-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSPVZR6m9Z0oPJ3FQSyS2bf/LXlroypq7OBdrwPFdNBlDxrjiSi+jT2hmUCLLJoP ixO5FpHER5+50YwxWYM0iQ== 0000950124-99-001759.txt : 19990315 0000950124-99-001759.hdr.sgml : 19990315 ACCESSION NUMBER: 0000950124-99-001759 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHIGAN CONSOLIDATED GAS CO /MI/ CENTRAL INDEX KEY: 0000065632 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 380478040 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07310 FILM NUMBER: 99563593 BUSINESS ADDRESS: STREET 1: 500 GRISWOLD ST CITY: DETROIT STATE: MI ZIP: 48226 BUSINESS PHONE: 3139652430 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 1-7310 Michigan Consolidated Gas Company, a Michigan corporation, meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is, therefore, filing this form with the reduced disclosure format. MICHIGAN CONSOLIDATED GAS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-0478040 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 500 GRISWOLD STREET, DETROIT, MICHIGAN 48226 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 313-965-2430 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENTS TO THIS FORM 10-K. X ----- ALL OF THE REGISTRANT'S 10,300,000 OUTSTANDING SHARES OF COMMON STOCK, PAR VALUE $1 PER SHARE, ARE INDIRECTLY OWNED BY MCN ENERGY GROUP INC. DOCUMENTS INCORPORATED BY REFERENCE: NONE - -------------------------------------------------------------------------------- 2 GLOSSARY Antrim Gas........................ Natural gas produced from shallow wells in the Devonian (Antrim) shale formations. End User Transportation........... A gas delivery service provided to large-volume commercial and industrial customers who purchase natural gas directly from producers or brokerage companies. FERC.............................. Federal Energy Regulatory Commission; a federal agency that determines the rates and regulations of interstate pipelines. Gas Storage....................... The process of injecting, storing and withdrawing natural gas from a depleted underground natural gas field or salt cavern. GCR............................... Gas Cost Recovery; a process, in effect through 1998, by which MichCon, through annual gas cost proceedings before the Michigan Public Service Commission, was allowed to recover its reasonable and prudent cost of gas sold. Intermediate Transportation....... A gas delivery service provided to producers, brokers and other gas companies that own the natural gas, but are not the ultimate consumers. MCN............................... MCN Energy Group Inc. and its subsidiaries. MichCon........................... Michigan Consolidated Gas Company; an indirect wholly-owned natural gas distribution and intrastate transmission subsidiary of MCN. MichCon Pipeline.................. MichCon Pipeline Co., a wholly-owned subsidiary of MichCon that engages in pipeline projects through its subsidiaries. ii 3 GLOSSARY (concluded) MPSC.............................. Michigan Public Service Commission; the regulator of intrastate aspects of the natural gas industry within the State of Michigan. Normal Weather.................... The average daily temperature within MichCon's service area during a recent 30-year period. Spot Market....................... The buying and selling of natural gas on a short-term basis, typically month to month. Units of Measurement: Bcf............................... Billion cubic feet of gas. Mcf............................... Thousand cubic feet of gas. MMcf.............................. Million cubic feet of natural gas. /d................................ Added to various units of measure to denote units per day. iii 4 TABLE OF CONTENTS
CONTENTS PAGE -------- NUMBER ------ Part I Item 1. Business....................................................................... 1 Item 2. Properties .................................................................... 8 Item 3. Legal Proceedings.............................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............................ 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................................ 10 Item 6. Selected Financial Data........................................................ 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................... 23 Item 8. Financial Statements and Supplementary Data.................................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................................... 49 Part III Item 10. Directors and Executive Officers of the Registrant............................. 49 Item 11. Executive Compensation......................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 49 Item 13. Certain Relationships and Related Transactions................................. 49 Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8- K............... 49 Signatures................................................................................. 52
iv 5 FORWARD-LOOKING STATEMENTS This Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: (i) the effects of weather and other natural phenomenon; (ii) increased competition from other energy suppliers as well as alternative forms of energy; (iii) the capital intensive nature of MichCon's business; (iv) economic climate and growth in the geographic areas in which MichCon does business; (v) the uncertainty of gas reserve estimates; (vi) the timing and extent of changes in commodity prices for natural gas, electricity and crude oil; (vii) conditions of capital markets and equity markets; (viii) the timing, nature and impact of Year 2000 activities; and (ix) the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance and authorized rates. ITEM 1. BUSINESS MichCon, or the Company, is a Michigan corporation that was organized in 1898 and, with its predecessors, has been in business for 150 years. MichCon is a natural gas utility primarily engaged in the distribution and transmission of natural gas in the State of Michigan. MichCon also has subsidiaries involved in the gathering and transmission of natural gas in northern Michigan. MichCon operates one of the largest natural gas distribution and transmission systems in the United States and the largest in Michigan. MichCon's non-regulated operations are not material. On December 31, 1998, MichCon and its subsidiaries employed 2,724 persons. Slightly less than half of MichCon's labor force is covered by five collective bargaining agreements. In June 1998, MichCon successfully negotiated and signed three 3-year collective bargaining agreements. The remaining two agreements will expire December 2000. RESULTS OF OPERATIONS MichCon's earnings for 1998 were $77.0 million, a decrease of $2.0 million from 1997. Results for 1998 include an unusual charge which reduced earnings by $11.2 million, net of taxes and minority interest, relating to a write-down of certain gas gathering properties, owned by Saginaw Bay Pipeline Company, a wholly-owned subsidiary of MichCon Pipeline. 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 carry value of the system exceeded its estimated fair value. Excluding this unusual charge, MichCon had 1998 earnings of $88.2 million, an improvement of $9.2 million over 1997. Earnings comparisons were impacted by variations in weather and cost-saving initiatives resulting in significantly lower operating costs. The cost-saving initiatives allowed MichCon to continue its record of solid financial performance. GAS SALES & TRANSPORTATION MichCon serves 1.2 million customers in the Detroit, Grand Rapids, Ann Arbor, Traverse City and Muskegon metropolitan areas and in various other communities throughout the State of Michigan. The following services are provided by MichCon: Gas Sales - Includes the sale and delivery of natural gas to residential and small-volume commercial customers. 1 6 End User Transportation - Through this service, large-volume commercial and industrial customers that purchase natural gas directly from producers or brokerage companies utilize the Company's network to transport the gas to their facilities. Intermediate Transportation - Provides transportation service through the Company's gathering and high pressure transmission system to producers, brokers and other local distribution companies that own the natural gas, but are not the ultimate consumer.
1998 1997 1996 -------- -------- -------- REVENUE (in millions of dollars) Gas Sales ......................... $ 823.8 $1,062.8 $1,085.8 End User Transportation ........... 82.0 84.5 82.2 Intermediate Transportation ....... 63.2 55.2 48.6 -------- -------- -------- Total Sales and Transportation .. 969.0 1,202.5 1,216.6 Other ............................. 64.7 51.2 42.2 -------- -------- -------- Total Operating Revenues ........ $1,033.7 $1,253.7 $1,258.8 ======== ======== ======== MARKETS (Bcf) Gas Sales ......................... 168.9 205.8 217.7 End User Transportation ........... 140.1 145.0 146.7 Intermediate Transportation ....... 537.5 586.4 527.5 -------- -------- -------- Total Sales and Transportation .. 846.5 937.2 891.9 ======== ======== ========
EFFECT OF WEATHER: MichCon's gas sales and end user transportation volumes, revenues and net income are impacted by weather. Given the seasonal nature of the business, revenues and net income tend to be higher in the first and fourth quarters of the calendar year. Effect of Weather on Gas Markets and Earnings
1998 1997 1996 -------- -------- ------- Percentage Colder (Warmer) Than Normal .... (19.3)% 0.8% 5.4% Increase (Decrease) From Normal in: Gas Markets (in Bcf) .................... (40.3) 0.6 10.9 Net Income (in Millions) ................ $(35.3) $ 0.5 $ 9.9
GAS SALES: Revenues decreased $239.0 million in 1998 due primarily to weather, which was 20.1% warmer in 1998 compared to 1997, and a reduction in gas sales rates resulting from lower gas costs. This market represents approximately 20% of total deliveries and produced approximately 64% of MichCon'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. MichCon 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. 2 7 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. MichCon 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 6 for a discussion regarding Regulatory Reform. MichCon'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 93,000 new customers added during the past four years. In 1998, three new areas of Michigan were served by MichCon, bringing the total number of new areas added since the program's inception in 1984 to 140. Cost of gas sold per Mcf for 1998 was $2.71, a decrease of $.40 (13%) from 1997. MichCon continued to retain a significant cost advantage over competing fuels. Cost of gas sold per Mcf for 1997 increased from 1996 by $.19 (7%). END USER TRANSPORTATION: Deliveries decreased slightly to 140.1 Bcf in 1998 due to warmer weather. In 1998, this market accounted for approximately 17% of total gas deliveries and produced approximately 14% of MichCon's gross profit margin. At December 31, 1998, MichCon had end user transportation agreements representing annual volumes of 154 Bcf. Approximately 53% of these volumes are under contracts that extend to 2000 or beyond and include the majority of the large, and most price-sensitive, customers. Contracts for the remaining volumes are typically one-year contracts that expire at various times during 1999 and relate to a large number of low-volume users with relatively low price sensitivity. Through technical and financial assistance, industrial and commercial customers have been encouraged to increase their use of natural gas. The natural gas-fueled power generation market accounted for approximately 31 Bcf of gas deliveries in both 1998 and 1997. Gas engine driven technologies, along with industrial process and heating, ventilation and air conditioning (HVAC) conversion applications in certain businesses, also provide significant opportunities for conversion to natural gas-powered equipment. The efficiencies and price competitiveness of natural gas can significantly reduce operating costs for customers, generally offsetting in a relatively short period of time the typically higher initial cost of gas-burning equipment. MichCon continues to be successful in converting customers' facilities to natural gas from alternative fuels and in retaining those customers after conversion. Also, it has not experienced any significant fuel switching by its customers in recent years. In 1998, approximately 23 Bcf of MichCon's transportation deliveries were to customers who substituted natural gas for coal. The primary focus of competition in this market is cost. Some large commercial and industrial customers have the capacity to switch to alternative fuel sources such as coal, electricity, oil and steam. In addition, some of these customers could bypass MichCon'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 MichCon's industrial customers bypassed its distribution system. MichCon competes against alternative fuel sources by providing competitive pricing and reliable supply through the use of the Company's extensive storage capacity and multiple supply sources. Almost all significant customers who could bypass MichCon are under long-term transportation contracts. 3 8 The MPSC has approved a direct access program for the state's two largest electric utilities, which began in mid-1998, and allows large electric users to directly purchase lower priced electricity. The program is not expected to materially impact the competitiveness of natural gas. INTERMEDIATE TRANSPORTATION: This service accounts for approximately 63% of total gas deliveries, however, due to the lower costs and therefore rates applicable to this service, it represents only 11% of MichCon's gross profit margin. The decrease in intermediate transportation deliveries in 1998 reflects lower off-system demand caused by the warmer weather and lower volumes transported for fixed-fee customers. Although transported volumes for fixed-fee customers may fluctuate, revenues from such customers are not affected. In 1998, through efficient use of transmission and storage assets as well as upstream supply, MichCon sold significant short-term services resulting in increased revenues from 1997. MichCon's extensive transmission pipeline system has enabled it to increase the volumes transported for Michigan gas producers, marketers, distribution companies and other pipelines. MichCon 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, MichCon 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, MichCon 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 MichCon'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 MichCon's customers. In addition, the pipeline provides significant off-system transportation opportunities as discussed below. MichCon is in an excellent position to increase revenues through providing transportation of new supplies of western Canadian gas, coming into the Chicago area beginning in December 1998, to third-party pipelines serving growing markets in eastern Canada and the northeast United States. In December 1997, MichCon entered into a long-term facility lease of its Milford-to-Belle River Pipeline to the Vector Pipeline to effectuate transportation of Chicago supplies to Dawn, Ontario, a significant Canadian natural gas market hub. An affiliate of MichCon owns a 25% interest in Vector. Currently, Vector is contemplating completing its proposed project in two phases. Phase One would be the construction of approximately 19 miles of 42" pipeline by November 1, 1999 from MichCon's Belle River Mills Compressor station to Dawn, Ontario. The remainder of Vector is scheduled to be completed in October 2000. MichCon is reviewing the possibility of providing transportation service to Vector for Phase One services to be delivered at Vector's proposed Belle River receipt point. The bridging service would commence on November 1, 1999 and terminate in October 31, 2000 when Phase Two of the Vector project is completed. Additional opportunities for transportation services are being pursued which will further maximize the use of MichCon's transmission infrastructure. MichCon is negotiating with Washington 10 Storage Corporation to provide transportation services to and from the storage field in southeastern Michigan which is expected to be in service by mid-1999. In addition, MichCon has identified firm, long-term capacity, available in late 1999, between its southern interconnections with ANR Pipeline Company (ANR) at Willow Run and Consumers Energy at Northville to various interconnections at the U.S./Canadian border near the St. Clair River. MichCon is soliciting offers for this capacity in the first quarter of 1999. MichCon also is investigating other firm and interruptible transportation services for incremental revenue opportunities. ENERGY ASSISTANCE PROGRAMS Energy assistance programs funded by the federal government and the State of Michigan, including the Home Heating Credit for low-income customers and the Family Independence Agency's State Emergency Relief Program, 4 9 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 MichCon 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 6 for a discussion regarding MichCon's plan). This geographic diversity of supply ensures that MichCon will be able to meet the requirements of its existing and future customers with reliable supplies of natural gas at a known cost, free from the potentially severe swings of a volatile gas market. Whereas prior to 1999 under GCR regulation gas supply costs were a non-profit passthrough of prudently incurred costs. Beginning January 1, 1999, MichCon has the ability to take full advantage of its assets and expertise to generate profits from gas supply operations. By fixing the gas cost component of MichCon's sales rates at $2.95/Mcf for three years, customers benefit from greater price certainty while MichCon can take advantage of opportunities to secure lower priced gas supplies. MichCon has secured 100% of its 1999 warmer than normal weather requirements and approximately 90% of its 2000 and 2001 similar requirements at prices that help ensure profit contributions from gas supply operations. Gas Supply Purchases(Bcf)
1998 1997 1996 ------- ------- -------- Michigan Producers ........... 41.9 66.0 86.3 Interstate Suppliers ......... 29.0 13.8 14.5 Canadian Suppliers ........... 31.7 31.3 37.3 Spot Market and other ........ 73.0 85.8 90.6 ------- ------- -------- 175.6 196.9 228.7 ======= ======= ========
MichCon purchased 24% of its 1998 supply from Michigan producers, 58% 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 Eastern Pipe Line Co. (PEPL), Viking Gas Transmission Company (Viking) and Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR is obligated to transport for MichCon 375 MMcf/d of supply from April through October 1999. Effective November 1, 1999, MichCon's ANR capacity reduces to 285 MMcf/d. The capacity reduction results in roughly $13 million in annual cost savings. ANR capacity delivers 117.5 MMcf/d of supply sourced in the Gulf, 117.5 MMcf/d sourced in the Midcontinent and 50 MMcf/d is Canadian supply. Viking transports 50 MMcf/d of Canadian supply to the ANR system for delivery to MichCon and PEPL transports two 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. 5 10 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, generally, are at the lowest levels. The use of this storage capacity also allows MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline charges during the winter months. During 1998, MichCon's maximum one-day sendout exceeded 2.1 Bcf, of which approximately 68% came from its underground storage fields. MichCon's gas distribution system has a maximum daily sendout capability of 2.8 Bcf, with the capacity to supply nearly 70% from underground storage. REGULATION AND RATES MichCon is subject to the jurisdiction of the MPSC as to various phases of its operations, including gas sales and transportation rates, service and accounting. MichCon is also 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, 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 price component of MichCon's sales rates at $2.95 per Mcf for the three-year period beginning on January 1, 1999. Prior to January 1999, MichCon did not generate any earnings nor generally incur any unrecovered costs on the gas supply portion of its operations. However, under this plan, changes in cost of gas will directly impact earnings. As part of its gas acquisition strategy, MichCon has entered into firm-price contracts for a substantial portion of its expected gas supply requirements for the next three years. These contracts, coupled with the use of MichCon's storage facilities, will substantially mitigate risks from winter price and volume fluctuations. Also beginning in 1999, the plan established an income sharing mechanism that will allow customers to share in profits if actual utility return on equity exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing and affirmed its approval of the plan. Various parties have appealed the MPSC's decision to the Michigan Court of Appeals. While management believes that the order will be upheld based upon applicable Michigan law, there can be no assurance as to the outcome. GENERAL RATE PROCEEDINGS: MichCon received authorization to defer manufactured gas plant (MGP) investigation and remediation costs in excess of the $11.7 million previously reserved by MichCon. The remaining balance of this initial reserve at December 31, 1998 is approximately $0.1 million. Any excess costs are to be deferred and amortized over a 10-year period beginning in the year subsequent to the year environmental investigation and remediation costs are paid. The recovery of any remediation costs incurred will be reviewed in a future rate case. MichCon filed an application with the MPSC in October 1996 requesting authority to decrease depreciation rates from an average rate of 4.1% to 3.5%. In December 1997, the MPSC issued an order approving a reduction in 6 11 annual depreciation costs by more than $16 million. While the Michigan Attorney General has appealed the depreciation order, management believes the MPSC order approving the lower depreciation rates without a corresponding gas rate reduction will be upheld. GAS COST RECOVERY(GCR): Prior to January 1, 1999, the GCR process allowed MichCon to recover its cost of gas sold if the MPSC determined that such costs were reasonable and prudent. As previously discussed, beginning January 1, 1999, the MichCon plan suspends the GCR mechanism and fixes the gas commodity component of MichCon's sales rate at $2.95 per Mcf for three years. The GCR process included an annual Gas Supply and Cost Review, in which the MPSC approved maximum monthly GCR factors. A subsequent annual GCR reconciliation proceeding provided a review of gas costs incurred during the year, determined whether approved gas costs had been overcollected or undercollected and, as a result, whether a refund or surcharge, including interest, was required to be returned to or collected from GCR customers. In September 1998, a settlement regarding MichCon's 1997 GCR Reconciliation Case was approved by the MPSC indicating a net underrecovery of approximately $13 million, including interest. In April 1998, the MPSC issued an order in MichCon's 1998 GCR Plan Case approving a $3.20 per Mcf maximum GCR factor including the net underrecovery for 1997 referred to above. MichCon's 1998 GCR overrecovery is approximately $15 million, including interest of $2.3 million. Pursuant to the terms of the plan that approved suspension of the GCR clause, MichCon will refund the overrecovery through surcharge credits during January through March 1999. In February 1997, MichCon filed its 1996 GCR reconciliation case indicating a net underrecovery of approximately $28 million, including interest. The total 1996 underrecovery was rolled into MichCon's 1997 GCR cost recovery. In September 1997, the MPSC issued an order finding that all of MichCon's 1996 gas costs were reasonable and prudent. FERC RATE MATTERS: In February 1998, FERC approved a settlement agreement in an ANR rate case entitling MichCon to refunds totaling $9.4 million. In April 1998, MichCon received $5.5 million relating to transportation services provided by ANR to MichCon. In June 1998, MichCon received the remaining refund, which was reflected as a reduction to MichCon's cost of gas. ENVIRONMENTAL MATTERS Prior to the construction of major natural gas pipelines, gas for heating and other uses was manufactured from processes involving coal, coke or oil. MichCon owns, or previously owned, 16 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 (EPA). MichCon is involved in an administrative proceeding before the EPA regarding one of the former MGP sites. MichCon has executed an order with the EPA, pursuant to which MichCon is legally obligated to investigate and remediate the MGP site. MichCon is remediating four 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, MichCon 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. 7 12 MichCon 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, MichCon accrued an additional liability and a corresponding regulatory asset of $32 million during 1995. MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon 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 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, MichCon spent $1.6 million, $0.8 million, and $0.9 million, respectively, investigating and remediating these former MGP sites. At December 31, 1998, the reserve balance was $32.1 million, of which $0.1 million was classified as current. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and, therefore, have an effect on MichCon's financial position and cash flows. However, management believes that insurance coverage and the cost deferral and rate recovery mechanism approved by the MPSC will prevent environmental costs from having a material adverse impact on MichCon's results of operations. In 1998, MichCon received written notification from ANR, alleging that MichCon has responsibility for a portion of the costs associated with responding to environmental conditions present at a natural gas storage field in Michigan currently owned and operated by an affiliate of ANR. At least some portion of the natural gas storage field was formerly owned by MichCon. MichCon is evaluating ANR's allegations to determine whether and to what extent, if any, it may have legal responsibility for these costs. Management does not believe that this matter will have a material impact on MCN's financial statements. FRANCHISES MichCon operates in more than 530 cities, villages and townships under franchises or permits that typically are revocable at will and have a 30-year maximum duration. In 1993, MichCon began a structured process to renew or re-establish formal franchises in 233 municipalities. During the period between January 1994 and December 1998, an additional 184 franchises expired. To date, 391 franchises have been renewed, including nine renewed in 1998 that account for gas sales volumes of approximately 115 MMcf annually. Additionally, one new franchise was acquired. There were no franchises lost during 1998. As for the 26 franchises that are currently expired, MichCon's gas distribution systems are rightfully occupying the streets with the consent or acquiescence of the municipalities. While MichCon could be ordered by any municipality in which its franchise has expired to remove its property, it could lose ownership only by its consent and the payment of an agreed upon price, or by condemnation and the payment of the fair value of such property. Should any of these municipalities seek to terminate MichCon's operations therein and substitute another gas utility operation, publicly or privately owned, the municipality must either (i) acquire and operate MichCon's system, (ii) construct a new system or (iii) grant a franchise to another privately owned utility to construct or acquire its own distribution system. ITEM 2. PROPERTIES 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 8 13 1,202,722 active meters. MichCon owns 2,604 miles of transmission and production lines that deliver natural gas to the distribution districts and interconnect its storage fields with the sources of supply and the market areas. MichCon also owns properties relating to four underground storage fields with an aggregate storage capacity of approximately 124 Bcf. Additionally, MichCon owns district office buildings, service buildings and gas receiving and metering stations. In January 1998, MichCon purchased its principal office building in Detroit, The Guardian Building, ending its long-term capital lease obligation. MichCon occupies its principal office building in Grand Rapids under a long-term lease. Portions of these buildings are subleased to affiliates and others. Most of MichCon's properties are held in fee, by easement, or under lease agreements expiring at various dates to 2006, with renewal options extending beyond that date. The principal plants and properties of MichCon are held subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under which MichCon's First Mortgage Bonds are issued. Some existing properties are being fully utilized and new properties are being added to meet the requirements of expansion into new areas. MichCon's capital expenditures for 1998 totaled $153.5 million and for 1999 are anticipated to be approximately $132 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. ITEM 3. LEGAL PROCEEDINGS In addition to the regulatory proceedings and other matters described in Item 1, "Business," MichCon also is involved in a number of lawsuits and administrative proceedings in the ordinary course of business with respect to taxes, environmental matters, contracts, personal injury, property damage claims and other matters. ENVIRONMENTAL In 1994, MichCon received a general notice of liability letter from the EPA stating that it was one of two potentially responsible parties at the Lower Ecorse Creek Superfund site in Wyandotte, Michigan. The EPA requested that MichCon conduct a remedial investigation and feasibility the 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 the responsible for contamination discovered at that site. MichCon informed the EPA of this belief and did not undertake the requested activities. In September 1996, the EPA sent MichCon a second general notice of liability letter for the site and demanded reimbursement of approximately $2.3 million in past costs, plus interest. The EPA then issued MichCon and the other potentially responsible party a unilateral administrative order under section 106 of the Comprehensive Environmental Response Compensation and Liability Act to implement the remedy. The EPA estimates the cost of the remedy to be approximately $650,000. MichCon again reviewed the EPA's bases for determining that it is a potentially responsible party and concluded again that it was not responsible for contamination discovered at that site and informed the EPA of its decision. The EPA has not taken any subsequent action against MichCon. The EPA may sue MichCon to force compliance with the order or may implement the remedy and then sue MichCon for recovery of all incurred costs. If the EPA institutes and prevails in such a suit and if the court determines that MichCon did not have sufficient cause 9 14 to comply with the order, the court may impose civil penalties and punitive damages. Management believes that MichCon was not responsible for contamination at the site and has sufficient cause not to comply with this order and that the resolution of this matter will not have a material adverse effect on MichCon's financial statements. ENERGY CONSERVATION PROGRAMS In July 1998, the Wayne County Michigan Circuit Court approved a settlement of two class action lawsuits in relation to a discontinued energy conservation program. There were 46,000 class members. The notice of settlement was sent in June 1998 to the class members. Terms of the settlement included capped co-payments for the repair of chimney damages or the installation of a chimney liner and a reduced price for a carbon monoxide detector purchased from MichCon. The request for reimbursement period ended on October 9, 1998, at which time only 30 class members participated in the settlement. Claims totaling $3,105 were paid out in November 1998. MichCon is continuing its lawsuit against certain of the manufacturers, contractors and installers of the plaintiffs' furnaces. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the 10,300,000 issued and outstanding shares of common stock of MichCon, par value $1 per share, are indirectly owned by MCN, and constitute 100% of the voting securities of MichCon. Therefore, no market exists for MichCon's common stock. On January 31, 1996, MichCon called for redemption the remaining 104,732 shares of its redeemable cumulative preferred stock. MichCon paid cash dividends of $46.1 million in 1998, $40.0 million in 1997 and $11.3 million in 1996 on its common stock. 10 15 ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
Selected Financial Data 1998 1997 1996 1995 1994 - --------------------------------------------- ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) INCOME AVAILABLE FOR COMMON STOCK ........... $ 76,976 $ 79,020 $ 79,824 $ 71,488 $ 59,387 =========== =========== =========== =========== =========== Cash Dividends Declared on Common Stock ..... $ 46,084 $ 40,000 $ 11,263 $ 6,500 $ 8,500 =========== =========== =========== =========== =========== RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY...................................... 12.2% 13.3% 14.7% 15.8% 15.2% =========== =========== =========== =========== =========== PROPERTY, PLANT AND EQUIPMENT ............... $ 2,889,020 $ 2,790,352 $ 2,668,294 $ 2,413,120 $ 2,189,150 Less - accumulated depreciation and depletion................................... 1,396,940 1,322,392 1,243,060 1,151,160 1,071,588 ----------- ----------- ----------- ----------- ----------- Net property, plant and equipment ........... $ 1,492,080 $ 1,467,960 $ 1,425,234 $ 1,261,960 $ 1,117,562 =========== =========== =========== =========== =========== TOTAL ASSETS ................................ $ 2,172,525 $ 2,136,336 $ 2,058,344 $ 1,798,493 $ 1,571,910 =========== =========== =========== =========== =========== CAPITAL EXPENDITURES ........................ $ 153,475 $ 155,208 $ 212,668 $ 235,767 $ 145,421 =========== =========== =========== =========== =========== CAPITALIZATION Long-term debt .............................. $ 615,419 $ 611,763 $ 536,561 $ 501,396 $ 431,870 Long-term capital lease obligations ......... 4,416 5,344 13,757 15,168 16,459 Redeemable cumulative preferred stock ....... -- -- -- -- 2,618 Common shareholder's equity ................. 646,843 616,024 577,004 489,821 417,833 ----------- ----------- ----------- ----------- ----------- Total capitalization ........................ $ 1,266,678 $ 1,233,131 $ 1,127,322 $ 1,006,385 $ 868,780 =========== =========== =========== =========== =========== SOURCES OF OPERATING REVENUES Gas sales ................................... $ 853,463 $ 1,079,530 $ 1,058,499 $ 896,707 $ 954,537 Application of (provision for) refunds-net .. (29,717) (16,736) 27,346 20,473 223 End user transportation ..................... 82,016 84,516 82,210 80,360 76,228 Intermediate transportation ................. 63,218 55,221 48,570 31,913 28,745 Storage services ............................ 7,243 7,630 6,956 8,857 8,054 Conservation and other assistance programs .. -- (2,914) (2,483) 14,499 18,716 Other ....................................... 57,435 46,432 37,687 28,004 25,175 ----------- ----------- ----------- ----------- ----------- Total operating revenues .................... $ 1,033,658 $ 1,253,679 $ 1,258,785 $ 1,080,813 $ 1,111,678 =========== =========== =========== =========== =========== DISPOSITION OF GAS (MMcf) Gas sales ................................... 168,906 205,760 217,672 206,951 201,423 End user transportation ..................... 140,051 144,963 146,662 145,288 139,800 Intermediate transportation ................. 537,532 586,496 527,510 341,550 303,617 ----------- ----------- ----------- ----------- ----------- 846,489 937,219 891,844 693,789 644,840 Company use and lost gas .................... 4,811 3,896 5,746 2,990 2,239 ----------- ----------- ----------- ----------- ----------- Total disposition of gas .................... 851,300 941,115 897,590 696,779 647,079 =========== =========== =========== =========== =========== EFFECT OF WEATHER Degree days ................................. 5,471 6,830 7,171 6,777 6,489 Percent colder (warmer) than normal ......... (19.3)% .8 % 5.4 % .3 % (4.2)% Increase (decrease) from normal in: Gas markets (MMcf) ........................ (40,272) 589 10,909 1,488 (4,353) Net income ................................ $ (35,314) $ 467 $ 9,886 $ 1,415 $ (3,984) UTILITY CUSTOMERS Residential ................................. 1,104,033 1,092,334 1,087,450 1,077,668 1,061,300 Total ....................................... 1,190,508 1,178,543 1,169,690 1,159,140 1,141,463 EMPLOYEES ................................... 2,724 2,867 3,062 3,128 3,273
11 16 ITEM 7. MANAGEMENT DISCUSSION & ANALYSIS MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS MichCon's earnings for 1998 were $77.0 million, a decrease of $2.0 million from 1997. Results for 1998 include an unusual charge which reduced earnings by $11.2 million. As subsequently discussed, the unusual charge represents the write-down of certain gas gathering properties. Excluding the unusual charge, MichCon had 1998 earnings of $88.2 million, an improvement of $9.2 million over 1997. Earnings for 1997 were $79.0 million, representing a slight decrease from 1996. Earnings comparisons were impacted by variations in weather and cost-saving initiatives resulting in significantly lower operating costs. The cost-saving initiatives allowed MichCon to continue its record of solid financial performance. - --------------------------------------------------------------------------------
EARNINGS COMPONENTS (IN MILLIONS) --------------------------------------------------- Comparing 1998 To 1997 Comparing 1997 To 1996 ---------------------- ---------------------- Dollar Percent Dollar Percent Change Change Change Change -------- -------- -------- -------- Operating Revenues .............. $ (220.0) (17.6)% $ (5.1) (.4)% Cost of Gas ..................... (180.7) (28.6) (4.4) (.7) Gross Margin .................... (39.3) (6.3) (.7) (.1) Operation and Maintenance ....... (30.2) (10.7) (11.6) (4.0) Depreciation and Depletion ...... (10.8) (10.4) 5.6 5.7 Property and Other Taxes ........ (5.3) (8.7) (1.0) (1.7) Property Write-down ............. 24.8 -- -- -- Other Income and Deductions ..... (5.9) (11.8) 3.0 6.4 Income Tax Provision ............ (9.8) (21.6) 4.2 10.1 Net Income ...................... (2.0) (2.6) (.8) (1.0)
- -------------------------------------------------------------------------------- GROSS MARGIN Gross margin (operating revenues less cost of gas) decreased $39.3 million and $.7 million in 1998 and 1997, respectively, reflecting changes in gas sales and end user transportation deliveries due primarily to abnormally warm weather in 1998 and significantly colder weather in 1996. Additionally, gross margins in 1998 and 1997 were favorably affected by the continued growth in intermediate transportation services as well as increased other operating revenues resulting from providing gas-related services.
- ------------------------------------------------------------------------------------------- EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS 1998 1997 1996 -------- -------- -------- 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 - ---------------------------------------------------------------------------------------------
12 17 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) GAS SALES AND END USER TRANSPORTATION revenues in total decreased $241.5 million in 1998 and $20.7 million in 1997. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that decreased by 41.8 Bcf to 309.0 Bcf in 1998 and decreased by 13.6 Bcf to 350.8 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 was also affected by 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, MichCon'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 and contract with MichCon to transport the gas to their facilities. MichCon continues to enter into multi-year, competitively priced transportation agreements with large-volume users to maintain these gas markets over the long term. - --------------------------------------------------------------------------------
1998 1997 1996 -------- -------- -------- Operating Revenues (in Millions) Gas Sales ..................... $ 823.8 $1,062.8 $1,085.8 End User Transportation ....... 82.0 84.5 82.2 Intermediate Transportation ... 63.2 55.2 48.6 Other ......................... 64.7 51.2 42.2 -------- -------- -------- $1,033.7 $1,253.7 $1,258.8 ======== ======== ======== Gas Markets (Bcf) Gas Sales ..................... 168.9 205.8 217.7 End User Transportation ....... 140.1 145.0 146.7 Intermediate Transportation ... 537.5 586.4 527.5 -------- -------- -------- 846.5 937.2 891.9 ======== ======== ========
- -------------------------------------------------------------------------------- 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 48.9 Bcf. Intermediate transportation deliveries increased in 1997 by 58.9 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 were affected by 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, MichCon 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. 13 18 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Although intermediate transportation volumes are a significant part of 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 $13.5 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 cost 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 $180.7 million in 1998 and by $4.4 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 $30.2 million in 1998 and $11.6 million 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. MichCon 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 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 employees has declined by 404 or 13%, while the number of customers has increased by over 30,000 or 3%. MichCon'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. MichCon'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. MichCon received $13.4 million of these funds in 1998, $.7 million more than in 1997. Home Heating Credits assisted 73,000 MichCon 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 MichCon's uncollectible gas accounts expense. 14 19 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) DEPRECIATION AND DEPLETION decreased by $10.8 million in 1998 and increased by $5.6 million in 1997. The decrease in 1998 resulted from lower depreciation rates for 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 $153.5 million in 1998 and $155.2 million in 1997. PROPERTY AND OTHER TAXES decreased $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 MichCon 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 certain gas gathering properties in northern Michigan (Note 2). As a result of the need to divert certain untreated gas away from the gathering system, a new gas reserve analysis was performed. 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. OTHER INCOME AND DEDUCTIONS Other income and deductions decreased $5.9 million in 1998 and increased $3.0 million in 1997. Other income and deductions for both 1998 and 1997 include 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, nonutility subsidiaries of MichCon borrowed $40 million in 1997 under a nonrecourse credit agreement. Accordingly, interest expense increased $2.8 million in 1998 and $5.5 million in 1997. Offsetting the impact of higher interest costs in 1998 was a change in minority interest reflecting joint venture partners' share of the write-down of certain gas gathering properties (Note 2). 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. MichCon owns, or previously owned, 16 such former manufactured gas plant (MGP) sites. During the mid-1980s, MichCon conducted preliminary environmental investigations at 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). 15 20 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) MichCon is involved in an administrative proceeding before the EPA regarding one of the former MGP sites. MichCon has executed an order with the EPA, pursuant to which MichCon is legally obligated to investigate and remediate the MGP site. MichCon is remediating four 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, MichCon 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. MichCon 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, MichCon accrued an additional liability and a corresponding regulatory asset of $32 million during 1995. MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon 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 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, MichCon 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 $32.1 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 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 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 MichCon's financial statements. 16 21 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES MichCon's cash flow from operating activities increased $30.7 million in 1998 and $85.6 million in 1997. The increase for both years reflects lower working capital requirements and higher earnings after adjusting for noncash items (depreciation, the unusual charge and deferred taxes) as compared to prior years. FINANCING ACTIVITIES MichCon 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, MichCon'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, MichCon 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 5). Proceeds from these issuances were used to retire first mortgage bonds, fund capital expenditures and for general corporate purposes. Also during 1998, MichCon redeemed through a tender offer $89.7 million and repaid $20 million of first mortgage bonds (Note 5). 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. 17 22 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) The following table sets forth the ratings for securities issued by MichCon:
- ---------------------------------------------------------------------------------------- Standard Duff & & Poors Moody's Phelp's Fitch -------- ------- ------- ----- Commercial paper ....................... A2 P1 D1 F1 First mortgage bonds ................... A- A2 A+ A - ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES MichCon's capital expenditures totaled $153.5 million during 1998, a decrease of $1.7 million from 1997. Capital expenditures primarily represent the construction of new distribution lines to attach new customers, new computer systems and improvements to existing storage, distribution and transmission systems. Capital expenditures for 1999 are expected to total $132 million. In December 1998, MichCon invested $28.2 million in a Grantor Trust to meet future cash flow obligations related to certain postretirement health care costs. It is management's opinion that MichCon will have sufficient capital resources, both internal and external to meet anticipated capital requirements. OUTLOOK MichCon's strategy is to expand its role as the preferred provider of natural gas and high-value energy services within Michigan. Accordingly, MichCon'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 MichCon'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. MichCon expects to provide natural gas to approximately 13,000 new customers in 1999. MichCon'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. MichCon 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 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. MichCon 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. 18 23 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) MichCon plans to capitalize on opportunities resulting from the gas industry restructuring by implementing its 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. As described in Note 7a to the consolidated financial statements, MichCon 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 MichCon 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 MichCon 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 $65.8 million. Factors that could give rise to the discontinuance of SFAS No. 71 include (1) increasing competition that restricts MichCon'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. 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 MichCon's operations and business processes. The effects of the Year 2000 issue could be exacerbated as a result of companies' dependence on partners, operators, suppliers and government agencies. Plan and State of Readiness - MichCon, aware of the Year 2000 potential impact, initiated a business systems replacement program in 1995. Additionally, MichCon 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 Chairman and Board of Directors of MCN 19 24 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Energy Group Inc., MichCon's parent company. MichCon has also retained the services of expert consultants to evaluate its Year 2000 program and to independently assess and validate its processes. MichCon has implemented a four-phase Year 2000 approach consisting of: i) inventory - identification of the components of MichCon'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. MichCon 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. MichCon's business systems primarily consist of general ledger, payroll, customer billing and inventory control systems and their related hardware. MichCon'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: - --------------------------------------------------------------------------------
Inventory Assessment Remediation Testing ---------- ---------- ----------- ---------- 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%
- -------------------------------------------------------------------------------- MichCon also has visited key 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, MichCon's operations may be adversely affected. The majority of MichCon's key operators and suppliers have represented to MichCon that they have completed their Year 2000 inventory and assessment phases. MichCon is continuing to monitor the progress of these key 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 MichCon's results of operation, liquidity or financial condition. The total costs are estimated to be between $3 million and $4 million, of which approximately $2.3 million was incurred through December 1998. The anticipated costs are not higher due in part to the ongoing replacement of significant older systems, particularly MichCon's customer information system. MichCon 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. 20 25 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Risk and Contingency Planning - MichCon anticipates a smooth transition to the Year 2000. However, the failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain business activities and operations such as: i) delivery of gas to customers; ii) control and operation of the distribution system by electronic devices; iii) communication with customers for purposes of service calls or inquiries; and iv) timely billing and collection. The risk and impact of such failures is largely dependent on critical vendors and the external infrastructure that includes telecommunications providers and gas suppliers. 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 MichCon'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 operators, suppliers and government agencies, MichCon cannot certify that it will be unaffected by Year 2000 complications. MichCon 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 MichCon's customers and employees, the following two mission-critical processes were identified: gas supply and distribution, and leak management emergency response. While MichCon believes it will be able to remediate and test all internal systems that support these processes, it fully recognizes its dependence on operators, suppliers and government agencies. In order to reduce its Year 2000 risk, MichCon is developing contingency plans for mission-critical processes in the event of a Year 2000 complication. Through failure scenario identification, MichCon'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 MichCon works with operators, suppliers and governmental agencies. MARKET RISK INFORMATION MichCon's primary market risk arises from fluctuations in natural gas prices and interest rates. MichCon manages natural gas price and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. If MichCon did not use derivative instruments, its exposure to such risk would be higher. A further discussion of MichCon's risk management activities is included in Note 10 to the Consolidated Financial Statements. NATURAL GAS PRICE RISK MichCon closely monitors and manages its exposure to natural gas price risk through a variety of risk management techniques. Natural gas swap agreements are used to manage MichCon's exposure to the risk of market price fluctuations on natural gas purchase contracts. A sensitivity analysis model was used to calculate the fair values of MichCon's natural gas 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 natural gas swap agreements. 21 26 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) INTEREST RATE RISK MichCon is subject to interest rate risk in connection with the issuance of variable- and fixed-rate debt. In order to manage interest costs, MichCon 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. MichCon'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 MichCon's debt and interest rate swaps, utilizing applicable forward interest rates in effect at December 31, 1998. The sensitivity analysis involved increasing and 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:
AMOUNT UNFAVORABLE RISK (IN MILLIONS) CHANGE IN ------------- ----------- Commodity Price Sensitive:* Swaps - pay fixed/receive variable............................... $ 3.8 Fair Value Interest Rate Sensitive: Debt - fixed rate................................................ $ 66.0 Fair Value - variable rate............................................. $ .6 Cash Flow Swaps - pay fixed/receive variable............................... $ .2 Fair Value - pay variable/receive fixed............................... $ 1.8 Fair Value
*Includes only the risk related to the swaps that serve as hedges and does not include the related underlying hedged item. NEW ACCOUNTING PRONOUNCEMENTS COMPUTER SOFTWARE In March 1998, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of internal-use software and specifically identifies which costs should be capitalized and which costs should be expensed. The statement is effective for fiscal years beginning after December 15, 1998. Management does not expect the SOP to have a material impact on MichCon'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 organizational and start-up 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 MichCon's financial statements. 22 27 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (CONCLUDED) 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. MichCon manages gas price risk and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. The effects of SFAS No. 133 on MichCon's financial statements are subject to fluctuations in the market value of hedging contracts, which are, in turn, affected by variations in gas prices and in interest rates. Management cannot quantify the effects of adopting SFAS No. 133 at this time. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: (i) the effects of weather and other natural phenomenon; (ii) increased competition from other energy suppliers as well as alternative forms of energy; (iii) the capital intensive nature of MichCon's business; (iv) economic climate and growth in the geographic areas in which MichCon does business; (v) the uncertainty of gas reserve estimates; (vi) the timing and extent of changes in commodity prices for natural gas, electricity and crude oil; (vii) conditions of capital markets and equity markets; (viii) the timing, nature and impact of Year 2000 activities; and (ix) the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance and authorized rates. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk is contained in Item 7. Management Discussion and Analysis - Market Risk Information, page 21 of this Report. 23 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1998 1997 1996 - --------------------------------------------- ----------- ----------- ----------- (Thousands of Dollars) Note(s) OPERATING REVENUES Gas Sales ................................. $ 823,746 $ 1,062,794 $ 1,085,845 Transportation and storage services ....... 12 152,477 147,367 137,737 Other ..................................... 12 57,435 43,518 35,203 ----------- ----------- ----------- Total Operating Revenues ................ 1,033,658 1,253,679 1,258,785 ----------- ----------- ----------- OPERATING EXPENSES Cost of gas ............................... 451,529 632,229 636,594 Operation and maintenance ................. 12 252,397 282,640 294,281 Depreciation and depletion ................ 92,883 103,703 98,147 Property and other taxes .................. 55,438 60,744 61,762 Property write-down ....................... 2 24,800 -- -- ----------- ----------- ----------- Total operating expenses ................ 877,047 1,079,316 1,090,784 ----------- ----------- ----------- OPERATING INCOME ............................ 156,611 174,363 168,001 ----------- ----------- ----------- OTHER INCOME AND (DEDUCTIONS) Interest income ........................... 12 5,688 4,659 3,900 Interest on long-term debt ................ (44,884) (45,526) (40,703) Other interest expense .................... (12,113) (8,664) (8,012) Minority interest ......................... 2 5,727 (1,882) (988) Equity in earnings - joint ventures ....... 1,946 1,199 886 Other ..................................... (182) 536 (1,756) ----------- ----------- ----------- Total other income and (deductions) ..... (43,818) (49,678) (46,673) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES .................. 112,793 124,685 121,328 INCOME TAX PROVISION ........................ 13 35,817 45,665 41,486 ----------- ----------- ----------- NET INCOME .................................. 76,976 79,020 79,842 DIVIDENDS ON PREFERRED STOCK ................ -- -- 18 ----------- ----------- ----------- NET INCOME AVAILABLE FOR COMMON STOCK ....... $ 76,976 $ 79,020 $ 79,824 =========== =========== ===========
The notes to the consolidated financial statements are an integral part of this statement. 24 29 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31 1998 1997 - --------------------------------------------------------------------- ---------- ---------- (Thousands of Dollars) Note(s) ASSETS CURRENT ASSETS Cash and cash equivalents. ...................................... $ 6,603 $ 14,353 Accounts receivable, less allowance for doubtful accounts of $8,928 and $15,015 respectively ............................... 142,818 195,662 Accrued unbilled revenues ....................................... 86,767 91,896 Gas in inventory ................................................ 3 56,969 40,201 Property taxes assessed applicable to future periods ............ 71,165 64,827 Accrued gas cost recovery revenues .............................. 7a -- 12,862 Other ........................................................... 30,169 33,361 ---------- ---------- 394,491 453,162 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS Investment in and advances to joint ventures .................... 19,343 19,643 Long-term investments ........................................... 9c 65,556 35,110 Deferred environmental costs .................................... 6b,7a 28,169 27,699 Prepaid benefit costs ........................................... 9 113,879 85,790 Other 59,007 46,972 ---------- ---------- 285,954 215,214 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, AT COST ............................ 8 2,889,020 2,790,352 Less - Accumulated depreciation and depletion ................... 1,396,940 1,322,392 ---------- ---------- 1,492,080 1,467,960 ---------- ---------- $2,172,525 $2,136,336 ========== ========== LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Accounts payable ................................................ $ 98,891 $ 130,267 Notes payable ................................................... 4 221,169 241,691 Current portion of long-term debt and capital lease obligations . 5a,8 58,288 34,956 Federal income, property and other taxes payable ................ 61,059 78,630 Deferred gas cost recovery revenues ............................. 7a 14,980 -- Exchange gas payable ............................................ 25,337 2,063 Customer deposits ............................................... 18,769 16,363 Other ........................................................... 67,222 65,717 ---------- ---------- 565,715 569,687 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes ........................................... 13 88,567 83,905 Unamortized investment tax credit ............................... 29,784 32,745 Tax benefits amortizable to customers ........................... 7a 130,120 122,922 Accrued environmental costs ..................................... 6b 32,000 32,000 Minority interest ............................................... 2 8,201 17,283 Other ........................................................... 51,460 44,663 ---------- ---------- 340,132 333,518 ---------- ---------- COMMITMENTS AND CONTINGENCIES 6,8 CAPITALIZATION (SEE ACCOMPANYING STATEMENT) Long-term debt, including capital lease obligations ............. 5a,8,10 619,835 617,107 Common shareholder's equity ..................................... 646,843 616,024 ---------- ---------- 1,266,678 1,233,131 ---------- ---------- $2,172,525 $2,136,336 ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 25 30 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------- --------- --------- --------- (Thousands of Dollars) Note(s) CASH FLOW FROM OPERATING ACTIVITIES Net income ................................................... $ 76,976 $ 79,020 $ 79,842 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation and depletion Per statement of income ................................ 92,883 103,703 98,147 Charged to other accounts 7,946 7,663 7,579 Property write-down , net of taxes and minority interest................................................ 2 11,200 -- -- Deferred income taxes - current .......................... (961) (3,130) 4,963 Deferred income taxes and investment tax credit, net ..... 15,005 10,853 6,999 Other .................................................... (4,430) (679) (2,629) Changes in assets and liabilities, exclusive of changes shown separately ....................................... 19,299 (10,167) (93,207) --------- --------- --------- Net cash provided from operating activities .......... 217,918 187,263 101,694 --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Notes payable, net ........................................... 4 (20,522) (23,435) 68,491 Issuance of long-term debt ................................... 5a 153,052 124,051 69,645 Cash dividend paid: Common Stock .............................................. (46,084) (40,000) (11,263) Preferred Stock ........................................... -- -- (54) Equity Investment ............................................ -- -- 1,614 Retirement of long-term debt ................................. 5a (126,292) (76,854) (6,384) --------- --------- --------- Net cash provided from (used for) financing activities ............................... (39,846) (16,238) 122,049 --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Notes receivable - affiliate, net ............................ 12 (3,249) -- -- Capital expenditures ......................................... (153,475) (155,208) (212,668) Other, net ................................................... (29,098) (11,474) (9,534) --------- --------- --------- Net cash used for investing activities ............... (185,822) (166,682) (222,202) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (7,750) 4,343 1,541 CASH AND CASH EQUIVALENTS, JANUARY 1 ........................... 14,353 10,010 8,469 --------- --------- --------- CASH AND CASH EQUIVALENTS, DECEMBER 31 ......................... $ 6,603 $ 14,353 $ 10,010 ========= ========= ========= CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Accounts receivable - net .................................. $ 50,174 $ (43,510) $ 7,807 Accrued/deferred gas cost recovery revenues ................ 27,843 14,810 (28,250) Accrued unbilled revenues .................................. 5,129 15,481 (16,243) Gas in inventory ........................................... (16,768) 28,008 (27,719) Property taxes assessed applicable to future periods ....... (6,338) (4,235) (3,643) Accounts payable ........................................... (30,617) (585) 21,401 Federal income, property and other taxes payable ........... (17,602) (6,228) (2,424) Exchange gas payable ....................................... 23,274 2,063 -- Deferred and prepaid benefit costs ......................... (28,089) (16,620) (44,021) Other current assets and liabilities ....................... 11,191 (2,353) 6,312 Deferred assets and liabilities ............................ 1,102 3,002 (6,427) --------- --------- --------- $ 19,299 $ (10,167) $ (93,207) ========= ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest, net of amounts capitalized ...................... $ 56,250 $ 52,172 $ 48,254 ========= ========= ========= Federal income taxes ...................................... $ 27,090 $ 46,984 $ 31,927 ========= ========= ========= Noncash financing activities: Transfer of pipeline net assets from MCN .................. $ -- $ -- $ 17,008 ========= ========= =========
The notes to the consolidated financial statements are an integral part of this statement. 26 31 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------- -------------- -------------- -------------- (Thousands of dollars) Note(s) LONG-TERM DEBT, EXCLUDING CURRENT REQUIREMENTS 5A FIRST MORTGAGE BONDS, INTEREST PAYABLE SEMI-ANNUALLY 6.3 % series due 1998 .............................................. $ -- $ -- $ 20,000 6.51 % series due 1999 ............................................. -- 30,000 30,000 5.75 % series due 2001 ............................................. 40,000 60,000 60,000 8 % series due 2002 ................................................ 17,314 70,000 70,000 6.72 % series due 2003 ............................................. 4,150 4,150 4,150 6.8 % series due 2003 .............................................. 15,850 15,850 15,850 9.125 % series due 2004 ............................................ 18,000 55,000 55,000 7.15 % series due 2006 ............................................. 40,000 40,000 40,000 7.21 % series due 2007 ............................................. 30,000 30,000 -- 7.06 % series due 2012 ............................................. 40,000 40,000 -- 8.25 % series due 2014 ............................................. 80,000 80,000 80,000 7.6 % series due 2017 .............................................. 14,980 14,990 -- 9.5 % series due 2019 .............................................. -- -- 5,000 7.5 % series due 2020 .............................................. 29,641 29,641 29,812 9.5 % series due 2021 .............................................. 40,000 40,000 40,000 6.75 % series due 2023 ............................................. 16,617 17,177 17,782 7 % series due 2025 ................................................ 40,000 40,000 40,000 Unamortized discount ............................................... (1,130) (1,235) (1,349) Remarketable securities, interest payable semi-annually 6.2 % series due 2038 ............................................. 75,000 -- -- 6.45 % series due 2038 ............................................. 75,000 -- -- Unamortized premium ................................................ 3,871 -- -- Unsecured Notes - 9.750 % series due 2000 ............................ -- -- 12,000 Long-term capital lease obligations .................................. 8 4,416 5,344 13,757 Other long-term debt ................................................. 36,126 46,190 18,316 ---------- ---------- ---------- Total............................................................... 619,835 617,107 550,318 ---------- ---------- ---------- COMMON SHAREHOLDER'S EQUITY COMMON STOCK, PAR VALUE $1 PER SHARE - AUTHORIZED, FOR all periods, 15,100,000 shares; outstanding 10,300,000 shares .... 10,300 10,300 10,300 ---------- ---------- ---------- ADDITIONAL PAID-IN CAPITAL Balance - beginning of period .................................... 230,399 230,399 211,777 Equity investment ................................................ -- -- 18,622 ---------- ---------- ---------- Balance - end of period .......................................... 230,399 230,399 230,399 ---------- ---------- ---------- RETAINED EARNINGS Balance - beginning of period .................................... 375,325 336,305 267,744 Net income ....................................................... 76,976 79,020 79,842 Dividends declared: Common stock ................................................... (46,157) (40,000) (11,263) Preferred stock ................................................ -- -- (18) ---------- ---------- ---------- Balance - end of period .......................................... 406,144 375,325 336,305 ---------- ---------- ---------- Total common shareholder's equity .................................... 646,843 616,024 577,004 ---------- ---------- ---------- Total capitalization ................................................. $1,266,678 $1,233,131 $1,127,322 ========== ========== ==========
The notes to the consolidated financial statements are an integral part of this statement. 27 32 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES COMPANY DESCRIPTION Michigan Consolidated Gas Company (MichCon) is a public utility engaged in the distribution and transmission of natural gas in the state of Michigan. MichCon is subject to the accounting requirements of and rate regulation by the Michigan Public Service Commission (MPSC) with respect to the distribution and intrastate transportation of natural gas. The major services provided by MichCon are gas sales, end user transportation and intermediate transportation. MichCon serves more than 1.2 million residential, commercial and industrial customers. MichCon is not dependent upon any one customer or group of customers. Its principal markets are located in the Detroit, Grand Rapids, Ann Arbor, Traverse City, and Muskegon metropolitan areas. MichCon's non-regulated operations are not material. MichCon is an indirect wholly owned subsidiary of MCN Energy Group Inc. (MCN). 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 MichCon and all of its subsidiaries. Investments in 50% or less owned entities have been accounted for under the equity method because MichCon has significant but not controlling influence over these entities. REVENUES AND COST OF GAS MichCon 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 rates. Beginning in 1999, MichCon implemented a Regulatory Reform Plan, approved by the MPSC. The plan suspends the GCR mechanism and fixes the gas component of MichCon's sales rates for the three-year period beginning January 1, 1999. 28 33 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and includes amounts for labor, materials, overhead, and an allowance for funds used during construction. Upon retirement, the cost of property, plant and equipment and net removal costs are charged to accumulated depreciation. MichCon records depreciation for a major portion of its property, plant and equipment on the basis of straight-line rates prescribed by the MPSC. Unit of production depreciation and depletion is used for certain production and transmission property. Depreciation rates vary by class of property. The ratio of the provision for depreciation to the average cost of depreciable property was 3.5% in 1998, 4.1% in 1997 and 4.4% in 1996. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION MichCon capitalizes an allowance for both debt and equity funds used during construction in the cost of major additions to utility plant. The total amount capitalized was $4,699,000, $3,188,000 and $5,233,000 in 1998, 1997 and 1996, respectively. 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. INCOME TAXES AND INVESTMENT TAX CREDIT Tax Benefits Amortizable to Customers represents the net revenue equivalent of the difference in property-related accumulated deferred income taxes computed in accordance with Statement of Financial Accounting Standards 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 temporary differences reverse. Investment tax credits relating to property placed into service were deferred and are being credited to income over the life of the related property. CONSOLIDATED STATEMENT OF CASH FLOWS For purposes of this statement, MichCon considers all highly liquid investments purchased with a maturity of three months or less, to be cash equivalents. 29 34 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. PROPERTY WRITE-DOWN 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. 3. GAS IN INVENTORY Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31, 1998, the replacement cost exceeded the $56,969,000 LIFO cost by $151,381,000. At December 31, 1997, the replacement cost exceeded the $40,201,000 LIFO cost by $170,240,000. A portion of gas in underground storage used as a pressure base is included in "Property, Plant and Equipment" in the amount of $32,041,000 at December 31, 1998 and $32,493,000 at December 31, 1997. 4. CREDIT FACILITIES AND SHORT-TERM BORROWINGS 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. 5. CAPITALIZATION a. LONG-TERM DEBT 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 the 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. 30 35 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In 1998, MichCon redeemed through a tender offer $37,000,000 of the outstanding $55,000,000 balance of 9.125% 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 the terms of the agreement, certain alternative variable interest rates are available at the borrowers' option during the life of the agreement. Quarterly principal payments commenced in 1997, with a final installment due November 2005. The loan is secured by a pledge of stock of the borrowers and a security interest in certain of their assets. MichCon may be required to support the credit agreement through limited capital contributions to the subsidiaries if certain cash flow and operating targets are not met. At December 31, 1998 and 1997, $29,200,000 and $36,400,000 were outstanding at weighted average interest rates of 5.8% and 6.4%, respectively. MichCon has variable interest rate swap agreements with notional principal amounts aggregating $92,000,000 in connection with its first mortgage bonds. Swap agreements of $40,000,000 through May 2002 have reduced the average cost of the related debt from 7.3% to 6.3% for the year ended December 31, 1998. Swap agreements of $40,000,000 through May 2005 have reduced the average cost of the related debt from 7.1% to 5.9% for the year ended December 31, 1998. Swap agreements of $12,000,000 through April 2000 have reduced the average cost of the related debt from 8.3% to 4.4% for the year ended December 31, 1998. A nonutility subsidiary of MichCon has an interest rate swap agreement on the $14,080,000 outstanding balance of its project loan agreement at December 31, 1998, that effectively fixes the interest rate at 7.5% through February 2003. Substantially all of the net utility properties of MichCon in the approximate amount of $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 $57,360,000 in 1999, $26,960,000 in 2000, $26,560,000 in 2001, $23,674,000 in 2002, and $25,960,000 in 2003. b. CUMULATIVE PREFERRED AND PREFERENCE STOCK MichCon is authorized to issue 7,000,000 shares of $1 per share par value preferred stock and 4,000,000 shares of $1 per share par value preference stock. At December 31, 1998, no issuances of preferred or preference stock were made under these authorizations. 6. COMMITMENTS AND CONTINGENCIES a. GUARANTY 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. 31 36 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. MichCon owns, or previously owned, 16 such former manufactured gas plant (MGP) sites. During the mid-1980s, MichCon conducted preliminary environmental investigations at 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). MichCon is currently involved in an administrative proceeding before the EPA regarding one of the former MGP sites. MichCon has executed an order with the EPA, pursuant to which MichCon is legally obligated to investigate and remediate the MGP site. MichCon is remediating four of the former MGP sites and is 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, MichCon 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. MichCon 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, MichCon accrued an additional liability and a corresponding regulatory asset of $32,000,000 during 1995. MichCon notified more than 40 current and former insurance carriers of the environmental conditions at these former MGP sites. MichCon 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 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, MichCon 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 $32,092,000, of which $92,000 was classified as current. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory 32 37 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 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. Presently, MichCon is evaluating ANR's allegations to determine whether and to what extent, if any, that MichCon may have legal responsibility for these costs. Pending the completion of this evaluation, MichCon has not recognized any liability for this matter. Management does not believe this will have a material impact on MichCon's financial statements. c. COMMITMENTS MichCon 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. MichCon has firm purchase commitments through 2001 for approximately 487 Bcf of gas. MichCon expects that sales, based on normal weather, will approximate its minimum purchase commitments. MichCon has long-term transportation contracts with various pipeline companies expiring on various dates through the year 2011. MichCon is committed to pay demand charges of approximately $53,100,000 during 1999 related to firm transportation agreements. Capital investments for 1999 are expected to approximate $132,000,000 and certain commitments have been made in connection with such capital investments. d. OTHER MichCon 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 MichCon's financial statements. 7. REGULATORY MATTERS a. REGULATORY ASSETS AND LIABILITIES MichCon's operations are subject to the provisions SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result, several regulatory assets and liabilities are recorded in MichCon'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. 33 38 ] MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following regulatory assets and liabilities were reflected in the Consolidated Statement of Financial Position as of December 31: - -------------------------------------------------------------------------------
(in thousands) 1998 1997 -------- -------- Regulatory Assets: Accrued gas cost recovery revenues ............. $ -- $ 12,862 Unamortized loss on retirement of debt ......... 15,548 10,181 Deferred environmental costs (Note 6b) ......... 28,169 27,699 Other .......................................... 196 986 -------- -------- $ 43,913 $ 51,728 ======== ======== Regulatory Liabilities: Deferred gas cost recovery revenues ............ $ 14,980 $ -- Tax benefits amortizable to customers .......... 130,120 122,922 -------- -------- $145,100 $122,922 ======== ========
- ------------------------------------------------------------------------------- MichCon currently has regulatory precedents and orders in effect which 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 MichCon 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 which was no longer probable of recovery or refund. If MichCon 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 $65,800,000. Management believes that 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 by 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. 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 34 39 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS the three-year period beginning on January 1, 1999. Prior to January 1999, MichCon did not generate earnings on the gas commodity portion of its operations. However, under this plan, changes in cost of gas will directly impact earnings. As part of its gas acquisition strategy, MichCon has entered into firm-price contracts for a substantial portion of its expected gas supply requirements for the next three years. These contracts, coupled with the use of MichCon's storage facilities, will substantially mitigate risks from winter price and volume fluctuations. Also beginning in 1999, the plan established an income sharing mechanism that will allow customers to share in profits if actual utility return on equity exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing and affirmed its approval of the plan. Various parties have appealed the MPSC's decision to the Michigan Court of Appeals. While management believes that based upon applicable Michigan law the order will be upheld on appeal, there can be no assurance as to the outcome. 8. CAPITAL AND OPERATING LEASES MichCon 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 building and parking structure are subleased to various tenants. In January 1998, MichCon purchased its home office building, 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 are not significant. Operating lease payments for the years ended December 31, 1998, 1997, and 1996 were $2,050,000, $2,015,000, and $2,239,000, respectively. 9. RETIREMENT BENEFITS AND TRUSTEED ASSETS In 1998, MichCon 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 MichCon participates in separate defined benefit retirement plans, maintained by MCN, for union and nonunion employees. The plans are noncontributory, cover substantially all employees and provide for normal retirement at age 65, but with the option to retire earlier or later under certain conditions. The plans provide pension benefits that are based on each employee's compensation and years of credited service. Currently these plans meet the full funding limitations of the Internal Revenue Code. Accordingly, no contributions for the 1998, 1997 or 1996 plan years were made, and none is expected to be made for the 1999 plan year. 35 40 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Net pension credit for the years ended December 31 includes the following components:
- ------------------------------------------------------------------------------------------ (in Thousands) 1998 1997 1996 -------- -------- -------- Service Cost ................................ $ 9,719 $ 9,406 $ 10,400 Interest Cost ............................... 36,195 34,408 33,262 Expected Return on Plan Assets .............. (71,780) (61,615) (55,765) Amortization of: Net gain ................................. (6,479) (5,177) (1,664) Prior service cost ....................... 1,031 (163) (163) Net transition asset ..................... (4,938) (4,993) (4,993) Special Termination Benefits ................ 5,054 -- -- Settlements ................................. (6,935) (3,250) -- -------- -------- -------- Net Pension Credit .......................... $(38,133) $(31,384) $(18,923) ======== ======== ======== - ------------------------------------------------------------------------------------------
36 41 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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:
- ------------------------------------------------------------------------------------------------------- (in Thousands) 1998 1997 ----------- ----------- Measurement Date October 31 October 31 Accumulated Benefit Obligation at the End of the Period ... $ 441,296 $ 396,265 =========== =========== Projected Benefit Obligation at the Beginning of the Period $ 465,098 $ 430,100 Service Cost .............................................. 9,719 9,406 Interest Cost ............................................. 36,195 34,408 Plan Amendments ........................................... 22,564 -- Actuarial Loss ............................................ 45,200 24,294 Special Termination Benefits .............................. 5,054 -- Settlements Due to Lump Sums .............................. (20,639) (8,490) Regular Benefits .......................................... (28,355) (24,620) ----------- ----------- Projected Benefit Obligation at the End of the Period ..... $ 534,836 $ 465,098 =========== =========== Plan Assets at Fair Value at the Beginning of the Period .. $ 814,548 $ 707,987 Actual Return on Plan Assets .............................. 102,153 138,863 Settlements Due to Lump Sums .............................. (15,956) (5,145) Regular Benefits .......................................... (28,355) (27,157) ----------- ----------- Plan Assets at Fair Value at the End of the Period ........ $ 872,390 $ 814,548 =========== =========== Funded Status of the Plans ................................ $ 337,554 $ 349,450 Unrecognized: Net gain ............................................... (214,328) (237,923) Prior service cost ..................................... 19,298 (1,439) Net transition asset ................................... (28,645) (34,342) ----------- ----------- Prepaid Pension Cost and Total Recognized ................. $ 113,879 $ 75,746 =========== =========== - -------------------------------------------------------------------------------------------------------
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. 37 42 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MichCon also sponsors defined contribution retirement savings plans. Participation in one of these plans is available to substantially all union and nonunion employees. MichCon matches employee contributions up to certain predefined limits based upon salary and years of credited service. The cost of these plans was $4,800,000 in 1998, $5,200,000 in 1997 and $5,300,000 in 1996. b. OTHER POSTRETIREMENT BENEFITS MichCon 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 MichCon. 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 MichCon deferred its 1993 postretirement costs in excess of claims paid (including the amortization of the initial transition obligation) until 1994, when new rates to recover such costs became effective. MichCon's policy is to fund certain trusts to the extent its postretirement benefit costs are recognized in rates. Separate qualified Voluntary Employees' Beneficiary Association (VEBA) trusts exist for union and nonunion employees. Funding to the VEBA trusts totaled $2,000,000, $6,500,000 and $41,600,000 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:
- ------------------------------------------------------------------------------------------------------------------- (in Thousands) 1998 1997 1996 ---------- ---------- ---------- Service Cost ........................... $ 3,699 $ 4,094 $ 4,259 Interest Cost .......................... 16,423 17,430 16,395 Expected Return on Plan Assets ......... (13,482) (11,026) (9,838) Amortization of: Net gain ............................ (5,684) (4,872) (4,307) Net transition obligation ........... 12,702 13,391 13,391 Special Termination Benefits ........... 1,186 -- -- ---------- ---------- ---------- Total Postretirement Cost .............. 14,844 19,017 19,900 Regulatory Adjustment .................. -- 4,863 7,509 ---------- ---------- ---------- Net Postretirement Cost ................ $ 14,844 $ 23,880 $ 27,409 ========== ========== ========== - -------------------------------------------------------------------------------------------------------------------
38 43 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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:
- ---------------------------------------------------------------------------------------------------------------------- (in Thousands) 1998 1997 Measurement Date ---------- ---------- October 31 October 31 Accumulated Postretirement Benefit Obligation at the Beginning of the Period ........ $ 223,124 $ 217,883 Service Cost ........................................................................ 3,699 4,094 Interest Cost ....................................................................... 16,423 17,430 Plan Amendments ..................................................................... (8,269) -- Actuarial (Gain) Loss ............................................................... 24,320 (4,909) Special Termination Benefits ........................................................ 1,186 -- Benefits Paid ....................................................................... (11,546) (11,374) ---------- ---------- Accumulated Postretirement Benefit Obligation at the End of the Period .............. $ 248,937 $ 223,124 ========== ========== Plan Assets at Fair Value at the Beginning of the Period ............................ $ 151,645 $ 126,282 Actual Return on Plan Assets ........................................................ 25,677 26,125 Company Contributions ............................................................... 6,500 7,000 Regular Benefits .................................................................... (10,674) (7,762) ---------- ---------- Plan Assets at Fair Value at the End of the Period .................................. $ 173,148 $ 151,645 ========== ========== Funded Status of the Plans .......................................................... $ (75,789) $ (71,479) Unrecognized: Net gain ......................................................................... (116,191) (124,760) Net transition obligation ........................................................ 188,026 200,728 Contributions Made After Measurement Date ........................................... 2,000 6,500 Regular Benefits Made After Measurement Date ........................................ (11,720) (945) ---------- ---------- Accrued Postretirement Asset (Liability) ............................................ $ (13,674) $ 10,044 ========== ========== - ----------------------------------------------------------------------------------------------------------------------
The rate at which healthcare costs are assumed to increase is the most significant factor in estimating MichCon's postretirement benefit obligation. MichCon 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 $31,854,000 (13%) and increase the sum of the service and interest rate cost by $2,863,000 (14%) 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 $27,946,000 (11%) and decrease the sum of the service and interest rate cost by $2,474,000 (12%) 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. 39 44 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 established a Grantor Trust and contributed $28,200,000 in 1998 and $31,300,000 in 1997 to the trust, which invested such proceeds in life insurance contracts and income securities. By funding the Grantor Trust and the VEBA trusts (Note 9b), MichCon is complying with MPSC directives that it fund various trusts to the extent its postretirement benefit costs are recognized in rates. Employees and retirees have no right, title or interest in the assets of the Grantor Trust, and MichCon can revoke such trust subject to providing the MPSC with prior notification. 10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS a. NATURAL GAS PRICE HEDGING As part of its gas acquisition strategy (Note 7b), MichCon has entered into firm-price contracts, including natural gas swap agreements, for a substantial portion of its expected gas supply requirements for the three year period 1999-2001. These swap agreements are used to manage MichCon's exposure to the risk of market price fluctuations on gas purchase commitments and effectively fixes the commodity rate portion of certain gas purchase agreements. If MichCon did not use natural gas swap agreements, its exposure to such risk would be higher. Although this strategy reduces risk, it also limits potential gains from favorable changes in gas prices. Changes in the market value of the swap agreements 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. As of December 31, 1998, MichCon's deferred loss from swap contracts was $3,313,000. Any unrealized gains and losses on natural gas swap agreements that were to be terminated or sold would 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. b. INTEREST RATE HEDGING In order to manage interest costs, MichCon 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 40 45 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS agreement. In the event of an early extinguishment of a designated debt obligation, unrealized 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, MichCon had interest rate swap agreements with notional principal amounts totaling $106,100,000 (Note 5a) and a weighted average remaining life of 4.3 years. At December 31, 1997, the notional principal amount of outstanding interest rate swaps totaled $107,800,000. 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. 11. FINANCIAL INSTRUMENTS MichCon 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 MichCon could realize in a current market exchange. The carrying amounts of certain financial instruments, such as notes payable, customer deposits and notes receivable, are assumed to approximate fair value due to their short-term nature. The carrying amount and fair value of other financial instruments consist of the following:
- ----------------------------------------------------------------------------------------------------------- (in Thousands) 1998 1997 - ------------------------------------------------------------------------- ----------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ Assets: Long-term investments .................. $ 65,556 $ 65,556 $ 35,110 $ 35,110 Liabilities and Shareholders' Equity: Long-term debt, excluding capital lease obligations .................... 615,419 668,063 611,763 651,980 Derivative Financial Instruments: Natural gas swaps: with unrealized losses ............... 3,313 3,313 -- -- Interest rate swaps: with unrealized gains ................ 6,340 4,048 with unrealized losses ............... 696 415 - -----------------------------------------------------------------------------------------------------------
The fair values are determined based on the following: Long-term investments - carrying amount approximates fair value taking into consideration interests rates available to MichCon for investments with similar provisions. 41 46 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Long-term debt - interest rates available to MichCon for issuance of debt with similar terms and remaining maturities. Natural gas and interest rate swaps - estimated amounts that MichCon would receive or pay to terminate the swap agreements, taking into account current gas prices, interest rates and the credit-worthiness of the counterparties. Guaranty - management is unable to practicably estimate the fair value of the Harbortown guaranty (Note 6a) due to the nature of the transaction. 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. 12. RELATED PARTY TRANSACTIONS MichCon enters into transactions with affiliated companies to provide transportation and storage services. MichCon purchased computer operations services from an affiliated company that was sold by MCN in June 1996. Under a service agreement with MCN, MichCon receives various tax, financial and legal services and provides construction, engineering, human resources, information technology and other services. The following is a summary of transactions with affiliated companies:
- ------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) 1998 1997 1996 ------------------------------------------------------- ------------ ------------ ------------ Revenues: Storage and transportation services............... $ 11,566 $ 14,744 $ 14,542 Other services ................................... 6,820 1,774 898 Interest revenue.................................. 1,502 -- -- Costs: Computer operations services...................... -- -- 6,800 Corporate expenses and other services............. 15,534 20,179 16,486 - ------------------------------------------------------------------------------------------------------------------
MichCon's accounts receivable from affiliated companies totaled $21,640,000 and $20,990,000, and accounts payable to affiliated companies totaled $11,501,000 and $28,942,000 at December 31, 1998 and 1997, respectively. MichCon is a participant in an intercompany credit agreement whereby it can borrow needed cash from and loan available cash to MCN and its subsidiaries. The outstanding balance of notes receivable from affiliated companies was $3,249,000 at December 31, 1998, with interest at the prime rate of 7.75%. There was no outstanding balance of notes receivable from affiliated companies at December 31, 1997. MichCon had no outstanding balances of notes payable to affiliated companies at December 31, 1998 and 1997. 42 47 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. SUMMARY OF INCOME TAXES MichCon is part of the consolidated federal income tax return of MCN. The federal income tax expense for MichCon and its subsidiaries is determined on an individual company basis with no allocation of tax benefits or expenses from other affiliates of MCN.
- ------------------------------------------------------------------------------------------------------------ (in Thousands) 1998 1997 1996 - -------------------------------------------------------- ---------- ---------- ---------- Effective Federal Income Tax Rate 31.5 % 36.4 % 33.8 % ========== ========== ========== Income Taxes Consist of: Current provision .................................. $ 27,768 $ 37,901 $ 31,318 Deferred provision ................................. 11,010 9,607 12,018 Investment tax credits ............................. (2,961) (1,843) (1,850) ---------- ---------- ---------- $ 35,817 $ 45,665 $ 41,486 ========== ========== ========== Reconciliation Between Statutory and Actual Income Taxes: Statutory Federal Income Taxes at a Rate of 35% ....... $ 39,477 $ 43,640 $ 42,465 Adjustments to Federal Tax Expense: Book over tax depreciation ......................... 1,071 5,301 6,367 Adjustments to taxes provided in prior periods ...... 1,080 300 (3,368) Investment tax credits ............................. (2,961) (1,843) (1,850) Other - net ........................................ (2,850) (1,733) (2,128) ---------- ---------- ---------- $ 35,817 $ 45,665 $ 41,486 ========== ========== ========== - ------------------------------------------------------------------------------------------------------------
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. 43 48 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The tax effect of temporary differences that gave rise to MichCon's deferred tax assets and liabilities consisted of the following:
- ------------------------------------------------------------------------------------------------------------------ (in Thousands) 1998 1997 - --------------------------------------------------------------------------------- ------------ ------------ Deferred Tax Assets: Employee Benefits............................................................. $ 5,406 $ 9,391 Uncollectibles................................................................ 3,125 4,671 Vacation accrual.............................................................. 2,259 3,442 Postretirement benefits....................................................... 5,394 -- Other......................................................................... 1,351 2,283 ------------ ------------ 17,535 19,787 ------------ ------------ Deferred Tax Liabilities: Depreciation and other property related basis differences, net.......................................................... 51,965 58,215 Pensions...................................................................... 37,911 24,564 Property taxes................................................................ 13,360 13,313 Gas cost recovery undercollection............................................. 57 4,502 Postretirement benefits....................................................... -- 3,515 Other......................................................................... 12,060 9,795 ------------ ------------ 115,353 113,904 ------------ ------------ Net Deferred Tax Liability....................................................... 97,818 94,117 Less: Net Deferred Tax Liability-Current....................................... 9,251 10,212 ------------ ------------ Net Deferred Tax Liability-Noncurrent............................................ $ 88,567 $ 83,905 ============ ============ - ------------------------------------------------------------------------------------------------------------------
14. STOCK INCENTIVE PLAN MCN's Stock Incentive Plan authorizes the use of performance units, restricted stock, stock options or other stock-related awards to key employees, primarily management. MichCon'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 MCN 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 MichCon ceases. During 1998, 1997 and 1996, MichCon granted 125,016, 102,750 and 122,669 performance units, respectively, with a weighted-average grant date fair value of $37.00, $31.00 and $24.625 per unit, respectively. MichCon accounts for stock-based compensation awards under the fair value-based method as prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation." 44 49 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED) Accordingly, the costs of performance units awarded, measured at their fair value on the grant date, are being recorded as compensation expense over their vesting period. MichCon adjusts compensation expense and Additional Paid-in Capital for changes in the number of performance units that are expected to vest. A stock-based compensation benefit of $1,493,000 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 cost recognized during 1997 and 1996 for all awards outstanding totaled $7,430,000, and $6,885,000, respectively. In February 1999, MichCon 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. 45 50 INDEPENDENT AUDITORS' REPORT Michigan Consolidated Gas Company: We have audited the accompanying consolidated statements of financial position of Michigan Consolidated Gas Company and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and capitalization for each of the three years in the period ended December 31, 1998. Our audits also included the consolidated financial statement schedule listed in Item 8. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information shown therein. /s/ Deloitte & Touche LLP - ------------------------- Detroit, Michigan February 25, 1999 46 51 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES SUPPLEMENTARY FINANCIAL INFORMATION QUARTERLY OPERATING RESULTS (UNAUDITED) Due to the seasonal nature of MichCon's business, revenues and net income tend to be higher in the first and fourth quarters of the calendar year.
First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------- ---------- ---------- ---------- ---------- (Thousands of Dollars) 1998 Operating Revenue ............ $ 429,227 $ 172,787 $ 122,428 $ 309,216 Operating Income (Loss)....... 109,669 15,962 (25,997) 56,977 Net Income (Loss)............. 61,664 3,014 (18,338) 30,636 1997 Operating Revenue ............ $ 527,445 $ 209,800 $ 119,114 $ 397,320 Operating Income (Loss)....... 106,772 14,810 (11,369) 64,150 Net Income (Loss)............. 62,193 931 (16,036) 31,932
47 52 SCHEDULE II MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions ------------------------ Provisions charged to Deductions ------------------------ for Purposes Balance at Utility Plant/ for Which the Balance Beginning Regulatory Reserves Were at End Description of Period Income Asset Provided of Period -------- --------- -------- -------- - -------- YEAR ENDED DECEMBER 31, 1998 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts........................ $ 15,015 $ 13,029 $ -- $ 19,116 $ 8,928 ======== ======== ======== ======== ======== Reserve included in Current Liabilities - Other and in Accrued Environmental Costs in Consolidated Statement of Financial Position: Environmental testing.................................. $ 33,741 $ -- $ -- $ 1,649 $ 32,092 ======== ======== ======== ======== ======== Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages................................. $ 4,838 $ (328) $ 438 $ 2,433 $ 2,515 ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1997 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts........................ $ 17,707 $ 21,680 $ -- $ 24,372 $ 15,015 ======== ======== ======== ======== ======== Reserve included in Current Liabilities - Other in Consolidated Statement of Financial Position: Environmental testing.................................. $ 34,576 $ -- $ -- $ 835 $ 33,741 ======== ======== ======== ======== ======== Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages................................. $ 9,182 $ 1,400 $ 608 $ 6,352 $ 4,838 ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1996 Reserve deducted from Assets in Consolidated Statement of Financial Position: Allowance for doubtful accounts........................ 13,250 $ 29,052 $ -- $ 24,595 $ 17,707 ======== ======== ======== ======== ======== Reserve included in Current Liabilities - Other in Consolidated Statement of Financial Position: Environmental testing.................................. $ 35,451 $ -- $ -- $ 875 $ 34,576 ======== ======== ======== ======== ======== Reserves included in Deferred Credits and Other Liabilities - Other in Consolidated Statement of Financial Position: Injuries and damages................................. $ 8,013 $ 3,052 $ 674 $ 2,557 $ 9,182 ======== ======== ======== ======== ========
48 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 11. EXECUTIVE COMPENSATION Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted per general instruction I (2) (c) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 10-K (A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT: 1. For a list of the financial statements included herein, see the section titled "Financial Statements and Supplementary Data", page 24 in Part II, Item 8 of this Report. 2. For the financial statement schedule included herein, see the section titled "Financial Statements and Supplementary Data", page 24 in Part II, Item 8 of this Report. Schedules other than those referred to above are omitted as not applicable or not required, or the required information is shown in the financial statements or notes thereto. 49 54 3. Exhibits, including those incorporated by reference:
EXHIBIT NO. DESCRIPTION ----------- ----------- 3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31, 1993 Form 10-Q). 3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q). 4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944 (Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form 8-K); Thirty-second Supplemental Indenture, dated January 1, 1993 (Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture, dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093); and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit 4-2 to Registration Statement No. 333-16285; Note - MichCon hereby agrees to furnish to the SEC, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by MichCon. 10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration Statement No. 33-21930-99). 10-2 Form of Employment Agreement (Exhibit 99-2 to MCN's June 30, 1997 Form 10-Q). 10-3 MCN Energy Group Inc. Executive Annual Performance Plan (As amended effective January 1, 1998).* 10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to MCN's March 31, 1995 Form 10-Q). 10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to MCN's September 30, 1996 Form 10-Q). 10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to MCN's September 30, 1996 Form 10-Q). 10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30, 1996 Form 10-Q). 10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to MCN's 1996 Form 10-K). 10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's 1996 Form 10-K). 10-10 MCN Energy Group Inc. Long-Term Incentive Performance Share Plan (As amended and restated October 1, 1997).* 10-11 MCN Energy Group Savings and Stock Ownership Plan (As amended and restated effective as of January 1, 1998).* 10-12 MichCon Investment and Stock Ownership Plan (As amended and restated effective as of January 1, 1998).* 12-1 Computation of Ratio of Earnings to Fixed Charges.*
50 55
EXHIBIT NO. DESCRIPTION ---------- ----------- 23-1 Independent Auditors' Consent - Deloitte & Touche LLP.* 24-1 Powers of Attorney.* 27-1 Financial Data Schedule.*
(B) REPORTS ON FORM 8-K: None. - ---------------------- * Indicates document filed herewith. References are to MichCon (File No. 1-7310) for MichCon documents incorporated by reference. References are to MCN (File No. 1-10070) for MCN documents incorporated by reference. 51 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHIGAN CONSOLIDATED GAS COMPANY (Registrant) By: /s/ Harold Gardner -------------------------------------------- Harold Gardner VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER MARCH 11, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
TITLE DATE ----- ---- * Director and Chairman March 11, 1999 ------------------------------------ Alfred R. Glancy III * Director, President and Chief March 11, 1999 ------------------------------------ Executive Officer Stephen E. Ewing * Director, Senior Vice President, March 11, 1999 ------------------------------------ Treasurer, and Chief Financial Officer Howard L. Dow III /s/ Harold Gardner Vice President, Chief Accounting March 11, 1999 ------------------------------------ Officer Harold Gardner * Director, Vice President, General March 11, 1999 ------------------------------------ Counsel and Secretary Ronald E. Christian * Director, Vice President, Marketing March 11, 1999 ------------------------------------ and Sales Anne R. Cooke * Director, Senior Vice President, March 11, 1999 ------------------------------------ Regional Operations Steven Kurmas * Director March 11, 1999 ------------------------------------ William K. McCrackin *By: /s/ Harold Gardner ----------------------------------- Harold Gardner Attorney-in-Fact
52 57 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 3-1 Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31, 1993 Form 10-Q). 3-2 By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q). 4-1 MichCon's Indenture of Mortgage and Deed of Trust dated March 1, 1944 (Exhibit 7-D to Registration Statement No. 2-5252); Twenty-ninth Supplemental Indenture, dated July 15, 1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1 to September 27, 1991 Form 8-K); Thirty-first Supplemental Indenture, dated December 15, 1991 (Exhibit 4-1 to February 28, 1992 Form 8-K); Thirty-second Supplemental Indenture, dated January 1, 1993 (Exhibit 4-1 to 1992 Form 10-K); Thirty-third Supplemental Indenture, dated May 5, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093); and Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit 4-2 to Registration Statement No. 333-16285; Note - MichCon hereby agrees to furnish to the SEC, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by MichCon. 10-1 MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration Statement No. 33-21930-99). 10-2 Form of Employment Agreement (Exhibit 99-2 to MCN's June 30, 1997 Form 10-Q). 10-3 MCN Energy Group Inc. Executive Annual Performance Plan (As amended effective January 1, 1998).* 10-4 MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to MCN's March 31, 1995 Form 10-Q). 10-5 MCN Executive Deferred Compensation Plan, as amended (Exhibit 10-1 to MCN's September 30, 1996 Form 10-Q). 10-6 MichCon Supplemental Death Benefit and Retirement Income Plan (Exhibit 10-2 to MCN's September 30, 1996 Form 10-Q). 10-7 MichCon Supplemental Retirement Plan (Exhibit 10-3 to MCN's September 30, 1996 Form 10-Q). 10-8 MCN Mandatory Deferred Compensation Plan, as amended (Exhibit 10-11 to MCN's 1996 Form 10-K). 10-9 MCN Energy Group Inc. Supplemental Savings Plan (Exhibit 10-12 to MCN's 1996 Form 10-K). 10-10 MCN Energy Group Inc. Long-Term Incentive Performance Share Plan (As amended and restated October 1, 1997).* 10-11 MCN Energy Group Savings and Stock Ownership Plan (As amended and restated effective as of January 1, 1998).* 10-12 MichCon Investment and Stock Ownership Plan (As amended and restated effective as of January 1, 1998).* 12-1 Computation of Ratio of Earnings to Fixed Charges.*
53 58
EXHIBIT NO. DESCRIPTION ----------- ----------- 23-1 Independent Auditors' Consent - Deloitte & Touche LLP.* 24-1 Powers of Attorney.* 27-1 Financial Data Schedule.*
(B) REPORTS ON FORM 8-K: None. - ---------------------- * Indicates document filed herewith. References are to MichCon (File No. 1-7310) for MichCon documents incorporated by reference. References are to MCN (File No. 1-10070) for MCN documents incorporated by reference. 54 EX-10.3 2 EXECUTIVE ANNUAL PERFORMANCE PLAN 1 EXHIBIT 10.3 MCN ENERGY GROUP INC. EXECUTIVE ANNUAL PERFORMANCE PLAN (AS AMENDED EFFECTIVE JANUARY 1, 1998) 2 TABLE OF CONTENTS
PAGE ARTICLE I - Title, Purpose and Effective Date ....................................................................1 1.1 Title ..........................................................................................1 1.2 Purpose ........................................................................................1 1.3 Effective Date .................................................................................1 ARTICLE 2 - Definitions...........................................................................................1 2.1 Affiliated Company .............................................................................1 2.2 Adjusted Standard Award Fund ...................................................................1 2.3 Average Common Stockholders Equity..............................................................1 2.4 Award ..........................................................................................1 2.5 Board of Directors or Board.....................................................................1 2.6 Cause ..........................................................................................2 2.7 Code ...........................................................................................2 2.8 Committee ......................................................................................2 2.9 Eligible Employee ..............................................................................2 2.10 EPS Growth Rate ................................................................................2 2.11 Executive Management ...........................................................................2 2.12 Net Income ....................................................................................2 2.13 Net Income Goal ................................................................................2 2.14 Operating Goal .................................................................................2 2.15 Participating Company ..........................................................................2 2.16 Plan Year ......................................................................................2 2.17 Return on Equity or ROE ........................................................................2 2.18 Standard Award Fund ............................................................................2 2.19 Tier............................................................................................2 ARTICLE 3 - Administration .......................................................................................3 ARTICLE 4 - Awards................................................................................................3 4.1 Eligibility For Awards .........................................................................3 4.2 Determination of Awards and Award Funds.........................................................3 4.3 Payment of Awards ..............................................................................4 4.4 Change in Employee Status ......................................................................4 ARTICLE 5 - Deferral of Receipt of Awards.........................................................................6 ARTICLE 6 - Beneficiary Designations .............................................................................6 6.1 Beneficiary Designation ........................................................................6 6.2 Change in Beneficiary Designation ..............................................................6 ARTICLE 7 - Amendment, Suspension or Termination .................................................................7
i 3 \ TABLE OF CONTENTS (CONTINUED) PAGE
ARTICLE 8 - Miscellaneous ........................................................................................7 8.1 Assignment Prohibited ..........................................................................7 8.2 Effect on Employee Benefits ....................................................................7 8.3 No Right To An Award ...........................................................................7 8.4 No Employment Rights ...........................................................................7 8.5 Law Applicable .................................................................................7 8.6 Gender, Number and Heading .....................................................................8 8.7 Joint and Several Liability ....................................................................8 ARTICLE 9 - Change in Control ....................................................................................9 9.1 General ........................................................................................9 9.2 Joint and Several Liability ....................................................................9 9.3 Definition of Change in Control ................................................................9 Attachment I - Target Percentages................................................................................10 Attachment II - MCN CORPORATE Scaling............................................................................11 Attachment III - MCNIC Scaling...................................................................................12 Attachment IV - MICHCON Scaling..................................................................................13 Attachment V - CITIZENS Scaling..................................................................................14 Attachment VI - Beneficiary Designation Form.....................................................................15
ii 4 MCN ENERGY GROUP INC. EXECUTIVE ANNUAL PERFORMANCE PLAN (as amended and restated effective January 1, 1998) ARTICLE I TITLE, PURPOSE, AND EFFECTIVE DATE 1.1 TITLE. The title of this Plan shall be the "MCN Energy Group Inc. Executive Annual Performance Plan" and is referred to in this document as the "Plan." 1.2 PURPOSE. The purpose of the Plan is to provide a direct financial incentive to employees of MCN Energy Group Inc. ("MCN") and its subsidiaries (individually a "Company" and collectively the "Companies") who contribute to the overall success of MCN and to its particular achievements in the areas of earnings, operating efficiency, customer satisfaction, and employee satisfaction. In addition, the Plan is designed to place the compensation of Company employees at competitive levels with similar industries and thereby to assist in motivating them, retaining them in the employ of the Company, and in attracting new highly qualified personnel to the Companies. 1.3 EFFECTIVE DATE. The Plan is effective January 1, 1998. ARTICLE 2 DEFINITIONS The following terms have the meaning described below when used in the Plan: 2.1 "AFFILIATED COMPANY" means any corporation while such corporation is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Corporation or any other employing entity while such entity is under common control (within the meaning of Section 414(c) of the Code) of the Corporation. 2.2 "ADJUSTED STANDARD AWARD FUND" shall mean the total maximum dollar amount that is required for the Final Award Fund which has been adjusted to reflect the performance level regarding the financial and operating goals (if applicable). 2.3 "AVERAGE COMMON STOCKHOLDERS EQUITY" shall mean the sum of (i) the common stockholders equity of a Company at the end of the previous Plan Year, less any adjustments specified on Attachments II though V, plus (ii) the common stockholders equity at the end of the current Plan Year, less any adjustments specified on Attachments II through V, divided by 2. 2.4 "AWARD" shall mean the payment of cash compensation under this Plan. 2.5 "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of MCN. 2.6 "CAUSE" shall mean repeated material breaches of an employee's duties of employment which are not cured after receipt by the employee of written notice specifying such breaches or the employee's conviction of a felony involving moral turpitude. 5 2.7 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.8 "COMMITTEE" shall mean the Compensation Committee of the Board. 2.9 "ELIGIBLE EMPLOYEE" shall mean any regular full-time or part-time employee of a Participating Company who is in Tiers I through V. 2.10 "EPS GROWTH RATE" shall mean the simple average of the year-to-year percentage change in earnings per share for MCN for each of any 3 consecutive years, which include the current Plan Year and the 2 preceding Plan Years. 2.11 "EXECUTIVE MANAGEMENT" shall mean the Chief Executive Officer of MCN, MCNIC and Michigan Consolidated Gas Company and any other individual so designated by the MCN Chief Executive Officer. 2.12 "NET INCOME" shall mean the net income available for common stock of a Company, as reported in the Income Statement of the Company for the Plan Year, less any adjustments specified on Attachments II through V. 2.13 "NET INCOME GOAL" shall mean the net income approved as a goal by the Board. 2.14 "OPERATING GOAL" shall mean the non-financial performance targets related to the operating priorities of a Participating Company. 2.15 "PARTICIPATING COMPANY" shall mean MCN, an Affiliated Company, or other affiliated entity (whether or not incorporated) designated by the Board of Directors. 2.16 "PLAN YEAR" shall mean the period beginning January 1 and ending December 31 of each year (the calendar year). 2.17 "RETURN ON EQUITY" OR "ROE" shall mean a rate for a Participating Company, expressed as a percent, which represents Net Income, divided by Average Common Stockholders Equity. 2.18 "STANDARD AWARD FUND" shall mean the total maximum dollar amount which would be required for an award fund if the financial goal and the operating goal (if applicable) for a Company is achieved exactly. 2.19 "TIER" shall mean the ranking assigned to each group of employees defined by level of responsibility and contribution, not titling nomenclature. The Tiers are set forth in Attachment I. ARTICLE 3 ADMINISTRATION The Vice Presidents of the Participating Companies' Human Resource Departments ("HR Vice Presidents") shall administer the Plan. The HR Vice Presidents shall have full authority and responsibility to 2 6 interpret and administer the terms of the Plan and may develop guidelines or adopt rules and regulations governing the administration of the Plan. The administration of this Plan is subject to the annual approval of the Board. Executive Management shall be responsible for making recommendations to the Committee with respect to employees of the Companies who are to receive Awards under the Plan and the amount of such Awards. In discharging this responsibility, Executive Management may consult with individual members of the Committee or the Board, with the management of MCN and any of the Companies, or with such other persons as Executive Management may deem appropriate. The Committee shall submit the recommendations to the Board for approval. Any member of the Board who is also an employee eligible to receive Awards under the Plan shall not vote or act on any matter relating solely to such member during the period the member is eligible to participate in the Plan. ARTICLE 4 AWARDS 4.1 ELIGIBILITY FOR AWARDS. All Eligible Employees shall participate in the Plan. Each Participating Company may set minimum service and performance requirements for its employees. The level of participation in the Plan is based on position and relative contribution to a set of financial measures and other strategic and operational objectives. The target percentages for each Tier and business unit are set forth in Attachment I. 4.2 DETERMINATION OF AWARDS AND AWARD FUNDS. The following formula will be used in determining respective bonus amounts recommended to be awarded to Eligible Employees. The HR Vice Presidents will consider the results for each Company separately: (a) The HR Vice Presidents will first confirm the financial and operating goals (if applicable) for the Plan Year. (b) The HR Vice Presidents will then determine the size of the Standard Award Fund. In determining the size of this fund, the HR Vice Presidents will compile a report containing the salaries (in dollars) of Eligible Employees for the Plan Year. Individual Standard Awards are calculated using the percent of base salary Target Percentages, shown in Attachment I. The ranges and percentages used in the computation of the Standard Award Fund may be revised from time to time, in the discretion of the Committee or the Board. (c) The Standard Award Fund is determined by adding the Individual Standard Awards. The Individual Standard Award amounts used in computing the Standard Award Fund will be adjusted upward or downward based on actual performance on the Financial Goal and the Operating Goal (if applicable). See Attachments II through V. The total of these adjusted Individual Standard Award amounts is the Adjusted Award Fund. The HR Vice Presidents will make their recommendations to the Executive Management with respect to the employees who are to receive awards with respect to the Plan Year and the amount of such awards. Such amounts shall be by individual for Tiers I and II and in total for Tiers III through V. Executive Management shall present such recommendations to the Committee for approval. 3 7 The Committee will determine which employees shall receive awards with respect to the Plan Year and the amount of the awards based upon the recommendations of Executive Management and the Committee's own consideration of the criteria established under the Plan for granting awards. The Committee shall submit the recommendations to the Board for approval. Any member of the Committee or Board who is also an Eligible Employee shall not vote. Any determination concerning the establishment of any Award Fund, once made, shall be conclusive and binding upon all employees eligible to participate in the Plan and their beneficiaries or successor(s) in interest. 4.3 PAYMENT OF AWARDS. Payment of Awards to Eligible Employees shall be made by the employing Company in the calendar year following the Plan Year for which the Award is made and within a reasonable period following approval of the award by the Board. 4.4 CHANGE IN EMPLOYEE STATUS. In the case of an employee who was eligible at the beginning of the Plan Year, but whose status has changed during the Plan Year so that the employee would not be eligible if eligibility for the Plan Year were determined at the end of the Plan Year, the following guidelines will apply, except where Executive Management proposes and the Committee determines, in its sole discretion, that factors shall be considered with respect to an Eligible Employee which make departure therefrom appropriate: (A) DEATH, RETIREMENT. An Eligible Employee who dies or retires during the Plan Year will be recommended for an Award in an amount that reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee. (B) RESIGNATION. An Eligible Employee who resigns during the Plan Year wherein the primary reason for the employee's resignation relates to ill health in the employee's immediate family or other compelling personal reasons, the Eligible Employee may be recommended for an Award in an amount which reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee. An Eligible Employee who resigns prior to the payment of an Award for a Plan Year for other reasons will not normally receive an Award. (C) TERMINATION. An Eligible Employee who is terminated prior to payment of an Award for a Plan Year for reasons related to organizational changes, such as the discontinuation of an organization unit or redundancy, may be recommended for an Award in an amount which reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee. An Eligible Employee who is terminated prior to the payment of an Award for a Plan Year for other reasons will not normally receive an Award. The Committee will not recommend an Eligible Employee who is terminated for Cause for an Award. (D) LEAVE OF ABSENCE - PAID. An Eligible Employee who is on a paid leave of absence for a portion of the Plan Year will be recommended to receive an Award in an amount that would have otherwise been recommended had the Eligible Employee been an active employee through the date the Award is paid for the Plan Year. 4 8 (E) LEAVE OF ABSENCE - UNPAID. An Eligible Employee who is on an unpaid leave of absence for health reasons for a portion of the Plan Year will be recommended to receive an Award in an amount, which reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee. An Eligible Employee who is on an unpaid leave of absence for any other reason during a portion of a Plan Year may be recommended for an Award in an amount that reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee. (F) DEMOTION. An Eligible Employee who was demoted during the Plan Year for poor performance will not be recommended for an Award. In the case of an Eligible Employee demoted for any other reason during the Plan year, who would not have been an Eligible Employee if eligibility for such Plan Year were determined on the date(s) with respect to which the employee's changed status as a result of the demotion or transfer applied, the employee may be recommended for an Award which excludes the proportionate part of the Plan Year with respect to which the employee's status was changed. (G) TRANSFER TO A NON-PARTICIPATING AFFILIATED COMPANY. An Eligible Employee who transfers during the Plan Year from a Company whose employees are eligible for consideration to a Company whose employees are not eligible for consideration may be recommended by the Committee to receive an Award in an amount which reflects the proportionate part of the Plan Year in which the Eligible Employee was an active employee of the Company whose employees are eligible for consideration. (H) TRANSFER TO A PARTICIPATING AFFILIATED COMPANY. An Eligible Employee who transfers during the Plan Year from one Participating Company to another participating Company wherein the plans are different may be recommended for an Award in an amount which reflects the employee's performance on behalf of the respective companies. (I) NEW HIRE OR TRANSFER FROM A NON-PARTICIPATING AFFILIATED COMPANY. An employee who is not an Eligible Employee at the beginning of the Plan Year who subsequently becomes eligible by reason of being hired by or transferred to a Participating Company may be recommended for an Award that reflects the full Plan Year or the proportionate part of the Plan Year in which the employee was an Eligible Employee. (J) TERMINATION AFTER END OF PLAN YEAR AND PRIOR TO PAYMENT. If an Eligible Employee ceases to be an active employee subsequent to the Plan Year to which the Award relates but prior to distribution of the Award, the Award may be payable to the employee, or the designated beneficiary, equal to all, none, or a prorated amount of the Award the Eligible Employee would have received if he were still employed. ARTICLE 5 DEFERRAL OF RECEIPT OF AWARDS An Eligible Employee may elect to defer receipt of all or a percentage of an Award granted to him under the Plan under the terms and subject to the provisions of the MCN Executive Deferred Compensation Plan in effect for the Plan Year for which the Award is to be paid. ARTICLE 6 5 9 BENEFICIARY DESIGNATIONS 6.1 BENEFICIARY DESIGNATION. An Eligible Employee shall designate a beneficiary on his Beneficiary Designation Form, as provided in Attachment VI. The designation of a beneficiary other than the Eligible Employee's spouse must be consented to in writing by the spouse. If an Eligible Employee has not designated a beneficiary, or if a designated beneficiary is not living or in existence at the time of the Eligible Employee's death, any death benefits payable under the Plan shall be paid to the Eligible Employee's spouse, if then living, and if the Eligible Employee's spouse is not then living, to the Eligible Employee's estate. 6.2 CHANGE IN BENEFICIARY DESIGNATION. An Eligible Employee may change the designated beneficiary, subject to the restriction in Section 6.1, from time to time by filing a new written designation with the Committee or Board. Such designation shall be effective upon receipt by the Committee or Board. Employees eligible to participate in the Plan may designate to the Committee, on a form approved by the Committee for that purpose, a beneficiary or beneficiaries to receive any amounts due under the Plan to the employee upon death. Such designation may be canceled or changed by the employee at the employee's discretion, but no cancellation or change will be recognized by the Committee unless effected in writing on a form approved by the Committee for that purpose and filed with the Committee. In the absence of a valid beneficiary designation, the amounts due hereunder shall be paid to the deceased employee's lawful successor(s) in interest in a lump sum as soon as practicable, but in no event later than one year following the employee's death. ARTICLE 7 AMENDMENT, SUSPENSION OR TERMINATION The Plan may be amended, suspended or terminated at any time by MCN by action of its Board or the Committee. However, no amendment, suspension or termination of the Plan shall affect the rights of employees to receive Awards approved but unpaid as of the date of such amendment, suspension or termination. ARTICLE 8 MISCELLANEOUS 8.1 ASSIGNMENT PROHIBITED. The rights and benefits under this Plan are personal and shall not be subject to any voluntary or involuntary alienation, assignment, pledge, transfer, or other disposition. 8.2 EFFECT ON EMPLOYEE BENEFITS. Awards under this Plan will not be considered compensation under any other employee benefit plan maintained by MCN or its subsidiaries, unless specifically included as compensation in such other plan's written plan document. 8.3 NO RIGHT TO AN AWARD. No employee or other person shall have any claim or right to be granted an Award under the Plan. The receipt of an Award with respect to any Plan year shall not entitle an employee to an award with respect to any subsequent Plan Year. 8.4 NO EMPLOYMENT RIGHTS. Neither the Plan nor any action taken pursuant to the provisions of the Plan shall be construed as a contract of employment between an employee and any Company, or as a right of any employee to be continued in the employment of any Company, or as a limitation of the right of any 6 10 Company to discharge any employee at any time, with or without cause, or as a limitation of the right of the employee to terminate employment at any time. 8.5 LAW APPLICABLE. This Plan and all actions hereunder shall be governed by and construed according to the laws of the State of Michigan. 8.6 GENDER, NUMBER AND HEADING. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. Whenever any words used herein are in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings of sections and subsections as used herein are inserted solely for convenience and reference and constitute no part of the Plan. 8.7 JOINT AND SEVERAL LIABILITY. The liability under the Plan for the Companies shall be joint and several so that each Company shall be liable for all obligations under the Plan to each employee covered by the Plan, regardless of the entity by which such employee is employed. ARTICLE 9 CHANGE IN CONTROL 9.1 GENERAL. Notwithstanding any other provision in this Plan, upon a Change of Control in MCN, as that term is defined in Section 9.3, the following shall be paid in cash to all Eligible Employees within twenty (20) days following a Change of Control: (a) Awards for the prior Plan Year if not then paid; and (b) Awards for the current Plan Year, payable pro rata based upon a fraction whose numerator is the number of days between December 31 of the prior year and the date of the Change of Control and whose denominator is 365. Each such Award shall be calculated based on the most recent performance appraisal completed for each Eligible Employee prior to the Change of Control and with respect to any pro rata Award, calculated as if the Company's earnings were exactly equal to its Net Income Goal. 9.2 JOINT AND SEVERAL LIABILITY. Upon and at all times after a Change in Control, the liability under the Plan of MCN and each Affiliated Company that has adopted the Plan shall be joint and several so that MCN and each such Affiliated Company shall each be liable for all obligations under the Plan to each employee covered by the Plan, regardless of the corporation by which such employee is employed. 9.3 DEFINITION OF CHANGE IN CONTROL. "Change of Control" means: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) or 20 percent or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"); or (ii) the combined voting power of the then outstanding voting securities of the 7 11 Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) Any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); (ii) Any acquisition by the Company; (iii) Any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iv) Any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (a) of this Section 9.3 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless following such reorganization, merger or consolidation, (i) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, twenty percent (20%) or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors; and (iii) at least a majority of the members of the Board of Directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the Shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the 8 12 Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, twenty percent (20%) or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors; and (C) at least a majority of the members of the Board of Directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. IN WITNESS WHEREOF, the undersigned officer of MCN has executed this Plan as of this ____ day of December 1998. MCN Energy Group Inc. By: --------------------------------- Alfred R. Glancy III Chairman and Chief Executive Officer 9 13 ATTACHMENT I
1998 TARGET PERCENTAGES ------------------------------------------------------------------------------------------------------- MCN MICHCON TARGET MCNIC* CITIZEN'S TARGET% TARGET% TARGET% TARGET% TIER DESCRIPTION BASE SALARY BASE SALARY BASE SALARY BASE SALARY ======================================================================================================= I Chairman & CEO 60% N/A N/A N/A ------------------------------------------------------------------------------------------------------- II Vice Chairman/Pres 50% 50% 55% N/A ------------------------------------------------------------------------------------------------------- III VP/Officer 40% 35% 45% 35% ------------------------------------------------------------------------------------------------------- IV Director 30% 25% 35% 25% ------------------------------------------------------------------------------------------------------- V Director/Key Execs 20% 15% 25% 15% =======================================================================================================
Eligibility is defined by level of responsibility and contribution, not titling nomenclature. Actual awards may be from 0 to 125% of an Eligible Employee's Individual Standard Award. However, the aggregate of all awards may not exceed the total Adjusted Award Fund. FUNDING The 1998 Executive Annual Performance Plan Standard Award Fund is based on the attainment of targeted ROE and then related to tier-target percents, shown above, of base annual salaries of Eligible Employees.
MEASURE WEIGHT TARGET ------- ------ ------ MichCon ROE 100% 11.0% MCNIC* ROE 100% 13% MCN ROE 100% 12% Citizens ROE 100% 13%
* Includes Mobile Bay Gathering Company and Reed Holdings. 10 14 ATTACHMENT II MCN CORPORATE EXECUTIVE ANNUAL PERFORMANCE PLAN 1998 SCALING OF AWARD
- ------------------------------------------------------------------------------------------------------------------------------ RELATED RANGE OF ROES SCALING FUNDING PERCENTAGE ============================================================================================================================== Less than 10% No Award - ------------------------------------------------------------------------------------------------------------------------------ 10% to 12% Reduced 5% for each 0.1% ROE under 12% 0% to 100% - ------------------------------------------------------------------------------------------------------------------------------ 12% 100% - ------------------------------------------------------------------------------------------------------------------------------ 12% to 14% Increased 3% for each 0.1% ROE from 12% to 14% 100% to 160% - ------------------------------------------------------------------------------------------------------------------------------ 14% to 15% Increased 1.5% for each 0.1% ROE from 14% to 15% 160% to 175% - ------------------------------------------------------------------------------------------------------------------------------ Above 15% Increased 0.4% for each 0.1% ROE above 15% Above 175% ==============================================================================================================================
If ROE exceeds 12.5% and MCN attains a 3-year average EPS Growth Rate of 12%, an additional 25% will be added to the fund resulting in 200% funding at 15% ROE. ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY Average Common Stockholders Equity shall be adjusted by: 1. Any gains or losses recorded to "Other Comprehensive Income Within Equity". 11 15 ATTACHMENT III MCNIC EXECUTIVE ANNUAL PERFORMANCE PLAN 1998 SCALING OF AWARD
- ------------------------------------------------------------------------------------------------------------------------------ RELATED RANGE OF ROES SCALING FUNDING PERCENTAGE ============================================================================================================================== Less than 11% No Award - ------------------------------------------------------------------------------------------------------------------------------ 11% to 13% Reduced 5% for each 0.1% ROE under 13% 0% to 100% - ------------------------------------------------------------------------------------------------------------------------------ 13% 100% - ------------------------------------------------------------------------------------------------------------------------------ 13% to 15% Increased 3% for each 0.1% ROE from 13% to 15% 100% to 160% - ------------------------------------------------------------------------------------------------------------------------------ 15% to 16% Increased 1.5% for each 0.1% ROE from 15% to 16% 160% to 175% - ------------------------------------------------------------------------------------------------------------------------------ Above 16% Increased 0.4% for each 0.1% ROE above 16% Above 175% ==============================================================================================================================
If ROE exceeds 13.5% and MCN attains a 3-year average EPS Growth Rate of 12%, an additional 25% will be added to the fund resulting in 200% funding at 16% ROE. Note: These targets and scaling will also apply to Mobile Bay Gathering Company and Reed Holdings. ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY Average Common Stockholders Equity shall be adjusted by: - 1. Any gains or losses recorded to "Other Comprehensive Income Within Equity". 12 16 ATTACHMENT IV MICHCON EXECUTIVE ANNUAL PERFORMANCE PLAN 1998 SCALING OF AWARD
- ------------------------------------------------------------------------------------------------------------------------------ RELATED RANGE OF ROES SCALING FUNDING PERCENTAGE ============================================================================================================================== Less than 9% No Award - ------------------------------------------------------------------------------------------------------------------------------ 9% to 11% Reduced 5% for each 0.1% ROE under 11% 0% to 100% - ------------------------------------------------------------------------------------------------------------------------------ 11% 100% - ------------------------------------------------------------------------------------------------------------------------------ 11% to 13% Increased 3% for each 0.1% ROE from 11% to 13% 100% to 160% - ------------------------------------------------------------------------------------------------------------------------------ 13% to 14% Increased 1.5% for each 0.1% ROE from 13% to 14% 160% to 175% - ------------------------------------------------------------------------------------------------------------------------------ Above 14% Increased 0.4% for each 0.1% ROE above 14% Above 175% ==============================================================================================================================
If ROE exceeds 11.5% and MCN attains a 3-year average EPS Growth Rate of 12%, an additional 25% will be added to the fund resulting in 200% funding at 14% ROE. ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY Average Common Stockholders Equity shall be adjusted by: 1. Any gains or losses recorded to "Other Comprehensive Income Within Equity". 13 17 ATTACHMENT V CITIZENS EXECUTIVE ANNUAL PERFORMANCE PLAN 1998 SCALING OF AWARD
- ----------------------------------------------------------------------------------------------------------------------------- RELATED RANGE OF ROES SCALING FUNDING PERCENTAGE ============================================================================================================================= Less than 11% No Award - ----------------------------------------------------------------------------------------------------------------------------- 11% to 13% Reduced 5% for each 0.1% ROE under 13% 0% to 100% - ----------------------------------------------------------------------------------------------------------------------------- 13% 100% - ----------------------------------------------------------------------------------------------------------------------------- 13% to 15% Increased 3% for each 0.1% ROE from 13% to 15% 100% to 160% - ----------------------------------------------------------------------------------------------------------------------------- 15% to 16% Increased 1.5% for each 0.1% ROE from 15% to 16% 160% to 175% - ----------------------------------------------------------------------------------------------------------------------------- Above 16% Increased 0.4% for each 0.1% ROE above 16% Above 175% =============================================================================================================================
If ROE exceeds 13.5% and MCN attains a 3-year average EPS Growth Rate of 12%, an additional 25% will be added to the fund resulting in 200% funding at 16% ROE. ADJUSTMENTS TO AVERAGE COMMON STOCKHOLDERS EQUITY Average Common Stockholders Equity shall be adjusted by: 1. Any gains or losses recorded to "Other Comprehensive Income Within Equity". 14 18 ATTACHMENT VI MCN ENERGY GROUP INC. EXECUTIVE ANNUAL PERFORMANCE PLAN BENEFICIARY DESIGNATION FORM
============================================================================================================================ Employee Name (Print) Social Security No. I. D. Number - ---------------------------------------------------------------------------------------------------------------------------- Address (Number/Street) City State Zip Code ============================================================================================================================
I hereby designate, pursuant to Article 6 of the above-referenced plan, the below-designated person(s) as my beneficiary in the event of my death: ============================================================================================================================ Beneficiary's Name Address - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
I UNDERSTAND THAT THE DESIGNATION OF A BENEFICIARY OTHER THAN MY SPOUSE MUST BE CONSENTED TO IN WRITING BY MY SPOUSE. In the event any of the above-named beneficiaries should predecease me, or shall survive me but die before receiving all amounts to be paid, I hereby name the following as a contingent beneficiary to receive any such unpaid amounts:
============================================================================================================================ Beneficiary's Name Address - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
In the event none of the above-named beneficiaries survive me, any unpaid amounts shall be paid to my lawful successor in interest. I reserve the right to change this beneficiary designation at any time by filing with the Committee or its designee a new beneficiary designation form. I understand that my most recent election as to the beneficiary designation will apply to all Deferrals by me under the plan.
============================================================================================================================ Employee Signature Date - ---------------------------------------------------------------------------------------------------------------------------- Receipt Acknowledged By Title Date ============================================================================================================================
Spousal Consent: I hereby consent to the designation of beneficiary set forth herein.
============================================================================================================================ Spouse's Signature Date - ---------------------------------------------------------------------------------------------------------------------------- Witness Date ============================================================================================================================
15 EX-10.10 3 LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN 1 EXHIBIT 10-10 MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN (AS AMENDED AND RESTATED OCTOBER 1, 1997) February 22, 1999 2 MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN Table of Contents Page ---- Article 1 - Title, Purpose and Effective Date............................... 1 1.1 Title ........................................................ 1 1.2 Purpose ...................................................... 1 1.3 Effective Date................................................ 1 Article 2 - Definitions..................................................... 1 2.1 Affiliated Company............................................ 1 2.2 Award......................................................... 1 2.3 Board of Directors............................................ 1 2.4 Cause ........................................................ 2 2.5 Code ......................................................... 2 2.6 Committee..................................................... 2 2.7 Common Stock.................................................. 2 2.8 Corporation .................................................. 2 2.9 Deferred Account.............................................. 2 2.10 Disability ................................................... 2 2.11 Key Employee.................................................. 2 2.12 Nonemployee Director.......................................... 2 2.13 Participant .................................................. 2 2.14 Participating Corporation..................................... 2 2.15 Peer Group.................................................... 2 i 3 Page ---- 2.16 Plan Interest Rate............................................ 2 2.17 Performance Share............................................. 2 2.18 TSR or Total Shareholder Return............................... 2 Article 3 - Administration.................................................. 3 3.1 Committee and Board to Administer............................. 3 3.2 Authority of the Committee and Board.......................... 3 3.3 Decisions Binding............................................. 3 Article 4 - Awards.......................................................... 3 4.1 Eligibility for Awards........................................ 3 Article 5 - Performance Cycle and Performance Comparison.................... 4 5.1 Performance Cycle............................................. 4 5.2 Performance Comparison........................................ 4 Article 6 - Grant of Awards................................................. 4 6.1 Grant of Performance Shares................................... 4 6.2 Initial Individual Award...................................... 4 6.3 Initial Grant................................................. 4 6.4 Adjustment to Initial Grant................................... 5 Article 7 - Dividend Equivalents............................................ 6 7.1 Dividend Equivalents.......................................... 6 Article 8 - Vesting of Performance Shares................................... 6 8.1 Vesting Date of Performance Shares - General.................. 6 8.2 Death, Disability & Retirement - Prior to Vesting Date........ 6 ii 4 Page ---- 8.3 Common Stock Holding Requirement.............................. 6 Article 9 - Valuation and Payment of Final Awards........................... 7 9.1 Amount of Final Award - General............................... 7 9.2 Amount of Final Award - Death................................. 7 9.3 Payment of Final Award - General.............................. 7 9.4 Payment of Final Award - Death................................ 7 Article 10 - Deferral of Payments........................................... 7 10.1 Election to Defer............................................. 7 10.2 Deferral Election Agreement................................... 8 10.3 Establishment of Deferred Account............................. 8 10.4 Dividend Equivalents.......................................... 8 10.5 Timing of Retirement Distributions............................ 8 10.6 Form of Distributions......................................... 9 10.7 Termination Benefit........................................... 9 10.8 Change in Payment Option...................................... 9 10.9 Hardship Withdrawal Benefits.................................. 9 10.10 Interaction with the MCN Energy Group Mandatory Deferred Compensation Plan............................................. 9 Article 11 - Funding of Benefits............................................ 9 11.1 Unfunded Plan................................................. 9 11.2 Non-ERISA Plan................................................ 10 Article 12 - Tax Withholdings............................................... 10 12.1 Tax Withholding............................................... 10 iii 5 Page ---- Article 13 - Selection of and Payments to a Beneficiary..................... 11 13.1 Beneficiary Designation....................................... 11 13.2 Change in Beneficiary Designation............................. 11 13.3 Pre-Retirement Survivor Benefit ............................. 11 13.4 Post-Retirement Survivor Benefit.............................. 11 Article 14 - Amendment and Termination...................................... 11 14.1 Amendment, Modification, and Termination...................... 11 14.2 Awards Previously Granted..................................... 12 14.3 Right to Suspend.............................................. 12 14.4 Right to Accelerate........................................... 12 Article 15 - Miscellaneous.................................................. 12 15.1 No Right of Continued Employment.............................. 12 15.2 Delivery of Shares............................................ 12 15.3 Transfer and Leave of Absence................................. 12 15.4 Michigan Law to Govern........................................ 12 15.5 Forfeitures................................................... 12 15.6 Gender, Number and Heading ................................... 13 Article 16 - Change in Control.............................................. 13 16.1 Change in Control............................................. 13 16.2 Transfer to Rabbi Trust....................................... 14 16.3 Joint and Several Liability................................... 14 Attachments Historical Background v 6 MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN (AS AMENDED AND RESTATED OCTOBER 1, 1997) ARTICLE 1 TITLE, PURPOSE AND EFFECTIVE DATE 1.1 TITLE. The title of the Plan, formerly the "MCN Energy Group Long-Term Incentive Performance Unit Plan," shall be the "MCN Energy Group Long-Term Incentive Performance Share Plan" and is referred to in this document as the "Plan." This Plan is governed by the broader provisions set forth in the MCN Corporation Stock Incentive Plan approved by shareholders on May 10, 1989. Any conflicting provisions between such plan and this Plan shall be governed by the MCN Corporation Stock Incentive Plan. 1.2 PURPOSE. The purpose of the Plan is to promote the success of MCN Energy Group Inc. (the "Corporation" or "MCN") by providing financial incentives to Key Employees of the Corporation and its affiliated companies, thereby promoting the long-term growth and financial success of the Corporation by (i) attracting and retaining outstanding ability, (ii) strengthening the Corporation's capability to develop, maintain, and direct a competent management team, (iii) providing an effective means for Key Employees to acquire and maintain ownership of MCN stock, (iv) motivating Key Employees to achieve long-range performance goals and objectives, and (v) providing incentive compensation opportunities competitive with those of other major corporations. 1.3 EFFECTIVE DATE. The Plan is effective October 1, 1997. ARTICLE 2 DEFINITIONS The following terms have the meaning described below when used in the Plan: 2.1 "AFFILIATED COMPANY" means any corporation while such corporation is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Corporation or any other employing entity while such entity is under common control (within the meaning of Section 414(c) of the Code) of the Corporation. 2.2 "AWARD" shall mean a grant of Performance Shares under this Plan. 2.3 "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of the Corporation. 7 2.4 "CAUSE" shall mean repeated material breaches of a Key Employee's duties of employment which are not cured after receipt by the Key Employee of written notice specifying such breaches or the Key Employee's conviction of a felony involving moral turpitude. 2.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.6 "COMMITTEE" shall mean not less than three Nonemployee Directors of the Board, who, at the time of service on the Compensation Committee hereunder, are, and at all times during the twelve month period prior to his or her becoming a member shall have been, not eligible to receive an Award granted by such Committee under the Plan. 2.7 "COMMON STOCK" shall mean common stock, par value $.01 of the Corporation. 2.8 "CORPORATION" shall mean MCN Energy Group Inc. or any successor to it in ownership of all or substantially all of its assets. 2.9 "DEFERRED ACCOUNT" shall mean an account established for a Participant under Section 10.3. 2.10 "DISABILITY" shall have the meaning set forth in Section 22(e)(3) of the Code. 2.11 "KEY EMPLOYEE" shall mean an employee of the Corporation who occupies a responsible executive, professional, or administrative position and who has the capacity to contribute to the success of the Corporation, as determined by the Committee or Board. 2.12 "NONEMPLOYEE DIRECTOR" shall have the meaning ascribed to such term in Rule 16b-3 of the Securities Exchange Act of 1934. 2.13 "PARTICIPANT" shall mean a Key Employee who has been granted an Award. 2.14 "PARTICIPATING CORPORATION" shall mean the Corporation, Affiliated Company, or other affiliated entity (whether or not incorporated) designated by the Board of Directors. 2.15 "PEER GROUP" shall mean a peer group of 16 comparison companies as reflected in Attachment I. The list may be revised as and when the Board deems appropriate. 2.16 "PLAN INTEREST RATE" shall mean the average interest rate of 10-year U.S. Treasury Notes for the November of the prior calendar year, or such other rate as set by the Committee or Board. 2.17 "PERFORMANCE SHARE" shall mean an award granted under Section 6.1. 2.18 "TSR" OR "TOTAL SHAREHOLDER RETURN" shall mean the percentage increase in value at the end of a three year period of $100 invested in Common Stock at the beginning of the 2 8 period with all dividends being reinvested at the price of Common Stock at the end of the month in which the dividend is paid. To determine the value at the beginning and end of any period, a calculation is made of the average Common Stock price for the trading days from December 17 through January 15. ARTICLE 3 ADMINISTRATION 3.1 COMMITTEE AND BOARD TO ADMINISTER. The Committee and Board shall administer the Plan. A majority of the members of the Committee or Board shall constitute a quorum for the conduct of business at any meeting. They shall act by majority vote of the members present at a duly convened meeting, which may include a meeting by conference telephone call held in accordance with applicable law. Action may be taken without a meeting if written consent thereto is given in accordance with applicable law. The Committee or Board may delegate its authority to administer the Plan. 3.2 AUTHORITY OF THE COMMITTEE AND BOARD. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Corporation, and subject to the provisions herein, the Committee or Board shall have full power to select employees who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan as they apply to employees; establish, amend, or waive rules and regulations for the Plan's administration as they apply to employees; and (subject to the provisions of Article 14 herein) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee or Board as provided in the Plan. Further, they shall make all other determinations, which may be necessary or advisable for the administration of the Plan, as the Plan applies to employees. The Committee or Board may delegate its authority as identified herein. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee or Board pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive, and binding on all persons, including the Corporation, its stockholders, Directors, employees, Participants and their estates and beneficiaries. ARTICLE 4 AWARDS 4.1 ELIGIBILITY FOR AWARDS. An Award may be made to a Key Employee selected by the Committee or Board. In making this selection, and in determining the amount of the Award, consideration may be given to the functions and responsibilities of the Key Employee, his present and potential contributions to the success of the Corporation, the value of his services to the Corporation, and such other factors deemed relevant. 3 9 ARTICLE 5 PERFORMANCE CYCLE AND PERFORMANCE COMPARISON 5.1 PERFORMANCE CYCLE. The performance cycle is six years. Each performance cycle is divided into two parts of three years each. Performance cycles overlap. 5.2 PERFORMANCE COMPARISON. The performance results for the Peer Group and MCN shall be arranged on the basis of TSR from highest to lowest. The Peer Group shall be divided into equal fourths or quartiles, with I being the highest quartile and IV the lowest. ARTICLE 6 GRANT OF AWARDS 6.1 GRANT OF PERFORMANCE SHARES. Subject to the limitations of the MCN Energy Group Inc. Stock Incentive Plan, the Committee or Board shall, after such consultation with and consideration of the recommendations of management as the Committee or Board considers desirable, select those Key Employees to whom Performance Shares will be granted. The value of Performance Shares shall be based in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, Performance Shares shall be subject to such terms, restrictions, conditions, vesting requirements, and payment rules (all of which are sometimes hereinafter collectively referred to as "rules") as the Committee or Board may determine in its sole discretion. All such rules applicable to a particular award of Performance Shares shall be reflected in writing and furnished to the Key Employee at the time of grant. The rules need not be identical for each award of Performance Shares. 6.2 INITIAL INDIVIDUAL AWARD. Initial individual Awards will be established for each Key Employee during the first quarter of the fourth year of the performance cycle, in accordance with Table I of Attachment II. The major factors considered in determining the level of an individual award include: (a) prior contribution and accomplishments; (b) projected contribution and impact on driving business performance and shareholder value over the next three years; (c) career potential; and (d) retention. 6.3 INITIAL GRANT. Subject to the Committee's or the Board's discretion, the initial grant shall be made in the first quarter of the fourth year of the performance cycle, based on TSR in the first three years of the performance cycle as compared to TSR of the Peer Group. Initial grants are determined by adjusting the initial individual Award either upward or downward based on MCN's TSR performance compared to the Peer Group, as reflected in Table II on Attachment II. Other performance criteria may be used at the sole discretion of the Board or Committee. 6.4 ADJUSTMENT TO INITIAL GRANT. An adjustment of initial grants may be made at the sole discretion of (i) the Board or Committee for a Participant in Tiers I and II; and (ii) the Chairman of 4 10 MCN for any other Participant. In general, however, an initial grant shall be adjusted as described below for the circumstances listed in 6.4(a) through (e). (a) NORMAL RETIREMENT OR DISABILITY. In the event of the retirement of a Participant at age 62 or older, or retirement due to Disability, the initial grant will be unchanged unless prorated at the discretion of the Board or the Chairman of the Board, as appropriate, according to the number of whole months in the last half of the performance cycle that the Participant was an active employee. Any proration of initial grants shall be effective as of the date of retirement. Final awards, if any, will be given at the end of the performance cycle and adjusted pursuant to Section 9.1. (b) EARLY RETIREMENT. In the event of the retirement of a Participant prior to age 62, the initial grant shall be prorated according to the number of whole months in the last half of the performance cycle that the Participant was an active employee. Any proration of initial grants shall be effective as of the date of early retirement. Final awards, if any, will be given at the end of the performance cycle and adjusted pursuant to Section 9.1. (c) DEATH. In the event of the death of the Participant, the initial grant for each performance cycle shall be prorated according to the number of whole months in the last half of the performance cycle that the Participant was an active employee. The proration of initial grants shall be effective as of the date of death and such Award shall vest in accordance with Section 8.2. The final Award for each performance cycle shall be valued and paid in accordance with Sections 9.2 and 9.4. (d) OTHER TERMINATIONS. In the event of termination for any reason not described in Sections 6.4(a), (b) or (c), a Participant's initial grants may be adjusted by all, none, or any portion of the initial grants that have been given to the Participant, in accordance with subsection (e) of this section 6.4. The reduction in initial grants is effective as of the date of termination. Final awards, if any, will be given at the end of the performance cycle and adjusted pursuant to Section 9.1. (e) FOR PURPOSES OF INITIAL GRANTS ISSUED IN 1994 AND 1995 ONLY. If a Participant voluntarily terminates employment with MCN or a Participating Corporation: (i) In the first year of the second part of the performance cycle (year four), the Participant's initial grant may be reduced to zero; (ii) In the second year of the second part of the performance cycle (year five), the Participant's initial grant may be reduced to an amount not less than 10 percent of the initial grant; and (iii) In the third year of the second part of the performance cycle (year six) up through the payment of the final award (in year seven), the Participant's initial grant may be reduced to an amount not less than 20 percent of the initial grant. Final awards, if any, will be given at the end of the performance cycle and adjusted pursuant to Section 9.1. 5 11 ARTICLE 7 DIVIDEND EQUIVALENTS 7.1 DIVIDEND EQUIVALENTS. During the second part of the performance cycle (years four through six) Participants will receive dividend equivalent amounts based on the number of Performance Shares in the initial grant, as adjusted pursuant to Section 6.4. Dividend equivalents for dividends with a record date that is subsequent to a Participant's retirement or termination date, will be paid to the Participant based on the reduced number of Performance Shares, as determined under Section 6.4. ARTICLE 8 VESTING OF PERFORMANCE SHARES 8.1 VESTING DATE OF PERFORMANCE SHARES - GENERAL. Subject to the Committee's or the Board's discretion and the rules of Sections 6.4 and 16.1, Performance Shares shall fully vest and be one hundred percent (100%) nonforfeitable on the date the Board approves the final Award (the "Vesting Date"). 8.2 DEATH - PRIOR TO VESTING DATE. Subject to the Committee's or the Board's discretion and the rules of Sections 6.4 and 16.1, upon termination of employment prior to the Vesting Date by reason of the Participant's death, all Performance Shares granted to such Participant shall become fully vested and nonforfeitable as of the date of death. 8.3 COMMON STOCK HOLDING REQUIREMENT. Participants receiving Common Stock as a final award under the Plan are required to hold such Common Stock until they separate employment from the Company, to the extent the Participant does not meet the Common Stock Ownership Guidelines described in Attachment III. Participants must consult with MCN's Legal Department prior to executing any sale of Common Stock. Compliance with the Common Stock Ownership Guidelines will be determined at that time. A Participant's failure to comply with this section 8.3 shall result in disciplinary action up to and including termination of employment, at the discretion of the Board or Committee. ARTICLE 9 VALUATION AND PAYMENT OF FINAL AWARDS 9.1 AMOUNT OF FINAL AWARD - GENERAL. Final Awards will be determined by adjusting the initial grant units either upward or downward based on the Corporation's performance in years four through six of the performance cycle as compared to the TSR of the Peer Group. Calculation of TSR performance for the final Award will follow that described in Section 5.2. Other performance criteria may be used at the sole discretion of the Board or Committee. The Board will authorize the size of the final Award based on Table III in Attachment II. The 6 12 value of the final Award shall be determined using the simple average of the sales price of the shares of Common Stock, sold under the provisions of this Plan, over the five trading-day period beginning with the trading day after the day the MCN Board of Directors approves the final Award. 9.2 AMOUNT OF FINAL AWARD - DEATH. Final Awards will be determined by adjusting the initial grant units either upward or downward based on the midpoint percentage of the Corporation's TSR quartile compared to the TSR of the Peer Group for the quarter immediately preceding the Participant's date of death. The value of the final Award shall be determined using the simple average of the reported high and low prices of Common Stock on the New York Stock Exchange composite tape on the date of death. If the date of death is not a trading day, the value of the final Award shall be determined using the simple average of the reported high and low prices of Common Stock on the New York Stock Exchange composite tape on the first trading day prior to the date of death. 9.3 PAYMENT OF FINAL AWARD - GENERAL. Final Awards, in the form of Common Stock, will be made in the first quarter following the end of the six-year performance cycle. 9.4 PAYMENT OF FINAL AWARD - DEATH. The final Award, in the form of Common Stock, shall be paid to the Beneficiary no later than 120 days after the Participant's date of death. ARTICLE 10 DEFERRAL OF PAYMENTS 10.1 ELECTION TO DEFER. A Participant in Tiers I through V may elect, no later than October 31 of the calendar year preceding the calendar year in which an Award would otherwise be payable to the Participant, to defer his Award in an amount (i) not less than 50 percent, nor (ii) in excess of 100 percent of the Award less the Federal Insurance Contributions Act tax on such Award, in 10 percent increments. The Award shall be deferred until termination of employment with the Corporation (the "Deferral Period"). The Deferral Period may not extend past the date the Participant terminates employment with the Corporation for any reason. 10.2 DEFERRAL ELECTION AGREEMENT. The Committee or Board shall provide to each Key Employee a form of Deferral Election Agreement (See Attachment IV), which shall set forth the Key Employee's acceptance of the terms provided hereunder, his agreement to be bound by the terms of the Plan, and such other matters as are set forth in this Plan or deemed advisable by the Committee or Board. The most recent Deferral Election Agreement shall be effective for all payments made to a Participant under the Plan with regards to the Deferral Period, payment of dividend equivalents and distribution elections. 10.3 ESTABLISHMENT OF DEFERRED ACCOUNT. The Committee or Board shall establish a Deferred Account for each Participant in regards to the Awards the Participant has elected to defer, as set forth on his Deferral Election Agreement. 7 13 (a) DENOMINATION OF DEFERRALS - GENERAL. During the Deferral Period, a Participant's Deferred Account shall be denominated in common stock equivalents equal to the number of shares of Common Stock the Participant would have otherwise received ("Share Equivalents"), had he not made an election to defer under Section 10.1 A Participant's Deferred Account shall earn dividend equivalents during the Deferral Period in accordance with Section 10.4. (b) DENOMINATION OF DEFERRALS -AFTER COMPLETION OF DEFERRAL PERIOD OR AGE 65. On the earlier of the date (i) the Deferral Period ends or (ii) the Participant turns age 65 ("Valuation Date"), the Participant's account shall be valued on a cash basis, using the average of the high and low Common Stock price on the New York Stock Exchange Composite Tape on the Valuation Date. Such cash valuation shall be used for purposes of determining the amount of interest to be credited to the Participant's account during the period annual distributions are made to the Participant ("Payout Period") and for purposes of determining the number of shares of Common Stock that will be distributed to a Participant during the Payout Period, in accordance with Section 10.6. Interest shall be credited annually on the Anniversary Date on the declining cash balance at the Plan Interest Rate. The Human Resources Department shall notify each Participant of his account balance within a reasonable time after the end of the Participant's Deferral Period. 10.4 DIVIDEND EQUIVALENTS. Dividend equivalents equal to 50% of the dividends payable on MCN Common Stock shall be credited to a Participant's Account during the Deferral Period based on the Share Equivalents held in such Participant's Account. Dividend equivalents shall be reinvested in Share Equivalents based upon the average of the high and low Common Stock price on the dividend payment date. Alternatively, a Participant may elect on his Deferral Election Agreement to have all of such credited dividend equivalents paid directly to him in cash during the Plan Year. A Participant's election regarding dividend equivalents shall be effective for all Share Equivalents held in the Participant's Account on the January 1 immediately following execution of his Deferral Election Form and shall remain in effect until revoked by the Participant. Revocation of a dividend equivalent election shall be effective on the January 1 immediately following revocation. 10.5 TIMING OF RETIREMENT DISTRIBUTIONS. Upon completion of a Participant's Deferral Period, the distribution of the Participant's Deferred Account shall be made in accordance with the Participant's selection on his Deferral Form; either (i) in annual payments over a period not less than one year and not more than 15 years, in one year increments, or (ii) as a lump sum distribution. If no Deferral Form is on file or no distribution option is indicated on the Deferral Form, the Participant's Deferred Account shall be distributed in one lump sum. All distributions shall be paid out at the end of the quarter in which the Participant's retirement date occurs. If a Participant has elected annual payments, the initial payment shall be made at the end of the quarter in which the Participant's Deferral Period ends. All subsequent annual payments shall be made at the end of the quarter in which the anniversary of the Participant's Deferral Period ("Anniversary Date") occurs. Interest shall accrue on the value of the Participant's account from the Valuation date to the end of the quarter in which the initial payment is distributed. 8 14 10.6 FORM OF DISTRIBUTIONS. Notwithstanding the fact that a Participant's Deferred Account shall be valued on a cash basis as of the Valuation Date, the distribution to a Participant shall be paid in MCN common stock. The number of shares of Common Stock to be distributed shall equal the number of shares (rounded up to the next whole number of shares) such cash-valued Deferred Account, divided by the number of payments remaining in the Payout Period, could have purchased based on the average of the high and low Common Stock price on the New York Stock Exchange Composite Tape on the fifth trading-day prior to the end of the quarter in which Valuation Date (or Anniversary Date for all subsequent payments) occurs. The number of shares distributed annually shall be determined by amortizing the cash value of the Participant's Deferred Account over the Payout Period. Interest shall be credited annually on the declining balance at the Plan Interest Rate. The number of shares distributed annually to the Participant shall be recalculated on the Participant's Anniversary Date to reflect changes in the Plan Interest Rate, the decrease in the number of annual payments left to be made, and other changes to the Participant's Deferred Account balance. The amortization schedule shall be updated annually to reflect the average 10-year Treasury Note interest rate for the fifth trading-day prior to the end of the quarter in which Valuation Date (or Anniversary Date for all subsequent payments) in which the distribution is to be made. 10.7 TERMINATION BENEFIT. A Participant who terminates employment prior to completion of his Deferral Period shall receive payment of his Account balance in accordance with the Participant's election on his Deferral Election Agreement; either in annual payments over three years or as a lump sum distribution. If no election is indicated on the Participant's Deferral Election Agreement, the Participant's termination benefit shall be paid to him in annual payments over three years beginning no later than 120 days after termination of employment. If the Participant's account is to be paid in annual installments, the account shall be valued in accordance with Section 10.3(b), using the termination date as the Valuation Date, and the timing and form of payments shall be determined in accordance with Sections 10.5 and 10.6. 10.8 CHANGE IN PAYMENT OPTION. A Participant's election regarding the distribution of his account on his Deferral Election Agreement shall be effective for all distributions from the Participant's account on the January 1 immediately following execution of his Deferral Election Form and shall remain in effect until a different election is indicated by the Participant on a subsequent Deferral Election Form. The payment options selected by the Participant on his Deferral Election Agreement may be changed at any time by the Participant submitting a new payment selection to the Committee or Board, but a change shall be effective only if it is received by the Committee or Board at least 12 months before payments under the Plan commence. 10.9 HARDSHIP WITHDRAWAL BENEFITS. At any time prior to a distribution in accordance with Section 10.6, a Participant may request that the Committee or Board make a distribution to him of all or part of his Deferred Account within 120 days. Such distribution shall be made only if the Committee or Board determines that the Participant is suffering from a financial hardship that cannot be satisfied from his normal sources of income, and the distribution shall be limited to the amount required to meet the financial hardship. In making these determinations, the Committee or Board shall utilize the regulations proposed or adopted by the U.S. Department of Treasury pursuant to Section 401(k) of the Code and the rules under the Savings Plan. A financial hardship shall first be satisfied 9 15 from (i) a loan under the provisions of the Savings Plan, (ii) the MCN Executive Deferred Compensation Plan, and (iii) the Supplemental Savings Plan, before a hardship distribution may be made from the Plan. 10.10 INTERACTION WITH THE MCN ENERGY GROUP MANDATORY DEFERRED COMPENSATION PLAN. The portion of any Award required to be deferred under The MCN Energy Group Mandatory Deferred Compensation Plan will be deemed to be deferred in accordance with Section 10.1 of the Plan. ARTICLE 11 FUNDING OF BENEFITS 11.1 UNFUNDED PLAN. The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Corporation's general assets. The Corporation shall not be required to set aside or hold in trust any funds for the benefit of a Participant or Beneficiary, who shall have the status of a general unsecured creditor with respect to the Corporation's obligation to make benefit payments pursuant to the Plan. Any assets of the Corporation available to pay Plan benefits shall be subject to the claims of the Corporation's general creditors and may be used by the Corporation in its sole discretion for any purpose. No employee shall have voting or other rights with respect to such shares of Common Stock prior to the delivery of such shares. The Corporation shall not, by any provisions of the Plan, be deemed to be a trustee of any Common Stock or any other property under the Plan, and any liabilities of the Corporation to any employee pursuant to the Plan shall be those of a debtor pursuant to such contract obligations as are created by or pursuant to the Plan, and the rights of any employee, former employee, or beneficiary under the Plan shall be limited to those of a general creditor of the Corporation. In its sole discretion, the Board may authorize the creation of trusts or other arrangements to meet the obligations of the Corporation and each other Participating Corporation under the Plan provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. 11.2 NON-ERISA PLAN. The Plan is intended to provide benefits for "a select group of management or highly compensated employees" within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore to be exempt from Sections 2, 3 and 4 of Title 1 of ERISA. Accordingly, the Plan shall terminate and, existing account balances and other benefits in pay status shall be paid in a single, actuarially equivalent lump-sum and no further benefits, vested or non-vested, shall be paid hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. ARTICLE 12 TAX WITHHOLDINGS 10 16 12.1 TAX WITHHOLDING. The Corporation shall not make the delivery of any shares of Common Stock until the Participant has made satisfactory arrangements for the payment of any applicable withholding taxes. The tax-withholding obligation may be satisfied by any of the following means, a combination of such means, or any other means established by the Committee or Board: (a) tendering cash payment; (b) authorizing the Corporation to (i) withhold 50% of the Common Stock to be issued and (ii) facilitate the sale of such stock; or (c) delivery to the Corporation by the Participant of owned and unencumbered shares of Common Stock having an aggregate fair market value on the date the withholding tax arises less than or equal to the amount of the withholding tax obligation. The Participant must satisfy the tax-withholding obligation no later than 30 days from the date the Award vests. The Committee or Board may establish procedures it deems appropriate to assist a Participant in making such payment. ARTICLE 13 SELECTION OF AND PAYMENTS TO A BENEFICIARY 13.1 BENEFICIARY DESIGNATION. A Participant shall designate a beneficiary on his Beneficiary Designation Form, as provided in Attachment V. The designation of a beneficiary other than the Participant's spouse must be consented to in writing by the spouse. If a Participant has not designated a beneficiary, or if a designated beneficiary is not living or in existence at the time of a Participant's death, any death benefits payable under the Plan shall be paid to the Participant's spouse, if then living, and if the Participant's spouse is not then living, to the Participant's estate. 13.2 CHANGE IN BENEFICIARY DESIGNATION. A Participant may change the designated beneficiary, subject to the restriction in Section 13.1, from time to time by filing a new written designation with the Committee or Board. Such designation shall be effective upon receipt by the Committee or Board. 13.3 PRE-RETIREMENT SURVIVOR BENEFIT. If a Participant dies prior to completion of the Deferral Period, his Beneficiary shall be entitled to receive a distribution of the Participant's Deferred Account. The distribution to a beneficiary shall be paid in Common Stock equal to the number of shares of Common Stock deemed to be held in the Participant's Deferred Account and valued at the closing price of MCN Common Stock on the New York Stock Exchange composite tape on the day of the Participant's death. The distribution shall be paid in accordance with the Participant's selection on his Deferral Form; either in annual installments over a three-year period, or as a lump sum distribution. If the Participant's account is to be paid in annual installments, the account shall be valued in accordance with Section 10.3(b), using the Participant's date of death as the Valuation Date, and the timing and form of payments shall be determined in accordance with Sections 10.5 and 10.6. Payments 11 17 to the beneficiary shall begin as soon as practicable, but in no event later than one year following the Participant's death. 13.4 POST-RETIREMENT SURVIVOR BENEFIT. If a Participant dies subsequent to the start of his distribution payments under Section 10.5, his beneficiary shall be entitled to continue to receive the distribution of the Participant's Deferred Account for the remainder of the period over which benefits were being paid to the deceased Participant. ARTICLE 14 AMENDMENT AND TERMINATION 14.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Committee or Board may at any time and from time to time, alter, amend, suspend, or terminate the Plan in whole or in part; provided, however, that no amendment which requires shareholder approval in order for the Plan to continue to comply with Rule 16b-3 under the Securities Exchange Act of 1934, including any successor to such Rule, shall be effective unless such amendment shall be approved by the requisite vote of shareholders of the Corporation entitled to vote thereon. 14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. 14.3 RIGHT TO SUSPEND. If the Board determines that payments under Sections 7.1, 9.3, 9.4 or 10.5 of the Plan would have a materially adverse affect on the Company's ability to carry on its business, the Board may suspend any or all such payments temporarily for such time as in it sole discretion it deems advisable, but in no event for a period in excess of one year. The Company shall pay such suspended payments in a lump sum distribution of (i) Common Stock for payments under Sections 9.3, 9.4 and 10.6, and (ii) cash for payments under Section 7.1, immediately upon the expiration of the period of suspension. 14.4 RIGHT TO ACCELERATE. The Board in its sole discretion may accelerate all vested benefits upon termination of the Plan, and pay such benefits in a single, actuarially equivalent lump-sum distribution of Common Stock. ARTICLE 15 MISCELLANEOUS 15.1 NO RIGHT OF CONTINUED EMPLOYMENT. Neither the establishment of the Plan, the granting of an Award, or the payment of any benefits hereunder or any action of the Corporation or of the Board or of the Committee shall be held or construed to confer upon any person any legal right to be continued in the employ of the Corporation or its direct or indirect subsidiaries, 12 18 each of which expressly reserves the right to discharge any employee whenever the interest of any such Corporation in its sole discretion may so require without liability to such Corporation, the Board or the Committee except as to any rights which may be expressly conferred upon such employee under the Plan. 15.2 DELIVERY OF SHARES. No shares shall be delivered pursuant to the payment of any Award unless the requirements of such laws and regulations, as may be deemed by the Committee or Board to be applicable thereto, are satisfied. 15.3 TRANSFER AND LEAVE OF ABSENCE. A transfer of a Key Employee from a Participating Corporation to an Affiliated Company and a leave of absence duly authorized in writing by the Participating Corporation, for military service or sickness, or for any other purpose approved by the Participating Corporation, shall not be deemed a termination of employment. 15.4 MICHIGAN LAW TO GOVERN. All questions pertaining to the construction, regulation, validity, and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Michigan. 15.5 FORFEITURES. Notwithstanding any other provisions of this Plan, if the Committee or Board finds by a majority vote, after full consideration of the facts, that a Participant, before or after termination of his employment with the Corporation or an Affiliated Company for any reason: (a) committed or engaged in fraud, embezzlement, theft, commission of a felony, or proven dishonesty in the course of his employment by the Corporation or its subsidiaries, which conduct damaged the Corporation or its subsidiaries, or disclosed trade secrets of the Corporation or its subsidiaries; (b) participated, engaged in, or had a financial or other interest, whether as an employee, officer, director, consultant, contractor, shareholder, owner, or otherwise, in any commercial endeavor in the United States which has a significant competitive impact on the business of the Corporation or its subsidiaries without the written consent of the Corporation or its subsidiaries; or (c) has taken any other action that has a significant adverse impact in the Corporation or its subsidiaries, the Participant shall forfeit all outstanding Awards, which are not vested. This forfeiture requirement shall not apply to Awards that have been deferred under Article 10. Clause (b) shall not be deemed to have been violated solely by reason of the Participant's ownership of stock or securities of any publicly owned corporation, if that ownership does not result in effective control of the Corporation. The decision of the Committee or Board as to the cause of the Participant's discharge, the damage done to the Corporation or its subsidiaries, and the extent of the 13 19 Participant's competitive activity shall be final. No decision of the Committee or Board, however, shall affect the finality of the discharge of the Participant by the Corporation or its subsidiaries in any manner. 15.6 GENDER, NUMBER AND HEADING. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. Whenever any words used herein are in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings of sections and subsections as used herein are inserted solely for convenience and reference and constitute no part of the Plan. ARTICLE 16 CHANGE IN CONTROL 16.1 CHANGE IN CONTROL. In the case of a Change in Control (as defined in the MCN Energy Group Inc. Stock Incentive Plan), each Performance Share shall immediately be fully vested and any restrictions on the transfer of previously issued stock shall lapse. For this purpose, the number of Performance Shares which shall vest shall in no event be less than one hundred percent (100%) of the initial grant; provided, however, that for each outstanding award year, if the Corporation is ranked in the first or second quartile of the peer group during the second half of the performance cycle at the time of the Change in Control, the number of Performance Shares which shall vest shall be two hundred percent (200%) or one hundred fifty percent (150%), respectively, of the initial grant. Such Award and all performance shares previously deferred shall be paid within thirty (30) days of such Change in Control, either in shares of Common Stock or if the Corporation no longer has common stock outstanding, the same consideration received by the Corporation's shareholders upon the consummation of the Change in Control transaction. 16.2 TRANSFER TO RABBI TRUST. The Corporation has established a trust pursuant to a Trust Agreement dated January 3, 1991 (the "Rabbi Trust"). The terms of the Rabbi Trust provide that, in the event of a Change of Control and thereafter, assets are to be transferred to such Rabbi Trust to provide benefits under the Plan. The Corporation shall make all transfers of funds required by the Rabbi Trust in a timely manner and shall otherwise abide by the terms of the Rabbi Trust. The transfer of funds required by this section shall be made in shares of Common Stock. 16.3 JOINT AND SEVERAL LIABILITY. Upon and at all times after a Change in Control, the liability under the Plan of the Corporation and each Affiliated Company that has adopted the Plan shall be joint and several so that the Corporation and each such Affiliated Company shall each be liable for all obligations under the Plan to each employee covered by the Plan, regardless of the corporation by which such employee is employed. 14 20 IN WITNESS WHEREOF, the undersigned officer of the Corporation has executed this Plan as of this 1st day of October, 1997, pursuant to the resolution adopted by the Board of Directors of the Corporation. MCN ENERGY GROUP INC. BY: -------------------------- Alfred R. Glancy III Chairman and Chief Executive Officer Dated as of , 1998 ---------------- Effective October 1, 1997 15 21 ATTACHMENT I MCN ENERGY GROUP, INC. COMPARISON COMPANIES Due to MCN's continued transition from a utility holding company to a diversified energy holding company, a change in the companies making up the peer group for measuring Performance Share values and payouts was made beginning with the 1996 plan year.
PEER GROUP A PEER GROUP B ------------ ------------ 1. Atlanta Gas Light Company 1. CMS Energy Corporation 2. CMS Energy Corporation 2. Coastal Corporation 3. Columbia Gas System, Inc. 3. Columbia Gas System, Inc. 4. Consolidated Natural Gas Company 4. Consolidated Natural Gas Company 5. DTE Energy Company (Detroit Edison) 5. Enron Corporation 6. Equitable Resources, Inc. 6. Equitable Resources, Inc. 7. Laclede Gas Company 7. K N Energy, Inc. 8. Marketspan Corporation (Brooklyn Union) 8. Marketspan Corporation (Brooklyn Union) 9. MCN Energy Group Inc. 9. MCN Energy Group Inc. 10. National Fuel Gas Company 10. National Fuel Gas Company 11. NICOR Inc. 11. ONEOK Inc. 12. ONEOK Inc. 12. Questar Corporation 13. Peoples Energy Corporation 13. Sonat Inc. 14. Southwest Gas Corporation 14. Southwest Energy Company 15. Washington Gas Light Company 15. The Williams Companies 16. WICOR, Inc. 16. WICOR, Inc.
APPLICATION OF PEER GROUP TO PERFORMANCE CYCLES INITIAL GRANTS FINAL AWARDS -------------- ------------ Period Year Peer Group Period Year Peer Group - ------ ---- ---------- ------ ---- ---------- 1992 - 1994 1995 A 1995 - 1997 1998 A 1993 - 1995 1996 A/B 1996 - 1998 1999 B 1994 - 1996 1997 B 1997 - 1999 2000 B
22 ATTACHMENT II
TABLE I - INITIAL INDIVIDUAL AWARD - 1997 ======================================================================================================= MCN MICHCON MCNIC* CITIZEN'S TIER DESCRIPTION TARGET % TARGET % TARGET % TARGET % BASE SALARY BASE SALARY BASE SALARY BASE SALARY ======================================================================================================= I Chairman & CEO 85% N/A N/A N/A - ------------------------------------------------------------------------------------------------------- II Vice Chairman/Pres 50 - 70% 45 - 60% 50 - 70% N/A - ------------------------------------------------------------------------------------------------------- III VP/Officer/Exec. 25 - 35% 25 - 35% 25 - 40% 25 - 35% Dir. - ------------------------------------------------------------------------------------------------------- IV Director 15 - 25% 15 - 25% 15 - 30% 15 - 30% - ------------------------------------------------------------------------------------------------------- V Sr. Staff/Mgmt. 5 - 15% 5 - 15% 5 - 15% 5 - 15% - ------------------------------------------------------------------------------------------------------- VI Discretionary Up to 20% Up to 20% Up to 20% Up to 20% & Population Population Population Population VII Max. 5% of Max. 5% of Max. 5% of Max. 5% of Salary Salary Salary Salary =======================================================================================================
* Includes Mobile Bay Gathering Company and Reed Holdings.
TABLE II - INITIAL GRANT - 1997 =================================================================================================== INITIAL GRANT =================================================================================================== % OF INITIAL PEER RANKING INDIVIDUAL AWARDS =================================================================================================== 1st Quartile 125 - 200% 2nd Quartile 75 - 150% 3rd Quartile 25 - 100% 4th Quartile 0 - 50% ===================================================================================================
TABLE III - FINAL AWARD - 1997 =================================================================================================== FINAL AWARD =================================================================================================== % OF PEER RANKING INITIAL GRANT =================================================================================================== 1st Quartile 125 - 200% 2nd Quartile 75 - 150% 3rd Quartile 25 - 100% 4th Quartile 0 - 50% ===================================================================================================
2 23 ATTACHMENT II
TABLE I - INITIAL INDIVIDUAL AWARD - 1998 ======================================================================================================= MCN MICHCON MCNIC* CITIZEN'S TIER DESCRIPTION TARGET % TARGET % TARGET % TARGET % BASE SALARY BASE SALARY BASE SALARY BASE SALARY ======================================================================================================= I Chairman & CEO 160% N/A N/A N/A - ------------------------------------------------------------------------------------------------------- II Vice Chairman/Pres 100 - 120% 70 - 95% 110 - 130% N/A - ------------------------------------------------------------------------------------------------------- III VP/Officer/Exec. 45 - 55% 35 - 45% 55 - 65% 30 - 40% Dir. - ------------------------------------------------------------------------------------------------------- IV Director 25 - 35% 25 - 35% 30 - 40% 20 - 30% - ------------------------------------------------------------------------------------------------------- V Sr. Staff/Mgmt. 15 - 25% 15 - 25% 15 - 25% 10 - 20% - ------------------------------------------------------------------------------------------------------- VI Discretionary Up to 20% Up to 20% Up to 20% Up to 20% & Population Population Population Population VII Max. 5% of Max. 5% of Max. 5% of Max. 5% of Salary Salary Salary Salary =======================================================================================================
* Includes Mobile Bay Gathering Company and Reed Holdings.
TABLE II - INITIAL GRANT - 1998 =================================================================================================== INITIAL GRANT =================================================================================================== % OF INITIAL PEER RANKING INDIVIDUAL AWARDS =================================================================================================== 1st Quartile 125 - 200% 2nd Quartile 75 - 150% 3rd Quartile 25 - 100% 4th Quartile 0 - 50% ===================================================================================================
TABLE III - FINAL AWARD - 1998 =================================================================================================== FINAL AWARD =================================================================================================== % OF PEER RANKING INITIAL GRANT =================================================================================================== 1st Quartile 125 - 200% 2nd Quartile 75 - 150% 3rd Quartile 25 - 100% 4th Quartile 0 - 50% ===================================================================================================
24 ATTACHMENT III MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN COMMON STOCK OWNERSHIP GUIDELINES ------------------------------------------------------- TIER GUIDELINE ------------------------------------------------------- I 8 times salary ------------------------------------------------------- II 5 times salary ------------------------------------------------------- III 3 times salary ------------------------------------------------------- IV and V 1 times salary ------------------------------------------------------- VI and VII None ------------------------------------------------------- For purposes of meeting these guidelines, the following shares of Common Stock are included: - - Actual shares owned outright - - Shares held in the MCN Energy Group Savings and Stock Ownership Plan - - Share equivalents in deferral plans - - Unvested Performance Shares For purposes of determining when shares received from the Plan may be sold, unvested Performance Shares are excluded. 25 ATTACHMENT IV MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PLAN PERFORMANCE SHARE PROGRAM DEFERRAL ELECTION FORM ================================================================================ This Benefit Agreement is entered into between (the "Company") and , (the "Employee"), pursuant to the MCN Energy Group Inc. Long-Term Incentive Plan (the "Plan"), with an Effective Date of . ================================================================================ ELECTION TO PARTICIPATE By the execution of this Benefit Agreement, the Employee hereby elects to participate in the Plan, and understands and agrees to the following: I. Deferrals must be stated as a percentage of the Final Award to be received, with a minimum deferral of 50% of the Final Award. II. Up to 100% of the Final Award is eligible for deferral, less applicable FICA tax on the Final Award. III. The Deferral Period remains in effect until termination of employment. IV. The most recent Deferral Period and Distribution election shall be effective for all amounts payable to the Employee under the Plan. V. All Deferral elections are irrevocable and can be modified only in accordance with the Plan. I ELECT TO DEFER % OF THE MCN ENERGY GROUP INC. COMMON STOCK I WILL RECEIVE AS A FINAL AWARD OF THE PERFORMANCE SHARES INITIALLY GRANTED TO ME ON . I UNDERSTAND THAT MY DEFERRAL PERIOD FOR ALL SHARE EQUIVALENTS HELD FOR ME UNDER THE PLAN SHALL REMAIN IN EFFECT UNTIL MY TERMINATION OF EMPLOYMENT WITH THE COMPANY. ================================================================================ DIVIDEND EQUIVALENT PAYMENT ELECTION I elect to have the dividend equivalents (equal to 50% of the MCN Energy Group Inc. common stock dividend rate) from my deferral account shares: [ ] Paid to me in cash; or [ ] Reinvested in my deferral account. ================================================================================ DISTRIBUTION ELECTIONS (PLEASE MAKE ONE (1) ELECTION PER BENEFIT CATEGORY) A. Pre-Retirement Survivor Benefits: [ ] Single Lump Sum Payment; OR [ ] Annual Installments Over a Three (3) Year Period B. Normal Retirement Benefits: [ ] Single Lump Sum Payment; OR [ ] Annual Installments Over a Year Period (not to exceed 15 years) C. Termination Prior To Retirement: [ ] Single Lump Sum Payment; OR [ ] Annual Installments Over a Three (3) Year Period NOTE: A Post-Retirement Survivor Benefit will continue payments which have commenced under any of the Installment Payout Options until the full payment period is satisfied. ================================================================================ ACCEPTANCE OF PLAN TERMS AND BENEFITS The Employee hereby agrees to all of the terms and conditions of the Plan as set forth in the Plan document. Participation in the Plan indicates the Employee's acceptance on his/her own behalf and on the behalf of his/her designated Beneficiary of the terms of entitlement to all Plan benefits whether payable to the Employee or his/her survivor. The Employee further understands that no assets of the Company are to be segregated to pay benefits under the Plan. No officer, employee, or representative of the Company is authorized to vary such terms and conditions verbally or in writing. The Plan may be modified only by an amendment to the Plan adopted by the Committee or the Board of Directors. The employee understands that a distribution election other than a lump sum will result in a distribution of a set dollar amount, plus interest, and not a set number of shares of Common Stock. - ---------- --------------------- -------------------------- Date Print Employee's Name Employee's Signature 26 ATTACHMENT V ================================================================================ MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN BENEFICIARY DESIGNATION FORM ================================================================================ - --------------------------- ----------------------- ----------------- Employee Name (Please Print) Social Security Number Employee I.D.# DESIGNATION OF BENEFICIARY The Plan provides certain death benefits to the Employee's designated Beneficiary. You may change your beneficiary designation at any time by executing a new Beneficiary Designation Form. Beneficiary Designation Forms are available through the Plan Committee. I hereby designate the following Beneficiary, in the event of my death, for any and all survivor benefits payable under the MCN Energy Group Inc. Long-Term Incentive Performance Share Plan: Primary Beneficiary: ------------------------------------------------------- Relationship to Employee: Address: -------------------- ---------------------- ---------------------- Contingent Beneficiary: ---------------------------------------------------- Relationship to Employee: Address: -------------------- ---------------------- ---------------------- In the event none of the above-named beneficiaries survive me, any unpaid amounts shall be paid to my lawful successor in interest. I reserve the right to change this beneficiary designation at any time by filing with the Committee or its designee a new Beneficiary Designation Form. I understand that my most recent election as to the beneficiary designation will apply to all award amounts payable to me at any time. - ---------- -------------------------- Date Employee's Signature ================================================================================ SPOUSAL CONSENT (REQUIRED FOR ALL NON-SPOUSAL PRIMARY BENEFICIARY DESIGNATIONS) I hereby consent to the above election of Beneficiary by my spouse for survivor benefits payable under the MCN Energy Group Inc. Long-Term Incentive Performance Share Plan. Further, I hereby acknowledge that I understand (1) that the effect of my consent may be to forfeit benefits I would be entitled to receive upon my spouse's death; (2) that my spouse's designation is not valid unless I consent to it; and (3) that my consent is irrevocable unless my spouse revokes the designation above. ---------- ------------------------ -------------------------- Date Print Spouse's Name Spouse's Signature ================================================================================ 27 MCN ENERGY GROUP INC. LONG-TERM INCENTIVE PERFORMANCE SHARE PLAN Historical Background 2/25/93 Plan adopted. 5/23/96 Plan amended and restated. 10/1/97 Plan amended and restated EX-10.11 4 MCN ENERGY GROUP SAVINGS AND STOCK OWNERSHIP PLAN 1 EXHIBIT 10-11 MCN ENERGY GROUP SAVINGS AND STOCK OWNERSHIP PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998) 2 MCN ENERGY GROUP SAVINGS AND STOCK OWNERSHIP PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998) TABLE OF CONTENTS
Page ---- ARTICLE I THE PLAN.................................................................................................1 1.1 Establishment and Amendment of the Plan.......................................................................1 1.2 Applicability of the Plan.....................................................................................1 1.3 Purpose and Type of Plan......................................................................................1 ARTICLE II DEFINITIONS..............................................................................................1 2.1 Actual Deferral Percentage....................................................................................2 2.2 Affiliated Company............................................................................................2 2.3 Anniversary Date..............................................................................................2 2.4 Annual Addition...............................................................................................2 2.5 Average Actual Deferral Percentage............................................................................2 2.6 Average Contribution Percentage...............................................................................2 2.7 Break in Service Year.........................................................................................2 2.8 Code..........................................................................................................2 2.9 Committee.....................................................................................................2 2.10 Company.......................................................................................................2 2.11 Compensation..................................................................................................2 2.12 Contribution Percentage.......................................................................................3 2.13 Disability Retirement Date....................................................................................4 2.14 Elective Deferrals............................................................................................4 2.15 Eligible Employee.............................................................................................4 2.16 Employee......................................................................................................4 2.17 Employee Post-1986 Voluntary Deduction Account................................................................4 2.18 Employee Pre-1987 Voluntary Deduction Account.................................................................4 2.19 Employee Salary Reduction Account.............................................................................4 2.20 Employer......................................................................................................4 2.21 Employer Salary Reduction Account.............................................................................5 2.22 Employer Voluntary Deduction Account..........................................................................5 2.23 ERISA.........................................................................................................5 2.24 ESOP..........................................................................................................5 2.25 ESOP Account..................................................................................................5 2.26 Excess Aggregate Contributions................................................................................5 2.27 Excess Contributions..........................................................................................5
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Page ---- 2.28 Excess Deferrals..............................................................................................5 2.29 Highly Compensated Employee...................................................................................5 2.30 Hour of Employment............................................................................................5 2.31 MCN Stock.....................................................................................................5 2.32 Military Service..............................................................................................6 2.33 Nonhighly Compensated Employee................................................................................6 2.34 Normal Retirement Date........................................................................................6 2.35 Participant...................................................................................................6 2.36 Plan..........................................................................................................6 2.37 Plan Account..................................................................................................6 2.38 Plan Year.....................................................................................................6 2.39 Regulations...................................................................................................6 2.40 Salary Reduction..............................................................................................6 2.41 Salary Reduction Account......................................................................................6 2.42 Savings Plan Account..........................................................................................6 2.43 Suspense Account..............................................................................................6 2.44 Trust.........................................................................................................6 2.45 Trust Agreement...............................................................................................6 2.46 Trustee.......................................................................................................7 2.47 Valuation Date................................................................................................7 2.48 Vesting Requirement...........................................................................................7 2.49 Voluntary Deduction...........................................................................................7 2.50 Voluntary Deduction Account...................................................................................7 2.51 Years of Service..............................................................................................7 ARTICLE III PARTICIPATION AND SERVICE...............................................................................7 3.1 Eligibility Requirements......................................................................................7 3.2 Eligibility Upon Merger or Reemployment.......................................................................8 3.3 Collective Bargaining Agency..................................................................................8 3.4 Applications..................................................................................................9 3.5 Years of Service..............................................................................................9 3.6 Break in Service Year........................................................................................10 3.7 Hours of Employment..........................................................................................10 3.8 Employment by Related Entities...............................................................................11 3.9 Leased Employees.............................................................................................12 ARTICLE IV CONTRIBUTIONS..........................................................................................12 4.1 Employee Contributions.......................................................................................12 4.2 Employer Savings Plan Contributions..........................................................................13 4.3 Employer ESOP Contributions..................................................................................14 4.4 Additional Employer Contributions............................................................................15 4.5 Rollover Contributions.......................................................................................15 4.6 Transfers from the MichCon Investment and Stock Ownership Plan...............................................16
ii 4
Page ---- 4.7 Limitations on Salary Reduction Contributions................................................................17 4.8 Distribution of Excess Deferrals.............................................................................18 4.9 Distribution or Recharacterization of Excess Contributions...................................................19 4.10 Limitations on Voluntary Deduction Contributions and Employer Contributions..................................20 4.11 Disposition of Excess Aggregate Contributions................................................................21 4.12 Statutory (Code Section 415) Limitations on Allocations to Accounts..........................................23 ARTICLE V VESTING IN ACCOUNTS......................................................................................25 5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary Deduction Account, and Employee Pre-1987 Voluntary Deduction Account..........................................................25 5.2 Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account...........................................................................................25 ARTICLE VI INVESTMENT PROVISIONS...................................................................................26 6.1 Investment of Contributions..................................................................................26 6.2 Change of Investment Direction...............................................................................26 6.3 Transfers Between Investment Funds...........................................................................27 ARTICLE VII INVESTMENT FUNDS.......................................................................................27 7.1 Investment Funds.............................................................................................27 7.2 Management of Investment Funds...............................................................................27 7.3 Voting of MCN Stock..........................................................................................27 7.4 Tender Offers................................................................................................28 7.5 Named Fiduciary Status.......................................................................................29 7.6 Expenses of Funds............................................................................................29 ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN......................................................................29 8.1 Committee to Maintain........................................................................................29 8.2 Plan Accounting..............................................................................................30 8.3 Valuation of Funds...........................................................................................30 8.4 Valuation of Savings Plan Account............................................................................30 8.5 Valuation of ESOP Account....................................................................................30 8.6 Valuation of Plan Account....................................................................................30 8.7 Committee to Furnish Annual Statements of Value of Plan Accounts.............................................30 8.8 Trust Agreement..............................................................................................30
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Page ---- ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS....................................................................31 9.1 Distribution Upon Termination of Employment Entitling Participant to Value of Plan Account.............................................................31 9.2 Distribution Upon Termination of Employment Under Circumstances Resulting in Forfeiture of Employer Contributions............................................31 9.3 Certain Distributions from Participant Accounts..............................................................32 9.4 In-Service Withdrawals--General..............................................................................32 9.5 Withdrawal of Voluntary Deduction Contributions..............................................................32 9.6 Hardship Withdrawal of Salary Reduction Contributions........................................................33 9.7 Time of Distributions........................................................................................34 9.8 Distributions of Stock.......................................................................................36 9.9 Distributions from Fixed Income Fund.........................................................................36 9.10 Loans........................................................................................................38 9.11 Definition of Employee Contributions and Employer Contributions..............................................40 9.12 Spousal Consent to Payment...................................................................................40 9.13 Distributions Pursuant to a Qualified Domestic Relations Order...............................................40 9.14 Direct Rollovers of Eligible Distributions...................................................................41 9.15 Special Distribution Events..................................................................................42 ARTICLE X ADMINISTRATION...........................................................................................42 10.1 The MCN Energy Group Master Trust, Retirement and Savings Plan Committee.....................................42 10.2 Notice to Employees..........................................................................................44 10.3 Notices to Employers or Committee............................................................................44 10.4 Participants' Acceptance of the Provisions of the Plan.......................................................44 10.5 Audit of Plan Records........................................................................................44 10.6 Claims Procedure.............................................................................................45 10.7 Effect of a Mistake..........................................................................................45 ARTICLE XI AMENDMENT AND TERMINATION...............................................................................45 11.1 Amendment....................................................................................................45 11.2 Withdrawal...................................................................................................46 11.3 Termination..................................................................................................46 11.4 Allocation of Funds Between Employers........................................................................46 11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries.....................................46 ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES..................................................................46 12.1 Adoption of the Plan.........................................................................................47 12.2 Withdrawal from the Plan.....................................................................................47 12.3 Company as Agent for Employers...............................................................................47
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Page ---- ARTICLE XIII TOP-HEAVY PLAN RULES...................................................................................47 13.1 Application of Top-Heavy Plan Rules..........................................................................47 13.2 Special Definitions..........................................................................................47 13.3 Determination of Top-Heavy Status............................................................................49 13.4 Superseding Rules............................................................................................51 13.5 Participants in More Than One Top-Heavy Plan of the Employer.................................................52 13.6 Changes in Applicable Vesting Schedule.......................................................................52 ARTICLE XIV SPECIAL PROVISIONS RELATING TO THE ESOP................................................................53 14.1 Establishment of ESOP........................................................................................53 14.2 ESOP Account.................................................................................................53 14.3 Discrimination Testing.......................................................................................53 14.4 Loans........................................................................................................53 14.5 Diversification..............................................................................................55 14.6 Put Option...................................................................................................55 14.7 Purchase of MCN Stock........................................................................................56 ARTICLE XV MISCELLANEOUS...........................................................................................56 15.1 Beneficiary Designation......................................................................................56 15.2 Incompetency.................................................................................................57 15.3 Expenses.....................................................................................................57 15.4 Nonassignability.............................................................................................57 15.5 Employment Noncontractual....................................................................................58 15.6 Merger or Consolidation with Another Plan....................................................................58 15.7 Continuance by a Successor...................................................................................58 15.8 USERRA Rights................................................................................................58 15.9 Construction.................................................................................................58 ARTICLE XVI REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS....................................................59 16.1 Redesignation of ESOP Portion of Plan........................................................................59 16.2 Allocation of Savings Plan Account Balances to ESOP Portion of Plan..........................................59 16.3 Distribution of Dividends on MCN Stock.......................................................................59
v 7 MCN ENERGY GROUP SAVINGS AND STOCK OWNERSHIP PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998) ARTICLE I THE PLAN 1.1 Establishment and Amendment of the Plan. MCN ENERGY GROUP INC. (hereinafter referred to as the "Company") presently maintains a savings and stock ownership plan for the benefit of its Eligible Employees and the Eligible Employees of its participating Affiliated Companies. The plan was previously sponsored by Michigan Consolidated Gas Company, a subsidiary of the Company. The plan was last restated effective as of January 1, 1989 and was then known as the MichCon Savings and Stock Ownership Plan, and was amended from time to time thereafter. The plan is hereby further amended and completely restated as set forth herein effective as of January 1, 1998, except as otherwise provided herein or required by law (for instance, certain provisions herein are legally required to be effective as of January 1, 1997, and are therefore effective as of such date), and shall be known as the "MCN Energy Group Savings and Stock Ownership Plan" (the "Plan"). The ESOP provisions of the Plan became effective as of April 1, 1989. 1.2 Applicability of the Plan. Except as otherwise specified herein or required by law, the provisions of the Plan as amended and restated herein effective as of January 1, 1998, shall be applicable only with respect to Eligible Employees of an Employer in current employment on or after January 1, 1998, and their beneficiaries. Any person who was covered under the Plan as in effect prior to January 1, 1998, and whose employment terminated under the Plan prior to January 1, 1998, shall continue to have his rights to receive benefits determined under the provisions of the Plan in effect when his employment relationship so terminated, subject to legally required changes prior to January 1, 1998 as described herein. 1.3 Purpose and Type of Plan. The purpose of the Plan is to provide a convenient way for Participants to save on a regular and long-term basis for their retirement income needs; to recognize the contribution made to the Employer's successful operation by its employees and to reward such contribution for those employees who qualify as participants under the terms of the Plan; and to facilitate ownership of MCN Stock by participating Eligible Employees. The non-ESOP portion of the Plan is intended to qualify as a profit-sharing plan and the ESOP portion of the Plan is intended to qualify as a stock bonus and an employee stock ownership plan for purposes of Code sections 401(a), 402, 412, 417, 4975, and related provisions. ARTICLE II DEFINITIONS Whenever used in the Plan, the following words and phrases shall have the respective meanings stated below unless a different meaning is plainly required by the context: 1 8 2.1 "Actual Deferral Percentage" means the ratio (expressed as a percentage) of (a) the Elective Deferrals of an Employee who is eligible to participate in the Plan for a Plan Year, to (b) the Compensation of that Employee for such Plan Year. 2.2 "Affiliated Company" means-- (a) any corporation other than the Company, i.e., either a subsidiary corporation or an affiliated or associated corporation of the Company, which together with the Company is a member of a "controlled group" of corporations (as defined in Code section 414(b)); (b) any organization which together with the Company is under "common control" (as defined in Code section 414(c)); (c) any organization which together with the Company is an "affiliated service group" (as defined in Code section 414(m)); or (d) any other entity required to be aggregated with the Company pursuant to Regulations under Code section 414(o). 2.3 "Anniversary Date" means with respect to each Employee, the anniversary each year of the Employee's first Hour of Employment. If an Employee whose employment was terminated is reemployed but prior to his reemployment he incurs a Break in Service Year or following his reemployment he incurs a Break in Service Year before completing a Year of Service, his Anniversary Date shall be based upon his first Hour of Employment coincident with or next following his date of reemployment; otherwise, his Anniversary Date shall not be changed. 2.4 "Annual Addition" means the amount allocated to a Participant's account, as such term is defined in section 4.12(a). 2.5 "Average Actual Deferral Percentage" means the average (expressed as a percentage) of the Actual Deferral Percentages of the Employees in a group who are eligible to participate in the Plan for a Plan Year. 2.6 "Average Contribution Percentage" means the average (expressed as a percentage) of the Contribution Percentages of the Employees in a group who are eligible to participate in the Plan for a Plan Year. 2.7 "Break in Service Year" means a 12-month period described in section 3.6. 2.8 "Code" means the Internal Revenue Code of 1986, as amended. 2.9 "Committee" means the committee appointed pursuant to section 10.1 to administer the Plan. 2.10 "Company" means MCN Energy Group Inc. 2.11 "Compensation" means a Participant's pay, determined as follows: 2 9 (a) For all purposes of the Plan, except as otherwise specified in (b) or (c) below or required by the context, Compensation includes and excludes the following items paid to the Employee: (i) Includible: (A) regular basic salary or wage paid to an Employee by the Employer before any payroll deduction for taxes, Salary Reductions, cafeteria plan elections or any other purpose, (B) shift differential (effective July 1, 1998); (C) sales commissions (effective January 1, 1999); and (D) For Employees who are participating in the cash balance portion of the MCN Energy Group Retirement Plan (or any successor plan), overtime and bonus payments (effective January 1, 1999). (i) Excludable: except to the extent specifically included in (i)(D) above, merit, incentive and other similar payments made in the form of a lump sum, bonuses, awards, shift differentials (prior to July 1, 1998), commissions (prior to January 1, 1999), deferred compensation, severance payments, differential payments made by reason of the Employee's entry into Military Service, all amounts paid for work in excess of 40 hours in any one week, all overtime or other premium paid for work in excess of a maximum number of hours in any one day, for work on holidays or for any other reason, payments for so-called fringe benefits such as Employer contributions to this Plan or any pension or retirement plan, increased wages or salary resulting from temporary promotion, upgrading or transfer, of whatever duration, to a higher paid job or classification, and any other premium, auxiliary, or special pay of any sort whatsoever. (b) For purposes of satisfying the limits on contributions described in sections 4.7 and 4.10 (ADP and ACP tests) and applying the limits of section 415 of the Code as described in section 4.12, Compensation shall mean "compensation" as defined in Treas. Regulation ss. 1.415-2(d) or any successor regulation. (c) For purposes of determining whether an individual is a Highly Compensated Employee, Compensation means an Employee's Compensation as defined in subsection (b) above but without regard to Code sections 125, 402(a)(8), and 402(h)(1)(B) (i.e., with the addition of elective deferrals pursuant to a cafeteria plan, a cash-or-deferred arrangement, or a simplified employee pension during periods in which such items are excluded under subsection (b)). (d) In accordance with Code Section 401(a)(17), the Compensation of each Employee that may be taken into account under the Plan, except for purposes of section 4.10, shall not exceed the first $150,000 of an Employee's Compensation (as adjusted pursuant to Code section 401(a)(17)). 2.12 "Contribution Percentage" means 3 10 (a) with respect to the non-ESOP portion of the Plan, the ratio (expressed as a percentage) of the sum of Voluntary Deduction contributions and the Employer contributions under section 4.2 made on behalf of an Employee who is eligible to participate for a Plan Year to the Compensation of the Employee for such Plan Year; provided, however, that in accordance with Code section 401(m), the Company may elect to take into account Elective Deferrals in computing such Contribution Percentage; and (b) with respect to the ESOP portion of the Plan, the ratio (expressed as a percentage) of the sum of the Employer contributions under section 4.3(a) made on behalf of an Employee who is eligible to participate and the value of the shares allocated under section 14.4(d) to the ESOP Account of the Employee for a Plan Year to the Compensation of the Employee for such Plan Year. 2.13 "Disability Retirement Date" means the date a Participant (i) becomes eligible to receive benefits under a long-term disability plan maintained by the Employer, or (ii) is determined by the Committee to be totally and permanently disabled. In determining whether a Participant is totally and permanently disabled, the Committee may, in its discretion, rely on the opinion of a physician selected by the Committee to assist it in making such a determination. 2.14 "Elective Deferrals" means Salary Reduction contributions under section 4.1(a) and contributions under other plans maintained by the Company or an Affiliated Company that constitute elective deferrals within the meaning of Code section 402(g)(3). 2.15 "Eligible Employee" means an Employee of an Employer, other than a "leased employee" (whether or not described in section 3.9) or an Employee covered by a collective bargaining agreement between Employee representatives and the Employer. 2.16 "Employee" means an individual who is an employee of the Company or an Affiliated Company (including, for certain purposes described in Section 3.9, a "leased employee" as described in Section 3.9), but shall not include an individual who enters into a formal or informal independent contractor agreement with the Company or is otherwise treated as an independent contractor under the payroll practices of the Company. 2.17 "Employee Post-1986 Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions after December 31, 1986, and investment gains and losses therefrom. 2.18 "Employee Pre-1987 Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions before January 1, 1987, and investment gains and losses therefrom. 2.19 "Employee Salary Reduction Account" means an Employee's Salary Reduction contributions, and investment gains and losses therefrom. 2.20 "Employer" means the Company and any Affiliated Company which has adopted the Plan with the consent of the Company and in the manner prescribed in section 12.1 and any successor corporation which shall adopt the Plan pursuant to section 15.7. If any such corporation shall withdraw from participation in the Plan in accordance with section 12.2, the term Employer shall not thereafter include such corporation. 4 11 2.21 "Employer Salary Reduction Account" means the Employer contributions to the Salary Reduction Account of an Employee pursuant to section 4.2, and investment gains and losses therefrom. 2.22 "Employer Voluntary Deduction Account" means the Employer contributions to the Voluntary Deduction Account of an Employee pursuant to section 4.2, and investment gains and losses therefrom. 2.23 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.24 "ESOP" means the employee stock ownership plan established pursuant to section 14.1, as modified by Article XVI. 2.25 "ESOP Account" means the account established and maintained on behalf of each Participant in accordance with sections 8.1(c) and (d) and 14.2. 2.26 "Excess Aggregate Contributions" means the amount described in section 4.11(a). 2.27 "Excess Contributions" means the amount described in section 4.9(a). 2.28 "Excess Deferrals" means the portion of Elective Deferrals for a calendar year, if any, described in section 4.8. 2.29 "Highly Compensated Employee" with respect to any Plan Year beginning on or after January 1, 1997, shall include highly compensated active employees and highly compensated former employees. A highly compensated active employee includes any Employee who performs service for an Employer during the determination year and who, during the look-back year received Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 415(d)), or who was a 5-percent owner at any time during the determination year or the look-back year. For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. A highly compensated former employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performed no service for the Employer during the determination year, and was a highly compensated active employee for either the separation year or any determination year ending on or after the employee's 55th birthday. The determination of who is a Highly Compensated Employee will be made in accordance with Section 414(q) of the Code and the regulations thereunder. 2.30 "Hour of Employment" means an hour for which an individual receives credit pursuant to section 3.7. 2.31 "MCN Stock" means common stock of MCN Energy Group Inc.. 5 12 2.32 "Military Service" means service (a) on active duty, in time of national or local emergency, in the armed forces of the United States or of any State thereof, (b) in the armed forces of the United States or of any State thereof under any compulsory service law, or (c) in the armed forces of the United States or any of its allies in time of war in which the United States is engaged. 2.33 "Nonhighly Compensated Employee" means an Employee of the Employer who is not a Highly Compensated Employee. 2.34 "Normal Retirement Date" means the Participant's sixty-fifth birthday, if such birthday falls on the first day of the month; otherwise, the first day of the month next following the month in which such birthday occurs. 2.35 "Participant" means an Employee who is participating in the Plan in accordance with its provisions. 2.36 "Plan" means the MCN Energy Group Savings and Stock Ownership Plan and any amendments thereto or restatements thereof from time to time adopted. 2.37 "Plan Account" means the total value of an Employee's Savings Plan Account and ESOP Account. 2.38 "Plan Year" means the calendar year. 2.39 "Regulations" means regulations issued by the Department of Labor construing Title I of ERISA or by the Internal Revenue Service construing the Code. 2.40 "Salary Reduction" means an election by a Participant to have the Compensation that would otherwise be payable reduced and contributed by the Employer to the Plan as a regular contribution on behalf of the Participant. 2.41 "Salary Reduction Account" means an Employee's Salary Reduction contributions, related Employer matching contributions, and investment gains and losses therefrom. 2.42 "Savings Plan Account" means the total value of an Employee's Salary Reduction Account and Voluntary Deduction Account. 2.43 "Suspense Account" means the account used to reflect MCN Stock acquired with loan proceeds pursuant to section 14.4. 2.44 "Trust" means the Trust created by agreement between the Employers and the Trustee, as from time to time amended. 2.45 "Trust Agreement" means the agreement between the Employers and the Trustee referred to in section 8.8. 6 13 2.46 "Trustee" means the Trustee hereinafter provided for in section 8.8 TRUSTEE UNDER THE TRUST AGREEMENT or any successor Trustee TRUSTEE. 2.47 "Valuation Date" means each business day on which the New York Stock Exchange shall be open for business. 2.48 "Vesting Requirement" means the requirement for vesting described in section 5.2. 2.49 "Voluntary Deduction" means an Employee's payroll deduction contributions other than Salary Reduction contributions. 2.50 "Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions, related Employer matching contributions, and investment gains and losses therefrom. 2.51 "Years of Service" means year(s) of employment of an Employee by an Employer or nonparticipating Affiliated Company as such term is defined in section 3.5. ARTICLE III PARTICIPATION AND SERVICE 3.1 Eligibility Requirements. (a) Each individual who was eligible to participate in the Plan on December 31, 1997, in accordance with the terms of the Plan in effect on said date shall continue to be eligible to participate, subject to the provisions of this Plan. Each other Employee shall become eligible to participate on the latest to occur of-- (i) Prior to February 1, 1999: (A) the date he is employed as an Eligible Employee, (B) the date on which he completes at least one year of eligibility service (as defined in section 3.1(b)), or (C) the date on which he attains age 21; (ii) On and after February 1, 1999: (A) the date he is employed as an Eligible Employee, or (B) the date on which he completes at least three (3) months of eligibility service (as defined in section 3.1(b)); provided he is employed as an Eligible Employee on such date. (b) For purposes of this Article III, a year of eligibility service shall mean the 12-month period beginning on the date of an Employee's first Hour of Employment, or the 12- 7 14 month period beginning on an Employee's Anniversary Date during which he completes at least 1,000 Hours of Employment, and three months of eligibility service shall mean the 3-month period beginning on the date of an Employee's first Hour of Employment. 3.2 Eligibility Upon Merger or Reemployment. (a) Merger. Any Employee who is a Participant in any plan which is merged into this Plan shall become a Participant in this Plan immediately upon the effective date of the merger. Such an Employee shall be eligible to actively participate in this Plan in accordance with Section 3.4. (b) Reemployment. In the event an Employee's employment is terminated and such individual is later reemployed as an Eligible Employee: (i) If the re-employed REEMPLOYED Eligible Employee had not met the age and service requirements for participation in the Plan during his prior period of employment but was re-employed REEMPLOYED before incurring a Break in Service Year, his prior period of employment shall be included for purposes of determining his eligibility for participation in the Plan. (ii) If the re-employed REEMPLOYED Eligible Employee had not met the age and service requirements for participation in the Plan during his prior period of employment and incurred a Break in Service Year, he must meet the participation requirements of Section 3.1 as if he were a new employee. (iii) If the re-employed REEMPLOYED Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment and incurred a Break in Service Year, and, pursuant to the Break in Service Year rules his years of eligibility service are disregarded, he must meet the participation requirements of Section 3.1 as if he were a new employee. (iv) If the re-employed REEMPLOYED Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment and incurred a Break in Service Year, but pursuant to the Break in Service Year rules his years of eligibility service are not disregarded, he shall again participate in the Plan on the date of his reemployment; (v) If the re-employed REEMPLOYED Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment and did not incur a Break in Service Year, he shall again participate as of the date of his reemployment or, if later, the date upon which he would have begun participation if not for the termination and reemployment. 3.3 Collective Bargaining Agency. If any Employee shall become a Participant in the Plan and shall thereafter be represented by a collective bargaining agency pursuant to a collective bargaining agreement between his Employer and the collective bargaining agency 8 15 representing such Employee, shall be eligible thereafter only if such agreement shall expressly so provide. If such an Employee becomes eligible to participate in the MichCon Investment and Stock Ownership Plan or any successor plan, his entire Plan Account shall be transferred to such plan and the Employee shall no longer be eligible to participate in this Plan. The Participant's Plan Account shall be fully vested upon such transfer. 3.4 Applications. An Employee who is eligible to participate on the date the Plan becomes effective with respect to his Employer may become a Participant commencing with such effective date by filing a written application with his Employer in the form prescribed by the Committee. Thereafter, an Eligible Employee may become a Participant by filing a written application with his Employer in the form prescribed by the Committee, and his participation in the Plan will commence within a reasonable time thereafter following processing of his application. The Employee's application shall authorize the Employer to deduct contributions from the Employee's Compensation in amounts specified by the Employee pursuant to Article IV, and to have contributions made as a Salary Reduction pursuant to Article IV. The application shall evidence the Employee's acceptance of and agreement to all of the provisions of the Plan. 3.5 Years of Service. An Employee shall be credited for Years of Service for his period of employment with the Employer and each nonparticipating Affiliated Company, determined as follows: (a) An Employee shall receive credit, for purposes of vesting, for all Years of Service. An Employee shall have one "Year of Service" for each 12-month period beginning on the date of the Employee's first Hour of Employment and on each subsequent Anniversary Date, during which the Employee completes 1,000 or more Hours of Employment. (b) Years of Service shall not be interrupted (i) by any transfer of employment of an Employee between Affiliated Companies regardless of whether the Affiliated Company is an Employer hereunder; or (ii) during such period as an Employee is receiving credit for Hours of Employment under section 3.7. (c) If an Employee is reemployed following a Break in Service Year, he shall be considered a new Employee for purposes of the Plan, except-- (i) If prior to such Break in Service Year he had a vested interest in his ESOP Account, Employer Salary Reduction Account, or Employer Voluntary Deduction Account, Years of Service he had prior to the Break in Service Year shall be reinstated after such Employee completes a Year of Service after such Break in Service Year. (ii) If paragraph (i) is not applicable, and if the Employee's number of consecutive Break in Service Years does not equal or exceed the greater of five or the number of Years of Service he had before incurring a Break in Service Year, the Years of Service he had prior to such Break in Service Years shall be reinstated after such Employee completes a Year of Service after such Break in Service Years. 9 16 (d) Notwithstanding the foregoing provisions, an Employee's Years of Service shall exclude any Years of Service completed before an Employee attains age 18. 3.6 Break in Service Year. "Break in Service Year" shall mean a 12-month period beginning on an Employee's Anniversary Date during which the Employee has not completed more than 500 Hours of Employment (as defined in section 3.7). Notwithstanding the foregoing, the following periods shall not be deemed to be Break in Service Years: (a) If a Participant retires on his Disability Retirement Date, thereafter ceases to be totally and permanently disabled, and returns to the employ of an Employer, the period between his Disability Retirement Date and the date as of which he ceases to be totally and permanently disabled. (b) If a Participant commences receiving benefits under a long-term disability benefit program maintained by an Employer and thereafter ceases to receive benefits under such program and returns to the employ of the Employer, the period during which he was receiving benefits under such program. If an Employee incurs a Break in Service Year and prior to such Break in Service Year has not completed five Years of Service, his Years of Service completed prior to such a Break in Service Year shall be disregarded unless he completes a Year of Service after such Break in Service Year and before the total of such Break in Service Year and any ensuing consecutive Break in Service Years equals the greater of five or the number of his Years of Service (as defined in section 3.5 but without excluding Years of Service completed prior to attaining age 18) prior to such Break in Service Year. 3.7 Hours of Employment. "Hours of Employment" shall mean, for any individual performing or who has performed services for one or more Employers or nonparticipating Affiliated Companies, the sum of the following: (a) All hours for which the individual is directly or indirectly paid or entitled to payment by an Employer or nonparticipating Affiliated Company for the performance of duties. These hours shall be credited to the individual for the computation period or periods in which the duties are performed. (b) Except as provided in section 3.7(e) below, all hours for which the individual is directly or indirectly paid or entitled to payment by an Employer or nonparticipating Affiliated Company for reasons (such as vacation, holiday, sickness, incapacity, layoff, jury duty, leave of absence, Military Service, or disability) other than for the performance of duties. These hours shall be credited to the individual for the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. (c) All hours for which back pay, irrespective of mitigation of damages, has been awarded, agreed to, or paid by an Employer or nonparticipating Affiliated Company, with no duplication of credit for hours. These hours shall be credited to the individual for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made. 10 17 (d) Except as provided in section 3.7(e) below, eight Hours of Employment per day for each working day that an individual is absent from work without pay for an approved leave of absence, voluntary time, sick time, disciplinary leave, or Military Service if the individual returns to the employ of an Employer or nonparticipating Affiliated Company within 90 days after the end of such period. These hours shall be credited to the individual for the computation period or periods in which the period during which no duties are performed occurs, beginning with the first such period. (e) Eight Hours of Employment per day for each working day that an individual is absent from work with or without pay because of pregnancy of the individual, birth of a child to the individual, placement of a child with the individual in connection with the adoption of such child by such individual, or caring for such child for a period beginning immediately following such birth or placement. The Committee may, in its discretion, request such information from the individual as the Committee shall deem relevant in order to verify that an absence is for the reasons described in this subsection (e). Notwithstanding the foregoing, no more than 501 Hours of Employment shall be credited under this subsection (e) on account of any such pregnancy or placement if the individual does not return to the employ of an Employer or participating Affiliated Company within 90 days after the end of the period approved for such absence. Hours credited under this subsection (e) shall be credited to the individual only in the year in which the absence begins if the crediting is necessary to prevent a Break in Service Year for such year; or, in any other case, in the immediately following year; provided, however, that if more than 501 hours are credited under this subsection (e) on account of any such pregnancy or placement, the excess over 501 hours shall be credited to the period or periods to which it relates. (f) Notwithstanding the foregoing, any individual whose compensation is not computed on the basis of hours worked and who normally performs services for any Employer or nonparticipating Affiliated Company during its entire work day shall be credited with ten Hours of Employment for each working day in any period during which he is entitled to receive compensation from the Employer or nonparticipating Affiliated Company for the performance of services pursuant to section 3.7(a) and eight Hours of Employment for each working day in any period during which such individual performed no duties but is entitled to Hours of Employment under section 3.7(b) or (c). Hours of Employment credited under this section 3.7 shall comply with the rules set forth in 29 C.F.R. section 2530.200b-2(b) and (c), which rules are hereby incorporated by reference. Notwithstanding anything herein to the contrary, Hours of Employment shall be credited hereunder at all times in compliance with the requirements of the Family and Medical Leave Act. 3.8 Employment by Related Entities. If an Employee's employer is a nonparticipating Affiliated Company, any period in which the Employee is employed by the nonparticipating Affiliated Company while an Affiliated Company, shall be taken into account for purposes of satisfying the eligibility service requirement set forth in section 3.1 and measuring such Employee's Years of Service to the same extent it would have been had such period of employment been employment by an Employer. 11 18 3.9 Leased Employees. A person who is not an employee on the employee payroll of an Employer or nonparticipating Affiliated Company and who performs services for an Employer or a nonparticipating Affiliated Company pursuant to an agreement between the Employer or nonparticipating Affiliated Company and a leasing organization shall be considered a "leased employee" if such person performed the services on a substantially full-time basis for a year and the services are under the primary direction and control of the recipient. A person who is considered a "leased employee" of an Employer or nonparticipating Affiliated Company shall not be considered an Employee for purposes of participating in this Plan or receiving any contribution or benefit under this Plan. A leased employee shall be excluded from this Plan regardless of whether the leased employee participates in any plan maintained by the leasing organization. However, if a leased employee participates in the Plan as a result of subsequent employment with an Employer, his previous service as a leased employee shall be counted in calculating his Years of Service. Notwithstanding the preceding provisions of this section 3.9, a leased employee will be included as an Employee for purposes of applying the requirements described in Code section 414(n)(3) and for purposes of determining the number and identity of Highly Compensated Employees. ARTICLE IV CONTRIBUTIONS 4.1 Employee Contributions. (a) Amount of Contributions. Each Participant may make a regular contribution to the Plan. Such contribution shall not be less than 1 percent nor more than-- (i) for a Participant who is was a Highly Compensated Employee during the immediately preceding Plan Year, 15 percent of his Compensation for a pay period, in incremental percentages of 1 percent, or (ii) for a Participant who was a Nonhighly Compensated Employee during the immediately preceding Plan Year, 20 percent (or, effective April 1, 1998, 17%) of his Compensation for a pay period, in incremental percentages of 1 percent. Contributions will be effected by Voluntary Deductions, Salary Reductions, or any combination thereof, as elected by the Participant. The amount of such Voluntary Deductions or Salary Reductions shall be transferred to the Trustee after each pay period; provided, however, that a Participant's Salary Reduction contributions shall not exceed 8 percent (12 percent effective February 1, 1999) of the Participant's Compensation for a pay period (if the Participant was a Highly Compensated Employee during the immediately preceding Plan Year), or 9 percent (17 percent effective February 1, 1999) of the Participant's Compensation for a pay period (if the Participant was not a Highly Compensated Employee during the immediately preceding Plan Year); and further provided, however, that Voluntary Deductions and Salary Reductions shall be limited as provided in sections 4.7 and, 4.10 AND 4.12. Notwithstanding the foregoing, the Committee may, in its sole discretion, (1) reduce the Salary Reduction contributions permitted by a group of Participants if, in the opinion of the Committee, it is advisable to do so in order to satisfy the requirements of section 4.7 or 4.12; or (2) reduce the Voluntary Deduction contributions permitted by a group of Participants if, in the opinion of the Committee, it is advisable to do so in order to satisfy the requirements of section 4.10 or 4.12. 12 19 (b) Changes in Contributions. The contribution of Voluntary Deductions and/or Salary Reductions designated by a Participant shall continue in effect, notwithstanding any change in his Compensation rate, until the Participant shall change such contribution; provided, however, that such contribution shall in no event be less than 1 percent, nor more than (i) fifteen percent (15%) in the case of a Participant who was a Highly Compensated Employee during the immediately preceding Plan Year or (ii) twenty percent (20%) (17% effective April 1, 1998) in the case of a Participant who was a Nonhighly Compensated Employee during the immediately preceding Plan Year, each in incremental percentages of 1 percent of the Participant's prevailing Compensation rate. A Participant may change his contribution from time to time by giving directions to his Employer in the form prescribed by the Committee, with such directions to take effect within a reasonable period following processing. (c) Voluntary Suspension of Contributions. Any Participant may, by giving written notice to his Employer in the form and timing prescribed by the Committee, suspend his contribution of Voluntary Deductions and/or Salary Reductions either indefinitely or for any specified period, provided that in the event of suspension of both such contributions the suspension shall be for at least 12 full months. In case of any such suspension of any contributions, the Employer's contributions on behalf of the Participant shall be automatically suspended for a like period. (d) Automatic Suspension of Contributions. A Participant's contributions of Voluntary Deductions and Salary Reductions and the Employer's contributions on behalf of the Participant shall be suspended automatically for any period during which the Participant is absent without pay under any of the circumstances described in section 3.7(c), (d), or (e), and such an absence shall not constitute termination of service for purposes of any of the provisions of Article IX. A Participant may, by giving notice to his Employer in the form and timing prescribed by the Committee, suspend his contribution of Voluntary Deductions and/or Salary Reductions for any period during which he is absent from work under any of the circumstances described in section 3.7(b) or (c) and receiving Compensation at a reduced Compensation rate, in which case the Employer contributions on behalf of such Participant shall be automatically suspended for a like period. 4.2 Employer Savings Plan Contributions. Each Employer shall contribute to the Salary Reduction Account of each of its participating Eligible Employees who would be eligible to participate under the requirements of Section 3.1(a)(i) (without regard to Section 3.1(a)(ii)) HAS COMPLETED ONE YEAR OF ELIGIBILITY SERVICE (AS DEFINED IN SECTION 3.1(B)) an amount equal to 25 percent of the Salary Reduction contribution of such Participant; provided, however, that Salary Reduction contributions in excess of four percent (4%) of the Participant's Compensation per pay period shall be disregarded. In cases where the Participant's Salary Reduction contribution is less than four percent (4%) of his Compensation per pay period, the Employer shall contribute to the Voluntary Deduction Account of such participating Employee an amount equal to 25 percent of the smaller of (a) his Voluntary Deduction contribution, or (b) 4 percent of his Compensation per pay period reduced by his Salary Reduction contribution. Effective as of the first pay period following the date on which a Participant has completed ten (10) Years of Service (or nine (9) Years of Service, beginning January 1, 1999), five percent (5%) shall be substituted for four percent (4%) in each place that it appears in the preceding paragraph. Effective as of the first pay period following the date on which a Participant has completed twenty-three (23) Years of Service, six percent (6%) shall be 13 20 substituted for four percent (4%) in each place that it appears in the first paragraph of this section 4.2. 4.3 Employer ESOP Contributions. (a) Basic ESOP Contribution. Each Employer shall each pay period contribute to the ESOP Account of each of its participating Eligible Employees who would be eligible to participate under the requirements of Section 3.1(a)(i) (without regard to Section 3.1(a)(ii)) HAS COMPLETED ONE YEAR OF ELIGIBILITY SERVICE (AS DEFINED IN SECTION 3.1(B)) an amount equal to the difference, if any, between (i) and (ii) below: (i) seventy-five percent (75%) of the sum of the Salary Reduction and Voluntary Deduction contributions of such Participant for such pay period; provided, however, that Salary Reduction and Voluntary Deduction contributions shall be disregarded to the extent that they exceed, in the aggregate, four percent (4%) of such Participant Compensation per pay period. The 4 percent shall be increased to five percent (5%) for Participants who have completed ten (10) Years of Service (or, effective January 1, 1999, nine (9) Years of Service), and shall be increased to six percent (6%) for Participants who have completed twenty-three (23) Years of Service. (ii) The value of the shares of MCN Stock allocated to the ESOP Account of such Participant pursuant to section 14.4(d) for such pay period. The value of shares allocated under section 14.4(d) shall be the market value thereof as of the last day of the pay period for which the shares are allocated, with the market value to be determined by the Committee in a nondiscriminatory manner. (b) Contribution of Principal, Interest, or Other Payments. Each Employer also shall contribute to the ESOP its proportionate share of any additional amount necessary to make principal, interest, or other payments required by the terms of any loan made to the ESOP in accordance with section 14.4. Each Employer's proportionate share shall be equal to the proportion that its contributions under section 4.3(a) bear BEARS to the total contributions under section 4.3(a). Each Employer also may make additional contributions to make principal, interest, or other payments in accordance with the terms of any loan made to the ESOP in accordance with section 14.4. (c) Dividend-Related Contributions. Each Employer also shall contribute to the ESOP Account of each of its participating Employees such amounts as may be necessary to acquire for the ESOP Account of such Participant shares of MCN Stock having a fair market value equal to the amount of any dividends on shares of MCN Stock allocated to the ESOP Account of such Participant that were used to repay an ESOP loan in accordance with section 14.4(c). Such contributions shall be made on, or as soon as practicable after, each date on which dividends on allocated shares of MCN Stock are used to repay a loan. In no event shall the shares of MCN Stock acquired with contributions under this subsection (c) be allocated to the ESOP Account of such Participant later than the last day of the Plan Year during which (but for the use of the dividend to repay the loan) the dividend giving rise to such contribution would have been allocated to the ESOP Account of such Participant. (d) Longevity Contributions. Within a reasonable time after March 1 of each Plan Year (or April 1, prior to 1999 with regard to Employers other than Michigan Consolidated Gas Company) (each a "Measurement Date") each Employer shall contribute to the ESOP 14 21 Account of each of its participating Eligible Employees on active payroll as of such Measurement Date who has at least 30 Years of Service as of such Measurement Date: (i) for periods prior to March 1, 1999 for Eligible Employees of Employers other than Michigan Consolidated Gas Company, twenty-five (25) shares of MCN Stock. (ii) effective March 1, 1999 for Eligible Employees described in paragraph (i) and effective March 1, 1998 for Eligible Employees of Michigan Consolidated Gas Company, six hundred dollars ($600) in shares of MCN Stock, as determined by the Committee in a nondiscriminatory manner. 4.4 Additional Employer Contributions. If a Participant receiving payments (based upon 40 or more hours per week) under the terms of any Workers' Compensation law does not have sufficient compensation to make Salary Reduction or Voluntary Deduction contributions in an amount equal to the amount of the Participant's contributions as in effect during the Participant's last period of active service, then the Participant's Employer shall contribute on behalf of the Participant such additional amount as would have been contributed by the Employer under sections 4.2 and 4.3 on behalf of such Participant had the Participant's contributions been continued at the rate in effect during the Participant's last period of active service. Additional contributions under this section 4.4 shall be treated for accounting purposes as if made under section 4.2 or 4.3, as applicable, except such contributions shall not be considered when computing the Contribution Percentage. Contributions under this Section 4.4 shall be deemed contributions made under Code Section 415(c)(3)(C), and for purposes of calculations under Section 415, "compensation" shall include the compensation the Participant would have received if the Participant were paid at the rate of compensation paid immediately before becoming disabled. 4.5 Rollover Contributions. (a) From Qualified Plan. If an Employee receives, either before or after becoming an Employee, an eligible rollover distribution (within the meaning of Code section 402(c)(4)) from an employees' trust described in Code section 401(a) which is exempt from tax under Code section 501(a) or from a qualified annuity plan described in Code section 403(a) (other than an employees' trust or an annuity plan under which the Employee was an Employee within the meaning of Code section 401(c)(1) at the time contributions were made on his behalf under such trust or annuity plan), then such Employee may transfer and deliver to the Committee, to be credited to his Employee Salary Reduction Account as if it were a Salary Reduction contribution, an amount which does not exceed the amount of such qualified total distribution or eligible rollover distribution (including any proceeds from the sale of any property received as a part of such qualified total distribution or eligible rollover distribution) less, in the case of a qualified total distribution, the amount considered contributed to such trust or annuity plan by the Employee. Former Employees who are Participants and who receive an eligible rollover distribution from another plan sponsored by an Employer may make rollover contributions in accordance with this section. (b) From Individual Retirement Account or Annuity. If-- 15 22 (i) an Employee receives, either before or after becoming an Employee, a distribution or distributions from an individual retirement account or individual retirement annuity (within the meaning of Code section 408) or from a retirement bond (within the meaning of Code section 409); and (ii) no amount in such account, no part of the value of such annuity, or no part of the value of the proceeds of such bond is attributable to any source other than an eligible rollover distribution (within the meaning of Code section 402(c)(4)) from an employees' trust described in Code section 401(a) which is exempt from tax under Code section 501(a) or annuity plan described in Code section 403(a) (other than an employees' trust or an annuity plan under which the Employee was an Employee within the meaning of Code section 401(c) at the time contributions were made on his behalf under such trust or annuity plan) and any earnings on such a qualified total distribution or eligible rollover distribution; then such Employee may transfer and deliver to the Committee, to be credited to his Salary Reduction Account as if it were a Salary Reduction contribution, such distribution or distributions. (c) Timing and Substantiation. Any transfer and delivery pursuant to this section 4.5 shall be delivered by the Employee to the Committee and by the Committee to the Trustee on or before the sixtieth day after the day on which the Employee receives the distribution or on or before such later date as may be prescribed by law. Any such transfer and delivery must be accompanied by (i) a statement of the Employee that to the best of his knowledge the amount so transferred meets the conditions specified in this section 4.5, and (ii) a copy of such documents as may have been received by the Employee advising him of the amount and the character of such distribution. Notwithstanding the foregoing, the Committee shall not accept a rollover contribution if, in its judgment, such acceptance would cause the Plan to violate any provision of the Code or Regulations. (d) Deemed Contribution for Certain Purposes. A rollover contribution pursuant to this section 4.5 shall be deemed to be a contribution of a Participant for purposes of the value of a Participant's fund account as provided in section 8.2 and in determining the amount distributable to a Participant, the provisions of Article IX that are applicable to Salary Reduction contributions will be used, pursuant to section 9.1, but not for purposes of determining the amount of the contribution to be made on behalf of a Participant by his Employer pursuant to section 4.2, 4.3, or 4.4 or calculating the Annual Addition of such Participant. (e) Deemed Participation for Certain Purposes. If the amount of rollover contribution is made by an Employee prior to his becoming a Participant, such Employee shall, until such time as he becomes a Participant, be deemed to be a Participant for all purposes of the Plan except for purposes of any determination of when he becomes a Participant pursuant to section 3.1 and the making of contributions pursuant to section 4.1(a). 4.6 Transfers from the MichCon Investment and Stock Ownership Plan. If an Employee who previously had participated in the MichCon Investment and Stock Ownership Plan (the "Investment Plan") becomes a Participant in the Plan and the Participant's plan account in the Investment Plan (including any outstanding Participant loans) is transferred to the Plan in accordance with section 3.3 of the Investment Plan, the Plan shall accept such 16 23 transfer. Amounts transferred shall be 100 percent vested at all times and shall be treated for all purposes in the same manner as they were treated under the Investment Plan; that is: (a) Amounts attributable to Employer salary reduction contributions under the Investment Plan shall be allocated to the Participant's Employee Salary Reduction Account; (b) Amounts attributable to voluntary deduction contributions under the Investment Plan shall be allocated to the Participant's Employee Voluntary Deduction Account; (c) Amounts attributable to Employer Investment Plan contributions shall be allocated to the Participant's Employer Salary Reduction Account or Employer Voluntary Deduction Account, as the case may be; and (d) Amounts transferred from the ESOP Account of the Participant in the Investment Plan shall be allocated to the Participant's ESOP Account. Notwithstanding the foregoing, amounts transferred shall not be used for purposes of determining the amount of the contribution to be made on behalf of a Participant by the Employer pursuant to section 4.2, 4.3, or 4.4, or calculating the Actual Deferral Percentage, Contribution Percentage, or Annual Addition of the Participant. 4.7 Limitations on Salary Reduction Contributions. (a) Dollar Limitation. In no event shall any Employer make Salary Reduction contributions for any calendar year, with respect to any Participant in excess of $10,000 (for 1998) (as adjusted by the Secretary of the Treasury to reflect increases in the cost of living). This limit shall be applied by aggregating all plans and arrangements maintained by the Company and all Affiliated Companies that provide for elective deferrals (as defined in Code section 402(g)). (b) ADP Test. In addition to the limitations set forth elsewhere in this Plan, effective January 1, 1997, one of the following tests must be satisfied for the Plan Year: (i) The Average Actual Deferral Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the Average Actual Deferral Percentage for the immediately preceding Plan Year for Nonhighly Compensated Employees who were then eligible to participate multiplied by 1.25; or (ii) The Average Actual Deferral Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the Average Actual Deferral Percentage for the immediately preceding Plan Year for Nonhighly Compensated Employees who were then eligible to participate multiplied by two, provided that the Average Actual Deferral Percentage for such Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for such Nonhighly Compensated Employees by more than two percentage points or such lesser amount as the Secretary of Treasury shall prescribe in accordance with Code section 401(m)(9) to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. Any such restriction on the multiple use of the alternative limit shall be implemented pursuant to uniform rules adopted by the Committee. 17 24 (c) Determination of Actual Deferral Percentages. For purposes of the Actual Deferral Percentage test described in this section 4.7-- (i) An Elective Deferral will be taken into account for a Plan Year only if it relates to Compensation that either would have been received by the Eligible Employee in the appropriate Plan Year (but for the deferral election) or is attributable to services performed by the Eligible Employee in the Plan Year and would have been received by the Eligible Employee within 2 1/2 months after the close of the Plan Year (but for the deferral election); (ii) An Elective Deferral will be taken into account for a Plan Year only if it is allocated to the Eligible Employee as of a date within that Plan Year. For this purpose, an Elective Deferral is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Elective Deferral is actually paid to the Trust no later than 12 months after the Plan Year to which the contribution relates; (iii) The Actual Deferral Percentage for an Employee who is eligible to participate shall be computed by treating any Excess Deferral (as defined in section 4.8) as an Elective Deferral, except to the extent provided by Regulations; (iv) The Actual Deferral Percentage for any Employee who is a participant under two or more section 401(k) plans or arrangements that are maintained by the Company or an Affiliated Company shall be determined as if all such Elective Deferrals were made under a single arrangement; provided, however, that no Elective Deferrals under an employee stock ownership plan (as defined in Code section 4975(e)(7)) shall be taken into account for purposes of this section 4.7; (v) In the event that two or more plans which include cash-or-deferred arrangements are considered as one plan for purposes of Code section 401(a)(4) or 410(b), the cash-or-deferred arrangements included in such plans shall be treated as one arrangement for purposes of this section 4.7; (vi) The determination and treatment of the Elective Deferrals and Actual Deferral Percentage of any Employee shall satisfy such other requirements as may be prescribed by the Secretary of Treasury. 4.8 Distribution of Excess Deferrals. "Excess Deferrals" means excess deferrals as defined under Code section 402(g). Notwithstanding any other provision of the Plan, the Excess Deferral, if any, of each Employee with respect to a calendar year plus any income and minus any loss allocable thereto shall be distributed no later than April 15 of the following calendar year to each Employee who claims an Excess Deferral for the preceding calendar year. Excess Deferrals shall be treated as Annual Additions under the Plan. The Employee's claim shall be in writing; shall be submitted to the Committee no later than March 1; shall specify the Employee's Excess Deferral for the preceding calendar year; and shall be accompanied by the Employee's written statement that if such amount is not distributed, such Excess Deferral, when added to amounts deferred under other plans or 18 25 arrangements described in Code section 401(k), 408(k), or 403(b), exceeds the limit imposed on the Employee by Code section 402(g) for the year in which the deferral occurred. Notwithstanding the preceding paragraph, the Employer may notify the Plan on behalf of the individual of Excess Deferrals to the extent that the individual has Excess Deferrals for the calendar year calculated by taking into account only elective deferrals under this Plan and other plans of the Company and any Affiliated Company. The Excess Deferral distributed to an Employee with respect to a calendar year shall be adjusted for any income or loss thereon for such calendar year and for the period between the end of such calendar year and the date of distribution. The income or loss allocable to such calendar year shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Salary Reduction Account by a fraction, the numerator of which is the Excess Deferral of the Employee for such calendar year and the denominator of which is the Employee's Salary Reduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Excess Deferral for the preceding calendar year multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. In the event that an Employee's Salary Reduction contributions are distributed to such Employee under this section 4.8, any Employer contributions attributable thereto plus any income and minus any loss allocable thereto shall be forfeited. 4.9 Distribution or Recharacterization of Excess Contributions. (a) Determination of Excess Contributions. "Excess Contributions" means, with respect to any Plan Year, the excess of (i) the aggregate amount of Elective Deferrals actually paid over to the Trust on behalf of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of such Elective Deferrals permitted under the limitations of section 4.7(b), in accordance with the provisions of Code Section 401(k)(8). Excess Contributions shall be returned to the Highly Compensated Employees, beginning with that Highly Compensated Employee who has the highest dollar amount of Elective Deferrals. The Highly Compensated Employee shall receive the portion of his Employee Deferrals (and income allocable thereto) which will either enable the Plan to distribute the total Excess Contribution (and thereby satisfy the ADP limit stated above) or cause such Highly Compensated Employee's Elective Deferrals to equal the Elective Deferrals of the Highly Compensated Employee with the next highest amount of Elective Deferrals. This prior process must then be repeated until the plan has distributed the total Excess Contributions described above. Excess Contributions shall be treated as Annual Additions under the Plan. For purposes of this section 4.9, to the extent permitted by the Code, the Excess Contributions shall be reduced by the amount of any Excess Deferrals included in such Excess Contributions and distributed to the Employee pursuant to section 4.8. 19 26 (b) Distribution or Recharacterization. Notwithstanding any other provision of the Plan, either-- (i) Excess Contributions with respect to a calendar year plus any income and minus any loss allocable thereto shall be distributed no later than the last day of the following calendar year to Employees on whose behalf such Excess Contributions were made for the preceding calendar year; or (ii) at the election of the Employee and to the extent permitted by the Code, the Excess Contributions shall be treated as distributed to the Employee and then contributed by the Employee to the Plan as a Voluntary Deduction contribution. (c) Adjustment for Income and Loss. The Excess Contributions to be distributed to an Employee with respect to a calendar year shall be adjusted for any income or loss thereon for such calendar year and for the period between the end of such calendar year and the date of distribution. The income or loss allocable to such calendar year shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Salary Reduction Account by a fraction, the numerator of which is the Excess Contributions for such calendar year and the denominator of which is the Employee's Salary Reduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Excess Contributions for the preceding calendar year multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. In the event that an Employee's Salary Reduction contributions are distributed to such Employee under this section 4.9, any Employer contributions attributable thereto plus any income and minus any loss allocable thereto shall be forfeited. 4.10 Limitations on Voluntary Deduction Contributions and Employer Contributions. (a) ACP Test. In addition to the limitations set forth elsewhere in this Plan, effective January 1, 1997, both the ESOP and the non-ESOP portions of the Plan, tested separately, must satisfy one of the following tests for each Plan Year: (i) The Average Contribution Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the Average Contribution Percentage during the immediately preceding Plan Year for Nonhighly Compensated Employees who are eligible to participate for the Plan Year multiplied by 1.25; or (ii) The Average Contribution Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the immediately preceding Plan Year's Average Contribution Percentage for Nonhighly Compensated Employees who were then eligible to participate for the Plan Year multiplied by two (2), and the Average Contribution Percentage for such Highly Compensated Employees shall not exceed the previous Plan Year's Average Contribution Percentage for such Nonhighly Compensated 20 27 Employees by more than two percentage points or such lesser amount as the Secretary of Treasury shall prescribe by regulations in accordance with Code Section 401(m)(9) to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employees, which regulations are incorporated herein by reference. Any such restriction on the multiple use of the alternative limit shall apply to all affected Highly Compensated Employees and shall be implemented pursuant to uniform rules adopted by the Committee. (b) Determination of Contribution Percentages. For purposes of the Average Contribution Percentage test described in this section 4.10-- (i) the Contribution Percentage for any Employee who is a Highly Compensated Employee for the Plan Year and who is eligible to make Employee contributions or to receive Employer contributions or Elective Deferrals allocated to his account under two or more plans described in Code section 401(a) or arrangements described in Code section 401(k) that are maintained by the Company or an Affiliated Company shall be determined as if all such contributions and Elective Deferrals were made under a single plan; provided, however, that contributions and Elective Deferrals under an employee stock ownership plan (as defined in Code section 4975(e)(7)) shall not be combined with contributions and Elective Deferrals under a plan that is not an employee stock ownership plan. (ii) In the event that this Plan satisfies the requirements of Code section 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Code section 410(b) only if aggregated with either the ESOP or the non-ESOP portion of this Plan, then this section 4.10 shall be applied by determining the Contribution Percentages of Employees as if all such plans were a single plan. The ESOP portion of the Plan will not be used in conjunction with any other plan to satisfy the requirements of Code section 401(a)(4) or 410(b). (iii) The determination and treatment of the Contribution Percentage of any Employee shall satisfy such other requirements as may be prescribed by the Secretary of Treasury. 4.11 Disposition of Excess Aggregate Contributions. (a) Determination of Excess Aggregate Contributions. "Excess Aggregate Contributions" means, with respect to any Plan Year, the excess of (i) the aggregate amount of Employer contributions under section 4.2 or sections 4.3(a) and 14.4(d) (as applicable) and Voluntary Deduction contributions (and any Elective Deferrals taken in account in computing Contribution Percentages under section 4.10(b)) (collectively "ACP Contributions") actually made on behalf of Highly Compensated Employees for such Plan Year, over the maximum amount of such contributions permitted under the limitations of section 4.10(a), in accordance with the provisions of Code Section 401(m). (i) First, the Contribution Percentage (as defined in section 4.10(b)) of the Highly Compensated Employee with the highest ACP Contributions is reduced as described in the subsections (b), (c) and (d) of this section to the extent necessary to remove all Excess Aggregate Contributions or to cause such Highly Compensated Employee's ACP Contributions to equal the amount of ACP Contribution of the Highly Compensated Employee with the next highest ACP Contributions. 21 28 (ii) Second, this process is repeated until the test described above is satisfied. Excess Aggregate Contributions shall be treated as Annual Additions under the Plan. For purposes of this section 4.11, the determination of an Employee's Excess Aggregate Contributions shall be made after first determining the Excess Deferral (as defined in section 4.8) and the Excess Contribution (as defined in section 4.9(a)) of such Employee. (b) Distribution of Excess Voluntary Deduction Contributions. To the extent necessary to satisfy the ACP Test specified in section 4.10, Voluntary Deduction contributions with respect to a calendar year plus any income and minus any loss allocable thereto for such calendar year and for the period between the end of such calendar year and the date of distribution shall be distributed no later than the last day of the following calendar year to the Highly Compensated Employees who made such Voluntary Deduction contributions for the preceding calendar year. The income or loss allocable to the Voluntary Deduction contributions for such calendar year returned to the Employee pursuant to this subsection shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Post-1986 Voluntary Deduction Account by a fraction, the numerator of which is such Voluntary Deduction contributions returned to the Employee and the denominator of which is the Employee's Post-1986 Voluntary Deduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Voluntary Deduction contributions for the preceding calendar year returned to the Employee multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. (c) Distribution of Excess Elective Deferrals Taken into Account. If, after returning all Voluntary Deduction contributions made by Highly Compensated Employees for the preceding calendar year, the contribution percentage test is still not satisfied, then to the extent necessary to satisfy such test, any Elective Deferrals taken into account for such test plus any income and minus any loss allocable thereto for such calendar year and for the period between the end of such calendar year and the date of distribution shall be distributed no later than the last day of the following calendar year to the Highly Compensated Employees on whose behalf such Elective Deferrals were made for the preceding calendar year. The income or loss allocable to the Elective Deferrals for such calendar year returned to the Employee pursuant to this subsection shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Salary Reduction Account by a fraction, the numerator of which is such Elective Deferrals returned to the Employee and the 22 29 denominator of which is the Employee's Salary Reduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Elective Deferrals for the preceding calendar year returned to the Employee multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. (d) Distribution of Other Excess Employer Contributions. If, after returning all Voluntary Deduction contributions and Elective Deferrals included in the Excess Aggregate Contributions, the contribution percentage test is still not satisfied, to the extent necessary to satisfy such test, the Employer contributions with respect to the calendar year made on behalf of Highly Compensated Employees and shares of MCN Stock allocated to Highly Compensated Employees under section 14.4(d) plus any income and minus any loss allocable thereto for such calendar year and for the period between the end of such calendar year and the date of distribution shall be forfeited and used to reduce Employer contributions to the Plan. The income or loss allocable to the Employer contributions under section 4.2 forfeited for such calendar year pursuant to this subsection shall be determined by multiplying the income or loss for such calendar year allocable to the Employer's Voluntary Deduction Account and the Employer's Salary Reduction Account by a fraction, the numerator of which is such Employer contributions forfeited and the denominator of which is the sum of the Employer's Voluntary Deduction Account balance and the Employer's Salary Reduction Account balance, both determined on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Employer contributions under section 4.2 for the preceding calendar year that were forfeited multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. The income or loss allocable to any Employer contribution under section 4.3(a) or any shares of MCN Stock allocated to a Highly Compensated Employee under section 14.4(d) shall be calculated in a similar manner based upon the ESOP Account of the Participant. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. 4.12 Statutory (Code Section 415) Limitations on Allocations to Accounts. Notwithstanding any other provision of the Plan, contributions under the Plan shall be subject to the limitations set forth in Code section 415, which are incorporated herein by reference. For 23 30 purposes of applying such limitations to contributions under the Plan, the rules set forth in this section 4.12 shall be applicable. (a) Annual Addition. The term "Annual Addition" means the amount allocated to a Participant's account during any calendar year that constitutes-- (i) Employer contributions; (ii) Employee contributions; (iii) forfeitures; and (iv) amounts described in Code Sections 415(l)(2) and 419(A)(d)(3). The compensation limitation referred to in Code section 415(c)(1)(B) shall not apply to-- (1) any contribution for medical benefits (within the meaning of Code section 419A(f)(2)) after separation from service which is otherwise treated as an Annual Addition, or (2) any amount otherwise treated as an Annual Addition under Code Section 415(l)(2). The Annual Addition for any calendar year before 1987 shall not be recomputed to treat all Employee contributions as an Annual Addition. (b) Combined-Plan Limits. Prior to January 1, 2000, in the case of an individual who was a Participant in the Plan on December 31, 1986, an amount shall be subtracted from the numerator of the defined contribution fraction (not exceeding such numerator) as prescribed by the Secretary of Treasury so that the sum of the defined benefit plan fraction and defined contribution plan fraction does not exceed 1.0 as of such date. Code section 415 shall be applied in such manner as to maximize the permissible contributions and benefits thereunder and, in determining the permissible amount of contributions under the Plan, any grandfathering provisions heretofore or hereafter adopted pursuant to Code section 415 shall be applicable. For purposes of applying the limitations set forth in Code section 415(e) prior to January 1, 2000, this Plan shall be the primary plan and any required reductions shall be made from the MichCon MCN ENERGY GROUP Retirement Plan (or other applicable defined benefit plan of the Employer). (c) Reduction of Annual Additions. (i) If the limitations of Code section 415 would be exceeded as a result of a reasonable error in estimating a Participant's Compensation or on account of such other limited facts and circumstances as the Commissioner of Internal Revenue finds justify the application of the rules hereinafter set forth, the Annual Additions to the Participant's account which exceed the applicable limitation shall be returned to the Participant to the extent of all or any portion of any Voluntary Deduction contributions which were made by him pursuant to Article IV. Any net earnings and gains allocable to such contributions for the period between 24 31 the date of such contribution and the date returned shall also be repaid to the Participant but such return of net earnings and gains will not be deemed a further reduction of any excess Annual Additions. (ii) If the Participant made no Voluntary Deduction contributions or if, after returning all or part of such contributions in accordance with the previous paragraph, his Annual Additions still exceed the limitations of Code section 415, then such excess shall be returned to the Participant to the extent of all or any portion of any Salary Reduction contributions made on behalf of such Participant, together with any net earnings and gains on such contributions as hereinabove described. (iii) If, after returning all or any portion of Voluntary Deduction and Salary Reduction contributions of a Participant in accordance with the preceding paragraphs, his Annual Additions still exceed the limitations of Code section 415, such portion of the Employer contributions under section 4.2 made on behalf of the Participant as must be removed to meet the limitations shall be allocated and reallocated to other Participants' Savings Plan Accounts as contributions by the Employer. (iv) If, after reallocating all or any portion of Employer contributions under section 4.2, a Participant's Annual Additions still exceed the limitation of Code section 415, such portion of the Employer contributions under section 4.3(a) made on behalf of the Participant and shares of MCN Stock allocated to his ESOP Account under section 14.4(d) as must be removed to meet the limitations shall be allocated and reallocated to other Participant's ESOP Accounts as contributions by the Employer. (v) If, as a result of the allocation of forfeitures, a reasonable error in estimating a Participant's Compensation, or under other limited facts and circumstances which the Commissioner of the Internal Revenue Service finds justify the availability of the following rules, any amount cannot be allocated during the Plan Year in accordance with the foregoing procedure without exceeding the applicable limitations for one or more Participants, any remaining amount shall be held unallocated in a special suspense account to be allocated to Participants in the succeeding Plan Year or Plan Years; provided, however, that (A) no Employer contributions and no Voluntary Deduction contributions shall be made in such succeeding Plan Year or Plan Years until such special suspense account is exhausted by allocations and reallocations; (B) no investment gains (or losses) or other income shall be allocated to the special suspense account; and (C) the amounts in the special suspense account shall be allocated as soon as possible without violating the limitations of this section 4.12. ARTICLE V VESTING IN ACCOUNTS 5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary Deduction Account, and Employee Pre-1987 Voluntary Deduction Account. The Employee Salary Reduction Account, the Employee Post-1986 Voluntary Deduction Account, and the Employee Pre-1987 Voluntary Deduction Account of each Participant shall be fully vested and nonforfeitable at all times. 5.2 Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account. 25 32 (a) In General. A Participant shall have a vested and nonforfeitable interest in his Employer Salary Reduction Account, Employer Voluntary Reduction Account, and ESOP Account after he has completed at least five Years of Service. Prior to that time he shall have no vested interest in such accounts. (b) Accelerated Vesting. Notwithstanding section 5.2(a) above but subject to Section 4.4, a Participant shall be fully vested and have a nonforfeitable interest in his entire Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account if-- (i) while still an Employee, he attains age 65; (ii) the Participant terminates employment with his Employer for reasons described in Section 9.1(a), (b) or (c); or (iii) while he is an Employee, contributions to the Plan are completely discontinued or the Plan is terminated, or the Plan is partially terminated and such Participant is affected by such partial termination; OR. (iv) while he is an Employee, his account balance is transferred to the MichCon Investment and Stock Ownership Plan in accordance with Section 3.3 (in which case such account balance shall be vested under the recipient plan). ARTICLE VI INVESTMENT PROVISIONS 6.1 Investment of Contributions. Employer contributions under sections 4.2, 4.3, and 4.4 and Employee contributions shall be invested in accordance with the following provisions: (a) The Employer contributions made pursuant to section 4.3(a), (c), and (d) shall be invested in the MCN Stock Fund (through each Participant's ESOP Account), which fund is described in Article VII. (b) Each Participant shall, by direction to the Committee in the form prescribed by the Committee, direct that the Employer contributions made pursuant to section 4.2 and Employee contributions, including those made as a Salary Reduction, be invested in such funds offered by the Trustee as are selected by the Committee. Employee contributions, including those made as a Salary Reduction, and the portion of Employer contributions referenced in section 6.1(b) above, need not be invested in the same fund. A Participant shall direct the manner in which the total of such Employee contributions and such Employer contributions referenced in section 6.1(b) above shall be divided, equally or otherwise, among the funds. 6.2 Change of Investment Direction. Any investment direction given by a Participant under section 6.1 shall be deemed to be a continuing direction until changed by the Participant. 26 33 A Participant may change any such direction in accordance with such procedures as the Committee may from time to time provide and apply in a nondiscriminatory manner. 6.3 Transfers Between Investment Funds. A Participant may direct that all or any part of the value of his interest in any investment fund be transferred to one or more of the other funds except that a Participant may not transfer any amount from the MCN Stock fund to the extent that the balance remaining in such fund immediately after the transfer would be less than the value of his ESOP Account. A transfer of all or any part of the value of a Participant's interest in the Fixed Income fund may from time to time be restricted by the terms of agreements which govern the investment of assets in such fund, in which event the Committee shall give notice of such restrictions to the Participants. ARTICLE VII INVESTMENT FUNDS 7.1 Investment Funds. The Trustee shall establish, operate, and maintain the following funds exclusively for the collective investment and reinvestment of monies directed by the Committee to be invested in such funds on behalf of Participants: (a) MCN Stock Fund. An MCN Stock fund which shall be invested solely in MCN Stock. (b) Fixed Income Fund. A Fixed Income fund which shall be invested, except as hereinafter provided, in marketable fixed income securities or accounts maintained by financial institutions which provide for fixed or variable rates of interest for specified periods of time. The terms of such agreements and the selection of such institutions shall be determined by the Company. Investment advisors for marketable fixed income securities may use fixed income futures and options to reduce the effect of market volatility. (c) Other Funds. Such other funds offered by the Trustee as the Committee may select. Notwithstanding the foregoing, the Trustee or the investment manager, as the case may be, shall invest such portion of the assets of the funds as the Committee may deem necessary or appropriate to facilitate the administration of such funds in any short-term fixed income fund as may be established under any common, commingled, or collective trust for employee benefit plans established and maintained by the Trustee. 7.2 Management of Investment Funds. Except as otherwise provided in this Article VII, the ownership of the assets and investments of the funds shall be in the Trustee as such; and the Trustee shall have in respect of any and all assets of the funds the same powers as if it were absolute owner thereof. 7.3 Voting of MCN Stock. 27 34 (a) Instructions from Participants. The Trustee shall vote, in person or by proxy, shares of MCN Stock held by the Trustee in the MCN Stock fund in accordance with instructions obtained from Participants. Each Participant shall be entitled to give voting instructions with respect to the number of shares of such respective stock which bears the same ratio to the total number of shares held by the Trustee on the record date as the number of shares allocated to the respective stock fund account of such Participant as of the Valuation Date preceding such record date bears to the total number of shares allocated to the respective stock fund accounts of all Participants as of such Valuation Date, excluding shares allocated to the accounts of persons whose accounts have been distributed prior to such record date. Written notice of any meeting of stockholders of MCN Energy Group Inc. and a request for voting instructions shall be given by the Committee or the Trustee, at such time and in such manner as the Committee shall determine, to each Participant entitled to give instructions for the voting of stock at such meeting. Shares with respect to which no voting instructions are received from Participants and unallocated shares of the ESOP shall be voted by the Trustee in the same proportion as shares for which voting instructions are received from Participants. The Trustee shall combine and vote fractional shares to the extent possible to reflect the voting instructions of Participants. (b) Confidentiality. The instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliated Company. 7.4 Tender Offers. (a) Rights of Participants. Notwithstanding any other provisions of this instrument, in the event an offer is made generally to the shareholders of MCN Energy Group Inc. to transfer all or a portion of the common stock of MCN Energy Group Inc. in return for valuable consideration including, but not limited to, offers regulated by section 14(D) of the Securities Exchange Act of 1934, as amended, each Participant owning a beneficial interest in the MCN Stock fund shall have the sole and exclusive right to decide if the common stock representing his interest in such fund shall be tendered. Each Participant shall have the right, to the extent the terms of the tender offer so permit, to direct the withdrawal of such shares from tender. A Participant shall not be limited as to the number of instructions to tender or withdraw from tender which he can give; provided, however, the Participant shall not have the right to give instructions to tender or withdraw from tender after a reasonable time established by the Trustee pursuant to section 7.4(c) below. (b) Duties of the Committee. Within a reasonable time after the commencement of a tender offer, the Committee shall provide to each Participant having an ownership interest in the MCN Stock fund-- (i) the offer to purchase as distributed by the offeror to the shareholders of MCN Energy Group Inc., 28 35 (ii) a statement of the shares representing his interest in the MCN Stock fund as of the most recent information available from the Committee, and (iii) directions as to the means by which a Participant can give confidential instructions to the Trustee with respect to the tender. The Committee shall establish and pay for a means by which a Participant can expeditiously deliver to the Trustee instructions with respect to the tender. (c) Duties of the Trustee. The Trustee shall follow the instructions of the Participants with respect to the tender offer. The Trustee shall not tender shares for which no instructions are received. Unallocated shares of MCN Stock of the ESOP shall be tendered or exchanged by the Trustee in the same proportion as the allocated shares for which the Trustee has received direction are tendered or exchanged, subject to the terms of any loan or pledge agreement covering such shares. On the basis of its ability to comply with the terms of the offer, the Trustee shall establish a reasonable time after which it shall not accept the instructions of Participants. (d) Confidentiality. The instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliated Company. 7.5 Named Fiduciary Status. For purposes of sections 7.3 and 7.4, each Participant is hereby designated a "named fiduciary" within the meaning of ERISA section 403(a)(1) with respect to shares of MCN Stock as to which he is entitled to make voting or tender offer decisions. 7.6 Expenses of Funds. Brokerage commissions, transfer taxes, and other charges and expenses in connection with the purchase and sale of securities for a fund shall be charged to the fund. Any income and other taxes payable with respect to a fund shall likewise be charged to the fund. ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN 8.1 Committee to Maintain. The Committee shall maintain, or cause to be maintained, for each Participant (i) a Savings Plan Account attributable to Voluntary Deduction contributions and related Employer contributions under section 4.2, and (ii) a separate account attributable to Salary Reduction contributions and related Employer contributions under section 4.2, each of which shall be composed, to the extent required by the investment directions of the particular Participant, of a MCN Stock fund account, a Fixed Income fund account, and an account for each other applicable fund in which his contributions and related Employer contributions are invested. The Committee also shall maintain, or cause to be maintained, for each Participant (A) an ESOP Account attributable to Employer contributions under section 4.3(a), (c) and (d), and (B) shares of MCN Stock allocated to the Participant pursuant to section 14.4(d), each of which shall be composed of a MCN Stock fund account and, to the extent diversification elections are 29 36 made by the Participant under section 14.5, such other accounts as the Committee or its delegate deems necessary or appropriate in giving effect to the diversification requirements of section 14.5. The Committee shall maintain, or cause to be maintained, all necessary records. 8.2 Plan Accounting. The interests of each Participant in the funds shall be his proportionate share of the value of such funds as of any Valuation Date. The Participant's proportionate share may be determined under any accounting method selected by the Committee that allocates fairly, in the opinion of the Committee, the investment gains and losses by or on behalf of each Participant to the fund and that complies with the requirements of the Code and the Regulations thereunder. The value of Participants' fund accounts shall be redetermined as of each Valuation Date. 8.3 Valuation of Funds. The value of a fund as of any Valuation Date shall be the market value of all assets (including any uninvested cash) held by the fund as determined by the Trustee reduced by the amount of any accrued liabilities of the fund on such Valuation Date. The Trustee's determination of market value shall be binding and conclusive upon all parties. To the extent any Employer securities held by the Plan are not readily tradable on an established securities market, valuation of such securities shall be made by an independent appraiser who meets requirements similar to the requirements of the regulations prescribed under Code Section 170(a)(1). 8.4 Valuation of Savings Plan Account. The value of a Participant's Savings Plan Account as of any Valuation Date shall be the sum of the values of his MCN Stock fund account, Fixed Income fund account, and any other of his fund accounts attributable to Salary Reductions, Voluntary Deductions, and Employer Contributions under section 4.2. 8.5 Valuation of ESOP Account. The value of a Participant's ESOP Account as of any Valuation Date shall be the sum of (i) the value of his ESOP Account attributable to Employer contributions on his behalf under section 4.3(a),(c) and (d) and shares of MCN Stock allocated to his ESOP Account under section 14.4(d); and (ii) the sum of the values of his Fixed Income fund account and any other of his fund accounts attributable to diversification elections under section 14.5. 8.6 Valuation of Plan Account. The value of a Participant's Plan Account as of any Valuation Date shall be the sum of the values of his MCN Stock fund account, Fixed Income fund account, and any other investment fund accounts maintained on his behalf under the Plan. 8.7 Committee to Furnish Annual Statements of Value of Plan Accounts. The Committee shall, not less frequently than annually, distribute to each Participant in the Plan a statement setting forth the Plan Account of such Participant. Such statement shall be deemed to have been accepted as correct unless written notice of objections thereto is received by the Committee or the Employer within 30 days after the distribution of such statement to the Participant. 8.8 Trust Agreement. A Trust has been established to fund benefits under the Plan. The Employers may, without further reference to or action by any Employee or Participant, from time to time enter into further agreements with the Trustee and make such amendments to 30 37 such Trust Agreement or such further agreements as they may deem necessary or desirable to carry out the Plan, and may take such other steps and execute such other instruments as the Employers may deem necessary or desirable to put the Plan into effect or to carry it out. ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS 9.1 Distribution Upon Termination of Employment Entitling Participant to Value of Plan Account. Upon-- (a) termination of a Participant's employment with his Employer due to retirement on his Normal Retirement Date or his Disability Retirement Date, (b) the death of the Participant, (c) termination of a Participant's employment with his Employer or placement on inactive payroll because of total and permanent disability or legally established mental incompetency of the Participant not qualifying the Participant for retirement hereunder, or (d) termination of a Participant's employment with his Employer under any circumstances after the Participant has satisfied the Vesting Requirement, the Committee shall, subject to the provisions of section SECTIONS 9.7 AND 9.9, direct the Trustee to distribute to the Participant, or, in a proper case his designated beneficiary or legal representative, the value of the Participant's Plan Account In a Lump Sum. 9.2 Distribution Upon Termination of Employment Under Circumstances Resulting in Forfeiture of Employer Contributions. Upon termination of a Participant's employment under circumstances other than those described in sections 9.1 and 9.7(c)(ii), the Committee shall, subject to the provisions of section 9.7, direct the Trustee to distribute to the Participant an amount equal to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account, Employee Post-1986 Voluntary Deduction Account, and Employee Salary Reduction Account each of which shall be fully vested and nonforfeitable at all times. Subject to Section 4.4, the Participant's Employer Voluntary Deduction Account, Employer Salary Reduction Account, and ESOP Account shall be forfeited and applied in reduction of the next succeeding contribution which the Participant's Employer would otherwise contribute to the Trust; provided, however-- (a) If all or any portion of such account is vested as a result of the application of the accelerated vesting schedule set forth in section 13.4(c), the Committee shall direct the Trustee to distribute such portion to the Participant; and (b) If such Participant is reemployed prior to his incurring five consecutive Break in Service Years, then following his date of reemployment, the Participant's Employer shall contribute on behalf of such Participant an amount equal to the amount that was forfeited upon his termination of employment, and such contribution shall be credited to the same accounts from which it was forfeited, in the same amounts. 31 38 Contributions made pursuant to (b) shall not be taken into account in determining under section 4.12 the Annual Additions to such Participant's Savings Plan Account. 9.3 Certain Distributions from Participant Accounts. (a) In General. Any Participant may, upon notice to the Committee in the form and timing prescribed by the Committee, terminate his participation in the Plan. Within a reasonable period of time following processing of such termination, the Committee shall direct the Trustee to distribute to the Participant an amount equal to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account and Employee Post-1986 Voluntary Deduction Account. [24 month requirement?], But only to the extent attributable to voluntary deduction contributions that have been in the plan for at least 2 years. (b) Withdrawals After Age 59 1/2. Upon notice to the Committee in the form and timing prescribed by the Committee, any Participant who has attained age 59 1/2 may make an election, not more frequently than once every calendar year, to withdraw all or any portion of the vested amount of his Plan Account. Within a reasonable period following the processing of such election, the Committee shall direct the Trustee to distribute to the Participant the amount the Participant has elected to withdraw. (c) Limited Withdrawal in the Event of Hardship. If a Participant incurs a financial hardship as defined in section 9.6, he may limit the amount of a distribution from his Voluntary Deduction Account under section 9.3(a) to the amount necessary to satisfy the hardship and to pay any taxes resulting from such distribution. 9.4 In-Service Withdrawals--General. At its discretion, the Committee may adopt rules limiting the number of withdrawals that may be made in any Plan Year and prescribe a minimum amount that may be withdrawn. All requests for a withdrawal shall be submitted in a form prescribed by the Committee. A Participant may not rescind a request for withdrawal which has been submitted to the Committee unless the Committee consents. A withdrawal shall be distributed as soon as reasonably practicable after the withdrawal request is received. 9.5 Withdrawal of Voluntary Deduction Contributions. Any Participant who shall have actively participated in the Plan for 24 or more calendar months (for purposes of this section 9.5 active participation means the Participant shall have made contributions to the Plan in each month in which compensation was available) may, upon notice to the Committee in the form and timing prescribed by the Committee, withdraw an amount not in excess of 100 percent of his Voluntary Deduction contributions under the Plan (but only to the extent attributable to Voluntary Deduction contributions that have been in the Plan for at least 2 years), with such election to be given effect within a reasonable time following processing. Withdrawals under this section 9.5 shall be from the MCN Stock fund, the Fixed Income fund, or such other investment funds offered by the Trustee as the Committee shall make available for purposes of this section. If the Participant has an account in more than one fund, he shall specify in his direction to the Committee the amount to be withdrawn from each fund. The contributions in all funds in the Employee Pre-1987 Voluntary Deduction Account must be withdrawn before a withdrawal is permitted from a fund in the Employee Post-1986 Voluntary Deduction Account. The amount of an in-service withdrawal from a specific fund in a Voluntary Deduction Account shall not exceed the Employee's contributions in such fund prior to the withdrawal. 32 39 9.6 Hardship Withdrawal of Salary Reduction Contributions. A Participant may request, upon written notice to the Committee in the form and timing prescribed by the Committee, a withdrawal from his Salary Reduction Account if the withdrawal is necessary to satisfy an immediate and heavy financial need of a Participant as defined below, with such election to be given effect within a reasonable time following processing. The amount of such withdrawal shall be limited to the Participant's Salary Reduction contributions or the total value of the Participant's Employee Salary Reduction Account as of the latest Valuation Date for which information is available, whichever is smaller. Withdrawals under this section 9.6 shall be from the MCN Stock fund, the Fixed Income fund, or such other investment funds under the Plan as the Participant specifies in his written request for a hardship withdrawal. The determination of whether or not a distribution is necessary to satisfy an immediate and heavy financial need and the amount required to be distributed to meet the need shall be made by the Committee. All determinations regarding financial need shall be made in accordance with written procedures established by the Committee and applied in a uniform and nondiscriminatory manner based on all of the applicable facts and circumstances. Such written procedures shall specify the requirements for requesting and receiving distributions on account of financial need, including the forms that must be submitted and to whom the forms are to be submitted. All determinations regarding financial need must comply with applicable Regulations under the Code. For purposes of this section 9.6, a financial hardship withdrawal shall be limited to the amount required to meet the need created by one of the following situations: (a) Expenses for medical care described in Code section 213(d) previously incurred by the Participant, his spouse, or any dependents of the Participant or necessary for these persons to obtain medical care described in Code section 213(d). (b) Costs directly related to the purchase (excluding mortgage payments) of the principal residence for the Participant. (c) Payment of tuition and related educational fees (including room and board expenses) for the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents (as defined in Code section 152). (d) The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage on the Participant's principal residence. A distribution will be deemed necessary to satisfy an immediate and heavy financial need of a Participant only if both of the following conditions are met: (I) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. Prior to January 1, 1999, this amount may be increased by the lesser of the amount withheld from the distribution under Code section 3405(c) or the remaining Salary Reduction contributions or total value of the Salary Reduction Account, if less, after subtracting the amount of the immediate and heavy financial need; AND (II). The Participant has obtained all distributions, other than hardship distributions, and all loans available under this Plan and all other plans maintained by the Employer. If a Participant receives a hardship distribution, (1) the Participant shall not be entitled to make Salary Reduction contributions or Voluntary Deduction contributions (or other employee contributions to qualified or nonqualified plans of deferred compensation, as described in 33 40 applicable regulations) for a period of one year after the hardship distribution, and (2) the Participant may not make Salary Reduction contributions for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the amount specified in Code section 402(g) for such taxable year less the amount of the Participant's Salary Reduction contributions for the taxable year of the hardship distribution. 9.7 Time of Distributions. (a) In General. Except as hereinafter provided and subject to the provisions of section 9.9, distributions made pursuant to section 9.1 or 9.7(c)(ii) shall be made by the Trustee at the direction of the Committee on such date as the Committee shall determine after consultation with the Participant or his beneficiary, but in no event later than March 1 of the calendar year following termination of the Participant's employment. Except as hereinafter provided, all other distributions or withdrawals under this Article IX shall be paid as soon as reasonably practicable by the Trustee at the direction of the Committee. Notwithstanding any other provision of the Plan-- (i) If the vested portion of a Participant's Plan Account has ever exceeded $5,000 (or such greater amount as permitted under the Code), no distribution shall be made to such Participant pursuant to Section 9.1, 9.2, 9.7(c)(ii), or 9.9 prior to the date the Participant attains the age of sixty-five (65) without written consent of the Participant; and (ii) if a distribution to a Participant is deferred pursuant to (i), the amount that would otherwise have been distributed to such Participant shall be invested in the Fixed Income fund or any other investment fund under the Plan, as the Participant shall direct, except that the ESOP Account of such Participant shall continue to be invested in the MCN Stock fund, subject to the diversification rules set forth in section 14.5. A former Participant whose distribution has been deferred pursuant to (i) above will not thereafter be eligible for withdrawals under section 9.3 or 9.5 or loans under section 9.10 but shall continue to have the voting and tender offer rights described sections 7.3 and 7.4 and to be treated as a Participant for purposes of Article VIII. A former Participant whose distribution has been deferred may initiate a distribution upon reasonable prior written notice to the Committee and shall receive an amount equal to the vested portion of his Plan Account within a reasonable period following processing of such election, with such amount to be distributed in a lump sum cash payment except that-- (A) amounts invested in the MCN Stock fund shall be distributed in accordance with section 9.8, (B) such former Participant may upon reasonable prior notice to the Committee receive a partial distribution rather than a total distribution, of the vested portion of his Account, but not more frequently than four times per year, and 34 41 (C) to the extent that such distribution comes from the Fixed Income fund account, such distribution shall be subject to the provisions of section 9.9. Notwithstanding any other provision of this Plan, if a Participant attains age 70 1/2 and still has a balance allocated to his or her Plan Account, a distribution shall be made under section 9.1 as if the Participant had terminated employment in the month in which the Participant attains age 70 1/2. Such distribution shall in no event be later than April 1 of the calendar year following the year in which the Participant attains age 70 1/2. Distributions to such Participant shall be made annually thereafter no later than December 31 of each year and shall be equal to at least the minimum amount required to be distributed by Code section 401(a)(9). For purposes of this paragraph, the life expectancy of a Participant and the Participant's spouse shall be redetermined annually. (b) Suspension of Participation. Prior to termination of his employment, if a Participant shall cease to meet the eligibility requirements of the Plan, his contributions and Employer contributions on his behalf shall be suspended during the period of his ineligibility. Subject to section 3.1, distribution of such Participant's Plan Account shall be deferred until termination of his employment with the Company and any Affiliated Company. If the provisions of section 3.3 relating to the transfer of a Participant's Plan Account to the MichCon Investment and Stock Ownership Plan or its successor are not applicable-- (i) with respect to Participants who cease to meet the eligibility requirements of the Plan prior to January 1, 1987, the Committee shall direct the Trustee to distribute the value of the Participant's Plan Account in accordance with section 9.1 whether or not such termination of employment shall be under the circumstances set forth in said section 9.1; and (ii) with respect to Participants who cease to meet the eligibility requirements of the Plan subsequent to December 31, 1986, such distribution shall be in accordance with section 9.1 or 9.3, whichever is applicable. (c) Transfer of Employment. (i) A transfer of employment from an Employer to an Affiliated Company shall not be considered a termination of employment. (ii) If a Participant shall be transferred to the employ of an Affiliated Company which has not elected to participate in the Plan, distribution of such Participant's Plan Account shall be deferred until the date on which he is no longer in the employ of the Company or any Affiliated Company, whereupon the Committee shall direct the Trustee to distribute the value of the Participant's Plan Account in the manner prescribed in section 9.1, subject to the provisions of section 9.7, whether or not termination of employment shall be under circumstances set forth in said section 9.1. (d) Special Rules Relating to Distributions in the Event of Death. In the event that a Participant dies before a distribution of his Plan Account, the Committee shall direct the Trustee to distribute the entire value of his Plan Account to his beneficiary no later than March 1 of the calendar year following the Participant's death, as provided in section 9.1. In the 35 42 event of the death of the Participant after the distribution of his Plan Account has begun, any remaining balance in his Plan Account at the time of death will be distributed at least as rapidly as under the method of distribution in effect at the date of the Participant's death. (e) Distribution must begin not later than the sixtieth (60th) day after the close of the Plan Year in which occurs the latest of (a) the Participant's termination of employment, (b) the Participant's attainment of age sixty-five (65), or (c) the tenth (10th) anniversary of the date the Participant first became a Participant, unless (1) the Participant elects a later date by submitting to the Committee a written statement signed by the Participant which describes the benefit and the date on which payment of such benefit shall commence, so long as such election does not violate the incidental benefit rule prescribed by the Code; or (2) if the amount of the payment required to commence on the date determined hereinabove cannot be ascertained by such date, or if it is not possible to make such payment on such date because the Committee has been unable to locate the Participant after making reasonable efforts to do so, a payment retroactive to such date may be made no later than sixty (60) days after the earliest date on which the amount of such payment can be ascertained under the Plan or the date on which the Participant is located, whichever is applicable. For purposes of this subsection, the failure of a Participant to consent to a distribution shall be deemed an election to defer commencement of payment of any benefit sufficient to satisfy this section. 9.8 Distributions of Stock. In the case of distributions under section 9.1, 9.2, 9.3(b), 9.7(a), or 9.7(c)(ii), the value of the Participant's MCN Stock fund account, if any, shall be paid in full shares of stock except that cash shall be distributed in lieu of fractional shares; provided, however, that a Participant entitled to such a distribution may elect to receive cash in lieu of MCN Stock. Except in the case of an election to receive cash in lieu of MCN Stock, the total number of shares allocated to such account shall be distributed from such account. Any remaining value of such account and, subject to the provisions of section 9.9, the value of the Participant's accounts in other funds shall be distributed in cash. Any transfer taxes payable with respect to the distribution of shares of stock shall be charged to the respective MCN Stock fund. Distributions pursuant to section 9.3(a) and withdrawals under sections 9.5 and 9.6 shall be paid entirely in cash. The distribution requirements of Code Section 409(o) shall be met by the Plan, to the extent applicable. 9.9 Distributions to Certain Participants from Fixed Income Fund. This Section 9.9 shall apply only to Participants with at least one Hour of Employment prior to May 31, 1988. (a) Normal Form. Notwithstanding any provision of the Plan, other than the final paragraph of section 9.7(a), if a distribution is to be made under section 9.1(a) or (c) and the Participant has a Fixed Income fund account and at least one Hour of Employment prior to May 31, 1988 and the Participant's first Hour of Employment is prior to January 1, 1999, then unless the Participant or legal representative shall make an election in the manner prescribed in section 9.9(b), the value of such account (exclusive of the portion thereof attributable to diversification elections under section 14.5) shall be distributed by the purchase of an immediately payable single premium annuity contract providing for monthly payments during the Participant's lifetime and, if the Participant is married on the date payment of his benefit commences and his spouse shall survive him, for monthly payments during the remainder of such spouse's lifetime, each such payment to such spouse being equal to one-half of the monthly payment received by the Participant, commencing no later than March 1 of the calendar year following the calendar year of the Participant's termination of employment, and 36 43 delivery of such contract to the Participant within a reasonable time after the Participant's termination of employment. If a distribution is to be made under section 9.1(b) because of a Participant's death and the Participant had a Fixed Income fund account at the time of his death and at least one Hour of Employment prior to May 31, 1988 and the Participant's first Hour of Employment was prior to January 1, 1999, then unless the Participant had made or the Participant's spouse or beneficiary, as the case may be, makes an election at the time and in the manner prescribed in section 9.9(b), the value of the Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 14.5) shall be distributed by purchase of an immediately payable single premium annuity contract providing for monthly payments to the Participant's spouse, or, if the Participant was not married on the day of his death, to his beneficiary during such person's lifetime, commencing no later than March 1 of the calendar year following the calendar year of the Participant's death and delivery of such contract to such person within a reasonable time after the date of Participant's death. (b) Election to Reject Normal Form. Subject to the provisions of this section 9.9(b), each Participant entitled to a distribution under section 9.9(a) (or legal representative on behalf of such a Participant) may, at any time during the 90-day period ending on the annuity starting date, elect to have the value of the Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 14.5) distributed by one or more of the methods set forth in section 9.9(c). Within 30 days after a Participant provides written notice to the Committee of his intention to retire on his Normal Retirement Date or Disability Retirement Date, or within 30 days after the Committee receives notice of a Participant's death, or within five business days after determining, in accordance herewith, that a Participant is totally and permanently disabled, or within five business days after receiving notice of the legally established mental incompetency of the Participant, if the Participant has a Fixed Income fund account at such time, the Committee shall deliver to such Participant or his legal representative, by mail or by personal delivery, written notice in nontechnical language explaining the terms and conditions of the annuity provided in section 9.9(a). The notice shall explain the Participant's or legal representative's right to elect an optional form of distribution and that such election may be revoked by the Participant or legal representative at any time prior to the annuity starting date or, if a lump sum payment is elected, prior to the first day on which all events have occurred which entitle the Participant or legal representative to the lump sum payment. The notice shall explain that a married Participant may elect a distribution pursuant to section 9.9(c) only if the spouse consents in writing to such election. Such written consent shall acknowledge consent to the designated beneficiary and the optional form of distribution, neither of which may be changed thereafter without again obtaining written spousal consent (or the consent of the spouse expressly permits changes by the Participant without further consent by the spouse). Such written consent shall acknowledge the effect of such election and shall be witnessed by a notary public or by a representative of the Committee who is designated to act in such capacity by the Committee. 37 44 If the Participant establishes to the satisfaction of the Committee that such written consent cannot be obtained because his spouse cannot be located, the requirement of such written consent shall be waived. Any election, change, or revocation under this section 9.9(b) shall be effective when written notice is delivered to the Committee in a form approved by the Committee for this purpose, provided such election, change, or revocation is delivered prior to the annuity starting date or, if a lump sum payment is elected, prior to the first day on which all events have occurred which entitle the Participant or legal representative to the lump sum payment. The notice shall explain that an effective revocation shall result in the benefit being provided as an annuity described in section 9.9(a). Subject to Section 9.14(C), such notice shall be provided no less than thirty (30) days and no more than ninety (90) days prior to the annuity starting date. (c) Optional Forms. In addition to the form described in section 9.9(a), distribution of the value of a Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 14.5) may be made either-- (i) in a lump sum payment; or (ii) by purchase of any form of single premium annuity contract that satisfies Code section 401(a)(9) as may from time to time be offered by the legal reserve life insurance companies with which the Trustee has agreements governing the investment of assets in the Fixed Income fund and delivery of such contract to the Participant or distributee within a reasonable time after the Participant's termination of employment or death. Within five business days after the Committee receives an election pursuant to this provision, the Committee shall provide the same written notice provided under section 9.9(b). An election pursuant to this provision shall be subject to the provisions of section 9.9(b). 9.10 Loans. The Trustee is hereby authorized to establish a loan program in accordance with this section 9.10. Upon application of a party in interest (as defined in ERISA section 3(14)) who is a Participant or beneficiary under the Plan, the Committee shall direct the Trustee to make a cash loan to such Participant or beneficiary, secured by 50 percent of the nonforfeitable value of the Participant's Employee and Employer Salary Reduction and ESOP Accounts determined as of the date the loan is made. The loan program shall be administered by the Committee subject to the following conditions and such other conditions that are consistent with Labor Regulation section 2550.408b-1 and are from time to time set forth in written administrative procedures which shall constitute a part of the Plan and are hereby incorporated by reference: (a) The term of a loan shall not extend beyond the earlier of four years or the date upon which the Participant or beneficiary ceases to be a party in interest; provided, however, that the four years shall be changed to eight years where the proceeds of the loan are used by the Participant or beneficiary to acquire the Participant's principal residence. (b) A loan shall bear interest at a reasonable rate which shall be based upon the prevailing interest rate charged by persons in the business of lending money on similar commercial loans under comparable circumstances at the time that such loan is granted, as determined by the Committee and uniformly applied. 38 45 (c) The amount of a loan (when added to the balance of other outstanding loans) shall not exceed the lesser of-- (i) $50,000 reduced by the excess (if any) of-- (A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which such loan was made, over (B) the outstanding balance of loans outstanding on the date such loan was made, or (ii) 50 percent of the nonforfeitable value of the Participant's Employee and Employer Salary Reduction and ESOP Accounts under the Plan which the Participant would have been entitled to receive if the Participant's employment had terminated on the date such loan was made. In no case shall a Participant be entitled to a loan under this Plan if the amount of the proposed loan is less than $500. (d) A loan shall be evidenced by a promissory note. (e) Payments of principal and interest shall be made by approximately equal payments not less frequently than monthly on a basis that would permit the loan to be fully amortized over its term. Loan payments shall be made by payroll deductions for Participants in active pay status. (f) Appropriate disclosure shall be made pursuant to the Truth in Lending Act to the extent applicable. (g) Amounts of principal and interest received on a loan shall be credited to the Participant's account and the outstanding loan balance shall be considered an investment of the assets of the account. Payment of principal and interest related to loans made from a Participant's ESOP Account shall be credited to such Participant's ESOP Account. Payment of principal and interest related to loans made from a Participant's Savings Plan Account shall be credited to the Participant's Investment Plan Account and shall be invested in the investment funds in the same proportions as the investment election then in effect by the Participant under Article VI. (h) The frequency of loans and the minimum amount for a loan shall be determined through uniform rules prescribed by the Committee and at the sole discretion of the Committee. (i) All applications for a loan shall be submitted to the Committee on a form prescribed by the Committee. Distribution shall be made as soon as reasonably practicable after the application of the loan is received. (j) If a Participant borrows from an account which is invested in more than one fund, he shall instruct the Committee as to the funds from which the loan is to be applied; 39 46 provided, however, that no borrowing shall be applied from the MCN Stock fund unless and until the Participant's ability to borrow from each of the other funds has been exhausted. (k) A married Participant may not borrow any amount from the Plan unless his spouse executes a written consent as hereinafter provided. Such consent must be executed during the 90-day period ending on the date on which the loan is made and shall specifically provide that the spouse consents both to the loan and to the use of the Participant's Salary Reduction and ESOP Accounts as security for the loan. The consent shall acknowledge the effect of the use of the Participant's accounts as security for the loan and shall be witnessed by a notary public or a representative of the Committee who is designated to act in such capacity by the Committee. (l) In the event a Participant defaults on a loan, the entire outstanding balance of and accrued interest on the loan shall be due and payable in accordance with the Plan's loan procedures and applicable Regulations. The Trustee and/or Committee may pursue collection on such defaulted loan by any means generally available to a creditor where a promissory note is in default, or if the entire amount due is not paid by such Participant following the default, the amount of such loan default shall be charged against the "secured portion" of the Participant's Plan Account and treated as a distribution with respect to such Participant; provided, however, that such a charge against a Participant's Plan Account shall not occur with respect to funds in his Employee Salary Reduction Account at a time so as to cause a violation of Code section 401(k)(2)(B)(i). 9.11 Definition of Employee Contributions and Employer Contributions. For the purposes of this Article IX, a Participant's Employee contributions shall include only those contributions made either as a Voluntary Deduction or a Salary Reduction which have not been previously withdrawn or distributed. If a Participant has previously had a portion of his Plan Account forfeited under section 9.2, the Employer contributions, exclusive of those made as a Salary Reduction to the Plan on his behalf, shall include only such Employer contributions made subsequent to such forfeiture. 9.12 Spousal Consent to Payment. Subject to section 9.7(a), the spouse of a married Participant or former Participant shall be required to consent in writing to any in-service withdrawal, loan, or distribution under the Plan to the Participant or former Participant. The spouse's consent shall be in such form as the Committee may prescribe. 9.13 Distributions Pursuant to a Qualified Domestic Relations Order. Upon receipt of a domestic relations order, the Committee will notify the involved Participant and any alternate payee that the order has been received and explain the Plan's procedures for determining whether the order is a qualified domestic relations order as defined in Code section 414(p). After determining that the order is a qualified domestic relations order, the Committee shall direct the Trustee to distribute or segregate the Participant's Account as provided in the qualified domestic relations order. If required by the qualified domestic relations order, the Trustee shall make distribution prior to the time that the Participant, whose account is subject to distribution, could have received a distribution. In a case of a dispute regarding the validity of a domestic relations order or the amounts or identities of parties to be paid thereunder, the Committee may segregate the portion of the 40 47 Participant's account in question, and may bring an action in a court of competent jurisdiction to determine the proper amount and/or recipient of benefits, or may submit such segregated amount to a court of competent jurisdiction (through an interpleader action or otherwise) until resolution of the matter. Further, if the Committee receives notice that a domestic relations order is forthcoming, the Committee may suspend payments from the Participant's Account or may follow the procedures described in the preceding sentence, until resolution of the matter. 9.14 Direct Rollovers of Eligible Distributions. (a) General. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this section, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Definitions. (i) Eligible rollover distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code section 401(a)(9); any hardship distribution after January 1, 1999; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible retirement plan. An eligible retirement plan is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code section 414(p), are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (c) Waiver of 30-Day Notice Period. If a distribution is one to which Code sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, 41 48 provided that (i) the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. 9.15 Special Distribution Events. Notwithstanding anything herein to the contrary, a Participant's Salary Reduction contributions shall not be distributed prior to the Employee's retirement, death, disability, termination of employment, or hardship, except that a distribution of such amounts may be made, in accordance with Code Section 401(k)(10), upon (a) termination of the Plan without establishment of another defined contribution plan other than an employee stock ownership plan (as defined in Code Section 4975(e) or 409) or a simplified employee pension plan (as defined in Code Section 408(k)); (b) the disposition by the Company to an unrelated corporation of substantially all of the assets (as defined in Code Section 409(e)(2)) used in the trade or business if the Company continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets; or (c) the disposition by the Company to an unrelated entity of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if the Company continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary. ARTICLE X ADMINISTRATION 10.1 The MCN Energy Group Master Trust, Retirement and Savings Plan Committee. (a) The Company shall appoint a Committee consisting of at least three members which shall be known as the MCN Energy Group Master Trust, Retirement and Savings Plan Committee (the "Committee") and which shall be responsible (except for duties specifically vested in the Trustee) for the administration of the provisions of the Plan. (b) At the Company's discretion, each Employer may be permitted one or more representatives on the Committee who shall be appointed by and remain in the office at the will of such Employer. Each Employer shall have the right at any time, with or without cause, to remove its representative on the Committee. A member of the Committee may resign and his resignation shall be effective upon delivery of his written resignation to each Employer. Upon resignation, removal, or failure or inability for any reason of any member of the Committee to act hereunder, the Board of Directors of the Employer by whom such member was appointed may be empowered to appoint a successor member. All successor members of the Committee shall have all of the rights and privileges and all of the duties of their predecessors but shall not be held accountable for the acts of their predecessors. Two or more Employers may appoint the same individual as their representative on the Committee, provided that the Committee shall consist of at least three members. (c) Any member of the Committee may, but need not, be a Participant or a director, officer, or shareholder of any of the Employers, and such status shall not disqualify him from taking any action hereunder or render him accountable for any distribution or material 42 49 advantage received by him under the Plan, provided that no member of the Committee who is a Participant shall take part in any action of the Committee on any matter involving solely his rights under the Plan. (d) The Committee shall be responsible for the administration of the Plan. The Committee shall have all such powers as may be necessary to carry out the provisions of the Plan and may from time to time establish rules and procedures for the administration of the Plan and the transaction of the Plan's business. The Committee shall have the exclusive right to make any finding of fact necessary or appropriate for any purpose under the Plan. The Committee shall have the maximum discretion permitted by law to interpret and construe the terms of the Plan and to resolve all issues arising under the Plan including, but not limited to the authority to-- (i) construe disputed or doubtful terms of the Plan; (ii) determine the eligibility of an individual to participate in the Plan; (iii) determine the amount, if any, of benefits to which any Participant, former Participant, beneficiary, or other person may be entitled under the Plan; (iv) determine the timing and manner of payment of benefits; and (v) resolve all other issues arising under the Plan. To the extent permitted by law, all findings of fact, determinations, interpretations, and decisions of the Committee shall be conclusive and binding upon all persons having or claiming to have any interest or right under the Plan. The Employers shall, from time to time, on request of the Committee, furnish to the Committee such data and information as the Committee shall require in the performance of its duties. (e) The Committee shall each month collect Employee contributions and Employer contributions from each Employer and shall deliver the amounts collected to the Trustee, together with instructions concerning the portions of such total amount to be invested in each fund. (f) The Committee shall direct the Trustee to make payments of amounts to be distributed or withdrawn from the Trust under Article IX and to make any transfers from one fund to another directed by Participants under section 6.3. (g) The Committee may act at a meeting, or by writing without a meeting, by the vote or assent of a majority of its members. The Committee shall elect a Secretary and such Secretary shall keep records of all meetings of the Committee and shall forward all necessary communications to the Trustee. The Committee may adopt such by-laws and regulations as it deems desirable for the conduct of its affairs and the administration of the Plan, provided that any such regulations shall be consistent with the provisions of the Plan. 43 50 (h) The members of the Committee, and each of them, shall be free from all liability, joint or several, for their acts, omissions, and conduct in administration of the Plan herein embodied, and the Employers shall jointly and severally indemnify them, and each of them, from the effects and consequences of their acts, omissions, and conduct in their official capacity except to the extent that such effects and consequences shall result from their own willful misconduct. (i) No member of the Committee shall receive any compensation or fee for his services, unless otherwise agreed between such member of the Committee and the Employers, but the Employers shall reimburse the Committee members for any necessary expenditures incurred in the discharge of their duties as Committee members. (j) The Committee may employ such counsel (who may be of counsel for any Employer) and agents, and may arrange for such clerical and other services as it may require in carrying out the provisions of the Plan, and all fees, charges, and costs so incurred shall be payable by the Plan except to the extent the Employers elect to pay such fees, charges, and costs. (k) The Committee shall maintain a record of all of its proceedings, shall maintain or cause to be maintained the Plan Accounts prescribed by Article VIII, and shall make the reports to Participants prescribed by section 8.7. 10.2 Notice to Employees. All notices, reports, and statements given, made, delivered, or transmitted to a Participant shall be deemed to have been duly given, made, or transmitted when mailed with postage prepaid and addressed to the Participant at the address last appearing on the books of the Employer. A Participant may record any change of his address from time to time by written notice filed with the Employer. 10.3 Notices to Employers or Committee. Written directions, notices, and other communications from Participants to the Employers or the Committee shall be mailed by first class mail with postage prepaid or delivered to such location as shall be specified upon the forms prescribed by the Committee for the giving of such directions, notices, and other communications, and shall be deemed to have been received by the addressee when received at such location. Any other notice to the Employers or the Committee shall be addressed. (a) If intended for the Committee: Savings Plan Committee c/o MCN Energy Group Inc. 500 Griswold Street Detroit, Michigan 48226 (b) If intended for an Employer, at its principal place of business. 10.4 Participants' Acceptance of the Provisions of the Plan. Each Participant at the time of becoming a Participant in the Plan and as a condition of participation shall sign an instrument evidencing the fact that he accepts and agrees to all provisions of the Plan. 10.5 Audit of Plan Records. The records of the Committee and the records of the Employers in respect of the Plan shall be examined annually by a firm of independent public 44 51 accountants appointed by the Committee. Such accountants shall, on the basis of such examination, make such reports to the Committee and to the Employers as they may request. The audited records of the Committee and the Employers shall be conclusive in respect of all matters involved in the administration of the Plan. 10.6 Claims Procedure. If any Participant or distributee believes he is entitled to benefits in an amount greater than those which he is receiving or has received, he may file a claim with the Secretary of the Committee. Such a claim shall be in writing and state the nature of the claim, the facts supporting the claim, the amount claimed, and the address of the claimant. The Secretary of the Committee shall review the claim and give written notice by registered or certified mail to the claimant of his decision with respect to the claim. Such notice shall be provided within 90 days after receipt of the claim, unless special circumstances require an extension, in which event the notice shall be provided within 180 days after receipt of the claim. Such notice shall be written in a manner calculated to be understood by the claimant and, if the claim is wholly or partially denied, set forth the specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim, and an explanation of why such material or information is necessary, and an explanation of the claim review procedure under the Plan. The Secretary shall also advise the claimant that he or his duly authorized representative may request a review by the full Committee of the denial by filing with the Committee, within 60 days after notice of the denial has been received by the claimant, a written request for such review. The claimant shall be informed that he may have reasonable access to pertinent documents and submit comments in writing to the Committee within the same 60-day period. If a request is so filed, review of the denial shall be made by the full Committee and the claimant shall be given written notice of the Committee's final decision. Such notice shall be provided within 60 days after receipt of such request, unless special circumstances require an extension, in which event the notice shall be provided within 120 days after receipt of the request. Such notice shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based and shall be written in a manner calculated to be understood by the claimant. 10.7 Effect of a Mistake. In the event of a mistake or misstatement as to the eligibility, participation, or service of any Participant, or the amount of payments made or to be made to a Participant or beneficiary, the Committee shall, if possible, adjust the Plan's records and cause to be withheld or accelerated or otherwise make adjustment of such amounts of payments as will in its sole judgment result in the Participant or beneficiary receiving the proper amount of payments under the Plan. ARTICLE XI AMENDMENT AND TERMINATION 11.1 Amendment. The Company may at any time and from time to time amend or modify the Plan by written instrument duly adopted by the Board of Directors of the Company or by the Committee. Any such amendment or modification shall become effective on such date as the Company shall determine, may apply to Participants in the Plan at the time thereof as well as future Participants, but may not reduce the Plan Account of any Participant as of the date of adoption of such amendment or modification. 45 52 11.2 Withdrawal. If an Employer shall withdraw from the Plan under section 12.2, or if an Employer shall adopt an amendment to the Plan which shall render impracticable the continued administration of the Plan as a joint plan of the several Employers, the Committee shall determine the portions of the various funds held by the Trustee which are applicable to the Participants of such Employer and shall direct the Trustee to segregate such portions in a separate trust. Such separate trust shall thereafter be held and administered as a part of the separate plan of such Employer. After such portions of the funds have been segregated in a separate trust, no such Participant or any distributee with respect to such Participant shall have any right to any benefit under the Plan or any claim against the Trust. 11.3 Termination. Any Employer may at any time terminate its participation in the Plan by resolution of its Board of Directors. In the event of any such termination, the Committee shall determine the portions of the various funds held by the Trustee which are applicable to the Participants of such Employer and shall direct the Trustee to distribute such portions to such Participants ratably in proportion to the values of their respective fund accounts; provided, however, amounts attributable to a Participant's Elective Deferrals shall not be distributed on account of such termination if the Employer, after such termination, maintains a defined contribution plan (other than an employee stock ownership plan or a simplified employee pension). The portions of the MCN Stock fund so distributed shall be distributed in kind except that cash shall be distributed in lieu of fractional shares. The portions of the Fixed Income fund and other investment funds so distributed shall be distributed in cash or in kind, or partly in cash and partly in kind, as determined by the Committee. Upon termination or partial termination of the Plan by any Employer or upon the complete discontinuance of contributions by any Employer, the benefits under the Plan of all affected Participants employed or formerly employed by such Employer shall become nonforfeitable. 11.4 Allocation of Funds Between Employers. The portion of a fund applicable to Participants of a particular Employer shall be an amount which bears the same ratio to the value of the fund which the aggregate value of the fund accounts of Participants employed by such Employer bears to the total value of the fund accounts of all Participants. 11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries. Subject to section 15.3, any provision of the Plan to the contrary notwithstanding, it shall be impossible for any part of the Trust to be used for or diverted to any purpose not for the exclusive benefit of Participants and their beneficiaries either by operation or termination of the Plan, by power of amendment, or by other means. Notwithstanding the preceding paragraph, if a contribution is made to the Trust by an Employer by a mistake of fact, then such contribution shall be returned to such Employer within one year after the payment of the contribution; and if any part or all of a contribution is disallowed as a deduction under Code section 404, then to the extent such contribution is disallowed as a deduction it shall be returned to such Employer within one year after the disallowance. All Employer contributions are conditioned upon their deductibility under Code section 404. ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES 46 53 12.1 Adoption of the Plan. Any Affiliated Company may become a participating Employer under the Plan by (a) taking such corporate action as shall be necessary to adopt the Plan, and (b) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to such Affiliated Company. The Plan shall become effective with respect to each particular Affiliated Company as of a date to be determined by the Board of Directors of such Employer after complying with all legal requirements pertaining to the participation of such Employer in the Plan. 12.2 Withdrawal from the Plan. Any Employer may withdraw from participation in the Plan at any time by filing with the Committee a duly certified copy of a resolution of its Board of Directors to that effect and giving notice of its intended withdrawal to the Committee, the other Employers, and the Trustee at least 30 days prior to the effective date of withdrawal. 12.3 Company as Agent for Employers. Each Employer other than the Company, hereby appoints, and each other corporation which shall become an Employer pursuant to section 12.1 or 15.7 by so doing shall be deemed to have appointed the Company its agent to exercise on its behalf all of the powers and authorities hereby conferred upon the Employers by the terms of the Plan, including, but not by way of limitation, the power to amend, restate, and terminate the Plan. The authority of the Company to act as agent shall continue unless and until the portion of the Trust fund held for the benefit of Employees of the particular Employer and their beneficiaries is set aside in a separate trust as provided in section 11.2. ARTICLE XIII TOP-HEAVY PLAN RULES 13.1 Application of Top-Heavy Plan Rules. If the Plan is top-heavy as determined under section 13.3, then the requirements in section 13.4 shall apply to the Plan to the extent indicated by that section 13.4. 13.2 Special Definitions. Any reference in this Article XIII to a "plan" means a stock bonus, pension, or profit-sharing plan of the Company and any Affiliated Company for the exclusive benefit of its employees or their beneficiaries, including this Plan. For purposes of this Article XIII only, the following terms shall have the meanings indicated: (a) "Compensation" means a Participant's Compensation from the Employer for any calendar year as defined in Article II. (b) "Determination Date" means, with respect to any Plan Year, the last day of the preceding Plan Year, except that in the case of the Plan's first Plan Year, the Determination Date shall be the last day of that Plan Year. Where one or more other plans are required or permitted to be aggregated with this Plan under section 13.3 and where all plan years of all such plans do not coincide, the "Key Employee Sum" and the "All Employee Sum" in section 13.3 each shall be determined separately for each plan as of its appropriate Determination Date and the results shall then be combined for the Determination Dates falling within the same calendar year. (c) "Employee" means a common law employee of the Employer who is or once was a Participant, including his beneficiary, but excluding any employee who is a member of a unit of employees covered by a collective bargaining agreement under which retirement 47 54 benefits were the subject of good faith bargaining with the Employer unless a member of such unit is a Key Employee. For purposes of making computations involving the MichCon Employee Stock Ownership Plan, employee shall include any common law employee of the Employer, including his beneficiary. (d) "Employer" means the Company and any other employing unit which would be included in the same controlled group as the Company (as defined in Code section 414(b)) or which is under common control with the Company (as defined in Code section 414(c)) or which is included in the same affiliated service group (as defined in Code section 414(m)) or which is required to be aggregated with the Company pursuant to Regulations under Code section 414(o). (e) "Key Employee" means each Employee or former Employee (including the beneficiary of either) who at any time during the Plan Year containing the Determination Date or any of the four preceding Plan Years received Compensation from the Employer and who-- (1) Is one of the fifty (50) (or if fewer, the greater of three (3) or ten percent (10%) of all Employees) officers of the Employer who had the largest Compensation in the five-year period ending on the last day of the current Plan Year, but only if such officer's Compensation exceeds one-half of the dollar limitation of Code Section 415(b)(1)(A) for the calendar year in which the Determination Date falls. (2) is one of the ten Employees owning the largest interest in the Employer and who has Compensation from the Employer in the amount greater than the dollar limitation of Code section 415(c)(1)(A) in effect for the calendar year in which the Determination Date falls; (3) owns 5 percent or more of the outstanding stock or voting power of the Employer; or (4) owns 1 percent or more of the outstanding stock or voting power of all stock of the Employer and has annual compensation from the Employer of more than $150,000. For purposes of (2), (3), and (4), the constructive ownership rules of Code section 318 shall apply with the modification that 5 percent shall be substituted for 50 percent appearing in Code section 318(a)(2)(C). For purposes of (2), an Employee shall be considered a Key Employee even if he is not among the ten largest owners, if his ownership interest in the Employer is not less than at least one of the top ten owners, and provided he has the requisite level of Compensation described in (2); and in the event two Employees have the same interest in the Employer, the Employee with the greater Compensation shall be regarded as having the larger interest. For purposes of (2), (3), and (4), each Employer that otherwise would be aggregated under this Article XIII's definition of Employer shall be treated as a separate Employer to determine ownership percentages. 48 55 (f) "Non-Key Employee" means any Employee or former Employee (including the beneficiary of either) who is not a Key Employee. (g) "Plan Year" means the calendar year. (h) "Valuation Date" means the date used for computing plan costs for minimum funding in the case of any defined benefit plan and the last day of the plan year in the case of any defined contribution plan, including this Plan. (i) "Years of Service" means an Employee's Years of Service determined under section 3.5. 13.3 Determination of Top-Heavy Status. Determination of whether the Plan is top-heavy for any Plan Year shall be made as follows: (a) Required Plan Aggregation. First, there shall be aggregated with the Plan (1) each plan of the Employer in which a Key Employee participates in the plan year containing the Determination Date, or any of the four preceding plan years, (2) each other plan of the Employer which, during this period, enables any plan in which a Key Employee participates to meet the requirements of Code section 401(a)(4) or 410, and (3) any terminated plan that was maintained by the Employer during the five year period ending on the Determination Date for the plan year in question if a Key Employee participated in such plan. (b) Key Employee Sum. Second, there shall be computed, as of the Determination Date, the sum of the present values of the accrued benefits of all Key Employees as determined by the Plan actuary under all defined benefit plans required to be aggregated under section 13.3(a) and the account balances of all Key Employees under all defined contribution plans, including this Plan, required to be aggregated under section 13.3(a). For purposes of this computation, the present value of an accrued benefit shall be determined as of the most recent Valuation Date occurring within a 12-month period ending on the Determination Date with the accrued benefit for a current Participant determined as if the individual had terminated employment as of such Valuation Date. For purposes of this computation, the accrued benefit of an Employee other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Company and Affiliated Companies, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code section 411(b)(1)(C). For purposes of this computation, account balance means the account balance as of the most recent Valuation Date occurring within a 12-month period ending on the Determination Date, plus an adjustment for contributions due as of the Determination Date. In the case of a profit-sharing plan or other plan not subject to the minimum funding requirements of Code section 412, the adjustment is the amount of any contributions actually made after the Valuation Date but on or before the Determination Date, except that in the first plan year after a plan is adopted, the adjustment shall include any contributions made after the Determination Date that are allocated as of a date within the first plan year. In the case of a money purchase pension plan or other plan subject to the minimum funding requirements of Code section 412, the adjustment is the amount of any contributions that would be allocated as of a date not later than the Determination Date, even though such amount is not yet required to be contributed, 49 56 plus the amount of any contribution actually made (or due to be made) after the Valuation Date but prior to the expiration of the extended payment period under Code section 412(c)(10). For purposes of this computation-- (A) there shall be included in the Key Employee Sum any distribution (other than rollover amounts or plan-to-plan transfers not initiated by the Employee or made to another plan maintained by the Employer) made to an Employee from the Plan, or from another plan required to be aggregated under section 13.3(a), within the five-year period ending on the Determination Date; (B) there shall be excluded from the Sum any rollover contribution and any plan-to-plan transfer initiated by the Employee and accepted after December 31, 1983, by any plan required to be aggregated under section 13.3(a) from a plan other than one maintained by the Employer; (C) there shall be excluded from the Sum the account balance and present value of the accrued benefit of any Employee who formerly was a Key Employee but who is not a Key Employee for the year ending on the Determination Date; and (D) there shall be excluded from the Sum any amounts attributable to tax deductible employee contributions. (E) The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year or (2) who has not been credited with at least one Hour of Service with any Employer at any time during the five-year period ending on the Determination Date will be disregarded. (c) All Employee Sum. Third, under the same procedures as set forth in section 13.3(b) above, including the special rules in (A), (B), and (C), there shall be computed the sum of present values of accrued benefits and account balances for all Employees of the Employer. (d) Top-Heavy Test Fraction. Fourth, the Key Employee Sum computed in section 13.3(b) shall be divided by the All Employee Sum computed in section 13.3(c), and if the resulting fraction is 0.60 or less, neither this Plan nor any plan required to be aggregated under section 13.3(a) is top-heavy for the Plan Year. If the fraction is greater than 0.60, both this Plan and any plan required to be aggregated under section 13.3(a) are top-heavy for the Plan Year, unless after the permissive plan aggregation described in section 13.3(e) below, the recomputed fraction is 0.60 or less. (e) Permissive Plan Aggregation. Fifth, at the election of the Employer, plans of the Employer, other than those required to be aggregated under section 13.3(a), but which provide benefits or contributions comparable to this Plan, may be aggregated with this Plan and the plans required to be aggregated under section 13.3(a), provided that such 50 57 aggregated group would meet the requirements of Code section 401(a)(4) and 410. The computations under section 13.3 (b) to (d) above may then be repeated, based on this permissively aggregated group, and if the fraction computed in section 13.3(d) is 0.60 or less for this group, then neither this Plan nor any plan required to be aggregated under section 13.3(a) is top-heavy for the Plan Year. If the fraction computed in section 13.3(d) is still greater than 0.60, both this Plan and any plan required to be aggregated under section 13.3(a) are top-heavy for the Plan Year but no plan which is permissively aggregated under this section 13.3(e) will be deemed to be top-heavy for such reason. 13.4 Superseding Rules. (a) Provisions Mandatory. For each Plan Year that the Plan is top-heavy, the provisions of paragraphs (b), (c), (d), and (e) of this section 13.4 are mandatory and shall apply to the Plan for that Plan Year, notwithstanding any other provision or provisions of the Plan that may conflict with or vary from said mandatory provisions. (b) Minimum Contributions for Non-Key Employee Participants. Contributions by the Employer to the Plan Account of each Non-Key Employee Participant who is employed by the Employer on the last day of the Plan Year and who is eligible to have an Employer contribution made to his Plan Account under section 4.2, 4.3, or 4.4 (without regard to any requirement of a minimum number of Hours of Employment (as defined in section 3.7) during the Plan Year) shall be equal to the lesser of (1) 3 percent of the Participant's Compensation for that Plan Year or (2) the maximum percentage of the Employer's contributions (as a percentage of Compensation not in excess of $150,000, as adjusted) allocated to the account of any Participant who is a Key Employee for the Plan Year multiplied by the Non-Key Employee Participant's Compensation for that Plan Year. For purposes of this section 13.4(b), Employer contributions made under any other defined contribution plan of the Employer in which any Key Employee participates or which enables another defined contribution plan of the Employer to meet the requirements of either Code section 401(a)(4) or 410 shall be considered contributions made under this Plan. Salary Reduction contributions will not be treated as Employer contributions for purposes of satisfying the minimum allocation, but will be included for purposes of determining whether a Key Employee has received an Employer contribution of at least three percent (3%). Notwithstanding the foregoing, in the event that the contribution to be made to the Plan Account on behalf of the Non-Key Employee under the provisions of sections 4.2, 4.3, and 4.4 is greater than the contribution which would be made under this section 13.4(b), the provisions of Article IV shall prevail. (c) Accelerated Vesting. A Participant's vested percentage in the portion of his account balance derived from Employer contributions described sections 4.2, 4.3, and 4.4 shall be determined in accordance with the following schedule but only with respect to those who are Participants during part or all of the Plan Year after the Plan becomes top-heavy and only if the following schedule results in a higher vested percentage than the application of the Plan's normal Vesting Requirement:
Years of Vested Service Percentage ----------------------- ---------- 0 0%
51 58 2 20% 3 40% 4 60% 5 80% 6 100%
(d) Reduction in Multiple Plan Limitations. In order to reduce the overall limitations on combined plan contributions and benefits under Code section 415, the number 1.0 shall be substituted for 1.25 in determinations of the maximum dollar amount which can be added to a Participant's account and of the dollar amount of the maximum benefit allowable in section 4.3 of the Plan; provided, however, that the foregoing sentence shall not apply if the top-heavy test fraction or recomputed fraction of section 13.3(e) is .90 or less, in which event each Non-Key Employee Participant shall receive an additional minimum contribution to his account equal to 1 percent of the Participant's Compensation for that Plan Year. 13.5 Participants in More Than One Top-Heavy Plan of the Employer. For each Plan Year that the Plan is top-heavy-- (a) Subject to the provisions of section 13.4(b), in the event that a Non-Key Employee is a Participant in both this Plan and another defined contribution plan of the Employer in the same Plan Year, such Employee shall in all events be entitled to have the portion of the contribution by the Employer specified in section 4.2, 4.3, or 4.4 or the contribution by the Employer specified in section 13.4(b), whichever is appropriate, allocated to his account. This provision shall in no way limit the Employee's right to have a contribution made on his behalf to such other defined contribution plan as shall be maintained by the Employer and in which he is a participant. (b) In the event that a Non-Key Employee is a Participant in both this Plan and a defined benefit plan of the Employer in the same Plan Year, such Employee shall not be entitled to have the contribution specified in section 13.4(b) made by the Employer to this Plan on his behalf. This provision shall in no way limit the Employee's right to have the portion of the contribution by the Employer specified in section 4.2, 4.3, or 4.4 allocated to his account. Such Employee shall, however, receive the defined benefit minimum as specified in Treasury Regulation section 1.416-1, M-12, and such minimum shall be increased, if the Company uses a factor of 1.25 in computing the denominators of the defined benefit and defined contribution factors under Code section 415(e), by one percentage point (up to a maximum of ten percentage points) for each Year of Service described in Treasury Regulation 1.416-1, M-2 (disregarding, as permitted therein, any Year of Service if the Plan was not top-heavy for any Plan Year ending during such Year of Service, or if the Year of Service was completed in a Plan Year beginning before January 1, 1984) of the Participant's average Compensation for the Plan Years described in Treasury Regulation section 1.416-1, M-2 (disregarding, as permitted therein, Compensation received for years ending in Plan Years beginning before January 1, 1984 and Compensation received for years beginning after the close of the last Plan Year in which the Plan is top-heavy). Treasury Regulation sections 1.416-1, M-2, M-12 and M-14 shall govern how the multiple plan requirements are satisfied. 13.6 Changes in Applicable Vesting Schedule. In the case of any change in the vesting provisions of the Plan, whether or not due to a change in the Plan's status as a top-heavy plan determined pursuant to section 13.3, each Participant whose nonforfeitable benefits 52 59 are adversely affected by the change may elect during the election period to have his nonforfeitable benefits determined without regard to such change. The election period shall begin on the date the change is adopted or becomes effective, whichever is earlier, and end on the latest of (a) the date which is 60 days after the change is adopted, (b) the date which is 60 days after the date such change becomes effective, or (c) the date which is 60 days after the day the Participant is given written notice of such change. ARTICLE XIV SPECIAL PROVISIONS RELATING TO THE ESOP 14.1 Establishment of ESOP. The MichCon Employee Stock Ownership Plan for Non-Union Employees was originally established effective as of April 1, 1989. Each Employer shall make contributions to the ESOP in accordance with section 4.3 hereof and the assets of the ESOP shall be invested at all times primarily in MCN Stock. The Company from time to time may direct the Trustee to incur debt in accordance with section 14.4 hereof to finance the acquisition of MCN Stock. 14.2 ESOP Account. The Committee shall establish an ESOP Account in the name of each Participant to which there shall be credited or charged-- (a) the Employer contributions under section 4.3(a), (c) and (d) hereof made on behalf of such Participant; (b) the shares allocated to the Participant pursuant to section 14.4(d) hereof; and (c) the investment gains and losses on such amounts. A Participant's ESOP Account shall be invested only in the MCN Stock fund, except to the extent that monies diversified under section 14.5 may, at the Participant's election, be directed to the Equities fund, the Senior Securities fund, or the Fixed Income fund. 14.3 Discrimination Testing. For purposes of the limitations on Salary Reduction contributions set forth in section 4.7 and the limitations on Voluntary Deduction contributions and Employer contributions set forth in section 4.12 4.10, the ESOP and non-ESOP portions of the Plan shall be tested separately. For purposes of such testing-- (a) the ESOP portion of the Plan shall mean Employer contributions under section 4.3(a) made on behalf of the Participant and the shares allocated to a Participant's ESOP Account pursuant to section 14.4(d); and (b) the non-ESOP portion of the Plan shall mean all Elective Deferrals, Voluntary Deductions and Employer contributions under section 4.2. 14.4 Loans. (a) Stock Acquired with Exempt Loan. The Company may direct the Trustee to incur a loan on behalf of the ESOP in a manner and under conditions which will cause the loan to qualify as an "exempt loan" within the meaning of Code section 4975(d)(3). A loan shall be used primarily for the benefit of Participants and their beneficiaries. The proceeds of each 53 60 such loan shall be used, within a reasonable time after the loan is obtained, only to purchase MCN Stock, to repay the loan, or to repay any prior loan. Any such loan shall provide for a reasonable rate of interest and an ascertainable period of maturity, and shall be without recourse against the Plan. Any such loan shall be secured solely by shares of MCN Stock acquired with the proceeds of the loan and shares of MCN Stock that were used as collateral on a prior loan which was repaid with the proceeds of the current loan. MCN Stock acquired with the proceeds of a loan, including shares pledged as collateral, shall be placed in a Suspense Account and released in accordance with subsection (b) below as the loan is repaid as if all shares in the Suspense Account were pledged. MCN Stock released from the Suspense Account shall be allocated in the manner described in subsection (d) below. No person entitled to payment under a loan made pursuant to this section 14.4 shall have recourse against any assets of the Plan other than the MCN Stock used as collateral for the loan, Employer contributions under section 4.3 that are available to meet obligations under the loan, and earnings attributable to such collateral and the investment of such contributions. Employer contributions under section 4.3(b) made with respect to any Plan Year during which the loan remains unpaid, and earnings on such contributions, shall be deemed available to meet obligations under the loan, unless otherwise provided by the Employer at the time such contributions are made. (b) Release of Pledged Shares. Any pledge of MCN Stock as collateral under this section 14.4 shall provide for the release of shares so pledged upon the payment of any portion of the principal of the loan. Shares so pledged shall be released in the proportion that the principal paid on the loan bears to the total principal amount of the loan, as provided in Treasury Regulation 54.4975-7(b)(8)(ii). The number of shares of MCN Stock that shall be released with each principal payment on the loan shall be equal to the number of shares of MCN Stock held as collateral on the loan immediately prior to the release multiplied by a fraction the numerator of which is the amount of principal of the loan repaid on such date and the denominator of which is the sum of the numerator plus the remaining outstanding principal amount of the loan after giving effect to the repayment of principal of the loan on such date. Each loan under this section 14.4 shall comply with the requirements of Treasury Regulation 54.4975-7(b)(8)(ii). If such a loan provides for monthly principal payments, shares of MCN Stock shall be released monthly. (c) Repayment of Loan. Payments of principal and interest on any loan under this section 14.4 shall be made by the Trustee at the direction of the Company solely from-- (i) the proceeds of such loan, if any portion of such proceeds are used for such purpose within a reasonable period of time after the loan is obtained as provided in section 14.4(a) above; (ii) Employer contributions under section 4.3(b) available to meet obligations under the loan; 54 61 (iii) earnings from the investment of such contributions; (iv) earnings attributable to MCN Stock acquired with the proceeds of such loan, whether allocated or unallocated; (v) the earnings on other allocated shares of MCN Stock held by the ESOP if the Internal Revenue Service, by private letter ruling, advises the Company that the use of such earnings to repay the loan will be deductible under Code section 404(k)(2)(C) and will not violate the requirements of Code section 4975; and (vi) the proceeds of a subsequent loan made to repay the loan. The contributions and earnings available to pay a loan must be accounted for separately by the Committee until all loans under this section 14.4 have been paid. If dividends on MCN Stock allocated to the ESOP Account of any Participant are used to repay any loan, shares of MCN Stock with a fair market value not less than the amount of such dividends shall be allocated in accordance with section 4.3(c) to the ESOP Account of such Participant prior to the end of the Plan Year during which (but for the use of the dividends to repay the loan) such dividend would have been allocated to the ESOP Account of such Participant. (d) Allocation of Released Shares. Subject to the limitations in section 4.12 on Annual Additions to a Participant's accounts, shares of MCN Stock released from a Suspense Account described in section 14.4(a) shall be allocated immediately to the ESOP Accounts of each Participant in the proportion that the contribution that would be required to be made on behalf of such Participant under section 4.3(a)(i) for the applicable period if no shares were allocated under section 4.3(a)(ii) during such period bears to the total of all Employer contributions that would be required under section 4.3(a)(i) hereof for the applicable period if no shares were allocated under section 4.3(a)(ii) during such period. 14.5 Diversification. Any Participant or any former Participant whose distribution has been deferred pursuant to section 9.7(a), who, in either case, has completed at least ten years of participation in the Plan, and who has attained the age of 55 is a "Qualified Participant". Any Qualified Participant shall have the right to make an election to direct the investment of a portion of his ESOP Account. Such a Participant may elect within 90 days after the close of each Plan Year in the six plan-year period beginning with the first Plan Year in which the individual becomes a Qualified Participant to diversify 25 percent of his ESOP Account, less any amount to which a prior election applies. In the case of the last year to which an election applies, 50 percent shall be substituted for 25 percent. The portion of a Qualified Participant's ESOP Account which is eligible for diversification may be invested in the Fixed Income fund and/or any other investment funds under the Plan, in any combination thereof. 14.6 Put Option. If MCN Stock becomes not readily tradable on an established market, then any Participant who is otherwise entitled to a distribution of his ESOP Account, shall have the right (hereinafter referred to as "Put Option") to require that his Employer repurchase any MCN Stock allocated to his ESOP Account under a fair valuation formula. The Put Option shall be exercisable only by written notice to the Participant's Employer during the 60-day period immediately following the date of distribution and if the Put Option is not 55 62 exercised within such 60-day period, then it can be exercised for an additional period of 60 days in the following Plan Year. The period during which the Put Option is exercisable shall not include any time when a Participant is unable to exercise it because his Employer is prohibited from honoring it by applicable federal or state law. This Put Option shall be nonterminable within the meaning of Treasury Regulation 54.4975-(11)(a)(ii). The amount paid for MCN Stock under the Put Option shall be paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the Put Option and not exceeding five years. There shall be adequate security provided and reasonable interest paid on the unpaid balance due under this section 14.6. 14.7 Purchase of MCN Stock. The ESOP may acquire shares of MCN Stock on a national securities exchange, from the Company or any Affiliated Company or otherwise; provided, however, that if any shares of MCN Stock are purchased from the Company or any Affiliated Company, the price shall not exceed an amount which constitutes adequate consideration (as defined in ERISA section 3(18) and any Regulations thereunder) and such purchase shall satisfy all other requirements of ERISA and the Code applicable to such purchases. Except as provided in section 14.6 or as otherwise required by applicable law, no shares of MCN Stock acquired by the ESOP shall be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from the Plan, whether or not any part of the Plan is then an ESOP. The protection afforded to Participants in the preceding sentence is nonterminable within the meaning of Treasury Regulation section 54.4975-(1)(a)(ii). ARTICLE XV MISCELLANEOUS 15.1 Beneficiary Designation. Subject to the provisions of section 9.9 and this section 15.1, each Participant shall have the right to designate a beneficiary or beneficiaries to receive any distribution to be made under section 9.1 upon the death of such Participant, or, in the case of a Participant who dies subsequent to termination of his employment but prior to the distribution of the entire amount to which he is entitled under the Plan, any undistributed balance to which such Participant would have been entitled. In the event of the death of a Participant whose spouse survives him, the beneficiary of the Participant shall be his surviving spouse unless such spouse has consented in writing to the designation of another beneficiary or beneficiaries. Any such written consent shall acknowledge the effect of such election and shall be witnessed by a notary public or by a representative of the Committee who is designated to act in such capacity by the Committee. In the event a Participant dies without a surviving spouse, or, in the event the surviving spouse of a Participant has executed the written consent hereinabove described, any distributions to be made under section 9.1 upon the death of the Participant shall be made to his designated beneficiary or beneficiaries. If the Participant establishes to the satisfaction of the Committee or its designated representative that such written consent cannot be obtained because his spouse cannot be located, the requirement of such written consent shall be waived. If no beneficiary has been named by a Participant who dies without a surviving spouse or if the beneficiary designated by such a Participant or by a Participant whose surviving spouse has executed the written consent hereinabove described has predeceased the 56 63 Participant or such designated beneficiary has died prior to complete disbursement of the Participant's Plan Account, the value of his account, or the undistributed portion thereof, shall be paid by the Trustee at the direction of the Committee-- (a) to the surviving spouse of such deceased Participant, if any; (b) if there shall be no surviving spouse, to the surviving children of such deceased Participant, if any, in equal shares; (c) if there shall be no surviving spouse or surviving children, to the executors or administrators of the estate of such deceased Participant; or (d) if no executor or administrator shall have been appointed for the estate of such deceased Participant, to the person or persons who would be entitled to the personal estate of such deceased Participant under the laws of his state of domicile if he had died leaving no will. In the event that a Participant and his spouse die under circumstances such that it is not clear whether the spouse survived the Participant, the Participant shall be presumed to have survived the spouse. 15.2 Incompetency. Any distribution under this Plan which is payable to a beneficiary who is a minor or to a Participant or beneficiary who, in the opinion of the Committee, is unable to manage his affairs by reason of illness or mental incompetency, may be made to or for the benefit of any such Participant or beneficiary in such of the following ways as the Committee shall direct: (a) Directly to any such minor beneficiary, if, in the opinion of the Committee, he is able to manage his affairs; (b) To the legal representative of any such Participant or beneficiary; or (c) To some near relative of any such Participant or beneficiary to be used for the latter's benefit. 15.3 Expenses. Except as otherwise provided in the Plan, all costs and expenses incurred in administering the Plan, including the expenses of the Committee, the fees and expenses of the Trustee, the fees of its counsel, and other administrative expenses, shall be borne by the Plan except to the extent the several Employers elect to bear such costs, fees, and expenses in such proportions as the Committee shall determine to be equitable and proper having regard to the nature of the particular expense. 15.4 Nonassignability. Except as may be required to comply with a qualified domestic relations order (as defined in Code section 414(p)), it is a condition of the Plan, and all rights of each Participant shall be subject thereto, that no right or interest of any Participant in the Plan or in a Plan Account shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, or bankruptcy but excluding devolution by death or mental 57 64 incompetency, and no right or interest of any Participant in the Plan or in his Plan Account shall be liable for, or subject to, any obligation or liability of such Participant. 15.5 Employment Noncontractual. The Plan confers no right upon any Employee to continue in employment. 15.6 Merger or Consolidation with Another Plan. A merger or consolidation with, or transfer of assets or liabilities to, any other plan shall not be effected unless the terms of such merger, consolidation, or transfer are such that each Participant, distributee, beneficiary, or other person entitled to receive benefits from the Plan would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit such person would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated. If any other plan shall be merged into and become a part of this Plan, each Participant or the person entitled to receive a benefit under such other plan shall be entitled to receive a benefit under this Plan which is equal to the benefit such person would have been entitled to receive had such other plan terminated immediately before the merger. 15.7 Continuance by a Successor. In the event that any Employer corporation shall be reorganized by way of merger, consolidation, transfer of assets, or otherwise, so that another Affiliated Company shall succeed to all or a portion of such Employer's business, such successor corporation, with the consent of each other participating Employer, may be substituted for such Employer under the Plan by adopting the Plan and becoming a party to the Trust Agreement. Employee contributions and Employer contributions shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of such successor corporation for the Employer under the Plan becomes effective. If, within 90 days from the effective date of any such reorganization, such successor corporation shall not have become a party to the Plan, or, if the Employer shall adopt a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to Employees of such Employer as of the close of business on the ninetieth day following the effective date of such reorganization or as of the close of business on the date of adoption of such plan of complete liquidation, as the case may be, and the Trustee shall distribute the portion of the Trust applicable to Participants of such Employer in the manner provided in section 11.3. 15.8 USERRA Rights. Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u), to the extent applicable. Loan repayments will be suspended under this Plan as permitted under Code Section 414(u). 15.9 Construction. Unless the context clearly requires otherwise-- (a) the masculine pronoun whenever used shall include the feminine, the singular shall include the plural, and vice versa, and (b) headings of Articles and sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. 58 65 ARTICLE XVI REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS This Article XVI designates that part of the non-ESOP portion of the Plan which is invested in the MCN Stock Fund becomes part of the ESOP portion of the Plan. This Article XVI also sets forth certain provisions regarding the operation of the ESOP portion of the Plan, such provisions to supersede any contrary provisions of the Plan. This Article XVI (including provisions regarding distribution of dividends) shall become effective as of January 1, 1998 with regard to dividends distributed on or after that date. Except as specifically provided in this Article XVI, the provisions of this Article XVI, including the redesignation of the ESOP portion of the Plan described herein, shall not affect any beneficiary designations or any other applicable agreements, elections, or consents that Participants, spouses, or beneficiaries validly executed under the terms of the Plan before the execution date of the Plan amendment which first adopts this Article XVI, and such designations, agreements, elections and consents shall continue to apply in the same manner as they did prior to such amendment. The ESOP, as set forth in this Article XVI, is intended to meet with requirements of an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code and the accompanying regulations, and Section 407(d)(6) of ERISA. As provided below, the ESOP is designed to invest primarily in qualifying employer securities of MCN Energy Group Inc.. 16.1 Redesignation of ESOP Portion of Plan. Effective as of the effective date described in the preamble to this Article XVI JANUARY 1, 1998, the ESOP portion of the Plan shall consist of the ESOP Account of each Participant plus the remaining part of each Participant's Plan Account that is invested in the MCN Stock Fund. The put option provisions of Section 14.6 shall apply to the entire ESOP portion of the Plan. However, only a Participant's ESOP Account shall be subject to the restrictions described in the first sentence of Section 6.3. 16.2 Allocation of Savings Plan Account Balances to ESOP Portion of Plan. All amounts contributed, transferred or designated as allocable to the Savings Plan Account of any Participant shall be treated as part of the ESOP portion of the Plan to the extent the Participant has directed the investment of such amounts in the MCN Stock Fund in accordance with Article VI of the Plan. 16.3 Distribution of Dividends on MCN Stock. At the direction of the Committee exercised in its sole discretion, the Trustee will, after dividends are paid on MCN Stock held in the Trust, but in no event later than 90 days following the end of the Plan Year in which such dividends are paid (to the extent such dividends are not used to make payment on an exempt loan as provided for in section 14.4(c) of the Plan), either (i) distribute to Participants such portion of the dividends attributable to the interests in MCN Stock held in their Plan Accounts (or, if so determined by the Committee, their ESOP Accounts) as described below or, (ii) arrange to have such dividends distributed directly to Participants by the Employer, or (iii) arrange to have such dividends distributed to Participants by a dividend disbursement agent selected by the Committee. In its sole discretion, the Committee may direct the Trustee to have such dividends distributed only to Participants who elect (or fail not to elect) to receive such dividend distributions in accordance with forms and procedures established by the Committee (which such procedures may apply to all Participants, or solely to a group or groups determined by the Committee). Further, in its sole discretion, the Committee may establish procedures that 59 66 would permit Participants to elect to have dividends distributed to them in a single sum rather than over periods that might otherwise be determined by the Committee to correspond with Employer payroll practices. The distribution of dividends on MCN Stock held in a Participant's Plan Account (or, if so determined by the Committee, a Participant's ESOP Account) shall be in an amount equal to all of the dividends paid on the MCN Stock held in such Participant's Plan Account (or, if so determined by the Committee, a Participant's ESOP Account). * * * * * * * * * * 60 67 IN WITNESS WHEREOF, the Company has caused its corporate name to be hereunto affixed by its duly authorized officers as of the 29th day of December, 1998. MCN ENERGY GROUP INC. By /s/ D. Nowakowski ----------------------- 61 EX-10.12 5 MICHCON INVESTMENT AND STOCK OWNERSHIP PLAN 1 EXHIBIT 10.12 MICHCON INVESTMENT AND STOCK OWNERSHIP PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998) 2 MICHCON INVESTMENT AND STOCK OWNERSHIP PLAN (As Amended and Restated Effective as of January 1, 1998) TABLE OF CONTENTS
Page ---- ARTICLE I The Plan......................................................................................... 1 1.1 Establishment and Amendment of the Plan............................................................ 1 1.2 Applicability of the Plan.......................................................................... 1 1.3 Purpose and Type of Plan........................................................................... 1 ARTICLE II Definitions..................................................................................... 1 2.1 Actual Deferral Percentage......................................................................... 2 2.2 Affiliated Company................................................................................. 2 2.3 Anniversary Date................................................................................... 2 2.4 Annual Addition.................................................................................... 2 2.5 Average Actual Deferral Percentage................................................................. 2 2.6 Break in Service Year.............................................................................. 2 2.7 Code............................................................................................... 2 2.8 Company............................................................................................ 2 2.9 Compensation....................................................................................... 2 2.10 Detroit Local Participants......................................................................... 3 2.11 Disability Retirement Date......................................................................... 3 2.12 Elective Deferrals................................................................................. 3 2.13 Eligible Employee.................................................................................. 3 2.14 Employee........................................................................................... 3 2.15 Employee Post-1986 Voluntary Deduction Account..................................................... 4 2.16 Employee Pre-1987 Voluntary Deduction Account...................................................... 4 2.17 Employee Salary Reduction Account.................................................................. 4 2.18 Employer........................................................................................... 4 2.19 Employer Salary Reduction Account.................................................................. 4 2.20 Employer Voluntary Deduction Account............................................................... 4 2.21 ERISA.............................................................................................. 4 2.22 ESOP............................................................................................... 4 2.23 ESOP Account....................................................................................... 4 2.24 Excess Contributions............................................................................... 4 2.25 Excess Deferrals................................................................................... 4 2.26 Greater Michigan Local Participants................................................................ 4 2.27 Highly Compensated Employee.........................................................................5
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Page ---- 2.28 Hour of Employment................................................................................. 5 2.29 Investment Plan Account............................................................................ 5 2.30 MCN Stock.......................................................................................... 5 2.31 Military Service................................................................................... 5 2.32 Nonhighly Compensated Employee..................................................................... 5 2.33 Normal Retirement Date............................................................................. 5 2.34 Participant........................................................................................ 5 2.35 Plan............................................................................................... 5 2.36 Plan Account....................................................................................... 5 2.37 Plan Year.......................................................................................... 6 2.38 Regulations........................................................................................ 6 2.39 Salary Reduction................................................................................... 6 2.40 Salary Reduction Account........................................................................... 6 2.41 Savings Plan....................................................................................... 6 2.42 Suspense Account................................................................................... 6 2.43 Trust.............................................................................................. 6 2.44 Trust Agreement.................................................................................... 6 2.45 Trustee............................................................................................ 6 2.46 Valuation Date..................................................................................... 6 2.47 Vesting Requirement................................................................................ 6 2.48 Voluntary Deduction................................................................................ 6 2.49 Voluntary Deduction Account........................................................................ 6 2.50 Years of Service................................................................................... 6 ARTICLE III Participation and Service..................................................................... 6 3.1 Eligibility Requirements........................................................................... 6 3.2 Eligibility Upon Merger or Reemployment............................................................ 7 3.3 Collective Bargaining Agency....................................................................... 8 3.4 Applications....................................................................................... 8 3.5 Years of Service................................................................................... 8 3.6 Break in Service Year.............................................................................. 9 3.7 Hours of Employment................................................................................ 9 3.8 Employment by Related Entities..................................................................... 10 3.9 Leased Employees................................................................................... 11 ARTICLE IV Contributions.................................................................................. 11 4.1 Employee Contributions............................................................................. 11 4.2 Employer Investment Plan Contributions............................................................. 12 4.3 Employer ESOP Contributions........................................................................ 14 4.4 Additional Employer Contributions.................................................................. 15 4.5 Rollover Contributions............................................................................. 15 4.6 Transfers from the Savings Plan.................................................................... 16 4.7 Limitations on Salary Reduction Contributions...................................................... 17
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Page ---- 4.8 Distribution of Excess Deferrals...................................................................18 4.9 Distribution or Recharacterization of Excess Contributions.........................................19 4.10 Statutory (Code Section 415) Limitations on Allocations to Accounts................................20 ARTICLE V Vesting in Accounts...............................................................................22 5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary Deduction Account, and Employee Pre-1987 Voluntary Deduction Account.................................................22 5.2 Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account...............................................................22 ARTICLE VI Investment Provisions...........................................................................23 6.1 Investment of Contributions........................................................................23 6.2 Change of Investment Direction.....................................................................23 6.3 Transfers Between Investment Funds.................................................................23 ARTICLE VII Investment Funds................................................................................24 7.1 Investment Funds...................................................................................24 7.2 Management of Investment Funds.....................................................................24 7.3 Voting of MCN Stock................................................................................24 7.4 Tender Offers......................................................................................25 7.5 Named Fiduciary Status.............................................................................26 7.6 Expenses of Funds..................................................................................26 ARTICLE VIII Accounts and Records of the Plan..............................................................26 8.1 Company to Maintain Accounts.......................................................................26 8.2 Plan Accounting....................................................................................27 8.3 Valuation of Funds.................................................................................27 8.4 Valuation of Investment Plan Account...............................................................27 8.5 Valuation of ESOP Account..........................................................................27 8.6 Valuation of Plan Account..........................................................................27 8.7 Company to Furnish Annual Statements of Value of Plan..............................................27 8.8 Trust Agreement....................................................................................27 ARTICLE IX Distributions, Withdrawals and Loans............................................................28 9.1 Distribution Upon Termination of Employment Entitling Participant to Value of Plan Account....................................................28 9.2 Distribution Upon Termination of Employment Under Circumstances Resulting in Forfeiture of Employer Contributions...................................28 9.3 Certain Distributions from Participant Accounts....................................................28
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Page ---- 9.4 In-Service Withdrawals -- General..................................................................29 9.5 Withdrawal of Voluntary Deduction Contributions....................................................29 9.6 Hardship Withdrawal of Salary Reduction Contributions..............................................29 9.7 Time of Distributions..............................................................................31 9.8 Distributions of Stock.............................................................................33 9.9 Distributions from Fixed Income Fund...............................................................33 9.10 Loans..............................................................................................35 9.11 Definition of Employee Contributions and Employer Contributions....................................37 9.12 Spousal Consent to Payment.........................................................................37 9.13 Distributions Pursuant to a Qualified Domestic Relations Order.....................................37 9.14 Direct Rollovers of Eligible Distributions.........................................................37 9.15 Special Distribution Events........................................................................38 ARTICLE X Administration...................................................................................39 10.1 Plan Administration and Interpretation.............................................................39 10.2 Notice to Employees................................................................................40 10.3 Notices to Employers...............................................................................40 10.4 Participants' Acceptance of the Provisions of the Plan.............................................40 10.5 Audit of Plan Records..............................................................................40 10.6 Claims Procedure...................................................................................40 10.7 Effect of a Mistake................................................................................41 ARTICLE XI Amendment and Termination.......................................................................41 11.1 Amendment..........................................................................................41 11.2 Withdrawal.........................................................................................41 11.3 Termination........................................................................................41 11.4 Allocation of Funds Between Employers..............................................................42 11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries...........................42 ARTICLE XII Participation by Affiliated Companies..........................................................42 12.1 Adoption of the Plan...............................................................................42 12.2 Withdrawal from the Plan...........................................................................42 12.3 Company as Agent for Employers.....................................................................42
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Page ---- ARTICLE XIII Special Provisions Relating to the ESOP........................................................43 13.1 Establishment of ESOP..............................................................................43 13.2 ESOP Account.......................................................................................43 13.3 Discrimination Testing.............................................................................43 13.4 Loans..............................................................................................43 13.5 Diversification....................................................................................45 13.6 Put Option.........................................................................................45 13.7 Purchase of MCN Stock..............................................................................46 ARTICLE XIV Miscellaneous..................................................................................46 14.1 Beneficiary Designation............................................................................46 14.2 Incompetency.......................................................................................47 14.3 Expenses...........................................................................................47 14.4 Nonassignability...................................................................................47 14.5 Employment Noncontractual..........................................................................48 14.6 Merger or Consolidation with Another Plan..........................................................48 14.7 Continuance by a Successor.........................................................................48 14.8 USERRA Rights......................................................................................48 14.9 Construction.......................................................................................48 ARTICLE XV Redesignation of ESOP and Distribution of Dividends..............................................48 15.1 Redesignation of ESOP Portion of Plan..............................................................49 15.2 Allocation of Investment Plan Account Balances to ESOP Portion of Plan.............................49 15.3 Distribution of Dividends on MCN Stock.............................................................49
v 7 MICHCON INVESTMENT AND STOCK OWNERSHIP PLAN (As Amended and Restated Effective as of January 1, 1998) ARTICLE I THE PLAN 1.1 Establishment and Amendment of the Plan. Michigan Consolidated Gas Company, which is also known as MichCon (hereinafter referred to as the "Company"), presently maintains an investment and stock ownership plan for the benefit of its Eligible Employees and the Eligible Employees of its participating Affiliated Companies. The plan was last restated effective as of April 1, 1989, and was amended from time to time thereafter. The Company previously established the MichCon Employee Stock Ownership Plan for Union Employees ("ESOP") and incorporated the ESOP into the Michigan Consolidated Gas Company Union Employee's Investment Plan to form the MichCon Investment and Stock Ownership Plan. The plan is hereby further amended and completely restated as set forth herein effective as of January 1, 1998, except as otherwise provided herein or required by law (for instance, certain provisions herein are legally required to be effective as of January 1, 1997, and are therefore effective as of such date), and shall continue to be known as the "MichCon Investment and Stock Ownership Plan" (the "Plan"). The ESOP provisions of the Plan became effective as of April 1, 1989. 1.2 Applicability of the Plan. Except as otherwise specified herein or required by law, the provisions of the Plan as amended and restated herein effective as of January 1, 1998, shall be applicable only with respect to Eligible Employees of an Employer in current employment on or after January 1, 1998, and their beneficiaries. Any person who was covered under the Plan as in effect prior to January 1, 1998, and whose employment terminated under the Plan prior to January 1, 1998, shall continue to have his rights to receive benefits determined under the provisions of the Plan in effect when his employment relationship so terminated, subject to legally required changes prior to January 1, 1998, as described herein. 1.3 Purpose and Type of Plan. The purpose of the Plan is to provide a convenient way for Participants to save on a regular and long-term basis for their retirement income needs; to recognize the contribution made to the Employer's successful operation by its employees and to reward such contribution for those employees who qualify as participants under the terms of the Plan; and to facilitate ownership of MCN Stock by participating Eligible Employees. The non-ESOP portion of the Plan is intended to qualify as a profit-sharing plan and the ESOP portion of the Plan is intended to qualify as a stock bonus and an employee stock ownership plan for purposes of Code sections 401(a), 402, 412, 417, 4975, and related provisions. ARTICLE II DEFINITIONS 1 8 Whenever used in the Plan, the following words and phrases shall have the respective meanings stated below unless a different meaning is plainly required by the context. 2.1 "Actual Deferral Percentage" means the ratio (expressed as a percentage) of (A) the (a) Elective Deferrals of an Employee who is eligible to participate in the Plan for a Plan Year, to (b) the Compensation of that Employee for such Plan Year. 2.2 "Affiliated Company" means-- (a) any corporation other than the Company, i.e., either a subsidiary corporation or an affiliated or associated corporation of the Company, which together with the Company is a member of a "controlled group" of corporations (as defined in Code section 414(b)); (b) any organization which together with the Company is under "common control" (as defined in Code section 414(c)); (c) any organization which together with the Company is an "affiliated service group" (as defined in Code section 414(m)); or (d) any other entity required to be aggregated with the Company pursuant to Regulations under Code section 414(o). 2.3 "Anniversary Date" means with respect to each Employee, the anniversary each year of the Employee's first Hour of Employment. If an Employee whose employment was terminated is reemployed but prior to his reemployment he incurs a Break in Service Year or following his reemployment he incurs a Break in Service Year before completing a Year of Service, his Anniversary Date shall be based upon his first Hour of Employment coincident with or next following his date of reemployment; otherwise, his Anniversary Date shall not be changed.. 2.4 "Annual Addition" means the amount allocated to a Participant's account as such term is defined in section 4.10(a). 2.5 "Average Actual Deferral Percentage" means the average (expressed as a percentage) of the Actual Deferral Percentages of the Employees in a group who are eligible to participate in the Plan for a Plan Year. 2.6 "Break in Service Year" means a 12-month period described in section 3.6. 2.7 "Code" means the Internal Revenue Code of 1986, as amended. 2.8 "Company" means Michigan Consolidated Gas Company. 2.9 "Compensation" means a Participant's pay, determined as follows: (a) For all purposes of the Plan, except as otherwise specified in (b) or (c) below or required by the context, Compensation means the regular basic salary or wage paid (plus, effective July 1, 1998, shift differential) to an Employee by the Employer before any 2 9 payroll deduction for taxes or any other purpose, and before any Salary Reduction contribution or cafeteria plan election, but excluding merit, incentive and other similar payments made in the form of a lump sum, bonuses, awards, shift differentials (prior to July 1, 1998), severance payments, differential payments made by reason of the Employee's entry into Military Service, all amounts paid for work in excess of 40 hours in any one week, all overtime or other premium paid for work in excess of a maximum number of hours in any one day, for work on holidays or for any other reason, payments for so-called fringe benefits such as Employer contributions to this Plan or any pension or retirement plan, increased wages or salary resulting from temporary promotion, upgrading or transfer, of whatever duration, to a higher paid job or classification, and any other premium, auxiliary, or special pay of any sort whatsoever. (b) For purposes of satisfying the limits on contributions described in section 4.7 (ADP test) and applying the limits of section 415 of the Code as described in section 4.10, Compensation shall mean "compensation" as defined in Treas. Regulation Section 1.415-2(d) or any successor regulation. (c) For purposes of determining whether an individual is a Highly Compensated Employee, Compensation means an Employee's Compensation as defined in subsection (b) above but without regard to Code sections 125, 402(a)(8), and 402(h)(1)(B) (i.e., with the addition of elective deferrals pursuant to a cafeteria plan, a cash-or-deferred arrangement, or a simplified employee pension during years in which such items are excluded under subsection (b)). (d) In accordance with Code Section 401(a)(17), the Compensation of each Employee that may be taken into account under the Plan shall not exceed the first $150,000 of an Employee's Compensation (as adjusted pursuant to Code section 401(a)(17)). 2.10 "Detroit Local Participants" means Participants represented by (i) Local #80 and Local #80 (P. T. & S.), Service Employees International Union and (ii) Local #799C (P.T.& S.), International Chemical Workers Union Council, United Food and Commercial Workers. 2.11 "Disability Retirement Date" means the date a Participant (i) becomes eligible to receive benefits under a long-term disability plan maintained by the Employer, or (ii) is determined by the Company to be totally and permanently disabled. In determining whether a Participant is totally and permanently disabled, the Company may, in its discretion, rely on the opinion of a physician selected by the Company to assist it in making such a determination. 2.12 "Elective Deferrals" means Salary Reduction contributions under section 4.1(a) and contributions under other plans maintained by the Company or an Affiliated Company that constitute elective deferrals within the meaning of Code section 402(g)(3). 2.13 "Eligible Employee" means an Employee of an Employer whose terms and conditions of employment are covered by an agreement with a collective bargaining agent which agreement permits participation in this Plan. 2.14 "Employee" means an individual who is an employee of the Company or an Affiliated Company (including, for certain purposes described in Section 3.9, a "leased employee" as described in Section 3.9), but shall not include an individual who enters into a 3 10 formal or informal independent contractor agreement with the Company or is otherwise treated as an independent contractor under the payroll practices of the Company. 2.15 "Employee Post-1986 Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions after December 31, 1986, and investment gains and losses therefrom. 2.16 "Employee Pre-1987 Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions before January 1, 1987, and investment gains and losses therefrom. 2.17 "Employee Salary Reduction Account" means an Employee's Salary Reduction contributions, and investment gains and losses therefrom. 2.18 "Employer" means the Company and any Affiliated Company which has adopted the Plan with the consent of the Company and in the manner prescribed in section 12.1 and any successor corporation which shall adopt the Plan pursuant to section 14.7. If any such corporation shall withdraw from participation in the Plan in accordance with section 12.2, the term Employer shall not thereafter include such corporation. 2.19 "Employer Salary Reduction Account" means the Employer contributions to the Salary Reduction Account of an Employee pursuant to section 4.2, and investment gains and losses therefrom. 2.20 "Employer Voluntary Deduction Account" means the Employer contributions to the Voluntary Deduction Account of an Employee pursuant to section 4.2, and investment gains and losses therefrom. 2.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.22 "ESOP" means the employee stock ownership plan established pursuant to section 13.1, as modified by Article XV. 2.23 "ESOP Account" means the account established and maintained on behalf of each Participant in accordance with sections 8.1(c) and (d) and 13.2. 2.24 "Excess Contributions" means the amount described in section 4.9(a). 2.25 "Excess Deferrals" means the portion of Elective Deferrals for a calendar year, if any, described in section 4.8. 2.26 "Greater Michigan Local Participants" means Participants who are represented by (i) Local #799C Northern, International Chemical Workers Union Council, United Food and Commercial Workers (ii) Local #70C, International Chemical Workers Union Council, United Food and Commercial Workers and (iii) Local #132C, International Chemical Workers Union Council, United Food and Commercial Workers. 4 11 2.27 "Highly Compensated Employee" with respect to any Plan Year beginning on or after January 1, 1997, shall include highly compensated active employees and highly compensated former employees. A highly compensated active employee includes any Employee who performs service for an Employer during the determination year and who, during the look-back year received Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 415(d)), or who was a 5-percent owner at any time during the determination year or the look-back year. For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. A highly compensated former employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performed no service for the Employer during the determination year, and was a highly compensated active employee for either the separation year or any determination year ending on or after the employee's 55th birthday. The determination of who is a Highly Compensated Employee will be made in accordance with Section 414(q) of the Code and the regulations thereunder. 2.28 "Hour of Employment" means an hour for which an individual receives credit pursuant to section 3.7. 2.29 "Investment Plan Account" means the total value of an Employee's Salary Reduction Account and Voluntary Reduction Account. 2.30 "MCN Stock" means common stock of MCN Energy Group Inc.. 2.31 "Military Service" means service (a) on active duty, in time of national or local emergency, in the armed forces of the United States or of any State thereof, (b) in the armed forces of the United States or of any State thereof under any compulsory service law, or (c)in the armed forces of the United States or any of its allies in time of war in which the United States is engaged. 2.32 "Nonhighly Compensated Employee" means an Employee of the Employer who is not a Highly Compensated Employee. 2.33 "Normal Retirement Date" means the Participant's sixty-fifth (65th) birthday, if such birthday falls on the first day of the month; otherwise, the first day of the month next following the month in which such birthday occurs. 2.34 "Participant" means an Employee who is participating in the Plan in accordance with its provisions. 2.35 "Plan" means MichCon Investment and Stock Ownership Plan and any amendments thereto or restatements thereof from time to time adopted. 2.36 "Plan Account" means the total value of an Employee's Investment Plan Account and ESOP Account. 5 12 2.37 "Plan Year" means the calendar year. 2.38 "Regulations" means regulations issued by the Department of Labor construing Title I of ERISA or by the Internal Revenue Service construing the Code. 2.39 "Salary Reduction" means an election by a Participant to have the Compensation that would otherwise be payable reduced and contributed by the Employer to the Plan as a regular contribution on behalf of the Participant. 2.40 "Salary Reduction Account" means an Employee's Salary Reduction contributions, related Employer matching contributions, and investment gains and losses therefrom. 2.41 "Savings Plan" means the MCN ENERGY GROUP Savings and Stock Ownership Plan (formerly the MichCon Savings and Stock Ownership Plan. 2.42 "Suspense Account" means the account used to reflect MCN Stock acquired with loan proceeds pursuant to section 13.4. 2.43 "Trust" means the Trust created by agreement between the Employers and the Trustee, as from time to time amended. 2.44 "Trust Agreement" means the agreement between the Employers and the Trustee referred to in section 8.8. 2.45 "Trustee" means the Trustee hereinafter provided for in section 8.8 TRUSTEE UNDER THE TRUST AGREEMENT or any successor Trustee TRUSTEE. 2.46 "Valuation Date" means each business day on which the New York Stock Exchange shall be open for business. 2.47 "Vesting Requirement" means the requirement for vesting described in section 5.2. 2.48 "Voluntary Deduction" means an Employee's payroll deduction contributions other than Salary Reduction contributions. 2.49 "Voluntary Deduction Account" means an Employee's Voluntary Deduction contributions, related Employer matching contributions, and investment gains and losses therefrom. 2.50 "Years of Service" means year(s) of employment of an Employee by an Employer or nonparticipating Affiliated Company as such term is defined in section 3.5. ARTICLE III PARTICIPATION AND SERVICE 3.1 Eligibility Requirements. 6 13 (a) Each individual who was eligible to participate in the Plan on December 31, 1997, in accordance with the terms of the Plan in effect on said date shall continue to be eligible to participate, subject to the provisions of this Plan. Each other Employee shall become eligible to participate on the latest to occur of-- (i) the date he is employed as an Eligible Employee, (ii) the date on which he completes at least one year of eligibility service (as defined in section 3.1(b)), or (iii) the date on which he attains age 21; provided he is employed as an Eligible Employee on such date. (b) For purposes of this Article III, a year of eligibility service shall mean the 12-month period beginning on the date of an Employee's first Hour of Employment, or the 12-month period beginning on an Employee's Anniversary Date during which he completes at least 1,000 Hours of Employment. 3.2 Eligibility Upon Merger or Reemployment. (a) Merger. Any Employee who is a Participant in any plan which is merged into this Plan shall become a Participant in this Plan immediately upon the effective date of the merger. Such an Employee shall be eligible to actively participate in this Plan in accordance with Section 3.4. (b) Reemployment. In the event an Employee's employment is terminated and such individual is later reemployed as an Eligible Employee: (i) If the re-employed reemployed Eligible Employee had not met the age and service requirements for participation in the Plan during his prior period of employment but was re-employed reemployed before incurring a Break in Service Year, his prior period of employment shall be included for purposes of determining his eligibility for participation in the Plan. (ii) If the re-employed reemployed Eligible Employee had not met the age and service requirements for participation in the Plan during his prior period of employment and incurred a Break in Service Year, he must meet the participation requirements of Section 3.1 as if he were a new employee. (iii) If the re-employed reemployed Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment, incurred a Break in Service Year, and, pursuant to the Break in Service Year rules, his years of eligibility service are disregarded, he must meet the participation requirements of Section 3.1 as if he were a new employee. (iv) If the re-employed reemployed Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment and incurred a Break in Service Year, but pursuant to the Break in Service Year rules his years of eligibility 7 14 service are not disregarded, he shall again participate in the Plan on the date of his reemployment; (v) If the re-employed reemployed Eligible Employee met the age and service requirements for participation in the Plan during his prior period of employment and did not incur a Break in Service Year, he shall again participate as of the date of his reemployment or, if later, the date upon which he would have begun participation if not for the termination and reemployment. 3.3 Collective Bargaining Agency. If any Employee shall become a Participant in the Plan and shall thereafter cease to be represented by a collective bargaining agency pursuant to a collective bargaining agreement between his Employer and a collective bargaining agency covered under this Plan, he shall nevertheless continue to be eligible to actively participate in the Plan until such time as the terms and conditions of his employment are no longer governed by such a collective bargaining agreement. If such an Employee becomes eligible to participate in the Savings Plan or any successor plan, his entire Plan Account shall be transferred to such plan and the Employee shall no longer be eligible to participate in this Plan. The Participant's Plan Account shall be fully vested upon such transfer. 3.4 Applications. An Employee who is eligible to participate on the date the Plan becomes effective with respect to his Employer may become a Participant by filing a written application with his Employer in the form prescribed by the Company. Thereafter, an Eligible Employee may become a Participant by filing a written application with his Employer in the form prescribed by the Company. Participation in the Plan will commence within a reasonable time following processing of a Participant's application. The Employee's application shall authorize the Employer to deduct contributions from the Employee's Eligible Compensation in amounts specified by the Employee pursuant to Article IV, and to have contributions made as a Salary Reduction pursuant to Article IV. The application shall evidence the Employee's acceptance of and agreement to all of the provisions of the Plan. 3.5 Years of Service. An Employee shall be credited for Years of Service for his period of employment with the Employer and each nonparticipating Affiliated Company, determined as follows: (a) An Employee shall receive credit, for purposes of vesting, for all Years of Service. An Employee shall have one "Year of Service" for each 12-month period beginning on the date of the Employee's first Hour of Employment and on each subsequent Anniversary Date, during which the Employee completes 1,000 or more Hours of Employment. (b) Years of Service shall not be interrupted (i) by any transfer of employment of an Employee between Affiliated Companies regardless of whether the Affiliated Company is an Employer hereunder; or (ii) during such period as an Employee is receiving credit for Hours of Employment under section 3.7. (c) If an Employee is reemployed following a Break in Service Year, he shall be considered a new Employee for purposes of the Plan, except-- 8 15 (i) If prior to such Break in Service Year he had a vested interest in his ESOP Account, Employer Salary Reduction Account, or Employer Voluntary Deduction Account, Years of Service he had prior to the Break in Service Year shall be reinstated after such Employee completes a Year of Service after such Break in Service Year. (ii) If paragraph (i) is not applicable, and if the Employee's number of consecutive Break in Service Years does not equal or exceed the greater of five or the number of Years of Service he had before incurring a Break in Service Year, the Years of Service he had prior to such Break in Service Years shall be reinstated after such Employee completes a Year of Service after such Break in Service Years. (d) Notwithstanding the foregoing provisions, an Employee's Years of Service shall exclude any Years of Service completed before an Employee attains age 18. 3.6 Break in Service Year. "Break in Service Year" shall mean a 12-month period beginning on an Employee's Anniversary Date during which the Employee has not completed more than 500 Hours of Employment (as defined in section 3.7). Notwithstanding the foregoing, the following periods shall not be deemed to be Break in Service Years: (a) If a Participant retires on his Disability Retirement Date, thereafter ceases to be totally and permanently disabled, and returns to the employ of an Employer, the period between his Disability Retirement Date and the date as of which he ceases to be totally and permanently disabled. (b) If a Participant commences receiving benefits under a long-term disability benefit program maintained by an Employer and thereafter ceases to receive benefits under such program and returns to the employ of the Employer, the period during which he was receiving benefits under such program. If an Employee incurs a Break in Service Year and prior to such Break in Service Year has not completed five Years of Service, his Years of Service completed prior to such a Break in Service Year shall be disregarded unless he completes a Year of Service after such Break in Service Year and before the total of such Break in Service Year and any ensuing consecutive Break in Service Years equals the greater of five or the number of his Years of Service (as defined in section 3.5 but without excluding Years of Service completed prior to attaining age 18) prior to such Break in Service Year. 3.7 Hours of Employment. "Hours of Employment" shall mean, for any individual performing or who has performed services for one or more Employers or nonparticipating Affiliated Companies, the sum of the following: (a) All hours for which the individual is directly or indirectly paid or entitled to payment by an Employer or nonparticipating Affiliated Company for the performance of duties. These hours shall be credited to the individual for the computation period or periods in which the duties are performed. (b) Except as provided in section 3.7(e) below, all hours for which the individual is directly or indirectly paid or entitled to payment by an Employer or nonparticipating Affiliated Company for reasons (such as vacation, holiday, sickness, incapacity, layoff, jury duty, leave of absence, Military Service, or disability) other than for the performance of duties. 9 16 These hours shall be credited to the individual for the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. (c) All hours for which back pay, irrespective of mitigation of damages, has been awarded, agreed to, or paid by an Employer or nonparticipating Affiliated Company, with no duplication of credit for hours. These hours shall be credited to the individual for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made. (d) Except as provided in section 3.7(e) below, eight Hours of Employment per day for each working day that an individual is absent from work without pay for an approved leave of absence, voluntary time, sick time, disciplinary layoff, or Military Service if the individual returns to the employ of an Employer or nonparticipating Affiliated Company within 90 days after the end of such period. These hours shall be credited to the individual for the computation period or periods in which the period during which no duties are performed occurs, beginning with the first such period. (e) Eight Hours of Employment per day for each working day that an individual is absent from work with or without pay because of pregnancy of the individual, birth of a child to the individual, placement of a child with the individual in connection with the adoption of such child by such individual, or caring for such child for a period beginning immediately following such birth or placement. The Company may, in its discretion, request such information from the individual as the Company shall deem relevant in order to verify that an absence is for the reasons described in this subsection (e). Notwithstanding the foregoing, no more than 501 Hours of Employment shall be credited under this subsection (e) on account of any such pregnancy or placement if the individual does not return to the employ of an Employer or participating Affiliated Company within 90 days after the end of the period approved for such absence. Hours credited under this subsection (e) shall be credited to the individual only in the year in which the absence begins if the crediting is necessary to prevent a Break in Service Year for such year; or, in any other case, in the immediately following year; provided, however, that if more than 501 hours are credited under this subsection (e) on account of any such pregnancy or placement, the excess over 501 hours shall be credited to the period or periods to which it relates. Hours of Employment credited under this section 3.7 shall comply with the rules set forth in 29 C.F.R. section 2530.200b-2(b) and (c), which rules are hereby incorporated by reference. Notwithstanding anything herein to the contrary, Hours of Employment shall be credited hereunder at all times in compliance with the requirements of the Family and Medical Leave Act. 3.8 Employment by Related Entities. If an Employee's employer is a nonparticipating Affiliated Company, any period in which the Employee is employed by the nonparticipating Affiliated Company (while an Affiliated Company) shall be taken into account for purposes of satisfying the eligibility service requirement set forth in section 3.1 and measuring such Employee's Years of Service to the same extent it would have been had such period of employment been employment by an Employer. 10 17 3.9 Leased Employees. A person who is not an Employee of an Employer or nonparticipating Affiliated Company and who performs services for an Employer or a nonparticipating Affiliated Company pursuant to an agreement between the Employer or nonparticipating Affiliated Company and a leasing organization shall be considered a "leased employee" if such person performed the services on a substantially full-time basis for a year and the services are under the primary direction and control of the recipient. A person who is considered a "leased employee" of an Employer or nonparticipating Affiliated Company shall not be considered an Employee for purposes of participating in this Plan or receiving any contribution or benefit under this Plan. A leased employee shall be excluded from this Plan regardless of whether the leased employee participates in any plan maintained by the leasing organization. However, if a leased employee participates in the Plan as a result of subsequent employment with an Employer, his previous service as a leased employee shall be counted in calculating his Years of Service. Notwithstanding the preceding provisions of this section 3.9, a leased employee will be included as an Employee for purposes of applying the requirements described in Code section 414(n)(3) and for purposes of determining the number and identity of Highly Compensated Employees. ARTICLE IV CONTRIBUTIONS 4.1 Employee Contributions. (a) Amount of Contributions. Each Participant may make a regular contribution to the Plan (not less than 1 percent) up to a percentage of his Compensation for a pay period in incremental percentages of 1 percent, determined as follows: Group Percentage ----- ---------- For Highly Compensated Employees 15% For Nonhighly Compensated Employees who are Detroit Local Participants: Prior to April 1, 1998 20% April 1, 1998 and later 17% For Nonhighly Compensated Employees who are Greater Michigan Local Participants: Prior to July 1, 1998 20% July 1, 1998 and later 17% Contributions will be effected by Voluntary Deductions, Salary Reductions, or any combination thereof, as elected by the Participant. The amount of such Voluntary Deductions or Salary Reductions shall be transferred to the Trustee after each pay period; provided, however, that a Participant's Salary Reduction contributions shall not exceed 8 percent of the Participant's Compensation for a pay period (if the Participant was a Highly Compensated Employee during the immediately preceding Plan Year), or 9 percent of the Participant's Compensation for a pay period (if the Participant was not a Highly Compensated Employee 11 18 during the immediately preceding Plan Year); and further provided, however, that Voluntary Deductions and Salary Reductions shall be limited as provided in sections 4.7 and 4.10. Notwithstanding the foregoing, the Company may, in its sole discretion, (1) reduce the Salary Reduction contributions permitted by a group of Participants if, in the opinion of the Company, it is advisable to do so in order to satisfy the requirements of section 4.7 or 4.10; or (2) reduce the Voluntary Deduction contributions permitted by a group of Participants if, in the opinion of the Company, it is advisable to do so in order to satisfy the requirements of section 4.10. (b) Changes in Contributions. The contribution of Voluntary Deductions and/or Salary Reductions designated by a Participant shall continue in effect, notwithstanding any change in his Compensation rate, until the Participant shall change such contribution; provided, however, that such contribution shall in no event be less than 1 percent, nor more than the limits of section 4.1(a), in incremental percentages of 1 percent of the Participant's Compensation for a pay period. A Participant may change his contribution from time to time by giving directions to his Employer in the form prescribed by the Company, with such directions to take effect within a reasonable period following processing. (c) Voluntary Suspension of Contributions. Any Participant may, by giving notice to his Employer in the form and timing prescribed by the Company, suspend his contribution of Voluntary Deductions and/or Salary Reductions, either indefinitely or for any specified period provided that in the event of suspension of both such contributions the suspension shall be for at least 12 full months. In case of any such suspension of any contributions, the Employer's contributions on behalf of the Participant shall be automatically suspended for a like period. (d) Automatic Suspension of Contributions. A Participant's contributions of Voluntary Deductions and Salary Reductions and the Employer's contributions on behalf of the Participant shall be suspended automatically for any period during which the Participant is absent without pay under any of the circumstances described in section 3.7(c), (d), or (e), and such an absence shall not constitute termination of service for purposes of any of the provisions of Article IX. A Participant may, by giving notice to his Employer in the form and timing prescribed by the Company, suspend his contribution of Voluntary Deductions and/or Salary Reductions for any period during which he is absent from work under any of the circumstances described in section 3.7(b) or (c) and receiving Compensation at a reduced Compensation rate, in which case the Employer contributions on behalf of such Participant shall be automatically suspended for a like period. 4.2 Employer Investment Plan Contributions. Each Employer shall contribute, to the Salary Reduction Account of each of its participating Employees, an amount equal to 25 percent of the Salary Reduction contribution of such Participant; provided, however, that Salary Reduction contributions shall be disregarded to the extent that they exceed an amount determined by multiplying the applicable contribution percentage shown in the following schedules by the Participant's Compensation for a pay period: (a) Prior to January 1, 1999, for all Participants except Participants described in subsection (b) below: 12 19 Contribution Years of Service Percentage ---------------- ------------ 1 through 3 2% More than 3 through 6 3% More than 6 through 10 4% More than 10 through 23 5% More than 23 6% (b) Prior to January 1, 1999, for (i) all Participants who became Eligible Employees on or after July 1, 1995, who are Utility I employees represented by I.C.W.U.C. U.F.C.W. Local 799C (Northern) or (ii) Participants who became Eligible Employees on or after April 1, 1997 who are service consumption technicians represented by Local 80 Detroit: Contribution Years of Service Percentage ---------------- ---------- 0 through 3 0% More than 3 through 6 3% More than 6 through 10 4% More than 10 through 23 5% More than 23 6% (c) On and after January 1, 1999, for all Participants except Participants described in subsection (d) below: Contribution Years of Service Percentage ---------------- ---------- 1 through 3 2% More than 3 through 6 3% More than 6 through 9 4% More than 9 through 23 5% More than 23 6% (d) On and after January 1, 1999, for (i) all Participants who became Eligible Employees on or after July 1, 1995, who are Utility I employees represented by I.C.W.U.C. U.F.C.W. Local 799C (Northern) or (ii) Participants who became Eligible Employees on or after April 1, 1997 who are service consumption technicians represented by Local 80: Contribution Years of Service Percentage ---------------- ---------- 0 through 3 0% More than 3 through 6 3% More than 6 through 9 4% More than 9 through 23 5% More than 23 6% 13 20 In addition, in cases where the Participant's Salary Reduction contribution is less than the percentage of his Compensation rate allowed in the above schedule for his Years of Service, the Employer shall contribute to the Voluntary Deduction Account of such participating Employee an amount equal to 25 percent of the smaller of (1) the Participant's Voluntary Deduction contribution, or (2) an amount equal to (A) the applicable contribution percentage, per the above schedule, times the Participant's Compensation for a pay period, minus (B) the Participant's Salary Reduction contribution. The maximum Employer matching contributions on behalf of any Participant shall not be increased until such Participant has provided notice to the Company in the manner and timing prescribed by the Company. 4.3 Employer ESOP Contributions. (a) Basic ESOP Contribution. Each Employer shall contribute to the ESOP Account of each of its participating Employees each pay period an amount equal to the difference, if any, between (i) and (ii) below: (i) 75 percent of the sum of the Salary Reduction and Voluntary Deduction contributions of such Participant for such pay period; provided, however, that Salary Reduction and Voluntary Deduction contributions shall be disregarded to the extent that they exceed, in the aggregate, an amount determined by multiplying the applicable contribution percentage in the schedules set forth in section 4.2 by such Participant Compensation for the pay period. (ii) The value of the shares of MCN Stock allocated to the ESOP Account of such Participant pursuant to section 13.4(d) for such pay period. The value of shares allocated under section 13.4(d) shall be the market value thereof as of the last day of the pay period for which the shares are allocated, with the market value to be determined by the Company in a nondiscriminatory manner. (b) Contribution of Principal, Interest, or Other Payments. Each Employer also shall contribute to the ESOP its proportionate share of any additional amount necessary to make principal, interest, or other payments required by the terms of any loan made to the ESOP in accordance with section 13.4. Each Employer's proportionate share shall be equal to the proportion that its contributions under section 4.3(a) bears to the total contributions under section 4.3(a). Each Employer also may make additional contributions to make principal, interest, or other payments in accordance with the terms of any loan made to the ESOP in accordance with section 13.4. (c) Dividend-Related Contributions. Each Employer also shall contribute to the ESOP Account of each of its participating Employees such amounts as may be necessary to acquire for the ESOP Account of such Participant shares of MCN Stock having a fair market value equal to the amount of any dividends on shares of MCN Stock allocated to the ESOP Account of such Participant that were used to repay an ESOP loan in accordance with section 13.4(c). Such contributions shall be made on, or as soon as practicable after, each date on which dividends on allocated shares of MCN Stock are used to repay a loan. In no event shall the shares of MCN Stock acquired with contributions under this subsection (c) be allocated to the ESOP Account of such Participant later than the last day of the Plan Year during which (but for the use of the dividend to repay the loan) the dividend giving rise to such contribution would have been allocated to the ESOP Account of such Participant. 14 21 (d) Longevity Contributions. Within a reasonable time after each March 1 (April 1 in the case of Greater Michigan Local Participants prior to 1999) of each Plan Year (in each case, the "Measurement Date"), each Employer shall contribute to the ESOP Account of each of its participating Eligible Employees on active payroll as of the Measurement Date who has at least 30 Years of Service as of such Measurement Date: (i) effective prior to March 1, 1999 for Greater Michigan Local Participants, twenty-five (25) shares of MCN Stock (ii) effective March 1, 1999 for Greater Michigan Local Participants and effective March 1, 1998 for Detroit Local Participants, six hundred dollars ($600) in shares of MCN Stock, as determined by the Company in a nondiscriminatory manner. 4.4 Additional Employer Contributions. If a Participant receiving payments (based upon 40 or more hours per week) under the terms of any Workers' Compensation law does not have sufficient compensation to make Salary Reduction or Voluntary Deduction contributions in an amount equal to the amount of the Participant's contributions as in effect during the Participant's last period of active service, then the Participant's Employer shall contribute on behalf of the Participant such additional amount as would have been contributed by the Employer under sections 4.2 and 4.3 on behalf of such Participant had the Participant's contributions been continued at the rate in effect during the Participant's last period of active service. Additional contributions under this section 4.4 shall be treated for accounting purposes as if made under section 4.2 or 4.3, as applicable, except such contributions shall not be considered when computing the Contribution Percentage. Contributions under this Section 4.4 shall be deemed contributions made under Code Section 415(c)(3)(C), and for purposes of calculations under Section 415, "compensation" shall include the compensation the Participant would have received if the Participant were paid at the rate of compensation paid immediately before becoming disabled. 4.5 Rollover Contributions. (a) From Qualified Plan. If an Employee receives, either before or after becoming an Employee an eligible rollover distribution (within the meaning of Code section 402(c)(4))from an employees' trust described in Code section 401(a) which is exempt from tax under Code section 501(a) or from a qualified annuity plan described in Code section 403(a) (other than an employees' trust or an annuity plan under which the Employee was an Employee within the meaning of Code section 401(c)(1) at the time contributions were made on his behalf under such trust or annuity plan), then such Employee may transfer and deliver to the Company, to be credited to his Employee Salary Reduction Account as if it were a Salary Reduction contribution, an amount which does not exceed the amount of such qualified total distribution or eligible rollover distribution (including any proceeds from the sale of any property received as a part of such qualified total distribution or eligible rollover distribution) less, in the case of a qualified total distribution, the amount considered contributed to such trust or annuity plan by the Employee. Former Employees who are Participants and who receive an eligible rollover distribution from another plan sponsored by an Employer may make rollover contributions in accordance with this section. 15 22 (b) From Individual Retirement Account or Annuity. If-- (i) an Employee receives, either before or after becoming an Employee, a distribution or distributions from an individual retirement account or individual retirement annuity (within the meaning of Code section 408) or from a retirement bond (within the meaning of Code section 409); and (ii) no amount in such account, no part of the value of such annuity, or no part of the value of the proceeds of such bond is attributable to any source other than an eligible rollover distribution (within the meaning of Code section 402(c)(4)) from an employees' trust described in Code section 401(a) which is exempt from tax under Code section 501(a) or annuity plan described in Code section 403(a) (other than an employees' trust or an annuity plan under which the Employee was an Employee within the meaning of Code section 401(c) at the time contributions were made on his behalf under such trust or annuity plan) and any earnings on such a qualified total distribution or eligible rollover distribution; then such Employee may transfer and deliver to the Company, to be credited to his Salary Reduction Account as if it were a Salary Reduction contribution, such distribution or distributions. (c) Timing and Substantiation. Any transfer and delivery pursuant to this section 4.5 shall be delivered by the Employee to the Company and by the Company to the Trustee on or before the sixtieth day after the day on which the Employee receives the distribution or on or before such later date as may be prescribed by law. Any such transfer and delivery must be accompanied by (i) a statement of the Employee that to the best of his knowledge the amount so transferred meets the conditions specified in this section 4.5, and (ii) a copy of such documents as may have been received by the Employee advising him of the amount and the character of such distribution. Notwithstanding the foregoing, the Company shall not accept a rollover contribution if, in its judgment, such acceptance would cause the Plan to violate any provision of the Code or Regulations. (d) Deemed Contribution for Certain Purposes. A rollover contribution pursuant to this section 4.5 shall be deemed to be a contribution of a Participant for purposes of the value of a Participant's fund account as provided in section 8.2 and in determining the amount distributable to a Participant, the provisions of Article IX that are applicable to Salary Reduction contributions will be used, pursuant to section 9.1, but not for purposes of determining the amount of the contribution to be made on behalf of a Participant by his Employer pursuant to section 4.2, 4.3, or 4.4 or calculating the Annual Addition of such Participant. (e) Deemed Participation for Certain Purposes. If the amount of rollover contribution is made by an Employee prior to his becoming a Participant, such Employee shall, until such time as he becomes a Participant, be deemed to be a Participant for all purposes of the Plan except for purposes of any determination of when he becomes a Participant pursuant to section 3.1 and the making of contributions pursuant to section 4.1(a). 4.6 Transfers from the Savings Plan. If an Employee who previously had participated in the Savings Plan becomes a Participant in the Plan and the Participant's plan account in the Savings Plan (including any outstanding loans) is transferred to the Plan in 16 23 accordance with section 3.3 of the Savings Plan, the Plan shall accept such transfer. Amounts transferred shall be 100 percent vested at all times and shall be treated for all purposes in the same manner as they were treated under the Savings Plan; that is: (a) Amounts attributable to Employer salary reduction contributions under the Savings Plan shall be allocated to the Participant's Employee Salary Reduction Account; (b) Amounts attributable to voluntary deduction contributions under the Savings Plan shall be allocated to the Participant's Employee Voluntary Deduction Account; (c) Amounts attributable to Employer Savings Plan contributions shall be allocated to the Participant's Employer Salary Reduction Account or Employer Voluntary Deduction Account, as the case may be; and (d) Amounts transferred from the ESOP Account of the Participant in the Savings Plan shall be allocated to the Participant's ESOP Account. Notwithstanding the foregoing, amounts transferred shall not be used for purposes of determining the amount of the contribution to be made on behalf of a Participant by the Employer pursuant to section 4.2, 4.3, or 4.4, or calculating the Actual Deferral Percentage or Annual Addition of the Participant. 4.7 Limitations on Salary Reduction Contributions. (a) Dollar Limitation. In no event shall any Employer make Salary Reduction contributions for any calendar year, with respect to any Participant in excess of $10,000 (for 1998) (as adjusted by the Secretary of the Treasury to reflect increases in the cost of living). This limit shall be applied by aggregating all plans and arrangements maintained by the Company and all Affiliated Companies that provide for elective deferrals (as defined in Code section 402(g)). (b) ADP Test. Effective for Plan Years beginning on or after January 1, 1997, in addition to the limitations set forth elsewhere in this Plan, one of the following tests must be satisfied for the Plan Year: (i) The Average Actual Deferral Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the Average Actual Deferral Percentage for the immediately preceding Plan Year for Nonhighly Compensated Employees who were then eligible to participate multiplied by 1.25; or (ii) The Average Actual Deferral Percentage for Highly Compensated Employees who are eligible to participate for the Plan Year shall not exceed the Average Actual Deferral Percentage for the immediately preceding Plan Year for Nonhighly Compensated Employees who were then eligible to participate multiplied by two, provided that the Average Actual Deferral Percentage for such Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for such Nonhighly Compensated Employees by more than two percentage points or such lesser amount as the Secretary of Treasury shall prescribe in accordance with Code section 401(m)(9) to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. Any such restriction on the multiple use of the alternative limit shall be implemented pursuant to uniform rules adopted by the Company. 17 24 (c) Determination of Actual Deferral Percentages. For purposes of the Actual Deferral Percentage test described in this section 4.7-- (i) An Elective Deferral will be taken into account for a Plan Year only if it relates to Compensation that either would have been received by the Eligible Employee in the appropriate Plan Year (but for the deferral election) or is attributable to services performed by the Eligible Employee in the Plan Year and would have been received by the Eligible Employee within 2 1/2 months after the close of the Plan Year (but for the deferral election); (ii) An Elective Deferral will be taken into account for a Plan Year only if it is allocated to the Eligible Employee as of a date within that Plan Year. For this purpose, an Elective Deferral is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Elective Deferral is actually paid to the Trust no later than 12 months after the Plan Year to which the contribution relates; (iii) The Actual Deferral Percentage for an Employee who is eligible to participate shall be computed by treating any Excess Deferral (as defined in section 4.8) as an Elective Deferral, except to the extent provided by Regulations; (iv) The Actual Deferral Percentage for any Employee who is a participant under two or more section 401(k) plans or arrangements that are maintained by the Company or an Affiliated Company shall be determined as if all such Elective Deferrals were made under a single arrangement; provided, however, that no Elective Deferrals under an employee stock ownership plan (as defined in Code section 4975(e)(7)) shall be taken into account for purposes of this section 4.7; (v) In the event that two or more plans which include cash-or-deferred arrangements are considered as one plan for purposes of Code section 401(a)(4) or 410(b), the cash-or-deferred arrangements included in such plans shall be treated as one arrangement for purposes of this section 4.7; (vi) The determination and treatment of the Elective Deferrals and Actual Deferral Percentage of any Employee shall satisfy such other requirements as may be prescribed by the Secretary of Treasury. 4.8 Distribution of Excess Deferrals. "Excess Deferrals" means excess deferrals as defined under Code section 402(g). Notwithstanding any other provision of the Plan, the Excess Deferral, if any, of each Employee with respect to a calendar year plus any income and minus any loss allocable thereto shall be distributed no later than April 15 of the following calendar year to each Employee who claims an Excess Deferral for the preceding calendar year. Excess Deferrals shall be treated as Annual Additions under the Plan. The Employee's claim shall be in writing; shall be submitted to the Company no later than March 1; shall specify the Employee's Excess Deferral for the preceding calendar year; and shall be accompanied by the Employee's written statement that if such amount is not distributed, such Excess Deferral, when added to amounts deferred under other plans or 18 25 arrangements described in Code section 401(k), 408(k), or 403(b), exceeds the limit imposed on the Employee by Code section 402(g) for the year in which the deferral occurred. Notwithstanding the preceding paragraph, the Employer may notify the Plan on behalf of the individual of Excess Deferrals to the extent that the individual has Excess Deferrals for the calendar year calculated by taking into account only elective deferrals under this Plan and other plans of the Company and any Affiliated Company. The Excess Deferral distributed to an Employee with respect to a calendar year shall be adjusted for any income or loss thereon for such calendar year and for the period between the end of such calendar year and the date of distribution. The income or loss allocable to such calendar year shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Salary Reduction Account by a fraction, the numerator of which is the Excess Deferral of the Employee for such calendar year and the denominator of which is the Employee's Salary Reduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Excess Deferral for the preceding calendar year multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. In the event that an Employee's Salary Reduction contributions are distributed to such Employee under this section 4.8, any Employer contributions attributable thereto plus any income and minus any loss allocable thereto shall be forfeited. 4.9 Distribution or Recharacterization of Excess Contributions. (a) Determination of Excess Contributions. "Excess Contributions" means, with respect to any Plan Year, the excess of (i) the aggregate amount of Elective Deferrals actually paid over to the Trust on behalf of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of such Elective Deferrals permitted under the limitations of section 4.7(b), in accordance with the provisions of Code Section 401(k)(8). Excess Contributions shall be returned to the Highly Compensated Employees, beginning with that Highly Compensated Employee who has the highest dollar amount of Elective Deferrals. The Highly Compensated Employee shall receive the portion of his Employee Deferrals (and income allocable thereto) which will either enable the Plan to distribute the total Excess Contribution (and thereby satisfy the ADP limit stated above) or cause such Highly Compensated Employee's Elective Deferrals to equal the Elective Deferrals of the Highly Compensated Employee with the next highest amount of Elective Deferrals. This prior process must then be repeated until the plan has distributed the total Excess Contributions described above. Excess Contributions shall be treated as Annual Additions under the Plan. 19 26 For purposes of this section 4.9, to the extent permitted by the Code, the Excess Contributions shall be reduced by the amount of any Excess Deferrals included in such Excess Contributions and distributed to the Employee pursuant to section 4.8. (b) Distribution or Recharacterization. Notwithstanding any other provision of the Plan, either-- (i) Excess Contributions with respect to a calendar year plus any income and minus any loss allocable thereto shall be distributed no later than the last day of the following calendar year to Employees on whose behalf such Excess Contributions were made for the preceding calendar year; or (ii) at the election of the Employee and to the extent permitted by the Code, the Excess Contributions shall be treated as distributed to the Employee and then contributed by the Employee to the Plan as a Voluntary Deduction contribution. (c) Adjustment for Income and Loss. The Excess Contributions to be distributed to an Employee with respect to a calendar year shall be adjusted for any income or loss thereon for such calendar year and for the period between the end of such calendar year and the date of distribution. The income or loss allocable to such calendar year shall be determined by multiplying the income or loss for such calendar year allocable to the Employee's Salary Reduction Account by a fraction, the numerator of which is the Excess Contributions for such calendar year and the denominator of which is the Employee's Salary Reduction Account balance on the last day of such calendar year. The income or loss allocable to the period between the end of such calendar year and the date of distribution shall be equal to 10 percent of the income or loss allocable to the Excess Contributions for the preceding calendar year multiplied by the number of calendar months that have elapsed from the end of the preceding calendar year to the date of distribution. A distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the following month. In the event that an Employee's Salary Reduction contributions are distributed to such Employee under this section 4.9, any Employer contributions attributable thereto plus any income and minus any loss allocable thereto shall be forfeited. 4.10 Statutory (Code Section 415) Limitations on Allocations to Accounts. Notwithstanding any other provision of the Plan, contributions under the Plan shall be subject to the limitations set forth in Code section 415, which are incorporated herein by reference. For purposes of applying such limitations to contributions under the Plan, the rules set forth in this section 4.10 shall be applicable. (a) Annual Addition. The term "Annual Addition" means the amount allocated to a Participant's account during any calendar year that constitutes-- (i) Employer contributions; (ii) Employee contributions; 20 27 (iii) forfeitures; and (iv) amounts described in Code Sections 415(l)(2) and 419(A)(d)(3). The compensation limitation referred to in Code section 415(c)(1)(B) shall not apply to-- (1) any contribution for medical benefits (within the meaning of Code section 419A(f)(2)) after separation from service which is otherwise treated as an Annual Addition, or (2) any amount otherwise treated as an Annual Addition under Code Section 415(l)(2). The Annual Addition for any calendar year before 1987 shall not be recomputed to treat all Employee contributions as an Annual Addition. (b) Combined-Plan Limits. Prior to January 1, 2000, in the case of an individual who was a Participant in the Plan on December 31, 1986, an amount shall be subtracted from the numerator of the defined contribution fraction (not exceeding such numerator) as prescribed by the Secretary of Treasury so that the sum of the defined benefit plan fraction and defined contribution plan fraction does not exceed 1.0 as of such date. Code section 415 shall be applied in such manner as to maximize the permissible contributions and benefits thereunder and, in determining the permissible amount of contributions under the Plan, any grandfathering provisions heretofore or hereafter adopted pursuant to Code section 415 shall be applicable. For purposes of applying the limitations set forth in Code section 415(e) prior to January 1, 2000, this Plan shall be the primary plan and any required reductions shall be made from the Michigan Consolidated Gas Company Retirement Plan for Employees Covered by Collective Bargaining Agreements (or other applicable defined benefit plan of the Employer). (c) Reduction of Annual Additions. (i) If the limitations of Code section 415 would be exceeded as a result of a reasonable error in estimating a Participant's Compensation or on account of such other limited facts and circumstances as the Commissioner of Internal Revenue finds justify the application of the rules hereinafter set forth, the Annual Additions to the Participant's account which exceed the applicable limitation shall be returned to the Participant to the extent of all or any portion of any Voluntary Deduction contributions which were made by him pursuant to Article IV. Any net earnings and gains allocable to such contributions for the period between the date of such contribution and the date returned shall also be repaid to the Participant but such return of net earnings and gains will not be deemed a further reduction of any excess Annual Additions. (ii) If the Participant made no Voluntary Deduction contributions or if, after returning all or part of such contributions in accordance with the previous paragraph, his Annual Additions still exceed the limitations of Code section 415, then such excess shall be returned to the Participant to the extent of all or any portion of any Salary Reduction 21 28 contributions made on behalf of such Participant, together with any net earnings and gains on such contributions as hereinabove described. (iii) If, after returning all or any portion of Voluntary Deduction and Salary Reduction contributions of a Participant in accordance with the preceding paragraphs, his Annual Additions still exceed the limitations of Code section 415, such portion of the Employer contributions under section 4.2 made on behalf of the Participant as must be removed to meet the limitations shall be allocated and reallocated to other Participants' Investment Plan Accounts as contributions by the Employer. (iv) If, after reallocating all or any portion of Employer contributions under section 4.2, a Participant's Annual Additions still exceed the limitation of Code section 415, such portion of the Employer contributions under section 4.3(a) made on behalf of the Participant and shares of MCN Stock allocated to his ESOP Account under section 13.4(d) as must be removed to meet the limitations shall be allocated and reallocated to other Participant's ESOP Accounts as contributions by the Employer. (v) If, as a result of the allocation of forfeitures, a reasonable error in estimating a Participant's Compensation, or under other limited facts and circumstances which the Commissioner of the Internal Revenue Service finds justify the availability of the following rules, any amount cannot be allocated during the Plan Year in accordance with the foregoing procedure without exceeding the applicable limitations for one or more Participants, any remaining amount shall be held unallocated in a special suspense account to be allocated to Participants in the succeeding Plan Year or Plan Years; provided, however, that (A) no Employer contributions and no Voluntary Deduction contributions shall be made in such succeeding Plan Year or Plan Years until such special suspense account is exhausted by allocations and reallocations; (B) no investment gains (or losses) or other income shall be allocated to the special suspense account; and (C) the amounts in the special suspense account shall be allocated as soon as possible without violating the limitations of this section 4.10. ARTICLE V VESTING IN ACCOUNTS 5.1 Employee Salary Reduction Accounts, Employee Post-1986 Voluntary Deduction Account, and Employee Pre-1987 Voluntary Deduction Account. The Employee Salary Reduction Account, the Employee Post-1986 Voluntary Deduction Account, and the Employee Pre-1987 Voluntary Deduction Account of each Participant shall be fully vested and nonforfeitable at all times. 5.2 Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account. (a) In General. A Participant shall have a vested and nonforfeitable interest in his Employer Salary Reduction Account, Employer Voluntary Reduction Account, and ESOP Account after he has completed at least five Years of Service. Prior to that time he shall have no vested interest in such accounts. (b) Accelerated Vesting. Notwithstanding section 5.2(a) above but subject to Section 4.4, a Participant shall be fully vested and have a nonforfeitable interest in his entire Employer Salary Reduction Account, Employer Voluntary Deduction Account, and ESOP Account if-- 22 29 (i) while still an Employee, he attains age 65; (ii) the Participant terminates employment with his Employer for reasons described in Section 9.1(a), (b) or (c); or (iii) while he is an Employee, contributions to the Plan are completely discontinued or the Plan is terminated, or the Plan is partially terminated and such Participant is affected by such partial termination; OR. (iv) while he is an Employee, his account balance is transferred to the Savings Plan in accordance with Section 3.3 (in which case such account balance shall be vested under the recipient plan). ARTICLE VI INVESTMENT PROVISIONS 6.1 Investment of Contributions. Employer contributions under sections 4.2, 4.3, and 4.4 and Employee contributions shall be invested in accordance with the following provisions: (a) The Employer contributions made pursuant to section 4.3(a), (c), and (d) shall be invested in the MCN Stock Fund (through each Participant's ESOP Account), which fund is described in Article VII. (b) Each Participant shall, by direction to the Company in the form prescribed by the Company, direct that the Employer contributions made pursuant to section 4.2 and Employee contributions, including those made as a Salary Reduction, be invested in such funds offered by the Trustee as are selected by the Company. Employee contributions, including those made as a Salary Reduction, and the portion of Employer contributions referenced in section 6.1(b) above, need not be invested in the same fund. A Participant shall direct the manner in which the total of such contributions and such Employer contributions referenced in section 6.1(b) above shall be divided, equally or otherwise, among the funds. 6.2 Change of Investment Direction. Any investment direction given by a Participant under section 6.1 shall be deemed to be a continuing direction until changed by the Participant. A Participant may change any such direction in accordance with such procedures as the Company may from time to time provide and apply in a nondiscriminatory manner. 6.3 Transfers Between Investment Funds. A Participant may direct that all or any part of the value of his interest in any investment fund be transferred to one or more of the other funds except that a Participant may not transfer any amount from the MCN Stock fund to the extent that the balance remaining in such fund immediately after the transfer would be less than the value of his ESOP Account. A transfer of all or any part of the value of a Participant's interest in the Fixed Income fund may from time to time be restricted by the terms of agreements which govern the 23 30 investment of assets in such fund, in which event the Company shall give notice of such restrictions to the Participants. ARTICLE VII INVESTMENT FUNDS 7.1 Investment Funds. The Trustee shall establish, operate, and maintain the following funds exclusively for the collective investment and reinvestment of monies directed by the Company to be invested in such funds on behalf of Participants: (a) MCN Stock Fund. An MCN Stock fund which shall be invested solely in MCN Stock. (b) Fixed Income Fund. A Fixed Income fund which shall be invested, except as hereinafter provided, in marketable fixed income securities or accounts maintained by financial institutions which provide for fixed or variable rates of interest for specified periods of time. The terms of such agreements and the selection of such institutions shall be determined by the Company. Investment advisors for marketable fixed income securities may use fixed income futures and options to reduce the effect of market volatility. (c) Other Funds. Such other funds offered by the Trustee as the Company may select. Notwithstanding the foregoing, the Trustee or the investment manager, as the case may be, shall invest such portion of the assets of the funds as the Company may deem necessary or appropriate to facilitate the administration of such funds in any short-term fixed income fund as may be established under any common, commingled, or collective trust for employee benefit plans established and maintained by the Trustee. 7.2 Management of Investment Funds. Except as otherwise provided in this Article VII, the ownership of the assets and investments of the funds shall be in the Trustee as such; and the Trustee shall have in respect of any and all assets of the funds the same powers as if it were absolute owner thereof. 7.3 Voting of MCN Stock. (a) Instructions from Participants. The Trustee shall vote, in person or by proxy, shares of MCN Stock held by the Trustee in the MCN Stock fund in accordance with instructions obtained from Participants. Each Participant shall be entitled to give voting instructions with respect to the number of shares of such respective stock which bears the same ratio to the total number of shares held by the Trustee on the record date as the number of shares allocated to the respective stock fund account of such Participant as of the Valuation Date preceding such record date bears to the total number of shares allocated to the respective stock fund accounts of all Participants as of such Valuation Date, excluding shares allocated to the accounts of persons whose accounts have been distributed prior to such record date. Written notice of any meeting of stockholders of MCN Energy Group Inc. and a request for voting instructions shall be given by the Company or the Trustee, at such time and in such manner as the Company shall determine, to each Participant entitled to give instructions for the voting of stock at such 24 31 meeting. Shares with respect to which no voting instructions are received from Participants and unallocated shares of the ESOP shall be voted by the Trustee in the same proportion as shares for which voting instructions are received from Participants. The Trustee shall combine and vote fractional shares to the extent possible to reflect the voting instructions of Participants. (b) Confidentiality. The instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliated Company 7.4 Tender Offers. (a) Rights of Participants. Notwithstanding any other provisions of this instrument, in the event an offer is made generally to the shareholders of MCN Energy Group Inc. to transfer all or a portion of the common stock of MCN Energy Group Inc. in return for valuable consideration including, but not limited to, offers regulated by section 14(D) of the Securities Exchange Act of 1934, as amended, each Participant owning a beneficial interest in the MCN Stock fund shall have the sole and exclusive right to decide if the common stock representing his interest in such fund shall be tendered. Each Participant shall have the right, to the extent the terms of the tender offer so permit, to direct the withdrawal of such shares from tender. A Participant shall not be limited as to the number of instructions to tender or withdraw from tender which he can give; provided, however, the Participant shall not have the right to give instructions to tender or withdraw from tender after a reasonable time established by the Trustee pursuant to section 7.4(c) below. (b) Duties of the Company. Within a reasonable time after the commencement of a tender offer, the Company shall provide to each Participant having an ownership interest in the MCN Stock fund-- (i) the offer to purchase as distributed by the offeror to the shareholders of MCN Energy Group Inc., (ii) a statement of the shares representing his interest in the MCN Stock fund as of the most recent information available from the Company, and (iii) directions as to the means by which a Participant can give confidential instructions to the Trustee with respect to the tender. The Company shall establish and pay for a means by which a Participant can expeditiously deliver to the Trustee instructions with respect to the tender. (c) Duties of the Trustee. The Trustee shall follow the instructions of the Participants with respect to the tender offer. The Trustee shall not tender shares for which no instructions are received. Unallocated shares of MCN Stock of the ESOP shall be tendered or exchanged by the Trustee in the same proportion as the allocated shares for which the Trustee has received direction are tendered or exchanged, subject to the terms of any loan or pledge agreement covering such shares. On the basis of its ability to comply with the terms of the 25 32 offer, the Trustee shall establish a reasonable time after which it shall not accept the instructions of Participants. (d) Confidentiality. The instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliated Company. 7.5 Named Fiduciary Status. For purposes of sections 7.3 and 7.4, each Participant is hereby designated a "named fiduciary" within the meaning of ERISA section 403(a)(1) with respect to shares of MCN Stock as to which he is entitled to make voting or tender offer decisions. 7.6 Expenses of Funds. Brokerage commissions, transfer taxes, and other charges and expenses in connection with the purchase and sale of securities for a fund shall be charged to the fund. Any income and other taxes payable with respect to a fund shall likewise be charged to the fund. ARTICLE VIII ACCOUNTS AND RECORDS OF THE PLAN 8.1 Company to Maintain Accounts. (a) The Company shall maintain, or cause to be maintained, for each Participant-- (i) an Investment Plan Account attributable to Voluntary Deduction contributions and related Employer contributions under section 4.2, and (ii) a separate account attributable to Salary Reduction contributions and related Employer contributions under section 4.2, each of which shall be composed, to the extent required by the investment directions of the particular Participant, of a MCN Stock fund account, a Fixed Income fund account, and an account for each other applicable fund in which his contributions and related Employer contributions are invested. (b) The Company also shall maintain, or cause to be maintained, for each Participant-- (i) an ESOP Account attributable to Employer contributions under section 4.3(a), (c) and (d), and (ii) shares of MCN Stock allocated to the Participant pursuant to section 13.4(d), each of which shall be composed of a MCN Stock fund account and, to the extent diversification elections are made by the Participant under section 13.5, such other accounts as the Company or its delegate deems necessary or appropriate in giving effect to the diversification requirements of section 13.5. The Company shall maintain, or cause to be maintained, all necessary records. 26 33 8.2 Plan Accounting. The interests of each Participant in the funds shall be his proportionate share of the value of such funds as of any Valuation Date. The Participant's proportionate share may be determined under any accounting method selected by the Company that allocates fairly, in the opinion of the Company, the investment gains and losses by or on behalf of each Participant to the fund and that complies with the requirements of the Code and the Regulations thereunder. The value of Participants' fund accounts shall be redetermined as of each Valuation Date. 8.3 Valuation of Funds. The value of a fund as of any Valuation Date shall be the market value of all assets (including any uninvested cash) held by the fund as determined by the Trustee reduced by the amount of any accrued liabilities of the fund on such Valuation Date. The Trustee's determination of market value shall be binding and conclusive upon all parties. To the extent any Employer securities held by the Plan are not readily tradable on an established securities market, valuation of such securities shall be made by an independent appraiser who meets requirements similar to the requirements of the regulations prescribed under Code Section 170(a)(1). 8.4 Valuation of Investment Plan Account. The value of a Participant's Investment Plan Account as of any Valuation Date shall be the sum of the values of his MCN Stock fund account, Fixed Income fund account, and any other of his fund accounts attributable to Salary Reductions, Voluntary Deductions, and Employer Contributions under section 4.2. 8.5 Valuation of ESOP Account. The value of a Participant's ESOP Account as of any Valuation Date shall be the sum of-- (a) the value of his MCN Stock Fund account attributable to Employer contributions on his behalf under section 4.3(a), (c) and (d) and shares of MCN Stock allocated to his ESOP Account under section 13.4(d); and (b) the sum of the values of his Fixed Income fund account and any other of his fund accounts attributable to diversification elections under section 13.5. 8.6 Valuation of Plan Account. The value of a Participant's Plan Account as of any Valuation Date shall be the sum of the values of his MCN Stock fund account, Fixed Income fund account, and any other investment fund accounts maintained on his behalf under the Plan. 8.7 Company to Furnish Annual Statements of Value of Plan. The Company shall, not less frequently than annually, distribute to each Participant in the Plan a statement setting forth the Plan Account of such Participant. Such statement shall be deemed to have been accepted as correct unless written notice of objections thereto is received by the Company or the Employer within 30 days after the distribution of such statement to the Participant. 8.8 Trust Agreement. A Trust has been established to fund benefits under the Plan. The Employers may, without further reference to or action by any Employee or Participant, from time to time enter into further agreements with the Trustee and make such amendments to such Trust Agreement or such further agreements as they may deem necessary or desirable to carry out the Plan, and may take such other steps and execute such other instruments as the Employers may deem necessary or desirable to put the Plan into effect or to carry it out. 27 34 ARTICLE IX DISTRIBUTIONS, WITHDRAWALS AND LOANS 9.1 Distribution Upon Termination of Employment Entitling Participant to Value of Plan Account. Upon-- (a) termination of a Participant's employment with his Employer due to retirement on his Normal Retirement Date or his Disability Retirement Date, (b) the death of the Participant, (c) termination of a Participant's employment with his Employer or placement on inactive payroll because of total and permanent disability or legally established mental incompetency of the Participant not qualifying the Participant for retirement hereunder, or (d) termination of a Participant's employment with his Employer under any circumstances after the Participant has satisfied the Vesting Requirement, the Company shall, subject to the provisions of sections 9.7 and 9.9, direct the Trustee to distribute to the Participant, or, in a proper case his designated beneficiary or legal representative, the value of the Participant's Plan Account in a lump sum. 9.2 Distribution Upon Termination of Employment Under Circumstances Resulting in Forfeiture of Employer Contributions. Upon termination of a Participant's employment under circumstances other than those described in sections 9.1 and 9.7(c)(ii), the Company shall, subject to the provisions of section 9.7, direct the Trustee to distribute to the Participant an amount equal to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account, Employee Post-1986 Voluntary Deduction Account, and Employee Salary Reduction Account each of which shall be fully vested and nonforfeitable at all times. Subject to Section 4.4,The Participant's Employer Voluntary Deduction Account, Employer Salary Reduction Account, and ESOP Account shall be forfeited and applied in reduction of the next succeeding contribution which the Participant's Employer would otherwise contribute to the Trust; provided, however, if such Participant is reemployed prior to his incurring five consecutive Break in Service Years, then following his date of reemployment the Participant's Employer shall contribute on behalf of such Participant an amount equal to the amount that was forfeited upon his termination of employment, and such contribution shall be credited to the same accounts from which it was forfeited, in the same amounts. Such contributions shall not be taken into account in determining under section 4.10 the Annual Additions to such Participant's Savings INVESTMENT Plan Account. 9.3 Certain Distributions from Participant Accounts. (a) In General. Any Participant may, upon notice to the Company in the form and timing prescribed by the Company, terminate his participation in the Plan. Within a reasonable period of time following processing of such termination, the Company shall direct the Trustee to distribute to the Participant an amount equal to the value of the Participant's Employee Pre-1987 Voluntary Deduction Account and Employee Post-1986 Voluntary Deduction Account; but only to the extent attributable to Voluntary Deduction contributions that have been in the Plan for at least 2 years.. Prior to July 1, 1998, such a Participant, if a Greater 28 35 Michigan Local Participants, shall be ineligible to again elect to make contributions under the Plan for a period of 12 full months from the date of termination of participation. (b) Withdrawals After Age 59 1/2. Upon notice to the Company in the form and timing prescribed by the Company, any Participant who has attained age 59 1/2 may make an election, not more frequently than once every calendar year, to withdraw all or any portion of the vested amount of his Plan Account. Within a reasonable period of time following the processing of such election, the Company shall direct the Trustee to distribute to the Participant as of such Valuation Date the amount the Participant has elected to withdraw. (c) Limited Withdrawal in the Event of Hardship. If a Participant incurs a financial hardship as defined in section 9.6, he may limit the amount of a distribution from his Voluntary Deduction Account under section 9.3(a) to the amount necessary to satisfy the hardship and to pay any taxes resulting from such distribution. 9.4 In-Service Withdrawals -- General. At its discretion, the Company may adopt rules limiting the number of withdrawals that may be made in any Plan Year and prescribe a minimum amount that may be withdrawn. All requests for a withdrawal shall be submitted in a form prescribed by the Company. A Participant may not rescind a request for withdrawal which has been submitted to the Company unless the Company consents. A withdrawal shall be distributed as soon as reasonably practicable after the withdrawal request is received. 9.5 Withdrawal of Voluntary Deduction Contributions. Any Participant who shall have actively participated in the Plan for 24 or more calendar months (for purposes of this section 9.5 active participation means the Participant shall have made contributions to the Plan in each month in which compensation was available), may, upon notice to the Company (in manner and timing prescribed by the Company), withdraw an amount not in excess of 100 percent of his Voluntary Deduction contributions under the Plan (but only to the extent attributable to voluntary deduction contributions that have been in the plan for at least 2 years), with such election to be given effect within a reasonable period of time following processing. Withdrawals under this section 9.5 shall be from the MCN Stock fund, the Fixed Income fund, or such other investment funds offered by the Trustee as the Company shall make available for purposes of this section. If the Participant has an account in more than one fund, he shall specify in his direction to the Company the amount to be withdrawn from each fund. The contributions in all funds in the Employee Pre-1987 Voluntary Deduction Account must be withdrawn before a withdrawal is permitted from a fund in the Employee Post-1986 Voluntary Deduction Account. The amount of an in-service withdrawal from a specific fund in a Voluntary Deduction Account shall not exceed the Employee's contributions in such fund prior to the withdrawal. 9.6 Hardship Withdrawal of Salary Reduction Contributions. A Participant may request, upon 20 days' written notice to the Company, a withdrawal from his Salary Reduction Account if the withdrawal is necessary to satisfy an immediate and heavy financial need of a Participant as defined below, with such election to be given effect within a reasonable period following processing. The amount of such withdrawal shall be limited to the Participant's Salary Reduction contributions or the total value of the Participant's Employee Salary Reduction Account as of the latest Valuation Date for which information is available, whichever is smaller. Withdrawals under this section 9.6 shall be from the MCN Stock fund, the Fixed Income fund, 29 36 or such other investment funds under the Plan as the Participant specifies in his written request for a hardship withdrawal. The determination of whether or not a distribution is necessary to satisfy an immediate and heavy financial need and the amount required to be distributed to meet the need shall be made by the Company. All determinations regarding financial need shall be made in accordance with written procedures established by the Company and applied in a uniform and nondiscriminatory manner, based on all applicable facts and circumstances. Such written procedures shall specify the requirements for requesting and receiving distributions on account of financial need, including the forms that must be submitted and to whom the forms are to be submitted. All determinations regarding financial need must comply with applicable Regulations under the Code. For purposes of this section 9.6, a financial hardship withdrawal shall be limited to the amount required to meet the need created by one of the following situations: (a) Expenses for medical care described in Code section 213(d) previously incurred by the Participant, his spouse, or any dependents of the Participant or necessary for these persons to obtain medical care described in Code section 213(d). (b) Costs directly related to the purchase (excluding mortgage payments) of the principal residence for the Participant. (c) Payment of tuition, related educational fees and room and board expenses for the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents (as defined in Code section 152). (d) The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage on the Participant's principal residence. A distribution will be deemed necessary to satisfy an immediate and heavy financial need of a Participant only if both of the following conditions are met: (I)(1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. Prior to January 1, 1999, this amount may be increased by the lesser of the amount withheld from the distribution under Code section 3405(c) or the remaining Salary Reduction contributions or total value of the Salary Reduction Account, if less, after subtracting the amount of the immediate and heavy financial need; and (II).(2) The Participant has obtained all distributions, other than hardship distributions, and all loans available under this Plan and all other plans maintained by the Employer. If a Participant receives a hardship distribution, (A) the Participant shall not be entitled to make Salary Reduction contributions or Voluntary Deduction contributions (or other employee contributions to qualified or nonqualified plans of deferred compensation, as described in applicable regulations) for a period of one year after the hardship distribution, and (B) the Participant may not make Salary Reduction contributions for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the amount specified in Code section 402(g) for such taxable year less the amount of the Participant's Salary Reduction contributions for the taxable year of the hardship distribution. 30 37 9.7 Time of Distributions. (a) In General. Except as hereinafter provided and subject to the provisions of section 9.9, distributions made pursuant to section 9.1 or 9.7(c)(ii) shall be made by the Trustee at the direction of the Company on such date as the Company shall determine after consultation with the Participant or his beneficiary, but in no event later than March 1 of the calendar year following termination of the Participant's employment. Except as hereinafter provided, all other distributions or withdrawals under this Article IX shall be paid as soon as reasonably practicable by the Trustee at the direction of the Company. Notwithstanding any other provision of the Plan-- (i) if the vested portion of a Participant's Plan Account has ever exceeded $5,000 (or such greater amount as permitted under the Code), no distribution shall be made to such Participant pursuant to Section 9.1, 9.2, 9.7(c)(ii), or 9.9 prior to the date the Participant attains the age of sixty-five (65) without written consent of the Participant; and (ii) if a distribution to a Participant is deferred pursuant to (i), the amount that would otherwise have been distributed to such Participant shall be invested in the Fixed Income fund or any other investment fund under the Plan, as the Participant shall direct, except that the ESOP Account of such Participant shall continue to be invested in the MCN Stock fund, subject to the diversification rules set forth in section 13.5. A former Participant whose distribution has been deferred pursuant to (i) above will not thereafter be eligible for withdrawals under section 9.3 or 9.5 or loans under section 9.10 but shall continue to have the voting and tender offer rights described sections 7.3 and 7.4 and to be treated as a Participant for purposes of Article VIII. A former Participant whose distribution has been deferred may initiate a distribution upon reasonable prior written notice to the Company and shall receive an amount equal to the vested portion of his Plan Account within a reasonable period following the processing of such election, with such amount to be distributed in a lump sum cash payment except that-- (A) amounts invested in the MCN Stock fund shall be distributed in accordance with section 9.8, (B) such former Participant may upon reasonable prior notice (as determined pursuant to procedures established by the Company) to the Company receive a partial distribution rather than a total distribution, of the vested portion of his Account, but not more frequently than four times per year, and (C) to the extent that such distribution comes from the Fixed Income fund account, such distribution shall be subject to the provisions of section 9.9. Notwithstanding any other provision of this Plan, if a Participant attains age 70 1/2 and still has a balance allocated to his or her Plan Account, a distribution shall be made under section 9.1 as if the Participant had terminated employment in the month in which the 31 38 Participant attains age 70 1/2. Such distribution shall in no event be later than April 1 of the calendar year following the year in which the Participant attains age 70 1/2. Distributions to such Participant shall be made annually thereafter no later than December 31 of each year and shall be equal to at least the minimum amount required to be distributed by Code section 401(a)(9). For purposes of this paragraph, the life expectancy of the Participant and the Participant's spouse shall be redetermined annually. (b) Suspension of Participation. Prior to termination of his employment, if a Participant shall cease to meet the eligibility requirements of the Plan, his contributions and Employer contributions on his behalf shall be suspended during the period of his ineligibility. Subject to section 3.1, distribution of such Participant's Plan Account shall be deferred until termination of his employment with the Company and any Affiliated Company. If the provisions of section 3.3 relating to the transfer of a Participant's Plan Account to the Savings Plan or its successor are not applicable-- (i) with respect to Participants who cease to meet the eligibility requirements of the Plan prior to January 1, 1987, the Company shall direct the Trustee to distribute the value of the Participant's Plan Account in accordance with section 9.1 whether or not such termination of employment shall be under the circumstances set forth in said section 9.1; and (ii) with respect to Participants who cease to meet the eligibility requirements of the Plan subsequent to December 31, 1986, such distribution shall be in accordance with section 9.1 or 9.3, whichever is applicable. (c) Transfer of Employment. (i) A transfer of employment from an Employer to an Affiliated Company shall not be considered a termination of employment. (ii) If a Participant shall be transferred to the employ of an Affiliated Company which has not elected to participate in the Plan, distribution of such Participant's Plan Account shall be deferred until the date on which he is no longer in the employ of the Company or any Affiliated Company, whereupon the Company shall direct the Trustee to distribute the value of the Participant's Plan Account in the manner prescribed in section 9.1, subject to the provisions of section 9.7, whether or not termination of employment shall be under circumstances set forth in said section 9.1. (d) Special Rules Relating to Distributions in the Event of Death. In the event that a Participant dies before a distribution of his Plan Account, the Company shall direct the Trustee to distribute the entire value of his Plan Account to his beneficiary no later than March 1 of the calendar year following the Participant's death, as provided in section 9.1. In the event of the death of the Participant after the distribution of his Plan Account has begun, any remaining balance in his Plan Account at the time of death will be distributed at least as rapidly as under the method of distribution in effect at the date of the Participant's death. (e) Distribution must begin not later than the sixtieth (60th) day after the close of the Plan Year in which occurs the latest of (a) the Participant's termination of employment, (b) the Participant's attainment of age sixty-five (65), or (c) the tenth (10th) anniversary of the date the Participant first became a Participant, unless (1) the Participant 32 39 elects a later date by submitting to the Company a written statement signed by the Participant which describes the benefit and the date on which payment of such benefit shall commence, so long as such election does not violate the incidental benefit rule prescribed by the Code; or (2) if the amount of the payment required to commence on the date determined hereinabove cannot be ascertained by such date, or if it is not possible to make such payment on such date because the Company has been unable to locate the Participant after making reasonable efforts to do so, a payment retroactive to such date may be made no later than sixty (60) days after the earliest date on which the amount of such payment can be ascertained under the Plan or the date on which the Participant is located, whichever is applicable. For purposes of this subsection, the failure of a Participant to consent to a distribution shall be deemed an election to defer commencement of payment of any benefit sufficient to satisfy this section. 9.8 Distributions of Stock. In the case of distributions under section 9.1, 9.2, 9.3(b), 9.7(a), or 9.7(c)(ii), the value of the Participant's MCN Stock fund account, if any, shall be paid in full shares of stock except that cash shall be distributed in lieu of fractional shares; provided, however, that a Participant entitled to such a distribution may elect to receive cash in lieu of MCN Stock. Except in the case of an election to receive cash in lieu of MCN Stock the total number of shares allocated to such account shall be distributed from such account. Any remaining value of such account and, subject to the provisions of section 9.9, the value of the Participant's accounts in other funds shall be distributed in cash. Any transfer taxes payable with respect to the distribution of shares of stock shall be charged to the respective MCN Stock fund. Distributions pursuant to section 9.3(a) and withdrawals under sections 9.5 and 9.6 shall be paid entirely in cash. The distribution requirements of Code Section 409(o) shall be met by the Plan, to the extent applicable. 9.9 Distributions to certain participants from Fixed Income Fund. This Section 9.9 shall apply only to Participants with at least one Hour of Employment prior to May 31, 1988. (a) Normal Form. Notwithstanding any provision of the Plan, other than the final paragraph of section 9.7(a), if a distribution is to be made under section 9.1(a) or (c) and the Participant has a Fixed Income fund account and at least one Hour of Employment prior to May 31, 1988 and the Participant's first Hour of Employment is prior to January 1, 1999, then unless the Participant or legal representative shall make an election in the manner prescribed in section 9.9(b), the value of such account (exclusive of the portion thereof attributable to diversification elections under section 13.5) shall be distributed by the purchase of an immediately payable single premium annuity contract providing for monthly payments during the Participant's lifetime and, if the Participant is married on the date payment of his benefit commences and his spouse shall survive him, for monthly payments during the remainder of such spouse's lifetime, each such payment to such spouse being equal to one-half of the monthly payment received by the Participant, commencing no later than March 1 of the calendar year following the calendar year of the Participant's termination of employment, and delivery of such contract to the Participant within a reasonable time after the Participant's termination of employment. If a distribution is to be made under section 9.1(b) because of a Participant's death and the Participant had a Fixed Income fund account at the time of his death and at least one Hour of Employment prior to May 31, 1988 and the Participant's first Hour of Employment was prior to January 1, 1999, then unless the Participant had made or the Participant's spouse or beneficiary, as the case may be, makes an election at the time and in the manner prescribed in section 9.9(b), the value of the Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 13.5) shall be distributed by purchase of an immediately payable single premium annuity contract providing 33 40 for monthly payments to the Participant's spouse, or, if the Participant was not married on the day of his death, to his beneficiary during such person's lifetime, commencing no later than March 1 of the calendar year following the calendar year of the Participant's death and delivery of such contract to such person within a reasonable time after the date of Participant's death. (b) Election to Reject Normal Form. Subject to the provisions of this section 9.9(b), each Participant entitled to a distribution under section 9.9(a) (or legal representative on behalf of such a Participant) may, at any time during the 90-day period ending on the annuity starting date, elect to have the value of the Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 13.5) distributed by one or more of the methods set forth in section 9.9(c). Within 30 days after a Participant provides notice to the Company (in the manner and timing prescribed by the Company) of his intention to retire on his Normal Retirement Date or Disability Retirement Date, or within 30 days after the Company receives notice of a Participant's death, or within five business days after determining, in accordance herewith, that a Participant is totally and permanently disabled, or within five business days after receiving notice of the legally established mental incompetency of the Participant, if the Participant has a Fixed Income fund account at such time, the Company shall deliver to such Participant or his legal representative, by mail or by personal delivery, written notice in nontechnical language explaining the terms and conditions of the annuity provided in section 9.9(a). The notice shall explain the Participant's or legal representative's right to elect an optional form of distribution and that such election may be revoked by the Participant or legal representative at any time prior to the annuity starting date or, if a lump sum payment is elected, prior to the first day on which all events have occurred which entitle the Participant or legal representative to the lump sum payment. The notice shall explain that a married Participant may elect a distribution pursuant to section 9.9(c) only if the spouse consents in writing to such election. Such written consent shall acknowledge consent to the designated beneficiary and the optional form of distribution, neither of which may be changed thereafter without again obtaining written spousal consent (or the consent of the spouse expressly permits changes by the Participant without further consent by the spouse). Such written consent shall acknowledge the effect of such election and shall be witnessed by a notary public or by a representative of the Company who is designated to act in such capacity by the Company. If the Participant establishes to the satisfaction of the Company that such written consent cannot be obtained because his spouse cannot be located, the requirement of such written consent shall be waived. Any election, change, or revocation under this section 9.9(b) shall be effective when notice is delivered to the Company in a form approved by the Company for this purpose, provided such election, change, or revocation is delivered prior to the annuity starting date or, if a lump sum payment is elected, prior to the first day on which all events have occurred which entitle the Participant or legal representative to the lump sum payment. The notice shall explain that an effective revocation shall result in the benefit being provided as an annuity described in section 9.9(a). Subject to Section 9.14(c), such notice shall be provided no less than thirty (30) days and no more than ninety (90) days prior to the annuity starting date. 34 41 (c) Optional Forms. In addition to the form described in section 9.9(a), distribution of the value of a Participant's Fixed Income fund account (exclusive of the portion thereof attributable to diversification elections under section 13.5) may be made either-- (i) in a lump sum payment; or (ii) by purchase of any form of single premium annuity contract that satisfies Code section 401(a)(9) as may from time to time be offered by the legal reserve life insurance companies with which the Trustee has agreements governing the investment of assets in the Fixed Income fund and delivery of such contract to the Participant or distributee within a reasonable time after the Participant's termination of employment or death. Within five business days after the Company receives an election pursuant to this provision, the Company shall provide the same notice provided under section 9.9(b). An election pursuant to this provision shall be subject to the provisions of section 9.9(b). 9.10 Loans. The Trustee is hereby authorized to establish a loan program in accordance with this section 9.10. Upon application of a party in interest (as defined in ERISA section 3(14)) who is a Participant or beneficiary under the Plan, the Company shall direct the Trustee to make a cash loan to such Participant or beneficiary, secured by 50 percent of the nonforfeitable value of the Participant's Employee and Employer Salary Reduction and ESOP Accounts determined as of the date the loan is made. The loan program shall be administered by the Company subject to the following conditions and such other conditions that are consistent with Labor Regulation section 2550.408b-1 and are from time to time set forth in written administrative procedures which shall constitute a part of the Plan and are hereby incorporated by reference: (a) The term of a loan shall not extend beyond the earlier of four years or the date upon which the Participant or beneficiary ceases to be a party in interest; provided, however, that the four years shall be changed to eight years where the proceeds of the loan are used by the Participant or beneficiary to acquire the Participant's principal residence. (b) A loan shall bear interest at a reasonable rate which shall be based upon the prevailing interest rate charged by persons in the business of lending money on similar commercial loans under comparable circumstances at the time that such loan is granted, as determined by the Company and uniformly applied. (c) The amount of a loan (when added to the balance of other outstanding loans) shall not exceed the lesser of-- (i) $50,000 reduced by the excess (if any) of-- (A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which such loan was made, over (B) the outstanding balance of loans outstanding on the date such loan was made, or 35 42 (ii) 50 percent of the nonforfeitable value of the Participant's Employee and Employer Salary Reduction and ESOP Accounts under the Plan which the Participant would have been entitled to receive if the Participant's employment had terminated on the date such loan was made. In no case shall a Participant be entitled to a loan under this Plan if the amount of the proposed loan is less than $500. (d) A loan shall be evidenced by a promissory note. (e) Payments of principal and interest shall be made by approximately equal payments not less frequently than monthly on a basis that would permit the loan to be fully amortized over its term. Loan payments shall be made by payroll deductions for Participants in active pay status. (f) Appropriate disclosure shall be made pursuant to the Truth in Lending Act to the extent applicable. (g) Amounts of principal and interest received on a loan shall be credited to the Participant's account and the outstanding loan balance shall be considered an investment of the assets of the account. Payment of principal and interest related to loans made from a Participant's ESOP Account shall be credited to such Participant's ESOP Account. Payment of principal and interest related to loans made from a Participant's Investment Plan Account shall be credited to the Participant's Investment Plan Account and shall be invested in the investment funds in the same proportions as the investment election then in effect by the Participant under Article VI. (h) The frequency of loans and the minimum amount for a loan shall be determined through uniform rules prescribed by the Company and at the sole discretion of the Company. (i) All applications for a loan shall be submitted to the Company on a form prescribed by the Company. Distribution shall be made as soon as reasonably practicable after the application of the loan is received. (j) If a Participant borrows from an account which is invested in more than one fund, he shall instruct the Company as to the funds from which the loan is to be applied; provided, however, that no borrowing shall be applied from the MCN Stock fund unless and until the Participant's ability to borrow from each of the other funds has been exhausted. (k) A married Participant may not borrow any amount from the Plan unless his spouse executes a written consent as hereinafter provided. Such consent must be executed during the 90-day period ending on the date on which the loan is made and shall specifically provide that the spouse consents both to the loan and to the use of the Participant's Salary Reduction and ESOP Accounts as security for the loan. The consent shall acknowledge the effect of the use of the Participant's accounts as security for the loan and shall be witnessed by a notary public or a representative of the Company who is designated to act in such capacity by the Company. 36 43 (l) In the event a Participant defaults on a loan, the entire outstanding balance of and accrued interest on the loan shall be due and payable in accordance with the Plan's loan procedures and applicable Regulations. The Trustee and/or Company may pursue collection on such defaulted loan by any means generally available to a creditor where a promissory note is in default, or if the entire amount due is not paid by such Participant following the default, the amount of such loan default shall be charged against the "secured portion" of the Participant's Plan Account and treated as a distribution with respect to such Participant; provided, however, that such a charge against a Participant's Plan Account shall not occur with respect to funds in his Employee Salary Reduction Account at a time so as to cause a violation of Code section 401(k)(2)(B)(i). 9.11 Definition of Employee Contributions and Employer Contributions. For the purposes of this Article IX, a Participant's Employee contributions shall include only those contributions made either as a Voluntary Deduction or a Salary Reduction which have not been previously withdrawn or distributed. If a Participant has previously had a portion of his Plan Account forfeited under section 9.2, the Employer contributions, exclusive of those made as a Salary Reduction to the Plan on his behalf, shall include only such Employer contributions made subsequent to such forfeiture. 9.12 Spousal Consent to Payment. Subject to section 9.7(a), the spouse of a married Participant or former Participant shall be required to consent in writing to any in-service withdrawal, loan, or distribution under the Plan to the Participant or former Participant. The spouse's consent shall be in such form as the Company may prescribe. 9.13 Distributions Pursuant to a Qualified Domestic Relations Order. Upon receipt of a domestic relations order, the Company will notify the involved Participant and any alternate payee that the order has been received and explain the Plan's procedures for determining whether the order is a qualified domestic relations order as defined in Code section 414(p). After determining that the order is a qualified domestic relations order, the Company shall direct the Trustee to distribute or segregate the Participant's Account as provided in the qualified domestic relations order. If required by the qualified domestic relations order, the Trustee shall make distribution prior to the time that the Participant, whose account is subject to distribution, could have received a distribution. In a case of a dispute regarding the validity of a domestic relations order or the amounts or identities of parties to be paid thereunder, the Company may segregate the portion of the Participant's account in question, and may bring an action in a court of competent jurisdiction to determine the proper amount and/or recipient of benefits, or may submit such segregated amount to a court of competent jurisdiction (through an interpleader action or otherwise) until resolution of the matter. Further, if the Company receives notice that a domestic relations order is forthcoming, the Company may suspend payments from the Participant's Account or may follow the procedures described in the preceding sentence, until resolution of the matter. 9.14 Direct Rollovers of Eligible Distributions. (a) General. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this section, a distributee may elect, at the time and in the manner prescribed by the Company, to have any portion of an eligible rollover 37 44 distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Definitions. (i) Eligible rollover distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary,; or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code section 401(a)(9), or, effective any hardship distribution after January 1, 1999, a hardship distribution; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible retirement plan. An eligible retirement plan is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code section 414(p), are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (c) Waiver of 30-Day Notice Period. If a distribution is one to which Code sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that (i) the Company clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. 9.15 Special Distribution Events. Notwithstanding anything herein to the contrary, a Participant's Salary Reduction contributions shall not be distributed prior to the Employee's retirement, death, disability, termination of employment, or hardship, except that a distribution of such amounts may be made, in accordance with Code Section 401(k)(10), upon (a) termination of the Plan without establishment of another defined contribution plan other than an employee stock ownership plan (as defined in Code Section 4975(e) or 409) or a simplified employee pension plan (as defined in Code Section 408(k)); 38 45 (b) the disposition by MCN Energy Group Inc. or the Company to an unrelated corporation of substantially all of the assets (as defined in Code Section 409(e)(2)) used in the trade or business if the Company continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets; or (c) the disposition by MCN Energy Group Inc. or the Company to an unrelated entity of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if the Company continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary. ARTICLE X ADMINISTRATION 10.1 Plan Administration and Interpretation. (a) The Company shall be responsible for the administration of the Plan, or may designate all or a portion of such responsibility to a committee for such purposes. The Company shall have all such powers as may be necessary to carry out the provisions of the Plan and may from time to time establish rules and procedures for the administration of the Plan and the transaction of the Plan's business. (b) The Company shall have the exclusive right to make any finding of fact necessary or appropriate for any purpose under the Plan. The Company shall have the maximum discretion permitted by law to interpret and construe the terms of the Plan and to resolve all issues arising under the Plan including, but not limited to the authority to-- (i) construe disputed or doubtful terms of the Plan; (ii) determine the eligibility of an individual to participate in the Plan; (iii) determine the amount, if any, of benefits to which any Participant, former Participant, beneficiary, or other person may be entitled under the Plan; (iv) determine the timing and manner of payment of benefits; and (v) resolve all other issues arising under the Plan. To the extent permitted by law, all findings of fact, determinations, interpretations, and decisions of the Company shall be conclusive and binding upon all persons having or claiming to have any interest or right under the Plan. The Employers shall, from time to time, on request of the Company, furnish to the Company such data and information as the Company shall require in the performance of its duties. (c) The Company shall each month collect Employee contributions and Employer contributions from each Employer and shall deliver the amounts collected to the Trustee, together with instructions concerning the portions of such total amount to be invested in each fund. 39 46 (d) The Company shall direct the Trustee to make payments of amounts to be distributed or withdrawn from the Trust under Article IX and to make any transfers from one fund to another directed by Participants under section 6.3. 10.2 Notice to Employees. All notices, reports, and statements given, made, delivered, or transmitted to a Participant shall be deemed to have been duly given, made, or transmitted when mailed with postage prepaid and addressed to the Participant at the address last appearing on the books of the Employer. A Participant may record any change of his address from time to time by written notice filed with the Employer. 10.3 Notices to Employers. Written directions, notices, and other communications from Participants to the Employers shall be mailed by first class mail with postage prepaid or delivered to such location as shall be specified upon the forms prescribed by the Company for the giving of such directions, notices, and other communications, and shall be deemed to have been received by the addressee when received at such location. Any other notice to the Employers shall be addressed-- (a) If intended for the Company: MichCon Investment and Stock Ownership Plan c/o Michigan Consolidated Gas Company 500 Griswold Street Detroit, Michigan 48226 (b) If intended for any other Employer, at its principal place of business. 10.4 Participants' Acceptance of the Provisions of the Plan. Each Participant at the time of becoming a Participant in the Plan and as a condition of participation shall sign an instrument evidencing the fact that he accepts and agrees to all provisions of the Plan. 10.5 Audit of Plan Records. The records of the Company and the records of the Employers in respect of the Plan shall be examined annually by a firm of independent public accountants appointed by the Company. Such accountants shall, on the basis of such examination, make such reports to the Company and to the Employers as they may request. The audited records of the Company and the Employers shall be conclusive in respect of all matters involved in the administration of the Plan. 10.6 Claims Procedure. If any Participant or distributee believes he is entitled to benefits in an amount greater than those which he is receiving or has received, he may file a claim with the Secretary of the Company. Such a claim shall be in writing and state the nature of the claim, the facts supporting the claim, the amount claimed, and the address of the claimant. The Secretary of the Company shall review the claim and, within a reasonable period of time after receipt of the claim, give written notice by registered or certified mail to the claimant of his decision with respect to the claim. Such notice shall be written in a manner calculated to be understood by the claimant and, if the claim is wholly or partially denied, set forth the specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the claimant to 40 47 perfect the claim, and an explanation of why such material or information is necessary, and an explanation of the claim review procedure under the Plan. The Secretary shall also advise the claimant that he or his duly authorized representative may request a review by the Company of the denial by filing with the Company, within 65 days after notice of the denial has been received by the claimant, a written request for such review. The claimant shall be informed that he may have reasonable access to pertinent documents and submit comments in writing to the Company within the same 65-day period. If a request is so filed, review of the denial shall be made by the Company and the claimant shall be given written notice of the Company's final decision. Such notice shall be provided within 60 days after receipt of such request. Such notice shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based and shall be written in a manner calculated to be understood by the claimant. 10.7 Effect of a Mistake. In the event of a mistake or misstatement as to the eligibility, participation, or service of any Participant, or the amount of payments made or to be made to a Participant or beneficiary, the Company shall, if possible, adjust the Plan's records and cause to be withheld or accelerated or otherwise make adjustment of such amounts of payments as will in its sole judgment result in the Participant or beneficiary receiving the proper amount of payments under the Plan. ARTICLE XI AMENDMENT AND TERMINATION 11.1 Amendment. The Company may at any time and from time to time amend or modify the Plan by written instrument duly adopted by the Board of Directors of the Company or by a designee of the Board. Any such amendment or modification shall become effective on such date as the Company shall determine, may apply to Participants in the Plan at the time thereof as well as future Participants, but may not reduce the Plan Account of any Participant as of the date of adoption of such amendment or modification. 11.2 Withdrawal. If an Employer shall withdraw from the Plan under section 12.2, or if an Employer shall adopt an amendment to the Plan which shall render impracticable the continued administration of the Plan as a joint plan of the several Employers, the Company shall determine the portions of the various funds held by the Trustee which are applicable to the Participants of such Employer and shall direct the Trustee to segregate such portions in a separate trust. Such separate trust shall thereafter be held and administered as a part of the separate plan of such Employer. After such portions of the funds have been segregated in a separate trust, no such Participant or any distributee with respect to such Participant shall have any right to any benefit under the Plan or any claim against the Trust. 11.3 Termination. Any Employer may at any time terminate its participation in the Plan by resolution of its Board of Directors without obtaining the consent of or giving notice to any Participant or collective bargaining representative. In the event of any such termination, the Company shall determine the portions of the various funds held by the Trustee which are applicable to the Participants of such Employer and shall direct the Trustee to distribute such portions to such Participants ratably in proportion to the values of their respective fund accounts; provided, however, amounts attributable to a Participant's Elective Deferrals shall not be distributed on account of such termination if the Employer, after such termination, maintains a defined contribution plan (other than an employee stock ownership plan or a simplified 41 48 employee pension). The portions of the MCN Stock fund so distributed shall be distributed in kind except that cash shall be distributed in lieu of fractional shares. The portions of the Fixed Income fund and other investment funds so distributed shall be distributed in cash or in kind, or partly in cash and partly in kind, as determined by the Company. Upon termination or partial termination of the Plan by any Employer or upon the complete discontinuance of contributions by any Employer, the benefits under the Plan of all affected Participants employed or formerly employed by such Employer shall become nonforfeitable. 11.4 Allocation of Funds Between Employers. The portion of a fund applicable to Participants of a particular Employer shall be an amount which bears the same ratio to the value of the fund which the aggregate value of the fund accounts of Participants employed by such Employer bears to the total value of the fund accounts of all Participants. 11.5 Trust to be Applied Exclusively for Participants and Their Beneficiaries. Subject to section 13.3, any provision of the Plan to the contrary notwithstanding, it shall be impossible for any part of the Trust to be used for or diverted to any purpose not for the exclusive benefit of Participants and their beneficiaries either by operation or termination of the Plan, by power of amendment, or by other means. Notwithstanding the preceding paragraph, if a contribution is made to the Trust by an Employer by a mistake of fact, then such contribution shall be returned to such Employer within one year after the payment of the contribution; and if any part or all of a contribution is disallowed as a deduction under Code section 404, then to the extent such contribution is disallowed as a deduction it shall be returned to such Employer within one year after the disallowance. All Employer contributions are conditioned upon their deductibility under Code section 404. ARTICLE XII PARTICIPATION BY AFFILIATED COMPANIES 12.1 Adoption of the Plan. Any Affiliated Company may become a participating Employer under the Plan by (a) taking such corporate action as shall be necessary to adopt the Plan, and (b) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to such Affiliated Company. The Plan shall become effective with respect to each particular Affiliated Company as of a date to be determined by the Board of Directors of such Employer after complying with all legal requirements pertaining to the participation of such Employer in the Plan. 12.2 Withdrawal from the Plan. Any Employer may withdraw from participation in the Plan at any time by filing with the Company a duly certified copy of a resolution of its Board of Directors to that effect and giving notice of its intended withdrawal to the Company, the other Employers, and the Trustee at least 30 days prior to the effective date of withdrawal. 12.3 Company as Agent for Employers. Each Employer other than the Company, hereby appoints, and each other corporation which shall become an Employer pursuant to section 12.1 or 13.7 by so doing shall be deemed to have appointed the Company its agent to 42 49 exercise on its behalf all of the powers and authorities hereby conferred upon the Employers by the terms of the Plan, including, but not by way of limitation, the power to amend, restate, and terminate the Plan. The authority of the Company to act as agent shall continue unless and until the portion of the Trust fund held for the benefit of Employees of the particular Employer and their beneficiaries is set aside in a separate trust as provided in section 11.2. ARTICLE XIII SPECIAL PROVISIONS RELATING TO THE ESOP 13.1 Establishment of ESOP. The MichCon Employee Stock Ownership Plan for Union Employees was originally established effective as of April 1, 1989. Each Employer shall make contributions to the ESOP in accordance with section 4.3 hereof and the assets of the ESOP shall be invested at all times primarily in MCN Stock. The Company from time to time may direct the Trustee to incur debt in accordance with section 13.4 hereof to finance the acquisition of MCN Stock. 13.2 ESOP Account. The Company shall establish an ESOP Account in the name of each Participant to which there shall be credited or charged-- (a) the Employer contributions under section 4.3(a), (c) and (d) hereof made on behalf of such Participant; (b) the shares allocated to the Participant pursuant to section 13.4(d) hereof; and (c) the investment gains and losses on such amounts. A Participant's ESOP Account shall be invested only in the MCN Stock fund, except to the extent that monies diversified under section 13.5 may, at the Participant's election, be directed to the Equities fund, the Senior Securities fund, or the Fixed Income fund. 13.3 Discrimination Testing. For purposes of the limitations on Salary Reduction contributions set forth in section 4.7, the ESOP and non-ESOP portions of the Plan shall be tested separately. For purposes of such testing-- (a) the ESOP portion of the Plan shall mean Employer contributions under section 4.3(a) made on behalf of the Participant and the shares allocated to a Participant's ESOP Account pursuant to section 13.4(d); and (b) the non-ESOP portion of the Plan shall mean all Elective Deferrals, Voluntary Deductions and Employer contributions under section 4.2. 13.4 Loans. (a) Stock Acquired with Exempt Loan. The Company may direct the Trustee to incur a loan on behalf of the ESOP in a manner and under conditions which will cause the loan to qualify as an "exempt loan" within the meaning of Code section 4975(d)(3). A loan shall be used primarily for the benefit of Participants and their beneficiaries. The proceeds of each 43 50 such loan shall be used, within a reasonable time after the loan is obtained, only to purchase MCN Stock, to repay the loan, or to repay any prior loan. Any such loan shall provide for a reasonable rate of interest and an ascertainable period of maturity, and shall be without recourse against the Plan. Any such loan shall be secured solely by shares of MCN Stock acquired with the proceeds of the loan and shares of MCN Stock that were used as collateral on a prior loan which was repaid with the proceeds of the current loan. MCN Stock acquired with the proceeds of a loan, including shares pledged as collateral, shall be placed in a Suspense Account and released in accordance with subsection (b) below as the loan is repaid as if all shares in the Suspense Account were pledged. MCN Stock released from the Suspense Account shall be allocated in the manner described in subsection (d) below. No person entitled to payment under a loan made pursuant to this section 13.4 shall have recourse against any assets of the Plan other than the MCN Stock used as collateral for the loan, Employer contributions under section 4.3 that are available to meet obligations under the loan, and earnings attributable to such collateral and the investment of such contributions. Employer contributions under section 4.3(b) made with respect to any Plan Year during which the loan remains unpaid, and earnings on such contributions, shall be deemed available to meet obligations under the loan, unless otherwise provided by the Employer at the time such contributions are made. (b) Release of Pledged Shares. Any pledge of MCN Stock as collateral under this section 13.4 shall provide for the release of shares so pledged upon the payment of any portion of the principal of the loan. Shares so pledged shall be released in the proportion that the principal paid on the loan bears to the total principal amount of the loan, as provided in Treasury Regulation 54.4975-7(b)(8)(ii). The number of shares of MCN Stock that shall be released with each principal payment on the loan shall be equal to the number of shares of MCN Stock held as collateral on the loan immediately prior to the release multiplied by a fraction the numerator of which is the amount of principal of the loan repaid on such date and the denominator of which is the sum of the numerator plus the remaining outstanding principal amount of the loan after giving effect to the repayment of principal of the loan on such date. Each loan under this section 13.4 shall comply with the requirements of Treasury Regulation 54.4975-7(b)(8)(ii). If such a loan provides for monthly principal payments, shares of MCN Stock shall be released monthly. (c) Repayment of Loan. Payments of principal and interest on any loan under this section 13.4 shall be made by the Trustee at the direction of the Company solely from-- (i) the proceeds of such loan, if any portion of such proceeds are used for such purpose within a reasonable period of time after the loan is obtained as provided in section 13.4(a) above; (ii) Employer contributions under section 4.3(b) available to meet obligations under the loan; (iii) earnings from the investment of such contributions; 44 51 (iv) earnings attributable to MCN Stock acquired with the proceeds of such loan, whether allocated or unallocated; (v) the earnings on other allocated shares of MCN Stock held by the ESOP if the Internal Revenue Service, by private letter ruling, advises the Company that the use of such earnings to repay the loan will be deductible under Code section 404(k)(2)(C) and will not violate the requirements of Code section 4975; and (vi) the proceeds of a subsequent loan made to repay the loan. The contributions and earnings available to pay a loan must be accounted for separately by the Company until all loans under this section 13.4 have been paid. If dividends on MCN Stock allocated to the ESOP Account of any Participant are used to repay any loan, shares of MCN Stock with a fair market value not less than the amount of such dividends shall be allocated in accordance with section 4.3(c) to the ESOP Account of such Participant prior to the end of the Plan Year during which (but for the use of the dividends to repay the loan) such dividend would have been allocated to the ESOP Account of such Participant. (d) Allocation of Released Shares. Subject to the limitations in section 4.10 on Annual Additions to a Participant's accounts, shares of MCN Stock released from a Suspense Account described in section 13.4(a) shall be allocated immediately to the ESOP Accounts of each Participant in the proportion that the contribution that would be required to be made on behalf of such Participant under section 4.3(a)(i) for the applicable period if no shares were allocated under section 4.3(a)(ii) during such period bears to the total of all Employer contributions that would be required under section 4.3(a)(i) hereof for the applicable period if no shares were allocated under section 4.3(a)(ii) during such period. 13.5 Diversification. Any Participant or any former Participant whose distribution has been deferred pursuant to section 9.7(a), who, in either case, has completed at least ten years of participation in the Plan, and who has attained the age of 55 is a "Qualified Participant". Any Qualified Participant shall have the right to make an election to direct the investment of a portion of his ESOP Account. Such a Participant may elect within 90 days after the close of each Plan Year in the six plan-year period beginning with the first Plan Year in which the individual becomes a Qualified Participant to diversify 25 percent of his ESOP Account, less any amount to which a prior election applies. In the case of the last year to which an election applies, 50 percent shall be substituted for 25 percent. The portion of a Qualified Participant's ESOP Account which is eligible for diversification may be invested in the Fixed Income fund and/or any other investment funds under the Plan, in any combination thereof. 13.6 Put Option. If MCN Stock becomes not readily tradable on an established market, then any Participant who is otherwise entitled to a distribution of his ESOP Account, shall have the right (hereinafter referred to as "Put Option") to require that his Employer repurchase any MCN Stock allocated to his ESOP Account under a fair valuation formula. The Put Option shall be exercisable only by written notice to the Participant's Employer during the 60-day period immediately following the date of distribution and if the Put Option is not exercised within such 60-day period, then it can be exercised for an additional period of 60 days 45 52 in the following Plan Year. The period during which the Put Option is exercisable shall not include any time when a Participant is unable to exercise it because his Employer is prohibited from honoring it by applicable federal or state law. This Put Option shall be nonterminable within the meaning of Treasury Regulation 54.4975-(11)(a)(ii). The amount paid for MCN Stock under the Put Option shall be paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the Put Option and not exceeding five years. There shall be adequate security provided and reasonable interest paid on the unpaid balance due under this section 13.6. 13.7 Purchase of MCN Stock. The ESOP may acquire shares of MCN Stock on a national securities exchange, from the Company or any Affiliated Company or otherwise; provided, however, that if any shares of MCN Stock are purchased from the Company or any Affiliated Company, the price shall not exceed an amount which constitutes adequate consideration (as defined in ERISA section 3(18) and any Regulations thereunder) and such purchase shall satisfy all other requirements of ERISA and the Code applicable to such purchases. Except as provided in section 13.6 or as otherwise required by applicable law, no shares of MCN Stock acquired by the ESOP shall be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from the Plan, whether or not any part of the Plan is then an ESOP. The protection afforded to Participants in the preceding sentence is nonterminable within the meaning of Treasury Regulation section 54.4975-(1)(a)(ii). ARTICLE XIV MISCELLANEOUS 14.1 Beneficiary Designation. Subject to the provisions of section 9.9 and this section 14.1, each Participant shall have the right to designate a beneficiary or beneficiaries to receive any distribution to be made under section 9.1 upon the death of such Participant, or, in the case of a Participant who dies subsequent to termination of his employment but prior to the distribution of the entire amount to which he is entitled under the Plan, any undistributed balance to which such Participant would have been entitled. In the event of the death of a Participant whose spouse survives him, the beneficiary of the Participant shall be his surviving spouse unless such spouse has consented in writing to the designation of another beneficiary or beneficiaries. Any such written consent shall acknowledge the effect of such election and shall be witnessed by a notary public or by a representative of the Company who is designated to act in such capacity by the Company. In the event a Participant dies without a surviving spouse, or, in the event the surviving spouse of a Participant has executed the written consent hereinabove described, any distributions to be made under section 9.1 upon the death of the Participant shall be made to his designated beneficiary or beneficiaries. If the Participant establishes to the satisfaction of the Company or its designated representative that such written consent cannot be obtained because his spouse cannot be located, the requirement of such written consent shall be waived. If no beneficiary has been named by a Participant who dies without a surviving spouse or if the beneficiary designated by such a Participant or by a Participant whose surviving spouse has executed the written consent hereinabove described has predeceased the Participant or such designated beneficiary has died prior to complete disbursement of the 46 53 Participant's Plan Account, the value of his account, or the undistributed portion thereof, shall be paid by the Trustee at the direction of the Company-- (a) to the surviving spouse of such deceased Participant, if any; (b) if there shall be no surviving spouse, to the surviving children of such deceased Participant, if any, in equal shares; (c) if there shall be no surviving spouse or surviving children, to the executors or administrators of the estate of such deceased Participant; or (d) if no executor or administrator shall have been appointed for the estate of such deceased Participant, to the person or persons who would be entitled to the personal estate of such deceased Participant under the laws of his state of domicile if he had died leaving no will. In the event that a Participant and his spouse die under circumstances such that it is not clear whether the spouse survived the Participant, the Participant shall be presumed to have survived the spouse. 14.2 Incompetency. Any distribution under this Plan which is payable to a beneficiary who is a minor or to a Participant or beneficiary who, in the opinion of the Company, is unable to manage his affairs by reason of illness or mental incompetency, may be made to or for the benefit of any such Participant or beneficiary in such of the following ways as the Company shall direct: (a) Directly to any such minor beneficiary, if, in the opinion of the Company, he is able to manage his affairs; (b) To the legal representative of any such Participant or beneficiary; or (c) To some near relative of any such Participant or beneficiary to be used for the latter's benefit. 14.3 Expenses. Except as otherwise provided in the Plan, all costs and expenses incurred in administering the Plan, including the expenses of the Company, the fees and expenses of the Trustee, the fees of its counsel, and other administrative expenses, shall be borne by the Employers in such proportions as the Company shall determine to be equitable and proper having regard to the nature of the particular expense. 14.4 Nonassignability. Except as may be required to comply with a qualified domestic relations order (as defined in Code section 414(p)), it is a condition of the Plan, and all rights of each Participant shall be subject thereto, that no right or interest of any Participant in the Plan or in a Plan Account shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, or bankruptcy but excluding devolution by death or mental incompetency, and no right or interest of any Participant in the Plan or in his Plan Account shall be liable for, or subject to, any obligation or liability of such Participant. 47 54 14.5 Employment Noncontractual. The Plan confers no right upon any Employee to continue in employment. 14.6 Merger or Consolidation with Another Plan. A merger or consolidation with, or transfer of assets or liabilities to, any other plan shall not be effected unless the terms of such merger, consolidation, or transfer are such that each Participant, distributee, beneficiary, or other person entitled to receive benefits from the Plan would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit such person would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated. If any other plan shall be merged into and become a part of this Plan, each Participant or the person entitled to receive a benefit under such other plan shall be entitled to receive a benefit under this Plan which is equal to the benefit such person would have been entitled to receive had such other plan terminated immediately before the merger. 14.7 Continuance by a Successor. In the event that any Employer corporation shall be reorganized by way of merger, consolidation, transfer of assets, or otherwise, so that another Affiliated Company shall succeed to all or a portion of such Employer's business, such successor corporation, with the consent of each other participating Employer, may be substituted for such Employer under the Plan by adopting the Plan and becoming a party to the Trust Agreement. Employee contributions and Employer contributions shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of such successor corporation for the Employer under the Plan becomes effective. If, within 90 days from the effective date of any such reorganization, such successor corporation shall not have become a party to the Plan, or, if the Employer shall adopt a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to Employees of such Employer as of the close of business on the ninetieth day following the effective date of such reorganization or as of the close of business on the date of adoption of such plan of complete liquidation, as the case may be, and the Trustee shall distribute the portion of the Trust applicable to Participants of such Employer in the manner provided in section 11.3. 14.8 USERRA Rights. Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u), to the extent applicable. Loan repayments will be suspended under this Plan as permitted under Code Section 414(u). 14.9 Construction. Unless the context clearly requires otherwise-- (a) the masculine pronoun whenever used shall include the feminine, the singular shall include the plural, and vice versa, and (b) headings of Articles and sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. ARTICLE XV REDESIGNATION OF ESOP AND DISTRIBUTION OF DIVIDENDS 48 55 This Article XV designates that part of the non-ESOP portion of the Plan which is invested in the MCN Stock Fund becomes part of the ESOP portion of the Plan. This Article XV also sets forth certain provisions regarding the operation of the ESOP portion of the Plan, such provisions to supersede any contrary provisions of the Plan. This Article XV (including provisions regarding distribution of dividends) shall become effective as of January 1, 1998 with regard to dividends distributed on or after that date. Except as specifically provided in this Article XV, the provisions of this Article XV, including the redesignation of the ESOP portion of the Plan described herein, shall not affect any beneficiary designations or any other applicable agreements, elections, or consents that Participants, spouses, or beneficiaries validly executed under the terms of the Plan before the execution date of the Plan amendment which first adopts this Article XV, and such designations, agreements, elections and consents shall continue to apply in the same manner as they did prior to such amendment. The ESOP, as set forth in this Article XV, is intended to meet with requirements of an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code and the accompanying regulations, and Section 407(d)(6) of ERISA. As provided below, the ESOP is designed to invest primarily in qualifying employer securities of MCN Energy Group Inc.. 15.1 Redesignation of ESOP Portion of Plan. Effective as of the effective date described in the preamble to this Article XV JANUARY 1, 1998, the ESOP portion of the Plan shall consist of the ESOP Account of each Participant plus the remaining part of each Participant's Plan Account that is invested in the MCN Stock Fund. The put option provisions of Section 13.6 shall apply to the entire ESOP portion of the Plan. However, only a Participant's ESOP Account shall be subject to the restrictions described in the first sentence of Section 6.3. 15.2 Allocation of Investment Plan Account Balances to ESOP Portion of Plan. All amounts contributed, transferred or designated as allocable to the Investment Plan Account of any Participant shall be treated as part of the ESOP portion of the Plan to the extent the Participant has directed the investment of such amounts in the MCN Stock Fund in accordance with Article VI of the Plan. 15.3 Distribution of Dividends on MCN Stock. At the direction of the Company exercised in its sole discretion, the Trustee will, after dividends are paid on MCN Stock held in the Trust, but in no event later than 90 days following the end of the Plan Year in which such dividends are paid (to the extent such dividends are not used to make payment on an exempt loan as provided for in section 13.4(c) of the Plan), either (i) distribute to Participants such portion of the dividends attributable to the interests in MCN Stock held in their Plan Accounts (or, if so determined by the Company, their ESOP Accounts) as described below or, (ii) arrange to have such dividends distributed directly to Participants by the Employer, or (iii) arrange to have such dividends distributed to Participants by a dividend disbursement agent selected by the Company. In its sole discretion, the Company may direct the Trustee to have such dividends distributed only to Participants who elect (or fail not to elect) to receive such dividend distributions in accordance with forms and procedures established by the Company (which such procedures may apply to all Participants, or solely to a group or groups determined by the Company). Further, in its sole discretion, the Company may establish procedures that would permit Participants to elect to have dividends distributed to them in a single sum rather 49 56 than over periods that might otherwise be determined by the Company to correspond with Employer payroll practices. The distribution of dividends on MCN Stock held in a Participant's Plan Account (or, if so determined by the Company, a Participant's ESOP Account) shall be in an amount equal to all of the dividends paid on the MCN Stock held in such Participant's Plan Account (or, if so determined by the Company, a Participant's ESOP Account). * * * * * * * * * * 50 57 IN WITNESS WHEREOF, Michigan Consolidated Gas Company has caused its corporate name to be hereunto affixed by its duly authorized officers as of the 29th day of December, 1998. MICHIGAN CONSOLIDATED GAS COMPANY By /s/ D. Nowokowski -------------------------------- Its: VP,Human Resources -------------------------------- 51 EX-12.1 6 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12-1 MICHIGAN CONSOLIDATED GAS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
Twelve Months Ended Twelve Months Ended Twelve Months Ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ------------------ EARNINGS AS DEFINED (1) Net Income ....................................................... $114,619 $125,630 $122,239 Fixed charges .................................................... 61,304 57,905 53,831 -------- -------- -------- Earnings as defined ............................................ $175,923 $183,535 $176,070 ======== ======== ======== FIXED CHARGES AS DEFINED (1) Interest on long-term debt ....................................... $ 47,091 $ 47,024 $ 43,163 Interest on other borrowed funds ................................. 12,113 8,664 8,012 Amortization of debt discounts, premium and expense .................................................... 955 1,032 1,081 Interest implicit in rentals (2) ................................. 1,145 1,185 1,575 -------- -------- -------- Fixed charges as defined ....................................... $ 61,304 $ 57,905 $ 53,831 ======== ======== ======== Ratio of Earnings to Fixed Charges ............................... 2.87 3.17 3.27 ======== ======== ======== - ----------------
Notes: - ------ (1) Earnings and fixed charges are defined and computed in accordance with Item 503 of Regulation S-K. (2) This amount is estimated to be a reasonable approximation of the interest portion of rentals. MichCon is a guarantor of certain other debt. Fixed charges related to such debt are deemed to be immaterial and therefore have been excluded from the above ratios. EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-56333 on Form S-3 of Michigan Consolidated Gas Company, of our report dated February 25, 1999, appearing in this Annual Report on Form 10-K of Michigan Consolidated Gas Company for the year ended December 31, 1998. /s/ Deloitte & Touche LLP - ------------------------- Detroit, Michigan March, 11, 1999 EX-24.1 8 POWERS OF ATTORNEY 1 EXHIBIT 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Alfred R. Glancy III ------------------------ Alfred R. Glancy III 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Stephen E. Ewing --------------------- Stephen E. Ewing 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the others) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ William K. McCrackin ------------------------ William K. McCrackin 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III and Stephen E. Ewing, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Harold Gardner ------------------- Harold Gardner 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the others) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Anne R. Cooke ------------------ Anne R. Cooke 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the others) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Ronald E. Christian ------------------------ Ronald E. Christian 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the others) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Howard L. Dow III --------------------- Howard L. Dow III 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director or Officer of MICHIGAN CONSOLIDATED GAS COMPANY, a Michigan corporation, does hereby constitute and appoint, Alfred R. Glancy III, Stephen E. Ewing and Harold Gardner, and each of them, his true and lawful attorneys and agents, each with full power and authority (acting alone and without the others) to execute in his name and on his behalf and to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the year ended December 31, 1998, including all amendments. IN WITNESS WHEREOF, I have executed this Power of Attorney this 22nd day of February, 1999. /s/ Steven Kurmas ------------------ Steven Kurmas EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Statement of Income and the Consolidated Statement of Financial Position and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 6,603 0 151,746 8,928 56,969 394,491 2,889,020 1,396,940 2,172,525 565,715 619,835 0 0 10,300 636,543 2,172,525 0 1,033,658 0 877,047 182 11,973 56,997 112,793 35,817 76,976 0 0 0 76,976 0 0
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