with a duly executed letter of transmittal or Form of Election, as the
case may be, and such other documents as the Exchange Agent may require, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that number of shares of Parent Common Stock into
which the Shares previously represented by such Certificate are converted in
accordance with this Article IV, (ii) the cash to which such holder is entitled
in accordance with this Article IV, (iii) cash in lieu of fractional shares, if
any, which such holder has the right to receive pursuant to Section 4.2(f) and
(iv) any dividends or other distributions pursuant to Section 4.2(d). In the
event the Merger Consideration and cash in lieu of fractional shares, if any,
which such holder has the right to receive pursuant to Section 4.2(f), and any
dividend or other distributions pursuant to Section 4.2(d), is to be delivered
to any person who is not the person in whose name the Certificate surrendered in
exchange therefor is registered in the transfer records of the Company, the
Merger Consideration, and cash in lieu of fractional shares which such holder
has the right to receive pursuant to Section 4.2(f), and any dividends or other
distributions pursuant to Section 4.2(d) may be delivered to a transferee if the
Certificate is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence satisfactory to
the Exchange Agent that any applicable stock transfer taxes have been paid or
are not payable.
(d) Distributions with Respect to Unexchanged Shares; Voting. All Shares of
Parent Common Stock to be issued pursuant to the Merger shall be deemed issued
and outstanding as of the Effective Time and whenever a dividend or other
distribution is declared by Parent in respect of the Parent Common Stock, the
record date for which is at or after the Effective Time, that declaration shall
include dividends or other distributions in respect of all shares issuable
pursuant to this Agreement. No dividends or other distributions in respect of
the Parent Common Stock shall be paid to any holder of any unsurrendered
Certificate until such Certificate is surrendered for exchange in accordance
with this Article IV. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be issued and/or paid to the
holder of the certificates representing Parent Common Stock issued in exchange
therefor, without interest, (A) at the time of such surrender, the dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to such Parent Common Stock and not paid and (B) at the
appropriate payment date, the dividends or other distributions payable with
respect to such Parent Common Stock with a record date after the Effective Time
but with a payment date subsequent to surrender.
(e) Transfers. After the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time.
(f) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional shares of Parent Common Stock will be issued to holders
of Shares and in lieu of any such fractional shares, each holder of Shares who
would otherwise have been entitled to receive a fractional share of Parent
Common Stock upon surrender of Certificates for exchange pursuant to this
Article IV will be paid an amount in cash (without interest) equal to such
holder's proportionate interest in the net proceeds from the sale or sales in
the open market by the Exchange Agent, on behalf of all such holders, of the
aggregate fractional shares of Parent Common Stock issued to the Exchange Agent
on behalf of such holders pursuant to this Article IV. As soon as practicable
following the Effective Time, the Exchange Agent shall determine the excess of
(i) the number of full shares of Parent Common Stock delivered to the Exchange
Agent by Parent over (ii) the aggregate number of full shares of Parent Common
Stock to be distributed to holders of Shares (such excess being herein called
the "Excess Parent Common Shares"). The Exchange Agent, as agent for the former
holders of Shares, shall sell the Excess Parent Common Shares at the prevailing
prices on the New York Stock Exchange, Inc. (the "NYSE"). The sales of the
Excess Parent Common Shares by the Exchange Agent shall
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be executed on the NYSE through one or more member firms of the NYSE and shall
be executed in round lots to the extent practicable. Parent shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs, if any,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Parent Common Shares. Until the net proceeds
of such sale have been distributed to the former holders of Shares, the Exchange
Agent will hold such proceeds in trust for such former holders.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Common Stock)
that remains unclaimed by the shareholders of the Company for 180 days after the
Effective Time shall be returned to Parent. Any shareholders of the Company who
have not theretofore complied with this Article IV shall thereafter look only to
Parent for payment of the Cash Consideration, their shares of Parent Common
Stock and any cash, dividends and other distributions in respect thereof payable
and/or issuable pursuant to Section 4.1 and Section 4.2(c) upon due surrender of
their Certificates (or affidavits of loss in lieu thereof), in each case,
without any interest thereon. Notwithstanding the foregoing, none of Parent, the
Surviving Corporation, the Exchange Agent or any other Person shall be liable to
any former holder of Shares for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Certificate to be lost, stolen or
destroyed and, if required by Parent, the posting by such Person of a bond in
customary amount as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate and subject to compliance with the terms
of Section 4.2, shares of Parent Common Stock and any cash payable and any
unpaid dividends or other distributions in respect thereof pursuant to Section
4.1 and Section 4.2(d) upon due surrender of, and deliverable in respect of, the
Shares represented by such Certificate pursuant to this Agreement.
(i) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "affiliate" (as determined pursuant
to Section 6.7) of the Company shall not be exchanged until Parent has received
a written agreement from such Person as provided in Section 6.7 hereof.
4.3. Dissenters' Rights. In accordance with Section 450.1762 of the MBCA,
no dissenters' rights shall be available to holders of Shares in connection with
the Merger.
4.4. Adjustments to Prevent Dilution. (a) In the event that the Company
changes the number of Shares issued and outstanding prior to the Effective Time
as a result of a reclassification, stock split (including a reverse split),
stock dividend or distribution, recapitalization, merger, subdivision, issuer
tender or exchange offer, or other similar transaction, the Merger Consideration
shall be equitably adjusted to reflect such change.
(b) In the event Parent (i) changes or establishes a record date for
changing the number of shares of Parent Common Stock issued and outstanding
prior to the Effective Time as a result of a stock split, stock dividend, stock
combination, recapitalization, reclassification, reorganization or similar
transaction with respect to the outstanding Parent Common Stock or (ii) pays or
makes an extraordinary dividend or distribution in respect of Parent Common
Stock (other than a distribution referred to in clause (i) of this sentence)
and, in either case, the record date therefor shall be prior to the Effective
Time, the Stock Consideration shall be proportionately adjusted. Regular
quarterly cash dividends and increases thereon shall not be considered
extraordinary for purposes of the preceding sentence. If, between the date
hereof and the Effective Time, Parent shall merge or consolidate with or into
any other corporation (a "Business Combination")and the terms thereof shall
provide that Parent Common Stock shall be converted into or exchanged for the
shares of any other corporation or entity, then provision shall be made so that
shareholders of the Company who would be entitled to receive shares of Parent
Common Stock pursuant to this Agreement shall be entitled to receive, in lieu of
each share of Parent Common Stock issuable to such shareholders as provided
herein, the same kind and amount of securities or assets as shall be
distributable upon such Business Combination with respect to one share of Parent
Common Stock and, if necessary or advisable, the parties hereto shall agree on
an appropriate restructuring of the transactions contemplated herein.
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4.5. Tax Opinion Adjustment. In the event that either the condition set
forth in Section 7.2(g) or the condition set forth in Section 7.3(f) is not
satisfied but would be capable of being satisfied if the number of Shares being
converted into Parent Common Stock were increased, and all other conditions set
forth in Article VII have been satisfied (or, with respect to conditions to be
satisfied at the Effective Time, will in fact be satisfied), then the number of
Shares being converted into Parent Common Stock shall be increased (and the
number of Shares converted into cash shall be decreased) to the extent necessary
to permit the satisfaction of the conditions set forth in each of Sections
7.2(g) and 7.3(f), provided, that, each additional Share that is converted into
the right to receive shares of Parent Common Stock solely as a result of the
operation of this Section 4.5, to the extent that the conversion is necessary so
that the value of the Parent Common Stock paid as consideration for Shares is
not less than 41% of the value of the total consideration for Shares, shall be
converted into the right to receive a number of shares of Parent Common Stock
having a value of $28.50 (it being understood that value, in each case, shall be
calculated consistent with the methods used in connection with the provision of
the tax opinions contemplated by Section 7.2(g) and 7.3(f)). For purposes of
Section 4.2(b), such additional Shares shall continue to be treated as part of
the Cash Election Number and the shares of Parent Common Stock issued in respect
thereof shall be treated as Cash Consideration. If required by law or the rules
of the NYSE, Parent will use its best reasonable efforts to obtain the requisite
approval of its shareholders for the issuance of a number of shares of Parent
Common Stock sufficient to take into account the revised number of shares of
Parent Common Stock to be issued. On the Closing Date, Parent and the Company
each shall obtain from its respective counsel a determination whether the
conditions set forth in Section 7.2(g) or 7.3(f), as the case may be, can be
satisfied without making any adjustment set forth in this Section 4.5 and, if
such condition cannot be satisfied without such an adjustment, a determination
as to the minimum percentage of the Merger Consideration that the Stock
Consideration must constitute in order for such counsel to render such opinion.
Parent and the Company shall jointly inform the Exchange Agent whether any
adjustment pursuant to this Section 4.5 is required; and, if so, the extent of
any such adjustment.
4.6. Uncertificated Shares of Parent Common Stock. The Company agrees that
if Parent establishes procedures for book-entry transfer of shares of Parent
Common Stock (or other similar system for uncertificated shares of Parent Common
Stock) prior to the Effective Time, issuance of Parent Common Stock pursuant to
this Agreement may be made pursuant to such book-entry or similar procedures.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of the Company, Parent and Merger
Sub. Except as set forth in the corresponding sections or subsections of the
disclosure letter, dated the date hereof, delivered by the Company to Parent or
by Parent to the Company (each, a "Disclosure Letter", and the "Company
Disclosure Letter" and the "Parent Disclosure Letter", respectively), as the
case may be, the Company (except for subparagraphs (b)(ii), (b)(iii), (c)(ii),
(q)(ii) and (v)(ii) below and references in paragraphs (a), (e) and (l) below to
documents made available by Parent to the Company) hereby represents and
warrants to Parent and Merger Sub, and Parent (except for subparagraphs (b)(i),
(c)(i), (j), (p), (q)(i), (s), (t) and (v)(i) below and references in paragraphs
(a), (e) and (l) below to documents made available by the Company to Parent), on
behalf of itself and Merger Sub, hereby represents and warrants to the Company,
that:
(a) Organization, Good Standing and Qualification. Each of it and its
Subsidiaries is a corporation or other entity duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
organization and has all requisite corporate or similar power and authority to
own and operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the ownership or operation of its
assets or properties or conduct of its business requires such qualification,
except where the failure to be so organized, qualified or in good standing, or
to have given power or authority when taken together with all other such
failures, is not reasonably likely to have a Material Adverse Effect (as defined
below). It has made available to Parent, in the case of the Company, and to the
Company, in the case of Parent, a complete and correct copy of its Subsidiaries'
articles of incorporation and by-laws or comparable governing documents for
non-corporate
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entities ("Organizational Documents"), each as amended to date. Such
Organizational Documents as so made available are in full force and effect.
Section 5.1(a) of the Disclosure Letters contains a correct and complete list of
each jurisdiction where the Company, in the case of the Company Disclosure
Letter, and Parent, in the case of the Parent Disclosure Letter, and in each
case, each of its Subsidiaries is organized.
As used in this Agreement, the term (i) "Subsidiary" means, with respect to
the Company, Parent or Merger Sub, as the case may be, any entity, whether
incorporated or unincorporated, of which at least a majority of the securities
or ownership interests having by their terms ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
is directly or indirectly owned or controlled by such party or by one or more of
its respective Subsidiaries or by such party and any one or more of its
respective Subsidiaries and (ii) "Material Adverse Effect" means, with respect
to the Company or Parent, as the case may be, a material adverse effect on the
condition (financial or otherwise), properties, business, operations, results of
operations or prospects of the Company or Parent, as the case may be, and its
respective Subsidiaries taken as a whole (other than any change or effect
arising out of (i) any transaction taken to comply with Section 6.17(c), (ii)
the Company's recognition of a write-down of its gas and oil properties under
the full cost method of accounting as prescribed by Rule 4-10 of Regulation S-X
under the Securities Act and Exchange Act, (iii) general economic conditions or
(iv) conditions generally affecting the electric or gas utility industries).
(b) Capital Structure. (i) The authorized capital stock of the Company
consists of 250,000,000 Shares (which are entitled to vote as a class), of which
85,655,381 Shares were outstanding as of the close of business on the date
hereof, and 25,000,000 shares of preferred stock, without par value (the
"Preferred Shares"), none of which were outstanding as of the date hereof. All
of the outstanding Shares have been duly authorized and are validly issued,
fully paid and nonassessable. Other than up to 4,560,345 shares subject to
issuance related to the 2,645,000 outstanding Preferred Redeemable Increased
Dividend Equity Securities (the "Feline Prides") and 250,000 shares of Series A
Junior Participating Preferred Stock subject to issuance pursuant to the Rights
Agreement, none of which were outstanding as of the close of business on the
date hereof, the Company has no Shares or Preferred Shares subject to issuance,
except that, as of the date hereof, there were 2,515,914 Shares subject to
issuance pursuant to the Company's Stock Incentive Plan, Long Term Incentive
Performance Share Plan, Mandatory Deferred Compensation Plan and Non-employee
Directors Compensation Plan (the "Stock Plans"). Section 5.1(b) of the Company
Disclosure Letter contains a correct and complete list of each outstanding
option to purchase Shares under the Stock Plans (each a "Company Option"), date
of grant, exercise price, expiration date and number of Shares subject thereto.
Each of the outstanding shares of capital stock or other securities of each of
the Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by a direct or indirect wholly owned Subsidiary of the
Company, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth in this Section 5.1(b), there are no preemptive
or other outstanding rights, options, warrants, conversion rights, stock
appreciation rights, redemption rights, repurchase rights, agreements,
arrangements, calls, commitments or rights of any kind that obligate the Company
or any of its Subsidiaries to issue or sell any shares of capital stock or other
securities of the Company or any of its Subsidiaries or any securities or
obligations convertible or exchangeable into or exercisable for, or giving any
Person a right to subscribe for or acquire, any securities of the Company or any
of its Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. After the Effective Time, the Feline Prides
will be convertible only into, with respect to each Purchase Contract (as
defined in the Purchase Contract Agreement dated March 25, 1997, between the
Company and First National Bank of Chicago (the "Purchase Contract Agreement")),
for each Share issuable on account of such Purchase Contract the right to
receive on the Purchase Contract Settlement Date (as defined in the Purchase
Contract Agreement) the Merger Consideration and cash in lieu of fractional
shares, if any, pursuant to Section 4.2(f) into which a Share would be converted
pursuant to Section 4.2 if such Share were a Non-Election Share, assuming for
purposes of such conversion that the Purchase Contract Settlement Date had
occurred immediately prior to the Effective Time. The Company does not have
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the shareholders of the Company on any matter
("Voting Debt"). Section 5.1(b) of the Company Disclosure Letter sets forth a
true and complete list of each Person in which the Company owns, directly or
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indirectly, any voting interest that may require a filing by Parent under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act").
(ii) The authorized capital stock of Parent consists of 400,000,000 shares
of Parent Common Stock (which are entitled to vote as a class), of which
145,045,159 shares were outstanding as of the close of business on September 30,
1999, 5,000,000 shares of preferred stock, without par value (the "Parent
Preferred Shares"), none of which were outstanding as of the date hereof. All of
the outstanding shares of Parent Common Stock have been duly authorized and are
validly issued, fully paid and nonassessable. Other than 1,500,000 shares of
Series A Junior Participating Preferred Stock reserved for issuance pursuant to
the Rights Agreement, dated as of September 23, 1997, between Parent and The
Detroit Edison Company, as Rights Agent (the "Parent Rights Agreement"), none of
which were outstanding as of the date hereof, Parent has no shares of Parent
Common Stock or Parent Preferred Shares subject to issuance, except that, as of
September 30, 1999, there were 997,575 shares of Parent Common Stock subject to
issuance pursuant to Parent's Long-Term Incentive Plan (the "Parent Stock
Plan"). Section 5.1(b) of the Parent Disclosure Letter contains a correct and
complete list of each outstanding option to purchase shares of Parent Common
Stock under the Parent Stock Plan, including the date of grant, exercise price,
expiration date and number of shares of Parent Common Stock subject thereto.
Each of the out standing shares of capital stock or other securities of each of
Parent's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by a direct or indirect wholly owned Subsidiary of
Parent, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth above, there are no preemptive or other
outstanding rights, options, warrants, conversion rights, stock appreciation
rights, redemption rights, repurchase rights, agreements, arrangements, calls,
commitments or rights of any kind that obligate Parent or any of its
Subsidiaries to issue or sell any shares of capital stock or other securities of
it or any of its Subsidiaries or any securities or obligations convertible or
exchangeable into or exercisable for, or giving any Person a right to subscribe
for or acquire, any securities of Parent or any of its Subsidiaries, and no
securities or obligations evidencing such rights are authorized, issued or
outstanding. Parent does not have outstanding any bonds, debentures, notes or
other obligations the holders of which have the right to vote (or convertible
into or exercisable for securities having the right to vote) with the
shareholders of Parent on any matter ("Parent Voting Debt"). As of the date
hereof, Parent has not granted registration rights to any person or entity which
rights are currently exercisable or will become exercisable between the date
hereof and the Effective Time.
(iii) The authorized capital stock of Merger Sub consists of 60,000 shares
of common stock (entitled to vote as a class), 1,000 of which are validly
issued, fully paid, nonassessable and outstanding as of the date hereof. All of
the issued and outstanding capital stock of Merger Sub is, and at the Effective
Time will be, owned by Parent, and there are (A) no other voting securities of
Merger Sub, (B) no securities of Merger Sub convertible into or exchangeable for
shares of capital stock or voting securities of Merger Sub and (C) no options or
other rights to acquire from Merger Sub, and no obligations of Merger Sub to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of Merger Sub. Merger Sub
was formed solely for the purpose of engaging in the transactions contemplated
in this Agreement and has not conducted any business prior to the date hereof
and has no, and prior to the Effective Time will have no, assets, liabilities or
obligations of any nature other than those incident to its formation and
pursuant to this Agreement and the Merger and the other transactions
contemplated by this Agreement.
(c) Corporate Authority; Approval and Fairness. (i) The Company has all
requisite corporate power and authority and has taken all corporate action
necessary in order to execute, deliver and perform (in the case of consummation
of the Merger, subject to obtaining requisite shareholder approval) its
obligations under this Agreement and to consummate, subject only to approval of
this Agreement by the holders of a majority of the outstanding Shares (the
"Company Requisite Vote"), the Merger. Assuming the due authorization, execution
and delivery of this Agreement by Parent and Merger Sub, this Agreement is a
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles (the
"Bankruptcy and Equity Exception"). The board of directors of the Company (A)
has unanimously adopted this Agreement and (B) has received the
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opinion of its financial advisor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), to the effect that the consideration to be
received by the holders of the Shares in the Merger is fair to such holders from
a financial point of view, a copy of which opinion has been delivered to Parent.
(ii) Each of the Parent and Merger Sub has all requisite corporate power
and authority and has taken all corporate action necessary in order to execute,
deliver and perform (in the case of consummation of the Merger, subject to
obtaining requisite shareholder approval) its obligations under this Agreement
and to consummate, subject only to any shareholder approval necessary to permit
the issuance of the shares of Parent Common Stock required to be issued pursuant
to Article IV (the "Parent Requisite Vote"), the Merger. Assuming the due
authorization, execution and delivery of this Agreement by the Company, this
Agreement is a valid and binding agreement of Parent enforceable against Parent
in accordance with its terms, subject to the Bankruptcy and Equity Exception.
Assuming the due authorization, execution and delivery of this Agreement by the
Company, this Agreement is a valid and binding agreement of Merger Sub
enforceable against Merger Sub in accordance with its terms. The Boards of
Directors of Parent and Merger Sub (A) have adopted this Agreement and (B) have
received the opinion of Parent's financial advisor, Warburg Dillon Read LLC, to
the effect that the consideration to be paid by Parent to the holders of Shares
in the Merger is fair to Parent from a financial point of view. Prior to the
Effective Time, Parent will have taken all necessary action to permit it to
issue the number of shares of Parent Common Stock required to be issued pursuant
to Article IV. The Parent Common Stock, when issued, will be validly issued,
fully paid and nonassessable, and no shareholder of Parent will have any
preemptive right of subscription or purchase in respect thereof. The Parent
Common Stock, when issued, will be registered under the Securities Act and the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act") and registered or exempt from
registration under any applicable state securities or "blue sky" laws.
(d) Governmental Filings; No Violations. (i) Other than the reports,
filings and/or notices (A) pursuant to Section 1.3, (B) under the HSR Act, the
Exchange Act and the Securities Act, (C) required to be made with the NYSE or
the Chicago Stock Exchange, (D) to comply with state securities or "blue sky"
laws, (E) with, to or of the Federal Energy Regulatory Commission (the "FERC")
pursuant to the Federal Power Act, as amended (the "Power Act"), if required,
(F) under the Public Utility Holding Company Act of 1935, as amended (the "1935
Act"), (G) with, to or of federal or state regulatory bodies pursuant to
Environmental Laws (as defined in Section 5.1(k)) and (H) identified in Section
5.1(d) of the respective Disclosure Letter, no notices, reports or other filings
are required to be made by it or any of its Subsidiaries with, nor are any
consents, registrations, approvals, permits or authorizations required to be
obtained by it or any of its Subsidiaries from, any governmental or regulatory
authority, agency, commission, body or other governmental entity ("Governmental
Entity"), in connection with the execution and delivery of this Agreement by it
and the consummation by it of the Merger and the other transactions contemplated
hereby, except those that the failure to make or obtain are not, individually or
in the aggregate, reasonably likely to have a Material Adverse Effect or
prevent, materially delay or materially impair the ability of it to consummate
the transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this Agreement by it do
not, and the consummation by it of the Merger and the other transactions
contemplated hereby will not, constitute or result in (A) a breach or violation
of, or a default under, its articles of incorporation or by-laws or the
Organizational Documents of any of its Subsidiaries, (B) a breach or violation
of, a default under, or the acceleration of any obligations or the creation of a
lien, pledge, security interest or other encumbrance on the assets of it or any
of its Subsidiaries (with or without notice, lapse of time or both) pursuant to,
any agreement, lease, license, contract, note, mortgage, indenture, arrangement
or other obligation ("Contracts") binding upon it or any of its Subsidiaries or
any Law (as defined in Section 5.1(i)) or governmental or non-governmental
permit or license to which it or any of its Subsidiaries is subject or (C) any
change in the rights or obligations of any party under any of the Contracts,
except, in the case of clause (B) or (C) above, for any breach, violation,
default, acceleration, creation or change that, individually or in the
aggregate, is not reasonably likely to have a Material Adverse Effect or
prevent, materially delay or materially impair the ability of it to consummate
the transactions contemplated by this Agreement. Section 5.1(d) of the Company
Disclosure Letter, with respect to the Company, and the Parent Disclosure
Letter, with respect to Parent, sets forth a correct and complete list of
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material Contracts of the Company, in the case of the Company Disclosure Letter,
and of Parent, in the case of the Parent Disclosure Letter, and any of its
respective Subsidiaries pursuant to which consents or waivers are or may be
required prior to consummation of the transactions contemplated by this
Agreement (whether or not subject to the exception set forth with respect to
clauses (B) and (C) above).
(e) Reports; Financial Statements. All material filings required to be made
by it and its Subsidiaries since December 31, 1995 under the Securities Act, the
Exchange Act, the 1935 Act, the Power Act and state law applicable to public
utilities, and under regulations applicable to public utilities in the United
States, have been made in accordance with the requirements of the relevant
Governmental Entities, except for such failures to make filings that are not,
individually or in the aggregate, reasonably likely to have a Material Adverse
Effect, and it has complied as of their respective dates, in all material
respects with all applicable requirements of appropriate statutes and rules and
regulations. It has delivered to the other party each registration statement,
report, proxy statement or information statement prepared by it since December
31, 1998 (the "Audit Date"), including (i) its Annual Report on Form 10-K for
the year ended December 31, 1998, and (ii) its Quarterly Reports on Form 10-Q
for the periods ended March 31, 1999, and June 30, 1999, each in the form
(including exhibits, annexes and any amendments thereto) filed with the
Securities and Exchange Commission (the "SEC") (collectively, including any such
reports filed subsequent to the date hereof and as amended, the "Reports"). As
of their respective dates, (or, if amended, as of the date of such amendment)
the Reports did not, and any Reports filed with the SEC subsequent to the date
hereof will not, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Reports (including the related notes and
schedules) presents fairly, or will present fairly, in all material respects,
the consolidated financial position of it and its Subsidiaries as of its date
and each of the consolidated statements of income, cash flows and changes in
shareholders' equity included in or incorporated by reference into the Reports
(including any related notes and schedules) presents fairly, or will present
fairly, the results of operations, cash flows and changes in shareholders'
equity, as the case may be, of it and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal
year-end audit adjustments that will not be material in amount or effect), in
each case in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP") consistently applied during the periods involved,
except as may be noted therein.
(f) Absence of Certain Changes. Except as disclosed in its Reports filed
prior to the date hereof, since the Audit Date it and its Subsidiaries have
conducted their respective businesses only in, and have not engaged in any
material transaction other than according to, the ordinary and usual course of
such businesses and there has not been (i) any change in the condition
(financial or otherwise), properties, business, operations, results of
operations or prospects of it and its Subsidiaries or any development or
combination of developments of which its officers have actual knowledge that,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect; (ii) any declaration, setting aside or payment of any
dividend, or other distribution in cash, stock or property in respect of its
capital stock, except for dividends or other distributions on its capital stock
publicly announced prior to the date hereof and except as expressly permitted
hereby; (iii) any split in its capital stock, combination, subdivision or
reclassification of any of its capital stock or issuance or authorization of any
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, except as expressly contemplated hereby; or
(iv) any change by it in accounting principles, or material change in its
accounting practices or methods. Since the Audit Date, except as provided for
herein or as disclosed in the Reports filed prior to the date hereof, there has
not been any increase in the compensation payable or that could become payable
by it or any of its Subsidiaries to officers or key employees or any amendment
of any of the Compensation and Benefit Plans (as defined in Section 5.1(h)(i))
other than increases or amendments in the ordinary and usual course.
(g) Litigation and Liabilities. Except as disclosed in the Reports filed
prior to the date hereof, there are no (i) civil, criminal or administrative
actions, suits, claims, hearings, investigations or proceedings pending or, to
the actual knowledge of its officers, threatened against it or any of its
Affiliates (as defined below), (ii) obligations or liabilities, whether or not
accrued, contingent or otherwise and whether or not required to be
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disclosed, or any facts or circumstances of which its officers have actual
knowledge that could reasonably be expected to result in any claims against, or
obligations or liabilities of, it or any of its Affiliates or (iii) developments
since the date of such Reports with respect to such disclosed actions, suits,
claims, hearings, investigations or proceedings, except, in each case, for those
that, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect or prevent or materially burden or materially impair the
ability of it to consummate the transactions contemplated by this Agreement. As
used herein, the term "Affiliate" shall have the meaning ascribed to such term
in Rule 12b-2 under the Exchange Act.
(h) Employee Benefits.
(i) A copy (or, if not in writing, a summary) of each bonus, deferred
compensation, pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock, stock option,
employment, termination, severance, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of it and its Subsidiaries (the "Compensation and
Benefit Plans") (other than immaterial policies and arrangements not related to
severance) and any trust agreement or insurance contract forming a part of such
Compensation and Benefit Plans has been provided or made available to the other
party prior to the date hereof. The Compensation and Benefit Plans are listed in
Section 5.1(h) of its Disclosure Letter and those containing any "change of
control" or similar provisions are specifically identified in Section 5.1(h) of
its Disclosure Letter.
(ii) All Compensation and Benefit Plans are in substantial compliance with
all applicable law, including the Code and the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Each Compensation and Benefit Plan
that is an "employee pension benefit plan" within the meaning of Section 3(2) of
ERISA (a "Pension Plan") and that is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service (the "IRS"), nor are there any existing circumstances
likely to result in revocation of any such favorable determination letter. No
actions, suits, or claims (other than routine claims for benefits) have been
filed or, to the actual knowledge of its officers, are contemplated or
threatened against any Compensation and Benefits Plan or against the assets of
any Compensation and Benefits Plan; and, to the actual knowledge of its
officers, there is no basis for such action, suit or claim. Neither it nor any
of its Subsidiaries has engaged in a transaction with respect to any
Compensation and Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject it or any of its
Subsidiaries to a material tax or penalty imposed by either Section 4975 of the
Code or Section 502 of ERISA that has not previously been satisfied.
(iii) No liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by it or any Subsidiary with respect to any ongoing,
frozen or terminated "single-employer plan", within the meaning of Section
4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered one employer with the
Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate"). It and its Subsidiaries have not incurred and do not expect to
incur any withdrawal liability with respect to a multiemployer plan under
Subtitle E to Title IV of ERISA regardless of whether based on contributions of
an ERISA Affiliate. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof or will be
required to be filed in connection with the transactions contemplated by this
Agreement.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has
an "accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA. Neither it nor its
Subsidiaries has provided, or is required to provide, security to any Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
(v) Under each Pension Plan which is a single-employer plan, as of the last
day of the most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within
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the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year.
(vi) Neither it nor its Subsidiaries have any obligations for retiree
health and life benefits under any Compensation and Benefit Plan, except as set
forth in the SEC filings or Section 5.1(h) of the Company Disclosure Letter; the
terms of each such plan provide that such retiree health and life benefits may
be amended or terminated at any time, except to the extent limited by any
collective bargaining agreement.
(vii) The consummation of the Merger and the other transactions
contemplated by this Agreement will not (x) entitle any employees of it or its
Subsidiaries to severance pay or any increase in severance pay upon any
termination of employment prior to or after the date hereof, (y) accelerate the
time of payment or vesting or trigger any payment or funding (through a grantor
trust or otherwise) of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Compensation and Benefit Plans, or (z) result in any breach or violation of, or
a default under, any of the Compensation and Benefit Plans.
(viii) The Company has amended the terms of any and all Compensation and
Benefit Plans, as applicable, to eliminate the automatic funding of accrued
benefits under such plans via the Rabbi Trust established effective January 3,
1991, in connection with the consummation of the Merger and the other
transactions contemplated by this Agreement.
(ix) No Compensation and Benefit Plan is maintained outside the United
States.
(i) Compliance with Laws; Permits. Except as set forth in the Reports filed
prior to the date hereof, the businesses of each of it and its Subsidiaries have
not been, and are not being, conducted in violation of any federal, state, local
or foreign law, statute, ordinance, rule, regulation, judgment, order,
injunction, decree, arbitration award, agency requirement, license or permit of
any Governmental Entity (collectively, "Laws"), except for violations that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect or prevent or materially burden or materially impair the ability
of it to consummate the transactions contemplated by this Agreement. Except as
set forth in the Reports filed prior to the date hereof, no investigation or
review by any Governmental Entity with respect to it or any of its Subsidiaries
is pending or, to the actual knowledge of its officers, threatened, nor has any
Governmental Entity indicated an intention to conduct the same, except for those
the outcome of which, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect or prevent or materially burden or
materially impair its ability to consummate the transactions contemplated by
this Agreement. Each of it and its Subsidiaries has all permits, licenses,
franchises, variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as presently conducted,
except those the absence of which, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect or prevent or materially
burden or materially impair its ability to consummate the Merger and the other
transactions contemplated by this Agreement.
(j) Takeover Statutes. No "fair price," "moratorium," "control share
acquisition" or other similar anti-takeover statute or regulation (each a
"Takeover Statute") or any anti-takeover provision in the Company's articles of
incorporation or by-laws is, or at the Effective Time will be, applicable to the
Company, the Shares, the Merger or the other transactions contemplated by this
Agreement.
(k) Environmental Matters. Except as disclosed in the Reports prior to the
date hereof and except as has not had and is not reasonably likely to have a
Material Adverse Effect: (i) each of it and its Subsidiaries is in compliance
with all applicable Environmental Laws; (ii) no property (including soils,
groundwater, surface water, buildings or other structures) currently owned or
operated by it or any of its Subsidiaries is contaminated with any Hazardous
Substance which could reasonably be expected to result in liability relating to
or require remediation under any Environmental Law; (iii) no property formerly
owned or operated by it or any of its Subsidiaries has been contaminated with
any Hazardous Substance during or prior to such period of ownership or operation
which could reasonably be expected to result in liability relating to or require
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remediation under any Environmental Law; (iv) neither it nor any of its
Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither it nor any of its
Subsidiaries has been associated with any release or threat of release of any
Hazardous Substance which could reasonably be expected to result in liability
relating to or require remediation under any Environmental Law; (vi) neither it
nor any of its Subsidiaries has received any notice, demand, letter, claim or
request for information alleging that it or any of its Subsidiaries may be in
violation of or subject to liability under any Environmental Law; (vii) neither
it nor any of its Subsidiaries is subject to any order, decree, injunction or
other arrangement with any Governmental Entity or any indemnity or other
agreement with any third party relating to liability under any Environmental Law
or relating to Hazardous Substances; (viii) there are no other circumstances or
conditions involving it or any of its Subsidiaries or the transactions
contemplated in this Agreement that could reasonably be expected to result in
any claim, liability, investigation, cost or restriction on the ownership, use,
or transfer of any property pursuant to any Environmental Law; and (ix) the
Company has delivered to Parent, and Parent has made available to the Company,
copies of all environmental reports, studies, assessments, sampling data and
other environmental information in its possession relating to it or its
Subsidiaries or their respective current and former properties or operations.
As used herein, the term "Environmental Law" means any federal, state,
local or foreign statute, law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,
investigation or restoration of the environment, health, safety, or natural
resources, (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, indoor air, employee
exposure, wetlands, pollution, contamination or any injury or threat of injury
to persons or property relating to any Hazardous Substance.
As used herein, the term "Hazardous Substance" means any substance that is:
(A) listed, classified or regulated pursuant to any Environmental Law; (B) any
petroleum or coal product or by-product, any waste, ash or sludge,
asbestos-containing material, lead-containing paint or plumbing, polychlorinated
biphenyls, radioactive material or radon; and (C) any other substance which may
be the subject of regulatory action by any Government Entity in connection with
any Environmental Law.
(l) Taxes. Except for failures and inaccuracies that are not, individually
or in the aggregate, reasonably likely to have a Material Adverse Effect, each
of it and its Subsidiaries (i) have prepared in good faith and duly and timely
filed (taking into account any extension of time within which to file) all Tax
Returns (as defined below) required to be filed by any of them and all such
filed Tax Returns are complete and accurate; (ii) has paid all Taxes (as defined
below) that are shown as due on such filed Tax Returns or that it or any of its
Subsidiaries are obligated to withhold from amounts owing to any employee,
creditor or third party, except with respect to matters contested in good faith;
and (iii) has not waived any statute of limitations with respect to Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.
Except as set forth in the Company Disclosure Letter, (i) neither it nor any of
its Subsidiaries is a party to any Tax allocation, indemnity or sharing
agreement (other than such an agreement between it and any of its Subsidiaries)
and (ii) neither it nor any of its Subsidiaries has any liability for Taxes as a
result of its or any of its Subsidiaries inclusion in any group's consolidated
or combined Tax returns other than a group of which it is a common parent,
except, in the case of clause (ii), as is not reasonably likely to have a
Material Adverse Effect. As of the date hereof, there are not pending or, to the
actual knowledge of its officers threatened in writing, any audits,
examinations, investigations or other proceedings in respect of Taxes or Tax
matters that, individually or in the aggregate are reasonably likely to have a
Material Adverse Effect. There are not, to the actual knowledge of its officers,
any unresolved questions or claims concerning its or any of its Subsidiaries'
Tax liability that, individually or in the aggregate, are reasonably likely to
have a Material Adverse Effect. Neither it nor any of its Subsidiaries has any
liability with respect to Taxes in excess of the amounts accrued with respect
thereto that are reflected in the financial statements included in the Reports
filed on or prior to the date hereof, except as is not, individually or in the
aggregate reasonably likely to have a Material Adverse Effect.
As used in this Agreement, (i) the term "Tax" (including, with correlative
meaning, the terms "Taxes", and "Taxable") includes all federal, state, local
and foreign income, profits, alternative minimum tax, franchise, gross receipts,
environmental, customs duty, capital stock, severances, stamp, payroll, sales,
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employment, unemployment, disability, use, property, withholding, excise,
add-on, production, value added, occupancy and other taxes, duties or
assessments of any nature whatsoever, together with all interest, penalties and
additions imposed with respect to such amounts and any interest in respect of
such penalties and additions, and (ii) the term "Tax Return" includes all
returns and reports (including elections, declarations, disclosures, schedules,
estimates and information returns) required to be supplied to a Tax authority
relating to Taxes.
(m) Labor Matters. Except as set forth in Section 5.1(m) of its Disclosure
Letter, neither it nor any of its Subsidiaries is a party to or otherwise bound
by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it or any of its
Subsidiaries the subject of any material proceeding asserting that it or any of
its Subsidiaries has committed an unfair labor practice or is seeking to compel
it to bargain with any labor union or labor organization nor is there pending
or, to the actual knowledge of its officers, threatened, nor has there been for
the past five years, any labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving it or any of its Subsidiaries. Each party has
previously made available to the other correct and complete copies of all labor
and collective bargaining agreements, Contracts or other agreements or
understandings with a labor union or labor organization to which it or any of
its Subsidiaries is party or by which any of them are otherwise bound
(collectively, the "Labor Agreements"). The consummation of the Merger and the
other transactions contemplated by this Agreement will not entitle any third
party (including any labor union or labor organization) to any payments under
any of the Labor Agreements.
(n) Intellectual Property.
(i) It or its Subsidiaries own (free and clear of any and all liens, claims
or encumbrances), or is licensed or otherwise possesses sufficient legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
brand marks, brand names, copyrights, and any applications therefor, technology,
know-how, computer software programs or applications, databases, industrial
designs and tangible or intangible proprietary information or materials that are
currently used (or, with respect to trademarks, trade names, brand marks, brand
names and service marks, have been used within the last five years) in its and
its Subsidiaries' businesses (collectively, "Intellectual Property Rights"),
except for any such failures to own, be licensed or possess that, individually
or in the aggregate, are not reasonably likely to have a Material Adverse
Effect.
(ii) Except as disclosed in the Reports filed prior to the date hereof, and
except for such matters that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect, (i) the use of the
Intellectual Property Rights by it or its Subsidiaries does not conflict with,
infringe upon, violate or interfere with or constitute an appropriation of any
right, title, interest or goodwill including, without limitation, any
intellectual property right, patent, trademark, trade name, service mark, brand
mark, brand name, copyright, technology, know-how, computer software program or
application, database or industrial design of any other Person and (ii) there
have been no claims made and neither it nor any of its Subsidiaries has received
notice of any claim or otherwise knows that any Intellectual Property Right is
invalid, conflicts with the asserted right of any other Person, has not been
used or enforced or has been failed to be used or enforced in a manner that
would result in the abandonment, cancellation or unenforceability of any
Intellectual Property Right of it or any of its Subsidiaries.
(o) Insurance. All material fire and casualty, general liability, business
interruption, product liability, and sprinkler and water damage insurance
policies maintained by it or any of its Subsidiaries are with reputable
insurance carriers, provide full and adequate coverage for all normal risks
incident to the business of it and its Subsidiaries and their respective
properties and assets, and are in character and amount at least equivalent to
that carried by persons engaged in similar businesses and subject to the same or
similar perils or hazards, except for any such failures to maintain insurance
policies that, individually or in the aggregate, are not reasonably likely to
have a Material Adverse Effect.
(p) Rights Plan. (i) The Company has amended the Rights Agreement to
provide that (x) Parent shall not be deemed an Acquiring Person (as defined in
the Rights Agreement), (y) the Distribution Date (as defined in the Rights
Agreement) shall not be deemed to occur and (z) the Rights will not separate
from the
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Shares, in each case, as a result of entering into this Agreement or
consummating the Merger and/or the other transactions contemplated hereby.
(ii) The Company has taken all necessary action with respect to all of the
outstanding Rights (as defined in the Rights Agreement) so that, as of
immediately prior to the Effective Time, the Rights Agreement will expire
without any payment by the Company in respect of the Rights.
(q) Brokers and Finders. Neither it nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the Merger or the
other transactions contemplated in this Agreement except that (i) the Company
has employed Merrill Lynch as its financial advisor, the arrangements with which
have been disclosed to Parent prior to the date hereof and (ii) Parent has
employed Warburg Dillon Read LLC as it financial advisor, the arrangements with
which have been disclosed to the Company prior to the date hereof.
(r) Year 2000. Except as disclosed in the Reports filed prior to the date
hereof, all computer systems and computer software used by it or any of its
Subsidiaries, and the material computer systems and computer software of its
material commercial counterparties, recognize or are being adapted so that,
prior to December 31, 1999, they shall recognize the advent of the year A.D.
2000 and can correctly recognize or are being adapted so that they can correctly
recognize and manipulate date information relating to dates on or after January
1, 2000 and the operation and functionality of such computer systems and such
computer software will not be adversely affected by the advent of the year A.D.
2000 or any manipulation of data featuring information relating to dates before,
on or after January 1, 2000 ("Millennium Functionality"), except in each case
for such computer systems and computer software, the failure of which to achieve
Millennium Functionality, individually or in the aggregate, has not had and is
not reasonably likely to have a Material Adverse Effect. Except as disclosed in
the Reports filed prior to the date hereof, the costs of the adaptions necessary
to achieve Millennium Functionality are not reasonably likely to have a Material
Adverse Effect.
(s) Regulatory Proceedings. Except as set forth in the Reports, neither the
Company nor any of its Subsidiaries, all or part of whose rates or services are
regulated by a Governmental Entity, (i) has rates which have been or are being
collected subject to refund, pending final resolution of any proceeding pending
before a Governmental Entity or on appeal to the courts or (ii) is a party to
any proceeding before a Governmental Entity or on appeal from orders of a
Governmental Entity which have had or are reasonably likely to result in orders
having a Material Adverse Effect.
(t) FERC Jurisdiction. To the actual knowledge of its officers, neither the
Company nor any of its Subsidiaries, nor any other entity in which the Company,
directly or indirectly owns or expects to retain any interest, owns or operates
any FERC jurisdictional facilities giving rise to a requirement for approval of
the Merger by the FERC.
(u) Regulation as a Utility. (i) It is not regulated as a public utility or
public service company by any state. Other than as set forth in Section 5.1(u)
of its Disclosure Letter, none of its Subsidiaries or Affiliates is subject to
regulation as a public utility or public service company (or similar
designation) by any state in the United States or in any foreign country.
(ii) Each of Parent and the Company is a holding company exempt from
registration pursuant to Section 3(a)(1) of the 1935 Act, as amended.
(v) Ownership of Shares. (i) Neither the Company nor any of its
Subsidiaries "Beneficially Owns" (as such term is defined in the Parent Rights
Agreement) any shares of Parent Common Stock.
(ii) Neither Parent nor any of its Subsidiaries "Beneficially Owns" (as
such term is defined in the Rights Agreement) any Shares.
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ARTICLE VI
COVENANTS
6.1. Interim Operations.
(a) The Company covenants and agrees as to itself and its Subsidiaries that
after the date hereof and prior to the Effective Time (unless Parent shall
otherwise approve, which approval shall not be unreasonably withheld or delayed,
and except as otherwise expressly contemplated by this Agreement):
(i) the business of the Company and its Subsidiaries shall be conducted in
the ordinary and usual course and, to the extent consistent therewith, it and
its Subsidiaries shall use their respective best reasonable efforts to (A)
preserve its business organization intact and maintain its existing relations
and goodwill with customers, suppliers, distributors, creditors, lessors,
employees and business associates and (B) maintain and keep material properties
and assets in as good repair and condition as such are in as of the date hereof,
subject to ordinary wear and tear;
(ii) the Company shall not (A) issue, sell, pledge, dispose of or encumber
any capital stock owned by it in any of its Subsidiaries; (B) amend its articles
of incorporation or by-laws or amend, modify or terminate the Rights Agreement;
(C) split, combine, subdivide or reclassify its outstanding shares of capital
stock; (D) declare, set aside or pay any dividend payable in cash, stock or
property in respect of any capital stock (other than dividends from its direct
or indirect wholly owned Subsidiaries and other than regular quarterly cash
dividends not in excess of $0.255 per Share and regular quarterly cash dividends
on the preferred and preference stock of its Subsidiaries); or (E) repurchase,
redeem or otherwise acquire (except for (I) mandatory sinking funds obligations
existing on the date hereof and (II) open market repurchases pursuant to the
terms of the Company's Direct Stock Purchase Plan and Dividend Reinvestment
Plan), or permit any of its Subsidiaries to purchase or otherwise acquire, any
shares of its capital stock or any securities convertible into or exchangeable
or exercisable for any shares of its capital stock;
(iii) neither the Company nor any of its Subsidiaries shall (A) issue,
sell, pledge, dispose of or encumber any shares of, or securities convertible
into or exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of its capital stock of
any class or any other property or assets (other than (I) Shares issuable
pursuant to options and other rights outstanding on the date hereof under the
Stock Plans, issuances of additional options or rights to acquire Shares granted
pursuant to the terms of the Stock Plans as in effect on the date hereof in the
ordinary and usual course of the operation of such Stock Plans and issuances of
Shares pursuant to options granted after the date hereof pursuant to the Stock
Plans and (II) Shares issuable pursuant to the terms of the outstanding Feline
Prides); (B) (I) transfer, lease, license, guarantee, sell, mortgage, pledge,
dispose of or encumber any of its coal fines property or assets, or, (II) except
as identified on Section 6.1(a)(iii) of the Company Disclosure Letter, other
than in the ordinary and usual course of business and other than sales not in
excess of $100,000,000 in the aggregate or $30,000,000 in respect of any
transaction or series of related transactions, transfer, lease, license,
guarantee, sell, mortgage, pledge, dispose of or encumber any other property or
assets; (C) make or authorize or commit for any capital expenditures or
operation and maintenance expenditures in excess of 110% of those contemplated
to be spent pursuant to the year 1999, 2000 or 2001 capital
appropriations/spending budgets set forth in Section 6.1(a) of the Company
Disclosure Letter; or (D) by any means, make any acquisition of, or investment
in, assets or stock of, or other interest in, any other Person or entity in
excess of $100,000,000 in the aggregate or $30,000,000 in respect of any
transaction or series of related transactions;
(iv) except as set forth in Section 6.1(a)(iv) of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries shall (A) incur, assume
or prepay any long-term debt or incur or assume any short-term debt other than
in the ordinary and usual course of business in amounts and for purposes
consistent with past practice under existing lines of credit, and except for the
incurrence of long-term indebtedness in connection with the refinancing of
existing indebtedness either at its stated maturity or at a lower cost of funds,
(B) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
third-party, including by means of any "keep well" or other agreement to support
or maintain any financial statement condition of another person, except in the
ordinary and usual
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course of business, (C) accelerate or delay collection of notes or accounts
receivable in advance of or beyond their regular due dates or the dates
consistent with past practice, or (D) change any accounting principle, practice
or method in a manner that is inconsistent with past practice, except to the
extent required by U.S. GAAP as advised by the Company's regular independent
accountants;
(v) neither the Company nor any of its Subsidiaries shall take or fail to
take any action that is reasonably likely to make any representation or warranty
of the Company contained herein inaccurate in any material respect at, or as of
any time prior to, the Effective Time, or that is, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect;
(vi) except as required by applicable Law, an existing collective
bargaining agreement or other Contract identified in Section 6.1(a)(vi) of the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries shall
terminate, establish, adopt, enter into, make any new grants or awards under,
amend or otherwise modify, any Compensation and Benefit Plans (other than
issuances of additional options, performance shares or rights to acquire Shares
granted pursuant to the terms of the Stock Plans as in effect on the date hereof
in the ordinary and usual course of the operation of such Stock Plans, provided,
that any such additional options, performance shares or rights to acquire Shares
shall not vest in connection with the Merger and the other transactions
contemplated by this Agreement), or except as required by any existing contract
with a non-officer employer increase the salary, wage, bonus or other
compensation of any employees, except increases occurring in the ordinary and
usual course of business (which shall include normal periodic performance
reviews and related compensation and benefit increases);
(vii) except as required by applicable law, an existing collective
bargaining agreement or other Contract identified in Section 6.1(a)(vii) of the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries shall
grant any severance or termination pay to, or enter into any employment or
severance agreement with any director or officer of it or such Subsidiaries,
provided, that the foregoing shall not require the Company to violate any of its
obligations existing prior to the date hereof as set forth in Section 5.1(h) of
the Company Disclosure Letter;
(viii) neither the Company nor any of its Subsidiaries shall settle or
compromise any material claims or litigation or amend or terminate any of its
material Contracts or waive, release or assign any material rights or claims;
(ix) neither the Company nor any of its Subsidiaries shall make any
material Tax election (other than in the ordinary and usual course or as is
required by Law) or permit any insurance policy naming it as a beneficiary or
loss-payable payee to be canceled or terminated except in the ordinary and usual
course of business; and
(x) neither the Company nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
(b) Parent covenants and agrees as to itself and its Subsidiaries that
after the date hereof and prior to the Effective Time (unless the Company shall
otherwise approve, which approval shall not be unreasonably withheld or delayed,
and except as otherwise expressly contemplated by this Agreement):
(i) the business of Parent and its Subsidiaries shall be conducted in the
ordinary and usual course and, to the extent consistent therewith, it and its
Subsidiaries shall use their respective best reasonable efforts to (A) preserve
its business organization intact and maintain its existing relations and
goodwill with customers, suppliers, distributors, creditors, lessors, employees
and business associates and (B) maintain and keep material properties and assets
in as good repair and condition as such are in as of the date hereof, subject to
ordinary wear and tear;
(ii) it shall not (A) amend its articles of incorporation or by-laws; (B)
split, combine, subdivide or reclassify its outstanding shares of capital stock;
(C) declare, set aside or pay any dividend payable, in cash, stock or property
in respect of any capital stock, other than dividends from its direct or
indirect wholly owned Subsidiaries and other than regularly quarterly cash
dividends not in excess of $0.515 per share of Parent Common Stock and regularly
quarterly cash dividends on the preferred and preference stock of its
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Subsidiaries; (D) repurchase, redeem or otherwise acquire, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of Parent Common Stock
or any securities convertible into or exchangeable or exercisable for any shares
of Parent Common Stock (other than repurchases, redemptions or other
acquisitions which are made at the then-prevailing market price of Parent Common
Stock on the NYSE and which in the aggregate do not exceed ten percent of the
shares of Parent Common Stock outstanding as of the date hereof) or (E) except
as permitted under this Agreement, enter into any agreement with respect to a
merger, reorganization, share exchange, consolidation or similar transaction
involving, or any purchase of all or substantially all of the equity securities
of it or any of its Significant Subsidiaries (as such term is defined in Rule
1-02 of Regulation S-X under the Exchange Act);
(iii) neither Parent nor any of its Subsidiaries shall, (A) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible into or
exchangeable or exercisable for, or options, warrants, calls, commitments or
rights of any kind to acquire, any shares of Parent Common Stock (other than (I)
shares of Parent Common Stock issuable pursuant to options outstanding on the
date hereof under the Parent Stock Plan, issuances of additional options or
rights to acquire shares of Parent Common Stock granted pursuant to the terms of
the Parent Stock Plan as in effect on the date hereof in the ordinary and usual
course of the operation of such Parent Stock Plan and issuances of shares of
Parent Common Stock pursuant to options granted after the date hereof pursuant
to the Parent Stock Plan and (II) issuances of Parent Common Stock, or
securities convertible with or exchangeable or exercisable for, or options,
warrants, calls, commitments or rights of any kind to acquire, shares of Parent
Common Stock, to a third-party on arms-length terms not in excess of 20% of the
number of shares of Parent Common Stock outstanding as of the date hereof), (B)
other than pursuant to the year 1999, 2000 or 2001 capital appropriations/
spending budgets set forth in Section 6.1(b) of the Parent Disclosure Letter and
other than in the ordinary and usual course of business (I) transfer, lease,
license, guarantee, sell, mortgage, pledge, dispose of or encumber any property
or assets, and other than sales not in excess of $250,000,000 in the aggregate;
or (II) by any means, make any acquisition of, or investment in, assets or stock
of, or other interest in, any other Person or entity in excess of $250,000,000
in the aggregate or (C) acquire "Beneficial Ownership" (as such term is defined
in the Rights Agreement) of any Shares;
(iv) Parent shall not change any material accounting principle, practice or
method in a manner that is inconsistent with past practice, except to the extent
required by U.S. GAAP as advised by Parent's regular independent accountants;
(v) neither Parent nor any of its Subsidiaries shall take or fail to take
any action that is reasonably likely to make any representation or warranty of
such party contained herein inaccurate in any material respect at, or as of any
time prior to, the Effective Time, or that is, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect; and
(vi) neither Parent nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
6.2. Acquisition Proposals. (a) The Company agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and use its best efforts to cause
its and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries ("Representatives")) not to, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation or similar transaction involving, or any purchase of all or,
except for transactions in the ordinary course of business or expressly
contemplated by this Agreement that could not interfere with the transactions
contemplated by this Agreement, including by Section 6.1(a)(iii), any of the
assets or any equity securities of, it or any of its Subsidiaries (any such
proposal or offer being hereinafter referred to as a "Company Acquisition
Proposal"). The Company further agrees that neither it nor any of its
Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall direct and use its best efforts to cause its and its
Subsidiaries' Representatives not to, directly or indirectly, engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any Person relating to a Company Acquisition
Proposal, or otherwise facilitate any effort or attempt to make
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or implement a Company Acquisition Proposal; provided, however, that nothing
contained in this Agreement (including the last preceding sentence and Section
6.1(b)) shall prevent the Company or its Board of Directors or Parent or its
Board of Directors, as applicable, from (A) complying with Rule 14e-2
promulgated under the Exchange Act with regard to a Company Acquisition
Proposal; (B) providing information in response to a request therefor by a
Person who has made an unsolicited bona fide written Company Acquisition
Proposal if the Company's Board of Directors receives from the Person so
requesting such information an executed confidentiality agreement on terms, with
respect to confidentiality, substantially similar to those contained in the
Confidentiality Agreement (as defined in Section 9.7); (C) engaging in any
negotiations or discussions with any Person who has made an unsolicited bona
fide written Company Acquisition Proposal; or (D) recommending such Company
Acquisition Proposal to the shareholders of the Company if and only to the
extent that, in each such case referred to in clause (B), (C) or (D) above,
prior to the time the Company Requisite Vote shall have been obtained, the Board
of Directors of the Company determines in good faith after consultation with
outside legal counsel and its financial advisor and based upon such other
matters as it deems relevant that failure to take such action would likely
result in a breach of their fiduciary duties under applicable law and that such
Company Acquisition Proposal, if accepted, is reasonably likely to be
consummated, taking into account all legal, financial and regulatory aspects of
the proposal and the Person making the proposal and would, if consummated, be
reasonably likely to result in a transaction more favorable to the Company's
shareholders from a financial point of view than the transaction contemplated by
this Agreement (any such more favorable Acquisition Proposal being referred to
in this Agreement as a "Superior Proposal"). The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Company Acquisition Proposal. The Company agrees that it will take the
necessary steps to promptly inform the individuals or entities referred to in
the first sentence hereof of the obligations undertaken in this Section 6.2 and
in the Confidentiality Agreement. The Company agrees that it will use its best
reasonable efforts to notify Parent within one day of the receipt thereof if any
such inquiries, proposals or offers are received by, any such information is
requested from, or any such discussions or negotiations are sought to be
initiated or continued with, any of its Representatives indicating, in
connection with such notice, the name of such Person and the material terms and
conditions of any proposals or offers and thereafter shall keep Parent informed,
on a current basis, on the status and terms of any such proposals or offers and
the status of any such discussions or negotiations. The Company also agrees that
it will promptly request each Person that has heretofore executed a
confidentiality agreement in connection with its consideration of acquiring all
or substantially all of it, Michigan Consolidated Gas Company or MCN Investment
Corporation to return all confidential information heretofore furnished to such
Person by or on behalf of it or any of its Subsidiaries.
(b) Parent agrees that neither it nor any of its Subsidiaries nor any of
the officers and directors of it or its Subsidiaries shall, and that it shall
direct and use its best efforts to cause its and its Subsidiaries' employees,
agents and Representatives not to, directly or indirectly, initiate, solicit,
encourage or otherwise facilitate any inquiries or the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation or
similar transaction involving, or any purchase of all or, except for
transactions in the ordinary course of business or expressly contemplated by
this Agreement that could not interfere with the transactions contemplated by
this Agreement, any of the assets or any equity securities of it or any of its
Subsidiaries to the extent that such proposal is conditioned on Parent's failure
to obtain the Parent Requisite Vote or could reasonably be expected to result in
a failure to consummate the transactions contemplated by this Agreement (any
such proposal or offer being hereinafter referred to as a "Parent Adverse
Proposal"). Parent further agrees that neither it nor any of its Subsidiaries
nor any of the officers and directors of it or its Subsidiaries shall, and that
it shall direct and use its best efforts to cause its and its Subsidiaries'
Representatives not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to a Parent Adverse Proposal, or otherwise
facilitate any effort or attempt to make or implement a Parent Adverse Proposal;
provided, however, that nothing contained in this Agreement shall prevent Parent
or its Board of Directors from (A) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to a Parent Adverse Proposal; (B) providing
information in response to a request therefor by a Person who has made an
unsolicited bona fide written Parent Adverse Proposal if Parent's Board of
Directors receives from the Person so requesting such information an executed
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confidentiality agreement on terms, with respect to confidentiality,
substantially similar to those contained in the Confidentiality Agreement; (C)
engaging in any negotiations or discussions with any Person who has made an
unsolicited bona fide written Parent Adverse Proposal; or (D) recommending such
Parent Adverse Proposal to the shareholders of Parent, if and only to the extent
that, in each such case referred to in clause (B), (C) or (D) above, prior to
the time the Parent Requisite Vote shall have been obtained the Board of
Directors of Parent determines in good faith after consultation with outside
legal counsel and its financial advisor and based upon such other matters as it
deems relevant that failure to take such action would likely result in a breach
of their fiduciary duties under applicable law and that such Parent Adverse
Proposal, if accepted, is reasonably likely to be consummated, taking into
account all legal, financial and regulatory aspects of the proposal and the
Person making the proposal and would, if consummated, be reasonably likely to
result in a transaction more favorable to the Parent's shareholders from a
financial point of view than the transaction contemplated by this Agreement.
Parent agrees that it will take the necessary steps to promptly inform the
individuals or entities referred to in the first sentence of this Section 6.2(b)
of the obligations undertaken in this Section 6.2(b) and in the Confidentiality
Agreement. Parent agrees that it will use its best reasonable efforts to notify
the Company within one day of the receipt thereof if any such inquiries,
proposals or offers are received by, any such information is requested from, or
any such discussions or negotiations are sought to be initiated or continued
with, any of its Representatives indicating, in connection with such notice, the
name of such Person and the material terms and conditions of any proposals or
offers and thereafter shall keep the Company informed, on a current basis, on
the status and terms of any such proposals or offers and the status of any such
discussions or negotiations.
6.3. Information Supplied. The Company and Parent each agrees, as to itself
and its Subsidiaries, that none of the information supplied or to be supplied by
it or its Subsidiaries for inclusion or incorporation by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of Parent Common Stock in the Merger (including the
joint proxy statement and prospectus (the "Prospectus/Proxy Statement")
constituting a part thereof) (the "S-4 Registration Statement") will, at the
time the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
(ii) the Prospectus/Proxy Statement and any amendment or supplement thereto
will, at the date of mailing to shareholders and at the times of the meetings of
shareholders of the Company and Parent to be held in connection with the Merger
and the issuance of Parent Common Stock, respectively, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Company and
Parent will cause the Form S-4 to comply as to form in all material respects
with the applicable provisions of the Securities Act and the rules and
regulations thereunder.
6.4. Shareholders Meetings. The Company will take, in accordance with
applicable law and its articles of incorporation and by-laws, all action
necessary to convene a meeting of holders of Shares (the "Shareholders Meeting")
as promptly as practicable after the S-4 Registration Statement is declared
effective to consider and vote upon the approval of this Agreement. Parent will
take, in accordance with its articles of incorporation and by-laws, all action
necessary to convene a meeting of holders of Parent Common Stock as promptly as
practicable after the S-4 Registration Statement is declared effective to
consider and vote upon the approval of the issuance of Parent Common Stock in
the Merger. Subject to fiduciary obligations under applicable law, each of the
Company's and Parent's Board of Directors shall recommend such approval and
shall take all lawful action to solicit such approval.
6.5. Filings; Other Actions; Notification. (a) Parent and the Company shall
promptly prepare and file with the SEC the Prospectus/Proxy Statement, and
Parent shall prepare and file with the SEC the S-4 Registration Statement as
promptly as practicable. Parent and the Company each shall use its best
reasonable efforts to have the S-4 Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing, and
promptly thereafter mail the Prospectus/Proxy Statement to the respective
shareholders of each of the Company and Parent. Parent shall also use its best
reasonable efforts to obtain prior to the effective date of the S-4 Registration
Statement all necessary state securities law or "blue sky"
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permits and approvals required in connection with the Merger and to consummate
the other transactions contemplated by this Agreement and will pay all expenses
incident thereto.
(b) The Company and Parent each shall use its best reasonable efforts to
cause to be delivered to the other party and its directors a letter of its
independent auditors, dated (i) the date on which the S-4 Registration Statement
shall become effective and (ii) the Closing Date, and addressed to the other
party and its directors, in form and substance customary for "comfort" letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement.
(c) The Company and Parent shall cooperate with each other and use (and
shall cause their respective Subsidiaries to use) their respective commercially
reasonable efforts to take or cause to be taken all actions, and do or cause to
be done all things, necessary, proper or advisable on its part under this
Agreement and applicable Laws to consummate and make effective the Merger and
the other transactions contemplated by this Agreement as soon as practicable,
including preparing and filing as promptly as practicable all documentation to
effect all necessary notices, reports and other filings and to obtain as
promptly as practicable all consents, registrations, approvals, permits and
authorizations necessary or advisable to be obtained from any third party and/or
any Governmental Entity in order to consummate the Merger or any of the other
transactions contemplated by this Agreement. Subject to applicable laws relating
to the exchange of information (including any obligations pursuant to any
listing agreement with or rules of any national securities exchange), Parent and
the Company shall have the right to review in advance, and to the extent
practicable each will consult the other on, all the information relating to
Parent or the Company, as the case may be, and any of their respective
Subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party and/or any Governmental Entity (including any
national securities exchange) in connection with the Merger and the other
transactions contemplated by this Agreement. In exercising the foregoing right,
each of the Company and Parent shall act reasonably and as promptly as
practicable.
(d) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
officers and shareholders and such other matters as may be reasonably necessary
or advisable in connection with the Prospectus/Proxy Statement, the S-4
Registration Statement or any other statement, filing, notice or application
made by or on behalf of Parent, the Company or any of their respective
Subsidiaries to any third party and/or any Governmental Entity in connection
with the Merger and the transactions contemplated by this Agreement.
(e) The Company and Parent each shall keep the other apprized of the status
of matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of any notices or other
communications received by Parent or the Company, as the case may be, or any of
its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger and the other transactions contemplated by this Agreement.
The Company and Parent each shall give prompt notice to the other of any change
that is reasonably likely to result in a Material Adverse Effect on it or
prevent, materially delay or materially impair the ability of the Company or
Parent, as the case may be, to consummate the transactions contemplated by this
Agreement.
(f) In the event any claim, action, suit investigation or other proceeding
by any Governmental Entity or other Person or other legal or administrative
proceeding is commenced that questions the validity or legality of this
Agreement or the Merger or the other transaction contemplated by this Agreement
or claims damages in connection therewith, the Company and Parent each agree to
cooperate and use their best reasonable efforts to defend against and respond
thereto.
6.6. Access. Upon reasonable notice, and except as may otherwise be
required by applicable law, the Company and Parent each shall (and shall cause
its Subsidiaries to) afford the other's officers, employees, counsel,
accountants and other authorized representatives reasonable access during normal
business hours throughout the period prior to the Effective Time, to its
properties, books, contracts and records and, during such period, the Company
and Parent each shall (and shall cause its Subsidiaries to) furnish promptly to
the other all information concerning its business, properties and personnel as
may reasonably be requested, provided that no investigation pursuant to this
Section shall affect or be deemed to modify any representation or warranty made
by the Company, Parent or Merger Sub and provided, further, that the foregoing
shall not
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require the Company or Parent to permit any inspection, or to disclose any
information, that in the reasonable judgment of the Company or Parent (i) would
result in the disclosure of any trade secrets of third parties or violate any of
its obligations with respect to confidentiality if the Company or Parent, as the
case may be, shall have used its best reasonable efforts to obtain the consent
of such third party to such inspection or disclosure or (ii) constitutes
information protected by attorney-client privilege, but only to the extent that
disclosure would impair the Company's or Parent's, as the case may be, ability
to assert such attorney-client privilege. All requests for information made
pursuant to this Section shall be directed to an executive officer of the
Company or Parent, as the case may be, or such Person as may be designated by
either of its executive officers, as the case may be. All such information shall
be governed by the terms of the Confidentiality Agreement.
6.7. Affiliates. At least ten business days prior to the date of the
Shareholders Meeting, the Company shall deliver to Parent a list of names and
addresses of those Persons who are, in the opinion of the Company, as of the
time of the Shareholders Meeting referred to in Section 6.4, "affiliates" of the
Company within the meaning of Rule 145 under the Securities Act. There shall be
added to such list the names and addresses of any other Person subsequently
identified by either Parent or the Company as a Person who may be deemed to be
such an affiliate of the Company; provided, however, that no such Person
identified by Parent shall be added to the list of affiliates of the Company if
Parent shall receive from the Company, on or before the date of the Shareholders
Meeting, an opinion of counsel reasonably satisfactory to Parent to the effect
that such Person is not such an affiliate. The Company shall exercise its best
efforts to deliver or cause to be delivered to Parent, prior to the date of the
Shareholders Meeting, from each affiliate of the Company identified in the
foregoing list (as the same may be supplemented as aforesaid), a letter dated as
of the Closing Date substantially in the form attached as Exhibit A-1 (the
"Affiliates Letter"). Parent shall not be required to maintain the effectiveness
of the S-4 Registration Statement or any other registration statement under the
Securities Act for the purposes of resale of Parent Common Stock by such
affiliates received in the Merger and the certificates representing Parent
Common Stock received by such affiliates shall bear a customary legend regarding
applicable Securities Act restrictions and the provisions of this Section.
6.8. Stock Exchange Listing and De-listing. Parent shall use its best
efforts to cause the shares of Parent Common Stock to be issued in the Merger to
be approved for listing on the NYSE subject to official notice of issuance,
prior to the Closing Date. The Surviving Corporation shall use its best efforts
to cause the Shares to be de-listed from the NYSE and de-registered under the
Exchange Act as soon as practicable following the Effective Time.
6.9. Publicity. The initial press release shall be a joint press release
and thereafter the Company and Parent each shall consult with each other prior
to issuing any press releases or otherwise making public announcements with
respect to the Merger and the other transactions contemplated by this Agreement.
6.10. Benefits.
(a) Stock Options. (i) At the Effective Time, each outstanding option to
purchase Shares (a "Company Option") under the Stock Plans, whether vested or
unvested, shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Company Option, the number of
shares of Parent Common Stock equal to the result (rounded to the nearest whole
share) of multiplying the number of Shares subject to the Company Option
immediately prior to the Effective Time by the Conversion Ratio (as defined
below), at an exercise price per share equal to the result (rounded to the
nearest whole cent) of dividing the per share exercise price of such Company
Option immediately prior to the Effective Time by the Conversion Ratio;
provided, however, that in the case of any Company Option to which Section 422
of the Code applies, the adjustments provided for in this Section shall be
effected in a manner consistent with the requirements of Section 424(a) of the
Code. At or prior to the Effective Time, the Company shall make all necessary
arrangements with respect to the Stock Plans to permit the assumption of the
unexercised Company Options by Parent pursuant to this Section. For purposes of
this Section, the term "Conversion Ratio" means a fraction, the numerator of
which is the average of the high and low sales price of one Share on the NYSE on
the three trading days immediately preceding the Effective Time and the
denominator of which is the average
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of the high and low sales price of one share of Parent Common Stock on the NYSE
on the trading day immediately preceding the Effective Time.
(ii) Effective at the Effective Time, Parent shall assume each Company
Option in accordance with the terms of the Stock Plans and the stock option
agreement by which it is evidenced. At or prior to the Effective Time, Parent
shall take all corporate action necessary to reserve for issuance a sufficient
number of shares of Parent Common Stock for delivery upon exercise of Company
Options assumed by it in accordance with this Section. As soon as practicable
after the Effective Time, Parent shall file a registration statement on Form S-8
(or any successor or other appropriate forms), or another appropriate form with
respect to the shares of Parent Common Stock subject to such Company Options,
and shall use its best reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Company Options remain
outstanding.
(iii) Prior to the Effective Time, the Board of Directors of Parent, or an
appropriate committee of non-employee directors thereof, shall adopt a
resolution consistent with the interpretive guidance of the SEC so that the
acquisition of shares of Parent Common Stock or options to acquire shares of
Parent Common Stock pursuant to this Agreement and the Merger and the Merger
shall be an exempt transaction for purposes of Section 16 by any officer or
director of the Company who may become a covered person of Parent for purposes
of Section 16 of the Exchange Act ("Section 16").
(b) Employee Benefits. (i) Parent agrees that, during the period commencing
at the Effective Time and ending on the first anniversary thereof, the employees
of the Company and its Subsidiaries ("Company Employees") will continue to be
provided with compensation and benefits under employee benefit plans (other than
plans involving the issuance of Shares) that are no less favorable in the
aggregate than those currently provided by the Company and its Subsidiaries to
such Company Employees under the Compensation and Benefit Plans of the Company
and its Subsidiaries.
(ii) From and after the Effective Time, Parent shall cause the Surviving
Corporation and The Detroit Edison Company to honor (i) each existing
employment, change of control, severance and termination agreement between the
Company or any of its Subsidiaries, and any officer, director or employee of the
Company or its Subsidiaries and (ii) all Compensation and Benefit Plans of the
Company and its Subsidiaries in accordance with their terms as in effect
immediately before the Effective Time. Notwithstanding the above, nothing in
this Agreement precludes Parent or any of its Subsidiaries from amending,
discontinuing or terminating any Compensation and Benefit Plan in accordance
with the terms thereof. Parent acknowledges that it has been advised by the
Company that the Merger constitutes a change of control for purposes of certain
Company Compensation and Benefit Plans specifically identified in Section
6.10(b) of the Company Disclosure Letter.
(iii) For all purposes under the employee benefit plans of Parent and its
Affiliates providing benefits to any current Company Employees after the
Effective Time (the "New Plans"), each Company Employee shall be credited with
his or her years of service with the Company and its Affiliates before the
Effective Time, to the same extent as such Company Employee was entitled, before
the Effective Time, to credit for such service for such purposes under any
similar Company Employee Plans, except to the extent such credit would result in
a duplication of benefits. In addition, and without limiting the generality of
the foregoing: (i) each Company Employee shall be immediately eligible to
participate, without any waiting time, in any and all New Plans to the extent
coverage under such New Plan replaces coverage under a comparable Company
Employee Plan in which such Company Employee participated immediately before the
Effective Time (such plans, collectively, the "Old Plans"); and (ii) for
purposes of each New Plan providing medical, dental, pharmaceutical and/or
vision benefits to any Company Employee, Parent shall cause all pre-existing
condition exclusions of such New Plan to be waived for such employee and his or
her covered dependents to the extent that such exclusions and requirements were
waived under the corresponding Company Employee Plans, and Parent shall cause
any eligible expenses incurred by such employee and his or her covered
dependents during the portion of the plan year of the Old Plan ending on the
date that such employee's participation in the corresponding New Plan begins to
be taken into account under such New Plan for purposes of satisfying all
deductible, coinsurance and
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maximum out-of-pocket requirements applicable to such employee and his or her
covered dependents for the applicable plan-year as if such amounts had been paid
in accordance with such New Plan.
(iv) Between the date hereof and December 31, 1999, the Company shall take
such reasonable and appropriate actions as agreed to by Parent to mitigate the
tax cost to the Company of providing the "change of control" benefits identified
in Section 5.1(h) of the Company Disclosure Letter.
(c) Election to Parent's Board of Directors; Management Executive
Committee. At the Effective Time of the Merger, Parent shall promptly increase
the size of its Board of Directors or exercise its best efforts to secure the
resignation of present directors in order to cause Alfred R. Glancy III and two
additional persons selected by the Company after consultation with Parent from
among the Company's directors as of the date hereof to be appointed to Parent's
Board of Directors.
(d) Employees. It is the present intention of Parent and the Company that
following the Effective Time, there will be no involuntary reductions in force
at the Surviving Corporation or its Subsidiaries, and that Parent, the Surviving
Corporation and their respective Subsidiaries will continue Parent's and the
Company's present strategy of achieving workforce reductions through attrition
or other voluntary means; provided, however, that if any reductions in workforce
in respect of employees of Parent and its Subsidiaries, including the Surviving
Corporation and its Subsidiaries, become necessary, they shall be made on a fair
and equitable basis, in light of the circumstances and the objectives to be
achieved, giving consideration to previous work history, job experience,
qualifications, and business needs without regard to whether employment prior to
the Effective Time was with the Company or its Subsidiaries or Parent or its
Subsidiaries, and any employees whose employment is terminated or jobs are
eliminated by Parent, the Surviving Corporation or any of their respective
Subsidiaries shall be entitled to participate on a fair and equitable basis in
the job opportunity and employment placement programs offered by Parent, the
Surviving Corporation or any of their respective Subsidiaries. Any workforce
reductions carried out following the Effective Time by Parent or the Surviving
Corporation and their respective Subsidiaries shall be done in accordance with
all applicable collective bargaining agreements, and all laws and regulations
governing the employment relationship and termination thereof including, without
limitation, the Worker Adjustment and Retraining Notification Act and
regulations promulgated thereunder, and any comparable state or local law.
6.11. Expenses. The Surviving Corporation or Parent shall pay all charges
and expenses of the Company, Merger Sub or Parent, including those of the
Exchange Agent, in connection with the transactions contemplated in Article IV,
and Parent shall reimburse the Surviving Corporation for such charges and
expenses paid by the Surviving Corporation. Except as otherwise provided in
Section 8.5(b), whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the Merger and the other
transactions contemplated by this Agreement shall be paid by the party incurring
such expense, except that expenses incurred in connection with the filing fee
for the S-4 Registration Statement and printing and mailing the Prospectus/Proxy
Statement and the S-4 Registration Statement shall be shared equally by Parent
and the Company.
6.12. Indemnification; Directors' and Officers' Insurance. (a) From and
after the Effective Time, Parent agrees that it will indemnify and hold harmless
each present and former director and officer of the Company, (when acting in
such capacity) determined as of the Effective Time (the "Indemnified Parties"),
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "Costs") incurred
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that the
Company would have been permitted under Michigan law and its articles of
incorporation and its by-laws in effect on the date hereof to indemnify such
Person (and Parent shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided, the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification).
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 6.12, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Parent thereof,
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but the failure to so notify shall not relieve Parent of any liability it may
have to such Indemnified Party so long as such failure does not materially
prejudice Parent. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) Parent
or the Surviving Corporation shall have the right to assume and control the
defense thereof and Parent shall not be liable to such Indemnified Parties for
any legal expenses of other counsel or any other expenses subsequently incurred
by such Indemnified Parties in connection with the defense thereof, except that
if Parent or the Surviving Corporation elects not to assume such defense or
counsel for the Indemnified Parties advises in writing that there are issues
which raise conflicts of interest between Parent or the Surviving Corporation
and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them subject to the consent of Parent, which shall not be
unreasonably withheld, and Parent or the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements setting forth such fees and expenses in reasonable detail
are received; provided, however, that Parent shall be obligated pursuant to this
paragraph (b) to pay for only one firm of counsel for all Indemnified Parties in
any jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of
any such matter and (iii) Parent shall not be liable for any settlement effected
without its prior written consent; and provided, further, that Parent shall not
have any obligation hereunder to any Indemnified Party if and when a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final, that the indemnification of such Indemnified Party in the
manner contemplated hereby is prohibited by applicable law.
(c) The Surviving Corporation shall maintain the Company's existing
officers' and directors' liability insurance ("D&O Insurance") for a period of
six years after the Effective Time so long as the annual premium therefor is not
in excess of 200% of the last annual premium paid prior to the date hereof (the
"Current Premium"); provided, however, that (x) the Surviving Corporation may
substitute therefor policies (which may be "tail" policies) containing terms
with respect to coverage and amount no less favorable to such directors and
officers, and (y) if the existing D&O Insurance expires, is terminated or
canceled during such six-year period, the Surviving Corporation will use its
best efforts to obtain as much D&O Insurance as can be obtained for the
remainder of such period for a premium not in excess (on an annualized basis) of
200% of the Current Premium.
(d) The provisions of this Section 6.12 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
6.13. Takeover Statutes. If any Takeover Statute is or may become
applicable to the Merger or the other transactions contemplated by this
Agreement, each of Parent and the Company and its Board of Directors shall grant
such approvals and take such actions as are necessary so that such transactions
may be consummated as promptly as practicable on the terms contemplated by this
Agreement or by the Merger and otherwise act to eliminate or minimize the
effects of such statute or regulation on such transactions.
6.14. Dividends. The Company shall coordinate with Parent the declaration,
setting of record dates and payment dates of dividends on Shares so that holders
of Shares do not receive dividends on both Shares and Parent Common Stock
received in the Merger in respect of any calendar quarter or fail to receive a
dividend on either Shares or Parent Common Stock received in the Merger in
respect of any calendar quarter.
6.15. Rate Matters. Other than currently pending rate filings, the Company
shall, and shall cause its Subsidiaries to, discuss with Parent any material
changes in its or its Subsidiaries regulated rates or charges (other than
pass-through fuel rates or charges), standards of service or accounting from
those in effect on the date hereof and consult with Parent prior to making any
filing (or any amendment thereto), or effecting any agreement, commitment,
arrangement or consent, whether written or oral, formal or informal, with
respect thereto.
6.16. Taxation. Subject to Section 6.2, neither Parent nor the Company
shall take or cause to be taken any action, whether before or after the
Effective Time, that would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Code.
6.17. Transition Matters. (a) Promptly after the date hereof, Parent and
the Company each shall designate three persons (the "Transition Coordinators")
to, subject to applicable laws relating to the exchange
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of information, facilitate a full exchange of information concerning the
business, operations, capital spending and budgets and financial results of
Parent and the Company and to identify ways in which the operations of Parent
and the Company can be consolidated or coordinated. The Transition Coordinators
shall meet at least monthly in person and shall meet together quarterly with the
Chief Executive Officers of Parent and the Company. From and after the date
hereof, Parent and the Company agree that they shall consult with each other
regarding all material business plans and decisions.
(b) The Company and Parent each agree to use its reasonable best efforts to
enter into a definitive agreement within 14 days of the date hereof for the sale
to Parent of the Company's 95% membership interest in each of the following
limited liability companies that own and operate synthetic fuel manufacturing
facilities: (i) CRC No. 1, LLC Union City, Kentucky, (ii) CRC No. 3, LLC,
Tazewell County Virginia and McDowell County Virginia, (iii) CRC No. 5, LLC
Monongalia County, West Virginia, and (iv) CRC No. 6, LLC Laurel County, West
Virginia. The Company and Parent each agree that the economic terms for each
such sale shall be designed to produce a payment stream to the Company with a
net present value of $40 per ton of capacity, utilizing a 12% discount rate.
(c) The Company agrees to use its best efforts promptly to enter into, or
to cause its Subsidiaries promptly to enter into, agreements to dispose of (i)
such of its interests as are necessary so that the transactions contemplated by
this Agreement will not jeopardize the status of any facilities in which the
Company directly or indirectly owns any interest as "Qualifying Facilities"
under the Public Utility Regulatory Policies Act of 1978, as amended, and (ii)
all FERC-jurisdictional assets or facilities whether directly or indirectly
owned or wholly or partially owned that would give rise to a requirement for
approval of the Merger by the FERC, in each case prior to the date when all
Governmental Consents (as defined below) are obtained and to use commercially
reasonable efforts to maximize the after-tax proceeds from such sales or
dispositions; provided, that the obligation to use best efforts shall not
require the Company to take any action pursuant to this Section 6.17(c) that
would cause (alone or together with other events) any failure to satisfy any
condition to Closing. The Company agrees to keep Parent informed on a current
basis regarding the status and terms of such dispositions and any other asset
dispositions contemplated by the Company and its Subsidiaries and to work
cooperatively with Parent to maximize the mutual benefit to the parties of such
dispositions.
6.18. Community Involvement. After the Effective Time, Parent intends to
continue, and intends to cause the Surviving Corporation to continue, to make
aggregate annual charitable contributions to the communities served by Parent
and the Surviving Corporation and otherwise maintain a substantial level of
involvement in community activities in the State of Michigan that is similar to,
or greater than, the normal aggregate annual level of charitable contributions,
community development and related activities carried on by Parent and the
Company prior to the date hereof.
6.19. 1935 Act and Power Act. (a) None of the parties hereto shall, nor
shall any such party permit any of its Subsidiaries to, without the other
party's consent, which shall not be unreasonably withheld or delayed, engage in
any activities that would (i) cause a change in its status, or that of its
Subsidiaries, under the 1935 Act, including, without limitation, the
registration of either party pursuant to the 1935 Act or (ii) result in
jurisdiction by the FERC over the Merger.
(b) None of the parties hereto shall, nor shall any such party permit any
of its Subsidiaries to, without the other party's consent, which shall not be
unreasonably withheld or delayed, fail to take such actions that are necessary
to (i) preserve existing exemptions from registration under the 1935 Act or (ii)
allow the Merger to proceed without a requirement for approval by the FERC.
6.20. Feline Prides. At or prior to the Effective Time, Parent shall take
all corporate action necessary to reserve for issuance a sufficient number of
shares of Parent Common Stock for delivery upon conversion of the Feline Prides
in accordance with their terms.
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ARTICLE VII
CONDITIONS
7.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Shareholder Approval. This Agreement shall have been duly approved by
holders of Shares constituting the Company Requisite Vote and shall have been
duly approved by the sole shareholder of Merger Sub in accordance with
applicable law and the articles of incorporation and by-laws of each such
corporation, and the issuance of Parent Common Stock pursuant to the Merger
shall have been duly approved by the holders of Parent Common Stock constituting
the Parent Requisite Vote.
(b) NYSE Listing. The shares of Parent Common Stock issuable to the Company
shareholders pursuant to this Agreement shall have been authorized for listing
on the NYSE upon official notice of issuance.
(c) Regulatory Consents. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated, and,
other than the filing provided for in Section 1.3, all notices, reports and
other filings required to be made prior to the Effective Time by the Company or
Parent or any of their respective Subsidiaries with, and all consents,
registrations, approvals, permits and authorizations required to be obtained
prior to the Effective Time by the Company or Parent or any of their respective
Subsidiaries from, any Governmental Entity (collectively, "Governmental
Consents") in connection with the execution and delivery of this Agreement and
the consummation of the Merger and the other transactions contemplated hereby by
the Company, Parent and Merger Sub shall have been made or obtained (as the case
may be) and become final, except for those that the failure to make or to
obtain, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on Parent or the Company, as applicable, or provide a
reasonable basis to conclude that the parties hereto or any of their affiliates
or respective directors, officers, agents, advisors or other representatives
would be subject to the risk of criminal or material financial liability.
(d) Litigation. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, law,
ordinance, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) that is in effect and restrains,
enjoins or otherwise prohibits consummation of the Merger or the other
transactions contemplated by this Agreement (collectively, an "Order"), and none
of the U.S. Department of Justice, the Michigan Public Service Commission or the
FERC shall have instituted any proceeding or be threatening to institute any
proceeding seeking any such Order.
(e) S-4. The S-4 Registration Statement shall have become effective under
the Securities Act. No stop order suspending the effectiveness of the S-4
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been initiated or be threatened, by the SEC.
(f) Blue Sky Approvals. Parent shall have received all state securities and
"blue sky" permits and approvals necessary to consummate the transactions
contemplated hereby.
(g) Certain Transactions. The Company shall have completed the disposition
of the interests required to be disposed of by Section 6.17(c) of this
Agreement.
7.2. Conditions to Obligations of Parent and Merger Sub. The obligations of
Parent and Merger Sub to effect the Merger are also subject to the satisfaction
or waiver by Parent at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in Sections 5.1(b)(i), 5.1(c)(i), 5.1(j), 5.1(p) and
5.1(q) of this Agreement shall be true and correct in all material respects (a)
on the date hereof and (b) on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the
Closing Date (except for representations and warranties that expressly speak
only as of specific date or time other than the date hereof or the Closing
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Date, which need only be true and correct in all material respects as of such
date or time) and all other representations and warranties of the Company set
forth in this Agreement shall be true and correct (i) on the date hereof and
(ii) on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date
(except for representations and warranties that expressly speak only as of
specific date or time other than the date hereof or the Closing Date, which need
only be true and correct as of such date or time) except in each of cases (i)
and (ii) for such failures of those representations or warranties to be true and
correct (without regard to any Material Adverse Effect, materiality or similar
qualifications contained therein) which, individually or in the aggregate, have
not had and are not reasonably likely to have, a Material Adverse Effect on
Parent, and Parent shall have received a certificate signed on behalf of the
Company by an executive officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent shall have
received a certificate signed on behalf of the Company by an executive officer
of the Company to such effect.
(c) Consents Under Agreements. The Company shall have obtained the consent
or approval of each Person whose consent or approval shall be required under any
material Contract to which the Company or any of its Subsidiaries is a party.
(d) Accountants Letter. Parent shall have received, in form and substance
reasonably satisfactory to Parent, from Deloitte & Touche LLP, the Company's
independent auditor, the "comfort" letter described in Section 6.5(b).
(e) Affiliates Letters. Parent shall have received an Affiliates Letter
from each Person identified as an affiliate of the Company pursuant to Section
6.7.
(f) Material Adverse Effect. There shall not have occurred any Material
Adverse Effect on the Company.
(g) Tax Opinion. Parent shall have received the opinion of Sullivan &
Cromwell, counsel to Parent, dated the Closing Date, to the effect that (based
on customary assumptions and representations and subject to customary
exceptions) the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that each
of Parent, Merger Sub and the Company will be a party to that reorganization
within the meaning of Section 368(b) of the Code. The condition set forth in
this Section 7.2(g) shall not be waivable after the Company Requisite Vote or
the Parent Requisite Vote has been obtained unless further shareholder approval
is obtained with appropriate disclosure.
(h) Governmental Consents. All Governmental Consents in connection with the
execution and delivery of this Agreement and the consummation of the Merger and
the other transactions contemplated hereby shall have been obtained without
imposing any terms or conditions that, individually or in the aggregate, in the
reasonable judgment of Parent, are reasonably likely to have a Material Adverse
Effect on Parent, the Company or the Surviving Corporation.
7.3. Conditions to Obligation of the Company. The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the
Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub set forth in Section 5.1(b)(ii), 5.1(c)(ii), 5.1(c)(iii),
and 5.1(q) this Agreement shall be true and correct in all material respects (a)
on the date hereof and (b) on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the
Closing Date (except for representations and warranties that expressly speak
only as of specific date or time other than the date hereof or the Closing Date,
which need only be true and correct in all material respect as of such date or
time) and all other representations and warranties of Parent and Merger Sub set
forth in this Agreement shall be true and correct (i) on the date hereof and
(ii) on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date
(except for representations and
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warranties that expressly speak only as of specific date or time other than the
date hereof or the Closing Date, which need only be true and correct in all
material respects as of such date or time) except in each of cases (i) and (ii)
for such failures of those representations or warranties to be true and correct
(without regard to any Material Adverse Effect, materiality or similar
qualifications contained therein) which, individually or in the aggregate, have
not had and are not reasonably likely to have, a Material Adverse Effect on the
Company, and the Company shall have received a certificate signed on behalf of
Parent and Merger Sub by an executive officer of Parent to such effect.
(b) Performance of Obligations of Parent and Merger Sub. Each of Parent and
Merger Sub shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the Closing
Date, and the Company shall have received a certificate signed on behalf of
Parent and Merger Sub by the an executive officer of Parent to such effect.
(c) Consents Under Agreements. Parent shall have obtained the consent or
approval of each Person whose consent or approval shall be required in order to
consummate the transactions contemplated by this Agreement under any material
Contract to which Parent or any of its Subsidiaries is a party.
(d) Accountants Letter. The Company shall have received, in form and
substance reasonably satisfactory to the Company, from Deloitte & Touche LLP,
Parent's independent auditor, the "comfort" letter described in Section 6.5(b).
(e) Material Adverse Effect. There shall not have occurred any Material
Adverse Effect on Parent.
(f) Tax Opinion. The Company shall have received the opinion of Wachtell,
Lipton, Rosen & Katz, counsel to the Company, dated the Closing Date, to the
effect that (based on customary assumptions and representations and subject to
customary exceptions) the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and that
each of Parent, Merger Sub and the Company will be a party to that
reorganization within the meaning of Section 368(b) of the Code. The condition
set forth in this Section 7.3(f) shall not be waivable after the Company
Requisite Vote or the Parent Requisite Vote has been obtained unless further
shareholder approval is obtained with appropriate disclosure.
ARTICLE VIII
TERMINATION
8.1. Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by shareholders of the Company and Parent referred
to in Section 7.1(a), by mutual written consent of the Company and Parent by
action of their respective Boards of Directors.
8.2. Termination by Either Parent or the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Parent or the Company if: (i)
the Merger shall not have been consummated by July 15, 2000, whether such date
is before or after the date of approval by the shareholders of the Company or
Parent (the "Termination Date"); provided that the Termination Date shall be
automatically extended for nine months (the "Extended Date") if, on July 15,
2000: (x) any of the Governmental Consents described in Section 7.1(c) have not
been obtained or waived, (y) each of the other conditions to the consummation of
the Merger set forth in Article VII has been satisfied or waived or remains
capable of satisfaction, and (z) any Governmental Consent that has not yet been
obtained is being pursued diligently and in good faith; (ii) the approval of the
Company's shareholders required by Section 7.1(a) shall not have been obtained
at a meeting duly convened therefor or at any adjournment or postponement
thereof; (iii) the approval of Parent's shareholders as required by Section
7.1(a) shall not have been obtained at a meeting duly convened therefor; (iv)
any Order permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether before
or after the approval by the shareholders of the Company or Parent); or (v) on
or after the Regulatory Termination Date (as defined below) the Board of
Directors of Parent or of the Company
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reasonably determines that it is more likely than not that Governmental Consents
necessary to satisfy the conditions to the parties' obligation to effect the
Merger will not be obtained on terms that satisfy the standard set forth in
Section 7.2(h) prior to the Extended Date; provided, that such party provides
the other two weeks prior notice. The right to terminate this Agreement pursuant
to clause (i) or (v) of the immediately preceding sentence shall not be
available to any party that has breached in any material respect its obligations
under this Agreement in any manner that shall have proximately contributed to
the occurrence of the failure of the Merger to be consummated. As used in this
Agreement, the term "Regulatory Termination Date" means the date one year from
the date hereof unless the transactions contemplated by this Agreement shall
require any approval of the FERC, in which case it shall mean the date 15 months
from the date hereof.
8.3. Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of the Company if:
(a) at any time prior to the Effective Time, whether before or after the
approval by shareholders of the Company referred to in Section 7.1(a),(i) the
Board of Directors of Parent shall have withdrawn or adversely modified its
approval or recommendation of this Agreement or failed to reconfirm its
recommendation of this Agreement within five business days after a written
request by the Company to do so or (ii) there has been a material breach by
Parent or Merger Sub of any representation, warranty, covenant or agreement
contained in this Agreement that is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by the Company to
the party committing such breach; or
(b) (i) the Company Requisite Vote shall not have been obtained, (ii) the
Company is not in breach of any of the terms of this Agreement, (iii) the Board
of Directors of the Company authorizes the Company, subject to complying with
the terms of this Agreement, to enter into a binding written agreement
concerning a transaction that constitutes a Superior Proposal and the Company
notifies Parent in writing that it intends to enter into such an agreement, (iv)
Parent does not make, within five business days of receipt of the Company's
written notification of its intention to enter into a binding agreement for a
Superior Proposal, an offer that the Board of Directors of the Company
determines, in good faith after consultation with its financial advisors, is at
least as favorable, from a financial point of view, to the shareholders of the
Company as the Superior Proposal, and (v) the Company prior to such termination
pays to Parent in immediately available funds any fees required to be paid
pursuant to Section 8.5. The Company agrees (x) that it will not enter into a
binding agreement referred to in clause (iii) of the last preceding sentence
until at least the sixth business day after it has provided the notice to Parent
required thereby and (y) to notify Parent promptly if its intention to enter
into a written agreement referred to in its notification shall change at any
time after giving such notification.
8.4. Termination by Parent. This Agreement may be terminated and the Merger
may be abandoned by action of the Board of Directors of Parent if:
(a) at any time prior to the Effective Time, whether before or after the
approval by the shareholders of Parent referred to in Section 7.1(a), (i) the
Board of Directors of the Company shall have withdrawn or adversely modified its
approval or recommendation of this Agreement or failed to reconfirm its
recommendation of this Agreement within five business days after a written
request by Parent to do so or (ii) there has been a material breach by the
Company of any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Parent to the Company; or
(b) (i) the Parent Requisite Vote shall not have been obtained, (ii) Parent
is not in breach of any of the terms of this Agreement, (iii) the Board of
Directors of Parent authorizes Parent, subject to complying with the terms of
this Agreement, to enter into a binding written agreement concerning a
transaction that constitutes a Parent Adverse Proposal and Parent notifies the
Company in writing that it intends to enter into such an agreement, (iv) the
Company does not make within five business days of receipt of Parent's
notification of its intention to enter into a binding agreement for a Parent
Adverse Proposal, an offer the Board of Directors of Parent determines, in good
faith after consultation with its financial advisors, is at least as favorable,
from a financial point of view, to the shareholders of Parent as the Parent
Adverse Proposal, and (v) Parent prior to such termination pays to the Company
in immediately available funds any fees required to
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be paid pursuant to Section 8.5. Parent agrees (x) that it will not enter into
any binding agreement referred to in clause (iii) of the last preceding sentence
until at least the sixth business day after it has provided the notice to the
Company required thereby and (y) to notify the Company promptly if its intention
to enter into a written agreement referred to in its notification shall change
at any time after giving such notification.
8.5. Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article
VIII, this Agreement (other than as set forth in Section 9.1) shall become void
and of no effect with no liability on the part of any party hereto (or of any of
its directors, officers, employees, agents, legal and financial advisors or
other representatives); provided, however, except as otherwise provided herein,
no such termination shall relieve any party hereto of any liability or damages
resulting from any breach of this Agreement.
(b) In the event that (i) a Company Acquisition Proposal shall have been
made to the Company or any of its Subsidiaries or any of its shareholders or any
Person shall have publicly announced an intention (whether or not conditional)
to make a Company Acquisition Proposal and thereafter this Agreement is
terminated by either Parent or the Company pursuant to Section 8.2(ii), (ii)
this Agreement is terminated by Parent pursuant to Section 8.4(a)(i) or, (iii)
this Agreement is terminated by the Company pursuant to Section 8.3(b) then the
Company shall, in the case of a termination pursuant to 8.3(b) prior to such
termination, and otherwise promptly, but in no event later than two days after
the date of such termination, pay Parent a termination fee of $55,000,000 and
shall promptly, but in no event later than two days after being notified of such
by Parent, pay all of the charges and expenses, including those of the Exchange
Agent, incurred by Parent or Merger Sub in connection with this Agreement and
the transactions contemplated by this Agreement up to a maximum amount of
$15,000,000, in each case payable by wire transfer of same day funds; provided,
however, that in the event of a termination pursuant to Section 8.2(ii) under
the circumstances set forth in clause (i) of this Section 8.5(b), or a
termination pursuant to Section 8.4(a)(i), the Company shall (a) promptly, but
in no event later than two days after being notified of such by Parent, pay all
of the charges and expenses incurred by Parent in connection with this Agreement
and the transactions contemplated by this Agreement up to a maximum amount of
$15,000,000, and, (b) if the Company enters into a definitive agreement to
consummate or consummates a Company Acquisition Proposal within 12 months from
the date of such termination, at the time of the entering into of such agreement
or such consummation, as applicable, pay Parent a termination fee of
$55,000,000. The Company acknowledges that the agreements contained in this
Section 8.5(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent and Merger Sub would not
enter into this Agreement; accordingly, if the Company fails to promptly pay the
amount due pursuant to this Section 8.5(b), and, in order to obtain such
payment, Parent or Merger Sub commences a suit which results in a judgment
against the Company for the fee set forth in this paragraph (b), the Company
shall pay to Parent or Merger Sub its costs and expenses (including attorneys'
fees) in connection with such suit, together with interest on the amount of the
fee at the prime rate of Citibank, N.A. in effect on the date such payment was
required to be made.
(c) In the event that (i) a Parent Adverse Proposal shall have been made to
Parent or any of its Subsidiaries or any of its shareholders or any Person shall
have publicly announced an intention (whether or not conditional) to make a
Parent Adverse Proposal and thereafter this Agreement is terminated by either
the Company or Parent pursuant to Section 8.2(iii), (ii) this Agreement is
terminated by the Company pursuant to Section 8.3(a)(i) or (iii) this Agreement
is terminated by Parent pursuant to Section 8.4(b), then Parent shall, in the
case of a termination pursuant to Section 8.4(b) prior to such termination, and
otherwise promptly, but in no event later than two days after the date of such
termination, pay the Company a termination fee of $85,000,000 and shall
promptly, but in no event later than two days after being notified of such by
the Company, pay all of the charges and expenses incurred by the Company in
connection with this Agreement and the transactions contemplated by this
Agreement up to a maximum amount of $15,000,000, in each case payable by wire
transfer of same day funds; provided, however, that in the event of a
termination pursuant to Section 8.2(iii) under the circumstances set forth in
clause (i) of this Section 8.5(c), or a termination pursuant to Section
8.3(a)(i), Parent shall (a) promptly, but in no event later than two days after
being notified of such by the Company, pay all of the charges and expenses
incurred by the Company in connection with this Agreement and the transactions
contemplated hereby up to a maximum amount of
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$15,000,000 and, (b) if Parent enters into a definitive agreement to consummate
or consummates a Parent Adverse Proposal within 12 months from the date of such
termination, at the time of the entering into of such agreement or such
consummation, as applicable, pay the Company a termination fee of $85,000,000.
Parent acknowledges that the agreements contained in this Section 8.5(c) are an
integral part of the transactions contemplated by this Agreement and that,
without these agreements, the Company would not enter into this Agreement;
accordingly, if Parent fails to promptly pay the amount due pursuant to this
Section 8.5(c), and, in order to obtain such payment, the Company commences a
suit which results in a judgment against Parent for the fee set forth in this
paragraph (c), Parent shall pay to the Company its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the
amount of the fee at the prime rate of Citibank, N.A. in effect on the date such
payment was required to be made.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Survival. This Article IX and the agreements of the Company, Parent
and Merger Sub contained in Sections 6.8 (Stock Exchange Listing and Delisting),
6.10 (Benefits), 6.11 (Expenses), 6.12 (Indemnification; Directors' and
Officers' Insurance) and 6.16 (Taxation) shall survive the consummation of the
Merger. This Article IX, the agreements of the Company, Parent and Merger Sub
contained in Section 6.11 (Expenses), Section 8.5 (Effect of Termination and
Abandonment) and the Confidentiality Agreement shall survive the termination of
this Agreement. All other representations, warranties, covenants and agreements
in this Agreement shall not survive the consummation of the Merger or the
termination of this Agreement.
9.2. Modification or Amendment. Subject to the provisions of applicable
law, at any time prior to the Effective Time, the parties hereto may modify or
amend this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties.
9.3. Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF
MICHIGAN WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Michigan and the Federal courts of the United States of America located in the
State of Michigan solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement,
and in respect of the transactions contemplated hereby, and hereby waive, and
agree not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or is
not maintainable in said courts or that the venue thereof may not be appropriate
or that this Agreement or any such document may not be enforced in or by such
courts, and the parties hereto irrevocably agree that all claims with respect to
such action or proceeding shall be heard and determined in such a Michigan State
or Federal court. The parties hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of such
dispute and agree that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 9.6 or in such other
manner as may be permitted by law shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
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UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
9.6. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent or Merger Sub
DTE Energy Company
2000 Second Avenue
Detroit, MI 48226
Attention: General Counsel
fax: (313) 235-0121
(with a copy to Joseph B. Frumkin, Esq.,
Sullivan & Cromwell,
125 Broad Street
New York, NY 10004
fax: (212) 558-3588)
if to the Company
MCN Energy Group Inc.
500 Griswold Street
Detroit, MI 48226
Attention: General Counsel
fax: (313) 965-0009
(with a copy to Seth A. Kaplan, Esq.,
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
fax: (212) 403-2000)
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. Entire Agreement. This Agreement (including any exhibits or appendices
hereto), the Company Disclosure Letter, the Parent Disclosure Letter and the
Confidentiality Agreement, dated August 30, 1999, between Parent and the Company
(the "Confidentiality Agreement") constitute the entire agreement, and supersede
all other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.12
(Indemnification; Directors' and Officers' Insurance), this Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
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9.9. Obligations of Parent and of the Company. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause such Subsidiary
to take such action. Whenever this Agreement requires a Subsidiary of the
Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such Subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such Subsidiary to take such action.
9.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.12. Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Parent may designate, by written
notice to the Company, another wholly owned direct or indirect subsidiary to be
a Constituent Corporation in lieu of Merger Sub, in which event all references
herein to Merger Sub shall be deemed references to such other subsidiary, except
that all representations and warranties made herein with respect to Merger Sub
as of the date of this Agreement shall be deemed representations and warranties
made with respect to such other subsidiary as of the date of such designation.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
MCN ENERGY GROUP INC.
By: /s/ ALFRED R. GLANCY III
------------------------------------
Name: Alfred R. Glancy III
Title: Chairman, President and Chief
Executive Officer
DTE ENERGY COMPANY
By: /s/ ANTHONY F. EARLEY, JR.
------------------------------------
Name: Anthony F. Earley, Jr.
Title: Chairman of the Board and
Chief Executive Officer and
President and Chief Operating
Officer
DTE ENTERPRISES, INC.
By: /s/ ANTHONY F. EARLEY, JR.
------------------------------------
Name: Anthony F. Earley, Jr.
Title: Chairman, Chief Executive
Officer and President.
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EXHIBIT A-1
[FORM OF AFFILIATE LETTER]
[DATE]
DTE Energy Company
2000 2nd Avenue
Detroit, Michigan 48226
Ladies and Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be an
"affiliate" of MCN Energy Group, a Michigan corporation (the "Company"), as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules
and Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to the terms of the Agreement and Plan of Merger
dated as of October 4, 1999, as it may be amended, supplemented or modified from
time to time (the "Merger Agreement"), among the Company, DTE Energy Company, a
Michigan corporation ("Parent"), and DTE Enterprises, Inc. a Michigan
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), the Company
will be merged with and into Merger Sub (the "Merger"), with Merger Sub as the
surviving corporation in the Merger. Capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in the Merger
Agreement.
In consideration of the agreements contained herein, Parent's reliance on
this letter in connection with the consummation of the Merger and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, I hereby represent, warrant and agree that I will not make any
sale, transfer or other disposition of common stock, without par value, of
Parent (the "Parent Common Stock") received by me pursuant to the Merger in
violation of the Securities Act or the Rules and Regulations. I have been
advised that the issuance of the shares of Parent Common Stock pursuant to the
Merger will have been registered with the Commission under the Securities Act on
a Registration Statement on Form S-4. I have also been advised, however, that
since I may be deemed to be an affiliate of the Company at the time the Merger
is submitted for a vote of the shareholders of the Company, the Parent Common
Stock received by me may be disposed by me only (i) pursuant to an effective
registration statement under the Securities Act, (ii) in conformity with the
volume and other limitations of Rule 145 promulgated by the Commission under the
Securities Act, or (iii) in reliance upon an exemption from registration that is
available under the Securities Act.
I also understand that instructions will be given to Parent's transfer
agent with respect to the Parent Common Stock to be received by me pursuant to
the Merger and that there will be placed on the certificates representing such
shares of Parent Common Stock, or any substitutes therefor, a legend stating in
substance as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, APPLIES AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN
COMPLIANCE WITH THE REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION
STATEMENT UNDER THAT ACT OR AN EXEMPTION FROM SUCH REGISTRATION."
It is understood and agreed that the legend set forth above shall be
removed upon surrender of certificates bearing such legend by delivery of
substitute certificates without such legend if I shall have delivered to Parent
an opinion of counsel, in form and substance reasonably satisfactory to Parent,
to the effect that (i) the sale or disposition of the shares represented by the
surrendered certificates may be effected without registration of the offering,
sale and delivery of such shares under the Securities Act, and (ii) the shares
to be so transferred may be publicly offered, sold and delivered by the
transferee thereof without compliance with the registration provisions of the
Securities Act.
A-A-1
<PAGE> 294
I further understand and agree that Parent is under no obligation to
register the sale, transfer or other disposition of the Parent Common Stock by
me or on my behalf under the Securities Act or to take any other action
necessary in order to make compliance with an exemption from such registration
available.
This letter agreement constitutes the complete understanding between Parent
and me concerning the subject matter hereof. Any notice required to be sent to
either party hereunder shall be sent by registered or certified mail, return
receipt requested, using the addresses set forth herein or such other address as
shall be furnished in writing by the parties. This letter agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.
If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.
Very truly yours,
--------------------------------------
Name:
Accepted this day
of , 199 by
DTE Energy Company
By:
- ----------------------------------------------------
Name:
Title:
A-A-2
<PAGE> 295
[Letterhead of Warburg Dillon Read LLC]
WARBURG DILLON READ LLC
299 Park Avenue
New York, NY
10171-0026
Telephone 212 821-4000
www.wdr.com
APPENDIX B
November 12, 1999
The Board of Directors
DTE Energy Company
2000 2nd Avenue
Detroit, Michigan 48226
Dear Sirs and Madam:
You have requested our opinion as to the fairness, from a financial point
of view, of the Consideration (as defined below) to be paid by DTE Energy
Company, a Michigan corporation ("DTE" or the "Company"), pursuant to the
Agreement and Plan of Merger dated October 4, 1999 as amended as of November 12,
1999 ("Merger Agreement"), by and among DTE, MCN Energy Group Inc., a Michigan
corporation ("MCN"), and DTE Enterprises, Inc., a Michigan corporation and
wholly owned subsidiary of the Company ("Merger Sub"). At the Effective Time (as
defined in Section 1.3 of the Merger Agreement), MCN shall be merged (the
"Merger") with and into Merger Sub, and the separate corporate existence of MCN
shall cease. Merger Sub shall be the surviving corporation in the Merger, and
the separate corporate existence of Merger Sub shall continue unaffected, except
as specified by the Merger Agreement. Pursuant to the terms of the Merger
Agreement, at the Effective Time, (i) each of the issued and outstanding shares
of the common stock of MCN, par value of $0.01 per share (including the
associated Right (as defined in the Merger Agreement), the "MCN Common Stock")
will be converted into the right to receive either $28.50 in cash or 0.775
shares of DTE common stock, without par value ("DTE Common Stock"), subject to
the Allocation and Election Procedures defined in Section 4.2 of the Merger
Agreement, whereby 55% of the total consideration for the MCN Common Stock will
be paid in cash, with the remaining 45% paid in DTE Common Stock (such
consideration, the "MCN Common Stock Consideration") and (ii) each outstanding
option to purchase MCN Common Stock shall be deemed to constitute an option to
purchase DTE Common Stock subject to the terms of, and in the manner
contemplated by, Section 6.10(a) of the Merger Agreement (the "MCN Option
Consideration" and, together with the MCN Common Stock Consideration, the
"Consideration").
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to DTE and MCN, (ii) reviewed certain internal financial information
and other data relating to the business and financial prospects of DTE and MCN,
including estimates and financial forecasts prepared by managements of DTE and
MCN, that were provided to us by DTE and MCN and not publicly available, (iii)
conducted discussions with members of the senior management of DTE and MCN with
respect to the business and prospects of DTE and MCN, (iv) reviewed publicly
available financial and stock market data of diversified natural gas companies
which are, in our opinion, generally comparable to MCN, (v) reviewed publicly
available financial and stock market data of certain natural gas distribution
companies which are, in our opinion, generally comparable to MCN's natural gas
distribution subsidiary, (vi) compared the financial terms of the Merger
Agreement with the publicly available financial terms of certain transactions
which are, in our opinion, generally comparable, (vii) performed a segment
analysis of MCN, (viii) performed a discounted cash flow analysis of certain
business operations of MCN based on financial forecasts provided by management
of DTE and MCN, (ix) reviewed publicly available financial and stock market data
of certain electric utilities which are, in our opinion, generally comparable to
DTE, (x) considered certain pro forma effects of the Merger on DTE's financial
statements and reviewed certain estimates of synergies prepared by DTE
management, (xi) considered the strategic advantages of the Merger, (xii)
reviewed the Merger Agreement, and (xiii) conducted such other financial
studies, analyses, and investigations, and considered such other
MEMBER SIPC
WARBURG DILLON READ LLC IS A SUBSIDIARY OF UBS AG.
WARBURG DILLON READ IS THE INVESTMENT BANKING DIVISION OF UBS AG.
MEMBER NEW YORK STOCK
EXCHANGE
AND OTHER PRINCIPAL
EXCHANGES
<PAGE> 296
WARBURG DILLON READ LLC Page 2 of 2
November 12, 1999
information as we deemed necessary or appropriate. The above analysis was
updated for the period from the date of our original opinion (October 4th) to
the date hereof.
In connection with our review, at your direction, we have not assumed any
responsibility for independent verification of any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on its
being complete and accurate in all material respects. In addition, at your
direction, we have not made any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company or MCN, nor
have we been furnished with any such evaluation or appraisal. With respect to
the financial forecasts referred to above, we have assumed, at your direction,
that they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of each company as to the
future performance of their respective company.
In addition, we have assumed with your approval that the future financial
results referred to above will be achieved at the times and in the amounts
projected by management. Our opinion is necessarily based on economic, monetary,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
Our opinion does not address the Company's underlying business decision to
effect the Merger or constitute a recommendation to any shareholder of the
Company or MCN as to how such shareholder should vote with respect to the
Merger. At your direction, we have not been asked to, nor do we, offer any
opinion as to the material terms of the Merger Agreement or the form of the
Merger. In rendering this opinion, we have assumed, with your consent, that the
Company and MCN will comply with all the material terms of the Merger Agreement.
Warburg Dillon Read LLC ("WDR") has acted as financial advisor to the Board
of Directors of the Company in connection with the Merger and will receive a fee
upon the consummation thereof. In the ordinary course of business, WDR, its
successors and affiliates may trade securities of the Company and MCN for their
own accounts and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing, it is our opinion that, as the
date hereof, the Consideration to be paid by the Company pursuant to the Merger
Agreement is fair, from a financial point of view, to the Company.
Very truly yours,
WARBURG DILLON READ LLC
<TABLE>
<S> <C>
By: [KENNETH S. CREWS SIGNATURE] By: [JAMES H. BRANDI SIGNATURE]
------------------------------------------------ ------------------------------------------------
Kenneth S. Crews James H. Brandi
Managing Director Managing Director
</TABLE>
WARBURG DILLON READ LLC
B-2
<PAGE> 297
[MERRILL LYNCH LETTERHEAD]
APPENDIX C
November 12, 1999
Board of Directors
MCN Energy Group Inc.
500 Griswold Street
Detroit, Michigan 48226
Members of the Board of Directors:
MCN Energy Group Inc. (the "Company"), DTE Energy Company ("DTE") and DTE
Enterprises, Inc., a newly formed, wholly owned subsidiary of ("DTE Sub"),
propose to enter into an Agreement and Plan of Merger, dated as of October 4,
1999 and as amended as of November 12, 1999 (the "Agreement"), pursuant to which
the Company will be merged with DTE Sub in a transaction (the "Merger") in which
each outstanding share of the Company's common stock, par value $0.01 per share
(the "Company Shares"), will be converted into the right to receive either (i)
$28.50 in cash (the "Cash Consideration") or (ii) 0.775 shares of the common
stock of DTE, without par value (the "DTE Shares" and together with the Cash
Consideration, the "Merger Consideration"), as the holder thereof shall have
elected, subject to the terms, limitations and procedures set forth in the
Agreement, which include a limitation on the aggregate amount of cash available
to be paid and the aggregate number of DTE Shares to be issued pursuant to the
Merger.
You have asked us whether, in our opinion, the Merger Consideration to be
received by the holders of the Company Shares pursuant to the Merger is fair
from a financial point of view to such holders.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and DTE that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities
and prospects of the Company and DTE, as well as the amount and
timing of the cost savings and related expenses expected to result
from the Merger furnished to us by the Company and DTE,
respectively;
(3) Conducted discussions with members of senior management and
representatives of the Company and DTE concerning the matters
described in clauses 1 and 2 above, as well as their respective
businesses and prospects before and after giving effect to the
Merger;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and DTE Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and DTE and
compared them with those of certain publicly traded companies that
we deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and DTE and their financial and legal
advisors;
<PAGE> 298
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or DTE or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company or DTE. With
respect to the financial forecast information furnished to or discussed with us
by the Company or DTE, we have assumed that they have been reasonably prepared
and reflect the best currently available estimates and judgment of the Company's
or DTE's management as to the expected future financial performance of the
Company or DTE, as the case may be. We have further assumed that the Merger will
qualify as a tax-free reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of or
business combination involving all or any part of the Company.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Company and/or its affiliates and may continue to do so and are
currently providing financing services to an affiliate of DTE and have received,
and may receive, fees for the rendering of such services. In addition, in the
ordinary course of our business, we may actively trade the Company Shares and
other securities of the Company, as well as DTE Shares and other securities of
DTE, for our own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger or
any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Company Shares or DTE Shares will trade following the announcement or
consummation of the Merger, as the case may be.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be received by the holders of
the Company Shares pursuant to the Merger is fair from a financial point of view
to the holders of such shares.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
C-2
<PAGE> 299
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Indemnification. The DTE Energy Company Amended and Restated Articles
of Incorporation provide that, to the fullest extent permitted by the Michigan
Business Corporations Act (the "Act") or any other applicable law, no director
of DTE shall be personally liable to DTE or its shareholders for or with respect
to any acts or omissions in the performance of his or her duties as a director
of DTE.
DTE's articles of incorporation further state that each person who is or
was or had agreed to become a director or officer of DTE, or each such person
who is or was serving or who had agreed to serve at the request of DTE's board
of directors as an employee or agent of DTE or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person), shall be indemnified by DTE to the fullest extent permitted by the Act
or by any other applicable law.
DTE's articles of incorporation further state that DTE may enter into one
or more agreements with any person, which agreements provide for indemnification
greater or different than that provided for in the articles of incorporation.
Section 209(c) of the Act permits a corporation to eliminate or limit a
director's liability to the corporation or its shareholders for money damages
for any action taken or any failure to take action as a director, except
liability for (1) the amount of financial benefit received by a director to
which he or she is not entitled; (2) the intentional infliction of harm on the
corporation or the shareholders; (3) a violation of Section 551 of the Act,
dealing with unlawful distributions; or (4) for an intentional criminal act.
Sections 561 and 562 of the Act permit a corporation to indemnify its
directors and officers against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if such
directors or officers acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. In a derivative action, i.e., one by or in
the right of the corporation, indemnification may be made for expenses actually
and reasonably incurred by directors and officers in connection with the defense
or settlement of an action or suit, but only with respect to a matter as to
which they have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification will be made if such person will have been found liable to the
corporation, unless and only to the extent that the court in which the action or
suit was brought will determine upon application that the defendant officers or
directors are fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Section 563 of the Act provides that a director or officer who has been
successful on the merits or otherwise in defense of an action, suit or
proceeding referred to in Sections 561 and 562 shall be indemnified against
actual and reasonable expenses, including attorney's fees, incurred by him or
her in connection with the action, suit or proceeding, or proceeding brought to
enforce this mandatory indemnification.
(b) Insurance. DTE (with respect to indemnification liability) and its
directors and officers (in their capacities as such) are insured against
liability for wrongful acts (to the extent defined) under three insurance
policies providing aggregate coverage in the amount of $100 million.
II-1
<PAGE> 300
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, among DTE Energy Company, MCN
Energy Group Inc. and DTE Enterprises, Inc., dated as of
October 4, 1999 and as amended as of November 12, 1999
(included as Appendix A to the Joint Proxy
Statement/Prospectus contained in this Registration
Statement).
3.1 Amended and Restated Articles of Incorporation of DTE Energy
Company (incorporated herein by reference to Exhibit 3-5 to
DTE's Form 10-Q for the quarter ended September 30, 1997
(file No. 1-11607)), dated December 13, 1995, as amended by
Certificate of Designation of Series A Junior Participating
Preferred Stock of DTE Energy Company (incorporated herein
by reference to Exhibit 3-6 to DTE's Form 10-Q for the
quarter ended September 30, 1997).
3.2 Articles of Incorporation of MCN Energy Group Inc., dated
August 12, 1988, as amended by Certificates of Amendment,
dated December 28, 1989 and May 2, 1994 (incorporated herein
by reference to Exhibit 3-1 to MCN's Form 10-Q for the
quarter ended March 31, 1998 (file No. 1-10007)).
3.3 Bylaws of DTE Energy Company, as amended through September
22, 1999.*
3.4 Bylaws of MCN Energy Group Inc., as amended through February
27, 1998 (incorporated herein by reference to Exhibit 3-2 to
MCN's Form 10-K for the fiscal year ended December 31, 1997
(file No. 1-10007)).
3.5 Articles of Incorporation of DTE Enterprises, Inc.*
3.6 Bylaws of DTE Enterprises, Inc.*
4.1 See Exhibits 3.1 and 3.3 for provisions of the DTE Energy
Company Amended and Restated Articles of Incorporation and
the DTE Energy Company By-Laws defining rights of holders of
DTE common stock.
4.2 Rights Agreement, dated as of September 23, 1997, between
DTE Energy Company and The Detroit Edison Company, as Rights
Agent, including the Form of Rights Certificate attached as
Exhibit B thereto (incorporated herein by reference to
Exhibit 4.1 to DTE's Form 8-K, dated September 23, 1997
(file No. 1-11607)).
4.3 Rights Agreement, dated as of December 20, 1989, as amended,
between MCN Corporation and National Bank of Detroit, as
Rights Agent (incorporated herein by reference to Exhibit
28-1 to MCN's Form 8-K dated December 20, 1989, Exhibit 4 to
MCN's Form 8-K dated July 23, 1997 and Exhibits 4.2 and 4.4
to MCN's Form 8-A/A dated October 4, 1999 (file No.
1-10007)).
5.1 Opinion of Christopher C. Nern, General Counsel of DTE
Energy Company, regarding validity of securities being
registered.**
8.1 Opinion of Sullivan & Cromwell regarding material federal
income tax consequences.**
8.2 Opinion of Wachtell, Lipton, Rosen & Katz regarding material
federal income tax consequences.**
12.1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.**
15.1 Awareness Letter of Deloitte & Touche, LLP relating to
DTE.**
23.1 Consent of Deloitte & Touche, LLP relating to DTE.**
23.2 Consent of Deloitte & Touche, LLP relating to MCN.**
23.3 Consent of Christopher C. Nern, General Counsel of DTE
Energy Company (included in the opinion filed as Exhibit 5.1
to this Registration Statement).**
23.4 Consent of Sullivan & Cromwell (included in the opinion
filed as Exhibit 8.1 to this Registration Statement).**
</TABLE>
II-2
<PAGE> 301
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.5 Consent of Wachtell, Lipton, Rosen & Katz (included in the
opinion filed as Exhibit 8.2 to this Registration
Statement).**
23.6 Consent of Warburg Dillon Read LLC.**
23.7 Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.**
23.8 Consent of Ryder Scott Company.**
23.9 Consent of Miller and Lents, Ltd.**
23.10 Consent of Holditch-Reservoir Technologies.**
23.11 Consent of Netherland, Sewell & Associates, Inc.**
23.12 Consent of Williamson Petroleum Consultants, Inc.**
99.1 Form of Proxy Card of DTE Energy Company.**
99.2 Form of Proxy Card of MCN Energy Group Inc.**
99.3 Consent of Person Named as About to Become a Director.**
</TABLE>
- -------------------------
* Previously filed.
**Filed herewith.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by the registrant pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 302
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c)(1) The undersigned registrant undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 303
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Detroit, State of Michigan on the 12th day of
November, 1999.
DTE ENERGY COMPANY
(Registrant)
By: /s/ ANTHONY F. EARLEY, JR.
------------------------------------
(Anthony F. Earley, Jr.
Chairman of the Board,
Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICERS:
/s/ ANTHONY F. EARLEY, JR. Chairman of the Board, Chief November 12, 1999
- --------------------------------------------- Executive
(Anthony F. Earley, Jr.) Officer and Director
/s/ GERARD M. ANDERSON President, DTE Energy Resources November 12, 1999
- ---------------------------------------------
(Gerard M. Anderson)
/s/ ROBERT J. BUCKLER President, DTE Energy Distribution November 12, 1999
- ---------------------------------------------
(Robert J. Buckler)
PRINCIPAL FINANCIAL OFFICERS:
/s/ LARRY G. GARBERDING Executive Vice President, November 12, 1999
- --------------------------------------------- Chief Financial Officer and
(Larry G. Garberding) Director
/s/ DAVID E. MEADOR Vice President November 12, 1999
- ---------------------------------------------
(David E. Meador)
/s/ TERENCE E. ADDERLEY Director November 12, 1999
- ---------------------------------------------
(Terence E. Adderley)
</TABLE>
II-5
<PAGE> 304
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LILLIAN BAUDER Director November 12, 1999
- ---------------------------------------------
(Lillian Bauder)
/s/ DAVID BING Director November 12, 1999
- ---------------------------------------------
(David Bing)
/s/ WILLIAM C. BROOKS Director November 12, 1999
- ---------------------------------------------
(William C. Brooks)
/s/ ALLAN D. GILMOUR Director November 12, 1999
- ---------------------------------------------
(Allan D. Gilmour)
/s/ THEODORE S. LEIPPRANDT Director November 12, 1999
- ---------------------------------------------
(Theodore S. Leipprandt)
/s/ JOHN E. LOBBIA Director November 12, 1999
- ---------------------------------------------
(John E. Lobbia)
/s/ EUGENE A. MILLER Director November 12, 1999
- ---------------------------------------------
(Eugene A. Miller)
/s/ CHARLES W. PRYOR, JR. Director November 12, 1999
- ---------------------------------------------
(Charles W. Pryor, Jr.)
/s/ DEAN E. RICHARDSON Director November 12, 1999
- ---------------------------------------------
(Dean E. Richardson)
</TABLE>
II-6
<PAGE> 1
EXHIBIT 99E
Map depicting the utility service
territories of Detroit Edison and MichCon
<PAGE> 1
EXHIBIT 99F
November 24, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
Re: DTE Energy Company - Application on Form U-1
under the Public Utility Holding Company Act of 1935
Ladies and Gentlemen:
I have examined the Application on Form U-1, filed the date hereof, by DTE
Energy Company ("Company" or "DTE") pursuant to the provisions of the Public
Utility Holding Company Act of 1935 ("1935 Act"). DTE is the parent holding
company of The Detroit Edison Company, a Michigan corporation and public utility
engaged in the generation, purchase, transmission, distribution and sale of
electric energy in a 7,600 square mile area in southeastern Michigan. The
Application requests that the Securities and Exchange Commission ("SEC" or
"Commission") issue an order authorizing the acquisition ("Merger") by the
Company of all of the issued and outstanding shares of common stock of MCN
Energy Group Inc. ("MCN"), a Michigan corporation and an exempt intrastate
holding company under the 1935 Act, such acquisition to occur in accordance with
the provisions of an Agreement and Plan of Merger, dated October 4, 1999 and as
amended November 12, 1999, between the Company and MCN ("Merger Agreement"). The
Merger Agreement provides that the MCN shall merger into DTE Enterprises, Inc.,
a wholly-owned subsidiary of DTE. MCN is the parent holding company of Michigan
Consolidated Gas Company ("MichCon"), a Michigan corporation and a natural gas
utility serving approximately 1.2 million customers in more than 500 communities
throughout Michigan.
I, as Vice President and General Counsel of the Company, have examined such
corporate records, certificates and other documents and such matters of law as I
have considered necessary or appropriate for purposes of this opinion, which is
submitted to the Commission in accordance with General Instruction F. (1) of the
General Instructions to SEC Form U-1. Subject to the assumptions and conditions
set forth herein, I am of the opinion that:
<PAGE> 2
Securities and Exchange Commission
November 24, 1999
Page 2
1. All laws of the State of Michigan applicable to the Merger
Agreement and the Merger, as described or incorporated by
reference in the Application will have been complied with.
2. The Company, DTE Enterprises, Inc. and MCN are each a
corporation validly organized and duly existing under the laws
of the State of Michigan.
3. The DTE common stock to be issued in conjunction with the
Merger will be validly issued, fully paid and nonassessible,
and the holders thereof will be entitled to the rights and
privileges appertaining thereto set forth in DTE's Articles of
Incorporation, including related share purchase rights to be
issued pursuant to the Rights Agreement, dated as of September
27, 1997, between the Company and The Detroit Edison Company
as Rights Agent.
4. The MCN common shares to be acquired in the Merger may be
legally acquired by the Company.
5. The consummation of the Merger will not violate the legal
rights of the holders of any securities issued by the Company
or any associate Company thereof.
The opinions expressed above are expressly subject to the following assumptions,
qualification and/or exceptions:
A. The Merger shall have been duly authorized and approved,
to the extent required by law and applicable
regulations, by the holders of common stock of DTE and
MCN.
B. DTE and MCN shall have obtained or made all required
approvals, authorizations, consents, certificates,
ruling and orders of, and all filings and registrations
with, all applicable federal and state commissions and
bodies and regulatory authorizations with respect to the
Merger; and such approvals shall have become final and
binding in all respects
<PAGE> 3
Securities and Exchange Commission
November 24, 1999
Page 3
and shall remain in effect (including the approval and
authorization of the SEC under the 1935 Act); and,
further, the Merger shall have been completed in
accordance with all such approvals, authorizations,
consents, certificates, orders, filings and
registrations. The Merger shall have become effective in
accordance with the laws of the State of Michigan.
C. The SEC shall have duly entered an appropriate order or
orders with respect to the Merger granting and
permitting the Application to become effective under the
1935 Act and the rules and regulations thereunder.
D. DTE's Registration Statement on Form S-4 (No. 333-89175)
filed with the SEC on October 15, 1999, and amended and
declared effective on November 12, 1999, shall remain
effective pursuant to the Securities Act of 1933, as
amended; and no stop order shall have been entered with
respect to such Registration Statement.
E. DTE, DTE Enterprises, Inc. and MCN (including
subsidiaries thereof), each as the case may be, shall
have obtained all consents, waivers and releases, if
any, required for the Merger under all applicable
corporate transactions, including, without limiting the
generality of the foregoing, debt instruments,
indentures, franchises, licenses and permits.
F. DTE, DTE Enterprises, Inc. and MCN shall have complied
with all conditions of the Merger Agreement.
This opinion is being delivered to the Commission in compliance with the General
Instructions to Form U-1; it may not be utilized for any other purpose other
than the satisfaction of such Instructions.
I consent to the use of this opinion as an exhibit to DTE's Application on Form
U-1.
Very truly yours,
/s/ Christopher C. Nern
Christopher C. Nern
Vice President and General Counsel
DTE Energy Company
<PAGE> 1
EXHIBIT 99.G1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
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 REGISTRANTS; STATE OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ----------------------------- ------------------
1-11607 DTE Energy Company 38-3217752
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-4000
1-2198 The Detroit Edison Company 38-0478650
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-8000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
DTE ENERGY COMPANY
- ------------------
New York and Chicago Stock Exchanges
Common Stock, without par value, with contingent preferred stock purchase
rights
THE DETROIT EDISON COMPANY
- --------------------------
Quarterly Income Debt Securities (QUIDS)
(Junior Subordinated Deferrable Interest Debentures New York Stock Exchange
- 7.625%, 7.54% and 7.375% Series)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
-------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have 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 registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At January 31, 1999, 145,060,367 shares of DTE Energy's Common Stock,
substantially all held by non-affiliates, were outstanding, with an aggregate
market value of approximately $5,884,011,136 based upon the closing price on the
New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in DTE Energy Company's definitive Proxy Statement for its
1999 Annual Meeting of Common Shareholders to be held April 28, 1999, which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the end of the Registrants' fiscal year covered by
this report on Form 10-K, is incorporated herein by reference to Part III (Items
10, 11, 12 and 13) of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
DTE ENERGY COMPANY
AND
THE DETROIT EDISON COMPANY
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
This document contains the Annual Reports on Form 10-K for the fiscal year
ended December 31, 1998 for each of DTE Energy Company and The Detroit Edison
Company. Information contained herein relating to an individual registrant is
filed by such registrant on its own behalf. Accordingly, except for its
subsidiaries, The Detroit Edison Company makes no representation as to
information relating to DTE Energy Company or any other companies affiliated
with DTE Energy Company.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................................................. 4
ANNUAL REPORT ON FORM 10-K FOR DTE ENERGY COMPANY:
Part I - Item 1 - Business..................................................................... 5
Item 2 - Properties................................................................... 13
Item 3 - Legal Proceedings............................................................ 14
Item 4 - Submission of Matters to a Vote of Security Holders.......................... 15
Part II - Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters..................................................... 15
Item 6 - Selected Financial Data...................................................... 16
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 17
Item 7A- Quantitative and Qualitative
Disclosure About Market Risk (Included in Item 7)....................... 17
Item 8 - Financial Statements and Supplementary Data.................................. 32
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 72
Part III - Items 10, 11, 12 and 13 - (Incorporated by reference from DTE Energy Company's
definitive Proxy Statement which will be filed with the
Securities and Exchange Commission, pursuant to Regulation 14A,
not later than 120 days after the end of the fiscal year)............... 72
ANNUAL REPORT ON FORM 10-K FOR THE DETROIT EDISON COMPANY:
Part I - Item 1 - Business..................................................................... 73
Item 2 - Properties................................................................... 74
Item 3 - Legal Proceedings............................................................ 74
Item 4 - Submission of Matters to a Vote of Security Holders.......................... 74
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Part II - Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters..................................................... 74
Item 6 - Selected Financial Data...................................................... 75
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 75
Item 8 - Financial Statements and Supplementary Data.................................. 75
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 78
Part III - Item 10 - Directors and Executive Officers of the Registrant.......................... 78
Item 11 - Executive Compensation...................................................... 78
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.............................................................. 78
Item 13 - Certain Relationships and Related Transactions.............................. 78
ANNUAL REPORTS ON FORM 10-K FOR DTE ENERGY COMPANY AND
THE DETROIT EDISON COMPANY:
Part IV - Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................. 79
Signature Page to DTE Energy Company Annual Report on Form 10-K......................................... 92
Signature Page to The Detroit Edison Company Annual Report on Form 10-K................................. 93
</TABLE>
3
<PAGE> 4
DEFINITIONS
<TABLE>
<S> <C>
Company.......................... DTE Energy Company and Subsidiary Companies
Consumers........................ Consumers Energy Company (a wholly owned subsidiary of
CMS Energy Corporation)
Detroit Edison................... The Detroit Edison Company (a wholly owned subsidiary of
DTE Energy Company) and Subsidiary Companies
Direct Access.................... Gives all retail customers equal opportunity to utilize the transmission
system which results in access to competitive generation resources
EPA.............................. United States Environmental Protection Agency
FERC............................. Federal Energy Regulatory Commission
kWh.............................. Kilowatthour
Ludington........................ Ludington Hydroelectric Pumped Storage Plant (owned jointly
with Consumers)
MDEQ............................. Michigan Department of Environmental Quality
MPSC............................. Michigan Public Service Commission
MW............................... Megawatt
Note............................. Notes to Consolidated Financial Statements of the Company
and Detroit Edison
NRC.............................. Nuclear Regulatory Commission
PSCR............................. Power Supply Cost Recovery
Registrant....................... Company or Detroit Edison, as the case may be
SALP............................. Systematic Assessment of Licensee Performance
SEC.............................. Securities and Exchange Commission
SFAS............................. Statement of Financial Accounting Standards
</TABLE>
4
<PAGE> 5
ANNUAL REPORT ON FORM 10-K FOR DTE ENERGY COMPANY
PART I
ITEM 1 - BUSINESS.
GENERAL
The Company, a Michigan corporation incorporated in 1995, is an exempt
holding company under the Public Utility Holding Company Act. As a result of the
1996 corporate restructuring, the Company became the parent holding company of
Detroit Edison and certain previously wholly-owned Detroit Edison subsidiaries.
The Company has no operations of its own, holding instead directly or
indirectly, the stock of Detroit Edison and other subsidiaries engaged in
energy-related businesses. Detroit Edison is the Company's principal operating
subsidiary, representing approximately 91% and 94% of the Company's assets and
revenues, respectively, at December 31, 1998. The Company has no employees.
Detroit Edison has 8,482 employees and other Company affiliates have 299
employees.
NON-REGULATED OPERATIONS
Affiliates of the Company are engaged in non-regulated businesses,
including energy-related services and products. Such services and products
include the operation of a pulverized coal facility and coke oven batteries,
coal sourcing, blending and transportation, landfill gas-to-energy facilities,
providing expertise in the application of new energy technologies, real estate
development, power marketing, specialty engineering services and retail
marketing of energy and other convenience products. Another affiliate, DTE
Capital Corporation, provides financial services to the Company's non-regulated
affiliates.
Non-regulated operating revenues of $319 million for 1998 were earned
primarily from projects related to the steel industry.
UTILITY OPERATIONS
Detroit Edison, incorporated in Michigan since 1967, is a public utility
subject to regulation by the MPSC and FERC and is engaged in the generation,
purchase, transmission, distribution and sale of electric energy in a 7,600
square mile area in Southeastern Michigan. Detroit Edison's service area
includes about 13% of Michigan's total land area and about half of its
population (approximately five million people). Detroit Edison's residential
customers reside in urban and rural areas, including an extensive shoreline
along the Great Lakes and connecting waters. 3,733 of Detroit Edison's 8,482
employees are represented by unions under two collective bargaining agreements.
One agreement expires in June 1999 for 3,174 employees and the other agreement
expires in August 2000 for 559 employees.
5
<PAGE> 6
Operating revenues, sales and customer data by rate class are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Operating Revenues (Millions)
<S> <C> <C> <C>
Electric
Residential $ 1,253 $ 1,179 $ 1,198
Commercial 1,553 1,501 1,506
Industrial 753 726 731
Other 343 251 207
---------------------------------------------------
Total $ 3,902 $ 3,657 $ 3,642
===================================================
<CAPTION>
Sales (Millions of kWh)
Electric
Residential 13,752 12,898 12,949
Commercial 18,897 17,997 17,706
Industrial 14,700 14,345 14,062
Other 2,357 1,855 1,690
---------------------------------------------------
Total System 49,706 47,095 46,407
Interconnection 5,207 3,547 2,046
---------------------------------------------------
Total 54,913 50,642 48,453
===================================================
<CAPTION>
Electric Customers at Year-End (Thousands)
Electric
Residential 1,884 1,870 1,847
Commercial 181 178 175
Industrial 1 1 1
Other 2 2 2
---------------------------------------------------
Total 2,068 2,051 2,025
===================================================
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Detroit Edison generally experiences its peak load and highest total system
sales during the third quarter of the year as a result of air conditioning and
cooling-related loads.
During 1998, sales to automotive and automotive-related customers accounted
for approximately 9% of total Detroit Edison operating revenues. Detroit
Edison's 30 largest industrial customers accounted for approximately 17% of
total operating revenues in 1998, 1997 and 1996, but no one customer accounted
for more than 3% of total operating revenues.
Detroit Edison's generating capability is primarily dependent upon coal.
Detroit Edison expects to obtain the majority of its coal requirements through
long-term contracts and the balance through short-term agreements and spot
purchases. Detroit Edison has contracts with four coal suppliers for a total
purchase of up to 54 million tons of low-sulfur western coal to be delivered
during the period from 1999 through 2005. It also has several contracts for the
purchase of approximately 1 million tons of Appalachian coal with varying
contract expiration dates through 1999. These existing long-term coal
6
<PAGE> 7
contracts include provisions for market price reopeners and price escalation as
well as de-escalation.
CERTAIN FACTORS AFFECTING PUBLIC UTILITIES
The electric utility industry is changing as the transition to competition
occurs. MPSC orders issued in 1997 and 1998 form the beginning of the
restructuring of the Michigan electric public utility industry. The
implementation of restructuring creates uncertainty as direct access and the
unbundling of utility products and services are introduced.
Restructuring legislation has not been adopted in Michigan although
restructuring is proceeding based upon guidelines set forth in various MPSC
orders. The MPSC, as a policy matter, has ruled that public utilities should
recover stranded costs, arising as a result of the transition to competition,
but many details concerning the orderly recovery of such costs, including the
operation of a true-up mechanism, are yet to be decided.
Restructuring presents other serious issues, such as planning for peak
sales and defining the scope of the public utility obligation. The introduction
of direct access has created uncertainty regarding the timing and level of
customer load that may move to other suppliers and the extent of back-up
capacity that Detroit Edison could be obligated to provide.
Companion FERC rulings are necessary for orderly transition in the
competitive bulk power supply markets, and procedures, as well as new equipment,
are necessary for the development of open access to transmission lines.
Detroit Edison is subject to extensive environmental regulation. Additional
costs may result as the effects of various chemicals on the environment
(including nuclear waste) are studied and governmental regulations are developed
and implemented. In addition, the impact of proposed EPA ozone transport
regulations and final new air quality standards relating to particulate air
pollution are unknown. The costs of future nuclear decommissioning activities
are the subject of increased regulatory attention, and recovery of environmental
costs through traditional ratemaking is the subject of considerable uncertainty.
REGULATION AND RATES
MICHIGAN PUBLIC SERVICE COMMISSION. Detroit Edison is subject to the
general regulatory jurisdiction of the MPSC, which, from time to time, issues
its orders pertaining to Detroit Edison's conditions of service, rates and
recovery of certain costs, accounting and various other matters.
As discussed in Notes 1 and 2, MPSC orders issued in 1997 and 1998 have provided
the beginning of the restructuring of the Michigan electric utility industry.
Other restructuring and regulatory matters are discussed below.
7
<PAGE> 8
In March 1998, Detroit Edison filed its 1997 PSCR Reconciliation Case with the
MPSC. PSCR costs were underrecovered by $2.7 million and when combined with
Fermi 2 performance standards, would result in a refund to customers of
approximately $21 million. An order is expected in the first quarter of 1999.
In September 1998, Detroit Edison filed its 1999 PSCR case. Fuel and purchased
power costs for 1999 are projected to increase by up to 25 percent, on average,
over the corresponding forecast for 1998. An order is expected by the third
quarter of 1999. Detroit Edison plans to file its 1998 PSCR Reconciliation Case
with the MPSC in March 1999.
In an order issued December 28, 1998 related to the 1988 Settlement Agreement
regarding Fermi 2, the MPSC requested parties to file briefs discussing whether
the past MPSC orders surrounding Fermi 2 (including the June 1995 order
regarding the retail wheeling experiment,the November 1997 order that reflected
the net effect of the $53 million reduction associated with the Fermi 2 phase in
for 1998 and a two-year amortization of incremental storm damage costs, and the
December 1998 order regarding the accelerated amortization of Fermi 2) have
fully accounted for the reductions in the Fermi 2 cost of service and, if not,
what additional actions should be taken, as well as what actions are needed to
revert to non-phase-in ratemaking in 2000. Detroit Edison indicated that the
MPSC does not need to take any further actions on this matter. Other parties
argue, among other things, that the MPSC should order that a general rate case
be filed by Detroit Edison.
In July 1998, Detroit Edison filed a required review of its current depreciation
expense with the MPSC. The application requested an effective increase in annual
depreciation expenses of $66 million; an adjustment in rates was not requested.
An order may be issued by the MPSC in the first quarter of 1999.
Detroit Edison filed an application with the MPSC in June 1998 requesting
approval of its direct access plan and accounting authority to defer costs that
would be incurred to implement direct access. In its filing, Detroit Edison
estimated that the cost to implement direct access would be approximately $168
million. Detroit Edison awaits further rulings by the MPSC.
Detroit Edison is under an obligation to solicit capacity from external
suppliers, whenever it determines that additional capacity is required. Detroit
Edison has issued two Requests for Proposal (RFP) in response to that
requirement. The first RFP was issued in May 1998 for capacity during 1998 and
1999, and the second RFP was issued in January 1999 for capacity from June 1999
through May 2002. There was minimal response to the May 1998 request, and
although there have been several responses to the January 1999 request, no
offers to provide Michigan generation by June 1999 have been received.
In February 1999, Detroit Edison filed a capacity plan with the MPSC outlining
its assessment and needs for capacity for the summer of 1999. Detroit Edison
indicated it will need to purchase approximately 2,000 MW of capacity to
supplement internal
8
<PAGE> 9
generation to reliably meet projected peak loads in 1999, and plans to add
approximately 550 MW of additional internal capacity.
Detroit Edison has contested the statutory authority of the MPSC to order a
direct access experiment. In October 1998 the Michigan Supreme court granted
Detroit Edison and other parties to the proceeding leave to appeal from a
January 1998 order of the Michigan Court of Appeals finding that the MPSC did
have statutory authority to authorize experimental direct access. Although
Detroit Edison expects to drop its appeal when a satisfactory clarifying order
is issued on the December 1998 order regarding the accelerated amortization of
Fermi 2, other parties may continue their appeals, and neither the Company nor
Detroit Edison is able to predict the final outcome or timing of these
proceedings. Oral arguments are scheduled for March 1999.
NUCLEAR REGULATORY COMMISSION. The NRC has regulatory jurisdiction over all
phases of the operation, construction (including plant modifications), licensing
and decommissioning of Fermi 2.
ENVIRONMENTAL MATTERS
DETROIT EDISON
Detroit Edison, in common with other electric utilities, is subject to
applicable permit and associated record keeping requirements, and to
increasingly stringent federal, state and local standards covering, among other
things, particulate and gaseous stack emission limitations, the discharge of
effluents (including heated cooling water) into lakes and streams and the
handling and disposal of waste material.
AIR. During 1997 and 1998, the EPA issued proposed ozone transport
regulations and final new air quality standards relating to ozone and
particulate air pollution. The proposed new rules will lead to additional
controls on fossil-fueled power plants to reduce nitrogen oxides, sulfur
dioxide, carbon dioxide and particulate emissions. See "Item 7 - Environmental
Matters" for further discussion.
WATER. Detroit Edison is required to demonstrate that the cooling water
intake structures at all of its facilities reflect the "best technology
available for minimizing adverse environmental impact." Detroit Edison filed
such demonstrations and the MDEQ Staff accepted all of them except those
relating to the St. Clair and Monroe Power Plants for which it requested further
information. Detroit Edison subsequently submitted the information. In the event
of a final adverse decision, Detroit Edison may be required to install
additional control technologies to further minimize the impact.
WASTES AND TOXIC SUBSTANCES. The Michigan Solid Waste and Hazardous Waste
Management Acts, the Michigan Environmental Response Act, the Federal Resource
Conservation and Recovery Act, Toxic Substances Control Act, and the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
regulate Detroit Edison's handling, storage and disposal of its waste materials.
9
<PAGE> 10
The EPA and the MDEQ have aggressive programs regarding the clean-up of
contaminated property. Detroit Edison has extensive land holdings and, from time
to time, must investigate claims of improperly disposed of contaminants. Detroit
Edison anticipates that it will be periodically included in these types of
environmental proceedings.
CONNERS CREEK. The Conners Creek Power Plant was in reserve status from
1988 to 1998. In April, 1998 the MPSC issued an order granting Detroit Edison's
request to waive competitive bidding for Conners Creek and restart the plant.
Although Detroit Edison believed that the plant complied with all applicable
environmental requirements, the Michigan Department of Natural Resources and the
Wayne County Air Quality Management Division issued notices of violation
contending that Detroit Edison was required to obtain a series of new permits
prior to plant operation. Subsequently the EPA issued a similar notice of
violation.
Detroit Edison conducted tests on the Conners Creek boilers and turbine during
June and July 1998. Following testing of the igniters, the boilers and turbine
were run for varying periods during the last week in June and the first week in
July to conduct a series of tests, including tests on the upgraded controls
systems and the turbine generator maximum load test. The only generation from
the plant was to allow the plant to complete these tests. The plant was never
dispatched by the Michigan Electric Coordinating System (MECS) in Ann Arbor to
meet power demands. In addition, the gas igniters were fired during the first
three days of September to dry out the boilers following draining of all water
from the equipment.
On August 5, 1998, Detroit Edison filed suit seeking a review of
determinations asserted by the state and local agencies that Detroit Edison's
activities in reactivating the Conners Creek power plant were in violation of
certain environmental regulations.
On January 11, 1999, the Department of Justice (DOJ) on behalf of the EPA sent
Detroit Edison a Demand Letter requiring the payment of $2.3 million in civil
penalties and an unconditional commitment to abandon the use of the facility as
a coal plant. Detroit Edison has rejected the DOJ/EPA demand and on January 15,
1999 the DOJ/EPA filed suit. Detroit Edison is presently trying to resolve the
issue through settlement discussions. It is impossible to predict what impact,
if any, the outcome of this will have upon Detroit Edison.
NON-REGULATED
The Company's non-regulated affiliates are subject to a number of
environmental laws and regulations dealing with the protection of the
environment from various pollutants. These non-regulated affiliates are in
substantial compliance with all environmental requirements.
10
<PAGE> 11
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRESENT
POSITION
NAME AGE(a) PRESENT POSITION HELD SINCE (b)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Anthony F. Earley, Jr. 49 Chairman of the Board, Chief Executive Officer, 8-1-98
President, Chief Operating Officer, and
Member of the Office of the President
Larry G. Garberding 60 Executive Vice President, Chief Financial Officer, 1-26-95
Member of the Office of the President
since December 1998
Gerard M. Anderson 40 President and Chief Operating Officer - DTE Energy 8-1-98
Resources, and Member of the Office of
the President
Robert J. Buckler 49 President and Chief Operating Officer - DTE Energy 8-1-98
Distribution, and Member of the Office of
the President
Michael E. Champley 50 Senior Vice President 4-1-97
Susan M. Beale 50 Vice President and Corporate Secretary 12-11-95
Leslie L. Loomans 55 Vice President and Treasurer 1-26-95
David E. Meador 41 Vice President and Controller 3-29-97
Christopher C. Nern 54 Vice President and General Counsel 1-26-95
</TABLE>
(a) As of December 31, 1998
(b) The Company was incorporated in January 1995, and, at that time,
certain officers of Detroit Edison were appointed officers of the
Company.
- --------------------------------------------------------------------------------
Under the Company's By-Laws, the officers of the Company are elected
annually by the Board of Directors at a meeting held for such purpose, each to
serve until the next annual meeting of directors or until their respective
successors are chosen and qualified.
Pursuant to Article VI of the Company's Articles of Incorporation,
directors of the Company will not be personally liable to the Company or its
shareholders in the performance of their duties to the full extent permitted by
law.
Article VII of the Company's Articles of Incorporation provides that each
person who is or was or had agreed to become a director or officer of the
Company, or each such person who is or was serving or who had agreed to serve at
the request of the Board of Directors as an employee or agent of the Company or
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (including the heirs, executors,
administrators or estate of such person), shall be indemnified by the Company to
the full extent permitted by the Michigan Business Corporation Act or any other
applicable laws as presently or hereafter in effect. In addition, the Company
has entered into indemnification agreements with all of its officers and
directors, which agreements set forth procedures for claims for indemnification
as well as contractually obligating the Company to provide indemnification to
the maximum extent permissible by law.
11
<PAGE> 12
The Company and its directors and officers in their capacities as such are
insured against liability for alleged wrongful acts (to the extent defined)
under three insurance policies providing aggregate coverage in the amount of
$100 million.
OTHER INFORMATION. Pursuant to the provisions of the Company's By-Laws, the
Board of Directors has by resolution set the number of directors comprising the
full Board at 13.
12
<PAGE> 13
ITEM 2 - PROPERTIES.
DETROIT EDISON
The summer net rated capability of Detroit Edison's generating units is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Location By
Michigan Summer Net Year
Plant Name County Rated Capability (1) (2) (3) in Service
- -------------------------------------------------------------------------------------------------------------------
(MW)
<S> <C> <C> <C> <C>
Fossil-fueled Steam-Electric
Belle River (4) St. Clair 1,026 10.0% 1984 and 1985
Greenwood St. Clair 785 7.6 1979
Harbor Beach Huron 103 1.0 1968
Marysville St. Clair 167 1.6 1930, 1943 and 1947
Monroe (5) Monroe 3,000 29.2 1971, 1973 and 1974
River Rouge Wayne 510 5.0 1957 and 1958
St. Clair St. Clair 1,406 13.7 1953, 1954, 1961 and 1969
Trenton Channel Wayne 725 7.1 1949, 1950 and 1968
---------------------
7,722 75.2%
Oil or Gas-fueled Peaking
Units (6) Various 525 5.1 1966-1971 and 1981
Nuclear-fueled Steam-Electric
Fermi 2 (7) Monroe 1,098 10.7 1988
Hydroelectric Pumped Storage
Ludington (8) Mason 917 9.0 1973
-----------------------
10,262 100.0%
=======================
</TABLE>
(1) Summer net rated capabilities of generating units in service are based on
periodic load tests and are changed depending on operating experience, the
physical condition of units, environmental control limitations and customer
requirements for steam, which otherwise would be used for electric
generation.
(2) Excludes two oil-fueled units, River Rouge Unit No. 1 (206 MW) and St.
Clair Unit No. 5 (250 MW), in economy reserve status.
(3) Excludes Conners Creek (236 MW) which is the subject of litigation
discussed herein in "Environmental Matters, Conners Creek."
(4) The Belle River capability represents Detroit Edison's entitlement to
81.39% of the capacity and energy of the plant. See Note 4.
(5) The Monroe Power Plant provided approximately 35% of Detroit Edison's total
1998 power plant generation.
(6) Detroit Edison has made arrangements for the purchase of gas-fueled peakers
which are expected to contribute 550 MW of generation by the summer of
1999.
(7) Fermi 2 has a design electrical rating (net) of 1,150 MW.
(8) Represents Detroit Edison's 49% interest in Ludington with a total
capability of 1,872 MW. Detroit Edison is leasing 306 MW to First Energy
for the six-year period June 1, 1996 through May 31, 2002.
- --------------------------------------------------------------------------------
13
<PAGE> 14
Detroit Edison and Consumers are parties to an Electric Coordination
Agreement providing for emergency assistance, coordination of operations and
planning for bulk power supply, with energy interchanged at nine
interconnections. Detroit Edison and Consumers also have interchange agreements
to exchange electric energy through 12 interconnections with First Energy,
Indiana Michigan Power Company, Northern Indiana Public Service Company and
Ontario Hydro. In addition, Detroit Edison has interchange agreements for the
exchange of electric energy with Michigan South Central Power Agency, Rouge
Steel Company and the City of Wyandotte.
Detroit Edison also purchases energy from cogeneration facilities and other
small power producers. Energy purchased from cogeneration facilities and small
power producers amounted to $31 million, $31.3 million and $28.3 million for
1998, 1997 and 1996, respectively, and is currently estimated at $34.5 million
for 1999.
Detroit Edison's electric generating plants are interconnected by a
transmission system operating at up to 345 kilovolts through 35 transmission
stations. As of December 31, 1998, electric energy was being distributed in
Detroit Edison's service area through 610 substations over 3,658 distribution
circuits.
NON-REGULATED
Non-regulated property primarily consists of a coke oven battery facility
and a coal processing facility located in River Rouge, Michigan, and a coke oven
battery facility in Burns Harbor, Indiana, along with 22 landfill gas projects
located throughout the United States.
ITEM 3 - LEGAL PROCEEDINGS.
Detroit Edison, in the ordinary course of its business, is involved in
a number of suits and controversies including claims for personal injuries and
property damage and matters involving zoning ordinances and other regulatory
matters. As of December 31, 1998, Detroit Edison was named as defendant in 148
lawsuits involving claims for personal injuries and property damage and had been
advised of 34 other potential claims not evidenced by lawsuits.
From time to time, Detroit Edison has paid nominal penalties which were
administratively assessed by the United States Coast Guard, United States
Department of Transportation under the Federal Water Pollution Control Act, as
amended, with respect to minor accidental oil spills at Detroit Edison's power
plants into navigable waters of the United States. Payment of such penalties
represents full disposition of these matters.
See "Note 11 - Commitments and Contingencies" and "Environmental Matters,
Detroit Edison, Conners Creek" herein for additional information.
14
<PAGE> 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None during the fourth quarter of 1998.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange, which
is the principal market for such stock, and the Chicago Stock Exchange. The
following table indicates the reported high and low sales prices of the
Company's Common Stock on the Composite Tape of the New York Stock Exchange and
dividends paid per share for each quarterly period during the past two years:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DIVIDENDS
PRICE RANGE PAID
CALENDAR QUARTER HIGH LOW PER SHARE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 First 32-7/8 26-1/4 $0.515
Second 28-3/8 26-1/8 0.515
Third 32-7/8 27-1/2 0.515
Fourth 34-3/4 28-1/16 0.515
1998 First 39-5/8 33-1/2 $0.515
Second 42 37-11/16 0.515
Third 45-5/16 39-3/16 0.515
Fourth 49-1/4 41-7/16 0.515
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, there were 145,071,317 shares of the Company's Common
Stock outstanding. These shares were held by a total of 111,610 shareholders of
record.
The Company's By-Laws provide that Chapter 7B of the Michigan Business
Corporation Act ("Act") does not apply to the Company. The Act regulates
shareholder rights when an individual's stock ownership reaches at least 20
percent of a Michigan corporation's outstanding shares. A shareholder seeking
control of the Company cannot require the Company's Board of Directors to call a
meeting to vote on issues related to corporate control within 10 days, as
stipulated by the Act. See "Note 6 - Shareholders' Equity" for additional
information, including information concerning the Rights Agreement, dated as of
September 23, 1997.
The amount of future dividends will depend on the Company's earnings,
financial condition and other factors, including the effects of utility
restructuring and the transition to competition, each of which is periodically
reviewed by the Company's Board of Directors.
Pursuant to Article I, Section 8. (c) and Article II, Section 3.(c) of the
Company's By-laws, as amended through May 1, 1998, notice is given that the 2000
Annual Meeting of the Company's Common Shareholders will be held on Wednesday,
April 26, 2000.
15
<PAGE> 16
ITEM 6 - SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(Millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 4,221 $ 3,764 $ 3,645 $ 3,636 $ 3,519
Net Income $ 443 $ 417 $ 309 $ 406 $ 390
Earnings Per Common Share - Basic
and Diluted $ 3.05 $ 2.88 $ 2.13 $ 2.80 $ 2.67
Dividends Declared Per
Share of Common Stock $ 2.06 $ 2.06 $ 2.06 $ 2.06 $ 2.06
At year end:
Total Assets $12,088 $11,223 $11,015 $11,131 $10,993
Long-Term Debt Obligations
(including capital leases) and
Redeemable Preferred and
Preference Stock Outstanding $ 4,323 $ 4,058 $ 4,038 $ 4,004 $ 3,980
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes thereto, contained herein.
The Detroit Edison Company (Detroit Edison) is the principal subsidiary of DTE
Energy Company (Company) and, as such, unless otherwise identified, this
discussion explains material changes in results of operations of both the
Company and Detroit Edison and identifies recent trends and events affecting
both the Company and Detroit Edison.
GROWTH
On January 1, 1996, Detroit Edison's common stock was exchanged on a
share-for-share basis for the common stock of the Company; and the Company
became the parent holding company of Detroit Edison. The Company has no
operations of its own, holding instead, directly or indirectly, the stock of
Detroit Edison, its principal operating subsidiary, and other subsidiaries
engaged in energy-related businesses. The holding company structure was adopted
to position the Company for changes in the energy markets, and the electric
utility industry in particular, by providing financial flexibility and
additional resources for the development of new energy-related businesses.
In order to sustain earnings growth, with an objective of 6% growth annually,
the Company and Detroit Edison have developed a business strategy focused on
core competencies, consisting of expertise in developing, managing and operating
energy assets, including coal sourcing, blending and transportation skills. In
addition, Detroit Edison has a program for developing work force training and
planning for the future.
Detroit Edison is preparing for the transition to competition in the electric
energy markets. Although Detroit Edison's electric power sales and system demand
have grown at compounded annual rates of about 3% for the last five years, the
transition to competition is expected to reduce Detroit Edison's system growth
in the long-term. Detroit Edison projects that its electric power sales will
increase at a compounded annual rate of approximately 2% over the next five
years, but the impact of the transition to competition on earnings and operating
conditions is uncertain.
The Company is building a portfolio of growth businesses that leverage its
skills and build upon key customer relationships. These growth businesses
include on-site energy projects and services, coal transportation and
processing, and energy marketing and trading. During the five-year period ending
2002, these businesses could contribute up to $150 million in earnings annually.
The Company's long-term growth strategy recognizes the fact that competition,
new technologies and environmental concerns will have a significant impact on
reshaping the electric utility industry. Therefore, the Company is investing in
new energy-related technologies such as fuel cells, distributed generation and
renewable sources of energy.
17
<PAGE> 18
The Company believes that its financial and technological resources, experience
in the energy field and strategic growth plan position it well to compete in the
changing energy markets, as competition is introduced in Michigan and across the
United States. While there can be no assurances that future performance will
equal or exceed past performance, for 1998, the Company's common stock provided
a total return of 29%, closing at $43.06 on December 31, 1998.
ELECTRIC INDUSTRY RESTRUCTURING
Detroit Edison is subject to regulation by the Michigan Public Service
Commission (MPSC) and the Federal Energy Regulatory Commission (FERC). In 1998,
Michigan legislators and regulators focused on competition and direct access in
the Michigan electric public utility industry. Direct access would give all
retail customers equal opportunity to utilize the transmission system which
results in access to competitive generation resources. The MPSC is committed to
opening the electric generation market in Michigan to competition and as a
result issued several Orders relating to restructuring and competition in 1998.
Although attempts to pass legislation in Michigan relating to restructuring were
unsuccessful in 1998, the MPSC Orders will enable Detroit Edison to begin
implementation of direct access in 1999. Issues remain to be resolved and
additional Orders are anticipated as Detroit Edison phases in the option for
customers to choose direct access service in 1999 and throughout the transition
to full competition, which is scheduled in 2002.
MICHIGAN PUBLIC SERVICE COMMISSION
Background
Details on restructuring the electric generation market began to emerge in 1996
with the issuance of a MPSC Staff Report on Electric Industry Restructuring.
MPSC Orders issued in 1997 and 1998 stated that Michigan utilities should
recover stranded costs and established December 31, 2007 as the last day for
recovery of such costs.
1997 Restructuring Orders
MPSC Orders issued in 1997 facilitated restructuring, but left several issues
unresolved. Due to the uncertainty regarding the future price of electricity,
the MPSC indicated a true-up mechanism should be established to ensure that
Detroit Edison did not over-recover its stranded costs. The MPSC also
established that during the transition period, affiliates of out-of-state
utilities could not be alternative suppliers without reciprocal arrangements,
but unaffiliated marketers could be an alternative supplier without providing
reciprocal service in another service territory.
1998 Restructuring Orders
MPSC Orders issued in 1998 identified a phased-in approach to restructuring,
whereby Detroit Edison would implement direct access in 225 megawatt (MW) blocks
of power through the transition period, with 1125 MW, or approximately 12.5% of
total load made
18
<PAGE> 19
available at the end of the transition period, with all remaining load available
for direct access on January 1, 2002. Detroit Edison requested approval of
accelerated amortization of the Fermi 2 nuclear plant. As discussed in Note 2,
the December 28, 1998 MPSC Order, while granting Detroit Edison's request,
imposed several conditions for the recovery of Fermi 2 costs. Detroit Edison has
requested a clarifying Order from the MPSC, and other parties have requested
rehearing on aspects of the MPSC Order.
Neither the Company nor Detroit Edison is able to predict the final outcome or
timing of these proceedings.
Direct Access Experiment
Detroit Edison has been involved in legal proceedings contesting the statutory
authority of the MPSC to order a direct access experiment. In October 1998 the
Michigan Supreme Court granted Detroit Edison and other parties to the
proceeding leave to appeal from a Michigan Court of Appeals finding that the
MPSC did have statutory authority to authorize experimental direct access. The
December 1998 MPSC Order provided that a 90 MW direct access experiment should
be immediately commenced, and was in addition to the 1125 MW previously
scheduled.
Market Conditions
Wholesale power prices rose significantly in 1998. Dramatic price increases
during the summer led to an investigation and report by the FERC Staff. The
report concluded that a combination of factors caused the price increase, and
although the increase was dramatic, it was narrow and short-lived. The report
concluded that the particular combination of events that led to the magnitude of
the price increases is not likely to recur, but indicated that wholesale power
prices can be expected to rise and fall as a result of the dynamics of supply
and demand.
Detroit Edison's planning and preparation limited its exposure during the summer
in the wholesale power markets. Detroit Edison made substantial use of options
and contracts with liquidated damages provisions, while spreading its purchases
over many buyers in different regions. Detroit Edison also continues to recover
approximately 80% of the charges for purchased power and generation through the
use of the Power Supply Cost Recovery (PSCR) clause.
Because Detroit Edison must currently import power to meet peak loads in the
summer, transmission capacity is a necessary requirement to serve customers
reliably during peak load periods. As a result of certain new transmission
procedures, there is uncertainty surrounding the ability of Detroit Edison to
import power reliably into Michigan. To relieve this uncertainty, additional
efforts to secure firm transmission rights will be necessary, as well as
additional in-state generating capability.
Detroit Edison has acquired significant additional commitments from other
utilities, and modified operating practices to provide flexibility to respond to
increasing uncertainties of load and market conditions. Detroit Edison has also
purchased new gas-fired
19
<PAGE> 20
combustion turbine peakers, which are expected to generate approximately 550 MW
of capacity for the summer of 1999.
Direct Access Implementation Issues
Several technical issues remain to be resolved before direct access can be
implemented. Detroit Edison formed a team, which is responsible for coordinating
activities surrounding direct access. Direct access will require new processes
and equipment. Some of these processes may be subject to modification by the
MPSC during the transition period. Detroit Edison estimates that expenditures of
up to $168 million may be required through 2001.
Detroit Edison believes that it may have an obligation to render service when a
direct access supplier cannot. The terms and conditions surrounding standby
service, whereby Detroit Edison may be required to supply generation services
for direct access customers when their suppliers cannot supply the necessary
generation, awaits further rulings by the MPSC.
The operation and parameters of the true-up mechanism needs further
clarification. It still is unknown how the MPSC will determine the actual price
of power to use in truing-up Detroit Edison's stranded cost recovery. The actual
methodology was deferred to future proceedings. Uncertainties exist regarding
the ultimate amount of stranded assets to be recovered including potential
disallowances for the recovery of recorded regulatory assets, recovery of costs
to be incurred to implement direct access, and other stranded costs.
Recoverability of these costs will be evaluated annually through the true-up
mechanism.
The FERC requires functional separation between the transmission
reliability/operation function of the utility and the wholesale merchant
function. The MPSC requires arm's-length transactions between Detroit Edison and
non-regulated affiliates. Efforts are ongoing to ensure that proper procedures
are developed and adhered to.
As a result of the December 28, 1998 MPSC Order, Detroit Edison discontinued the
application of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" for its generation
business. See Notes 1 and 2. While Detroit Edison is reviewing applicable
accounting guidance, uncertainty exists as to whether additional changes in
accounting policies will be required as a result of the discontinuation of SFAS
No. 71 for its generation business.
FEDERAL ENERGY REGULATORY COMMISSION
Detroit Edison is regulated at the federal level by the FERC with respect to
accounting, sales for resale in interstate commerce, certain transmission
services, issuances of securities, licensing of hydro and pumping stations and
other matters. The FERC as a policy matter, believes that transmission should be
made available on a non-discriminatory basis. A number of proceedings, as
discussed below, are in furtherance of this policy.
20
<PAGE> 21
In 1996, the FERC issued Order 888, which requires public utilities to file open
access transmission tariffs for wholesale transmission services in accordance
with non-discriminatory terms and conditions, and Order 889, which requires
public utilities and others to obtain transmission information for wholesale
transactions through a system on the Internet. In addition, Order 889 requires
public utilities to separate transmission operations from wholesale marketing
functions.
In July 1996, Detroit Edison filed its Pro Forma Open Access Transmission Tariff
in compliance with FERC Order 888. During 1997, Detroit Edison negotiated a
partial settlement regarding the price and terms and conditions of certain
services provided as part of the tariff. Several issues were litigated and
Detroit Edison awaits a decision. Rates currently being utilized for
transmission are consistent with the settlement and are subject to refund upon
the FERC's final decision.
Detroit Edison has a power pooling agreement with Consumers Energy Company
(Consumers Energy). In March 1997, a joint transmission tariff, filed by Detroit
Edison and Consumers Energy, became effective. In compliance with FERC Order
888, the tariff modified the pooling agreement to permit third-party access to
transmission facilities utilized for pooled operations under non-discriminatory
terms and conditions. As Detroit Edison and Consumers Energy were unable to
agree on other modifications to the pooling agreement, Detroit Edison has
requested that the FERC approve its termination. Consumers Energy has requested
that the pooling agreement be continued. The FERC has not ruled on either of
these requests.
As part of a broad look into its policies on Independent System Operators and
other Regional Transmission Organizations (RTO's), the FERC on November 24, 1998
announced plans to solicit the views of state commissions on the establishment
of regional electric transmission districts. At conferences to be held beginning
in the first quarter of 1999, the FERC will hear the state commissions' views on
the criteria that should be used to establish boundaries for RTO's and the role
of states in the formation and governance of RTO's. Additional consultations
with the states, industry representatives and others will follow to discuss
specific district boundaries. The FERC also plans to initiate a rulemaking or
other generic proceeding on RTO's to solicit further comment.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash from operating activities, which is the Company's primary source of
liquidity, was $868 million in 1998, $952 million in 1997 and $1,079 million in
1996. Net cash from operating activities decreased in 1998 due primarily to
increased accounts receivable and other non-cash items. Net cash from operating
activities decreased in 1997 compared to 1996 due primarily to changes in
inventory levels.
21
<PAGE> 22
Cash flow from operations is expected to be sufficient to meet cash requirements
for Detroit Edison's capital expenditures as well as the Company's scheduled
long-term debt redemption requirements and dividends.
CASH USED FOR INVESTING ACTIVITIES
Net cash used for investing activities was higher in 1998 due to increased plant
and equipment expenditures and non-regulated investments in coke oven batteries.
Net cash used for investing activities was higher for the Company in 1997 due to
the acquisition of a coke oven battery, a non-regulated expenditure. For Detroit
Edison, net cash used for investing activities was lower in 1997 due primarily
to lower plant and equipment expenditures.
Cash requirements for 1998 Detroit Edison capital expenditures were $514
million. Detroit Edison's cash requirements for capital expenditures are
expected to be approximately $2.l billion for the period 1999 through 2003.
Cash requirements for 1998 non-regulated investments and capital expenditures
were $442 million. Cash requirements for non-regulated investments and capital
expenditures are expected to be approximately $1.4 billion for the period 1999
through 2003. Significant non-regulated investments are expected to be
externally financed.
CASH FROM (USED FOR) FINANCING ACTIVITIES
Net cash from Company financing activities was higher in 1998 due to increases
in long- and short-term borrowings, partially offset by redemptions of preferred
stock and long-term debt.
Net cash used for Company financing activities decreased in 1997 compared to
1996 due primarily to the redemption of preferred stock in 1996, partially
offset by higher redemptions of long-term debt.
22
<PAGE> 23
The following securities were issued and redeemed in 1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITIES ISSUED (Millions)
<S> <C>
Quarterly Income Debt Securities
7.5%-7.4% issued in May and November $ 200
Remarketed Notes
6.2%-7.1% issued in June and November 400
Non-Recourse Debt
6.6% issued in July 163
----------
TOTAL ISSUED $ 763
==========
SECURITIES REDEEMED
Mandatory Redemptions
1990 Series A, B, C Mortgage Bonds
7.9%-8.4% redeemed in March $ 19
Non-Recourse Debt
6.9%-7.8% redeemed in April, June, October and December 36
Early Redemptions
Series S Mortgage Bonds
6.4% redeemed in February 150
Cumulative Preferred Stock
7.75%-7.74% redeemed in May and December 150
Quarterly Income Debt Securities
8.5% redeemed in December 50
----------
TOTAL REDEEMED $ 405
==========
</TABLE>
- --------------------------------------------------------------------------------
The preceding totals do not include Detroit Edison's Series 1999 A, $118.36
Million, 5.55%, which was sold on a forward basis in 1998 and will be issued in
September 1999. The proceeds will be used to refund two tax-exempt securities of
the same principal amount.
23
<PAGE> 24
YEAR 2000
The Company and Detroit Edison have been involved in an enterprise-wide program
to address Year 2000 issues. A program office was established in mid-1997 to
implement a rigorous plan to address the impact of Year 2000 on hardware and
software systems, embedded systems (which include microprocessors used in the
production and control of electric power), and critical service providers. The
emphasis has been on mission critical systems that support core business
activities or processes. Core business activities/processes include safety,
environmental and regulatory compliance, product production and delivery,
revenue collection, employee and supplier payment and financial asset
management.
The plan for addressing Year 2000 is divided into several phases including
raising general awareness of Year 2000 throughout the Company and Detroit
Edison; maintaining an inventory of systems and devices; performing an
assessment of inventoried systems and devices; performing compliance testing of
suspect systems and devices; remediation of non-compliant systems and devices
through replacement, repair, retirement, or identifying an acceptable work
around; testing and remediation of systems and devices in an integrated
environment and preparing business continuity plans.
Inventory, assessment and compliance testing phases have been completed for
known systems and devices. The remediation phase is approximately 80% complete
and is expected to be fully complete by August 1999 for mission critical assets
and supporting assets. Integration planning, including the mapping of critical
business processes, is near completion for Detroit Edison. Integration testing
and remediation is expected to be complete by October 1999.
To support the program phases, the program office has been working with major
utility industry associations and organizations, customers and vendors to gather
and share information on Year 2000 issues. The program office has contacted
vendors critical to Company operations to determine their progress on Year 2000.
To further assist in identifying potential problems, tests of generating
facilities have been conducted by advancing control systems dates to the Year
2000. Results of these tests have shown that the generating facilities operated
successfully in this induced "millennium mode." Exercises were conducted on
December 31, 1998 and January 1, 1999 to assess the ability to reach employees
and the regional security centers of the East Central Area Reliability Group
through various communication channels. The exercised communication channels
operated properly. The business continuity program will provide opportunities to
conduct similar exercises on other systems in advance of the Year 2000. Similar
analysis has not been completed for other affiliates.
In the event that an unknown Year 2000 condition adversely affects service to
customers or an internal business process, contingency and business continuity
plans and procedures are being developed to provide rapid restoration to normal
conditions.
24
<PAGE> 25
The Company and Detroit Edison have always maintained a comprehensive
operational emergency response plan. The business continuity function of the
Year 2000 program will supplement the existing emergency plan to include Year
2000 specific events. A Year 2000 emergency response office will be fully
operational by November 1999 to manage and coordinate operations, including
mobilization of all employees as necessary, during the transition to the new
millennium.
The Company and Detroit Edison believe that with all Year 2000 modifications,
business continuity and emergency management plans in place, the Year 2000 will
not have a material effect on their financial position, liquidity and results of
operations. Despite all efforts, there can be no assurances that Year 2000
issues can be totally eliminated. Results of modifications and testing done
during the fourth quarter of 1998 have demonstrated that Detroit Edison should
be able to maintain normal operating conditions into the Year 2000, although
there may be isolated electric service interruptions. Detroit Edison's internal
business systems may be affected by a Year 2000 related failure that could
temporarily interrupt the ability to communicate with customers, collect
revenue, or complete cash transactions. In addition, no assurances can be given
that the systems of vendors, interconnected utilities and customers will not
result in Year 2000 problems.
The Company estimates that Year 2000 costs will approximate $80 million with $39
million expended between January 1, 1998 and December 31, 1998. Operating cash
flow is expected to be sufficient to pay Year 2000 modification costs with no
material impact on operating results or cash flows.
ENVIRONMENTAL MATTERS
Protecting the environment from damage, as well as correcting past environmental
damage, continues to be a focus of state and federal regulators. Legislation
and/or rulemaking could further impact the electric utility industry including
Detroit Edison. The U.S. Environmental Protection Agency (EPA) and the Michigan
Department of Environmental Quality have aggressive programs regarding the
clean-up of contaminated property. Detroit Edison anticipates that it will be
periodically included in these types of environmental proceedings.
During 1997 and 1998 the EPA issued ozone transport regulations and final new
air quality standards relating to ozone and particulate air pollution. In
September 1998, the EPA issued a State Implementation Plan (SIP) call, giving
states a year to develop new regulations to limit nitrogen oxide emissions
because of their contribution to ozone formation. The EPA draft proposal
suggests most emission reductions should come from utilities. If Michigan
follows the EPA's recommendations, it is estimated that it will cost Detroit
Edison more than $400 million to comply. Until the state issues its regulations,
it is impossible to predict the full impact of the SIP call. Detroit Edison is
unable to predict what effect, if any, restructuring of the electric utility
industry would have on recoverability of such environmental costs.
25
<PAGE> 26
MARKET RISK
Detroit Edison had investments valued at market of $309 million and $239 million
in three nuclear decommissioning trust funds at December 31, 1998 and 1997,
respectively. At December 31, 1998, these investments consisted of approximately
33% in fixed debt instruments, 63% in publicly traded equity securities and 4%
in cash equivalents. At December 31, 1997, these investments consisted of
approximately 40% in fixed debt instruments and 60% in publicly traded equity
securities. A hypothetical 10% increase in interest rates and a 10% decrease in
equity prices quoted by stock exchanges would result in a $9 million and $8
million reduction in the fair value of debt and a $20 million and $ 10 million
reduction in the fair value of equity securities held by the trusts at December
31, 1998 and 1997, respectively. Adjustments to market value would result in a
corresponding adjustment to other liabilities based on current regulatory
treatment.
A hypothetical 10% decrease in interest rates would increase the fair value of
long-term debt from $4.8 billion to $5.3 billion at December 31, 1998 and from
$4.2 billion to $4.6 billion at December 31, 1997.
DTE Energy Trading, Inc. (DTE ET), an indirect wholly owned subsidiary of the
Company, which provides price risk management services utilizing energy
commodity derivative instruments began operations in 1998. The Company measures
the risk inherent in DTE ET's portfolio utilizing Value at Risk (VaR) analysis
and other methodologies, which simulate forward price curves in electric power
markets to quantify estimates of the magnitude and probability of potential
future losses related to open contract positions. DTE ET's VaR expresses the
potential loss in fair value of its forward contract and option position over a
particular period of time, with a specified likelihood of occurrence, due to an
adverse market movement. The Company reports VaR as a percentage of its
earnings, based on a 95% confidence interval, utilizing 10 day holding periods.
At December 31, 1998, DTE ET's VaR from its power marketing and trading
activities was less than 1% of the Company's consolidated "Income Before Income
Taxes" for the year ending December 31, 1998. The VaR model uses the
variance-covariance statistical modeling technique, and implied and historical
volatilities and correlations over the past 20 day period. The estimated market
prices used to value these transactions for VaR purposes reflect the use of
established pricing models and various factors including quotations from
exchanges and over-the-counter markets, price volatility factors, the time value
of money, and location differentials. For further information, see Notes 1 and
10.
RESULTS OF OPERATIONS
Net income for 1998 was $443 million, or $3.05 per share, up $26 million over
1997 earnings. The increase in earnings was due to tax credits generated by
non-regulated businesses.
26
<PAGE> 27
Net income for 1997 was $417 million, or $2.88 per share, up $108 million over
1996 earnings. After adjusting 1996 earnings for the steam heating special
charges, 1997 earnings reflect a 2.7% increase over the prior year.
Net income for 1996 included a $149 million ($97 million after-tax), or $0.67
per share, special charge following completion of Detroit Edison's review of its
steam heating operations.
OPERATING REVENUES
Operating revenue was $4.2 billion, up 12.1% from 1997 operating revenue of $3.8
billion. Operating revenues increased (decreased) due to the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------
(Millions)
Detroit Edison
<S> <C> <C>
Rate change $ (8) $ (62)
System sales volume and mix 220 27
Sales between utilities 51 48
Fermi 2 performance disallowances (11) (3)
Other - net (7) 5
----------------------------
Total Detroit Edison 245 15
----------------------------
Non-regulated
DTE Energy Services 124 89
DTE Coal Services 39 14
DTE Energy Trading 43 -
Other - net 6 1
----------------------------
Total Non-regulated 212 104
----------------------------
Total $ 457 $ 119
============================
- -------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
Detroit Edison kilowatthour (kWh) sales for 1998 and the percentage change by
year were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(Billions of kWh)
SALES
-------
<S> <C> <C> <C>
Residential 13.7 6.6% (0.4)%
Commercial 18.9 5.0 1.6
Industrial 14.7 2.5 2.0
Other (primarily sales for resale) 2.4 27.1 9.7
--------
Total System 49.7 5.5 1.5
Sales between utilities 5.2 46.8 73.4
--------
Total 54.9 8.4 4.5
========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, residential sales increased due to more cooling demand and growth in
the customer base. Commercial sales increased due to more cooling demand and
favorable economic conditions. Industrial sales increased due to higher usage.
Sales between utilities increased due to greater demand for energy and increased
availability of energy for sale.
In 1997, residential sales decreased due to less heating and cooling demand
which more than offset growth in the customer base. Commercial and industrial
sales increased for both periods reflecting a continuation of good economic
conditions. Sales to other customers increased in both periods due to a greater
demand for energy. Sales between utilities also increased in 1997 due to greater
demand for energy and increased availability of energy for sale.
OPERATING EXPENSES
Fuel and Purchased Power
Net system output and average fuel and purchased power unit costs per
megawatthour (MWh) for Detroit Edison were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
(Thousands of MWh)
Power plant generation
<S> <C> <C> <C>
Fossil 44,091 42,162 41,829
Nuclear 7,130 5,523 4,750
Purchased power 7,216 6,146 5,149
----------------------------------------------
Net system output 58,437 53,831 51,728
==============================================
Average unit cost ($/MWh) $ 16.40 $ 14.54 $ 15.03
==============================================
- --------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
In 1998, fuel and purchased power expense increased for Detroit Edison due to
higher purchased power unit costs as a result of price volatility during periods
of unseasonably warm summer weather and an 8.6% increase in system output. These
increases were partially offset by lower unit costs as a result of increased
usage of low-cost nuclear fuel and higher third party revenues credited to
inventory.
In 1998, non-regulated purchased power expense increased due to the operations
of DTE ET.
In 1997, fuel expense decreased due to the termination of high cost long-term
coal contracts, reduction in coal contract buyout expense and a decrease in
nuclear fuel costs. Higher purchased power expense was due primarily to
increased purchases of power while Fermi 2 was shut down.
Operation and Maintenance
In 1998, Company operation and maintenance expenses increased $287 million.
Higher non-regulated subsidiary expenses of $184 million were due to the
increased level of non-regulated operations and the addition of new businesses.
Higher Detroit Edison expenses of $103 million were due to higher Year 2000
expenses ($32.4 million), the 1997 storm expense deferral ($29.8 million), 1998
emergency restoration and storm expense ($20.7 million), a 1997 insurance
receivable recovery ($15.3 million), 1997 storm amortization ($14.2 million),
the Conners Creek restart ($13.3 million), partially offset by cost reductions
of ($22.7 million).
In 1997, Company operation and maintenance expenses increased $67 million due
primarily to increased non-regulated subsidiary (mainly EES Coke Battery
Company, Inc. and PCI Enterprises Company) expenses of $95 million offset by
lower net Detroit Edison operation and maintenance expenses.
As a result of stringent cost controls, Detroit Edison operation and maintenance
expenses decreased in 1997 due primarily to lower post-retirement benefit ($18.8
million) and fossil generation ($15.1 million) expenses, lower minor storm and
trouble work ($13.6 million), the Fermi 2 outage accrual in 1996 ($13 million)
and the receipt of additional insurance proceeds related to the 1993 Fermi 2
turbine replacement ($9.8 million), partially offset by higher compensation
expense related to a shareholder value improvement plan ($25.7 million).
Depreciation and Amortization
In 1998, Company depreciation and amortization expense increased due primarily
to increases in property, plant and equipment. These increases were almost
entirely offset by lower Detroit Edison amortization of regulatory assets.
Depreciation and amortization expense increased in 1997 due primarily to
increases in property, plant and equipment.
29
<PAGE> 30
INTEREST EXPENSE AND OTHER
Interest Expense
Interest expense increased in 1998 due primarily to the issuance of debt to
finance asset acquisitions of non-regulated subsidiaries and the issuance of
debt to redeem Detroit Edison's preferred stock.
Interest expense increased in 1997 due primarily to the issuance of debt to
finance asset acquisitions of non-regulated subsidiaries, partially offset by
Detroit Edison's mandatory and optional redemption of debt.
Other - Net
Other-net expense decreased for the Company in 1998 due primarily to lower net
write downs of equity investments ($3 million).
Other-net increased in 1997 due primarily to higher accretion expense ($9.5
million), lower accretion income ($3 million) and the write down of an equity
investment ($5 million).
INCOME TAXES
The effective income tax rate for the Company was lower in 1998 and 1997 due
primarily to increased utilization of alternate fuels credits generated from
non-regulated businesses. Alternate fuels credits phase out beginning in 2003
through 2007.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company has
not yet determined the impact of this Statement on the consolidated financial
statements. This Statement is effective for fiscal years beginning after June
15, 1999, with earlier adoption encouraged. The Company will adopt this
accounting standard as required by January 1, 2000.
FORWARD-LOOKING STATEMENTS
Certain information presented herein is based on the expectations of the Company
and Detroit Edison, and, as such, is forward-looking. The Private Securities
Litigation Reform Act of 1995 encourages reporting companies to provide analyses
and estimates of future prospects and also permits reporting companies to point
out that actual results may differ from those anticipated.
30
<PAGE> 31
Actual results for the Company and Detroit Edison may differ from those expected
due to a number of variables including, but not limited to, weather, actual
sales, the effects of competition and the phased-in implementation of direct
access, the implementation of utility restructuring in Michigan (which involves
pending regulatory proceedings, possible legislative activity, and the recovery
of stranded costs), environmental (including proposed regulations to limit
nitrogen oxide emissions) and nuclear requirements, the impact of FERC
proceedings and regulations, the success of non-regulated lines of business and
the timely completion of Year 2000 modifications. While the Company and Detroit
Edison believe that estimates given accurately measure the expected outcome,
actual results could vary materially due to the variables mentioned as well as
others. This discussion contains a Year 2000 readiness disclosure.
31
<PAGE> 32
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and schedules are included
herein.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................33
DTE Energy Company:
Consolidated Statement of Income.......................................34
Consolidated Statement of Cash Flows...................................35
Consolidated Balance Sheet ............................................36
Consolidated Statement of Changes in Shareholders' Equity..............38
The Detroit Edison Company:
Consolidated Statement of Income.......................................39
Consolidated Statement of Cash Flows...................................40
Consolidated Balance Sheet ............................................41
Consolidated Statement of Changes in Shareholders' Equity..............43
Notes to Consolidated Financial Statements...............................44
Schedule II - Valuation and Qualifying Accounts..........................91
</TABLE>
Note: Detroit Edison's financial statements are presented here for ease of
reference and are not considered to be part of Part II - Item 8 of the
Company's report.
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Shareholders of
DTE Energy Company and
The Detroit Edison Company
We have audited the consolidated balance sheets of DTE Energy Company and
subsidiaries and of The Detroit Edison Company and subsidiaries (together, the
"Companies") as of December 31, 1998 and 1997, and the related consolidated
statements of income, cash flows, and changes in shareholders' equity for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility of
the Companies' management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule 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, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DTE Energy Company
and subsidiaries and of The Detroit Edison Company and subsidiaries at 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. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements of the Companies taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 27, 1999
33
<PAGE> 34
DTE ENERGY COMPANY
CONSOLIDATED STATEMENT OF INCOME
(Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $ 4,221 $ 3,764 $ 3,645
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and purchased power 1,063 837 846
Operation and maintenance 1,288 1,001 934
Depreciation and amortization 661 660 625
Steam heating special charge - - 149
Taxes other than income 272 265 259
- -----------------------------------------------------------------------------------------
Total Operating Expenses 3,284 2,763 2,813
- -----------------------------------------------------------------------------------------
OPERATING INCOME 937 1,001 832
- -----------------------------------------------------------------------------------------
INTEREST EXPENSE AND OTHER
Interest expense 319 297 288
Preferred stock dividends of subsidiary 6 12 16
Other - net 15 18 (2)
- -----------------------------------------------------------------------------------------
Total Interest Expense and Other 340 327 302
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 597 674 530
INCOME TAXES 154 257 221
- -----------------------------------------------------------------------------------------
NET INCOME $ 443 $ 417 $ 309
=========================================================================================
AVERAGE COMMON SHARES OUTSTANDING 145 145 145
- -----------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC AND DILUTED $ 3.05 $ 2.88 $ 2.13
=========================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
34
<PAGE> 35
DTE ENERGY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 443 $ 417 $ 309
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 661 660 625
Steam heating special charge - - 149
Other (125) (29) (30)
Changes in current assets and liabilities:
Restricted cash (67) (54) -
Accounts receivable (84) (36) (32)
Inventories (40) (36) 42
Payables 15 16 2
Other 65 14 14
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 868 952 1,079
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures (555) (456) (531)
Investment in coke oven battery businesses (401) (211) -
Nuclear decommissioning trust funds (70) (68) (52)
Other (11) (6) (34)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,037) (741) (617)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 763 250 224
Increase (Decrease) in short-term borrowings 189 32 (27)
Redemption of long-term debt (255) (196) (176)
Redemption of preferred stock (150) - (185)
Dividends on common stock (299) (299) (299)
Other 6 (6) (11)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for) financing activities 254 (219) (474)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 85 (8) (12)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 45 53 65
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 130 $ 45 $ 53
================================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 309 $ 290 $ 277
Income taxes paid 160 243 207
New capital lease obligations 52 34 35
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Notes to Consolidated Financial Statements.)
35
<PAGE> 36
DTE ENERGY COMPANY
CONSOLIDATED BALANCE SHEET
(Millions, Except Per Share Amounts and Shares)
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 130 $ 45
Restricted cash 121 54
Accounts receivable
Customer (less allowance for doubtful
accounts of $20 for 1998 and 1997) 316 305
Accrued unbilled revenues 153 137
Other 135 78
Inventories (at average cost)
Fuel 171 130
Materials and supplies 167 173
Other 39 13
- --------------------------------------------------------------------------------------------------
1,232 935
- --------------------------------------------------------------------------------------------------
INVESTMENTS
Nuclear decommissioning trust funds 309 239
Other 261 57
- --------------------------------------------------------------------------------------------------
570 296
- --------------------------------------------------------------------------------------------------
PROPERTY
Property, plant and equipment 11,121 14,495
Property under capital leases 242 256
Nuclear fuel under capital lease 659 607
Construction work in progress 156 16
- --------------------------------------------------------------------------------------------------
12,178 15,374
- --------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization 5,235 6,440
- --------------------------------------------------------------------------------------------------
6,943 8,934
- --------------------------------------------------------------------------------------------------
REGULATORY ASSETS 3,091 856
- --------------------------------------------------------------------------------------------------
OTHER ASSETS 252 202
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,088 $ 11,223
==================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
36
<PAGE> 37
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 239 $ 161
Accrued interest 57 57
Dividends payable 75 78
Accrued payroll 101 81
Short-term borrowings 231 42
Deferred income taxes 60 64
Current portion long-term debt 294 205
Current portion capital leases 118 110
Other 217 219
- ---------------------------------------------------------------------------------------------------------
1,392 1,017
- ---------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Deferred income taxes 1,888 1,983
Capital leases 126 137
Regulatory liabilities 294 400
Other 493 203
- ---------------------------------------------------------------------------------------------------------
2,801 2,723
- ---------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 4,197 3,777
- ---------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Detroit Edison Cumulative Preferred Stock, $100
par value, 6,747,484 shares authorized,
5,207,657 issued, 1,501,223 shares
outstanding in 1997 - 144
Common stock, without par value, 400,000,000 shares
authorized, 145,071,317 and 145,097,829 issued
and outstanding, respectively 1,951 1,951
Retained earnings 1,747 1,611
- ---------------------------------------------------------------------------------------------------------
3,698 3,706
- ---------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 3, 9, 10, 11 AND 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,088 $ 11,223
=========================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
37
<PAGE> 38
DTE ENERGY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Millions, Except Per Share Amounts; Shares in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
DETROIT EDISON CUMULATIVE PREFERRED STOCK
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 1,501 $ 144 1,501 $ 144 3,351 $ 327
Redemption of Cumulative Preferred Stock (1,501) (150) - - (1,850) (185)
Preferred stock expense - 6 - - - 2
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year - $ - 1,501 $ 144 1,501 $ 144
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year 145,098 $ 1,951 145,120 $ 1,951 145,120 $ 1,951
Repurchase and retirement of common stock (27) - (22) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 145,071 $ 1,951 145,098 $ 1,951 145,120 $ 1,951
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year $ 1,611 $ 1,493 $ 1,485
Net income 443 417 309
Dividends declared on common stock ($2.06
per share) (299) (299) (299)
Preferred stock expense (6) - (2)
Other (2) - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,747 $ 1,611 $ 1,493
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 3,698 $ 3,706 $ 3,588
=============================================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
38
<PAGE> 39
THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF INCOME
(Millions)
<TABLE>
<CAPTION>
Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $ 3,902 $ 3,657 $ 3,642
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and purchased power 1,021 837 846
Operation and maintenance 998 895 923
Depreciation and amortization 643 658 624
Steam heating special charge - - 149
Taxes other than income 270 264 259
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,932 2,654 2,801
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 970 1,003 841
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE AND OTHER
Interest expense 277 282 288
Other - net 15 16 -
- -------------------------------------------------------------------------------------------------------------------
Total Interest Expense and Other 292 298 288
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 678 705 553
INCOME TAXES 260 288 225
- -------------------------------------------------------------------------------------------------------------------
NET INCOME 418 417 328
PREFERRED STOCK DIVIDENDS 6 12 16
- -------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON STOCK $ 412 $ 405 $ 312
===================================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
39
<PAGE> 40
THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
<TABLE>
<CAPTION>
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 418 $ 417 $ 328
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 643 658 624
Steam heating special charge - - 149
Other (154) (3) (30)
Changes in current assets and liabilities:
Accounts receivable (51) (18) (30)
Inventories (31) (14) 42
Payables (12) 12 1
Other 60 (1) 2
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 873 1,051 1,086
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures (514) (439) (479)
Nuclear decommissioning trust funds (70) (68) (52)
Other (29) (5) (18)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (613) (512) (549)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 200 - 185
Increase (decrease) in short-term borrowings 231 (10) (27)
Redemption of long-term debt (219) (185) (176)
Redemption of preferred stock (150) - (185)
Dividends on common stock and preferred stock (326) (331) (332)
Cash portion of restructuring dividend to parent - - (56)
Other (6) - (9)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (270) (526) (600)
- ----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10) 13 (63)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 15 2 65
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5 $ 15 $ 2
==================================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 269 $ 277 $ 277
Income taxes paid 292 277 209
New capital lease obligations 52 34 35
Non-cash portion of restructuring dividend to parent - - 27
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Notes to Consolidated Financial Statements.)
40
<PAGE> 41
THE DETROIT EDISON COMPANY
CONSOLIDATED BALANCE SHEET
(Millions, Except Per Share Amounts and Shares)
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5 $ 15
Accounts receivable
Customer (less allowance for doubtful
accounts of $20 for 1998 and 1997) 307 300
Accrued unbilled revenues 153 137
Other 90 63
Inventories (at average cost)
Fuel 171 130
Materials and supplies 138 150
Other 21 11
- ---------------------------------------------------------------------------------------------
885 806
- ---------------------------------------------------------------------------------------------
INVESTMENTS
Nuclear decommissioning trust funds 309 239
Other 74 38
- ---------------------------------------------------------------------------------------------
383 277
- ---------------------------------------------------------------------------------------------
PROPERTY
Property, plant and equipment 10,610 14,204
Property under capital leases 242 256
Nuclear fuel under capital lease 659 607
Construction work in progress 118 12
- ---------------------------------------------------------------------------------------------
11,629 15,079
- ---------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization 5,201 6,431
- ---------------------------------------------------------------------------------------------
6,428 8,648
- ---------------------------------------------------------------------------------------------
REGULATORY ASSETS 3,091 856
- ---------------------------------------------------------------------------------------------
OTHER ASSETS 200 158
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,987 $ 10,745
=============================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
41
<PAGE> 42
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 211 $ 150
Accrued interest 54 56
Dividends payable 80 83
Accrued payroll 86 80
Short-term borrowings 231 -
Deferred income taxes 60 64
Current portion long-term debt 219 169
Current portion capital leases 118 110
Other 203 218
- ------------------------------------------------------------------------------------------------------
1,262 930
- ------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Deferred income taxes 1,846 1,973
Capital leases 126 137
Regulatory liabilities 294 400
Other 484 201
- ------------------------------------------------------------------------------------------------------
2,750 2,711
- ------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,462 3,531
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock, $100 par value,
6,747,484 shares authorized, 5,207,657 issued,
1,501,223 shares outstanding in 1997 - 144
Common stock, $10 par value, 400,000,000 shares
authorized, 145,119,875 issued and outstanding 1,451 1,451
Premium on common stock 548 548
Common stock expense (48) (48)
Retained earnings 1,562 1,478
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,513 3,573
- ------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 3, 9, 10, 11 AND 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,987 $ 10,745
======================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements.)
42
<PAGE> 43
THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Millions, Except Per Share Amounts; Shares in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE PREFERRED STOCK
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 1,501 $ 144 1,501 $ 144 3,351 $ 327
Redemption of Cumulative Preferred Stock (1,501) (150) - - (1,850) (185)
Preferred stock expense - 6 - - - 2
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year - $ - 1,501 $ 144 1,501 $ 144
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK 145,120 $ 1,451 145,120 $ 1,451 145,120 $ 1,451
- -----------------------------------------------------------------------------------------------------------------------------
PREMIUM ON COMMON STOCK $ 548 $ 548 $ 548
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EXPENSE $ (48) $ (48) $ (48)
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year $ 1,478 $ 1,392 $ 1,485
Net income 418 417 328
Dividends declared
Common stock ($2.20 per share) (319) (319) (319)
Cumulative Preferred Stock* (6) (12) (16)
Preferred stock expense (6) - (2)
Restructuring dividend to parent - - (84)
Other (3) - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,562 $ 1,478 $ 1,392
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 3,513 $ 3,573 $ 3,487
=============================================================================================================================
</TABLE>
* At established rate for each series.
(See Notes to Consolidated Financial Statements.)
43
<PAGE> 44
DTE ENERGY COMPANY AND THE DETROIT EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CORPORATE STRUCTURE AND PRINCIPLES OF CONSOLIDATION
DTE Energy Company (Company), a Michigan corporation incorporated in 1995, is an
exempt holding company under the Public Utility Holding Company Act. The Company
has no significant operations of its own, holding instead the stock of The
Detroit Edison Company (Detroit Edison), an electric public utility regulated by
the Michigan Public Service Commission (MPSC) and the Federal Energy Regulatory
Commission (FERC), and other energy-related businesses. On January 1, 1996, the
holders of Detroit Edison's common stock exchanged such stock on a
share-for-share basis for the common stock of the Company; and certain Detroit
Edison subsidiaries were transferred to the Company in the form of a dividend.
The Company and Detroit Edison consolidate all majority owned subsidiaries.
Investments in limited liability companies, partnerships and joint ventures are
accounted for using the equity method. All significant inter-company balances
and transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REGULATION AND REGULATORY ASSETS AND LIABILITIES
Detroit Edison's transmission and distribution business meets the criteria of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." This accounting standard recognizes the
cost based ratemaking process which results in differences in the application of
generally accepted accounting principles between regulated and non-regulated
businesses. SFAS No. 71 requires the recording of regulatory assets and
liabilities for transactions that would have been treated as revenue and expense
in non-regulated businesses. Detroit Edison's regulatory assets and liabilities
are being amortized to revenue and expense as they are included in rates.
Continued applicability of SFAS No. 71 requires that rates be designed to
recover specific costs of providing regulated services and products and that it
be reasonable to assume that rates are set at levels that will recover a
utility's costs and can be charged to and collected from customers.
44
<PAGE> 45
MPSC Orders issued in 1997 and 1998 have altered the regulatory process in
Michigan and provide a plan for transition to competition for the generation
business of Detroit Edison. In guidance issued in 1997, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board (FASB) concluded that
the application of SFAS No. 71 to a separable portion of a business which is
subject to a deregulation plan should cease when legislation is passed and/or a
rate order is issued that contains sufficient detail on a transition plan. Since
MPSC Orders issued through December 31, 1998 contain sufficient detail on a
transition plan, effective December 31, 1998 Detroit Edison's generation
business no longer met the criteria of SFAS No. 71. Detroit Edison did not write
off any regulatory assets as a result of the discontinuation of SFAS No. 71 for
its generation business, because EITF No. 97-4, "Deregulation of the Pricing of
Electricity - Issues Related to the Application of FASB Statement No. 71,
Accounting for the Effects of Certain Types of Regulation, and No. 101,
Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71," permits the recording of regulatory assets which are
expected to be recovered through regulated rates. A December 1998 MPSC Order
authorized the recovery of an additional regulatory asset equal to the net book
value of Fermi 2 at December 31, 1998. See the following table of regulatory
assets and liabilities and Note 2 for further details.
Detroit Edison has recorded the following regulatory assets and liabilities at
December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
(Millions)
ASSETS
<S> <C> <C>
Unamortized nuclear costs $ 2,808 $ -
Unamortized loss on reacquired debt 94 101
Recoverable income taxes 107 562
Power supply cost recovery 49 -
Fermi 2 phase-in plan - 84
Fermi 2 deferred amortization - 66
1997 storm damage costs 15 30
Other 18 13
----------------------------
Total Assets $ 3,091 $ 856
============================
LIABILITIES
Unamortized deferred investment tax
credits $ 188 $ 301
Fermi 2 capacity factor performance
standard 86 74
Other 20 25
----------------------------
Total Liabilities $ 294 $ 400
============================
- ----------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 46
UNAMORTIZED NUCLEAR COSTS - See Note 2.
UNAMORTIZED LOSS ON REACQUIRED DEBT
In accordance with MPSC regulations applicable to Detroit Edison, the discount,
premium and expense related to debt redeemed with refunding are amortized over
the life of the replacement issue or if related to the generation business
amortized through 2007. Discount, premium and expense on future early
redemptions of debt will be charged to earnings if they relate to the generation
business of Detroit Edison or the non-regulated businesses of the Company.
RECOVERABLE INCOME TAXES
Recoverable income taxes, a regulatory asset, represent future revenue recovery
from customers for deferred income taxes recorded upon the adoption of SFAS No.
109, "Accounting for Income Taxes," in 1993. At that time, an increase in
accumulated deferred income tax liabilities was recorded representing the tax
effect of temporary differences not previously recognized and the recomputation
of the tax liability at the current tax rate. The MPSC issued an Order providing
assurance that the effects of previously flowed-through tax benefits will
continue to be allowed rate recovery.
POWER SUPPLY COST RECOVERY (PSCR)
State legislation provides Detroit Edison a mechanism, subject to MPSC approval,
for recovery of changes in power supply costs for purchased power and generation
based on a reconciliation of actual costs and usage.
FERMI 2 PHASE-IN PLAN
SFAS No. 92, "Regulated Enterprises - Accounting for Phase-in Plans," permits
the capitalization of costs deferred for future recovery under a phase-in plan.
Based on a MPSC authorized phase-in plan, Detroit Edison recorded a receivable
totaling $506.5 million from 1988 through 1992. Beginning in 1993 and ending in
1998, these amounts were amortized to operating expense as they were included in
rates. Amortization of these amounts totaled $84 million, $112 million, and $102
million in, 1998, 1997 and 1996, respectively.
FERMI 2 DEFERRED AMORTIZATION
Effective December 31, 1998 deferred amounts are included in unamortized nuclear
costs.
1997 STORM DAMAGE COSTS
The costs of major storms in 1997, as authorized by the MPSC, were deferred and
are amortized into expense in 1998 and 1999 as they are recovered through rates.
46
<PAGE> 47
UNAMORTIZED DEFERRED INVESTMENT TAX CREDITS
Investment tax credits utilized, which relate to utility property, were deferred
and are amortized over the estimated composite service life of the related
property.
FERMI 2 CAPACITY FACTOR PERFORMANCE STANDARD
The MPSC has established a capacity factor performance standard which provides
for the disallowance of net incremental replacement power cost if Fermi 2 does
not perform to certain operating criteria. A disallowance is imposed for the
amount by which the Fermi 2 three-year rolling average capacity factor is less
than the greater of either the average of the top 50% of U.S. boiling water
reactors or 50%. An estimate of the incremental cost of replacement power is
required in computing the reserve for amounts due customers under this
performance standard.
CASH EQUIVALENTS
For purposes of the Consolidated Statement of Cash Flows, the Company considers
investments purchased with a maturity of three months or less to be cash
equivalents.
RESTRICTED CASH
Cash maintained for debt service requirements and other contractual obligations
is classified as restricted cash.
REVENUES
Detroit Edison records unbilled revenues for electric and steam heating services
provided after cycle billings through month-end.
47
<PAGE> 48
PROPERTY, RETIREMENT AND MAINTENANCE, DEPRECIATION AND AMORTIZATION
A summary of property by classification at December 31 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
(Millions)
Transmission and distribution
<S> <C> <C>
Property $ 5,354 $ 5,074
Construction work in progress 3 1
Property under capital leases 5 6
Less accumulated depreciation (2,063) (1,912)
----------------------------
3,299 3,169
----------------------------
Generation
Property 5,256 9,130
Construction work in progress 115 11
Property under capital leases 237 250
Less accumulated depreciation (2,587) (4,011)
----------------------------
3,021 5,380
----------------------------
Nuclear fuel under capital lease 659 607
Less accumulated amortization (551) (508)
----------------------------
108 99
----------------------------
Non-utility
Property 511 291
Construction work in progress 38 4
Less accumulated depreciation (34) (9)
-----------------------------
515 286
----------------------------
Total property $ 6,943 $ 8,934
============================
- -------------------------------------------------------------------------------
</TABLE>
Utility properties are stated at original cost less regulatory disallowances and
impairment losses. In general, the cost of properties retired in the normal
course of business is charged to accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense, and the cost of new property
installed, which replaces property retired, is charged to property accounts. The
annual provision for utility property depreciation is calculated on the
straight-line remaining life method by applying annual rates approved by the
MPSC to the average of year-beginning and year-ending balances of depreciable
property by primary plant accounts. Provision for depreciation of Fermi 2,
excluding decommissioning expense, was 3.25% of average depreciable property for
1998, 1997 and 1996. Provision for depreciation of all other utility plant, as a
percent of average depreciable property, was 3.29% for 1998, 1997 and 1996.
48
<PAGE> 49
Non-utility property is stated at original cost. Depreciation is computed over
the estimated useful lives using straight-line and declining-balance methods.
LONG-LIVED ASSETS
Long-lived assets held and used by the Company are reviewed based on market
factors and operational considerations for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
SOFTWARE COSTS
The Company capitalizes the cost of software developed for internal use. These
costs are amortized on a straight-line basis over a five-year period beginning
with the project's completion.
CAPITALIZATION - DISCOUNT AND COST
The discount and cost related to the issuance of long-term debt are amortized
over the life of each issue.
FERMI 2 REFUELING OUTAGES
Detroit Edison recognizes the cost of Fermi 2 refueling outages over periods in
which related revenues are recognized. Under this procedure, a provision is
recorded for incremental costs anticipated to be incurred during the next
scheduled Fermi 2 refueling outage.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method. Compensation expense is not recorded for stock options granted with an
exercise price equal to the fair market value at the date of grant. For grants
of restricted stock, compensation equal to the market value of the shares at the
date of grant is deferred and amortized to expense over the vesting period.
ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES
Trading activities of DTE Energy Trading, Inc. (DTE ET), an indirect wholly
owned subsidiary of the Company, are accounted for using the mark-to-market
method of accounting. Under such method, DTE ET's energy trading contracts,
including both transactions for physical delivery and financial instruments, are
recorded at market value. The resulting unrealized gains and losses from changes
in market value of open positions are recorded as assets or liabilities on the
Consolidated Balance Sheet. Current period changes in the assets or liabilities
are recognized as net gains or losses in "Operating Revenues" on the
Consolidated Statement of Income. Realized gains and losses are also recognized
in "Operating Revenues." The market prices used to value these transactions
reflect management's best estimate considering various
49
<PAGE> 50
factors, including closing exchange and over-the-counter quotations, time value
and volatility factors underlying the commitments.
Detroit Edison continues to account for its forward purchase and sale
commitments and over-the-counter options on a settlement basis.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1998
presentation.
NOTE 2 - REGULATORY MATTERS
- --------------------------------------------------------------------------------
Detroit Edison is subject to the primary regulatory jurisdiction of the MPSC,
which, from time to time, issues its Orders pertaining to Detroit Edison's
conditions of service, rates and recovery of certain costs including the costs
of generating facilities. MPSC Orders issued December 1988, January 1994,
November 1997 and December 1998 are currently in effect with respect to Detroit
Edison's rates and certain other revenue, accounting, and operating-related
matters.
ELECTRIC INDUSTRY RESTRUCTURING
There are ongoing proceedings for the restructuring of the Michigan electric
public utility industry and the implementation of a direct access program. In
1997 and 1998, the MPSC issued several Orders relating to direct access and
competition.
In July 1998, Detroit Edison filed an application with the MPSC, indicating that
accelerated amortization of Detroit Edison's Fermi 2 assets was necessary to
provide a reasonable opportunity for Detroit Edison to recover its investment in
those assets. In a December 28, 1998 Order, the MPSC authorized the accelerated
amortization of the remaining net book balances (as of December 31, 1998) of
Fermi 2 and its associated regulatory assets in a manner that will provide an
opportunity for full recovery under current base rates, taking into account the
related tax consequences, of those assets by December 31, 2007.
The December 28, 1998 Order imposed six conditions for the recovery by Detroit
Edison of accelerated amortization of Fermi 2 and required a signed acceptance.
In a January 15, 1999 response, Detroit Edison requested a clarifying Order from
the MPSC. Subject to receipt of the requested clarifying Order, Detroit Edison
has;
- - reduced its rates by application of a credit equal to 2.787% ($93.8
million annually) of base rates, effective January 1, 1999;
- - indicated it will reduce its jurisdictional retail rates by removing the
Fermi 2 regulatory asset, referred to in Note 1 as unamortized nuclear
costs, from rate base on a pro rata jurisdictional rate basis when such
asset reaches zero, which is currently anticipated to occur January 1,
2008;
- - indicated that while it has no plans to sell Fermi 2, should such a sale
occur, it will return to customers the difference between Fermi 2's net
book value at the time of
50
<PAGE> 51
sale and the actual sale price; and the MPSC will
be advised of a purchase of Detroit Edison during the accelerated
amortization period so that the MPSC may determine whether the proposed
transaction is in the public interest and properly balances the interests
of investors and customers;
- - agreed that should Detroit Edison seek to abandon Fermi 2 (which Detroit
Edison has no plans to do) during the accelerated amortization period, and
only if electric generation has not been deregulated by either Michigan
state or federal action, Detroit Edison will initiate a contested case
proceeding before the MPSC seeking approval of the abandonment;
- - agreed to fully abide by the direct access program (and schedule)
established by the MPSC in previous restructuring orders; and
- - indicated that if its earned rate of return exceeds its authorized rate of
return during the period of time that amortization of Fermi 2 is being
accelerated, it will apply 50% of the excess earnings to reduce its
stranded investment.
Petitions for rehearing on the December 28, 1998 MPSC Order have been filed by
several parties.
ACCOUNTING IMPLICATIONS
Detroit Edison accounts for its transmission and distribution business in
accordance with SFAS No. 71 which requires recognition of the effects of rate
regulation in the financial statements. Continued application of SFAS No. 71 by
Detroit Edison requires: 1) third party regulation of rates, 2) cost-based
rates and 3) a reasonable assumption that all costs will be recoverable from
customers through rates.
In 1997, the FASB issued EITF No. 97-4. The EITF indicated that: 1) an entity
should cease to apply SFAS No. 71 no later than the date the specific
deregulation plan is ordered by legislation or by a regulatory authority and the
details of the plan are known, and 2) both stranded costs and regulated assets
and liabilities should continue to be recognized to the extent that the
transition plan provides for their recovery through a separate regulated
business.
Detroit Edison believes that the restructuring orders provide sufficient details
regarding the transition to competition for its electric generation business and
therefore SFAS No. 71 should no longer be applied to that business. Accordingly,
effective December 31, 1998, Detroit Edison adopted the provisions of SFAS No.
101, "Regulated Enterprises-Accounting for the Discontinuation of Application of
FASB Statement No. 71," for its electric generation business. SFAS No. 101
requires an evaluation to be performed to determine whether or not indications
of impairment exist for plant assets under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the elimination of certain effects of rate regulation that have been
recognized as assets or liabilities pursuant to SFAS No. 71.
At December 31, 1998 Detroit Edison performed an impairment test of its Fermi 2
nuclear generation plant and related regulatory assets pursuant to SFAS No. 121.
The impairment test for Fermi 2 indicated that it was fully impaired. Therefore,
the Fermi 2
51
<PAGE> 52
plant asset and its related regulatory assets were written off. At December 31,
1998, the accumulation of future regulatory recovery for Fermi 2 assets from
bundled customers and transition surcharges from unbundled customers was
calculated. Since the December 28, 1998 MPSC Order provides for full recovery of
Fermi 2, a regulatory asset was established which will be amortized through
December 31, 2007. There was no impact on income from the write off of the Fermi
2 plant assets and subsequent recording of the regulatory asset for unamortized
nuclear costs.
A summary of the regulatory asset established at December 31, 1998 is shown in
the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Net book value of Fermi 2 before write down $ 2,508
Fermi 2 future income tax regulatory asset 331
Fermi 2 deferred amortization 66
Deferred investment tax credit (97)
-----------
Unamortized nuclear costs $ 2,808
===========
- -------------------------------------------------------------------------------------
</TABLE>
1988 SETTLEMENT AGREEMENT
The December 1988 MPSC Order established for the period January 1989 through
December 2003: 1) a cap on Fermi 2 capital additions of $25 million per year, in
1988 dollars adjusted by the Consumers Price Index (CPI), cumulative, 2) a cap
on Fermi 2 non-fuel operation and maintenance expenses adjusted by the CPI and
3) a capacity factor performance standard based on a three-year rolling average
commencing in 1991. For a capital investment of $200 million or more (in 1988
dollars adjusted by the CPI), Detroit Edison must obtain prior MPSC approval to
include the investment in rate base. Under the cap on Fermi 2 capital
expenditures, the cumulative amount available totals $72 million (in 1998
dollars) at December 31, 1998. Under the cap on Fermi 2 non-fuel operation and
maintenance expenses, the cumulative amount available totals $105 million (in
1998 dollars) at December 31, 1998.
Under the December 1988 Order, if nuclear operations at Fermi 2 permanently
cease, amortization in rates of a $513 million investment in Fermi 2 would
continue and the remaining net rate base investment amount would be removed from
rate base and amortized in rates, without return, over 10 years with such
amortization not to exceed $290 million per year. The December 1988 and January
1994 Orders do not address the costs of decommissioning if the operations at
Fermi 2 prematurely cease.
In accordance with a November 1997 MPSC Order, Detroit Edison reduced revenues
by $53 million to reflect the scheduled reduction in the revenue requirement for
Fermi 2, in accordance with the 1988 settlement agreement. The $53 million
decrease is included in the $93.8 million decrease effective January 1, 1999. In
addition, the November 1997 MPSC Order authorized the deferral of $30 million of
1997 storm
52
<PAGE> 53
damage costs and amortization and recovery of the costs over a 24-month
period commencing January 1998. In December 1997, the Association of Businesses
Advocating Tariff Equity in Michigan and the Residential Ratepayer Consortium
filed a lawsuit in Ingham County Circuit Court contending that Detroit Edison
and the MPSC breached the December 1988 MPSC Order by offsetting the stipulated
revenue reduction with the amortization of the storm costs. The Michigan
Attorney General has filed an appeal of the November 1997 Order in the Michigan
Court of Appeals.
NOTE 3 - FERMI 2
- --------------------------------------------------------------------------------
GENERAL
Fermi 2, a nuclear generating unit, began commercial operation in January 1988.
The Nuclear Regulatory Commission (NRC) maintains jurisdiction over the
licensing and operation of Fermi 2. Fermi 2 has a design electrical rating (net)
of 1,150 megawatts (MW). This unit represents approximately 12% of total
operation and maintenance expenses and 11% of summer net rated capability. The
net book balance of the Fermi 2 plant was written off at December 31, 1998 and
an equivalent regulatory asset was established.
Ownership of an operating nuclear generating unit subjects Detroit Edison to
significant additional risks. Fermi 2 is regulated by a number of different
governmental agencies concerned with public health, safety and environmental
protection. Consequently, Fermi 2 is subjected to greater scrutiny than a
conventional fossil-fueled plant. See Note 2.
INSURANCE
Detroit Edison insures Fermi 2 with property damage insurance provided by
Nuclear Electric Insurance Limited (NEIL). The NEIL insurance policies provide
$500 million of composite primary coverage (with a $1 million deductible) and
$2.25 billion of excess coverage, respectively, for stabilization,
decontamination and debris removal costs, repair and/or replacement of property
and decommissioning. Accordingly, the combined limits provide total property
damage insurance of $2.75 billion.
Detroit Edison maintains insurance policies with NEIL providing for extra
expenses, including certain replacement power costs necessitated by Fermi 2's
unavailability due to an insured event. These policies have a 17-week waiting
period and provide for three years of coverage.
Under the NEIL policies, Detroit Edison could be liable for maximum
retrospective assessments of up to approximately $20 million per loss if any one
loss should exceed the accumulated funds available to NEIL.
As required by federal law, Detroit Edison maintains $200 million of public
liability insurance for a nuclear incident. Further, under the Price-Anderson
Amendments Act of 1988, deferred premium charges of $83.9 million could be
levied against each licensed nuclear facility, but not more than $10 million per
year per facility. On December 31,
53
<PAGE> 54
1998, there were 109 licensed nuclear facilities in the United States. Thus,
deferred premium charges in the aggregate amount of approximately $9.1 billion
could be levied against all owners of licensed nuclear facilities in the event
of a nuclear incident at any of these facilities.
DECOMMISSIONING
The NRC has jurisdiction over the decommissioning of nuclear power plants and
requires decommissioning funding based upon a formula. The MPSC and FERC
regulate the recovery of costs of decommissioning nuclear power plants and both
require the use of external trust funds to finance the decommissioning of Fermi
2. Base rates approved by the MPSC provide for the decommissioning costs of
Fermi 2. Detroit Edison is continuing to fund FERC jurisdictional amounts for
decommissioning even though explicit provisions are not included in FERC rates.
Detroit Edison believes that the MPSC and FERC collections will be adequate to
fund the estimated cost of decommissioning using the NRC formula.
Detroit Edison has established external trust funds to hold decommissioning and
low-level radioactive waste disposal funds collected from customers. During
1998, 1997 and 1996 Detroit Edison collected $36.2 million, $35.5 million and
$37.7 million, respectively, from customers for decommissioning and low-level
radioactive waste disposal. Such amounts were recorded as components of
depreciation and amortization expense in the Consolidated Statement of Income
and in other liabilities in the Consolidated Balance Sheet at December 31, 1998
and in accumulated depreciation and amortization at December 31, 1997. Net
unrealized gains of $36.8 million and $31.5 million in 1998 and 1997,
respectively, were recorded as increases to the nuclear decommissioning trust
funds and other liabilities in the Consolidated Balance Sheet at December 31,
1998 and in accumulated depreciation and amortization at December 31, 1997.
At December 31, 1998, Detroit Edison had a reserve of $265.6 million for the
future decommissioning of Fermi 2 and $11.1 million for low-level radioactive
waste disposal costs. These reserves are included in other liabilities in the
Consolidated Balance Sheet at December 31, 1998 and in accumulated depreciation
and amortization at December 31, 1997, with a like amount deposited in external
trust funds. It is estimated that the cost of decommissioning Fermi 2 when its
license expires in the year 2025 will be $649 million in 1998 dollars and $3
billion in 2025 dollars using a 6% inflation rate.
Detroit Edison also had a reserve of $32.1 million at December 31, 1998 for the
future decommissioning of Fermi 1, an experimental nuclear unit on the Fermi 2
site that has been shut down since 1972. This reserve is included in other
liabilities in the Consolidated Balance Sheet with a like amount deposited in an
external trust fund. Detroit Edison estimates that the cost of decommissioning
Fermi 1 in the year 2025 is between $29 million and $32 million in 1998 dollars
and between $146 million and $161 million in 2025 dollars using a 6% inflation
rate.
The FASB is reviewing the accounting for obligations associated with the
retirement of long-lived assets, including decommissioning of nuclear power
plants.
54
<PAGE> 55
CAPACITY FACTOR PERFORMANCE STANDARD
The capacity factor disallowance for 1997 has not yet been determined by the
MPSC. At December 31, 1998 and 1997, Detroit Edison had accruals of $85.6
million and $74 million, respectively, for the Fermi 2 capacity factor
performance standard disallowances that are expected to be imposed by the MPSC
during the period 1997-2003.
NUCLEAR FUEL DISPOSAL COSTS
In accordance with the Federal Nuclear Waste Policy Act of 1982, Detroit Edison
has a contract with the United States Department of Energy (DOE) for the future
storage and disposal of spent nuclear fuel from Fermi 2. Detroit Edison is
obligated to pay DOE a fee of one mill per net kilowatthour of Fermi 2
electricity generated and sold. The fee is a component of nuclear fuel expense.
Delays have occurred in the DOE's program for the acceptance and disposal of
spent nuclear fuel at a permanent repository. Until the DOE is able to fulfill
its obligation under the contract, Detroit Edison is responsible for the spent
nuclear fuel storage and estimates that existing storage capacity will be
sufficient until the year 2001, or until 2015 with expansion of such storage
capacity.
NOTE 4 - JOINTLY-OWNED UTILITY PLANT
- ------------------------------------
Detroit Edison's portion of jointly-owned utility plant is as follows:
- --------------------------------------------------------------------------------
Belle River Ludington Pumped Storage
- --------------------------------------------------------------------------------
In-service date 1984-1985 1973
Ownership interest * 49%
Investment (millions) $ 1,031 $ 192
Accumulated depreciation (millions) $ 393 $ 88
* Detroit Edison's ownership interest is 62.78% in Unit No. 1, 81.39% of
the portion of the facilities applicable to Belle River used jointly by
the Belle River and St. Clair Power Plants, 49.59% in certain
transmission lines and, at December 31, 1998, 75% in facilities used in
common with Unit No. 2.
- --------------------------------------------------------------------------------
BELLE RIVER
The Michigan Public Power Agency (MPPA) has an ownership interest in Belle River
Unit No. 1 and certain other related facilities. MPPA is entitled to 18.61% of
the capacity and energy of the entire plant and is responsible for the same
percentage of the plant's operation and maintenance expenses and capital
improvements.
55
<PAGE> 56
LUDINGTON PUMPED STORAGE
Operation, maintenance and other expenses of the Ludington Pumped Storage Plant
are shared by Detroit Edison and Consumers Energy in proportion to their
respective ownership interests in the plant.
NOTE 5 - INCOME TAXES
- --------------------------------------------------------------------------------
Total income tax expense as a percent of income before tax varied from the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
Deferred Fermi 2 depreciation
and return 3.9 4.6 5.3
Investment tax credit (2.5) (2.1) (2.8)
Depreciation 5.1 4.6 6.0
Removal costs (1.9) (1.5) (2.2)
Alternate fuels credit (13.1) (3.5) (0.4)
Other-net (1.0) 0.4 (0.4)
------------------------------------
Effective income tax rate 25.5% 37.5% 40.5%
====================================
- --------------------------------------------------------------------------
</TABLE>
Components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
Current federal income tax expense $ 143 $ 267 $ 219
Deferred federal income tax expense - net 26 5 17
Investment tax credit (15) (15) (15)
----------------------------
Total $ 154 $ 257 $ 221
============================
- --------------------------------------------------------------------------
</TABLE>
Internal Revenue Code Section 29 provides a tax credit (alternate fuels credit)
for qualified fuels produced and sold by a taxpayer to an unrelated person
during the taxable year. The alternate fuels credit reduced current federal
income tax expense $79 million, $24.2 million and $1.9 million for 1998, 1997
and 1996 respectively.
56
<PAGE> 57
Deferred income tax assets (liabilities) were comprised of the following at
December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Property $ (1,139) $ (2,233)
Unamortized nuclear costs (983) -
Property taxes (66) (62)
Investment tax credit 154 162
Reacquired debt losses (32) (35)
Contributions in aid of construction 63 55
Other 55 66
-------------------------------
$ (1,948) $ (2,047)
===============================
Deferred income tax liabilities $ (2,447) $ (2,572)
Deferred income tax assets 499 525
-------------------------------
$ (1,948) $ (2,047)
===============================
- ---------------------------------------------------------------------------------
</TABLE>
The federal income tax returns of the Company are settled through the year 1991.
The Company believes that adequate provisions for federal income taxes have been
made through December 31, 1998.
NOTE 6 - SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
At December 31, 1998, the Company had Cumulative Preferred Stock, without par
value, 5 million shares authorized with no shares issued. At December 31, 1998,
1.5 million shares of preferred stock are reserved for issuance in accordance
with the Shareholders Rights Agreement.
At December 31, 1998, Detroit Edison had Cumulative Preference Stock of $1 par
value, 30 million shares authorized with no shares issued.
Detroit Edison's 7.75% Series of Cumulative Preferred Stock was redeemed in May
1998, while its 7.74% Series was redeemed in December 1998. There was no
Cumulative Preferred Stock outstanding at December 31, 1998. Detroit Edison had
the following Cumulative Preferred Stock outstanding at December 31, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Shares Outstanding Amount
- ---------------------------------------------------------------------
(Thousands) (millions)
<S> <C> <C>
7.75% Series 1,001 $ 100
7.74% Series 500 50
Preferred stock expense - (6)
---------------------------
1,501 $ 144
===========================
- ---------------------------------------------------------------------
</TABLE>
57
<PAGE> 58
In September 1997, the Board of Directors of the Company declared a dividend
distribution of one right (Right) for each share of Company common stock
outstanding. Under certain circumstances, each Right entitles the shareholder to
purchase one one-hundredth of a share of Company Series A Junior Participating
Preferred Stock at a price of $90. The Right is transferable apart from the
Company common stock until 10 days following a public announcement that a person
or group has acquired beneficial ownership of 10% or more of outstanding Company
common shares, or the commencement or announcement of a reclassification, merger
or consolidation which would result in a 10% plus shareholder increasing its
ownership of the Company more than 1%. If the acquiring person or group acquires
10% or more of the Company common stock, and the Company survives, each Right
(other than those held by the acquirer) will entitle its holder to buy Company
common stock having a value of $180 for $90. If the acquiring person or group
acquires 10% or more of the Company common stock, and the Company does not
survive, each Right (other than those held by the surviving or acquiring
company) will entitle its holder to buy shares of common stock of the surviving
or acquiring company having a value of $180 for $90. The Rights will expire on
October 6, 2007 unless redeemed by the Company at $0.01 per Right at any time
prior to an event which would permit the Rights to be exercised. The Company may
amend the Rights agreement without the approval of the holders of the Rights
Certificates, except that the redemption price may not be less than $0.01 per
Right.
Apart from MPSC or FERC approval and the requirement that common, preferred and
preference stock be sold for at least par value, there are no legal restrictions
on the issuance of additional authorized shares of stock by Detroit Edison.
There are no legal restrictions on the issuance of additional authorized shares
of the Company's common and preferred stock.
NOTE 7 - LONG-TERM DEBT
- --------------------------------------------------------------------------------
Detroit Edison's 1924 Mortgage and Deed of Trust (Mortgage), the lien of which
covers substantially all of Detroit Edison's properties, provides for the
issuance of additional General and Refunding Mortgage Bonds (Mortgage Bonds). At
December 31, 1998, approximately $3.8 billion principal amount of Mortgage Bonds
could have been issued on the basis of property additions, combined with an
earnings test provision, assuming an interest rate of 6.25% on any such
additional Mortgage Bonds. An additional $1.6 billion principal amount of
Mortgage Bonds could have been issued on the basis of bond retirements.
Unless an event of default has occurred, and is continuing, each series of
Quarterly Income Debt Securities (QUIDS) provides that interest will be paid
quarterly. However, Detroit Edison also has the right to extend the interest
payment period on the QUIDS for up to 20 consecutive interest payment periods.
Interest would continue to accrue during the deferral period. If this right is
exercised, Detroit Edison may not declare or pay dividends on, or redeem,
purchase or acquire, any of its capital stock during the deferral
58
<PAGE> 59
period. Detroit Edison may redeem any series of capital stock pursuant to the
terms of any sinking fund provisions during the deferral period. Additionally,
during any deferral period, Detroit Edison may not enter into any inter-company
transactions with any affiliate of Detroit Edison, including the Company, to
enable the payment of dividends on any equity securities of the Company.
At December 31, 1998, $113 million of tax exempt revenue bonds were subject to
periodic remarketings within one year. Remarketing agents remarket the bonds at
the lowest interest rate necessary to produce a par bid. In the event that a tax
exempt revenue bond remarketing fails, Standby Note Purchase Agreements and/or
Letters of Credit provide that banks will purchase the bonds and, after the
conclusion of all necessary proceedings, remarket the bonds. In the event the
banks' obligations under the Standby Note Purchase Agreements and/or Letters of
Credit are not honored, then, Detroit Edison would be required to purchase any
bonds subject to a failed remarketing.
The Company's long-term debt outstanding at December 31 was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
MORTGAGE BONDS
6.5% to 8.4% due 1999 to 2023 $ 1,742 $ 1,911
REMARKETED NOTES
5.4% to 6.4% due 2028 to 2034 (a) 410 410
6.2% and 7.1% due 2038 400 -
TAX EXEMPT REVENUE BONDS
SECURED BY MORTGAGE BONDS
Installment Sales Contracts
7.1% due 2004 to 2024 (b) 282 282
Loan Agreements
6.7% due 2008 to 2025 (b) 607 607
UNSECURED
Installment Sales Contracts
7.5% due 2004 to 2019 (b) 142 142
Loan Agreements
3.2% due 2024 to 2030 (a) 113 113
QUIDS
7.4% to 7.6% due 2026 to 2028 385 235
NON-RECOURSE DEBT
7.3% due 1999 to 2009 (b) 410 282
Less amount due within one year (294) (205)
----------------------------
TOTAL LONG-TERM DEBT $ 4,197 $ 3,777
============================
</TABLE>
(a) Variable rate at December 31, 1998.
(b) Weighted average interest rate at December 31, 1998.
- --------------------------------------------------------------------------------
59
<PAGE> 60
In the years 1999 - 2003, the Company's long-term debt maturities are $294,
$270, $194, $275 and $238 million, respectively.
NOTE 8 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
- --------------------------------------------------------------------------------
At December 31, 1998, Detroit Edison had total short-term credit arrangements of
approximately $685 million, under which $231 million was outstanding. At
December 31, 1997 there were no amounts outstanding. The weighted average
interest rates for short-term borrowings during 1998, 1997 and 1996 were 5.7%,
5.7% and 5.6%, respectively.
Detroit Edison had bank lines of credit of $201 million, all of which had
commitment fees in lieu of compensating balances. Detroit Edison uses bank lines
of credit and other credit facilities to support the issuance of commercial
paper and bank loans. Detroit Edison had $231 million of commercial paper
outstanding at December 31, 1998. Detroit Edison had no commercial paper
outstanding at December 31, 1997.
Detroit Edison had a nuclear fuel financing arrangement (heat purchase contract)
with Renaissance Energy Company (Renaissance), an unaffiliated company.
Renaissance may issue commercial paper or borrow from participating banks on the
basis of promissory notes. To the extent the maximum amount of funds available
to Renaissance (currently $400 million) is not needed by Renaissance to purchase
nuclear fuel, such funds may be loaned to Detroit Edison for general corporate
purposes pursuant to a separate Loan Agreement. At December 31, 1998,
approximately $284 million was available to Detroit Edison under such Loan
Agreement. See Note 9 for a discussion of Detroit Edison's heat purchase
contract with Renaissance.
Detroit Edison had a $200 million short-term financing agreement secured by its
customer accounts receivable and unbilled revenues portfolio. Borrowings are at
prevailing money market rates. At December 31, 1998 and December 31, 1997 there
were no amounts outstanding.
At December 31, 1998, DTE Capital Corporation (DTE Capital), a Company
subsidiary, had short-term credit arrangements of $400 million backed by a
Support Agreement from the Company. The credit agreement provides support for
DTE Capital's commercial paper. At December 31, 1998 there was no commercial
paper outstanding. At December 31, 1997 DTE Capital had short-term credit
arrangements of $200 million, backed by a Support Agreement from the Company
under which $42 million was outstanding. Also in January 1998, the Company
entered into a $60 million Support Agreement with DTE Capital for the purpose of
DTE Capital's credit enhancing activities on behalf of DTE Energy affiliates.
NOTE 9 - LEASES
- --------------------------------------------------------------------------------
Future minimum lease payments under long-term non-cancelable leases, consisting
of nuclear fuel ($120 million computed on a projected units of production
basis), lake
60
<PAGE> 61
vessels ($25 million), locomotives and coal cars ($172 million), office space
($12 million), and computers, vehicles and other equipment ($1 million) at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(Millions)
Remaining
1999 2000 2001 2002 2003 Years Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 69 $ 52 $ 44 $ 35 $ 20 $ 110 $ 330
======
- ---------------------------------------------------------------------------------------
</TABLE>
Rental expenses for both capital and operating leases were $96 million
(including $49 million for nuclear fuel), $72 million (including $42 million for
nuclear fuel) and $78 million (including $53 million for nuclear fuel) for 1998,
1997 and 1996, respectively.
Detroit Edison has a heat purchase contract with Renaissance which provides for
the purchase by Renaissance for Detroit Edison of up to $400 million of nuclear
fuel, subject to the continued availability of funds to Renaissance to purchase
such fuel. Title to the nuclear fuel is held by Renaissance. Detroit Edison
makes quarterly payments under the heat purchase contract based on the
consumption of nuclear fuel for the generation of electricity.
Under SFAS No. 71, amortization of Detroit Edison's leased assets is modified so
that the total of interest on the obligation and amortization of the leased
asset is equal to the rental expense allowed for ratemaking purposes. For
ratemaking purposes, the MPSC has treated all leases as operating leases. Net
income was not affected by capitalization of leases. Due to the discontinuation
of the application of SFAS No. 71 for the generation business effective December
31, 1998, prospectively, the costs of these assets will be amortized based on
their economic useful lives.
NOTE 10 - FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
TRADING ACTIVITIES
DTE ET markets and trades electricity and natural gas physical products and
financial instruments, and provides risk management services utilizing energy
commodity derivative instruments which include futures, exchange traded and
over-the-counter options, and forward purchase and sale commitments. The
notional amounts and terms of DTE ET's outstanding energy trading financial
instruments and the fair values of DTE ET's energy commodity derivative
instruments were not material at December 31, 1998.
MARKET RISK
DTE ET manages, on a portfolio basis, the market risks inherent in its
activities subject to parameters established by the Company's Risk Management
Committee (RMC), which is authorized by its Board of Directors. Market risks are
monitored by the RMC to
61
<PAGE> 62
ensure compliance with the Company's stated risk management policies. DTE ET
marks its portfolio to market and measures its risk on a daily basis in
accordance with Value at Risk (VaR) and other risk methodologies. The
quantification of market risk using VaR provides a consistent measure of risk
across diverse energy markets and products.
CREDIT RISK
DTE ET is exposed to credit risk in the event of nonperformance by customers or
counterparties of its contractual obligations. The concentration of customers
and/or counterparties may impact overall exposure to credit risk, either
positively or negatively, in that the counterparties may be similarly affected
by changes in economic, regulatory or other conditions. However, DTE ET
maintains credit policies with regard to its customers and counterparties that
management believes significantly minimize overall credit risk. These policies
include an evaluation of potential customers' and counterparties' financial
condition and credit rating, collateral requirements or other credit
enhancements such as letters of credit or guarantees, and the use of
standardized agreements which allow for the netting or offsetting of positive
and negative exposures associated with a single counterparty. Based on these
policies, the Company does not anticipate a materially adverse effect on
financial position or results of operations as a result of customer or
counterparty nonperformance. Those futures and option contracts which are traded
on the New York Mercantile Exchange are financially guaranteed by the Exchange
and have nominal credit risk.
NON-TRADING ACTIVITIES
INTEREST RATE SWAPS
In October 1996, Detroit Edison entered into a three-year interest rate swap
agreement based on a notional amount of $25 million, which is nominally linked
to the Detroit Edison 1993 Series B Remarketed Notes. Detroit Edison receives a
rate equal to the London Interbank Offered Rate (LIBOR) and pays a rate equal to
the quarterly weighted average Public Securities Association Municipal Swap
Index divided by 67.3%. The intent of the swap is to shift floating rate
exposure from taxable to tax-exempt markets. In 1998 and 1997 the average rate
received was 5.68% and 5.7% and the average rate paid was 5.02% and 5.36%,
respectively. The net of interest received and interest paid on the swap is
accrued as a component of interest expense in the current period. The swap is
subject to market risk of changes in both interest rates and tax rates.
PCI Enterprises Company (PCI), a coal pulverizing subsidiary, entered into a
seven-year interest rate swap agreement beginning June 30, 1997, with the intent
of reducing the impact of changes in interest rates on its variable rate
non-recourse debt. The initial notional amount was $30 million which was based
on 60% of its term loan of $50 million. The notional amount outstanding at
December 31, 1998 and 1997, was $27 million and $29.2 million, respectively and
will decline throughout the term of the loan based on amortization of principal
amounts. PCI pays a fixed interest rate of 6.96% on the notional amount and
receives a variable interest rate based on LIBOR. In 1998, and 1997, the
62
<PAGE> 63
average rate received was 5.65% and 5.69%, respectively. The net of interest
received and interest paid on the swap is accrued as a component of interest
expense in the current period. The swap is subject to market risk of changes in
interest rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. The carrying amount
of financial instruments, except for long-term debt, approximates fair value.
The estimated fair value of total long-term debt at December 31, 1998 and 1997
was $4.8 billion and $4.2 billion, respectively, compared to the carrying amount
of $4.5 billion and $4 billion, respectively. Investments in debt and equity
securities are classified as "available for sale."
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
COMMITMENTS
Detroit Edison has entered into purchase commitments of approximately $1.1
billion at December 31, 1998, which includes, among other things, line
construction and clearance costs and other equipment purchases. The Company and
Detroit Edison have also entered into long-term fuel supply commitments of
approximately $1.1 billion.
Detroit Edison has an Energy Purchase Agreement (Agreement) for the purchase of
steam and electricity from the Detroit Resource Recovery Facility. Under the
Agreement, Detroit Edison will purchase steam through the year 2008 and
electricity through June 30, 2024. Purchases of steam and electricity were $31.1
million, $34.3 million and $30.2 million for 1998, 1997 and 1996, respectively.
Annual purchase commitments are approximately $37 million, $39 million, $40
million, $41 million and $43 million for 1999, 2000, 2001, 2002 and 2003,
respectively. See Note 14 relating to steam heating special charge.
In October 1995, the MPSC issued an Order approving Detroit Edison's six-year
capacity and energy purchase agreement with Ontario Hydro. Ontario Hydro agreed
to sell Detroit Edison 300 MW of capacity from mid-May through mid-September.
This purchase will offset a concurrent agreement to lease approximately a third
of Detroit Edison's Ludington 917 MW capacity to First Energy for the same time
period. The net economic effect of Ludington lease and the Ontario Hydro
purchase is an estimated reduction in PSCR expense of $74 million which will be
refunded to Detroit Edison customers.
CONTINGENCIES
LEGAL PROCEEDINGS
Detroit Edison and plaintiffs in a class action pending in the Circuit Court for
Wayne County, Michigan (Gilford, et al v. Detroit Edison), as well as plaintiffs
in two other pending actions which make class claims (Sanchez, et al v. Detroit
Edison, Circuit
63
<PAGE> 64
Court for Wayne County, Michigan; and Frazier v. Detroit Edison, United States
District Court, Eastern District of Michigan), are preparing for binding
arbitration to settle these matters. A July 1998 Consent Judgement has received
preliminary Court approval. A Fairness Hearing with respect to the terms of the
settlement was held in August 1998, and no objections to the settlement were
raised. A second Fairness Hearing is contemplated following the results of the
arbitration. The settlement agreement provides that Detroit Edison's monetary
liability is to be no less than $17.5 million and no greater than $65 million
after the conclusion of all related proceedings. Detroit Edison has accrued an
amount considered to be probable.
OTHER
In addition to the matters reported herein, the Company and its subsidiaries are
involved in litigation and environmental matters dealing with the numerous
aspects of their business operations. The Company believes that such litigation
and the matters discussed above will not have a material effect on its financial
position, results of operations and cash flows.
See Notes 2 and 3 for a discussion of contingencies related to Regulatory
Matters and Fermi 2.
NOTE 12 - EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
RETIREMENT PLAN
Detroit Edison has a trusteed and non-contributory defined benefit retirement
plan (Plan) covering all eligible employees who have completed six months of
service. The Plan provides retirement benefits based on the employees' years of
benefit service, average final compensation and age at retirement. Detroit
Edison's policy is to fund pension cost calculated under the projected unit
credit actuarial cost method. Net pension cost included the following
components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
Service cost - benefits earned during period $ 31 $ 27 $ 25
Interest cost on projected benefit obligation 88 86 82
Expected return on Plan assets (118) (104) (101)
Amortization of unrecognized prior service cost 5 5 4
Amortization of unrecognized net asset resulting
from initial application (4) (4) (4)
------------------------------------------
Net pension cost $ 2 $ 10 $ 6
==========================================
- -------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 65
The following reconciles the funded status of the Plan to the amount recorded in
the Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Projected benefit obligation at beginning of year $ 1,294 $ 1,176
Service cost - benefits earned during period 31 27
Interest cost on projected benefit obligation 88 86
Net loss 61 77
Benefits paid to participants (74) (72)
------------------------
Projected benefit obligation at end of year 1,400 1,294
------------------------
Fair value of Plan assets (primarily equity and
debt securities) at beginning of year 1,347 1,232
Actual return on Plan assets 143 187
Benefits paid to participants (74) (72)
------------------------
Fair value of Plan assets at end of year 1,416 1,347
------------------------
Plan assets in excess of projected benefit
obligation 16 53
Unrecognized net (asset) resulting from initial
application (15) (20)
Unrecognized net loss (gain) 31 (4)
Unrecognized prior service cost 47 52
------------------------
Asset recorded in the Consolidated Balance Sheet $ 79 $ 81
========================
- -------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the projected benefit obligation at December 31
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.5 % 7.0%
Annual increase in future compensation levels 4.0 4.5
Expected long-term rate of return on Plan assets 9.0 9.0
- --------------------------------------------------------------------------------
</TABLE>
The unrecognized net asset at date of initial application is being amortized
over approximately 15.4 years, which was the average remaining service period of
employees at January 1, 1987.
In addition to the Plan, there are several supplemental non-qualified,
non-contributory, retirement benefit plans for certain management employees.
65
<PAGE> 66
SAVINGS AND INVESTMENT PLANS
Detroit Edison has voluntary defined contribution plans qualified under Section
401 (a) and (k) of the Internal Revenue Code for all eligible employees. Detroit
Edison contributes up to 6% of base compensation for non-represented employees
and up to 4% for represented employees. Matching contributions were $21 million,
$20 million and $17 million for 1998, 1997 and 1996, respectively.
OTHER POSTRETIREMENT BENEFITS
Detroit Edison provides certain postretirement health care and life insurance
benefits for retired employees. Substantially all of Detroit Edison's employees
will become eligible for such benefits if they reach retirement age while
working for Detroit Edison. These benefits are provided principally through
insurance companies and other organizations.
Net other postretirement benefits cost included the following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
Service cost - benefits earned during period $ 19 $ 19 $ 20
Interest cost on accumulated
benefit obligation 38 39 40
Expected return on assets (30) (20) (14)
Amortization of unrecognized transition obligation 21 21 21
--------------------------------
Net other postretirement benefits cost $ 48 $ 59 $ 67
================================
- --------------------------------------------------------------------------------------------
</TABLE>
The following reconciles the funded status to the amount recorded in the
Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Postretirement benefit obligation at beginning of year $ 580 $ 583
Service cost - benefits earned during period 19 19
Interest cost on accumulated benefit obligation 38 39
Benefit payments (27) (27)
Net loss (gain) 15 (34)
-------------------------------
Postretirement benefit obligation at end of year 625 580
-------------------------------
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C> <C>
Fair value of assets (primarily equity and debt
securities) at beginning of year 309 213
Detroit Edison contributions 57 57
Actual return on assets 56 39
-------------------------------
Fair value of assets at end of year 422 309
-------------------------------
Postretirement benefit obligation in (excess) of assets (203) (271)
Unrecognized transition obligation 287 308
Unrecognized net (gain) (28) (16)
-------------------------------
Asset recorded in the Consolidated
Balance Sheet $ 56 $ 21
===============================
- ----------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the postretirement benefit obligation at
December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.5 % 7.0 %
Annual increase in future compensation levels 4.0 4.5
Expected long-term rate of return on assets 8.5 8.5
- --------------------------------------------------------------------------
</TABLE>
Benefit costs were calculated assuming health care cost trend rates beginning at
8.5% for 1999 and decreasing to 5% in 2008 and thereafter for persons under age
65 and decreasing from 5.9% to 5% for persons age 65 and over. A
one-percentage-point increase in health care cost trend rates would increase the
aggregate of the service cost and interest cost components of benefit costs by
$10 million for 1998 and increase the accumulated benefit obligation by $85
million at December 31, 1998. A one-percentage point decrease in the health care
cost trend rates would decrease the aggregate of the service cost and interest
cost components of benefit costs by $8 million for 1998 and decrease the
accumulated benefit obligation by $70 million at December 31, 1998.
NOTE 13 - STOCK-BASED COMPENSATION
- --------------------------------------------------------------------------------
The Company adopted a Long-Term Incentive Plan (LTIP) in 1995. Under the LTIP,
certain key employees may be granted restricted common stock, stock options,
stock appreciation rights, performance shares and performance units. Common
stock granted under the LTIP may not exceed 7.2 million shares. Performance
units (which have a face amount of $1) granted under the LTIP may not exceed 25
million in the aggregate. As of December 31, 1998, no stock appreciation rights,
performance shares or performance units have been granted under the LTIP.
Under the LTIP, shares of restricted common stock were awarded and are
restricted for a period not exceeding four years. All shares are subject to
forfeiture if specified performance measures are not met. There are no exercise
prices related to these shares. During the applicable restriction period, the
recipient has all the voting, dividend
67
<PAGE> 68
and other rights of a record holder except that the shares are nontransferable,
and non-cash distributions paid upon the shares would be subject to transfer
restrictions and risk of forfeiture to the same extent as the shares themselves.
The shares were recorded at the market value on the date of grant and amortized
to expense based on the award that was expected to vest and the period to which
the related employee services were to be rendered. Restricted common stock
activity for the year ended December 31 was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted common shares awarded 74,000 68,500 56,000
Weighted average market price of
shares awarded $ 38.77 $ 28.38 $ 34.28
Compensation cost charged against
income (thousands) $ 976 $ 222 $ 1,165
- -----------------------------------------------------------------------------
</TABLE>
Stock options were also issued under the LTIP. Options are exercisable at a rate
of 25% per year during the four years following the date of grant. The options
will expire 10 years after the date of the grant. The option exercise price
equals the fair market value of the stock on the date that the option was
granted. Stock option activity was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted
Number Average
of Options Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 - -
Granted 310,500 $ 28.38
-------
Outstanding at December 31, 1997
(none exercisable) 310,500 28.38
Granted 319,500 38.38
Exercised (22,625) 28.50
-------
Outstanding at December 31, 1998
(58,750 exercisable) 607,375 33.70
=======
- ---------------------------------------------------------------------------
</TABLE>
The Company continues to apply APB Opinion 25 "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense has been recorded for options
granted. As required by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has determined the pro forma information as if the Company had
accounted for
68
<PAGE> 69
its employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a modified Black/Scholes option
pricing model - American style and the following weighted average assumptions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.84% 6.83%
Dividend yield 5.39% 7.26%
Expected volatility 17.48% 18.31%
Expected life 10 years 10 years
Fair value per option $6.43 $4.15
- -------------------------------------------------------------------------
</TABLE>
The pro forma effect of these options would be to reduce net income by $695,000
and $244,000, for the years ending December 31, 1998 and 1997, respectively.
There was no pro forma effect on earnings per share (EPS).
NOTE 14 - STEAM HEATING SPECIAL CHARGE
- --------------------------------------------------------------------------------
In 1996, a special charge to net income of $149 million ($97 million after-tax)
or $0.67 cents per share was recorded. The special charge included a reserve for
steam purchase commitments during the period from 1997 through 2008 under the
agreement with the Detroit Resource Recovery Facility, expenditures for closure
of a portion of the steam heating system and improvements in service to
remaining customers. The reserve for steam purchase commitments was recorded at
its present value, therefore Detroit Edison will record non-cash accretion
expense during the period 1997 through 2008. In addition, beginning in 1997,
amortization of the reserve for steam purchase commitments is netted against
losses on steam heating purchases recorded in fuel and purchased power expense.
NOTE 15 - SEGMENT AND RELATED INFORMATION
- --------------------------------------------------------------------------------
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." The Company's reportable
business segment is its regulated electric utility, Detroit Edison, which is
engaged in the generation, purchase, transmission, distribution and sale of
electric energy in a 7,600 square mile area in Southeastern Michigan. All other
includes non-regulated energy-related businesses and services, which develop and
manage electricity and other
69
<PAGE> 70
energy-related projects, and engage in domestic energy trading and marketing.
Inter-segment revenues are not material. Financial data for business segments
are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Regulated Reconciliations
Electric All and
Utility Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
1998 (Millions)
<S> <C> <C> <C> <C>
Operating revenues $ 3,902 $ 319 $ - $ 4,221
Depreciation and amortization 643 18 - 661
Interest expense net 277 34 8 319
Income tax expense (benefit) 260 (100) (6) 154
Net income 412 42 (11) 443
Total assets 10,987 937 164 12,088
Capital expenditures 514 251 - 765
- ---------------------------------------------------------------------------------------------------------
1997 (Millions)
Operating revenues $ 3,657 $ 107 $ - $ 3,764
Depreciation and amortization 658 2 - 660
Interest expense net 282 16 (1) 297
Income tax expense (benefit) 288 (30) (1) 257
Net income 405 14 (2) 417
Total assets 10,745 448 30 11,223
Capital expenditures 439 228 - 667
- ---------------------------------------------------------------------------------------------------------
1996 (Millions)
Operating revenues $ 3,642 $ 3 $ - 3,645
Depreciation and amortization 624 1 - 625
Interest expense net 288 - - 288
Income tax expense (benefit) 225 (4) - 221
Net income 312 (2) (1) 309
Total assets 10,874 106 35 11,015
Capital expenditures 479 52 - 531
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------
(Millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $ 945 $ 1,064 $ 1,199 $ 1,013
Operating Income 233 248 266 190
Net Income 104 101 132 106
Earnings Per Common Share 0.72 0.69 0.91 0.73
- ------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
1997 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------
(Millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $ 868 $ 892 $ 1,030 $ 974
Operating Income 202 225 285 289
Net Income 71 85 132 129
Earnings Per Common Share 0.49 0.59 0.91 0.89
- -----------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 72
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13
Information required by Part III (Items 10, 11, 12 and 13) of this Form
10-K is incorporated by reference from DTE Energy Company's definitive Proxy
Statement for its 1999 Annual Meeting of Common Shareholders to be held April
28, 1999, which will be filed with the Securities and Exchange Commission,
pursuant to Regulation 14A, not later than 120 days after the end of the
Company's fiscal year covered by this report on Form 10-K, all of which
information is hereby incorporated by reference in, and made part of, this Form
10-K, except that the information required by Item 10 with respect to executive
officers of the Registrant is included in Part I of this report.
72
<PAGE> 73
ANNUAL REPORT ON FORM 10-K FOR THE DETROIT EDISON COMPANY
PART I
ITEM 1 - BUSINESS.
See the Company's "Item 1 - Business" which is incorporated herein by this
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRESENT
POSITION
NAME AGE(a) PRESENT POSITION HELD SINCE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Anthony F. Earley, Jr. 49 Chairman of the Board, Chief Executive Officer, 8-1-98
President, Chief Operating Officer, and Member
of the Office of the President
Larry G. Garberding 60 Executive Vice President, Chief Financial Officer, 8-1-90
Member of the Office of the President since
December 1998
Gerard M. Anderson 40 President and Chief Operating Officer - DTE Energy 8-1-98
Resources, and Member of the Office of the
President
Robert J. Buckler 49 President and Chief Operating Officer - DTE Energy 8-1-98
Distribution, and Member of the Office of the
President
Michael E. Champley 50 Senior Vice President 4-1-97
Douglas R. Gipson 51 Senior Vice President 4-1-93
Susan M. Beale 50 Vice President and Corporate Secretary 3-27-95
Lynne E. Halpin 47 Vice President and Chief Information Officer 5-25-98
Leslie L. Loomans 55 Vice President and Treasurer 10-1-89
Ron A. May 47 Vice President 8-1-98
David E. Meador 41 Vice President and Controller 3-29-97
Sandra J. Miller 55 Vice President 3-30-98
Christopher C. Nern 54 Vice President and General Counsel 6-1-93
Michael C. Porter 45 Vice President 9-22-97
William R. Roller 53 Vice President 4-22-96
S. Martin Taylor 58 Vice President 11-28-94
(a) As of December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Under Detroit Edison By-Laws, the officers of Detroit Edison are elected
annually by the Board of Directors at a meeting held for such purpose, each to
serve until the next annual meeting of directors or until their respective
successors are chosen and qualified. With the exception of Messrs. Earley,
Meador and Porter, and Ms. Halpin, all of the above officers have been employed
by Detroit Edison in one or more management capacities during the past five
years.
Anthony F. Earley, Jr., was President and Chief Operating Officer of Long
Island Lighting Company, formerly an electric and gas utility company serving
Long Island, New York, from 1989 to 1994. Effective March 1, 1994, he was
elected President and
73
<PAGE> 74
Chief Operating Officer and a member of the Board of Directors of Detroit
Edison, and effective August 1, 1998, he was elected to the additional position
of Chairman and Chief Executive Officer and Member of the Office of the
President.
David E. Meador was Controller, Mopar Parts Division, at Chrysler
Corporation, an international automotive manufacturer, from November 1996 until
February 1997. From 1986 to 1996, he held a variety of executive financial
positions at Chrysler. Effective February 28, 1997, he was elected Vice
President and effective March 29, 1997, he assumed the duties of Controller.
Michael C. Porter was Senior Vice President and Managing Director at
McCann-Erickson in Detroit from 1994 to September 1997 and Vice President of
Marketing for The Stroh Brewery Company in Detroit from 1990 to 1994. Effective
September 22, 1997, he was elected Vice President - Corporate Communications.
Lynne E. Halpin was Vice President of Business Applications for Netscape
Communications Corp. from July 1996 to May 1998 and Acting Vice President of
Global Systems Development and Director of Business Systems Development for
Xerox Corporation from November 1993 to June 1996. Effective May 25, 1998, she
was elected Vice President and Chief Information Officer of Detroit Edison.
ITEM 2 - PROPERTIES.
See the Company's "Item 2 - Properties - Detroit Edison," which is
incorporated herein by this reference.
ITEM 3 - LEGAL PROCEEDINGS.
See the Company's "Item 3 - Legal Proceedings," which is incorporated
herein by this reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
See the Company's "Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters," the third paragraph of which is incorporated
herein by this reference. Detroit Edison's By-Laws contain this same provision
with respect to the Michigan Business Corporation Act. All of Detroit Edison's
Common Stock is held by the Company.
74
<PAGE> 75
The amount of future dividends paid by Detroit Edison to the Company will
depend on Detroit Edison's earnings, financial condition and other factors,
including the effects of utility restructuring and a transition to competition,
each of which is periodically reviewed by Detroit Edison's Board of Directors.
ITEM 6 - SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 3,902 $ 3,657 $ 3,642 $ 3,636 $ 3,519
Net Income $ 418 $ 417 $ 328 $ 434 $ 420
Net Income Available
for Common Stock $ 412 $ 405 $ 312 $ 406 $ 390
At year end:
Total Assets $ 10,987 $ 10,745 $ 10,874 $ 11,131 $ 10,993
Long-Term Debt
Obligations (including capital
leases) and Redeemable
Preferred and Preference
Stock Outstanding $ 3,588 $ 3,812 $ 4,000 $ 4,004 $ 3,980
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See the Company's and Detroit Edison's "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations," which is
incorporated herein by this reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages 32 through 72 (except for Notes 5, 7 and 16 below).
NOTE 5 - INCOME TAXES
- --------------------------------------------------------------------------------
Total income tax expense as a percent of income before tax varies from the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35.0 % 35.0 % 35.0 %
Deferred Fermi 2 depreciation and return 3.5 4.5 5.2
Investment tax credit (2.1) (2.0) (2.7)
Depreciation 4.5 4.5 5.9
Removal costs (1.7) (1.5) (2.2)
Other-net (0.9) 0.4 (0.5)
---------------------------------------------------
Effective income tax rate 38.3 % 40.9 % 40.7 %
===================================================
- -------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 76
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
Current federal tax expense $ 280 $ 308 $ 224
Deferred federal tax expense - net (5) (6) 16
Investment tax credits (15) (14) (15)
-----------------------------------
Total $ 260 $ 288 $ 225
===================================
- -----------------------------------------------------------------------------------
</TABLE>
Deferred income tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Property $ (1,139) $ (2,233)
Unamortized nuclear costs (983) -
Property taxes (65) (62)
Investment tax credit 154 162
Reacquired debt losses (32) (35)
Contributions in aid of construction 63 55
Other 96 77
--------------------------------
$ (1,906) $ (2,036)
================================
Deferred income tax liabilities $ (2,403) $ (2,560)
Deferred income tax assets 497 524
--------------------------------
$ (1,906) $ (2,036)
================================
- --------------------------------------------------------------------------------
</TABLE>
NOTE 7 - LONG-TERM DEBT
- --------------------------------------------------------------------------------
Detroit Edison's 1924 Mortgage and Deed of Trust (Mortgage), the lien of which
covers substantially all of Detroit Edison's properties, provides for the
issuance of additional General and Refunding Mortgage Bonds (Mortgage Bonds). At
December 31, 1998, approximately $3.8 billion principal amount of Mortgage Bonds
could have been issued on the basis of property additions, combined with an
earnings test provision, assuming an interest rate of 6.25% on any such
additional Mortgage Bonds. An additional $1.6 billion principal amount of
Mortgage Bonds could have been issued on the basis of bond retirements.
Unless an event of default has occurred, and is continuing, each series of
Quarterly Income Debt Securities (QUIDS) provides that interest will be paid
quarterly. However,
76
<PAGE> 77
Detroit Edison also has the right to extend the interest payment period on the
QUIDS for up to 20 consecutive interest payment periods. Interest would continue
to accrue during the deferral period. If this right is exercised, Detroit Edison
may not declare or pay dividends on, or redeem, purchase or acquire, any of its
capital stock during the deferral period. Detroit Edison may redeem any series
of capital stock pursuant to the terms of any sinking fund provisions during the
deferral period. Additionally, during any deferral period, Detroit Edison may
not enter into any inter-company transactions with any affiliate of Detroit
Edison, including the Company, to enable the payment of dividends on any equity
securities of the Company.
At December 31, 1998, $113 million of tax exempt revenue bonds were subject to
periodic remarketings within one year. Remarketing agents remarket the bonds at
the lowest interest rate necessary to produce a par bid. In the event that a tax
exempt revenue bond remarketing fails, Standby Note Purchase Agreements and/or
Letters of Credit provide that banks will purchase the bonds and, after the
conclusion of all necessary proceedings, remarket the bonds. In the event the
banks' obligations under the Standby Note Purchase Agreements and/or Letters of
Credit are not honored, then, Detroit Edison would be required to purchase any
bonds subject to a failed remarketing.
Long-term debt outstanding at December 31 was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
MORTGAGE BONDS
6.5% to 8.4% due 1999 to 2023 $ 1,742 $ 1,911
REMARKETED NOTES
5.4% to 6.4% due 2028 to 2034 (a) 410 410
TAX EXEMPT REVENUE BONDS
SECURED BY MORTGAGE BONDS
Installment Sales Contracts
7.1% due 2004 to 2024 (b) 282 282
Loan Agreements
6.7% due 2008 to 2025 (b) 607 607
UNSECURED
Installment Sales Contracts
7.5% due 2004 to 2019 (b) 142 142
Loan Agreements
3.2% due 2024 to 2030 (a) 113 113
QUIDS
7.4% to 7.6% due 2026 to 2028 385 235
Less amount due within one year (219) (169)
---------------------------
TOTAL LONG-TERM DEBT $ 3,462 $ 3,531
===========================
</TABLE>
(a) Variable rate at December 31, 1998.
(c) Weighted average interest rate at December 31, 1998.
- --------------------------------------------------------------------------------
77
<PAGE> 78
In the years 1999 - 2003, Detroit Edison's long-term debt maturities are $219,
$194, $119, $198 and $199 million, respectively.
NOTE 16 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
(Millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $ 901 $ 992 $ 1,105 $ 904
Operating Income 237 248 284 201
Net Income 98 95 125 100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
(Millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $ 864 $ 878 $ 985 $ 930
Operating Income 203 225 285 290
Net Income 74 86 128 129
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13
See the Company's "Items 10, 11, 12 and 13" which is incorporated herein by
this reference, except for the information required by Item 10 with respect to
executive officers of the Registrant which is included in Part 1 of this report.
All of Detroit Edison's directors are the same as the Company's directors.
78
<PAGE> 79
ANNUAL REPORTS ON FORM 10-K FOR DTE ENERGY COMPANY
AND THE DETROIT EDISON COMPANY
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
(1) Consolidated financial statements. See "Item 8 - Financial
Statements and Supplementary Data" on page 32.
(2) Financial statement schedules. See "Item 8 - Financial Statements
and Supplementary Data" on page 32.
(3) Exhibits (*Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report
pursuant to Item 14 (c) of this report).
(i) Exhibits filed herewith.
Exhibit
Number
------
4-198 Seventh Supplemental Note Indenture, dated as of
October 15, 1998, between Detroit Edison and
Bankers Trust Company, as Trustee, creating the
7.375% QUIDS, including form of QUIDS.
4-199 $300,000,000 Support Agreement, dated as of
November 18, 1998, between DTE Energy and DTE
Capital Corporation.
4-200 Second Supplemental Indenture, dated as of
November 1, 1998, between DTE Capital Corporation
and The Bank of New York, as Trustee, creating the
$300,000,000 Remarketed Notes, 1998 Series B,
including form of Note.
4-201 $400,000,000 Support Agreement, dated as of
January 19, 1999, between DTE Energy Company and
DTE Capital Corporation.
10-27* Sixth Restatement of The Detroit Edison Company
Management Supplemental Benefit Plan (1998).
10-28* Amendment No. 1 to The Detroit Edison Company
Long-Term Incentive Plan, effective December 31,
1998.
10-29* DTE Energy Company Plan for Deferring the Payment
of Directors' Fees (As Amended and Restated
Effective As Of January 1, 1999).
79
<PAGE> 80
10-30* - DTE Energy Company Deferred stock Compensation
Plan for Non-Employee Directors, effective as of
January 1, 1999.
10-31* - DTE Energy Company Retirement Plan for
Non-Employee Directors (As Amended and Restated
Effective As Of December 31, 1998).
11-14 - DTE Energy Company Basic and Diluted Earnings Per
Share of Common Stock.
12-14 - DTE Energy Company Computation of Ratio of
Earnings to Fixed Charges.
12-15 - The Detroit Edison Company Computation of Ratio of
Earnings to Fixed Charges.
12-16 - The Detroit Edison Company Computation of Ratio of
Earnings to Fixed Charges and Preferred Stock
Dividends.
21-3 - Subsidiaries of the Company and Detroit Edison.
23-12 - Consent of Deloitte & Touche LLP.
27-25 - Financial Data Schedule for the period ended
December 31, 1998 for DTE Energy Company.
27-26 - Financial Data Schedule for the period ended
December 31, 1998 for The Detroit Edison Company.
99-28- Second Amended and Restated Credit Agreement,
Dated as of January 19, 1999 among DTE Capital
Corporation, the Initial Lenders, Citibank, N.A.,
as Agent, and ABN AMRO Bank N.V., Barclays Bank
PLC, Bayerische Landesbank Giruzertrale, Cayman
Islands Branch, Comerica Bank, Den Daske Bank
Aktieselskab and The First National Bank of
Chicago, as Co-Agents, and Salomon Smith Barney
Inc., as Arranger.
(ii) Exhibits incorporated herein by reference.
3(a) - Amended and Restated Articles of Incorporation of DTE Energy
Company, dated December 13, 1995. (Exhibit 3-5 to Form 10-Q for
quarter ended September 30, 1997)
3(b) - Certificate of Designation of Series A Junior Participating
Preferred Stock of DTE Energy Company. Exhibit 3-6 to Form 10-Q
for quarter ended September 30, 1997.)
80
<PAGE> 81
3(c) - Restated Articles of Incorporation of Detroit Edison, as
filed December 10, 1991 with the State of Michigan, Department of
Commerce - Corporation and Securities Bureau (Exhibit 4-117 to
Form 10-Q for quarter ended March 31, 1993).
3(d) - Certificate containing resolution of the Detroit Edison Board
of as filed February 22, 1993 with the State of Michigan,
Department of Commerce - Corporation and Securities Bureau
(Exhibit 4-134 to Form 10-Q for quarter ended March 31, 1993).
3(e) - Certificate containing resolution of the Detroit Edison
Board of Directors establishing the Cumulative Preferred Stock,
7.74% Series, as filed April 21, 1993 with the State of Michigan,
Department of Commerce - Corporation and Securities Bureau
(Exhibit 4-140 to Form 10-Q for quarter ended March 31, 1993).
3(f) - Rights Agreement, dated as of September 23, 1997, by and between
DTE Energy Company and The Detroit Edison Company, as Rights
Agent (Exhibit 4-1 to DTE Energy Company Current Report on Form
8-K, dated September 23, 1997).
3(g) - Agreement and Plan of Exchange (Exhibit 1(2) to DTE Energy Form
8-B filed January 2, 1996, File No. 1-11607).
3(h) - Bylaws of DTE Energy Company, as amended through May 1, 1998.
(Exhibit 3-10 to Registration No. 333-65765).
3(i) - Bylaws of The Detroit Edison Company, as amended through May
1, 1998. (Exhibit 3-9 to Registration No. 333-65765.)
4(a) - Mortgage and Deed of Trust, dated as of October 1, 1924,
between Detroit Edison (File No. 1-2198) and Bankers Trust
Company as Trustee (Exhibit B-1 to Registration No. 2-1630) and
indentures supplemental thereto, dated as of dates indicated
below, and filed as exhibits to the filings as set forth below:
September 1, 1947 Exhibit B-20 to Registration No. 2-7136
October 1, 1968 Exhibit 2-B-33 to Registration No. 2-30096
November 15, 1971 Exhibit 2-B-38 to Registration No. 2-42160
January 15, 1973 Exhibit 2-B-39 to Registration No. 2-46595
June 1, 1978 Exhibit 2-B-51 to Registration No. 2-61643
June 30, 1982 Exhibit 4-30 to Registration No. 2-78941
August 15, 1982 Exhibit 4-32 to Registration No. 2-79674
October 15, 1985 Exhibit 4-170 to Form 10-K for
year ended December 31, 1994
November 30, 1987 Exhibit 4-139 to Form 10-K for
year ended December 31, 1992
July 15, 1989 Exhibit 4-171 to Form 10-K for
year ended December 31, 1994
81
<PAGE> 82
December 1, 1989 Exhibit 4-172 to Form 10-K for
year ended December 31, 1994
February 15, 1990 Exhibit 4-173 to Form 10-K for
year ended December 31, 1994
April 1, 1991 Exhibit 4-15 to Form 10-K for year ended
December 31, 1996
May 1, 1991 Exhibit 4-178 to Form 10-K for year ended
December 31, 1996
May 15, 1991 Exhibit 4-179 to Form 10-K for year ended
December 31, 1996
September 1, 1991 Exhibit 4-180 to Form 10-K for year ended
December 31, 1996
November 1, 1991 Exhibit 4-181 to Form 10-K for year ended
December 31, 1996
January 15, 1992 Exhibit 4-182 to Form 10-K for year ended
December 31, 1996
February 29, 1992 Exhibit 4-187 to Form 10-Q for quarter ended
March 31, 1998
April 15, 1992 Exhibit 4-188 to Form 10-Q for quarter ended
March 31, 1998
July 15, 1992 Exhibit 4-189 to Form 10-Q for quarter ended
March 31, 1998
July 31, 1992 Exhibit 4-190 to Form 10-Q for quarter ended
March 31, 1998
November 30, 1992 Exhibit 4-130 to Registration No. 33-56496
January 1, 1993 Exhibit 4-131 to Registration No. 33-56496
March 1, 1993 Exhibit 4-191 to Form 10-Q for quarter ended
March 31, 1998
March 15, 1993 Exhibit 4-192 to Form 10-Q for quarter ended
March 31, 1998
April 1, 1993 Exhibit 4-143 to Form 10-Q for quarter ended
March 31, 1993
April 26, 1993 Exhibit 4-144 to Form 10-Q for quarter ended
March 31, 1993
May 31, 1993 Exhibit 4-148 to Registration No. 33-64296
June 30, 1993 Exhibit 4-149 to Form 10-Q for quarter ended
June 30, 1993 (1993 Series AP)
June 30, 1993 Exhibit 4-150 to Form 10-Q for quarter ended
June 30, 1993 (1993 Series H)
September 15, 1993 Exhibit 4-158 to Form 10-Q for quarter ended
September 30, 1993
March 1, 1994 Exhibit 4-163 to Registration No. 33-53207
June 15, 1994 Exhibit 4-166 to Form 10-Q for quarter ended
June 30, 1994
August 15, 1994 Exhibit 4-168 to Form 10-Q for quarter ended
September 30, 1994
December 1, 1994 Exhibit 4-169 to Form 10-K for
year ended December 31, 1994
August 1, 1995 Exhibit 4-174 to Form 10-Q for quarter ended
September 30, 1995
82
<PAGE> 83
4(b) - Collateral Trust Indenture (notes), dated as of June 30, 1993
(Exhibit 4-152 to Registration No. 33-50325).
4(c) - First Supplemental Note Indenture, dated as of June 30, 1993
(Exhibit 4-153 to Registration No. 33-50325).
4(d) - Second Supplemental Note Indenture, dated as of September 15,
1993 (Exhibit 4-159 to Form 10-Q for quarter ended September 30,
1993).
4(e) - First Amendment, dated as of August 15, 1996, to Second
Supplemental Note Indenture (Exhibit 4-17 to Form 10-Q for
quarter ended September 30, 1996).
4(f) - Third Supplemental Note Indenture, dated as of August 15, 1994
(Exhibit 4-169 to Form 10-Q for quarter ended September 30,
1994).
4(g) - First Amendment, dated as of December 12, 1995, to Third
Supplemental Note Indenture, dated as of August 15, 1994 (Exhibit
4-12 to Registration No. 333-00023).
4(h) - Fourth Supplemental Note Indenture, dated as of August 15, 1995
(Exhibit 4-175 to Detroit Edison Form 10-Q for quarter ended
September 30, 1995).
4(i) - Fifth Supplemental Note Indenture, dated as of February 1, 1996
(Exhibit 4-14 to Form 10-K for year ended December 31, 1996).
4(j) - Sixth Supplemental Note Indenture, dated as of May 1, 1998,
between Detroit Edison and Bankers Trust Company, as Trustee,
creating the 7.54% Quarterly Income Debt Securities ("QUIDS"),
including form of QUIDS. (Exhibit 4-193 to form 10-Q for quarter
ended June 30, 1998.)
4(k) - Standby Note Purchase Credit Facility, dated as of August 17,
1994, among The Detroit Edison Company, Barclays Bank PLC, as
Bank and Administrative Agent, Bank of America, The Bank of New
York, The Fuji Bank Limited, The Long-Term Credit Bank of Japan,
LTD, Union Bank and Citicorp Securities, Inc. and First Chicago
Capital Markets, Inc. as Remarketing Agents (Exhibit 99-18 to
Form 10-Q for quarter ended September 30, 1994).
4-(l) - $60,000,000 Support Agreement dated as of January 21, 1998
between DTE Energy Company and DTE Capital Corporation. (Exhibit
4-183 to Form 10-K for year ended December 31, 1997.)
4-(m) - $100,000,000 Support Agreement, dated as of June 16, 1998,
between DTE Energy Company and DTE Capital Corporation. (Exhibit
4-194 to Form 10-Q for quarter ended June 30, 1998.)
83
<PAGE> 84
4-(n)- Indenture, dated as of June 15, 1998, between DTE Capital
Corporation and The Bank of New York, as Trustee. (Exhibit 4-196
to Form 10-Q for quarter ended June 30, 1998.)
4-(o)- First Supplemental Indenture, dated as of June 15, 1998,
between DTE Capital Corporation and The Bank of New York, as
Trustee, creating the $100,000,000 Remarketed Notes, Series A due
2038, including form of Note. (Exhibit 4-197 to Form 10-Q for
quarter ended June 30, 1998.)
*10(a) Certain arrangements pertaining to the employment of Michael C.
Porter. (Exhibit 10-8* to Form 10-Q for Quarter ended September
30, 1997.)
*10(b) Form of Change-in-Control Severance Agreement, dated as of
October 1, 1997, between DTE Energy Company and Gerard M.
Anderson, Susan M. Beale, Robert J. Buckler, Michael C.
Champley, Haven C. Cockerham, Anthony F. Earley, Jr., Larry G.
Garberding, Douglas R. Gipson, John E. Lobbia, Leslie L.
Loomans, David E. Meador, Christopher C. Nern, Michael C.
Porter, William R. Roller and S. Martin Taylor. (Exhibit 10-9*
to Form 10-Q for quarter ended September 30, 1997.)
*10(c)- Form of 1995 Indemnification Agreement between the Company and
its directors and officers (Exhibit 3L (10-1) to DTE Energy
Company Form 8-B dated January 2, 1996).
*10(d)- Form of Indemnification Agreement between Detroit Edison and
its officers other than those identified in *10(l) (Exhibit 10-41
to Detroit Edison's Form 10-Q for quarter ended June 30, 1993).
*10(e)- Certain arrangements pertaining to the employment of S. Martin
Taylor (Exhibit 10-22*) to Form 10-K for quarter ended March 31,
1998).
*10(f)- Amended and Restated Post-Employment Income Agreement, dated
March 23, 1998, between Detroit Edison and Anthony F. Earley,
Jr. (Exhibit 10-20* to Form 10-Q for quarter ended March 31,
1998).
*10(g) Restricted Stock Agreement, dated March 23, 1998, between
Detroit Edison and Anthony F. Earley, Jr. (Exhibit 10-20* to Form
10-Q for quarter ended March 31, 1998)
*10(h) Amended and Restated Detroit Edison Savings Reparation Plan
(February 23, 1998) (Exhibit 10-19* to Form 10-Q for quarter
ended March 31, 1998).
*10(i) Certain arrangements pertaining to the employment of Larry G.
Garberding (Exhibit 10-23* to Form 10-Q for quarter ended March
31, 1998).
84
<PAGE> 85
*10(j)- Form of Indemnification Agreement, between Detroit Edison and
(1) John E. Lobbia, (2) Larry G. Garberding and (3) Anthony F.
Earley, Jr. (Exhibit 10-24* to Form 10-Q for quarter ended March
31, 1998).
*10(k)- Employment Agreement, dated April 16, 1998, between Detroit
Edison and Lynn Halpin. (Exhibit 10-26* to Form 10-Q, for quarter
ended June 30, 1998.)
*10(l)- Form of Indemnification Agreement between Detroit Edison and
its directors (Exhibit 10-25* to Form 10-Q for quarter ended
March 31, 1998).
*10(m)- Executive Vehicle Program, dated October 1, 1993 (Exhibit
10-47 to Detroit Edison's Form 10-Q for quarter ended September
30, 1993).
*10(n)- Amendment No. 1 to Executive Vehicle Plan, November 1993
(Exhibit 10-58 to Detroit Edison's Form 10-K for year ended
December 31, 1993).
*10(o)- Certain arrangements pertaining to the employment of Gerard M.
Anderson (Exhibit 10-40 to Detroit Edison's Form 10-K for year
ended December 31, 1993).
*10(p)- Long-Term Incentive Plan (Exhibit 10-3 to Form 10-K for year
ended December 31, 1996).
*10(q)- 1997 Executive Incentive Plan Measures (Exhibit *10-7 to
Form 10 Q for quarter ended March 31, 1997).
*10(r)- 1998 Executive Incentive Plan Measures (Exhibit 10-18* to Form
10-Q for quarter ended March 31, 1998.)
*10(s)- 1998 Shareholder Value Improvement Plan Measures (Exhibit
11-17* to Form 10-Q for quarter ended March 31, 1998.)
*10(t)- Fourth Restatement of The Benefit Equalization Plan for
Certain Employees of The Detroit Edison Company (October 1997).
(Exhibit 10-11* to Form 10-K for year ended December 31, 1997.)
*10(u)- The Detroit Edison Company Key Employee Deferred Compensation
Plan (October 1997). (Exhibit 10-12* to Form 10-K for year ended
December 31, 1997.)
*10(v)- The Detroit Edison Company Executive Incentive Plan (October
1997). (Exhibit 10-13* to Form 10-K for the year ended December
31, 1997.)
*10(w)- Detroit Edison Company Shareholder Value Improvement Plan
(October 1997). (Exhibit 10 15* to Form 10-K for year ended
December 31, 1997.)
85
<PAGE> 86
*10(x)- Trust Agreement for DTE Energy Company Change-In-Control
Severance Agreements between DTE Energy Company and Wachovia
Bank, N.A. (Exhibit 10-16* to Form 10-K for year ended
December 31, 1997.)
*10(y)- Certain arrangements pertaining to the employment of David E.
Meador (Exhibit 10-5 to Form 10-K for year ended December 31,
1997.)
*10(z)- Amended and Restated Supplemental Long-Term Disability Plan,
dated January 27, 1997. (Exhibit *10-4 to Form 10-K for year
ended December 31, 1996.)
*10(aa)-Fourth Restatement of The Retirement Reparation Plan for
Certain Employees of The Detroit Edison Company (October 1997).
(Exhibit *10-10 to Form 10-K for year ended December 31, 1997.)
99(a)- Belle River Participation Agreement between Detroit Edison
and Michigan Public Power Agency, dated as of December 1, 1982
(Exhibit 28-5 to Registration No. 2-81501).
99(b)- Belle River Transmission Ownership and Operating Agreement
between Detroit Edison and Michigan Public Power Agency, dated as
of December 1, 1982 (Exhibit 28-6 to Registration No. 2-81501).
99(c)- 1988 Amended and Restated Loan Agreement, dated as of October 4,
1988, between Renaissance Energy Company (an unaffiliated
company) ("Renaissance") and Detroit Edison (Exhibit 99-6 to
Registration No. 33-50325).
99(d)- First Amendment to 1988 Amended and Restated Loan Agreement,
dated as of February 1, 1990, between Detroit Edison and
Renaissance (Exhibit 99-7 to Registration No. 33-50325).
99(e)- Second Amendment to 1988 Amended and Restated Loan Agreement,
dated as of September 1, 1993, between Detroit Edison and
Renaissance (Exhibit 99-8 to Registration No. 33-50325).
99(f)- Third Amendment, dated as of August 28, 1997, to 1988 Amended
and Restated Loan Agreement between Detroit Edison and
Renaissance. (Exhibit 99-22 to Form 10-Q for quarter ended
September 30, 1997.)
99(g)- $200,000,000 364-Day Credit Agreement, dated as of September 1,
1993, among Detroit Edison, Renaissance and Barclays Bank PLC,
New York Branch, as Agent (Exhibit 99-12 to Registration No.
33-50325).
99(h)- First Amendment, dated as of August 31, 1994, to $200,000,000
364-Day Credit Agreement, dated September 1, 1993, among The
Detroit
86
<PAGE> 87
Edison Company, Renaissance Energy Company, the Banks party
thereto and Barclays Bank, PLC, New York Branch, as Agent
(Exhibit 99-19 to Form 10-Q for quarter ended September 30,
1994).
99(i)- Third Amendment, dated as of March 8, 1996, to $200,000,000
364-Day Credit Agreement, dated September 1, 1993, as amended,
among Detroit Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-11 to
Form 10-Q for quarter ended March 31, 1996).
99(j)- Fourth Amendment, dated as of August 29, 1996, to $200,000,000
364-Day Credit Agreement as of September 1, 1990, as amended,
among Detroit Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-13 to
Form 10-Q for quarter ended September 30, 1996).
99(k)- Fifth Amendment, dated as of September 1, 1997, to $200,000,000
Multi-Year Credit Agreement, dated as of September 1, 1993, as
amended, among Detroit Edison, Renaissance, the Banks Party
thereto and Barclays Bank PLC, New York Branch, as Agent.
(Exhibit 99-24 to Form 10-Q for quarter ended September 30,
1997.)
99(l)- $200,000,000 Three-Year Credit Agreement, dated September 1,
1993, among Detroit Edison, Renaissance and Barclays Bank, PLC,
New York Branch, as Agent (Exhibit 99-13 to Registration No.
33-50325).
99(m)- First Amendment, dated as of September 1, 1994, to $200,000,000
Three-Year Credit Agreement, dated as of September 1, 1993, among
The Detroit Edison Company, Renaissance Energy Company, the Banks
party thereto and Barclays Bank, PLC, New York Branch, as Agent
(Exhibit 99-20 to Form 10-Q for quarter ended September 30,
1994).
99(n)- Third Amendment, dated as of March 8, 1996, to $200,000,000
Three-Year Credit Agreement, dated September 1, 1993, as amended
among Detroit Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-12 to
Form 10-Q for quarter ended March 31, 1996).
99(o)- Fourth Amendment, dated as of September 1, 1996, to $200,000,000
Multi-Year (formerly Three-Year) Credit Agreement, dated as of
September 1, 1993, as amended among Detroit Edison, Renaissance,
the Banks party thereto and Barclays Bank, PLC, New York Branch,
as Agent (Exhibit 99-14 to Form 10-Q for quarter ended September
30, 1996).
99(p)- Fifth Amendment, dated as of August 28, 1997, to $200,000,000
364-Day Credit Agreement, dated as of September 1, 1990, as
amended, among Detroit Edison, Renaissance, the Banks Party
thereto
87
<PAGE> 88
and Barclays Bank PLC, New York Branch, as Agent. (Exhibit 99-25
to Form 10-Q for quarter ended September 30, 1997.)
99(q)- Sixth Amendment, dated as of August 27, 1998, to $200,000,000
364-Day Credit Agreement dated as of September 1, 1990, as
amended, among Detroit Edison, Renaissance, the Banks party
thereto and Barclays Bank PLC, New York Branch, as agent.
(Exhibit 99-32 to Registration No. 333-65765.)
99(r)- 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract,
dated October 4, 1988, between Detroit Edison and Renaissance
(Exhibit 99-9 to Registration No. 33-50325).
99(s)- First Amendment to 1988 Amended and Restated Nuclear Fuel Heat
Purchase Contract, dated as of February 1, 1990, between Detroit
Edison and Renaissance (Exhibit 99-10 to Registration No.
33-50325).
99(t)- Second Amendment, dated as of September 1, 1993, to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract
between Detroit Edison and Renaissance (Exhibit 99-11 to
Registration No. 33-50325).
99(u)- Third Amendment, dated as of August 31, 1994, to 1988 Amended and
Restated Nuclear Fuel Heat Purchase Contract, dated October 4,
1988, between The Detroit Edison Company and Renaissance Energy
Company (Exhibit 99-21 to Form 10-Q for quarter ended September
30, 1994).
99(v)- Fourth Amendment, dated as of March 8, 1996, to 1988 Amended
and Restated Nuclear Fuel Heat Purchase Contract Agreement, dated
as of October 4, 1988, between Detroit Edison and Renaissance
(Exhibit 99-10 to Form 10-Q for quarter ended March 31, 1996).
99(w)- Sixth Amendment, dated as of August 28, 1997, to 1988 Amended and
Restated Nuclear Fuel Heat Purchase Contract between Detroit
Edison and Renaissance. (Exhibit 99-23 to Form 10-Q for quarter
ended September 30, 1997.)
99(x)- Standby Note Purchase Credit Facility, dated as of September 12,
1997, among The Detroit Edison Company and the Bank's Signatory
thereto and The Chase Manhattan Bank, as Administrative Agent,
and Citicorp Securities, Inc., Lehman Brokers, Inc., as
Remarketing Agents and Chase Securities, Inc. as Arranger.
(Exhibit 999-26 to Form 10-Q for quarter ended September 30,
1997.)
99(y)- Master Trust Agreement ("Master Trust"), dated as of June 30,
1994, between Detroit Edison and Fidelity Management Trust
Company relating to the Savings & Investment Plans (Exhibit 4-167
to Form 10- Q for quarter ended June 30, 1994).
99(z)- First Amendment, effective as of February 1, 1995, to Master
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<PAGE> 89
Trust (Exhibit 4-10 to Registration No. 333-00023).
99(aa)- Second Amendment, effective as of February 1, 1995 to Master
Trust (Exhibit 4-11 to Registration No. 333-00023).
99(bb)- Third Amendment, effective January 1, 1996, to Master Trust
(Exhibit 4-12 to Registration No. 333-00023).
99(cc)- Fourth Amendment to Trust Agreement Between Fidelity Management
Trust Company and The Detroit Edison Company (July 1996).
(Exhibit 4-186 to Form 10-K for year ended December 31, 1997.)
99(dd)- Fifth Amendment to Trust Agreement Between Fidelity Management
Trust Company and The Detroit Edison Company (December 1997).
(Exhibit 4-186 to Form 10-K for the year ended December 31,
1997.)
99(ee)- The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Savings Reparation Plan (Exhibit 99-1 to
Form 10-K for year ended December 31, 1996).
99(ff)- The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Retirement Reparation Plan (Exhibit 99-2
to Form 10-K for year ended December 31, 1996).
99(gg)- The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Management Supplemental Benefit Plan
(Exhibit 99-3 to Form 10-K for year ended December 31, 1996).
99(hh)- The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Benefit Equalization Plan (Exhibit 99-4 to
Form 10-K for year ended December 31, 1996).
99(ii)- The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Plan for Deferring the Payment of
Directors' Fees (Exhibit 99-5 to Form 10-K for year ended
December 31, 1996).
99(jj)- The Detroit Edison Company Irrevocable Grantor Trust for The
DTE Energy Company Retirement Plan for Non-Employee Directors
(Exhibit 99-6 to Form 10-K for year ended December 31, 1996).
99(kk)- DTE Energy Company Irrevocable Grantor Trust for The DTE
Energy Company Plan for Deferring the Payment of Directors' Fees
(Exhibit 99-7 to Form 10-K for year ended December 31, 1996).
99(ll)- DTE Energy Company Irrevocable Grantor Trust for The DTE
Energy Company Retirement Plan for Non-Employee Directors
(Exhibit 99-8 to Form 10-K for year ended December 31, 1996).
89
<PAGE> 90
(b) Registrants filed a report on Form 8-K, dated January 22, 1999,
discussing a series of MPSC Orders issued December 28, 1998.
(c) *Denotes management contract or compensatory plan or arrangement
required to be entered as an exhibit to this report.
90
<PAGE> 91
DTE ENERGY COMPANY AND
THE DETROIT EDISON COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance --------------------------- Balance
at Beginning Charged to Charged to at End
of Costs and Other of
Description Period Expenses Accounts(a) Deductions(b) Period
- --------------------------------------------- ------------- ---------- ----------- ------------- -------
(Thousands)
<S> <C> <C> <C> <C> <C>
YEAR 1998
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet)........................ $ 20,000 $ 23,216 $ 2,789 $ (26,005) $ 20,000
YEAR 1997
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet)........................ $ 20,000 $ 18,738 $ 2,657 $ (21,395) $ 20,000
YEAR 1996
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet)........................ $ 22,000 $ 12,756 $ 2,763 $ (17,519) $ 20,000
</TABLE>
- -------------------------------------------
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.
91
<PAGE> 92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S><C>
DTE ENERGY COMPANY
-------------------------------------
(Registrant)
By /s/ ANTHONY F. EARLEY, JR. By /s/ LARRY G. GARBERDING
------------------------------------ -------------------------------------
Anthony F. Earley, Jr. Larry G. Garberding
Chairman of the Board, Executive Vice President,
Chief Executive Officer, President Chief Financial Officer and Director
and Chief Operating Officer
By /s/ DAVID E. MEADOR By /s/ TERENCE E. ADDERLEY
------------------------------------ -------------------------------------
David E. Meador Terence E. Adderley, Director
Vice President and Controller
By /s/ LILLIAN BAUDER By /s/ DAVID BING
------------------------------------ -------------------------------------
Lillian Bauder, Director David Bing, Director
By /s/ WILLIAM C. BROOKS By /s/ ALLAN D. GILMOUR
------------------------------------ -------------------------------------
William C. Brooks, Director Allan D. Gilmour, Director
By /s/ THEODORE S. LEIPPRANDT By
------------------------------------ -------------------------------------
Theodore S. Leipprandt, Director John E. Lobbia, Director
By /s/ EUGENE A. MILLER By /s/ DEAN E. RICHARDSON
------------------------------------ -------------------------------------
Eugene A. Miller, Director Dean E. Richardson, Director
By /s/ ALAN E. SCHWARTZ By /s/ WILLIAM WEGNER
------------------------------------ -------------------------------------
Alan E. Schwartz, Director William Wegner, Director
</TABLE>
Date: February 24, 1999
92
<PAGE> 93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S><C>
THE DETROIT EDISON COMPANY
-------------------------------------
(Registrant)
By /s/ ANTHONY F. EARLEY, JR. By /s/ LARRY G. GARBERDING
------------------------------------ -------------------------------------
Anthony F. Earley, Jr. Larry G. Garberding
Chairman of the Board, Executive Vice President,
Chief Executive Officer, President Chief Financial Officer and Director
and Chief Operating Officer
By /s/ DAVID E. MEADOR By /s/ TERENCE E. ADDERLEY
------------------------------------ -------------------------------------
David E. Meador Terence E. Adderley, Director
Vice President and Controller
By /s/ LILLIAN BAUDER By /s/ DAVID BING
------------------------------------ -------------------------------------
Lillian Bauder, Director David Bing, Director
By /s/ WILLIAM C. BROOKS By /s/ ALLAN D. GILMOUR
------------------------------------ -------------------------------------
William C. Brooks, Director Allan D. Gilmour, Director
By /s/ THEODORE S. LEIPPRANDT By
------------------------------------ -------------------------------------
Theodore S. Leipprandt, Director John E. Lobbia, Director
By /s/ EUGENE A. MILLER By /s/ DEAN E. RICHARDSON
------------------------------------ -------------------------------------
Eugene A. Miller, Director Dean E. Richardson, Director
By /s/ ALAN E. SCHWARTZ By /s/ WILLIAM WEGNER
------------------------------------ -------------------------------------
Alan E. Schwartz, Director William Wegner, Director
</TABLE>
Date: February 24, 1999
93
<PAGE> 1
EXHIBIT 99.G2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
REGISTRANTS; STATE OF
COMMISSION INCORPORATION; ADDRESS; AND I.R.S. EMPLOYER
FILE NUMBER TELEPHONE NUMBER IDENTIFICATION NO.
----------- --------------------------- ------------------
<S> <C> <C>
1-11607 DTE Energy Company 38-3217752
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-4000
1-2198 The Detroit Edison Company 38-0478650
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-8000
</TABLE>
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
YES X NO __
At October 29, 1999, 145,045,159 shares of DTE Energy's Common Stock,
substantially all held by non-affiliates, were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
DTE ENERGY COMPANY
AND
THE DETROIT EDISON COMPANY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
This document contains the Quarterly Reports on Form 10-Q for the quarter
ended September 30, 1999 for each of DTE Energy Company and The Detroit Edison
Company. Information contained herein relating to an individual registrant is
filed by such registrant on its own behalf. Accordingly, except for its
subsidiaries, The Detroit Edison Company makes no representation as to
information relating to any other companies affiliated with DTE Energy Company.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 3
Quarterly Report on Form 10-Q for DTE Energy Company:
Part I -- Financial Information........................... 4
Item 1 -- Financial Statements......................... 4
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 20
Part II -- Other Information.............................. 28
Item 5 -- Other Information............................ 28
Quarterly Report on Form 10-Q for The Detroit Edison
Company:
Part I -- Financial Information........................... 29
Item 1 -- Financial Statements......................... 29
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 29
Part II -- Other Information.............................. 29
Item 1 -- Legal Proceedings............................ 29
Quarterly Reports on Form 10-Q for DTE Energy Company and
The Detroit Edison Company:
Item 6 -- Exhibits and Reports on Form 8-K............. 30
Signature Page to DTE Energy Company Quarterly Report on
Form 10-Q................................................. 38
Signature Page to The Detroit Edison Company Quarterly
Report on Form 10-Q....................................... 39
</TABLE>
<PAGE> 3
DEFINITIONS
<TABLE>
<S> <C>
Annual Report 1998 Annual Report to the Securities and Exchange Commission
on Form 10-K for DTE Energy Company or The Detroit Edison
Company, as the case may be
Annual Report Notes Notes to Consolidated Financial Statements appearing on
pages 45 through 72 and 76 through 79 of the 1998 Annual
Report to the Securities and Exchange Commission on Form
10-K for DTE Energy Company and The Detroit Edison Company,
as the case may be
Company DTE Energy Company and Subsidiary Companies
Detroit Edison The Detroit Edison Company (a wholly owned subsidiary of DTE
Energy Company) and Subsidiary Companies
DTE Capital DTE Capital Corporation (a wholly owned subsidiary of DTE
Energy Company)
Electric Choice Gives all retail customers equal opportunity to utilize the
transmission system which results in access to competitive
generation resources
EPA United States Environmental Protection Agency
FERC Federal Energy Regulatory Commission
kWh Kilowatthour
MCN MCN Energy Group Inc.
MPSC Michigan Public Service Commission
MW Megawatt
MWh Megawatthour
Note(s) Note(s) to Condensed Consolidated Financial Statements
(Unaudited) appearing herein
PSCR Power Supply Cost Recovery
Quarterly Report Quarterly Report to the Securities and Exchange Commission
on Form 10-Q for DTE Energy Company or The Detroit Edison
Company, as the case may be, for the quarters ended March
31, 1999 and June 30, 1999
Quarterly Report Notes Notes to Condensed Consolidated Financial Statements
(Unaudited) appearing on pages 16 through 18 of the
Quarterly Report to the Securities and Exchange Commission
on Form 10-Q for the quarters ended March 31, 1999 and June
30, 1999 for DTE Energy Company and The Detroit Edison
Company, as the case may be
Registrant Company or Detroit Edison, as the case may be
</TABLE>
3
<PAGE> 4
QUARTERLY REPORT ON FORM 10-Q FOR DTE ENERGY COMPANY
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
The following condensed consolidated financial statements (unaudited) are
included herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DTE Energy Company:
Condensed Consolidated Statement of Income 5
Condensed Consolidated Balance Sheet 6
Condensed Consolidated Statement of Cash Flows 8
Condensed Consolidated Statement of Changes in
Shareholders' Equity 9
The Detroit Edison Company:
Condensed Consolidated Statement of Income 11
Condensed Consolidated Balance Sheet 12
Condensed Consolidated Statement of Cash Flows 14
Condensed Consolidated Statement of Changes in
Shareholder's Equity 15
Notes to Condensed Consolidated Financial Statements
(Unaudited) 16
Independent Accountants' Report 19
</TABLE>
Note: Detroit Edison's Condensed Consolidated Financial Statements are presented
here for ease of reference and are not considered to be part of Item I of
the Company's report.
4
<PAGE> 5
DTE ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES.......................................... $1,440 $1,199 $3,614 $3,208
------ ------ ------ ------
OPERATING EXPENSES
Fuel and purchased power............................... 510 359 1,063 852
Operation and maintenance.............................. 397 338 1,086 906
Depreciation and amortization.......................... 183 169 547 496
Taxes other than income................................ 69 67 211 207
------ ------ ------ ------
Total Operating Expenses.......................... 1,159 933 2,907 2,461
------ ------ ------ ------
OPERATING INCOME............................................ 281 266 707 747
------ ------ ------ ------
INTEREST EXPENSE AND OTHER
Interest expense....................................... 95 83 260 236
Preferred stock dividends of subsidiary................ -- 1 -- 6
Other -- net........................................... 4 4 13 9
------ ------ ------ ------
Total Interest Expense and Other.................. 99 88 273 251
------ ------ ------ ------
INCOME BEFORE INCOME TAXES.................................. 182 178 434 496
INCOME TAXES................................................ 21 46 48 159
------ ------ ------ ------
NET INCOME.................................................. $ 161 $ 132 $ 386 $ 337
====== ====== ====== ======
AVERAGE COMMON SHARES OUTSTANDING........................... 145 145 145 145
------ ------ ------ ------
EARNINGS PER COMMON SHARE --
BASIC AND DILUTED......................................... $ 1.11 $ 0.91 $ 2.66 $ 2.32
------ ------ ------ ------
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
<PAGE> 6
DTE ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 54 $ 130
Restricted cash........................................... 317 121
Accounts receivable
Customer (less allowance for doubtful accounts of $21
and $20, respectively)................................ 437 316
Accrued unbilled revenues.............................. 154 153
Other.................................................. 97 135
Inventories (at average cost)
Fuel................................................... 148 171
Materials and supplies................................. 160 167
Other..................................................... 87 39
------- -------
1,454 1,232
------- -------
INVESTMENTS
Nuclear decommissioning trust funds....................... 337 309
Other..................................................... 229 261
------- -------
566 570
------- -------
PROPERTY
Property, plant and equipment............................. 11,580 11,121
Property under capital leases............................. 222 242
Nuclear fuel under capital lease.......................... 662 659
Construction work in progress............................. 108 156
------- -------
12,572 12,178
------- -------
Less accumulated depreciation and amortization.............. 5,507 5,235
------- -------
7,065 6,943
------- -------
REGULATORY ASSETS........................................... 2,972 3,091
------- -------
OTHER ASSETS................................................ 259 252
------- -------
TOTAL ASSETS...................................... $12,316 $12,088
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
6
<PAGE> 7
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 215 $ 239
Accrued interest.......................................... 53 57
Dividends payable......................................... 75 75
Accrued payroll........................................... 86 101
Short-term borrowings..................................... 296 231
Income taxes.............................................. 73 69
Current portion long-term debt............................ 566 294
Current portion capital leases............................ 87 118
Other..................................................... 240 208
------- -------
1,691 1,392
------- -------
OTHER LIABILITIES
Deferred income taxes..................................... 1,902 1,888
Capital leases............................................ 118 126
Regulatory liabilities.................................... 230 294
Other..................................................... 532 493
------- -------
2,782 2,801
------- -------
LONG-TERM DEBT.............................................. 3,985 4,197
------- -------
SHAREHOLDERS' EQUITY
Common stock, without par value, 400,000,000 shares
authorized, 145,045,159 and 145,071,317 issued and
outstanding, respectively.............................. 1,950 1,951
Retained earnings......................................... 1,908 1,747
------- -------
3,858 3,698
------- -------
CONTINGENCIES (NOTE 5)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $12,316 $12,088
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
7
<PAGE> 8
DTE ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30
--------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income................................................ $ 386 $ 337
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 518 474
Other.................................................. (43) (57)
Changes in current assets and liabilities:
Restricted cash...................................... (11) (70)
Accounts receivable.................................. (84) (89)
Inventories.......................................... 30 (36)
Payables............................................. (43) 51
Other................................................ (16) 44
----- -----
Net cash from operating activities..................... 737 654
----- -----
INVESTING ACTIVITIES
Plant and equipment expenditures.......................... (530) (655)
Investment in coke oven battery businesses................ -- (195)
----- -----
Net cash used for investing activities................. (530) (850)
----- -----
FINANCING ACTIVITIES
Issuance of long-term debt................................ 265 363
Increase in short-term borrowings......................... 65 356
Increase in restricted cash for debt redemptions.......... (185) --
Redemption of long-term debt.............................. (204) (187)
Redemption of preferred stock............................. -- (100)
Dividends on common stock................................. (224) (224)
Other..................................................... -- 3
----- -----
Net cash (used for) from financing activities.......... (283) 211
----- -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (76) 15
----- -----
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........ 130 45
----- -----
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............. $ 54 $ 60
===== =====
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized)............ $ 263 $ 244
Income taxes paid......................................... 102 115
New capital lease obligations............................. 3 52
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
8
<PAGE> 9
DTE ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
1999
-----------------
SHARES AMOUNT
------ ------
<S> <C> <C>
COMMON STOCK
Balance at beginning of year.............................. 145,071 $1,951
Repurchase and retirement of common stock................. (26) (1)
------- ------
Balance at September 30, 1999............................. 145,045 $1,950
------- ------
RETAINED EARNINGS
Balance at beginning of year.............................. $1,747
Net income................................................ 386
Dividends declared on common stock ($1.545 per share)..... (224)
Repurchase and retirement of common stock................. (1)
------
Balance at September 30, 1999............................. $1,908
------
TOTAL SHAREHOLDERS' EQUITY........................ $3,858
======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
9
<PAGE> 10
[This page intentionally left blank.]
10
<PAGE> 11
THE DETROIT EDISON COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES.......................................... $1,211 $1,105 $3,128 $2,998
------ ------ ------ ------
OPERATING EXPENSES
Fuel and purchased power.................................. 405 344 888 818
Operation and maintenance................................. 275 249 773 719
Depreciation and amortization............................. 176 162 522 486
Taxes other than income................................... 69 66 210 206
------ ------ ------ ------
Total Operating Expenses.......................... 925 821 2,393 2,229
------ ------ ------ ------
OPERATING INCOME............................................ 286 284 735 769
------ ------ ------ ------
INTEREST EXPENSE AND OTHER
Interest expense.......................................... 82 72 219 208
Other -- net.............................................. 1 3 3 13
------ ------ ------ ------
Total Interest Expense and Other.................. 83 75 222 221
------ ------ ------ ------
INCOME BEFORE INCOME TAXES.................................. 203 209 513 548
INCOME TAXES................................................ 65 84 164 230
------ ------ ------ ------
NET INCOME.................................................. 138 125 349 318
PREFERRED STOCK DIVIDENDS................................... -- 1 -- 6
------ ------ ------ ------
NET INCOME AVAILABLE FOR COMMON STOCK....................... $ 138 $ 124 $ 349 $ 312
====== ====== ====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
11
<PAGE> 12
THE DETROIT EDISON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 26 $ 5
Restricted cash........................................... 185 --
Accounts receivable
Customer (less allowance for doubtful accounts of
$20).................................................. 378 307
Accrued unbilled revenues.............................. 154 153
Other.................................................. 64 90
Inventories (at average cost)
Fuel................................................... 148 171
Materials and supplies................................. 135 138
Other..................................................... 64 21
------- -------
1,154 885
------- -------
INVESTMENTS
Nuclear decommissioning trust funds....................... 337 309
Other..................................................... 39 74
------- -------
376 383
------- -------
PROPERTY
Property, plant and equipment............................. 11,029 10,610
Property under capital leases............................. 222 242
Nuclear fuel under capital lease.......................... 662 659
Construction work in progress............................. 9 118
------- -------
11,922 11,629
------- -------
Less accumulated depreciation and amortization.............. 5,446 5,201
------- -------
6,476 6,428
------- -------
REGULATORY ASSETS........................................... 2,972 3,091
------- -------
OTHER ASSETS................................................ 213 200
------- -------
TOTAL ASSETS...................................... $11,191 $10,987
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
12
<PAGE> 13
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 167 $ 211
Accrued interest.......................................... 43 54
Dividends payable......................................... 80 80
Accrued payroll........................................... 80 86
Short-term borrowings..................................... 296 231
Income taxes.............................................. 104 60
Current portion long-term debt............................ 479 219
Current portion capital leases............................ 87 118
Other..................................................... 192 203
------- -------
1,528 1,262
------- -------
OTHER LIABILITIES
Deferred income taxes..................................... 1,867 1,846
Capital leases............................................ 118 126
Regulatory liabilities.................................... 230 294
Other..................................................... 517 484
------- -------
2,732 2,750
------- -------
LONG-TERM DEBT.............................................. 3,308 3,462
------- -------
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 400,000,000 shares
authorized, 145,119,875 issued and outstanding......... 1,451 1,451
Premium on common stock................................... 548 548
Common stock expense...................................... (48) (48)
Retained earnings......................................... 1,672 1,562
------- -------
3,623 3,513
------- -------
CONTINGENCIES (NOTE 5)
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........ $11,191 $10,987
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
13
<PAGE> 14
THE DETROIT EDISON COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30
--------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income................................................ $ 349 $ 318
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 493 463
Other.................................................. (5) (168)
Changes in current assets and liabilities:
Accounts receivable.................................. (46) (64)
Inventories.......................................... 26 (32)
Payables............................................. (61) 103
Other................................................ (53) (48)
----- -----
Net cash from operating activities..................... 703 572
----- -----
INVESTING ACTIVITIES
Plant and equipment expenditures.......................... (429) (365)
----- -----
Net cash used for investing activities................. (429) (365)
----- -----
FINANCING ACTIVITIES
Issuance of long-term debt................................ 265 100
Increase in short-term borrowings......................... 65 205
Increase in restricted cash for debt redemptions.......... (185) --
Redemption of long-term debt.............................. (159) (169)
Redemption of preferred stock............................. -- (100)
Dividends on common and preferred stock................... (239) (245)
Other..................................................... -- 3
----- -----
Net cash used for financing activities................. (253) (206)
----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 21 1
----- -----
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........ 5 15
----- -----
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............. $ 26 $ 16
===== =====
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized)............ $ 229 $ 219
Income taxes paid......................................... 186 195
New capital lease obligations............................. 3 52
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
14
<PAGE> 15
THE DETROIT EDISON COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
(MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
1999
-----------------
SHARES AMOUNT
------ ------
<S> <C> <C>
COMMON STOCK
Balance at beginning of year.............................. 145,120 $1,451
------- ------
Balance at September 30, 1999............................. 145,120 $1,451
------- ------
PREMIUM ON COMMON STOCK
Balance at beginning of year.............................. $ 548
------
Balance at September 30, 1999............................. $ 548
------
COMMON STOCK EXPENSE
Balance at beginning of year.............................. $ (48)
------
Balance at September 30, 1999............................. $ (48)
------
RETAINED EARNINGS
Balance at beginning of year.............................. $1,562
Net income................................................ 349
Dividends declared on common stock ($1.65 per share)...... (239)
------
Balance at September 30, 1999............................. $1,672
------
TOTAL SHAREHOLDER'S EQUITY.................................. $3,623
======
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
15
<PAGE> 16
DTE ENERGY COMPANY AND THE DETROIT EDISON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- ANNUAL REPORT NOTES
These condensed consolidated financial statements (unaudited) should be
read in conjunction with the Annual Report Notes and the Quarterly Report Notes.
The Notes contained herein update and supplement matters discussed in the Annual
Report Notes and the Quarterly Report Notes.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements are unaudited, but in the
opinion of the Company and Detroit Edison, with respect to its own financial
statements, include all adjustments necessary for a fair statement of the
results for the interim periods. Financial results for this interim period are
not necessarily indicative of results that may be expected for any other interim
period or for the fiscal year.
Certain prior year balances have been reclassified to conform to the
current year's presentation.
NOTE 2 -- MERGER AGREEMENT
On October 4, 1999 the Company entered into a definitive merger agreement
with MCN. MCN, a Michigan corporation, is primarily involved in natural gas
production, gathering, processing, transmission, storage and distribution,
electric power generation and energy marketing. MCN's largest subsidiary is
Michigan Consolidated Gas Company, a natural gas utility serving 1.2 million
customers in more than 500 communities throughout Michigan. The merger, which is
subject to a number of regulatory approvals, is expected to be completed in six
to nine months. The merger agreement provides that the Company will acquire all
outstanding shares of MCN for $28.50 per share in cash or 0.775 shares of
Company common stock for each share of MCN common stock, subject to certain
allocation procedures requiring that the aggregate number of shares of MCN
common stock that will be converted into cash and the Company's common stock
will be equal to 55% and 45%, respectively, of the total number of shares of MCN
common stock outstanding immediately prior to the merger. The transaction was
preliminarily valued at $4.6 billion, which includes the assumption of
approximately $2 billion of MCN's debt.
The merger agreement provides for termination under certain circumstances;
in such event, (1) the Company may be required to pay MCN a termination fee of
$85 million plus expense reimbursement of up to $15 million or (2) MCN may be
required to pay the Company a termination fee of $55 million plus expense
reimbursement of up to $15 million.
16
<PAGE> 17
NOTE 3 -- REGULATORY MATTERS
As discussed in Note 2 of the Annual Report, proceedings were pending
regarding Detroit Edison's recovery of certain extraordinary storm costs over a
24-month period commencing January 1998. On June 11, 1999, in an unpublished
opinion, the Michigan Court of Appeals remanded back to the MPSC for hearing a
November 1997 order that permitted Detroit Edison to amortize extraordinary
storm damage expenses incurred in 1997 over the following two years. The MPSC
had approved Detroit Edison's request to offset the storm damage expense against
a $53 million revenue requirement reduction from the 1988 Fermi settlement on an
ex-parte basis. The Attorney General appealed the MPSC ruling. Detroit Edison
filed a motion for rehearing with the Michigan Court of Appeals on July 1, 1999.
Detroit Edison is unable to determine the timing or the outcome of these
proceedings.
NOTE 4 -- SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
At September 30, 1999, Detroit Edison had total short-term credit
arrangements of approximately $505 million under which $96 million of commercial
paper was outstanding. Additionally, Detroit Edison had a $200 million trade
receivables sales agreement under which $200 million was outstanding at
September 30, 1999.
At September 30, 1999, DTE Capital had short-term credit arrangements of
$400 million, backed by a Support Agreement from the Company, under which no
amounts were outstanding.
In addition, the Company has entered into a total of $550 million of
Support Agreements with DTE Capital for the purpose of DTE Capital's credit
enhancing activities on behalf of DTE Energy affiliates.
NOTE 5 -- CONTINGENCIES
LEGAL PROCEEDINGS
Detroit Edison and plaintiffs in a class action pending in the Circuit
Court for Wayne County, Michigan (Gilford, et al v. Detroit Edison), as well as
plaintiffs in two other pending actions which make class claims (Sanchez, et al
v. Detroit Edison, Circuit Court for Wayne County, Michigan; and Frazier v.
Detroit Edison, United States District Court, Eastern District of Michigan),
agreed to binding arbitration to settle these matters. The settlement agreement
provides that Detroit Edison's monetary liability would be no less than $17.5
million and no greater than $65 million after the conclusion of all related
proceedings. In July 1998, the Consent Judgement received preliminary Court
approval. The Fairness Hearing with respect to the terms of the settlement was
held in August 1998, and no objections to the settlement were raised. On October
28, 1999, a panel of arbitrators awarded the plaintiffs $45.15 million. As a
result of the arbitration award, Detroit Edison must deposit $40.15 million in
an escrow fund for the plaintiffs by November 27, 1999. Due to sufficient prior
accruals and insurance coverage, Detroit Edison does not anticipate a material
1999 earnings impact due to this award.
17
<PAGE> 18
NOTE 6 -- SEGMENT AND RELATED INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." The Company's reportable business segment is its electric
utility, Detroit Edison, which is engaged in the generation, purchase,
transmission, distribution and sale of electric energy in a 7,600 square mile
area in Southeastern Michigan. All other includes non-regulated energy-related
businesses and services, which develop and manage electricity and other
energy-related projects, and engage in domestic energy trading and marketing.
Inter-segment revenues are not material. Financial data for business segments
are as follows:
<TABLE>
<CAPTION>
ELECTRIC ALL RECONCILIATIONS
UTILITY OTHER AND ELIMINATIONS CONSOLIDATED
-------- ----- ---------------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
Three Months Ended September 30, 1999
Operating revenues................................ $1,211 $229 $ -- $1,440
Net income........................................ 138 23 -- 161
Nine Months Ended September 30, 1999
Operating revenues................................ $3,128 $486 $ -- $3,614
Net income........................................ 349 47 (10) 386
Three Months Ended September 30, 1998
Operating revenues................................ $1,105 $ 94 $ -- $1,199
Net income........................................ 124 10 (2) 132
Nine Months Ended September 30, 1998
Operating revenues................................ $2,998 $210 $ -- $3,208
Net income........................................ 312 29 (4) 337
</TABLE>
------------------------
This Quarterly Report on Form 10-Q, including the report of Deloitte &
Touche LLP (on page 19) will automatically be incorporated by reference in the
Prospectuses constituting part of the Registration Statements on Form S-3
(Registration Nos. 33-53207, 33-64296 and 333-65765) of The Detroit Edison
Company and Form S-8 (Registration No. 333-00023), Form S-4 (Registration No.
333-89175) and Form S-3 (Registration No. 33-57545) of DTE Energy Company, filed
under the Securities Act of 1933. Such report of Deloitte & Touche LLP, however,
is not a "report" or "part of the Registration Statement" within the meaning of
Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11(a) of such Act do not apply.
18
<PAGE> 19
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of DTE Energy Company and
The Detroit Edison Company
We have reviewed the accompanying condensed consolidated balance sheets of
DTE Energy Company and subsidiaries and of The Detroit Edison Company and
subsidiaries as of September 30, 1999, and the related condensed consolidated
statements of income for the three-month and nine-month periods ended September
30, 1999 and 1998, the condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 1999 and 1998, and the condensed
consolidated statement of changes in shareholders' equity for the nine-month
period ended September 30, 1999. These financial statements are the
responsibility of DTE Energy Company's management and of The Detroit Edison
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of DTE Energy Company and
subsidiaries and of The Detroit Edison Company and subsidiaries as of December
31, 1998, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 27, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheets
as of December 31, 1998 is fairly stated, in all material respects, in relation
to the consolidated balance sheets from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 8, 1999
19
<PAGE> 20
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This analysis for the three and nine months ended September 30, 1999, as
compared to the same periods in 1998, should be read in conjunction with the
condensed consolidated financial statements (unaudited), the accompanying Notes,
the Quarterly Report Notes and the Annual Report Notes.
Detroit Edison is the principal operating subsidiary of the Company and, as
such, unless otherwise identified, this discussion explains material changes in
results of operations of both the Company and Detroit Edison and identifies
recent trends and events affecting both the Company and Detroit Edison.
GROWTH
As discussed in the Annual Report, in order to sustain earnings growth with
an objective of 6% growth annually, the Company and Detroit Edison have
developed a business strategy focused on core competencies, consisting of
expertise in developing, managing and operating energy assets, including coal
sourcing, blending and transportation skills. As part of this strategy it was
expected that one new line of business would be developed in 1999 through
acquisition or start-up.
As discussed in Note 2, the Company and MCN have entered into a merger
agreement. Subject to the receipt of all regulatory approvals, as well as the
approval of the shareholders of each company, scheduled for December 20, 1999,
the merger is expected to be completed in six to nine months. The Company
expects that completion of the merger will result in the issuance of
approximately 30 million additional shares of its common stock and approximately
$1.4 billion in additional external financing.
The merger of the Company and MCN is expected to create a fully integrated
electric and natural gas company that would be able to achieve an average of $60
million in (after-tax) cost savings per year over the first ten years of the
merger. This business combination is also expected to be accretive to the
Company's earnings per share by 2001 and is expected to strongly support the
Company's commitment to a long-term earnings growth rate of 6%.
The merger agreement also provides for a Company affiliate to purchase all
of MCN's membership interest in several limited liability companies that own and
operate synthetic fuel manufacturing facilities (coal fines plants).
The successful completion and implementation of the merger is subject to a
number of risks, including the satisfactory receipt of all necessary regulatory
approvals, as well as the approval of the shareholders of each company. While
the Company expects that the combined entity will provide for operating cost
reductions, there can be no assurances that such reductions will occur. The
merger is expected to create fully integrated electric and gas operations which
will permit the Company to continue to successfully compete in the energy
markets as competition is fully introduced and implemented; however, there can
be no assurances that the new company will be successfully responsive to
competitive pressures. The external financing needs of the
20
<PAGE> 21
merger may create a sensitivity to interest rate changes; and the Company will
need to successfully integrate the two operations in order to be able to service
the expected debt requirements and achieve aggregate operating cost reductions.
The merger is anticipated to strategically place the Company in the energy
markets, but there can be no assurances that the combination will be successful.
ELECTRIC INDUSTRY RESTRUCTURING
Various bills have been introduced and proposed for introduction at the
Federal level and in the Michigan Legislature addressing competition in the
electric markets. The Company and Detroit Edison are reviewing these bills; and
the impact, which may include generation divestiture, of the adoption and
implementation of one or more of these legislative proposals is unknown. Detroit
Edison is voluntarily proceeding with the implementation of Electric Choice as
provided for in MPSC Orders.
MICHIGAN PUBLIC SERVICE COMMISSION
In March 1999, the MPSC approved an interim code of conduct filed by
Detroit Edison. The interim code allows DTE Energy affiliated companies to
participate in the Electric Choice program. The MPSC also opened a proceeding to
develop a permanent code of conduct. A final order from the MPSC is not expected
until the third quarter of 2000.
In March 1999, Detroit Edison filed an application with the MPSC for
true-up of its stranded costs, including Electric Choice implementation costs,
and on September 17, 1999, filed its direct testimony. The testimony recommended
Detroit Edison continue to provide exclusive metering and billing service, as
set forth in its approved Electric Choice Implementation Plan, at least through
the transition period ending in 2007; supported its proposed true-up methodology
including estimated initial transition charge levels for the year 2002 by
customer class; and supported Detroit Edison's proposed calculation of stranded
costs during the bidding period. The testimony also supported revised stranded
cost balances; presented Detroit Edison's position concerning the true-up of
stranded costs for actual market clearing price, and proposed a method for
identifying resale mitigation resources. In addition, the testimony supported
adjustment to calculations in the PSCR proceeding to account for the resale of
load lost due to the Electric Choice program; and presented its proposed method
for recovery of Electric Choice implementation costs. MPSC Staff and intervenors
have filed testimony in opposition to Detroit Edison's position. A final order
is not expected until the first quarter of 2000.
On July 22, 1999, the Association of Businesses Advocating Tariff Equity
(ABATE) made a filing with the MPSC indicating that Detroit Edison's retail
rates produce approximately $333 million of excess revenues. Of this amount,
approximately $202 million is related to ABATE's proposed reversal of the
December 28, 1998 MPSC order authorizing the accelerated amortization of Fermi
2. On September 22, 1999, Detroit Edison, the MPSC Staff (Staff), the Michigan
Environmental Council and Public Research Group in Michigan, and the Attorney
General (AG) filed their direct cases in
21
<PAGE> 22
the ABATE Complaint Case. Of particular significance is the proposal by the
Staff that the MPSC establish three profitability bands for return on equity
which would produce predefined benefits or penalties. Detroit Edison's testimony
supports a revenue deficiency of $33 million. The Staff concluded that no
revenue sufficiency exists when Detroit Edison's pending required review of its
depreciation rates is taken into account. The Staff also assumed that the Fermi
2 Amortization Order will not be reversed. The AG proposes the reversal of the
Fermi 2 Amortization Order. Detroit Edison will file rebuttal testimony in
mid-November 1999. A final MPSC order is not expected until spring 2000. Detroit
Edison is unable to predict the outcome of this proceeding.
On September 30, 1999, Detroit Edison filed its 2000 PSCR plan case. Fuel
and purchased power costs for 2000 are projected to increase by up to 6 percent,
on average, over the corresponding forecast for 1999. Detroit Edison is seeking
a corresponding increase in its PSCR Factor for 2000. An order is expected in
the third quarter of 2000.
ELECTRIC CHOICE
On June 29, 1999, the Michigan Supreme Court, on a 4-3 vote, issued an
opinion determining that the MPSC lacked authority to order retail wheeling in
the context of an Electric Choice program. The Court reversed an earlier
Michigan Court of Appeals opinion finding such authority and vacated two MPSC
orders directing implementation of the experimental program. The Court held that
the MPSC possesses no common law powers and may only exercise authority clearly
conferred upon it by the Legislature. It stated that retail wheeling issues
involve many policy concerns and stated that the Legislature, not the Court, is
the body that must consider and weigh the economic and social costs and benefits
of electric restructuring.
On August 17, 1999, the MPSC issued an order setting a deadline of
September 1, 1999 for Detroit Edison and Consumers Energy to notify the MPSC if
they choose to voluntarily implement the Electric Choice program previously
ordered by the MPSC. On September 1, 1999, Detroit Edison filed a letter with
the MPSC reaffirming the decision to expeditiously move ahead with the voluntary
implementation of Electric Choice. Consumers Energy has likewise agreed to
proceed with the Electric Choice program. On September 20, 1999, the bidding on
the 225 MW allotted for Detroit Edison and 150 MW allotted for Consumers Energy
for the first phase of Electric Choice was fully subscribed. Four additional
bidding phases are contemplated, 225 MW closing on November 19, 1999 and 225 MW
each closing in January, March and November 2000.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash from operating activities for the Company and Detroit Edison was
higher due to increased net income and changes in current assets and
liabilities.
22
<PAGE> 23
CASH USED FOR INVESTING ACTIVITIES
Net cash used for investing activities for the Company was lower due to an
investment in coke oven battery businesses in the prior period and lower plant
and equipment expenditures.
Net cash used for investing activities was higher for Detroit Edison due to
higher plant and equipment expenditures.
CASH (USED FOR) FROM FINANCING ACTIVITIES
Net cash used for financing activities for the Company for the nine month
period ended September 30, 1999 was $283 million compared to net cash from
financing activities of $211 million for the same period in 1998. This
fluctuation was mainly due to a decreased usage of short-term borrowings.
Net cash used for financing activities for Detroit Edison increased due
primarily to an increase in restricted cash for debt redemptions and a decreased
usage of short-term borrowings.
Detroit Edison has an effective shelf registration statement on file with
the Securities and Exchange Commission pursuant to which it may issue up to $225
million in debt securities.
In August 1999, Detroit Edison issued $40 million of General and Refunding
Mortgage Bonds.
In August and September 1999, Detroit Edison issued three series of 30-year
collateralized tax-exempt bonds totaling $225 million. The proceeds were used to
redeem $40 million of debt in September 1999 and the remainder will be used for
December 1999 redemptions.
In November 1999, Detroit Edison purchased $24 million of Mortgage Bonds in
the open market. These bonds have been canceled.
YEAR 2000
The Company and Detroit Edison have been involved in an enterprise-wide
program to address Year 2000 issues. A program office was established in
mid-1997 to implement a rigorous plan to address the impact of Year 2000 on
hardware and software systems, embedded systems (which include microprocessors
used in the production and control of electric power), and critical service
providers. The emphasis has been on mission critical systems that support core
business activities or processes. Core business activities/processes include
safety, environmental and regulatory compliance, product production and
delivery, revenue collection, employee and supplier payment and financial asset
management.
The plan for addressing Year 2000 is divided into several phases including
raising general awareness of Year 2000 throughout the Company and Detroit
Edison; maintaining an inventory of systems and devices; performing an
assessment of inventoried systems and devices; performing compliance testing of
suspect systems and devices; remediation of non-compliant systems and devices
through replacement,
23
<PAGE> 24
repair, retirement, or identifying an acceptable work around; testing and
remediation of systems and devices in an integrated environment and preparing
business continuity plans.
Inventory, assessment and compliance testing phases have been completed for
known systems and devices. Remediation of mission critical assets is complete.
Integration planning, including the mapping of critical business processes, is
complete for Detroit Edison. Integration testing for Detroit Edison is also
complete.
To support the program, the Year 2000 office has been working with major
utility industry associations and organizations, customers and vendors to gather
and share information on Year 2000 issues. Letters were sent to the North
American Electric Reliability Council (NERC) and the U.S. Nuclear Regulatory
Commission (NRC) concerning Year 2000 readiness on June 29, 1999 and June 30,
1999, respectively. These letters confirmed that Detroit Edison systems critical
to the generation, transmission and distribution of power are ready for
operation into the new millennium. The NRC responded on October 1, 1999,
confirming that all requested information has been provided. The program office
has contacted vendors critical to Company operations to determine their progress
on Year 2000.
To further assist in identifying potential problems, tests of generating
facilities have been conducted by advancing control systems dates to the Year
2000. Results of these tests have shown that the generating facilities operated
successfully in this induced "millennium mode." Exercises were conducted on
December 31, 1998 and January 1, 1999 to assess the ability to reach employees
and the regional security centers of the East Central Area Reliability Group
through various communication channels. The exercised communication channels
operated properly. Detroit Edison back-up telecommunication systems worked as
designed in a North America-wide drill conducted on April 9, 1999. Detroit
Edison participated in the NERC nationwide Year 2000 drill for all utility
systems on September 8 and 9, 1999. As a result of the drill, Detroit Edison was
able to demonstrate its ability to deploy resources, perform operation and
administrative procedures, use backup telecommunication systems and implement
some contingency plans.
In the event that an unknown Year 2000 condition adversely affects service
to customers or an internal business process, contingency and business
continuity plans and procedures have been developed to provide rapid restoration
to normal conditions. The Company and Detroit Edison have always maintained a
comprehensive operational emergency response plan. The business continuity
function of the Year 2000 program supplements the existing emergency plan to
include Year 2000 specific events. To manage and coordinate operations,
including mobilization of all employees as necessary during the transition to
the new millennium, a Year 2000 emergency coordination center was fully
operational as of September 30, 1999. During the rollover event, the emergency
management staffing plan calls for 1,300 working and on-call employees to manage
Year 2000 issues. This is in addition to the normal holiday-weekend staff. Most
of the employees work in the Fossil Generation, Nuclear Generation, Energy
Delivery and Information Systems organizations. Key facilities, including
substations, will be staffed during the rollover. The emergency coordination
center will continuously monitor the impact of Year 2000 as it is experienced in
other parts of the world and moves to the Eastern Standard Time zone.
24
<PAGE> 25
The Company and Detroit Edison believe that with all Year 2000
modifications, business continuity and emergency management plans in place, the
Year 2000 will not have a material effect on their financial position, liquidity
and results of operations. Despite all efforts, there can be no assurances that
Year 2000 issues can be totally eliminated. Results of modifications and testing
done through September 30, 1999 have demonstrated that Detroit Edison should be
able to maintain normal operating conditions into the Year 2000, although there
may be isolated electric service interruptions. Detroit Edison's internal
business systems may be affected by a Year 2000 related failure that could
temporarily interrupt the ability to communicate with customers, collect
revenue, or complete cash transactions. In addition, no assurances can be given
that the systems of vendors, interconnected utilities and customers will not
result in Year 2000 problems.
The Company estimates that Year 2000 costs will approximate $87 million
with $81 million expended through September 30, 1999. Operating cash flow is
expected to be sufficient to pay Year 2000 modification costs with no material
impact on operating results or cash flows.
RESULTS OF OPERATIONS
For the three months ended September 30, 1999, the Company's net income was
$161 million or $1.11 per common share as compared to $132 million or $0.91 per
common share during the same period in 1998. For the nine months ended September
30, 1999, net income was $386 million or $2.66 per common share compared to $337
million or $2.32 per common share during the same period in 1998.
The 1999 three and nine month earnings were higher than 1998 due to higher
electric system sales and increased utilization of tax credits generated by
non-regulated businesses, partially offset by higher operating expenses,
primarily Year 2000, fuel and purchased power, and depreciation and amortization
expenses.
OPERATING REVENUES
Increases in operating revenues were due primarily to higher non-regulated
subsidiary revenues, principally energy trading and coke oven battery
operations, higher system sales due to increased customer base and electric
usage and increased heating load for the nine month period, partially offset by
decreased sales between utilities and regulated rate decreases.
25
<PAGE> 26
Detroit Edison kWh sales increased (decreased) as compared to the prior
year as follows:
<TABLE>
<CAPTION>
THREE NINE
MONTHS MONTHS
------ ------
<S> <C> <C>
Residential................................................. 2.0% 3.2%
Commercial.................................................. (0.6) 2.8
Industrial.................................................. 11.1 4.7
Other (includes primarily sales for resale)................. 12.6 10.3
Total System........................................... 3.9 3.8
Sales between utilities..................................... (26.0) (29.6)
Total.................................................. 2.2 0.9
</TABLE>
The increase in residential sales resulted from growth in the customer base
and electric usage, and more heating related demand for the nine month period.
Industrial sales increased, reflecting more heating related demand along with
replacement energy sales for the Ford Rouge Power Plant for the nine month
period and a continuation of favorable economic conditions. Commercial sales
decreased for the three month period due to cooler weather. Sales to other
customers increased reflecting increased demand from sales for resale customers.
Sales between utilities decreased due to less power available for sale.
OPERATING EXPENSES
Fuel and Purchased Power
For the three and nine month periods ended, fuel and purchased power
expense increased for the Company due primarily to new non-regulated subsidiary
expenses, principally energy trading operations. Detroit Edison fuel and
purchased power expense increased due to increased purchases of higher cost
power and higher system output, partially offset by increased usage of lower
cost system generation as a result of increased system availability and lower
fuel unit costs due to decreased nuclear fuel cost and increased usage of low
cost Fermi 2 generation.
Net system output and average fuel and purchased power unit costs for
Detroit Edison were as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(THOUSANDS OF MWH)
<S> <C> <C> <C> <C>
Power plant generation
Fossil.................................................... 11,847 11,387 32,021 32,784
Nuclear................................................... 2,377 1,445 7,028 5,734
Purchased power............................................. 1,988 2,924 5,761 5,706
------ ------ ------ ------
Net system output........................................... 16,212 15,756 44,510 44,224
====== ====== ====== ======
Average unit cost ($/MWh)
Generation................................................ $12.80 $13.18 $12.54 $12.88
Purchased power........................................... 101.62 53.81 60.38 48.33
</TABLE>
26
<PAGE> 27
Operation and Maintenance
Operation and maintenance expense increased for the three and nine month
periods due to new non-regulated subsidiary operation expense ($33 million) and
($126 million), respectively, higher transmission and distribution related
expenses for the three month period ($26 million) and higher expenses for Year
2000 testing and remediation for the nine month period ($27 million). The
increase in non-regulated subsidiary operation expense was due to the increased
level of operation and the addition of new businesses.
Income Taxes
Income tax expense for the Company decreased in 1999 due primarily to
increased utilization of alternate fuels credits generated from non-regulated
businesses and the end of the Fermi 2 phase-in plan.
FORWARD-LOOKING STATEMENTS
Certain information presented herein is based on the expectations of the
Company and Detroit Edison, and, as such, is forward-looking. The Private
Securities Litigation Reform Act of 1995 encourages reporting companies to
provide analyses and estimates of future prospects and also permits reporting
companies to point out that actual results may differ from those anticipated.
Actual results for the Company and Detroit Edison may differ from those
expected due to a number of variables including, but not limited to, weather,
actual sales, the effects of competition and the phased-in implementation of
Electric Choice, the implementation of utility restructuring in Michigan (which
involves pending and proposed regulatory and legislative proceedings, and the
recovery of stranded costs), environmental (including proposed regulations to
limit nitrogen oxide emissions) and nuclear requirements, the impact of FERC
proceedings and regulations, the success of non-regulated lines of business and
the timely completion and functioning of Year 2000 modifications. In addition,
expected results will be dependent upon the successful completion and
implementation of the Company's pending merger with MCN. While the Company and
Detroit Edison believe that estimates given accurately measure the expected
outcome, actual results could vary materially due to the variables mentioned as
well as others. This discussion contains a Year 2000 readiness disclosure.
27
<PAGE> 28
QUARTERLY REPORT ON FORM 10-Q FOR DTE ENERGY COMPANY
PART II -- OTHER INFORMATION
ITEM 5 -- OTHER INFORMATION.
A special meeting of the Company's common shareholders will be held on
December 20, 1999. At this meeting, Shareholders will be asked to approve the
issuance of common stock in connection with the MCN merger. The affirmative vote
of a majority of shares voting is required for passage.
28
<PAGE> 29
QUARTERLY REPORT ON FORM 10-Q FOR THE DETROIT EDISON COMPANY
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
See pages 11 through 15.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See the Company's and Detroit Edison's "Item 2 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations," which is
incorporated herein by this reference.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS.
In a lawsuit filed in January 1999 in the Circuit Court for Wayne County
Michigan (Cook, et al v. Detroit Edison), a number of individual plaintiffs have
claimed employment-related sex, gender and race discrimination, as well as
harassment. A hearing on plaintiffs' request for class action certification is
scheduled to be held in December 1999. Detroit Edison believes the claims are
without merit and class action certification is not appropriate.
29
<PAGE> 30
QUARTERLY REPORTS ON FORM 10-Q FOR
DTE ENERGY COMPANY AND THE DETROIT EDISON COMPANY
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(i) Exhibits filed herewith.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
3-14 -- Bylaws of Detroit Edison, as amended through September 22,
1999.
4-204 -- Supplemental Indenture, dated as of August 1, 1999, creating
the General and Refunding Mortgage Bonds, 1999 Series AP,
Due September 1, 2029; 1999 Series BP, Due September 1,
2029; and 1999 Series LP, Due September 1, 2029.
4-205 -- Supplemental Indenture, dated as of August 15, 1999,
creating the General and Refunding Mortgage Bonds, Floating
Rate 1999 Series D Due September 17, 2001.
11-17 -- DTE Energy Company Basic and Diluted Earnings Per Share of
Common Stock.
12-20 -- DTE Energy Company Computation of Ratio of Earnings to Fixed
Charges.
12-21 -- The Detroit Edison Company Computation of Ratio of Earnings
to Fixed Charges.
15-12 -- Awareness Letter of Deloitte & Touche LLP regarding their
report dated November, 1999.
27-29 -- Financial Data Schedule for the period ended September 30,
1999 for DTE Energy Company.
27-30 -- Financial Data Schedule for the period ended September 30,
1999 for The Detroit Edison Company.
99-29 -- U.S. $160,000,000 Standby Note Purchase Credit Facility,
dated as of October 26, 1999, among Detroit Edison, the
Bank's signatory thereto, Barclays Bank PLC, as
Administrative Agent and Barclays Capital Inc., Lehman
Brothers Inc. and Banc One Capital Markets, Inc., as
Remarketing Agents.
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C>
99-30 -- Seventh Amendment, dated as of August 26, 1999, to
$200,000,000 364-Day Credit Agreement, dated as of September
1, 1993, as amended among The Detroit Edison Company,
Renaissance Energy Company, the Banks parties thereto and
Barclays Bank PLC, New York branch as Agent.
99-31 -- Eighth Amendment, dated as of August 26, 1999 to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract
between Detroit Edison and Renaissance Energy Company.
</TABLE>
(ii) Exhibits incorporated herein by reference.
<TABLE>
<S> <C> <C>
2(a) -- Agreement and Plan of Merger, among DTE Energy Company, MCN
Energy Group Inc. and DTE Enterprises, Inc., dated as of
October 4, 1999 (Exhibit 2(a) to Form 8-K dated October 5,
1999).
3(a) -- Amended and Restated Articles of Incorporation of DTE Energy
Company, dated December 13, 1995. (Exhibit 3-5 to Form 10-Q
for quarter ended September 30, 1997).
3(b) -- Certificate of Designation of Series A Junior Participating
Preferred Stock of DTE Energy Company. Exhibit 3-6 to Form
10-Q for quarter ended September 30, 1997.)
3(c) -- Bylaws of DTE Energy Company, as amended through September
22, 1999 (Exhibit 3-3 to Registration No. 333-89175).
3(d) -- Articles of Incorporation of DTE Enterprises, Inc. (Exhibit
3.5 to Registration No. 333-89175).
3(e) -- Bylaws of DTE Enterprises, Inc. (Exhibit 3.6 to Registration
No. 333-89175).
3(f) -- Rights Agreement, dated as of September 23, 1997, by and
between DTE Energy Company and The Detroit Edison Company,
as Rights Agent (Exhibit 4-1 to DTE Energy Company Current
Report on Form 8-K, dated September 23, 1997).
3(g) -- Agreement and Plan of Exchange (Exhibit 1(2) to DTE Energy
Form 8-B filed January 2, 1996, File No. 1-11607).
4(a) -- Mortgage and Deed of Trust, dated as of October 1, 1924,
between Detroit Edison (File No. 1-2198) and Bankers Trust
Company as Trustee (Exhibit B-1 to Registration No. 2-1630)
and indentures supplemental thereto, dated as of dates
indicated below, and filed as exhibits to the filings as set
forth below:
</TABLE>
<TABLE>
<S> <C> <C> <C>
September 1, 1947 Exhibit B-20 to Registration No. 2-7136
October 1, 1968 Exhibit 2-B-33 to Registration No. 2-30096
November 15, 1971 Exhibit 2-B-38 to Registration No. 2-42160
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
January 15, 1973 Exhibit 2-B-39 to Registration No. 2-46595
June 1, 1978 Exhibit 2-B-51 to Registration No. 2-61643
June 30, 1982 Exhibit 4-30 to Registration No. 2-78941
August 15, 1982 Exhibit 4-32 to Registration No. 2-79674
October 15, 1985 Exhibit 4-170 to Form 10-K for year ended December 31, 1994
November 30, 1987 Exhibit 4-139 to Form 10-K for year ended December 31, 1992
July 15, 1989 Exhibit 4-171 to Form 10-K for year ended December 31, 1994
December 1, 1989 Exhibit 4-172 to Form 10-K for year ended December 31, 1994
February 15, 1990 Exhibit 4-173 to Form 10-K for year ended December 31, 1994
April 1, 1991 Exhibit 4-15 to Form 10-K for year ended December 31, 1996
May 1, 1991 Exhibit 4-178 to Form 10-K for year ended December 31, 1996
May 15, 1991 Exhibit 4-179 to Form 10-K for year ended December 31, 1996
September 1, 1991 Exhibit 4-180 to Form 10-K for year ended December 31, 1996
November 1, 1991 Exhibit 4-181 to Form 10-K for year ended December 31, 1996
January 15, 1992 Exhibit 4-182 to Form 10-K for year ended December 31, 1996
February 29, 1992 Exhibit 4-187 to Form 10-Q for quarter ended March 31, 1998
April 15, 1992 Exhibit 4-188 to Form 10-Q for quarter ended March 31, 1998
July 15, 1992 Exhibit 4-189 to Form 10-Q for quarter ended March 31, 1998
July 31, 1992 Exhibit 4-190 to Form 10-Q for quarter ended March 31, 1998
November 30, 1992 Exhibit 4-130 to Registration No. 33-56496
January 1, 1993 Exhibit 4-131 to Registration No. 33-56496
March 1, 1993 Exhibit 4-191 to Form 10-Q for quarter ended March 31, 1998
March 15, 1993 Exhibit 4-192 to Form 10-Q for quarter ended March 31, 1998
April 1, 1993 Exhibit 4-143 to Form 10-Q for quarter ended March 31, 1993
April 26, 1993 Exhibit 4-144 to Form 10-Q for quarter ended March 31, 1993
May 31, 1993 Exhibit 4-148 to Registration No. 33-64296
June 30, 1993 Exhibit 4-149 to Form 10-Q for quarter ended June 30, 1993
(1993 Series AP)
June 30, 1993 Exhibit 4-150 to Form 10-Q for quarter ended June 30, 1993
(1993 Series H)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
September 15, 1993 Exhibit 4-158 to Form 10-Q for quarter ended September 30,
1993
March 1, 1994 Exhibit 4-163 to Registration No. 33-53207
June 15, 1994 Exhibit 4-166 to Form 10-Q for quarter ended June 30, 1994
August 15, 1994 Exhibit 4-168 to Form 10-Q for quarter ended September 30,
1994
December 1, 1994 Exhibit 4-169 to Form 10-K for year ended December 31, 1994
August 1, 1995 Exhibit 4-174 to Form 10-Q for quarter ended September 30,
1995
</TABLE>
<TABLE>
<S> <C> <C>
4(b) -- Collateral Trust Indenture (notes), dated as of June 30,
1993 (Exhibit 4-152 to Registration No. 33-50325).
4(c) -- First Supplemental Note Indenture, dated as of June 30, 1993
(Exhibit 4-153 to Registration No. 33-50325).
4(d) -- Second Supplemental Note Indenture, dated as of September
15, 1993 (Exhibit 4-159 to Form 10-Q for quarter ended
September 30, 1993).
4(e) -- First Amendment, dated as of August 15, 1996, to Second
Supplemental Note Indenture (Exhibit 4-17 to Form 10-Q for
quarter ended September 30, 1996).
4(f) -- Third Supplemental Note Indenture, dated as of August 15,
1994 (Exhibit 4-169 to Form 10-Q for quarter ended September
30, 1994).
4(g) -- First Amendment, dated as of December 12, 1995, to Third
Supplemental Note Indenture, dated as of August 15, 1994
(Exhibit 4-12 to Registration No. 333-00023).
4(h) -- Fourth Supplemental Note Indenture, dated as of August 15,
1995 (Exhibit 4-175 to Detroit Edison Form 10-Q for quarter
ended September 30, 1995).
4(i) -- Fifth Supplemental Note Indenture, dated as of February 1,
1996 (Exhibit 4-14 to Form 10-K for year ended December 31,
1996).
4(j) -- Sixth Supplemental Note Indenture, dated as of May 1, 1998,
between Detroit Edison and Bankers Trust Company, as
Trustee, creating the 7.54% Quarterly Income Debt Securities
("QUIDS"), including form of QUIDS. (Exhibit 4-193 to Form
10-Q for quarter ended June 30, 1998.)
4(k) -- Seventh Supplemental Note Indenture, dated as of October 15,
1998, between Detroit Edison and Bankers Trust Company, as
Trustee, creating the 7.375% QUIDS, including form of QUIDS.
(Exhibit 4-198 to Form 10-K for year ended December 31,
1998.)
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
4(l) -- Standby Note Purchase Credit Facility, dated as of August
17, 1994, among The Detroit Edison Company, Barclays Bank
PLC, as Bank and Administrative Agent, Bank of America, The
Bank of New York, The Fuji Bank Limited, The Long-Term
Credit Bank of Japan, LTD, Union Bank and Citicorp
Securities, Inc. and First Chicago Capital Markets, Inc. as
Remarketing Agents (Exhibit 99-18 to Form 10-Q for quarter
ended September 30, 1994).
4(m) -- $60,000,000 Support Agreement dated as of January 21, 1998
between DTE Energy Company and DTE Capital Corporation.
(Exhibit 4-183 to Form 10-K for year ended December 31,
1997.)
4(n) -- $100,000,000 Support Agreement, dated as of June 16, 1998,
between DTE Energy Company and DTE Capital Corporation.
(Exhibit 4-194 to Form 10-Q for quarter ended June 30,
1998.)
4(o) -- $300,000,000 Support Agreement, dated as of November 18,
1998, between DTE Energy and DTE Capital Corporation.
(Exhibit 4-199 to Form 10-K for year ended December 31,
1998.)
4(p) -- $400,000,000 Support Agreement, dated as of January 19,
1999, between DTE Energy Company and DTE Capital
Corporation. (Exhibit 4-201 to Form 10-K for year ended
December 31, 1998.)
4(q) -- $50,000,000 Support Agreement dated as of June 10, 1999
between DTE Energy Company and DTE Capital Corporation
(Exhibit 4-203 to Form 10-Q for quarter ended June 30,
1999).
4(r) -- Indenture, dated as of June 15, 1998, between DTE Capital
Corporation and The Bank of New York, as Trustee. (Exhibit
4-196 to Form 10-Q for quarter ended June 30, 1998.)
4(s) -- First Supplemental Indenture, dated as of June 15, 1998,
between DTE Capital Corporation and The Bank of New York, as
Trustee, creating the $100,000,000 Remarketed Notes, Series
A due 2038, including form of Note. Exhibit 4-197 to Form
10-Q for quarter ended June 30, 1998.)
4(t) -- Second Supplemental Indenture, dated as of November 1, 1998,
between DTE Capital Corporation and The Bank of New York, as
Trustee, creating the $300,000,000 Remarketed Notes, 1998
Series B, including form of Note. (Exhibit 4-200 to Form
10-K for year ended December 31, 1998.)
4(u) -- Second Amended and Restated Credit Agreement, Dated as of J
January 19, 1999 among DTE Capital Corporation, the Initial
Lenders, Citibank, N.A., as Agent, and ABN AMRO Bank N.V.,
Barclays Bank PLC, Bayerische Landesbank Giruzertrale,
Cayman Islands Branch, Comerica Bank, Den Daske Bank
Aktieselskab and The First National Bank of Chicago, as
Co-Agents, and Salomon Smith Barney Inc., as
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C> <C>
Arranger. (Exhibit 99-28 to Form 10-K for year ended
December 31, 1998).
4(v) -- $40,000,000 Support Agreement dated as of February 24, 1999
between DTE Energy Company and DTE Capital Corporation
(Exhibit 4-202 to Form 10-Q for quarter ended March 31,
1999).
99(a) -- Belle River Participation Agreement between Detroit Edison
and Michigan Public Power Agency, dated as of December 1,
1982 (Exhibit 28-5 to Registration No. 2-81501).
99(b) -- Belle River Transmission Ownership and Operating Agreement
between Detroit Edison and Michigan Public Power Agency,
dated as of December 1, 1982 (Exhibit 28-6 to Registration
No. 2-81501).
99(c) -- 1988 Amended and Restated Loan Agreement, dated as of
October 4, 1988, between Renaissance Energy Company (an
unaffiliated company) ("Renaissance") and Detroit Edison
(Exhibit 99-6 to Registration No. 33-50325).
99(d) -- First Amendment to 1988 Amended and Restated Loan Agreement,
dated as of February 1, 1990, between Detroit Edison and
Renaissance (Exhibit 99-7 to Registration No. 33-50325).
99(e) -- Second Amendment to 1988 Amended and Restated Loan
Agreement, dated as of September 1, 1993, between Detroit
Edison and Renaissance (Exhibit 99-8 to Registration No.
33-50325).
99(f) -- Third Amendment, dated as of August 28, 1997, to 1988
Amended and Restated Loan Agreement between Detroit Edison
and Renaissance (Exhibit 99-22 to Form 10-Q for quarter
ended September 30, 1997.)
99(g) -- $200,000,000 364-Day Credit Agreement, dated as of September
1, 1993, among Detroit Edison, Renaissance and Barclays Bank
PLC, New York Branch, as Agent (Exhibit 99-12 to
Registration No. 33-50325).
99(h) -- First Amendment, dated as of August 31, 1994, to
$200,000,000 364-Day Credit Agreement, dated September 1,
1993, among The Detroit Edison Company, Renaissance Energy
Company, the Banks party thereto and Barclays Bank, PLC, New
York Branch, as Agent (Exhibit 99-19 to Form 10-Q for
quarter ended September 30, 1994).
99(i) -- Third Amendment, dated as of March 8, 1996, to $200,000,000
364-Day Credit Agreement, dated September 1, 1993, as
amended, among Detroit Edison, Renaissance, the Banks party
thereto and Barclays Bank, PLC, New York Branch, as Agent
(Exhibit 99-11 to Form 10-Q for quarter ended March 31,
1996).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C>
99(j) -- Fourth Amendment, dated as of August 29, 1996, to
$200,000,000 364-Day Credit Agreement as of September 1,
1990, as amended, among Detroit Edison, Renaissance, the
Banks party thereto and Barclays Bank, PLC, New York Branch,
as Agent (Exhibit 99-13 to Form 10-Q for quarter ended
September 30, 1996).
99(k) -- Fifth Amendment, dated as of September 1, 1997, to
$200,000,000 Multi-Year Credit Agreement, dated as of
September 1, 1993, as amended, among Detroit Edison,
Renaissance, the Banks Party thereto and Barclays Bank PLC,
New York Branch, as Agent. (Exhibit 99-24 to Form 10-Q for
quarter ended September 30, 1997.)
99(l) -- $200,000,000 Three-Year Credit Agreement, dated September 1,
1993, among Detroit Edison, Renaissance and Barclays Bank,
PLC, New York Branch, as Agent (Exhibit 99-13 to
Registration No. 33-50325).
99(m) -- First Amendment, dated as of September 1, 1994, to
$200,000,000 Three-Year Credit Agreement, dated as of
September 1, 1993, among The Detroit Edison Company,
Renaissance Energy Company, the Banks party thereto and
Barclays Banks party thereto and Barclays Bank, PLC, New
York Branch, as Agent (Exhibit 99-14 to Form 10-Q for
quarter ended September 30, 1996).
99(p) -- Fifth Amendment, dated as of August 28, 1997, to
$200,000,000 364-Day Credit Agreement, dated as of September
1, 1990, as amended, among Detroit Edison, Renaissance, the
Banks Party thereto and Barclays Bank PLC, New York Branch,
as Agent (Exhibit 99-25 to Form 10-Q for quarter ended
September 30, 1997.)
99(q) -- Sixth Amendment, dated as of August 27, 1998, to
$200,000,000 364-Day Credit Agreement dated as of September
1, 1990, as amended, among Detroit Edison, Renaissance, the
Banks party thereto and Barclays Bank PLC, New York Branch,
as agent. (Exhibit 99-32 to Registration No. 333-65765.)
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C>
99(r) -- 1988 Amended and Restated Nuclear Fuel Heat Purchase
Contract, dated October 4, 1988, between Detroit Edison and
Renaissance (Exhibit 99-9 to Registration No. 33-50325).
99(s) -- First Amendment to 1988 Amended and Restated Nuclear Fuel
Heat Purchase Contract, dated as of February 1, 1990,
between Detroit Edison and Renaissance (Exhibit 99-10 to
Registration No. 33-50325).
99(t) -- Second Amendment, dated as of September 1, 1993, to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract
between Detroit Edison and Renaissance (Exhibit 99-11 to
Registration No. 33-50325).
99(u) -- Third Amendment, dated as of August 31, 1994, to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract,
dated October 4, 1988, between The Detroit Edison Company
and Renaissance Energy Company (Exhibit 99-21 to Form 10-Q
for quarter ended September 30, 1994).
99(v) -- Fourth Amendment, dated as of March 8, 1996, to 1988 Amended
and Restated Nuclear Fuel Heat Purchase Contract Agreement,
dated as of October 4, 1988, between Detroit Edison and
Renaissance (Exhibit 99-10 to Form 10-Q for quarter ended
March 31, 1996).
99(w) -- Sixth Amendment, dated as of August 28, 1997, to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract
between Detroit Edison and Renaissance. (Exhibit 99-23 to
Form 10-Q for quarter ended September 30, 1997.)
99(x) -- Standby Note Purchase Credit Facility, dated as of September
12, 1997, among The Detroit Edison Company and the Bank's
Signatory thereto and The Chase Manhattan Bank, as
Administrative Agent, and Citicorp Securities, Inc., Lehman
Brokers, Inc., as Remarketing Agents and Chase Securities,
Inc. as Arranger. (Exhibit 999-26 to Form 10-Q for quarter
ended September 30, 1997.)
</TABLE>
(b) On October 5, 1999 the Company filed a Current Report on Form 8-K discussing
the proposed merger with MCN.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
DTE ENERGY COMPANY
--------------------------------------------------------
(Registrant)
Date November 8, 1999 /s/ SUSAN M. BEALE
--------------------------------------------------------
Susan M. Beale
Vice President and Corporate Secretary
Date November 8, 1999 /s/ DAVID E. MEADOR
--------------------------------------------------------
David E. Meador
Vice President
</TABLE>
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE DETROIT EDISON COMPANY
--------------------------------------------------------
(Registrant)
Date November 8, 1999 /s/ SUSAN M. BEALE
--------------------------------------------------------
Susan M. Beale
Vice President and Corporate Secretary
Date November 8, 1999 /s/ DANIEL G. BRUDZYNSKI
--------------------------------------------------------
Daniel G. Brudzynski
Controller
</TABLE>
39
<PAGE> 1
EXHIBIT 99.G3
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) October 15, 1999
MCN Energy Group Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MICHIGAN 1-10070 38-2820658
State of Incorporation (Commission File (I.R.S. Employer
Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(313) 256-5500
<PAGE> 2
Item 5. Other Events
The registrant is filing herewith the following in connection with management's
decision, in August 1999, to retain its natural gas producing properties in
Michigan. In the 1998 MCN Annual Report on Form 10-K/A, MCN accounted for its
Exploration & Production (E&P) segment, which included these properties, as a
discontinued operation. Accordingly, E&P's operating results for prior periods
have been reclassified from discontinued operations to continuing operations.
The decision to retain these properties was based on the interaction of two
factors. MCN significantly revised its strategic direction. Key aspects of the
new corporate strategy include a Midwest-to-Northeast regional focus rather than
a North American focus, and an emphasis on achieving operational efficiencies
and growth through the integration of existing businesses. Shortly thereafter,
the bid for the Michigan properties was lowered significantly. The lower price
was unacceptable, especially in light of MCN's new strategic direction.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MCN ENERGY GROUP INC.
Date: October 15, 1999 By: /s/ GERARD KABZINSKI
---------------------
Gerard Kabzinski
Vice President and Controller
<PAGE> 4
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS RESTATED 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]
[RESTATED]
[MULTIPLIER] 1,000
<TABLE>
<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] 409,785
[ALLOWANCES] 9,665
[INVENTORY] 147,387
[CURRENT-ASSETS] 767,457
[PP&E] 4,041,417
[DEPRECIATION] 1,644,094
[TOTAL-ASSETS] 4,392,898
[CURRENT-LIABILITIES] 1,447,136
[BONDS] 1,307,168
[PREFERRED-MANDATORY] 502,203
[PREFERRED] 0
[COMMON] 797
[OTHER-SE] 791,125
[TOTAL-LIABILITY-AND-EQUITY] 4,392,898
[SALES] 0
[TOTAL-REVENUES] 2,030,698
[CGS] 0
[TOTAL-COSTS] 2,436,550
[OTHER-EXPENSES] 19,561
[LOSS-PROVISION] 13,282
[INTEREST-EXPENSE] 111,750
[INCOME-PRETAX] (469,936)
[INCOME-TAX] (183,468)
[INCOME-CONTINUING] (286,468)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (286,468)
[EPS-BASIC] (3.63)
[EPS-DILUTED] (3.63)
</TABLE>
<PAGE> 5
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS RESTATED 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]
[RESTATED]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] DEC-31-1997
[CASH] 39,495
[SECURITIES] 0
[RECEIVABLES] 421,635
[ALLOWANCES] 15,711
[INVENTORY] 56,777
[CURRENT-ASSETS] 730,036
[PP&E] 4,186,774
[DEPRECIATION] 1,488,050
[TOTAL-ASSETS] 4,330,937
[CURRENT-LIABILITIES] 993,954
[BONDS] 1,212,564
[PREFERRED-MANDATORY] 505,104
[PREFERRED] 0
[COMMON] 782
[OTHER-SE] 1,143,169
[TOTAL-LIABILITY-AND-EQUITY] 4,330,937
[SALES] 0
[TOTAL-REVENUES] 2,207,867
[CGS] 0
[TOTAL-COSTS] 1,985,477
[OTHER-EXPENSES] (10,759)
[LOSS-PROVISION] 21,934
[INTEREST-EXPENSE] 86,453
[INCOME-PRETAX] 180,467
[INCOME-TAX] 47,238
[INCOME-CONTINUING] 133,229
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 133,229
[EPS-BASIC] 1.82
[EPS-DILUTED] 1.79
</TABLE>
<PAGE> 6
[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]
[RESTATED]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] DEC-31-1996
[CASH] 30,462
[SECURITIES] 0
[RECEIVABLES] 381,083
[ALLOWANCES] 18,487
[INVENTORY] 79,161
[CURRENT-ASSETS] 724,228
[PP&E] 3,717,557
[DEPRECIATION] 1,335,201
[TOTAL-ASSETS] 3,633,404
[CURRENT-LIABILITIES] 947,195
[BONDS] 1,252,040
[PREFERRED-MANDATORY] 173,809
[PREFERRED] 0
[COMMON] 673
[OTHER-SE] 783,895
[TOTAL-LIABILITY-AND-EQUITY] 3,633,404
[SALES] 0
[TOTAL-REVENUES] 1,997,268
[CGS] 0
[TOTAL-COSTS] 1,785,975
[OTHER-EXPENSES] 3,764
[LOSS-PROVISION] 29,425
[INTEREST-EXPENSE] 77,781
[INCOME-PRETAX] 148,944
[INCOME-TAX] 36,375
[INCOME-CONTINUING] 112,569
[DISCONTINUED] 37,771
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 150,340
[EPS-BASIC] 2.25
[EPS-DILUTED] 2.23
</TABLE>
<PAGE> 7
EXHIBIT 99.1
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
RESULTS OF OPERATIONS
Special investigation results in restatement -- Subsequent to the issuance
of MCN's December 31, 1998 financial statements, certain matters came to
management's attention and resulted in a special investigation of prior years'
operations of CoEnergy Trading Company (CTC), MCN's non-utility energy marketing
subsidiary. As a result of the investigation, MCN identified that its internal
controls had been overridden and that certain transactions had not been properly
accounted for. Specifically, the investigation concluded that CTC had entered
into gas supply contracts and agreed to pay significantly less than market
prices in one period in return for above-market prices to be paid in subsequent
periods through March 2000. The effect of these transactions was to improperly
delay the accrual of cost of gas expenses, resulting in the overstatement of the
1998 net loss by $.5 million and the overstatement of 1997 net income by $8.6
million.
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly marking to market these
transactions was the understatement of the 1998 net loss by $7.1 million and the
overstatement of 1997 net income by $.4 million. However, net income of $2.6
million and $1.8 million was realized and recorded in connection with these
trading activities in 1998 and 1997, respectively, resulting in a net loss of
$4.5 million in 1998 and net income of $1.4 million in 1997 from such
activities. From the inception of these trading activities in March 1997 through
March 1999, $5.7 million of net income was realized and recorded in connection
with these trading activities. However, marking these contracts to market, as
required, results in a previously unrecorded net unrealized loss of $8.4 million
through March 1999, indicating a net loss of $2.7 million from such activities.
Other items identified during the investigation resulted in the
understatement of the 1998 net loss by $.9 million and the overstatement of 1997
net income by $.1 million.
As described in Note 1b to the Consolidated Financial Statements, the
accompanying consolidated financial statements for 1998 and 1997 have been
restated from those originally reported to properly account for the transactions
identified, resulting in an increase in the 1998 net loss of $7.5 million or
$.09 per diluted share and a decrease in 1997 net income of $9.1 million or $.12
per diluted share. The corrections did not have an impact on the liquidity or
cash flows of MCN. The financial information contained in Management's
Discussion and Analysis herein has been revised to reflect the impact of such
restatement.
Discontinued operations subsequently retained -- In the 1998 MCN Annual
Report on Form 10-K/A, MCN accounted for its Exploration & Production (E&P)
segment as a discontinued operation as a result of its decision to sell all of
its gas and oil properties. In August 1999, management announced its intention
to retain its natural gas producing properties in Michigan. Accordingly, E&P's
operating results for all periods included herein have been reclassified from
discontinued operations to continuing operations. The decision to retain these
properties was based on the interaction of two factors. MCN significantly
revised its strategic direction. Key aspects of the new corporate strategy
include a Midwest-to-Northeast regional focus rather than a North American
focus, and an emphasis on achieving operational efficiencies and growth through
the integration of existing businesses. Shortly thereafter, the bid for the
Michigan properties was lowered significantly. The lower price was unacceptable,
especially in light of MCN's new strategic direction.
Results for 1998 reflect unusual charges -- MCN experienced a net loss of
$286.5 million or $3.63 per share in 1998. As subsequently discussed, 1998
results reflect several unusual charges that totaled $389.6 million or $4.94 per
share. Excluding these charges, MCN had 1998 earnings of $103.1 million or $1.31
per share compared to 1997 earnings of $133.2 million or $1.79 per diluted
share. The earnings
F-2
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
comparisons reflect the effects of low energy prices, abnormally warm weather
and higher financing costs, partially offset by reduced operating costs in the
Gas Distribution segment. MCN's earnings from continuing operations for 1997
increased $20.6 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS) (in Millions)
Continuing Operations:
Diversified Energy:
Before unusual charges................................. $ 14.7 $ 52.1 $ 31.2
Unusual charges (Notes 2a, 2b & 3)..................... (372.9) -- --
------- ------ ------
(358.2) 52.1 31.2
------- ------ ------
Gas Distribution:
Before unusual charges................................. 88.4 81.1 81.4
Unusual charges (Note 2c).............................. (16.7) -- --
------- ------ ------
71.7 81.1 81.4
------- ------ ------
Total from Continuing Operations:
Before unusual charges.................................... 103.1 133.2 112.6
Unusual charges (Notes 2 & 3)............................. (389.6) -- --
------- ------ ------
(286.5) 133.2 112.6
------- ------ ------
Discontinued Operations (Note 4):
Income from operations.................................... -- -- 1.6
Gain on sale.............................................. -- -- 36.2
------- ------ ------
-- -- 37.8
------- ------ ------
$(286.5) $133.2 $150.4
======= ====== ======
DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations:
Diversified Energy:
Before unusual charges................................. $ .19 $ .72 $ .47
Unusual charges (Notes 2a, 2b & 3)..................... (4.73) -- --
------- ------ ------
(4.54) .72 .47
------- ------ ------
Gas Distribution:
Before unusual charges................................. 1.12 1.07 1.20
Unusual charges (Note 2c).............................. (.21) -- --
------- ------ ------
.91 1.07 1.20
------- ------ ------
Total from Continuing Operations:
Before unusual charges.................................... 1.31 1.79 1.67
Unusual charges (Notes 2 & 3)............................. (4.94) -- --
------- ------ ------
(3.63) 1.79 1.67
------- ------ ------
Discontinued Operations (Note 4):
Income from operations.................................... -- -- .03
Gain on sale.............................................. -- -- .53
------- ------ ------
-- -- .56
------- ------ ------
$ (3.63) $ 1.79 $ 2.23
======= ====== ======
</TABLE>
F-3
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
STRATEGIC DIRECTION -- MCN's objective is to achieve competitive long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in this
portfolio-management strategy is the frequent review of internal and external
factors affecting the company's investments. Therefore, the pace of new
investments and the disposition of existing assets 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 a significant portion of 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, investment losses and
restructuring charges, which reduced 1998 earnings by $389.6 million or $4.94
per share. A detailed discussion of each unusual charge by segment follows:
<TABLE>
<CAPTION>
1998
--------------------
NET DILUTED
INCOME EPS
------ -------
<S> <C> <C>
UNUSUAL CHARGES (in Millions, Except Per Share Amounts)
Diversified Energy:
Pipelines & Processing (Note 2a).......................... $ (89.5) $(1.13)
Electric Power (Note 3)................................... (1.6) (.02)
Exploration & Production (Note 2b)........................ (275.0) (3.49)
Corporate & Other (Note 3)................................ (6.8) (.09)
------- ------
(372.9) (4.73)
Gas Distribution (Note 2c).................................. (16.7) (.21)
------- ------
$(389.6) $(4.94)
======= ======
</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.
F-4
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Exploration & Production recorded write-downs in the second and third
quarter of 1998 totaling $416.9 million pre-tax ($271.0 million net of taxes) to
reflect the impact of low oil and gas prices as well as the under-performance of
certain oil and gas properties. The E&P business recognized the write-downs
under the full cost method of accounting as prescribed by the Securities and
Exchange Commission (SEC). Under the full cost method of accounting, E&P's
capitalized exploration and development costs at September 30, 1998 and June 30,
1998 exceeded the full cost "ceiling," resulting in the excess being written off
to income. The ceiling is the sum of discounted future net cash flows from the
production of proved gas and oil reserves and the lower of cost or estimated
fair value of unproved properties, net of related income tax effects. Future net
cash flows are required to be estimated based on end-of-quarter prices and
costs, unless contractual arrangements exist, even if any price decline is
temporary. A significant portion of the write-down was due to
lower-than-expected exploratory drilling results.
In 1998, MCN also recognized a $6.1 million pre-tax loss ($4.0 million net
of taxes) from the write-down of an investment in the common stock of an E&P
company. The loss was due to a decline in the fair value of the securities that
is not considered temporary.
Subsequent to the issuance of the 1998 Annual Report on Form 10-K/A, the
E&P segment recorded several unusual charges in 1999 (Note 4a). Included in
these unusual charges for 1999 was the $68.8 million pre-tax ($44.7 million net
of taxes) loss on the sale of the Western and Midcontinent/Gulf Coast
properties. Proceeds from the sale of these properties totaled approximately
$265 million. At December 31, 1998, the Western and Midcontinent/Gulf Coast
properties had 360 billion cubic feet equivalent of proven reserves. MCN will
continue selling other non-Michigan E&P oil and gas properties. Additionally, in
the second quarter of 1999, MCN recognized a $52.0 million pre-tax ($33.8
million net of taxes) write-down of its gas and oil properties under the full
cost method of accounting, due primarily to an unfavorable revision in the
timing of production of proved gas and oil reserves as well as reduced
expectations of sales proceeds on unproved acreage. Also, MCN recognized an
additional $7.5 million pre-tax ($4.9 million net of taxes) write-down of its
investment in the common stock of an E&P company during the second quarter of
1999. MCN has no carrying value in this investment after this write-down.
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.
F-5
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
DIVERSIFIED ENERGY
Results impacted by unusual charges, financing costs 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 $37.4 million from 1997. These results reflect higher financing costs,
reduced contributions from the Pipelines & Processing and E&P segments due to
low energy prices as well as increased losses from the Energy Marketing segment.
Partially offsetting the decreases for 1998 was increased operating and joint
venture income posted by the Electric Power segment.
Earnings for 1997 increased by $20.9 million from 1996, reflecting
increased operating and joint venture income from the Pipelines & Processing,
Electric Power and E&P segments. Reduced Energy Marketing contributions and
higher financing costs partially offset this growth.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*......................................... $ 992.8 $951.3 $734.4
-------- ------ ------
Operating Expenses*
Property write-downs (Notes 2a & 2b)...................... 554.6 -- --
Restructuring charges (Note 3)............................ 12.9 -- --
Other..................................................... 989.6 905.7 693.6
-------- ------ ------
1,557.1 905.7 693.6
-------- ------ ------
Operating Income (Loss)..................................... (564.3) 45.6 40.8
-------- ------ ------
Equity in Earnings of Joint Ventures........................ 61.2 53.1 16.6
-------- ------ ------
Other Income & (Deductions)*
Interest income........................................... 5.2 6.7 3.0
Interest expense.......................................... (54.3) (32.2) (28.7)
Dividends on preferred securities......................... (36.4) (31.1) (12.4)
Investment loss (Note 2b)................................. (6.1) -- --
Other..................................................... 20.2 10.1 5.5
-------- ------ ------
(71.4) (46.5) (32.6)
-------- ------ ------
Income (Loss) Before Income Taxes........................... (574.5) 52.2 24.8
Income Tax Provision (Benefit).............................. (216.3) .1 (6.4)
-------- ------ ------
Net Income (Loss)
Before unusual charges.................................... 14.7 52.1 31.2
Unusual charges (Notes 2a, 2b & 3)........................ (372.9) -- --
-------- ------ ------
$ (358.2) $ 52.1 $ 31.2
======== ====== ======
</TABLE>
- -------------------------
* Includes intercompany transactions
F-6
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results, excluding the unusual charges,
declined $34.5 million in 1998 and increased $41.3 million in 1997. A discussion
of each business segment, its contributions and its outlook follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME (LOSS) (in Millions)
Before Unusual Charges:
Pipelines & Processing.................................... $ 21.4 $ 29.1 $ 10.7
Electric Power............................................ 26.0 18.1 4.6
Energy Marketing.......................................... (3.6) (2.3) 9.4
Exploration & Production.................................. 29.0 58.1 33.2
Corporate & Other......................................... (8.6) (4.3) (.5)
-------- ------ ------
64.2 98.7 57.4
Unusual Charges (Notes 2a, 2b & 3).......................... (567.3) -- --
-------- ------ ------
$ (503.1) $ 98.7 $ 57.4
======== ====== ======
</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.
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 (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.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (million gallons)......................... 60.4 60.8 10.5
Transportation (Bcf)........................................ 175.5 116.0 86.4
Gas Processed (Bcf)
CO(2) 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.
F-7
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
METHANOL PRICES*
per Gallon
[METHANOL PRICE CHART]
<TABLE>
<CAPTION>
YEAR METHANOL PRICES
- ---- ---------------
<S> <C>
96 0.44
97 0.58
98 0.36
</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.
F-8
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
ELECTRICITY SALES*
[ELECTRICITY SALES GRAPH]
<TABLE>
<CAPTION>
DOMESTIC AND INTERNATIONAL
--------------------------
<S> <C>
96 708.9
97 1843.3
98 3805
</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.
F-9
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 loss increased $1.3 million in
1998. The increased loss in 1998 primarily reflects unrealized losses associated
with trading activities (Note 1b) and higher gas storage costs, partially offset
by higher earnings from a significant increase in gas sales volumes.
Additionally, the earnings comparison was affected as a result of 1997 including
$2.2 million of contributions from Energy Marketing's 25% interest in a gas
storage project that was sold in December 1997. Operating and joint venture
income for 1997 decreased $11.7 million due to lower gas sales margins as well
as higher costs for storage capacity, which enhances Energy Marketing's ability
to offer reliable gas supply during peak winter months.
GAS SALES & EXCHANGE GAS DELIVERIES*
in Bcf
[GAS SALES & EXCHANGE GAS DELIVERIES GRAPH]
<TABLE>
<CAPTION>
YEAR GAS SALES & EXCHANGE GAS DELIVERIES*
- ---- ------------------------------------
<S> <C>
96 241.5
97 358.8
98 465.7
</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
F-10
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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.
EXPLORATION & PRODUCTION is engaged in natural gas and oil exploration,
development and production.
E&P operating and joint venture income, excluding the write-downs,
decreased by $29.1 million in 1998 and increased $24.9 million in 1997. Earnings
for the 1998 period reflects a sharp decline in average oil sales prices,
partially offset by an increase in average gas sales prices, and a slight
decline in the level of gas and oil produced. The 1997 period reflects a
significant increase in gas and oil produced due to the development and
acquisition of properties, partially offset by a decline in oil sales prices.
Results for 1997 also include income from MCN's unconsolidated joint venture
which contributed $6.6 million of pre-tax gains from the sale of undeveloped
properties.
GAS & OIL PRODUCTION
(in Bcf equivalent)
[GAS & OIL PRODUCTION GRAPH]
GAS & OIL PRODUCTION
(in Bcf equivalent)
[GAS & OIL PRODUCTION GRAPH]
<TABLE>
<CAPTION>
YEAR GAS AND OIL
- ---- -----------
<S> <C>
96 63.7
97 98.3
98 97.9
</TABLE>
Gas and oil production declined .4 billion cubic feet equivalent (Bcfe) in
1998 and increased 34.6 Bcfe or 54% in 1997. E&P operating results reflect
average oil sales rates per barrel of $12.58 in 1998, $16.87 in 1997 and $20.18
in 1996. E&P experienced average gas sale rates per thousand cubic feet (Mcf) of
$2.04 in 1998, $1.95 in 1997 and $1.96 in 1996. The average gas and oil sales
rates include the effect of hedging with
F-11
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
commodity swap and futures agreements, which are used to manage Diversified
Energy's exposure to the risk of market price fluctuations as discussed in the
"Risk Management Strategy" section that follows.
E&P operating and joint venture income for 1998 also reflects higher
production-related expenses and depletion costs which increased per Mcf
equivalent by $.11 and $.07, respectively.
E&P operations have supplemented Diversified Energy's earnings through the
generation of gas production tax credits, primarily from production of coalbed
methane and Antrim shale gas properties. Tax credits decreased 41% to $10.5
million in 1998, compared to $17.8 million in 1997 and $15.9 million in 1996.
The decline in 1998 reflects the sale of Antrim tax credits in mid-1998, whereby
the income from such sale is recorded as other income as the credits are
generated.
Outlook -- In August 1999, MCN announced a significantly revised strategic
direction. Consistent with this revised strategy, as well as the result of the
lowering of the bid for the Michigan E&P properties, MCN will retain its natural
gas producing properties in Michigan and continue selling other E&P oil and gas
properties. The timing of any sales is dependent upon receiving bids that
reflect the long-term value of such properties.
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 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 a significant portion of 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 $24.9 million in 1998 and $13.9
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. All periods also reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, 1998 reflects an unusual charge of $6.1 million
representing the write-down of an investment in the common stock of an E&P
company, as previously discussed.
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%
F-12
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
Additionally, other income and deductions in 1998 include $7.4 million of
income from a tax credit sale transaction, whereby MCN records income from such
sale as the credits are generated by the purchaser.
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 recorded in all periods 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
F-13
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS (in Millions)
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 2c)............................. 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 2c)................................. (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 2c)................................. (16.7) -- --
-------- -------- --------
$ 71.7 $ 81.1 $ 81.4
======== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
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
F-14
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
the continued growth in intermediate transportation services as well as
increased other operating revenues resulting from providing gas-related
services.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
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
[GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON GRAPH]
[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
* Total Margins Weather Normalized
F-15
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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%.
F-16
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
GAS DISTRIBUTION -- NUMBER OF CUSTOMERS SERVED PER EMPLOYEE
[GAS DISTRIBUTION/NUMBER OF CUSTOMERS SERVED PER EMPLOYEE GRAPH]
<TABLE>
<CAPTION>
GAS DISTRIBUTION - NUMBER OF CUSTOMERS SERVED
YEAR PER EMPLOYEE
- ---- ---------------------------------------------
<S> <C>
96 380
97 409
98 435
</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 2c).
F-17
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 2c). 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.
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
F-18
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
F-19
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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
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).
F-20
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS (in Millions)
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 (Decrease) 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 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 a significant portion 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 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 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.
F-21
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 ratings for securities issued by MCN and
its subsidiaries as of June 1999:
<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), currently
operating as MCN Energy Enterprises, 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.
F-22
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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 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.
F-23
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
Diversified Energy........................................ $324.8 $405.0 $395.3
Gas Distribution.......................................... 158.0 157.7 215.3
Discontinued Operations................................... -- -- 6.5
------ ------ ------
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.
F-24
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 customer 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
F-25
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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
F-26
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
UNFAVORABLE
AMOUNT CHANGE IN
------ -----------
<S> <C> <C>
MARKET RISK (in millions)
Commodity Price Sensitive:*
Swaps -- pay fixed/receive variable....................... $ 53.6 Fair Value
-- pay variable/receive fixed...................... $ 54.0 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.
As discussed in Note 1b to the Consolidated Financial Statements, MCN's
non-utility energy marketing subsidiary entered into unauthorized gas purchase
and sale contracts for trading purposes. MCN is exposed to natural gas price
risk on such contracts that have not been effectively closed. At December 31,
1998, a 10% unfavorable change in basis would have reduced the fair value of
such open contracts that totaled 44 Bcf by $1.2 million. A 10% favorable change
in basis would have increased the fair value of such contracts by a
corresponding amount.
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).
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
F-27
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONCLUDED)
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.
Energy Trading Activities -- In November 1998, the Emerging Issues Task
Force reached consensus on Issue No. 98-10, "Accounting for Energy Trading and
Risk Management Activities" (EITF 98-10), effective for fiscal years beginning
after December 15, 1998. EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their fair value, with changes in fair value recognized currently in earnings.
Management does not expect EITF 98-10 to have a material impact on MCN's
financial statements.
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.
F-28
<PAGE> 35
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Gas and oil sales...................................... $1,813,343 $2,014,418 $1,827,198
Transportation......................................... 139,609 129,953 120,019
Other.................................................. 77,746 63,496 50,051
---------- ---------- ----------
2,030,698 2,207,867 1,997,268
---------- ---------- ----------
OPERATING EXPENSES
Cost of gas............................................ 1,205,774 1,335,033 1,193,578
Operation and maintenance.............................. 389,415 393,341 371,980
Depreciation, depletion and amortization............... 179,490 181,612 145,990
Property and other taxes............................... 69,553 75,491 74,427
Property write-downs and restructuring charges (Notes 2
and 3).............................................. 592,318 -- --
---------- ---------- ----------
2,436,550 1,985,477 1,785,975
---------- ---------- ----------
OPERATING INCOME (LOSS).................................. (405,852) 222,390 211,293
---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES (Note 6)............ 62,225 55,659 17,867
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income........................................ 10,893 11,166 7,234
Interest on long-term debt............................. (87,346) (75,170) (66,517)
Other interest expense................................. (24,404) (11,283) (11,264)
Dividends on preferred securities of subsidiaries...... (36,370) (31,090) (12,374)
Investment losses (Notes 2b and 2c).................... (14,635) -- --
Minority interest...................................... 5,992 (1,964) (1,059)
Other (Note 5e)........................................ 19,561 10,759 3,764
---------- ---------- ----------
(126,309) (97,582) (80,216)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.................................................. (469,936) 180,467 148,944
INCOME TAX PROVISION (BENEFIT)........................... (183,468) 47,238 36,375
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS................. (286,468) 133,229 112,569
DISCONTINUED OPERATIONS, NET OF TAXES (Note 4)........... -- -- 37,771
---------- ---------- ----------
NET INCOME (LOSS)........................................ $ (286,468) $ 133,229 $ 150,340
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations.................................. $ (3.63) $ 1.82 $ 1.68
Discontinued operations (Note 4)....................... -- -- .57
---------- ---------- ----------
$ (3.63) $ 1.82 $ 2.25
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 11d)
Continuing operations.................................. $ (3.63) $ 1.79 $ 1.67
Discontinued operations (Note 4)....................... -- -- .56
---------- ---------- ----------
$ (3.63) $ 1.79 $ 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.
F-29
<PAGE> 36
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B
---------- ----------
(IN THOUSANDS)
<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.................... 400,120 405,924
Accrued unbilled revenues................................. 87,888 93,010
Gas in inventory.......................................... 147,387 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
---------- ----------
767,457 730,036
---------- ----------
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 2c)................................ 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 2c)................................ 2,916,540 2,813,434
Exploration & Production (Note 2b)........................ 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
---------- ----------
$4,392,898 $4,330,937
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-30
<PAGE> 37
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable.......................................... $ 304,349 $ 342,195
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.......... 69,465 86,826
Deferred gas cost recovery revenues....................... 14,980 --
Gas payable............................................... 42,669 8,317
Customer deposits......................................... 18,791 16,382
Other..................................................... 108,310 101,630
---------- ----------
1,447,136 993,954
---------- ----------
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)............................................. 791,922 1,143,951
---------- ----------
2,601,293 2,861,619
---------- ----------
$4,392,898 $4,330,937
========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-31
<PAGE> 38
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(286,468) $ 133,229 $ 150,340
Adjustments to reconcile net income (loss) to net cash
provided from operating activities
Depreciation, depletion and amortization
Per statement of operations........................... 179,490 181,612 145,990
Charged to other accounts............................. 8,000 7,728 11,026
Unusual charges (Notes 2 and 3)......................... 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)
Changes in assets and liabilities, exclusive of changes
shown separately...................................... (97,966) 33,823 (94,754)
--------- --------- ---------
Net cash provided from operating activities........... 152,722 343,384 198,332
--------- --------- ---------
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.................................. $ (6,653) $ (49,017) $ (66,183)
Accrued unbilled revenues................................. 5,122 15,499 (16,099)
Gas in inventory.......................................... (90,610) 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.......................................... (35,597) 24,273 102,711
Federal income, property and other taxes payable.......... (17,333) (10,820) (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
--------- --------- ---------
$ (97,966) $ 33,823 $ (94,754)
========= ========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-32
<PAGE> 39
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997
(RESTATED) (RESTATED)
NOTE 1B NOTE 1B 1996
---------- ---------- ----
(IN THOUSANDS)
<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........................... 365,730 305,352 218,425
Net income (loss)(a)..................................... (286,468) 133,229 150,340
Cash dividends declared.................................. (82,239) (72,851) (62,875)
Other.................................................... -- -- (538)
--------- ---------- --------
Balance -- end of period................................. (2,977) 365,730 305,352
--------- ---------- --------
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS............. (22,288) (22,039) (14,492)
--------- ---------- --------
$ 791,922 $1,143,951 $784,568
========= ========== ========
(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS)(Note 1a):
Net income (loss)........................................ $(286,468) $ 133,229 $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 -- --
--------- ---------- --------
$(295,525) $ 125,753 $150,438
========= ========== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
F-33
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1a. 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),
currently operating as MCN Energy Enterprises, 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; Exploration & Production (E&P) properties with 1.2
trillion cubic feet equivalent of proved gas and oil reserves at December
31, 1998.
- 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.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION -- The full-cost accounting
method prescribed by the Securities and Exchange Commission (SEC) is followed
for investments in gas and oil properties. Under the full cost method
substantially all acquisition, exploration and development costs are
capitalized. To the extent such capitalized costs exceed the "ceiling," the
excess is written off to income. The ceiling is the sum of discounted future net
cash flows from proved gas and oil reserves (using unescalated prices and costs
unless contractual arrangements exist), and the costs of unproved properties
after income tax effects. The ceiling test is applied at the end of each quarter
and requires a write-down of gas and oil properties if the ceiling is exceeded,
even if any price decline is temporary. Management's investment and operating
decisions are based upon prices, costs and production assumptions that are
different from those used to compute the ceiling. As a
F-34
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result, it is possible that future fluctuations in key forecast assumptions
could result in impairments being recorded for accounting purposes, when the
long-term economics of such properties have not changed.
The unit of production method is used for calculating depreciation,
depletion and amortization (DD&A) on proved gas and oil properties. The average
DD&A expense per thousand cubic feet equivalent (Mcfe) was $.82, $.75, and $.70
in 1998, 1997 and 1996, respectively. Costs directly associated with the
acquisition and evaluation of unproved gas and oil properties are excluded from
the amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically, and a provision for impairment is made to
the full-cost amortization base when appropriate.
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, 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>
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 determine if the asset's carrying amount is in excess of its fair value
less the cost to sell.
F-35
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
1b. RESTATEMENT
Subsequent to the issuance of MCN's December 31, 1998 financial statements,
certain matters came to management's attention and resulted in a special
investigation of prior years' operations of CoEnergy Trading Company (CTC),
MCN's non-utility energy marketing subsidiary. As a result of the investigation,
MCN identified that its internal controls had been overridden and that certain
transactions had not been properly accounted for. Specifically, the
investigation concluded that CTC had entered into gas supply contracts and
agreed to pay significantly less than market prices in one period in return for
above-market prices to be paid in subsequent periods through March 2000. The
effect of these transactions was to improperly delay the accrual of cost of gas
expenses, resulting in the overstatement of the 1998 net loss by $478,000 and
the overstatement of 1997 net income by $8,585,000.
F-36
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly accounting for these
transactions was the understatement of the 1998 net loss by $7,112,000 and the
overstatement of 1997 net income by $385,000. However, net income of $2,574,000
and $1,824,000 was realized and recorded in connection with these trading
activities in 1998 and 1997, respectively, resulting in a net loss of $4,538,000
in 1998 and net income of $1,439,000 in 1997 from such activities. From the
inception of these trading activities in March 1997 through March 1999,
$5,721,000 of net income was realized and recorded in connection with these
trading activities. However, marking these contracts to market, as required,
results in a previously unrecorded net unrealized loss of $8,435,000 through
March 1999, indicating a net loss of $2,714,000 from such activities.
Other items identified during the investigation resulted in the
understatement of the 1998 net loss by $879,000 and the overstatement of 1997
net income by $107,000.
The accompanying consolidated financial statements have been restated from
amounts originally reported to properly account for the transactions identified.
Additionally, amounts have been reclassified to reflect E&P as a continuing
operation. A summary of the significant effects of the restatement and
reclassification on MCN's 1998 and 1997 financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
RECLASSIFIED RECLASSIFIED
AND AND
PREVIOUSLY RESTATED PREVIOUSLY RESTATED
REPORTED RESTATED (NOTE 4A) REPORTED RESTATED (NOTE 4A)
---------- -------- ------------ ---------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
Cost of Gas....................... $1,250,815 $1,262,372 $1,205,774 $1,392,856 $1,406,819 $1,335,033
Income (Loss)From Continuing
Operations Before Income
Taxes........................... $ (21,620) $ (33,177) $ (469,936) $ 174,413 $ 160,450 $ 180,467
Income Tax Provision (Benefit).... $ (15,456) $ (19,500) $ (183,468) $ 62,266 $ 57,380 $ 47,238
Income (Loss) From Continuing
Operations...................... $ (6,164) $ (13,677) $ (286,468) $ 112,147 $ 103,070 $ 133,229
Net Income (Loss)................. $ (278,955) $ (286,468) $ (286,468) $ 142,306 $ 133,229 $ 133,229
Basic Earnings (Loss) Per Share
Continuing Operations........... $ (.08) $ (.17) $ (3.63) $ 1.54 $ 1.41 $ 1.82
Continuing and Discontinued
Operations.................... $ (3.54) $ (3.63) $ (3.63) $ 1.95 $ 1.82 $ 1.82
Diluted Earnings (Loss) Per Share
Continuing Operations........... $ (.08) $ (.17) $ (3.63) $ 1.51 $ 1.39 $ 1.79
Continuing and Discontinued
Operations.................... $ (3.54) $ (3.63) $ (3.63) $ 1.91 $ 1.79 $ 1.79
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
Accounts Receivable............... $ 397,298 $ 400,120 $ 400,120 $ 404,448 $ 405,924 $ 405,924
Gas in Inventory.................. $ 149,797 $ 147,387 $ 147,387 $ 56,777 $ 56,777 $ 56,777
Accounts Payable.................. $ 278,417 $ 304,349 $ 304,349 $ 326,756 $ 342,195 $ 342,195
Federal Income, Property and Other
Taxes Payable................... $ 78,395 $ 69,465 $ 69,465 $ 91,712 $ 86,826 $ 86,826
Common Shareholders' Equity....... $ 808,512 $ 791,922 $ 791,922 $1,153,028 $1,143,951 $1,143,951
</TABLE>
F-37
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. EXPLORATION & PRODUCTION
PROPERTY --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). 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.
INVESTMENT --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.
C. 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.
F-38
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In the 1998 MCN Annual Report on Form 10-K/A, MCN accounted for its
E&P segment as a discontinued operation as a result of its decision to sell
all of its gas and oil properties. In August 1999, management announced its
intention to retain its natural gas producing properties in Michigan.
Accordingly, E&P's operating results for prior periods have been
reclassified from discontinued operations to continuing operations. The
decision to retain these properties was based on the interaction of two
factors. MCN significantly revised its strategic direction. Key aspects of
the new corporate strategy include a Midwest-to-Northeast regional focus
rather than a North American focus, and an emphasis on achieving
operational efficiencies and growth through the integration of existing
businesses. Shortly thereafter, the bid for the Michigan properties was
lowered significantly. The lower price was unacceptable, especially in
light of MCN's new strategic direction.
WRITE-DOWN OF E&P PROPERTIES: In the second quarter of 1999, MCN
recognized a $52,000,000 pre-tax ($33,800,000 net of taxes) write-down of
its gas and oil properties under the full cost method of accounting, due
primarily to an unfavorable revision in the timing of production of proved
gas and oil reserves as well as reduced expectations of sales proceeds on
unproved acreage. Under the full cost method of accounting as prescribed by
the Securities and Exchange Commission, MCN's capitalized exploration and
production costs at June 30, 1999 exceeded the full cost "ceiling,"
resulting in the excess being written off to income. The ceiling is the sum
of discounted future net cash flows from the production of proved gas and
oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects.
LOSS ON INVESTMENT OF E&P COMPANY: MCN recognized an additional
$7,456,000 pre-tax loss ($4,846,000 net of taxes) from the write-down of an
investment in the common stock of an E&P company during the second quarter
of 1999. MCN has no carrying value in this investment after this
write-down.
LOSSES ON SALE OF PROPERTIES: In the second quarter of 1999, MCN
recognized losses from the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $68,798,000 pre-tax ($44,719,000 net of taxes).
F-39
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-40
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-41
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<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
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
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.
F-42
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Regulatory Assets
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
F-43
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $147,387,000 LIFO cost by
$152,961,000. At December 31, 1997, the replacement cost exceeded the
$56,777,000 LIFO cost by $176,373,000.
F-44
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Detailed information on long-term debt, excluding current requirements, is
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
First Mortgage Bonds, interest payable semi-annually
6.51% series due 1999..................................... $ -- $ 30,000
5 3/4 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>
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.
F-45
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-46
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-47
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized information for MCN-obligated mandatorily redeemable
preferred securities of subsidiaries holding solely debentures of MCN is as
follows:
<TABLE>
<CAPTION>
LIQUIDATION MATURITY OF EARLIEST
VALUE UNDERLYING REDEMPTION
1998 1997 PER SHARE SECURITY DATE
---- ---- ----------- ----------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<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.
F-48
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-49
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
F-50
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
COMMON (LOSS) PER
INCOME (LOSS) SHARES SHARE
------------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
1998
Basic Loss Per Share..................................... $(286,468) 78,823 $(3.63)
------
Effect of Dilutive Securities............................ -- --
--------- ------
Diluted Loss Per Share................................... $(286,468) 78,823 $(3.63)
========= ====== ======
1997
Basic Earnings Per Share................................. $ 133,229 72,887 $ 1.82
------
Effect of Dilutive Securities
FELINE PRIDES.......................................... 1,688 1,021
Enhanced PRIDES........................................ 222 623
Stock-based compensation plans......................... -- 904
--------- ------
Diluted Earnings Per Share............................... $ 135,139 75,435 $ 1.79
========= ====== ======
1996
Basic Earnings Per Share................................. $ 112,569 66,944 $ 1.68
------
Effect of Dilutive Securities
Enhanced PRIDES........................................ 73 41
Stock-based compensation plans......................... -- 536
--------- ------
Diluted Earnings Per Share............................... $ 112,642 67,521 $ 1.67
========= ====== ======
</TABLE>
F-51
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
F-52
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 undiscounted 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
F-53
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-54
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred Swap Losses and Receivables
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>
1998 1997
---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Fixed Price Receiver
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.
F-55
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. TRADING ACTIVITIES
As discussed in Note 1b to the Consolidated Financial Statements, a
special investigation of MCN's non-utility energy marketing operations
identified certain unauthorized gas purchase and sale contracts that were
entered into for trading purposes. The unauthorized transactions violate
MCN's risk-management policy that requires all such activities to be
reviewed and approved by a risk committee that reports regularly to the MCN
Board of Directors. The purchase and sale contracts entered into in
connection with trading activities run through March 2000 and are accounted
for using the mark-to-market method, with unrealized gains and losses
recorded as an adjustment to cost of gas.
C. 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.
F-56
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and fair value of other financial instruments consist
of the following:
<TABLE>
<CAPTION>
1998 1997
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<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................... 4,699 4,699 2,031 2,031
with unrealized losses.................. -- -- 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 terms.
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
F-57
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
F-58
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Measurement Date............................................ October 31 October 31
Accumulated Benefit Obligation at 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>
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.
F-59
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<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>
F-60
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Measurement Date..................................... October 31 October 31
Accumulated Postretirement Benefit
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
F-61
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Effective Federal Income Tax Rate........................... (38.8)% 25.1% 23.4%
========= ======== ========
Income Taxes Consist of:
Current................................................... $ 7,002 $ 18,280 $ 603
Deferred, net............................................. (176,995) 48,728 53,528
Gas production tax credits................................ (10,485) (17,797) (15,878)
Other tax credits, net.................................... (2,990) (1,973) (1,878)
--------- -------- --------
$(183,468) $ 47,238 $ 36,375
========= ======== ========
Reconciliation Between Statutory and Actual Income Taxes
Statutory Federal Income Taxes at a Rate of 35%............. $(164,477) $ 63,165 $ 52,130
Adjustments to Federal Taxes
Book over tax depreciation................................ 1,071 5,301 6,367
Adjustments to taxes provided in prior periods............ (412) (162) (3,369)
Stock-related benefits.................................... (1,095) -- --
Gas production tax credits................................ (10,485) (17,797) (15,878)
Other tax credits......................................... (2,990) (1,973) (1,878)
Allowance for funds used during construction.............. (1,900) (1,105) (245)
Undistributed foreign earnings............................ (1,244) -- --
Other, net................................................ (1,936) (191) (752)
--------- -------- --------
$(183,468) $ 47,238 $ 36,375
========= ======== ========
</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.
F-62
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that gave rise to MCN's deferred
tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
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
In 1998, MCN adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the reporting of business
segments based on the organizational structure used by management to assess
performance and make resource allocation decisions.
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 five major
business segments as described in the Summary of Significant Accounting
Policies -- Company Description (Note 1a).
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.
Under Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest
to Discontinued Operations," Diversified Energy's interest and preferred
dividend expenses were allocated to the E&P segment previously presented as
discontinued operations based on its ratio of total capital to that of
Diversified Energy (Note 4a). As discussed in Note 4a, the E&P segment is no
longer a discontinued operation, and the allocation of the interest and
preferred dividend expenses to the E&P segment has been changed to be based on
an imputed debt structure reflective of its industry as is done with MCN's other
segments.
F-63
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION
----------- -------- --------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues From Unaffiliated
Customers................... $ 20,856 $ 47,131 $767,068 $ 150,504 $ -- $1,045,139
Revenues From Affiliated
Customers................... 345 -- 105,543 56,598 -- 6,635
--------- -------- -------- --------- -------- ----------
Total operating
revenues................ 21,201 47,131 872,611 207,102 -- 1,051,774
========= ======== ======== ========= ======== ==========
Depreciation, Depletion and
Amortization................ 1,705 208 1,229 80,576 1,998 93,774
Operating Income (Loss)....... (146,264) (5,021) (5,987) (387,955) (19,162) 158,537
Equity in Earnings of Joint
Ventures.................... 29,987 28,546 2,401 -- 308 983
--------- -------- -------- --------- -------- ----------
Operating and joint
venture income (loss)... (116,277) 23,525 (3,586) (387,955) (18,854) 159,520
========= ======== ======== ========= ======== ==========
Interest Income............... 1,001 944 1,676 426 53,100 5,716
Interest Expense(b)........... (14,382) (2,021) (5,726) (21,154) (62,960) (57,477)
Income Taxes.................. (46,893) 8,212 (510) (160,900) (16,377) 33,000
Net Income (Loss)............. (82,240) 19,271 (1,037) (253,353) (40,843) 71,734
Total Assets.................. 575,969 300,529 386,917 988,201 72,388 2,116,173
Investments In and Advances to
Joint Ventures.............. 521,711 231,668 29,435 -- 18,939 1,478
Capital Expenditures.......... 113,229 1,602 2,596 200,430 6,966 157,952
Capital Investments........... 333,128 88,209 3,355 200,430 7,092 158,716
Significant Noncash Items:
Property write-downs and
restructuring charges
(Notes 2 & 3)............. (137,681) (2,470) -- (416,977) (10,390) (24,800)
Investment losses (Notes 2b
and 2c)................... -- -- -- (6,135) -- (8,500)
<CAPTION>
ELIMINATIONS CONSOLIDATED
& OTHER TOTAL
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1998
Revenues From Unaffiliated
Customers................... $ -- $2,030,698
Revenues From Affiliated
Customers................... (169,121) --
--------- ----------
Total operating
revenues................ (169,121) 2,030,698
========= ==========
Depreciation, Depletion and
Amortization................ -- 179,490
Operating Income (Loss)....... -- (405,852)
Equity in Earnings of Joint
Ventures.................... -- 62,225
--------- ----------
Operating and joint
venture income (loss)... -- (343,627)
========= ==========
Interest Income............... (51,970) 10,893
Interest Expense(b)........... 51,970 (111,750)
Income Taxes.................. -- (183,468)
Net Income (Loss)............. -- (286,468)
Total Assets.................. (47,279) 4,392,898
Investments In and Advances to
Joint Ventures.............. -- 803,231
Capital Expenditures.......... -- 482,775
Capital Investments........... -- 790,930
Significant Noncash Items:
Property write-downs and
restructuring charges
(Notes 2 & 3)............. -- (592,318)
Investment losses (Notes 2b
and 2c)................... -- (14,635)
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS ELIMINATIONS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION & OTHER
----------- -------- --------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Revenues From Unaffiliated
Customers................... $ 6,971 $ 51,804 $743,793 $ 144,033 $ -- $1,261,266 $ --
Revenues From Affiliated
Customers................... 397 -- 92,921 71,795 -- 10,020 (175,133)
-------- -------- -------- ---------- -------- ---------- ---------
Total operating
revenues................ 7,368 51,804 836,714 215,828 -- 1,271,286 (175,133)
======== ======== ======== ========== ======== ========== =========
Depreciation, Depletion and
Amortization................ 1,153 (22) 915 73,909 1,220 104,437 --
Operating Income (Loss)....... 585 5,377 (7,414) 51,455 (4,433) 176,820 --
Equity in Earnings of Joint
Ventures.................... 28,551 12,653 5,182 6,600 139 2,534 --
-------- -------- -------- ---------- -------- ---------- ---------
Operating and joint
venture income (loss)... 29,136 18,030 (2,232) 58,055 (4,294) 179,354 --
======== ======== ======== ========== ======== ========== =========
Interest Income............... 109 278 2,332 160 37,202 4,735 (33,650)
Interest Expense(b)........... (8,436) (165) (4,920) (13,937) (38,120) (54,525) 33,650
Income Taxes.................. 8,721 6,341 (1,180) (1,675) (12,105) 47,136 --
Net Income (Loss)............. 17,070 12,409 (1,308) 45,884 (21,911) 81,085 --
Total Assets.................. 391,550 208,421 313,669 1,237,813 97,819 2,167,637 (85,972)
Investments In and Advances to
Joint Ventures.............. 323,597 180,127 25,159 -- 19,252 8,841 --
Capital Expenditures.......... 19,491 4,823 663 374,997 4,951 157,732 --
Capital Investments........... 171,735 243,231 3,893 374,997 5,425 160,329 --
<CAPTION>
CONSOLIDATED
TOTAL
------------
<S> <C>
1997
Revenues From Unaffiliated
Customers................... $2,207,867
Revenues From Affiliated
Customers................... --
----------
Total operating
revenues................ 2,207,867
==========
Depreciation, Depletion and
Amortization................ 181,612
Operating Income (Loss)....... 222,390
Equity in Earnings of Joint
Ventures.................... 55,659
----------
Operating and joint
venture income (loss)... 278,049
==========
Interest Income............... 11,166
Interest Expense(b)........... (86,453)
Income Taxes.................. 47,238
Net Income (Loss)............. 133,229
Total Assets.................. 4,330,937
Investments In and Advances to
Joint Ventures.............. 556,976
Capital Expenditures.......... 562,657
Capital Investments........... 959,610
</TABLE>
F-64
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DIVERSIFIED ENERGY
-----------------------------------------------------------------
EXPLORATION &
PIPELINES & ELECTRIC ENERGY PRODUCTION CORPORATE & GAS
PROCESSING POWER MARKETING (NOTE 4A) OTHER(A) DISTRIBUTION
----------- -------- --------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Revenues From Unaffiliated
Customers.................. $ 5,928 $ 42,142 $589,036 $ 93,790 $ -- $1,266,372
Revenues From Affiliated
Customers.................. 441 -- 84,126 44,151 -- 9,882
-------- -------- -------- -------- -------- ----------
Total operating
revenues............... 6,369 42,142 673,162 137,941 -- 1,276,254
======== ======== ======== ======== ======== ==========
Depreciation, Depletion and
Amortization............... 944 (90) 916 44,468 938 98,814
Operating Income (Loss)...... 134 4,823 5,142 33,235 (2,525) 170,484
Equity in Earnings (Loss) of
Joint Ventures............. 10,590 (211) 4,208 -- 2,026 1,254
-------- -------- -------- -------- -------- ----------
Operating and joint
venture income
(loss)................. 10,724 4,612 9,350 33,235 (499) 171,738
======== ======== ======== ======== ======== ==========
Interest Income.............. 189 82 946 207 20,043 3,967
Interest Expense(b).......... (6,089) -- (3,426) (8,376) (29,243) (48,847)
Income Taxes................. 4,055 1,687 2,375 (6,487) (7,992) 42,737
Net Income (Loss)............ 7,117 3,159 5,574 31,506 (16,183) 81,396
Total Assets................. 220,943 47,611 310,732 963,273 40,714 2,086,325
Investments In and Advances
to Joint Ventures.......... 177,026 27,233 34,408 -- 20,046 6,675
Capital Expenditures......... 6,865 2,086 1,114 388,719 2,987 215,317
Capital Investments.......... 157,663 19,641 1,364 388,690 2,997 220,393
<CAPTION>
ELIMINATIONS CONSOLIDATED
& OTHER(C) TOTAL
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1996
Revenues From Unaffiliated
Customers.................. $ -- $1,997,268
Revenues From Affiliated
Customers.................. (138,600) --
--------- ----------
Total operating
revenues............... (138,600) 1,997,268
========= ==========
Depreciation, Depletion and
Amortization............... -- 145,990
Operating Income (Loss)...... -- 211,293
Equity in Earnings (Loss) of
Joint Ventures............. -- 17,867
--------- ----------
Operating and joint
venture income
(loss)................. -- 229,160
========= ==========
Interest Income.............. (18,200) 7,234
Interest Expense(b).......... 18,200 (77,781)
Income Taxes................. -- 36,375
Net Income (Loss)............ 37,771 150,340
Total Assets................. (36,194) 3,633,404
Investments In and Advances
to Joint Ventures.......... -- 265,388
Capital Expenditures......... -- 617,088
Capital Investments.......... -- 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.
(c) Eliminations and other includes MCN's discontinued computer operations (Note
4b).
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.
F-65
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the issuance of the December 31, 1998 financial statements,
MCN management determined that certain transactions were improperly recorded.
Certain amounts have been restated primarily to record cost of gas expense,
including trading losses, in the appropriate accounting periods as described in
Note 1b. The effects of this restatement on each of the quarterly periods in the
years ended December 31, 1998 and 1997 are presented below. The effect of
reclassifying E&P from a discontinued operation to a continuing operation is
also presented below (Note 4a).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $701,460 $ 406,214 $ 351,145 $571,879 $2,030,698
Operating Income (Loss):
Before unusual charges............... $116,626 $ 22,040 $ (346) $ 48,146 $ 186,466
Unusual charges...................... -- (333,022) (259,296) -- (592,318)
-------- --------- --------- -------- ----------
$116,626 $(310,982) $(259,642) $ 48,146 $ (405,852)
======== ========= ========= ======== ==========
Operating and Joint Venture Income
(Loss):
Before unusual charges............... $133,387 $ 33,877 $ 17,617 $ 63,810 $ 248,691
Unusual charges...................... -- (333,022) (259,296) -- (592,318)
-------- --------- --------- -------- ----------
$133,387 $(299,145) $(241,679) $ 63,810 $ (343,627)
======== ========= ========= ======== ==========
Net Income (Loss)
Before unusual charges............... $ 78,882 $ 7,829 $ (7,578) $ 23,997 $ 103,130
Unusual charges...................... -- (220,452) (169,146) -- (389,598)
-------- --------- --------- -------- ----------
$ 78,882 $(212,623) $(176,724) $ 23,997 $ (286,468)
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Before unusual charges............... $ 1.01 $ .10 $ (.10) $ .31 $ 1.31
Unusual charges...................... -- (2.80) (2.14) -- (4.94)
-------- --------- --------- -------- ----------
$ 1.01 $ (2.70) $ (2.24) $ .31 $ (3.63)
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Before unusual charges............... $ .95 $ .10 $ (.10) $ .30 $ 1.31
Unusual charges...................... -- (2.80) (2.14) -- (4.94)
-------- --------- --------- -------- ----------
$ .95 $ (2.70) $ (2.24) $ .30 $ (3.63)
======== ========= ========= ======== ==========
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
</TABLE>
F-66
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED, NOTE 1B
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $658,584 $ 367,740 $ 316,301 $537,569 $1,880,194
Operating Income (Loss):
Before unusual charges............... $107,893 $ 13,883 $ (6,883) $ 42,551 $ 157,444
Unusual charges...................... -- -- (175,341) -- (175,341)
-------- --------- --------- -------- ----------
$107,893 $ 13,883 $(182,224) $ 42,551 $ (17,897)
======== ========= ========= ======== ==========
Operating and Joint Venture Income
(Loss):
Before unusual charges............... $124,654 $ 25,720 $ 11,080 $ 58,215 $ 219,669
Unusual charges...................... -- -- (175,341) -- (175,341)
-------- --------- --------- -------- ----------
$124,654 $ 25,720 $(164,261) $ 58,215 $ 44,328
======== ========= ========= ======== ==========
Net Income (Loss)
Continuing operations, before unusual
charges........................... $ 76,940 $ 4,509 $ (5,508) $ 24,958 $ 100,899
Unusual charges...................... -- -- (114,576) -- (114,576)
Discontinued operations.............. 1,942 (217,132) (56,640) (961) (272,791)
-------- --------- --------- -------- ----------
$ 78,882 $(212,623) $(176,724) $ 23,997 $ (286,468)
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Continuing operations, before unusual
charges........................... $ .98 $ .06 $ (.07) $ .32 $ 1.28
Unusual charges...................... -- -- (1.45) -- (1.45)
Discontinued operations.............. .03 (2.76) (.72) (.01) (3.46)
-------- --------- --------- -------- ----------
$ 1.01 $ (2.70) $ (2.24) $ .31 $ (3.63)
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Continuing operations, before unusual
charges........................... $ .93 $ .06 $ (.07) $ .31 $ 1.28
Unusual charges...................... -- -- (1.45) -- (1.45)
Discontinued operations.............. .02 (2.76) (.72) (.01) (3.46)
-------- --------- --------- -------- ----------
$ .95 $ (2.70) $ (2.24) $ .30 $ (3.63)
======== ========= ========= ======== ==========
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
</TABLE>
F-67
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS PREVIOUSLY REPORTED, NOTE 1B
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Operating Revenues..................... $658,584 $ 367,740 $ 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
</TABLE>
F-68
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Operating Revenues..................... $788,761 $ 387,925 $ 327,817 $703,364 $2,207,867
Operating Income....................... $123,020 $ 24,485 $ 889 $ 73,996 $ 222,390
Operating and Joint Venture Income..... $137,381 $ 34,955 $ 18,238 $ 87,475 $ 278,049
Income from Continuing Operations...... $ 79,919 $ 7,181 $ 1,242 $ 44,887 $ 133,229
Earnings Per Share from Continuing
Operations:
Basic................................ $ 1.18 $ .10 $ .02 $ .57 $ 1.82
Diluted.............................. $ 1.16 $ .10 $ .02 $ .55 $ 1.79
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>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS RESTATED, NOTE 1B
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Operating Revenues..................... $753,728 $ 350,807 $ 287,508 $671,791 $2,063,834
Operating Income (Loss)................ $109,639 $ 11,593 $ (13,449) $ 63,152 $ 170,935
Operating and Joint Venture Income..... $119,300 $ 22,063 $ 2,275 $ 76,356 $ 219,994
Net Income (Loss):
Continuing operations................ $ 69,885 $ 1,366 $ (7,895) $ 39,714 $ 103,070
Discontinued operations.............. 10,034 5,815 9,137 5,173 30,159
-------- --------- --------- -------- ----------
$ 79,919 $ 7,181 $ 1,242 $ 44,887 $ 133,229
======== ========= ========= ======== ==========
Basic Earnings (Loss) Per Share:
Continuing operations................ $ 1.03 $ .02 $ (.10) $ .51 $ 1.41
Discontinued operations.............. .15 .08 .12 .06 .41
-------- --------- --------- -------- ----------
$ 1.18 $ .10 $ .02 $ .57 $ 1.82
======== ========= ========= ======== ==========
Diluted Earnings (Loss) Per Share:
Continuing operations................ $ 1.01 $ .02 $ (.10) $ .49 $ 1.39
Discontinued operations.............. .15 .08 .12 .06 .40
-------- --------- --------- -------- ----------
$ 1.16 $ .10 $ .02 $ .55 $ 1.79
======== ========= ========= ======== ==========
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>
F-69
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
AS PREVIOUSLY REPORTED, NOTE 1B
<S> <C> <C> <C> <C> <C>
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:
Continued 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>
20. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities" and related SEC accounting
rules.
CAPITALIZED COSTS
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Proved Properties........................................... $1,357,413 $1,033,492
Unproved Properties......................................... 99,611 265,809
---------- ----------
1,457,024 1,299,301
SEC Ceiling Test Write-downs (Note 2b)...................... 416,977 --
Accumulated Depreciation, Depletion and Amortization........ 224,795 150,015
---------- ----------
Net Capitalized Costs....................................... $ 815,252 $1,149,286
========== ==========
</TABLE>
F-70
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION
Unproved properties held by MCN are excluded from amortization until they
have been evaluated. A summary of costs excluded from amortization at December
31, 1998, and the year in which they were incurred, follows:
<TABLE>
<CAPTION>
YEAR COSTS INCURRED
---------------------------------------
1995 &
TOTAL 1998 1997 1996 PRIOR
----- ---- ---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Acquisition..................................... $43,131 $14,254 $17,119 $ 9,321 $2,437
Exploration..................................... 56,480 13,757 32,655 9,935 133
======= ======= ======= ======= ======
$99,611 $28,011 $49,774 $19,256 $2,570
======= ======= ======= ======= ======
</TABLE>
The acquisition amount includes all costs incurred to purchase or lease
property with unproved reserves.
COST INCURRED
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition:
Proved properties......................................... $ 53,377 $ 35,695 $ 60,340
Unproved properties....................................... 7,498 66,721 136,142
-------- -------- --------
60,875 102,416 196,482
Exploration................................................. 52,948 143,580 65,160
Development................................................. 86,607 129,001 120,569
======== ======== ========
$200,430 $374,997 $382,211
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues:
Unaffiliated customers.................................... $ 150,504 $144,041 $ 94,615
Affiliated customers...................................... 56,598 71,787 43,326
--------- -------- --------
207,102 215,828 137,941
--------- -------- --------
Production Costs............................................ 79,245 68,364 48,255
SEC Ceiling Test Write-downs................................ 416,977 -- --
Depreciation, Depletion and Amortization.................... 80,576 73,910 44,469
--------- -------- --------
576,798 142,274 92,724
--------- -------- --------
Income (Loss) Before Income Taxes........................... (369,696) 73,554 45,217
--------- -------- --------
Income Taxes:
Income tax provision (benefit)............................ (129,698) 26,997 16,438
Gas production tax credits................................ (10,485) (17,797) (15,878)
--------- -------- --------
(140,183) 9,200 560
--------- -------- --------
Results of Operations, Excluding Corporate and Interest
Costs..................................................... $(229,513) $ 64,354 $ 44,657
========= ======== ========
</TABLE>
F-71
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE QUANTITY INFORMATION
MCN's proved reserves are located in the United States. The estimated
quantities of proved reserves disclosed below are based upon estimates by MCN's
independent petroleum engineers.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Proved Developed and Undeveloped Reserves:
Beginning of year.................................... 1,166,174 25,843 1,137,729 17,214
Revisions of previous estimates................... (66,188) (2,865) (30,260) (430)
Extensions and discoveries........................ 59,729 534 165,283 4,435
Production........................................ (82,040) (2,635) (78,218) (3,346)
Sales of minerals in place........................ (37,661) (8,389) (51,465) (1,019)
Purchases of minerals in place.................... 52,959 499 23,105 8,989
--------- ------ --------- ------
End of year.......................................... 1,092,973 12,987 1,166,174 25,843
========= ====== ========= ======
Proved Developed Reserves:
Beginning of year.................................... 590,299 12,601 688,995 9,554
End of year.......................................... 630,130 6,367 590,299 12,601
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following presentation of the standardized measure of discounted future
net cash flows is intended to be neither a measure of the fair market value of
MCN's gas and oil properties, nor an estimate of the present value of actual
future cash flows to be obtained as a result of their development and
production. It is based upon subjective estimates of proved reserves only and
attributes no value to categories of reserves other than proved reserves, such
as probable or possible reserves, or to unproved acreage. Furthermore, as it is
based on year-end prices and costs adjusted only for existing contractual
arrangements and assumes an arbitrary annual discount rate of 10%, it does not
reflect the impact of future price and cost changes. Future income tax expenses
were computed by applying statutory tax rates, adjusted for permanent
differences and tax credits, to estimated future pre-tax net cash flows.
The standardized measure is intended to provide a better means for
comparing the value of MCN's proved reserves at a given time with those of other
gas and oil producing companies than is provided by a simple comparison of raw
proved reserve quantities.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future Revenues.......................................... $2,795,786 $3,121,124 $3,867,785
Future Production Costs.................................. 984,042 1,155,734 1,322,108
Future Development Costs................................. 264,631 328,739 340,190
---------- ---------- ----------
Future Net Cash Flows Before Income Taxes................ 1,547,113 1,636,651 2,205,487
Discount to Present Value at 10%......................... 806,746 812,605 1,139,507
---------- ---------- ----------
Present Value of Future Net Cash Flows Before Income
Taxes.................................................. 740,367 824,046 1,065,980
Future Income Taxes Discounted at 10%.................... -- 105,371 226,913
Future Tax Credits Discounted at 10%..................... -- (50,889) (62,207)
---------- ---------- ----------
Standardized Measure of Discounted Future Net Cash
Flows.................................................. $ 740,367 $ 769,564 $ 901,274
========== ========== ==========
</TABLE>
Future income taxes and tax credits have been excluded from the 1998
calculation since MOG is in a net operating loss position, and it is more likely
than not that these tax benefits would not be realized by MOG on a stand-alone
basis. However, MCN files a consolidated federal income tax return, which
includes the taxable
F-72
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income or loss of MOG as well as MOG's tax credits. Accordingly, it is
management's opinion that any tax benefits earned by MOG will be utilized by MCN
in its consolidated tax returns.
The principal sources of change in the standardized measure of discounted
future net cash flows were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of Year........................................... $ 769,564 $ 901,274 $521,907
Net changes in sales prices and production costs.......... (67,085) (261,154) 126,526
Net change due to revisions in quantity estimates......... (59,106) (26,015) 5,061
Extensions, discoveries, additions and improved recovery,
net of related costs................................... 46,739 153,291 200,026
Development costs incurred, previously estimated.......... 86,607 103,201 86,810
Changes in estimated future development costs............. (26,573) (120,219) (81,069)
Sales, net of production costs............................ (127,857) (147,464) (89,686)
Net change in future income taxes......................... 105,371 116,366 (85,616)
Net change in federal tax credits......................... (41,997) (17,797) (15,878)
Sales of reserves in place................................ (56,924) (83,985) --
Purchases of reserves in place............................ 41,525 48,685 193,550
Accretion of discount and other........................... 70,103 103,381 39,643
--------- --------- --------
End of Year................................................. $ 740,367 $ 769,564 $901,274
========= ========= ========
</TABLE>
21. 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.
F-73
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<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............................ 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts...... 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net..................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues...................... 1,121 -- 86,767 -- 87,888
Gas in inventory............................... -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods...................................... 214 1,172 71,165 -- 72,551
Other.......................................... 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes.......................... 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities...... -- 3,548 65,556 601 69,705
Deferred swap losses and receivables........... -- 63,147 -- -- 63,147
Deferred environmental costs................... 2,604 -- 28,169 -- 30,773
Prepaid benefit costs.......................... -- -- 113,879 (2,104) 111,775
Other.......................................... 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES................................... 1,550,770 782,471 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 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable............................... $ 4,123 $ 218,851 98,891 $ (17,516) $ 304,349
Notes payable.................................. 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations............................ -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable...................................... 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues............ -- -- 14,980 -- 14,980
Gas payable.................................... -- 17,332 25,337 -- 42,669
Customer deposits.............................. 22 -- 18,769 -- 18,791
Other.......................................... 18,337 25,276 67,222 (2,525) 108,310
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes.......................... (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit.............. 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers.......... -- -- 130,120 -- 130,120
Deferred swap gains and payables............... -- 62,956 -- -- 62,956
Accrued environmental costs.................... 3,000 -- 32,000 -- 35,000
Minority interest.............................. -- 2,697 8,201 -- 10,898
Other.......................................... 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
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.................... 825,088 869,426 646,843 (1,549,435) 791,922
---------- ---------- ---------- ----------- ----------
1,327,291 1,556,759 1,266,678 (1,549,435) 2,601,293
---------- ---------- ---------- ----------- ----------
$1,615,384 $2,255,772 $2,172,525 $(1,650,783) $4,392,898
========== ========== ========== =========== ==========
</TABLE>
F-74
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1997
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............. $ 23 $ 25,119 $ 14,353 $ -- $ 39,495
Accounts receivable............................ 15,525 242,343 210,677 (46,910) 421,635
Less -- Allowance for doubtful accounts...... 75 621 15,015 -- 15,711
---------- ---------- ---------- ----------- ----------
Accounts receivable, net....................... 15,450 241,722 195,662 (46,910) 405,924
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
---------- ---------- ---------- ----------- ----------
20,549 303,864 453,162 (47,539) 730,036
---------- ---------- ---------- ----------- ----------
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 $2,185,523 $2,136,336 $(1,685,237) $4,330,937
========== ========== ========== =========== ==========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Accounts payable............................... $ 4,385 $ 254,391 $ 130,267 $ (46,848) $ 342,195
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 7,795 78,630 -- 86,826
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
---------- ---------- ---------- ----------- ----------
18,769 456,054 569,687 (50,556) 993,954
---------- ---------- ---------- ----------- ----------
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.................... 1,160,548 999,930 616,024 (1,632,551) 1,143,951
---------- ---------- ---------- ----------- ----------
1,665,652 1,595,387 1,233,131 (1,632,551) 2,861,619
---------- ---------- ---------- ----------- ----------
$1,694,315 $2,185,523 $2,136,336 $(1,685,237) $4,330,937
========== ========== ========== =========== ==========
</TABLE>
F-75
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ---------- ---------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 18,262 $ 992,828 $1,033,658 $ (14,050) $2,030,698
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.................................... 10,706 752,207 451,529 (8,668) 1,205,774
Operation and maintenance...................... (10,207) 152,607 252,397 (5,382) 389,415
Depreciation, depletion and amortization....... 3,206 83,401 92,883 -- 179,490
Property and other taxes....................... 1,719 12,396 55,438 -- 69,553
Property write-downs and restructuring
charges...................................... 8,669 558,849 24,800 -- 592,318
--------- ---------- ---------- --------- ----------
14,093 1,559,460 877,047 (14,050) 2,436,550
--------- ---------- ---------- --------- ----------
OPERATING INCOME (LOSS).......................... 4,169 (566,632) 156,611 -- (405,852)
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (282,284) 61,242 1,946 281,321 62,225
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 37,408 6,609 5,688 (38,812) 10,893
Interest on long-term debt..................... (641) (41,821) (44,884) -- (87,346)
Other interest expense......................... (2,474) (48,630) (12,113) 38,813 (24,404)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (36,370) (36,370)
Investment losses.............................. (8,500) (6,135) -- -- (14,635)
Minority interest.............................. -- 265 5,727 -- 5,992
Other.......................................... (605) 20,348 (182) -- 19,561
--------- ---------- ---------- --------- ----------
25,188 (69,364) (45,764) (36,369) (126,309)
--------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (252,927) (574,754) 112,793 244,952 (469,936)
INCOME TAX PROVISION (BENEFIT)................... (2,829) (216,456) 35,817 -- (183,468)
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS)................................ (250,098) (358,298) 76,976 244,952 (286,468)
DIVIDENDS ON PREFERRED SECURITIES................ 36,370 -- -- (36,370) --
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $(286,468) $ (358,298) $ 76,976 $ 281,322 $ (286,468)
========= ========== ========== ========= ==========
TWELVE MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------
OPERATING REVENUES............................... $ 17,607 $ 951,269 $1,253,679 $ (14,688) $2,207,867
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas.................................... 9,749 703,145 632,229 (10,090) 1,335,033
Operation and maintenance...................... 2,281 113,018 282,640 (4,598) 393,341
Depreciation, depletion and amortization....... 2,279 75,630 103,703 -- 181,612
Property and other taxes....................... 1,679 13,068 60,744 -- 75,491
--------- ---------- ---------- --------- ----------
15,988 904,861 1,079,316 (14,688) 1,985,477
--------- ---------- ---------- --------- ----------
OPERATING INCOME................................. 1,619 46,408 174,363 -- 222,390
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES................................... 135,757 52,356 1,199 (133,653) 55,659
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 32,857 6,378 4,659 (32,728) 11,166
Interest on long-term debt..................... 408 (30,052) (45,526) -- (75,170)
Other interest expense......................... (1,253) (34,382) (8,664) 33,016 (11,283)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (31,090) (31,090)
Minority interest.............................. -- (82) (1,882) -- (1,964)
Other.......................................... 74 10,149 536 -- 10,759
--------- ---------- ---------- --------- ----------
32,086 (47,989) (50,877) (30,802) (97,582)
--------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES....................... 169,462 50,775 124,685 (164,455) 180,467
INCOME TAX PROVISION............................. 2,573 (1,000) 45,665 -- 47,238
--------- ---------- ---------- --------- ----------
NET INCOME....................................... 166,889 51,775 79,020 (164,455) 133,229
DIVIDENDS ON PREFERRED SECURITIES................ 31,090 -- -- (31,090) --
--------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK............ $ 135,799 $ 51,775 $ 79,020 $(133,365) $ 133,229
========= ========== ========== ========= ==========
</TABLE>
F-76
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................................... $ 17,469 $ 734,441 $1,258,785 $ (13,427) $1,997,268
--------- ---------- ---------- --------- ----------
OPERATING EXPENSES
Cost of gas......................................... 9,655 557,340 636,594 (10,011) 1,193,578
Operation and maintenance........................... 785 80,330 294,281 (3,416) 371,980
Depreciation, depletion and amortization............ 1,940 45,903 98,147 -- 145,990
Property and other taxes............................ 2,134 10,531 61,762 -- 74,427
--------- ---------- ---------- --------- ----------
14,514 694,104 1,090,784 (13,427) 1,785,975
--------- ---------- ---------- --------- ----------
OPERATING INCOME...................................... 2,955 40,337 168,001 -- 211,293
--------- ---------- ---------- --------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES........................................ 152,368 15,915 886 (151,302) 17,867
--------- ---------- ---------- --------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income..................................... 12,675 3,220 3,900 (12,561) 7,234
Interest on long-term debt.......................... 114 (25,928) (40,703) -- (66,517)
Other interest expense.............................. (1,218) (14,595) (8,012) 12,561 (11,264)
Dividends on preferred securities of subsidiaries... -- -- -- (12,374) (12,374)
Minority interest................................... -- (71) (988) -- (1,059)
Other............................................... 190 5,330 (1,756) -- 3,764
--------- ---------- ---------- --------- ----------
11,761 (32,044) (47,559) (12,374) (80,216)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................... 167,084 24,208 121,328 (163,676) 148,944
INCOME TAX PROVISION.................................. 1,814 (6,925) 41,486 -- 36,375
--------- ---------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS..................... 165,270 31,133 79,842 (163,676) 112,569
DISCONTINUED OPERATIONS, NET OF TAXES................. -- 37,771 -- -- 37,771
--------- ---------- ---------- --------- ----------
NET INCOME............................................ 165,270 68,904 79,842 (163,676) 150,340
DIVIDENDS ON PREFERRED SECURITIES..................... 12,356 -- 18 (12,374) --
--------- ---------- ---------- --------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK................. $ 152,914 $ 68,904 $ 79,824 $(151,302) $ 150,340
========= ========== ========== ========= ==========
</TABLE>
F-77
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
TWELVE MONTHS ENDED DECEMBER 31, 1997
----------------------------------------------------------------------
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
========= ========= ========= ========= =========
</TABLE>
F-78
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNIC MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES............... $ 38,535 $ 84,678 $ 101,694 $ (26,575) $ 198,332
--------- --------- ---------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net.................................. -- 19,000 68,491 -- 87,491
Capital contributions received from (distributions
paid to) affiliates, net.......................... (3,069) 41,195 1,614 (39,740) --
Dividends paid...................................... (62,875) -- (11,263) 11,263 (62,875)
Preferred securities dividends paid................. (12,356) -- (54) 12,410 --
Issuance of common stock............................ 17,264 -- -- -- 17,264
Issuance of preferred securities.................... 77,218 -- -- -- 77,218
Issuance of long-term debt.......................... -- 328,895 69,645 -- 398,540
Long-term commercial paper and 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>
F-79
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of MCN Energy Group Inc.:
We have audited the accompanying consolidated statements of financial
position of MCN Energy Group Inc. and subsidiaries (the "Company"), 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 Company'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, such financial statements 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.
As discussed in Note 1b, the accompanying 1998 and 1997 financial
statements have been restated.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 25, 1999
(June 7, 1999 as to the effects of the matters described in Note 1b.)
(October 15, 1999 as to effects of the matters described in Note 4a.)
F-80
<PAGE> 87
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, June 7, 1999 as to the effects of the
matters described in Note 1b, and October 15, 1999 as to the effects of the
matters described in Note 4a (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the restatement described in Note
1b); such consolidated financial statements and report are included in the
Company's Current Report on Form 8-K. Our audits also included the consolidated
financial statement schedule, Schedule II Valuation and Qualifying Accounts of
the Company. 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.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 25, 1999
(June 7, 1999 as to the effects of the matters described in Note 1b)
(October 15, 1999 as to the effects of the matters described in Note 4a)
<PAGE> 88
SCHEDULE II
MCN ENERGY GROUP INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
----------------------
PROVISIONS DEDUCTIONS
CHARGED TO FOR PURPOSES
BALANCE AT ---------------------- FOR WHICH THE BALANCE
BEGINNING REGULATORY RESERVES WERE AT END
DESCRIPTION OF PERIOD INCOME ASSET PROVIDED OF PERIOD
- -------------------------------------------------------------- --------- ------ ---------- ------------- ---------
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in Thousands)
Reserves deducted from assets in Consolidated Statement of
Financial Position:
Allowance for doubtful accounts........................... $15,711 $13,302 $ -- $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).................................. $ -- $10,390 $ -- $ 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 $ -- $ -- $ 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
======= ======= ====== ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets in Consolidated Statement
of Financial Position:
Allowance for doubtful accounts........................... $18,487 $21,847 $ -- $24,623 $15,711
======= ======= ====== ======= =======
Reserves included in Current Liabilities -- Other and in
Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (2)................................. $37,576 $ -- $ -- $ 835 $36,741
======= ======= ====== ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages...................................... $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838
======= ======= ====== ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets in Consolidated Statement
of Financial Position:
Allowance for doubtful accounts........................... $13,765 $29,425 $ -- $24,703 $18,487
======= ======= ====== ======= =======
Reserves included in Current Liabilities -- Other and in
Accrued Environmental Costs in Consolidated
Statement of Financial Position:
Environmental testing (2)................................. $38,451 $ -- $ -- $ 875 $37,576
======= ======= ====== ======= =======
Reserves included in Deferred Credits and Other
Liabilities -- Other in Consolidated Statement of
Financial Position:
Injuries and damages...................................... $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182
======= ======= ====== ======= =======
</TABLE>
NOTES:
(1) Reference is made to Note 3 to the Consolidated Financial Statements.
(2) Reference is made to Note 13b to the Consolidated Financial Statements.
<PAGE> 89
EXHIBIT 99-2
QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
------- -------
(IN THOUSANDS OF
DOLLARS -- EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
1999
Operating revenues.......................................... $796,586 $488,784
Operating income (loss):
Before unusual charges.................................... $153,918 $ 16,927
Unusual charges........................................... -- (52,000)
-------- --------
$153,918 $(35,073)
======== ========
Operating and joint venture income (loss):
Before unusual charges.................................... $166,376 $ 29,093
Unusual charges........................................... -- (52,000)
-------- --------
$166,376 $(22,907)
======== ========
Income (loss) before cumulative effect of accounting change:
Before unusual charges.................................... $ 88,415 $ (2,875)
Unusual charges........................................... -- (83,365)
-------- --------
$ 88,415 $(86,240)
======== ========
Net income (loss):
Before unusual charges.................................... $ 85,543 $ (2,875)
Unusual charges........................................... -- (83,365)
-------- --------
$ 85,543 $(86,240)
======== ========
Basic earnings (loss) per share:
Before unusual charges and cumulative effect of accounting
change................................................. $ 1.11 $ (.03)
Unusual charges........................................... -- (1.00)
Cumulative effect of accounting change.................... (.04) --
-------- --------
$ 1.07 $ (1.03)
======== ========
Diluted earnings (loss) per share:
Before unusual charges and cumulative effect of accounting
change................................................. $ 1.06 $ (.03)
Unusual charges........................................... -- (1.00)
Cumulative effect of accounting change.................... (.04) --
-------- --------
$ 1.02 $ (1.03)
======== ========
Dividends paid per share.................................... $ .2550 $ .2550
Average daily trading volume................................ 265,050 306,259
Price per share:............................................
High...................................................... $19.5625 $22.6250
Low....................................................... $15.8125 $15.9375
Close..................................................... $16.0625 $20.7500
</TABLE>
<PAGE> 1
EXHIBIT 99.G4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10070
MCN ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
500 GRISWOLD STREET, DETROIT, MICHIGAN
(Address of principal executive offices)
38-2820658
(I.R.S. Employer
Identification No.)
48226
(Zip Code)
Registrant's telephone number, including area code 313-256-5500
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of November 12, 1999:
Common Stock, par value $.01 per share: 85,655,381
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INDEX TO FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................ 22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 1
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 42
SIGNATURE................................................... 43
</TABLE>
ii
<PAGE> 3
MCN ENERGY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Results reflect reduced Diversified Energy and Gas Distribution
contributions -- MCN had a net loss for the 1999 third quarter of $31.2 million
or $.37 per share compared with a net loss of $176.7 million or $2.24 per share
in the same 1998 quarter. MCN experienced a net loss in the 1999 nine- and
twelve-month periods of $31.9 million or $.39 per share and $7.9 million or $.10
per share, respectively, compared with a net loss of $310.5 million or $3.95 per
share and $265.6 million or $3.38 per share for the same 1998 periods. As
subsequently discussed, the comparability in earnings was affected by
non-recurring items consisting of an accounting change and several unusual
charges. The unusual charges include losses on the sale of properties, property
write-downs, investment losses and restructuring charges.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
----------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)
Diversified Energy:
Before unusual charges............... $(12.7) $ .2 $ (17.8) $ 21.6 $ (24.6) $ 33.9
Unusual charges (Note 3)............. (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- ------- ------- -------
(16.5) (152.2) (105.0) (351.3) (111.8) (339.0)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e)............ -- (16.7) -- (16.7) -- (16.7)
------ ------- ------- ------- ------- -------
(14.7) (24.5) 76.0 40.8 106.8 73.4
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (27.4) (7.6) 58.2 79.1 82.2 124.0
Unusual charges (Note 3)............. (3.8) (169.1) (87.2) (389.6) (87.2) (389.6)
------ ------- ------- ------- ------- -------
(31.2) (176.7) (29.0) (310.5) (5.0) (265.6)
Cumulative Effect of Accounting Change,
Net of Taxes (Note 6)................ -- -- (2.9) -- (2.9) --
------ ------- ------- ------- ------- -------
$(31.2) $(176.7) $ (31.9) $(310.5) $ (7.9) $(265.6)
====== ======= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE -- BASIC AND
DILUTED
Diversified Energy:
Before unusual charges............... $ (.15) $ -- $ (.22) $ .27 $ (.30) $ .43
Unusual charges (Note 3)............. (.05) (1.93) (1.05) (4.74) (1.07) (4.75)
------ ------- ------- ------- ------- -------
(.20) (1.93) (1.27) (4.47) (1.37) (4.32)
------ ------- ------- ------- ------- -------
Gas Distribution:
Before unusual charges............... (.17) (.10) .92 .73 1.31 1.15
Unusual charges (Note 3e)............ -- (.21) -- (.21) -- (.21)
------ ------- ------- ------- ------- -------
(.17) (.31) .92 .52 1.31 .94
------ ------- ------- ------- ------- -------
Total Before Accounting Change:
Before unusual charges............... (.32) (.10) .70 1.00 1.01 1.58
Unusual charges (Note 3)............. (.05) (2.14) (1.05) (4.95) (1.07) (4.96)
------ ------- ------- ------- ------- -------
(.37) (2.24) (.35) (3.95) (.06) (3.38)
Cumulative Effect of Accounting Change
(Note 6)............................. -- -- (.04) -- (.04) --
------ ------- ------- ------- ------- -------
$ (.37) $ (2.24) $ (.39) $ (3.95) $ (.10) $ (3.38)
====== ======= ======= ======= ======= =======
</TABLE>
1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Excluding the non-recurring items, MCN had a net loss of $27.4 million for
the 1999 quarter and earnings of $58.2 million and $82.2 million for the 1999
nine-and twelve-month periods, respectively, resulting in decreases of $19.8
million, $20.9 million and $41.8 million from the corresponding 1998 periods.
The comparisons reflect losses in the Diversified Energy group resulting from
the decline in earnings in the Energy Marketing and Exploration & Production
(E&P) segments as well as increased financing costs. The 1999 quarter also
reflects higher seasonal losses in the Gas Distribution segment. The decline in
Diversified Energy's results in the 1999 nine- and twelve-month periods was
partially offset by increased contributions from the Gas Distribution segment
resulting from its new gas sales program and the favorable impact of more normal
weather. Also affecting the comparability for the nine- and twelve-month periods
were gains recorded by the Diversified Energy group in 1998 from the sale of
certain assets.
RESTATEMENT -- As discussed in Note 5 to the Consolidated Financial
Statements included herein and in MCN's 1998 Annual Report included in the Form
8-K filed with the Securities and Exchange Commission (SEC) on October 15, 1999
(Note 1), MCN conducted a special investigation of prior years' operations of
CoEnergy Trading Company, its non-utility energy marketing subsidiary,
subsequent to the issuance of its December 31, 1998 financial statements. As a
result of the investigation, MCN identified that its internal control systems
had been overridden, and that certain transactions had not been properly
accounted for. The accompanying consolidated financial statements for the 1998
periods have been restated from those originally reported to properly account
for the transactions identified. The restatements result in a decrease in net
loss of $.4 million for the 1998 quarter and an increase in net loss of $3.7
million or $.05 per share and $9.1 million or $.11 per share for the 1998 nine-
and twelve-month periods, respectively. The corrections did not have an impact
on the liquidity or cash flows of MCN. The financial information contained in
Management's Discussion and Analysis herein has been revised to reflect the
impact of such restatement.
STRATEGIC DIRECTION -- MCN announced in August 1999 a significantly revised
strategic direction that includes: focusing on the Midwest-to-Northeast region
rather than on North America; emphasizing operational efficiencies and growth
through the integration of existing businesses rather than building a portfolio
of diverse, non-operated energy investments; retaining its natural gas producing
properties in Michigan while going forward with the sale of its other
exploration and production oil and gas properties; and reducing capital
investment levels to approximately $500 million in 1999 and to $300 million in
2000.
PENDING MERGER -- MCN and DTE Energy Company (DTE) have signed a definitive
merger agreement dated October 4, 1999 under which DTE will acquire all
outstanding shares of MCN common stock. The boards of directors of both
companies have unanimously approved the merger agreement. The transaction is
subject to the approval of the shareholders of both companies, regulatory
approvals and other customary merger conditions. The transaction is expected to
close in six to nine months from the date of the merger agreement and will be
accounted for as a purchase by DTE. The combined company, which will be named
DTE Energy Company and headquartered in Detroit, will be the largest electric
and gas utility in Michigan. In the 1999 fourth quarter and 2000 first quarter,
MCN will record legal, accounting, employee benefit and other expenses
associated with the merger. Further information regarding the merger agreement
is included in Note 2 to the Consolidated Financial Statements included herein.
UNUSUAL CHARGES -- MCN recorded several unusual charges in the 1999 second
and third quarters as well as the 1998 second and third quarters, consisting of
losses on the sale of properties, property write-downs, investment losses and
restructuring charges (Note 3).
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A discussion of each unusual charge by segment follows:
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ----------------- -----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
UNUSUAL CHARGES
Diversified Energy:
Pipelines & Processing........... $ -- $ (89.5) $ -- $ (89.5) $ -- $ (89.5)
Electric Power................... -- (1.6) -- (1.6) -- (1.6)
Exploration & Production......... (3.8) (54.5) (87.2) (275.0) (87.2) (275.0)
Corporate & Other................ -- (6.8) -- (6.8) -- (6.8)
----- ------- ------ ------- ------ -------
(3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
Gas Distribution................... -- (16.7) -- (16.7) -- (16.7)
----- ------- ------ ------- ------ -------
$(3.8) $(169.1) $(87.2) $(389.6) $(87.2) $(389.6)
===== ======= ====== ======= ====== =======
Loss Per Share..................... $(.05) $ (2.14) $(1.05) $ (4.95) $(1.07) $ (4.96)
===== ======= ====== ======= ====== =======
</TABLE>
PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a $133.8
million pre-tax ($87.0 million net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal briquettes
produced from six coal fines plants qualifying for synthetic fuel tax credits
and MCN's ability to utilize or sell such credits. Although the plants were in
service by June 30, 1998, the date specified to qualify for the tax credits,
operating delays at the plants in the 1998 third quarter significantly increased
the possibility that the Internal Revenue Service (IRS) would challenge the
project's eligibility for tax credits. In addition, there was uncertainty as to
whether MCN could utilize or sell the credits. These factors led to MCN's
decision to record an impairment loss equal to the carrying value of the plants,
reflecting the likely inability to recover such costs. MCN sought to maximize
the value of its investment in the coal fines project, and in May 1999 filed a
request with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, MCN received favorable
determination letters from the IRS ruling that four of the six plants were in
service by June 30, 1998 (Note 4a).
In the third quarter of 1998, MCN also recorded an impairment loss of $3.9
million pre-tax ($2.5 million net of taxes) relating to an acquired
out-of-service pipeline in Michigan. MCN reviewed the business alternatives for
this asset and determined that its development is unlikely. Accordingly, MCN
recorded an impairment loss equal to the carrying value of this asset.
ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $2.5
million pre-tax ($1.6 million net of taxes) restructuring charge related to
certain international power projects. The charge was incurred as a result of
refocusing MCN's strategic plan, particularly the decision to exit certain
international power projects.
EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a $52.0
million pre-tax ($33.8 million net of taxes) write-down of its gas and oil
properties under the full cost method of accounting, due primarily to an
unfavorable revision in the timing of production of proved gas and oil reserves
as well as reduced expectations of sales proceeds on unproved acreage. Under the
full cost method of accounting as prescribed by the SEC, MCN's capitalized
exploration and production costs at June 30, 1999 exceeded the
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
full cost "ceiling," resulting in the excess being written off to income. The
ceiling is the sum of discounted future net cash flows from the production of
proved gas and oil reserves, and the lower of cost or estimated fair value of
unproved properties, net of related income tax effects.
In the second and third quarters of 1998, MCN recognized write-downs of its
gas and oil properties totaling $333.0 million pre-tax ($216.5 million net of
taxes) and $83.9 million pre-tax ($54.5 million net of taxes), respectively. The
write-downs were also the result of MCN's capitalized exploration and production
costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN recognized
losses from the sale of its Western and Midcontinent/Gulf Coast E&P properties
totaling $68.8 million pre-tax ($44.7 million net of taxes). In the third
quarter of 1999, MCN recognized additional losses relating to the sale of these
properties totaling $5.9 million pre-tax ($3.8 million net of taxes).
Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5
million pre-tax loss ($4.9 million net of taxes) from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a $6.1
million pre-tax loss ($4.0 million net of taxes) from the write-down of this
investment during the second quarter of 1998. The losses were due to declines in
the fair value of the securities that are not considered temporary. MCN has no
carrying value in this investment after the write-downs.
CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a $10.4
million pre-tax ($6.8 million net of taxes) restructuring charge related to the
corporate realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment included cost saving
initiatives expected to reduce future operating expenses.
GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a $24.8
million pre-tax ($11.2 million net of taxes and minority interest) write-down of
certain gas gathering properties. An analysis revealed that projected cash flows
from the gathering system were not sufficient to cover the system's carrying
value. Therefore, an impairment loss was recorded representing the amount by
which the carrying value of the system exceeded its estimated fair value.
Loss on Investment: In the third quarter of 1998, MCN also recorded an $8.5
million pre-tax loss ($5.5 million net of taxes) from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell in
2000. The write-down represents the amount by which the carrying value exceeded
the estimated fair value of the investment.
DIVERSIFIED ENERGY
Results reflect reduced Energy Marketing and E&P contributions -- The
Diversified Energy group had a net loss of $16.5 million for the 1999 third
quarter compared to a net loss of $152.2 million for the same 1998 period.
Diversified Energy had net losses of $105.0 million and $111.8 million in the
1999 nine- and twelve-month periods, respectively, compared to losses of $351.3
million and $339.0 million in the corresponding 1998 periods. As previously
discussed, results for all 1999 and 1998 periods were impacted by the unusual
charges. Excluding the unusual charges, Diversified Energy had losses of $12.7
million, $17.8 million and $24.6 million for the 1999 quarter, nine- and
twelve-month periods, respectively, compared to earnings of $.2 million, $21.6
million and $33.9 million for the same 1998 periods. The results for all 1999
periods reflect losses from the Energy Marketing segment due to higher gas
costs. Additionally, all 1999 periods reflect the impact of lower E&P gas and
oil production on operating and joint venture income as well as higher financing
costs. The earnings comparisons for the nine- and twelve-month periods were also
affected by gains recorded in 1998 from the sale of certain assets.
Additionally, Diversified Energy's results for the 1999 nine- and
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods reflect the impact of lower methanol prices and methanol
production on the Pipelines & Processing segment.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ------------------ -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
DIVERSIFIED ENERGY OPERATIONS
Operating Revenues*...................... $335.5 $ 228.9 $ 927.0 $ 734.0 $1,185.8 $1,039.3
------ ------- ------- -------- -------- --------
Operating Expenses*
Property write-downs and restructuring
charges (Note 3).................... -- 234.5 52.0 567.5 52.0 567.5
Other.................................. 347.9 227.5 929.6 721.4 1,198.0 1,018.2
------ ------- ------- -------- -------- --------
347.9 462.0 981.6 1,288.9 1,250.0 1,585.7
------ ------- ------- -------- -------- --------
Operating Loss........................... (12.4) (233.1) (54.6) (554.9) (64.2) (546.4)
------ ------- ------- -------- -------- --------
Equity in Earnings of Joint Ventures..... 15.0 17.9 38.5 46.1 53.8 59.2
------ ------- ------- -------- -------- --------
Other Income & (Deductions)*
Interest income........................ 1.1 .9 3.1 5.3 3.0 7.4
Interest expense....................... (14.4) (16.4) (46.6) (38.1) (62.8) (43.5)
Dividends on preferred securities of
subsidiaries........................ (10.3) (8.2) (31.0) (27.2) (40.2) (37.0)
Loss on sale of E&P properties (Note
3c)................................. (5.9) -- (74.7) -- (74.7) --
Loss on E&P investment (Note 3c)....... -- -- (7.5) (6.1) (7.5) (6.1)
Other.................................. 3.8 (.1) 13.8 13.1 20.9 16.0
------ ------- ------- -------- -------- --------
(25.7) (23.8) (142.9) (53.0) (161.3) (63.2)
------ ------- ------- -------- -------- --------
Loss Before Income Taxes................. (23.1) (239.0) (159.0) (561.8) (171.7) (550.4)
------ ------- ------- -------- -------- --------
Income Taxes
Current and deferred benefit........... (6.6) (84.3) (54.0) (199.5) (59.9) (195.8)
Federal tax credits.................... -- (2.5) -- (11.0) -- (15.6)
------ ------- ------- -------- -------- --------
(6.6) (86.8) (54.0) (210.5) (59.9) (211.4)
------ ------- ------- -------- -------- --------
Net Income (Loss)
Before unusual charges................. (12.7) .2 (17.8) 21.6 (24.6) 33.9
Unusual charges (Note 3)............... (3.8) (152.4) (87.2) (372.9) (87.2) (372.9)
------ ------- ------- -------- -------- --------
$(16.5) $(152.2) $(105.0) $ (351.3) $ (111.8) $ (339.0)
====== ======= ======= ======== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
OPERATING AND JOINT VENTURE INCOME
Operating and joint venture results for the 1999 quarter, nine- and
twelve-month periods (excluding the unusual charges) decreased from the
comparable 1998 periods by $16.7 million, $22.8 million and $38.7 million,
respectively. Results for all 1999 periods reflect reduced contributions from
the Energy Marketing, E&P and Electric Power segments. Pipelines & Processing
results improved in the 1999 quarter,
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
but declined in the 1999 nine- and twelve-month periods. Additionally, lower
Corporate & Other expenses in the 1999 nine- and twelve-month periods favorably
impacted operating and joint venture income.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
--------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING AND JOINT VENTURE INCOME
(LOSS)
Before Unusual Charges:
Pipelines & Processing................ $ 4.1 $ 3.5 $ 13.7 $ 19.1 $ 16.0 $ 27.1
Electric Power........................ 6.6 8.6 18.0 21.0 23.0 25.8
Energy Marketing...................... (8.8) .4 (6.0) .7 (10.2) (1.5)
Exploration & Production.............. 1.8 6.5 10.0 23.4 15.6 34.5
Corporate & Other..................... (1.1) .3 .2 (5.5) (2.8) (5.6)
----- ------- ------ ------- ------ -------
2.6 19.3 35.9 58.7 41.6 80.3
Unusual Charges (Note 3)................ -- (234.5) (52.0) (567.5) (52.0) (567.5)
----- ------- ------ ------- ------ -------
$ 2.6 $(215.2) $(16.1) $(508.8) $(10.4) $(487.2)
===== ======= ====== ======= ====== =======
</TABLE>
PIPELINES & PROCESSING operating and joint venture results (excluding the
write-offs) increased $.6 million for the 1999 quarter, and decreased $5.4
million and $11.1 million for the 1999 nine- and twelve-month periods,
respectively. All 1999 periods reflect start-up expenditures associated with new
projects and a decline in the "allowance for funds used during construction"
(AFUDC) associated with MCN's 16%-owned Portland Natural Gas Transmission
System, as it was placed in service in the first quarter of 1999. The 1999 nine-
and twelve-month periods also reflect reduced earnings from MCN's 25%-owned
methanol production business resulting from lower methanol margins as well as
lower methanol volumes produced. Earnings from the methanol production business
benefited from strong methanol prices during 1997 and early 1998, but prices and
margins have since weakened. Pipelines & Processing's average methanol sales
prices declined 9% for the 1999 nine-month period and 23% for the 1999
twelve-month period. Methanol production declined 5.0 million gallons for the
1999 nine-month period and 5.2 million gallons for the 1999 twelve-month period
due primarily to the shutdown of the methanol plant for scheduled maintenance in
March 1999. Additionally, Pipelines & Processing results for the 1998 periods
were impacted by operating losses related to the start-up of the coal fines
plants (Note 3a).
Pipelines & Processing operating and joint venture income was also affected
by an increase in transportation volumes for all 1999 periods due to new gas
gathering ventures and the expansion of existing pipeline projects. Volumes
transported increased for the 1999 quarter, nine- and twelve-month periods by
7.1 billion cubic feet (Bcf), 24.1 Bcf and 35.0 Bcf, respectively. Pipelines &
Processing results were also impacted in all 1999 periods by an increase in gas
processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs
increased 11.0 Bcf, 20.0 Bcf and 23.2 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively, reflecting volumes associated with the
acquisition and development of additional processing facilities. Pipelines &
Processing operations include variations in the level of gas processed to remove
carbon dioxide (CO(2)). The volume of CO(2) gas treated decreased .3 Bcf in the
1999 quarter, and increased 2.0 Bcf and 6.7 Bcf in the 1999 nine- and
twelve-month periods, respectively. However, earnings were not significantly
affected by these variations, since under the terms of Pipelines & Processing's
CO(2) processing contracts, revenues are not volume sensitive.
In November 1999, MCN reached an agreement to sell four of its coal fines
plants to DTE in an arms-length transaction that is independent of the pending
merger (Note 4b). The sales price will depend on total production performance of
the four plants. DTE will initially make a $45 million payment that will be
adjusted up to $152 million or down to zero based on the results of a 36-month
production test period. The sale is expected to be finalized in December 1999.
Beginning in 2001, Pipelines & Processing results are expected to
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
be favorably affected by the recording of gains from the sale of the plants as
increasing production levels are achieved.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------ -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PIPELINES & PROCESSING STATISTICS*
Methanol Produced (Million Gallons)........ 15.7 15.2 40.6 45.6 55.4 60.6
==== ==== ===== ===== ===== =====
Transportation (Bcf)....................... 52.4 45.3 153.5 129.4 199.5 164.5
==== ==== ===== ===== ===== =====
Gas Processed (Bcf):
Carbon Dioxide Treatment................ 12.4 12.7 38.2 36.2 50.9 44.2
Natural Gas Liquids Removal............. 22.6 11.6 54.1 34.1 65.1 41.9
---- ---- ----- ----- ----- -----
35.0 24.3 92.3 70.3 116.0 86.1
==== ==== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
Pipelines & Processing has also recorded earnings from certain joint
venture investments where it is allocated income based on its share of the
ventures' earnings but not less than a predetermined fixed amount. Joint venture
income recorded from these investments through September 1999 was based on the
fixed amount. Under the joint venture agreements, the fixed amount will be
lowered or eliminated in 2000.
Pipelines & Processing has a 75% interest in an asphalt manufacturing
partnership that recently completed construction of a plant designed to produce
up to 100,000 tons of high-quality asphalt annually. Currently, the plant is
experiencing difficulties in producing economical quantities of asphalt, and MCN
is aggressively working to resolve the issues.
In 1998, MCN advanced approximately $18 million to a developer of a
fertilizer project in the United Arab Emirates. The advance was structured as an
interest-bearing loan with the possibility of being converted into an equity
investment in the project. The advance, which was due in September 1999, is
being extended for an additional year. The project is being developed more
slowly than initially anticipated, and MCN's continuing role in the project is
under negotiation.
ELECTRIC POWER operating and joint venture results (excluding the
restructuring charges) decreased by $2.0 million, $3.0 million and $2.8 million
in the 1999 quarter, nine- and twelve-month periods, respectively. Results for
all 1999 periods were unfavorably affected by higher start-up expenditures
associated with new ventures as well as reduced contributions from MCN's
international power investments, specifically the Torrent Power Limited (TPL)
venture. In August 1999, MCN completed the sale of its 40% interest in TPL for
approximately $130 million, resulting in a small gain. TPL holds minority
interests in electric distribution companies and power generation facilities in
the state of Gujarat, India. Earnings from TPL for 1999 were deferred due to the
pending sale. Additionally, the nine- and twelve-month periods comparison was
impacted by an uncollectible expense provision recorded in the second quarter of
1999 associated with a customer in bankruptcy as well as reduced contributions
from the 30 megawatt (MW) Ada cogeneration facility, reflecting the sale of a
50% interest in the project in the first quarter of 1998.
Electric Power's earnings comparison for the nine- and twelve-month periods
also was impacted by increased contributions from the 1,370 MW Midland
Cogeneration Venture (MCV) facility, reflecting an increase in MCN's interest in
the MCV partnership from 18% to 23% in June 1998. Earnings from the MCV
partnership for the 1999 nine- and twelve-month periods include a favorable $2.1
million pre-tax adjustment for the resolution of a number of contract issues
with the electricity purchaser. Also contributing favorably to
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
the 1999 results were higher earnings from MCN's 50%-owned, 123 MW Michigan
Power cogeneration facility due to higher electricity capacity payments received
under its long-term power purchase agreement.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- ------------------ ------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(THOUSANDS OF MW HOURS)*
<S> <C> <C> <C> <C> <C> <C>
ELECTRIC POWER
Electricity Sales -- Domestic...... 692.3 651.5 2,084.2 1,855.4 2,745.4 2,498.0
Electricity
Sales -- International.......... -- 336.5 -- 874.2 414.2 874.4
----- ----- ------- ------- ------- -------
692.3 988.0 2,084.2 2,729.6 3,159.6 3,372.4
===== ===== ======= ======= ======= =======
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
ENERGY MARKETING operating and joint venture results decreased $9.2
million, $6.7 million and $8.7 million for the 1999 quarter, nine- and
twelve-month periods, respectively. The 1999 periods reflect the accounting
effect of anticipated temporary high gas prices on gas in inventory and cost of
gas sold. During the third quarter of each year, Energy Marketing normally
increases gas in inventory and depletes such inventories in the colder fourth
and first quarters of the year when gas demand and gas prices typically are at
their highest. In anticipation that third quarter inventory injections will be
withdrawn prior to year-end, Energy Marketing prices the gas inventory
injections at the estimated average purchase rate for the calendar year. For the
1999 third quarter, the actual average purchase rate incurred exceeded the
estimated average purchase rate for the year. This resulted in a higher cost of
gas sold in the 1999 third quarter, the impact of which is expected to reverse
in the 1999 fourth quarter.
Results for all 1999 periods were also impacted by higher costs for natural
gas transportation and storage capacity. The Washington 10 storage project, for
which MCN markets 100% of the 42 Bcf of storage capacity, was completed and
placed into operation in July 1999. Completion of the storage field in time for
the 1999-2000 winter heating season enhances Energy Marketing's ability to offer
a reliable gas supply during peak winter months.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
-------------- -------------- --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)*
<S> <C> <C> <C> <C> <C> <C>
ENERGY MARKETING
Gas Sales................................ 140.5 114.5 423.1 333.0 544.7 435.8
Exchange Gas Deliveries.................. -- -- 5.6 6.8 9.9 11.9
----- ----- ----- ----- ----- -----
140.5 114.5 428.7 339.8 554.6 447.7
===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes MCN's share of joint ventures
The impact of the higher cost of gas sold as previously discussed, as well
as the higher costs for gas transportation and storage capacity more than offset
the improved margins resulting from an increase in total gas sales and exchange
deliveries. Gas sales and exchange deliveries in total increased 26.0 Bcf, 88.9
Bcf and 106.9 Bcf during the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in gas sales is due in part to the April 1999
acquisition of existing marketing operations that significantly increased Energy
Marketing's level of sales to large commercial and industrial customers in the
Midwest. The comparisons of earnings for the nine- and twelve-month periods were
also affected by losses recorded in 1998 associated with trading activities
(Note 5) as well as higher 1999 uncollectible expenses and costs associated with
the June 1999 dissolution of the DTE-CoEnergy joint venture.
EXPLORATION & PRODUCTION operating and joint venture results (excluding the
unusual charges) decreased by $4.7 million, $13.4 million and $18.9 million for
the 1999 quarter, nine- and twelve-month periods, respectively. These results
reflect a decline in overall gas and oil production of 10.1 billion cubic feet
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
equivalent (Bcfe) in the 1999 quarter, 21.0 Bcfe in the 1999 nine-month period
and 25.0 Bcfe in the 1999 twelve-month period. The decrease in gas and oil
production is due primarily to the sale of MCN's Western and Midcontinent/Gulf
Coast E&P properties recorded in the second quarter of 1999. Gas and oil
production in future periods will also be lower due to the expected sale of
other non-Michigan E&P properties by mid-2000.
E&P results for all 1999 periods were also impacted by an increase in
production-related expenses and variations in gas and oil sales prices.
Production expenses increased per thousand cubic feet (Mcf) equivalent by $.22,
$.12 and $.09 for the 1999 quarter, nine- and twelve-month periods,
respectively, reflecting the higher costs of operating the E&P properties
retained. Gas prices increased by $.17 per Mcf in the 1999 third quarter, by
$.16 per Mcf in the current nine-month period and by $.13 per Mcf in the 1999
twelve-month period. Oil prices increased by $1.44 per barrel (Bbl) in the 1999
quarter, but declined by $.61 per Bbl and $1.82 per Bbl in the current nine-and
twelve-month periods, respectively. The impact of fluctuations in natural gas
and oil sales prices on E&P operating and joint venture income was mitigated by
hedging with swap and futures agreements, as discussed in the "Risk Management
Strategy" section that follows.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
--------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf)........................... 12.9 21.3 48.1 62.4 67.8 83.0
Oil Production (million Bbl)................... .2 .5 1.0 2.1 1.5 3.1
Gas and Oil Production (Bcf equivalent)........ 14.2 24.3 54.2 75.2 76.9 101.9
Average Gas Selling Price (per Mcf)............ $ 2.59 $ 2.03 $ 2.15 $ 2.07 $ 2.13 $ 2.23
Effect of Hedging (per Mcf).................... (.37) .02 .05 (.03) .02 (.21)
------ ------ ------ ------ ------ ------
Overall Average Gas Sales Price (per Mcf)...... $ 2.22 $ 2.05 $ 2.20 $ 2.04 $ 2.15 $ 2.02
====== ====== ====== ====== ====== ======
Average Oil Sales Price (per Bbl).............. $13.20 $10.64 $11.77 $11.55 $11.27 $12.99
Effect of Hedging (per Bbl).................... -- 1.12 .45 1.28 .72 .82
------ ------ ------ ------ ------ ------
Overall Average Oil Sales Price (per Bbl)...... $13.20 $11.76 $12.22 $12.83 $11.99 $13.81
====== ====== ====== ====== ====== ======
</TABLE>
RISK MANAGEMENT STRATEGY -- MCN manages commodity price risk by utilizing
futures, options and swap contracts to more fully balance its portfolio of gas
and oil supply and sales agreements. In late 1998, MCN began entering into
offsetting positions for existing hedges of gas and oil production from
properties that have been or were expected to be sold in 1999. MCN's risk
management strategy has been revised to reflect the change in its business that
will result from its new strategic direction as previously discussed.
Additionally, as a result of the special investigation, MCN is taking additional
steps to ensure compliance with risk management policies that are periodically
reviewed by the Board of Directors.
CORPORATE & OTHER operating and joint venture results (excluding the
restructuring charges) declined $1.4 million in the 1999 quarter, and improved
$5.7 million and $2.8 million for the 1999 nine- and twelve-month periods,
respectively. The variations primarily reflect adjustments that reduced or
eliminated accruals for employee incentive awards based on MCN's operating or
stock price performance.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for the 1999 quarter, nine- and twelve-month
periods reflect unfavorable changes of $1.9 million, $89.9 and $98.1 million,
respectively. The comparability of other income and deductions for all periods
is affected by unusual charges consisting of losses from the sale of E&P
properties and the write-down of an E&P investment. Other income and deductions
for the 1999 nine- and twelve-month periods reflect higher interest and
preferred dividend expense due to an increase in debt and preferred securities
required to finance capital investments in the Diversified Energy group. The
1999 nine- and
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
twelve-month periods include lower interest income due to the collection in
March 1998 of a $46 million advance made to a Philippine independent power
producer.
Other income in the 1999 nine- and twelve-month periods includes a $3.1
million pre-tax gain recorded in the 1999 second quarter from the sale of a
pipeline facility. Other income in the 1998 nine- and twelve-month periods
includes $9.9 million of pre-tax gains recorded in the 1998 first quarter from
the sale of certain gas sales contracts and a 50% interest in the 30 MW Ada
cogeneration facility. Other income for the 1998 twelve-month period includes a
$3.2 million pre-tax gain from the December 1997 sale of Diversified Energy's
25% interest in a gas storage project.
Additionally, other income in all 1999 periods include income from a third
quarter 1998 tax credit sale transaction, whereby MCN records income from such
sale as the credits are generated by the purchaser. MCN recorded pre-tax income
of $3.3 million, $9.4 million and $13.6 million in the 1999 quarter, nine- and
twelve-month periods, respectively, from such sale.
INCOME TAXES
The variations in income taxes for all 1999 periods reflect fluctuations in
pre-tax results. Income tax comparisons were also affected by tax credits and
stock-related tax benefits recorded in 1998, as well as the generation of
foreign income in 1998 that was not subject to U.S. or foreign tax provisions.
Gas production tax credits have not been recorded in the 1999 periods as a
result of the 1998 tax credit sale transaction and MCN's current net operating
loss tax position.
OUTLOOK
MCN's new strategic direction emphasizes achieving operational efficiencies
and growth through integration of existing businesses. MCN will continue
pursuing new pipeline, electric power and energy marketing ventures, with an
emphasis on operating projects that enhance MCN businesses within the
Midwest-to-Northeast corridor.
To achieve the operating efficiencies expected from the new strategic
direction, MCN is working to reorganize its Diversified Energy group into the
segments detailed below:
- Midstream & Supply develops and manages MCN's gas producing, gathering,
processing, storage and transmission facilities within the
Midwest-to-Northeast target region.
- Energy Marketing consists of MCN's non-regulated marketing activities to
industrial, commercial and residential customers, both inside and outside
the Gas Distribution segment's service area.
- Power develops and manages independent electric power projects.
- Energy Holdings manages and seeks to maximize the value of existing
ventures outside MCN's target region. It primarily consists of gas
gathering and processing investments in major U.S. producing basins.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GAS DISTRIBUTION
Results reflect seasonal loss and higher operating costs -- Gas
Distribution had a net loss of $14.7 million for the 1999 third quarter compared
to a net loss of $24.5 million from the same 1998 period. The Gas Distribution
segment typically records third quarter losses due to seasonally lower demand
for natural gas during the summer months. Gas Distribution had earnings of $76.0
million and $106.8 million for the 1999 nine- and twelve-month periods,
respectively, resulting in increases of $35.2 million and $33.4 million from the
comparable 1998 periods. Earnings in all three 1998 periods were unfavorably
affected by $16.7 million of unusual charges as previously discussed. Excluding
the unusual charges, Gas Distribution's earnings declined by $6.9 million for
the 1999 quarter, and improved by $18.5 million and $16.7 million in the 1999
nine- and twelve-month periods, respectively. The 1999 quarter reflects higher
operating costs. The earnings improvements for the 1999 nine- and twelve-month
periods reflect contributions from the new gas sales program as subsequently
discussed. Additionally, all 1999 periods reflect the impact of more favorable
weather.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
---------------- ---------------- --------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION OPERATIONS
Operating Revenues*
Gas sales.............................. $ 74.9 $ 80.2 $653.5 $579.1 $ 913.3 $ 929.7
End user transportation................ 22.4 16.7 72.6 60.0 94.9 83.1
Intermediate transportation............ 14.2 14.5 42.8 48.4 57.6 62.6
Other.................................. 17.9 12.7 62.7 47.2 82.9 62.3
------ ------ ------ ------ -------- --------
129.4 124.1 831.6 734.7 1,148.7 1,137.7
Cost of Sales............................ 33.2 32.1 354.6 311.6 505.1 533.0
------ ------ ------ ------ -------- --------
Gross Margin............................. 96.2 92.0 477.0 423.1 643.6 604.7
------ ------ ------ ------ -------- --------
Other Operating Expenses*
Operation and maintenance.............. 65.3 58.3 203.5 184.2 275.9 260.3
Depreciation, depletion and
amortization........................ 24.4 23.2 74.4 69.5 98.7 95.2
Property and other taxes............... 12.3 12.2 43.8 43.7 56.0 58.1
Property write-down (Note 3e).......... -- 24.8 -- 24.8 -- 24.8
------ ------ ------ ------ -------- --------
102.0 118.5 321.7 322.2 430.6 438.4
------ ------ ------ ------ -------- --------
Operating Income (Loss).................. (5.8) (26.5) 155.3 100.9 213.0 166.3
------ ------ ------ ------ -------- --------
Equity in Earnings of Joint Ventures..... .4 .1 1.5 .5 1.9 .9
------ ------ ------ ------ -------- --------
Other Income and (Deductions)*
Interest income........................ .9 1.6 2.7 3.6 4.8 4.6
Interest expense....................... (13.8) (13.1) (40.3) (41.1) (56.7) (55.6)
Investment loss (Note 3e).............. -- (8.5) -- (8.5) -- (8.5)
Minority interest...................... (.3) 7.1 (.8) 5.9 (1.0) 5.5
Other.................................. (.8) .5 (.7) 1.1 (2.1) .9
------ ------ ------ ------ -------- --------
(14.0) (12.4) (39.1) (39.0) (55.0) (53.1)
------ ------ ------ ------ -------- --------
Income (Loss) Before Income Taxes........ (19.4) (38.8) 117.7 62.4 159.9 114.1
Income Taxes............................. (4.7) (14.3) 41.7 21.6 53.1 40.7
------ ------ ------ ------ -------- --------
Net Income (Loss)
Before unusual charges................. (14.7) (7.8) 76.0 57.5 106.8 90.1
Unusual charges (Note 3e).............. -- (16.7) -- (16.7) -- (16.7)
------ ------ ------ ------ -------- --------
$(14.7) $(24.5) $ 76.0 $ 40.8 $ 106.8 $ 73.4
====== ====== ====== ====== ======== ========
</TABLE>
- -------------------------
* Includes intercompany transactions
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GROSS MARGIN
Gross margin (operating revenues less cost of sales) increased $4.2
million, $53.9 million and $38.9 million in the 1999 quarter, nine- and
twelve-month periods, respectively. The increase is due primarily to margins
generated under Michigan Consolidated Gas Company's (MichCon) new three-year gas
sales program, which is part of its Regulatory Reform Plan (Note 7a). Under the
gas sales program that began in January 1999, MichCon's gas sales rates include
a gas commodity component that is fixed at $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy is likely to continue producing
favorable margins in each of the three years.
Gross margins for all three 1999 periods also reflect higher gas sales
resulting from more normal weather, especially the 1999 nine-month period that
was 13.1% colder than the same 1998 period. Additionally, gross margins for all
1999 periods reflect revenues from the continued growth in other gas-related
services as well as revenues and cost of sales associated with three heating and
cooling firms acquired in October 1998.
Gas Distribution's operations are seasonal, with gross margins and earnings
concentrated in the first and fourth quarters of each calendar year. By the end
of the first quarter, the heating season is largely over, and Gas Distribution
typically incurs substantially reduced gross margins and earnings in the second
quarter and losses in the third quarter. The seasonal nature of Gas
Distribution's operations is expected to be more pronounced as a result of
MichCon's new gas sales program.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EFFECT OF WEATHER ON GAS MARKETS AND
EARNINGS
Percent Warmer Than Normal................ N/M N/M (8.5)% (21.6)% (10.7)% (14.5)%
Decrease From Normal in:
Gas Markets (Bcf)...................... (.7) (1.5) (11.1) (26.7) (24.6) (27.4)
Net Income (Millions).................. $ (.7) $(1.1) $(11.0) $(23.1) $(23.2) $(23.7)
Diluted Earnings Per Share............. $(.01) $(.01) $ (.13) $ (.29) $ (.28) $ (.30)
</TABLE>
- -------------------------
N/M -- not meaningful
GAS SALES AND END USER TRANSPORTATION revenues in total increased by $.4
million and $87.0 million for the 1999 quarter and nine-month period,
respectively, and decreased by $4.6 million for the 1999 twelve-month period.
Revenues were affected by fluctuations in gas sales and end user transportation
deliveries that increased in total by 1.9 Bcf, 14.6 Bcf and 3.0 Bcf in the
current quarter, nine- and twelve-month periods, respectively. The higher gas
sales and end user transportation deliveries were due primarily to weather,
which was colder in all the 1999 periods compared to the corresponding 1998
periods.
Revenues were also impacted by variations in the cost of the gas commodity
component of gas sales rates. As previously discussed, this gas commodity
component was fixed under MichCon's new gas sales program at $2.95 per Mcf
beginning in January 1999. Prior to 1999, MichCon's sales rates were set to
recover all of its reasonably and prudently incurred gas costs. The gas
commodity component of MichCon's sales rate increased
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
$.58 per Mcf (24%) and $.23 per Mcf (8%) for the 1999 quarter and nine-month
period, respectively, and decreased $.08 per Mcf (3%) for the 1999 twelve-month
period.
<TABLE>
<CAPTION>
QUARTER 9 MONTHS 12 MONTHS
------------- ------------- -------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(BCF)
<S> <C> <C> <C> <C> <C> <C>
GAS DISTRIBUTION MARKETS
Gas Sales..................................... 10.6 12.8 127.3 117.5 182.0 182.6
End User Transportation....................... 32.7 28.6 107.0 102.2 145.1 141.5
----- ----- ----- ----- ----- -----
43.3 41.4 234.3 219.7 327.1 324.1
Intermediate Transportation*.................. 128.3 133.9 390.8 430.8 497.5 570.2
----- ----- ----- ----- ----- -----
171.6 175.3 625.1 650.5 824.6 894.3
===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
* Includes intercompany volumes
Additionally, gas sales and end user transportation revenues in total were
impacted by MichCon's three-year customer choice program, which is also part of
its Regulatory Reform Plan. Under the customer choice program that began in
April 1999, approximately 70,000 or 6% of its customers are purchasing natural
gas from suppliers other than MichCon. However, MichCon continues to transport
and deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services. MichCon's customers who
have chosen to purchase their gas from other suppliers are reflected as end user
transportation customers rather than gas sales customers. Accordingly, gas sales
revenues have decreased, partially offset by an increase in end user
transportation revenues, resulting in a net decrease in total operating revenues
due to the gas commodity component included in gas sales rates.
INTERMEDIATE TRANSPORTATION revenues decreased $.3 million, $5.6 million
and $5.0 million in the 1999 quarter, nine- and twelve-month periods,
respectively. Intermediate transportation revenues reflect lower off-system
volumes of 5.6 Bcf, 40.0 Bcf and 72.7 Bcf in the 1999 quarter, nine- and
twelve-month periods, respectively. A significant portion of the volume decrease
was for customers who pay a fixed fee for intermediate transportation capacity
regardless of actual usage. Although volumes associated with these fixed-fee
customers may vary, the related revenues are not affected. The decrease for all
1999 periods is due to customers shifting volumes from a higher rate to a lower
rate transportation route. The decrease in intermediate transportation revenues
for the 1999 nine- and twelve-month periods is also due in part to an adjustment
in 1998 of revenues related to fees generated from tracking the transfer of gas
title on MichCon's transportation system.
OTHER OPERATING REVENUES increased $5.2 million, $15.5 million and $20.6
million in the 1999 quarter, nine- and twelve-month periods, respectively. The
improvements are due to an increase in facility development and appliance
maintenance services, late payment fees and other gas-related services.
Additionally, all 1999 periods reflect revenues from the acquisition of three
heating and cooling firms in October 1998.
COST OF SALES
Cost of sales is affected by variations in gas sales volumes and the cost
of purchased gas as well as related transportation costs. Under the Gas Cost
Recovery (GCR) mechanism that was in effect through December 1998 (Note 7b),
MichCon's sales rates were set to recover all of its reasonably and prudently
incurred gas costs. Therefore, fluctuations in cost of gas sold had little
effect on gross margins. Under MichCon's new gas sales program, the gas
commodity component of its sales rates is fixed. Accordingly, beginning in
January 1999, changes in cost of gas sold directly impact gross margins and
earnings.
Cost of sales increased $1.1 million and $43.0 million in the 1999 quarter
and nine-month periods, respectively, and decreased $27.9 million in the 1999
twelve-month period. Cost of sales for all 1999 periods
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
was affected by a reduction in gas sales volumes as a result of customers who
have chosen to purchase their gas from other suppliers under MichCon's customer
choice program. As previously discussed, MichCon maintains its previously
existing sales margins on these services by continuing to transport and deliver
the gas to the customers' premises.
The increase in the current nine-month period was due primarily to higher
weather-driven sales volumes. Cost of sales was also impacted by average prices
paid for gas, which increased $.42 per Mcf (18%) in the current quarter and
decreased $.25 per Mcf (8%) in the current twelve-month period. Prices paid for
gas sold in the 1999 nine-month period were flat compared to the same 1998
period. Additionally, all 1999 periods reflect cost of sales associated with the
operations of the three heating and cooling firms acquired in October 1998.
OTHER OPERATING EXPENSES
OPERATION AND MAINTENANCE expenses increased $7.0 million, $19.3 million
and $15.6 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The increase in the 1999 quarter and nine-month period is due to
higher employee benefit costs. The increase in all 1999 periods also reflects
additional computer system support costs associated with MichCon's new customer
information system as well as advertising costs associated with MichCon's new
gas sales program. The 1998 nine- and twelve-month periods benefited from an
interstate pipeline company refund.
DEPRECIATION AND DEPLETION increased $1.2 million, $4.9 million and $3.5
million in the 1999 quarter, nine- and twelve-month periods, respectively.
Depreciation on higher plant balances impacted all 1999 periods. The increase in
all 1999 periods was tempered by the effect of lower depreciation rates for
MichCon's utility property, plant and equipment that became effective in January
1998.
PROPERTY AND OTHER TAXES decreased $2.1 million in the 1999 twelve-month
period. The improvement is attributable to lower Michigan Single Business Taxes
resulting from an increase in capital acquisition deductions.
PROPERTY WRITE-DOWN of $24.8 million in the 1998 periods represents the
impairment of a Michigan gas gathering system (Note 3e).
EQUITY IN EARNINGS OF JOINT VENTURES
Equity in earnings of joint ventures increased $.3 million in the 1999
quarter, and $1.0 million in the 1999 nine- and twelve-month periods. The
comparability is affected by losses recorded in the 1998 periods from Gas
Distribution's 47.5% interest in a Missouri gas distribution company. The
investment was written down to fair value in the third quarter of 1998, and no
additional losses have since been recorded as a result of the intended sale of
the investment in 2000.
OTHER INCOME AND DEDUCTIONS
Other income and deductions changed unfavorably by $1.6 million, $.1
million and $1.9 million in the 1999 quarter, nine- and twelve-month periods,
respectively. The 1998 nine- and twelve-month periods were impacted by gains
from the sale of property. The 1999 quarter and twelve-month periods include
slightly higher interest costs. Other income and deductions in all 1998 periods
also reflect an unusual charge to write down the investment in a small natural
gas distribution company located in Missouri (Note 3e). Also impacting other
income and deductions in all 1998 periods was a change in minority interest
reflecting the joint venture partners' share of the write-down of the Michigan
gas gathering properties (Note 3e).
INCOME TAXES
Income taxes increased $9.6 million, $20.1 million and $12.4 million in the
1999 quarter, nine- and twelve-month periods, respectively, reflecting an
increase in pre-tax earnings. The increase for all 1999 periods
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
is also due to the flow-through effect of certain book-to-tax temporary
differences. Additionally, income tax comparisons for the 1999 nine- and
twelve-month periods were affected by the favorable resolution of prior years'
tax issues.
OUTLOOK
Gas Distribution's strategy is to aggressively expand its role as the
preferred provider of natural gas and high-value energy services within
Michigan. Accordingly, Gas Distribution's objectives are to increase revenues
and control costs in order to deliver strong shareholder returns and provide
customers with high-quality service at competitive prices.
Gas Distribution has begun and plans to continue capitalizing on
opportunities resulting from the gas industry restructuring. MichCon is
currently implementing its Regulatory Reform Plan, which includes a
comprehensive experimental three-year customer choice program designed to offer
all sales customers added choices and greater price certainty. The customer
choice program began in April 1999, with approximately 70,000 customers choosing
to purchase natural gas from suppliers other than MichCon. Plan years begin
April 1 of each year, and the number of customers allowed to participate in the
plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is
also a volume limitation on commercial and industrial participants of 10 Bcf in
1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon continues to transport and
deliver the gas to the customers' premises at prices that maintain its
previously existing sales margins on these services.
The Plan also suspended the GCR mechanism for customers who continue to
purchase gas from MichCon and fixed the gas commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period that began in January
1999. The suspension of the GCR mechanism allows MichCon to profit from its
ability to purchase gas at less than $2.95 per Mcf. As part of its gas
acquisition strategy, MichCon has entered into fixed-price contracts at costs
below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy has produced favorable margins through
September 1999 and is likely to continue producing favorable margins through
2001. The level of margins generated from selling gas will be affected by the
number of customers choosing to purchase gas from suppliers other than MichCon
under the three-year customer choice program.
Also beginning in 1999, an income sharing mechanism allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. The impact of weather and expenses incurred in the
fourth quarter of 1999 will determine the actual amount of profit, if any, to be
shared with customers.
Gas Distribution also plans to grow revenues and earnings by offering a
variety of energy-related services, which include appliance sales, installation
and maintenance. Growth in revenues is expected from the three heating and
cooling firms acquired in October 1998 that have been integrated under MichCon
Home Services, which is expanding its customer base and range of services.
CHANGES IN ACCOUNTING
In the 1999 first quarter, MCN adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants. SOP 98-5 requires start-up and organizational costs to be expensed
as incurred. This change in accounting principle resulted in the write-off of
start-up and organization costs capitalized as of December 31, 1998. The
cumulative effect of the change was to decrease earnings by $2.9 million for the
1999 nine- and twelve-month periods.
In the 1999 first quarter, MCN adopted the Emerging Issues Task Force
consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
fair value, with changes in fair value recognized in earnings. Adoption of EITF
98-10 did not have a material impact on MCN's financial statements.
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
9 MONTHS
-----------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash Flow Provided From (Used For):
Operating activities...................................... $ 211.5 $ 237.5
Financing activities...................................... (270.4) 306.9
Investing activities...................................... 72.2 (523.9)
------- -------
Net Increase in Cash and Cash Equivalents................... $ 13.3 $ 20.5
======= =======
</TABLE>
OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $26.0 million during
the 1999 nine-month period as compared to the same 1998 period. The decrease was
due primarily to higher working capital requirements, substantially offset by
increased earnings, after adjusting for non-cash items (depreciation, unusual
charges and deferred taxes).
FINANCING ACTIVITIES
MCN's cash flow related to financing activities decreased $577.3 million
during the 1999 nine-month period compared to the same 1998 period. The change
primarily reflects lower debt issuances and higher debt repayments, partially
offset by an increase in equity issuances, in the 1999 nine-month period. A
summary of MCN's significant financing activities and financing plans during
1999 follows.
Prior to mid-February 1999, MCN issued new shares of common stock pursuant
to its Dividend Reinvestment and Stock Purchase Plan and various employee
benefit plans. MCN generated $.2 million in the 1999 nine-month period and $14.7
million in the same 1998 period from common stock issuances under these plans.
Beginning in mid-February 1999, shares issued under these plans are being
acquired by MCN through open market purchases.
MCN's 5,865,000 of Preferred Redeemable Increased Dividend Equity
Securities (Enhanced PRIDES) matured in April 1999. Each security represented a
contract to purchase one share of MCN common stock. Upon conversion of the
Enhanced PRIDES, MCN received cash proceeds totaling approximately $135.0
million. The proceeds were used to repay a $130.0 million medium-term note of
Diversified Energy that came due in May 1999.
In March 1999, MCN entered into a $150 million revolving credit agreement
that expired in October 1999. There was no balance outstanding under this credit
agreement at September 30, 1999. MCN effectively replaced this agreement in
October 1999 by entering into a $290 million revolving credit agreement that
expires in July 2000. Borrowings under the credit agreement were used to
refinance $100 million of Single Point Remarketed Reset Capital Securities that
were redeemed in October 1999. The credit agreement will also be used to repay
debt, fund capital investments and for general corporate purposes.
DIVERSIFIED ENERGY
The Diversified Energy group maintains credit lines that allow for
borrowings of up to $200 million under a 364-day revolving credit facility and
up to $200 million under a three-year revolving credit facility. These
facilities support Diversified Energy's commercial paper program, which is used
to finance capital investments and working capital requirements. The 364-day
facility was renewed in July 1999. During the first nine months
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
of 1999, Diversified Energy's commercial paper and bank borrowings outstanding
increased by $129.6 million, leaving borrowings of $355.3 million outstanding
under this program at September 30, 1999.
MCN received approximately $270 million through September 1999 from the
sale of various non-Michigan E&P properties. MCN also received approximately
$130 million in August 1999 from the sale of its interest in TPL. Proceeds from
these sales were used to repay outstanding debt at the MCN Corporate and
Diversified Energy levels. Proceeds from the sale of additional non-Michigan E&P
properties are expected by mid-2000 and will be used to repay outstanding
borrowings and for general corporate purposes.
MCN repaid $80 million and $130 million of medium-term notes that came due
in February 1999 and May 1999, respectively.
GAS DISTRIBUTION
Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term
borrowing needs, MichCon normally issues commercial paper that is backed by
credit lines with several banks. MichCon has established credit lines that allow
for borrowings of up to $150 million under a 364-day revolving credit facility
and up to $150 million under a three-year revolving credit facility. The 364-day
facility was renewed in July 1999. During the first nine months of 1999, MichCon
repaid $88.7 million of commercial paper, leaving borrowings of $129.6 million
outstanding under this program at September 30, 1999.
During 1999, MichCon issued approximately $110 million of debt (Note 10)
and repaid $68 million of first mortgage bonds.
INVESTING ACTIVITIES
MCN's cash flow related to investing activities increased $596.1 million in
the 1999 nine-month period as compared to the same 1998 period. The increase was
due primarily to proceeds from the sale of property and investments and lower
capital investments.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
Capital investments equaled $391.6 million in the 1999 nine-month period
compared to $636.6 million for the same period in 1998. The 1999 amounts include
significantly lower levels of investments in E&P properties and Pipelines &
Processing ventures.
<TABLE>
<CAPTION>
9 MONTHS
----------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
CAPITAL INVESTMENTS
Consolidated Capital Expenditures:
Diversified Energy........................................ $138.5 $283.8
Gas Distribution.......................................... 94.9 106.3
------ ------
233.4 390.1
------ ------
MCN's Share of Joint Venture Capital Expenditures:(1)
Pipelines & Processing.................................... 76.6 166.1
Electric Power............................................ 52.0 19.7
Energy Marketing.......................................... -- .6
Other..................................................... .1 .8
------ ------
128.7 187.2
------ ------
Acquisitions:(2)............................................ 29.5 59.3
------ ------
Total Capital Investments................................... $391.6 $636.6
====== ======
</TABLE>
- -------------------------
(1) A portion of joint venture capital expenditures is financed with joint
venture debt
(2) Includes MCN's share of certain debt existing at the date of acquisitions
Total capital investments were partially funded from the sale of certain
E&P properties and joint venture investments that totaled approximately $400
million in the 1999 nine-month period.
OUTLOOK
1999 capital investments to approximate $500 million -- MCN's strategic
direction is to grow in its targeted region by investing in energy-related
projects. For 1999, MCN anticipates investing approximately $500 million, of
which 70% is expected to be within the Diversified Energy group.
The proposed level of investments for 2000 and each of the next several
years approximates $300 million and is expected to be financed primarily with
internally generated funds, including proceeds received from the sale of assets.
No issuance of incremental equity securities is expected for the next few years.
It is management's opinion that MCN and its subsidiaries will have sufficient
capital resources to meet anticipated capital and operating requirements.
YEAR 2000
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN has implemented a corporate-wide,
four-phase Year 2000 approach consisting of: i) inventory -- identification of
the components of MCN's systems, equipment and facilities; ii) assessment --
assessing Year 2000 readiness and prioritizing the risks of items identified in
the inventory phase; iii) remediation -- upgrading, repairing and replacing
non-compliant systems, equipment and facilities; and iv) testing -- verifying
items remediated. MCN has completed the Year 2000 implementation plan for its
mission critical
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
business systems and measurement and control systems (including embedded
microprocessors), and therefore considers these systems Year 2000 ready. The
completion status of these systems follows:
<TABLE>
<CAPTION>
INVENTORY ASSESSMENT REMEDIATION TESTING
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Business Systems:
September 30, 1999.................................. 100% 100% 98% 98%
October 31, 1999.................................... 100% 100% 100% 100%
Measurement and Control Systems:
September 30, 1999.................................. 100% 100% 99% 99%
October 31, 1999.................................... 100% 100% 100% 100%
</TABLE>
Costs associated with the Year 2000 issue are not expected to have a
material adverse effect on MCN results of operations, liquidity and financial
condition. The total costs are estimated to be between $5 million and $6
million, of which approximately $4.6 million was incurred through September
1999. This estimate does not include MCN's share of Year 2000 costs that may be
incurred by partnerships and joint ventures. The anticipated costs are not
higher due in part to the ongoing replacement of significant old systems. MCN
has made a substantial investment in new systems that were installed over the
past few years that are Year 2000 ready, particularly MichCon's customer
information system which was installed and functional in April 1999. The
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of customer satisfaction and to respond
to changes in regulation and increased competition within the energy industry.
MCN anticipates a smooth transition to the Year 2000. However, the failure
to correct a material Year 2000 problem could result in an interruption in or a
failure of certain business activities and operations. Such interruptions or
failures could have a material adverse effect on MCN's results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
key partners, operators, suppliers and government agencies, MCN cannot certify
that it will be unaffected by Year 2000 complications.
In order to reduce its Year 2000 risk, MCN has completed the development of
contingency plans for mission-critical processes in the event of a Year 2000
complication. Contingency plans for several essential gas transmission
facilities were tested under a "power outage" scenario and have achieved
excellent results. Completed contingency plans will continue to be enhanced
throughout the remainder of 1999 as MCN works with partners, operators,
suppliers and governmental agencies.
MARKET RISK INFORMATION
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN manages commodity price and interest rate
risk through the use of various derivative instruments and generally limits the
use of such instruments to hedging activities. A discussion and analysis of the
events and factors that have changed MCN's commodity price, interest rate and
foreign currency risk during the 1999 nine-month period follows.
COMMODITY PRICE RISK
HEDGING ACTIVITIES
Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas
sale and purchase contracts and gas inventories. As a result of changes in
commodity prices that occurred during the 1999 nine-month period, there have
been significant changes in the outcome of the sensitivity analysis performed
for commodity price risk at September 30, 1999 as compared to December 31, 1998.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
A sensitivity analysis calculates the change in fair values of MCN's
natural gas and oil futures and swap agreements given a hypothetical 10%
increase or decrease in commodity prices utilizing applicable forward commodity
rates in effect at the end of the reporting period.
Changes in fair values resulting from sensitivity analysis calculations
follow:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Commodity Price Sensitive:*
Swaps: Pay fixed/receive variable................. $ 79.6 $(79.6) $ 53.6 $(53.6)
Pay variable/receive fixed................ $(91.0) $ 91.0 $(54.0) $ 54.0
Futures: Longs.................................... $ 5.3 $ (5.3) $ 1.9 $ (1.9)
Shorts................................... $ (3.5) $ 3.5 $ (.1) $ .1
</TABLE>
- -------------------------
* Includes only the risk related to the derivative instruments that serve as
hedges and does not include the risk associated with the related underlying
hedged item.
NON-HEDGING ACTIVITIES
During 1999, MCN sold its Western and Midcontinent/Gulf Coast E&P
properties, but has not yet fully exited the natural gas and oil swap agreements
and futures contracts that served as hedges of the price risk associated with
the gas and oil produced from these properties. As a result, these natural gas
and oil swap agreements and futures contracts are no longer considered hedges
under definitions prescribed by the SEC and generally accepted accounting
principles. Accordingly, these swap agreements and futures contracts are
accounted for using the mark-to-market method, with unrealized gains and losses
recorded in earnings. At September 30, 1999, these swap agreements and futures
contracts total 14.1 Bcf, have a notional value of $33.0 million and mature
through 2000.
Changes in fair values resulting from sensitivity analysis calculations
previously discussed follow:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ASSUMING ASSUMING ASSUMING ASSUMING
A 10% A 10% A 10% A 10%
INCREASE IN DECREASE IN INCREASE IN DECREASE IN
COMMODITY COMMODITY COMMODITY COMMODITY
PRICES PRICES PRICES PRICES
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Commodity Price Sensitive:*
Swaps: Pay variable/receive fixed................. $(2.3) $ 2.3 N/A N/A
Futures: Shorts................................... $(1.3) $ 1.3 N/A N/A
</TABLE>
INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of
variable and fixed-rate debt and preferred securities. In order to manage
interest costs and risk, MCN uses interest rate swap agreements to exchange
fixed and variable-rate interest payment obligations over the life of the
agreements without exchange of the underlying principal amounts. During the 1999
nine-month period, there have not been any events or factors that have caused
any significant changes to MCN's interest rate risk.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONCLUDED)
FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are located in India, Nepal and the United Arab
Emirates. During August 1999, MCN completed the sale of its interest in TPL that
is located in India for approximately $130 million. This sale has reduced MCN's
foreign currency risk to an insignificant level.
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE AND HEDGING ACTIVITIES -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000.
SFAS No. 133 requires all derivatives to be recognized in the balance sheet
as either assets or liabilities measured at their fair value and sets forth
conditions in which a derivative instrument may be designated as a hedge. The
Statement requires that changes in the fair value of derivatives be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to be
recorded to other comprehensive income or to offset related results on the
hedged item in earnings.
MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Accordingly, management cannot quantify the effects of
adopting SFAS No. 133 at this time.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve certain risks and uncertainties as set forth
in MCN's 1998 Annual Report included herein in the Form 8-K filed with the SEC
on October 15, 1999.
The Year 2000 disclosure is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act. Therefore, MCN claims the full
protections established by the Act.
AVAILABLE INFORMATION
The following information is available without charge to shareholders and
other interested parties: the 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999; the Form 10-Q Quarterly Reports and the
Quarterly Statistical Supplements. To request these publications, shareholders
and other interested parties are instructed to contact: MCN Investor Relations,
500 Griswold Street, Detroit, Michigan 48226, (800) 548-4655. Information is
also available on MCN's website at http://www.mcnenergy.com.
21
<PAGE> 24
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------- -----------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
-------- --------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of sales.................................. 329,339 201,006 1,118,172 853,551 1,470,395 1,309,153
Operation and maintenance...................... 98,159 90,712 298,586 277,215 410,786 386,192
Depreciation, depletion and amortization....... 38,611 44,231 125,948 135,478 169,960 182,245
Property and other taxes....................... 14,921 15,542 52,849 54,255 68,147 72,277
Property write-downs and restructuring charges
(Note 3 ).................................... -- 259,296 52,000 592,318 52,000 592,318
-------- --------- ---------- ---------- ---------- ----------
481,030 610,787 1,647,555 1,912,817 2,171,288 2,542,185
-------- --------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................... (18,171) (259,642) 100,674 (453,998) 148,820 (380,002)
-------- --------- ---------- ---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES............. 15,396 17,963 40,020 46,561 55,684 60,040
-------- --------- ---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 1,909 2,496 5,774 8,659 8,008 13,136
Interest on long-term debt..................... (22,540) (24,392) (66,046) (62,345) (91,047) (79,336)
Other interest expense......................... (5,541) (4,991) (20,858) (16,654) (28,608) (20,981)
Dividends on preferred securities of
subsidiaries................................. (10,335) (8,178) (31,004) (27,162) (40,212) (36,916)
Loss on sale of E&P properties (Note 3c)....... (5,877) -- (74,675) -- (74,675) --
Investment losses (Notes 3c and 3e)............ -- (8,500) (7,456) (14,635) (7,456) (14,635)
Minority interest (Note 3e).................... (632) 7,275 (1,371) 6,030 (1,409) 5,580
Other.......................................... 3,281 134 13,655 14,095 19,121 17,040
-------- --------- ---------- ---------- ---------- ----------
(39,735) (36,156) (181,981) (92,012) (216,278) (116,112)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES......................... (42,510) (277,835) (41,287) (499,449) (11,774) (436,074)
INCOME TAX BENEFIT............................... (11,356) (101,111) (12,308) (188,984) (6,792) (170,496)
-------- --------- ---------- ---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE......................................... (31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES (NOTE 6)................................. -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
NET LOSS......................................... $(31,154) $(176,724) $ (31,851) $(310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
LOSS PER SHARE -- BASIC AND DILUTED (NOTE 11)
Before cumulative effect of accounting
change....................................... $ (0.37) $ (2.24) $ (.35) $ (3.95) $ (.06) $ (3.38)
Cumulative effect of accounting change (Note
6)........................................... -- -- (.04) -- (.04) --
-------- --------- ---------- ---------- ---------- ----------
$ (0.37) $ (2.24) $ (0.39) $ (3.95) $ (0.10) $ (3.38)
======== ========= ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING -- BASIC AND
DILUTED........................................ 85,282 78,938 82,724 78,689 81,840 78,531
======== ========= ========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................... $ .2550 $ .2550 $ .7650 $ .7650 $ 1.0200 $ 1.0200
======== ========= ========== ========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- ---------------------
1998 1998 1998
(RESTATED) (RESTATED) (RESTATED)
1999 NOTE 5 1999 NOTE 5 1999 NOTE 5
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- BEGINNING OF PERIOD................. $(45,400) $ 190,548 $ (2,977) $ 365,730 $ (6,622) $ 340,767
ADD -- NET LOSS................................ (31,154) (176,724) (31,851) (310,465) (7,854) (265,578)
-------- --------- -------- --------- -------- ---------
(76,554) 13,824 (34,828) 55,265 (14,476) 75,189
DEDUCT -- CASH DIVIDENDS DECLARED.............. 22,009 20,446 63,735 61,887 84,087 81,811
-------- --------- -------- --------- -------- ---------
BALANCE -- END OF PERIOD....................... $(98,563) $ (6,622) $(98,563) $ (6,622) $(98,563) $ (6,622)
======== ========= ======== ========= ======== =========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
22
<PAGE> 25
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)...................................... $ 30,353 $ 60,031 $ 17,039
Accounts receivable, less allowance for doubtful
accounts of $16,216, $9,515 and $9,665,
respectively....................................... 301,243 280,496 400,120
Accrued unbilled revenues............................. 21,499 17,359 87,888
Gas in inventory...................................... 238,366 197,799 147,387
Property taxes assessed applicable to future
periods............................................ 39,505 33,115 72,551
Other................................................. 56,799 56,120 42,472
---------- ---------- ----------
687,765 644,920 767,457
---------- ---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes................................. 11,144 53,519 50,547
Investments in debt and equity securities............. 72,494 42,986 69,705
Deferred swap losses and receivables (Note 15)........ 96,539 45,033 63,147
Deferred environmental costs.......................... 31,291 30,655 30,773
Prepaid benefit costs................................. 140,295 97,169 111,775
Other................................................. 125,569 96,719 98,940
---------- ---------- ----------
477,332 366,081 424,887
---------- ---------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Pipelines & Processing................................ 581,515 488,536 521,711
Electric Power........................................ 134,298 228,960 231,668
Energy Marketing...................................... 25,496 24,944 29,435
Gas Distribution...................................... 2,478 628 1,478
Other................................................. 18,695 19,354 18,939
---------- ---------- ----------
762,482 762,422 803,231
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Pipelines & Processing................................ 46,094 38,703 48,706
Exploration & Production (Note 3c).................... 690,760 1,013,778 1,040,047
Gas Distribution...................................... 3,001,638 2,869,897 2,916,540
Other................................................. 77,937 34,747 36,124
---------- ---------- ----------
3,816,429 3,957,125 4,041,417
Less -- Accumulated depreciation and depletion........ 1,688,186 1,603,223 1,644,094
---------- ---------- ----------
2,128,243 2,353,902 2,397,323
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
23
<PAGE> 26
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1998
(RESTATED)
1999 NOTE 5 1998
---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................................... $ 291,176 $ 318,129 $ 304,349
Notes payable......................................... 370,995 414,957 618,851
Current portion of long-term debt, preferred
securities and capital lease obligations........... 131,302 269,499 269,721
Federal income, property and other taxes payable...... 5,249 48,130 69,465
Deferred gas cost recovery revenues (Note 7b)......... -- 23,899 14,980
Gas payable........................................... 36,073 50,302 42,669
Customer deposits..................................... 15,766 16,829 18,791
Interest payable...................................... 26,459 30,095 30,314
Other................................................. 80,355 62,305 77,996
---------- ---------- ----------
957,375 1,234,145 1,447,136
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credit..................... 28,510 31,641 30,056
Tax benefits amortizable to customers................. 136,906 132,676 130,120
Deferred swap gains and payables (Note 15)............ 76,810 38,556 62,956
Accrued environmental costs........................... 30,373 35,000 35,000
Minority interest..................................... 10,928 11,948 10,898
Other................................................. 104,076 64,454 75,439
---------- ---------- ----------
387,603 314,275 344,469
---------- ---------- ----------
LONG-TERM DEBT, including capital lease obligations
(Note 10)............................................. 1,460,941 1,402,526 1,307,168
---------- ---------- ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES HOLDING SOLELY DEBENTURES
OF MCN................................................ 402,900 405,481 502,203
---------- ---------- ----------
CONTINGENCIES (NOTE 14)
COMMON SHAREHOLDERS' EQUITY
Common stock (Note 10)................................ 855 791 797
Additional paid-in capital (Note 10).................. 967,356 813,809 832,966
Retained earnings (deficit)........................... (98,563) (6,622) (2,977)
Accumulated other comprehensive loss (Note 13)........ (357) (14,792) (16,576)
Yield enhancement, contract and issuance costs........ (22,288) (22,288) (22,288)
---------- ---------- ----------
847,003 770,898 791,922
---------- ---------- ----------
$4,055,822 $4,127,325 $4,392,898
========== ========== ==========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
24
<PAGE> 27
MCN ENERGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998
(RESTATED)
1999 NOTE 5
---- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss.................................................. $ (31,851) $(310,465)
Adjustments to reconcile net loss to net cash provided
from operating activities Depreciation, depletion and
amortization:
Per statement of operations........................... 125,948 135,478
Charged to other accounts............................. 6,676 5,990
Unusual charges, net of taxes (Note 3).................. 87,185 389,598
Cumulative effect of accounting change, net of taxes
(Note 6)............................................... 2,872 --
Deferred income taxes -- current........................ (9,791) (11,994)
Deferred income taxes and investment tax credit, net.... 82,738 14,779
Equity in earnings of joint ventures, net of
distributions.......................................... (15,176) (30,344)
Other................................................... (790) (9,331)
Changes in assets and liabilities, exclusive of changes
shown separately....................................... (36,312) 53,787
--------- ---------
Net cash provided from operating activities........... 211,499 237,498
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net........................................ (247,856) 103,588
Dividends paid............................................ (63,735) (61,887)
Issuance of common stock (Note 10)........................ 132,544 14,742
Reacquisition of common stock............................. (780) --
Issuance of long-term debt (Note 10)...................... 106,535 458,761
Long-term commercial paper and bank borrowings, net....... 92,344 109,643
Retirement of long-term debt and preferred securities
(Note 10)............................................... (289,439) (326,194)
Other..................................................... -- 8,243
--------- ---------
Net cash provided from (used for) financing
activities........................................... (270,387) 306,896
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures...................................... (233,410) (390,067)
Acquisitions.............................................. (33,071) (36,731)
Investment in debt and equity securities, net............. (4,572) 46,286
Investment in joint ventures.............................. (62,572) (166,977)
Sale of property and joint venture interests.............. 409,616 44,034
Other..................................................... (3,789) (20,403)
--------- ---------
Net cash provided from (used for) investing
activities........................................... 72,202 (523,858)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 13,314 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 17,039 39,495
--------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30..................... $ 30,353 $ 60,031
========= =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Accounts receivable, net.................................. $ 98,192 $ 113,476
Accrued unbilled revenues................................. 66,389 75,651
Accrued/deferred gas cost recovery revenues, net.......... (15,153) 36,761
Gas in inventory.......................................... (90,979) (141,022)
Property taxes assessed applicable to future periods...... 33,046 34,764
Accounts payable.......................................... (8,373) (22,576)
Federal income, property and other taxes payable.......... (64,216) (38,668)
Gas payable............................................... (6,596) 41,985
Interest payable.......................................... (3,855) 1,635
Prepaid benefit costs, net................................ (28,487) (16,276)
Other current assets and liabilities, net................. (2,193) (10,845)
Other deferred assets and liabilities, net................ (14,087) (21,098)
--------- ---------
$ (36,312) $ 53,787
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 97,395 $ 90,088
========= =========
Federal income taxes.................................... $ 3,550 $ 11,700
========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.
25
<PAGE> 28
MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
MCN Energy Group Inc. (MCN) is a diversified energy company that operates
two major business groups, Diversified Energy and Gas Distribution. Diversified
Energy, operating through MCN Energy Enterprises Inc. (MCNEE), was previously
doing business as MCN Investment Corporation. Gas Distribution principally
consists of Michigan Consolidated Gas Company (MichCon).
In MCN's 1998 Annual Report on Form 10-K/A, MCN accounted for its
Exploration & Production (E&P) segment as a discontinued operation as the result
of its decision to sell all of its oil and gas properties. In August 1999, the
company made a strategic business decision to keep a portion of these properties
(Note 8). Accordingly, financial results included in MCN's 1998 Annual Report on
Form 10-K/A have been reclassified to reflect the E&P segment as a continuing
operation, and are included in MCN's Form 8-K filed October 15, 1999 with the
Securities and Exchange Commission (SEC). Therefore, the accompanying
consolidated financial statements should be read in conjunction with MCN's 1998
Annual Report included in the Form 8-K. Additionally, certain reclassifications
have been made to the prior year's financial statements to conform to the 1999
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments necessary for a fair presentation of the
financial statements for the periods presented.
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
2. MERGER AGREEMENT WITH DTE ENERGY COMPANY
MCN and DTE Energy Company (DTE) have signed a definitive merger agreement,
dated October 4, 1999, under which DTE will acquire all outstanding shares of
MCN common stock. Under the terms of the agreement, MCN shareholders will have
the right to elect to receive either $28.50 in cash or 0.775 shares of DTE
common stock in exchange for each share of MCN common stock that they hold. The
acquisition of shares is subject to an allocation and proration that is intended
to result in 45% of the MCN shares being converted into shares of DTE common
stock and 55% being converted into cash.
The boards of directors of both companies have unanimously approved the
merger agreement. The transaction is subject to the approval of the shareholders
of both companies, regulatory approvals and other customary merger conditions.
The transaction is expected to close in six to nine months from the date of the
merger agreement and will be accounted for as a purchase by DTE. The combined
company, which will be named DTE Energy Company and headquartered in Detroit,
will be the largest electric and gas utility in Michigan.
DTE is a diversified energy provider. Its principal subsidiary is The
Detroit Edison Company, Michigan's largest electric utility serving 2.1 million
customers in southeastern Michigan. DTE's non-regulated subsidiaries and
ventures sell methane gas from landfills, coal, metallurgical coke and other
energy-related products and services.
Additionally, as part of the merger agreement, MCN has agreed to use its
best efforts to enter into agreements to dispose of some or all of its interests
in certain assets or facilities. MCN may sell all or a portion of several
"Qualifying Facilities" as defined by the Public Utility Regulatory Policies Act
of 1978, as amended. MCN's investments in these "Qualifying Facilities" include:
a 23% interest in the Midland Cogeneration Venture, a 1,370 megawatt (MW)
cogeneration facility located in Michigan; a 50% interest in the Michigan Power
Project, a 123 MW cogeneration plant located in Michigan; a 33 1/3% interest in
the Carson Cogeneration facility, a 42 MW cogeneration plant located in
California; and a 50% interest in the Ada Cogeneration facility, a 30 MW
cogeneration plant located in Michigan. Furthermore, under the terms of the
merger agreement, MCN will dispose of all or a portion of its 95% interest in
the Cobisa-Person facility, a 140
26
<PAGE> 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MW power plant in New Mexico that is currently under construction.
3. UNUSUAL CHARGES
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN recorded several unusual charges in 1998,
consisting of property write-downs, investment losses, and restructuring
charges. In 1999, MCN recorded additional unusual charges. A discussion of each
unusual charge by segment follows:
A. PIPELINES & PROCESSING
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$133,782,000 pre-tax ($86,959,000 net of taxes) write-off of its coal fines
project. The economic viability of the project is dependent on coal
briquettes produced from six coal fines plants qualifying for synthetic
fuel tax credits and MCN's ability to utilize or sell such credits.
Although the plants were in service by June 30, 1998, the date specified to
qualify for the tax credits, operating delays at the plants in the 1998
third quarter significantly increased the possibility that the Internal
Revenue Service (IRS) would challenge the project's eligibility for tax
credits. In addition, there was uncertainty as to whether MCN could utilize
or sell the credits. These factors led to MCN's decision to record an
impairment loss equal to the carrying value of the plants, reflecting the
likely inability to recover such costs. MCN sought to maximize the value of
its investment in the coal fines project, and in May 1999 filed a request
with the IRS seeking a factual determination that its coal fines plants
were in service on June 30, 1998. In September 1999, MCN received favorable
determination letters from the IRS ruling that four of the six plants were
in service by June 30, 1998 (Note 4a).
In the third quarter of 1998, MCN also recorded an impairment loss of
$3,899,000 pre-tax ($2,534,000 net of taxes) relating to an acquired
out-of-service pipeline in Michigan. MCN reviewed the business alternatives
for this asset and determined that its development is unlikely.
Accordingly, MCN recorded an impairment loss equal to the carrying value of
this asset.
B. ELECTRIC POWER
Restructuring Charge: In the third quarter of 1998, MCN recorded a
$2,470,000 pre-tax ($1,605,000 net of taxes) restructuring charge related
to certain international power projects. The charge was incurred as a
result of refocusing MCN's strategic plan, particularly the decision to
exit certain international power projects.
C. EXPLORATION & PRODUCTION
Property Write-Downs: In the second quarter of 1999, MCN recognized a
$52,000,000 pre-tax ($33,800,000 net of taxes) write-down of its gas and
oil properties under the full cost method of accounting, due primarily to
an unfavorable revision in the timing of the production of proved gas and
oil reserves as well as reduced expectations of sales proceeds on unproved
acreage. Under the full cost method of accounting as prescribed by the SEC,
MCN's capitalized exploration and production costs at June 30, 1999
exceeded the full cost "ceiling," resulting in the excess being written off
to income. The ceiling is the sum of discounted future net cash flows from
the production of proved gas and oil reserves, and the lower of cost or
estimated fair value of unproved properties, net of related income tax
effects.
In the second and third quarters of 1998, MCN recognized write-downs
of its gas and oil properties totaling $333,022,000 pre-tax ($216,465,000
net of taxes) and $83,955,000 pre-tax ($54,570,000 net of taxes),
respectively. The write-downs were also the result of MCN's capitalized
exploration and production costs exceeding the full cost ceiling.
Losses on Sale of Properties: In the second quarter of 1999, MCN
recognized losses from the sale of its Western and Midcontinent/Gulf Coast
E&P properties totaling $68,798,000 pre-tax ($44,719,000 net
27
<PAGE> 30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of taxes). In the third quarter of 1999, MCN recognized additional losses
relating to the sale of these properties totaling $5,877,000 pre-tax
($3,820,000 net of taxes).
Loss on Investment: In the second quarter of 1999, MCN recognized a
$7,456,000 pre-tax ($4,846,000 net of taxes) loss from the write-down of an
investment in the common stock of an E&P company. MCN had also recognized a
$6,135,000 pre-tax ($3,987,000 net of taxes) loss from the write-down of
this investment during the second quarter of 1998. The losses were due to
declines in the fair value of the securities that are not considered
temporary. MCN has no carrying value in this investment after the
write-downs.
D. CORPORATE & OTHER
Restructuring Charge: In the third quarter of 1998, MCN recorded a
$10,390,000 pre-tax ($6,753,000 net of taxes) restructuring charge related
to the corporate realignment designed to improve operating efficiencies
through a more streamlined organizational structure. The realignment
includes cost saving initiatives expected to reduce future operating
expenses. As of September 30, 1999, payments of $3,087,000 have been
charged against the restructuring accruals relating to severance and
termination benefits. These benefits will continue to be paid through 2000.
The remaining restructuring costs, primarily for net lease expenses, are
expected to be paid over the related lease terms that expire through 2006.
E. GAS DISTRIBUTION
Property Write-Downs: In the third quarter of 1998, MCN recorded a
$24,800,000 pre-tax ($11,200,000 net of taxes and minority interest)
write-down of certain gas gathering properties. An analysis revealed that
projected cash flows from the gathering system were not sufficient to cover
the system's carrying value. Therefore, an impairment loss was recorded
representing the amount by which the carrying value of the system exceeded
its estimated fair value.
Loss on Investment: In the third quarter of 1998, MCN also recorded an
$8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of an
investment in a Missouri gas distribution company that MCN intends to sell
in 2000. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.
4. COAL FINES PLANTS
A. IRS DETERMINATION
During the third quarter of 1998, MCN recorded an impairment loss of
$133,782,000, pre-tax, which equaled the carrying value of its coal fines
plants and reflected the likely inability to recover such costs (Note 3a).
In September 1999, MCN received "in-service" determination letters from the
IRS with respect to its six coal fines plants, which were built to produce
briquettes that qualify for synthetic fuel tax credits. In the
determination letters, the IRS ruled that four of the plants were in
service by the June 30, 1998 deadline in order to qualify for synthetic
fuel tax credits. The IRS ruled that two other plants did not meet the
in-service requirements. The company continues to believe these two plants
also meet the requirements and intends to appeal the unfavorable rulings.
B. DISPOSITION
In November 1999, MCN reached an agreement to sell four of its coal
fines plants to DTE in an arms-length transaction that is independent of
the pending merger. The sales price will depend on total production
performance of the four plants. DTE will initially make a $45,000,000
payment that will be adjusted up to $152,000,000 or down to zero based on
the results of a 36-month production test period. The sale is expected to
be finalized in December 1999.
28
<PAGE> 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RESTATEMENT
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, subsequent to the issuance of MCN's December
31, 1998 financial statements, certain matters came to management's attention
and resulted in a special investigation of prior years' operations of CoEnergy
Trading Company (CTC), MCN's non-utility energy marketing subsidiary. As a
result of the investigation, MCN identified that its internal controls had been
overridden, and that certain transactions had not been properly accounted for.
Specifically, the investigation concluded that CTC had entered into gas supply
contracts and agreed to pay significantly less than market prices in one period
in return for above-market prices to be paid in subsequent periods through March
2000. The effect of these transactions was to improperly delay the accrual of
cost of gas expenses, resulting in the overstatement of net loss for the 1998
third quarter and nine-month periods by $3,044,000 and $1,680,000, respectively,
and an understatement of net loss for the 1998 twelve-month period by
$3,991,000.
Additionally, the investigation identified that CTC had entered into
certain unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities were not accounted for
properly using the required mark-to-market method, under which unrealized gains
and losses are recorded as an adjustment to cost of gas. The effect of not
properly accounting for these transactions was the understatement of net loss
for the 1998 third quarter, nine- and twelve-month periods by $1,801,000,
$4,545,000 and $4,208,000, respectively. However, net income of $403,000,
$1,590,000 and $2,682,000 was realized and recorded in connection with these
trading activities in the 1998 third quarter, nine- and twelve-month periods,
respectively, resulting in a net loss from such activities for the 1998 third
quarter, nine- and twelve-month periods of $1,398,000, $2,955,000 and
$1,526,000, respectively. From the inception of these trading activities in
March 1997 through June 1999, $2,714,000 of net loss was realized and recorded
in connection with these trading activities. All of the contracts were
effectively closed by the end of June 1999.
Other items identified during the investigation resulted in the
understatement of net loss for the 1998 third quarter, nine- and twelve-month
periods by $816,000, $859,000 and $880,000, respectively.
The 1998 information in the accompanying consolidated financial statements
has been restated from amounts originally reported to properly account for the
transactions identified. A summary of the significant effects of the restatement
on MCN's September 30, 1998 financial statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------- ---------------------- -----------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS
Cost of Sales............... $ 201,663 $ 201,006 $ 847,823 $ 853,551 $1,295,187 $1,309,153
Loss Before Income Taxes.... $(278,492) $(277,835) $(493,721) $(499,449) $ (422,108) $ (436,074)
Income Tax Benefit.......... $(101,341) $(101,111) $(186,980) $(188,984) $ (165,609) $ (170,496)
Net Loss.................... $(177,151) $(176,724) $(306,741) $(310,465) $ (256,499) $ (265,578)
Loss Per Share -- Basic and
Diluted................... $ (2.24) $ (2.24) $ (3.90) $ (3.95) $ (3.27) $ (3.38)
</TABLE>
29
<PAGE> 32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
PREVIOUSLY
REPORTED RESTATED
---------- --------
<S> <C> <C>
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
Accounts Receivable......................................... $277,229 $280,496
Gas in Inventory............................................ $200,399 $197,799
Accounts Payable............................................ $297,771 $318,129
Federal Income, Property and Other Taxes Payable............ $ 55,020 $ 48,130
Common Shareholders' Equity................................. $783,699 $770,898
</TABLE>
6. ACCOUNTING FOR START-UP ACTIVITIES
In January 1999, MCN adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-up Activities," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants.
SOP 98-5 requires start-up and organizational costs to be expensed as incurred.
This change in accounting principle resulted in the write-off of start-up and
organization costs capitalized as of December 31, 1998. The cumulative effect of
the change was to decrease earnings by $4,418,000 pre-tax ($2,872,000 net of
taxes) for the nine- and twelve-month periods ended September 30, 1999.
7. REGULATORY MATTERS
A. REGULATORY REFORM PLAN
As discussed in MCN's 1998 Annual Report included in the Form 8-K
filed with the SEC on October 15, 1999, MichCon implemented its Regulatory
Reform Plan in January 1999. The plan includes a new three-year gas sales
program under which MichCon's gas sales rates include a gas commodity
component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of
its gas acquisition strategy, MichCon has entered into fixed-price
contracts at costs below $2.95 per Mcf for a substantial portion of its
expected gas supply requirements through 2001.
The plan also includes a comprehensive experimental three-year
customer choice program, which is subject to annual caps on the level of
participation. The customer choice program began in April 1999, with
approximately 70,000 customers choosing to purchase natural gas from
suppliers other than MichCon. Plan years begin April 1 of each year, and
the number of customers allowed to participate in the plan is limited to
75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume
limitation on commercial and industrial participants. The volume limitation
for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in
2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the
gas to the customers' premises at prices that maintain its previously
existing sales margins on these services. Various parties have appealed the
Michigan Public Service Commission's (MPSC) approval of the plan. While
management believes the plan will be upheld on appeal, there can be no
assurance as to the outcome.
B. GAS COST RECOVERY PROCEEDINGS
Prior to January 1999, the Gas Cost Recovery (GCR) process allowed
MichCon to recover its cost of gas sold if the MPSC determined that such
costs were reasonable and prudent. An annual GCR reconciliation proceeding
provided a review of gas costs incurred during the previous year and
determined whether gas costs had been overcollected or undercollected, and
as a result, whether a refund or surcharge, including interest, was
required to be returned to or collected from GCR customers. The GCR process
was suspended with the implementation of MichCon's Regulatory Reform Plan
in January 1999.
30
<PAGE> 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, MichCon filed its final GCR reconciliation case
covering gas costs incurred during 1998 which indicates an overrecovery of
$18,000,000, including interest. Management believes that 1998 gas costs
were reasonable and prudent and that the MPSC will approve the gas costs
incurred. However, management cannot predict the outcome of this
proceeding. During the first quarter of 1999, MichCon refunded the
overrecovery to customers as a reduction in gas sales rates.
8. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In December 1998, MCN accounted for its E&P segment as a discontinued
operation as a result of its decision to sell all of its gas and oil properties.
In August 1999, management announced its intention to retain its natural gas
producing properties in Michigan. Accordingly, E&P's operating results for prior
periods have been reclassified from discontinued operations to continuing
operations. The decision to retain these properties was based on the interaction
of two factors. MCN significantly revised its strategic direction. Key aspects
of the new corporate strategy include a Midwest-to-Northeast regional focus
rather than a North American focus, and an emphasis on achieving operational
efficiencies and growth through the integration of existing businesses. Shortly
thereafter, the bid for the Michigan properties was lowered significantly. The
lower price was unacceptable, especially in light of MCN's new strategic
direction.
9. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
In October 1999, MCN entered into a $290,000,000 revolving credit agreement
that expires in July 2000. Borrowings under the credit agreement are at variable
rates. This agreement replaced the March 1999 $150,000,000 revolving credit
agreement.
MCNEE and MichCon maintain credit lines that allow for borrowings of up to
$350,000,000 under 364-day revolving credit facilities and up to $350,000,000
under three-year revolving credit facilities. These credit lines totaling
$700,000,000 support their commercial paper programs. The 364-day revolving
credit facilities were renewed in July 1999. The three-year revolving credit
facilities expire in July 2001.
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN borrowed $260,000,000 under a one-year
term loan facility, due December 2, 1999. Principal payments are required based
on certain proceeds received from the sale of E&P assets. As of September 30,
1999, MCN had repaid $203,000,000 of borrowings under the facility.
10. ENHANCED PRIDES, LONG-TERM DEBT AND PREFERRED SECURITIES
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN issued 5,865,000 of Preferred Redeemable
Increased Dividend Equity Securities (Enhanced PRIDES) in 1996. Each security
represented a contract to purchase one share of MCN common stock. The Enhanced
PRIDES were converted into MCN common stock in April 1999, and as a result MCN
received cash proceeds totaling approximately $135,000,000.
In October 1999, MCN borrowed from its $290,000,000 revolving credit
agreement and redeemed, at par, $100,000,000 of Single Point Remarketed Reset
Capital Securities which were due in 2037.
In September 1999, MichCon redeemed $18,000,000 of 9.125% first mortgage
bonds, which were due September 2004.
In June 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due
June 2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. The
notes are insured by a financial guaranty insurance policy and are rated AAA or
its equivalent by the major rating agencies. The notes are redeemable at par on
or after June 1, 2004.
31
<PAGE> 34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER SHARE COMPUTATION
MCN reports both basic and diluted earnings per share (EPS). Basic EPS is
computed by dividing income or loss before cumulative effect of accounting
change by the weighted average number of common shares outstanding during the
period. Diluted EPS assumes the issuance of potential dilutive common shares
outstanding during the period and adjusts for changes in income and the
repurchase of common shares that would have occurred with proceeds from the
assumed issuance. Potentially dilutive securities have been excluded from the
diluted EPS calculation since their inclusion would have been antidilutive.
12. SHAREHOLDERS' RIGHTS PLAN
As discussed in MCN's 1998 Annual Report included in the Form 8-K filed
with the SEC on October 15, 1999, MCN has a Shareholders' Rights Plan that is
designed to maximize shareholders' value in the event that MCN is acquired. The
rights are attached to and trade with shares of MCN common stock until they are
exercisable upon certain triggering events. The plan has been amended, in
connection with the pending merger with DTE (Note 2), so that DTE's acquisition
of MCN will not represent a triggering event.
13. COMPREHENSIVE INCOME
MCN reports comprehensive income, which is defined as the change in common
shareholder's equity during a period from transactions and events from non-owner
sources, including net income. Total comprehensive income for the applicable
periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- -----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPREHENSIVE INCOME (LOSS)
Net Loss...................... $(31,154) $(176,724) $(31,851) $(310,465) $(7,854) $(265,578)
-------- --------- -------- --------- ------- ---------
Other Comprehensive Income
(Loss), Net of Taxes:
Foreign currency
translation adjustment:
Foreign currency
translation
adjustment.......... 16 (85) (600) (5,898) (1,256) (11,423)
Less: Reclassification
for losses
recognized in net
income.............. 13,132 -- 13,132 -- 13,132 --
-------- --------- -------- --------- ------- ---------
13,148 (85) 12,532 (5,898) 11,876 (11,423)
-------- --------- -------- --------- ------- ---------
Unrealized loss on
securities:
Unrealized losses
during period....... -- (2,559) (1,159) (5,362) (2,287) (6,546)
Less: Reclassification
for losses
recognized in net
income.............. -- -- 4,846 3,987 4,846 3,987
-------- --------- -------- --------- ------- ---------
-- (2,559) 3,687 (1,375) 2,559 (2,559)
-------- --------- -------- --------- ------- ---------
Total Other Comprehensive
Income (Loss), Net of
Taxes.................... 13,148 (2,644) 16,219 (7,273) 14,435 (13,982)
-------- --------- -------- --------- ------- ---------
Total Comprehensive Income
(Loss)................... $(18,006) $(179,368) $(15,632) $(317,738) $ 6,581 $(279,560)
======== ========= ======== ========= ======= =========
</TABLE>
32
<PAGE> 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONTINGENCIES
MCN is involved in certain legal and administrative proceedings before
various courts and governmental agencies concerning claims arising in the
ordinary course of business. These proceedings include certain contract disputes
between Gas Distribution and gas producers. Management cannot predict the final
disposition of such proceedings, but believes that adequate provision has been
made for probable losses. It is management's belief, after discussion with legal
counsel, that the ultimate resolution of those proceedings still pending will
not have a material adverse effect on MCN's financial statements.
15. COMMODITY SWAP AGREEMENTS
MCN's Diversified Energy and Gas Distribution groups manage commodity price
risk through the use of various derivative instruments and predominately limit
the use of such instruments to hedging activities. The following assets and
liabilities related to the use of gas and oil swap agreements are reflected in
the Consolidated Statement of Financial Position:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- ------------
1999 1998 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
Unrealized losses..................................... $ 64,940 $31,923 $48,700
Receivables........................................... 43,989 13,776 25,864
-------- ------- -------
108,929 45,699 74,564
Less -- Current portion............................... 12,390 666 11,417
-------- ------- -------
$ 96,539 $45,033 $63,147
======== ======= =======
DEFERRED SWAP GAINS AND PAYABLES
Unrealized gains...................................... $ 34,884 $13,024 $24,126
Payables.............................................. 72,707 36,890 54,525
-------- ------- -------
107,591 49,914 78,651
Less -- Current portion............................... 30,781 11,358 15,695
-------- ------- -------
$ 76,810 $38,556 $62,956
======== ======= =======
</TABLE>
33
<PAGE> 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION
MCN is organized into two business groups, Diversified Energy and Gas
Distribution. The groups operate five major business segments as set forth in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED
CUSTOMERS:
Pipelines & Processing............ $ 6,416 $ 6,238 $ 17,747 $ 14,677 $ 23,927 $ 15,948
Electric Power.................... 14,624 12,727 39,747 34,972 51,905 47,797
Energy Marketing.................. 305,405 184,926 813,594 592,491 1,029,471 858,348
Exploration & Production.......... 9,292 23,810 51,167 87,261 73,109 110,688
Gas Distribution.................. 127,122 123,444 825,974 729,418 1,141,696 1,129,402
-------- --------- ---------- ---------- ---------- ----------
462,859 351,145 1,748,229 1,458,819 2,320,108 2,162,183
-------- --------- ---------- ---------- ---------- ----------
REVENUES FROM AFFILIATED CUSTOMERS:
Pipelines & Processing............ 507 62 1,609 298 1,656 396
Energy Marketing.................. 17,940 15,356 49,466 47,432 66,276 64,696
Exploration & Production.......... 22,538 27,205 68,081 72,467 93,513 108,579
Gas Distribution.................. 2,318 618 5,652 5,328 6,959 8,326
-------- --------- ---------- ---------- ---------- ----------
43,303 43,241 124,808 125,525 168,404 181,997
-------- --------- ---------- ---------- ---------- ----------
Eliminations........................ (43,303) (43,241) (124,808) (125,525) (168,404) (181,997)
-------- --------- ---------- ---------- ---------- ----------
Consolidated Operating Revenues..... $462,859 $ 351,145 $1,748,229 $1,458,819 $2,320,108 $2,162,183
======== ========= ========== ========== ========== ==========
NET INCOME (LOSS):
Pipelines & Processing............ $ (99) $ (89,332) $ 3,358 $ (82,089) $ 3,207 $ (78,036)
Electric Power.................... 4,311 2,627 11,682 15,290 15,663 18,660
Energy Marketing.................. (7,158) (197) (7,545) 2,646 (11,228) 2,610
Exploration & Production.......... (4,034) (51,017) (83,742) (258,408) (78,687) (249,752)
Gas Distribution.................. (14,671) (24,516) 75,962 40,854 106,842 73,418
Corporate & Other................. (9,503) (14,289) (28,694) (28,758) (40,779) (32,478)
-------- --------- ---------- ---------- ---------- ----------
(31,154) (176,724) (28,979) (310,465) (4,982) (265,578)
Cumulative effect of accounting
change.......................... -- -- (2,872) -- (2,872) --
-------- --------- ---------- ---------- ---------- ----------
Consolidated Net Loss............... $(31,154) $(176,724) $ (31,851) $ (310,465) $ (7,854) $ (265,578)
======== ========= ========== ========== ========== ==========
</TABLE>
17. CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by MCNEE are subject to a support agreement between
MCN and MCNEE, under which MCN has committed to make payments of interest and
principal on MCNEE's securities in the event of failure to pay by MCNEE. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCNEE's securities. The carrying value of MCN's assets on
an unconsolidated basis, which primarily consists of investments in subsidiaries
other than MichCon, is $736,335,000 at September 30, 1999.
The following MCN consolidating financial statements are presented and
include separately MCNEE, MichCon and MCN and other subsidiaries. MCN has
determined that separate financial statements and other disclosures concerning
MCNEE are not material to investors. The other MCN subsidiaries represent
Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I,
MCN Financing II, MCN Financing III, MCN Financing V, MCN Financing VI, MichCon
Enterprises, Inc. and Blue Lake Holdings, Inc., until its sale on December 31,
1997.
34
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 6,847 $ 335,539 $122,635 $ (2,162) $ 462,859
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 5,047 298,054 28,187 (1,949) 329,339
Operation and maintenance........................ (752) 36,612 62,486 (187) 98,159
Depreciation, depletion and amortization......... 1,044 13,375 24,192 -- 38,611
Property and other taxes......................... 349 2,397 12,175 -- 14,921
--------- --------- -------- -------- ---------
5,688 350,438 127,040 (2,136) 481,030
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS)............................ 1,159 (14,899) (4,405) (26) (18,171)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (30,454) 14,952 444 30,454 15,396
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 10,841 1,100 916 (10,948) 1,909
Interest on long-term debt....................... 245 (10,248) (12,537) -- (22,540)
Other interest expense........................... (2,304) (13,000) (1,184) 10,947 (5,541)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (10,335) (10,335)
Loss on sale of E&P properties................... -- (5,877) -- -- (5,877)
Minority interest................................ -- (350) (282) -- (632)
Other............................................ (813) 4,657 (590) 27 3,281
--------- --------- -------- -------- ---------
7,969 (23,718) (13,677) (10,309) (39,735)
--------- --------- -------- -------- ---------
LOSS BEFORE INCOME TAXES........................... (21,326) (23,665) (17,638) 20,119 (42,510)
INCOME TAX BENEFIT................................. (507) (6,751) (4,098) -- (11,356)
--------- --------- -------- -------- ---------
NET LOSS........................................... (20,819) (16,914) (13,540) 20,119 (31,154)
DIVIDENDS ON PREFERRED SECURITIES.................. 10,335 -- -- (10,335) --
--------- --------- -------- -------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK....... $ (31,154) $ (16,914) $(13,540) $ 30,454 $ (31,154)
========= ========= ======== ======== =========
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 1,634 $ 228,949 $122,428 $ (1,866) $ 351,145
--------- --------- -------- -------- ---------
OPERATING EXPENSES
Cost of sales.................................... 931 170,039 31,143 (1,107) 201,006
Operation and maintenance........................ (8,742) 42,791 57,422 (759) 90,712
Depreciation, depletion and amortization......... 696 20,562 22,973 -- 44,231
Property and other taxes......................... 360 3,095 12,087 -- 15,542
Property write-downs and restructuring charges... 8,669 225,827 24,800 -- 259,296
--------- --------- -------- -------- ---------
1,914 462,314 148,425 (1,866) 610,787
--------- --------- -------- -------- ---------
OPERATING LOSS..................................... (280) (233,365) (25,997) -- (259,642)
--------- --------- -------- -------- ---------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (171,089) 17,896 511 170,645 17,963
--------- --------- -------- -------- ---------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 8,447 1,149 1,639 (8,739) 2,496
Interest on long-term debt....................... 91 (13,508) (10,975) -- (24,392)
Other interest expense........................... (445) (11,244) (2,001) 8,699 (4,991)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (8,178) (8,178)
Investment loss.................................. (8,500) -- -- -- (8,500)
Minority interest................................ -- 225 7,050 -- 7,275
Other............................................ 17 (412) 529 -- 134
--------- --------- -------- -------- ---------
(390) (23,790) (3,758) (8,218) (36,156)
--------- --------- -------- -------- ---------
LOSS BEFORE INCOME TAXES........................... (171,759) (239,259) (29,244) 162,427 (277,835)
INCOME TAX BENEFIT................................. (3,254) (86,951) (10,906) -- (101,111)
--------- --------- -------- -------- ---------
NET INCOME......................................... (168,505) (152,308) (18,338) 162,427 (176,724)
DIVIDENDS ON PREFERRED SECURITIES.................. 8,178 -- -- (8,178) --
--------- --------- -------- -------- ---------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(176,683) $(152,308) $(18,338) $170,605 $(176,724)
========= ========= ======== ======== =========
</TABLE>
35
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 25,419 $ 927,018 $806,280 $(10,488) $1,748,229
--------- --------- -------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 17,685 771,091 336,948 (7,552) 1,118,172
Operation and maintenance........................ (1,586) 109,108 193,974 (2,910) 298,586
Depreciation, depletion and amortization......... 2,851 49,539 73,558 -- 125,948
Property and other taxes......................... 1,126 8,386 43,337 -- 52,849
Property write-downs and restructuring charges... -- 52,000 -- -- 52,000
--------- --------- -------- -------- ----------
20,076 990,124 647,817 (10,462) 1,647,555
--------- --------- -------- -------- ----------
OPERATING INCOME (LOSS)............................ 5,343 (63,106) 158,463 (26) 100,674
--------- --------- -------- -------- ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
SUBSIDIARIES..................................... (29,894) 38,563 1,457 29,894 40,020
--------- --------- -------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 32,470 3,088 2,861 (32,645) 5,774
Interest on long-term debt....................... 706 (31,724) (35,028) -- (66,046)
Other interest expense........................... (9,616) (38,867) (5,020) 32,645 (20,858)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (31,004) (31,004)
Loss on sale of E&P properties................... -- (74,675) -- -- (74,675)
Investment loss.................................. -- (7,456) -- -- (7,456)
Minority interest................................ -- (566) (805) -- (1,371)
Other............................................ (1,071) 15,003 (303) 26 13,655
--------- --------- -------- -------- ----------
22,489 (135,197) (38,295) (30,978) (181,981)
--------- --------- -------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (2,062) (159,740) 121,625 (1,110) (41,287)
INCOME TAX PROVISION (BENEFIT)..................... (1,215) (54,120) 43,027 -- (12,308)
--------- --------- -------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................................ (847) (105,620) 78,598 (1,110) (28,979)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES............................................ -- (2,872) -- -- (2,872)
--------- --------- -------- -------- ----------
NET INCOME (LOSS).................................. (847) (108,492) 78,598 (1,110) (31,851)
DIVIDENDS ON PREFERRED SECURITIES.................. 31,004 -- -- (31,004) --
--------- --------- -------- -------- ----------
NET (LOSS) AVAILABLE FOR COMMON STOCK.............. $ (31,851) $(108,492) $78,598 $ 29,894 $ (31,851)
========= ========= ======== ======== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 10,303 $ 734,031 $724,442 $ (9,957) $1,458,819
--------- --------- -------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................... 5,374 547,775 306,244 (5,842) 853,551
Operation and maintenance........................ (8,502) 108,320 181,512 (4,115) 277,215
Depreciation, depletion and amortization......... 2,035 64,533 68,910 -- 135,478
Property and other taxes......................... 1,531 9,382 43,342 -- 54,255
Write-down of E&P properties..................... 8,669 558,849 24,800 -- 592,318
--------- --------- -------- -------- ----------
9,107 1,288,859 624,808 (9,957) 1,912,817
--------- --------- -------- -------- ----------
OPERATING INCOME (LOSS)............................ 1,196 (554,828) 99,634 -- (453,998)
--------- --------- -------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES..................................... (305,927) 46,062 1,461 304,965 46,561
--------- --------- -------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income.................................. 28,019 5,314 3,573 (28,247) 8,659
Interest on long-term debt....................... 494 (29,145) (33,694) -- (62,345)
Other interest expense........................... (1,104) (36,647) (7,149) 28,246 (16,654)
Dividends on preferred securities of
subsidiaries................................... -- -- -- (27,162) (27,162)
Loss on sale of E&P properties................... -- -- -- -- --
Investment loss.................................. (8,500) (6,135) -- -- (14,635)
Minority interest................................ -- 123 5,907 -- 6,030
Other............................................ (490) 13,350 1,235 -- 14,095
--------- --------- -------- -------- ----------
18,419 (53,140) (30,128) (27,163) (92,012)
--------- --------- -------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................. (286,312) (561,906) 70,967 277,802 (499,449)
INCOME TAX PROVISION (BENEFIT)..................... (3,010) (210,601) 24,627 -- (188,984)
--------- --------- -------- -------- ----------
NET INCOME (LOSS).................................. (283,302) (351,305) 46,340 277,802 (310,465)
DIVIDENDS ON PREFERRED SECURITIES.................. 27,162 -- -- (27,162) --
--------- --------- -------- -------- ----------
NET LOSS AVAILABLE FOR COMMON STOCK................ $(310,464) $(351,305) $46,340 $304,964 $ (310,465)
========= ========= ======== ======== ==========
</TABLE>
36
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 33,378 $1,185,815 $1,115,496 $(14,581) $2,320,108
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 23,017 975,523 482,233 (10,378) 1,470,395
Operation and maintenance...................... (3,291) 153,395 264,859 (4,177) 410,786
Depreciation, depletion and amortization....... 4,022 68,407 97,531 -- 169,960
Property and other taxes....................... 1,314 11,400 55,433 -- 68,147
Property write-downs and restructuring
charges...................................... -- 52,000 -- -- 52,000
--------- ---------- ---------- -------- ----------
25,062 1,260,725 900,056 (14,555) 2,171,288
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 8,316 (74,910) 215,440 (26) 148,820
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (6,251) 53,743 1,942 6,250 55,684
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 41,859 4,383 4,976 (43,210) 8,008
Interest on long-term debt..................... (429) (44,400) (46,218) -- (91,047)
Other interest expense......................... (10,986) (50,850) (9,984) 43,212 (28,608)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (40,212) (40,212)
Loss on sale of E&P properties................. -- (74,675) -- -- (74,675)
Investment loss................................ -- (7,456) -- -- (7,456)
Minority interest.............................. -- (424) (985) -- (1,409)
Other.......................................... (1,186) 22,001 (1,720) 26 19,121
--------- ---------- ---------- -------- ----------
29,258 (151,421) (53,931) (40,184) (216,278)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ 31,323 (172,588) 163,451 (33,960) (11,774)
INCOME TAX PROVISION (BENEFIT)................... (1,034) (59,975) 54,217 -- (6,792)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............................. 32,357 (112,613) 109,234 (33,960) (4,982)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
TAXES.......................................... -- (2,872) -- -- (2,872)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ 32,357 (115,485) 109,234 (33,960) (7,854)
DIVIDENDS ON PREFERRED SECURITIES................ 40,212 -- -- (40,212) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $ (7,855) $ (115,485) $ 109,234 $ 6,252 $ (7,854)
========= ========== ========== ======== ==========
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................... $ 15,967 $1,039,310 $1,121,762 $(14,856) $2,162,183
--------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Cost of sales.................................. 8,644 785,533 524,321 (9,345) 1,309,153
Operation and maintenance...................... (8,094) 142,953 256,844 (5,511) 386,192
Depreciation, depletion and amortization....... 2,609 85,107 94,529 -- 182,245
Property and other taxes....................... 1,860 12,933 57,484 -- 72,277
Property write-downs and restructuring
charges...................................... 8,669 558,849 24,800 -- 592,318
--------- ---------- ---------- -------- ----------
13,688 1,585,375 957,978 (14,856) 2,542,185
--------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS).......................... 2,279 (546,065) 163,784 -- (380,002)
--------- ---------- ---------- -------- ----------
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND
SUBSIDIARIES................................... (260,893) 58,974 1,807 260,152 60,040
--------- ---------- ---------- -------- ----------
OTHER INCOME AND (DEDUCTIONS)
Interest income................................ 38,135 8,418 4,602 (38,019) 13,136
Interest on long-term debt..................... 602 (34,691) (45,247) -- (79,336)
Other interest expense......................... (1,607) (47,616) (10,031) 38,273 (20,981)
Dividends on preferred securities of
subsidiaries................................. -- -- -- (36,916) (36,916)
Investment loss................................ (8,500) (6,135) -- -- (14,635)
Minority interest.............................. -- 99 5,481 -- 5,580
Other.......................................... (417) 16,349 1,108 -- 17,040
--------- ---------- ---------- -------- ----------
28,213 (63,576) (44,087) (36,662) (116,112)
--------- ---------- ---------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ (230,401) (550,667) 121,504 223,490 (436,074)
INCOME TAX PROVISION (BENEFIT)................... (2,166) (211,562) 43,232 -- (170,496)
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS)................................ (228,235) (339,105) 78,272 223,490 (265,578)
DIVIDENDS ON PREFERRED SECURITIES................ 36,916 -- -- (36,916) --
--------- ---------- ---------- -------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..... $(265,151) $ (339,105) $ 78,272 $260,406 $ (265,578)
========= ========== ========== ======== ==========
</TABLE>
37
<PAGE> 40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1999
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
Accounts receivable.............................. 5,450 239,004 111,434 (38,429) 317,459
Less -- Allowance for doubtful accounts........ 168 1,652 14,396 -- 16,216
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,282 237,352 97,038 (38,429) 301,243
Accrued unbilled revenues........................ 321 -- 21,178 -- 21,499
Gas in inventory................................. -- 128,196 110,170 -- 238,366
Property taxes assessed applicable to future
periods........................................ 284 1,529 37,692 -- 39,505
Other............................................ 6,171 59,589 38,609 (47,570) 56,799
---------- ---------- ---------- ----------- ----------
12,138 445,059 316,567 (85,999) 687,765
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 9,248 106,934 -- (105,038) 11,144
Investments in debt and equity securities........ -- 5,217 66,653 624 72,494
Deferred swap losses and receivables............. -- 96,539 -- -- 96,539
Deferred environmental costs..................... 2,769 -- 28,522 -- 31,291
Prepaid benefit costs............................ 783 -- 146,534 (7,022) 140,295
Other............................................ 16,273 41,802 64,528 2,966 125,569
---------- ---------- ---------- ----------- ----------
29,073 250,492 306,237 (108,470) 477,332
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,372,832 740,237 19,766 (1,370,353) 762,482
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,697 793,985 2,973,747 -- 3,816,429
Less -- Accumulated depreciation and depletion... 19,537 203,718 1,464,931 -- 1,688,186
---------- ---------- ---------- ----------- ----------
29,160 590,267 1,508,816 -- 2,128,243
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 5,845 $ 213,448 $ 112,090 $ (40,207) $ 291,176
Notes payable.................................... 57,751 181,748 132,465 (969) 370,995
Current portion of long-term debt and capital
lease obligations.............................. 103,094 149 28,059 -- 131,302
Federal income, property and other taxes
payable........................................ (4,359) 2,016 51,591 (43,999) 5,249
Gas payable...................................... -- 30,310 5,763 -- 36,073
Customer deposits................................ 4 -- 15,762 -- 15,766
Interest payable................................. 2,270 12,259 11,930 -- 26,459
Other............................................ 12,548 21,078 47,834 (1,105) 80,355
---------- ---------- ---------- ----------- ----------
177,153 461,008 405,494 (86,280) 957,375
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ -- -- 104,778 (104,778) --
Unamortized investment tax credit................ 252 -- 28,258 -- 28,510
Tax benefits amortizable to customers............ -- -- 136,906 -- 136,906
Deferred swap gains and payables................. -- 76,810 -- -- 76,810
Accrued environmental costs...................... 3,000 -- 27,373 -- 30,373
Minority interest................................ -- 2,358 8,570 -- 10,928
Other............................................ 12,538 45,894 48,757 (3,113) 104,076
---------- ---------- ---------- ----------- ----------
15,790 125,062 354,642 (107,891) 387,603
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 777,455 683,486 -- 1,460,941
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 402,900 -- -- -- 402,900
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 855 5 10,300 (10,305) 855
Additional paid-in capital....................... 967,356 956,767 230,399 (1,187,166) 967,356
Retained earnings (deficit)...................... (98,563) (293,885) 467,065 (173,180) (98,563)
Accumulated other comprehensive loss............. -- (357) -- -- (357)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
847,360 662,530 707,764 (1,370,651) 847,003
---------- ---------- ---------- ----------- ----------
$1,443,203 $2,026,055 $2,151,386 $(1,564,822) $4,055,822
========== ========== ========== =========== ==========
</TABLE>
38
<PAGE> 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
SEPTEMBER 30, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost............... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
Accounts receivable.............................. 5,185 185,364 108,135 (8,673) 290,011
Less -- Allowance for doubtful accounts........ 70 533 8,912 -- 9,515
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 5,115 184,831 99,223 (8,673) 280,496
Accrued unbilled revenues........................ 214 -- 17,145 -- 17,359
Gas in inventory................................. -- 101,334 96,465 -- 197,799
Property taxes assessed applicable to future
periods........................................ 121 1,593 31,401 -- 33,115
Other............................................ 3,904 24,980 136,736 (109,500) 56,120
---------- ---------- ---------- ----------- ----------
10,727 360,785 391,581 (118,173) 644,920
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 3,387 131,597 -- (81,465) 53,519
Investments in debt and equity securities........ -- 5,464 37,171 351 42,986
Deferred swap losses and receivables............. -- 45,033 -- -- 45,033
Deferred environmental costs..................... 2,603 -- 28,052 -- 30,655
Prepaid benefit costs............................ 619 -- 103,814 (7,264) 97,169
Other............................................ 4,891 33,671 58,429 (272) 96,719
---------- ---------- ---------- ----------- ----------
11,500 215,765 227,466 (88,650) 366,081
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,282,571 741,335 20,458 (1,281,942) 762,422
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 44,295 1,067,113 2,845,717 -- 3,957,125
Less -- Accumulated depreciation and depletion... 14,889 211,170 1,377,164 -- 1,603,223
---------- ---------- ---------- ----------- ----------
29,406 855,943 1,468,553 -- 2,353,902
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 2,894 $ 259,081 $ 67,591 $ (11,437) $ 318,129
Notes payable.................................... 107,440 211,348 204,313 (108,144) 414,957
Current portion of long-term debt and capital
lease obligations.............................. -- 211,433 58,066 -- 269,499
Federal income, property and other taxes
payable........................................ 703 6,204 41,223 -- 48,130
Deferred gas cost recovery revenues.............. -- -- 23,899 -- 23,899
Gas payable...................................... -- 21,782 28,520 -- 50,302
Customer deposits................................ 26 -- 16,803 -- 16,829
Interest payable................................. 2,873 13,697 13,525 -- 30,095
Other............................................ 16,680 9,534 38,112 (2,021) 62,305
---------- ---------- ---------- ----------- ----------
130,616 733,079 492,052 (121,602) 1,234,145
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ (6,574) -- 84,652 (78,078) --
Unamortized investment tax credit................ 279 -- 31,362 -- 31,641
Tax benefits amortizable to customers............ -- -- 132,676 -- 132,676
Deferred swap gains and payables................. -- 38,556 -- -- 38,556
Accrued environmental costs...................... 3,000 -- 32,000 -- 35,000
Minority interest................................ -- 2,599 9,349 -- 11,948
Other............................................ 15,712 14,148 41,858 (7,264) 64,454
---------- ---------- ---------- ----------- ----------
12,417 55,303 331,897 (85,342) 314,275
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 780,781 621,745 -- 1,402,526
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 405,481 -- -- -- 405,481
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 791 5 10,300 (10,305) 791
Additional paid-in capital....................... 813,809 797,852 230,399 (1,028,251) 813,809
Retained earnings (deficit)...................... (6,622) (178,400) 421,665 (243,265) (6,622)
Accumulated other comprehensive loss............. -- (14,792) -- -- (14,792)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
785,690 604,665 662,364 (1,281,821) 770,898
---------- ---------- ---------- ----------- ----------
$1,334,204 $2,173,828 $2,108,058 $(1,488,765) $4,127,325
========== ========== ========== =========== ==========
</TABLE>
39
<PAGE> 42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
DECEMBER 31, 1998
------------------------------------------------------------------------
(IN THOUSANDS)
<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.............................. 10,039 265,312 151,746 (17,312) 409,785
Less -- Allowance for doubtful accounts........ 84 653 8,928 -- 9,665
---------- ---------- ---------- ----------- ----------
Accounts receivable, net......................... 9,955 264,659 142,818 (17,312) 400,120
Accrued unbilled revenues........................ 1,121 -- 86,767 -- 87,888
Gas in inventory................................. -- 90,418 56,969 -- 147,387
Property taxes assessed applicable to future
periods........................................ 214 1,172 71,165 -- 72,551
Other............................................ 5,143 11,872 30,169 (4,712) 42,472
---------- ---------- ---------- ----------- ----------
17,833 377,157 394,491 (22,024) 767,457
---------- ---------- ---------- ----------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred income taxes............................ 3,305 128,807 -- (81,565) 50,547
Investments in debt and equity securities........ -- 3,548 65,556 601 69,705
Deferred swap losses and receivables............. -- 63,147 -- -- 63,147
Deferred environmental costs..................... 2,604 -- 28,169 -- 30,773
Prepaid benefit costs............................ -- -- 113,879 (2,104) 111,775
Other............................................ 9,401 26,870 59,007 3,662 98,940
---------- ---------- ---------- ----------- ----------
15,310 222,372 266,611 (79,406) 424,887
---------- ---------- ---------- ----------- ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
SUBSIDIARIES..................................... 1,534,180 782,471 19,343 (1,532,763) 803,231
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST............. 48,681 1,103,716 2,889,020 -- 4,041,417
Less -- Accumulated depreciation and depletion... 17,210 229,944 1,396,940 -- 1,644,094
---------- ---------- ---------- ----------- ----------
31,471 873,772 1,492,080 -- 2,397,323
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 4,123 $ 218,851 $ 98,891 $ (17,516) $ 304,349
Notes payable.................................... 260,771 137,762 221,169 (851) 618,851
Current portion of long-term debt and capital
lease obligations.............................. -- 211,433 58,288 -- 269,721
Federal income, property and other taxes
payable........................................ 1,441 6,965 61,059 -- 69,465
Deferred gas cost recovery revenues.............. -- -- 14,980 -- 14,980
Gas payable...................................... -- 17,332 25,337 -- 42,669
Customer deposits................................ 22 -- 18,769 -- 18,791
Interest payable................................. 2,835 16,519 10,960 -- 30,314
Other............................................ 15,502 8,757 56,262 (2,525) 77,996
---------- ---------- ---------- ----------- ----------
284,694 617,619 565,715 (20,892) 1,447,136
---------- ---------- ---------- ----------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................ (10,308) -- 88,567 (78,259) --
Unamortized investment tax credit................ 272 -- 29,784 -- 30,056
Tax benefits amortizable to customers............ -- -- 130,120 -- 130,120
Deferred swap gains and payables................. -- 62,956 -- -- 62,956
Accrued environmental costs...................... 3,000 -- 32,000 -- 35,000
Minority interest................................ -- 2,697 8,201 -- 10,898
Other............................................ 10,435 15,741 51,460 (2,197) 75,439
---------- ---------- ---------- ----------- ----------
3,399 81,394 340,132 (80,456) 344,469
---------- ---------- ---------- ----------- ----------
LONG-TERM DEBT, INCLUDING CAPITAL LEASE
OBLIGATIONS...................................... -- 687,333 619,835 -- 1,307,168
---------- ---------- ---------- ----------- ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.... 502,203 -- -- -- 502,203
---------- ---------- ---------- ----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock..................................... 797 5 10,300 (10,305) 797
Additional paid-in capital....................... 832,966 1,071,390 230,399 (1,301,789) 832,966
Retained earnings (deficit)...................... (2,977) (185,393) 406,144 (220,751) (2,977)
Accumulated other comprehensive loss............. -- (16,576) -- -- (16,576)
Yield enhancement, contract and issuance costs... (22,288) -- -- -- (22,288)
---------- ---------- ---------- ----------- ----------
808,498 869,426 646,843 (1,532,845) 791,922
---------- ---------- ---------- ----------- ----------
$1,598,794 $2,255,772 $2,172,525 $(1,634,193) $4,392,898
========== ========== ========== =========== ==========
</TABLE>
40
<PAGE> 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
MCN ELIMINATIONS
AND OTHER AND CONSOLIDATED
SUBSIDIARIES MCNEE MICHCON RECLASSES TOTAL
------------ ----- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES.......... $ 51,563 $ 30,059 $ 177,343 $(47,466) $ 211,499
--------- --------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net............................. (203,020) 43,986 (88,704) (118) (247,856)
Capital contributions paid to affiliates,
net.......................................... -- (114,623) -- 114,623 --
Dividends paid................................. (63,735) -- (17,500) 17,500 (63,735)
Preferred securities dividends paid............ (31,004) -- -- 31,004 --
Issuance of common stock....................... 132,544 -- -- -- 132,544
Reacquisition of common stock.................. (780) -- -- -- (780)
Issuance of long-term debt..................... -- -- 106,535 -- 106,535
Long-term commercial paper and bank
borrowings, net.............................. -- 92,344 -- -- 92,344
Retirement of long-term debt and preferred
securities................................... -- (212,960) (76,479) -- (289,439)
--------- --------- --------- -------- ---------
NET CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES................................. (165,995) (191,253) (76,148) 163,009 (270,387)
--------- --------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures........................... (882) (138,232) (94,296) -- (233,410)
Acquisitions................................... -- (33,071) -- -- (33,071)
Investment in debt and equity securities,
net.......................................... -- (3,452) (1,097) (23) (4,572)
Investment in joint ventures and
subsidiaries................................. 113,623 (61,558) (14) (114,623) (62,572)
Sale of property and joint venture interests... -- 411,867 -- (2,251) 409,616
Other.......................................... 371 (5,003) (511) 1,354 (3,789)
--------- --------- --------- -------- ---------
Net cash provided from (used for) investing
activities................................. 113,112 170,551 (95,918) (115,543) 72,202
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................... (1,320) 9,357 5,277 -- 13,314
CASH AND CASH EQUIVALENTS, JANUARY 1............. 1,400 9,036 6,603 -- 17,039
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.......... $ 80 $ 18,393 $ 11,880 $ -- $ 30,353
========= ========= ========= ======== =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES.......... $ 37,775 $ 11,228 $ 218,035 $(29,540) $ 237,498
--------- --------- --------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable, net............................. 107,440 138,592 (37,378) (105,066) 103,588
Capital contributions paid to affiliates,
net.......................................... -- (38,554) -- 38,554 --
Dividends paid................................. (61,887) -- -- -- (61,887)
Preferred securities dividends paid............ (27,162) -- -- 27,162 --
Issuance of common stock....................... 14,742 -- -- -- 14,742
Issuance of long-term debt..................... -- 305,709 153,052 -- 458,761
Long-term commercial paper, net................ -- 109,643 -- -- 109,643
Retirement of long-term debt................... (100,365) (101,192) (124,637) -- (326,194)
Other.......................................... -- 8,243 -- -- 8,243
--------- --------- --------- -------- ---------
Net cash provided from (used for) financing
activities................................. (67,232) 422,441 (8,963) (39,350) 306,896
--------- --------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures........................... (6,632) (278,256) (105,179) -- (390,067)
Acquisitions................................... -- (36,731) -- -- (36,731)
Investment in debt and equity securities,
net.......................................... -- 48,347 (2,061) -- 46,286
Investment in joint ventures and
subsidiaries................................. (1,250) (165,776) 49 -- (166,977)
Sale of property and investment in joint
ventures..................................... -- 46,060 -- (2,026) 44,034
Other.......................................... 38,689 (24,385) (105,623) 70,916 (20,403)
--------- --------- --------- -------- ---------
Net cash provided from (used for) investing
activities................................. 30,807 (410,741) (212,814) 68,890 (523,858)
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,350 22,928 (3,742) -- 20,536
CASH AND CASH EQUIVALENTS, JANUARY 1............. 23 25,119 14,353 -- 39,495
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30.......... $ 1,373 $ 48,047 $ 10,611 $ -- $ 60,031
========= ========= ========= ======== =========
</TABLE>
41
<PAGE> 44
OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
12-1 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Group Inc.
12-2 Computation of Ratio of Earnings to Fixed Charges for MCN
Energy Enterprises Inc.
27-1 1999 Financial Data Schedule
27-2 1998 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
MCN filed a report on Form 8-K dated September 22, 1999, under Item 5, with
respect to the offering by MCN Energy Enterprises Inc. of up to
$620,000,000 of its unsecured notes, designated as Medium-Term Notes,
Series C (Offered Notes) pursuant to the registration statement of the
registrant and MCN Energy Enterprises Inc. on Form S-3 (No. 333-47137)
filed with the Securities and Exchange Commission under the Securities Act
of 1933. The following documents were filed as Exhibits thereto:
- Distribution Agreement dated September 22, 1999 with respect to the
Offered Notes.
- Form of Note with respect to the Offered Notes.
MCN filed a report on Form 8-K dated October 4, 1999, under Item 5,
announcing that it had entered into an Agreement and Plan of Merger, dated
as of October 4, 1999, among MCN, DTE Energy Company, and DTE Enterprises,
Inc., pursuant to which MCN and DTE Enterprises, Inc. will merge, with DTE
Enterprises, Inc. as the surviving corporation in the merger. The following
documents were filed as Exhibits thereto:
- Agreement and Plan of Merger, dated as of October 4, 1999, by and
among MCN Energy Group Inc., DTE Energy Company, and DTE Enterprises,
Inc.
- Press Release, dated October 5, 1999
MCN filed a report on Form 8-K dated October 15, 1999, under Item 5, with
respect to management's decision, in August 1999, to retain its natural gas
producing properties in Michigan. In the 1998 MCN Annual Report on Form
10-K/A, MCN accounted for its Exploration & Production (E&P) segment, which
included these properties, as a discontinued operation. Accordingly, E&P's
operating results for prior periods have been reclassified from
discontinued operations to continuing operations. The decision to retain
these properties was based on the interaction of two factors. MCN
significantly revised its strategic direction. Key aspects of the new
corporate strategy include a Midwest-to-Northeast regional focus rather
than a North American focus, and an emphasis on achieving operational
efficiencies and growth through the integration of existing businesses.
Shortly thereafter, the bid for the Michigan properties was lowered
significantly. The lower price was unacceptable, especially in light of
MCN's new strategic direction. The following documents were filed as
Exhibits thereto:
- MCN Energy Group Inc. 1998 Annual Report reflecting the E&P segment
reclassified as a continuing operation
- March 31, 1999 and June 30, 1999 Quarterly Operating Results and
Common Stock Prices
- MCN 1998 Financial Data Schedule
- MCN 1997 Financial Data Schedule
- MCN 1996 Financial Data Schedule
42
<PAGE> 45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCN ENERGY GROUP INC.
Date: November 12, 1999 By: /s/ GERARD KABZINSKI
----------------------------------
Gerard Kabzinski
Vice President and Controller
43
<PAGE> 1
EXHIBIT 99.G-5A
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DTE MCN ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating Revenues $ 4,626 $ 2,320 $ - $ 6,946
----------- ----------- ----------- -----------
Operating Expenses
Fuel, purchased power and gas 1,273 1,470 - 2,743
Operation and maintenance 1,469 411 - 1,880
Depreciation, depletion and amortization 712 170 29 911
Taxes other than income 276 68 - 344
Property write-downs and restructuring charges - 52 - 52
----------- ----------- ----------- -----------
Total Operating Expenses 3,730 2,171 29 5,930
Operating Income (Loss) 896 149 (29) 1,016
Interest Expense and Other
Interest expense 341 120 77 538
Preferred stock dividends of subsidiary 1 40 - 41
Equity in earnings of joint ventures - (56) - (56)
Loss on sale of exploration and production properties - 75 - 75
Other - net 19 (18) - 1
----------- ----------- ----------- -----------
Total Interest Expense and Other 361 161 77 599
Income (Loss) Before Income Taxes 535 (12) (106) 417
Income Taxes (Benefit) 43 (7) (29) 7
----------- ----------- ----------- -----------
Income (Loss) Before Cumulative Effect of Accounting Change $ 492 $ (5) $ (77) $ 410
Cumulative Effect of Accounting Change, Net of Taxes - (3) - (3)
----------- ----------- ----------- -----------
Net Income (Loss) $ 492 $ (8) $ (77) $ 407
=========== =========== =========== ===========
Average Common Shares Outstanding
Basic 145 82 175
----------- ----------- -----------
Diluted 145 82 179
----------- ----------- -----------
Basic Earnings Per Share
Earnings per Common Share Before Cumulative Effect of Accounting Change $ 3.39 $ (0.06) $ 2.34
Cumulative Effect of Accounting Change - (0.04) (0.02)
----------- ----------- -----------
$ 3.39 $ (0.10) $ 2.32
=========== =========== ===========
Diluted Earnings Per Share
Earnings per Common Share Before Cumulative Effect of Accounting Change $ 3.39 $ (0.06) $ 2.29
Cumulative Effect of Accounting Change - (0.04) (0.02)
----------- ----------- -----------
$ 3.39 $ (0.10) $ 2.27
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 99.G-5B
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DTE MCN ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
(MILLIONS)
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 54 $ 30 $ - $ 84
Restricted cash 317 - - 317
Accounts receivable, net 534 301 - 835
Accrued unbilled revenues 154 22 - 176
Inventories
Fuel 148 - - 148
Gas - 238 187 425
Materials and supplies 160 15 - 175
Other 87 82 - 169
----------- ----------- ------------ -----------
1,454 688 187 2,329
Investments
Nuclear decommissioning trust funds 337 - - 337
Other 229 763 (35) 957
----------- ----------- ------------ -----------
566 763 (35) 1,294
Property
Property, plant and equipment 11,688 3,816 195 15,699
Property under capital leases 222 - - 222
Nuclear fuel under capital lease 662 - - 662
----------- ----------- ------------ -----------
12,572 3,816 195 16,583
Less accumulated depreciation, depletion and amortization 5,507 1,688 - 7,195
----------- ----------- ------------ -----------
7,065 2,128 195 9,388
Acquisition adjustment / goodwill - - 1,308 1,308
Regulatory Assets 2,972 48 - 3,020
Other Assets 259 429 300 988
----------- ----------- ------------ -----------
Total Assets $ 12,316 $ 4,056 $ 1,955 $ 18,327
=========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 215 $ 291 $ - $ 506
Dividends payable 75 - - 75
Short-term borrowings 296 371 1,372 2,039
Current portion long-term debt 566 131 - 697
Current portion capital leases 87 - - 87
Other 452 164 60 676
----------- ----------- ------------ -----------
1,691 957 1,432 4,080
Other Liabilities
Deferred income taxes 1,902 - 133 2,035
Capital leases 118 - - 118
Regulatory liabilities 230 166 187 583
Other 532 222 52 806
----------- ----------- ------------ -----------
2,782 388 372 3,542
Long-Term Debt 3,985 1,461 - 5,446
Preferred Stock of Subsidiaries - 403 - 403
Shareholders' Equity
Common stock 1,950 1 997 2,948
Additional paid-in capital - 945 (945) -
Retained earnings (deficit) 1,908 (99) 99 1,908
----------- ----------- ------------ -----------
3,858 847 151 4,856
Total Liabilities and Shareholders' Equity $ 12,316 $ 4,056 $ 1,955 $ 18,327
=========== =========== ============ ===========
</TABLE>
<PAGE> 1
EXHIBIT 99.G-5C
DTE ENERGY COMPANY AND MCN ENERGY GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF
RETAINED EARNINGS
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DTE MCN ADJUSTMENTS COMBINED
------------- -------------- ------------ ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,720 $ (7) $ 7 $ 1,720
Net income (loss) 492 (8) 8 492
Dividends declared (299) (84) 84 (299)
Preferred stock expense (2) - - (2)
Repurchase and retirement of common stock (1) - - (1)
Other (2) - - (2)
------------- ------------- ------------- ------------
Balance at September 30, 1999 $ 1,908 $ (99) $ 99 $ 1,908
============= ============= ============= ============
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 7,065
[OTHER-PROPERTY-AND-INVEST] 566
[TOTAL-CURRENT-ASSETS] 1,454
[TOTAL-DEFERRED-CHARGES] 3,231
[OTHER-ASSETS] 0
[TOTAL-ASSETS] 12,316
[COMMON] 1,950
[CAPITAL-SURPLUS-PAID-IN] 0
[RETAINED-EARNINGS] 1,908
[TOTAL-COMMON-STOCKHOLDERS-EQ] 3,858
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 3,985
[SHORT-TERM-NOTES] 200
[LONG-TERM-NOTES-PAYABLE] 0
[COMMERCIAL-PAPER-OBLIGATIONS] 96
[LONG-TERM-DEBT-CURRENT-PORT] 566
[PREFERRED-STOCK-CURRENT] 0
[CAPITAL-LEASE-OBLIGATIONS] 118
[LEASES-CURRENT] 87
[OTHER-ITEMS-CAPITAL-AND-LIAB] 0
[TOT-CAPITALIZATION-AND-LIAB] 12,316
[GROSS-OPERATING-REVENUE] 4,626
[INCOME-TAX-EXPENSE] 43
[OTHER-OPERATING-EXPENSES] 3,730
[TOTAL-OPERATING-EXPENSES] 3,730
[OPERATING-INCOME-LOSS] 896
[OTHER-INCOME-NET] (19)
[INCOME-BEFORE-INTEREST-EXPEN] 896
[TOTAL-INTEREST-EXPENSE] 341
[NET-INCOME] 492
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] 492
[COMMON-STOCK-DIVIDENDS] 299
[TOTAL-INTEREST-ON-BONDS] 275
[CASH-FLOW-OPERATIONS] 951
[EPS-BASIC] 3.39
[EPS-DILUTED] 3.39
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 9,388
[OTHER-PROPERTY-AND-INVEST] 1,294
[TOTAL-CURRENT-ASSETS] 2,329
[TOTAL-DEFERRED-CHARGES] 4,008
[OTHER-ASSETS] 0
[TOTAL-ASSETS] 18,327
[COMMON] 2,948
[CAPITAL-SURPLUS-PAID-IN] 0
[RETAINED-EARNINGS] 1,908
[TOTAL-COMMON-STOCKHOLDERS-EQ] 4,856
[PREFERRED-MANDATORY] 403
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 5,446
[SHORT-TERM-NOTES] 1,458
[LONG-TERM-NOTES-PAYABLE] 0
[COMMERCIAL-PAPER-OBLIGATIONS] 581
[LONG-TERM-DEBT-CURRENT-PORT] 697
[PREFERRED-STOCK-CURRENT] 103
[CAPITAL-LEASE-OBLIGATIONS] 118
[LEASES-CURRENT] 87
[OTHER-ITEMS-CAPITAL-AND-LIAB] 0
[TOT-CAPITALIZATION-AND-LIAB] 18,327
[GROSS-OPERATING-REVENUE] 6,946
[INCOME-TAX-EXPENSE] 7
[OTHER-OPERATING-EXPENSES] 5,930
[TOTAL-OPERATING-EXPENSES] 5,930
[OPERATING-INCOME-LOSS] 1,016
[OTHER-INCOME-NET] (1)
[INCOME-BEFORE-INTEREST-EXPEN] 1,016
[TOTAL-INTEREST-EXPENSE] 538
[NET-INCOME] 407
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] 407
[COMMON-STOCK-DIVIDENDS] 0
[TOTAL-INTEREST-ON-BONDS] 0
[CASH-FLOW-OPERATIONS] 0
[EPS-BASIC] 2.32
[EPS-DILUTED] 2.27
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 6,476
[OTHER-PROPERTY-AND-INVEST] 376
[TOTAL-CURRENT-ASSETS] 1,154
[TOTAL-DEFERRED-CHARGES] 3,185
[OTHER-ASSETS] 0
[TOTAL-ASSETS] 11,191
[COMMON] 1,451
[CAPITAL-SURPLUS-PAID-IN] 548
[RETAINED-EARNINGS] 1,672
[TOTAL-COMMON-STOCKHOLDERS-EQ] 3,623
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 3,308
[SHORT-TERM-NOTES] 200
[LONG-TERM-NOTES-PAYABLE] 0
[COMMERCIAL-PAPER-OBLIGATIONS] 96
[LONG-TERM-DEBT-CURRENT-PORT] 479
[PREFERRED-STOCK-CURRENT] 0
[CAPITAL-LEASE-OBLIGATIONS] 118
[LEASES-CURRENT] 87
[OTHER-ITEMS-CAPITAL-AND-LIAB] 0
[TOT-CAPITALIZATION-AND-LIAB] 11,191
[GROSS-OPERATING-REVENUE] 3,128
[INCOME-TAX-EXPENSE] 164
[OTHER-OPERATING-EXPENSES] 2,393
[TOTAL-OPERATING-EXPENSES] 2,393
[OPERATING-INCOME-LOSS] 735
[OTHER-INCOME-NET] (3)
[INCOME-BEFORE-INTEREST-EXPEN] 735
[TOTAL-INTEREST-EXPENSE] 219
[NET-INCOME] 349
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] 349
[COMMON-STOCK-DIVIDENDS] 239
[TOTAL-INTEREST-ON-BONDS] 248
[CASH-FLOW-OPERATIONS] 703
[EPS-BASIC] 0
[EPS-DILUTED] 0
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 1,523,882
[OTHER-PROPERTY-AND-INVEST] 1,366,843
[TOTAL-CURRENT-ASSETS] 687,765
[TOTAL-DEFERRED-CHARGES] 138,974
[OTHER-ASSETS] 338,358
[TOTAL-ASSETS] 4,055,822
[COMMON] 855
[CAPITAL-SURPLUS-PAID-IN] 967,356
[RETAINED-EARNINGS] (98,563)
[TOTAL-COMMON-STOCKHOLDERS-EQ] 847,003
[PREFERRED-MANDATORY] 402,900
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 847,316
[SHORT-TERM-NOTES] 86,064
[LONG-TERM-NOTES-PAYABLE] 409,871
[COMMERCIAL-PAPER-OBLIGATIONS] 484,931
[LONG-TERM-DEBT-CURRENT-PORT] 25,534
[PREFERRED-STOCK-CURRENT] 103,094
[CAPITAL-LEASE-OBLIGATIONS] 3,754
[LEASES-CURRENT] 2,674
[OTHER-ITEMS-CAPITAL-AND-LIAB] 1,689,684
[TOT-CAPITALIZATION-AND-LIAB] 4,055,822
[GROSS-OPERATING-REVENUE] 2,320,108
[INCOME-TAX-EXPENSE] (6,792)
[OTHER-OPERATING-EXPENSES] 2,171,288
[TOTAL-OPERATING-EXPENSES] 2,171,288
[OPERATING-INCOME-LOSS] 148,820
[OTHER-INCOME-NET] 19,121
[INCOME-BEFORE-INTEREST-EXPEN] 148,820
[TOTAL-INTEREST-EXPENSE] 119,655
[NET-INCOME] (7,854)
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] (7,854)
[COMMON-STOCK-DIVIDENDS] 84,087
[TOTAL-INTEREST-ON-BONDS] 45,248
[CASH-FLOW-OPERATIONS] 126,723
[EPS-BASIC] (0.10)
[EPS-DILUTED] (0.10)
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 1,508,816
[OTHER-PROPERTY-AND-INVEST] 19,766
[TOTAL-CURRENT-ASSETS] 316,567
[TOTAL-DEFERRED-CHARGES] 28,522
[OTHER-ASSETS] 277,715
[TOTAL-ASSETS] 2,151,386
[COMMON] 10,300
[CAPITAL-SURPLUS-PAID-IN] 230,399
[RETAINED-EARNINGS] 467,065
[TOTAL-COMMON-STOCKHOLDERS-EQ] 707,764
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 541,063
[SHORT-TERM-NOTES] 2,852
[LONG-TERM-NOTES-PAYABLE] 138,766
[COMMERCIAL-PAPER-OBLIGATIONS] 129,613
[LONG-TERM-DEBT-CURRENT-PORT] 25,534
[PREFERRED-STOCK-CURRENT] 0
[CAPITAL-LEASE-OBLIGATIONS] 3,657
[LEASES-CURRENT] 2,525
[OTHER-ITEMS-CAPITAL-AND-LIAB] 1,307,376
[TOT-CAPITALIZATION-AND-LIAB] 2,151,386
[GROSS-OPERATING-REVENUE] 1,115,496
[INCOME-TAX-EXPENSE] 54,217
[OTHER-OPERATING-EXPENSES] 900,056
[TOTAL-OPERATING-EXPENSES] 900,056
[OPERATING-INCOME-LOSS] 215,440
[OTHER-INCOME-NET] (1,720)
[INCOME-BEFORE-INTEREST-EXPEN] 215,440
[TOTAL-INTEREST-EXPENSE] 56,202
[NET-INCOME] 109,234
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] 109,234
[COMMON-STOCK-DIVIDENDS] 63,584
[TOTAL-INTEREST-ON-BONDS] 45,248
[CASH-FLOW-OPERATIONS] 177,226
[EPS-BASIC] 0
[EPS-DILUTED] 0
</TABLE>
<PAGE> 1
[ARTICLE] OPUR1
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] SEP-30-1999
[BOOK-VALUE] PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 0
[OTHER-PROPERTY-AND-INVEST] 1,330,504
[TOTAL-CURRENT-ASSETS] 445,059
[TOTAL-DEFERRED-CHARGES] 203,473
[OTHER-ASSETS] 47,019
[TOTAL-ASSETS] 2,026,055
[COMMON] 5
[CAPITAL-SURPLUS-PAID-IN] 956,767
[RETAINED-EARNINGS] (293,885)
[TOTAL-COMMON-STOCKHOLDERS-EQ] 662,530
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[LONG-TERM-DEBT-NET] 306,253
[SHORT-TERM-NOTES] 26,430
[LONG-TERM-NOTES-PAYABLE] 271,105
[COMMERCIAL-PAPER-OBLIGATIONS] 355,318
[LONG-TERM-DEBT-CURRENT-PORT] 0
[PREFERRED-STOCK-CURRENT] 0
[CAPITAL-LEASE-OBLIGATIONS] 97
[LEASES-CURRENT] 149
[OTHER-ITEMS-CAPITAL-AND-LIAB] 1,066,703
[TOT-CAPITALIZATION-AND-LIAB] 2,026,055
[GROSS-OPERATING-REVENUE] 1,185,815
[INCOME-TAX-EXPENSE] (59,975)
[OTHER-OPERATING-EXPENSES] 1,260,725
[TOTAL-OPERATING-EXPENSES] 1,260,725
[OPERATING-INCOME-LOSS] (74,910)
[OTHER-INCOME-NET] 22,001
[INCOME-BEFORE-INTEREST-EXPEN] (74,910)
[TOTAL-INTEREST-EXPENSE] 95,250
[NET-INCOME] (115,485)
[PREFERRED-STOCK-DIVIDENDS] 0
[EARNINGS-AVAILABLE-FOR-COMM] (115,485)
[COMMON-STOCK-DIVIDENDS] 0
[TOTAL-INTEREST-ON-BONDS] 0
[CASH-FLOW-OPERATIONS] (49,918)
[EPS-BASIC] 0
[EPS-DILUTED] 0
</TABLE>
<PAGE> 1
EXHIBIT 99.I-1
SECURITIES AND EXCHANGE COMMISSION
-------------------------------------------------
(Release No. 35-__________)
FILING UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
DTE Energy Company ("DTE"), 2000 2nd Avenue, Detroit, MI 48226-1279, a
Michigan corporation which is a holding company exempt from the registration
requirements of the Act under section 3(a)(1) of the Act pursuant to Rule 2, has
filed an Application/Declaration on Form U-1 under sections 9(a)(2), 10 and
3(a)(1) of the Act.
Pursuant to the terms of an Agreement and Plan of Merger dated as of
October 4, 1999, and as amended on November 12, 1999 (the "Merger Agreement"),
by and among DTE, DTE Enterprises, Inc., a Michigan corporation and a
wholly-owned subsidiary of DTE ("Merger Sub"), and MCN Energy Group Inc.
("MCN"), a Michigan corporation which is a holding company exempt from the
registration requirements of the Act under section 3(a)(1) of the Act pursuant
to Rule 2, DTE proposes that MCN be merged into Merger Sub with Merger Sub
surviving as a wholly-owned subsidiary of DTE (the "Merger"). As a result of the
Merger, DTE will be a public-utility holding company as defined in section
2(a)(7) of the Act with four public utility subsidiaries, The Detroit Edison
Company ("Detroit Edison"), which is a wholly-owned subsidiary of DTE, Michigan
Consolidated Gas Company ("MichCon") and Citizens Gas Fuel Company ("Citizens"),
which are currently wholly-owned subsidiaries of MCN, and Southern Missouri Gas
Company, L.P. ("SMGC"), in which MCN owns a 46.5% limited partnership interest
and 1.0% general partnership interest.
DTE is a holding company which provides, through its subsidiaries,
electric utility services and other energy-related products and services in
Michigan. Detroit Edison, the Company's principal operating subsidiary, is an
electric utility incorporated under the laws of the Michigan. Detroit Edison is
engaged in the generation, purchase, transmission, distribution and sale of
electric energy in a 7,600 square-mile area in southeastern Michigan. Detroit
Edison's service area includes about 13% of Michigan's total land area and about
half of the state's population (approximately five million people). Detroit
Edison's residential customers reside in urban and rural areas, including an
extensive shoreline along the Great Lakes and connecting waters. DTE and Detroit
Edison are engaged in numerous non-utility businesses, as well as certain other
utility businesses that are not jurisdictional under the Act, through various
subsidiaries. For the nine months ended September 30, 1999, DTE's operating
revenues on a consolidated basis were approximately $3.6 billion, of which
approximately $486 million were attributable to non-utility activities. Total
assets of DTE and its subsidiaries as of September 30, 1999 were approximately
$12.3 billion, of which approximately $7.065 billion consisted of net electric
plant and equipment.
<PAGE> 2
MCN is an integrated energy holding company primarily involved in
natural gas production, gathering, processing, transmission, storage and
distribution, electric power generation and energy marketing. MCN is organized
under the laws of the state of Michigan and claims its exemption from regulation
by the Commission under the Act (except for Section 9(a)(2) thereof) under
Section 3(a)(1) of the Act pursuant to Rule 2. Through its subsidiaries, MCN
operates the largest natural gas distribution and intrastate transmission system
in Michigan and provides natural gas service in the state. It also has extensive
diversified energy holdings through various subsidiaries, including interests in
a number of electric generating facilities. For the twelve months ended
September 30, 1999, MCN's operating revenues on a consolidated basis were
approximately $2.3 billion, of which approximately $1.1 billion were
attributable to utility activities. Consolidated assets of MCN and its
subsidiaries as of September 30, 1999 were more than $4.0 billion, of which
approximately $1.5 billion consisted of net gas utility plant and equipment.
MCN's regulated utility operations are operated by its Gas Distribution
business segment and consist of three natural gas utility subsidiaries. MichCon
is MCN's principal utility subsidiary. A natural gas distribution and
transmission company serving approximately 1.2 million customers in more than
500 communities throughout Michigan, MichCon owns integrated distribution,
transmission, production and storage properties and facilities. As of 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. It 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's compressor facilities related to
transmission and production, have a total rated capacity of 28,500 horsepower
and 2,285 horsepower, respectively. Properties relating to four underground
natural gas storage fields with an aggregate working gas storage capacity of
approximately 124 Bcf consist principally of 297 gas storage wells (61 of which
are observation wells), approximately 105 miles of field lines, dehydration
plants and compressor facilities with a total rated capacity of 69,000
horsepower. For the twelve months ended September 30, 1999, MichCon's operating
revenues and income were approximately $1.1 billion and $109 million,
respectively. As of September 30, 1999, MichCon's assets were valued at $2.2
billion.
Citizens is a public utility engaged in the distribution of natural
gas, also in Michigan. 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. For the twelve months ended September 30, 1999,
Citizens' operating revenues and income were approximately $16.2 million and
$1.7 million, respectively. As of September 30, 1999, Citizens' assets were
valued at $23.3 million.
SMGC is a public utility engaged in the distribution of natural gas.
SMGC was organized in 1996 and with its predecessors, has been in business since
1995. SMGC serves approximately 7,000 residential, commercial, and industrial
customers in southern Missouri. SMGC conducts all of its business in the state
of Missouri. For the twelve months ended September 30, 1999, SMGC's operating
revenues were approximately $5.7 million and its net income losses were
-2-
<PAGE> 3
approximately $2.4 million. As of September 30, 1999, SMGC's assets were valued
at $49.1 million.
The Application/Declaration states that the Merger will create a fully
integrated electric and natural gas company with a strong regional energy
infrastructure and competitive operations spanning the energy value chain. By
combining DTE's experience in power plant operations, coal management and
marketing with MCN's experience in natural gas purchasing, transportation,
storage and marketing, the combined company will be positioned to market coal,
gas, and electricity in the region and to compete more effectively in the
development of new power plants and distributed generation. DTE and MCN believe
this will generate significant opportunities to deliver greater value to
shareholders.
The Merger Agreement provides that, as soon as practicable following
the satisfaction or waiver of the conditions to each party's obligation to
consummate the Merger, MCN will be merged with and into Merger Sub, the separate
corporate existence of MCN will cease, and Merger Sub will continue as the
surviving corporation in the merger, operating as a wholly-owned subsidiary of
DTE.
As is described in detail in the Merger Agreement, each share of MCN
Common Stock, including the associated right to purchase Series A Junior
Participating Preferred Stock, outstanding prior to the merger will be converted
into the right to receive either $28.50 in cash or .775 shares of DTE Common
Stock, which had a closing price of $37 per share on October 4, 1999, the last
trading day prior to the announcement of the merger, subject to allocation and
proration procedures that ensure that the aggregate number of shares of MCN
common stock that will be converted into cash and DTE common stock will be equal
to 55% and 45%, respectively, of the total number of shares of MCN common stock
outstanding immediately prior to the merger. MCN Common Stock shareholders will
become DTE shareholders, and DTE will become the sole holder of all of the
outstanding common stock of MCN.
The Merger is subject to the expiration or termination of the 30-day
waiting period under the HSR Act and no action having been instituted by the DOJ
or the FTC that is not withdrawn, terminated or otherwise resolved prior to the
effective time of the Merger. The HSR Act, and the rules and regulations
thereunder, provide that certain acquisitions (including the Merger) may not be
consummated until required information and materials have been furnished to the
DOJ and the FTC and specified waiting periods have expired or been terminated.
On November 22, 1999, DTE and MCN made their separate filings with the DOJ and
the FTC. The Michigan Public Service Commission does not have jurisdiction over
the Merger, but will submit a letter concurrent with the filing of this
Application/Declaration indicating that it does not oppose it.
DTE states that following consummation of the Merger, it and each of
its subsidiaries will be entitled to an exemption from all provisions of the Act
except section 9(a)(2) because it and each of its public utility subsidiaries
from which it derives a material part of its income will be predominantly
intrastate in character and will carry on their utility businesses substantially
within the state of Michigan.
-3-
<PAGE> 4
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
-4-
