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8-K - FORM 8-K - DTE ENERGY CO | k50639e8vk.htm |
Table of Contents
Exhibit 99.1
Michigan Consolidated Gas Company
Unaudited Consolidated Financial Statements as of and for the Quarter and the Six Months Ended June
30, 2011
Michigan Consolidated Gas Company
TABLE OF CONTENTS
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
(in Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Operating Revenues |
$ | 238 | $ | 230 | $ | 918 | $ | 975 | ||||||||
Operating Expenses |
||||||||||||||||
Cost of gas |
92 | 81 | 491 | 539 | ||||||||||||
Operation and maintenance |
102 | 67 | 203 | 175 | ||||||||||||
Depreciation and amortization |
22 | 22 | 44 | 48 | ||||||||||||
Taxes other than income |
14 | 15 | 31 | 31 | ||||||||||||
230 | 185 | 769 | 793 | |||||||||||||
Operating Income |
8 | 45 | 149 | 182 | ||||||||||||
Other (Income) and Deductions |
||||||||||||||||
Interest expense |
15 | 16 | 31 | 33 | ||||||||||||
Interest income |
(2 | ) | (2 | ) | (4 | ) | (4 | ) | ||||||||
Other income |
(1 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||
Other expenses |
| 2 | 1 | 3 | ||||||||||||
12 | 15 | 25 | 29 | |||||||||||||
Income (Loss) Before Income Taxes |
(4 | ) | 30 | 124 | 153 | |||||||||||
Income Tax Provision (Benefit) |
(1 | ) | 11 | 45 | 55 | |||||||||||
Net Income (Loss) |
$ | (3 | ) | $ | 19 | $ | 79 | $ | 98 | |||||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
June 30 | December 31 | |||||||
(in Millions) | 2011 | 2010 | ||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | | $ | | ||||
Accounts receivable (less allowance for
doubtful accounts of $81 and $94,
respectively) |
||||||||
Customer |
304 | 421 | ||||||
Affiliates |
62 | 49 | ||||||
Other |
7 | | ||||||
Inventories |
||||||||
Gas |
21 | 43 | ||||||
Materials and supplies |
16 | 17 | ||||||
Gas customer choice deferred asset |
42 | 105 | ||||||
Current deferred income taxes |
35 | 38 | ||||||
Notes receivable |
||||||||
Affiliates |
77 | 4 | ||||||
Other |
3 | 3 | ||||||
Other |
3 | 12 | ||||||
570 | 692 | |||||||
Investments |
24 | 24 | ||||||
Property |
||||||||
Property, plant and equipment |
3,763 | 3,817 | ||||||
Less accumulated depreciation and amortization |
(1,547 | ) | (1,622 | ) | ||||
2,216 | 2,195 | |||||||
Other Assets |
||||||||
Regulatory assets |
716 | 778 | ||||||
Net investment in lease |
70 | 71 | ||||||
Notes receivable affiliates |
| 1 | ||||||
Prepaid pension costs affiliates |
188 | 178 | ||||||
Other |
8 | 10 | ||||||
982 | 1,038 | |||||||
Total Assets |
$ | 3,792 | $ | 3,949 | ||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
June 30 | December 31 | |||||||
(in Millions, Except Shares) | 2011 | 2010 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
||||||||
Affiliates |
$ | 16 | $ | 24 | ||||
Other |
152 | 156 | ||||||
Short-term borrowings |
||||||||
Affiliates |
| 137 | ||||||
Other |
| 150 | ||||||
Gas inventory equalization |
109 | | ||||||
Current portion of long-term debt, including capital leases |
40 | | ||||||
Other |
90 | 111 | ||||||
407 | 578 | |||||||
Long-Term Debt |
849 | 889 | ||||||
Other Liabilities |
||||||||
Deferred income taxes |
539 | 454 | ||||||
Regulatory liabilities |
582 | 614 | ||||||
Accrued pension liability affiliates |
51 | 50 | ||||||
Accrued postretirement liability affiliates |
158 | 182 | ||||||
Asset retirement obligations |
117 | 118 | ||||||
Other |
52 | 53 | ||||||
1,499 | 1,471 | |||||||
Commitments and Contingencies (Notes 6 and 8) |
||||||||
Shareholders Equity |
||||||||
Common stock, $1 par value, 15,100,000 shares authorized, 10,300,000 shares
issued and outstanding |
534 | 534 | ||||||
Retained earnings |
505 | 479 | ||||||
Accumulated other comprehensive loss |
(2 | ) | (2 | ) | ||||
1,037 | 1,011 | |||||||
Total Liabilities and Shareholders Equity |
$ | 3,792 | $ | 3,949 | ||||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended | ||||||||
June 30 | ||||||||
(in Millions) | 2011 | 2010 | ||||||
Operating Activities |
||||||||
Net income |
$ | 79 | $ | 98 | ||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||
Depreciation and amortization |
44 | 48 | ||||||
Deferred income taxes and investment tax credits, net |
38 | 12 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
93 | 210 | ||||||
Inventories |
22 | 10 | ||||||
Accrued postretirement liability-affiliates |
(24 | ) | (3 | ) | ||||
Accrued pension liability-affiliates |
(10 | ) | (13 | ) | ||||
Accrued gas cost recovery |
8 | (3 | ) | |||||
Accounts payable |
(13 | ) | (27 | ) | ||||
Gas inventory equalization |
109 | 68 | ||||||
Income, property and other taxes payable |
(2 | ) | 34 | |||||
Other assets |
130 | 51 | ||||||
Other liabilities |
2 | (12 | ) | |||||
Net cash from operating activities |
476 | 473 | ||||||
Investing Activities |
||||||||
Plant and equipment expenditures |
(76 | ) | (61 | ) | ||||
Proceeds from sale of assets |
| 9 | ||||||
Notes receivable |
(73 | ) | 3 | |||||
Other |
| 25 | ||||||
Net cash used for investing activities |
(149 | ) | (24 | ) | ||||
Financing Activities |
||||||||
Short-term borrowings, net |
(287 | ) | (439 | ) | ||||
Capital contribution by parent company |
| 25 | ||||||
Dividends on common stock |
(40 | ) | (35 | ) | ||||
Other |
| (2 | ) | |||||
Net cash used for financing activities |
(327 | ) | (451 | ) | ||||
Net Decrease in Cash and Cash Equivalents |
| (2 | ) | |||||
Cash and Cash Equivalents at Beginning of Period |
| 2 | ||||||
Cash and Cash Equivalents at End of Period |
$ | | $ | | ||||
Noncash Financing Activity |
||||||||
Transfer of non-utility subsidiaries to affiliate |
$ | (13 | ) | $ | | |||
See Notes to Consolidated Financial Statements (Unaudited)
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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
(Dollars in Millions, | Common Stock | Retained | Comprehensive | |||||||||||||||||
Shares in Thousands) | Shares | Amount | Earnings | Loss | Total | |||||||||||||||
Balance, December 31, 2010 |
10,300 | $ | 534 | $ | 479 | $ | (2 | ) | $ | 1,011 | ||||||||||
Net income |
| | 79 | | 79 | |||||||||||||||
Dividends declared on common stock |
| | (40 | ) | | (40 | ) | |||||||||||||
Transfer of non-utility subsidiaries
to affiliate |
| | (13 | ) | | (13 | ) | |||||||||||||
Balance, June 30, 2011 |
10,300 | $ | 534 | $ | 505 | $ | (2 | ) | $ | 1,037 | ||||||||||
The following table displays other comprehensive income for the six months ended June 30:
(in Millions) | 2011 | 2010 | ||||||
Net income |
$ | 79 | $ | 98 | ||||
Comprehensive income |
$ | 79 | $ | 98 | ||||
See Notes to Consolidated Financial Statements (Unaudited)
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Michigan Consolidated Gas Company
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 BASIS OF PRESENTATION
These Consolidated Financial Statements should be read in conjunction with the Notes to
Consolidated Financial Statements included in the 2010 Consolidated Financial Statements furnished
on Form 8-K.
The accompanying Consolidated Financial Statements are prepared using accounting principles
generally accepted in the United States of America. These accounting principles require management
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
the Companys estimates.
The Consolidated Financial Statements are unaudited, but in the Companys opinion include all
adjustments necessary to a fair statement of the results for the interim periods. 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, 2011.
References in this report to Company and MichCon are to Michigan Consolidated Gas Company and
its subsidiaries, collectively.
Certain prior year balances were reclassified to match the current years financial statement
presentation.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Michigan Corporate Income Tax (MCIT)
On May 25, 2011, the Michigan Business Tax (MBT) was repealed and the MCIT was enacted and will
become effective January 1, 2012. The MCIT subjects corporations with business activity in
Michigan to a 6 percent tax rate on an apportioned income tax base and eliminates the modified
gross receipts tax and nearly all credits available under the MBT. The MCIT also eliminated the
future deductions allowed under MBT that enabled companies to establish a one-time deferred tax
asset upon enactment of the MBT to offset deferred tax liabilities that resulted from enactment of
the MBT.
Effective with the enactment of the MCIT in the second quarter of 2011, the net state deferred tax
liability was remeasured to reflect the impact of the MCIT tax rate on cumulative temporary
differences expected to reverse after the effective date. The net impact of this remeasurement was
a decrease in deferred income tax liabilities of $6 million that was offset against the regulatory
asset established upon the enactment of the MBT.
Due to the elimination of the future tax deductions allowed under the MBT, the one-time MBT
deferred tax asset that was established upon the enactment of the MBT has been remeasured to zero.
The net impact of this remeasurement is a reduction of net deferred tax assets of $53 million that
was offset against the regulatory liability established upon enactment of the MBT
Consistent with the original establishment of this deferred tax liability, no recognition of this
non-cash transaction has been reflected in the Consolidated Statements of Cash Flows.
Stock-Based Compensation
The Company received an allocation of costs from DTE Energy associated with stock-based
compensation of $2 million in each of the three month periods ended June 30, 2011 and June 30,
2010, while such allocation was $4 million in each of the six month periods ended June 30, 2011 and
2010.
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NOTE 3 FAIR VALUE
Fair value is defined 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 it believes 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 was immaterial at June 30, 2011 and December 31, 2010. The Company believes it uses
valuation techniques that maximize the use of observable market-based inputs and minimize the use
of unobservable inputs.
Fair Value of Financial Instruments
The fair value of long-term debt is determined by using quoted market prices when available and a
discounted cash flow analysis based upon estimated current borrowing rates when quoted market
prices are not available. The table below shows the fair value and the carrying value for long-term
debt securities. Certain other financial instruments, such as notes payable, customer deposits and
notes receivable are not shown as carrying value approximates fair value.
June 30, 2011 | December 31, 2010 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
Long-Term Debt |
$988 million | $889 million | $981 million | $889 million |
NOTE 4 FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
The Company recognizes all derivatives at their fair value on the Consolidated Statements of
Financial Position unless they qualify for certain scope exceptions, including the normal purchases
and normal sales exception. Further, derivatives that qualify and are designated for hedge
accounting are classified as either hedges of a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as
hedges of the fair value of a recognized asset or liability or of an unrecognized firm commitment
(fair value hedge). For cash flow hedges, the portion of the derivative gain or loss that is
effective in offsetting the change in the value of the underlying exposure is deferred in
Accumulated other comprehensive income and later reclassified into earnings when the underlying
transaction occurs. For fair value hedges, changes in fair values for the derivative are recognized
in earnings each period. Gains and losses from the ineffective portion of any hedge are recognized
in earnings immediately. For derivatives that do not qualify or are not designated for hedge
accounting, changes in the fair value are recognized in earnings each period.
The Companys primary market risk exposure is associated with commodity prices, credit and interest
rates. MichCon has risk management policies to monitor and manage market risks.
Commodity Price Risk
The Company has fixed-priced contracts for portions of its expected gas supply requirements through
March 2014. These gas supply contracts are designated and qualify for the normal purchases and
sales exception and are therefore accounted for under the accrual method. The Company may also sell
forward storage and transportation capacity contracts. Forward firm storage and transportation
contracts are not derivatives and are therefore accounted for under the accrual method.
Credit Risk
The Company is exposed to credit risk if customers or counterparties do not comply with their
contractual obligations. MichCon maintains credit policies that significantly minimize overall
credit risk. These policies include an evaluation of potential customers and counterparties
financial condition, credit rating, collateral requirements or other credit enhancements such as
letters of credit or guarantees. The Company generally uses standardized agreements that allow the
netting of positive and negative transactions associated with a single counterparty.
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The Company maintains a provision for credit losses based on factors surrounding the credit risk of
its customers, historical trends, and other information. Based on the Companys credit policies and
its June 30, 2011 provision for credit losses, the Companys exposure to counterparty
nonperformance is not expected to have a material adverse effect on the Companys financial
statements.
Interest Rate Risk
MichCon occasionally uses treasury locks and other interest rate derivatives to hedge the risk
associated with interest rate market volatility. In 2004, MichCon entered into an interest rate
derivative to limit its sensitivity to market interest rate risk associated with the issuance of
long-term debt. Such instrument was designated as a cash flow hedge. The Company subsequently
issued long-term debt and terminated the hedge at a cost that is included in accumulated other
comprehensive loss. Amounts recorded in other comprehensive loss will be reclassified to interest
expense as the related interest affects earnings through 2033.
NOTE 5 ASSET RETIREMENT OBLIGATIONS
A reconciliation of the asset retirement obligations for the six months ended June 30, 2011
follows:
(in Millions) | ||||
Asset retirement obligations at December 31, 2010 |
$ | 118 | ||
Accretion |
4 | |||
Revision in estimated cash flows |
(1 | ) | ||
Liabilities settled |
(4 | ) | ||
Asset retirement obligations at June 30, 2011 |
$ | 117 | ||
NOTE 6 REGULATORY MATTERS
Gas Cost Recovery (GCR) Proceedings
The GCR process is designed to allow MichCon to recover all of its gas supply costs if incurred
under reasonable and prudent policies and practices. The MPSC reviews these costs, policies and
practices for prudence in annual plan and reconciliation filings.
The following table summarizes MichCons GCR reconciliation filing currently pending with the MPSC:
Net Over-Recovery, | ||||||||||||
GCR Year | Date Filed | Including Interest | GCR Cost of Gas Sold | |||||||||
2009-2010 |
June 2010 | $5.9 million | $1.0 billion | |||||||||
2010-2011 |
June 2011 | $1.0 million | $0.7 billion |
2011-2012 Plan Year In December 2010, MichCon filed its GCR plan case for the 2011-2012 GCR plan
year. MichCon filed for a maximum base GCR factor of $5.89 per Mcf adjustable monthly by a
contingency factor.
Other
The Company is unable to predict the outcome of the unresolved 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 SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
In August 2010, MichCon entered into an amended and restated $250 million two-year unsecured
revolving credit agreement and a new $175 million three-year unsecured revolving credit agreement
with a syndicate of 23 banks that may be used for general corporate borrowings, but are intended to
provide liquidity support for the Companys commercial paper program. No one bank provides more
than 8.25% of the commitment in any facility. Borrowings under the facilities are available at
prevailing short-term interest rates.
The above agreements require the Company to maintain a total funded debt to capitalization ratio of
no more than 0.65 to 1. In the agreements, total funded debt means all indebtedness of the
Company and its consolidated subsidiaries, including capital lease obligations, hedge agreements
and guarantees of third parties debt, but excluding contingent obligations, nonrecourse and junior
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subordinated debt and, except for calculations at the end of the second quarter, certain MichCon
short-term debt. Capitalization means the sum of (a) total funded debt plus (b) consolidated net
worth, which is equal to consolidated total stockholders equity of the Company and its
consolidated subsidiaries (excluding pension effects under certain FASB statements), as determined
in accordance with accounting principles generally accepted in the United States of America. At
June 30, 2011, the total funded debt to total capitalization ratio for MichCon was 0.46 to 1.
Should the Company have delinquent obligations of at least $50 million to any creditor, such
delinquency will be considered a default under the Companys credit agreements. There was no
commercial paper outstanding at June 30, 2011 and $150 million of commercial paper outstanding at
December 31, 2010.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Environmental
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. The
facilities, which produced gas, have been designated as manufactured gas plant (MGP) sites. MichCon
owns, or previously owned, 14 former MGP sites. Investigations have revealed contamination related
to the by-products of gas manufacturing at each site. In addition to the MGP sites, MichCon 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. Accordingly, the Company recognizes a liability and
corresponding regulatory asset for estimated investigation and remediation costs at former MGP
sites. As of June 30, 2011 and December 31, 2010, MichCon had $37 million and $36 million,
respectively, accrued for remediation.
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. The Company anticipates the
cost amortization methodology approved by the MPSC for MichCon, which allows MichCon to amortize
the MGP costs over a ten-year period beginning with the year subsequent to the year the MGP costs
were incurred, will prevent environmental costs from having a material adverse impact on the
Companys results of operations.
Labor Contracts
There are several bargaining units for the Companys represented employees. In the 2011 second
quarter, a new three-year agreement was ratified covering approximately 400 represented employees.
The majority of the remaining represented employees are under contracts that expire in October
2013.
Purchase Commitments
As of June 30, 2011, the Company was party to numerous long-term purchase commitments relating to a
variety of goods and services required for its business. These agreements primarily consist of
long-term gas purchase and transportation agreements. The Company estimates that these commitments
will be approximately $1.3 billion through 2051. MichCon also estimates that 2011 capital
expenditures will be approximately $180 million. The Company has made certain commitments in
connection with expected capital expenditures.
Bankruptcies
The Company sells gas and gas storage and transportation services to numerous companies operating
in the steel, automotive, energy, retail and other industries. Certain of its 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 sale contracts and it records
provisions for amounts considered at risk of probable loss. The Company believes its previously
accrued amounts are adequate for probable losses. The final resolution of these matters is not
expected to have a material effect on its consolidated financial statements.
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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 that it can estimate and are
considered probable of loss. The resolution of these pending proceedings is not expected to have a
material effect on its operations or financial statements in the periods they are resolved.
See Note 6 for a discussion of contingencies related to Regulatory Matters.
NOTE 9 RETIREMENT BENEFITS AND TRUSTEED ASSETS
The following details the components of net periodic benefit costs (credit) for pension benefits
and other postretirement benefits:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||
(in Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Three Months Ended June 30 |
||||||||||||||||||||
Service cost |
$ | 4 | $ | 3 | $ | 4 | $ | 3 | ||||||||||||
Interest cost |
10 | 10 | 7 | 7 | ||||||||||||||||
Expected return on plan assets |
(18 | ) | (20 | ) | (8 | ) | (6 | ) | ||||||||||||
Amortization of: |
||||||||||||||||||||
Net actuarial loss |
7 | 4 | 3 | 3 | ||||||||||||||||
Net transition liability |
| | | 1 | ||||||||||||||||
Net periodic benefit cost (credit) |
$ | 3 | $ | (3 | ) | $ | 6 | $ | 8 | |||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||
(in Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Six Months Ended June 30 |
||||||||||||||||||||
Service cost |
$ | 7 | $ | 6 | $ | 8 | $ | 7 | ||||||||||||
Interest cost |
20 | 21 | 14 | 14 | ||||||||||||||||
Expected return on plan assets |
(36 | ) | (40 | ) | (15 | ) | (12 | ) | ||||||||||||
Amortization of: |
||||||||||||||||||||
Net actuarial loss |
14 | 8 | 6 | 5 | ||||||||||||||||
Net transition liability |
| | | 2 | ||||||||||||||||
Net periodic benefit cost (credit) |
$ | 5 | $ | (5 | ) | $ | 13 | $ | 16 | |||||||||||
Pension and other Postretirement Contributions
The Company does not expect to make a contribution to its pension plans in 2011.
In January 2011, the Company contributed $45 million to its other postretirement benefit plans. The
Company does not plan on making additional contribution to the plans in 2011.
NOTE 10 DISPOSALS
Effective
January 1, 2011, MichCon transferred certain non utility subsidiaries to an affiliated
company. The transfer was effected by a non-cash dividend of approximately $13 million.
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