<PAGE> 1
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
10
<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.
11
<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.
15
<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.
18
<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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<PAGE> 31
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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<PAGE> 32
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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<PAGE> 34
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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<PAGE> 35
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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<PAGE> 36
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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<PAGE> 37
- 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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<PAGE> 38
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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<PAGE> 46
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>
40
<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.
42
<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.
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<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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<PAGE> 57
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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<PAGE> 58
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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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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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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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.
69
<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>
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<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>
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<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.
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<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.
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<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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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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<PAGE> 105
- 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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<PAGE> 106
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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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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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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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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<PAGE> 121
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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<PAGE> 122
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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<PAGE> 123
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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<PAGE> 124
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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<PAGE> 126
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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<PAGE> 127
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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<PAGE> 128
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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<PAGE> 129
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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<PAGE> 130
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
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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
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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,
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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
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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
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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
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<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>
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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>
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<TABLE>
<CAPTION>
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(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
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<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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<PAGE> 260
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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<PAGE> 290
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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<PAGE> 291
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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<PAGE> 292
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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<PAGE> 293
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 Dillion Read LLC]
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 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.
<PAGE> 296
[Letterhead of Warburg Dillion Read LLC]
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>
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> 305
EXHIBIT INDEX
<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).**
23.5 Consent of Wachtell, Lipton, Rosen & Katz (included in the
opinion filed as Exhibit 8.2 to this Registration
Statement).**
</TABLE>
<PAGE> 306
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.
<PAGE> 1
DTE Energy Company
November 12, 1999
Page 1
Exhibit 5. 1
Christopher C. Nern, Esq.
Vice President and General Counsel
DTE Energy Company
2000 2nd Avenue
Detroit, MI 48226-1279
November 12, 1999
DTE Energy Company
2000 2nd Avenue
Detroit, Michigan 48226-1279
Ladies and Gentlemen:
I have examined the Form S-4 Registration Statement (Reg. No. 333-89175) of DTE
Energy Company (the "Company") originally filed on October 15, 1999, as amended
through the date hereof (the "Registration Statement"), to which this opinion is
an exhibit, for the registration under the Securities Act of 1933, as amended
(the "Act"), of up to 32,126,112 shares of the Company's common stock, without
par value (the "Shares") and related share purchase rights (the "Rights") to be
issued pursuant to the 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"), both the Shares and the Rights are to be
issued in connection with the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of October 4, 1999, as amended as of November 12, 1999,
among MCN Energy Group Inc. ("MCN"), the Company and DTE Enterprises, Inc., a
wholly owned subsidiary of the Company, included as Exhibit A to the Joint Proxy
Statement/Prospectus comprising a part of the Registration Statement. Pursuant
to the Merger Agreement, the Company will become the parent corporation of and
own all the outstanding common stock of MCN. The Merger Agreement has been
approved by the Boards of Directors of the Company and MCN.
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.
<PAGE> 2
DTE Energy Company
November 12, 1999
Page 2
Based on the foregoing and subject to the qualifications set forth
herein, I am of the opinion that:
1. The Company is a corporation duly organized and existing under
the laws of the State of Michigan.
2. Under Michigan law, the Shares are duly authorized and when the
Registration Statement relating to the Shares and the Rights has
become effective under the Act, and when the Shares have been duly
issued and delivered in connection with the Merger Agreement as
contemplated by the Registration Statement, the Shares will be
validly issued, fully paid and nonassessable.
3. Under Michigan law, assuming that the Rights Agreement has been
duly authorized, executed and delivered by the Rights Agent, then,
when the Registration Statement has become effective under the Act
and the Shares have been validly issued and delivered in
connection with the Merger Agreement as contemplated by the
Registration Statement, the Rights attributable to the Shares will
be validly issued.
In connection with my opinion set forth in paragraph 3 above, I note
that the question whether the Board of Directors of the Company might be
required to redeem the Rights at some future time will depend upon the facts and
circumstances existing at that time and, accordingly, is beyond the scope of
such opinion.
I have relied as to certain matters on information obtained from public
officials, officers of the Company and other sources believed by me to be
responsible.
I hereby consent to the filing of this opinion as Exhibit 5.1 to the
Joint Proxy Statement/Prospectus and to the reference to me under the caption
"Validity of Shares" in the Joint Proxy Statement/Prospectus constituting a part
of the Registration Statement. In giving such consent, I do not thereby admit
that I am in the category of persons whose consent is required under Section 7
of the Act.
I am qualified to practice law in the State of Michigan, and in
rendering this opinion, my examination of matters of law has been limited to,
and I express no opinion as to the laws of any jurisdictions other than, the
laws of the State of Michigan and the Federal laws of the United States.
Very truly yours,
/s/ Christopher C. Nern
Christopher C. Nern
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF SULLIVAN & CROMWELL]
November 12, 1999
DTE Energy Company,
200 2nd Avenue,
644 WCB,
Detroit, MI 48226-1279.
Ladies and Gentlemen:
We have acted as counsel to DTE Energy Company, a Michigan corporation
(the "Company"), in connection with the planned merger of MCN Energy Group Inc.,
a Michigan corporation ("MCN"), with and into DTE Enterprises, Inc., a Michigan
corporation ("Merger Sub"), pursuant to the Agreement and Plan of Merger, dated
as of October 4, 1999 and as amended as of November 12, 1999, by and between the
Company, MCN and Merger Sub as described in the Joint Proxy Statement/Prospectus
(the "Joint Proxy Statement/Prospectus") of DTE and MCN, dated November 12,
1999, which is part of the registration statement on Form S-4 of the Company, to
which this opinion is attached as an exhibit. It is our opinion that the
discussion set forth in the Joint Proxy Statement/Prospectus under the heading
"Material Federal Income Tax Consequences of the Merger" is a fair and accurate
summary of the matters therein discussed, subject to the limitations set forth
therein.
We hereby consent to the filing of this opinion as an exhibit to the
Joint Proxy Statement/Prospectus. By giving the foregoing consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE> 1
EXHIBIT 8.2
[LETTERHEAD OF WACHTELL, LIPTON, ROSEN & KATZ]
November 12, 1999
MCN Energy Group Inc.
500 Griswold Street
Detroit, MI 48226
Ladies And Gentlemen:
Reference is made to the Registration Statement on Form S-4 (the
"Registration Statement") of DTE Energy Company, a Michigan corporation ("DTE"),
relating to the merger (the "Merger") of MCN Energy Group Inc., a Michigan
corporation, with and into DTE Enterprises, Inc., a Michigan corporation and a
wholly owned subsidiary of DTE.
We have participated in the preparation of the discussion set forth in
the section entitled "MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER" in
the Registration Statement. In our opinion, such discussion, insofar as it
relates to the United States federal income tax consequences of the Merger, is
accurate in all material respects.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the Registration Statement, and to the
references therein to us. In giving such consent, we do not thereby admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended.
Very truly yours,
/S/ WACHTELL, LIPTON, ROSEN & KATZ
pcc/jmh
<PAGE> 1
EXHIBIT 12.1
MCN ENERGY GROUP INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
TWELVE TWELVE TWELVE TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED(1)(5)(6)
Pre-tax income(2)(7)(8)............ $(32,301) $(497,476) $167,336 $146,607 $128,997 $100,143
Fixed charges(3)................... 169,024 158,242 125,338 99,944 72,895 55,197
-------- --------- -------- -------- -------- --------
Earnings as defined.............. $136,723 $(339,234) $292,674 $246,551 $201,892 $155,340
======== ========= ======== ======== ======== ========
FIXED CHARGES AS
DEFINED(1)(4)(5)(6)
Interest, expensed................. $119,655 $ 111,750 $ 86,453 $ 77,781 $ 57,675 $ 49,104
Interest, capitalized.............. 11,383 19,938 18,190 13,235 7,926 2,928
Amortization of debt discounts,
premium and expense.............. 3,351 2,869 2,426 2,217 1,641 1,332
Interest implicit in rentals....... 2,363 2,554 2,181 2,339 2,325 1,904
Preferred securities dividend
requirements of subsidiaries..... 40,212 36,370 31,090 12,390 9,699 2,194
-------- --------- -------- -------- -------- --------
Fixed charges as defined......... $176,964 $ 173,481 $140,340 $107,962 $ 79,266 $ 57,462
======== ========= ======== ======== ======== ========
Ratio of Earnings to Fixed
Charges.......................... 2.09 2.28 2.55 2.70
======== ======== ======== ========
Coverage Deficiency(9)(10)......... $ 40,241 $ 512,715
======== =========
</TABLE>
- -------------------------
(1) Earnings and fixed charges are defined and computed in accordance with Item
503 of Regulation S-K.
(2) This amount represents the aggregate of (a) the pre-tax income from
continuing operations of MCN and its majority-owned subsidiaries, (b) MCN's
share of pre-tax income of its 50% owned companies, and (c) any income
actually received from less than 50% owned companies.
(3) Fixed charges added to earnings are adjusted to exclude interest
capitalized during the period for nonutility companies and the preferred
securities dividend requirements of MichCon included in fixed charges but
not deducted in the determination of pre-tax income.
(4) Fixed charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries, increased to reflect the pre-tax earnings
requirement for MichCon.
(5) In June 1996, MCN completed the sale of The Genix Group, its computer
operations subsidiary. For purposed of calculating the Ratio of Earnings to
Fixed Charges, it has been classified as a discontinued operation and
therefore excluded from the ratio for all periods presented.
(6) The E&P segment has been reclassified from discontinued operations to
continuing operations as described in Note 8 to the Consolidated Financial
Statements included in the September 30, 1999 Quarterly Report included
herein. Therefore, for purposes of calculating the Ratio of Earnings to
Fixed Charges, E&P financial information is included in the ratio for all
periods presented.
(7) For the twelve-month period ended September 30, 1999, MCN recorded several
unusual charges, consisting of property write-downs, investment loss, and
losses on sale of properties, totaling $134,131,000 pre-tax ($87,185,000
net of taxes).
(8) For the twelve-month period ended December 31, 1998, MCN recorded several
unusual charges, consisting of property write-downs, investment losses and
restructuring charges, totaling $606,953,000 pre-tax ($389,598,000 net of
taxes and minority interest).
<PAGE> 2
(9) Earnings for the twelve-month period ended September 30, 1999, were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$40,241,000. The Ratio of Earnings to Fixed Charges excluding unusual
charges would have been 1.53.
(10) Earnings for the twelve-month period ended December 31, 1998, were not
adequate to cover fixed charges. The amount of the coverage deficiency was
$512,715,000. The Ratio of Earnings to Fixed Charges excluding unusual
charges would have been 1.54.
<PAGE> 1
EXHIBIT 15.1
November 12, 1999
DTE Energy Company
2000 Second Avenue
Detroit, Michigan 48226
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of DTE Energy Company and subsidiaries for the periods ended March
31, 1999 and 1998, June 30, 1999 and 1998 and September 30, 1999 and 1998, as
indicated in our reports dated April 28, 1999, July 28, 1999 and November 8,
1999 respectively; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our reports referred to above, which were included in your
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999, June
30, 1999 and September 30, 1999, are being used in the Registration Statement.
We also are aware that the aforementioned reports, pursuant to Rule 436(c) under
the Securities Act of 1933, are not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-89175 of DTE Energy Company on Form S-4 of our
report dated January 27, 1999, appearing in the Annual Report on Form 10-K of
DTE Energy Company for the year ended December 31, 1998 and to the reference to
us under the heading "Experts" in the Joint Proxy Statement/Prospectus, which is
part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
November 12, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of DTE Energy Company on
Form S-4 of our report 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), on the audited consolidated financial statements of MCN Energy Group Inc.
and to the reference to us under the headings "Experts" appearing in the Joint
Proxy Statement/Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Detroit, Michigan
November 12, 1999
<PAGE> 1
EXHIBIT 23.6
CONSENT OF WARBURG DILLON READ LLC
We hereby consent to the use of Appendix B containing our opinion letter
dated November 12, 1999, to the Board of Directors of DTE Energy Company ("DTE")
in the Proxy Statement/Prospectus constituting a part of the Registration
Statement on Form S-4 relating to the Merger of DTE with MCN Energy Group Inc.
and to the references to our firm in such Proxy Statement/Prospectus. In giving
this consent we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
WARBURG DILLON READ LLC
New York, New York
November 12, 1999
<PAGE> 1
EXHIBIT 23.7
CONSENT OF
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
We hereby consent to the use of our opinion letter dated November 12, 1999
to the Board of Directors of MCN Energy Group Inc. included as Appendix C to the
Joint Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed merger of MCN Energy Group Inc.
with a wholly-owned subsidiary of DTE Energy Company, and to the references to
such opinion in such Joint Proxy Statement/Prospectus under the caption "THE
MERGER". In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, nor do we thereby admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ THOMAS L. GERLACHER
------------------------------------
Name: Thomas L. Gerlacher
Title: Vice President, Investment
Banking
New York, New York
November 12, 1999
<PAGE> 1
EXHIBIT 23.8
November 12, 1999
MCN Energy Group, Inc.
500 Griswold
Detroit, Michigan 48226
Re: DTE Energy Company
Registration Statement on Form S-4
Ladies and Gentlemen:
The firm of Ryder Scott Company Petroleum Engineers consents to the use of its
name and the information contained in its report dated January 22, 1999,
regarding MCN Energy Group Inc.'s oil and gas reserve information as of December
31, 1998, and to the reference under the heading "Experts" in the Prospectus
which is part of DTE Energy Company's Registration Statement on Form S-4 and any
amendments thereto, filed in conjunction with DTE Energy Company's merger with
MCN Energy Group Inc.
Ryder Scott Company Petroleum Engineers has no interest in MCN Energy Group Inc.
or any affiliated companies or subsidiaries and is not to receive such interest
as payment for such reports and has no director, officer, or employee otherwise
connected with MCN Energy Group Inc. We are not employed by MCN Energy Group
Inc. on a contingent basis.
/s/ RYDER SCOTT COMPANY, L.P.
RYDER SCOTT COMPANY, L.P.
<PAGE> 1
EXHIBIT 23.9
November 12, 1999
MCN Energy Group Inc.
500 Griswold
Detroit, Mi 48226
Re: DTE Energy Company
Registration Statement on Form S-4
Ladies and Gentlemen:
The firm of Miller and Lents, Ltd. consents to the use of its name and the
information contained in its report dated January 4, 1999, regarding MCN Energy
Group Inc.'s oil and gas reserve information as of December 31, 1998, and to the
reference under the heading "Experts" in the Prospectus which is part of DTE
Energy Company's Registration Statement on Form S-4 and any amendments thereto,
filed in conjunction with DTE Energy Company's merger with MCN Energy Group Inc.
Miller and Lents, Ltd. has no interest in MCN Energy Group Inc. or any
affiliated companies or subsidiaries and is not to receive such interest as
payment for such reports and has no director, officer, or employee otherwise
connected with MCN Energy Group Inc. We are not employed by MCN Energy Group
Inc. on a contingent basis.
Yours very truly,
MILLER AND LENTS, LTD.
/s/ JAMES C. PEARSON
James C. Pearson
President
JCP/mk
<PAGE> 1
EXHIBIT 23.10
November 12, 1999
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
Re: DTE Energy Company
Registration Statement on Form S-4
Ladies and Gentlemen:
The firm of Holditch-Reservoir Technologies, as successor to S. A. Holditch &
Associates, consents to the use of its name and the information contained in its
report dated January 11, 1999, regarding MCN Energy Group Inc.'s oil and gas
reserve information as of December 31, 1998, and to the reference under the
heading "Experts" in the Prospectus which is part of DTE Energy Company's
Registration Statement on Form S-4 and any amendments thereto, filed in
conjunction with DTE Energy Company's merger with MCN Energy Group Inc.
Holditch-Reservoir Technologies, as successor to S. A. Holditch & Associates,
has no interest in MCN Energy Group Inc. or any affiliated companies or
subsidiaries and is not to receive such interest as payment for such reports and
has no director, officer, or employee otherwise connected with MCN Energy Group
Inc. We are not employed by MCN Energy Group Inc. on a contingent basis.
Very truly yours,
HOLDITCH-RESERVOIR TECHNOLOGIES
/s/ W. DENTON COPELAND
W. Denton Copeland
Operations Manager
<PAGE> 1
EXHIBIT 23.11
November 12, 1999
MCN Energy Group Inc.
500 Griswold
Detroit, Michigan 48226
Re: DTE Energy Company
Registration Statement on Form S-4
Ladies and Gentlemen:
The firm of Netherland, Sewell & Associates, Inc. consents to the use of
its name and the information contained in its report dated January 6, 1999,
regarding MCN Energy Group Inc.'s oil and gas reserve information as of December
31, 1998, and to the reference under the heading "Experts" in the Prospectus
which is part of DTE Energy Company's Registration Statement on Form S-4 and any
amendments thereto, filed in conjunction with DTE Energy Company's merger with
MCN Energy Group Inc.
Netherland, Sewell & Associates, Inc. has no interest in MCN Energy Group
Inc. or any affiliated companies or subsidiaries and is not to receive such
interest as payment for such reports and has no director, officer, or employee
otherwise connected with MCN Energy Group Inc. We are not employed by MCN Energy
Group Inc. on a contingent basis.
Very truly yours,
By: /s/ FREDERIC D. SEWELL
Frederic D. Sewell
President
Dallas, Texas
RCB:JMO
<PAGE> 1
EXHIBIT 23.12
[LETTERHEAD OF WILLIAMSON PETROLEUM CONSULTANTS, INC.]
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
Williamson Petroleum Consultants, Inc. hereby consents to the use of its
name and the information contained in its report, "Evaluation of Proved Oil and
Gas Reserves to the Interests of MCNIC Oil & Gas Company in Various Enhanced Oil
Recovery Projects Effective December 31, 1998 for Disclosure to the Securities
and Exchange Commission, Williamson Project 8.8670" dated December 30, 1998,
regarding MCN Energy Group Inc.'s oil and gas reserve information as of December
31, 1998, and to the reference under the heading "Experts" in the Prospectus
which is part of DTE Energy Company's Registration Statement on Form S-4 and any
amendments thereto, filed in conjunction with DTE Energy Company's merger with
MCN Energy Group Inc.
Williamson Petroleum Consultants, Inc. has no interest in MCN Energy Group
Inc. or in any affiliated companies or subsidiaries and is not to receive such
interest as payment for such reports and has no director, officer, or employee
otherwise connected with MCN Energy Group Inc. We are not employed by MCN Energy
Group Inc. on a contingent basis.
/s/ WILLIAMSON PETROLEUM CONSULTANTS,
INC.
--------------------------------------
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
November 12, 1999
<PAGE> 1
EXHIBIT 99.1
Form of Proxy Card of DTE Energy Company
[Reverse of DTE Energy Company Proxy Card] [Logo of DTE Energy Company]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PROXY By signing on the other side, I (we) appoint Theodore S. Leipprandt,
Eugene A. Miller and Dean E. Richardson, and any of them, as proxies,
each with full power of substitution, acting jointly or by any of them if only
one be present and acting, to vote and act with respect to all shares of common
stock of the undersigned in DTE Energy Company, at the Special Meeting of
Shareholders to be held on Monday, December 20, 1999, upon all subjects that may
properly come before the meeting, including the matters described in the Joint
Proxy Statement/Prospectus furnished herewith, subject to the directions
indicated on the reverse side of this card or through the telephone or Internet
proxy procedures, and at the discretion of the proxies on any other matters that
may properly come before the meeting. If specific voting instructions are not
given with respect to matters to be acted upon and the signed card is returned,
the proxies will vote in accordance with the directors' recommendations provided
below and at their discretion on any matters that may properly come before the
meeting.
The Board of Directors recommends a vote "FOR" proposal 1 listed on the
reverse side of this card. The Board of Directors knows of no other matters
that are to be presented at the meeting.
Please sign on the reverse side of this card and return promptly to Corporate
Election Services; or if you choose, you can submit your proxy by calling
1-800-250-9081, or through the Internet in accordance with the instructions on
the reverse side of this card. If you do not sign and return a proxy, submit a
proxy by telephone or through the Internet, or attend the meeting and vote by
ballot, shares that you own directly cannot be voted.
RECORD VOTE AND SIGN ON REVERSE SIDE
<PAGE> 2
[ X ] Please mark your PROXY
votes as in this
example
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1 AT THE RIGHT.
<TABLE>
<S><C>
--------------------------------------------------------------------
1. To approve the issuance of shares of DTE Energy Company
common stock 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, the
"Merger Agreement"), among DTE Energy Company, MCN Energy
Group Inc. and DTE Enterprises, Inc., as more fully described
in the accompanying Joint Proxy Statement/Prospectus.
FOR AGAINST ABSTAIN
/ / / / / /
--------------------------------------------------------------------
2. In their discretion on such other matters related to the
foregoing proposal as may properly come before the meeting.
--------------------------------------------------------------------
The signature(s) below should correspond exactly with the
names(s) as shown on the left. Where stock is registered
jointly in the names of two or more persons, ALL should sign.
When signing as Attorney, Executor, Administrator, Trustee,
Guardian, or as Corporate Officer on behalf of a corporation,
please give full title as such.
--------------------------------------------------------------------
--------------------------------------------------------------------
Signature(s) Date
</TABLE>
- --------------------------------------------------------------------------------
Please detach proxy at perforation before mailing.
IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL YOUR PROXY.
- --------------------------------------------------------------------------------
VOTE BY TELEPHONE VOTE BY INTERNET VOTE BY MAIL
Call TOLL-FREE using a Access the WEBSITE and Return your proxy in the
Touch-Tone phone cast your vote POSTAGE-PAID envelope
provided.
1-800-250-9081 http://www.votefast.com
- -------------------------------------------------------------------------------
VOTE 24 HOURS A DAY, 7 DAYS A WEEK!
Your telephone or internet vote must be received by 5:00 p.m. eastern daylight
time on December 19, 1999 to be counted in the final tabulation.
YOUR CONTROL NUMBER IS [ ]
VOTE BY TELEPHONE
Have your proxy card available when you call the Toll-Free number 1-800-250-9081
using a Touch-Tone phone. You will be prompted to enter your control number and
then you can follow the simple prompts that will be presented to you to record
your vote.
VOTE BY INTERNET
Have your proxy card available when you access the website
http://www.votefast.com. You will be prompted to enter your control number and
then you can follow the simple prompts that will be presented to you to record
your vote.
VOTE BY MAIL
Please mark, sign and date your proxy card and return it in the postage paid
envelope provided or return it to: Corporate Election Services, P.O. Box 535600,
Pittsburgh, Pennsylvania 15253.
TO CHANGE YOUR VOTE
Any subsequent vote by any means will change your prior vote. For example, if
you voted by telephone, a subsequent internet vote will change your vote. The
last vote received before 5:00 p.m. eastern daylight time, December 19, 1999
will be the one counted. You may also revoke your proxy by voting in person at
the meeting.
[DTE ENERGY LOGO]
<PAGE> 1
EXHIBIT 99.2
Form of Proxy Card of MCN Energy Group Inc.
[Reverse of MCN Energy Group Inc. Proxy Card] [Logo of MCN Energy Group Inc.]
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF MCN ENERGY GROUP INC.
PROXY I (we) have received the proxy soliciting material relative to the
Special Meeting, and (i) appoint Alfred R. Glancy III, Howard L. Dow III and
Daniel L. Schiffer, or any one of them, as Proxies with full power of
substitution, for and in my (our) name, to vote all shares of Common Stock of
MCN Energy Group Inc. owned of record by me (us) and (ii) direct Putnam
Fiduciary Trust Company, Trustee under MCN Energy Group Inc.'s 401(k) plans, to
vote in person or by proxy all shares of Common Stock of MCN Energy Group Inc.
allocated to my accounts under those Plans, and which I am entitled to vote, in
each case, on all matters that may come before the Special Meeting of
Shareholders to be held at MCN's headquarters on December 20, 1999, at
2:00 p.m., and any adjournments, unless otherwise specified herein and subject
to the directions indicated on the reverse side of this card or through the
telephone or Internet proxy procedures. The Proxies, in their discretion, are
further authorized to vote on other matters that may properly come before the
Special Meeting and any adjournments.
The Board of Directors recommends a vote "FOR" the proposal listed on the
reverse side of this card. The Board of Directors knows of no other matters
that are to be presented at the meeting.
Please sign on the reverse side of this card and return promptly to First
Chicago Trust Co., a Division of Equiserve or, if you choose, you can submit
your proxy by calling 1-877-PRX-VOTE (1-877-779-8683), or through the Internet
in accordance with the instructions on the reverse side of this card. If you do
not sign and return a proxy, submit a proxy by telephone or through the
Internet, or attend the meeting and vote by ballot, shares that you own directly
cannot be voted.
<PAGE> 2
[ X ] Please mark your PROXY
votes as in this
example
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1 BELOW.
<TABLE>
<S><C>
--------------------------------------------------------------------
1. 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, the "Merger Agreement"), among DTE Energy Company, MCN
Energy Group Inc. and DTE Enterprises, Inc., as more fully
described in the accompanying Joint Proxy Statement/Prospectus.
FOR AGAINST ABSTAIN
/ / / / / /
--------------------------------------------------------------------
2. In their discretion the Proxies are authorized to vote
upon such other business as may properly come before the
meeting or adjournments.
--------------------------------------------------------------------
Mark box at right if you plan to attend MCN's Special Meeting
of Shareholders in Detroit / /
Please sign exactly as name appears hereon. Joint owners
should each sign. When signing as Attorney, Executor,
Administrator, Trustee, or Guardian, please give full title
as such.
--------------------------------------------------------------------
--------------------------------------------------------------------
Signature(s) Date
</TABLE>
- --------------------------------------------------------------------------------
Please detach proxy at perforation before mailing.
IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL YOUR PROXY.
- --------------------------------------------------------------------------------
VOTE BY TELEPHONE VOTE BY INTERNET VOTE BY MAIL
Call TOLL-FREE using a Access the WEBSITE and Return your proxy in the
Touch-Tone phone cast your vote POSTAGE-PAID envelope
provided.
1-877-PRX-VOTE http://www.eproxyvote.com/MCN
1-877-779-8683
- --------------------------------------------------------------------------------
VOTE 24 HOURS A DAY, 7 DAYS A WEEK!
Your telephone or Internet vote must be received by 5:00 p.m. eastern time on
December 17, 1999 to be counted in the final tabulation.
VOTE BY TELEPHONE
Have your proxy card available when you call the Toll-Free number 1-877-779-8683
using a Touch-Tone phone. You will be prompted to enter your control number and
then you can follow the simple prompts that will be presented to you to record
your vote.
VOTE BY INTERNET
Have your proxy card available when you access the website
HTTP://WWW.EPROXY.COM/MCN. You will be prompted to enter your control number and
then you can follow the simple prompts that will be presented to you to record
your vote.
VOTE BY MAIL
Please mark, sign and date your proxy card and return it in the postage paid
envelope provided or return it to: MCN Energy, c/o First Chicago Trust Co., a
Division of Equiserve, P.O. Box 8612, Edison, N.J. 08818-9126.
TO CHANGE YOUR VOTE
Any subsequent vote by any means will change your prior vote. For example, if
you voted by telephone, a subsequent Internet vote will change your vote. The
last vote received before 5:00 p.m. eastern time, December 17, 1999 will be the
one counted. You may also revoke your proxy by voting in person at the special
meeting.
[LOGO OF MCN ENERGY GROUP INC.]
<PAGE> 1
EXHIBIT 99.3
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to be named as a person about to become
a director of DTE Energy Company in the Registration Statement on Form S-4 of
DTE Energy Company dated November 12, 1999.
/s/ ALFRED R. GLANCY III
--------------------------------------
Alfred R. Glancy III
Dated: November 12, 1999
