UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2008
Commission file number 1-11607
DTE ENERGY COMPANY
(Exact name of registrant as specified in its charter)
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Michigan
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38-3217752
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2000 2nd Avenue, Detroit, Michigan
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48226-1279
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(Address of principal executive offices)
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(Zip Code)
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313-235-4000
(Registrants telephone number, including area code)
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
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
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At September 30, 2008, 163,025,446 shares of DTE Energys common stock were outstanding,
substantially all of which were held by non-affiliates.
DTE
Energy Company
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2008
TABLE OF CONTENTS
Definitions
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Company
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DTE Energy Company and any subsidiary companies
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CTA
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Costs to achieve, consisting of project management, consultant support and
employee severance, related to the Performance Excellence Process
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Customer Choice
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Statewide initiatives giving customers in Michigan the option to choose
alternative suppliers for electricity and gas
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Detroit Edison
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The Detroit Edison Company, a direct wholly-owned subsidiary of DTE Energy,
and any subsidiary companies
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DTE Energy
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DTE Energy Company, directly or indirectly the parent of Detroit Edison,
MichCon and numerous non-utility subsidiaries
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EPA
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United States Environmental Protection Agency
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FERC
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Federal Energy Regulatory Commission
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GCR
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A gas cost recovery mechanism authorized by the MPSC, permitting MichCon to
pass the cost of natural gas to its customers
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MDEQ
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Michigan Department of Environmental Quality
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MichCon
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Michigan Consolidated Gas Company, an indirect wholly-owned subsidiary of DTE
Energy, and any subsidiary companies
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MISO
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Midwest Independent System Operator, a Regional Transmission Organization
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MPSC
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Michigan Public Service Commission
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Non-utility
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An entity that is not a public utility; its conditions of service, prices of
goods and services and other operating related matters are not directly
regulated by the MPSC or the FERC
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NRC
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Nuclear Regulatory Commission
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Production tax credits
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Tax credits as authorized under Sections 45K and 45 of the Internal Revenue
Code designed to stimulate investment in and development of alternate fuel
sources; the amount of a production tax credit can vary each year as
determined by the Internal Revenue Service
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Proved reserves
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Estimated quantities of natural gas, natural gas liquids and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reserves under existing economic and
operating conditions
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PSCR
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A power supply cost recovery mechanism authorized by the MPSC that allows
Detroit Edison to recover through rates its fuel, fuel-related and purchased
power expenses
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Securitization
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Detroit Edison financed specific stranded costs at lower interest rates
through the sale of rate reduction bonds by a wholly owned special purpose
entity, the Detroit Edison Securitization Funding LLC
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SFAS
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Statement of Financial Accounting Standards
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Stranded costs
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Costs incurred by utilities in order to serve customers in a regulated
environment that, absent special regulatory approval, would not otherwise be
recoverable if customers switch to alternative energy suppliers
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Subsidiaries
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The direct and indirect subsidiaries of DTE Energy Company
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Synfuels
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The fuel produced through a process involving chemically modifying and
binding particles of coal, used for power generation and coke production;
synfuel production through December 31, 2007 generated production tax credits
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Unconventional Gas
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Includes those oil and gas deposits that originated and are stored in coal
bed, tight sandstone and shale formations
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Units of Measurement
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Bcf
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Billion cubic feet of gas
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Bcfe
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Conversion metric of natural gas, the ratio of 6 Mcf of gas to 1 barrel of oil
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GWh
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Gigawatthour of electricity
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kWh
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Kilowatthour of electricity
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Mcf
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Thousand cubic feet of gas
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MMcf
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Million cubic feet of gas
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MW
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Megawatt of electricity
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MWh
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Megawatthour of electricity
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Forward-Looking Statements
Certain information presented herein 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 presently
contemplated, projected, estimated or budgeted. Many factors may impact forward-looking statements
including, but not limited to, the following:
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the uncertainties of successful exploration of gas shale resources and inability to
estimate gas reserves with certainty;
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the effects of weather and other natural phenomena on operations and sales to
customers, and purchases from suppliers;
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economic climate and population growth or decline in the geographic areas where we do
business;
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environmental issues, laws, regulations, and the cost of remediation and compliance,
including actual and potential new federal and state requirements that could include carbon
and more stringent mercury emission controls, a renewable portfolio standard and energy
efficiency mandates;
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nuclear regulations and operations associated with nuclear facilities;
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impact of electric and gas utility restructuring in Michigan, including legislative
amendments and Customer Choice programs;
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employee relations and the impact of collective bargaining agreements;
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unplanned outages;
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access to capital markets and capital market conditions and the results of other
financing efforts which can be affected by credit agency ratings;
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instability in capital markets which could impact availability of short and long-term
financing or the potential for loss on cash equivalents and investments;
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the timing and extent of changes in interest rates;
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the level of borrowings;
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changes in the cost and availability of coal and other raw materials, purchased power
and natural gas;
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effects of competition;
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impact of regulation by the FERC, MPSC, NRC and other applicable governmental
proceedings and regulations, including any associated impact on rate structures;
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contributions to earnings by non-utility subsidiaries;
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changes in and application of federal, state and local tax laws and their
interpretations, including the Internal Revenue Code, regulations, rulings, court
proceedings and audits;
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the ability to recover costs through rate increases;
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the availability, cost, coverage and terms of insurance and stability of insurance
providers;
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the cost of protecting assets against, or damage due to, terrorism;
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changes in and application of accounting standards and financial reporting regulations;
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changes in federal or state laws and their interpretation with respect to regulation,
energy policy and other business issues;
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amounts of uncollectible accounts receivable;
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binding arbitration, litigation and related appeals; and
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changes in the economic and financial viability of our suppliers, customers and trading
counterparties, and the continued ability of such parties to perform their obligations to
the Company.
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New factors emerge from time to time. We cannot predict what factors may arise or how such factors
may cause our results to differ materially from those contained in any forward-looking statement.
Any forward-looking statements refer only as of the date on which such statements are made. We
undertake no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of unanticipated
events.
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Part I Item 2.
DTE ENERGY COMPANY
Managements Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
DTE Energy is a diversified energy company with 2007 annual revenues in excess of $8 billion and
assets of approximately $24 billion. We are the parent company of Detroit Edison and MichCon,
regulated electric and gas utilities engaged primarily in the business of providing electricity and
natural gas sales, distribution and storage services throughout southeastern Michigan. We operate
four energy-related non-utility segments with operations throughout the United States.
Net income in the third quarter of 2008 was $177 million, or $1.08 per diluted share, compared to
net income of $197 million, or $1.19 per diluted share, in the third quarter of 2007. Net income
for the nine months ended September 30, 2008 was $417 million, or $2.56 per diluted share, compared
to net income of $716 million, or $4.15 per diluted share, in the comparable period of 2007. The
decrease for the quarter was due primarily to lower earnings in the Energy Trading business and
synfuel related income included in discontinued operations, partially
offset by improved results at the utilities and Power and Industrial
Projects business. The decrease for the nine-month period
was due primarily to $364 million in net income resulting from the 2007 gain on the sale of the
Antrim shale gas exploration and production business of $897 million ($574 million after-tax),
partially offset by losses recognized on related hedges of $323 million ($210 million after-tax),
including recognition of amounts previously recorded in accumulated other comprehensive income
during 2007. The comparison for the nine-month period is also impacted by a 2008 gain of $128
million ($82 million after-tax) on the sale of a portion of the Barnett shale properties.
The items discussed below influenced our current financial performance and may affect future
results:
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Effects of weather on utility operations;
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Collectibility of accounts receivable on utility operations;
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Impact of regulatory decisions on utility operations;
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Impact of legislation on utility operations;
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Impact of increased market demand on coal supply;
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Challenges associated with nuclear fuel;
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Discontinuance of planned monetization of a portion of our Power and Industrial Projects business;
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Monetization of portions of our Unconventional Gas Production business;
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Results in our Energy Trading business;
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Discontinuance of the Synthetic Fuel business;
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Cost reduction efforts and required environmental and reliability-related capital
investments; and
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Ability to access capital markets for short and long-term financing, when needed.
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Reference in this report to we, us, our, Company or DTE are to DTE Energy and its
subsidiaries, collectively.
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UTILITY OPERATIONS
Our Electric Utility segment consists of Detroit Edison, which is engaged in the generation,
purchase, distribution and sale of electricity to approximately 2.2 million residential, commercial
and industrial customers in southeastern Michigan.
Our Gas Utility segment consists of MichCon and Citizens Gas Fuel Company (Citizens). MichCon is
engaged in the purchase, storage, transmission, distribution and sale of natural gas to
approximately 1.3 million residential, commercial and industrial customers throughout Michigan.
MichCon also has subsidiaries involved in the gathering, processing and transmission of natural gas
in northern Michigan. Citizens distributes natural gas in Adrian, Michigan to approximately 17,000
customers.
Effects of Weather on Utility Operations
Earnings from our utility operations are seasonal and
very sensitive to weather. Electric utility earnings are primarily dependent on hot summer weather,
while the gas utilitys results are primarily dependent on cold winter weather. During the nine
months ended September 30, 2008, we experienced colder weather than in the nine months ended
September 30, 2007.
Additionally, we frequently experience various types of storms that damage our electric
distribution infrastructure, resulting in power outages. Restoration and other expenses associated
with storm-related power outages were $9 million and $52 million in the three and nine months ended
September 30, 2008 as compared to $22 million and $52 million in the three and nine months ended
September 30, 2007.
Collectibility of Accounts Receivable on Utility Operations
Both utilities continue to experience
high levels of past due receivables, primarily attributable to economic conditions including high
levels of unemployment and home foreclosures. High energy prices and a lack of adequate levels of
assistance for low-income customers have also impacted our accounts receivable.
We have taken actions to manage the level of past due receivables, including customer
disconnections, contracting with collection agencies and working with Michigan officials and others
to increase the share of low-income funding allocated to our customers. The allowance for doubtful
accounts expense for the two utilities is approximately $32 million for the quarter ended September
30, 2008 compared to $33 million for the quarter ended September 30, 2007. The allowance for
doubtful accounts expense for the two utilities is approximately $168 million for the nine months
ended September 30, 2008 compared to $101 million for the nine months ended September 30, 2007.
The April 2005 MPSC gas rate order provided for an uncollectible true-up mechanism for MichCon.
MichCons operating revenues include a component representing ninety percent of the difference
between the actual uncollectible expense for each year and $37 million, including carrying charges.
An annual reconciliation proceeding before the MPSC is held. The MPSC approved the 2005 annual
reconciliation in December 2006, allowing MichCon to surcharge $11 million beginning in January
2007. The MPSC approved the 2006 annual reconciliation in December 2007, allowing MichCon to
surcharge $33 million beginning in January 2008. We filed the 2007 reconciliation in March 2008,
requesting an additional surcharge of approximately $34 million including a $1 million uncollected
balance from the 2005 surcharge. We accrue interest income on the outstanding balances.
Impact of Regulatory Decisions on Utility Operations
Detroit Edison filed a general rate case in
April 2007 requesting a $123 million, or 2.9%, average increase in Detroit Edisons annual revenue
requirement for 2008, and in August 2007 filed a supplement to this filing to account for events
which occurred subsequent to the initial filing. A July 2007 decision by the Court of Appeals of
the State of Michigan remanded back to the MPSC the November 2004 order in a prior Detroit Edison
rate case that denied recovery of merger control premium costs. Also, the Michigan legislature
enacted the Michigan Business Tax (MBT) in July 2007. The supplemental filing addressed the
recovery of the merger control premium costs and the enactment of the MBT. The net impact of the
supplemental changes results in an additional revenue requirement of approximately $76 million. In
February 2008, Detroit Edison filed an update to its April 2007 rate case filing, which includes
the use of 2009 as the projected test year; a revised 2009 load forecast; 2009 estimates on
environmental and advanced metering infrastructure capital expenditures; and adjustments to the MBT
calculation. An MPSC order related to this filing is expected by early 2009. See Note 6 of the
Notes to Consolidated Financial Statements.
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The MPSC issued an order in August 2006 approving a settlement agreement providing for an
annualized 2006 rate reduction of $53 million for Detroit Edison, effective September 2006.
Beginning January 1, 2007 and continuing until April 13, 2008, one year from the April 13, 2007
general rate case filing, rates were reduced by an additional $26 million, for a total reduction of
$79 million annually. Detroit Edison experienced a rate reduction of approximately $25 million
during the period the rate reduction was in effect for 2008 and approximately $19 million and $53
million in the three and nine months ended September 30, 2007, respectively, as a result of this
order. The revenue reduction is net of the recovery of costs associated with the Performance
Excellence Process. The settlement agreement provides for some level of realignment of the existing
rate structure by allocating a larger percentage of the rate reduction to the commercial and
industrial customer classes than to the residential customer classes.
In August 2006, MichCon filed an application with the MPSC requesting permission to sell base gas
that would become accessible with storage facilities upgrades. In December 2006, MichCon filed its
2007-2008 GCR plan case proposing a maximum GCR factor of $8.49 per Mcf. In August 2007, a
settlement agreement in this proceeding was approved by the MPSC that provides for a sharing with
customers of the proceeds from the sale of base gas. In addition, the agreement provides for a rate
case filing moratorium until January 1, 2009, unless certain unanticipated changes occur that
impact income by more than $5 million. MichCons gas storage enhancement projects, the main subject
of the aforementioned settlement, have enabled 17 billion cubic feet (Bcf) of gas to become
available for cycling. Under the settlement terms, MichCon delivered 13.4 Bcf of this gas to its
customers through 2007 at a savings to market-priced supplies of approximately $54 million. This
settlement provides for MichCon to retain the proceeds from the sale of 3.6 Bcf of gas, which
MichCon expects to sell through the end of 2008. During 2007, MichCon sold 0.75 Bcf of base gas and
recognized a pre-tax gain of $5 million. MichCon did not sell base gas in the first nine months of
2008. In July 2008, MichCon filed an application with the MPSC requesting permission to sell an
additional 4 Bcf of base gas that will become available for sale as a result of better than
expected operations at its storage fields. MichCon proposed to sell 1.3 Bcf of the base gas to GCR
customers during the 2009-2010 GCR period at cost and to sell the remaining 2.7 Bcf to non-system
supply customers in 2009 at market prices. MichCon requested that the MPSC treat the proceeds from
the sale of the 2.7 Bcf of base gas to non-system supply customers as a one-time increase in
MichCons net income, and not include the proceeds in the calculation of MichCons revenue
requirements in future rate cases.
Impact of Legislation on Utility Operations
On September 18, 2008, the Michigan House of
Representatives and Michigan Senate passed a package of bills to establish a comprehensive,
sustainable, long-term energy plan for Michigan. The Governor of Michigan signed the bills on
October 6, 2008.
The package of bills includes:
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2008 Public Act (PA) 286 that reforms Michigans utility regulatory framework, including
the electric Customer Choice program,
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2008 PA 295 that establishes a renewable portfolio / energy optimization standard and
provides a funding mechanism, and
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2008 PA 287 that provides for an income tax credit for the purchase of energy efficient
appliances and a credit to offset a portion of the renewable charge.
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2008 PA 286 makes the following changes in the regulatory framework for Michigan utilities.
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Electric Customer Choice reform
The bill establishes a 10 percent
limit on participation in the electric Customer Choice program. In
general, customers representing 10 percent of a utilitys load may
receive electric generation from an electric supplier that is not a
utility. After that threshold is met, the remaining customers will
remain on full, bundled utility service. As of September 30, 2008,
approximately 3 percent of Detroit Edisons load was on the electric
Customer Choice program. The bill also allows continuation of prior
MPSC policies for customers to return to full utility service.
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Cost-of-service based electric rates (deskewing)
The bill requires
the MPSC to set rates based on cost-of-service for all customer
classes, eliminating over a five-year period the current subsidy by
businesses of residential customer rates. This provision does not
change total revenue for Detroit Edison. It lowers rates for most
commercial and industrial customers and increases rates for
residential and certain other industrial customers to match the actual
cost of service for each customer class. Rate changes will be phased
in over five years, with a 2.5% annual cap. Rates for schools and
other qualified educational institutions will be set at their cost of
service sooner.
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File and use ratemaking
The bill establishes a 12 month deadline for
the MPSC to complete a rate case and allows a utility to
self-implement rate changes six months after a rate filing, subject to
certain limitations. If the final rate case order leads to lower rates
than the utility had self-implemented, the utility will refund, with
interest, the difference. In addition, utility rate cases may be based
on a forward test year. The bill also has provisions designed to help
the MPSC obtain increased funding for additional staff.
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Certificate of Need process for major capital investments
The bill
establishes a certificate of need process for capital projects costing
more than $500 million. The process requires the MPSC to review for
prudence, prior to construction, proposed investments in new
generating assets, acquisitions of existing power plants, major
upgrades of power plants, and long-term power purchase agreements. The
bill increases the certainty for utilities to recover the cost of
projects approved by the MPSC and provides for the utilities to
recover interest expense during construction.
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M&A approval
The bill grants the MPSC the authority to review and
approve proposed utility mergers and acquisitions in Michigan and sets
out evaluation criteria.
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2008 PA 295 establishes a renewable energy and energy optimization (energy efficiency, energy
conservation or load management) program in Michigan and provides for a separate funding surcharge
to pay the cost of those programs.
Renewable Energy Standard
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The bill requires electric providers to source 10% of electricity sold
to retail customers from renewable energy resources by 2015.
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Qualifying renewable energy resources would include wind, biomass,
solar, hydro, and geothermal, among others.
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Detroit Edison will be required to have a renewable energy capacity
portfolio of 300MW by December 31, 2013 and 600MW by December 31,
2015.
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The MPSC will establish a per meter surcharge to fund the
renewable energy requirements. The recovery mechanism starts prior to
actual construction in order to smooth the rate impact for customers.
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Within 60 days after the passage of the new law, the MPSC is to issue
a temporary order implementing this act.
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Within 90 days following the issuance of a temporary order, the
utilities will file a Renewable Portfolio Standard (RPS) plan with the
MPSC.
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The bill allows for the lowering of compliance if RPS costs exceed
the surcharge/cost cap or if other specified factors adversely affect
the availability of renewable energy.
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The bill specifies that a utility can build or have others build and
later sell to the utility up to 50 percent of the generation required
to meet the RPS. The other 50 percent would be contracted through
long-term power purchase agreements.
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The bill also provides for a net metering program to be established by
Commission order for on-site customer-owned renewable generation up to
1% of an electric utilitys load.
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Energy Optimization Standard
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Requires utilities to create electric and natural gas energy
optimization plans for each customer class and includes funding
surcharges as well as the potential for incentives for exceeding
performance goals.
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For electric sales, the program targets 0.3 percent annual savings in
2009, ramping up to 1 percent annual savings by 2012. Savings
percentages are based on prior year retail sales.
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For natural gas sales, the targeted annual savings start at
0.1 percent in 2009 and ramp up to 0.75 percent by 2012.
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The MPSC will allow utilities to capitalize certain costs of their
energy optimization program. The costs which can be capitalized
include equipment, materials and installation costs.
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Incentives are potentially available for exceeding annual program
targets. The financial incentive could be the lesser of 25% of the net
cost reductions to our customers or 15% of total program spend,
subject to MPSC approval.
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The bill would also allow a natural gas utility that spends at least
0.5 percent of its revenues on energy efficiency programs to implement
a symmetrical decoupling true-up mechanism that adjusts for sales
volumes that are above or below the level reflected in its gas
distribution rates.
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By March 2016, the MPSC may suspend the program if it determines the
program is no longer cost-effective.
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Impact of Increased Market Demand on Coal Supply
Our generating fleet produces approximately 79%
of its electricity from coal. Increasing coal demand from domestic and international markets has
resulted in volatility and higher prices which are passed to our customers through the PSCR. In
addition, difficulty in recruiting workers, obtaining environmental permits and finding
economically recoverable amounts of new coal have resulted in decreasing coal output from the
central Appalachian region. Furthermore, as a result of environmental regulation and declining
eastern coal stocks, demand for cleaner burning western coal has increased.
Challenges Associated with Nuclear Fuel
We operate one nuclear facility (Fermi 2) that undergoes
a periodic refueling outage approximately every eighteen months. Uranium prices have been rising
due to supply concerns. In the future, there may be additional nuclear facilities constructed in
the industry that may place additional pressure on uranium supplies and prices. We have a contract
with the U.S. Department of Energy (DOE) for the future storage and disposal of spent nuclear fuel
from Fermi 2. We are obligated to pay the DOE a fee of 1 mill per kWh of Fermi 2 electricity
generated and sold; this fee is a component of nuclear fuel expense. Delays have occurred in the
DOEs program for the acceptance and disposal of spent nuclear fuel at a permanent repository. We
are a party in litigation
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against the DOE for both past and future costs associated with the DOEs failure to accept spent
nuclear fuel under the timetable set forth in the Federal Nuclear Waste Policy Act of 1982. Until
the DOE is able to fulfill its obligation under the contract, we are responsible for the spent
nuclear fuel storage and have begun work on an on-site dry cask storage facility.
NON-UTILITY OPERATIONS
We have made significant investments in non-utility asset-intensive businesses. We employ
disciplined investment criteria when assessing opportunities that leverage our assets, skills and
expertise. Specifically, we invest in targeted energy markets with attractive competitive dynamics
where meaningful scale is in alignment with our risk profile. As part of a strategic review of our
non-utility operations, we have taken various actions including the sale, restructuring or
recapitalization of certain non-utility businesses.
Beginning in the second quarter of 2008, we realigned our Coal Transportation and Marketing
business from the Coal and Gas Midstream segment (now the Gas Midstream segment) to the Power and
Industrial Projects segment due to changes in how financial information is evaluated and resources
allocated to segments by senior management. The Companys segment information reflects this change
for all periods presented. See Note 10 of the Notes to Consolidated Financial Statements for
further information on this realignment.
Gas Midstream
Gas Midstream owns partnership interests in two interstate transmission pipelines and two natural
gas storage fields. The pipeline and storage assets are primarily supported by stable, long-term,
fixed-price revenue contracts. The assets of these businesses are well integrated with other DTE
Energy operations. Pursuant to an operating agreement, MichCon provides physical operations,
maintenance and technical support for Washington 28 and Washington 10 storage facilities. In
addition, pursuant to a separate agreement, MichCon provides physical operations, maintenance and
technical support for a portion of the Vector Pipeline system which MichCon leases to Vector. Gas
Midstream is continuing its steady growth plan with the completion of two new storage capacity
expansions and the expanding and building of new pipeline capacity to serve markets in the Midwest
and Northeast United States.
Unconventional Gas Production
Our Unconventional Gas Production business is engaged in natural gas exploration, development and
production primarily within the Barnett shale in north Texas. We continue to develop our position
here, with total leasehold acreage of 66,216 (64,183 acres, net of interest of others). We
continue to acquire select positions in active development areas in the Barnett shale to optimize
our existing portfolio.
Monetization of Portions of our Unconventional Gas Production Business
- In 2008, we sold a portion
of our Barnett shale properties for gross proceeds of approximately $260 million. The properties
sold included 75 Bcf of proved reserves on approximately 11,000 net acres in the core area of the
Barnett shale. The Company recognized a cumulative pre-tax gain of $128 million ($82 million
after-tax) on the sale during 2008.
We plan to continue to develop our holdings in the western portion of the Barnett shale and to seek
opportunities for additional monetization of select properties within our Barnett shale holdings,
when conditions are appropriate. We invested approximately $80 million in the Barnett shale for the
first nine months of 2008 and expect to invest an additional $15 million during the remainder of
the year. During 2008, we expect to drill 35 new wells and achieve Barnett shale production of
approximately 5 Bcfe of natural gas from our remaining properties, compared with approximately 7.7
Bcfe in 2007 from all properties, including those that were sold.
Power and Industrial Projects
Power and Industrial Projects is comprised primarily of projects that deliver energy and
utility-type products and services to industrial, commercial and institutional customers; provide
coal transportation services and marketing and develop biomass energy projects. This business
provides utility-type services using project assets usually located on or near the customers
premises in the steel, automotive, pulp and paper, airport and other industries.
10
Services include pulverized coal and petroleum coke supply, power generation, steam production,
chilled water production, wastewater treatment and compressed air supply. We own and operate one
gas-fired peaking electric generating plant and a biomass-fired electric generating plant. A
second biomass-fired electric generating plant is currently under development pending certain
regulatory and management approvals. This business also develops, owns and operates landfill gas
recovery systems throughout the United States, and produces metallurgical coke from three coke
batteries. The production of coke from two of these coke batteries generates production tax
credits. The business provides coal transportation services including fuel, transportation,
storage, blending and rail equipment management services. We specialize in minimizing fuel costs
and maximizing reliability of supply for energy-intensive customers. Additionally, we participate
in coal marketing and the purchase and sale of emissions credits. This business performs coal mine
methane extraction, in which we recover methane gas from mine voids for processing and delivery to
natural gas pipelines, industrial users or for small power generation projects.
Discontinuance of Planned Monetization of a Portion of our Power and Industrial Projects Business
During the third quarter of 2007, we announced our plans to sell a 50% interest in a portfolio of
select Power and Industrial Projects. As a result, the assets and liabilities of the Projects were
classified as held for sale at that time. During 2008, the United States asset sale market weakened
and challenges in the debt market persisted. As a result of these developments, our work on this
planned monetization was discontinued. As of June 30, 2008, the assets and liabilities of the
Projects were no longer classified as held for sale.
Energy Trading
Energy Trading focuses on physical power and gas marketing and trading, structured transactions,
enhancement of returns from DTE Energys asset portfolio, optimization of contracted natural gas
pipelines and storage, and power transmission and generating capacity positions. Our customer base
is predominantly utilities, local distribution companies, pipelines and other marketing and trading
companies. We enter into derivative financial instruments as part of our marketing and hedging
activities. Most of the derivative financial instruments are accounted for under the mark-to-market
method, which results in the recognition of unrealized gains and losses from changes in the fair
value of the derivatives in our results of operations. We utilize forwards, futures, swaps and
option contracts to mitigate risk associated with our marketing and trading activity as well as for
proprietary trading within defined risk guidelines. Energy Trading also provides commodity risk
management services to the other businesses within DTE Energy.
Results in our Energy Trading Business
Significant portions of the electric and gas marketing and
trading portfolio are economically hedged. The portfolio includes financial instruments and gas
inventory, as well as contracted natural gas pipelines and storage and power generation capacity
positions. Most financial instruments are deemed derivatives, whereas proprietary gas inventory,
power transmission, pipelines and certain storage assets are not derivatives. As a result, this
segment may experience earnings volatility as derivatives are marked-to-market without revaluing
the underlying non-derivative contracts and assets. This results in gains and losses that are
recognized in different accounting periods. We may incur mark-to-market accounting gains or losses
in one period that could reverse in subsequent periods.
DISCONTINUED OPERATIONS
Synthetic Fuel
Due to the expiration of synfuel production tax credits at the end of 2007, the Synthetic Fuel
business ceased operations and was classified as a discontinued operation effective December 31,
2007. Synfuel plants chemically changed coal and waste coal into a synthetic fuel as determined
under the Internal Revenue Code. Production tax credits were provided for the production and sale
of solid synthetic fuel produced from coal and were available through December 31, 2007. The
synthetic fuel plants generated operating losses that were substantially offset by production tax
credits. The value of a production tax credit is adjusted annually by an inflation factor
published annually by the Internal Revenue Service (IRS). The value is reduced if the Reference
Price of a barrel of oil exceeds certain thresholds. The actual tax credit phase-out for 2007 was
approximately 67%.
11
PERFORMANCE EXCELLENCE PROCESS
We continuously review and adjust our cost structure and seek improvements in our processes. In
2005, we initiated a company-wide review of our operations called the Performance Excellence
Process. This initiative was an extension of the DTE Energy Operating System initiative adopted in
2002. These initiatives represent the application of tools and operating practices that have
resulted in operating efficiencies, inventory reductions and improvements in technology systems,
among other enhancements.
The primary goal is to become more competitive by reducing costs, eliminating waste and optimizing
business processes while improving customer service. Many of our customers are under intense
economic pressure and will benefit from our efforts to keep down our costs and their rates.
Additionally, we will need significant resources in the future to invest in the infrastructure
required to provide safe, reliable and affordable energy. Specifically, we began a series of
focused improvement initiatives within our Electric and Gas Utilities, and our corporate support
function. The process is rigorous and challenging and seeks to yield sustainable performance
improvements for our customers and shareholders. We have identified continuous improvement
opportunities, including the Performance Excellence Process. To fully realize the benefits from
this program, it was necessary to make significant up-front investments in our infrastructure and
business processes, and we began to realize sustained net cost savings in 2007.
In September 2006, the MPSC issued an order approving a settlement agreement that allows Detroit
Edison and MichCon, commencing in 2006, to defer the incremental costs to achieve (CTA), subject to
the MPSC establishing a recovery mechanism. Further, the order provides for Detroit Edison and
MichCon to amortize the CTA deferrals over a ten-year period beginning with the year subsequent to
the year the CTA was deferred. Detroit Edison deferred approximately $102 million and $54 million
of CTA in 2006 and 2007, respectively, as a regulatory asset and began amortizing deferred costs in
2007 as the recovery of these costs was provided for by the MPSC in the order approving the
settlement in the show cause proceeding. Amortization of prior year deferred CTA costs was $4
million and $3 million for the three months ended September 30, 2008 and 2007, respectively, and
$12 million and $8 million for the nine months ended September 30, 2008 and 2007, respectively.
Detroit Edison deferred approximately $9 million and $18 million of CTA for the three months ended
September 30, 2008 and 2007, respectively, and approximately $20 million and $39 million of CTA for
the nine months ended September 30, 2008 and 2007, respectively. MichCon cannot defer CTA costs at
this time because a regulatory recovery mechanism has not been established by the MPSC. MichCon
expects to seek a recovery mechanism in its next rate case in 2009.
CAPITAL INVESTMENT
We anticipate significant capital investment across all of our business segments. Most of our
capital expenditures will be concentrated within our utility segments. From 2008 through 2012, our
electric utility segment currently expects to invest approximately $5.8 billion (excluding
investments in new base load generation capacity, if any), including increased environmental
requirements, reliability enhancement projects and development of renewable energy resources. Our
gas utility segment currently expects to invest approximately $850 million on system expansion,
pipeline safety and reliability enhancement projects through the same period. We plan to seek
regulatory approval to include these capital expenditures within our regulatory rate base
consistent with prior treatment.
OUTLOOK
The next few years will be a period of rapid change for DTE Energy and for the energy industry. Our
strong utility base, combined with our integrated non-utility operations, position us well for
long-term growth.
Looking forward, we will focus on several areas that we expect will improve future performance:
|
|
|
Continuing to pursue regulatory stability and investment recovery for our utilities;
|
|
|
|
|
Managing the growth of our utility asset base;
|
|
|
|
|
Enhancing our cost structure across all business segments;
|
|
|
|
|
Improving our Electric and Gas Utility customer satisfaction; and
|
|
|
|
|
Investing in businesses that integrate our assets and leverage our skills and
expertise.
|
12
We will continue to pursue opportunities to grow our businesses in a disciplined manner if we can
secure opportunities that meet our strategic, financial and risk criteria.
RESULTS OF OPERATIONS
Segments realigned
Beginning in the second quarter of 2008, we have realigned our Coal
Transportation and Marketing business from the Coal and Gas Midstream segment (now the Gas
Midstream segment) to the Power and Industrial Projects segment due to changes in how financial
information is evaluated and resources allocated to segments by senior management. The Companys
segment information reflects this change for all periods presented. See Note 10 of the Notes to
Consolidated Financial Statements for further information on this realignment.The following
sections provide a detailed discussion of the operating performance and future outlook of our
segments.
Net income by segment for the three and nine month periods ended September 30, 2008 and 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
$
|
159
|
|
|
$
|
107
|
|
|
$
|
251
|
|
|
$
|
207
|
|
Gas Utility
|
|
|
(15
|
)
|
|
|
(29
|
)
|
|
|
33
|
|
|
|
31
|
|
Non-Utility Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Midstream
|
|
|
11
|
|
|
|
9
|
|
|
|
27
|
|
|
|
25
|
|
Unconventional Gas Production
|
|
|
3
|
|
|
|
1
|
|
|
|
89
|
|
|
|
(208
|
)
|
Power and Industrial Projects
|
|
|
26
|
|
|
|
9
|
|
|
|
30
|
|
|
|
26
|
|
Energy Trading
|
|
|
19
|
|
|
|
45
|
|
|
|
36
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
(69
|
)
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
|
144
|
|
|
|
78
|
|
|
|
284
|
|
|
|
238
|
|
Non-utility
|
|
|
59
|
|
|
|
64
|
|
|
|
182
|
|
|
|
(124
|
)
|
Corporate & Other
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
(69
|
)
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
152
|
|
|
|
397
|
|
|
|
596
|
|
Discontinued Operations
|
|
|
8
|
|
|
|
45
|
|
|
|
20
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
177
|
|
|
$
|
197
|
|
|
$
|
417
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELECTRIC UTILITY
Our Electric Utility segment consists of Detroit Edison.
Factors impacting income
: Net income increased by $52 million in the third quarter of 2008 and $44
million for the nine-month period ended September 30, 2008. These increases were primarily due to
lower expenses for operation and maintenance, depreciation and amortization, and taxes other than
income, partially offset by lower gross margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
1,440
|
|
|
$
|
1,403
|
|
|
$
|
3,766
|
|
|
$
|
3,707
|
|
Fuel and Purchased Power
|
|
|
586
|
|
|
|
518
|
|
|
|
1,403
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
854
|
|
|
|
885
|
|
|
|
2,363
|
|
|
|
2,433
|
|
Operation and Maintenance
|
|
|
292
|
|
|
|
386
|
|
|
|
1,019
|
|
|
|
1,114
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Depreciation and Amortization
|
|
|
193
|
|
|
|
203
|
|
|
|
563
|
|
|
|
583
|
|
Taxes Other Than Income
|
|
|
54
|
|
|
|
63
|
|
|
|
176
|
|
|
|
204
|
|
Other Asset (Gains) and Losses, Reserves, Net
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
316
|
|
|
|
227
|
|
|
|
606
|
|
|
|
520
|
|
Other (Income) and Deductions
|
|
|
67
|
|
|
|
70
|
|
|
|
212
|
|
|
|
213
|
|
Income Tax Provision
|
|
|
90
|
|
|
|
50
|
|
|
|
143
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
159
|
|
|
$
|
107
|
|
|
$
|
251
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as a Percentage of Operating Revenues
|
|
|
22
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
Gross margin
decreased $31 million in the third quarter of 2008 and $70 million in the nine-month
period ended September 30, 2008. The 2008 decreases were due to the absence of the favorable impact
of a May 2007 MPSC order related to the 2005 PSCR reconciliation and the unfavorable impacts of
weather and service territory performance. These decreases were partially offset by higher rates
attributable to the April 2008 expiration of a rate reduction related to the MPSC show cause
proceeding and higher margins due to customers returning from the electric Customer Choice program.
Revenues include a component for the cost of power sold that is recoverable through the PSCR
mechanism. See Note 6 of the Notes to Consolidated Financial Statements.
The following table details changes in various gross margin components relative to the comparable
prior period:
Increase (Decrease) in Gross Margin Components Compared to Prior Year
|
|
|
|
|
|
|
|
|
(in Millions)
|
|
Three Months
|
|
|
Nine Months
|
|
Weather related impacts
|
|
$
|
(13
|
)
|
|
$
|
(32
|
)
|
Return of customers from electric Customer Choice
|
|
|
6
|
|
|
|
20
|
|
Service territory performance
|
|
|
(17
|
)
|
|
|
(24
|
)
|
Refundable pension cost
|
|
|
(6
|
)
|
|
|
(20
|
)
|
2005 PSCR reconciliation order in 2007
|
|
|
|
|
|
|
(34
|
)
|
April 2008 expiration of show-cause rate decrease
|
|
|
18
|
|
|
|
30
|
|
Other, net
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
Decrease in gross margin
|
|
$
|
(31
|
)
|
|
$
|
(70
|
)
|
|
|
|
|
|
|
|
Power Generated and Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Thousands of MWh)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Power Plant Generation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fossil
|
|
|
10,566
|
|
|
|
11,055
|
|
|
|
31,153
|
|
|
|
31,729
|
|
Nuclear
|
|
|
2,405
|
|
|
|
2,352
|
|
|
|
7,156
|
|
|
|
7,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,971
|
|
|
|
13,407
|
|
|
|
38,309
|
|
|
|
38,924
|
|
Purchased Power
|
|
|
2,486
|
|
|
|
2,765
|
|
|
|
5,725
|
|
|
|
5,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System Output
|
|
|
15,457
|
|
|
|
16,172
|
|
|
|
44,034
|
|
|
|
44,809
|
|
Less Line Loss and Internal Use
|
|
|
(1,056
|
)
|
|
|
(1,160
|
)
|
|
|
(2,623
|
)
|
|
|
(2,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net System Output
|
|
|
14,401
|
|
|
|
15,012
|
|
|
|
41,411
|
|
|
|
42,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Unit Cost ($/MWh)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation (1)
|
|
$
|
19.32
|
|
|
$
|
16.93
|
|
|
$
|
17.98
|
|
|
$
|
15.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Power
|
|
$
|
88.43
|
|
|
$
|
69.61
|
|
|
$
|
73.23
|
|
|
$
|
68.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Average Unit Cost
|
|
$
|
30.43
|
|
|
$
|
25.94
|
|
|
$
|
25.16
|
|
|
$
|
22.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents fuel costs associated with power plants.
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Thousands of MWh)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Electric Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
4,595
|
|
|
|
4,836
|
|
|
|
11,955
|
|
|
|
12,340
|
|
Commercial
|
|
|
5,072
|
|
|
|
5,166
|
|
|
|
14,347
|
|
|
|
14,345
|
|
Industrial
|
|
|
3,327
|
|
|
|
3,278
|
|
|
|
10,074
|
|
|
|
9,974
|
|
Wholesale
|
|
|
700
|
|
|
|
718
|
|
|
|
2,123
|
|
|
|
2,170
|
|
Other
|
|
|
89
|
|
|
|
93
|
|
|
|
285
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,783
|
|
|
|
14,091
|
|
|
|
38,784
|
|
|
|
39,121
|
|
Interconnections sales (1)
|
|
|
618
|
|
|
|
921
|
|
|
|
2,627
|
|
|
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Sales
|
|
|
14,401
|
|
|
|
15,012
|
|
|
|
41,411
|
|
|
|
42,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Deliveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Wholesale
|
|
|
13,783
|
|
|
|
14,091
|
|
|
|
38,784
|
|
|
|
39,121
|
|
Electric Customer Choice
|
|
|
329
|
|
|
|
389
|
|
|
|
1,011
|
|
|
|
1,163
|
|
Electric Customer Choice Self Generators (2)
|
|
|
|
|
|
|
180
|
|
|
|
70
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Sales and Deliveries
|
|
|
14,112
|
|
|
|
14,660
|
|
|
|
39,865
|
|
|
|
40,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents power that is not distributed by Detroit Edison.
|
|
(2)
|
|
Represents deliveries for self generators who have purchased power from alternative energy
suppliers to supplement their power requirements.
|
Operation and maintenance
expense decreased $94 million in the third quarter of 2008 and $95
million in the
nine-month period ended September 30, 2008. The decrease for the third quarter was primarily due to
lower storm expenses of $13 million, $26 million of
information systems implementation costs, lower benefits expense of $12 million, lower corporate support expenses
of $15 million, lower fossil generation outage expenses of $10 million and $12 million attributable
to continuous improvement initiatives. The decrease in the nine-month
period was due primarily to $60 million of
information systems implementation costs, lower benefit expenses of $35 million, lower corporate support
expenses of $25 million, lower fossil generation outage expenses of $10 million, partially offset
by higher uncollectible expenses of $31 million.
Depreciation and amortization
expense decreased $10 million in the third quarter of 2008 and $20
million in the nine-month period ended September 30, 2008 due primarily to decreased amortization
of regulatory assets.
Taxes other than income
decreased $9 million in the third quarter of 2008 and $28 million in the
nine-month period ended September 30, 2008 due to the Michigan Single Business Tax (SBT) expense in
2007, which was replaced with the Michigan Business Tax (MBT) in 2008. The MBT is accounted for in
the Income Tax provision.
Other asset (gains) losses and reserves, net
decreased $7 million and $13 million in the third
quarter and nine-month period ended September 30, 2008 due to $6 million and $12 million reserve
adjustments in the 2007 comparable periods for a loan guaranty related to our former ownership of
a steam heating business now owned by Thermal Ventures II, LP (Thermal).
Outlook
We will move forward in our efforts to continue to improve the operating performance and
cash flow of Detroit Edison. We continue to resolve outstanding regulatory issues by pursuing
regulatory and/or legislative solutions. Many of these issues and problems have been addressed by
the legislation passed by the Michigan House of Representatives and Michigan Senate and signed by
the Governor of Michigan, discussed more fully in the Overview section. Looking forward, additional
issues, such as volatility in prices for coal and other commodities, health care costs and higher
levels of capital spending, will result in us taking meaningful action to address our costs while
continuing to provide quality customer service. We will continue to seek opportunities to improve
productivity, remove waste and decrease our costs while improving customer satisfaction.
Long term, we will be required to invest an estimated $2.4 billion on emission controls through
2018. We intend to seek recovery of these investments in future rate cases.
15
Additionally, our service territory may require additional generation capacity. A new base-load
generating plant has not been built within the State of Michigan in over 20 years. Should our
regulatory environment be conducive to such a significant capital expenditure, we may build,
upgrade or co-invest in a base-load coal facility or a new nuclear plant.
On September 18, 2008, Detroit Edison submitted a Combined License Application with the NRC for
construction and operation of a possible 1,500 megawatt nuclear power plant at the site of the
companys existing Fermi 2 nuclear plant. We have not decided on construction of a new base-load
nuclear plant; however, by completing the license application before the end of 2008, we may
qualify for financial incentives under the Federal Energy Policy Act of 2005. In addition, Detroit
Edison is also moving ahead with plans for renewable energy resources and an aggressive energy
efficiency program.
The following variables, either individually or in combination, could impact our future results:
|
|
|
The amount and timing of cost recovery allowed as a result of regulatory proceedings,
related appeals or new legislation;
|
|
|
|
|
Our ability to reduce costs and maximize plant and distribution system performance;
|
|
|
|
|
Variations in market prices of power, coal and gas;
|
|
|
|
|
Economic conditions within Michigan and corresponding impacts on demand for
electricity;
|
|
|
|
|
Collectibility of accounts receivable;
|
|
|
|
|
Weather, including the severity and frequency of storms;
|
|
|
|
|
The level of customer participation in the electric Customer Choice program;
|
|
|
|
|
Any potential new federal and state environmental, renewable energy and energy
efficiency requirements;
|
|
|
|
|
Access to capital markets and capital market conditions and the results of other
financing efforts which can be affected by credit agency ratings; and
|
|
|
|
|
Instability in capital markets which could impact availability of short and long-term
financing or the potential for loss on cash equivalents and investments.
|
GAS UTILITY
Our Gas Utility segment consists of MichCon and Citizens.
Factors impacting income:
Gas Utilitys net loss decreased $14 million in the third quarter of 2008
due to higher gross margins and lower operation and maintenance expenses. Net income was higher by
$2 million in the 2008 nine-month period due primarily to higher gross margins, partially offset by
higher expenses for operation and maintenance, and depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
225
|
|
|
$
|
173
|
|
|
$
|
1,537
|
|
|
$
|
1,358
|
|
Cost of Gas
|
|
|
105
|
|
|
|
59
|
|
|
|
975
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
120
|
|
|
|
114
|
|
|
|
562
|
|
|
|
514
|
|
Operation and Maintenance
|
|
|
94
|
|
|
|
106
|
|
|
|
365
|
|
|
|
330
|
|
Depreciation and Amortization
|
|
|
25
|
|
|
|
24
|
|
|
|
75
|
|
|
|
69
|
|
Taxes Other Than Income
|
|
|
9
|
|
|
|
14
|
|
|
|
35
|
|
|
|
43
|
|
Other Asset (Gains) Losses, Net
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(6
|
)
|
|
|
(29
|
)
|
|
|
89
|
|
|
|
70
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Other (Income) and Deductions
|
|
|
15
|
|
|
|
10
|
|
|
|
40
|
|
|
|
28
|
|
Income Tax Provision (Benefit)
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
16
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(15
|
)
|
|
$
|
(29
|
)
|
|
$
|
33
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as a Percentage of Operating Revenues
|
|
|
(3
|
)%
|
|
|
(17
|
)%
|
|
|
6
|
%
|
|
|
5
|
%
|
Gross margin
increased $6 million in the third quarter of 2008 and $48 million in the nine-month
period ended September 30, 2008. The increase in the third quarter is due primarily to higher
revenue of $6 million associated with the uncollectible tracking mechanism, $2 million of appliance
repair revenue and $1 million favorable impact of weather, partially offset by $4 million of lower
storage services and $2 million of customer conservation and lower volumes. The increase in the
nine-month period is due primarily to higher revenue of $39 million associated with the
uncollectible tracking mechanism, $11 million favorable impact of lower lost gas recognized and
higher valued gas received as compensation for transportation of third party customer gas, $4 million of
appliance repair revenue and $3 million favorable impact of weather, partially offset by $7 million
of lower storage services and $3 million as a result of customer conservation and lower volumes.
Revenues include a component for the cost of gas sold that is recoverable through the GCR
mechanism. See Note 6 of the Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Gas Markets
(in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
$
|
156
|
|
|
$
|
106
|
|
|
$
|
1,297
|
|
|
$
|
1,118
|
|
End user transportation
|
|
|
22
|
|
|
|
21
|
|
|
|
105
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
127
|
|
|
|
1,402
|
|
|
|
1,219
|
|
Intermediate transportation
|
|
|
18
|
|
|
|
12
|
|
|
|
53
|
|
|
|
42
|
|
Storage and other
|
|
|
29
|
|
|
|
34
|
|
|
|
82
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
225
|
|
|
$
|
173
|
|
|
$
|
1,537
|
|
|
$
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Markets
(in Bcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
|
9
|
|
|
|
11
|
|
|
|
99
|
|
|
|
103
|
|
End user transportation
|
|
|
23
|
|
|
|
25
|
|
|
|
90
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
36
|
|
|
|
189
|
|
|
|
200
|
|
Intermediate transportation
|
|
|
94
|
|
|
|
85
|
|
|
|
332
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
121
|
|
|
|
521
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance
expense decreased $12 million in the third quarter of 2008 and increased
$35 million in the nine-month period ended September 30, 2008. The third quarter decrease is
primarily due to $7 million of lower corporate support expenses, 2007 EBS costs of $3 million and
lower benefits expenses of $5 million, partially offset by higher uncollectible expenses of $4
million. The increase in the 2008 nine-month period is due primarily to higher uncollectible
expenses of $52 million, partially offset by $19 million of lower corporate support expenses. The
increase in uncollectible expense is partially offset by increased revenues from the uncollectible
tracking mechanism included in gross margin discussed above.
Depreciation and amortization
expense increased $1 million in the third quarter of 2008 and $6
million in the
nine-month period ended September 30, 2008 due to higher levels of depreciable plant. In the
nine-month period ended September 30, 2007, we recorded a $3 million adjustment resulting from an
MPSC order related to pipeline assets.
Other asset (gains) losses, net
improved by $4 million in the nine-month period ended September 30,
2008. In 2007, we recorded a $3 million loss attributable to an MPSC disallowance of certain costs
related to the acquisition of pipeline assets.
17
Outlook
Higher gas prices and economic conditions have resulted in continued pressure on
receivables and working capital requirements that are partially mitigated by the MPSCs GCR and
uncollectible true-up mechanisms. We will continue to seek opportunities to improve productivity,
remove waste and decrease our costs while improving customer satisfaction.
The following variables, either individually or in combination, could impact our future results:
|
|
|
The amount and timing of cost recovery allowed as a result of regulatory proceedings,
related appeals or new legislation;
|
|
|
|
|
Our ability to reduce costs and maximize distribution system performance;
|
|
|
|
|
Variations in market prices of gas;
|
|
|
|
|
Economic conditions within Michigan and corresponding impacts on demand for gas;
|
|
|
|
|
Collectibility of accounts receivable;
|
|
|
|
|
Weather;
|
|
|
|
|
Customer conservation;
|
|
|
|
|
Volatility in the short-term storage markets which impact third-party storage revenues;
|
|
|
|
|
Timing of base gas sales;
|
|
|
|
|
Access to capital markets and capital market conditions and the results of other
financing efforts which can be affected by credit agency ratings; and
|
|
|
|
|
Instability in capital markets which could impact availability of short and long-term
financing.
|
NON-UTILITY OPERATIONS
Gas Midstream
Our Gas Midstream segment consists of our non-utility gas pipelines and storage business.
Factors impacting income:
Increased storage contract revenues and higher pipeline equity earnings offset by a non-recurring 2007 gain
in the nine-month period and a higher tax provision due to the MBT in 2008, resulted in $2 million
increases in net income in 2008 as compared to 2007. Operating revenues in the three and nine-month
periods were higher due primarily to increased storage capacity sold in long-term agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
53
|
|
|
$
|
49
|
|
Operation and Maintenance
|
|
|
3
|
|
|
|
3
|
|
|
|
10
|
|
|
|
9
|
|
Depreciation and Amortization
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
4
|
|
Taxes Other Than Income
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Other Asset (Gains)Losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
14
|
|
|
|
11
|
|
|
|
37
|
|
|
|
35
|
|
Other (Income) and Deductions
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(5
|
)
|
Income Tax Provision
|
|
|
7
|
|
|
|
5
|
|
|
|
19
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
11
|
|
|
$
|
9
|
|
|
$
|
27
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outlook
Our Gas Midstream business expects to continue its steady growth plan. In April 2008, an
additional 7 Bcf of increased storage capacity was placed in service. Future additions to storage
capacity of approximately 3 Bcf will occur over the next few months. Vector Pipeline placed into
service its Phase 1 expansion for approximately
18
200 MMcf/d in November 2007. In addition, Vector
Pipeline received FERC approval in June 2008 to build one additional compressor station, which
will expand the Vector Pipeline by approximately 100 MMcf/d, with a proposed in-service date of
November 1, 2009. Adding another compressor station will bring the system from its current capacity
of about 1.2 Bcf/d up to 1.3 Bcf/d in 2009. Both the 2007 and 2009 expansion projects are supported
by customers under long-term contracts. Gas Midstream has a 26% ownership interest in Millennium
Pipeline which commenced construction in June 2007 and is scheduled to be in service in late 2008.
There are certain substantive penalties to Millennium that potentially could be imposed in the event that completion is delayed after
January 1, 2009. Millennium Pipeline currently has nearly 85% of its capacity sold to customers
under long-term contracts.
Unconventional Gas Production
Our Unconventional Gas Production business is engaged in natural gas exploration, development and
production primarily within the Barnett shale in northern Texas. In June 2007, we sold our Antrim
shale gas exploration and production business in northern Michigan for gross proceeds of $1.3
billion.
In 2008, we sold a portion of our Barnett shale properties for gross proceeds of approximately $260
million. The properties sold included 75 Bcf of proved reserves on approximately 11,000 net acres
in the core area of the Barnett shale. We recognized a gain of $128 million ($82 million after-tax)
on the sale in 2008.
Factors impacting income
: The 2007 results reflect the recording of $323 million of losses on
financial contracts related to expected Antrim gas production and sales through 2013. The 2008
nine-month results include the gain recognized on the sale of our Barnett shale property described
above. In addition, lower gas sales volumes were offset by higher commodity prices and higher gas
and oil production from retained wells in 2008 compared to 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
14
|
|
|
$
|
15
|
|
|
$
|
37
|
|
|
$
|
(244
|
)
|
Operation and Maintenance
|
|
|
5
|
|
|
|
5
|
|
|
|
16
|
|
|
|
30
|
|
Depreciation, Depletion and Amortization
|
|
|
2
|
|
|
|
4
|
|
|
|
7
|
|
|
|
18
|
|
Taxes Other Than Income
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
8
|
|
Other Asset (Gains) and Losses, net
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
7
|
|
|
|
5
|
|
|
|
142
|
|
|
|
(309
|
)
|
Other (Income) and Deductions
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
|
11
|
|
Income Tax Provision (Benefit)
|
|
|
2
|
|
|
|
|
|
|
|
50
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
89
|
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
decreased $1 million in the third quarter of 2008 and increased $281 million in
the 2008 nine-month period. The improvement in the nine-month period reflects the recording of $323
million of losses during the 2007 periods on financial contracts that hedged our price risk
exposure related to expected Antrim gas production and sales through 2013. These financial
contracts were accounted for as cash flow hedges, with changes in estimated fair value of the
contracts reflected in other comprehensive income. Upon the sale of Antrim, the financial contracts
no longer qualified as cash flow hedges. The contracts were retained and offsetting financial
contracts were put into place to effectively settle these positions. In conjunction with the Antrim
sale and effective settlement of these contract positions, Antrim reclassified amounts held in
accumulated other comprehensive income and recorded the effective settlements, reducing operating
revenues in the 2007 period by $323 million. Excluding the impact of the losses on the Antrim
hedges, operating revenues decreased $1 million and $42 million in the three and nine months ended
September 30, 2008 as compared to the same periods in 2007. The decreases were principally due to
lower natural gas sales volumes as a result of our monetization initiatives, partially offset by
higher commodity prices and higher gas and oil production on retained wells.
Operation and maintenance
expense was unchanged in the third quarter and decreased $14 million in
the nine-month period ended September 30, 2008. For the nine-month period ended September 30,
2008, Barnett shale
production was approximately 3.4 Bcfe compared with approximately 5.7 Bcfe during the same period
in 2007, as a result of our monetization initiatives.
Outlook
We plan to continue to develop our holdings in the western portion of the Barnett shale
and to seek opportunities for additional monetization of select properties within our Barnett shale
holdings, when conditions are
19
appropriate. We invested approximately $80 million in the Barnett
shale for the first nine months of 2008 and expect to invest an additional $15 million during the
remainder of the year. During 2008, we expect to drill 35 new wells and achieve Barnett shale
production of approximately 5 Bcfe of natural gas from our remaining properties, compared with
approximately 7.7 Bcfe in 2007 from all properties, including those that were sold.
Power and Industrial Projects
Power and Industrial Projects is comprised primarily of projects that deliver energy and
utility-type products and services to industrial, commercial and institutional customers; provide
coal transportation services and marketing and develop biomass energy projects.
During the third quarter of 2007, we announced our plans to sell a 50% interest in a portfolio of
select Power and Industrial Projects. As a result, the assets and liabilities of the Projects were
classified as held for sale at that time and the Company ceased recording depreciation and
amortization expense related to these assets. During the second quarter of 2008, the United States
asset sale market weakened and challenges in the debt market persisted. As a result of these
developments, our work on this planned monetization was discontinued. As of June 30, 2008, the
assets and liabilities of the Projects were no longer classified as held for sale. Depreciation and
amortization resumed in June 2008 when the assets were reclassified as held and used.
Factors impacting income
: Net income increased by $17 million in the 2008 third quarter and $4
million for the nine-month period ended September 30, 2008. This is primarily due to lower
operations and maintenance expenses, partially offset by lower revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
264
|
|
|
$
|
298
|
|
|
$
|
778
|
|
|
$
|
972
|
|
Operation and Maintenance
|
|
|
223
|
|
|
|
276
|
|
|
|
707
|
|
|
|
904
|
|
Depreciation and Amortization
|
|
|
12
|
|
|
|
13
|
|
|
|
23
|
|
|
|
33
|
|
Taxes Other Than Income
|
|
|
3
|
|
|
|
2
|
|
|
|
10
|
|
|
|
9
|
|
Asset (Gains) Losses, Net
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
30
|
|
|
|
8
|
|
|
|
29
|
|
|
|
27
|
|
Other (Income) and Deductions
|
|
|
(12
|
)
|
|
|
(1
|
)
|
|
|
(15
|
)
|
|
|
8
|
|
Minority Interest
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
(4
|
)
|
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
15
|
|
|
|
3
|
|
|
|
16
|
|
|
|
6
|
|
Production Tax Credits
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
1
|
|
|
|
10
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
26
|
|
|
$
|
9
|
|
|
$
|
30
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
decreased $34 million in the third quarter of 2008 and $194 million in the
nine-month period ended September 30, 2008. The third quarter decline is primarily due to a
reduction in coal transportation and trading volumes and a customer purchasing change that
resulted in coal being sourced directly from the supplier. These factors were offset by higher
incremental coke sales and a favorable mark-to-market valuation. The 2008 nine- month decrease was
primarily attributable to reductions in coal transportation and
trading volumes, and
the customer purchasing change.
Operation and maintenance
expense decreased $53 million in the third quarter of 2008 and $197
million in the nine-month period ended September 30, 2008. These decreases reflect the lower coal
transportation volumes affecting operating revenues combined with a
reduction in coal trading volumes.
Other Assets (gains) losses, net
expense improved by $3 million in the third quarter of 2008 and
decreased $10 million in the nine-month period ended September 30, 2008. The nine-month loss is
primarily attributable to a loss of approximately $19 million related to the valuation adjustment
for the cumulative depreciation and amortization upon reclassification of certain project assets as
held and used. The increase in gains for the 2008 quarter and an
offset to the nine month period loss were gains attributable to the sale of one of our coke battery
projects where the proceeds were dependent on future production.
Other (income) and deductions
were higher by $11 million in the third quarter and $23 million
higher in the nine-month period due primarily to an adjustment to inter-company interest
allocation with Corporate & Other (which eliminates in consolidation).
20
Outlook
Power and Industrial Projects will continue leveraging its extensive energy-related
operating experience and project management capability to develop and grow the on-site energy
business. We expect to see a positive impact on net income through the rest of 2008, offset by
approximately $11 million of our annual 2007 coal transportation and marketing business net income.
This activity was dependent upon our Synfuel operations that ceased operations at the end of 2007.
Energy Trading
Our Energy Trading segment focuses on physical power and gas marketing, structured transactions,
enhancement of returns from DTE Energys asset portfolio, optimization of contracted natural gas
pipelines and storage, and power transmission and generating capacity positions.
Factors impacting income
: Energy Tradings 2008 third quarter net income was lower by $26 million.
Net income increased $3 million in the nine-month period ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
405
|
|
|
$
|
292
|
|
|
$
|
1,128
|
|
|
$
|
700
|
|
Fuel, Purchased Power and Gas
|
|
|
355
|
|
|
|
203
|
|
|
|
1,004
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
50
|
|
|
|
89
|
|
|
|
124
|
|
|
|
101
|
|
Operation and Maintenance
|
|
|
17
|
|
|
|
17
|
|
|
|
50
|
|
|
|
41
|
|
Depreciation, Depletion and Amortization
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
Taxes Other Than Income
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
31
|
|
|
|
71
|
|
|
|
68
|
|
|
|
56
|
|
Other (Income) and Deductions
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
Income Tax Provision
|
|
|
12
|
|
|
|
23
|
|
|
|
29
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
19
|
|
|
$
|
45
|
|
|
$
|
36
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
decreased $39 million in the third quarter of 2008 and increased $23 million in the
nine-month period ended September 30, 2008.
The third quarter 2008 decrease is comprised of unfavorable unrealized and realized margins of $29
million and $10 million, respectively. The decrease in unrealized margins consisted of $49 million
unfavorability in our power marketing, transmission optimization, and full requirements wholesale
portfolios, and $9 million in our oil portfolio due to timing related gains in 2007. This
unfavorability is partially offset by $29 million mark-to-market increases largely in our gas
storage strategies resulting from impact of forward gas prices. The decrease in realized margins
consisted of $19 million and $4 million from our power and oil strategies, respectively, partially
offset by $13 million improvement in realized margins from our gas strategies. Realized increases
in our gas strategies were due to the impact of declining gas prices on recurring long-term gas
contracts and favorability resulting from a $9 million gain from the termination of a long-term
physical sales contract, partially offset by an $18 million lower of cost or market adjustment for
inventory in 2008.
The increase for the nine-month period is due to higher unrealized margins of $18 million and
improved realized margins of $5 million. The increase in unrealized margins includes the absence of
$30 million in mark-to-market losses in June 2007 reflecting revisions of valuation estimates for
natural gas contracts. Partially offsetting this
favorability is the absence of $14 million of prior year mark to market timing related gains in our
oil portfolio. Higher realized margins consisted of $33 million from our gas strategies,
primarily gas trading, and $3 million from our oil trading portfolio, partially offset by $31
million decline in power positions, primarily from our power marketing and transmission
optimization strategies.
21
Operation and maintenance
expense was unchanged in the third quarter of 2008 and increased $9
million in the
nine-month period ended September 30, 2008 due to higher payroll and incentive costs.
Outlook
Significant portions of the Energy Trading portfolio are economically hedged. The
portfolio includes financial instruments and gas inventory, as well as capacity positions of
natural gas storage, natural gas pipelines, and power transmission and full requirements contracts.
The financial instruments are deemed derivatives, whereas the proprietary gas inventory, pipelines,
transmission contracts, certain full requirements contracts and storage assets are not derivatives.
As a result, we will experience earnings volatility as derivatives are marked-to-market without
revaluing the underlying non-derivative assets. The majority of such earnings volatility is
associated with the natural gas storage cycle, which does not coincide with the calendar year, but
runs annually from April of one year to March of the next year. Energy Tradings strategy is to
economically manage the price risk of storage with futures and over-the-counter forwards and swaps.
This results in gains and losses that are recognized in different interim and annual accounting
periods.
See also the Fair Value section that follows.
CORPORATE & OTHER
Corporate & Other results include various corporate staff functions that support the entire
Company. Their associated costs are fully allocated to the various segments based on services
utilized. As a result, the allocation amount can vary from year to year on each segment. In
addition, Corporate & Other holds certain non-utility debt and energy related investments.
Factors impacting income:
Corporate & Other results were lower by $44 million in the third quarter
of 2008 and $551 million in the 2008 nine-month period, due primarily to the 2007 gain on the sale
of the Antrim shale gas exploration and production business of approximately $897 million ($574
million after-tax) and an adjustment to inter-company interest allocation with Power and Industrial Projects (which eliminates in consolidation), partially offset by effective income tax rate adjustments.
DISCONTINUED OPERATIONS
Synthetic Fuel
We discontinued the operations of our synthetic fuel production facilities throughout the United
States as of December 31, 2007. Synfuel plants chemically changed coal and waste coal into a
synthetic fuel as determined under the Internal Revenue Code. Production tax credits were provided
for the production and sale of solid synthetic fuel produced from coal and were available through
December 31, 2007. The synthetic fuel business generated operating losses that were substantially
offset by production tax credits.
The incentive provided by production tax credits was designed to reduce and phase out if the price
of oil increased to the point of providing significant market incentives for the production of
synthetic fuels. As such, the tax credit in a given year was phased out if the reference price of
oil within that year exceeded a threshold price. As of December 31, 2007, the reference price
exceeded the threshold and the tax credit value was reduced by an estimated phase-out percentage of
69%. Reserves for expected refunds of partner payments for production tax credits were recorded at
December 31, 2007 based on this estimated phase-out percentage. A $12 million pre-tax gain was
recorded in the first quarter of 2008 to reflect the actual 67% phase-out percentage based on the
actual IRS Reference Price and inflation factor published by the IRS in March 2008. In the third
quarter of 2008, an additional pre-tax gain of $16 million was recorded to recognize a true-up of
final payments and distributions to partners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
|
|
|
$
|
277
|
|
|
$
|
7
|
|
|
$
|
806
|
|
Operation and Maintenance
|
|
|
|
|
|
|
329
|
|
|
|
9
|
|
|
|
967
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
4
|
|
Taxes Other Than Income
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
Asset (Gains), Losses and Reserves, Net
|
|
|
(16
|
)
|
|
|
(67
|
)
|
|
|
(31
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
16
|
|
|
|
19
|
|
|
|
32
|
|
|
|
(24
|
)
|
Other (Income) and Deductions
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(7
|
)
|
Minority Interest
|
|
|
|
|
|
|
(46
|
)
|
|
|
2
|
|
|
|
(161
|
)
|
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
9
|
|
|
|
22
|
|
|
|
14
|
|
|
|
49
|
|
Production Tax Credits
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
21
|
|
|
|
13
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8
|
|
|
$
|
45
|
|
|
$
|
20
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
decreased $277 million in the third quarter of 2008 and $799 million for the
nine-month period ended September 30, 2008 due to the cessation of operations of our synfuel
facilities at December 31, 2007. The 2008 activity reflects the increased value of 2007 synfuel
production as a result of final determination of the IRS Reference Price and inflation factor.
Operation and maintenance
expense decreased $329 million in the third quarter of 2008 and $958
million in the nine-month period ended September 30, 2008 due to the cessation of operations of our
synfuel facilities at December 31, 2007. The 2008 activity reflects adjustments to 2007
contractually defined cost sharing mechanisms with suppliers, as determined by applying the actual
phase-out percentage.
Asset (gains), losses and reserves, net
decreased $51 million in the third quarter of 2008 and $113
million in the nine-month period ended September 30, 2008 due to the cessation of operations of our
synfuel facilities at December 31, 2007. The 2008 activity reflects the impact of reserve
adjustments for the final phase-out percentage and true-ups of final payments and distributions to
partners.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements
. The cumulative effect
adjustment upon adoption of SFAS No. 157 represented a $4 million increase to the January 1, 2008
balance of retained earnings. As permitted by FASB Staff Position FAS 157-2, we have deferred the
effective date of SFAS No. 157 as it pertains to non-financial assets and liabilities to January 1,
2009. See also the Fair Value section.
See also Notes 2 and 3 of the Notes to Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
Cash Requirements
We use cash to maintain and expand our electric and gas utilities and to grow our non-utility
businesses, retire and pay interest on long-term debt and pay dividends. During the first nine
months of 2008, our cash requirements were met primarily through operations and from our
non-utility monetization program. We believe that we will have sufficient internal and external
capital resources to fund anticipated capital and operating requirements.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
Cash Flow From (Used For)
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
417
|
|
|
$
|
716
|
|
Depreciation, depletion and amortization
|
|
|
675
|
|
|
|
716
|
|
Deferred income taxes
|
|
|
280
|
|
|
|
90
|
|
Gain on sale of non-utility assets
|
|
|
(128
|
)
|
|
|
(897
|
)
|
Gain on sale of synfuel and other assets, net
|
|
|
(19
|
)
|
|
|
(130
|
)
|
Working capital and other
|
|
|
(207
|
)
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
1,018
|
|
|
|
792
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Plant and equipment expenditures utility
|
|
|
(842
|
)
|
|
|
(750
|
)
|
Plant and equipment expenditures non-utility
|
|
|
(154
|
)
|
|
|
(206
|
)
|
Proceeds from sale of non-utility assets
|
|
|
253
|
|
|
|
1,258
|
|
Proceeds (refunds) from sale of synfuels and other assets
|
|
|
(282
|
)
|
|
|
287
|
|
Restricted cash and other investments
|
|
|
(23
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
1,013
|
|
|
|
|
|
Redemption of long-term debt
|
|
|
(446
|
)
|
|
|
(340
|
)
|
Repurchase of long-term debt
|
|
|
(238
|
)
|
|
|
|
|
Short-term borrowings, net
|
|
|
71
|
|
|
|
(62
|
)
|
Repurchase of common stock
|
|
|
(16
|
)
|
|
|
(686
|
)
|
Dividends on common stock and other
|
|
|
(265
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
$
|
89
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
24
Cash from Operating Activities
A majority of our operating cash flow is provided by our electric and gas utilities, which are
significantly influenced by factors such as weather, electric Customer Choice, regulatory
deferrals, regulatory outcomes, economic conditions and operating costs.
Cash from operations in the nine months ended September 30, 2008 increased $226 million from the
comparable 2007 period. The operating cash flow increase primarily reflects higher net income after
adjusting for non-cash and non-operating items (depreciation, depletion and amortization, deferred taxes and gains on sales of
assets) and cash payments received related to our synfuel program hedges.
Cash from Investing Activities
Cash inflows associated with investing activities are primarily generated from the sale of assets,
while cash outflows are primarily generated from plant and equipment expenditures. Net cash used
for investing activities was approximately $1 billion for the nine months ended September 30, 2008,
compared with cash from investing activities of $592 million in the same period in 2007. The change
was primarily driven by our non-utility monetization program and the completion of refund payments
to our synfuel partners in 2008.
Cash from Financing Activities
We rely on both short-term borrowings and long-term financing as a source of funding for our
capital requirements not satisfied by our operations.
Net cash from financing activities was $119 million during the nine months ended September 30, 2008
compared to net cash used for financing activities of approximately $1.4 billion for the same
period in 2007. The change was primarily attributable to increased proceeds from the issuance of
long-term debt and lower repurchases of common stock.
Outlook
We expect cash flow from operations to increase over the long-term primarily due to improvements
from higher earnings at our utilities. We have incurred costs associated with implementation of our
Performance Excellence Process, but we began to realize sustained net cost savings in 2007. We may
also be impacted by the delayed collection of underrecoveries of our PSCR and GCR costs and
electric and gas accounts receivable as a result of MPSC orders. Energy prices are likely to be a
source of volatility with regard to working capital requirements for the foreseeable future. We are
continuing our efforts to identify opportunities to improve cash flow through working capital
initiatives.
We anticipate approximately $200 million of net synfuel-related cash impacts in 2008 and 2009,
which consists of the final reconciliation of cash from synthetic fuel operations (related to
activity prior to December 31, 2007), proceeds from option hedges, and tax credit carryforward
utilization and other tax benefits that are expected to reduce future tax payments.
As part of a strategic review of our non-utility operations, we have taken various actions
including the sale, restructuring or recapitalization of certain non-utility businesses that
generated approximately $900 million in
after-tax cash proceeds in 2007 and an additional approximately $170 million in the first nine
months of 2008 from the sale of a portion of Barnett shale properties. Proceeds from the
monetization activities were used to repurchase common stock and redeem outstanding debt.
As part of the normal course of business, Detroit Edison, MichCon and various non-utility
subsidiaries of the Company routinely enter into physical or financially settled contracts for the
purchase and sale of electricity, natural gas, coal, capacity, storage and other energy-related
products and services. Certain of these contracts contain
provisions which allow the counterparties to request that the Company post cash or letters of
credit in the event that the credit rating of DTE Energy is downgraded below investment grade.
Certain of these contracts for Detroit Edison and MichCon contain similar provisions in the event
that the credit rating of the
25
particular utility is downgraded below investment grade. The amount of such collateral which could
be requested fluctuates based upon commodity prices and the provisions and maturities of the
underlying transactions.
Recent distress in the financial markets has had an adverse impact on financial market activities,
including extreme volatility in security prices and severely diminished liquidity and credit
availability. We have assessed the implications of these factors on our current business and
determined that there has not been a significant impact to our financial position and results of
operations during the first nine months of 2008.
We have experienced difficulties in accessing the commercial paper markets for short-term financing
needs and an extended period of distress in the capital markets could have a negative impact on our
liquidity in future periods. Short-term borrowings, principally in the form of commercial paper,
provide us with the liquidity needed on a daily basis. Our commercial paper program is supported
by our unsecured credit facilities. Beginning in late September, access to the commercial paper markets has
been sharply reduced and, as a result, we have drawn against our unsecured credit lines to
supplement other sources of funds to meet our short-term liquidity needs. We continue to access
the long-term bond markets as evidenced by Detroit Edisons issuance of $250 million of five-year
senior notes in October 2008. See Note 1 of the Notes to Consolidated Financial Statements.
Our benefit plans have not experienced any direct significant impact on liquidity or counterparty
risk due to the turmoil in the financial markets. As a result of losses experienced in the
financial markets, our benefit plan assets are expected to have a negative return for 2008, which
would create increased benefit costs in future years and may result in higher contributions in
future years than originally planned.
While the impact of continued market volatility and turmoil in the credit markets cannot be
predicted, we believe we have sufficient operating flexibility, cash resources and funding sources
to maintain adequate amounts of liquidity and to meet our future operating cash and capital
expenditure needs.
FAIR VALUE
SFAS No. 157 Fair Value Measurements
Effective January 1, 2008, we adopted SFAS No. 157. The cumulative effect adjustment upon adoption
of SFAS No. 157 represented a $4 million increase to the January 1, 2008 balance of retained
earnings. As permitted by FASB Staff Position FAS 157-2, we have deferred the effective date of
SFAS No. 157 as it pertains to non-financial assets and liabilities to January 1, 2009. See Note 3
of the Notes to Consolidated Financial Statements.
Derivative Accounting
The accounting standards for determining whether a contract meets the criteria for derivative
accounting are numerous and complex. Moreover, significant judgment is required to determine
whether a contract requires derivative accounting, and similar contracts can sometimes be accounted
for differently. If a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as Assets or Liabilities from risk management and trading activities, at the
fair value of the contract. The recorded fair value of the contract is then adjusted at each
reporting date, in the Consolidated Statements of Operations, to reflect any change in the fair
value of the contract, a practice known as mark-to-market (MTM) accounting. Changes in the fair
value of a designated derivative that is highly effective as a cash flow hedge are recorded as a
component of Accumulated other comprehensive income, net of taxes, until the hedged item affects
income. These amounts are subsequently reclassified into earnings as a component of the value of
the forecasted transaction, in the same period as the forecasted transaction affects earnings. The
ineffective portion of the fair value changes is recognized in the Consolidated Statements of
Operations immediately.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The fair value of
derivative contracts are determined from a combination of quoted market prices, published indexes
and mathematical valuation models. Where possible, we derive the pricing for our contracts from
active quotes or external resources. Actively quoted indexes include exchange-traded positions such
as the New York Mercantile Exchange and the Intercontinental Exchange, and over-the-counter
positions for which broker quotes are available. For periods or locations in which external market
data is
26
not readily observable, we estimate value using mathematical valuation models. Valuation models
require various inputs, including forward prices, volatility, interest rates and exercise periods.
For those inputs which are not observable, we use model-based extrapolation, proxy techniques or
historical analysis to derive the required valuation inputs. We periodically update our policy and
valuation methodologies for changes in market liquidity and other assumptions which may impact the
estimated fair value of our derivative contracts. Liquidity and transparency in energy markets
where fair value is evidenced by market quotes, current market transactions or other observable
market information may permit us to record gains at inception of new derivative contracts. Our credit risk
and the credit risk of our counterparties is incorporated in the valuation of assets and liabilities through the use of credit
reserves, the impact of which is immaterial for the third quarter and nine months ended September 30, 2008.
Contracts we typically classify as derivative instruments include power, gas, certain coal and oil
forwards, futures, options and swaps, and foreign currency contracts. Items we do not generally
account for as derivatives (and which are therefore excluded from the following tables) include
proprietary gas inventory, certain gas storage and transportation arrangements, and gas and oil
reserves.
We manage our MTM risk on a portfolio basis based upon the delivery period of our contracts and the
individual components of the risks within each contract. Accordingly, we record and manage the
energy purchase and sale obligations under our contracts in separate components based on the
commodity (e.g. electricity or gas), the product (e.g. electricity for delivery during peak or
off-peak hours), the delivery location (e.g. by region), the risk profile (e.g. forward or option),
and the delivery period (e.g. by month and year).
The subsequent tables contain the following four categories represented by their operating
characteristics and key risks:
|
|
|
Economic Hedges
Represents derivative activity associated with assets owned and
contracted by DTE Energy, including forward sales of gas production and trades associated
with owned transportation and storage capacity. Changes in the value of derivatives in this
category economically offset changes in the value of underlying non-derivative positions,
which do not qualify for fair value accounting. The difference in accounting treatment of
derivatives in this category and the underlying non-derivative positions can result in
significant earnings volatility.
|
|
|
|
|
Structured Contracts
Represents derivative activity transacted by originating
substantially hedged positions with wholesale energy marketers, producers, end users,
utilities, retail aggregators and alternative energy suppliers.
|
|
|
|
|
Proprietary Trading
Represents derivative activity transacted with the intent of
taking a view, capturing market price changes, or putting capital at risk. This activity is
speculative in nature as opposed to hedging an existing exposure.
|
|
|
|
|
Other
Primarily represents derivative activity associated with our gas reserves. A
portion of the price risk associated with anticipated production from the Barnett gas
reserves has been mitigated through 2010. Changes in the value of the hedges are recorded
as Assets or Liabilities from risk management and trading activities, with an offset in
Other comprehensive income to the extent that the hedges are deemed effective. The amounts
shown in the following tables exclude the value of the underlying gas reserves including
changes therein.
|
As a result of adherence to generally accepted accounting principles, the tables below do not
include the expected earnings impacts of certain non-derivative gas storage and power contracts.
Consequently, gains and losses from these positions may not match with the related physical and
financial hedging instruments in some reporting periods, resulting in volatility in DTE Energys
reported period-by-period earnings; however, the financial impact of this timing difference will
reverse at the time of physical delivery and/or settlement.
27
The following table provides details on changes in our MTM net asset (or liability) position for
the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
|
|
|
Structured
|
|
|
Proprietary
|
|
|
|
|
|
|
|
(in Millions)
|
|
Hedges
|
|
|
Contracts
|
|
|
Trading
|
|
|
Other
|
|
|
Total
|
|
MTM at December 31, 2007
|
|
$
|
4
|
|
|
$
|
(365
|
)
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassify to realized upon settlement
|
|
|
18
|
|
|
|
(283
|
)
|
|
|
72
|
|
|
|
(1
|
)
|
|
|
(194
|
)
|
Changes in fair value recorded to income
|
|
|
(24
|
)
|
|
|
333
|
|
|
|
11
|
|
|
|
(13
|
)
|
|
|
307
|
|
Amortization of option premiums
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recorded to unrealized income
|
|
|
(6
|
)
|
|
|
49
|
|
|
|
82
|
|
|
|
(14
|
)
|
|
|
111
|
|
Cumulative effect adjustment to initially
apply SFAS No. 157, pre-tax
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Amounts recorded in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in collateral held by (for) others
|
|
|
2
|
|
|
|
17
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(14
|
)
|
Option premiums paid and other
|
|
|
|
|
|
|
9
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTM at September 30, 2008
|
|
$
|
|
|
|
$
|
(283
|
)
|
|
$
|
47
|
|
|
$
|
(12
|
)
|
|
$
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the Companys price risk related to its Antrim shale gas exploration and
production business was mitigated by financial contracts that hedged our price risk exposure
through 2013. The contracts were retained when the Antrim business was sold and offsetting
financial contracts were put into place to effectively settle these positions. The contracts will
require payments through 2013. These contracts represent a significant portion of the above net
mark-to-market liability.
The following table provides a current and noncurrent analysis of Assets and Liabilities from risk
management and trading activities, as reflected on the Consolidated Statements of Financial
Position as of September 30, 2008. Amounts that relate to contracts that become due within twelve
months are classified as current and all remaining amounts are classified as noncurrent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
|
|
|
Structured
|
|
|
Proprietary
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
(in Millions)
|
|
Hedges
|
|
|
Contracts
|
|
|
Trading
|
|
|
Eliminations
|
|
|
Other
|
|
|
(Liabilities)
|
|
Current assets
|
|
$
|
20
|
|
|
$
|
192
|
|
|
$
|
121
|
|
|
$
|
(7
|
)
|
|
$
|
5
|
|
|
$
|
331
|
|
Noncurrent assets
|
|
|
2
|
|
|
|
173
|
|
|
|
34
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MTM assets
|
|
|
22
|
|
|
|
365
|
|
|
|
155
|
|
|
|
(10
|
)
|
|
|
5
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(17
|
)
|
|
|
(293
|
)
|
|
|
(92
|
)
|
|
|
7
|
|
|
|
(16
|
)
|
|
|
(411
|
)
|
Noncurrent liabilities
|
|
|
(5
|
)
|
|
|
(355
|
)
|
|
|
(16
|
)
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MTM liabilities
|
|
|
(22
|
)
|
|
|
(648
|
)
|
|
|
(108
|
)
|
|
|
10
|
|
|
|
(17
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MTM net assets (liabilities)
|
|
$
|
|
|
|
$
|
(283
|
)
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
(12
|
)
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below shows the maturity of our MTM positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
(in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Total Fair
|
|
Source of Fair Value
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Beyond
|
|
|
Value
|
|
Economic Hedges
|
|
$
|
(4
|
)
|
|
$
|
10
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
$
|
|
|
Structured Contracts
|
|
|
(25
|
)
|
|
|
(104
|
)
|
|
|
(45
|
)
|
|
|
(109
|
)
|
|
|
(283
|
)
|
Proprietary Trading
|
|
|
(1
|
)
|
|
|
54
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
47
|
|
Other
|
|
|
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(30
|
)
|
|
$
|
(46
|
)
|
|
$
|
(62
|
)
|
|
$
|
(110
|
)
|
|
$
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Part I Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
DTE Energy has commodity price risk in both utility and non-utility businesses arising from market
price fluctuations.
The Electric and Gas utility businesses have risks in connection with the anticipated purchases of
coal, natural gas, uranium, electricity and base metals to meet their service obligations. However,
the Company does not bear material exposure to earnings risk as such changes are included in
regulatory rate recovery mechanisms. Regulatory rate-recovery occurs in the form of PSCR and GCR
mechanisms and a tracking mechanism to mitigate some losses from customer migration due to electric
Customer Choice programs. See Note 6 of the Notes to Consolidated Financial Statements.
The Company is exposed to short-term cash flow or liquidity risk as a result of the time
differential between actual cash settlements and regulatory rate recovery. DTE manages this risk
through timely regulatory filings, interim rate relief proceedings, tracking mechanisms and
long-term supply contracts, where possible.
Our Gas Midstream business segment has exposure to natural gas price fluctuations. Gas Midstream
manages its exposure through the sale of long-term storage and transportation contracts.
Our Unconventional Gas Production business segment has exposure to natural gas and crude oil price
fluctuations. These commodity price fluctuations can impact both current year earnings and reserve
valuations. To manage this exposure, we may use forward energy contracts and swaps. Approximately
45% of the 2008 production is hedged.
Our Power and Industrial Projects segment is subject to electricity, natural gas, petroleum- based
chemical and coal-based product price risk. To manage this exposure, we may use forward energy,
capacity and futures contracts.
Our Energy Trading business segment has exposure to electricity, natural gas, crude oil, heating
oil and foreign currency price fluctuations. These risks are managed through its energy marketing
and trading operations through the use of forward energy, capacity, storage, options and futures
contracts.
Credit Risk
Bankruptcies
We transact with numerous companies operating in the steel, automotive, energy, retail, financial
and other industries. Certain of our customers have filed for bankruptcy protection under Chapter
11 of the U. S. Bankruptcy Code. We regularly review contingent matters relating to these customers
and our purchase and sale contracts and we record provisions for amounts considered at risk of
probable loss. We believe our previously accrued amounts are adequate for probable loss. The final
resolution of these matters is not expected to have a material effect on our financial statements.
Other
We engage in business with customers that are both investment and non-investment grade. We closely
monitor the credit ratings of all our customers and, when allowable and deemed necessary, we
request collateral or guarantees from such customers to secure their obligations above a
predetermined credit exposure limit.
29
Trading Activities
We are exposed to credit risk through trading activities. Credit risk is the potential loss that
may result if our trading counterparties fail to meet their contractual obligations. We utilize
both external and internally generated credit assessments when determining the credit quality of
our trading counterparties. The following table displays the credit quality of our trading
counterparties as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Exposure
|
|
|
|
|
|
|
|
|
|
before Cash
|
|
|
Cash
|
|
|
Net Credit
|
|
(in Millions)
|
|
Collateral
|
|
|
Collateral
|
|
|
Exposure
|
|
Investment Grade (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
A- and Greater
|
|
$
|
267
|
|
|
$
|
(6
|
)
|
|
$
|
261
|
|
BBB+ and BBB
|
|
|
138
|
|
|
|
|
|
|
|
138
|
|
BBB-
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Grade
|
|
|
471
|
|
|
|
(6
|
)
|
|
|
465
|
|
Non-investment grade (2)
|
|
|
105
|
|
|
|
(5
|
)
|
|
|
100
|
|
Internally Rated investment grade (3)
|
|
|
182
|
|
|
|
(2
|
)
|
|
|
180
|
|
Internally Rated non-investment grade (4)
|
|
|
17
|
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
775
|
|
|
$
|
(22
|
)
|
|
$
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This category includes counterparties with minimum credit ratings of Baa3 assigned by Moodys
Investors Service (Moodys) and BBB- assigned by Standard & Poors Rating Group, a division of
the McGraw-Hill Companies, Inc. (Standard & Poors). The five largest counterparty exposures
combined for this category represented approximately 47% of the total gross credit exposure.
|
|
(2)
|
|
This category includes counterparties with credit ratings that are below investment grade.
The five largest counterparty exposures combined for this category represented approximately
13% of the total gross credit exposure.
|
|
(3)
|
|
This category includes counterparties that have not been rated by Moodys or Standard &
Poors, but are considered investment grade based on DTE Energys evaluation of the
counterpartys creditworthiness. The five largest counterparty exposures combined for this
category represented approximately 7% of the total gross credit exposure.
|
|
(4)
|
|
This category includes counterparties that have not been rated by Moodys or Standard &
Poors, and are considered non-investment grade based on DTE Energys evaluation of the
counterpartys creditworthiness. The five largest counterparty exposures combined for this
category represented approximately 1% of the total gross credit exposure.
|
Interest Rate Risk
We are subject to interest rate risk in connection with the issuance of debt and preferred
securities. In order to manage interest costs, we may use treasury locks and interest rate swap
agreements. Our exposure to interest rate risk arises primarily from changes in U.S. Treasury
rates, commercial paper rates and London Inter-Bank Offered Rates (LIBOR). As of September 30,
2008, we had a floating rate debt-to-total debt ratio of approximately 17.4% (excluding securitized
debt).
Foreign Currency Risk
We have foreign currency exchange risk arising from market price fluctuations associated with fixed
priced contracts. These contracts are denominated in Canadian dollars and are primarily for the
purchase and sale of power as well as for long-term transportation capacity. To limit our exposure
to foreign currency fluctuations, we have entered into a series of currency forward contracts
through January 2013. Additionally, we may enter into fair value currency hedges to mitigate
changes in the value of contracts or loans.
30
Summary of Sensitivity Analysis
We performed a sensitivity analysis on the fair values of our commodity contracts, long-term debt
instruments and foreign currency forward contracts. The sensitivity analysis involved increasing
and decreasing forward rates at September 30, 2008 by a hypothetical 10% and calculating the
resulting change in the fair values. The following represents the results of the sensitivity
analysis calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in Millions)
|
|
Assuming a 10%
|
|
Assuming a 10%
|
|
|
Activity
|
|
increase in rates
|
|
decrease in rates
|
|
Change in the fair value of
|
Coal Contracts
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
Commodity contracts
|
Gas Contracts
|
|
$
|
(17
|
)
|
|
$
|
18
|
|
|
Commodity contracts
|
Oil Contracts
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
Commodity contracts
|
Power Contracts
|
|
$
|
6
|
|
|
$
|
(6
|
)
|
|
Commodity contracts
|
Interest Rate Risk
|
|
$
|
(306
|
)
|
|
$
|
335
|
|
|
Long-term debt
|
Foreign Currency Risk
|
|
$
|
(12
|
)
|
|
$
|
12
|
|
|
Forward contracts
|
31
Part I Item 4.
CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
Management of the Company carried out an evaluation, under the supervision and with the
participation of DTE Energys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of September 30, 2008, which is the end of the period covered by this report. Based
on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that such controls and procedures are effective in providing reasonable assurance that
information required to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to provide reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Due to the
inherent limitations in the effectiveness of any disclosure controls and procedures, management
cannot provide absolute assurance that the objectives of its disclosure controls and procedures
will be attained.
(b) Changes in internal control over financial reporting
There have been no changes in the Companys internal control over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
32
Part I Item 1.
DTE
Energy Company
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions, Except per Share Amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
2,338
|
|
|
$
|
2,128
|
|
|
$
|
7,159
|
|
|
$
|
6,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel, purchased power and gas
|
|
|
1,034
|
|
|
|
763
|
|
|
|
3,332
|
|
|
|
2,596
|
|
Operation and maintenance
|
|
|
628
|
|
|
|
752
|
|
|
|
2,081
|
|
|
|
2,282
|
|
Depreciation, depletion and amortization
|
|
|
235
|
|
|
|
248
|
|
|
|
677
|
|
|
|
712
|
|
Taxes other than income
|
|
|
71
|
|
|
|
76
|
|
|
|
229
|
|
|
|
276
|
|
Gain on sale of non-utility assets
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
(897
|
)
|
Other asset (gains) losses, reserves and impairments, net
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
7
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,963
|
|
|
|
1,842
|
|
|
|
6,198
|
|
|
|
4,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
375
|
|
|
|
286
|
|
|
|
961
|
|
|
|
1,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Income) and Deductions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
125
|
|
|
|
131
|
|
|
|
371
|
|
|
|
401
|
|
Interest income
|
|
|
(5
|
)
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
(24
|
)
|
Other income
|
|
|
(34
|
)
|
|
|
(27
|
)
|
|
|
(74
|
)
|
|
|
(51
|
)
|
Other expenses
|
|
|
22
|
|
|
|
5
|
|
|
|
45
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
99
|
|
|
|
329
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Minority Interest
|
|
|
267
|
|
|
|
187
|
|
|
|
632
|
|
|
|
927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
|
97
|
|
|
|
34
|
|
|
|
231
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
169
|
|
|
|
152
|
|
|
|
397
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
(41
|
)
|
Minority interest in discontinued operations
|
|
|
|
|
|
|
(46
|
)
|
|
|
2
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
45
|
|
|
|
20
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
177
|
|
|
$
|
197
|
|
|
$
|
417
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.04
|
|
|
$
|
0.93
|
|
|
$
|
2.45
|
|
|
$
|
3.47
|
|
Discontinued operations
|
|
|
0.05
|
|
|
|
0.27
|
|
|
|
0.12
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.09
|
|
|
$
|
1.20
|
|
|
$
|
2.57
|
|
|
$
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.03
|
|
|
$
|
0.92
|
|
|
$
|
2.44
|
|
|
$
|
3.46
|
|
Discontinued operations
|
|
|
0.05
|
|
|
|
0.27
|
|
|
|
0.12
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.08
|
|
|
$
|
1.19
|
|
|
$
|
2.56
|
|
|
$
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
162
|
|
|
|
165
|
|
|
|
162
|
|
|
|
172
|
|
Diluted
|
|
|
163
|
|
|
|
166
|
|
|
|
163
|
|
|
|
173
|
|
Dividends Declared per Common Share
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
1.59
|
|
|
$
|
1.59
|
|
See Notes to Consolidated Financial Statements (Unaudited)
33
DTE Energy Company
Consolidated Statements of Financial Position (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
223
|
|
|
$
|
123
|
|
Restricted cash
|
|
|
36
|
|
|
|
140
|
|
Accounts receivable (less allowance for doubtful
accounts of $266 and $182, respectively)
|
|
|
|
|
|
|
|
|
Customer
|
|
|
1,375
|
|
|
|
1,658
|
|
Other
|
|
|
320
|
|
|
|
514
|
|
Accrued power and gas supply cost recovery revenue
|
|
|
110
|
|
|
|
76
|
|
Inventories
|
|
|
|
|
|
|
|
|
Fuel and gas
|
|
|
564
|
|
|
|
429
|
|
Materials and supplies
|
|
|
206
|
|
|
|
204
|
|
Deferred income taxes
|
|
|
259
|
|
|
|
387
|
|
Assets from risk management and trading activities
|
|
|
331
|
|
|
|
181
|
|
Other
|
|
|
299
|
|
|
|
196
|
|
Current assets held for sale
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
3,723
|
|
|
|
3,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Nuclear decommissioning trust funds
|
|
|
756
|
|
|
|
824
|
|
Other
|
|
|
538
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
1,294
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
19,907
|
|
|
|
18,809
|
|
Less accumulated depreciation and depletion
|
|
|
(7,837
|
)
|
|
|
(7,401
|
)
|
|
|
|
|
|
|
|
|
|
|
12,070
|
|
|
|
11,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,037
|
|
|
|
2,037
|
|
Regulatory assets
|
|
|
2,830
|
|
|
|
2,786
|
|
Securitized regulatory assets
|
|
|
1,035
|
|
|
|
1,124
|
|
Intangible assets
|
|
|
86
|
|
|
|
25
|
|
Notes receivable
|
|
|
114
|
|
|
|
87
|
|
Assets from risk management and trading activities
|
|
|
206
|
|
|
|
199
|
|
Prepaid pension assets
|
|
|
167
|
|
|
|
152
|
|
Other
|
|
|
126
|
|
|
|
116
|
|
Noncurrent assets held for sale
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
6,601
|
|
|
|
7,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,688
|
|
|
$
|
23,742
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements (Unaudited)
34
DTE Energy Company
Consolidated Statements of Financial Position (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31
|
|
(in Millions, Except Shares)
|
|
2008
|
|
|
2007
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
931
|
|
|
$
|
1,189
|
|
Accrued interest
|
|
|
138
|
|
|
|
112
|
|
Dividends payable
|
|
|
87
|
|
|
|
87
|
|
Short-term borrowings
|
|
|
1,155
|
|
|
|
1,084
|
|
Current portion long-term debt, including capital leases
|
|
|
362
|
|
|
|
454
|
|
Liabilities from risk management and trading activities
|
|
|
411
|
|
|
|
281
|
|
Deferred gains and reserves
|
|
|
4
|
|
|
|
400
|
|
Other
|
|
|
505
|
|
|
|
566
|
|
Current liabilities associated with assets held for sale
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
|
4,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (net of current portion)
|
|
|
|
|
|
|
|
|
Mortgage bonds, notes and other
|
|
|
6,158
|
|
|
|
5,576
|
|
Securitization bonds
|
|
|
933
|
|
|
|
1,065
|
|
Trust preferred-linked securities
|
|
|
289
|
|
|
|
289
|
|
Capital lease obligations
|
|
|
64
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
7,444
|
|
|
|
6,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,951
|
|
|
|
1,824
|
|
Regulatory liabilities
|
|
|
1,168
|
|
|
|
1,168
|
|
Asset retirement obligations
|
|
|
1,325
|
|
|
|
1,277
|
|
Unamortized investment tax credit
|
|
|
99
|
|
|
|
108
|
|
Liabilities from risk management and trading activities
|
|
|
374
|
|
|
|
450
|
|
Liabilities from transportation and storage contracts
|
|
|
115
|
|
|
|
126
|
|
Accrued pension liability
|
|
|
68
|
|
|
|
68
|
|
Accrued postretirement liability
|
|
|
1,063
|
|
|
|
1,094
|
|
Deferred gains
|
|
|
12
|
|
|
|
15
|
|
Nuclear decommissioning
|
|
|
122
|
|
|
|
134
|
|
Other
|
|
|
313
|
|
|
|
303
|
|
Noncurrent liabilities associated with assets held for sale
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
6,610
|
|
|
|
6,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 2, 6 and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
45
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, without par value, 400,000,000 shares
authorized, 163,025,446 and 163,232,095 shares issued and
outstanding, respectively
|
|
|
3,172
|
|
|
|
3,176
|
|
Retained earnings
|
|
|
2,952
|
|
|
|
2,790
|
|
Accumulated other comprehensive loss
|
|
|
(128
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
5,996
|
|
|
|
5,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
23,688
|
|
|
$
|
23,742
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements (Unaudited)
35
DTE
Energy Company
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
417
|
|
|
$
|
716
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
675
|
|
|
|
716
|
|
Deferred income taxes
|
|
|
280
|
|
|
|
90
|
|
Gain on sale of non-utility assets
|
|
|
(128
|
)
|
|
|
(897
|
)
|
Other asset (gains), losses and reserves, net
|
|
|
12
|
|
|
|
14
|
|
Gain on sale of interests in synfuel projects
|
|
|
(31
|
)
|
|
|
(144
|
)
|
Partners share of synfuel project (gains) losses
|
|
|
2
|
|
|
|
(161
|
)
|
Contributions from synfuel partners
|
|
|
14
|
|
|
|
177
|
|
Changes in assets and liabilities, exclusive of changes shown separately (Note 1)
|
|
|
(223
|
)
|
|
|
281
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
1,018
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Plant and equipment expenditures utility
|
|
|
(842
|
)
|
|
|
(750
|
)
|
Plant and equipment expenditures non-utility
|
|
|
(154
|
)
|
|
|
(206
|
)
|
Proceeds from sale of interests in synfuel projects
|
|
|
84
|
|
|
|
329
|
|
Refunds to synfuel partners
|
|
|
(387
|
)
|
|
|
(81
|
)
|
Proceeds from sale of non-utility assets
|
|
|
253
|
|
|
|
1,258
|
|
Proceeds from sale of other assets, net
|
|
|
21
|
|
|
|
39
|
|
Restricted cash for debt redemptions
|
|
|
104
|
|
|
|
52
|
|
Proceeds from sale of nuclear decommissioning trust fund assets
|
|
|
180
|
|
|
|
227
|
|
Investment in nuclear decommissioning trust funds
|
|
|
(202
|
)
|
|
|
(254
|
)
|
Other investments
|
|
|
(105
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
Net cash from (used for) investing activities
|
|
|
(1,048
|
)
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
1,013
|
|
|
|
|
|
Redemption of long-term debt
|
|
|
(446
|
)
|
|
|
(340
|
)
|
Repurchase of long-term debt
|
|
|
(238
|
)
|
|
|
|
|
Short-term borrowings, net
|
|
|
71
|
|
|
|
(62
|
)
|
Repurchase of common stock
|
|
|
(16
|
)
|
|
|
(686
|
)
|
Dividends on common stock
|
|
|
(258
|
)
|
|
|
(278
|
)
|
Other
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
Net cash from (used for) financing activities
|
|
|
119
|
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
89
|
|
|
|
16
|
|
Cash and Cash Equivalents Reclassified (to) from Assets Held for Sale
|
|
|
11
|
|
|
|
(7
|
)
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
123
|
|
|
|
147
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
223
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements (Unaudited)
36
DTE Energy Company
Consolidated Statements of Changes in Shareholders Equity and
Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
|
(Dollars in Millions, Shares in Thousands)
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Loss
|
|
Total
|
|
Balance, December 31, 2007
|
|
|
163,232
|
|
|
$
|
3,176
|
|
|
$
|
2,790
|
|
|
$
|
(113
|
)
|
|
$
|
5,853
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
417
|
|
Implementation of SFAS No. 157, net of taxes of $2
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
(259
|
)
|
Repurchase and retirement of common stock
|
|
|
(432
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Net change in unrealized gains on derivatives,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Net change in unrealized losses on investments,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Stock-based compensation and other
|
|
|
225
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
Balance, September 30, 2008
|
|
|
163,025
|
|
|
$
|
3,172
|
|
|
$
|
2,952
|
|
|
$
|
(128
|
)
|
|
$
|
5,996
|
|
|
The following table displays other comprehensive income for the ninemonth periods ended September
30:
|
|
|
|
|
|
|
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
417
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Benefit obligations, net of taxes of $- and $2, respectively
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on derivatives:
|
|
|
|
|
|
|
|
|
Losses during the period, net of taxes of $- and $(76), respectively
|
|
|
(1
|
)
|
|
|
(141
|
)
|
Amounts reclassified to income, net of taxes of $2 and $125, respectively
|
|
|
3
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investments:
|
|
|
|
|
|
|
|
|
Losses during the period, net of taxes of $(9) and $(2), respectively
|
|
|
(17
|
)
|
|
|
(3
|
)
|
Amounts reclassified to income, net of taxes of $- and $1, respectively
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
402
|
|
|
$
|
809
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements (Unaudited)
37
DTE Energy Company
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 GENERAL
The Company is a diversified energy company. It is the parent company of Detroit Edison and
MichCon, regulated electric and gas utilities engaged primarily in the business of providing
electricity and natural gas sales, distribution and storage services throughout southeastern
Michigan. The Company also operates four energy-related non-utility segments with operations
throughout the United States.
These Consolidated Financial Statements should be read in conjunction with the Notes to
Consolidated Financial Statements included in the 2007 Annual Report on Form 10-K.
The accompanying Consolidated Financial Statements are prepared using accounting principles
generally accepted in the United States of America. These accounting principles require us to use
estimates and assumptions that impact reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from
our estimates.
The Consolidated Financial Statements are unaudited, but include all adjustments necessary for a
fair presentation of such financial statements. All adjustments are of a normal recurring nature,
except as otherwise disclosed in these Consolidated Financial Statements and Notes to Consolidated
Financial Statements. Financial results for this interim period are not necessarily indicative of
results that may be expected for any other interim period or for the fiscal year ending December
31, 2008.
Certain prior year amounts have been reclassified to reflect current year classifications.
Asset Retirement Obligations
The Company records asset retirement obligations in accordance with SFAS No. 143,
Accounting for
Asset Retirement Obligations
and FIN 47,
Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143
. The Company has a legal retirement obligation for the
decommissioning costs for its Fermi 1 and Fermi 2 nuclear plants. To a lesser extent, the Company
has legal retirement obligations for gas production facilities, gas gathering facilities and
various other operations. The Company has conditional retirement obligations for gas pipeline
retirement costs and disposal of asbestos at certain of its power plants. To a lesser extent, the
Company has conditional retirement obligations at certain service centers, compressor and gate
stations, and disposal costs for PCB contained within transformers and circuit breakers. The
Company recognizes such obligations as liabilities at fair market value when they are incurred,
which generally is at the time the associated assets are placed in service. Fair value is measured
using expected future cash outflows discounted at our credit-adjusted risk-free rate.
For the Companys regulated operations, timing differences arise in the expense recognition of
legal asset retirement costs that the Company is currently recovering in rates. The Company defers
such differences under SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation
.
A reconciliation of the asset retirement obligations for the nine months ended September 30, 2008
follows:
|
|
|
|
|
(in Millions)
|
|
|
|
|
Asset retirement obligations at January 1, 2008
|
|
$
|
1,293
|
|
Accretion
|
|
|
62
|
|
Liabilities settled
|
|
|
(15
|
)
|
Revision in estimated cash flows
|
|
|
(11
|
)
|
Transfers from Assets held for sale
|
|
|
14
|
|
|
|
|
|
Asset retirement obligations at September 30, 2008
|
|
|
1,343
|
|
Less amount included in current liabilities
|
|
|
(18
|
)
|
|
|
|
|
|
|
$
|
1,325
|
|
|
|
|
|
38
Approximately $1 billion of the asset retirement obligations represent nuclear decommissioning
liabilities that are funded through a surcharge to electric customers over the life of the Fermi 2
nuclear power plant.
Intangible Assets
The Company has certain intangible assets relating to non-utility contracts and emission
allowances. The Company amortizes intangible assets on a straight-line basis over the expected
period of benefit, ranging from 4 to 30 years. The gross carrying amount and accumulated
amortization of intangible assets at September 30, 2008 were $102 million and $16 million,
respectively. The gross carrying amount and accumulated amortization of intangible assets at
December 31, 2007 were $31 million and $6 million, respectively. Amortization expense of intangible
assets is estimated to be $5 million annually for the years 2008 through 2012.
Retirement Benefits and Trusteed Assets
The following details the components of net periodic benefit costs for qualified and non-qualified
pension benefits and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Three Months Ended September 30
|
|
Pension Benefits
|
|
|
Benefits
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service cost
|
|
$
|
13
|
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
17
|
|
Interest cost
|
|
|
48
|
|
|
|
46
|
|
|
|
30
|
|
|
|
28
|
|
Expected return on plan assets
|
|
|
(64
|
)
|
|
|
(59
|
)
|
|
|
(19
|
)
|
|
|
(17
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
8
|
|
|
|
16
|
|
|
|
10
|
|
|
|
18
|
|
Prior service cost
|
|
|
1
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Net transition liability
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
Special termination benefits
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
6
|
|
|
$
|
24
|
|
|
$
|
35
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Nine Months Ended September 30
|
|
Pension Benefits
|
|
|
Benefits
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service cost
|
|
$
|
41
|
|
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
47
|
|
Interest cost
|
|
|
143
|
|
|
|
134
|
|
|
|
91
|
|
|
|
89
|
|
Expected return on plan assets
|
|
|
(194
|
)
|
|
|
(179
|
)
|
|
|
(57
|
)
|
|
|
(50
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
24
|
|
|
|
44
|
|
|
|
29
|
|
|
|
51
|
|
Prior service cost
|
|
|
4
|
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
(2
|
)
|
Net transition liability
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
5
|
|
Special termination benefits
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
18
|
|
|
$
|
58
|
|
|
$
|
106
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Termination Benefits in the above table represents costs associated with the Companys
Performance Excellence Process.
The Company expects to contribute $150 million to its qualified pension plans during its fiscal
year 2008. No contributions have been made to the plans for the three- and nine- month periods
ended September 30, 2008.
The Company expects to contribute $5 million to its non-qualified pension plans during its fiscal
year 2008. No contributions have been made to the plans for the three- and nine- month periods
ended September 30, 2008.
The Company expects to contribute $116 million to its postretirement medical and life insurance
benefit plans during its fiscal year 2008. No contributions were made during the three-month period
ended September 30, 2008. Approximately $40 million of contributions were made to the plans for the
nine-month period ended September 30, 2008.
Income Taxes
The Companys effective income tax rate from continuing operations for the three months ended
September 30, 2008 was 37% as compared to 18% for the three months ended September 30, 2007, and
for the nine months ended September 30, 2008 was 37% as compared to 35% for the nine months ended
September 30, 2007. The 2008 third
39
quarter rate is higher due primarily to a lower interim effective tax rate in 2007. The 2008
effective tax rate increase is also due to higher state income taxes related to the Michigan
Business Tax which was effective January 1, 2008.
The Company has $17 million of unrecognized tax benefits at September 30, 2008 as compared to $14
million of unrecognized tax benefits at December 31, 2007 that, if recognized, would favorably
impact its effective tax rate. During the next 12 months, statutes of limitations will expire for
the Companys tax returns in various states, and it is reasonably possible that state tax audits
will also be settled. It is therefore possible that there will be a decrease in unrecognized tax
benefits of $6 million within the next 12 months.
Short-Term Credit Arrangements and Borrowings
DTE Energy and its wholly-owned subsidiaries, Detroit Edison and MichCon, have entered into
revolving credit facilities with similar terms. The five-year credit facilities are with a
syndicate of banks and may be used for general corporate borrowings, but are intended to provide
liquidity support for each of the companies commercial paper programs. Borrowings under the
facilities are available at prevailing short-term interest rates. The agreements require the
Company to maintain a debt to total capitalization ratio of no more
than 0.65 to 1. In addition,
Detroit Edison has a separate $100 million short-term unsecured bank loan facility with covenants
identical to those specified under our back-up credit facilities. DTE Energy,
Detroit Edison and MichCon are currently in compliance with this financial covenant. The availability under these
combined facilities is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in Millions)
|
|
DTE Energy
|
|
|
Detroit Edison
|
|
|
MichCon
|
|
|
Total
|
|
Five-year unsecured revolving facility,
expiring October 2010
|
|
$
|
675
|
|
|
$
|
69
|
|
|
$
|
181
|
|
|
$
|
925
|
|
Five-year unsecured revolving facility,
expiring October 2009
|
|
|
525
|
|
|
|
206
|
|
|
|
244
|
|
|
|
975
|
|
Unsecured bank loan facility, expiring July 2009
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities at September 30, 2008
|
|
|
1,200
|
|
|
|
375
|
|
|
|
425
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts outstanding at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issuances and borrowings
|
|
|
(381
|
)
|
|
|
(373
|
)
|
|
|
(401
|
)
|
|
|
(1,155
|
)
|
Letters of credit
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667
|
)
|
|
|
(373
|
)
|
|
|
(401
|
)
|
|
|
(1,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net availability at September 30, 2008
|
|
$
|
533
|
|
|
$
|
2
|
|
|
$
|
24
|
|
|
$
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
October 31, 2008, amounts outstanding totaled $1,349 million, resulting in net availability
under these combined facilities of $651 million.
Stock-Based Compensation
The Companys stock incentive program permits the grant of incentive stock options, non-qualifying
stock options, stock awards, performance shares and performance units to employees and members of
its Board of Directors.
The Company recorded stock-based compensation expense of $8 million and $8 million, with an
associated tax benefit of $3 million and $2 million for the three months ended September 30, 2008
and 2007, respectively. The Company recorded stock-based compensation expense of $33 million and
$27 million, with an associated tax benefit of $12 million and $9 million for the nine months ended
September 30, 2008 and 2007, respectively. Compensation cost capitalized in property, plant and
equipment was $0.4 million and $0.3 million during the three months ended September 30, 2008 and
2007, respectively. Compensation cost capitalized in property, plant and equipment was $1.4
million and $1.5 million during the nine months ended September 30, 2008 and 2007, respectively.
40
Stock Options
The following table summarizes our stock option activity for the nine months ended September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in Millions)
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
Options outstanding at January 1, 2008
|
|
|
4,394,809
|
|
|
$
|
42.37
|
|
|
|
|
|
Granted
|
|
|
811,300
|
|
|
$
|
41.77
|
|
|
|
|
|
Exercised
|
|
|
(65,097
|
)
|
|
$
|
33.67
|
|
|
|
|
|
Forfeited or expired
|
|
|
(78,967
|
)
|
|
$
|
44.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008
|
|
|
5,062,045
|
|
|
$
|
42.36
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008
|
|
|
3,808,654
|
|
|
$
|
42.04
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, the weighted average remaining contractual life for the exercisable
shares was 4.67 years. As of September 30, 2008, 1,253,391 options were non-vested. During the nine
months ended September 30, 2008, 610,440 options vested.
The Company determined the fair value for these options at the date of grant using a Black-Scholes
based option pricing model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2008
|
|
September 30, 2007
|
Risk-free interest rate
|
|
|
3.05
|
%
|
|
|
4.71
|
%
|
Dividend yield
|
|
|
5.20
|
%
|
|
|
4.38
|
%
|
Expected volatility
|
|
|
20.45
|
%
|
|
|
17.99
|
%
|
|
|
|
|
|
|
|
|
|
Expected life
|
|
6 years
|
|
6 years
|
The weighted average grant date fair value of options granted during the nine months ended
September 30, 2008 was $4.76 per share. The intrinsic value of options exercised for the nine
months ended September 30, 2008 was $0.6 million. Total option expense recognized was $0.5 million
and $0.7 million for the three months ended September 30, 2008 and 2007, respectively, while total
option expense recognized was $3 million and $3 million for the nine months ended September 30,
2008 and 2007, respectively.
Stock Awards
The following summarizes stock awards activity for the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Restricted
|
|
Grant Date
|
|
|
Stock
|
|
Fair Value
|
Balance at January 1, 2008
|
|
|
984,310
|
|
|
$
|
47.36
|
|
Grants
|
|
|
379,600
|
|
|
|
41.99
|
|
Forfeitures
|
|
|
(64,315
|
)
|
|
|
45.49
|
|
Vested
|
|
|
(365,678
|
)
|
|
|
46.90
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
933,917
|
|
|
|
45.37
|
|
|
|
|
|
|
|
|
|
|
41
Performance Share Awards
The following summarizes performance share activity for the nine months ended September 30, 2008:
|
|
|
|
|
|
|
Performance Shares
|
Balance at January 1, 2008
|
|
|
1,174,153
|
|
Grants
|
|
|
534,965
|
|
Forfeitures
|
|
|
(67,025
|
)
|
Payouts
|
|
|
(312,647
|
)
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
1,329,446
|
|
|
|
|
|
|
Unrecognized Compensation Cost
As of September 30, 2008, the Company had $44 million of total unrecognized compensation cost
related to non-vested stock incentive plan arrangements. These costs are expected to be recognized
over a weighted-average period of 1.15 years.
Consolidated Statement of Cash Flows
The following provides detail of the changes in assets and liabilities that are reported in the
Consolidated Statement of Cash Flows, and supplementary cash information:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
456
|
|
|
$
|
383
|
|
Accrued GCR revenue
|
|
|
(102
|
)
|
|
|
(37
|
)
|
Inventories
|
|
|
(134
|
)
|
|
|
(45
|
)
|
Accounts payable
|
|
|
(221
|
)
|
|
|
(176
|
)
|
Income taxes payable
|
|
|
(31
|
)
|
|
|
(112
|
)
|
Risk management and trading activities
|
|
|
(103
|
)
|
|
|
127
|
|
Deferred gains from asset sales
|
|
|
39
|
|
|
|
15
|
|
Postretirement obligation
|
|
|
(30
|
)
|
|
|
10
|
|
Other assets
|
|
|
(86
|
)
|
|
|
(358
|
)
|
Other liabilities
|
|
|
(11
|
)
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
$
|
(223
|
)
|
|
$
|
281
|
|
|
|
|
|
|
|
|
Supplementary Cash Information
|
|
|
|
|
|
|
|
|
Cash paid for interest (net of interest capitalized)
|
|
$
|
345
|
|
|
$
|
392
|
|
Cash paid for income taxes
|
|
$
|
21
|
|
|
$
|
314
|
|
42
In connection with maintaining certain traded risk management positions, the Company may be
required to post cash collateral with its clearing agent. As a result, the Company entered into a
demand financing agreement for up to $50 million with its clearing agent in lieu of posting
additional cash collateral (a non-cash transaction). There were no balances outstanding under this
facility at September 30, 2008 and approximately $13 million outstanding as of December 31, 2007.
Other Asset (Gains) and Losses, Reserves and Impairments, net
The following items are included in the Other asset (gains) and losses, reserves and impairments,
net line in the Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Electric utility
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
12
|
|
Gas utility
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-utility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power and industrial projects
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
(1
|
)
|
Barnett shale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Other
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
Fair Value Accounting
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. It emphasizes that fair value is
a market-based measurement, not an entity-specific measurement. Fair value measurement should be
determined based on the assumptions that market participants would use in pricing an asset or
liability. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Effective January 1, 2008, the Company adopted SFAS No.
157. As permitted by FASB Staff Position FAS No. 157-2, the Company has elected to defer the
effective date of SFAS No. 157 as it pertains to non-financial assets and liabilities to January 1,
2009. The cumulative effect adjustment upon adoption of SFAS No. 157 represented a $4 million
increase to the January 1, 2008 balance of retained earnings. See also Note 3.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
. This Statement permits
an entity to choose to measure many financial instruments and certain other items at fair value.
The fair value option established by SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. An entity will report in earnings
unrealized gains and losses on items, for which the fair value option has been elected, at each
subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with
a few exceptions, such as investments otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and
not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. At January 1, 2008, the Company elected not to use
the fair value option for financial assets and liabilities held at that date.
In October 2008, the FASB issued FASB Staff Position (FSP) 157-3,
Determining the Fair Value of a
Financial Asset in a Market That is Not Active
. The FSP clarifies the application of SFAS No. 157,
Fair Value Measurements,
in an inactive market, and provides an illustrative example to demonstrate
how the fair value of a financial asset is determined when the market for that financial asset is
inactive. The FSP was effective upon issuance, including prior periods for which financial
statements have not been issued. The adoption of the FSP did not have a material impact on the
Companys consolidated financial statements.
43
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations,
to improve the relevance,
representational faithfulness and comparability of the information that a reporting entity provides
in its financial reports about a business combination and its effects. To accomplish this, SFAS No.
141(R) requires the acquiring entity in a business combination to recognize all the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information needed to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 141(R) is applied prospectively
to business combinations entered into by the Company after January 1, 2009, with earlier adoption
prohibited. The Company will apply the requirements of SFAS No. 141(R) to business combinations
consummated after January 1, 2009.
GAAP Hierarchy
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles.
This statement identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements under GAAP. SFAS No. 162
is effective 60 days following the approval of the Public Company Accounting Oversight Board
amendments to AU section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles
. The Company will adopt SFAS No. 162 once effective. The adoption is not
expected to have a material impact on its consolidated financial statements.
Useful Life of Intangible Assets
In May 2008, the FASB issued FSP 142-3,
Determination of the Useful Life of Intangible Assets.
This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. For a recognized intangible asset, an entity shall disclose
information that enables users to assess the extent to which the expected future cash flows
associated with the asset are affected by the entitys intent and/or ability to renew or extend the
arrangement. This FSP is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008. The FSP will not have a material impact on the
Companys consolidated financial statements.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued FSP EITF 03-6-1,
Determining Whether Instruments Granted in Share
Based Payment Transactions are Participating Securities.
This FSP addresses whether instruments
granted in share-based payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing earnings per share (EPS)
under the two-class method described in paragraphs 60 and 61 of FASB No. 128,
Earnings Per Share.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of EPS pursuant to the two-class method. This FSP is effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2008. The
Company is currently assessing the effects of this FSP on its EPS calculation.
Disclosures about Derivative Instruments and Guarantees
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
. This Statement requires enhanced disclosures
about an entitys derivative and hedging activities. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. Comparative disclosures for earlier periods at initial adoption are
encouraged but not required. The Company will adopt SFAS No. 161 on January 1, 2009.
44
In September 2008, the FASB issued FSP No. 133-1 and FIN 45-4,
Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161.
This FSP is intended to improve
disclosures about credit derivatives by requiring more information about the potential adverse
effects of changes in credit risk on the financial position, financial performance, and cash flows
of the sellers of credit derivatives. This FSP also requires additional disclosures about the
current status of the payment/performance risk of a guarantee. The provisions of the FSP that
amend SFAS No. 133 and FIN 45 are effective for reporting periods ending after November 15, 2008.
The FSP also clarifies that the disclosures required by SFAS No. 161 should be provided for any
reporting period (annual or interim) beginning after November 15, 2008. The Company is still
assessing the impact of these pronouncements on our disclosures, and will begin providing any
additional required disclosures related to SFAS No. 133 and FIN 45 for the year ending December 31,
2008. Disclosures necessary under SFAS No. 161 will be made beginning with the quarter ending March
31, 2009.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of ARB No. 51.
This Statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial statements.
SFAS No. 160 is effective for fiscal years, and interim periods within those years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. This Statement shall be applied
prospectively as of the beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements. The presentation and disclosure
requirements shall be applied retrospectively for all periods presented. The Company will adopt
SFAS No. 160 as of January 1, 2009 and is currently assessing the effects of SFAS No. 160 on its
consolidated financial statements.
Offsetting Amounts Related to Certain Contracts
In April 2007, the FASB issued FSP FIN 39-1,
Amendment of FASB Interpretation No. 39
. This FSP
permits the Company to offset the fair value of derivative instruments with cash collateral
received or paid for those derivative instruments executed with the same counterparty under a
master netting arrangement. As a result, the Company is permitted to record one net asset or
liability that represents the total net exposure of all derivative positions under a master netting
arrangement. The decision to offset derivative positions under master netting arrangements remains
an accounting policy choice. The guidance in this FSP is effective for fiscal years beginning after
November 15, 2007. It is applied retrospectively by adjusting the financial statements for all
periods presented. The Company adopted FSP FIN 39-1 as of January 1, 2008. At adoption, the Company
chose to offset the collateral amounts against the fair value of derivative assets and liabilities,
reducing both the Companys total assets and total liabilities. The Company retrospectively
reclassified certain assets and liabilities on the Consolidated Statement of Financial Position at
December 31, 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
FSP FIN 39-1
|
|
|
(in Millions)
|
|
Reported
|
|
Adjustments
|
|
As Adjusted
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral held by others
|
|
$
|
56
|
|
|
$
|
(3
|
)
|
|
$
|
53
|
|
Other
|
|
|
448
|
|
|
|
13
|
|
|
|
461
|
|
Assets from risk management and trading activities
|
|
|
195
|
|
|
|
(14
|
)
|
|
|
181
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets from risk management and trading activities
|
|
|
207
|
|
|
|
(8
|
)
|
|
|
199
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,198
|
|
|
|
(9
|
)
|
|
|
1,189
|
|
Liabilities from risk management and trading activities
|
|
|
282
|
|
|
|
(1
|
)
|
|
|
281
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from risk management and trading activities
|
|
|
452
|
|
|
|
(2
|
)
|
|
|
450
|
|
45
NOTE 3 FAIR VALUE
Effective January 1, 2008, the Company adopted SFAS No. 157. This Statement defines fair value,
establishes a framework for measuring fair value and expands the disclosures about fair value
measurements. The Company has elected the option to defer the effective date of SFAS No. 157 as it
pertains to non-financial assets and liabilities to January 1, 2009.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
in a principal or most advantageous market. Fair value is a market-based measurement that is
determined based on inputs, which refer broadly to assumptions that market participants use in
pricing assets or liabilities. These inputs can be readily observable, market corroborated or
generally unobservable inputs. The Company makes certain assumptions that market participants would
use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in
the inputs to valuation techniques. Credit risk of the Company and its
counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the
impact of which is immaterial for the third quarter and nine months ended September 30, 2008.
The Company believes it uses valuation techniques that maximize
the use of observable market-based inputs and minimize the use of unobservable inputs.
SFAS No. 157 establishes a fair value hierarchy, which prioritizes the inputs to valuation
techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. SFAS No. 157 requires that assets and
liabilities be classified in their entirety based on the lowest level of input that is significant
to the fair value measurement in its entirety. Assessing the significance of a particular input may require
judgment considering factors specific to the asset or liability, and may affect the valuation of
the asset or liability and its placement within the fair value hierarchy. The Company classifies
fair value balances based on the fair value hierarchy defined by SFAS No. 157 as follows:
|
|
|
Level 1 Consists of unadjusted quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access as of the reporting date.
|
|
|
|
|
Level 2 Consists of inputs other than quoted prices included within Level 1 that are
directly observable for the asset or liability or indirectly observable through
corroboration with observable market data.
|
|
|
|
|
Level 3 Consists of unobservable inputs for assets or liabilities whose fair value
is estimated based on internally developed models or methodologies using inputs that are
generally less readily observable and supported by little, if any, market activity at the
measurement date. Unobservable inputs are developed based on the best available information
and subject to cost-benefit constraints.
|
The following table presents assets and liabilities measured and recorded at fair value on a
recurring basis as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting
|
|
|
Net Balance at
|
|
(in Millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Adjustments
(2)
|
|
|
September 30, 2008
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts
|
|
$
|
469
|
|
|
$
|
287
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
756
|
|
Employee benefit trust investments
(1)
|
|
|
20
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
Derivative assets
|
|
|
362
|
|
|
|
2,138
|
|
|
|
476
|
|
|
|
(2,439
|
)
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
851
|
|
|
$
|
2,481
|
|
|
$
|
476
|
|
|
$
|
(2,439
|
)
|
|
$
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
|
|
|
$
|
(18
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(18
|
)
|
Derivative liabilities
|
|
|
(371
|
)
|
|
|
(1,935
|
)
|
|
|
(870
|
)
|
|
|
2,391
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(371
|
)
|
|
$
|
(1,953
|
)
|
|
$
|
(870
|
)
|
|
$
|
2,391
|
|
|
$
|
(803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets (Liabilities) at September 30, 2008
|
|
$
|
480
|
|
|
$
|
528
|
|
|
$
|
(394
|
)
|
|
$
|
(48
|
)
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes cash surrender value of life insurance investments.
|
|
(2)
|
|
Amounts represent the impact of master netting agreements that allow the Company to net gain
and loss positions and cash collateral held or placed with the same counterparties.
|
46
The following table presents the fair value reconciliation of Level 3 derivative assets and
liabilities measured at fair value on a recurring basis for the nine months ended September 30,
2008:
|
|
|
|
|
(in Millions)
|
|
Derivatives
|
|
Liability balance as of January 1, 2008
(1)
|
|
$
|
(366
|
)
|
Changes in fair value recorded in income
|
|
|
262
|
|
Changes in fair value recorded in other comprehensive income
|
|
|
(6
|
)
|
Purchases, issuances and settlements
|
|
|
(242
|
)
|
Transfers in/out of Level 3
|
|
|
(42
|
)
|
|
|
|
|
Liability balance as of September 30, 2008
|
|
$
|
(394
|
)
|
|
|
|
|
The amount of total gains (losses) included in net income
attributed to the change in unrealized gains (losses) related
to assets and liabilities held at September 30, 2008
|
|
$
|
10
|
|
|
|
|
|
|
|
|
(1)
|
|
Balance as of January 1, 2008 includes a cumulative effect adjustment which represents
an increase to beginning retained earnings related to Level 3 derivatives upon adoption of
SFAS No. 157.
|
Net gains
of $262 million related to Level 3 derivative assets and liabilities are reported in
Operating Revenues for the nine months ended September 30, 2008 consistent with the Companys
accounting policy. Net gains of $45 million related to Level 1 and Level 2 derivative assets and
liabilities, and the impact of netting, are also reported in Operating Revenues for the nine months
ended September 30, 2008. Transfers in and/or out of Level 3 represent existing assets or
liabilities that were either previously categorized as a higher level for which the inputs to the
model became unobservable or assets and liabilities that were previously classified as Level 3 for
which the lowest significant input became observable during the period.
SFAS No. 157 provides for limited retrospective application, the net of which is recorded as an
adjustment to beginning retained earnings in the period of adoption. As a result, the Company
recorded a cumulative effect adjustment of $4 million, net of taxes, as an increase to beginning
retained earnings as of January 1, 2008.
Nuclear Decommissioning Trusts
The trust fund investments have been established to satisfy Detroit Edisons nuclear
decommissioning obligations. The nuclear decommissioning trust fund investments hold debt and
equity securities directly and indirectly through commingled funds and institutional mutual funds.
The commingled funds and institutional mutual funds which hold exchange-traded equity or debt
securities are valued using quoted prices in actively traded markets. Non-exchange- traded fixed
income securities are valued based upon quotations available from brokers or pricing services.
Employee Benefit Trust Investments
The employee benefit trust investments are invested in commingled funds and institutional mutual
funds holding equity or fixed income securities. The commingled funds and institutional mutual
funds which hold exchange-traded equity securities are valued using quoted prices in actively
traded markets. Non-exchange-traded fixed income securities are valued based upon quotations
available from brokers or pricing services.
Deferred Compensation Liabilities
Deferred compensation plans allow eligible participants to defer a portion of their compensation.
The participant is able to designate the investment of the deferred compensation to investments
available under the 401(k) plan offered by the Company, although the Company does not actually
purchase the investments. The deferred compensation liability is determined based upon the fair
values of the mutual funds and equity securities designated in each participants account.
47
Derivative Assets and Liabilities
Derivative assets and liabilities are comprised of physical and financial derivative contracts,
including futures, forwards, options and swaps that are both exchange-traded and over-the-counter
traded contracts. Various inputs are used to value derivatives depending on the type of contract
and availability of market data. Exchange-traded derivative contracts are valued using quoted
prices in active markets. Other derivatives contracts are valued based upon a variety of inputs
including commodity market prices, interest rates, credit ratings, default rates, market-based
seasonality and basis differential factors. Mathematical valuation models are used for derivatives
for which external market data is not readily observable, such as contracts which extend beyond the
actively traded reporting period. Derivative instruments are principally used in the Companys
Energy Trading segment.
NOTE 4 DISPOSALS AND DISCONTINUED OPERATIONS
Sale of Antrim Shale Gas Exploration and Production Business
In June 2007, the Company sold its Antrim shale gas exploration and production business (Antrim)
for gross proceeds of approximately $1.3 billion and recognized a pre-tax gain of $897 million
($574 million after-tax) during 2007. Prior to the sale, the operating results of Antrim were
reflected in the Unconventional Gas Production segment.
The Antrim business is not presented as a discontinued operation due to continuation of cash flows
related to the sale of a portion of Antrims natural gas production to Energy Trading under the
terms of natural gas sales contracts that expire in 2010 and 2012. These continuing cash flows,
while not significant to DTE Energy, are significant to Antrim and therefore meet the definition of
continuing cash flows as described in EITF 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations
.
Plan to Sell Interest in Certain Power and Industrial Projects
During the third quarter of 2007, the Company announced its plans to sell a 50% interest in a
portfolio of select Power and Industrial Projects. As a result, the assets and liabilities of the
Projects were classified as held for sale at that time and the Company ceased recording
depreciation and amortization expense related to these assets. During 2008, the United States asset
sale market weakened and challenges in the debt market persisted. As a result of these
developments, the Companys work on this planned monetization was discontinued. As of June 30,
2008, the assets and liabilities of the Projects were no longer classified as held for sale.
Depreciation and amortization resumed in June 2008 when the assets were reclassified as held and
used. During the second quarter of 2008, the Company recorded a loss of $19 million related to the
valuation adjustment for the cumulative depreciation and amortization not recorded during the held
for sale period. The Consolidated Statement of Financial Position includes $28 million of minority
interests in the Projects classified as held for sale as of December 31, 2007.
The following table presents the major classes of assets and liabilities of the Projects classified
as held for sale at December 31, 2007:
|
|
|
|
|
|
|
December 31,
|
|
(in Millions)
|
|
2007
|
|
Cash and cash equivalents
|
|
$
|
11
|
|
Accounts receivable (less allowance for doubtful accounts of $4)
|
|
|
65
|
|
Inventories
|
|
|
4
|
|
Other current assets
|
|
|
3
|
|
|
|
|
|
Total current assets held for sale
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
55
|
|
Property, plant and equipment, net of accumulated depreciation of $183
|
|
|
285
|
|
Intangible assets
|
|
|
38
|
|
Long-term notes receivable
|
|
|
46
|
|
Other noncurrent assets
|
|
|
1
|
|
|
|
|
|
Total noncurrent assets held for sale
|
|
|
425
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
508
|
|
|
|
|
|
48
|
|
|
|
|
|
|
December 31,
|
|
(in Millions)
|
|
2007
|
|
Accounts payable
|
|
$
|
38
|
|
Other current liabilities
|
|
|
10
|
|
|
|
|
|
Total current liabilities associated with assets held for sale
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including capital lease obligations of $31)
|
|
|
53
|
|
Asset retirement obligations
|
|
|
16
|
|
Other liabilities
|
|
|
13
|
|
|
|
|
|
Total noncurrent liabilities associated with assets held for sale
|
|
|
82
|
|
|
|
|
|
|
Total liabilities related to assets held for sale
|
|
$
|
130
|
|
|
|
|
|
Sale of Interest in Barnett Shale Properties
In 2008, the Company sold a portion of its Barnett shale properties for gross proceeds of
approximately $260 million. As of December 31, 2007, property, plant and equipment of approximately
$122 million, net of approximately $14 million of accumulated depreciation and depletion, was
classified as held for sale. The Company recognized a gain of $128 million ($82 million after-tax)
on the sale during 2008.
Synthetic Fuel Business
The Company discontinued the operations of its synthetic fuel production facilities as of December
31, 2007. Synfuel plants chemically changed coal and waste coal into a synthetic fuel as determined
under the Internal Revenue Code. Production tax credits were provided for the production and sale
of solid synthetic fuel produced from coal and were available through December 31, 2007. The
synthetic fuel business generated operating losses that were substantially offset by production tax
credits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
$
|
|
|
|
$
|
277
|
|
|
$
|
7
|
|
|
$
|
806
|
|
Operation and Maintenance
|
|
|
|
|
|
|
329
|
|
|
|
9
|
|
|
|
967
|
|
Depreciation, Depletion and Amortization
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
4
|
|
Taxes Other Than Income
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
Asset (Gains), Losses and Reserves, Net
|
|
|
(16
|
)
|
|
|
(67
|
)
|
|
|
(31
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
16
|
|
|
|
19
|
|
|
|
32
|
|
|
|
(24
|
)
|
Other (Income) and Deductions
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(7
|
)
|
Minority Interest
|
|
|
|
|
|
|
(46
|
)
|
|
|
2
|
|
|
|
(161
|
)
|
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
9
|
|
|
|
22
|
|
|
|
14
|
|
|
|
49
|
|
Production Tax Credits
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
21
|
|
|
|
13
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8
|
|
|
$
|
45
|
|
|
$
|
20
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 RESTRUCTURING
In 2005, the Company initiated a company-wide review of its operations called the Performance
Excellence Process and began a series of focused improvement initiatives within its Electric and
Gas Utilities, and the related corporate support functions. This process continued as of September
30, 2008.
The Company incurred costs to achieve (CTA) restructuring expense for employee severance and other
costs. Other costs include project management and consultant support. Pursuant to MPSC
authorization, beginning in the third quarter of 2006, Detroit Edison deferred approximately $102
million of CTA in 2006. During 2007, Detroit Edison deferred CTA costs of $54 million. Detroit
Edison began amortizing deferred 2006 costs in 2007 and 2007 deferred costs in 2008 as the recovery
of these costs was provided for by the MPSC. Amortization of prior year deferred CTA costs was $4
million and $3 million for the three months ended September 30, 2008 and 2007, respectively, and
$12
49
million and $8 million for the nine months ended September 30, 2008 and 2007, respectively. Detroit
Edison deferred approximately $9 million and $18 million of CTA for the three months ended
September 30, 2008 and 2007, respectively, and approximately $20 million and $39 million of CTA for
the nine months ended September 30, 2008 and 2007, respectively. MichCon cannot defer CTA costs
because a recovery mechanism has not been established. MichCon plans to seek a recovery mechanism
in its next rate case which is expected to be filed in 2009. See Note 6.
Amounts expensed are recorded in Operation and maintenance on the Consolidated Statements of
Operations. Deferred amounts are recorded in the Regulatory assets line on the Consolidated
Statements of Financial Position. Costs incurred for the three- and nine-month periods ended
September 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Employee Severance Costs
|
|
|
Other Costs
|
|
|
Total Cost
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Costs incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
16
|
|
|
$
|
9
|
|
|
$
|
19
|
|
Gas Utility
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
|
|
|
|
4
|
|
|
|
13
|
|
|
|
17
|
|
|
|
13
|
|
|
|
21
|
|
Less amounts deferred or capitalized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
|
|
|
|
|
3
|
|
|
|
9
|
|
|
|
16
|
|
|
|
9
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount expensed
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
Employee Severance Costs
|
|
|
Other Costs
|
|
|
Total Cost
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Costs incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
21
|
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
44
|
|
Gas Utility
|
|
|
|
|
|
|
3
|
|
|
|
5
|
|
|
|
2
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
|
|
|
|
18
|
|
|
|
29
|
|
|
|
32
|
|
|
|
29
|
|
|
|
50
|
|
Less amounts deferred or capitalized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
|
|
|
|
|
14
|
|
|
|
21
|
|
|
|
30
|
|
|
|
21
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount expensed
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 REGULATORY MATTERS
Regulation
Detroit Edison and MichCon are subject to the regulatory jurisdiction of the MPSC, which issues
orders pertaining to rates and recovery of certain costs. These costs include the costs of
generating facilities, regulatory assets, conditions of service, accounting, and operating-related
matters. Detroit Edison is also regulated by the FERC with respect to financing authorization and
wholesale electric activities.
MPSC Show-Cause Order
In March 2006, the MPSC issued an order directing Detroit Edison to show cause by June 1, 2006 why
its rates should not be reduced in 2007. Subsequently, Detroit Edison filed its response to this
order and the MPSC issued an
order approving a settlement agreement in this proceeding on August 31, 2006. The order provided
for an annualized rate reduction of $53 million for 2006, effective September 5, 2006. Beginning
January 1, 2007, and continuing until April 13, 2008, one year from the filing of the general rate
case on April 13, 2007, rates were reduced by an additional $26 million, for a total reduction of
$79 million annually. The revenue reduction is net of the recovery of the amortization of the costs
associated with the implementation of the Performance Excellence Process. The settlement agreement
provided for some level of realignment of the existing rate structure by allocating a larger
percentage share of the rate reduction to the commercial and industrial customer classes than to
the residential customer classes.
As part of the settlement agreement, a Choice Incentive Mechanism (CIM) was established with a base
level of electric choice sales set at 3,400 GWh. The CIM prescribes regulatory treatment of changes
in non-fuel revenue attributed to increases or decreases in electric Customer Choice sales. If
electric Customer Choice sales exceed
50
3,600 GWh, Detroit Edison will be able to recover 90% of its reduction in non-fuel revenue from
full service customers, up to $71 million. If electric Customer Choice sales fall below 3,200 GWh,
Detroit Edison will credit 100% of the increase in non-fuel revenue to the unrecovered regulatory
asset balance. In March 2008, Detroit Edison filed a reconciliation of its CIM for the year 2007.
Detroit Edisons annual Electric Choice sales for 2007 were 2,239 GWh which was below the base
level of sales of 3,200 GWh. Accordingly, the Company used the resulting additional non-fuel
revenue to reduce unrecovered regulatory asset balances related to the Regulatory Asset Recovery
Surcharge (RARS) mechanism. This reconciliation did not result in any rate increase.
2007 Electric Rate Case Filing
Pursuant to the February 2006 MPSC order in Detroit Edisons rate restructuring case and the August
2006 MPSC order in the settlement of the show cause case, Detroit Edison filed a general rate case
on April 13, 2007 based on a 2006 historical test year. The filing with the MPSC requested a $123
million, or 2.9%, average increase in Detroit Edisons annual revenue requirement for 2008.
The requested $123 million increase in revenues is required to recover significant environmental
compliance costs and inflationary increases, partially offset by net savings associated with the
Performance Excellence Process. The filing was based on a return on equity of 11.25% on an expected
50% capital and 50% debt capital structure by the end of 2008.
In addition, Detroit Edisons filing made, among other requests, the following proposals:
|
|
|
Make progress toward correcting the existing rate structure to more accurately reflect
the actual cost of providing service to business customers;
|
|
|
|
|
Equalize distribution rates between Detroit Edison full service and Customer Choice
customers;
|
|
|
|
|
Re-establish with modification the CIM originally established in the Detroit Edison
2006 show cause filing. The CIM reconciles changes related to customers moving between
Detroit Edison full service and electric Customer Choice;
|
|
|
|
|
Terminate the Pension Equalization Mechanism;
|
|
|
|
|
Establish an emission allowance pre-purchase plan to ensure that adequate emission
allowances will be available for environmental compliance; and
|
|
|
|
|
Establish a methodology for recovery of the costs associated with preparation of an
application for a new nuclear generation facility.
|
Also in the filing, in connection with Michigans 21st Century Energy Plan, Detroit Edison
reinstated a long-term integrated resource planning (IRP) process with the purpose of developing
the least overall cost plan to serve customers generation needs over the next 20 years. Based on
the IRP, new base load capacity may be required for Detroit Edison. To protect tax credits
available under federal law, Detroit Edison determined it would be prudent to initiate the
application process for a new nuclear unit. Detroit Edison has not made a decision to build a new
nuclear unit; however, it has elected to preserve its option to build at some point in the future
by beginning the complex nuclear licensing process in 2007. Additionally, beginning the licensing
process at the present time positions Detroit Edison to potentially take advantage of tax
incentives derived from provisions in the 2005 Federal Energy Policy Act, which will benefit
customers. To qualify for these tax credits, a combined operating license application for
construction and operation of an advanced nuclear generating plant must be filed with the Nuclear
Regulatory Commission (NRC) no later than December 31, 2008. Detroit Edison filed the combined
operating license application with the NRC on September 18, 2008. Formal NRC review and approval
is expected to take 3- 4 years and is estimated to cost an additional $57 million. Costs of $20
million related to preparing the combined licensing application have been deferred and included in
Other assets as of September 30, 2008.
On August 31, 2007, Detroit Edison filed a supplement to its April 2007 rate case filing. A July
2007 decision by the State of Michigan Court of Appeals remanded back to the MPSC the November 2004
order in a prior Detroit Edison
51
rate case that denied recovery of merger control premium costs. The supplemental filing addressed
recovery of approximately $61 million related to the merger control premium. The filing also
included the impact of the July 2007 enactment of the MBT and other adjustments. The net impact of
the supplemental filing resulted in an approximately $76 million average increase in Detroit
Edisons annual revenue requirement for 2008.
On February 20, 2008, Detroit Edison filed an update to its April 2007 rate case filing. The update
reflected the use of 2009 as the projected test year and included a revised 2009 load forecast;
2009 revised estimates on environmental and advanced metering infrastructure capital expenditures;
and adjustments to the calculation of the MBT. The update also included the August 2007
supplemental filing adjustments for the merger control premium, the new MBT and environmental
operating and maintenance adjustments. The net impact of the updated filing resulted in an
approximately $85 million average increase in Detroit Edisons annual revenue requirement for 2009.
The total filing requested a $284 million increase in Detroit Edisons annual revenue for 2009. An
MPSC order related to this filing is expected by early 2009.
Regulatory Accounting Treatment for Performance Excellence Process
In May 2006, Detroit Edison and MichCon filed applications with the MPSC to allow deferral of costs
associated with the implementation of the Performance Excellence Process, a Company-wide
cost-savings and performance improvement program. Detroit Edison and MichCon sought MPSC
authorization to defer and amortize Performance Excellence Process implementation costs for
accounting purposes to match the expected savings from the Performance Excellence Process program
with the related CTA.
The Performance Excellence Process continued as of September 30, 2008. In September 2006, the MPSC
issued an order approving a settlement agreement that allows Detroit Edison and MichCon, commencing
in 2006, to defer the incremental CTA, subject to the MPSC establishing a recovery mechanism.
Further, the order provided for Detroit Edison and MichCon to amortize the CTA deferrals over a
10-year period beginning with the year subsequent to the year the CTA was deferred. MichCon cannot
defer CTA costs at this time because a regulatory recovery mechanism has not been established by
the MPSC. MichCon plans to seek a recovery mechanism in its next rate case which is expected to be
filed in 2009. See Note 5 for additional information on amounts deferred and amortized in 2006 and
2007 and for the three and nine months ended September 30, 2008 and 2007.
Accounting for Costs Related to Enterprise Business Systems (EBS)
In July 2004, Detroit Edison filed an accounting application with the MPSC requesting authority to
capitalize and amortize costs related to EBS, consisting of computer equipment, software and
development costs, as well as related training, maintenance and overhead costs. In April 2005, the
MPSC approved a settlement agreement providing for the deferral of up to $60 million of certain EBS
costs, which would otherwise be expensed, as a regulatory asset for future rate recovery starting
January 1, 2006. At September 30, 2008, approximately $26 million of EBS costs have been deferred
as a regulatory asset. EBS costs recorded as plant assets are being amortized over a 15-year
period, pursuant to MPSC authorization.
Fermi 2 Enhanced Security Costs Settlement
The Customer Choice and Electricity Reliability Act, as amended in 2003, allows for the recovery of
reasonable and prudent costs of new and enhanced security measures required by state or federal
law, including providing for reasonable security from an act of terrorism. In December 2006,
Detroit Edison filed an application with the MPSC for recovery of $11.4 million of Fermi 2 Enhanced
Security Costs (ESC), discounted back to September 11, 2001 plus carrying costs from that date. In
April 2007, the MPSC approved a settlement agreement that authorizes Detroit Edison to recover
Fermi 2 ESC incurred during the period of September 11, 2001 through December 31, 2005. The
settlement defined Detroit Edisons ESC, discounted back to September 11, 2001, as $9.1 million
plus carrying charges. A total of $13 million, including carrying charges, has been deferred as a
regulatory asset. Detroit Edison is authorized to incorporate into its rates an enhanced security
factor over a period not to exceed five years. Amortization expense related to this regulatory
asset was approximately $1 million and $3 million for the three- and nine-month periods ended
September 30, 2008, respectively. Amortization of this regulatory asset was approximately $1
million and $2 million for the three- and nine-months ended September 30, 2007.
52
Reconciliation of Regulatory Asset Recovery Surcharge (RARS)
In December 2006, Detroit Edison filed a reconciliation of costs underlying its existing RARS. This
true-up filing was made to maximize the remaining time for recovery of significant cost increases
prior to expiration of the RARS 5-year recovery limit under PA 141. Detroit Edison requested a
reconciliation of the regulatory asset surcharge to ensure proper recovery by the end of the 5-year
period of: (1) Clean Air Act Expenditures, (2) Capital in Excess of Base Depreciation, (3) MISO
Costs and (4) the regulatory liability for the 1997 Storm Charge. In July 2007, the MPSC approved a
negotiated RARS deficiency settlement that resulted in a $10 million write-down of
RARS-related costs in 2007. As discussed above, the CIM in the MPSC Show-Cause Order will reduce
the regulatory asset. Detroit Edison had no CIM reductions for the three months ended September 30,
2008 due to the expiration of the CIM in April 2008. Approximately $20 million was credited to the
unrecovered regulatory asset balance during the three months ended September 30, 2007.
Approximately $11 million and $27 million was credited to the unrecovered regulatory asset balance
during the nine months ended September 30, 2008 and 2007, respectively.
Power Supply Costs Recovery Proceedings
2005 Plan Year
In March 2006, Detroit Edison filed its 2005 PSCR reconciliation that sought
approval for recovery of an under-recovery of approximately $144 million at December 31, 2005 from
its commercial and industrial customers. The filing included a motion for entry of an order to
implement immediately a reconciliation surcharge of 4.96 mills per kWh on the bills of its
commercial and industrial customers. The under-collected PSCR expense allocated to residential
customers could not be recovered due to the PA 141 rate cap for residential customers, which
expired January 1, 2006. In addition to the 2005 PSCR plan year reconciliation, the filing included
a reconciliation for the Pension Equalization Mechanism (PEM) for the periods from November 24,
2004 through December 31, 2004 and from January 1, 2005 through December 31, 2005. The PEM
reconciliation seeks to allocate and refund approximately $12 million to customers based on their
contributions to pension expense during the subject periods. In September 2006, the MPSC ordered
the Company to roll the entire 2004 PSCR over-collection amount to its 2005 PSCR Reconciliation. An
order was issued on May 22, 2007 approving a 2005 PSCR
under-collection amount of $94 million and the recovery of this amount through a surcharge for 12
months beginning in June 2007. In addition, the order approved Detroit Edisons proposed PEM
reconciliation that was refunded to customers on a bills-rendered basis during June 2007. The 2005
under-collection surcharge was terminated in May 2008. The surcharge will be reconciled in the
Companys 2008 PSCR reconciliation.
2006 Plan Year
In March 2007, Detroit Edison filed its 2006 PSCR reconciliation that sought
approval for recovery of an under-collection of approximately $51 million. Included in the 2006
PSCR reconciliation filing was the Companys PEM reconciliation that reflects a $21 million
over-collection which is subject to refund to customers. An MPSC order was issued on April 22, 2008
approving the 2006 PSCR under-collection amount of $51 million and the recovery of this amount as
part of the 2007 PSCR factor. In addition, the order approved Detroit Edisons PEM reconciliation
and authorized the Company to refund the $22 million over-recovery, including interest, to
customers in May 2008. The 2006 PEM refund was included in May 2008 customer bills. The refund
will be reconciled in the Companys 2008 PEM reconciliation.
2007 Plan Year
In September 2006, Detroit Edison filed its 2007 PSCR plan case seeking approval
of a levelized PSCR factor of 6.98 mills per kWh above the amount included in base rates for all
PSCR customers. The Companys PSCR plan filing included $130 million for the recovery of its
projected 2006 PSCR under-collection, bringing the total requested PSCR factor to 9.73 mills/kWh.
The Companys application included a request for an early hearing and temporary order granting such
ratemaking authority. The Companys 2007 PSCR plan included fuel and power supply costs, including
NOx and SO
2
emission allowance costs, transmission costs and MISO costs. The Company
filed supplemental testimony and briefs in December 2006 supporting its updated request to include
approximately $81 million for the recovery of its projected 2006 PSCR under-collection. The MPSC
issued a temporary order in December 2006 approving the Companys request. In addition, Detroit
Edison was granted the authority to include all PSCR over/(under) collections in future PSCR plans,
thereby reducing the time between refund or recovery of PSCR reconciliation amounts. The Company
began to collect its 2007 power supply costs, including the 2006 rollover amount, through a PSCR
factor of 8.69 mills/kWh on January 1, 2007. The Company reduced the PSCR factor to 6.69 mills/kWh
on July 1, 2007 based on the updated 2007 plan year projections and increased the PSCR factor to
8.69 mills/kWh on December 1, 2007. In August 2007, the MPSC approved Detroit
53
Edisons 2007 PSCR plan case and authorized the Company to charge a maximum power supply cost
recovery factor of 8.69 mills/kWh in 2007. The Company filed its 2007 PSCR reconciliation case in
March 2008. The filing requests recovery of a $44 million PSCR under-collection through its 2008
PSCR plan. Included in the 2007 PSCR reconciliation filing was the Companys 2007 PEM
reconciliation that reflects a $21 million over-collection, including interest and prior year
refunds. The Company expects an order in this proceeding in the second quarter of 2009.
2008 Plan Year
In September 2007, Detroit Edison filed its 2008 PSCR plan case seeking approval
of a levelized PSCR factor of 9.23 mills/kWh above the amount included in base rates for all PSCR
customers. The Company is supporting a total 2008 power supply expense forecast of $1.3 billion
that includes $1 million for the recovery of its projected 2007 PSCR under-collection. Also
included in the filing was a request for approval of the Companys emission compliance strategy
which included pre-purchases of emission allowances as well as a request for pre-approval of a
contract for capacity and energy associated with a renewable (wind) energy project. On January 31,
2008, Detroit Edison filed a revised PSCR plan case seeking approval of a levelized PSCR factor of
11.22 mills/kWh above the amount included in base rates for all PSCR customers. The revised filing
supports a 2008 power supply expense forecast of $1.4 billion and includes $43 million for the
recovery of a projected 2007 PSCR under-collection. In March 2008, the MPSC ordered that Detroit
Edison shall not self-implement the 11.22 mills/kWh power supply cost recovery factor proposed in
its January 2008 filing. Detroit Edison filed a renewed motion for a temporary order to implement
the 11.22 mills/kWh factor in June 2008. On July 29, 2008, the MPSC issued a temporary order
approving Detroit Edisons request to increase the PSCR factor to 11.22 mills/kWh. The Company
expects a final MPSC order in this proceeding in the fourth quarter of 2008.
2009 Plan Year
In September 2008, Detroit Edison filed its 2009 PSCR plan case seeking approval
of a levelized PSCR factor of 17.67 mills/kWh above the amount included in base rates for
residential customers and a levelized PSCR factor of 17.29 mills/kWh above the amount included in
base rates for commercial and industrial customers. The Company is supporting a total power supply
expense forecast of $1.73 billion. The plan also includes approximately $69 million for the
recovery of its projected 2008 PSCR undercollection from all customers and approximately $12
million for the refund of its 2005 PSCR Reconciliation surcharge overcollection to commercial and
industrial customers only. Also included in the filing is a request for approval of the Companys
expense associated with the use of urea in the selective catalytic reduction units at Monroe power
plant as well as a request for approval of a contract for capacity and energy associated with a
renewable (wind) energy project. The Companys PSCR Plan will allow the Company to recover its
reasonably and prudently incurred power supply expense including; fuel costs, purchased and net
interchange power costs, NOx and SO2 emission allowance costs, transmission costs and MISO costs.
Uncollectible Expense True-Up Mechanism (UETM) and Report of Safety and Training-Related
Expenditures
2005 UETM
In March 2006, MichCon filed an application with the MPSC for approval of its UETM for
2005. This was the first filing MichCon made under the UETM, which was approved by the MPSC in
April 2005 as part of MichCons last general rate case. MichCons 2005 base rates included $37
million for anticipated uncollectible expenses. Actual 2005 uncollectible expenses totaled $60
million. The true-up mechanism allowed MichCon to recover 90% of uncollectibles that exceeded the
$37 million base. Under the formula prescribed by the MPSC, MichCon recorded an under-recovery of
approximately $11 million for uncollectible expenses from May 2005 (when the mechanism took effect)
through the end of 2005. In December 2006, the MPSC issued an order authorizing MichCon to
implement the UETM monthly surcharge for service rendered on and after January 1, 2007.
As part of the March 2006 application with the MPSC, MichCon filed a review of its 2005 annual
safety and training-related expenditures. MichCon reported that actual safety and training-related
expenditures for the initial period exceeded the pro-rata amounts included in base rates and, based
on the under-recovered position, recommended no refund at that time. In the December 2006 order,
the MPSC also approved MichCons 2005 safety and training report. On October 14, 2008, the State of
Michigan Court of Appeals rejected the appeal of the Attorney General of the State of Michigan
upholding the right of the MPSC to authorize MichCon to charge the 2005 UETM.
2006 UETM
In March 2007, MichCon filed an application with the MPSC for approval of its UETM for
2006 requesting $33 million of under-recovery plus applicable carrying costs of $3 million. The
March 2007 application included a report of MichCons 2006 annual safety and training-related
expenditures, which showed a $2 million
54
over-recovery. In August 2007, MichCon filed revised exhibits reflecting an agreement with the MPSC
Staff to net the $2 million over-recovery and associated interest related to the 2006 safety and
training-related expenditures against the 2006 UETM under-recovery. An MPSC order was issued in
December 2007 approving the collection of $33 million requested in the August 2007 revised filing.
MichCon was authorized to implement the new UETM monthly surcharge for service rendered on and
after January 1, 2008.
2007 UETM
In March 2008, MichCon filed an application with the MPSC for approval of its UETM for
2007 requesting approximately $34 million. This total includes $33 million of costs related to 2007
uncollectible expense and associated carrying charges and $1 million of under-collections for the
2005 UETM. The March 2008 application included a report of MichCons 2007 annual safety and
training-related expenses, which showed no refund was necessary because actual expenditures
exceeded the amount included in base rates. MichCon anticipates the MPSC will issue an order
authorizing MichCon to implement the monthly UETM surcharge proposed in this filing for service
rendered on and after January 1, 2009.
Gas Cost Recovery Proceedings
2005-2006 Plan Year
In June 2006, MichCon filed its GCR reconciliation for the 2005-2006 GCR
year. The filing supported a total over-recovery, including interest through March 2006, of $13
million. MPSC Staff and other interveners filed testimony regarding the reconciliation in which
they recommended disallowances related to MichCons implementation of its dollar cost averaging
fixed price program. In January 2007, MichCon filed testimony rebutting these recommendations. In
December 2007, the MPSC issued an order adopting the adjustments proposed by the MPSC Staff,
resulting in an $8 million disallowance. Expense related to the disallowance was recorded in 2007.
The MPSC authorized MichCon to roll a net over-recovery, inclusive of interest, of $20 million into
its 2006-2007 GCR reconciliation. In December 2007, MichCon filed an appeal of the case with the
Michigan Court of Appeals. MichCon is currently unable to predict the outcome of the appeal.
2006-2007 Plan Year
In June 2007, MichCon filed its GCR reconciliation for the 2006-2007 GCR
year. The filing supported a total under-recovery, including interest through March 2007, of $18
million. In March 2008, the parties reached a settlement agreement that allowed for full recovery
of MichCons GCR costs during the 2006-2007 GCR year. The settlement reflected the $20 million net
over-recovery required by the MPSCs order in its 2005-2006 GCR reconciliation. The under-recovery including interest through March 2007 agreed to
under the settlement is $9 million and will be included in the 2007-2008 GCR reconciliation. An
MPSC order was issued on April 22, 2008 approving the settlement.
2007-2008 Plan Year / Base Gas Sale Consolidated
In August 2006, MichCon filed an application
with the MPSC requesting permission to sell base gas that would become accessible with storage
facilities upgrades. In December 2006, MichCon filed its 2007-2008 GCR plan case proposing a
maximum GCR factor of $8.49 per Mcf. In August 2007, a settlement agreement in this proceeding was
reached by all intervening parties that provided for a sharing with customers of the proceeds from
the sale of base gas. In addition, the agreement provided for a rate case filing moratorium until
January 1, 2009, unless certain unanticipated changes occur that impact income by more than $5
million. The settlement agreement was approved by the MPSC in August 2007. MichCons gas storage
enhancement projects, the main subject of the aforementioned settlement, have enabled 17 billion
cubic feet (Bcf) of gas to become available for cycling. Under the settlement terms, MichCon
delivered 13.4 Bcf of this gas to its customers through 2007 at a savings to market-priced supplies
of approximately $54 million. This settlement also provided for MichCon to retain the proceeds from
the sale of 3.6 Bcf of gas, which MichCon expects to sell through 2009. During 2007, MichCon sold
0.75 Bcf of base gas and recognized a pre-tax gain of $5 million. There were no sales of base gas
in the first nine months of 2008. In June 2008, MichCon filed its GCR reconciliation for the
2007-2008 GCR year. The filing supported a total under-recovery, including interest through March
2008, of $10 million.
2008-2009 Plan Year
In December 2007, MichCon filed its GCR plan case for the 2008-2009 GCR Plan
year. MichCon filed for a maximum GCR factor of $8.36 per Mcf, adjustable by a contingent
mechanism. In June 2008, MichCon made an informational filing documenting the increase in market
prices for gas since its December 2007 filing and calculating its new maximum factor of $10.76 per
Mcf based on its contingent mechanism. On August 26, 2008, the MPSC approved a partial settlement
agreement which includes the establishment of a new maximum base GCR factor of $11.36 per Mcf that
will not be subject to adjustment by contingent GCR factors for the remainder of the 2008-2009 GCR
plan year. An MPSC order in this case is expected in 2008.
2009 Proposed Native Base Gas Sale
In July 2008, MichCon filed an application with the MPSC
requesting permission to sell an additional 4 Bcf of base gas that will become available for sale
as a result of better than
55
expected operations at its storage fields. MichCon proposed to sell 1.3 Bcf of the base gas to GCR
customers during the 2009-2010 GCR period at cost and to sell the remaining 2.7 Bcf to non-system
supply customers in 2009 at market prices. MichCon requested that the MPSC treat the proceeds from
the sale of the 2.7 Bcf of base gas to non-system supply customers as a one-time increase in
MichCons net income and not include the proceeds in the calculation of MichCons revenue
requirements in future rate cases.
Other
In July 2007, the State of Michigan Court of Appeals published its decision with respect to an
appeal by Detroit Edison and others of certain provisions of a November 2004 MPSC order, including
reversing the MPSCs denial of recovery of merger control premium costs. In its published decision,
the Court of Appeals held that Detroit Edison is entitled to recover its allocated share of the
merger control premium and remanded this matter to the MPSC for further proceedings to establish
the precise amount and timing of this recovery. Detroit Edison has filed a supplement to its April
2007 rate case to address the recovery of the merger control premium costs. In September 2007, the
Court of Appeals remanded to the MPSC, for reconsideration, the MichCon recovery of merger control
premium costs. Other parties filed requests for leave to appeal to the Michigan Supreme Court from
the Court of Appeals decision and in September 2008, the Michigan Supreme Court granted the
requests to address the merger control premium as well as the recovery of transmission costs
through the PSCR. The Company is unable to predict the financial or other outcome of any legal or
regulatory proceeding at this time.
The Company is unable to predict the outcome of the regulatory matters discussed herein. Resolution
of these matters is dependent upon future MPSC orders and appeals, which may materially impact the
financial position, results of operations and cash flows of the Company.
NOTE 7 COMMON STOCK AND EARNINGS PER SHARE
The Company reports both basic and diluted earnings per share. Basic earnings per share is computed
by dividing income from continuing operations by the weighted average number of common shares
outstanding during the period. The calculation of diluted earnings per share assumes the issuance
of potentially dilutive common shares outstanding during the period and the repurchase of common
shares that would have occurred with proceeds from the assumed issuance. Diluted earnings per share
assume the exercise of stock options. Non-vested restricted stock awards are included in the number
of common shares outstanding; however, for purposes of computing basic earnings per share,
non-vested restricted stock awards are excluded. A reconciliation of both calculations is presented
in the following table as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30
|
|
|
Ended September 30
|
|
(in Millions, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
169
|
|
|
$
|
152
|
|
|
$
|
397
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
|
|
|
162
|
|
|
|
165
|
|
|
|
162
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock based on weighted average
number of shares outstanding
|
|
$
|
1.04
|
|
|
$
|
0.93
|
|
|
$
|
2.45
|
|
|
$
|
3.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
169
|
|
|
$
|
152
|
|
|
$
|
397
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
|
|
|
162
|
|
|
|
165
|
|
|
|
162
|
|
|
|
172
|
|
Incremental shares from stock-based awards
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of dilutive shares outstanding
|
|
|
163
|
|
|
|
166
|
|
|
|
163
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock assuming issuance of incremental shares
|
|
$
|
1.03
|
|
|
$
|
0.92
|
|
|
$
|
2.44
|
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 2 million shares of common stock as of September 30, 2008 were
not included in the computation of diluted earnings per share because the options exercise price
was greater than the average market price of the common shares, thus making these options
anti-dilutive.
56
NOTE 8 LONG-TERM DEBT
Detroit Edison converted $238 million of tax-exempt bonds from an auction rate mode to a weekly
rate mode in March 2008 due to a loss of liquidity in the auction rate markets. Detroit Edison then
repurchased these bonds and held them until such time as it could either redeem and reissue the
bonds or remarket the bonds in a longer-term mode. Approximately $187 million of these bonds have
been redeemed and reissued and $51 million have been remarketed in a fixed rate mode to maturity.
Debt Issuances
In 2008, the Company has issued or remarketed the following long-term debt:
(in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Month Issued
|
|
Type
|
|
Interest Rate
|
|
Maturity
|
|
Amount
|
|
|
MichCon
|
|
April
|
|
Senior Notes (1)
|
|
5.26%
|
|
2013
|
|
$
|
60
|
|
MichCon
|
|
April
|
|
Senior Notes (1)
|
|
6.04%
|
|
2018
|
|
|
100
|
|
MichCon
|
|
April
|
|
Senior Notes (1)
|
|
6.44%
|
|
2023
|
|
|
25
|
|
Detroit Edison
|
|
April
|
|
Tax-Exempt Revenue Bonds (2) (3)
|
|
Variable
|
|
2036
|
|
|
69
|
|
Detroit Edison
|
|
May
|
|
Tax-Exempt Revenue Bonds (2) (3)
|
|
Variable
|
|
2029
|
|
|
118
|
|
Detroit Edison
|
|
May
|
|
Tax-Exempt Revenue Bonds (2) (4)
|
|
5.30%
|
|
2030
|
|
|
51
|
|
MichCon
|
|
June
|
|
Senior Notes (5)
|
|
6.78%
|
|
2028
|
|
|
75
|
|
Detroit Edison
|
|
June
|
|
Senior Notes (1)
|
|
5.60%
|
|
2018
|
|
|
300
|
|
Detroit Edison
|
|
July
|
|
Tax-Exempt Revenue Bonds (2) (6)
|
|
Variable
|
|
2020
|
|
|
32
|
|
MichCon
|
|
August
|
|
Senior Notes (7)
|
|
5.94%
|
|
2015
|
|
|
140
|
|
MichCon
|
|
August
|
|
Senior Notes (7)
|
|
6.36%
|
|
2020
|
|
|
50
|
|
Detroit Edison
|
|
October
|
|
Senior Notes (1)
|
|
6.40%
|
|
2013
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Proceeds were used to pay down short-term debt and for general corporate purposes.
|
|
(2)
|
|
Detroit Edison Tax-Exempt Revenue Bonds are issued by a public body that loans
the proceeds to Detroit Edison on terms substantially mirroring the Revenue
Bonds.
|
|
(3)
|
|
Proceeds were used to refinance auction rate Tax-Exempt Revenue Bonds.
|
|
(4)
|
|
These Tax-Exempt Revenue Bonds were converted from an auction rate mode and
remarketed in a fixed rate mode to maturity.
|
|
(5)
|
|
Proceeds were used to repay the 6.45% Remarketable Securities due 2038 subject to
mandatory or optional tender on June 30, 2008.
|
|
(6)
|
|
Proceeds were used to refinance Tax-Exempt Revenue Bonds that matured July 2008.
|
|
(7)
|
|
Proceeds were used to repay a portion of the $200 million MichCon 6.125% Senior
Notes due September 2008.
|
57
Debt Retirements and Redemptions
In 2008, the following debt has been retired, through optional redemption or payment at maturity:
(in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Month Retired
|
|
Type
|
|
Interest Rate
|
|
Maturity
|
|
Amount
|
|
|
Detroit Edison
|
|
April
|
|
Tax-Exempt Revenue Bonds (1)
|
|
Variable
|
|
2036
|
|
$
|
69
|
|
Detroit Edison
|
|
May
|
|
Tax-Exempt Revenue Bonds (1)
|
|
Variable
|
|
2029
|
|
|
118
|
|
MichCon
|
|
June
|
|
Remarketable Securities (2)
|
|
6.45%
|
|
2038
|
|
|
75
|
|
Detroit Edison
|
|
July
|
|
Tax-Exempt Revenue Bonds (3)
|
|
7.00%
|
|
2008
|
|
|
32
|
|
MichCon
|
|
September
|
|
Senior Notes (4)
|
|
6.125%
|
|
2008
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These Tax-Exempt Revenue Bonds were converted from auction rate mode
and subsequently redeemed with proceeds from the issuance of new
Detroit Edison Tax-Exempt Revenue Bonds.
|
|
(2)
|
|
These Remarketable Securities were optionally redeemed by MichCon with
proceeds from the issuance of new MichCon Senior Notes.
|
|
(3)
|
|
These Tax-Exempt Revenue Bonds were redeemed with the proceeds from
the issuance of new Detroit Edison Tax-Exempt Revenue Bonds.
|
|
(4)
|
|
These Senior Notes were redeemed with the proceeds from the issuance
of new MichCon Senior Notes and short-term debt.
|
NOTE 9 COMMITMENTS AND CONTINGENCIES
Environmental
Electric Utility
Air
Detroit Edison is subject to EPA ozone transport and acid rain regulations that limit power
plant emissions of sulfur dioxide and nitrogen oxides. In March 2005, the EPA issued additional
emission reduction regulations relating to ozone, fine particulate, regional haze and mercury air
pollution. The new rules will lead to additional controls on fossil-fueled power plants to reduce
nitrogen oxide, sulfur dioxide and mercury emissions. To comply with these requirements, Detroit
Edison has spent approximately $1.1 billion through 2007. The Company estimates Detroit Edison
future capital expenditures at up to $282 million in 2008 and up to $2.4 billion of additional
capital expenditures through 2018 to satisfy both the existing and proposed new control
requirements
.
Water
In response to an EPA regulation, Detroit Edison is required to examine alternatives for
reducing the environmental impacts of the cooling water intake structures at several of its
facilities. Based on the results of the studies to be conducted over the next several years,
Detroit Edison may be required to install additional control technologies to reduce the impacts of
the water intakes. Initially, it was estimated that Detroit Edison could incur up to approximately
$55 million over the 4 to 6 years subsequent to 2007 in additional capital expenditures to comply
with these requirements. However, a recent court decision remanded back to the EPA several
provisions of the federal regulation that may result in a delay in compliance dates. The decision
also raised the possibility that Detroit Edison may have to install cooling towers at some
facilities at a cost substantially greater than was initially estimated for other mitigative
technologies.
Contaminated Sites
Detroit Edison conducted remedial investigations at contaminated sites,
including three former manufactured gas plant (MGP) sites, the area surrounding an ash landfill and
several underground and aboveground storage tank locations. Liabilities accrued for remediation of
these sites were approximately $12 million at September 30, 2008 and $15 million at December 31,
2007. The costs to remediate are expected to be incurred over the next several years.
Gas Utility
Contaminated Sites
Prior to the construction of major interstate natural gas pipelines, gas for
heating and other uses was manufactured locally from processes involving coal, coke or oil. Gas
Utility owns, or previously owned, 15 such former MGP sites. Investigations have revealed
contamination related to the by-products of gas manufacturing
58
at each site. In addition to the MGP sites, the Company is also in the process of cleaning up other
contaminated sites. Cleanup activities associated with these sites will be conducted over the next
several years.
The MPSC has established a cost deferral and rate recovery mechanism for investigation and
remediation costs incurred at former MGP sites. At September 30, 2008 and December 31, 2007, Gas
Utility had liabilities of approximately $38 million and $40 million, respectively, for estimated
investigation and remediation costs at former MGP sites and related regulatory assets.
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 affect the Companys financial position and cash flows. However, the Company
anticipates the cost deferral and rate recovery mechanism approved by the MPSC will prevent
environmental costs from having a material adverse impact on its results of operations.
Non-Utility
The Companys non-utility affiliates are subject to a number of environmental laws and regulations
dealing with the protection of the environment from various pollutants. The Company is in the
process of installing new environmental equipment at its coke battery facility in Michigan. The
Company expects the project to be completed during 2009. The coke battery facility received and
responded to information requests from the EPA resulting in the issuance of a notice of violation
regarding potential maximum achievable control technologies and new source review violations. The
EPA is in the process of reviewing the Companys position of demonstrated compliance and has not
initiated escalated enforcement. At this time, the Company cannot predict the impact of this issue.
The Companys non-utility affiliates are substantially in compliance with all environmental
requirements, other than as noted above.
Guarantees
In certain limited circumstances, the Company enters into contractual guarantees. The Company may
guarantee another entitys obligation in the event it fails to perform. The Company may provide
guarantees in certain indemnification agreements. Finally, the Company may provide indirect
guarantees for the indebtedness of others. Below are the details of specific material guarantees
the Company currently provides.
Millennium Pipeline Project Guarantee
The Company owns a 26.25% equity interest in the Millennium Pipeline Project (Millennium).
Millennium is accounted for under the equity method. Millennium is expected to begin commercial
operations in December 2008.
On August 29, 2007, Millennium entered into a borrowing facility to finance the construction costs
of the project. The total facility amounts to $800 million and is guaranteed by the project
partners, based upon their respective ownership percentages. The facility expires on August 29,
2010. The amount outstanding under this facility was $772 million at September 30, 2008. Proceeds
of the facility are being used to fund project costs and expenses relating to the development,
construction and commercial start up and testing of the pipeline project and for general corporate
purposes. In addition, the facility has been utilized to reimburse the project partners for costs
and expenses incurred in connection with the project for the period subsequent to June 1, 2004
through immediately prior to the closing of the facility.
The Company has agreed to guarantee 26.25% of the borrowing facility in the event of default by
Millennium. The guarantee includes DTE Energys revolving credit facilitys covenant and default
provisions by reference. The Company has also provided performance guarantees in regards to
completion of Millennium to the major shippers in an amount of approximately $16 million.
Millennium has contractual obligations to begin commercial operations on January 1, 2009. The
maximum potential amount of future payments under these guarantees is approximately $226 million.
There are no recourse provisions or collateral that would enable us to recover any amounts paid
under the guarantees other than our share of project assets.
Parent Company Guarantee of Subsidiary Obligations
Various non-utility subsidiaries of the Company have entered into contracts which contain ratings
triggers and are guaranteed by DTE Energy. These contracts contain provisions which allow the
counterparties to request that the Company post cash or letters of credit as collateral in the
event that DTE Energys credit rating is downgraded below investment grade. Certain of these
provisions (known as hard triggers) state specific circumstances under which the Company can be
asked to post collateral upon the occurrence of a credit downgrade, while other provisions (known
as soft triggers) are not as specific. For contracts with soft triggers, it is difficult to estimate the amount of collateral which may be requested by counterparties and/or which the Company may ultimately be required to post.
59
The amount of such collateral which could
be requested fluctuates based on commodity prices (primarily gas and power) and the provisions and
maturities of the underlying transactions. As of September 30, 2008, the value of the transactions
for which the Company is exposed to collateral requests is approximately $500 million. The Company
believes that the actual amount ultimately posted would be much less than this aggregate exposure.
Other Guarantees
The Companys other guarantees are not individually material, with maximum potential payments of
$10 million as of September 30, 2008.
Labor Contracts
There are several bargaining units for the Companys represented employees. In September 2008,
approximately 500 employees in the Companys electric operations ratified a new four-year contract.
The contracts of the remaining represented employees expire at various dates in 2009 and 2010.
Purchase Commitments
Detroit Edison has an Energy Purchase Agreement to purchase steam and electricity from the Greater
Detroit Resource Recovery Authority (GDRRA). Under the Agreement, Detroit Edison will purchase
steam through 2008 and electricity through June 2024. In 1996, a charge to income was recorded that
included a reserve for steam purchase commitments in excess of replacement costs from 1997 through
2008. The reserve for steam purchase commitments totals $5 million as of September 30, 2008 and is
being amortized to Fuel, purchased power and gas expense with non-cash accretion expense being
recorded through 2008. The Company estimates steam and electric purchase commitments from 2008
through 2024 will not exceed $343 million. In 2003, the Company sold the steam heating business of
Detroit Edison to Thermal Ventures II, LP. Under the terms of the sale, Detroit Edison remains
contractually obligated to buy steam from GDRRA through December 2008. Also, the Company guaranteed
bank loans of $13 million that Thermal Ventures II, LP may use for capital improvements to the
steam heating system and during 2007 recorded a liability of $13 million related to the bank loan
guarantee.
As of September 30, 2008, the Company was party to numerous long-term purchase commitments relating
to a variety of goods and services required for the Companys business. These agreements primarily
consist of fuel supply commitments and energy trading contracts. The Company estimates that these
commitments will be approximately $5.9 billion from 2008 through 2051. The Company also estimates
that 2008 capital expenditures will be approximately $1.5 billion. The Company has made certain
commitments in connection with expected capital expenditures.
Bankruptcies
The Company transacts with numerous companies operating in the steel, automotive, energy, retail,
financial and other industries. Certain of the Companys customers have filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. The Company regularly reviews contingent
matters relating to these customers and its purchase and sale contracts, and records provisions for
amounts considered at risk of probable loss. Management believes the Companys previously accrued
amounts are adequate for probable losses. The final resolution of these matters is not expected to
have a material effect on the Companys consolidated financial statements.
Other Contingencies
The Company is involved in certain legal, regulatory, administrative and environmental proceedings
before various courts, arbitration panels and governmental agencies concerning claims arising in
the ordinary course of business. These proceedings include certain contract disputes, additional
environmental reviews and investigations, audits, inquiries from various regulators and pending
judicial matters. The Company cannot predict the final disposition of such proceedings. The Company
regularly reviews legal matters and records provisions for claims it can estimate and which are
considered probable of loss. The resolution of these pending proceedings is not expected to have a
material effect on the Companys operations or financial statements in the periods they are
resolved.
See Note 6 for a discussion of contingencies related to regulatory matters.
60
NOTE 10 SEGMENT INFORMATION
Beginning in the second quarter of 2008, the Company realigned its Coal Transportation and
Marketing business from the Coal and Gas Midstream segment (now the Gas Midstream segment) to the Power and Industrial Projects
segment, due to changes in how financial information is evaluated and resources allocated to
segments by senior management. The Companys segment information reflects this change for all
periods presented. The Company sets strategic goals, allocates resources and evaluates performance
based on the following structure:
Electric Utility
|
|
|
The Companys Electric Utility segment consists of Detroit Edison, which is engaged in
the generation, purchase, distribution and sale of electricity to approximately 2.2 million
residential, commercial and industrial customers in southeastern Michigan.
|
Gas Utility
|
|
|
The Gas Utility segment consists of MichCon and Citizens. MichCon is engaged in the
purchase, storage, transmission, distribution and sale of natural gas to approximately 1.3
million residential, commercial and industrial customers throughout Michigan. MichCon also
has subsidiaries involved in the gathering, processing and transmission of natural gas in
northern Michigan. Citizens distributes natural gas in Adrian, Michigan to approximately
17,000 customers.
|
Non-Utility Operations
|
|
|
Gas Midstream
consists of gas pipelines and storage businesses;
|
|
|
|
|
Unconventional Gas Production
is engaged in unconventional gas project development and
production;
|
|
|
|
|
Power and Industrial Projects
is comprised primarily of projects that deliver energy
and utility-type products and services to industrial, commercial and institutional
customers, biomass energy projects and coal transportation and marketing; and
|
|
|
|
|
Energy Trading
primarily consists of energy marketing and trading operations.
|
Corporate & Other
primarily consists of corporate staff functions that are fully allocated to the
various segments based on services utilized. Additionally, Corporate & Other holds certain
non-utility debt and energy-related investments.
The income tax provisions or benefits of DTE Energys subsidiaries are determined on an individual
company basis and recognize the tax benefit of production tax credits and net operating losses. The
subsidiaries record income tax payable to or receivable from DTE Energy resulting from the
inclusion of its taxable income or loss in DTE Energys consolidated federal tax return.
Inter-segment billing for goods and services exchanged between segments is based upon tariffed or
market-based prices of the provider and primarily consists of power sales, gas sales and coal
transportation services in the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Electric Utility
|
|
$
|
5
|
|
|
$
|
20
|
|
|
$
|
11
|
|
|
$
|
29
|
|
Gas Utility
|
|
|
3
|
|
|
|
1
|
|
|
|
6
|
|
|
|
4
|
|
Gas Midstream
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
|
|
13
|
|
Unconventional Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Power and Industrial Projects
|
|
|
8
|
|
|
|
34
|
|
|
|
77
|
|
|
|
140
|
|
Energy Trading
|
|
|
24
|
|
|
|
26
|
|
|
|
96
|
|
|
|
43
|
|
Corporate & Other
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
(60
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
68
|
|
|
$
|
137
|
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Financial data of the business segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(in Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
$
|
1,440
|
|
|
$
|
1,403
|
|
|
$
|
3,766
|
|
|
$
|
3,707
|
|
Gas Utility
|
|
|
225
|
|
|
|
173
|
|
|
|
1,537
|
|
|
|
1,358
|
|
Non-utility Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Midstream
|
|
|
19
|
|
|
|
16
|
|
|
|
53
|
|
|
|
49
|
|
Unconventional Gas Production (1)
|
|
|
14
|
|
|
|
15
|
|
|
|
37
|
|
|
|
(244
|
)
|
Power and Industrial Projects
|
|
|
264
|
|
|
|
298
|
|
|
|
778
|
|
|
|
972
|
|
Energy Trading
|
|
|
405
|
|
|
|
292
|
|
|
|
1,128
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
702
|
|
|
|
621
|
|
|
|
1,996
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
Reconciliation & Eliminations
|
|
|
(24
|
)
|
|
|
(68
|
)
|
|
|
(137
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total From Continuing Operations
|
|
$
|
2,338
|
|
|
$
|
2,128
|
|
|
$
|
7,159
|
|
|
$
|
6,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utility
|
|
$
|
159
|
|
|
$
|
107
|
|
|
$
|
251
|
|
|
$
|
207
|
|
Gas Utility
|
|
|
(15
|
)
|
|
|
(29
|
)
|
|
|
33
|
|
|
|
31
|
|
Non-utility Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Midstream
|
|
|
11
|
|
|
|
9
|
|
|
|
27
|
|
|
|
25
|
|
Unconventional Gas Production (1)(2)
|
|
|
3
|
|
|
|
1
|
|
|
|
89
|
|
|
|
(208
|
)
|
Power and Industrial Projects
|
|
|
26
|
|
|
|
9
|
|
|
|
30
|
|
|
|
26
|
|
Energy Trading
|
|
|
19
|
|
|
|
45
|
|
|
|
36
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other (3)
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
(69
|
)
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
|
144
|
|
|
|
78
|
|
|
|
284
|
|
|
|
238
|
|
Non-utility
|
|
|
59
|
|
|
|
64
|
|
|
|
182
|
|
|
|
(124
|
)
|
Corporate & Other
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
(69
|
)
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
152
|
|
|
|
397
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations (4)
|
|
|
8
|
|
|
|
45
|
|
|
|
20
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
177
|
|
|
$
|
197
|
|
|
$
|
417
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
2007 Operating Revenues and Net Loss include recognition of losses on hedge contracts associated with
the Antrim sale transaction. See Note 4.
|
|
(2)
|
|
2008 Net Income of the Unconventional Gas Production segment in the nine month period results
primarily from the after-tax gain on the sale of a portion of the Barnett shale properties. See Note 4.
|
|
(3)
|
|
2007 Net Income results principally from the gain recognized on the Antrim sale transaction. See Note 4.
|
|
(4)
|
|
Discontinued operations of synthetic fuel business as of December 31, 2007. See Note 4.
|
62
Part II Other Information
Item 1. Legal Proceedings
We are involved in certain legal, regulatory, administrative and environmental proceedings before
various courts, arbitration panels and governmental agencies concerning matters arising in the
ordinary course of business. These proceedings include certain contract disputes, environmental
reviews and investigations, audits, inquiries from various regulators, and pending judicial
matters. We cannot predict the final disposition of such proceedings. We regularly review legal
matters and record provisions for claims that are considered probable of loss. The resolution of
pending proceedings is not expected to have a material effect on our operations or financial
statements in the period they are resolved.
We are aware of attempts by an environmental organization known as the Waterkeeper Alliance to
initiate a criminal action in Canada against the Company for alleged violations of the Canadian
Fisheries Act. Fines under the relevant Canadian statute could potentially be significant. To
date, the Company has not been properly served process in this matter. Nevertheless, as a result
of a recent decision by a Canadian court, a trial schedule has been initiated. The Company
believes the claims of the Waterkeeper Alliance in this matter are without legal merit and has
appealed the courts decision. We are not able to predict or assess the outcome of this action at
this time.
The City of Detroit Water and Sewer Department (DWSD) has a suit pending in U.S. District Court for the
Eastern District of Michigan against EES Coke Battery, LLC (EES Coke), which is an indirect wholly
owned subsidiary of the Company, alleging that certain constituents of waste water discharged by
EES Coke into DWSDs sewer system exceeded the permitted amounts. DWSD has requested that EES Coke
be required to obtain a new permit and to pay fines for past excess amounts. DWSD and EES Coke are
negotiating a consent order to settle this matter that will require EES Coke to pay fines in excess
of $100,000. EES Coke is making capital improvements that are intended to prevent exceeding the
permitted amounts in the future.
Item 1A. Risk Factors
There are various risks associated with the operations of DTE Energys utility and non-utility
businesses. Our 2007 Form 10-K includes a detailed discussion of our risk factors. The
information presented below amends and restates a certain risk factor and
should be read in conjunction with the risk factors and information disclosed in our 2007 Form
10-K. Additional risks and uncertainties not currently known to the Company, or that are currently
deemed to be immaterial, also may materially adversely affect the Companys business, financial
condition and/or future operating results.
Michigans electric Customer Choice program could negatively impact our financial performance.
The
electric Customer Choice program, as originally contemplated in Michigan, anticipated an eventual
transition to a totally deregulated and competitive environment where customers would be charged
market-based rates for their electricity. The State of Michigan currently experiences a hybrid
market, where the MPSC continues to regulate electric rates for our customers, while alternative
electric suppliers charge market-based rates. In addition, such regulated electric rates for
certain groups of our customers exceed the cost of service to those customers. Due to distorted
pricing mechanisms during the initial implementation period of electric Customer Choice, many
commercial customers chose alternative electric suppliers. MPSC rate orders and recent energy
legislation enacted by the State of Michigan are phasing out the pricing disparity and have placed
a cap on the total potential Customer Choice related migration. Recent higher wholesale electric
prices have also resulted in some former electric Customer Choice customers migrating back to
Detroit Edison for electric generation service. Even with the electric Customer Choice-related
relief received in recent Detroit Edison rate orders and the legislated 10 percent cap on
participation in the electric Customer Choice program, there continues to be financial risk
associated with the electric Customer Choice program. Electric Customer Choice migration is
sensitive to market price and bundled electric service price increases.
63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
The following table provides information about Company purchases of equity securities that are
registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934 during the
three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Value that May Yet
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Be Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
Period
|
|
Purchased (1)
|
|
|
Per Share
|
|
|
or Programs
|
|
|
Programs (2)
|
|
07/01/08 - 07/31/08
|
|
|
1,200
|
|
|
$
|
43.07
|
|
|
|
|
|
|
$
|
822,895,623
|
|
08/01/08 - 08/31/08
|
|
|
20,000
|
|
|
$
|
42.25
|
|
|
|
|
|
|
$
|
822,895,623
|
|
09/01/08 - 09/30/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
822,895,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,200
|
|
|
$
|
42.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents shares of common stock purchased on the open market to provide shares to
participants under various employee compensation and incentive programs. These purchases were
not made pursuant to a publicly announced plan or program.
|
|
(2)
|
|
In January 2005, the DTE Energy Board of Directors authorized the repurchase of up to $700
million in common stock through 2008. In May 2007, the DTE Energy Board of Directors
authorized the repurchase of up to an additional $850 million of common stock through 2009.
Through September 30, 2008, repurchases of approximately $725 million of common stock were
made under these authorizations. These authorizations provide Company management with
flexibility to pursue share repurchases from time to time, and will depend on future asset
monetization, cash flows and investment opportunities.
|
64
Item 6. Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
Exhibits filed herewith:
|
|
|
|
4-250
|
|
Forty-First Supplemental Indenture, dated as of August 1, 2008 to
Indenture of Mortgage and Deed of Trust dated as of March 1, 1944 between
Michigan Consolidated Gas Company and Citibank, N.A., Trustee establishing the
2008 Series H and I Collateral Bonds.
|
|
|
|
4-251
|
|
Eighth Supplemental Indenture, dated as of August 1, 2008 to Supplemental
to Indenture dated as of June 1, 1998 between Michigan Consolidated Gas
Company and Citibank, N.A., Trustee, establishing the 5.94% Senior Notes,
2008 Series H due 2015 and 6.36% Senior Notes, 2008 Series I due 2020.
|
|
|
|
31-43
|
|
Chief Executive Officer Section 302 Form 10-Q Certification.
|
|
|
|
31-44
|
|
Chief Financial Officer Section 302 Form 10-Q Certification.
|
|
|
|
Exhibits
incorporated herein by reference:
|
|
|
|
4-252
|
|
Supplemental Indenture, dated as of October 1, 2008 to Mortgage and Deed of
Trust dated as of October 1, 1924 between The Detroit Edison Company and
The Bank of New York Mellon Trust Company N.A. as successor trustee,
providing for General and Refunding Mortgage Bonds, 2008 Series J (Exhibit
4-259 to The Detroit Edison Companys Form 10-Q for the quarter ended
September 30, 2008).
|
|
|
|
4-253
|
|
Twenty-Seventh Supplemental Indenture, dated as of October 1, 2008 to the Collateral
Trust Indenture, dated as of June 30, 1993 between The Detroit Edison
Company and The Bank of New York Mellon Trust Company N.A. providing for
2008 Series J 6.40% Senior Notes due 2013 (Exhibit 4-260 to The Detroit
Edison Companys Form 10-Q for the quarter ended September 30, 2008).
|
|
|
|
Exhibits furnished herewith:
|
|
|
|
32-43
|
|
Chief Executive Officer Section 906 Form 10-Q Certification.
|
|
32-44
|
|
Chief Financial Officer Section 906 Form 10-Q Certification.
|
65
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DTE ENERGY COMPANY
(Registrant)
|
|
Date: November 4, 2008
|
/s/ PETER B. OLEKSIAK
|
|
|
Peter B. Oleksiak
|
|
|
Vice President and Controller and
Chief Accounting Officer
|
|
|
66
Exhibit 4-250
Executed in 78 Counterparts
of which this is Counterpart No. ___
FORTY-FIRST
SUPPLEMENTAL INDENTURE
TO
INDENTURE OF MORTGAGE AND
DEED OF TRUST
DATED AS OF MARCH 1, 1944
AS RESTATED IN
PART II OF THE TWENTY-NINTH
SUPPLEMENTAL INDENTURE DATED AS OF JULY 15, 1989
WHICH BECAME EFFECTIVE ON APRIL 1, 1994
MICHIGAN CONSOLIDATED GAS COMPANY
TO
CITIBANK, N.A.,
TRUSTEE
DATED AS OF AUGUST 1, 2008
CREATING TWO ISSUES OF FIRST MORTGAGE BONDS,
DESIGNATED AS
2008 SERIES H COLLATERAL BONDS
2008 SERIES I COLLATERAL BONDS
MICHIGAN CONSOLIDATED GAS COMPANY
FORTY-FIRST SUPPLEMENTAL INDENTURE
DATED AS OF AUGUST 1, 2008
SUPPLEMENTAL TO INDENTURE OF MORTGAGE
AND DEED OF TRUST
DATED AS OF MARCH 1, 1944
TABLE OF CONTENTS
|
|
|
|
|
|
|
PAGE
|
|
ARTICLE I ESTABLISHMENT OF AN ISSUE OF FIRST MORTGAGE BONDS, OF THE SERIES DESIGNATED AND
DISTINGUISHED AS 2008 SERIES H BONDS
|
|
|
4
|
|
|
|
|
|
|
SECTION 1
|
|
|
4
|
|
SECTION 2
|
|
|
10
|
|
SECTION 3
|
|
|
10
|
|
SECTION 4
|
|
|
10
|
|
SECTION 5
|
|
|
11
|
|
|
|
|
|
|
ARTICLE II ESTABLISHMENT OF AN ISSUE OF FIRST MORTGAGE BONDS, OF THE SERIES DESIGNATED AND
DISTINGUISHED AS 2008 SERIES I BONDS
|
|
|
11
|
|
|
|
|
|
|
SECTION 1
|
|
|
11
|
|
SECTION 2
|
|
|
17
|
|
SECTION 3
|
|
|
17
|
|
SECTION 4
|
|
|
17
|
|
SECTION 5
|
|
|
18
|
|
|
|
|
|
|
ARTICLE III ISSUE OF COLLATERAL BONDS
|
|
|
18
|
|
|
|
|
|
|
ARTICLE IV THE TRUSTEE
|
|
|
18
|
|
|
|
|
|
|
ARTICLE V RECORDING AND FILING OF SUPPLEMENTAL INDENTURE DATED AS OF JUNE 1, 2008
|
|
|
19
|
|
|
|
|
|
|
ARTICLE VI MISCELLANEOUS PROVISIONS
|
|
|
20
|
|
2
THIS FORTY-FIRST SUPPLEMENTAL INDENTURE, dated as of the 1
st
day of August, 2008,
between MICHIGAN CONSOLIDATED GAS COMPANY, a corporation duly organized and existing under and by
virtue of the laws of the State of Michigan (hereinafter called the Company), having its
principal place of business at 2000 2
nd
Avenue, Detroit, Michigan, and CITIBANK, N.A., a
national banking association incorporated and existing under and by virtue of the laws of the
United States of America, having an office at 388 Greenwich Street in the Borough of Manhattan, the
City of New York, New York, as successor trustee (hereinafter with its predecessors as trustee
called the Mortgage Trustee or the Trustee):
WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture of
Mortgage and Deed of Trust (the Original Indenture), dated as of March 1, 1944;
WHEREAS, the Company has heretofore executed and delivered to the Trustee the Twenty-ninth
Supplemental Indenture, which became effective April 1, 1994, to provide for the modification and
restatement of the Original Indenture as previously amended (as so amended, supplemented and
modified the Indenture), and to secure the Companys First Mortgage Bonds, unlimited in aggregate
principal amount except as therein otherwise provided, issued pursuant to the:
Thirtieth Supplemental Indenture, dated as of September 1, 1991;
Thirty-first Supplemental Indenture, dated as of December 15, 1991;
Thirty-second Supplemental Indenture, dated as of January 5, 1993;
Thirty-third Supplemental Indenture, dated as of May 1, 1995;
Thirty-fourth Supplemental Indenture, dated as of November 1, 1996;
Thirty-fifth Supplemental Indenture, dated as of June 18, 1998;
Thirty-sixth Supplemental Indenture, dated as of August 15, 2001;
Thirty-seventh Supplemental Indenture, dated as of February 15, 2003;
Thirty-eighth Supplemental Indenture, dated as of October 1, 2004;
Thirty-ninth Supplemental Indenture, dated as of April 1, 2008; and
Fortieth Supplemental Indenture, dated as of June 1, 2008;
WHEREAS, at the date hereof there were outstanding First Mortgage Bonds of the Company issued
under the Indenture, of 10 series in the principal amounts set forth below (including Collateral
Bonds):
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Amount
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Amount
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Designation of Series
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Initially Issued
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Outstanding
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First Mortgage Bonds
(Secured Term Notes, Series B)
8
1
/
4
% Series due 2014
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$
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80,000,000
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$
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80,000,000
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First Mortgage Bonds
(Secured Medium-Term Notes, Series B)
7.06% Series due 2012
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$
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40,000,000
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$
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40,000,000
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Collateral Bonds
(Remarketable Securities)
Collateral Series A
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$
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75,000,000
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$
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75,000,000
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3
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Amount
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Amount
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Designation of Series
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Initially Issued
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Outstanding
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Collateral Bonds
(Senior Notes)
6
1
/
8
% Collateral Bonds due 2008
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$
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200,000,000
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$
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200,000,000
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5.70% Collateral Bonds due 2033
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$
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200,000,000
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$
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200,000,000
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2004 Series E Collateral Bonds
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$
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120,000,000
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$
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120,000,000
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2008 Series A Collateral Bonds
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$
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60,000,000
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$
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60,000,000
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2008 Series B Collateral Bonds
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$
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100,000,000
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$
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100,000,000
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2008 Series C Collateral Bonds
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$
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25,000,000
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$
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25,000,000
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2008 Series F Collateral Bonds
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$
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75,000,000
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$
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75,000,000
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WHEREAS, the Company desires in and by this Supplemental Indenture to establish two issues of
bonds to be issued under the Indenture of the series established under the Thirty-fifth
Supplemental Indenture, to designate the terms thereof, to specify the particulars necessary to
describe and define the same and to specify such other provisions and agreements in respect thereof
as are in the Indenture provided or permitted; and
WHEREAS, all the conditions and requirements necessary to make this Supplemental Indenture,
when duly executed and delivered, a valid, binding and legal instrument in accordance with its
terms and for the purposes herein expressed, have been done, performed and fulfilled, and the
execution and delivery of this Supplemental Indenture in the form and with the terms hereof have
been in all respects duly authorized;
NOW, THEREFORE, in consideration of the premises and in further consideration of the sum of
One Dollar in lawful money of the United States of America paid to the Company by the Trustee at or
before the execution and delivery of this Forty-first Supplemental Indenture, the receipt whereof
is hereby acknowledged, and of other good and valuable consideration, it is agreed by and between
the Company and the Trustee as follows:
ARTICLE I
ESTABLISHMENT OF AN ISSUE OF
FIRST MORTGAGE BONDS, OF THE SERIES
DESIGNATED AND DISTINGUISHED AS COLLATERAL BONDS
SECTION 1. There is hereby established an issue of bonds to be issued under and secured by the
Indenture, to be known as First Mortgage Bonds, designated and distinguished as Collateral
Bonds of the Company (herein collectively sometimes called the Collateral Bonds) of the series
established under the Thirty-fifth Supplemental Indenture. The Collateral Bonds may be issued
without limitation as to aggregate principal amount except as provided in the Indenture (including
the Thirty-fifth Supplemental Indenture) and in this Supplemental Indenture. The Collateral Bonds
shall be registered bonds without coupons and shall be dated as of the date of the authentication
thereof by the Mortgage Trustee.
A separate issue of Collateral Bonds, designated 2008 Series H Collateral Bonds, (the
Series H Bonds) is being issued by the Company hereunder contemporaneously with the issuance of a
separate series of senior debt securities of the Company designated as the
Companys 5.94% Senior Notes, 2008 Series H due 2015 (the Series H Notes) and is being
4
issued and assigned and delivered to Citibank, N.A., as trustee (in such capacity, together with
any successor trustee(s), the Senior Trustee) under the Indenture, dated as of June 1, 1998, as
amended, supplemented and modified, governing such senior debt securities (as so amended,
supplemented and modified, the Senior Indenture), in such capacity, as collateral for the benefit
of the holders of the Series H Notes. The series of such senior debt securities collateralized by
the Series H Bonds issued hereunder shall be referred to as the Series H Notes with respect to
such Series H Bonds.
The issue of the Series H Bonds established hereby shall bear interest at such rate or rates
and be payable on such date or dates, shall mature and be subject to mandatory or optional
redemption on such date or dates and shall have such other terms and provisions not inconsistent
with the Indenture as are set forth in the form of Series H Bonds, and the form of Trustees
Certificate to be endorsed on such bonds, as are set forth substantially in the following forms
respectively (herein sometimes called the Series H Bond Form):
$140,000,000
MICHIGAN CONSOLIDATED GAS COMPANY
FIRST MORTGAGE BONDS, 2008 SERIES H COLLATERAL BONDS
being a series of
FIRST MORTGAGE BONDS
ORIGINAL ISSUE DATE: AUGUST 20, 2008
MATURITY DATE: SEPTEMBER 1, 2015
THE FIRST MORTGAGE BONDS, 2008 SERIES H COLLATERAL BONDS (HEREINAFTER, SERIES H BONDS),
REPRESENTED BY THIS CERTIFICATE ARE BEING ISSUED AND DELIVERED BY THE COMPANY TO CITIBANK, N.A., AS
TRUSTEE (IN SUCH CAPACITY, THE SENIOR TRUSTEE) UNDER AN INDENTURE, DATED AS OF JUNE 1, 1998,
BETWEEN THE COMPANY AND THE SENIOR TRUSTEE, AS AMENDED, SUPPLEMENTED AND MODIFIED FROM TIME TO TIME
AND AS SUPPLEMENTED BY THE SUPPLEMENTAL INDENTURE THERETO DATED AS OF AUGUST 1, 2008 (THE NOTE
INDENTURE) (AS SO AMENDED, SUPPLEMENTED AND MODIFIED, THE SENIOR INDENTURE). THE SERIES H BONDS
ARE TO BE HELD IN TRUST AS COLLATERAL FOR THE BENEFIT OF THE HOLDERS OF $140,000,000 AGGREGATE
PRINCIPAL AMOUNT OF 5.94% SENIOR NOTES, 2008 SERIES H DUE 2015 (THE SERIES H NOTES) ISSUED
PURSUANT TO THE SENIOR INDENTURE. THE SERIES H NOTES ARE THE RELATED NOTES WITH RESPECT TO THE
SERIES H BONDS WITHIN THE MEANING OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
THE SERIES H BONDS MAY NOT BE SOLD OR OTHERWISE TRANSFERRED (EXCEPT TO A SUCCESSOR TRUSTEE UNDER
THE SENIOR INDENTURE OR, SUBJECT TO COMPLIANCE WITH APPLICABLE LAW, AS MAY BE INVOLVED IN THE
COURSE OF THE EXERCISE OF RIGHTS AND REMEDIES CONSEQUENT UPON AN EVENT OF DEFAULT
UNDER THE SENIOR INDENTURE) UNTIL THE EARLIER OF THE RELEASE DATE (AS
5
DEFINED BELOW) OR THE PRIOR
RETIREMENT OF THE RELATED NOTES THROUGH REDEMPTION, REPURCHASE OR OTHERWISE.
THE INTEREST RATE ON THE SERIES H BONDS SHALL AT ALL TIMES BE IDENTICAL TO THAT OF, AND SHALL BE
ESTABLISHED IN THE MANNER SET FORTH IN, THE SERIES H NOTES.
THE INTEREST PAYMENT DATES IN RESPECT OF THE SERIES H BONDS SHALL AT ALL TIMES BE IDENTICAL TO
THOSE OF, AND SHALL BE ESTABLISHED IN THE MANNER SET FORTH IN, THE SERIES H NOTES.
THE COMPANY SHALL MAKE PAYMENTS OF THE PRINCIPAL OF, AND MAKE-WHOLE AMOUNT (AS DEFINED IN THE
SENIOR INDENTURE), IF ANY, AND INTEREST ON, THE SERIES H BONDS, TO THE SENIOR TRUSTEE, WHICH
PAYMENTS SHALL BE APPLIED BY THE SENIOR TRUSTEE TO THE SATISFACTION OF OBLIGATIONS ON THE SERIES H
NOTES.
IN ADDITION TO THE PAYMENT OF PRINCIPAL AND INTEREST ON THE SERIES H BONDS IN THE EVENT ANY
MAKE-WHOLE AMOUNT (AS DEFINED IN THE SENIOR INDENTURE) SHALL BE REQUIRED TO BE PAID BY THE COMPANY
ON THE SERIES H NOTES, THERE SHALL BE DUE AND PAYABLE ON THE SERIES H BONDS AN ADDITIONAL AMOUNT
EQUAL TO SUCH MAKE-WHOLE AMOUNT WHICH SHALL BE PAID BY THE COMPANY IN THE AMOUNTS AND ON THE DATES
REQUIRED FOR THE PAYMENT OF ANY SUCH AMOUNTS UNDER THE SENIOR INDENTURE.
THE MATURITY DATE SPECIFIED ABOVE IS ALSO THE MATURITY DATE OF THE SERIES H NOTES.
MICHIGAN CONSOLIDATED GAS COMPANY (hereinafter called the Company), a corporation of the
State of Michigan, for value received, hereby promises to pay to CITIBANK, N.A., as trustee for the
benefit of the holders of the Series H Notes, or registered assigns (in such capacity, the Senior
Trustee), the sum of One hundred forty million Dollars ($140,000,000) on the Maturity Date
specified above, at the corporate trust office of the Mortgage Trustee hereinafter named in the
Borough of Manhattan, the City of New York, New York, or at the principal office of any successor
in trust, in lawful money of the United States of America, and to pay interest thereon at the
Interest Rate(s) from time to time specified in or determined pursuant to the Series H Notes, in
like lawful money payable at the office or agency of the Company in the Borough of Manhattan, the
City of New York, New York on such interest payment date(s) and on the Maturity Date (each an
Interest Payment Date) as provided in the Series H Notes, from the Original Issue Date specified
above or from the most recent Interest Payment Date to which interest has been paid, commencing on
March 1, 2009, until the Companys obligation with respect to the payment of such principal sum
shall be discharged as provided in the Indenture hereinafter mentioned and the Senior Indenture.
If the date of the Series H Bonds represented by this certificate is after a Record Date (as
defined below) with respect to any Interest Payment Date and prior to such Interest Payment Date,
then payment of interest shall commence on the second Interest Payment Date succeeding such date.
If the Company shall default in the payment of interest due on any Interest Payment Date, then
interest shall be payable from the next preceding Interest Payment Date to which interest has been
paid, or, if no such interest has been paid on the Series H Bonds represented by this certificate,
from the Original Issue Date. So
long as there is no existing default in the payment of interest, the person in whose name the
6
Series H Bonds represented by this certificate were registered at the close of business on the
relevant Record Date with respect to an Interest Payment Date shall be entitled to receive the
interest payable on such Interest Payment Date, except that if the Company shall default in the
payment of interest due on such Interest Payment Date, such defaulted interest shall be paid to the
person in whose name the Series H Bonds represented by this Certificate are registered on the
Record Date for the Interest Payment Date fixed by the Company for the payment of such defaulted
interest, provided that in no case shall such Record Date be less than ten days after notice
thereof shall have been mailed to all registered holders of Series H Bonds. The term Record Date
as used herein with respect to any Interest Payment Date otherwise shall mean the fifteenth
calendar day (whether or not a Business Day) prior to such Interest Payment Date.
Business Day means any day other than a day on which banking institutions in the State of
New York or the State of Michigan are authorized or obligated pursuant to law or executive order to
close. In the event that any Interest Payment Date, redemption date or maturity date is not a
Business Day, then the required payment of principal, Make-Whole Amount, if any, and interest will
be made on the next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay).
The bonds represented by this certificate, of the series hereinafter specified, are bonds of
the Company (herein called the bonds) known as its First Mortgage Bonds, issued and to be
issued in one or more series under, and all equally and ratably secured by, an Indenture of
Mortgage and Deed of Trust dated as of March 1, 1944, duly executed by the Company to Citibank,
N.A., successor trustee (Mortgage Trustee) as restated in Part II of the Twenty-ninth
Supplemental Indenture dated as of July 15, 1989, which became effective on April 1, 1994, to which
indenture and all indentures supplemental thereto executed on and after July 15, 1989 reference is
hereby made for a description of the property mortgaged and pledged, the nature and extent of the
security, the terms and conditions upon which the bonds are, and are to be, issued and secured, and
the rights of the holders of the bonds and of the Mortgage Trustee in respect of such security
(which indenture and all indentures supplemental thereto, including the Forty-first Supplemental
Indenture dated as of August 1, 2008, are hereinafter collectively called the Indenture). As
provided in the Indenture, the bonds may be for various principal sums and are issuable in series,
which may mature at different times, may bear interest at different rates and may otherwise vary as
therein provided. The bonds represented by this certificate are part of a Series designated
Collateral Bonds, herein called Collateral Bonds, created by the Thirty-fifth Supplemental
Indenture, dated as of June 18, 1998, as supplemented by the Forty-first Supplemental Indenture
dated as of August 1, 2008, as provided for in the Indenture.
With the consent of the Company and to the extent permitted by and as provided in the
Indenture and the Senior Indenture, the rights and obligations of the Company and/or the rights of
the holders of the Series H Bonds and/or the terms and provisions of the Indenture may be modified
or altered by such affirmative vote or votes of the holders of the Series H Notes then outstanding
as are specified in the Senior Indenture.
The Series H Bonds shall be redeemed if and to the extent Series H Notes are redeemed, as
provided in the Senior Indenture with respect to the Series H Notes and in the Series H Notes.
In case an Event of Default as defined in the Indenture or the Senior Indenture shall occur,
the principal of the Series H Bonds may become or be declared due and payable in the
7
manner, with the effect, and subject to the conditions provided in the Indenture and the
Senior Indenture.
The Senior Trustee has agreed pursuant to the Senior Indenture to hold the Series H Bonds as
collateral for the benefit of the holders of the Series H Notes under all circumstances and not to
transfer (except to a successor trustee or, subject to compliance with applicable law, as may be
involved in the course of exercise of rights and remedies consequent upon an Event of Default under
the Senior Indenture) such Series H Bonds until the earlier of the Release Date or the prior
retirement of the Series H Notes through redemption, repurchase or otherwise. Release Date means
the date on which all First Mortgage Bonds of the Company issued and outstanding under the
Indenture, other than the Collateral Bonds, have been retired (at, before or after the maturity
thereof) through payment, redemption or otherwise provided that no default or event of default has
occurred and, at such time, is continuing under the Senior Indenture. On the Release Date, the
Senior Trustee shall deliver to the Company for cancellation all Series H Bonds, and the Company
shall cause the Senior Trustee to provide notice to all holders of Series H Notes of the occurrence
of the Release Date. As a result, on the Release Date, the Series H Bonds shall cease to secure
the Series H Notes and the Series H Notes instead will be secured by substituted Collateral Bonds.
Following the Release Date, the Company shall cause the Indenture to be closed, and the Company
shall not issue any additional Collateral Bonds thereunder. From and after the Release Date, the
Companys obligations in respect of the Series H Bonds shall be satisfied and discharged.
No recourse shall be had for the payment of the principal of, Make-Whole Amount, if any, or
the interest on, the Series H Bonds, or for any claim based hereon or otherwise in respect of the
Series H Bonds or the Indenture, the Senior Indenture or any indenture supplemental to either
thereof, against any incorporator, stockholder, director or officer, past, present or future, of
the Company, as such, or any predecessor or successor corporation, either directly or through the
Company or any such predecessor or successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such
liability, whether at common law, in equity, by any constitution, statute or otherwise, of
incorporators, stockholders, directors or officers being waived and released by the owner hereof
and every owner of any Series H Note by the acceptance of the Series H Bonds or such Series H Note,
as the case may be, and as part of the consideration for the issue thereof, and being likewise
waived and released pursuant to the Indenture and the Senior Indenture.
This bond shall not be valid or become obligatory for any purpose unless and until the
certificate of authentication hereon shall have been manually executed by the Mortgage Trustee or
its successor in trust under the Indenture.
IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this certificate to be
executed under its name with the signature of its duly authorized Officer, under its corporate
seal, which may be a facsimile, attested with the signature of its Corporate Secretary.
Dated:
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MICHIGAN CONSOLIDATED GAS COMPANY
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By:
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N.A. Khouri
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Vice President and Treasurer
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8
Attest:
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By:
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Sandra Kay Ennis
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Corporate Secretary
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The bonds represented by this certificate constitute Collateral Bonds of the series designated
and described in the within-mentioned Indenture.
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CITIBANK, N.A., as Mortgage Trustee
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By:
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Authorized Officer
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[End of Bond Form]
So long as there is no existing default in the payment of interest on the Series H Bonds, all
Series H Bonds authenticated by the Trustee after the Record Date specified for any Interest
Payment Date, and prior to such Interest Payment Date (unless the issue date hereinafter specified
is after such Record Date) shall be dated the date of authentication, but shall bear interest from
such Interest Payment Date, and the person in whose name any Series H Bonds is registered at the
close of business on any Record Date with respect to any Interest Payment Date shall be entitled to
receive the interest payable on such Interest Payment Date notwithstanding any transfer or exchange
of such Series H Bonds subsequent to the Record Date and on or prior to such Interest Payment Date,
except if and to the extent the Company shall default in the payment of the interest due on such
Interest Payment Date, in which case such defaulted interest shall be paid to the person in whose
name such Series H Bonds is registered on the Record Date for the special Interest Payment Date
fixed by the Company for the payment of such defaulted interest, provided that in no case shall
such Record Date be less than ten days after notice thereof shall have been mailed to all
registered holders of Series H Bonds; and provided that interest payable on a maturity date shall
be payable to the person to whom the principal thereof is payable. If the issue date of any Series
H Bonds is after such Record Date, such Series H Bonds shall bear interest from the issue date but
payment of interest shall commence on the second Interest Payment Date next succeeding the issue
date. Any notice which is mailed as herein provided shall be conclusively presumed to have been
properly and sufficiently given on the date of such mailing, whether or not the holder receives
notice.
The terms Interest Payment Date, Record Date and Business Day as used herein are defined
in the Series H Bond Form.
The term issue date as used herein with respect to the issue of Series H Bonds established
hereby shall mean the date of first authentication of such Series H Bonds.
9
As used in this Section 1, the term default in the payment of interest means failure to pay
interest on the applicable Interest Payment Date disregarding any period of grace permitted by
Section 9.01 of the Indenture.
The Company shall make payments of the principal of, and Make-Whole Amount or interest on, the
Series H Bonds to the Senior Trustee, which payments shall be applied by the Senior Trustee in
satisfaction of obligations on the Series H Notes in respect of such Series H Bonds.
SECTION 2. The issue of Series H Bonds established hereby shall be redeemed if and to the
extent the Series H Notes are redeemed, as provided in the Senior Indenture and in such Series H
Notes. The redemption price in respect of any Series H Bonds (including principal, Make-Whole
Amount, if any, and interest thereon) shall be the redemption price applicable to the Series H
Notes. Any notice required to be furnished to the holders of the Series H Bonds or the Trustee
relating to the redemption of such Series H Bonds shall be considered furnished by the delivery of
appropriate notice to the holders of the Series H Notes or the Senior Trustee, as the case may be,
as provided in the Senior Indenture and the Series H Notes. Any redemption payment made by the
Company on the Series H Notes (whether for principal, Make-Whole Amount, if any, or interest) shall
be applied by the Senior Trustee as payment of the redemption price in respect of the
correspondingly redeemed Series H Bonds. In the event the Series H Notes are redeemed in part, an
equivalent aggregate principal amount of the Series H Bonds shall be so redeemed, the Senior
Trustee, as holder of the Series H Bonds as collateral for such Series H Notes, shall deliver to
the Mortgage Trustee for cancellation an equivalent principal amount of the Series H Bonds
corresponding to the Series H Notes so redeemed, and the Company shall execute and the Mortgage
Trustee shall authenticate and deliver, without charge, to the Senior Trustee, as holder thereof,
one or more new Series H Bonds of authorized denominations for the unredeemed balance of any Series
H Bonds surrendered for redemption in connection with the redemption of the Series H Notes.
SECTION 3. The Series H Bonds shall be registered bonds without coupons. The Mortgage Trustee
shall be the registrar and paying agent for the Series H Bonds, which duties it hereby accepts.
Series H Bonds may be issued in the denomination of $1,000 or any integral multiple thereof.
SECTION 4. As further provided in the Series H Bond Form, the Series H Bonds shall not be
assignable or transferable except as may be set forth under Article IV of the Senior Indenture, or,
subject to compliance with applicable law, as may be involved in the course of the exercise of
rights and remedies consequent upon an Event of Default under the Senior Indenture. Subject to the
foregoing, the Series H Bonds shall be exchangeable upon surrender thereof at the corporate trust
office of the Trustee in the Borough of Manhattan, the City of New York, New York, for registered
bonds of the same aggregate principal amount and other terms, but of different authorized
denomination or denominations, such exchanges to be made without service charge (except for any
stamp tax or other governmental charge).
Every bond so surrendered shall be accompanied by a proper transfer power duly executed by the
registered owner or by duly authorized attorney transferring such bond to the Company, and the
signature to such transfer power shall be guaranteed to the satisfaction of the Trustee. All bonds
so surrendered shall be forthwith canceled and delivered to or upon the order of the Company. All
bonds executed, authenticated and delivered in exchange for bonds so
surrendered shall be valid obligations of the Company, evidencing the same debt as the bonds
10
surrendered, and shall be secured by the same lien and be entitled to the same benefits and
protection as the bonds in exchange for which they are executed, authenticated and delivered.
The Company shall not be required to make any such exchange or any registration of transfer
(1) during a period of fifteen days next preceding any Interest Payment Date, but only if there is
an existing default in the payment of interest on the Series H Bonds on which such payment is due
or (2) after the bond so presented for exchange or registration of transfer, or any portion
thereof, has been called for redemption and notice thereof given to the registered owner.
SECTION 5. Pending the preparation of definitive Series H Bonds, the Company may from time to
time execute, and upon its written order, the Trustee shall authenticate and deliver, in lieu of
such definitive bonds and subject to the same provisions, limitations and conditions, one or more
temporary bonds, in registered form, of any denomination specified in the written order of the
Company for the authentication and delivery thereof, and with such omissions, insertions and
variations as may be determined by the Board of Directors of the Company. Such temporary bonds
shall be substantially of the tenor of the bonds to be issued as herein before recited.
If any such temporary Series H Bonds shall at any time be so authenticated and delivered in
lieu of definitive bonds, the Company shall upon request at its own expense prepare, execute and
deliver to the Trustee and thereupon, upon the presentation and surrender of temporary bonds, the
Trustee shall authenticate and deliver in exchange therefor, without charge to the holder,
definitive bonds of the same series and other terms, if any, and for the same principal sum in the
aggregate as the temporary bonds surrendered. All temporary bonds so surrendered shall be
forthwith canceled by the Trustee and delivered to or upon the order of the Company. Until
exchanged for definitive bonds the temporary bonds shall in all respects be entitled to the lien
and security of the Indenture and all supplemental indentures.
ARTICLE II
ESTABLISHMENT OF AN ISSUE OF
FIRST MORTGAGE BONDS, OF THE SERIES
DESIGNATED AND DISTINGUISHED AS COLLATERAL BONDS
SECTION 1. There is hereby established an issue of bonds to be issued under and secured by the
Indenture, to be known as First Mortgage Bonds, designated and distinguished as Collateral
Bonds of the Company (herein collectively sometimes called the Collateral Bonds) of the series
established under the Thirty-fifth Supplemental Indenture. The Collateral Bonds may be issued
without limitation as to aggregate principal amount except as provided in the Indenture (including
the Thirty-fifth Supplemental Indenture) and in this Supplemental Indenture. The Collateral Bonds
shall be registered bonds without coupons and shall be dated as of the date of the authentication
thereof by the Mortgage Trustee.
A separate issue of Collateral Bonds, designated 2008 Series I Collateral Bonds, (the
Series I Bonds) is being issued by the Company hereunder contemporaneously with the issuance of a
separate series of senior debt securities of the Company designated as the Companys 6.36% Senior
Notes, 2008 Series I due 2020 (the Series I Notes) and is being issued and assigned and
delivered to Citibank, N.A., as trustee (in such capacity, together with any successor trustee(s),
the Senior Trustee) under the Indenture, dated as of June 1, 1998, as
amended, supplemented and modified, governing such senior debt securities (as so amended,
supplemented and modified, the Senior Indenture), in such capacity, as collateral for the benefit
of the holders of the Series I Notes. The series of such senior debt securities collateralized by
11
the Series I Bonds issued hereunder shall be referred to as the Series I Notes with respect to
such Series I Bonds.
The issue of the Series I Bonds established hereby shall bear interest at such rate or rates
and be payable on such date or dates, shall mature and be subject to mandatory or optional
redemption on such date or dates and shall have such other terms and provisions not inconsistent
with the Indenture as are set forth in the form of Series I Bonds, and the form of Trustees
Certificate to be endorsed on such bonds, as are set forth substantially in the following forms
respectively (herein sometimes called the Series I Bond Form):
$50,000,000
MICHIGAN CONSOLIDATED GAS COMPANY
FIRST MORTGAGE BONDS, 2008 SERIES I COLLATERAL BONDS
being a series of
FIRST MORTGAGE BONDS
ORIGINAL ISSUE DATE: AUGUST 20, 2008
MATURITY DATE: SEPTEMBER 1, 2020
THE FIRST MORTGAGE BONDS, 2008 SERIES I COLLATERAL BONDS (HEREINAFTER, SERIES I BONDS),
REPRESENTED BY THIS CERTIFICATE ARE BEING ISSUED AND DELIVERED BY THE COMPANY TO CITIBANK, N.A., AS
TRUSTEE (IN SUCH CAPACITY, THE SENIOR TRUSTEE) UNDER AN INDENTURE, DATED AS OF JUNE 1, 1998,
BETWEEN THE COMPANY AND THE SENIOR TRUSTEE, AS AMENDED, SUPPLEMENTED AND MODIFIED FROM TIME TO TIME
AND AS SUPPLEMENTED BY THE SUPPLEMENTAL INDENTURE THERETO DATED AS OF AUGUST 1, 2008 (THE NOTE
INDENTURE) (AS SO AMENDED, SUPPLEMENTED AND MODIFIED, THE SENIOR INDENTURE). THE SERIES I BONDS
ARE TO BE HELD IN TRUST AS COLLATERAL FOR THE BENEFIT OF THE HOLDERS OF $50,000,000 AGGREGATE
PRINCIPAL AMOUNT OF 6.36% SENIOR NOTES, 2008 SERIES I DUE 2020 (THE SERIES I NOTES) ISSUED
PURSUANT TO THE SENIOR INDENTURE. THE SERIES I NOTES ARE THE RELATED NOTES WITH RESPECT TO THE
SERIES I BONDS WITHIN THE MEANING OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
THE SERIES I BONDS MAY NOT BE SOLD OR OTHERWISE TRANSFERRED (EXCEPT TO A SUCCESSOR TRUSTEE UNDER
THE SENIOR INDENTURE OR, SUBJECT TO COMPLIANCE WITH APPLICABLE LAW, AS MAY BE INVOLVED IN THE
COURSE OF THE EXERCISE OF RIGHTS AND REMEDIES CONSEQUENT UPON AN EVENT OF DEFAULT UNDER THE SENIOR
INDENTURE) UNTIL THE EARLIER OF THE RELEASE DATE (AS DEFINED BELOW) OR THE PRIOR RETIREMENT OF THE
RELATED NOTES THROUGH REDEMPTION, REPURCHASE OR OTHERWISE.
12
THE INTEREST RATE ON THE SERIES I BONDS SHALL AT ALL TIMES BE IDENTICAL TO THAT OF, AND SHALL BE
ESTABLISHED IN THE MANNER SET FORTH IN, THE SERIES I NOTES.
THE INTEREST PAYMENT DATES IN RESPECT OF THE SERIES I BONDS SHALL AT ALL TIMES BE IDENTICAL TO
THOSE OF, AND SHALL BE ESTABLISHED IN THE MANNER SET FORTH IN, THE SERIES I NOTES.
THE COMPANY SHALL MAKE PAYMENTS OF THE PRINCIPAL OF, AND MAKE-WHOLE AMOUNT (AS DEFINED IN THE
SENIOR INDENTURE), IF ANY, AND INTEREST ON, THE SERIES I BONDS, TO THE SENIOR TRUSTEE, WHICH
PAYMENTS SHALL BE APPLIED BY THE SENIOR TRUSTEE TO THE SATISFACTION OF OBLIGATIONS ON THE SERIES I
NOTES.
IN ADDITION TO THE PAYMENT OF PRINCIPAL AND INTEREST ON THE SERIES I BONDS IN THE EVENT ANY
MAKE-WHOLE AMOUNT (AS DEFINED IN THE SENIOR INDENTURE) SHALL BE REQUIRED TO BE PAID BY THE COMPANY
ON THE SERIES I NOTES, THERE SHALL BE DUE AND PAYABLE ON THE SERIES I BONDS AN ADDITIONAL AMOUNT
EQUAL TO SUCH MAKE-WHOLE AMOUNT WHICH SHALL BE PAID BY THE COMPANY IN THE AMOUNTS AND ON THE DATES
REQUIRED FOR THE PAYMENT OF ANY SUCH AMOUNTS UNDER THE SENIOR INDENTURE.
THE MATURITY DATE SPECIFIED ABOVE IS ALSO THE MATURITY DATE OF THE SERIES I NOTES.
MICHIGAN CONSOLIDATED GAS COMPANY (hereinafter called the Company), a corporation of the
State of Michigan, for value received, hereby promises to pay to CITIBANK, N.A., as trustee for the
benefit of the holders of the Series I Notes, or registered assigns (in such capacity, the Senior
Trustee), the sum of Fifty million Dollars ($50,000,000) on the Maturity Date specified above, at
the corporate trust office of the Mortgage Trustee hereinafter named in the Borough of Manhattan,
the City of New York, New York, or at the principal office of any successor in trust, in lawful
money of the United States of America, and to pay interest thereon at the Interest Rate(s) from
time to time specified in or determined pursuant to the Series I Notes, in like lawful money
payable at the office or agency of the Company in the Borough of Manhattan, the City of New York,
New York on such interest payment date(s) and on the Maturity Date (each an Interest Payment
Date) as provided in the Series I Notes, from the Original Issue Date specified above or from the
most recent Interest Payment Date to which interest has been paid, commencing on March 1, 2009,
until the Companys obligation with respect to the payment of such principal sum shall be
discharged as provided in the Indenture hereinafter mentioned and the Senior Indenture. If the
date of the Series I Bonds represented by this certificate is after a Record Date (as defined
below) with respect to any Interest Payment Date and prior to such Interest Payment Date, then
payment of interest shall commence on the second Interest Payment Date succeeding such date. If
the Company shall default in the payment of interest due on any Interest Payment Date, then
interest shall be payable from the next preceding Interest Payment Date to which interest has been
paid, or, if no such interest has been paid on the Series I Bonds represented by this certificate,
from the Original Issue Date. So long as there is no existing default in the payment of interest,
the person in whose name the Series I Bonds represented by this certificate were registered at the
close of business on the relevant Record Date with respect to an Interest Payment Date shall be
entitled to receive the interest payable on such Interest Payment Date, except that if the Company
shall default in the payment of interest due on such
13
Interest Payment Date, such defaulted interest shall be paid to the person in whose name the
Series I Bonds represented by this Certificate are registered on the Record Date for the Interest
Payment Date fixed by the Company for the payment of such defaulted interest, provided that in no
case shall such Record Date be less than ten days after notice thereof shall have been mailed to
all registered holders of Series I Bonds. The term Record Date as used herein with respect to
any Interest Payment Date otherwise shall mean the fifteenth calendar day (whether or not a
Business Day) prior to such Interest Payment Date.
Business Day means any day other than a day on which banking institutions in the State of
New York or the State of Michigan are authorized or obligated pursuant to law or executive order to
close. In the event that any Interest Payment Date, redemption date or maturity date is not a
Business Day, then the required payment of principal, Make-Whole Amount, if any, and interest will
be made on the next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay).
The bonds represented by this certificate, of the series hereinafter specified, are bonds of
the Company (herein called the bonds) known as its First Mortgage Bonds, issued and to be
issued in one or more series under, and all equally and ratably secured by, an Indenture of
Mortgage and Deed of Trust dated as of March 1, 1944, duly executed by the Company to Citibank,
N.A., successor trustee (Mortgage Trustee) as restated in Part II of the Twenty-ninth
Supplemental Indenture dated as of July 15, 1989, which became effective on April 1, 1994, to which
indenture and all indentures supplemental thereto executed on and after July 15, 1989 reference is
hereby made for a description of the property mortgaged and pledged, the nature and extent of the
security, the terms and conditions upon which the bonds are, and are to be, issued and secured, and
the rights of the holders of the bonds and of the Mortgage Trustee in respect of such security
(which indenture and all indentures supplemental thereto, including the Forty-first Supplemental
Indenture dated as of August 1, 2008, are hereinafter collectively called the Indenture). As
provided in the Indenture, the bonds may be for various principal sums and are issuable in series,
which may mature at different times, may bear interest at different rates and may otherwise vary as
therein provided. The bonds represented by this certificate are part of a Series designated
Collateral Bonds, herein called Collateral Bonds, created by the Thirty-fifth Supplemental
Indenture, dated as of June 18, 1998, as supplemented by the Forty-first Supplemental Indenture
dated as of August 1, 2008, as provided for in the Indenture.
With the consent of the Company and to the extent permitted by and as provided in the
Indenture and the Senior Indenture, the rights and obligations of the Company and/or the rights of
the holders of the Series I Bonds and/or the terms and provisions of the Indenture may be modified
or altered by such affirmative vote or votes of the holders of the Series I Notes then outstanding
as are specified in the Senior Indenture.
The Series I Bonds shall be redeemed if and to the extent Series I Notes are redeemed, as
provided in the Senior Indenture with respect to the Series I Notes and in the Series I Notes.
In case an Event of Default as defined in the Indenture or the Senior Indenture shall occur,
the principal of the Series I Bonds may become or be declared due and payable in the manner, with
the effect, and subject to the conditions provided in the Indenture and the Senior Indenture.
The Senior Trustee has agreed pursuant to the Senior Indenture to hold the Series I Bonds as
collateral for the benefit of the holders of the Series I Notes under all circumstances
14
and not to transfer (except to a successor trustee or, subject to compliance with applicable
law, as may be involved in the course of exercise of rights and remedies consequent upon an Event
of Default under the Senior Indenture) such Series I Bonds until the earlier of the Release Date or
the prior retirement of the Series I Notes through redemption, repurchase or otherwise. Release
Date means the date on which all First Mortgage Bonds of the Company issued and outstanding under
the Indenture, other than the Collateral Bonds, have been retired (at, before or after the maturity
thereof) through payment, redemption or otherwise provided that no default or event of default has
occurred and, at such time, is continuing under the Senior Indenture. On the Release Date, the
Senior Trustee shall deliver to the Company for cancellation all Series I Bonds, and the Company
shall cause the Senior Trustee to provide notice to all holders of Related Notes of the occurrence
of the Release Date. As a result, on the Release Date, the Series I Bonds shall cease to secure
the Series I Notes and the Series I Notes instead will be secured by substituted Collateral Bonds.
Following the Release Date, the Company shall cause the Indenture to be closed, and the Company
shall not issue any additional Collateral Bonds thereunder. From and after the Release Date, the
Companys obligations in respect of the Series I Bonds shall be satisfied and discharged.
No recourse shall be had for the payment of the principal of, Make-Whole Amount, if any, or
the interest on, the Series I Bonds, or for any claim based hereon or otherwise in respect of the
Series I Bonds or the Indenture, the Senior Indenture or any indenture supplemental to either
thereof, against any incorporator, stockholder, director or officer, past, present or future, of
the Company, as such, or any predecessor or successor corporation, either directly or through the
Company or any such predecessor or successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such
liability, whether at common law, in equity, by any constitution, statute or otherwise, of
incorporators, stockholders, directors or officers being waived and released by the owner hereof
and every owner of any Series I Note by the acceptance of the Series I Bonds or such Series I Note,
as the case may be, and as part of the consideration for the issue thereof, and being likewise
waived and released pursuant to the Indenture and the Senior Indenture.
This bond shall not be valid or become obligatory for any purpose unless and until the
certificate of authentication hereon shall have been manually executed by the Mortgage Trustee or
its successor in trust under the Indenture.
IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this certificate to be
executed under its name with the signature of its duly authorized Officer, under its corporate
seal, which may be a facsimile, attested with the signature of its Corporate Secretary.
Dated:
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MICHIGAN CONSOLIDATED GAS COMPANY
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By:
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N.A. Khouri
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Vice President and Treasurer
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15
Attest:
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By:
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Sandra Kay Ennis
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Corporate Secretary
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The bonds represented by this certificate constitute Collateral Bonds of the series designated
and described in the within-mentioned Indenture.
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CITIBANK, N.A., as Mortgage Trustee
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By:
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Authorized Officer
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[End of Bond Form]
So long as there is no existing default in the payment of interest on the Series I Bonds, all
Series I Bonds authenticated by the Trustee after the Record Date specified for any Interest
Payment Date, and prior to such Interest Payment Date (unless the issue date hereinafter specified
is after such Record Date) shall be dated the date of authentication, but shall bear interest from
such Interest Payment Date, and the person in whose name any Series I Bonds is registered at the
close of business on any Record Date with respect to any Interest Payment Date shall be entitled to
receive the interest payable on such Interest Payment Date notwithstanding any transfer or exchange
of such Series I Bonds subsequent to the Record Date and on or prior to such Interest Payment Date,
except if and to the extent the Company shall default in the payment of the interest due on such
Interest Payment Date, in which case such defaulted interest shall be paid to the person in whose
name such Series I Bonds is registered on the Record Date for the special Interest Payment Date
fixed by the Company for the payment of such defaulted interest, provided that in no case shall
such Record Date be less than ten days after notice thereof shall have been mailed to all
registered holders of Series I Bonds; and provided that interest payable on a maturity date shall
be payable to the person to whom the principal thereof is payable. If the issue date of any Series
I Bonds is after such Record Date, such Series I Bonds shall bear interest from the issue date but
payment of interest shall commence on the second Interest Payment Date next succeeding the issue
date. Any notice which is mailed as herein provided shall be conclusively presumed to have been
properly and sufficiently given on the date of such mailing, whether or not the holder receives
notice.
The terms Interest Payment Date, Record Date and Business Day as used herein are defined
in the Series I Bond Form.
The term issue date as used herein with respect to the issue of Series I Bonds established
hereby shall mean the date of first authentication of such Series I Bonds.
16
As used in this Section 1, the term default in the payment of interest means failure to pay
interest on the applicable Interest Payment Date disregarding any period of grace permitted by
Section 9.01 of the Indenture.
The Company shall make payments of the principal of, and Make-Whole Amount or interest on, the
Series I Bonds to the Senior Trustee, which payments shall be applied by the Senior Trustee in
satisfaction of obligations on the Series I Notes in respect of such Series I Bonds.
SECTION 2. The issue of Series I Bonds established hereby shall be redeemed if and to the
extent the Series I Notes are redeemed, as provided in the Senior Indenture and in such Series I
Notes. The redemption price in respect of any Series I Bonds (including principal, Make-Whole
Amount, if any, and interest thereon) shall be the redemption price applicable to the Series I
Notes. Any notice required to be furnished to the holders of the Series I Bonds or the Trustee
relating to the redemption of such Series I Bonds shall be considered furnished by the delivery of
appropriate notice to the holders of the Series I Notes or the Senior Trustee, as the case may be,
as provided in the Senior Indenture and the Series I Notes. Any redemption payment made by the
Company on the Series I Notes (whether for principal, Make-Whole Amount, if any, or interest) shall
be applied by the Senior Trustee as payment of the redemption price in respect of the
correspondingly redeemed Series I Bonds. In the event the Series I Notes are redeemed in part, an
equivalent aggregate principal amount of the Series I Bonds shall be so redeemed, the Senior
Trustee, as holder of the Series I Bonds as collateral for such Series I Notes, shall deliver to
the Mortgage Trustee for cancellation an equivalent principal amount of the Series I Bonds
corresponding to the Series I Notes so redeemed, and the Company shall execute and the Mortgage
Trustee shall authenticate and deliver, without charge, to the Senior Trustee, as holder thereof,
one or more new Series I Bonds of authorized denominations for the unredeemed balance of any Series
I Bonds surrendered for redemption in connection with the redemption of the Series I Notes.
SECTION 3. The Series I Bonds shall be registered bonds without coupons. The Mortgage Trustee
shall be the registrar and paying agent for the Series I Bonds, which duties it hereby accepts.
Series I Bonds may be issued in the denomination of $1,000 or any integral multiple thereof.
SECTION 4. As further provided in the Series I Bond Form, the Series I Bonds shall not be
assignable or transferable except as may be set forth under Article IV of the Senior Indenture, or,
subject to compliance with applicable law, as may be involved in the course of the exercise of
rights and remedies consequent upon an Event of Default under the Senior Indenture. Subject to the
foregoing, the Series I Bonds shall be exchangeable upon surrender thereof at the corporate trust
office of the Trustee in the Borough of Manhattan, the City of New York, New York, for registered
bonds of the same aggregate principal amount and other terms, but of different authorized
denomination or denominations, such exchanges to be made without service charge (except for any
stamp tax or other governmental charge).
Every bond so surrendered shall be accompanied by a proper transfer power duly executed by the
registered owner or by duly authorized attorney transferring such bond to the Company, and the
signature to such transfer power shall be guaranteed to the satisfaction of the Trustee. All bonds
so surrendered shall be forthwith canceled and delivered to or upon the order of the Company. All
bonds executed, authenticated and delivered in exchange for bonds so
surrendered shall be valid obligations of the Company, evidencing the same debt as the bonds
17
surrendered, and shall be secured by the same lien and be entitled to the same benefits and
protection as the bonds in exchange for which they are executed, authenticated and delivered.
The Company shall not be required to make any such exchange or any registration of transfer
(1) during a period of fifteen days next preceding any Interest Payment Date, but only if there is
an existing default in the payment of interest on the Series I Bonds on which such payment is due
or (2) after the bond so presented for exchange or registration of transfer, or any portion
thereof, has been called for redemption and notice thereof given to the registered owner.
SECTION 5. Pending the preparation of definitive Series I Bonds, the Company may from time to
time execute, and upon its written order, the Trustee shall authenticate and deliver, in lieu of
such definitive bonds and subject to the same provisions, limitations and conditions, one or more
temporary bonds, in registered form, of any denomination specified in the written order of the
Company for the authentication and delivery thereof, and with such omissions, insertions and
variations as may be determined by the Board of Directors of the Company. Such temporary bonds
shall be substantially of the tenor of the bonds to be issued as herein before recited.
If any such temporary Series I Bonds shall at any time be so authenticated and delivered in
lieu of definitive bonds, the Company shall upon request at its own expense prepare, execute and
deliver to the Trustee and thereupon, upon the presentation and surrender of temporary bonds, the
Trustee shall authenticate and deliver in exchange therefore, without charge to the holder,
definitive bonds of the same series and other terms, if any, and for the same principal sum in the
aggregate as the temporary bonds surrendered. All temporary bonds so surrendered shall be
forthwith canceled by the Trustee and delivered to or upon the order of the Company. Until
exchanged for definitive bonds the temporary bonds shall in all respects be entitled to the lien
and security of the Indenture and all supplemental indentures.
ARTICLE III
ISSUE OF COLLATERAL BONDS
The Series H Bonds and Series I Bonds in the aggregate principal amount of $190,000,000 in
respect of the Series H Notes and Series I Notes, respectively, may be executed, authenticated and
delivered from time to time as permitted by the provisions of the Indenture, including with respect
to exchange and replacement of bonds.
ARTICLE IV
THE TRUSTEE
The Trustee shall not be responsible in any manner whatsoever for or in respect of the
validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company,
or for or in respect of the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
Except as herein otherwise provided, no duties, responsibilities or liabilities are assumed,
or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture other
than as set forth in the Indenture and this Supplemental Indenture is executed and accepted on
behalf of the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully
to all intents as if the same were herein set forth at length.
18
ARTICLE V
RECORDING AND FILING OF SUPPLEMENTAL INDENTURE
DATED AS OF JUNE 1, 2008
Pursuant to the terms and provisions of the Original Indenture, a Supplemental Indenture dated
as of June 1, 2008 providing for the terms of Collateral Bonds to be issued thereunder designated
as 2008 Series F Collateral Bonds has heretofore been entered into between the Company and the
Trustee and has been filed in the Office of the Secretary of State of Michigan as a financing
statement on June 26, 2008 (Filing No. 2008102339-8) and has been recorded as a real estate
mortgage in the offices of the respective Register of Deeds of certain counties in the State of
Michigan, as follows:
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Liber/
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County
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Recorded
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Instrument no.
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Page
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Alcona
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6/26/08
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453
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1015
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Alger
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6/26/08
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200801428
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N/A
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Alpena
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6/26/08
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466
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191
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Antrim
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6/26/08
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781
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2690
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Arenac
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6/26/08
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533
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38
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Barry
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6/26/08
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20080626-0006613
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N/A
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Benzie
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6/26/08
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2008R-03376
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N/A
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Charlevoix
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6/26/08
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853
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426
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Cheboygan
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6/26/08
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1101
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661
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Chippewa
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6/26/08
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1054
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|
|
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95
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Clare
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6/26/08
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1082
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|
243
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Clinton
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6/26/08
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5132679
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N/A
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Crawford
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6/26/08
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692
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|
|
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150
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Delta
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6/26/08
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920
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|
|
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964
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Dickinson
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6/26/08
|
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655
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|
|
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478
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|
Emmet
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|
6/26/08
|
|
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1104
|
|
|
|
65
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|
Gladwin
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6/26/08
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869
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|
|
|
574
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Grand Traverse
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6/26/08
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2008R-11662
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N/A
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Gratiot
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6/26/08
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851
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1319
|
|
Ionia
|
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6/26/08
|
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608
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|
|
6760
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|
Iosco
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6/26/08
|
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953
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|
|
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751
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Iron
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|
6/26/08
|
|
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517
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22
|
|
Isabella
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6/26/08
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1444
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|
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27
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|
Jackson
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6/26/08
|
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1902
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|
|
716
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|
Kalkaska
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6/26/08
|
|
|
3086059
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N/A
|
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Kent
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7/10/08
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|
20080710-0064332
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N/A
|
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Lake
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6/26/08
|
|
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326
|
|
|
|
1810
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|
Leelanau
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|
6/26/08
|
|
|
982
|
|
|
|
14
|
|
Lenawee
|
|
6/26/08
|
|
|
2367
|
|
|
|
916
|
|
Livingston
|
|
6/26/08
|
|
|
2008R-020131
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N/A
|
|
Macomb
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6/27/08
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19396
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|
|
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574
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|
Manistee
|
|
6/26/08
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|
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2008R004069
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N/A
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|
Marquette
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|
6/26/08
|
|
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2008R-06950
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N/A
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|
Mason
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|
6/26/08
|
|
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2008R03611
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|
|
N/A
|
|
Mecosta
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|
6/26/08
|
|
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777
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|
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2605
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|
19
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|
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Liber/
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County
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Recorded
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Instrument no.
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Page
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Menominee
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6/26/08
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636
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966
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|
Missaukee
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|
6/26/08
|
|
|
2008-02256
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|
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N/A
|
|
Monroe
|
|
6/26/08
|
|
|
2008R12966
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|
|
|
N/A
|
|
Montcalm
|
|
6/26/08
|
|
|
1410
|
|
|
|
1159
|
|
Montmorency
|
|
6/26/08
|
|
|
302
|
|
|
|
184
|
|
Muskegon
|
|
6/26/08
|
|
|
3784
|
|
|
|
485
|
|
Newaygo
|
|
6/26/08
|
|
|
431
|
|
|
|
7145
|
|
Oakland
|
|
7/09/08
|
|
|
40446
|
|
|
|
343
|
|
Oceana
|
|
6/26/08
|
|
GR 2008
|
|
|
13797
|
|
Ogemaw
|
|
6/26/08
|
|
|
3080331
|
|
|
|
N/A
|
|
Osceola
|
|
6/26/08
|
|
|
862
|
|
|
|
436
|
|
Oscoda
|
|
6/26/08
|
|
|
208-01802
|
|
|
|
N/A
|
|
Otsego
|
|
6/26/08
|
|
|
1175
|
|
|
|
416
|
|
Ottawa
|
|
7/17/08
|
|
|
5691
|
|
|
|
99
|
|
Presque Isle
|
|
6/26/08
|
|
|
464
|
|
|
|
444
|
|
Roscommon
|
|
6/26/08
|
|
|
1073
|
|
|
|
798
|
|
St. Clair
|
|
6/26/08
|
|
|
3857
|
|
|
|
652
|
|
Saginaw
|
|
7/09/08
|
|
|
2500
|
|
|
|
421
|
|
Shiawassee
|
|
6/26/08
|
|
|
1124
|
|
|
|
0178
|
|
Washtenaw
|
|
7/09/08
|
|
|
4690
|
|
|
|
87
|
|
Wayne
|
|
7/09/08
|
|
|
47337
|
|
|
|
469
|
|
Wexford
|
|
6/26/08
|
|
|
612
|
|
|
|
1581
|
|
ARTICLE VI
MISCELLANEOUS PROVISIONS
Except insofar as herein otherwise expressly provided, all the provisions, terms and
conditions of the Indenture shall be deemed to be incorporated in, and made a part of, this
Forty-first Supplemental Indenture, and the Twenty-ninth Supplemental Indenture dated as of July
15, 1989, as supplemented by the Thirtieth Supplemental Indenture dated as of September 1, 1991, by
the Thirty-first Supplemental Indenture dated as of December 15, 1991, by the Thirty-second
Supplemental Indenture dated as of January 5, 1993, by the Thirty-third Supplemental Indenture
dated as of May 1, 1995, by the Thirty-fourth Supplemental Indenture dated as of November 1, 1996,
by the Thirty-fifth Supplemental Indenture dated as of June 18, 1998, by the Thirty-sixth
Supplemental Indenture dated as of August 15, 2001, by the Thirty-seventh Supplemental Indenture
dated as of February 15, 2003, by the Thirty-eighth Supplemental Indenture dated as of October 1,
2004, by the Thirty-ninth Supplemental Indenture dated as of April 1, 2008, by the Fortieth
Supplemental Indenture dated as of June 1, 2008 and by this Supplemental Indenture is in all
respects ratified and confirmed; and the Indenture and said Supplemental Indentures shall be read,
taken and construed as one and the same instrument.
Except to the extent specifically provided therein, no provision of this Supplemental
Indenture or any future supplemental indenture is intended to modify, and the parties do hereby
adopt and confirm, the provisions of Section 318(c) of the Trust Indenture Act, which amend and
supersede provisions of the Indenture in effect prior to November 15, 1990.
20
Nothing in this Supplemental Indenture is intended, or shall be construed, to give to any
person or corporation, other than the parties hereto and the holders of Collateral Bonds issued and
to be issued under and secured by the Indenture, any legal or equitable right, remedy or claim
under or in respect of this Supplemental Indenture, or under any covenant, condition or provision
herein contained, all the covenants, conditions and provisions of this Supplemental Indenture being
intended to be, and being, for the sole and exclusive benefit of the parties hereto and of the
holders of bonds issued and to be issued under the Indenture and secured thereby.
All covenants, promises and agreements in this Supplemental Indenture contained by or on
behalf of the Company shall bind its successors and assigns whether so expressed or not.
This Supplemental Indenture may be executed in any number of counterparts, and each of such
counterparts when so executed shall be deemed to be an original; but all such counterparts shall
together constitute but one and the same instrument.
21
IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this Supplemental Indenture
to be executed by its duly authorized Officer, and its corporate seal to be hereunto affixed, and
Citibank, N.A., as Mortgage Trustee as aforesaid, has caused the same to be executed by one of its
authorized signatories and its corporate seal to be hereunto affixed, on the respective dates of
their acknowledgments hereinafter set forth, as of the date and year first above written.
|
|
|
|
|
MICHIGAN CONSOLIDATED GAS COMPANY
|
|
By:
|
/s/Paul A. Stadnikia
|
|
|
Paul A. Stadnikia
|
|
|
Assistant Treasurer
|
|
|
Signed, sealed, acknowledged and
delivered by MICHIGAN CONSOLIDATED
GAS COMPANY in the presence of:
|
|
|
|
|
|
|
/s/Anthony G. Morrow
|
|
Anthony G. Morrow
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/Daniel T. Richards
|
|
Daniel T. Richards
|
|
|
|
|
|
|
|
|
|
State of Michigan
|
|
}
|
|
|
|
|
}
|
|
ss.
|
County of Wayne
|
|
}
|
|
|
The foregoing instrument was acknowledged before me this 14
th
day of August, 2008,
by Paul A. Stadnikia, as Assistant Treasurer, of Michigan Consolidated Gas Company, a Michigan
corporation, on behalf of the corporation.
|
|
|
|
|
|
|
/s/Stephanie V. Washio
|
|
Stephanie V. Washio
|
|
Notary Public, Wayne County, MI
Acting in Wayne County, MI
My Commission Expires: May 18, 2012
|
|
22
|
|
|
|
|
CITIBANK, N.A., as Mortgage Trustee
|
|
By:
|
/s/Wafaa Orfy
|
|
|
Wafaa Orfy
|
|
|
Vice President
|
|
|
Signed, sealed, acknowledged and
delivered by CITIBANK, N.A.
in the presence of:
|
|
|
|
|
|
|
/s/John J. Byrnes
|
|
Name:
|
John J. Byrnes
|
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
/s/Louis Piscitelli
|
|
Name:
|
Louis Piscitelli
|
|
Vice President
|
|
|
|
|
|
|
|
State of New York
|
|
}
|
|
|
|
|
}
|
|
ss.
|
County of New York
|
|
}
|
|
|
The foregoing instrument was acknowledged before me this 18
th
day of August, 2008,
by Wafaa Orfy, as Vice President of Citibank, N.A., a national banking association, on behalf of
the association, as Trustee, as in said instrument described.
|
|
|
|
|
|
|
|
/s/Zenaida Santiago
|
|
Notary Public, State of New York
|
|
No. 01SA6152564
Qualified in Kings County
Acting in New York County
Commission Expires September 18, 2010
|
|
23
This instrument was drafted by:
Daniel T. Richards
2000 2nd Avenue, 688WCB
Detroit, MI 48226
When recorded return to:
Stephanie V. Washio
2000 2nd Avenue, 688WCB
Detroit, MI 48226
24
Exhibit 4-251
EIGHTH SUPPLEMENTAL INDENTURE
FROM
MICHIGAN CONSOLIDATED GAS COMPANY
TO
CITIBANK, N.A.
TRUSTEE
Dated as of August 1, 2008
SUPPLEMENT TO INDENTURE
Dated as of June 1, 1998
Providing for
5.94% Senior Notes, 2008 Series H due 2015
6.36% Senior Notes, 2008 Series I due 2020
This EIGHTH SUPPLEMENTAL INDENTURE is made as of the 1st day of August, 2008, by and between
MICHIGAN CONSOLIDATED GAS COMPANY, a corporation duly organized and existing under the laws of the
State of Michigan (the Company), and CITIBANK, N.A., a national banking association incorporated
and existing under and by virtue of the laws of the United States of America, as trustee (the
Trustee).
RECITALS OF THE COMPANY:
WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture, dated
as of June 1, 1998 (the Original Indenture), as amended, supplemented and modified (as so
amended, supplemented and modified, the Indenture), providing for the issuance by the Company
from time to time of its senior debt securities (the Securities); and
WHEREAS, the Company desires to provide for the issuance of two series of its Securities
pursuant to the Indenture; and
WHEREAS
, the Company, in the exercise of the power and authority conferred upon and
reserved to it under the provisions of the Original Indenture, including Section 10.1 thereof, and
pursuant to appropriate resolutions of the Board of Directors, has duly determined to make, execute
and deliver to the Trustee this Supplemental Indenture to the Original Indenture as permitted by
Section 2.1 and Section 3.1 of the Original Indenture in order to establish the form or terms of,
and to provide for the creation and issue of two series of its Securities under the Original
Indenture, which shall be known as the 5.94% Senior Notes, 2008 Series H due 2015, and the 6.36%
Senior Notes, 2008 Series I due 2020; and
WHEREAS
, all things necessary to make such Securities, when executed by the Company
and authenticated and delivered by the Trustee or any Authenticating Agent and issued upon the
terms and subject to the conditions hereinafter and in the Original Indenture set forth against
payment therefor, the valid, binding and legal obligations of the Company and to make this
Supplemental Indenture a valid, binding and legal agreement of the Company, have been done;
NOW, THEREFORE,
in order to establish the terms of a series of Securities, and for
and in consideration of the premises and of the covenants contained in the Original Indenture and
in this Supplemental Indenture and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, it is mutually covenanted and agreed as follows:
Article I
RELATION TO INDENTURE; DEFINITIONS
Section 1.01.
This Supplemental Indenture constitutes an integral part of the Indenture.
2
Section 1.02.
For all purposes of this Supplemental Indenture:
(a) Capitalized terms used but not otherwise defined herein shall have the respective meanings
assigned to such terms in the Indenture;
(b) All references herein to Articles and Sections, unless otherwise specified, refer to the
corresponding Articles and Sections of this Supplemental Indenture; and
(c) The terms hereof, herein, hereby, hereto, hereunder, and herewith refer to
this Supplemental Indenture.
(d) The following terms shall have the meaning set forth below:
Institutional Investor has the meaning set forth in the Purchase Agreement.
Original Issue Date means August 20, 2008.
Purchase Agreement means the Note Purchase Agreement dated as of June 27, 2008, among
the Company and the several initial purchasers named therein.
Restricted Securities Legend means the legend set forth in Section 2.03(b) herein.
Securities Act means the Securities Act of 1933, as amended.
Article II
THE SECURITIES
Section 2.01. Title of the Securities; Stated Maturity.
This Supplemental Indenture hereby establishes two series of Securities, known as and entitled
5.94% Senior Notes, 2008 Series H due 2015 (the Series H Notes), and 6.36% Senior Notes, 2008
Series I due 2020 (the Series I Notes and together with the Series H Notes, the Senior Notes).
The aggregate principal amount of the Series H Notes shall be limited initially to One hundred
forty million Dollars ($140,000,000), and the aggregate principal amount of the Series I Notes
shall be limited initially to Fifty million Dollars ($50,000,000) (except, in each case, for
Senior Notes authenticated and delivered upon transfer of, or in exchange for, or in lieu of, other
Senior Notes).
The Senior Notes issued on the Original Issue Date will be sold by the Company pursuant to the
Purchase Agreement.
3
The Senior Notes are not subject to repayment at the option of Holders thereof and are not
subject to any sinking fund. As provided in the forms of Series H Notes, and Series I Notes
attached hereto as Appendix I and Appendix II respectively, the Senior Notes are subject to
optional redemption, as a whole or in part, by the Company prior to the Stated Maturity of the
principal thereof on the terms set forth therein. Except as modified in the forms of the Senior
Notes, redemptions shall be effected in accordance with Article Twelve of the Original Indenture.
The Senior Notes shall have such other terms and provisions as are set forth in the forms of
the Senior Notes attached hereto as Appendix I and Appendix II respectively, (which are
incorporated by reference in and made a part of this Supplemental Indenture as if set forth in full
at this place).
Section 2.02. Amount and Denominations
The Senior Notes shall be issuable only in fully registered form and, as permitted by Section
3.1 and Section 3.2 of the Original Indenture, in denominations of $1,000 and integral multiples
thereof.
Section 2.03. Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Securities evidencing the Senior
Notes are presented to the Security Registrar with a request:
(i) to register the transfer of such Securities; or
(ii) to exchange such Securities for Securities of the same series of any authorized
denominations of the same aggregate principal amount and Stated Maturity, the Security Registrar
shall register the transfer or make the exchange as requested if its reasonable requirements for
such transaction are met; provided, however, that the Securities surrendered for transfer or
exchange:
(A) shall be duly endorsed or be accompanied by a written instrument of transfer in form
reasonably satisfactory to the Company and the Security Registrar, duly executed by the
Holder thereof or his attorney duly authorized in writing; and
(B) are accompanied by the following additional information and documents, as
applicable:
(x) if such Securities are being delivered to the Security Registrar by a Holder for
registration in the name of such Holder, without transfer, a certification from such
Holder to that effect (in the form set forth on the reverse side of the Transfer
Restricted Security); or
4
(y) if such Securities are being transferred to the Company, a certification to that
effect (in the form set forth on the reverse side of the Transfer Restricted Security);
or
(z) if such Securities are being transferred pursuant to an exemption from
registration in accordance with Rule 144 under the Securities Act or in reliance upon
another exemption from the registration requirements of the Securities Act, (i) a
certification to that effect (in the form set forth on the reverse side of the Transfer
Restricted Security) and (ii) if the Company so requests, other evidence reasonably
satisfactory to it as to the compliance with the restrictions set forth in the legend set
forth in Section 2.03(b).
In case of redemption, the Company shall not be required (i) to issue, register the transfer
of or exchange Senior Notes of any series during a period beginning at the opening of business 15
days before any selection of Senior Notes of that series to be redeemed and ending at the close of
business on the day of the mailing of the relevant notice of redemption, or (ii) to register the
transfer of or exchange any Senior Notes so selected for redemption, in whole or in part, except
the unredeemed portion of any Senior Notes being redeemed in part.
(b) Legends for Securities. Each Security certificate evidencing the Senior Notes (and all
Securities issued in exchange therefor or in substitution thereof) shall bear a legend in
substantially the following form (each defined term in the legend being defined as such for
purposes of the legend only):
THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE SECURITIES ACT) AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND (B) IN
ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. IN CONNECTION
WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES
AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
Article III
DELIVERY AND TRANSFER OF 2008 SERIES H COLLATERAL BONDS
The Company hereby delivers and transfers to the Trustee in connection with the issuance of
the Series H Notes, One hundred forty million Dollars ($140,000,000) aggregate principal amount of
a related issue of Collateral Bonds of the Company designated 2008 Series H Collateral Bonds (the
Series H Bonds and, together with all other First Mortgage Bonds issued under the First Mortgage
Indenture as security for Securities issued under the Indenture, Collateral Bonds), which has
been fully registered in the name of the Trustee in such capacity, to be held in trust for the
benefit of the Holders from time to time of the Series H Notes as security for any and all
5
obligations of the Company in respect of the Series H Notes under the Indenture, this
Supplemental Indenture and the Series H Notes, including but not limited to (1) the full and prompt
payment of the interest on, principal of, and Make-Whole Amount, if any, on the Series H Notes when
and as the same shall become due and payable in accordance with the terms and provisions of the
Indenture and this Supplemental Indenture and the Series H Notes, either at the Stated Maturity,
upon acceleration of the maturity or upon redemption of the Series H Notes, and (2) the full and
prompt payment of any interest on the Series H Notes when and as the same shall become due and
payable in accordance with the terms and provisions of the Indenture and this Supplemental
Indenture and the Series H Notes. The Trustee shall enforce all of its rights under the First
Mortgage Indenture as a holder of the Series H Bonds transferred to it as provided in this Article
III for the benefit of the Holders of the Series H Notes and the proceeds of the enforcement of
such rights shall be applied by the Trustee to satisfy the Companys obligations under the
Indenture, this Supplemental Indenture and the Series H Notes. The Series H Bonds are the Related
Issue of Collateral Bonds with respect to the Series H Notes within the meaning of the Indenture.
The Company shall make payments of the principal of, and Make-Whole Amount or interest on, the
Series H Bonds to the Trustee, which payments shall be applied by the Trustee in satisfaction of
all obligations then due on the Series H Notes.
The Series H Bonds shall not be sold or transferred by the Trustee until the earlier of the
Release Date or the prior retirement of the Series H Notes through redemption, repurchase or
otherwise. The Release Date shall be the date that all First Mortgage Bonds of the Company
issued and outstanding under the First Mortgage Indenture, other than the Collateral Bonds, have
been retired (at, before or after the maturity thereof) through payment, redemption or otherwise,
provided that no Default or Event of Default has occurred and, at such time, is continuing under
the Indenture.
Article IV
DELIVERY AND TRANSFER OF 2008 SERIES I COLLATERAL BONDS
The Company hereby, delivers and transfers to the Trustee in connection with the issuance of
the Series I Notes, Fifty million Dollars ($50,000,000) aggregate principal amount of a related
issue of Collateral Bonds of the Company designated 2008 Series I Collateral Bonds (the Series I
Bonds and, together with all other First Mortgage Bonds issued under the First Mortgage Indenture
as security for Securities issued under the Indenture, Collateral Bonds), which has been fully
registered in the name of the Trustee in such capacity, to be held in trust for the benefit of the
Holders from time to time of the Series I Notes as security for any and all obligations of the
Company in respect of the Series I Notes under the Indenture, this Supplemental Indenture and the
Series I Notes, including but not limited to (1) the full and prompt payment of the interest on,
principal of, and Make-Whole Amount, if any, on the Series I Notes when and as the same shall
become due and payable in accordance with the terms and provisions of the Indenture and this
Supplemental Indenture and the Series I Notes, either at the Stated Maturity, upon acceleration of
the maturity or upon redemption of the Series I Notes, and (2) the full and prompt payment of any
interest on
6
the Series I Notes when and as the same shall become due and payable in accordance with the
terms and provisions of the Indenture and this Supplemental Indenture and the Series I Notes. The
Trustee shall enforce all of its rights under the First Mortgage Indenture as a holder of the
Series I Bonds transferred to it as provided in this Article IV for the benefit of the Holders of
the Series I Notes and the proceeds of the enforcement of such rights shall be applied by the
Trustee to satisfy the Companys obligations under the Indenture, this Supplemental Indenture and
the Series I Notes. The Series I Bonds are the Related Issue of Collateral Bonds with respect
the Series I Notes within the meaning of the Indenture.
The Company shall make payments of the principal of, and Make-Whole Amount or interest on, the
Series I Bonds to the Trustee, which payments shall be applied by the Trustee in satisfaction of
all obligations then due on the Series I Notes.
The Series I Bonds shall not be sold or transferred by the Trustee until the earlier of the
Release Date or the prior retirement of the Series I Notes through redemption, repurchase or
otherwise. The Release Date shall be the date that all First Mortgage Bonds of the Company
issued and outstanding under the First Mortgage Indenture, other than the Collateral Bonds, have
been retired (at, before or after the maturity thereof) through payment, redemption or otherwise,
provided that no Default or Event of Default has occurred and, at such time, is continuing under
the Indenture.
Article V
COVENANTS
Section 5.01. Limitation on Liens
The covenant set forth in Section 11.10 of the Original Indenture shall apply to the Senior
Notes only from and after the Release Date (unless Substituted Collateral Bonds are issued to
secure the Senior Notes from and after the Release Date in which case such covenant shall not
apply); provided, that, in any case, the Company may issue, assume or guarantee Indebtedness
secured by a Lien not otherwise permitted under Section 11.10 so long as it effectively secures the
Senior Notes equally and ratably with such Indebtedness.
Section 5.02. Limitation on Sale and Leaseback Transactions
The covenant set forth in Section 11.11 of the Original Indenture shall apply to the Senior
Notes only from and after the Release Date (unless Substituted Collateral Bonds are issued to
secure the Senior Notes from and after the Release Date in which case such covenant shall not
apply).
Section 5.03. Substituted Collateral Bonds
The Company covenants and agrees that:
(a) It shall notify the Trustee not less than 90 days prior to the anticipated Release Date
that on the Release Date the Company will cause Substituted Collateral
7
Bonds and an associated supplemental indenture to be delivered to the Trustee in accordance
with Section 4.9 of the Original Indenture as security for the Securities issued under the
Indenture.
(b) On or prior to the Release Date,
(i) the Company shall have delivered to the Trustee as security for the Securities then
Outstanding under the Indenture, including the Senior Notes, Substituted Collateral Bonds
complying with the provisions of Section 4.9 of the Original Indenture, such Substituted
Collateral Bonds being issued
(A) in an aggregate principal amount at least equal to the aggregate principal amount of
Securities then Outstanding under the Indenture, and
(B) in series corresponding to the Series of Securities then Outstanding under the
Indenture, and each such series of Substituted Collateral Bonds shall be issued (1) in an
aggregate principal amount equal to the aggregate principal amount of the corresponding series
of Securities then Outstanding, (2) bearing interest at a rate equal to the interest rate borne
by the corresponding series of Securities, (3) having interest payment dates that are the same
as the Interest Payment Dates of the corresponding series of Securities, (4) with a stated
maturity that is the same as the Stated Maturity of the corresponding series of Securities, (5)
containing the same redemption or other make-whole payment provisions as the corresponding
series of Securities and provisions providing for the mandatory redemption thereof upon an
acceleration of the maturity of any Outstanding Securities of the corresponding series
following an Event of Default, and (6) meeting the other requirements of Section 4.9 of the
Original Indenture; it being expressly understood that each such series of Substituted
Collateral Bonds shall be held by the Trustee for the benefit of the Holders of the
corresponding series of Securities from time to time Outstanding subject to such terms and
conditions relating to surrender to the Company, transfer restrictions, voting, application of
payments of principal and interest and other matters as shall be set forth in an indenture
supplemental hereto specifically providing for the delivery to the Trustee of such Substituted
Collateral Bonds;
(ii) such Substituted Collateral Bonds shall have been issued under and shall be secured by
a Substituted Mortgage Indenture
(A) on which the Company shall be the obligor, and
(B) which shall be qualified, or shall meet the requirements for qualification, under the
Trust Indenture Act;
(iii) the Company shall have delivered to the Trustee:
(A) an indenture supplemental hereto providing for the delivery to the Trustee of
Substituted Collateral Bonds in accordance with Section 4.9 of the Original Indenture and
Section 5.03(b)(i) above, together with such Substituted Collateral Bonds;
8
(B) an Officers Certificate (1) stating that, to the knowledge of the signer, (A) no
Event of Default has occurred and is continuing and (B) no event has occurred and is continuing
which entitles the secured party under the Substituted Mortgage Indenture to accelerate the
maturity of the indebtedness outstanding thereunder and (2) stating the aggregate principal
amount of indebtedness issuable, and then proposed to be issued, under and secured by the lien
of the Substituted Mortgage Indenture; and
(C) an Opinion of Counsel to the effect that such Substituted Collateral Bonds have been
duly issued under such Substituted Mortgage Indenture and constitute valid obligations,
entitled to the benefit of the lien of the Substituted Mortgage Indenture equally and ratably
with all other indebtedness then outstanding secured by such lien; and
(iv) the Company shall have been advised in writing, within not more than 30 days prior to
such substitution of the Substituted Collateral Bonds for the Collateral Bonds, by at least two
credit rating agencies qualifying as nationally recognized statistical rating organizations (as
defined by the Securities Exchange Act of 1934, as amended) then maintaining a securities rating
on the Senior Notes that the substitution of such Substituted Collateral Bonds for the Collateral
Bonds will not result in a reduction of the securities rating assigned to the Senior Notes by that
credit rating agency immediately prior to the substitution or the suspension or withdrawal of its
rating and the Company shall have provided the Trustee with written evidence of such advice;
provided that, in the event such Senior Notes are not rated by at least two such credit rating
agencies as described above immediately prior to any proposed substitution, the Company shall
cause the Senior Notes to be so rated prior to such substitution (and without giving effect to any
substitution) by at least two such credit rating agencies described above.
(c) in the event that the Company cannot obtain assurance of at least two credit rating
agencies as described in Section 5.03(b)(iv) above, the Company will take such actions as are
necessary to cause the Release Date not to occur.
(d) Notwithstanding any other provision of the Indenture, including Section 4.9(d) of the
Original Indenture, the requirements of this Section 5.03 shall constitute covenants, agreements
and obligations of the Company under the Indenture.
Section 5.04. Additional Event of Default.
Failure by the Company to deliver Substituted Mortgage Bonds in accordance with the provisions
of Section 5.03 of this Supplemental Indenture and Section 4.9 of the Original Indenture on or
prior to the Release Date shall be an Event of Default with respect to the Senior Notes as
contemplated by Section 6.1(9) of the Original Indenture.
Article VI
MISCELLANEOUS
Section 6.01. Limitation of Trustee Liabilty
9
The Trustee has accepted the amendment of the Indenture effected by this Supplemental
Indenture and agrees to execute the trust created by the Indenture as hereby amended, but only upon
the terms and conditions set forth in the Indenture, including the terms and provisions defining
and limiting the liabilities and responsibilities of the Trustee, and without limiting the
generality of the foregoing, the Trustee shall not be responsible in any manner whatsoever for or
with respect of any of the recitals or statements contained herein, all of which recitals or
statements are made solely by the Company, or for or with respect to (a) the validity or
sufficiency of this Supplemental Indenture or any of the terms or provisions hereof, (b) the proper
authorization hereof by the Company by corporate action or otherwise, and (c) the due execution
hereof by the Company.
Section 6.02. Applicable Law
This Supplemental Indenture and the Senior Notes shall be construed in connection with and as
a part of the Indenture and shall be governed by the laws (other than the choice of law provisions)
of the State of New York.
Section 6.03. Survivability of Certain Provisions
(a) If any provision of this Supplemental Indenture conflicts with another provision of the
Indenture required to be included in indentures qualified under the Trust Indenture Act of 1939, as
amended (as enacted prior to the date of this Supplemental Indenture), by any of the provisions of
Section 310 to 317, inclusive, of said act, such required provision shall control.
(b) In case any one or more of the provisions contained in this Supplemental Indenture or in
the Senior Notes issued hereunder should be invalid, illegal, or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected, impaired, prejudiced or disturbed thereby.
Section 6.04. Successors and Assigns
Whenever in this Supplemental Indenture either of the parties hereto is named or referred to,
such name or reference shall be deemed to include the successors or assigns of such party, and all
the covenants and agreements contained in this Supplemental Indenture by or on behalf of the
Company or by or on behalf of the Trustee shall bind and inure to the benefit of the respective
successors and assigns of such parties, whether so expressed or not.
Section 6.05. Counterpart Signatures and Descriptive Headings
(a) This Supplemental Indenture may be simultaneously executed in several counterparts, and
all such counterparts executed and delivered, each as an original, shall constitute but one and the
same instrument.
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(b) The descriptive headings of the several Articles of this Supplemental Indenture were
formulated, used and inserted in this Supplemental Indenture for convenience only and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.
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IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this Supplemental Indenture
to be executed by its duly authorized Officer and its corporate seal to be hereunto affixed, and
CITIBANK, N.A., as Trustee as aforesaid, has caused this Supplemental Indenture to be executed by
one of its authorized signatories, as of August 1, 2008.
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MICHIGAN CONSOLIDATED GAS COMPANY
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[Corporate Seal]
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By:
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/s/Paul A. Stadnikia
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Paul A. Stadnikia
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Assistant Treasurer
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CITIBANK, N.A., as Trustee
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By:
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/s/Wafaa M. Orfy
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Wafaa M. Orfy
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Vice President
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THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE SECURITIES ACT) AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND (B) IN
ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. IN CONNECTION
WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES
AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
MICHIGAN CONSOLIDATED GAS COMPANY
5.94% Senior Notes
2008 Series H due 2015
Principal Amount: $
Authorized Denomination: $1,000
Regular Record Date: close of business on the 15
th
calendar day (whether or not a
Business Day) prior to the relevant Interest Payment Date
Original Issue Date: August 20, 2008
Stated Maturity: September 1, 2015
Interest Payment Dates: March 1 and September 1 of each year, commencing March 1, 2009.
Interest Rate: 5.94% per annum
MICHIGAN CONSOLIDATED GAS COMPANY, a corporation duly organized and existing under the laws of
the State of Michigan (the Company, which term includes any successor corporation under the
Senior Indenture hereinafter referred to), for value received, hereby promises to pay to
or registered assigns, at the office or agency of the Company in
the City of New York, New York, the principal sum of
MILLION DOLLARS
($ ) on September 1, 2015 (the Stated Maturity), in the coin or currency of the
United States, and to pay interest thereon from the Original Issue Date shown above, or from the
most recent Interest Payment Date to which interest has been paid or duly provided for,
semi-annually in arrears on each Interest Payment Date as specified above, commencing on March 1,
2009 and on the Stated Maturity at the rate per annum shown
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above (the Interest Rate) until the principal hereof is paid or made available for payment
and on any overdue principal and Make-Whole Amount and on any overdue installment of interest. The
interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will,
as provided in the Senior Indenture, be paid to the Person in whose name this Security (or one or
more Predecessor Securities) is registered at the close of business on the Regular Record Date as
specified above next preceding such Interest Payment Date; provided that any interest payable at
Stated Maturity or on a Redemption Date will be paid to the Person to whom principal is payable.
Except as otherwise provided in the Senior Indenture, any such interest not so punctually paid or
duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and
may either be paid to the Person in whose name this Senior Note is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the
Senior Trustee, notice whereof shall be given to Holders of Securities of this series not less than
10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange, if any, on which the Securities of
this series shall be listed, and upon such notice as may be required by any such exchange, all as
more fully provided in the Senior Indenture.
Payments of interest on this Senior Note will include interest accrued to but excluding the
respective Interest Payment Dates. Interest payments for this Senior Note shall be computed and
paid on the basis of a 360-day year consisting of twelve 30-day months. The Company shall pay
interest on overdue principal and Make-Whole Amount, if any, and, to the extent lawful, on overdue
installments of interest at the rate per annum borne by this Senior Note. In the event that any
Interest Payment Date, Redemption Date or Maturity Date is not a Business Day, then the required
payment of principal, Make-Whole Amount, if any, and interest will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect of any such
delay). Business Day means any day other than a day on which banking institutions in the State of
New York or the State of Michigan are authorized or obligated pursuant to law or executive order to
close.
Payment of principal of, Make-Whole Amount, if any, and interest on the Securities of this
series shall be made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts. Payments of principal, Make-Whole
Amount, if any, and interest due at the Stated Maturity or earlier redemption of such Securities
shall be made at the office of the Paying Agent upon surrender of such Securities to the Paying
Agent, and (ii) payments of interest shall be made, at the option of the Company, subject to such
surrender where applicable, (A) by check mailed to the address of the Person entitled thereto as
such address shall appear in the Security Register or (B) by wire transfer at such place and to
such account at a banking institution in the United States as may be designated in writing to the
Senior Trustee at least fourteen (14) days prior to the date for payment by the Person entitled
thereto. Notwithstanding the foregoing, so long as any Senior Note is held by an Institutional
Investor, payment of principal, Make-Whole Amount, if any, and interest on the Senior Notes held by
such Holder shall be made in the manner specified in the Purchase Agreement.
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UNTIL THE RELEASE DATE (AS DEFINED ON THE REVERSE HEREOF), THIS SENIOR NOTE SHALL BE SECURED
BY FIRST MORTGAGE BONDS (THE FIRST MORTGAGE BONDS) ISSUED AND DELIVERED BY THE COMPANY TO THE
SENIOR TRUSTEE (AS DEFINED ON THE REVERSE HEREOF) UNDER THE COMPANYS TWENTY-NINTH SUPPLEMENTAL
INDENTURE DATED AS OF JULY 15, 1989, PROVIDING FOR THE RESTATEMENT OF THE INDENTURE OF MORTGAGE AND
DEED OF TRUST DATED AS OF MARCH 1, 1944 BETWEEN THE COMPANY AND CITIBANK, N.A. (THE MORTGAGE
TRUSTEE) WHICH BECAME EFFECTIVE APRIL 1, 1994, AS PREVIOUSLY SUPPLEMENTED INCLUDING AS
SUPPLEMENTED BY THE FORTY-FIRST SUPPLEMENTAL INDENTURE (AS SO SUPPLEMENTED, THE MORTGAGE
INDENTURE). ON THE RELEASE DATE, THE SENIOR NOTES SHALL CEASE TO BE SECURED BY SUCH FIRST MORTGAGE
BONDS AND INSTEAD SHALL BE SECURED BY SUBSTITUTED COLLATERAL BONDS PURSUANT TO SECTION 5.03 OF THE
EIGHTH SUPPLEMENTAL INDENTURE DATED AS OF AUGUST 1, 2008 TO THE INDENTURE DESCRIBED ON THE REVERSE
HEREOF.
Reference is made to the further provisions of this Senior Note set forth herein. Such further
provisions shall for all purposes have the same effect as though fully set forth at this place.
This Senior Note shall not be valid or become obligatory for any purpose until the certificate
of authentication hereon shall have been manually signed by the Senior Trustee under the Senior
Indenture referred to on the reverse hereof.
IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this instrument to be duly
executed under its corporate seal.
Dated: August 20, 2008
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MICHIGAN CONSOLIDATED GAS COMPANY
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By:
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N.A. Khouri
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Vice President and Treasurer
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Attest:
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By:
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Sandra Kay Ennis
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Corporate Secretary
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CERTIFICATION OF AUTHENTICATION
Dated: August 20, 2008
This is one of the Securities of the series designated therein referred to in the
within-mentioned Senior Indenture.
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CITIBANK, N.A., as Trustee
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By:
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Authorized Officer
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[REVERSE]
MICHIGAN CONSOLIDATED GAS COMPANY
5.94% Senior Notes
2008 Series H due 2015
1.
Senior Indenture
. (a) This Senior Note is one of the duly authorized issue
of Securities of the Company (hereinafter called the Securities) of the series hereinafter
specified, all issued or to be issued under and pursuant to an Indenture, dated as of June 1, 1998,
as supplemented by the First Supplemental Indenture, dated as of June 18, 1998, the Second
Supplemental Indenture, dated as of June 9, 1999, the Third Supplemental Indenture, dated as of
August 15, 2001, the Fourth Supplemental Indenture dated as of February 15, 2003, the Fifth
Supplemental Indenture dated as of October 1, 2004, the Sixth Supplemental Indenture dated as of
April 1, 2008, the Seventh Supplemental Indenture dated as of June 1, 2008, and the Eighth
Supplemental Indenture dated as of August 1, 2008 between the Company and the Trustee (as so
supplemented, the Senior Indenture), duly executed and delivered by the Company to Citibank,
N.A., as Trustee (herein called the Senior Trustee, which term includes any successor trustee
under the Senior Indenture), to which Senior Indenture reference is hereby made for a description
of the rights, limitations of rights, obligations, duties and immunities thereunder of the Senior
Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more
series, which different series may be issued in various aggregate principal amounts, may mature at
different times, may bear interest, if any, at different rates, may be subject to different
redemption provisions (if any) and may be subject to different sinking, purchase or analogous funds
(if any) and may otherwise vary as provided in the Senior Indenture. This Security is one of the
series designated as the 5.94% Senior Notes, 2008 Series H due 2015 (the Senior Notes) of the
Company.
(b) The Senior Indenture contains provisions for defeasance at any time of the entire
indebtedness of the Senior Notes or certain covenants with respect thereto upon compliance by the
Company with certain conditions set forth therein.
2.
Defined Terms
. Capitalized terms used herein for which no definition is provided
herein shall have the meanings set forth in the Senior Indenture.
3.
Transfer
. No service charge will be made for any transfer or exchange of Senior
Notes, but payment will be required of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
The Company shall not be required (a) to issue, transfer or exchange any Senior Notes during a
period beginning at the opening of business fifteen (15) days before the day of the mailing of a
notice pursuant to Section 12.4 of the Indenture identifying the serial numbers of the Senior Notes
to be called for redemption, and ending at the close of business on the day of the mailing, or (b)
to transfer or exchange any Senior Notes
I-5
theretofore selected for redemption in whole or in part, except the unredeemed portion of any
Senior Note redeemed in part.
4.
Redemption at the Companys Option
. The Senior Notes shall be subject to
redemption at the option of the Company, in whole at any time or in part from time to time (any
such date of optional redemption, a Redemption Date for purposes of the Indenture), at an
optional redemption price (which shall be a Redemption Price for purposes of the Indenture) equal
to 100% of the principal amount of the Senior Notes to be redeemed on the Redemption Date together
with the Make-Whole Amount (as defined below), if any, plus, in each case, accrued and unpaid
interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Series of Notes, that are due
and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on
the Interest Payment Date to the registered Holders as of the close of business on the relevant
Record Date.
Make-Whole Amount
means, with respect to any Senior Note, an amount equal to the excess, if
any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called
Principal of such Senior Note over the amount of such Called Principal, provided that the
Make-Whole Amount may in no event be less than zero. For the purposes of determining the
Make-Whole Amount, the following terms have the following meanings:
Called Principal
means, with respect to a Senior Note, the principal of the Senior Note that
is to be redeemed on an optional Redemption Date or has become or is declared to be immediately due
and payable pursuant to Section 6.2 of the Indenture, as the context requires.
Discounted Value
means, with respect to the Called Principal of a Senior Note, the amount
obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from
their respective scheduled due dates to the Settlement Date with respect to such Called Principal,
in accordance with accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Senior Note is payable) equal to the Reinvestment
Yield with respect to such Called Principal.
Reinvestment Yield
means, with respect to the Called Principal of a Senior Note, 0.50% plus
the yield to maturity implied by (i) the yields reported, as of 10:00 a.m. (New York City time) on
the second Business Day preceding the Settlement Date with respect to such Called Principal, on the
display designated as PX-1 on the Bloomberg Financial Market Screen (or such other display on the
Bloomberg Financial Market Service having the same information as PX-1, if PX-1 is replaced by
the Bloomberg Financial Market Screen) for the most recently issued, actively traded on-the-run,
benchmark U.S. Treasury securities having a maturity equal to the Remaining Average Life of such
Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such
time or the yields reported as of such time are not ascertainable
I-6
(including by way of interpolation), the Treasury Constant Maturity Series Yields reported,
for the latest day for which such yields have been so reported as of the second Business Day
preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical
Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury
securities having a constant maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting
U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial
practice and (b) interpolating linearly on a straight line basis between (1) the most recently
issued, actively traded on-the-run, benchmark U.S. Treasury security with the maturity closest to
and greater than the Remaining Average Life and (2) the most recently issued, actively traded
on-the-run, benchmark U.S. Treasury security with the maturity closest to and less than the
Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as
appears in the interest rate of the applicable Senior Note.
Remaining Average Life
means, with respect to any Called Principal, the number of years
(calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into
(ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining
Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to
the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such
Called Principal and the Stated Maturity of such Remaining Scheduled Payment.
Remaining Scheduled Payments
means, with respect to the Called Principal of a Senior Note,
all payments of such Called Principal and interest thereon that would be due after the Settlement
Date with respect to such Called Principal if no payment of such Called Principal were made prior
to its Stated Maturity, provided that if such Settlement Date is not a date on which interest
payments are due to be made under the terms of the Senior Note, then the amount of the next
succeeding scheduled interest payment will be reduced by the amount of interest accrued to such
Settlement Date and required to be paid on such Settlement Date.
Settlement Date
means, with respect to the Called Principal of a Senior Note, the optional
Redemption Date on which such Called Principal is to be redeemed or has become or is declared to be
immediately due and payable pursuant to Section 6.2 of the Indenture as the context requires.
Unless the Company defaults in payment of the applicable Redemption Price, on and after the
applicable Redemption Date interest will cease to accrue on the principal amount of the Senior
Notes called for redemption.
If money sufficient to pay the applicable Redemption Price with respect to the principal
amount of and accrued interest on the principal amount of the Senior Notes to be redeemed on the
applicable Redemption Date is deposited with the Senior Trustee or Paying Agent on or before the
related Redemption Date and certain other conditions
I-7
are satisfied, then on or after such date, interest will cease to accrue on the principal
amount of the Senior Notes called for redemption.
If the Company elects to redeem all or a portion of the Senior Notes, the redemption will be
conditional upon receipt by the Paying Agent or the Senior Trustee of monies sufficient to pay the
Redemption Price. If the Senior Notes are only partially redeemed by the Company, the Senior
Trustee shall select which Senior Notes are to be redeemed pro rata among all of the Senior Notes
at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal
amounts thereof and otherwise in accordance with the terms of the Indenture.
In the event of redemption of the Senior Notes in part only, a new Senior Note or Senior Notes
for the unredeemed portion will be issued in the name or names of the Holders thereof upon the
surrender thereof.
The Senior Notes will not have a sinking fund.
Notice of redemption shall be given as provided in Section 12.4 of the Indenture. Each such
notice shall specify such optional Redemption Date, the aggregate principal amount of the Senior
Notes to be prepaid on such date, the principal amount of each Senior Note held by such Holder to
be redeemed, and the interest to be paid on the Redemption Date with respect to such principal
amount being prepaid, and shall be accompanied by a certificate of a senior financial officer of
the Company as to the estimated Make-Whole Amount due in connection with such redemption
(calculated as if the date of such notice were the date of the redemption), setting forth the
details of such computation. The Make-Whole Amount shall be determined by the Company two Business
Days prior to the applicable Redemption Date and the Company shall deliver to holder of the Senior
Notes and to the Trustee a certificate of a senior financial officer specifying the calculation of
such Make-Whole Amount as of the Redemption Date.
Any redemption of less than all of the Senior Notes shall, with respect to the principal
thereof, be divisible by $1,000.
5.
Security; Release Date
. Prior to the Release Date (as hereinafter defined), the
Senior Notes shall be secured by First Mortgage Bonds designated as 2008 Series H Collateral Bonds
(the Collateral Bonds), delivered by the Company to the Senior Trustee for the benefit of the
Holders of the Senior Notes. Prior to the Release Date, the Company shall make payments of the
principal of, and Make-Whole Amount, if any, and or interest on, the Collateral Bonds to the Senior
Trustee, which payments shall be applied by the Senior Trustee to satisfaction of all obligations
then due on the Senior Notes. Reference is made to the Mortgage Indenture and the Senior Indenture
for a description of the rights of the Senior Trustee as holder of the Collateral Bonds, the
property mortgaged and pledged under the Mortgage Indenture and the rights of the Company and of
the Mortgage Trustee in respect thereof, the duties and immunities of the Mortgage Trustee and the
terms and conditions upon which the Collateral Bonds are secured and the circumstances under which
additional First Mortgage Bonds or Substituted Collateral Bonds may be issued.
I-8
FROM AND AFTER SUCH TIME AS ALL FIRST MORTGAGE BONDS (OTHER THAN COLLATERAL BONDS) ISSUED
UNDER THE MORTGAGE INDENTURE HAVE BEEN RETIRED THROUGH PAYMENT, REDEMPTION OR OTHERWISE AT, BEFORE
OR AFTER THE MATURITY THEREOF (THE RELEASE DATE), THE COLLATERAL BONDS SHALL CEASE TO SECURE THE
SENIOR NOTES IN ANY MANNER PROVIDED THAT NO DEFAULT OR EVENT OF DEFAULT HAS OCCURRED AND AT SUCH
TIME IS CONTINUING UNDER THE SENIOR INDENTURE. IN CERTAIN CIRCUMSTANCES PRIOR TO THE RELEASE DATE
AS PROVIDED IN THE SENIOR INDENTURE, THE COMPANY IS PERMITTED TO REDUCE THE AGGREGATE PRINCIPAL
AMOUNT OF A SERIES OF COLLATERAL BONDS HELD BY THE SENIOR TRUSTEE, BUT IN NO EVENT PRIOR TO THE
RELEASE DATE TO AN AMOUNT LESS THAN THE AGGREGATE OUTSTANDING PRINCIPAL AMOUNT OF THE SERIES OF
SENIOR NOTES INITIALLY ISSUED CONTEMPORANEOUSLY WITH SUCH COLLATERAL BONDS. ON THE RELEASE DATE,
THE SENIOR NOTES SHALL CEASE TO BE SECURED BY SUCH FIRST MORTGAGE BONDS AND INSTEAD SHALL BE
SECURED BY SUBSTITUTED COLLATERAL BONDS PURSUANT TO SECTION 5.03 OF THE EIGHTH SUPPLEMENTAL
INDENTURE DATED AS OF AUGUST 1, 2008 TO THE INDENTURE DESCRIBED ABOVE.
6.
Effect of Event of Default
. In case an Event of Default with respect to the Senior
Notes shall occur and be continuing, the unpaid principal of the Senior Notes may be declared due
and payable, in the manner, with the effect and subject to the conditions provided in the Senior
Indenture. Upon any such declaration, the Company shall also pay to the Holders of the Senior
Notes the Make-Whole Amount on the Senior Notes, if any, determined as of the date the Senior Notes
shall have been declared due and payable.
7.
Amendments and Waivers
. The Senior Indenture may be modified by the Company and
the Senior Trustee without consent of any Holder with respect to certain matters as described in
the Indenture. In addition, the Senior Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and obligations of the Company
and the rights of the Holders of the Securities of each series to be affected under the Senior
Indenture at any time by the Company and the Senior Trustee with the consent of the Holders of a
majority in principal amount of the Securities at the time Outstanding of each series to be
affected. The Senior Indenture also contains provisions permitting the Holders of a majority in
principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders
of all Securities of such series, to waive compliance by the Company with certain provisions of the
Senior Indenture and certain past defaults under the Senior Indenture and their consequences. Any
such consent or waiver by the Holder of this Senior Note shall bind such Holder and all future
Holders of this Senior Note and of any note issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon
this Senior Note.
I-9
8.
Obligations of Company
. No reference herein to the Senior Indenture and no
provision of this Senior Note or of the Senior Indenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of and any Make-Whole
Amount, if any, and interest on this Senior Note at the time, place, and rate and in the coin or
currency herein prescribed.
9.
Denominations, Transfer and Exchange
.
(a) The Senior Notes are issuable only in registered form without coupons in denominations
of $1,000 and any integral multiple thereof. As provided in the Senior Indenture and subject to
certain limitations therein set forth, Senior Notes of this series are exchangeable for a like
aggregate principal amount of Senior Notes of this series of a different authorized denomination,
as requested by the Holder surrendering the same.
(b) As provided in the Senior Indenture and subject to certain limitations therein set forth,
the transfer of this Senior Note is registrable in the Security Register, upon surrender of this
Senior Note for registration of transfer at the office or agency of the Company in any place where
the principal of (and Make-Whole Amount, if any) and interest on this Senior Note are payable, duly
endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company
and the Security Registrar duly executed by the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Senior Notes of this series, and of like tenor, of
authorized denominations and for the same maturity and aggregate principal amount, shall be issued
to the designated transferee or transferees.
(c) No service charge shall be made for any such registration of transfer or exchange, but the
Company may require payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Prior to due presentment of this Senior Note for registration of
transfer, the Company, the Senior Trustee and any agent of the Company or the Senior Trustee may
treat the Person in whose name this Senior Note is registered as the owner hereof for all purposes,
whether or not this Senior Note be overdue, and neither the Company, the Senior Trustee nor any
such agent shall be affected by notice to the contrary.
10.
No Liability of Certain Persons
. A director, officer, employee or stockholder, as
such, of the Company shall not have any liability for any obligations of the Company under this
Senior Note or the Senior Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder, by accepting a Senior Note, waives and releases all
such liability. The waiver and release are part of the consideration for the issuance of this
Senior Note.
11.
Governing Law
. The Senior Indenture and this Senior Note shall for all purposes be
governed by, and construed in accordance with, the internal laws of the State of New York.
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THE FOLLOWING ABBREVIATIONS SHALL BE CONSTRUED AS THOUGH THE WORDS SET FORTH BELOW OPPOSITE
EACH ABBREVIATION WERE WRITTEN OUT IN FULL WHERE SUCH ABBREVIATION APPEARS:
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TEN COM
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- as tenants in common
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(Name) CUST
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(Name) as Custodian for
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TEN ENT
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- as tenants by the entirety
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(Name) UNIF GIFT
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(name) under
the (State)
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JF TEN
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- as joint tenants with
right of survivorship and not as
tenants in common
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MIN ACT (state)
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Uniform Gifts to Minors Act
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ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
To assign this Senior Note, fill in the form below: (I) or (we) assign and transfer this Senior
Note to:
(Print or type assignees name, address and zip code)
(Insert assignees social security or tax I.D. number)
and irrevocably appoint
agent to transfer this Senior Note on the books of the Company. The agent
may substitute another to act for him.
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Dated:
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Your Signature:
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(Sign exactly as your name appears on the
other side of this Senior Note)
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Signature Guarantee:
(Signatures must be guaranteed by an eligible guarantor institution meeting the requirements of
the Transfer Agent, which requirements will include membership or participation in STAMP or such
other signature guarantee program as may be determined by the Transfer Agent in addition to, or
in substitution for, STAMP, all in accordance with the Exchange Act.)
Social Security Number or Taxpayer Identification Number:
I-11
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF SECURITIES
This Certificate relates to $
principal amount of Senior Notes held in definitive
form by
(the Transferor). The Transferor has requested the Trustee by
written order to exchange or register the transfer of a Security or Securities.
In connection with any transfer of any of the Securities evidenced by this certificate
occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act
of 1933, the undersigned confirms that such Securities are being transferred in accordance with its
terms:
CHECK ONE BOX BELOW:
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(1)
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o
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to the Company; or
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(2)
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inside the United States to a qualified institutional buyer (as defined in Rule 144A
under the Securities Act of 1933) that purchases for its own account or for the account of a
qualified institutional buyer to whom notice is given that such transfer is being made in
reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the
Securities Act of 1933; or
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(3)
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pursuant to another available exemption from registration under the Securities Act of
1933.
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Prior to the expiration of the period referred to in Rule 144(k), unless one of the boxes is
checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in
the name of any Person other than the registered holder thereof; provided, however, that if box (3)
is checked, the Trustee may require, prior to registering any such transfer of the Securities, such
certifications and other information satisfactory to the Company and the Trustee to confirm that
such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933.
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[INSERT NAME OF TRANSFEROR]
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[SIGNATURE GUARANTEE]
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Signatures must be guaranteed by an eligible guarantor institution meeting the requirements
of the Security Registrar, which requirements include membership or participation in the Security
Transfer Agent Medallion Program (STAMP) or such other signature guarantee program as may be
determined by the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
I-12
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PPN:
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APPENDIX II
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No.R-___
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$
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THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE SECURITIES ACT) AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND (B) IN
ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. IN CONNECTION
WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES
AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
MICHIGAN CONSOLIDATED GAS COMPANY
6.36% Senior Notes
2008 Series I due 2020
Principal Amount: $
Authorized Denomination: $1,000
Regular Record Date: close of business on the 15
th
calendar day (whether or not a
Business Day) prior to the relevant Interest Payment Date
Original Issue Date: August 20, 2008
Stated Maturity: September 1, 2020
Interest Payment Dates: March 1 and September 1 of each year, commencing March 1, 2009.
Interest Rate: 6.36% per annum
MICHIGAN CONSOLIDATED GAS COMPANY, a corporation duly organized and existing under the laws of
the State of Michigan (the Company, which term includes any successor corporation under the
Senior Indenture hereinafter referred to), for value received, hereby promises to pay to
or registered assigns, at the office or agency of the Company in
the City of New York, New York, the principal sum of
MILLION DOLLARS
($ ) on September 1, 2020 (the Stated Maturity), in the coin or currency of the
United States, and to pay interest thereon from the Original Issue Date shown above, or from the
most recent Interest Payment Date to which interest has been paid or duly provided for,
semi-annually in arrears on each Interest Payment Date as specified above, commencing on March 1,
2009 and on the Stated Maturity at the rate per annum shown above (the Interest Rate) until the
principal hereof is paid or made available for
II-1
payment and on any overdue principal and Make-Whole Amount and on any overdue installment of
interest. The interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in the Senior Indenture, be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of business on the
Regular Record Date as specified above next preceding such Interest Payment Date; provided that any
interest payable at Stated Maturity or on a Redemption Date will be paid to the Person to whom
principal is payable. Except as otherwise provided in the Senior Indenture, any such interest not
so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this Senior Note is
registered at the close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Senior Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities exchange, if any,
on which the Securities of this series shall be listed, and upon such notice as may be required by
any such exchange, all as more fully provided in the Senior Indenture.
Payments of interest on this Senior Note will include interest accrued to but excluding the
respective Interest Payment Dates. Interest payments for this Senior Note shall be computed and
paid on the basis of a 360-day year consisting of twelve 30-day months. The Company shall pay
interest on overdue principal and Make-Whole Amount, if any, and, to the extent lawful, on overdue
installments of interest at the rate per annum borne by this Senior Note. In the event that any
Interest Payment Date, Redemption Date or Maturity Date is not a Business Day, then the required
payment of principal, Make-Whole Amount, if any, and interest will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect of any such
delay). Business Day means any day other than a day on which banking institutions in the State of
New York or the State of Michigan are authorized or obligated pursuant to law or executive order to
close.
Payment of principal of, Make-Whole Amount, if any, and interest on the Securities of this
series shall be made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts. Payments of principal, Make-Whole
Amount, if any, and interest due at the Stated Maturity or earlier redemption of such Securities
shall be made at the office of the Paying Agent upon surrender of such Securities to the Paying
Agent, and (ii) payments of interest shall be made, at the option of the Company, subject to such
surrender where applicable, (A) by check mailed to the address of the Person entitled thereto as
such address shall appear in the Security Register or (B) by wire transfer at such place and to
such account at a banking institution in the United States as may be designated in writing to the
Senior Trustee at least fourteen (14) days prior to the date for payment by the Person entitled
thereto. Notwithstanding the foregoing, so long as any Senior Note is held by an Institutional
Investor, payment of principal, Make-Whole Amount, if any, and interest on the Senior Notes held by
such Holder shall be made in the manner specified in the Purchase Agreement.
II-2
UNTIL THE RELEASE DATE (AS DEFINED ON THE REVERSE HEREOF), THIS SENIOR NOTE SHALL BE SECURED
BY FIRST MORTGAGE BONDS (THE FIRST MORTGAGE BONDS) ISSUED AND DELIVERED BY THE COMPANY TO THE
SENIOR TRUSTEE (AS DEFINED ON THE REVERSE HEREOF) UNDER THE COMPANYS TWENTY-NINTH SUPPLEMENTAL
INDENTURE DATED AS OF JULY 15, 1989, PROVIDING FOR THE RESTATEMENT OF THE INDENTURE OF MORTGAGE AND
DEED OF TRUST DATED AS OF MARCH 1, 1944 BETWEEN THE COMPANY AND CITIBANK, N.A. (THE MORTGAGE
TRUSTEE) WHICH BECAME EFFECTIVE APRIL 1, 1994, AS PREVIOUSLY SUPPLEMENTED INCLUDING AS
SUPPLEMENTED BY THE FORTY-FIRST SUPPLEMENTAL INDENTURE (AS SO SUPPLEMENTED, THE MORTGAGE
INDENTURE). ON THE RELEASE DATE, THE SENIOR NOTES SHALL CEASE TO BE SECURED BY SUCH FIRST MORTGAGE
BONDS AND INSTEAD SHALL BE SECURED BY SUBSTITUTED COLLATERAL BONDS PURSUANT TO SECTION 5.03 OF THE
EIGHTH SUPPLEMENTAL INDENTURE DATED AS OF AUGUST 1, 2008 TO THE INDENTURE DESCRIBED ON THE REVERSE
HEREOF.
Reference is made to the further provisions of this Senior Note set forth herein. Such further
provisions shall for all purposes have the same effect as though fully set forth at this place.
This Senior Note shall not be valid or become obligatory for any purpose until the certificate
of authentication hereon shall have been manually signed by the Senior Trustee under the Senior
Indenture referred to on the reverse hereof.
IN WITNESS WHEREOF, MICHIGAN CONSOLIDATED GAS COMPANY has caused this instrument to be duly
executed under its corporate seal.
Dated: August 20, 2008
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MICHIGAN CONSOLIDATED GAS COMPANY
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By:
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N.A. Khouri
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Vice President and Treasurer
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Attest:
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By:
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Sandra Kay Ennis
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Corporate Secretary
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II-3
CERTIFICATION OF AUTHENTICATION
Dated: August 20, 2008
This is one of the Securities of the series designated therein referred to in the
within-mentioned Senior Indenture.
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CITIBANK, N.A., as Trustee
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By:
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Authorized Officer
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II-4
[REVERSE]
MICHIGAN CONSOLIDATED GAS COMPANY
6.36% Senior Notes
2008 Series I due 2020
1.
Senior Indenture
. (a) This Senior Note is one of the duly authorized issue
of Securities of the Company (hereinafter called the Securities) of the series hereinafter
specified, all issued or to be issued under and pursuant to an Indenture, dated as of June 1, 1998,
as supplemented by the First Supplemental Indenture, dated as of June 18, 1998, the Second
Supplemental Indenture, dated as of June 9, 1999, the Third Supplemental Indenture, dated as of
August 15, 2001, the Fourth Supplemental Indenture dated as of February 15, 2003, the Fifth
Supplemental Indenture dated as of October 1, 2004, the Sixth Supplemental Indenture dated as of
April 1, 2008, the Seventh Supplemental Indenture dated as of June 1, 2008, and the Eighth
Supplemental Indenture dated as of August 1, 2008 between the Company and the Trustee (as so
supplemented, the Senior Indenture), duly executed and delivered by the Company to Citibank,
N.A., as Trustee (herein called the Senior Trustee, which term includes any successor trustee
under the Senior Indenture), to which Senior Indenture reference is hereby made for a description
of the rights, limitations of rights, obligations, duties and immunities thereunder of the Senior
Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more
series, which different series may be issued in various aggregate principal amounts, may mature at
different times, may bear interest, if any, at different rates, may be subject to different
redemption provisions (if any) and may be subject to different sinking, purchase or analogous funds
(if any) and may otherwise vary as provided in the Senior Indenture. This Security is one of the
series designated as the 6.36% Senior Notes, 2008 Series I due 2020 (the Senior Notes) of the
Company.
(b) The Senior Indenture contains provisions for defeasance at any time of the entire
indebtedness of the Senior Notes or certain covenants with respect thereto upon compliance by the
Company with certain conditions set forth therein.
2.
Defined Terms
. Capitalized terms used herein for which no definition is provided
herein shall have the meanings set forth in the Senior Indenture.
3.
Transfer
. No service charge will be made for any transfer or exchange of Senior
Notes, but payment will be required of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
The Company shall not be required (a) to issue, transfer or exchange any Senior Notes during a
period beginning at the opening of business fifteen (15) days before the day of the mailing of a
notice pursuant to Section 12.4 of the Indenture identifying the serial numbers of the Senior Notes
to be called for redemption, and ending at the close of business on the day of the mailing, or (b)
to transfer or exchange any Senior Notes
II-5
theretofore selected for redemption in whole or in part, except the unredeemed portion of any
Senior Note redeemed in part.
4.
Redemption at the Companys Option
. The Senior Notes shall be subject to
redemption at the option of the Company, in whole at any time or in part from time to time (any
such date of optional redemption, a Redemption Date for purposes of the Indenture), at an
optional redemption price (which shall be a Redemption Price for purposes of the Indenture) equal
to 100% of the principal amount of the Senior Notes to be redeemed on the Redemption Date together
with the Make-Whole Amount (as defined below), if any, plus, in each case, accrued and unpaid
interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Series of Notes, that are due
and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on
the Interest Payment Date to the registered Holders as of the close of business on the relevant
Record Date.
Make-Whole Amount
means, with respect to any Senior Note, an amount equal to the excess, if
any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called
Principal of such Senior Note over the amount of such Called Principal, provided that the
Make-Whole Amount may in no event be less than zero. For the purposes of determining the
Make-Whole Amount, the following terms have the following meanings:
Called Principal
means, with respect to a Senior Note, the principal of the Senior Note that
is to be redeemed on an optional Redemption Date or has become or is declared to be immediately due
and payable pursuant to Section 6.2 of the Indenture, as the context requires.
Discounted Value
means, with respect to the Called Principal of a Senior Note, the amount
obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from
their respective scheduled due dates to the Settlement Date with respect to such Called Principal,
in accordance with accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Senior Note is payable) equal to the Reinvestment
Yield with respect to such Called Principal.
Reinvestment Yield
means, with respect to the Called Principal of a Senior Note, 0.50% plus
the yield to maturity implied by (i) the yields reported, as of 10:00 a.m. (New York City time) on
the second Business Day preceding the Settlement Date with respect to such Called Principal, on the
display designated as PX-1 on the Bloomberg Financial Market Screen (or such other display on the
Bloomberg Financial Market Service having the same information as PX-1, if PX-1 is replaced by
the Bloomberg Financial Market Screen) for the most recently issued, actively traded on-the-run,
benchmark U.S. Treasury securities having a maturity equal to the Remaining Average Life of such
Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such
time or the yields reported as of such time are not ascertainable
II-6
(including by way of interpolation), the Treasury Constant Maturity Series Yields reported,
for the latest day for which such yields have been so reported as of the second Business Day
preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical
Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury
securities having a constant maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting
U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial
practice and (b) interpolating linearly on a straight line basis between (1) the actively traded
on-the-run, benchmark U.S. Treasury security with the maturity closest to and greater than the
Remaining Average Life and (2) the most recently issued, actively traded on-the-run, benchmark
U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. The
Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate
of the applicable Senior Note.
Remaining Average Life
means, with respect to any Called Principal, the number of years
(calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into
(ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining
Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to
the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such
Called Principal and the Stated Maturity of such Remaining Scheduled Payment.
Remaining Scheduled Payments
means, with respect to the Called Principal of a Senior Note,
all payments of such Called Principal and interest thereon that would be due after the Settlement
Date with respect to such Called Principal if no payment of such Called Principal were made prior
to its Stated Maturity, provided that if such Settlement Date is not a date on which interest
payments are due to be made under the terms of the Senior Note, then the amount of the next
succeeding scheduled interest payment will be reduced by the amount of interest accrued to such
Settlement Date and required to be paid on such Settlement Date.
Settlement Date
means, with respect to the Called Principal of a Senior Note, the optional
Redemption Date on which such Called Principal is to be redeemed or has become or is declared to be
immediately due and payable pursuant to Section 6.2 of the Indenture as the context requires.
Unless the Company defaults in payment of the applicable Redemption Price, on and after the
applicable Redemption Date interest will cease to accrue on the principal amount of the Senior
Notes called for redemption.
If money sufficient to pay the applicable Redemption Price with respect to the principal
amount of and accrued interest on the principal amount of the Senior Notes to be redeemed on the
applicable Redemption Date is deposited with the Senior Trustee or Paying Agent on or before the
related Redemption Date and certain other conditions
II-7
are satisfied, then on or after such date, interest will cease to accrue on the principal
amount of the Senior Notes called for redemption.
If the Company elects to redeem all or a portion of the Senior Notes, the redemption will be
conditional upon receipt by the Paying Agent or the Senior Trustee of monies sufficient to pay the
Redemption Price. If the Senior Notes are only partially redeemed by the Company, the Senior
Trustee shall select which Senior Notes are to be redeemed pro rata among all of the Senior Notes
at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal
amounts thereof and otherwise in accordance with the terms of the Indenture.
In the event of redemption of the Senior Notes in part only, a new Senior Note or Senior Notes
for the unredeemed portion will be issued in the name or names of the Holders thereof upon the
surrender thereof.
The Senior Notes will not have a sinking fund.
Notice of redemption shall be given as provided in Section 12.4 of the Indenture. Each such
notice shall specify such optional Redemption Date, the aggregate principal amount of the Senior
Notes to be prepaid on such date, the principal amount of each Senior Note held by such Holder to
be redeemed, and the interest to be paid on the Redemption Date with respect to such principal
amount being prepaid, and shall be accompanied by a certificate of a senior financial officer of
the Company as to the estimated Make-Whole Amount due in connection with such redemption
(calculated as if the date of such notice were the date of the redemption), setting forth the
details of such computation. The Make-Whole Amount shall be determined by the Company two Business
Days prior to the applicable Redemption Date and the Company shall deliver to holder of the Senior
Notes and to the Trustee a certificate of a senior financial officer specifying the calculation of
such Make-Whole Amount as of the Redemption Date.
Any redemption of less than all of the Senior Notes shall, with respect to the principal
thereof, be divisible by $1,000.
5.
Security; Release Date
. Prior to the Release Date (as hereinafter defined), the
Senior Notes shall be secured by First Mortgage Bonds designated as 2008 Series I Collateral Bonds
(the Collateral Bonds), delivered by the Company to the Senior Trustee for the benefit of the
Holders of the Senior Notes. Prior to the Release Date, the Company shall make payments of the
principal of, and Make-Whole Amount, if any, and or interest on, the Collateral Bonds to the Senior
Trustee, which payments shall be applied by the Senior Trustee to satisfaction of all obligations
then due on the Senior Notes. Reference is made to the Mortgage Indenture and the Senior Indenture
for a description of the rights of the Senior Trustee as holder of the Collateral Bonds, the
property mortgaged and pledged under the Mortgage Indenture and the rights of the Company and of
the Mortgage Trustee in respect thereof, the duties and immunities of the Mortgage Trustee and the
terms and conditions upon which the Collateral Bonds are secured and the circumstances under which
additional First Mortgage Bonds or Substituted Collateral Bonds may be issued.
II-8
FROM AND AFTER SUCH TIME AS ALL FIRST MORTGAGE BONDS (OTHER THAN COLLATERAL BONDS) ISSUED
UNDER THE MORTGAGE INDENTURE HAVE BEEN RETIRED THROUGH PAYMENT, REDEMPTION OR OTHERWISE AT, BEFORE
OR AFTER THE MATURITY THEREOF (THE RELEASE DATE), THE COLLATERAL BONDS SHALL CEASE TO SECURE THE
SENIOR NOTES IN ANY MANNER PROVIDED THAT NO DEFAULT OR EVENT OF DEFAULT HAS OCCURRED AND AT SUCH
TIME IS CONTINUING UNDER THE SENIOR INDENTURE. IN CERTAIN CIRCUMSTANCES PRIOR TO THE RELEASE DATE
AS PROVIDED IN THE SENIOR INDENTURE, THE COMPANY IS PERMITTED TO REDUCE THE AGGREGATE PRINCIPAL
AMOUNT OF A SERIES OF COLLATERAL BONDS HELD BY THE SENIOR TRUSTEE, BUT IN NO EVENT PRIOR TO THE
RELEASE DATE TO AN AMOUNT LESS THAN THE AGGREGATE OUTSTANDING PRINCIPAL AMOUNT OF THE SERIES OF
SENIOR NOTES INITIALLY ISSUED CONTEMPORANEOUSLY WITH SUCH COLLATERAL BONDS. ON THE RELEASE DATE,
THE SENIOR NOTES SHALL CEASE TO BE SECURED BY SUCH FIRST MORTGAGE BONDS AND INSTEAD SHALL BE
SECURED BY SUBSTITUTED COLLATERAL BONDS PURSUANT TO SECTION 5.03 OF THE EIGHTH SUPPLEMENTAL
INDENTURE DATED AS OF AUGUST 1, 2008 TO THE INDENTURE DESCRIBED ABOVE.
6.
Effect of Event of Default
. In case an Event of Default with respect to the Senior
Notes shall occur and be continuing, the unpaid principal of the Senior Notes may be declared due
and payable, in the manner, with the effect and subject to the conditions provided in the Senior
Indenture. Upon any such declaration, the Company shall also pay to the Holders of the Senior
Notes the Make-Whole Amount on the Senior Notes, if any, determined as of the date the Senior Notes
shall have been declared due and payable.
7.
Amendments and Waivers
. The Senior Indenture may be modified by the Company and
the Senior Trustee without consent of any Holder with respect to certain matters as described in
the Indenture. In addition, the Senior Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and obligations of the Company
and the rights of the Holders of the Securities of each series to be affected under the Senior
Indenture at any time by the Company and the Senior Trustee with the consent of the Holders of a
majority in principal amount of the Securities at the time Outstanding of each series to be
affected. The Senior Indenture also contains provisions permitting the Holders of a majority in
principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders
of all Securities of such series, to waive compliance by the Company with certain provisions of the
Senior Indenture and certain past defaults under the Senior Indenture and their consequences. Any
such consent or waiver by the Holder of this Senior Note shall bind such Holder and all future
Holders of this Senior Note and of any note issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon
this Senior Note.
II-9
8.
Obligations of Company
. No reference herein to the Senior Indenture and no
provision of this Senior Note or of the Senior Indenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of and any Make-Whole
Amount, if any, and interest on this Senior Note at the time, place, and rate and in the coin or
currency herein prescribed.
9.
Denominations, Transfer and Exchange
.
(a) The Senior Notes are issuable only in registered form without coupons in denominations
of $1,000 and any integral multiple thereof. As provided in the Senior Indenture and subject to
certain limitations therein set forth, Senior Notes of this series are exchangeable for a like
aggregate principal amount of Senior Notes of this series of a different authorized denomination,
as requested by the Holder surrendering the same.
(b) As provided in the Senior Indenture and subject to certain limitations therein set forth,
the transfer of this Senior Note is registrable in the Security Register, upon surrender of this
Senior Note for registration of transfer at the office or agency of the Company in any place where
the principal of (and Make-Whole Amount, if any) and interest on this Senior Note are payable, duly
endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company
and the Security Registrar duly executed by the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Senior Notes of this series, and of like tenor, of
authorized denominations and for the same maturity and aggregate principal amount, shall be issued
to the designated transferee or transferees.
(c) No service charge shall be made for any such registration of transfer or exchange, but the
Company may require payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Prior to due presentment of this Senior Note for registration of
transfer, the Company, the Senior Trustee and any agent of the Company or the Senior Trustee may
treat the Person in whose name this Senior Note is registered as the owner hereof for all purposes,
whether or not this Senior Note be overdue, and neither the Company, the Senior Trustee nor any
such agent shall be affected by notice to the contrary.
10.
No Liability of Certain Persons
. A director, officer, employee or stockholder, as
such, of the Company shall not have any liability for any obligations of the Company under this
Senior Note or the Senior Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder, by accepting a Senior Note, waives and releases all
such liability. The waiver and release are part of the consideration for the issuance of this
Senior Note.
11.
Governing Law
. The Senior Indenture and this Senior Note shall for all purposes be
governed by, and construed in accordance with, the internal laws of the State of New York.
II-10
THE FOLLOWING ABBREVIATIONS SHALL BE CONSTRUED AS THOUGH THE WORDS SET FORTH BELOW OPPOSITE
EACH ABBREVIATION WERE WRITTEN OUT IN FULL WHERE SUCH ABBREVIATION APPEARS:
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TEN COM
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- as tenants in common
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(Name) CUST
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(Name) as Custodian for
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TEN ENT
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- as tenants by the entirety
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(Name) UNIF GIFT
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(name) under the (State)
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JF TEN
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- as joint tenants with
right of survivorship and not as
tenants in common
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MIN ACT (state)
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Uniform Gifts to Minors
Act
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ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
To assign this Senior Note, fill in the form below: (I) or (we) assign and transfer this Senior
Note to:
(Print or type assignees name, address and zip code)
(Insert assignees social security or tax I.D. number)
and irrevocably appoint
agent to transfer this Senior Note on the books of the Company. The agent
may substitute another to act for him.
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Dated:
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Your Signature:
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(Sign exactly as your name appears on the
other side of this Senior Note)
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Signature Guarantee:
(Signatures must be guaranteed by an eligible guarantor institution meeting the requirements of
the Transfer Agent, which requirements will include membership or participation in STAMP or such
other signature guarantee program as may be determined by the Transfer Agent in addition to, or
in substitution for, STAMP, all in accordance with the Exchange Act.)
Social Security Number or Taxpayer Identification Number:
II-11
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF SECURITIES
This Certificate relates to $
principal amount of Senior Notes held in definitive
form by
(the Transferor). The Transferor has requested the Trustee by
written order to exchange or register the transfer of a Security or Securities.
In connection with any transfer of any of the Securities evidenced by this certificate
occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act
of 1933, the undersigned confirms that such Securities are being transferred in accordance with its
terms:
CHECK ONE BOX BELOW:
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(1)
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to the Company; or
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(2)
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inside the United States to a qualified institutional buyer (as defined in Rule 144A
under the Securities Act of 1933) that purchases for its own account or for the account of a
qualified institutional buyer to whom notice is given that such transfer is being made in
reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the
Securities Act of 1933; or
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(3)
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pursuant to another available exemption from registration under the Securities Act of
1933.
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Prior to the expiration of the period referred to in Rule 144(k), unless one of the boxes is
checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in
the name of any Person other than the registered holder thereof; provided, however, that if box (3)
is checked, the Trustee may require, prior to registering any such transfer of the Securities, such
certifications and other information satisfactory to the Company and the Trustee to confirm that
such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933.
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[INSERT NAME OF TRANSFEROR]
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[SIGNATURE GUARANTEE]
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Signatures must be guaranteed by an eligible guarantor institution meeting the requirements of
the Security Registrar, which requirements include membership or participation in the Security
Transfer Agent Medallion Program (STAMP) or such other signature guarantee program as may be
determined by the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
II-12