1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-0550
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common
stock at April 30,July 31, 1996:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 91,999,87992,440,089
CMS Energy Class G Common Stock, no par value 7,700,9197,760,072
Consumers Power Company, $10 par value, privately
held by CMS Energy 84,108,789
2
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended March 31,June 30, 1996
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers Power Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Power Company makes no
representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I:
CMS Energy Corporation
Report of Independent Public Accountants.Accountants . . . . . . . . . . . . . . 6
Consolidated Statements of Income .Income. . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows .Flows. . . . . . . . . . . . . . . . 8
Consolidated Balance Sheets .Sheets. . . . . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Common Stockholders' Equity.Equity . . . . . . . 11
Condensed Notes to Consolidated Financial Statements.Statements . . . . . . . . 12
Management's Discussion and Analysis.Analysis . . . . . . . . . . . . . . . . 21
Consumers Power Company
Report of Independent Public Accountants.Accountants . . . . . . . . . . . . . . 34
Consolidated Statements of Income .Income. . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows .Flows. . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets .Sheets. . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Common Stockholder's Equity.Equity . . . . . . . 39
Condensed Notes to Consolidated Financial Statements.Statements . . . . . . . . 40
Management's Discussion and Analysis.Analysis . . . . . . . . . . . . . . . . 47
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 58
Item 4. Submission of Matters to a Vote of Security Holders. . 57. . 60
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 5961
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6062
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ABB . . . . . . . . . . . . . . Asea Brown BoveriABB Energy Ventures, Inc.
ALJ . . . . . . . . . . . . . . Administrative Law Judge
Attorney General. . . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . Big Rock Point nuclear plant, owned by
Consumers
Board of Directors. . . . . . . Board of Directors of CMS Energy
Class G Common Stock. . . . . . One of two classes of common stock of
CMS Energy, no par value, which reflects
the separate performance of the Consumers
Gas Group
Clean Air Act . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Electric and Gas. . . . . CMS Electric and Gas Company, a subsidiary
of Enterprises
CMS Electric Marketing. . . . . CMS Electric Marketing Company, a
subsidiary of Enterprises
CMS Energy. . . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas and Electric. . . . . . CMS Gas and Electric Company, a subsidiary
of Enterprises
CMS Gas Marketing . . . . . . . CMS Gas Marketing Company, a subsidiary of
Enterprises
CMS Gas Transmission. . . . . . CMS Gas Transmission and Storage Company, a
subsidiary of Enterprises
CMS Generation. . . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . . CMS Midland Holdings Company, a subsidiary
of Consumers
CMS Midland . . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers
CMS NOMECO. . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . . Consumers Power Company, a subsidiary of
CMS Energy
Consumers Power Company
Financing I . . . . . . . . . A wholly-owned Delaware business trust offormed by
Consumers
Consumers Gas Group . . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan Gas
Storage
Court of Appeals. . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . . Demand-side management
EDEER S. A.. . . . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., an electric distribution
utility in northeastern Argentina
EDEVA . . . . . . . . . . . . Empresa de Energia y Vapor S. A., a
consortium of Argentine investors
Enterprises . . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
FERC. . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . Gas cost recovery
General Motors. . . . . . . . . General Motors Corporation
GTNs. . . . . . . . . . . . . . CMS Energy General Term Notes, $250 million
Series A and $125 million Series B
HYDRA-CO. . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary of
CMS Generation
kWh . . . . . . . . . . . . . Kilowatt-hour
Ludington . Kilowatt-hour. . . . . . . . . Ludington pumped storage plant, jointly
owned by Consumers and Detroit Edison
mcf . . . . . . . . . . . . . . Thousand cubic feet
MCV Facility. . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . . Management's Discussion and Analysis
Michigan Gas Storage. . . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
Michigan Natural Resources
and Environmental
Protection Act. . . . . . .Act . . . . . . . Michigan Natural Resources and
Environmental Protection Act Part 201
MHP . . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.
MPSC. . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . Megawatts
NEIL. . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NML . . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . . Notice of Proposed Rulemaking
NRC . . . . . . . . . . . . . . Nuclear Regulatory Commission
Order 888 and Order 889 . . . FERC final rules issued on April 24, 1996
Outstanding Shares. . . . . . . Outstanding shares of Class G Common Stock
Palisades . . . . . . . . . . . Palisades nuclear plant, owned by Consumers
PPA . . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a
35-year term commencingthat commenced in March 1990
PSCR. . . . . . . . . . . . . . Power supply cost recovery
RCRA. . . . . . . . . . . . . Resource Conservation Recovery Act of 1976
Retained Interest . . . . . . . The interest in the common stockholders'
equity of the Consumers Gas Group that is
retained by CMS Energy
Retained Interest Shares. . . . Authorized but unissued shares of Class G
Common Stock not held by holders of the
Outstanding Shares and attributable to the
Retained Interest
SEC . . . . . . . . . . . . . . Securities and Exchange Commission
Settlement Order. . . . . . . . MPSC Order issued March 31, 1993 in MPSC
Case Nos. U-10127, U-8871 and others, and
the rehearing order issued May 26, 1993
SFAS. . . . . . . . . . . . . . Statement of Financial Accounting Standards
Superfund . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production company located
in Traverse City, Michigan
TGN . . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
Walter. . . . . . . . . . . . . Walter International, Inc., an oil and gas
exploration and production company located
in Houston, Texas
6
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of
CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
March 31,June 30, 1996 and 1995, and the related consolidated statements of income,
common stockholders' equity and cash flows for the three-month, six-month
and twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of
December 31, 1995, and the related consolidated statements of income,
common stockholders' equity and cash flows for the year then ended (not
presented herein), and, in our report dated January 26, 1996, we expressed
an unqualified opinion on those statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Arthur AndersenARTHUR ANDERSEN LLP
Detroit, Michigan,
May 10,August 9, 1996.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
March 31 March 31June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 591581 $ 540 $2,328 $2,185543 $1,172 $1,083 $2,366 $2,179
Gas utility 546 482 1,259 1,105207 197 753 679 1,269 1,119
Oil and gas exploration and production 31 32 107 9424 62 56 114 100
Independent power production 2137 23 94 6064 46 114 75
Natural gas transmission, storage and marketing 83 38 241 14077 43 160 81 275 147
Other 3 2 195 6 7 17 10
------- ------- ------- ------- ------- -------
Total operating revenue 1,275 1,117 4,048 3,590936 835 2,217 1,952 4,155 3,630
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 7370 67 289 294143 134 292 290
Purchased power - related parties 140 124 507 484146 121 286 245 532 487
Purchased and interchange power 44 47 36 207 15691 83 204 148
Cost of gas sold 410 308 923 721164 135 574 443 952 733
Other 168 160 706 638174 162 348 322 724 649
------- ------- ------- ------- ------- -------
Total operation 838 695 2,632 2,293598 532 1,442 1,227 2,704 2,307
Maintenance 40 46 180 19438 45 78 91 173 191
Depreciation, depletion and amortization 124 114 426 39099 92 223 206 433 398
General taxes 59 56 199 17845 42 104 98 202 184
------- ------- ------- ------- ------- -------
Total operating expenses 1,061 911 3,437 3,055780 711 1,847 1,622 3,512 3,080
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 103 87 378 33194 83 197 170 389 328
Gas utility 91 91 151 14322 17 113 108 156 142
Oil and gas exploration and production 9 15 247 18 22 26 26
Independent power production 627 13 39 3133 26 53 42
Natural gas transmission, storage and marketing 8 3 1916 6 24 9
Other (3) (3) - (1)(4) 1 (7) (2) (5) 3
------- ------- ------- ------- ------- -------
Total pretax operating income 214 206 611 535156 124 370 330 643 550
------- ------- ------- ------- ------- -------
INCOME TAXES 57 54 133 11134 25 91 79 141 112
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 157 152 478 424122 99 279 251 502 438
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 2 3 35 6 11 12
Accretion expense (7) (8) (30) (34)(14) (16) (29) (32)
Other income taxes, net 3 1 14 114 4 6 5 12 9
Other, net 1 2 54 7 196 20
------- ------- ------- ------- ------- -------
Total other income - 1 1 2 8- 9
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 59 57 56 225 203116 113 227 212
Other interest 7 5 29 206 4 12 9 30 22
Capitalized interest (2) (1) (9) (6)(4) (2) (10) (5)
Preferred stock dividends 7 7 14 14 28 28
Preferred securities distributions 12 - 14 - 4 -
------- ------- ------- ------- ------- -------
Net fixed charges 7072 67 274 245142 134 279 257
------- ------- ------- ------- ------- -------
NET INCOME $ 8850 $ 8633 $ 206138 $ 187119 $ 223 $ 190
======= ======= ======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 7649 $ 8633 $ 191125 $ 187119 $ 207 $ 190
======= ======= ======= ======= ======= =======
Class G $ 121 $ - $ 1513 $ - $ 16 $ -
======= ======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 88 92 87 90 8691 87
======= ======= ======= ======= ======= =======
Class G 8 - 8 - 8 -
======= ======= ======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy $ .83.54 $ .99.37 $ 2.121.37 $ 2.171.36 $ 2.28 $ 2.19
======= ======= ======= ======= ======= =======
Class G $ 1.50.16 $ - $ 1.901.66 $ - $ 2.05 $ -
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .24 $ .21 $ .93.48 $ .81.42 $ .96 $ .84
======= ======= ======= ======= ======= =======
Class G $ .28 $ - $ .84.56 $ - $ 1.12 $ -
======= ======= ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
ThreeSix Months Ended Twelve Months Ended
March 31 March 31June 30 June 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 88138 $ 86119 $ 206223 $ 187190
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,$24, $24,
$51 and $49, respectively) 124 114 426 390223 206 433 398
Capital lease amortization 9 10 36 3022 19 40 42
Debt discount amortization - 16 8 16 3634
Deferred income taxes and investment tax credit 6 29 52 6817 57 35 63
Accretion expense 7 8 30 3414 16 29 32
Accretion income - abandoned Midland project (3) (3)(5) (6) (11) (12)
Undistributed earnings of related parties (21) (12) (62) (33)(41) (25) (69) (43)
MCV power purchases - settlement (Note 2) (12) (37)(27) (70) (94) (112)
(102)
Other 7 - 14 48 2 13 5
Changes in other assets and liabilities 144 127 106 (45)137 71 156 (24)
------ ------ ------ ------
Net cash provided by operating activities 349 330 701 557486 405 763 573
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (110) (131) (514) (592)(251) (280) (506) (587)
Investments in partnerships and unconsolidated subsidiaries (71) (11) (301) (41)(133) (20) (355) (48)
Investments in nuclear decommissioning trust funds (24) (24) (51) (49)
Acquisition of companies, net of cash acquired (20) (156) (10) (156)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)(12) (19) (34) (43)
Deferred demand-side management costs (2) (2)(5) (4) (10) (11)(9)
Other (3) (4) (12)- (6) (8) (9)
Proceeds from sale of property - - 2215 1 36 20
------ ------ ------ ------
Net cash used in investing activities (225) (326) (915) (879)(430) (508) (938) (881)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans and notes and bonds 339 208 464 869385 162 556 741
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 8 9 159 2616 15 161 28
Repayment of bank loans (247) (9) (256) (380)
Increase (decrease) in notes payable, net (303) (204) (97) 135
Repayment of bank loans (246) (9) (255) (427)(233) (30) (201) 180
Payment of common stock dividends (24) (18) (90) (70)(48) (37) (95) (73)
Payment of capital lease obligations (9) (10) (36) (29)(22) (19) (40) (42)
Retirement of bonds and other long-term debt - (11) (33) (181)(13) (31) (145)
Retirement of common stock - - (1) (1)
------ ------ ------ ------
Net cash provided by (used in) financing activities (138) (35) 208 322(52) 69 190 308
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (14) (31) (6)4 (34) 15 -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 48 4845 45
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 4260 $ 4845 $ 4260 $ 4845
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
March 31 March 31June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $6,130$6,177 $6,103 $5,826$5,899
Gas 2,2872,309 2,218 2,1152,146
Oil and gas properties (full-cost method) 1,0961,114 1,074 978992
Other 8690 105 5556
------ ------ ------
9,5999,690 9,500 8,9749,093
Less accumulated depreciation, depletion and amortization 4,7474,843 4,627 4,4054,493
------ ------ ------
4,8524,847 4,873 4,5694,600
Construction work-in-progress 200247 201 257264
------ ------ ------
5,0525,094 5,074 4,8264,864
------ ------ ------
INVESTMENTS
Independent power production 297306 275 262286
Natural gas transmission, storage and marketing 231238 193 4142
First Midland Limited Partnership (Note 2) 226228 225 219221
Midland Cogeneration Venture Limited Partnership (Note 2) 104110 103 8390
Other 2588 22 1617
------ ------ ------
883970 818 621656
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 4260 56 4845
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 356290 296 149168
Inventories at average cost
Gas in underground storage 39109 184 80155
Materials and supplies 8583 83 79
Generating plant fuel stock 1623 37 2734
Deferred income taxes 2221 24 3727
Prepayments and other 190160 230 178143
------ ------ ------
750746 910 598651
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 458450 462 473469
Nuclear decommissioning trust funds 323339 304 236262
Abandoned Midland project 126122 131 143139
Other 451428 444 441442
------ ------ ------
1,3581,339 1,341 1,2931,312
------ ------ ------
TOTAL ASSETS $8,043$8,149 $8,143 $7,338$7,483
====== ====== ======
10
March 31 March 31June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,541$1,575 $1,469 $1,209$1,229
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 3,1103,116 2,906 2,7872,748
Non-current portion of capital leases 10894 106 103109
------ ------ ------
5,2155,241 4,837 4,4554,442
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 97131 207 180181
Notes payable 38108 341 135309
Accounts payable 267 304 160287 306 197
Accrued taxes 223 256 172204 254 147
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 6059 53 5450
Accrued interest 4951 45 3040
Accrued refunds 2825 22 3530
Other 187181 192 166167
------ ------ ------
1,0391,136 1,510 1,0271,216
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 638646 640 604621
Postretirement benefits 539 533 549533 547
Power purchases - settlement (Note 2) 215207 221 295269
Deferred investment tax credits 168166 171 178176
Regulatory liabilities for income taxes, net 5357 44 2933
Other 176163 187 201179
------ ------ ------
1,7891,772 1,796 1,8561,825
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,043$8,149 $8,143 $7,338$7,483
====== ====== ======
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company
Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
March 31 March 31June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,959 1,734 1,951 1,701 1,734 1,6841,740 1,688
Common stock reacquired - - - - (1) (1)
Common stock issued:
CMS Energy 7 33 100 506 14 39 101 52
Class G 1 - 1252 - 126 -
Common stock reissued - - - - 1 1
------- ------- ------- ------- ------- -------
At end of period 1,959 1,734 1,959 1,7341,967 1,740 1,967 1,740 1,967 1,740
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) 1 (8) - 1 1(1)
Change in unrealized investment-gaininvestment-
gain (loss) - - - 1 (9) -2
------- ------- ------- ------- ------- -------
At end of period (8) 1 (8) 1 (8) 1
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (411) (527) (475) (595) (527) (644)(513) (630)
Net income 88 86 206 18750 33 138 119 223 190
Common stock dividends declared:
CMS Energy (22) (18) (84) (70)(19) (44) (37) (87) (73)
Class G (2) - (6)(4) - (8) -
------- ------- ------- ------- ------- -------
At end of period (411) (527) (411) (527)(385) (513) (385) (513) (385) (513)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,541 $1,209 $1,541 $1,209$1,575 $1,229 $1,575 $1,229 $1,575 $1,229
======= ======= ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
12
CMS Energy Corporation
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1995 Form 10-K of CMS Energy Corporation that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure and Basis of Presentation
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and storage and transmission of natural gas.gas, and
electric distribution.
CMS Energy uses the equity method of accounting for investments in
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
income. For the three, six and twelve month periods ended March 31,June 30, 1996,
undistributed equity earnings were $21$20 million, $41 million and $62$69
million, respectively and $12$13 million, $25 million and $33$43 million for the
three, six and twelve month periods ended March 31,June 30, 1995.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
Consumers, through itstwo wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: 1) CMS Midland
owns a 49 percent general partnership interest in the MCV Partnership; and
2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in
the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the endtermination of the PPA. In 1993,
the MPSC issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge, and a variable energy charge which is based primarily on Consumers' average
cost of coal consumed. The Settlement Order permits Consumers to recover
capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the
fixed energy charge, and the prescribed energy charges associated with the
scheduled deliveries within certain hourly availability limits, whether or
not those deliveries are scheduled on an economic basis. For all energy
delivered on an economic basis above the availability limits to 915 MW,
Consumers has been allowed to recover a capacity payment of 1/2 cent per
kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC-authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. If Consumers is unable to sell any capacity above the
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
- --------------------------------------------------------------------------
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries and losses (a) 20 22 72 72 74
==========================================================================
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will determine the levels of recovery from
retail customers at a later date. The Settlement Order also provides
Consumers the right to remarket to third parties the remaining contract
capacity. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and inAppeals. In March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. The total estimated
cash underrecoveries are not expected to change under the settlement
agreement as proposed, although the years in which they occur could vary
from the schedule shown in the above table. Consumers does not anticipate
the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding thisthe proposed settlement agreement, see
Note 3.
At March 31,June 30, 1996 and December 31, 1995, the after-tax present value of the
Settlement Order liability totaled $198$193 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8$18 million, partially offset
by after-tax accretion expense of $4$9 million. The undiscounted after-tax
amount associated with the liability totaled $593$578 million at March 31,June 30,
1996.
In 1994 and 1995, Consumers paid a total of $44 million to terminate power
purchase agreements with the developers of two proposed independent power
projects totaling 109 MW. As part of the proposed settlement agreement
reached with the MPSC staff (see Note 3), Consumers is seeking to utilize
less-expensive contract capacity from the MCV Facility which Consumers is
currently not authorized to recover from retail customers. Cost recovery
for this contract capacity would start in 1996. Even if Consumers is not
allowed to substitute MCV Facility capacity for the capacity to be
provided under the terminated agreements, Consumers believes that the MPSC
would still approve recovery of the buyout costs due to the significant
customer savings resulting from the terminated power purchase agreements.
As a result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued in
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 231995 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
Consumers filed a request with the MPSC seeking to adjust its depreciation
rates and to reallocate certain portions of its electric production plant
to transmission accounts. For further information regarding these
requests, see the Electric Rate Proceedings and Special Rates discussions
in the Management's Discussion and Analysis.MD&A.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:would
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.in the third quarter of 1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall, however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting
among other things, recoveryreconsideration of certain gas losses, as well as
reconsideration of issuesissues. This petition was denied in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.June 1996.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and, accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme Court
for review. This petition was denied in June 1996.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends towill vigorously oppose
any claims they may raise, but cannot predict the outcome of this issue.
Resolution of the issues discussed in this note is not expected to have a
material impact on CMS Energy's or Consumers' financial position or
results of operations.
4: Commitments, Contingencies and Other
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and suchcosts. Consumers' liability is therefore expected to be
less thanbetween $1 million and $9 million. At March 31,June 30, 1996, Consumers has
accrued a liability$1 million for its estimated losses.
TheUnder the Michigan Natural Resources and Environmental Protection Act,
was
substantially amended in June 1995. This Michigan lawwhich bears some similarities to the federal Superfund, law. Consumers expects that it will
ultimately incur investigation and remedial action costs at a number of
sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31,June 30, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions,
such as remediation technique, nature and extent of contamination and
legal and regulatory requirements, could effectaffect the estimate of remedial
action costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate
case. The order authorizes current recovery of $1 million annually.
Consumers is continuing discussions with certain insurance companies
regarding coverage for some or all of the costs whichthat may be incurred for
these sites.
The federal Clean Air Act contains provisions that limit emissions of sulfur
dioxide and nitrogen oxides and require emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are
presentlycurrently operating at or near the sulfur dioxide emission limits whichthat
will be effective in the year 2000. The Clean Air Act's provisions
required Consumers to make capital expenditures totaling $25 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and possible modifications at other
coal-fired units to be an additional $50 million by the year 2000.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $965$1020 million for 1996, $770$795 million for 1997 and $745$765
million for 1998.
Other: As of March 31,June 30, 1996, CMS Energy or its subsidiaries have
guaranteed up to $71$104 million in contingent obligations of unconsolidated
affiliates and other parties.
In August 1995 CMS Generation was served a complaint, which was filed in thea
U.S. District Court in Denver,the State of Colorado, alleging multiple claims
relating to a business project in the Philippines. Plaintiffs have
claimed approximately $85 million in direct damages, indirect damages in a
like amount, plus punitive damages, interest, and attorney's fees.
CMS Generation is vigorously contesting this action.
Consumers has experienced a number of lawsuits filed against it relating
to so-called stray voltage. Claimants contend that stray voltage results
when small electrical currents present in grounded electrical systems are
diverted from their intended path. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying
the grounding of the customer's service. At March 31,June 30, 1996, Consumers had
3334 separate stray voltage lawsuits awaiting trial court action.
In addition to the matters disclosed in these notes, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business and involving personal
injury, and property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
5: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costsa report on the adequacy of the surcharge
revenues with the MPSC at three-year intervals beginning in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In order to address concerns
raised subsequent to the initial cask loading, Consumers and the NRC each
analyzed the effects of seismic and other natural hazards on the support
pad on which the casks are placed, and confirmed that the pad location is
acceptable to support the casks. As of March 31,June 30, 1996, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks.
In a review of the cask manufacturer's quality assurance program,
Consumers detected indications of minor flaws in welds in the steel liner
of one of the loaded casks. Although the cask continues to safely store
spent fuel and there is no requirement for its replacement, Consumers has
nevertheless decided to remove the spent fuel and insert it in another
cask. Consumers has examined radiographs for all of
its casks and has found all other welds acceptable. The cask in which the
minor flaws were detected continues to store spent fuel safely and there
is no requirement for its replacement, but Consumers had nevertheless
planned to remove the spent fuel and insert it into another cask.
However, Consumers has postponed this action while it monitors an
investigation under way at another utility that uses a similar dry storage
cask system for spent nuclear fuel. The other utility experienced an
unexpected ignition of hydrogen gas following the loading of a cask.
Although the event caused no injuries or releases of radioactive material,
and Consumers' procedures had already precluded a similar event, the NRC
has instructed utilities using the dry storage casks to take certain
additional precautions when loading or unloading casks. Consumers does
not plan to load or unload any casks before the end of 1996.
Certain parties, including the Attorney General, have petitioned the NRC
to suspend Consumers' general license to store spent fuel, claiming that
Consumers' cask unloading procedure does not satisfy NRC regulations. The
NRC staff is reviewing the petitions.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs forduring prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of prolonged accidental
outages forsuch costs would be covered during the next 12
months after a 21 week exclusion withof the outage, followed by reduced coverage to approximately 80
percent for two additional years. If certain loss events occur at its own
or other nuclear plants similarly insured, Consumers could be required to
pay maximum assessments of:of $30 million in any one year to NML and NEIL;
$79 million per event under the nuclear liability secondary financial
protection program, limited to $10 million per event in any one year; and
$6 million in the event of nuclear workers claiming bodily injury from
radiation exposure. Consumers considers the possibility of these
assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicatesindicated that the
Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999.1999; however, an analysis
that Consumers submitted to the NRC for review in April 1996 suggests that
the reactor vessel could be safely operated beyond 1999 without annealing.
Nevertheless, Consumers is currently developing plansa contingency plan to
anneal the reactor vessel in 1998 at an estimated cost of $20 million to
$30 million. This repairmillion, which would likely allow for operation of the plant to the
end of its license life in the year 2007.2007 or beyond. Consumers cannot
predict whether the studies being conducted as part ofNRC will concur with the development plansApril 1996 analysis or, if
the NRC does concur, whether these analyses will supportresult in a future
decision to anneal.postpone annealing.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31June 30 were:
In Millions
ThreeSix Twelve
Months Ended Twelve Months Ended
1996 1995 1996 1995
- -------------------------------------------------------------------------
Cash transactions
Interest paid (net of amounts capitalized) $ 56114 $ 60100 $ 203221 $ 170185
Income taxes paid (net of refunds) 2 - 36 3945 19 60 35
Non-cash transactions
Nuclear fuel placed under capital lease $ -1 $ 723 $ 204 $ 2542
Other assets placed under capital leases 1 2 4 1510
Common Stock issued to acquire companies - 24 66 24
Assumption of debt - 16 4 16
Capital leases refinanced - - 21 -
==========================================================================
7: Short-Term And Long-Term Financings, Capitalization and Other
CMS Energy
In the first quarter of 1996, CMS Energy filed a shelf-registration with
the SEC for the issuance and sale of up to $125 million of GTNs, Series B,
with net proceeds to be used for general corporate purposes. As of AprilJune
30, 1996, CMS Energy had issued and outstanding approximately $250 million
of Series A and $30$51 million of Series B GTNs with a weighted-average interestinter-
est rates of 7.7 and 8.0 percent, respectively.
Consumers
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital requirements.require-
ments. At March 31,June 30, 1996, a total of $38$108 million was outstanding at a
weighted-average interest rate of 6.26.1 percent, compared with $133$309 million
outstanding at March 31,June 30, 1995, at a weighted-average interest rate of 7.06.7
percent. Consumers has an established $500 million trade receivables
purchase and sale program. At March 31,June 30, 1996 and 1995, receivables sold
under the agreement totaled $280$200 million and $300$190 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
In January 1996, 4four million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securitiesthe Trust Originated Preferred Securities, and the
primary asset of the trust is $103 million of 8.36 percent unsecured
subordinated deferrable interest notes issued by Consumers. TheConsumers and maturing in
2015. Consumers' obligations of Consumers with respect to the preferred securitiesTrust Originated Pre-
ferred Securities under the notes, that mature in 2015, the indenture under which the notes are
issued, Consumers' guarantee of the preferred securitiesTrust Originated Preferred Securities,
and the Declarationdeclaration of Trust, taken together,trust constitute a full and unconditional guarantee
by Consumers of the trust's obligations under the Trust Originated PreferredPre-
ferred Securities.
CMS NOMECO
In March 1996, CMS NOMECO refinancedreplaced its $140 million revolving credit
agreement with a $225 million revolving credit agreement. As of March 31,June 30,
1996, $120$123 million remainswas outstanding under the new agreement, with a weighted-averageweight-
ed-average interest rate of 6.06.4 percent.
CMS Generation
In January 1996, CMS Generation refinanced a one yearone-year $118 million bridge
credit facility for the HYDRA-CO acquisition with a $110 million, five-
year term loan. As of March 31,June 30, 1996, $107$67 million remainswas outstanding with a
weighted-average interest rate of 7.57.4 percent.
8: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the twelve month
period ended March 31,June 30, 1996 reflect the performance of the Consumers Gas
Group since initial issuance of Class G Common Stock during the third
quarter of 1995. The Class G Common Stock participates in earnings and
dividends from the issue date. The earnings (loss) attributable to each
class of common stock and the related amounts per share are computed by
considering the weighted-average number of shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to the Consumers Gas Group net income (loss) multiplied by a fraction, the
numerator is the weighted-average number of Outstanding Shares during the
period and the denominator represents the weighted-average number of
Outstanding Shares and Retained Interest Shares during the period.
The earnings attributable to Class G Common Stock on a per share basis,
for the threesix months ended March 31,June 30, 1996, are based on 23.72 percent of the
income of the Consumers Gas Group. Earnings per share for Class G Common
Stock are omitted from the statements of income for the periods reported
prior to the periods ended September 30, 1995, since the Class G Common
Stock was not part of the equity structure of CMS Energy. For purpose of
analysis, following are pro forma data for the threesix months ended March 31,June
30, 1995 and the year ended December 31, 1995 which give effect to the
issuance and sale of 7.52 million shares of Class G Common Stock (representing(repre-
senting 23.50 percent of the equity attributable to the Consumers Gas
Group) on January 1, 1994, and actual data for the threesix months ended March 31,June
30, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
ThreeSix Months Ended ThreeSix Months Ended Year
Ended ------------------ ------------------ ----------
March 31 March 31Ended Ended
June 30 June 30 December 31
1996 1995 1995
- --------------------------------------------------------------------------
Net Income $ 88138 $ 86119 $ 204
Net Income attributable to CMS Energy
Common Stock $ 76125 $ 74107 $ 189
Net Income attributable to outstanding
Class G Common Stock $ 1213 $ 12 $ 15
Average shares outstanding:
CMS Energy Common Stock 91.664 86.91891.828 87.454 88.810
Class G Common Stock 7.6277.662 7.520 7.536
Earnings per share attributable to
CMS Energy Common Stock $ 0.831.37 $ 0.861.22 $ 2.14
Earnings per share attributable to
outstanding Class G Common Stock $ 1.501.66 $ 1.551.63 $ 1.93
==========================================================================
In AprilFebruary and May 1996, the Board of Directors declared quarterly dividendsCMS Energy paid a dividend of $.24 per share on
CMS Energy Common Stock and $.28 per share on Class G Common Stock. In
July 1996, the Board of Directors declared a quarterly dividend of $.27
per share on CMS Energy Common Stock and $.295 per share on Class G Common
Stock to be paid in August 1996.
21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
CMS Energy. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates, assumptionsassump-
tions and uncertainties whichthat could cause actual results or outcomes to
differ materially from those expressed in the forward-looking information.statements.
In addition to certain contingency matters (and their respective cautionarycaution-
ary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking
Information section of this MD&A indicates some important factors that
could cause actual results or outcomes to differ materially from those
addressed in the forward-looking discussions.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and storage and transmission of natural gas.gas, and elec-
tric distribution.
Consolidated earningsEarnings for the quarters ended March 31,Quarters Ended June 30, 1996 and 1995
Consolidated net income totaled $88$50 million for the second quarter of 1996
of which $49 million or $.83$.54 per share is attributable to CMS Energy
Common Stock compared to $33 million or $.37 per share of CMS Energy
Common Stock for the second quarter of 1995. Net income attributable to
Class G Common Stock totaled $1 million or $.16 per share for the firstsecond
quarter of 1996, compared to1996. The increase in consolidated net income of $86 million
or $.99 per CMS Energy Common share for the first quarter of 1995. The $2
million increaseprimarily
reflects increased electric utility sales resulting from
Michigan's continuing economic growth, the impact of a 1996 electric utility rate increase, and higher 1996
gas utility deliveries duerevenues from storage facility operations, the equity earnings
resulting from the buy-out of a power purchase agreement involving a
partnership in which CMS Generation owns a 50 percent ownership interest,
and increased earnings from CMS Gas Transmission's 25 percent ownership
interest in TGN.
Consolidated Earnings for the Six Months Ended June 30, 1996 and 1995
Consolidated net income totaled $138 million for the six months ended June
30, 1996, of which $125 million or $1.37 per share is attributable to
increased
growthCMS Energy Common Stock compared to $119 million or $1.36 per share for
the six months ended June 30, 1995. Net income attributable to Class G
Common Stock totaled $13 million or $1.66 per share for the six months
ended June 30, 1996. The $19 million increase in consolidated net income
reflects the same benefits as described for the quarter-ended period along
with higher electric utility sales and colder weather experiencedgas utility deliveries. Partially
offsetting these benefits was reduced operating income from Consumers'
interest in the first quarter of 1996.
Partially offsetting this increase in net income wasMCV Facility during the reversal of a gas
contract contingency which benefited the 1995 period (see Note 3). The
decrease in earnings1996 period. Earnings per share
attributable to CMS Energy Common Stock for the first quartersix months of 1996,
compared to the first six months of 1995, reflects the net income attrib-
utable to Class G Common Stock. Class G Common Stock was issued in the
third quarter of 1995. (See Note 8).
Consolidated Earnings for the 12 Months Ended June 30, 1996 and 1995
primarily
reflects comparatively lowerConsolidated net income (reflectingtotaled $223 million for the above12 months ended June
30, 1996, of which $207 million or $2.28 per share is attributable to
CMS Energy Common Stock compared to $190 million or $2.19 per share for
the twelve months ended June 30, 1995. Net income attributable to Class G
Common Stock totaled $16 million or $2.05 per share for the twelve months
ended June 30, 1996. The $33 million increase in consolidated net income
reflects the 1996 electric utility rate increase, higher electric utility
sales and gas utility deliveries, higher 1996 gas utility revenues from
storage facility operations, the equity earnings resulting from the buy-
out of a power purchase agreement from a partnership in which
CMS Generation owns a 50 percent ownership interest, and increased earn-
ings from CMS Gas Transmission's 25 percent ownership interest in TGN.
Earnings per share attributable to CMS Energy Common Stock for the twelve
months ended June 30, 1996, compared to the twelve months ended June 30,
1995, non-
recurring item) andreflects the net income attributable to Class G Common stock.Stock. Class
G Common stockStock was issued in the third quarter of 1995.
Consolidated earnings forFor further information, see the 12 months ended March 31, 1996 and 1995
Consolidated net income totaled $206 million or $2.12 per CMS Energy
Common share for the 12 months ended March 31, 1996, compared to $187
million or $2.17 per CMS Energy Common share for the 12 months ended March
31, 1995. The $19 million increase reflects both higher electric utility
sales and gas utility deliveries and the impactindividual results of increased electric
utility rates which became effectiveoperations disclo-
sure in early 1996. Partially offsetting
this increase was the recognition of DSM incentive revenue and the
reversal of previously recorded gas contingencies (see Note 3) in the 1995
period, and increased operating expenses in the 1996 period. The decrease
in CMS Energy Common Stock earnings per share for the 12 months ended
March 31, 1996, compared to the corresponding period in the prior year,
primarily reflects comparatively lower net income (reflecting the above
1995 non-recurring items) and the net income attributable to Class G
Common stock. Class G Common stock was issued in the third quarter of
1995.MD&A.
Cash Position, FinancingInvesting and InvestingFinancing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. CMS Energy's consolidated operating cash requirements
are met by its operating and financing activities. CMS Energy's consolidatedconsoli-
dated cash from operations is derived mainly from Consumers' sale and
transportation of natural gas, its generation, transmission, and sale of
electricity and CMS NOMECO's sale of oil and natural gas. Consolidated
cash from operations totaled $349$486 million and $330$405 million for the first
quarterssix months of 1996 and 1995, respectively. Increased cash resultingThe $81 million increase
resulted from higher sales of utility electricity, improved gas utility
deliveries, lower cash losses associated with the PPA, and CMS NOMECO's
increased sale of oil and natural gas was partially offset byand changes in the timing of cash
payments related to Consumers' operations. CMS Energy primarily uses its operating
cash primarily to expand its international businesses, maintain and expand
its electric and gas utility systems, retire portions of its long-term
debt and pay dividends.
FinancingInvesting Activities: Net cash used in financinginvesting activities totaled $138$430
million and $35$508 million for the first quarterssix months of 1996 and 1995,
respectively. The decrease of $78 million primarily reflects the acquisi-
tion of HYDRA-CO in the first quarter of 1995 partially offset by an
increase in 1996 in investments in partnerships and unconsolidated subsid-
iaries. CMS Energy's expenditures for its utility and international
businesses were $190 million and $220 million, respectively.
Financing Activities: Net cash provided by (used in) financing activities
totaled $(52) million and $69 million for the six months of $103 million reflects a decrease in1996 and 1995,
respectively. For the six months ended June 30, 1996 net cash was used
for reducing notes payable and refinancing of bank loans and was partially
offset by increased cash of $97 million in proceeds from the sale of Trust Originated
Preferred Securities through
Consumers Power Company Financing I (see Note 7).
In October 1995, CMS NOMECO filed a registration statement with the SEC
for an initial public offering of not more than 20 percent of CMS NOMECO
common stock. CMS Energy will continue to evaluate market conditions for
a possible offering of CMS NOMECO common stock.
In the first quarter of 1996, CMS Energy filed a shelf-registration
statement with the SEC for the issuance and sale of up to $125 million of
GTNs, Series B, with net proceeds to be used for general corporate purposes.purpos-
es. As of AprilJune 30, 1996, CMS Energy had issued and outstanding approximatelyapproxi-
mately $250 million of GTNs, Series A and $30$51 million of GTNs, Series B
with weighted-average interest rates of 7.7 percent and 8.0 percent,
respectively.
In the first quarter of 1996, CMS Generation refinanced itsthe $118 million
bridge credit facility forobtained in connection with the acquisition of
HYDRA-CO with a $110 million, five-year term loan. As of March 31,June 30, 1996,
$107$67 million remainswas outstanding with a weighted-average interest rate of 7.57.4
percent.
In the first quarter of 1996, CMS NOMECO refinancedreplaced its $140 million revolvingrevolv-
ing credit agreement with a $225 million revolving credit agreement. As
of March 31,June 30, 1996, $120$123 million remainswas outstanding under the new agreement
with a weighted-average interest rate of 6.06.4 percent.
In February and May 1996, CMS Energy paid $22 million in cash dividends to
holders of CMS Energy Common Stock and $2 million in cash dividends to
holders of Class G Common Stock.
In AprilJuly 1996, the Board of Directors declared quarterly dividends $.24of $.27
per share on CMS Energy Common Stock and $.28$.295 per share on Class G Common
Stock.Stock, representing an increase in the annualized dividend on CMS Energy
Common Stock to $1.08 per share from the previous amount of $.96 per share
(a 12.5 percent increase), and an increase in the annualized dividend on
Class G Common Stock to $1.18 per share from the previous dividend of
$1.12 per share (a 5.4 percent increase).
In Aprilthe second quarter of 1996, Consumers declared and paid a $75 million
common dividend to CMS Energy from its first quarter earnings. In July
1996, Consumers declared a $75$40 million common dividend to be paid in
MayAugust 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
In June 1996, CMS Enterprises paid a common dividend of $42 million to
CMS Energy. In July 1996, CMS Enterprises declared a $48 million common
dividend to CMS Energy to be paid in August 1996.
Other Investing Activities: Net cash used in investing activities totaled $225
million and $326 million for the first quarters of 1996 and 1995,
respectively. The decrease of $101 million primarily reflects the
acquisition of HYDRA-CO in the first quarter of 1995 partially offset by
an increase in 1996 in investments in partnerships and unconsolidated
subsidiaries. CMS Energy's expenditures for its utility and international
businesses were $86 million and $117 million, respectively.
Financing and Investing Outlook:Matters: CMS Energy has available, unsecured,unse-
cured, committed lines of credit totaling $105 million and a $450 million
credit facility. At March 31,June 30, 1996, CMS Energy hashad utilized a total of
$242$233 million under these facilities. CMS Energy will continue to evaluate
the capital markets in 1996 as a source of financing its subsidiaries'
investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit
totaling $145 million and a $425 million working capital facility. At
March 31,June 30, 1996, Consumers had a total of $38$108 million outstanding under
these facilities. Consumers has FERC authorization to issue or guarantee
up to $900 million in short-term debt through December 31, 1996. ConsumersConsum-
ers uses short-term borrowings to finance working capital and gas in
storage, and to pay for capital expenditures between long-term financings.
Consumers has an agreement permitting the sales of certain accounts
receivable for up to $500 million. At March 31,June 30, 1996 and 1995, receivables
sold totaled $280$200 million and $300$190 million, respectively.
At June 30, 1996 the book value per share for CMS Energy Common Stock was
$16.11 and $11.66 for Class G Common Stock.
Electric Utility Results of Operations
In Millions
Pretax Operating Income
Quarter ended 6 months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $ - $ 9 $ 6664
Rate increases and
other regulatory issues 9 811 18 18
Operations and maintenance 5 8 4 2
General taxes
and depreciation (6) (29)
------- -------(5) (10) (27)
Other - 2 2
--- --- ----
Total change $16$11 $27 $ 47
======= =======61
=== === ====
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercialTotal electric sales increased 7.3 percentfor the quarter ended (4.6
percent), six months ended (4.3 percent), and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31,June 30,
1996 were 35.9
billion(4.1 percent) over the comparable 1995 periods. The table below
reflects these electric kWh a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
Duringincreases by class of customer for the
period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.various periods.
In Billions of kWh
Electric Sales
Quarter ended June Six months ended June 12 months ended June
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
Residential 2.4 2.4 - 5.4 5.1 0.3 11.0 10.2 0.8
Commercial 2.4 2.3 0.1 4.8 4.6 0.2 9.8 9.3 0.5
Industrial 3.2 3.2 - 6.1 6.3 (0.2) 12.5 12.6 (0.1)
Other 0.9 0.6 0.3 1.6 1.2 0.4 2.9 2.7 0.2
--- --- --- ---- ---- --- ---- ---- ---
Total sales 8.9 8.5 0.4 17.9 17.2 0.7 36.2 34.8 1.4
=== === === ==== ==== === ==== ==== ===
Power Costs: Power costs totaled $260 million and $227$235 million for the
three-month periods ending March 31,quarters ended June 30, 1996 and 1995, respectively. The $33$25 million
increase primarily reflects greater power purchases from outside sources
to meet increased sales demand. Power costs totaled $1,003$520 million and $934$462
million duringfor the 12-month periods ending March 31,six months ended June 30, 1996 and 1995, respectively.
The $69$58 million increase again primarily reflects greater power purchases
from outside sources to meet increased sales demand. Power costs totaled
$1,028 million and $925 million during the 12 months ended June 30, 1996
and 1995, respectively. Consistent with the changes in power costs in the
other periods, the $103 million increase also resulted from greater power
purchases from outside sources to meet increased sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the endtermination of the PPA.PPA in 2025.
In 1993, the MPSC issued the Settlement Order that has allowed Consumers
to recover substantially all payments for 915 MW of contract capacity
purchased from the MCV Partnership. ABATE and the Attorney General had
appealed the Settlement Order to the Court of Appeals and inAppeals. In March 1996, the
Court of Appeals affirmed the Settlement Order. The market for the
remaining 325 MW of contract capacity was assessed at the end of 1992.
This assessment, along with the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-taxafter-
tax cash underrecoveries totaled $8$18 million for the first threesix months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settlementsettle-
ment agreement that would potentially resolve several issues in three
pending proceedings, including the electric rate case (discussed below)
and cost recovery for the entire 325 MW of MCV Facility capacity above the
MPSC's currently authorized 915 MW level. The total estimated cash
underrecoveries are not expected to change under the settlement agreement
as proposed, although the years in which they occur could vary from the
schedule shown in the above table. Consumers does not anticipate the need
for an additional loss to be recorded above the amount anticipated in 1992
if the settlement agreement is adopted as proposed. For further informationinforma-
tion regarding the proposed settlement agreement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC granted Consumers
authority to increase its annual electric retail rates by $46 million.million, in
response to Consumers' 1994 request. This partial final order did not
address cost recovery related to the 325 MW of MCV Facility contract
capacity above 915 MW. The MPSC stated that this matter would be addressedad-
dressed in connection with its consideration of the proposed settlement
agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed settlementsettle-
ment agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996.in the third quarter of 1996. For more information
regarding the electric rate order and the proposed settlement agreement,
see Note 3.
In 1995, Consumers filed a request with the MPSC seeking approval to
increase its traditional depreciation expense by $21 million and reallocatereallo-
cate certain portions of its utility plant from production to transmission,transmis-
sion, resulting in a $28 million decrease.decrease in depreciation expense associ-
ated with this transfer. If the MPSC approves both aspects toof the request are approved,re-
quest, the net result wouldwill be a decrease in electric depreciation expense
of $7 million for ratemaking purposes. The ALJ issued a proposal for
decision in this case that recommended the MPSC reject Consumers' position
regarding the reallocation of Consumers' depreciation reserve and plant
investment. This case is currently part of the proposed settlement.settlement
agreement. In the proposed settlement, proposal, Consumers requested
thatthe depreciation of certainthe Palisades
and Big Rock Point nuclear generating plants (including nuclear plants)would be accelerated while
holding overall depreciation rates level.would remain the same.
Special Rates: Consumers currently has a request before the MPSC that
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: In April 1996, a seven company consortium
in which CMS Gas and Electric holds a 40 percent interest, acquired a 90
percent ownership interest in EDSEER S.A., an electric distribution
utility serving northeastern Argentina's Entre Rios Province for $161
million. EDEER S.A., with 1995 revenue of $105 million and electric sales
of 1.1 billion kWh, serves over 200,000 customers, primarily residential
and commercial, in a 55,000 square kilometer area. CMS Gas and Electric,
as lead operator, anticipates taking over operation of the utility in May
1996.
CMS Energy and Consumers estimate capital
expenditures, including new lease commitments, related to its electric
utility operations of $380$315 million for 1996, $285$300 million for 1997 and
$290$305 million for 1998. These amounts include an attributed portion of
Consumers' anticipated capital expenditures for plant and equipment common
to both the electric and gas utility businesses and CMS Energy's capital expenditures relating to its
international energy distribution operations.businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act
significantly increased the environmental constraints that utilities will
operate under in the future. While the Clean Air Act's provisions require
Consumers to make certain capital expenditures in order to comply with the
amendments for nitrogen oxide reductions, Consumers' generating units are
presentlycurrently operating at or near the sulfur dioxide emission limits whichthat
will be effective in the year 2000. Final acid rain program nitrogen
oxide regulations are expected to be issued in 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law. Consumers expects that it will ultimately incur costs at a
number of sites. Consumers believes costs incurred for both investigation
and required remedial actions are properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 7.
Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report recognized improved
performance at the plant, specifically in the areas of Engineering and
Plant Operations. In the report, the NRC noted areas which continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address
previously identified weak areas. The report noted that performance in
the areas of Maintenance and Plant Support was good and remained
unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 8.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict whether the studies being conducted
as a part of the development plans will support a future decision to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action. CMS Energy believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations.
Consumers Gas Group Results of Operations
In Millions
Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
Sales $ 22 $ 53
Reversal of gas contingencies (23) (34)
Recovery of gas costs and
other regulatory issues 2 6
Operations and maintenance 3 (6)
General taxes and depreciation (4) (11)
----- -----
Total change $ - $ 8
===== =====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and total system
deliveries, excluding transport to the MCV Facility, increased 14.8
percent from 1995 levels. On a weather-adjusted basis, total system
deliveries increased 8.5 percent, reflecting significant growth resulting
from customer additions and conversions to natural gas from alternative
fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf,
a 19.0 percent increase from the corresponding period ended March 31,
1995, and total system deliveries, excluding transport to the MCV
Facility, increased 17.8 percent.
Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million
for the first quarters of 1996 and 1995, respectively. The increase of
$64 million was the result of increased sales. The increased costs also
reflect the reversal of a $23 million gas supplier contingency during the
first quarter of 1995. The cost of gas sold totaled $735 million and $608
million for the 12 months ended March 31, 1996 and 1995, respectively.
The increase of $127 million was also the result of increased sales offset
by the reversal of the gas supplier contingency of $23 million in the 1995
period.
Consumers Gas Group Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC,
requesting, among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$130 million for 1996, $110 million for 1997 and $105 million for 1998.
These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available to Consumers and its continued internal review of these
former manufactured gas plant sites have resulted in an estimate for all
costs related to investigation and remedial action of between $48 million
and $98 million. These estimates are based on undiscounted 1996 costs.
At March 31, 1996, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could effect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring
environmental clean-up costs and amortizing these costs over 10 years.
The order authorizes current recovery of $1 million annually. Consumers
is continuing discussions with certain insurance companies regarding
coverage for some or all of the costs which may be incurred for these
sites. For further information, see Note 7.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1996 decreased $6 million from the same period in 1995,
primarily due to recognition of a gain from assignment and novation of a
gas supply contract recorded in the first quarter of 1995 partially offset
by higher oil and gas prices and volumes in the first quarter of 1996.
Pretax operating income for the 12 months ended March 31, 1996 increased
$2 million from the 12 months ended March 31, 1995, primarily due to
higher sales volumes and oil prices partially offset by lower average
market prices for gas and the gains from the assignment and novation of a
gas supply contracts in 1995.
Capital Expenditures: Capital expenditures for the three months ended
March 31, 1996 totaled $27 million, primarily for development of existing
oil and gas reserves.
CMS Energy currently plans to invest $405 million from 1996 to 1998 in its
oil and gas exploration and production operations. These capital
expenditures will be concentrated in North and South America and offshore
west Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1996 decreased $7 million from 1995 levels, primarily
reflecting lower capacity sales by the MCV Partnership. Pretax operating
income for the 12 months ended March 31, 1996 increased $8 million from
the 12 months ended March 31, 1995, primarily reflecting additional
generating capacity and improved equity earnings.
Capital Expenditures and Other: In April 1996, CMS Generation and ABB
signed agreements with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the Jorf
Lasfar coal-fueled power plant located southwest of Casablanca. The
agreements cover purchase and operation of two existing 330 MW units and
construction and operation of another two 330 MW units by CMS Generation
and ABB. CMS Energy posted a $30 million conditional letter of credit to
ensure performance under the agreements. CMS Generation and ABB each will
hold 50 percent interest in the transaction. Financial closing is
expected by year end, with construction of the second two units to begin
shortly thereafter.
In the first quarter of 1996, CMS Generation increased its ownership
interest from 51 percent to 78 percent in its Centrales Termicas Mendoza
electric generating plant in western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million in the Mendoza plant
to refurbish and repower the facility resulting in an increase in its
capacity from 260 MW to over 400 MW.
Capital expenditures for the three months ended March 31, 1996 totaled $15
million related to expanding ownership in existing facilities.
CMS Energy currently plans to invest $515 million relating to its
independent power production operations from 1996 to 1998. CMS Generation
will pursue acquisitions and development of electric generating plants in
the United States, Latin America, southern Asia, the Pacific Rim region
and North Africa.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three and 12
months ended March 31, 1996 increased $5 million and $10 million,
respectively, over the same periods ended March 31, 1995, primarily
reflecting earnings from new pipeline investments and the continued growth
of existing projects and gas marketed to end-users.
Capital Expenditures and Other: In April 1996, CMS Gas Transmission
signed a purchase agreement to sell its 50 percent ownership interest in
Moss Bluff Gas Storage Systems, a partnership that owns a gas storage
facility, to its partner, MHP, and MHP will sell its 50 percent ownership
interest to CMS Gas Transmission in the Grands Lacs Limited Partnership, a
marketing center for natural gas. CMS Gas Transmission will receive a net
cash payment of approximately $26 million. The transaction is anticipated
to close no later than June 30, 1996.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of 10-day
storage service and has the capability of being refilled in 20 days.
In February 1996, CMS Gas Transmission acquired an ownership interest in
Nitrotec Corporation, a proprietary gas technology company. Nitrotec
specializes in the development and commercialization of advanced carbon-
based adsorption gas separation technologies. Nitrotec recently received
approval of patent applications covering its helium removal process and
nitrogen rejection process.
Capital expenditures for the three months ended March 31, 1996 totaled $76
million for acquisitions, expansion of existing facilities and
construction of new facilities.
CMS Energy currently plans to invest $260 million from 1996 to 1998
relating to its non-utility gas operations, and will continue to pursue
development of natural gas storage, gathering and pipeline operations both
domestically and internationally. CMS Energy also plans to work toward
the development of U.S. regional "market centers" for natural gas through
strategic alliances and asset acquisition and development.
Forward-Looking Information
Capital Expenditures: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total approximately $2.5 billion over
the next three years. Cash generated by operations is expected to satisfy
a substantial portion of capital expenditures. Additionally, CMS Energy
will continue to evaluate capital markets in 1996 as a potential source of
financing its subsidiaries' investing activities.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Electric utility $380 $285 $290
Gas utility 130 110 105
Oil and gas exploration and production 120 135 150
Independent power production 190 175 150
Natural gas transmission, storage and marketing 145 65 50
---- ---- ----
$965 $770 $745
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital
expenditures see the individual capital expenditures sections within this
MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions or the
developing competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including: the installation of cogeneration or other self-generation
facilities by Consumers' larger industrial customers; the formation of
municipal utilities which would displace retail service by Consumers to an
entire community; and competition from neighboring utilities which offer
flexible rate arrangements designed to encourage movement to their
respective service areas. Consumers continues to work toward retaining
its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for
competitively discounted electric rates. Certain facilities will have the
option of taking retail wheeling service (if available) after the first
three years of the contract. The MPSC approved this contract in 1995.
This MPSC order and other MPSC orders approving special long-term sales
contracts have been appealed by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and Detroit Edison. Under the experiment,
up to 60 MW of Consumers' additional load requirements could be met by
retail wheeling. The program becomes effective upon Consumers' next
solicitation for capacity. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those previously filed by Detroit Edison
and the Attorney General. Consumers does not expect this short-term
experiment to have a material impact on its financial position, liquidity
or results of operations.
In April 1996, the FERC issued two orders which require utilities to
provide open access to the interstate transmission grid. The first order
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The order also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second order
requires utilities to establish electronic systems to share information
about available transmission capacity and to separate their wholesale
power marketing and transmission operations functions by implementing
standards of conduct. These orders will become effective in July 1996.
In addition, the FERC issued a NOPR on April 24, 1996, which proposes for
consideration a new system for utilities to use in reserving capacity on
their own and others' transmission lines. This would replace certain
tariffs included in the first order with a capacity reservation tariff in
which participants would reserve firm rights to transfer power between
designated receipt and delivery points. Consumers is evaluating these
developments and has not determined the impact of the FERC's Orders on its
financial position, liquidity or results of operations.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry. The
MPSC has directed Consumers (and Detroit Edison) to file applications by
May 15, 1996, addressing the recommendation of the Michigan Jobs
Commission to allow a choice of power suppliers for new industrial and
commercial electric load. The Michigan Jobs Commission's recommendations
also include related matters, such as the full recovery of utility
stranded costs. No new legislation has been introduced. However,
Consumers anticipates additional MPSC orders during 1996 which will
further define a new electric and gas utility regulatory framework for
Michigan.
SFAS 71 allows the deferral of certain costs and the recording of
regulatory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Consumers Gas Group Outlook, Competition and Deliveries: Consumers
currently anticipates gas deliveries to grow approximately 2 percent per
year (excluding transportation to the MCV Facility and off-system
deliveries) over the next five years, assuming a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increased efforts to promote natural gas to both current and potential
customers that are using other fuels for space and water heating. The
emerging use of natural gas vehicles also provides Consumers with sales
growth opportunities. In addition, as air quality standards continue to
become more stringent, management believes that greater opportunities
exist for converting industrial boiler load and other processes to natural
gas. Consumers also plans additional capital expenditures to construct
new gas mains that are expected to expand Consumers' system. Actual gas
deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions and the level
of natural gas consumption.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are
regulated by the MPSC as parties to this proceeding. Consumers has filed
its comments with the MPSC, indicating that the MPSC should only direct
local distribution companies to file pilot programs designed to test the
feasibility of expanded transportation service. Consumers also expressed
its position that it is premature to expand transportation service to
residential customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions both domestically and internationally (including
those of the FERC and the MPSC) with respect to rates, industry and rate
structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
natural gas pipeline and storage facilities, recovery of purchased power,
decommissioning costs, and present or prospective wholesale and retail
competition, among others. The business and profitability of CMS Energy
is also influenced by economic and geographic factors including political
and economic risks(particularly those associated with international
development and operations, including currency fluctuation), changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, unanticipated development project
delays or changes in project costs, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of CMS Energy.
Forward-looking information is included throughout this Form 10-Q.
CMS Energy's material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
(This page intentionally left blank)
34
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of March 31, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1995, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended (not presented herein), and, in our report dated
January 26, 1996, we expressed an unqualified opinion on those statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 10, 1996.
35
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
OPERATING REVENUE
Electric $ 591 $ 540 $2,328 $2,185
Gas 546 482 1,259 1,105
Other 4 10 33 25
----------------------------------------------
Total operating revenue 1,141 1,032 3,620 3,315
----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 73 67 289 294
Purchased power - related parties 140 124 507 484
Purchased and interchange power 47 36 207 156
Cost of gas sold 345 281 735 608
Other 136 137 591 573
----------------------------------------------
Total operation 741 645 2,329 2,115
Maintenance 39 45 178 190
Depreciation, depletion and amortization 108 101 364 342
General taxes 56 54 191 172
----------------------------------------------
Total operating expenses 944 845 3,062 2,819
----------------------------------------------
PRETAX OPERATING INCOME
Electric 103 87 378 331
Gas 91 91 151 143
Other 3 9 29 22
----------------------------------------------
Total pretax operating income 197 187 558 496
INCOME TAXES 61 56 150 124
----------------------------------------------
NET OPERATING INCOME 136 131 408 372
----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 16 17
Accretion income 3 3 11 12
Accretion expense (7) (8) (30) (34)
Other income taxes, net 3 2 13 11
Other, net - 2 4 12
----------------------------------------------
Total other income 3 3 14 18
----------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 35 140 137
Other interest 3 5 22 19
Capitalized interest (1) - (3) (1)
----------------------------------------------
Net interest charges 37 40 159 155
----------------------------------------------
Net Income 102 94 263 235
Preferred Stock Dividends 7 7 28 28
Preferred Securities Distributions 1 - 1 -
----------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 94 $ 87 $ 234 $ 207
==============================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 102 $ 94 $ 263 $ 235
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,
$51 and $49, respectively) 108 101 364 342
Capital lease and other amortization 9 11 36 29
Deferred income taxes and investment tax credit 3 23 37 65
Accretion expense 7 8 30 34
Accretion income - abandoned Midland project (3) (3) (11) (12)
Undistributed earnings of related parties (4) (10) (30) (24)
MCV power purchases - settlement (Note 2) (12) (37) (112) (102)
Other 3 2 6 2
Changes in other assets and liabilities 95 120 58 (34)
------ ------ ------ ------
Net cash provided by operating activities 308 309 641 535
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (83) (74) (422) (438)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)
Deferred demand-side management costs (2) (2) (10) (11)
Other 1 (4) 1 (4)
Proceeds from sale of property - - 1 13
------ ------ ------ ------
Net cash used in investing activities (103) (102) (520) (530)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (303) (204) (97) 135
Payment of capital lease obligations (9) (10) (36) (28)
Payment of preferred stock dividends (7) (7) (28) (21)
Retirement of bonds and other long-term debt (1) (1) (1) (27)
Preferred securities distributions (1) - (1) -
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 100
Payment of common stock dividends - - (70) (160)
Repayment of bank loans - - - (422)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash used in financing activities (211) (222) (123) (23)
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (15) (2) (18)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 28
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 8 $ 10 $ 8 $ 10
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
Consumers Power Company
Consolidated Balance Sheets
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $6,130 $6,103 $5,826
Gas 2,207 2,169 2,078
Other 26 30 30
-----------------------------------
8,363 8,302 7,934
Less accumulated depreciation, depletion and amortization 4,195 4,090 3,893
-----------------------------------
4,168 4,212 4,041
Construction work-in-progress 199 190 249
-----------------------------------
4,367 4,402 4,290
-----------------------------------
INVESTMENTS
Stock of affiliates 336 337 318
First Midland Limited Partnership (Note 2) 226 225 219
Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83
Other 9 7 8
-----------------------------------
675 672 628
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 8 14 10
Accounts receivable and accrued revenue, less
allowances of $3, $3 and $4, respectively (Note 7) 173 137 63
Accounts receivable - related parties 12 10 11
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 74 72 76
Generating plant fuel stock 16 37 27
Postretirement benefits 25 25 25
Deferred income taxes 23 26 39
Prepayments and other 143 181 133
-----------------------------------
513 686 464
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 458 462 473
Nuclear decommissioning trust funds 323 304 236
Abandoned Midland Project 126 131 143
Other 309 297 322
-----------------------------------
1,216 1,194 1,174
-----------------------------------
TOTAL ASSETS $6,771 $6,954 $6,556
===================================
38
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 504 491 491
Revaluation capital 29 29 17
Retained earnings since December 31, 1992 331 237 167
-----------------------------------
1,705 1,598 1,516
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,923 1,922 1,954
Non-current portion of capital leases 96 104 103
-----------------------------------
4,180 3,980 3,929
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 89 90 48
Notes payable 38 341 135
Accrued taxes 201 225 134
Accounts payable 165 207 125
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 64 56 56
Accrued refunds 28 22 35
Accrued interest 26 32 25
Other 166 178 153
-----------------------------------
867 1,241 806
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 599 605 585
Postretirement benefits 520 517 537
Power purchases - settlement (Note 2) 215 221 295
Deferred investment tax credit 166 169 177
Regulatory liabilities for income taxes, net 53 44 29
Other (Note 4) 171 177 198
-----------------------------------
1,724 1,733 1,821
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,771 $6,954 $6,556
===================================
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers
Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due
2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
---------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 491 491 391
Stockholder's contribution 13 - 13 100
---------------------------------------------------
At end of period 504 491 504 491
---------------------------------------------------
REVALUATION CAPITAL
At beginning of period 29 15 17 15
Change in unrealized investment-gain - 2 12 2
---------------------------------------------------
At end of period 29 17 29 17
---------------------------------------------------
RETAINED EARNINGS
At beginning of period 237 80 167 120
Net income 102 94 263 235
Common stock dividends declared - - (70) (160)
Preferred stock dividends declared (7) (7) (28) (28)
Preferred securities distributions (1) - (1) -
---------------------------------------------------
At end of period 331 167 331 167
---------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,705 $1,516 $1,705 $1,516
===================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
40
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1995 Form 10-K of Consumers Power Company that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
Consumers, through its subsidiaries, holds the following assets related to
the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
to purchase contract capacity from the MCV Partnership is 1,240 MW for
1996 and for each subsequent year through the end of the PPA. In 1993,
the MPSC issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity, the fixed energy charge and the prescribed energy charges
associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. For all energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been allowed to recover 1/2
cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC-authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. If Consumers is unable to sell any capacity above the
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will determine the levels of recovery from
retail customers at a later date. The Settlement Order also provides
Consumers the right to remarket to third parties the remaining contract
capacity. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and in March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding this proposed settlement, see Note 3.
At March 31, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $198 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8 million, partially offset by
after-tax accretion expense of $4 million. The undiscounted after-tax
amount associated with the liability totaled $593 million at March 31,
1996.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 3), Consumers is seeking to utilize less-expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Cost recovery for this
contract capacity would start in 1996. Even if Consumers is not allowed
to substitute MCV Facility capacity for the capacity to be provided under
the terminated agreements, Consumers believes that the MPSC would still
approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 23 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
Consumers filed a request with the MPSC, seeking to adjust its
depreciation rates and to reallocate certain portions of its electric
production plant to transmission accounts. For further information
regarding these requests, see the Electric Rate Proceedings and Special
Rates discussions in the Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting,
among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme
Court for review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and such liability is expected to be less than $9
million. At March 31, 1996, Consumers has accrued a liability for its
estimated losses.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in June 1995. This Michigan law bears some
similarities to the federal Superfund law. Consumers expects that it will
ultimately incur investigation and remedial action costs at a number of
sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and legal and
regulatory requirements, could effect the estimate of remedial action
costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the
costs which may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require emissions monitoring.
Consumers' coal-fueled electric generating units burn low-sulfur coal and
are presently operating at or near the sulfur dioxide emission limits
which will be effective in the year 2000. The Clean Air Act's provisions
required Consumers to make capital expenditures totaling $25 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and possible modifications at other
coal-fired units to be an additional $50 million by the year 2000.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $445 million for 1996, $395 million for 1997 and
$395 million for 1998.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At March
31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action.
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies, arising from
the ordinary course of business involving personal injury and property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costs
with the MPSC in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In order to address concerns
raised subsequent to the initial cask loading, Consumers and the NRC each
analyzed the effects of seismic and other natural hazards on the support
pad on which the casks are placed, and confirmed that the pad location is
acceptable to support the casks. As of March 31, 1996, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks.
In a review of the cask manufacturer's quality assurance program,
Consumers detected indications of minor flaws in welds in the steel liner
of one of the loaded casks. Although the cask continues to safely store
spent fuel and there is no requirement for its replacement, Consumers has
nevertheless decided to remove the spent fuel and insert it in another
cask. Consumers has examined radiographs for all of its casks and has
found all other welds acceptable. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21-week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $30 million in any one
year to NML and NEIL; $79 million per event under the nuclear liability
secondary financial protection program, limited to $10 million per event
in any one year; and $6 million in the event of nuclear workers claiming
bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict whether the studies being conducted as part of the
development plans will support a future decision to anneal.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
---- ---- ---- -----
Cash transactions
Interest paid (net of
amounts capitalized) $ 41 $ 50 $149 $147
Income taxes paid
(net of refunds) 5 - 48 31
Non-cash transactions
Nuclear fuel placed
under capital lease $ - $ 7 $ 20 $ 25
Other assets placed
under capital leases 1 2 4 15
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital
requirements. At March 31, 1996, a total of $38 million was outstanding
at a weighted-average interest rate of 6.2 percent, compared with $133
million outstanding at March 31, 1995, at a weighted-average interest rate
of 7.0 percent. Consumers has an established $500 million trade
receivables purchase and sale program. At March 31, 1996 and 1995,
receivables sold under the agreement totaled $280 million and $300
million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
In January 1996, 4 million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securities and the primary asset of the
trust is $103 million of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers. The obligations of Consumers with
respect to the preferred securities under the notes that mature in 2015,
the indenture under which the notes are issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996.
47
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
Consumers. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates,
assumptions and uncertainties which could cause actual results or outcomes
to differ materially from those expressed in the forward-looking
information. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Form 10-Q,
the Forward-Looking Information section of this MD&A indicates some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
Consolidated earnings for the quarters ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $94 million and $87 million for the first quarters of
1996 and 1995, respectively. The $7 million increase reflects increased
electric sales resulting from Michigan's continuing economic growth, the
impact of a 1996 electric rate increase and higher gas deliveries due to
increased growth and colder weather experienced in the first quarter of
1996. Partially offsetting this increase in net income was the reversal
of a gas contract contingency which benefited the 1995 period (see Note
3).
Consolidated earnings for the 12 months ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $234 million and $207 million for the 12 months ended
March 31, 1996 and March 31, 1995, respectively. The $27 million increase
reflects both higher electric sales and gas deliveries and the impact of
increased electric rates which became effective in early 1996. Partially
offsetting this increase was the recognition of DSM incentive revenue and
the reversal of previously recorded gas contingencies (see Note 3) in the
1995 period, and increased operating expenses in the 1996 period.
Cash Position, Financing and Investing
Cash from operations is derived from the sale and transportation of
natural gas and the generation, transmission, and sale of electricity.
Cash from operations totaled $308 million and $309 million for the first
quarters of 1996 and 1995, respectively. Increased cash resulting from
higher sales of electricity, improved gas deliveries and lower cash losses
associated with the PPA, was essentially offset by the timing of cash
payments related to Consumers' operations. Consumers primarily uses its
operating cash to maintain and expand its electric and gas systems, retire
portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities totaled $211
million and $222 million for the first quarters of 1996 and 1995,
respectively. The decrease of $11 million reflects increased cash from a
$13 million equity investment from CMS Energy and $97 million from the
sale of Trust Originated Preferred Securities (see Note 7). During the
first quarter of 1996, cash was used to reduce short-term borrowings by an
additional $99 million, as compared to the 1995 period.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
Investing Activities: Net cash used in investing activities totaled $103
million and $102 million for the first quarters of 1996 and 1995,
respectively. Cash used for increased capital expenditures was
principally offset by the reduced costs to retire property.
Financing and Investing Outlook: Consumers has several available,
unsecured, committed lines of credit totaling $145 million and a $425
million working capital facility. At March 31, 1996, Consumers had a
total of $38 million outstanding under these facilities. Consumers has
FERC authorization to issue or guarantee up to $900 million in short-term
debt through December 31, 1996. Consumers uses short-term borrowings to
finance working capital and gas in storage, and to pay for capital
expenditures between long-term financings. Consumers has an agreement
permitting the sales of certain accounts receivable for up to $500
million. At March 31, 1996 and 1995, receivables sold totaled $280
million and $300 million, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1996 and
1995: Electric pretax operating income totaled $103 million and $87
million for the first quarters of 1996 and 1995, respectively. The $16
million increase primarily resulted from increased electric sales, an
increase in electric rates in early 1996, and lower operation and
maintenance costs during the first quarter of 1996. Partially offsetting
this increase were decreased revenue from special contract discounts given
to large industrial customers and higher depreciation and general taxes in
1996.
Electric Pretax Operating Income for the 12 months ended March 31, 1996
and 1995: Electric pretax operating income totaled $378 million and $331
million for the 12 months ended March 31, 1996 and 1995, respectively.
The $47 million increase is primarily the result of increased electric
sales and an increase in electric rates effective in early 1996. These
increases were partially offset by higher electric depreciation and
property tax expenses in the 1996 period, decreased revenue from special
contract discounts given to large industrial customers, and the impact of
recognizing DSM incentive revenue in the 1995 period.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
--------- ---------
Sales $ 9 $ 66
Rate increases and other regulatory issues 9 8
Operations and maintenance 4 2
General taxes and depreciation (6) (29)
---- ----
Total change $16 $ 47
==== ====
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercial sales increased 7.3 percent and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31, 1996 were 35.9
billion kWh, a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
During the period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.
Power Costs: Power costs totaled $260 million and $227 million for the
three-month periods ending March 31, 1996 and 1995, respectively. The $33
million increase primarily reflects greater power purchases from outside
sources to meet increased sales demand. Power costs totaled $1,003
million and $934 million during the 12-month periods ending March 31, 1996
and 1995, respectively. The $69 million increase primarily reflects
greater power purchases from outside sources to meet increased sales
demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the end of the PPA. In 1993, the
MPSC issued the Settlement Order that has allowed Consumers to recover
substantially all payments for 915 MW of contract capacity purchased from
the MCV Partnership. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals and in March 1996, the Court of
Appeals affirmed the Settlement Order. The market for the remaining 325
MW of contract capacity was assessed at the end of 1992. This assessment,
along with the Settlement Order, resulted in Consumers recognizing a loss
for the present value of the estimated future underrecoveries of power
purchases from the MCV Partnership. Additional losses may occur if actual
future experience materially differs from the 1992 estimates. As
anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax
cash underrecoveries totaled $8 million for the first three months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the electric rate case (discussed
below) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding the settlement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996. For more information regarding the
electric rate order and the settlement, see Note 3.
In 1995, Consumers filed a request with the MPSC, seeking approval to
increase its traditional depreciation expense by $21 million and
reallocate certain portions of its utility plant from production to
transmission, resulting in a $28 million decrease. If both aspects to the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The ALJ
issued a proposal for decision in this case that recommended the MPSC
reject Consumers' position regarding the reallocation of Consumers'
depreciation reserve and plant investment. This case is currently part of
the proposed settlement. In the settlement proposal, Consumers requested
that depreciation of certain plants (including nuclear plants) be
accelerated while holding overall depreciation rates level.
Special Rates: Consumers currently has a request before the MPSC that,
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its electric utility
operations of $315 million for 1996, $285 million for 1997 and $290
million for 1998. These amounts include an attributed portion of
Consumers' anticipated capital expenditures for plant and equipment common
to both the electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean
Air Act significantly increased the environmental constraints that
utilities will operate under in the future. While the Clean Air Act's
provisions require Consumers to make certain capital expenditures in order
to comply with the amendments for nitrogen oxide reductions, Consumers'
generating units are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. Final acid rain
program nitrogen oxide regulations are expected to be issued in 1996.
Management believes that Consumers' annual operating costs will not be
materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law.
Consumers expects that it will ultimately incur costs at a number of
sites. Consumers believes costs incurred for both investigation and
required remedial actions are properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report recognized improved
performance at the plant, specifically in the areas of Engineeringengineering and
Plant Operations.plant operations. In the report, the NRC noted areas whichthat continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address previouslyprevi-
ously identified weak areas. The report noted that performance in the
areas of Maintenancemaintenance and Plant Supportplant support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. InConsumers
does not plan to load or unload any casks before the end of 1996, Consumers plans to unload and replace one of the casks whereinclud-
ing a cask in which a minor flaw has been detected. For further information,informa-
tion, see Note 5.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicatesindicated that
the Palisades reactor vessel can be safely operated through late 1999.1999;
however, an analysis that Consumers submitted to the NRC for review in
April 1996 suggests that the reactor vessel could be safely operated
beyond 1999 without annealing. Nevertheless, Consumers is currently
developing plansa contingency plan to anneal the reactor vessel in 1998 at an
estimated cost of $20 million to $30 million. This repairmillion, which would likely allow for
operation of the plant to the end of its license life in the year 2007.2007 or
beyond. Consumers cannot predict whether the studies being conducted
as a part ofNRC will concur with the
development plansApril 1996 analysis or, if the NRC does concur, whether these analyses
will supportresult in a future decision to anneal.postpone annealing.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,June 30,
1996, Consumers had 3334 separate stray voltage lawsuits awaiting trial
court action. ConsumersCMS Energy believes that the resolution of these lawsuits
will not have a material impact on its financial position, liquidity or
results of operations.
Consumers Gas UtilityGroup Results of Operations
GasIn Millions
Pretax Operating Income
for the quartersQuarter ended March 31, 1996 and
1995: Gas pretax operating income totaled $91 million for both the first
quarters of 1996 and 1995. Pretax operating income reflected a 15 percent
increase in gas deliveries resulting from customer additions and load
conversions to natural gas from alternative fuels and colder temperatures
during the first quarter of 1996. However, when compared to 1995, the
strong increases were offset by the benefit achieved in 1995 with the
reversal of a previously recorded gas contract contingency (see Note 3)
and higher depreciation and general taxes.
Gas Pretax Operating Income for the 12Six months ended March 31, 1996 and
1995: Gas pretax operating income totaled $151 million and $143 million
for the 12 months ended March 31, 1996 and 1995, respectively. The $8
million increase reflects higher gas deliveries and higher operating
expenses. However, the increase was partially offset by the reversal in
the 1995 period, of previously recorded gas contingencies.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 --------- ---------with 1995
Sales $ 221 $ 5323 $ 51
Reversal of gas
contingencies - (23) (34)
Recovery of gas costs and
other regulatory issues 2 63 1 3
Gas storage facility
operations 4 7 7
Operations and maintenance 3 (6)(2) 2 (5)
General taxes and
depreciation (4) (11)
----- -----(1) (5) (8)
--- ---- ----
Total change $ -5 $ 8
===== =====5 $ 14
=== ==== ====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and totalTotal system deliveries, excluding transport to the MCV
Facility, increased 14.8
percent fromfor the quarter ended (2.8 percent), six months ended
(11.3 percent), and 12 months ended June 30, 1996 (15.9 percent) over the
comparable 1995 levels. On a weather-adjusted basis, total systemperiods. The increased deliveries increased 8.5 percent, reflecting significantreflect growth resultingresult-
ing from customer additions, and conversions to natural gas from alternative
fuels. Forfuels, continued strength in the Michigan economy and, for the six months
ended and 12 months ended March 31,June 30, 1996, gas sales totaled 271colder temperatures. The table
below indicates total system deliveries and the impact of weather on the
six months ended and 12 months ended June 30, 1996 and 1995.
In bcf
a 19.0 percent increase from the corresponding periodGas Deliveries
Six months ended March 31,June 12 months ended June
1996 1995 and total systemVar. 1996 1995 Var.
Weather-adjusted
deliveries 204.0 192.1 11.9 337.9 319.4 18.5
(variance reflects
growth)
Impact of weather 6.8 (2.7) 9.5 18.2 (12.1) 30.3
----- ----- ---- ----- ----- ----
System deliveries
excluding transport
to the MCV Facility, increased 17.8 percent.210.8 189.4 21.4 356.1 307.3 48.8
Transport to MCV 33.0 26.4 6.6 60.3 63.4 (3.1)
----- ----- ---- ----- ----- ----
Total system
deliveries 243.8 215.8 28.0 416.4 370.7 45.7
===== ===== ==== ===== ===== ====
Cost of Gas Sold: CostThe cost of gas sold totaled $345$106 million and $281$102
million for the firstsecond quarters of 1996 and 1995, respectively. The
increase of $64$4 million was the result of increased sales. For the six
months ended June 30, 1996 and 1995, the cost of gas sold totaled $451
million and $383 million, respectively. The increase of $68 million
resulted from increased costs also
reflectsales and the reversal of a $23 million gas
suppliercontract contingency during the first quarter of 1995. The cost of gas
sold totaled $735$739 million and $608$617 million for the 12 months ended
March 31,June 30, 1996 and 1995, respectively. The increase of $127$122 million
was alsoreflects the result of increased sales offset
bysame benefits as described for the reversal of the gas supplier contingency of $23 million in the 1995six-month period.
Consumers Gas UtilityGroup Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC, requesting, among other things, recoveryrequest-
ing reconsideration of certain gas losses, as well as
reconsideration of issuesissues. This petition was denied in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.June
1996.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-passbypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC-authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends towill vigorously oppose
any claims they may raise, but cannot predict the outcome of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$130 million for 1996, $110$120 million for 1997 and $105$110 million for 1998.
These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available to Consumers and its continued internal review of these
former manufactured gas plant sites have resulted in an estimate for all
costs related to investigation and remedial action of between $48 million
and $98 million. These estimates are based on undiscounted 1996 costs.
At March 31,June 30, 1996, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could effectaffect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring environmentalenvironmen-
tal clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continuingcontinu-
ing discussions with certain insurance companies regarding coverage for
some or all of the costs whichthat may be incurred for these sites. For
further information regarding environmental matters, see Note 4.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended June 30, 1996 increased $2 million over the comparable period in
1995, primarily reflecting higher oil and gas volumes and prices. Pretax
operating income for the six months ended June 30, 1996 decreased $4
million and for the twelve months ended June 30, 1996 remained unchanged
over the comparable periods in 1995, primarily due to recognition of a
gain from assignment and novation of a gas supply contract recorded in the
first quarter of 1995 partially offset by higher oil and gas prices and
volumes in 1996.
Capital Expenditures: CMS Energy currently plans to invest $405 million
from 1996 to 1998 in its oil and gas exploration and production opera-
tions. These capital expenditures will be concentrated in North and South
America and offshore west Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three, six and
twelve months ended June 30, 1996 increased $14 million, $7 million and
$11 million, respectively over the comparable periods in 1995, primarily
reflecting a gain resulting from the sale of a power purchase agreement by
a partnership in which CMS Generation owns a 50 percent ownership interest
partially offset for the six month period by reduced MCV earnings.
Capital Expenditures and Other: In the second quarter of 1996,
CMS Generation commenced construction of the La Plata Cogeneration Pro-
ject, a 128 MW natural gas fueled, combined cycle power plant in Buenos
Aires Province, Argentina. Construction of the $110 million plant being
built on the site of a petroleum refinery owned and operated by YPF S.A.,
Argentina's largest oil company, is scheduled to be complete by the fall
of 1997. In July 1996, CMS Generation increased its ownership interest in
the project from 39 percent to 100 percent by purchasing the remaining 61
percent from EDEVA, a consortium of Argentine investors. The Overseas
Private Investment Corporation is expected to provide approximately $75
million in non-recourse project financing for the facility.
In April 1996, CMS Generation and ABB signed agreements with Morocco's
national utility, Office National de l'Electricite, for the privatization,
expansion and operation of the Jorf Lasfar coal-fueled power plant located
southwest of Casablanca. The agreements cover purchase and operation of
two existing 330 MW electric generating units and construction and opera-
tion of another two 330 MW electric generating units by CMS Generation and
ABB. CMS Generation and ABB each will hold a 50 percent interest in the
transaction. CMS Energy posted a $30 million conditional letter of credit
to ensure performance under the agreements. Financial closing is expected
by year end, with construction of the second two units to begin shortly
thereafter.
In July 1996, CMS Generation began construction on repowering its
Centrales Termicas Mendoza electric generating plant in western
Argentina's Mendoza Province. In the first quarter of 1996,
CMS Generation increased its ownership interest in the plant to 81 per-
cent. The company currently plans to invest $185 million to refurbish and
repower the facility resulting in an increase in its generating capacity
from 242 MW to 506 MW.
CMS Energy currently plans to invest $575 million relating to its indepen-
dent power production operations from 1996 to 1998. CMS Generation will
pursue acquisitions and development of electric generating plants in the
United States, Latin America, southern Asia, the Pacific Rim region and
North Africa.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three, six and
twelve months ended June 30, 1996 increased $5 million, $10 million and
$15 million respectively over the comparable periods in 1995, reflecting
earnings from new pipeline and storage investments, primarily TGN, the
continued growth of existing projects and gas marketed to end-users and
the gain resulting from the dissolution of the Moss Bluff and Grand Lacs
partnerships (see below).
Capital Expenditures and Other: In June 1996, CMS Gas Transmission sold
its 50 percent ownership interest in Moss Bluff Gas Storage Systems, a
partnership that owns a gas storage facility, to its partner, MHP, and
purchased the remaining 50 percent ownership interest in the Grands Lacs
Limited Partnership, a marketing center for natural gas from MHP. This
transaction resulted in CMS Gas Transmission receiving approximately $26
million.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of 10-day
storage service and has the capability of being refilled in 20 days.
In January 1996, CMS Gas Transmission acquired an ownership interest in
Nitrotec Corporation, a proprietary gas technology company. Nitrotec
specializes in the development and commercialization of advanced carbon-
based adsorption gas separation technologies. Nitrotec recently received
approval of patent applications covering its helium removal process and
nitrogen rejection process.
CMS Energy currently plans to invest $255 million from 1996 to 1998
relating to its non-utility gas operations, and will continue to pursue
development of natural gas storage, gathering and pipeline operations both
domestically and internationally. CMS Energy also plans to work toward
the development of U.S. regional "market centers" for natural gas through
strategic alliances and asset acquisition and development.
International Electric Distribution
Capital Expenditures: In April 1996, a seven-company consortium in which
CMS Electric and Gas holds a 40 percent interest acquired 90 percent of
the outstanding shares of EDEER, an electric distribution utility serving
northeastern Argentina's Entre Rios Province, for approximately $160
million, of which CMS Energy's portion was $65 million. EDEER, with 1995
revenue of $105 million and electric sales of 1.1 billion kWh, serves over
200,000 customers, primarily residential and commercial, in a 55,000
square kilometer area. In May 1996, the Entre Rios Province transferred
ownership and operating management of EDEER to the consortium.
CMS Energy currently plans to invest $65 million from 1996 to 1998 relat-
ing to its international energy distribution operations.
Forward-Looking Information
Forward-looking information is included throughout this Form 10-Q.
CMS Energy's material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing governmental policies and regulatory actions both
domestic and international (including those of the FERC and the MPSC) with
respect to rates, industry and rate structure, operation of nuclear power
facilities, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, operation and construction of
natural gas pipeline and storage facilities, recovery of the cost of
purchased power or natural gas, decommissioning costs, and present or
prospective wholesale and retail competition, among others. The business
and profitability of CMS Energy are also influenced by economic and
geographic factors including political and economic risks (particularly
those associated with international development and operations, including
currency fluctuation), changes in environmental laws and policies, weather
conditions, competition for retail and wholesale customers, pricing and
transportation of commodities, market demand for energy, inflation,
capital market conditions, unanticipated development project delays or
changes in project costs, and the ability to secure agreement in pending
negotiations (particularly for projects in development), among other
important factors. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond
the control of CMS Energy.
Capital Expenditures: ConsumersCMS Energy estimates that capital expenditures,
including new lease commitments related to its electric and gas utility
operationsinvestments in partnerships and
unconsolidated subsidiaries, will total approximately $1.2$2.6 billion over
the next three years. Cash generated by operations is expected to satisfy
a substantial portion of capital expenditures. Nevertheless, CMS Energy
will continue to evaluate capital markets in 1996 as a potential source of
financing its subsidiaries' investing activities.
In Millions
Years Ended December 31 1996 1997 1998
Electric utility $ 315 $ 300 $ 305
Gas utility 130 120 110
Oil and gas exploration and production 120 135 150
Independent power production 250 175 150
Natural gas transmission, storage and
marketing 140 65 50
International electric distribution 65 - -
---- ---- ----
Consumers
Construction $396 $368 $335
Nuclear fuel lease 34 5 41
Capital leases other than nuclear fuel 6 19 16
Michigan Gas Storage 9 3 3
---- ---- ----
$445 $395 $395
==== ==== ====$1,020 $ 795 $ 765
===== ===== =====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital expenditures by electric and gas utility,expen-
ditures see the Electric Capital
Expenditures and Gas Capital Expenditures sectionsindividual capital expenditures disclosure within this
MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions, or the developingdevel-
oping competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including:including the installation of cogeneration or other self-generation
facilities by Consumers' larger industrial customers; the formation of
municipal utilities whichthat would displace retail service by Consumers to an
entire community; and competition from neighboring utilities whichthat offer
flexible rate arrangements designed to encourage movement to their
respective service
areas. Consumers continues to work toward retaining its current retail
service customers.
In July 1996, an electric marketer filed applications with the MPSC for
approval to sell electricity generated outside of Michigan to certain of
Consumers' industrial customers. These customers purchase approximately
100 MW annually from Consumers. There is currently no MPSC-approved
program of retail access that would allow the transactions requested by
this electric marketer to take place, although similar applications filed
for customers of other Michigan electric utilities have been set for
hearing with the MPSC. Consumers intends to vigorously oppose the cre-
ation of any such program before the MPSC and in the courts; however,
Consumers cannot predict the ultimate outcome of this matter.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for competitivelycompeti-
tively discounted electric rates. Certain facilities will have the option
of taking retail wheeling service (if available) after the first three
years of the contract. The MPSC approved this contract in 1995.
This MPSC order1995, and other MPSC orders approving specialhas
since approved long-term sales contracts with other major customers
representing a substantial percentage of Consumers' industrial load deemed
to have viable cogeneration alternatives. These orders have been appealed
by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:include
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and Detroit Edison. Under the experiment,
up to 60 MW of Consumers' additional load requirements could be met by
retail wheeling. The program becomes effective upon Consumers' next
solicitation for capacity. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those previously filed by Detroit Edison
and the Attorney General. Consumers does not expect this short-term
experiment to have a material impact on its financial position, liquidity
or results of operations.
In April 1996, the FERC issued two ordersOrders 888 and 889, which require utilities
to provide open access to the interstate transmission grid. The first orderOrder 888
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The orderOrder 888 also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second orderOrder 889 requires
utilities to establish electronic systems to share information about
available transmission capacity and to separate their wholesale power
marketing and transmission operations functions by implementing standards
of conduct. These orders will becomeOrders became effective in July 1996. In addition, the
FERC issued a NOPR onin April 24, 1996 whichthat proposes for consideration a new
system for utilities to use in reserving capacity on their own and others'
transmission lines. This would replace certain tariffs included in the first orderOrder
888 with a capacity reservation tariff in which participants would reserve
firm rights to transfer power between designated receipt and delivery
points. Consumers is evaluating these developments and has not determined
the full impact of the FERC's Orders on its financial position, liquidity
or results of operations. In July 1996, Consumers filed an open access
transmission tariff and conforming transmission rate change in response to
Order 888.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan utilitiesutili-
ties in light of increasing competition in the utility industry. TheIn April
1996, the MPSC has directed Consumers, (and Detroit Edison)Edison, and other electric
utilities to file applications by
May 15, 1996, addressing the recommendation of the
Michigan Jobs Commission to allow a choice of power suppliers for new
industrial and commercial electric load. Consumers filed a proposed plan
for open access transmission services, under which Consumers could meet
new demand in its service area by delivering electricity from any supplier
capable of providing power to Consumers' electric system, provided certain
reciprocity and other conditions were met. Among other conditions was a
requirement that stranded costs would be fully recovered from existing
customers. The Michigan Jobs Commission's recommendations also include
related matters, such as the full recovery of utility stranded costs. No
new legislation has been introduced. However, Consumers anticipates
additional MPSC orders during 1996 whichthat will further define a new electric
and gas utility regulatory framework for Michigan.
SFAS 71 allows the deferral of certain costs and the recording of regula-
tory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Consumers Gas Group Outlook, Competition and Deliveries: Consumers
currently anticipates gas deliveries to grow approximately 2 percent per
year (excluding transportation to the MCV Facility and off-system deliver-
ies) over the next five years, assuming a steadily growing customer base.
Additionally, Consumers has several strategies that will support increased
load requirements in the future. These strategies include increased
efforts to promote natural gas to both current and potential customers
that are using other fuels for space and water heating. In addition, as
air quality standards continue to become more stringent, management
believes that greater opportunities exist for converting industrial boiler
load and other processes to natural gas. Consumers also plans additional
capital expenditures to construct new gas mains that are expected to
expand Consumers' system. Actual gas deliveries in future periods may be
affected by abnormal weather, alternative energy prices, changes in
competitive conditions, and the level of natural gas consumption.
In 1995, the Low Income Home Energy Assistance Program provided approxi-
mately $71 million in heating assistance to about 400,000 Michigan house-
holds, with approximately 18 percent of funds going to Consumers' custom-
ers. In late 1995, federal legislative approval provided Michigan resi-
dents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are regulat-
ed by the MPSC as parties to this proceeding. Consumers has filed its
comments with the MPSC, indicating that the MPSC should only direct local
distribution companies to file pilot programs designed to test the feasi-
bility of expanded transportation service. Consumers also expressed its
position that it is premature to expand transportation service to residen-
tial customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient regulato-
ry assurance exists to provide for the recovery of these deferred costs.
34
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of income, common stockholder's equity
and cash flows for the three-month, six-month and twelve-month periods
then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical proce-
dures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than
an audit conducted in accordance with generally accepted auditing stan-
dards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and subsid-
iaries as of December 31, 1995, and the related consolidated statements of
income, common stockholder's equity and cash flows for the year then ended
(not presented herein), and, in our report dated January 26, 1996, we
expressed an unqualified opinion on those statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
August 9, 1996.
35
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions
OPERATING REVENUE
Electric $ 581 $ 543 $1,172 $1,083 $2,366 $2,179
Gas 207 197 753 679 1,269 1,119
Other 9 10 13 21 31 33
---------------------------------------------------------
Total operating revenue 797 750 1,938 1,783 3,666 3,331
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 70 67 143 134 292 290
Purchased power - related parties 146 121 286 245 532 487
Purchased and interchange power 44 47 91 83 204 148
Cost of gas sold 106 102 451 383 739 617
Other 144 139 279 276 594 576
---------------------------------------------------------
Total operation 510 476 1,250 1,121 2,361 2,118
Maintenance 37 45 76 89 170 187
Depreciation, depletion and amortization 82 79 190 181 367 347
General taxes 42 41 99 95 193 179
---------------------------------------------------------
Total operating expenses 671 641 1,615 1,486 3,091 2,831
---------------------------------------------------------
PRETAX OPERATING INCOME
Electric 94 83 197 170 389 328
Gas 22 17 113 108 156 142
Other 10 9 13 19 30 30
---------------------------------------------------------
Total pretax operating income 126 109 323 297 575 500
INCOME TAXES 34 28 95 85 156 125
---------------------------------------------------------
NET OPERATING INCOME 92 81 228 212 419 375
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 9 8 17 17
Accretion income 2 3 5 6 11 12
Accretion expense (7) (8) (14) (16) (29) (32)
Other income taxes, net 4 3 7 6 13 11
Other, net - 1 - 3 2 11
---------------------------------------------------------
Total other income 3 3 7 7 14 19
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 36 69 71 139 139
Other interest 3 4 6 9 21 21
Capitalized interest (1) (1) (1) (1) (3) (1)
---------------------------------------------------------
Net interest charges 37 39 74 79 157 159
---------------------------------------------------------
Net Income 58 45 161 140 276 235
Preferred Stock Dividends 7 7 14 14 28 28
Preferred Securities Distribution 2 - 4 - 4 -
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 49 $ 38 $ 143 $ 126 $ 244 $ 207
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 161 $ 140 $ 276 $ 235
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $24,
$51 and $49, respectively) 190 181 367 347
Capital lease and other amortization 21 19 40 42
Deferred income taxes and investment tax credit 25 42 40 52
Accretion expense 14 16 29 32
Accretion income - abandoned Midland project (5) (6) (11) (12)
Undistributed earnings of related parties (12) (18) (30) (31)
MCV power purchases - settlement (Note 2) (27) (70) (94) (112)
Other 3 2 5 4
Changes in other assets and liabilities 83 38 128 15
------ ------ ------ ------
Net cash provided by operating activities 453 344 750 572
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (184) (175) (423) (427)
Investments in nuclear decommissioning trust funds (24) (24) (51) (49)
Cost to retire property, net (12) (19) (34) (43)
Deferred demand-side management costs (5) (4) (10) (9)
Proceeds from sale of property - 1 1 12
Other 2 (5) 1 (5)
------ ------ ------ ------
Net cash used in investing activities (223) (226) (516) (521)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (233) (30) (201) 180
Payment of common stock dividends (75) (70) (75) (164)
Payment of capital lease obligations (21) (18) (38) (41)
Payment of preferred stock dividends (14) (14) (28) (28)
Preferred securities distributions (4) - (4) -
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 -
Retirement of bonds and other long-term debt - (1) (1) (26)
Repayment of bank loans - - - (375)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash used in financing activities (237) (133) (237) (54)
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (7) (15) (3) (3)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 13
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 7 $ 10 $ 7 $ 10
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
Consumers Power Company
Consolidated Balance Sheets
June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $6,177 $6,103 $5,899
Gas 2,229 2,169 2,097
Other 26 30 30
-----------------------------------
8,432 8,302 8,026
Less accumulated depreciation, depletion and amortization 4,276 4,090 3,968
-----------------------------------
4,156 4,212 4,058
Construction work-in-progress 226 190 263
-----------------------------------
4,382 4,402 4,321
-----------------------------------
INVESTMENTS
Stock of affiliates 340 337 321
First Midland Limited Partnership (Note 2) 228 225 221
Midland Cogeneration Venture Limited Partnership (Note 2) 110 103 90
Other 9 7 8
-----------------------------------
687 672 640
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 7 14 10
Accounts receivable and accrued revenue, less
allowances of $2, $3 and $3, respectively (Note 7) 104 137 83
Accounts receivable - related parties 26 10 49
Inventories at average cost
Gas in underground storage 109 184 155
Materials and supplies 73 72 75
Generating plant fuel stock 23 37 34
Postretirement benefits 25 25 25
Deferred income taxes 22 26 28
Prepayments and other 112 181 102
-----------------------------------
501 686 561
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 450 462 469
Nuclear decommissioning trust funds 339 304 262
Abandoned Midland Project 122 131 139
Other 288 297 315
-----------------------------------
1,199 1,194 1,185
-----------------------------------
TOTAL ASSETS $6,769 $6,954 $6,707
===================================
38
June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 504 491 491
Revaluation capital 31 29 19
Retained earnings since December 31, 1992 305 237 136
-----------------------------------
1,681 1,598 1,487
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,925 1,922 1,955
Non-current portion of capital leases 92 104 109
-----------------------------------
4,154 3,980 3,907
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 83 90 49
Accounts payable 170 207 158
Accrued taxes 151 225 130
Notes payable 108 341 309
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 65 56 53
Accrued interest 37 32 34
Accrued refunds 25 22 30
Other 165 178 156
-----------------------------------
894 1,241 1,014
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 620 605 594
Postretirement benefits 514 517 534
Power purchases - settlement (Note 2) 207 221 269
Deferred investment tax credit 164 169 174
Regulatory liabilities for income taxes, net 57 44 33
Other (Note 4) 159 177 182
-----------------------------------
1,721 1,733 1,786
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,769 $6,954 $6,707
===================================
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers
Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from
Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 504 491 491 491 491 491
Stockholder's contribution - - 13 - 13 -
---------------------------------------------------------
At end of period 504 491 504 491 504 491
---------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 29 17 29 15 19 12
Change in unrealized investment-gain 2 2 2 4 12 7
---------------------------------------------------------
At end of period 31 19 31 19 31 19
---------------------------------------------------------
RETAINED EARNINGS
At beginning of period 331 168 237 80 136 93
Net income 58 45 161 140 276 235
Common stock dividends declared (75) (70) (75) (70) (75) (164)
Preferred stock dividends declared (7) (7) (14) (14) (28) (28)
Preferred securities distributions (2) - (4) - (4) -
---------------------------------------------------------
At end of period 305 136 305 136 305 136
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,681 $1,487 $1,681 $1,487 $1,681 1,487
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
40
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1995 Form 10-K of Consumers Power Company that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contract-
ed to sell electricity to Consumers for a 35-year period beginning in 1990
and to supply electricity and steam to The Dow Chemical Company. Consum-
ers, through two wholly owned subsidiaries, holds the following assets
related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49
percent general partnership interest in the MCV Partnership; and 2)
CMS Holdings holds, through the FMLP, a 35 percent lessor interest in the
MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the termination of the PPA. In 1993,
the MPSC issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge, and a variable energy charge based primarily on Consumers' average
cost of coal consumed. The Settlement Order permits Consumers to recover
capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the
fixed energy charge, and the prescribed energy charges associated with the
scheduled deliveries within certain hourly availability limits, whether or
not those deliveries are scheduled on an economic basis. For all energy
delivered on an economic basis above the availability limits to 915 MW,
Consumers has been allowed to recover a capacity payment of 1/2 cent per
kWh in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the estimat-
ed future underrecoveries of power costs under the PPA as a result of the
Settlement Order. This loss was based, in part, on management's assess-
ment of the future availability of the MCV Facility and the effect of the
future power market on the amount, timing and price at which various
increments of the capacity, above the MPSC-authorized level, could be
resold. Additional losses may occur if actual future experience material-
ly differs from the 1992 estimates. As anticipated in 1992, Consumers
continues to experience cash underrecoveries associated with the Settle-
ment Order. If Consumers is unable to sell any capacity above the 1993
MPSC-authorized level, future additional after-tax losses and after-tax
cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will determine the levels of recovery from
retail customers at a later date. The Settlement Order also provides
Consumers the right to remarket to third parties the remaining contract
capacity. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals. In March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed settle-
ment agreement that would potentially resolve several issues in three
pending proceedings, including Consumers' electric rate case (see Note 3)
and cost recovery for the entire 325 MW of MCV Facility capacity above the
MPSC's currently authorized 915 MW level. The total estimated cash
underrecoveries are not expected to change under the settlement agreement
as proposed, although the years in which they occur could vary from the
schedule shown in the above table. Consumers does not anticipate the need
for an additional loss to be recorded above the amount anticipated in 1992
if the settlement agreement is adopted as proposed. For further informa-
tion regarding the proposed settlement agreement, see Note 3.
At June 30, 1996 and December 31, 1995, the after-tax present value of the
Settlement Order liability totaled $193 million and $202 million, respec-
tively. The reduction in the liability since December 31, 1995 reflects
after-tax cash underrecoveries of $18 million, partially offset by after-
tax accretion expense of $9 million. The undiscounted after-tax amount
associated with the liability totaled $578 million at June 30, 1996.
In 1994 and 1995, Consumers paid a total of $44 million to terminate power
purchase agreements with the developers of two proposed independent power
projects totaling 109 MW. As part of the proposed settlement agreement
reached with the MPSC staff (see Note 3), Consumers is seeking to utilize
less-expensive contract capacity from the MCV Facility which Consumers is
currently not authorized to recover from retail customers. Cost recovery
for this contract capacity would start in 1996. Even if Consumers is not
allowed to substitute MCV Facility capacity for the capacity to be provid-
ed under the terminated agreements, Consumers believes that the MPSC would
still approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued in
February 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 1995 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its consid-
eration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition, Consum-
ers filed a request with the MPSC seeking to adjust its depreciation rates
and to reallocate certain portions of its electric production plant to
transmission accounts. For further information regarding these requests,
see the Electric Rate Proceedings and Special Rates discussions in the
MD&A.
In September 1995, Consumers and the MPSC staff reached a proposed settle-
ment agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in Febru-
ary 1996 when the MPSC issued a partial final order in Consumers' electric
rate case. If fully adopted, the settlement agreement would provide for
cost recovery of the entire 325 MW of uncommitted MCV Facility capacity;
implement provisions for incentive ratemaking; resolve the special compet-
itive services and depreciation rate cases; implement a limited direct
access program; and accelerate recovery of nuclear plant investment.
Consumers expects a final order in the third quarter of 1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases, includ-
ing costs for postretirement benefits and costs related to Consumers'
former manufactured gas plant sites (see Note 4). In March 1996, the MPSC
issued a final order in this case, authorizing recovery of costs related
to postretirement benefits and former manufactured gas plant sites.
Overall, however, the order decreased Consumers' gas rates by $11.7
million annually and authorized an 11.6 percent return on common equity, a
decrease from the 13.25 percent previously authorized. Consumers filed a
petition for rehearing with the MPSC, requesting reconsideration of
certain issues. This petition was denied in June 1996.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain intra-
state producers. In early 1995, management concluded that the intrastate
producers' pending appeals of the order would not be successful and,
accordingly, reversed a previously accrued contingency and recorded a $23
million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers petitioned the Michigan Supreme Court
for review. This petition was denied in June 1996.
In October 1995, the MPSC issued an order regarding a $44 million (exclud-
ing any interest) gas supply contract pricing dispute between Consumers
and certain intrastate producers. The order stated that Consumers was not
obligated to seek prior approval of market-based pricing provisions that
were implemented under the contracts in question. The producers subse-
quently filed a claim of appeal of the MPSC order with the Court of
Appeals. Consumers believes the MPSC order supports its position that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are numer-
ous credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based upon past negoti-
ations, Consumers estimates its total liability for the significant sites
will average less than 4 percent of the estimated total site remediation
costs. Consumers' liability is therefore expected to be between $1
million and $9 million. At June 30, 1996, Consumers has accrued $1
million for its estimated losses.
Under the Michigan Natural Resources and Environmental Protection Act,
which bears some similarities to Superfund, Consumers expects that it will
ultimately incur investigation and remedial action costs at a number of
sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest. Consumers has prepared plans for remedial investiga-
tion/feasibility studies for several of these sites. Three of the four
plans submitted by Consumers have been approved by the DNR or the Michigan
Department of Environmental Quality. The findings for two remedial
investigations indicate that the expenditures for remedial action at those
sites are likely to be less than previously estimated; however, these
findings may not be representative of all of the sites. Data available to
Consumers and its continued internal review have resulted in an estimate
for all costs related to investigation and remedial action for all 23
sites of between $48 million and $98 million. These estimates are based
on undiscounted 1996 costs. At June 30, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions,
such as remediation technique, nature and extent of contamination and
legal and regulatory requirements, could affect the estimate of remedial
action costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and amor-
tizing these costs over 10 years. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate
case. The order authorizes current recovery of $1 million annually.
Consumers is continuing discussions with certain insurance companies
regarding coverage for some or all of the costs that may be incurred for
these sites.
The Clean Air Act contains provisions that limit emissions of sulfur
dioxide and nitrogen oxides and require emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are cur-
rently operating at or near the sulfur dioxide emission limits that will
be effective in the year 2000. The Clean Air Act's provisions required
Consumers to make capital expenditures totaling $25 million to install
equipment at certain generating units. Consumers estimates capital
expenditures for in-process and possible modifications at other coal-fired
units to be an additional $50 million by the year 2000. Management
believes that Consumers' annual operating costs will not be materially
affected.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $445 million for 1996, $420 million for 1997 and
$415 million for 1998.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when neces-
sary, modifying the grounding of the customer's service. At June 30,
1996, Consumers had 34 separate stray voltage lawsuits awaiting trial
court action.
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies arising from
the ordinary course of business and involving personal injury, property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers file a report on the adequacy of the surcharge
revenues with the MPSC at three-year intervals beginning in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In order to address concerns
raised subsequent to the initial cask loading, Consumers and the NRC each
analyzed the effects of seismic and other natural hazards on the support
pad on which the casks are placed, and confirmed that the pad location is
acceptable to support the casks. As of June 30, 1996, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In a review of the cask manufacturer's quality assurance program, Consum-
ers detected indications of minor flaws in welds in the steel liner of one
of the loaded casks. Consumers has examined radiographs for all of its
casks and has found all other welds acceptable. The cask in which the
minor flaws were detected continues to store spent fuel safely and there
is no requirement for its replacement, but Consumers had nevertheless
planned to remove the spent fuel and insert it into another cask. Howev-
er, Consumers has postponed this action while it monitors an investigation
under way at another utility that uses a similar dry storage cask system
for spent nuclear fuel. The other utility experienced an unexpected
ignition of hydrogen gas following the loading of a cask. Although the
event caused no injuries or releases of radioactive material, and
Consumers' procedures had already precluded a similar event, the NRC has
instructed utilities using the dry storage casks to take certain addition-
al precautions when loading or unloading casks. Consumers does not plan
to load or unload any casks before the end of 1996.
Certain parties, including the Attorney General, have petitioned the NRC
to suspend Consumers' general license to store spent fuel, claiming that
Consumers' cask unloading procedure does not satisfy NRC regulations. The
NRC staff is reviewing the petitions.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs during prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next 12
months of the outage, followed by reduced coverage to approximately 80
percent for two additional years. If certain loss events occur at its own
or other nuclear plants similarly insured, Consumers could be required to
pay maximum assessments of $30 million in any one year to NML and NEIL;
$79 million per event under the nuclear liability secondary financial
protection program, limited to $10 million per event in any one year; and
$6 million in the event of nuclear workers claiming bodily injury from
radiation exposure. Consumers considers the possibility of these assess-
ments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of data from testing of similar materials indicated that the
Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999; however, an analysis
that Consumers submitted to the NRC for review in April 1996 suggests that
the reactor vessel could be safely operated beyond 1999 without annealing.
Nevertheless, Consumers is currently developing a contingency plan to
anneal the reactor vessel in 1998 at an estimated cost of $20 million to
$30 million, which would likely allow for operation of the plant to the
end of its license life in the year 2007 or beyond. Consumers cannot
predict whether the NRC will concur with the April 1996 analysis or, if
the NRC does concur, whether these analyses will result in a future
decision to postpone annealing.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and financ-
ing activities for the periods ended June 30 were:
In Millions
Six Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid
(net of amounts capitalized) $ 65 $ 77 $146 $151
Income taxes paid
(net of refunds) 74 46 71 25
Non-cash transactions
Nuclear fuel placed under
capital lease $ 1 $ 23 $ 4 $ 42
Other assets placed under
capital leases 1 2 4 10
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital require-
ments. At June 30, 1996, a total of $108 million was outstanding at a
weighted-average interest rate of 6.1 percent, compared with $309 million
outstanding at June 30, 1995, at a weighted-average interest rate of 6.7
percent. Consumers has an established $500 million trade receivables
purchase and sale program. At June 30, 1996 and 1995, receivables sold
under the agreement totaled $200 million and $190 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
In January 1996, four million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing the Trust Originated Preferred Securities, and the
primary asset of the trust is $103 million of 8.36 percent unsecured
subordinated deferrable interest notes issued by Consumers and maturing in
2015. Consumers' obligations with respect to the Trust Originated Pre-
ferred Securities under the notes, the indenture under which the notes are
issued, Consumers' guarantee of the Trust Originated Preferred Securities,
and the declaration of trust constitute a full and unconditional guarantee
by Consumers of the trust's obligations under the Trust Originated Pre-
ferred Securities.
In July 1996, Consumers declared a $40 million common dividend to be paid
in August 1996.
Also in July 1996, Consumers redeemed $36 million of maturing first
mortgage bonds.
47
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
Consumers. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates, assump-
tions and uncertainties that could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements.
In addition to certain contingency matters (and their respective caution-
ary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking
Information section of this MD&A indicates some important factors that
could cause actual results or outcomes to differ materially from those
addressed in the forward-looking discussions.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
Consolidated Earnings for the Quarters Ended June 30, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $49 million and $38 million for the second quarters of
1996 and 1995, respectively. The $11 million increase primarily reflects
the impact of a 1996 electric rate increase and 1996 gas revenues from
storage facility operations.
Consolidated Earnings for the Six Months Ended June 30, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $143 million and $126 million for the six months ended
June 30, 1996 and 1995, respectively. The $17 million increase reflects
the same benefits as described for the quarter-ended period along with
higher electric sales and gas deliveries. Partially offsetting these
benefits was reduced operating income from Consumers' interest in the MCV
Facility during the 1996 period.
Consolidated Earnings for the 12 Months Ended June 30, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $244 million and $207 million for the 12 months ended
June 30, 1996 and 1995, respectively. The $37 million increase reflects
the 1996 electric rate increase, higher electric sales and gas deliveries,
and 1996 gas revenues from storage facility operations.
For further information, see the Electric and Gas Utility Results of
Operations sections of this MD&A.
Cash Position, Investing and Financing
Cash from operations is derived from the sale and transportation of
natural gas and the generation, transmission, and sale of electricity.
Cash from operations totaled $453 million and $344 million for the first
six months of 1996 and 1995, respectively. The $109 million increase
resulted from higher sales of electricity, improved gas deliveries, lower
cash losses associated with the PPA, and changes in the timing of cash
payments related to Consumers' operations. Consumers uses its operating
cash primarily to maintain and expand its electric and gas systems, retire
portions of its long-term debt, and pay dividends.
Investing Activities: Net cash used in investing activities totaled $223
million and $226 million for the first six months of 1996 and 1995,
respectively. Cash used for increased capital expenditures was largely
offset by reduced costs to retire property.
Financing Activities: Net cash used in financing activities totaled $237
million and $133 million for the six months of 1996 and 1995, respective-
ly. The increase of $104 million reflects an additional $203 million in
cash used to reduce short-term borrowings, partially offset by $97 million
in proceeds from the sale of Trust Originated Preferred Securities (see
Note 7).
In July 1996, Consumers declared a $40 million common dividend to be paid
in August 1996. Consumers had temporarily suspended its common dividends
in mid-1995 to improve its capital structure.
Also in July 1996, Consumers redeemed $36 million of maturing first
mortgage bonds.
Other Investing and Financing Matters: Consumers has several available,
unsecured, committed lines of credit totaling $145 million and a $425
million working capital facility. At June 30, 1996, Consumers had a total
of $108 million outstanding under these facilities. Consumers has FERC
authorization to issue or guarantee up to $900 million in short-term debt
through December 31, 1996. Consumers uses short-term borrowings to
finance working capital and gas in storage, and to pay for capital expen-
ditures between long-term financings. Consumers has an agreement permit-
ting the sales of certain accounts receivable for up to $500 million. At
June 30, 1996 and 1995, receivables sold totaled $200 million and $190
million, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the Quarters Ended June 30, 1996 and
1995: Electric pretax operating income totaled $94 million and $83 million
for the second quarters of 1996 and 1995, respectively. The $11 million
increase resulted primarily from an increase in electric rates in early
1996, higher electric sales, and lower operation and maintenance costs
during the second quarter of 1996. Partially offsetting these benefits
were decreased revenues due to special contract discounts given to large
industrial customers and higher depreciation and general taxes in 1996.
Electric Pretax Operating Income for the Six Months Ended June 30, 1996
and 1995: Electric pretax operating income totaled $197 million and $170
million for the six months ended June 30, 1996 and 1995, respectively.
The $27 million increase reflects the same factors as described for the
quarter-ended period.
Electric Pretax Operating Income for the 12 Months Ended June 30, 1996 and
1995: Electric pretax operating income totaled $389 million and $328
million for the 12 months ended June 30, 1996 and 1995, respectively. The
$61 million increase is also primarily the result of higher electric sales
and an increase in electric rates in early 1996. These increases were
partially offset by higher depreciation and general tax expenses in the
1996 period and decreased revenues due to special contract discounts given
to large industrial customers.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $ - $ 9 $ 64
Rate increases and
other regulatory issues 11 18 18
Operations and maintenance 5 8 4
General taxes
and depreciation (5) (10) (27)
Other - 2 2
--- --- ----
Total change $11 $27 $ 61
=== === ====
Electric Sales: Total electric sales increased for the quarter ended (4.6
percent), six months ended (4.3 percent), and 12 months ended June 30,
1996 (4.1 percent) over the comparable 1995 periods. The table below
reflects these electric kWh sales increases by class of customer for the
various periods.
In Billions of kWh
Electric Sales
Quarter ended June Six months ended June 12 months ended June
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
Residential 2.4 2.4 - 5.4 5.1 0.3 11.0 10.2 0.8
Commercial 2.4 2.3 0.1 4.8 4.6 0.2 9.8 9.3 0.5
Industrial 3.2 3.2 - 6.1 6.3 (0.2) 12.5 12.6 (0.1)
Other 0.9 0.6 0.3 1.6 1.2 0.4 2.9 2.7 0.2
--- --- --- ---- ---- --- ---- ---- ---
Total sales 8.9 8.5 0.4 17.9 17.2 0.7 36.2 34.8 1.4
=== === === ==== ==== === ==== ==== ===
Power Costs: Power costs totaled $260 million and $235 million for the
quarters ended June 30, 1996 and 1995, respectively. The $25 million
increase primarily reflects greater power purchases from outside sources
to meet increased sales demand. Power costs totaled $520 million and $462
million for the six months ended June 30, 1996 and 1995, respectively.
The $58 million increase again primarily reflects greater power purchases
from outside sources to meet increased sales demand. Power costs totaled
$1,028 million and $925 million during the 12 months ended June 30, 1996
and 1995, respectively. Consistent with the changes in power costs in the
other periods, the $103 million increase also resulted from greater power
purchases from outside sources to meet increased sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the termination of the PPA in 2025.
In 1993, the MPSC issued the Settlement Order that has allowed Consumers
to recover substantially all payments for 915 MW of contract capacity
purchased from the MCV Partnership. ABATE and the Attorney General had
appealed the Settlement Order to the Court of Appeals. In March 1996, the
Court of Appeals affirmed the Settlement Order. The market for the
remaining 325 MW of contract capacity was assessed at the end of 1992.
This assessment, along with the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $18 million for the first six months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed settle-
ment agreement that would potentially resolve several issues in three
pending proceedings, including the electric rate case (discussed below)
and cost recovery for the entire 325 MW of MCV Facility capacity above the
MPSC's currently authorized 915 MW level. The total estimated cash
underrecoveries are not expected to change under the settlement agreement
as proposed, although the years in which they occur could vary from the
schedule shown in the above table. Consumers does not anticipate the need
for an additional loss to be recorded above the amount anticipated in 1992
if the settlement agreement is adopted as proposed. For further informa-
tion regarding the proposed settlement agreement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: In early 1996, the MPSC granted Consumers
authority to increase its annual electric retail rates by $46 million, in
response to Consumers' 1994 request. This partial final order did not
address cost recovery related to the 325 MW of MCV Facility contract
capacity above 915 MW. The MPSC stated that this matter would be ad-
dressed in connection with its consideration of the proposed settlement
agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed settle-
ment agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order in the third quarter of 1996. For more information
regarding the electric rate order and the proposed settlement agreement,
see Note 3.
In 1995, Consumers filed a request with the MPSC seeking approval to
increase its traditional depreciation expense by $21 million and reallo-
cate certain portions of its utility plant from production to transmis-
sion, resulting in a $28 million decrease in depreciation expense associ-
ated with this transfer. If the MPSC approves both aspects of the re-
quest, the net result will be a decrease in electric depreciation expense
of $7 million for ratemaking purposes. The ALJ issued a proposal for
decision in this case that recommended the MPSC reject Consumers' position
regarding the reallocation of Consumers' depreciation reserve and plant
investment. This case is currently part of the proposed settlement
agreement. In the proposed settlement, the depreciation of the Palisades
and Big Rock Point nuclear generating plants would be accelerated while
overall depreciation rates would remain the same.
Special Rates: Consumers currently has a request before the MPSC that
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its electric utility opera-
tions of $315 million for 1996, $300 million for 1997 and $305 million for
1998. These amounts include an attributed portion of Consumers' antici-
pated capital expenditures for plant and equipment common to both the
electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the Clean Air Act
significantly increased the environmental constraints that utilities will
operate under in the future. While the Clean Air Act's provisions require
Consumers to make certain capital expenditures in order to comply with the
amendments for nitrogen oxide reductions, Consumers' generating units are
currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. Final acid rain program nitrogen
oxide regulations are expected to be issued in 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to Superfund.
Consumers expects that it will ultimately incur costs at a number of
sites. Consumers believes costs incurred for both investigation and
required remedial actions are properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report recognized improved
performance at the plant, specifically in the areas of engineering and
plant operations. In the report, the NRC noted areas that continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address previ-
ously identified weak areas. The report noted that performance in the
areas of maintenance and plant support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. Consumers
does not plan to load or unload any casks before the end of 1996, includ-
ing a cask in which a minor flaw has been detected. For further informa-
tion, see Note 5.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of data from testing of similar materials indicated that
the Palisades reactor vessel can be safely operated through late 1999;
however, an analysis that Consumers submitted to the NRC for review in
April 1996 suggests that the reactor vessel could be safely operated
beyond 1999 without annealing. Nevertheless, Consumers is currently
developing a contingency plan to anneal the reactor vessel in 1998 at an
estimated cost of $20 million to $30 million, which would likely allow for
operation of the plant to the end of its license life in the year 2007 or
beyond. Consumers cannot predict whether the NRC will concur with the
April 1996 analysis or, if the NRC does concur, whether these analyses
will result in a future decision to postpone annealing.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At June 30,
1996, Consumers had 34 separate stray voltage lawsuits awaiting trial
court action. Consumers believes that the resolution of these lawsuits
will not have a material impact on its financial position, liquidity or
results of operations.
Gas Utility Results of Operations
Gas Pretax Operating Income for the Quarters Ended June 30, 1996 and 1995:
Gas pretax operating income totaled $22 million and $17 million for the
second quarters of 1996 and 1995, respectively. The $5 million increase
is primarily the result of gas storage facility operations and higher gas
deliveries resulting from customer additions and load conversions to
natural gas from alternative fuels.
Gas Pretax Operating Income for the Six Months Ended June 30, 1996 and
1995: Gas pretax operating income totaled $113 million and $108 million
for the six months ended June 30, 1996 and 1995, respectively. The $5
million increase reflects the same benefits as described for the quarter-
ended period. These benefits were partially offset by the benefit in 1995
resulting from the reversal of a previously recorded gas contract contin-
gency (see Note 3) and higher depreciation and general tax expenses during
1996.
Gas Pretax Operating Income for the 12 Months Ended June 30, 1996 and
1995: Gas pretax operating income totaled $156 million and $142 million
for the 12 months ended June 30, 1996 and 1995, respectively. The $14
million increase reflects higher gas deliveries and benefits related to
gas storage facility operations. However, these benefits were partially
offset by the reversal, during the 12 months ended June 30, 1995, of
previously recorded gas contingencies and higher operation and mainte-
nance, general tax and depreciation expenses.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $ 23 $ 51
Reversal of gas
contingencies - (23) (34)
Recovery of gas costs and
other regulatory issues 3 1 3
Gas storage facility
operations 4 7 7
Operations and maintenance (2) 2 (5)
General taxes and
depreciation (1) (5) (8)
--- ---- ----
Total change $ 5 $ 5 $ 14
=== ==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, increased for the quarter ended (2.8 percent), six months ended
(11.3 percent), and 12 months ended June 30, 1996 (15.9 percent) over the
comparable 1995 periods. The increased deliveries reflect growth result-
ing from customer additions, conversions to natural gas from alternative
fuels, continued strength in the Michigan economy and, for the six months
ended and 12 months ended June 30, 1996, colder temperatures. The table
below indicates total system deliveries and the impact of weather on the
six months ended and 12 months ended June 30, 1996 and 1995.
In bcf
Gas Deliveries
Six months ended June 12 months ended June
1996 1995 Var. 1996 1995 Var.
Weather-adjusted
deliveries 204.0 192.1 11.9 337.9 319.4 18.5
(variance reflects
growth)
Impact of weather 6.8 (2.7) 9.5 18.2 (12.1) 30.3
----- ----- ---- ----- ----- ----
System deliveries
excluding transport
to MCV 210.8 189.4 21.4 356.1 307.3 48.8
Transport to MCV 33.0 26.4 6.6 60.3 63.4 (3.1)
----- ----- ---- ----- ----- ----
Total system
deliveries 243.8 215.8 28.0 416.4 370.7 45.7
===== ===== ==== ===== ===== ====
Cost of Gas Sold: The cost of gas sold totaled $106 million and $102
million for the second quarters of 1996 and 1995, respectively. The
increase of $4 million was the result of increased sales. For the six
months ended June 30, 1996 and 1995, the cost of gas sold totaled $451
million and $383 million, respectively. The increase of $68 million
resulted from increased sales and the reversal of a $23 million gas
contract contingency during the first quarter of 1995. The cost of gas
sold totaled $739 million and $617 million for the 12 months ended
June 30, 1996 and 1995, respectively. The increase of $122 million
reflects the same benefits as described for the six-month period.
Gas Utility Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers filed a petition for rehearing with the MPSC, request-
ing reconsideration of certain issues. This petition was denied in June
1996.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to bypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC-authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and will vigorously oppose
any claims they may raise, but cannot predict the outcome of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$130 million for 1996, $120 million for 1997 and $110 million for 1998.
These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available to Consumers and its continued internal review of these
former manufactured gas plant sites have resulted in an estimate for all
costs related to investigation and remedial action of between $48 million
and $98 million. These estimates are based on undiscounted 1996 costs.
At June 30, 1996, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could affect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring environmen-
tal clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continu-
ing discussions with certain insurance companies regarding coverage for
some or all of the costs that may be incurred for these sites. For
further information regarding environmental matters, see Note 4.
Forward-Looking Information
Forward-looking information is included throughout this Form 10-Q.
Consumers' material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing governmental policies and regulatory actions (including
those of the FERC and the MPSC) with respect to rates, industry and rate
structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
operation and construction of natural gas pipeline and storage facilities,
recovery of the cost of purchased power or natural gas, decommissioning
costs, and present or prospective wholesale and retail competition, among
others. The business and profitability of Consumers are also influenced
by economic and geographic factors including political and economic risks,
changes in environmental laws and policies, weather conditions, competi-
tion for retail and wholesale customers, pricing and transportation of
commodities, market demand for energy, inflation, capital market condi-
tions, and the ability to secure agreement in pending negotiations, among
other important factors. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results, and may
be beyond the control of Consumers.
Capital Expenditures: Consumers estimates that capital expenditures,
including new lease commitments, related to its electric and gas utility
operations will total approximately $1.3 billion over the next three
years.
In Millions
Years Ended December 31 1996 1997 1998
Consumers
Construction $396 $392 $357
Nuclear fuel lease 34 5 41
Capital leases other than nuclear fuel 6 20 14
Michigan Gas Storage 9 3 3
---- ---- ----
$445 $420 $415
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital expen-
ditures by electric and gas utility, see the Electric Capital Expenditures
and Gas Capital Expenditures sections within this MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions, or the devel-
oping competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including the installation of cogeneration or other self-generation
facilities by Consumers' larger industrial customers; the formation of
municipal utilities that would displace retail service by Consumers to an
entire community; and competition from neighboring utilities that offer
flexible rate arrangements designed to encourage movement to their service
areas. Consumers continues to work toward retaining its current retail
service customers.
In July 1996, an electric marketer filed applications with the MPSC for
approval to sell electricity generated outside of Michigan to certain of
Consumers' industrial customers. These customers purchase approximately
100 MW annually from Consumers. There is currently no MPSC-approved
program of retail access that would allow the transactions requested by
this electric marketer to take place, although similar applications filed
for customers of other Michigan electric utilities have been set for
hearing with the MPSC. Consumers intends to vigorously oppose the cre-
ation of any such program before the MPSC and in the courts; however,
Consumers cannot predict the ultimate outcome of this matter.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for competi-
tively discounted electric rates. Certain facilities will have the option
of taking retail wheeling service (if available) after the first three
years of the contract. The MPSC approved this contract in 1995, and has
since approved long-term sales contracts with other major customers
representing a substantial percentage of Consumers' industrial load deemed
to have viable cogeneration alternatives. These orders have been appealed
by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and Detroit Edison. Under the experiment,
up to 60 MW of Consumers' additional load requirements could be met by
retail wheeling. The program becomes effective upon Consumers' next
solicitation for capacity. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those previously filed by Detroit Edison
and the Attorney General. Consumers does not expect this short-term
experiment to have a material impact on its financial position, liquidity
or results of operations.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid. Order 888
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. Order 888 also requires power pools to restructure their
ongoing operations and open up to non-utility members. Order 889 requires
utilities to establish electronic systems to share information about
available transmission capacity and to separate their wholesale power
marketing and transmission operations functions by implementing standards
of conduct. These Orders became effective in July 1996. In addition, the
FERC issued a NOPR in April 1996 that proposes for consideration a new
system for utilities to use in reserving capacity on their own and others'
transmission lines. This would replace certain tariffs included in Order
888 with a capacity reservation tariff in which participants would reserve
firm rights to transfer power between designated receipt and delivery
points. Consumers is evaluating these developments and has not determined
the full impact of the FERC's Orders on its financial position, liquidity
or results of operations. In July 1996, Consumers filed an open access
transmission tariff and conforming transmission rate change in response to
Order 888.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan utili-
ties in light of increasing competition in the utility industry. In April
1996, the MPSC directed Consumers, Detroit Edison, and other electric
utilities to file applications addressing the recommendation of the
Michigan Jobs Commission to allow a choice of power suppliers for new
industrial and commercial electric load. Consumers filed a proposed plan
for open access transmission services, under which Consumers could meet
new demand in its service area by delivering electricity from any supplier
capable of providing power to Consumers' electric system, provided certain
reciprocity and other conditions were met. Among the other conditions was
a requirement that stranded costs would be fully recovered from existing
customers. The Michigan Jobs Commission's recommendations also include
related matters, such as the full recovery of utility stranded costs. No
new legislation has been introduced. However, Consumers anticipates
additional MPSC orders during 1996 that will further define a new electric
and gas utility regulatory framework for Michigan.
SFAS 71 allows the deferral of certain costs and the recording of regula-
tory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Gas Outlook, Competition and Deliveries: Consumers currently anticipates
gas deliveries to grow approximately 2 percent per year (excluding transportationtrans-
portation to the MCV Facility and off-system deliveries) over the next
five years, assuming a steadily growing customer base. Additionally,
Consumers has several strategies whichthat will support increased load requirementsrequire-
ments in the future. These strategies include increased efforts to
promote natural gas to both current and potential customers that are using
other fuels for space and water heating. The emerging use of natural gas
vehicles also provides Consumers with sales growth opportunities. In addition, as air quality
standards continue to become more stringent, management believes that
greater opportunities exist for converting industrial boiler load and
other processes to natural gas. Consumers also plans additional capital
expenditures to construct new gas mains that are expected to expand
Consumers' system. Actual gas deliveries in future periods may be affectedaffect-
ed by abnormal weather, alternative energy prices, changes in competitive
conditions, and the level of natural gas consumption.
In 1995, the Low Income Home Energy Assistance Program provided approximatelyapproxi-
mately $71 million in heating assistance to about 400,000 Michigan households,house-
holds, with approximately 18 percent of funds going to Consumers' customers.custom-
ers. In late 1995, federal legislative approval provided Michigan residentsresi-
dents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Noticenotice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are regulatedregulat-
ed by the MPSC as parties to this proceeding. Consumers has filed its
comments with the MPSC, indicating that the MPSC should only direct local
distribution companies to file pilot programs designed to test the feasibilityfeasi-
bility of expanded transportation service. Consumers also expressed its
position that it is premature to expand transportation service to residentialresiden-
tial customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient regulatoryregulato-
ry assurance exists to provide for the recovery of these deferred costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions (including those of the FERC and the MPSC) with
respect to rates, industry and rate structure, operation of nuclear power
facilities, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, natural gas pipeline and storage
facilities, recovery of purchased power, decommissioning costs, and
present or prospective wholesale and retail competition, among others.
The business and profitability of Consumers is also influenced by economic
and geographic factors including political and economic risks, changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of Consumers.
Forward-looking information is included throughout this Form 10-Q.
Consumers' material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in CMS Energy's and Consumers' 1995 FormsForm 10-K for the
year ended December 31, 1995.1995 and Form 10-Q for the quarter ended March 31,
1996. Reference is made to the Condensed Notes to
the Consolidated Financial
Statements included herein for additional information regarding various
pending administrative and judicial proceedings involving rate, operating
and environmental matters.
RATE CASE PROCEEDINGS
Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant
Investment
In proceedings before the MPSC docketed asRate Case No. U-7830, Step 3A, the
MPSC reviewed Consumers' compliance with the financial stabilization order
conditions. In 1991, the MPSC issued an order finding that Consumers was
not in compliance with certain financial stabilization orders. Upon
appeal by several parties, including the Attorney General, the Court of
Appeals affirmed the MPSC determinations in Step 3A in an order issued in
April 1995. In May 1995, ABATE filed an application for leave to appeal
this decision with the Michigan Supreme Court, which was denied by that
court in March 1996. This proceeding is now closed.Proceedings
1994 Gas Rate Case Filing
Consumers filed a general gas rate case in December 1994. Consumers'
final position in this case requested an increase in its gas rates of $6.7
million annually and a 12.25 percent return on common equity. The MPSC
issued a final order in this case in March 1996. In this order, the MPSC
reduced Consumers' general gas rates by $11.7 million annually based on a
return on common equity of 11.6 percent. In April 1996, Consumers filed a
petition for rehearing of this order with the MPSC. The Company cannot
predictOn June 5, 1996, the
outcome of this matter.
MCV - RELATED PROCEEDINGSpetition for rehearing was denied. This proceeding is now closed.
1993 Electric Rate Case
In March 1993,May 1994, the MPSC approved, with modifications,issued a contested
settlement agreement among Consumers,final order in this case which increased
annual electric revenues by $58 million, or about 2.8 percent, and ap-
proved an allowed return on common equity of 11.75 percent. In August
1994, the MPSC staff and 10 independent
cogenerators which resolved certain regulatory issues and allowed
Consumers to recover from electric customers a substantial portion of the
cost of 915 MW of contract capacity from the MCV Facility. After their
requestsdenied petitions for rehearing were deniedfiled by the MPSC, ABATEConsumers and the
Attorney General. The Attorney General appealed the orders approving the settlementMPSC order to the
Court of Appeals. In March 1996,The Attorney General later filed a motion to withdraw
its appeal, which was granted by the Court of Appeals affirmed the March 1993 MPSC
order settling the electric rate issues involving Consumers and the MCV
Facility, and rejected claims by ABATE and the Attorney General which
contested the rates being charged electric customers since January 1993
for 915 MW of capacity and related energy being provided by the MCV
Facility.on July 1, 1996.
This proceeding is now closed.
STRAY VOLTAGE LAWSUITSStray Voltage Lawsuits
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. Several recent lawsuits
allege personal injury as well as damage to livestock. Consumers believes
these claims to be without merit and intends to vigorously oppose all
claims the plaintiffs may raise but cannot predict the outcome of this
matter. At March 31,June 30, 1996, Consumers
had 3334 separate stray voltage cases awaiting action at the trial court
level.
INDEPENDENT POWER PRODUCTION PROJECT LITIGATIONlevel and six cases on appeal or involved in the post-trial process.
Ludington Pumped Storage Plant
In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR
and certain other parties signed an agreement in principle designed to
resolve all legal issues associated with fish mortality at Ludington. In
January 1996, the FERC approved the settlement agreement, and in February
1996 the MPSC approved the settlement agreement and the recovery of costs
associated with the settlement agreement. On June 4, 1996, the Michigan
Supreme Court dismissed all lawsuits which sought damages from Consumers
and Detroit Edison for injuries to fishery resources because of the
operation of Ludington and the revocation of the plant's bottom-lands
lease. These proceedings are now closed.
MPSC Case No. U-10029 - Intrastate Gas Supply
In February 1993, the MPSC issued an order granting Consumers' request to
lower the price to be paid to one of its intrastate gas suppliers, North
Michigan, which then filed an appeal with the Court of Appeals. The Court
of Appeals affirmed the MPSC order and denied North Michigan's motion for
reconsideration. In September 1995, North Michigan filed an application
with the Michigan Supreme Court for leave to appeal the Court of Appeals'
decision. On June 28, 1996, the Michigan Supreme Court denied North
Michigan's application. Collateral suits are still pending in the Court
of Appeals.
Highland Township Franchise Proceeding
MichCon obtained a revocable franchise in 1956 to provide natural gas
service to Highland Township, Michigan. In 1962, Consumers secured an
irrevocable 30 year franchise to provide natural gas service to Highland
Township. Neither franchise was exclusive. Although MichCon's franchise
for service in Highland Township expired in 1986 and was not renewed,
MichCon continued service to customers in Highland Township. Consumers
secured a revocable renewal franchise for Highland Township in 1992.
Thereafter, in 1992 Consumers filed suit to enjoin MichCon from expanding
its gas service to new customers in Highland Township, which was granted.
MichCon subsequently transferred its remaining rights and interest in the
Highland Township franchise to Consumers, ceased doing business there and
appealed the Circuit Court decision with the Court of Appeals. In August
1995, William R. Williams and twothe Court of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.) filedAppeals refused to decide the issue addressed by the
Circuit Court (namely whether MichCon, as a lawsuit against CMS Generationholdover utility without any
franchise, could continue to lawfully do business in a township) because
the Denver County District
Court State of Colorado, in connection withAppeals concluded that Consumers' 1992 revocable renewal
franchise was invalid since it was not confirmed by a project to be developed in
Bantangas, Philippines by Luzon Power Associates, Inc. in which
CMS Generation purchased a 50% ownership interest. Luzon Power
Associates, Inc. has an agreement to supply power tovote of the Manila Electric
Company. The complaint alleges, breach of a confidentiality agreement,
breach of fiduciary duty, intentional interference with a contract, breach
of implied covenant of good faith and fair dealing, and unfair
competition. The claims primarily relate to a confidentiality agreement
between the parties, and CMS Generation's alleged pursuit of another
project to sell power directly to the Manila Electric Company, knownHighland
Township electorate as the Magellan project, in alleged violationCourt determined was required by the Public
Utility Franchise Act. The Court of a restrictive covenant inAppeals reversed the confidentiality agreement. The plaintiffs claim direct damages of
approximately $85 millionCircuit Court
decision and indirect damages in a like amount from loss
of future business, plus punitive damages, interest, and attorney's fees.
CMS Generation removedremanded the case to the United States DistrictCircuit Court for entry of summary
disposition in MichCon's favor. Consumers' motion for reconsideration and
for a stay of the DistrictCourt of Colorado in SeptemberAppeals' decision was denied. In December
1995, and in JanuaryConsumers filed an application, which is still pending, with the
Michigan Supreme Court for leave to appeal the Court of Appeals' decision.
On June 25, 1996, the Michigan Legislature amended the Public Utility
Franchise Act to provide that court deniedrevocable franchises may be granted by a
township without a vote of the electorate.
Environmental Matters
Independent Power Production Project
In June 1996, CMS Generation's motion to dismiss the suit or to transfer
the case based on improper venue. A trial date of July 1997 has been setGeneration Operating Company, a CMS Generation subsid-
iary, was informed by the court.U.S. Attorney's Office of an EPA investigation
involving alleged violations of RCRA and Superfund. These officials are
investigating certain allegedly improper ash disposal which may have
occurred during 1993 at a plant in California. CMS Generation Operating
Company operated the plant during the period in question. CMS Generation
Operating Company believes that fines exceeding $100,000 and other charges
or sanctions (either civil or criminal) may be sought in connection with
this investigation. CMS Generation Operating Company and its counsel are
continuing to meet with the plaintiff's positionpersons responsible for the investigation to
discuss the basis of the allegations and possible resolution that may be
acceptable to all parties. Resolution of these matters is without
merit and intendsnot expected to
have a material adverse effect on the financial condition of CMS Energy.
If an action is filed against CMS Generation Operating Company,
CMS Generation Operating Company will vigorously opposedefend any claims they may raiseraised,
but cannot predict the outcome of this matter.
59Item 4. Submission of Matters to a Vote of Security Holders
At CMS Energy's and Consumers' Annual Meeting of Shareholders held on
May 24, 1996, the shareholders ratified the appointment of Arthur Andersen
LLP as independent auditors of CMS Energy and Consumers for the year ended
December 31, 1996. The vote at CMS Energy was 84,269,040 in favor and
388,679 against, with 462,645 abstaining. The vote at Consumers was
85,311,416 in favor and 8,641 against, with 19,066 abstaining.
At the same meeting, shareholders elected all eleven nominees for the
office of director for both CMS Energy and Consumers. The total number of
votes cast at CMS Energy was 85,120,365. The votes cast for individual
nominees were as follows:
CMS ENERGY CORPORATION
Number of Votes
For Withheld Total
William T. McCormick, Jr. 83,988,590 1,131,775 85,120,365
James J. Duderstadt 84,037,642 1,082,723 85,120,365
Kathleen R. Flaherty 84,047,095 1,073,270 85,120,365
Victor J. Fryling 84,025,003 1,095,362 85,120,365
Earl D. Holton 84,069,629 1,050,736 85,120,365
Lois A. Lund 84,008,658 1,111,707 85,120,365
Michael G. Morris 84,022,123 1,098,242 85,120,365
William U. Parfet 84,068,735 1,051,630 85,120,365
Percy A. Pierre 84,058,028 1,062,337 85,120,365
Kenneth Whipple 84,069,947 1,050,418 85,120,365
John B. Yasinsky 84,061,266 1,059,099 85,120,365
The total number of votes cast at Consumers was 85,339,123. The votes
cast for individual nominees were as follows:
CONSUMERS POWER COMPANY
Number of Votes
For Withheld Total
William T. McCormick, Jr. 85,313,405 25,718 85,339,123
James J. Duderstadt 85,313,733 25,390 85,339,123
Kathleen R. Flaherty 85,313,172 25,951 85,339,123
Victor J. Fryling 85,314,065 25,058 85,339,123
Earl D. Holton 85,314,291 24,832 85,339,123
Lois A. Lund 85,312,941 26,182 85,339,123
Michael G. Morris 85,314,095 25,028 85,339,123
William U. Parfet 85,313,846 25,277 85,339,123
Percy A. Pierre 85,314,274 24,849 85,339,123
Kenneth Whipple 85,314,261 24,862 85,339,123
John B. Yasinsky 85,314,005 25,118 85,339,123
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(4) CMS Energy: Second Supplemental Indenture dated as of
March 19, 1996 between CMS Energy Corporation
and The Chase Manhattan Bank (National
Association), as Trustee
(10) CMS Energy: Employment Agreement dated March 20, 1996
between CMS Energy Corporation and Preston D.
Hopper
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) - CMS Energy: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
There have been no Current Reports on Form 8-K dated January 18, 1996 (Consumers), February
23, 1996 (CMS Energy)filed since the filing of
CMS Energy Corporation's and April 23, 1996 (CMS Energy and Consumers)
covering matters pursuant to "Item 5. Other Events."Consumers Power Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
6062
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: May 15,August 14, 1996 By A M Wright
-----------------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: May 15,August 14, 1996 By A M Wright
-----------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer