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 JuneSeptember 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 JulyOctober 31, 1996:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 92,440,08992,529,498
CMS Energy Class G Common Stock, no par value 7,760,0727,809,380
Consumers Power Company, $10 par value,
privately held by CMS Energy 84,108,789
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended JuneSeptember 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 AccountantsAccountants. . . . . . . . . . . . . 36
Consolidated Statements of Income . . . . . . . . . . . . . . 34. . 37
Consolidated Statements of Income.Cash Flows . . . . . . . . . . . . . . 38
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 35. . 39
Consolidated Statements of Cash Flows.Common Stockholder's Equity. . . . . . 41
Condensed Notes to Consolidated Financial Statements. . . . . . . 42
Management's Discussion and Analysis. . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets.50
PART II:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Common Stockholder's Equity . . . . . . . 39
Condensed Notes to Consolidated Financial Statements . . . . . . . . 40
Management's Discussion61
Item 6. Exhibits and AnalysisReports on Form 8-K. . . . . . . . . . . . . . . . . 47
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 58
Item 4. Submission of Matters to a Vote of Security Holders. . . . 60
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 6162
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6263
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ABB . . . . . . . . . . . . . ABB 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 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 Delaware business trust formed 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
DEQ . . . . . . . . . . . . . Michigan Department of Environmental
Quality
DNR . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . Demand-side management
EDEER . . . . . . . . . . . . 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 . . . . . . . . . . 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 . . . . . . . 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 that 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 and a subsidiary
of CMS NOMECO
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 and a subsidiary of
CMS NOMECO
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
JuneSeptember 30, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month,
six-monthnine-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 ANDERSEN LLP
Detroit, Michigan,
August 9,November 11, 1996.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30 JuneSeptember 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 581655 $ 543 $1,172 $1,083 $2,366 $2,179640 $1,827 $1,723 $2,381 $2,246
Gas utility 207 197 753 679 1,269 1,119123 122 880 801 1,274 1,116
Oil and gas exploration and production 31 24 62 56 114 10032 26 94 82 120 101
Independent power production 37 23 64 46 114 7544 25 108 71 133 87
Natural gas transmission, storage and marketing 77 43 160 81 275 14771 52 231 133 294 171
Other 3 5 6 74 4 10 11 17 1013
------- ------- ------- ------- ------- -------
Total operating revenue 936 835 2,217 1,952 4,155 3,630929 869 3,150 2,821 4,219 3,734
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 70 67 143 134 292 29076 74 219 208 294 284
Purchased power - related parties 146 121 286 245 532 487150 124 436 369 558 492
Purchased and interchange power 44 47 91 83 204 14856 72 147 154 189 182
Cost of gas sold 164 135 574 443 952 733106 93 682 536 967 755
Other 174 162 348 322 724 649189 168 539 491 746 656
------- ------- ------- ------- ------- -------
Total operation 598 532 1,442 1,227 2,704 2,307577 531 2,023 1,758 2,754 2,369
Maintenance 38 45 78 91 173 19142 48 120 139 167 192
Depreciation, depletion and amortization 99 92 223 206 433 39896 322 302 436 410
General taxes 45 42 104 9845 149 143 202 184189
------- ------- ------- ------- ------- -------
Total operating expenses 780 711 1,847 1,622 3,512 3,080763 720 2,614 2,342 3,559 3,160
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 94 83 197 170 389 328126 125 323 295 390 346
Gas utility 22 17 113 108 156 142(1) 2 112 110 153 139
Oil and gas exploration and production 9 7 18 22 26 2610 5 28 27 31 24
Independent power production 2729 13 33 26 53 4262 40 68 48
Natural gas transmission, storage and marketing 8 3 16 6 245 4 21 9 26 10
Other (4) 1 (7)(3) - (10) (2) (5) 3(8) 7
------- ------- ------- ------- ------- -------
Total pretax operating income 156 124 370 330 643 550166 149 536 479 660 574
------- ------- ------- ------- ------- -------
INCOME TAXES 34 25 91 79 141 11232 125 111 143 118
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 122 99 279 251 502 438132 117 411 368 517 456
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 2 3 5 6 117 9 10 12
Accretion expense (7) (8) (14) (16) (29)(7) (21) (23) (28) (32)
Other income taxes, net 4 4 6 53 3 9 8 12 910
Other, net 1 2 4(1) 5 6 7 6 2017
------- ------- ------- ------- ------- -------
Total other income (deductions) (1) (2) - - 1 1 2 - 97
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 59 57 116 113 227 21258 55 174 168 230 218
Other interest 6 4 12 9 30 227 8 19 17 29 25
Capitalized interest (1) (2) (1)(5) (4) (2) (10)(9) (5)
Preferred dividends 7 7 14 1421 21 28 28
Preferred securities distributions 2 - 46 - 46 -
------- ------- ------- ------- ------- -------
Net fixed charges 72 67 142 134 279 25773 68 215 202 284 266
------- ------- ------- ------- ------- -------
NET INCOME $ 5058 $ 3347 $ 138196 $ 119166 $ 223234 $ 190197
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 4961 $ 3348 $ 125186 $ 119167 $ 207220 $ 190198
======= ======= ======= ======= ======= =======
Class G $ 1(3) $ -(1) $ 1310 $ -(1) $ 1614 $ -(1)
======= ======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 89 92 88 92 87 91 8788
======= ======= ======= ======= ======= =======
Class G 8 -7 8 -7 8 -7
======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
CMS Energy $ .65 $ .54 $ .372.02 $ 1.371.90 $ 1.362.39 $ 2.28 $ 2.192.26
======= ======= ======= ======= ======= =======
Class G $ .16(.28) $ -(.17) $ 1.661.38 $ -(.17) $ 2.051.92 $ -(.17)
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .27 $ .24 $ .21.75 $ .48.66 $ .42.99 $ .96 $ .84.87
======= ======= ======= ======= ======= =======
Class G $ .295 $ .28 $ -.855 $ .56.28 $ -1.135 $ 1.12 $ -.28
======= ======= ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 138196 $ 119166 $ 223234 $ 190197
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $24,$37, $38,
$49 and $51, and $49, respectively) 223 206 433 398322 302 436 410
Capital lease and other amortization 22 19 40 42
Debt discount amortization - 16 8 3433 50 44 70
Deferred income taxes and investment tax credit 17 5725 65 35 6360
Accretion expense 14 16 2921 23 28 32
Accretion income - abandoned Midland project (5) (6) (11)(7) (9) (10) (12)
Undistributed earnings of related parties (41) (25) (69) (43)(54) (47) (60) (58)
MCV power purchases - settlement (Note 2) (27) (70) (94) (112)(43) (102) (78) (118)
Other 8 2 13 511 12 6 (30)
Changes in other assets and liabilities 137 71 156 (24)16 (71) 178 26
------ ------ ------ ------
Net cash provided by operating activities 486 405 763 573520 389 813 577
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (251) (280) (506) (587)(430) (380) (585) (540)
Investments in partnerships and unconsolidated subsidiaries (133) (20) (355) (48)(147) (174) (215) (187)
Investments in nuclear decommissioning trust funds (24) (24)(37) (38) (49) (51) (49)
Acquisition of companies, net of cash acquired (20) (156) (10) (156)(147) (19) (147)
Cost to retire property, net (12) (19)(20) (28) (34) (43)(41)
Deferred demand-side management costs (5) (4) (10) (9)
Other - (6) (7) (8) (9)(11)
Proceeds from sale of property 1534 1 36 2055 11
Other 4 (7) (3) (6)
------ ------ ------ ------
Net cash used in investing activities (430) (508) (938) (881)(622) (780) (858) (972)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans and notes 385 162 556 741211 507 733
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 16 15 161 28
Repayment of bank loans (247) (9) (256) (380)29 148 41 154
Increase (decrease) in notes payable, net (233) (30) (201) 180- 135 (133) 74
Repayment of bank loans (264) (14) (268) (344)
Payment of common stock dividends (48) (37) (95) (73)
Payment of capital lease obligations (22) (19) (40) (42)(75) (60) (99) (78)
Retirement of bonds and other long-term debt - (13) (31) (145)(37) (44) (37) (95)
Payment of capital lease obligations (33) (26) (44) (37)
Retirement of common stock - -(1) (1) (1) (1)
------ ------ ------ ------
Net cash provided by (used in) financing activities (52) 69 190 308101 349 63 406
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 4 (34) 15 -(1) (42) 18 11
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 45 4537 26
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 6055 $ 4537 $ 6055 $ 4537
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
JuneSeptember 30 JuneSeptember 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $6,177$6,286 $6,103 $5,899$6,007
Gas 2,3092,363 2,218 2,1462,180
Oil and gas properties (full-cost method) 1,1141,126 1,074 9921,074
Other 9087 105 56
------ ------ ------
9,6909,862 9,500 9,0939,317
Less accumulated depreciation, depletion and amortization 4,8434,936 4,627 4,4934,578
------ ------ ------
4,8474,926 4,873 4,6004,739
Construction work-in-progress 247251 201 264222
------ ------ ------
5,0945,177 5,074 4,8644,961
------ ------ ------
INVESTMENTS
Independent power production 306305 275 286277
Natural gas transmission, storage and marketing 238241 193 42186
First Midland Limited Partnership (Note 2) 228230 225 221222
Midland Cogeneration Venture Limited Partnership (Note 2) 110127 103 9098
Other 8889 22 1721
------ ------ ------
970992 818 656804
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 6055 56 4537
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 290219 296 168202
Inventories at average cost
Gas in underground storage 109250 184 155263
Materials and supplies 82 83 83 7977
Generating plant fuel stock 2328 37 3428
Deferred income taxes 2119 24 2718
Prepayments and other 160132 230 143117
------ ------ ------
746785 910 651742
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 450442 462 469466
Nuclear decommissioning trust funds 339360 304 262283
Abandoned Midland project 122117 131 139135
Other 428418 444 442459
------ ------ ------
1,3391,337 1,341 1,3121,343
------ ------ ------
TOTAL ASSETS $8,149$8,291 $8,143 $7,483$7,850
====== ====== ======
10
JuneSeptember 30 JuneSeptember 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,575$1,619 $1,469 $1,229$1,439
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 3,1162,996 2,906 2,7482,763
Non-current portion of capital leases 9492 106 109101
------ ------ ------
5,2415,163 4,837 4,4424,659
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 131198 207 181207
Notes payable 108 341 309341 474
Accounts payable 287260 306 197214
Accrued taxes 204147 254 147106
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 59 53 5049
Accrued interest 51 45 4032
Accrued refunds 2523 22 3031
Other 181196 192 167172
------ ------ ------
1,1361,365 1,510 1,2161,380
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 646651 640 621628
Postretirement benefits 533528 533 547
Power purchases - settlement (Note 2) 207197 221 269244
Deferred investment tax credits 166163 171 176173
Regulatory liabilities for income taxes, net 5761 44 3338
Other 163 187 179181
------ ------ ------
1,7721,763 1,796 1,8251,811
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,149$8,291 $8,143 $7,483$7,850
====== ====== ======
(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 SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30 JuneSeptember 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 1,7341,967 1,740 1,951 1,701 1,740 1,6881,935 1,694
Common stock reacquired - - - -(1) (1) (1) (1) (1) (1)
Common stock issued:
CMS Energy 7 6 14 39 101 5212 72 26 111 41 117
Class G 1 - 2 - 126 -123 3 123 4 123
Common stock reissued - - -1 - 1 1- 2
------- ------- ------- ------- ------- -------
At end of period 1,967 1,740 1,967 1,740 1,967 1,7401,979 1,935 1,979 1,935 1,979 1,935
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) 1 (8) - 1 (1)(8) -
Change in unrealized investment-
gain (loss) - - - 1 (9) 21 (8) 1 (8)
------- ------- ------- ------- ------- -------
At end of period (7) (8) 1(7) (8) 1(7) (8) 1
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (411) (527)(385) (513) (475) (595) (513) (630)(489) (608)
Net income 50 33 138 119 223 19058 47 196 166 234 197
Common stock dividends declared:
CMS Energy (22) (19) (44) (37) (87) (73)(25) (21) (69) (58) (91) (76)
Class G (2) - (4) -(2) (6) (2) (8) -(2)
------- ------- ------- ------- ------- -------
At end of period (385) (513) (385) (513) (385) (513)(354) (489) (354) (489) (354) (489)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,575 $1,229 $1,575 $1,229 $1,575 $1,229$1,619 $1,439 $1,619 $1,439 $1,619 $1,439
======= ======= ======= ======= ======= =======
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,utilities, commercial
and industrial customers, storage and transmission of natural 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, sixnine and twelve month periods ended JuneSeptember 30,
1996, undistributed equity earnings were $20$13 million, $41$54 million and $69$60
million, respectively and $13$22 million, $25$47 million and $43$58 million for the
three, sixnine and twelve month periods ended JuneSeptember 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 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.
Results of Operations for CMS Midland and CMS Holdings:
In Millions
Summarized Statements of Income
Quarter Nine months 12 months
Periods Ended September 30 1996 1995 1996 1995 1996 1995
Pretax operating income $19 $9 $31 $28 $38 $33
Income taxes and other 6 3 9 8 11 7
--- -- --- --- --- ---
Net income $13 $6 $22 $20 $27 $26
=== == === === === ===
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 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-
taxafter-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
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 the proposed settlement agreement, see Note 3.
At JuneSeptember 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $193$186 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $18$28 million, partially offset by
after-tax accretion expense of $9$12 million. The undiscounted after-tax
amount associated with the liability totaled $578$564 million at JuneSeptember 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 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 believesbelieved this iswas 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.
In November 1996, the Court of Appeals affirmed the MPSC's 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
theCMS Energy's 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 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 induring the thirdfourth 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 decreaseequity.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the 13.25 percent previously authorized.
Consumers filed a petition for rehearing with the MPSC, requesting
reconsiderationoutcome of certain issues. This petition was denied in June 1996.any regulatory proceeding where this
issue has arisen.
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 petitionedand the Michigan Supreme Court later denied the producers' petition
for review. ThisIn September 1996, the producers filed a petition was denied in June 1996.requesting
the U.S. Supreme Court to review the Michigan Supreme Court's decision.
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.
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 that its share of the 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
JuneSeptember 30, 1996, Consumers has accrued $1 million for its estimated
losses.
Under Part 201 of 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 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.DEQ. 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 JuneSeptember 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-upclean-
up costs incurred at these sites and amortizing these costs over 10ten 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-fueledcoal-
fueled electric generating units burn low-sulfur coal and are currently
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$35 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$40 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
$1020$940 million for 1996, $795$925 million for 1997 and $765$900 million for 1998. For
further information regarding capital expenditures, see Forward-Looking
Information in CMS Energy's MD&A.
Other: As of JuneSeptember 30, 1996, CMS Energy or its subsidiaries have
guaranteed up to $104$93 million in contingent obligations of unconsolidated
affiliates and other parties.
In August 1995 CMS Generation was served a complaint, which was filed in a
U.S. District Court in 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 aA number of lawsuits have been filed against itConsumers relating to so-called
stray voltage. Claimants contend that stray voltage results when smalllow-level
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 JuneSeptember 30, 1996, Consumers had 3431 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,
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 file a report on the adequacy of the surcharge revenues with the
MPSC at three-year intervals beginning in 1998. In 1993,Consumers filed its
decommissioning plan for Big Rock with the NRC in 1995. The NRC has
reviewed the plan but does not formally approve decommissioning until
approximately two years before site release.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades. In order to address concerns
raised subsequent toPalisades; however, certain parties, including
the initial cask loading, Consumers andAttorney General, have petitioned the NRC each
analyzedto 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
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,petitions.
Consumers hadhas loaded 13 dry storage casks with spent nuclear fuel at
Palisades. 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. 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 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 12twelve
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 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 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 adopt or
postpone annealing.
6: Supplemental Cash Flow Information
For purposes of theThe Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less are considered cash
equivalents.less. Other cash
flow activities and non-cash investing and financing activities for the
periods ended JuneSeptember 30 were:
In Millions
Six TwelveNine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $ 114176 $ 100159 $ 221224 $ 185195
Income taxes paid (net
of refunds) 45 19 60 3561 25 70 37
Non-cash transactions
Nuclear fuel placed under
capital lease $ 18 $ 2324 $ 410 $ 4227
Other assets placed under
capital leases 1 2 3 4 107
Common Stock issued to
acquire companies - 24 66 2486 4 86
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-registrationshelf registration with the
SEC for the issuance and sale of up to $125 million of GTNs, Series B GTNs, with
net proceeds to be used for general corporate purposes. As of JuneSeptember 30,
1996, CMS Energy had issued and outstanding approximately $250 million of
Series A and $51$82 million of Series B GTNs with weighted-average inter-
estinterest
rates of 7.7 and 8.0 percent, respectively.
In the fourth quarter of 1996, CMS Energy received net proceeds of
approximately $64 million from the issuance of 2.1 million shares of
CMS Energy Common Stock purchased by an underwriter and subsequently sold by
the underwriter in block transactions. The issuance of these shares
completes the remaining amount on a shelf-registration filing by CMS Energy
with the SEC on February 15, 1995 covering the issuance of up to $200
million of securities encompassing Common Stock of CMS Energy. Proceeds
from the sale will be used for general corporate purposes of CMS Energy.
Consumers
In October 1996, Consumers hasreceived FERC authorization to issue or guarantee up to $900
million of short-term debtsecurities through December 31,1998. This is the same amount of
short-term securities authorized through 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.requirements.
At JuneSeptember 30, 1996, a total of $108$340 million was outstanding at a
weighted-average interest rate of 6.16.0 percent, compared with $309$474 million
outstanding at JuneSeptember 30, 1995, at a weighted-average interest rate of
6.76.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At JuneSeptember 30, 1996 and 1995, receivables sold
under the agreement totaled $200 million and $190 million, respectively.$210 million. Accounts receivable and accrued
revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In October 1996, Consumers requested FERC authorization to issue $500
million of long-term securities for refunding purposes. The authorization
would apply to the period from December 1996 through November 1998.
Consumers has been required to seek authorization to issue long-term
securities from the FERC since late 1995, when the Michigan legislature
repealed the MPSC's authority to regulate the issuance of securities. Also
in October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
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-
ferredPreferred
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-
ferredPreferred
Securities.
In September 1996, Consumers extended its nuclear fuel lease an additional
year to November 1998.
CMS NOMECO
In March 1996, CMS NOMECO replaced its $140 million revolving credit
agreement with a $225 million revolving credit agreement. As of JuneSeptember
30, 1996, $123$102 million was outstanding under the new agreement, with a
weight-
ed-averageweighted-average interest rate of 6.46.3 percent.
CMS Generation
In January 1996, CMS Generation refinanced a one-year $118 million bridge
credit facility for the HYDRA-CO acquisition with a $110 million, five-
yearfive-year
term loan. As of JuneSeptember 30, 1996, $67$107 million was outstanding with a
weighted-average interest rate of 7.47.3 percent.
8: Earnings Per Share and Dividends
Earnings (loss) per share attributable to Common Stock, for the twelve month
periodperiods
ended JuneSeptember 30, 1996 reflect the performance of the Consumers Gas Group.
Earnings (loss) per share attributable to Common Stock, for the periods
ended September 30, 1995 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,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 sixnine months ended JuneSeptember 30, 1996, are based on 23.7223.67 percent of the
income of the Consumers Gas Group. Earnings per share forThe seasonal loss attributable to Class
G Common Stock are omitted from the statements of incomeon a per share basis, for the periods reported
prior to the periods ended September 30,
1995, since the Class G Common
Stock was not partis based on 23.17 percent of the equity structureloss of CMS Energy.the Consumers Gas Group. For
purpose of analysis, following are pro forma data for the sixnine months ended
JuneSeptember 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
(repre-
senting(representing 23.50 percent of the equity attributable to the Consumers Gas
Group) on January 1, 1994, and actual data for the sixnine months ended
JuneSeptember 30, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
SixNine Months SixEnded Nine Months Ended Year Ended
Ended Ended
JuneSeptember 30 JuneSeptember 30 December 31
1996 1995 1995
Net Income $ 138196 $ 119166 $ 204
Net Income attributable
to CMS Energy Common Stock $ 125186 $ 107156 $ 189
Net Income attributable
to outstanding Class G
Common Stock $ 1310 $ 1210 $ 15
Average shares outstanding:
CMS Energy Common Stock 91.828 87.45492.001 88.021 88.810
Class G Common Stock 7.662 7.5207.695 7.521 7.536
Earnings per share attributable
to CMS Energy Common Stock $ 1.372.02 $ 1.221.76 $ 2.14
Earnings per share attributable
to outstanding Class G
Common Stock $ 1.661.38 $ 1.631.38 $ 1.93
In February and May 1996, CMS Energy paid a dividend of $.24 per share on
CMS Energy Common Stock and $.28 per share on Class G Common Stock. In
JulyAugust 1996, CMS Energy paid a dividend of $.27 per share on CMS Energy
Common Stock and $.295 per share on Class G Common Stock. In October 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 AugustNovember 1996.
21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in theCMS Energy's 1995 Form 10-K of
CMS Energy.10-
K. 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-
tionsassumptions 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-
arycautionary
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,utilities, commercial
and industrial customers, storage and transmission of natural gas, and
elec-
tricelectric distribution.
Consolidated Earnings for the QuartersPeriods Ended JuneSeptember 30, 1996 and 1995
In Millions, Except Per Share Amounts
Consolidated net income totaled $50 millionEarnings at September 30 1996 1995 Change
Quarter:
Consolidated Net Income $ 58 $ 47 $ 11
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 61 48 13
Class G (3) (1) (2))
Earnings (Loss) Per Average Common Share:
CMS Energy .65 .54 .11
Class G (.28) (.17) (a) (.11)
Nine months:
Consolidated Net Income $ 196 $ 166 $ 30
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 186 167 19
Class G 10 (1) 11
Earnings (Loss) Per Average Common Share:
CMS Energy 2.02 1.90 .12
Class G 1.38 (.17) (a) 1.55
Twelve months:
Consolidated Net Income $ 234 $ 197 $ 37
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 220 198 22
Class G 14 (1) 15
Earnings (Loss) Per Average Common Share:
CMS Energy 2.39 2.26 .13
Class G 1.92 (.17) (a) 2.09
(a) Class G Shares were issued on July 21, 1995. Pro-forma earnings
(loss) per share, assuming Class G shares were outstanding during the
entire period for the second quarter, of 1996
of which $49 million or $.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 second
quarter of 1996.nine month and twelve month
periods ended September 30, 1995, would be $ (.25), $ 1.38 and $ 1.63
respectively.
The increase in consolidated net income for each period in 1996 primarily
reflects the favorable impact of a 1996an electric utility rate increase higherand increased
operating income resulting from a refund received by the MCV Partnership.
As a result, in August 1996, the MCV Partnership recognized a $19 million
reduction to fuel costs in its current operating results. This resulted
in a $6 million earnings benefit in 1996 for CMS Energy. Consolidated net
income was also effected by increased earnings from CMS Gas Transmission's
25 percent ownership interest in TGN. The nine-month and twelve-month
periods in 1996 reflect increased electric sales, gas utilitydeliveries and
revenues from storage facility operations,gas loaning activities. In addition, the nine-month and
twelve-month periods in 1996 reflect 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
CMS 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 gas utility deliveries. Partially
offsetting these benefits was reduced operating income from Consumers'
interest in the MCV Facility during the 1996 period. Earnings per share
attributable to CMS Energy Common Stock for the first six 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
Consolidated net income totaled $223 million for the 12 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, reflects the net income attributable to Class G Common Stock. Class
G Common Stock was issued in the third quarter of 1995.interest. For further
information, see the individual results of operations disclo-
sure insections of this
MD&A.
Cash Position, Investing and Financing
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
consoli-
datedconsolidated cash from operations is derived mainly from Consumers' sale
and transportation of natural gas, itsConsumers' generation, transmission,
and sale of electricity and CMS NOMECO's sale of oil and natural gas.
Consolidated cash from operations totaled $486$520 million and $405$389 million
for the first sixnine months of 1996 and 1995, respectively. The $81$131
million increase resulted from higherincreased electricity sales of utility electricity, improvedand gas utility
deliveries, lower cash losses associated with the PPA, CMS NOMECO's
increased sale of oil and natural gas and changes in the timing of cash
payments related to Consumers' operations. CMS Energy 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.
Investing Activities: Net cash used in investing activities totaled $430$622
million and $508$780 million for the first sixnine months of 1996 and 1995,
respectively. The decrease of $78$158 million primarily reflects the
acquisi-
tionacquisition of HYDRA-CO in the first quarter of 1995 and an increase in
proceeds from the sale of property during 1996. These changes were
partially offset by an increase in 1996 in investments in partnerships and unconsolidated subsid-
iaries.capital expenditures. CMS Energy's
expenditures for its utility and international businesses were $190$314
million and $220$299 million, respectively.
Financing Activities: Net cash provided by (used in) financing activities totaled
$(52)$101 million and $69$349 million for the sixfirst nine months of 1996 and 1995,
respectively. For the six months ended June 30, 1996The net decrease of $248 million primarily reflects an
increase in cash was used for reducing notes payable andto repay bank loans partially offset by increased
proceeds due to refinancing bank loans and wasissuing notes, a decrease in
the sale of Common Stock, and a net decrease in cash received from short
term-borrowings, compared with 1995. These changes were partially offset
by $97 million in proceeds from the sale of Trust Originated Preferred Securities (see
Note 7). in 1996.
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 GTNs, with net proceeds to be used for general corporate
purpos-
es.purposes. As of JuneSeptember 30, 1996, CMS Energy had issued and outstanding
approxi-
matelyapproximately $250 million of GTNs, Series A GTNs and $51$82 million of GTNs, Series B
GTNs with weighted-average interest rates of 7.7 percent and 8.0 percent,
respectively.
In the first quarter of 1996, CMS Generation refinanced the $118 million
bridge credit facility obtained in connection with the acquisition of
HYDRA-CO with a $110 million, five-year term loan. As of JuneSeptember 30,
1996, $67$107 million was outstanding with a weighted-average interest rate
of 7.47.3 percent.
In the first quarter of 1996, CMS NOMECO replaced its $140 million
revolv-
ingrevolving credit agreement with a $225 million revolving credit agreement.
As of JuneSeptember 30, 1996, $123$102 million was outstanding under the new
agreement with a weighted-average interest rate of 6.46.3 percent.
In February and MayThrough September 30, 1996, CMS Energy paid $22$69 million in cash dividends
to holders of CMS Energy Common Stock and $2$6 million in cash dividends to
holders of Class G Common Stock. In October 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 November 1996.
In July 1996, the Board of Directors declared quarterly dividends of $.27
per share on CMS Energy Common Stock and $.295 per share on Class G Common
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 the second quarter of 1996, Consumers declared and paid a $75 million
common dividend to CMS Energy from its first quarter earnings. In Julythe
third quarter of 1996, Consumers declared and paid a $40 million common
dividend to CMS Energy from its second quarter earnings. In October 1996,
Consumers declared a $48 million common dividend to CMS Energy, from its
third quarter earnings, to be paid in AugustNovember 1996. Consumers had
temporarily suspended its common dividends infrom mid-1995 until early 1996
to improve its capital structure.
In Junethe second quarter of 1996, CMS Enterprises declared and paid a common
dividend of $42 million to CMS Energy. In Julythe third quarter of 1996,
CMS Enterprises declared and paid a $48$23 million common dividend to
CMS Energy.
In the fourth quarter of 1996, CMS Energy received net proceeds of
approximately $64 million from the issuance of 2.1 million shares of
CMS Energy Common Stock purchased by an underwriter and subsequently sold
by the underwriter in block transactions. The issuance of these shares
completes the remaining amount on a shelf-registration filing by
CMS Energy with the SEC on February 15, 1995 covering the issuance of up
to $200 million of securities encompassing Common Stock of CMS Energy.
Proceeds from the sale will be paid in August 1996.used for general corporate purposes of
CMS Energy.
Other Investing and Financing Matters: CMS Energy has available,
unse-
cured,unsecured, committed lines of credit totaling $105 million and a $450
million credit facility. At JuneSeptember 30, 1996, CMS Energy had utilized a
total of $233$179 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
JuneSeptember 30, 1996, Consumers had a total of $108$340 million outstanding
under these facilities. In October 1996, Consumers hasreceived FERC
authorization to issue or guarantee
up to $900 million inof short-term debtsecurities through
December 31,1998. This is the same amount of short-term securities authorized through
1996. Consum-
ersConsumers 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 JuneSeptember 30, 1996 and
1995, receivables sold totaled $200$210 million. In October 1996, Consumers
requested FERC authorization to issue $500 million and $190of long-term securities
for refunding purposes. Also in October 1996, Michigan Gas Storage
entered into a $23 million respectively.secured, variable rate, seven-year term loan.
At JuneSeptember 30, 1996 the book value per share for CMS Energy Common Stock
was
$16.11 and $11.66 for Class G Common Stock.Stock was $16.57 and $11.07, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the Periods Ended September 30, 1996
and 1995:
In Millions
Pretax Operating Income
Quarter ended 6Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $(12) $ - $ 9 $ 64(3) $11
Rate increases and other
regulatory issues 11 18 1813 32 32
Operations and maintenance 5- 8 412
General taxes and depreciation (5) (10) (27)(1) (12) (19)
Other - 2 21 3 8
----- --- ---
----
Total change $11 $27 $ 611 $28 $44
===== === === ====
Electric Sales: Total electric sales increased for the quarter ended (4.6(2.7
percent), sixnine months ended (4.3(3.7 percent), and 12twelve months ended
JuneSeptember 30, 1996 (4.1(3.4 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 SixSept. 30 Nine months ended JuneSept. 30 12 months ended JuneSept. 30
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
Residential 2.4 2.42.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7 - 5.4 5.1 0.3 11.0 10.2 0.8
Commercial 2.4 2.3 0.1 4.8 4.67.5 7.3 0.2 9.8 9.3 0.59.5 0.3
Industrial 3.4 3.2 3.20.2 9.5 9.5 - 6.1 6.3 (0.2) 12.512.7 12.6 (0.1)0.1
Other 0.9 0.6 0.3 1.6 1.2 0.4 2.9 2.7 0.22.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 8.9 8.5 0.4 17.9 17.2 0.7 36.2 34.8 1.49.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === === ==== ==== === ==== ==== ===
Power Costs:
In Millions
Power costs totaled $260 million and $235 million for the
quarters ended JuneCosts at September 30 1996 and 1995 respectively.Change
Quarter $ 282 $270 $ 12
Nine months 802 731 71
Twelve months 1,041 958 83
The $25 million
increaseincreases in each period resulted 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-
taxafter-tax cash underrecoveries
totaled $18$28 million for the first sixnine 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-
mentsettlement 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-
tioninformation
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-
dressedaddressed
in connection with its consideration of the proposed settlement agreement
discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settle-
mentsettlement 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 induring the thirdfourth 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-
catereallocate
certain portions of its utility plant from production to transmis-
sion,transmission,
resulting in a $28 million decrease in depreciation expense associ-
atedassociated with
this transfer. If the MPSC approves both aspects of the re-
quest,request, 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: CMS Energy and Consumers estimate capital
expenditures, including new lease commitments, related to its electric
utility operations of $315 million for 1996, $300 million for 1997 and
$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.
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 late 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
ThePart 201 of 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-
ouslypreviously
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-
ingincluding
a cask in which a minor flaw has been detected. For further informa-
tion,information,
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 adopt or postpone annealing.
Stray Voltage: Consumers has experienced aA number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock. At
JuneSeptember 30, 1996, Consumers had 3431 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,
liquidity or results of operations.
Consumers Gas Group Results of Operations
In Millions
Pretax Operating Income
Quarter ended SixNine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $ 23 $ 51$24 $50
Reversal of gas contingencies - (23) (34)(23)
Recovery of gas costs and
other regulatory issues 2 3 1 3
Gas storage facility
operations 4loaning activities - 7 7
Operations and maintenance (2) 2(6) (5) (16)
General taxes and depreciation (1) (5) (8)- (4) (7)
--- ---- ------- ---
Total change $(3) $ 5 $ 5 $ 142 $14
=== ==== ======= ===
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, increaseddecreased for the quarter ended (2.8(5.1 percent), sixbut increased for
the nine months ended (11.3(8.9 percent), and 12 monthstwelve-months ended JuneSeptember 30,
1996 (15.9(14.2 percent) overwhen compared with the comparablecorresponding 1995 periods. The
increased deliveries reflect growth result-
ingresulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the sixnine months ended and 12 monthstwelve-months ended
JuneSeptember 30, 1996, colder temperatures. Although the industrial sector,
for the nine months ended September 30, 1996, accounted for approximately
20% of total deliveries, it contributed almost 40% of the weather-adjusted
growth. The table below indicates total system deliveries and the impact of
weather on the
sixweather:
In Bcf
Gas Deliveries
Nine months ended and 12 months ended
JuneSept. 30 1996 and 1995.
In bcf
Gas Deliveries
Six months ended June 12 months ended JuneSept. 30
1996 1995 Var. 1996 1995 Var.
Weather-adjusted deliveries 204.0 192.1 11.9 337.9 319.4 18.5234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth)
Impact of weather 6.8 (2.7) 9.5 18.2 (12.1) 30.36.6 (2.1) 8.7 17.4 (10.5) 27.9
----- ----- ---- ----- ----- ----
System deliveries
excluding transport
to MCV 210.8 189.4 21.4 356.1 307.3 48.8241.1 221.4 19.7 354.5 310.5 44.0
Transport to MCV 33.0 26.4 6.6 60.3 63.4 (3.1)48.6 39.9 8.7 62.4 58.2 4.2
----- ----- ---- ----- ----- ----
Total system deliveries 243.8 215.8 28.0 416.4 370.7 45.7289.7 261.3 28.4 416.9 368.7 48.2
===== ===== ==== ===== ===== ====
Cost of Gas Sold:
In Millions
Cost of Gas Sold at September 30 1996 1995 Change
Quarter $ 51 53 $ (2)
Nine months 504 435 69
Twelve months 740 622 118
The cost of gas sold totaled $106 million and $102
millionincreases for the second quarters of 1996nine-month and 1995, respectively. The
increase of $4 million wastwelve-month periods were 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.
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 filed a petition for rehearing with the MPSC, request-
ingrequesting
reconsideration of certain issues. This petition was denied in June 1996.1996
and the matter is now closed.
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:loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers estimates capital expenditures,
including new lease commitments, relatedstrongly disagrees with this suggestion
but is unable to its gas utility operationspredict the outcome 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.any regulatory proceeding where this
issue has arisen.
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 JuneSeptember 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-
talenvironmental
clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continu-
ingcontinuing
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.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months ended
JuneSeptember 30, 1996 increased $2$5 million over the comparable period in 1995,
primarily reflecting higher oil and gas volumesprices and prices.higher gas volumes.
Pretax operating income for the sixnine months ended JuneSeptember 30, 1996
decreased $4increased $1 million and forfrom the twelve months ended June 30, 1996 remained unchanged
over the comparable periodssame period in 1995, primarily due to higher
oil and gas prices and volumes, mostly offset by the recognition of a $9.9
million gain from assignment and novation of a gas supply contract recorded
in the first quarter of 1995. Pretax operating income for the twelve months
ended September 30, 1996 increased $7 million from the 12 months ended
September 30, 1995, primarily due to higher sales volumes and prices,
partially offset by higherthe gain from the assignment and novation of a gas
supply contract.
Capital Expenditures: Capital expenditures during 1996 relate primarily to
the development of existing 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.reserves.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three, sixnine and
twelve months ended JuneSeptember 30, 1996 increased $14$16 million, $7$22 million
and $11$20 million, respectively, over the comparable periods in 1995,
primarily reflecting a gain resulting fromon the sale of a power purchase agreement by a
partnership in which CMS Generation owns a 50 percent ownership interest, partially offset fora gain on
the six month periodsale of a partnership interest and increased operating income resulting
from a refund received by reducedthe MCV earnings.Partnership.
Capital Expenditures and Other: In the second quarter of 1996,
CMS Generation commenced construction of the La Plata Cogeneration Pro-
ject,Plant, 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 completecompleted 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-
tionoperation 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
bytargeted
for year end 1996, 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.percent. 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. Capital markets
financing is targeted for early 1997.
During August 1996, CMS Energy currently plans to invest $575 million relating to its indepen-
dentGeneration's GVK Industries independent power
production operationsproject in Jegurupadu, Andhra Pradesh, India began generating electricity
from 1996 to 1998.the plant's first gas-fueled turbine. CMS Generation will
pursue acquisitionsholds a 25.25
percent interest in, and developmentoperates, the 235 MW plant. Construction is
continuing on two additional gas turbines and one steam turbine unit of electric generating plants in the
United States, Latin America, southern Asia, the Pacific Rim regioncombined cycle facility with an estimated total cost of $260 million. The
project has received a Government of India counter-guarantee and North Africa.expects to
complete international financing during late 1996 or early 1997.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three, sixnine and
twelve months ended JuneSeptember 30, 1996 increased $5$1 million, $10$12 million and
$15$16 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 GrandGrands 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: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total approximately $2.6$2.8 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. CMS Energy estimates the
following capital expenditures by business segment over the next three
years:
In Millions
Years Ended December 31 1996 1997 1998
Electric utility $ 315 $ 300 $ 305(a) $315 $260 $275
Gas utility 130 120(a) 135 110 100
Oil and gas exploration and production 120 135 150
Independent power production 250 175 150164 162 162
Natural gas transmission, storage
and marketing 140 65 5058 113
International electric distribution 65 - -66 200 100
---- ---- ----
$1,020 $ 795 $ 765
===== ===== =====$940 $925 $900
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and
gas utility businesses.
CMS Energy currently plans to invest $405 million from 1996 to 1998 in its
oil and gas exploration and production operations which will be concentrated
in North and South America and offshore west Africa. CMS Energy also plans
to invest $488 million relating to its independent power production
operations from 1996 to 1998 to pursue acquisitions and development of
electric generating plants in the United States, Latin America, southern
Asia, the Pacific Rim region and North Africa. An investment of $311 million
from 1996 to 1998, relating to non-utility gas operations, is planned to
continue 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.
These estimates are estimates prepared for planning purposes and are subject to
revision.
For a breakdown of projected capital expen-
ditures see the individual capital expenditures disclosure within this
MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growthThe Governor of the State of
Michigan has requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities 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 bylight of increasing
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.utility industry. 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 earlyApril 1996, the MPSC significantly reduceddirected
Consumers, Detroit Edison, and other electric utilities to file applications
addressing the rate subsidizationrecommendation of residential customers bythe Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and large
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. In addition to offering electric rates that are
competitive with other energy providers,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, 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 expectJobs Commission have continued to meet for the purpose of confirming
the principles, such as full recovery of stranded costs in the event of
expanded choice by retail customers, upon which a new regulatory and
statutory framework for the electric utility business in Michigan would be
based. Once established, those principles could in turn form the basis for
definitive agreements, filings with the MPSC, and revised statutes. These
parties are hopeful that the principles and definitive agreements would
receive the support of other interested parties such as the MPSC staff.
There can be no assurance that the necessary agreements will be reached,
that regulatory approvals will be granted, and that necessary legislation
will be passed, nor can a definitive timetable be established at this short-term
experiment to have a material impact on its financial position, liquidity
or resultstime
for realization of operations.these events.
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 ofConsumers currently expects approximately 2 percent average annual growth in
electric system sales over the State of Michigan has requested thatnext five years. Actual electric sales in
future periods may be affected by abnormal weather, changing economic
conditions, or the MPSC review
the existing statutory and regulatory framework governing Michigan utili-
ties in light of increasingdeveloping competitive market for electricity as
discussed below.
Consumers' retail service is affected by competition in several areas,
including the utility industry. In Aprilinstallation 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 of facilities or
production to their service areas. Consumers continues to work toward
retaining its current retail service customers.
As part of an order issued in early 1996, the MPSC directedsignificantly reduced the
rate subsidization of residential customers by industrial and large
commercial customers. In addition, 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 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.
In addition to offering electric rates that are competitive with those of
other energy providers, Consumers is pursuing numerous other strategies to
retain its other large customers. These strategies include improving
reliability, power quality and customer communications, and providing
consulting services to help customers use energy efficiently. Consumers is
also taking steps to prepare for a future environment in which open access
is the predominant means by which large industrial and commercial customers
provide for their power requirements.
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 otherthe 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 July 1996, an electric utilitiesmarketer filed applications with the MPSC for
approval to file applications addressingsell 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 recommendationtransactions requested by this electric
marketer to take place. Consumers intends to vigorously oppose the creation
of any such program before the Michigan Jobs Commission to allow a choiceMPSC and in the courts; however, Consumers
cannot predict the ultimate outcome 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 that will further define a new electric
and gas utility regulatory framework for Michigan.this matter.
SFAS 71 allows the deferral of certain costs and the recording of regula-
toryregulatory
assets. Management has evaluated Consumers' current regulatory position and
believes it continues to support the recognition of Consumers' electric-relatedelectric-
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 maymight 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-
relatedelectric-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)deliveries) 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 1995,1996, the Low Income Home Energy Assistance Program provided approxi-
mately $71$58 million
in heating assistance to about 400,000 Michigan house-
holds,households, with approximately 1819 percent
of funds going to Consumers' custom-
ers. In late 1995, federalcustomers. Federal legislative approval
provided Michigan resi-
dentsresidents with approximately $60$55 million of funding for 1996.1997. Consumers
cannot predict what level of funding will be approved fortherefore does not anticipate a significant change in its revenues from this
program in 1997.
In JanuaryOctober 1996, the MPSC issued a notice of legislative-type hearingsan order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines. These
pilot programs, which are to be heldimplemented in 1996,the second quarter of 1997,
are intended to assesshelp the MPSC determine whether it is appropriate to allow
all natural
gas customers access to the competitive 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.market.
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-
ryregulatory assurance
exists to provide for the recovery of these deferred costs.
3436
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 JuneSeptember 30, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month, six-monthnine-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-
duresprocedures 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,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
subsid-
iariessubsidiaries 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,November 11, 1996.
3537
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30 JuneSeptember 30
1996 1995 1996 1995 1996 1995
In Millions
OPERATING REVENUE
Electric $ 581655 $ 543 $1,172 $1,083 $2,366 $2,179640 $1,827 $1,723 $2,381 $2,246
Gas 207 197 753 679 1,269 1,119123 122 880 801 1,274 1,116
Other 920 10 13 21 31 33 30 41 36
---------------------------------------------------------
Total operating revenue 797 750 1,938 1,783 3,666 3,331798 772 2,740 2,554 3,696 3,398
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 70 67 143 134 292 29076 74 219 208 294 284
Purchased power - related parties 146 121 286 245 532 487150 124 436 369 558 492
Purchased and interchange power 44 47 91 83 204 14856 72 147 154 189 182
Cost of gas sold 106 102 451 383 739 61751 53 504 435 740 622
Other 144 139 279 276 594 576154 142 435 419 607 573
---------------------------------------------------------
Total operation 510 476 1,250 1,121 2,361 2,118487 465 1,741 1,585 2,388 2,153
Maintenance 37 45 76 89 170 18741 47 117 136 164 188
Depreciation, depletion and amortization 82 79 190 181 367 34783 81 273 262 369 354
General taxes 42 41 99 95 193 17943 43 141 138 192 183
---------------------------------------------------------
Total operating expenses 671 641 1,615 1,486 3,091 2,831654 636 2,272 2,121 3,113 2,878
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 94 83 197 170 389 328126 125 323 295 390 346
Gas 22 17 113 108 156 142(1) 2 112 110 153 139
Other 1019 9 13 19 30 3033 28 40 35
---------------------------------------------------------
Total pretax operating income 126 109 323 297 575 500144 136 468 433 583 520
INCOME TAXES 34 28 95 85 156 12538 36 134 121 158 132
---------------------------------------------------------
NET OPERATING INCOME 92 81 228 212 419 375106 100 334 312 425 388
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 9 813 13 17 17
Accretion income 2 3 5 6 117 9 10 12
Accretion expense (7) (8) (14) (16) (29)(7) (21) (23) (28) (32)
Other income taxes, net 4 3 7 63 9 9 13 11
Other, net - 1 - 31 2 1 11
---------------------------------------------------------
Total other income 3 3 7 7 142 4 9 10 13 19
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 35 36 69 71104 106 139 139140
Other interest 3 4 6 9 21 215 7 11 16 19 24
Capitalized interest - (1) (1) (1) (1)(2) (2) (3) (1)(2)
---------------------------------------------------------
Net interest charges 37 39 74 79 157 15941 113 120 155 162
---------------------------------------------------------
Net Income 58 45 161 140 276 23569 63 230 202 283 245
Preferred Stock Dividends 7 7 14 1421 21 28 28
Preferred Securities Distribution 2 - 46 - 46 -
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 4960 $ 3856 $ 143203 $ 126181 $ 244249 $ 207217
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3638
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 161230 $ 140202 $ 276283 $ 235245
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $24,$37, $38,
$49 and $51, and $49, respectively) 190 181 367 347273 262 369 354
Capital lease and other amortization 21 19 40 4232 27 44 38
Deferred income taxes and investment tax credit 25 42 4027 52 32 52
Accretion expense 14 16 2921 23 28 32
Accretion income - abandoned Midland project (5) (6) (11)(7) (9) (10) (12)
Undistributed earnings of related parties (12) (18) (30) (31)(28) (39) (35)
MCV power purchases - settlement (Note 2) (27) (70) (94) (112)(43) (102) (78) (118)
Other 3 24 4 5 4
Changes in other assets and liabilities 83 38 128 15(49) (113) 148 6
------ ------ ------ ------
Net cash provided by operating activities 453 344 750 572458 318 782 566
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (184) (175) (423) (427)(298) (278) (434) (411)
Investments in nuclear decommissioning trust funds (24) (24)(37) (38) (49) (51) (49)
Cost to retire property, net (12) (19)(20) (28) (34) (43)(41)
Deferred demand-side management costs (5) (4) (10) (9)(6) (7) (8) (11)
Proceeds from sale of property - 1 1 124
Other 2 (5) 1 (5)
------ ------ ------ ------
Net cash used in investing activities (223) (226) (516) (521)(359) (355) (523) (515)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (114) (70) (114) (133)
Retirement of bonds and other long-term debt (37) (1) (37) (1)
Payment of capital lease obligations (32) (26) (43) (37)
Payment of preferred stock dividends (21) (21) (28) (28)
Preferred securities distributions (6) - (6) -
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) -(1) 135 (134) 74
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)(328)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash used inprovided by (used in) financing activities (237) (133) (237) (54)(101) 17 (252) (53)
------ ------ ------ ------
NET DECREASEINCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (7) (15) (3) (3)(2) (20) 7 (2)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 135 7
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 712 $ 105 $ 712 $ 105
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3739
Consumers Power Company
Consolidated Balance Sheets
JuneSeptember 30 JuneSeptember 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $6,177$6,286 $6,103 $5,899$6,007
Gas 2,2292,268 2,169 2,0972,132
Other 2625 30 30
-----------------------------------
8,4328,579 8,302 8,0268,169
Less accumulated depreciation, depletion and amortization 4,2764,354 4,090 3,9684,041
-----------------------------------
4,1564,225 4,212 4,0584,128
Construction work-in-progress 226194 190 263217
-----------------------------------
4,3824,419 4,402 4,3214,345
-----------------------------------
INVESTMENTS
Stock of affiliates 340338 337 321326
First Midland Limited Partnership (Note 2) 228230 225 221222
Midland Cogeneration Venture Limited Partnership (Note 2) 110127 103 9098
Other 98 7 8
-----------------------------------
687703 672 640654
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 712 14 105
Accounts receivable and accrued revenue, less
allowances of $2, $3 and $3, respectively (Note 7) 10464 137 8378
Accounts receivable - related parties 2627 10 49
Inventories at average cost
Gas in underground storage 109250 184 155263
Materials and supplies 7371 72 7573
Generating plant fuel stock 2328 37 3428
Postretirement benefits 25 25 25
Deferred income taxes 2221 26 2820
Prepayments and other 11281 181 10277
-----------------------------------
501579 686 561618
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 450442 462 469466
Nuclear decommissioning trust funds 339360 304 262283
Abandoned Midland Project 122117 131 139135
Other 288278 297 315316
-----------------------------------
1,1991,197 1,194 1,1851,200
-----------------------------------
TOTAL ASSETS $6,769$6,898 $6,954 $6,707$6,817
===================================
3840
JuneSeptember 30 JuneSeptember 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 3130 29 1922
Retained earnings since December 31, 1992 305326 237 136191
-----------------------------------
1,6811,701 1,598 1,4871,545
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,9251,876 1,922 1,9551,921
Non-current portion of capital leases 9289 104 109101
-----------------------------------
4,1544,122 3,980 3,9073,923
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 8397 90 4988
Notes payable 340 341 474
Accounts payable 170161 207 158133
Accrued taxes 15196 225 130
Notes payable 108 341 30973
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 65 56 53
Accrued interest 3728 32 3426
Accrued refunds 2523 22 3031
Other 165173 178 156161
-----------------------------------
8941,073 1,241 1,0141,134
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 620618 605 594593
Postretirement benefits 514509 517 534
Power purchases - settlement (Note 2) 207197 221 269244
Deferred investment tax credit 164162 169 174172
Regulatory liabilities for income taxes, net 5761 44 3338
Other (Note 4) 159156 177 182179
-----------------------------------
1,7211,703 1,733 1,7861,760
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,769$6,898 $6,954 $6,707$6,817
===================================
(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.
3941
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended SixNine Months Ended Twelve Months Ended
JuneSeptember 30 JuneSeptember 30 JuneSeptember 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 1731 19 29 15 19 1222 14
Change in unrealized investment-gain 2 2 2 4 12(loss) (1) 3 1 7 8 8
---------------------------------------------------------
At end of period 31 19 31 19 31 1930 22 30 22 30 22
---------------------------------------------------------
RETAINED EARNINGS
At beginning of period 331 168305 135 237 80 136 93191 107
Net income 58 45 161 140 276 23569 63 230 202 283 245
Common stock dividends declared (75)(39) - (114) (70) (75) (70) (75) (164)(114) (133)
Preferred stock dividends declared (7) (7) (14) (14)(21) (21) (28) (28)
Preferred securities distributions (2) - (4)(6) - (4)(6) -
---------------------------------------------------------
At end of period 305 136 305 136 305 136326 191 326 191 326 191
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,681 $1,487 $1,681 $1,487 $1,681 1,487$1,701 $1,545 $1,701 $1,545 $1,701 $1,545
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4042
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-
edcontracted 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,Consumers, 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.
Results of Operations for CMS Midland and CMS Holdings:
In Millions
Summarized Statements of Income
Quarter Nine months 12 months
Periods Ended September 30 1996 1995 1996 1995 1996 1995
Pretax operating income $19 $9 $31 $28 $38 $33
Income taxes and other 6 3 9 8 11 7
--- -- --- --- --- ---
Net income $13 $6 $22 $20 $27 $26
=== == === === === ===
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-
edestimated
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-
mentassessment
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-
lymaterially differs from the
1992 estimates. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settle-
mentSettlement 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-
mentsettlement 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-
tioninformation
regarding the proposed settlement agreement, see Note 3.
At JuneSeptember 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $193$186 million and $202 million,
respec-
tively.respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $18$28 million, partially offset by
after-
taxafter-tax accretion expense of $9$12 million. The undiscounted after-tax
amount associated with the liability totaled $578$564 million at JuneSeptember 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-
edprovided
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 believesbelieved this iswas 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.
In November 1996, the Court of Appeals affirmed the MPSC's 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-
erationconsideration 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-
ersConsumers
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
theConsumers' MD&A.
In September 1995, Consumers and the MPSC staff reached a proposed
settle-
mentsettlement 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-
aryFebruary
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-
itivecompetitive services and depreciation rate cases; implement a limited direct
access program; and accelerate recovery of nuclear plant investment.
Consumers expects a final order induring the thirdfourth 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-
ingincluding
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
decreaseequity.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the 13.25 percent previously authorized. Consumers filed a
petition for rehearing with the MPSC, requesting reconsiderationoutcome of certain issues. This petition was denied in June 1996.any regulatory proceeding where this
issue has arisen.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intra-
stateintrastate 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 petitionedand the Michigan Supreme Court later denied the producers' petition
for review. ThisIn September 1996, the producers filed a petition was denied in June 1996.requesting
the U.S. Supreme Court to review the Michigan Supreme Court's decision.
In October 1995, the MPSC issued an order regarding a $44 million (exclud-
ing(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
subse-
quentlysubsequently 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-
ousnumerous
credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based upon past
negoti-
ations,negotiations, Consumers estimates that its share of the 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
JuneSeptember 30, 1996, Consumers has accrued $1 million for its estimated
losses.
Under Part 201 of 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/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.DEQ. 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 JuneSeptember 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-upclean-
up costs incurred at these sites and amor-
tizingamortizing these costs over 10ten 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-fueledcoal-
fueled electric generating units burn low-sulfur coal and are cur-
rentlycurrently
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$35 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$40 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$450 million for 1996, $420$370 million for 1997, and
$415$375 million for 1998. For further information regarding capital
expenditures, see Forward-Looking Information in Consumers' MD&A.
Other: Consumers has experienced aA number of lawsuits have been filed against itConsumers relating to
so-called stray voltage. Claimants contend that stray voltage results when
smalllow-level 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,necessary, modifying the
grounding of the customer's service. At JuneSeptember 30, 1996, Consumers had
3431 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,Consumers filed its
decommissioning plan for Big Rock with the NRC in 1995. The NRC has
reviewed the plan but does not formally approve decommissioning until
approximately two years before site release.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades. In order to address concerns
raised subsequent toPalisades; however, certain parties, including
the initial cask loading, Consumers andAttorney General, have petitioned the NRC each
analyzedto 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
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,petitions.
Consumers hadhas loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, Consum-
ersConsumers 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-
aladditional 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 12twelve
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-
mentsassessments 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 adopt or
postpone annealing.
6: Supplemental Cash Flow Information
For purposes of theThe Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less are considered cash
equivalents.less. Other cash
flow activities and non-cash investing and financ-
ingfinancing activities for the
periods ended JuneSeptember 30 were:
In Millions
SixNine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $ 65 $ 77 $146 $151$111 $125 $145 $155
Income taxes paid (net
of refunds) 74 46 71 25105 72 76 41
Non-cash transactions
Nuclear fuel placed under
capital lease $ 18 $ 2324 $ 410 $ 4227
Other assets placed under
capital leases 1 2 3 4 107
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
In October 1996, Consumers hasreceived FERC authorization to issue or guarantee up to $900
million of short-term debtsecurities through December 31,1998. This is the same amount of
short-term securities authorized through 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.requirements.
At JuneSeptember 30, 1996, a total of $108$340 million was outstanding at a
weighted-average interest rate of 6.16.0 percent, compared with $309$474 million
outstanding at JuneSeptember 30, 1995, at a weighted-average interest rate of
6.76.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At JuneSeptember 30, 1996 and 1995, receivables sold
under the agreement totaled $200 million and $190 million, respectively.$210 million. Accounts receivable and accrued
revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In October 1996, Consumers requested FERC authorization to issue $500
million of long-term securities for refunding purposes. The authorization
would apply to the period from December 1996 through November 1998.
Consumers has been required to seek authorization to issue long-term
securities from the FERC since late 1995, when the Michigan legislature
repealed the MPSC's authority to regulate the issuance of securities. Also
in October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
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-
ferredPreferred
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-
ferredPreferred
Securities.
In JulySeptember 1996, Consumers extended its nuclear fuel lease an additional
year to November 1998.
In October 1996, Consumers declared a $40$48 million common dividend to be paid
in AugustNovember 1996.
Also in July 1996, Consumers redeemed $36 million of maturing first
mortgage bonds.
4750
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in theConsumers' 1995 Form 10-K of
Consumers.10-K.
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-
tionsassumptions 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-
arycautionary
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 QuartersPeriods Ended JuneSeptember 30, 1996 and 1995
In Millions
Consolidated net income after dividends and distributions on preferred
securities totaled $49 million and $38 million forEarnings at September 30 1996 1995 Change
Quarter $ 60 $ 56 $ 4
Nine months 203 181 22
Twelve months 249 217 32
The earnings in each period in 1996 reflect the second quarters of
1996 and 1995, respectively. The $11 million increase primarily reflects
thefavorable impact of a 1996an
electric rate increase received in February 1996. The nine-month and
twelve-month periods in 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
higherreflect increased 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 storagegas loaning activities. In addition, other
operating income increased for all periods in 1996 due to a FERC-ordered
refund received by the MCV Partnership from a gas pipeline supplier. The
FERC Order required combining the capital cost of common-use facility
operations.additions with the cost of existing common-use facilities for the purpose
of determining the gas transportation rates to be charged to all system
shippers, including the MCV Facility. As a result, in August 1996, the
MCV Partnership recognized a $19 million reduction to fuel costs in its
current operating results. This resulted in a $6 million earnings benefit
in 1996 for Consumers. 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$458 million and $344$318 million for the first
sixnine months of 1996 and 1995, respectively. The $109$140 million increase
resulted from higherincreased electricity sales of electricity, improvedand 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$359
million and $226$355 million for the first sixnine 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$101
million for the sixfirst nine months of 1996, and 1995, respective-
ly.compared with $17 million
provided by financing activities for the corresponding period in 1995.
The net increase of $104 million reflects an additional $203$118 million in cash used to reducein 1996 reflects an
additional $44 million in common dividends paid, the redemption of $36
million of maturing first mortgage bonds, and a net decrease of $136
million in cash received from short-term borrowings compared with 1995.
These changes were partially offset by $97 million in proceeds from the
sale of Trust Originated Preferred Securities (see Note 7). in 1996.
In JulyOctober 1996, Consumers declared a $40$48 million common dividend to be
paid in AugustNovember 1996. Consumers had temporarily suspended its common
dividends infrom mid-1995 until early 1996 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 JuneSeptember 30, 1996, Consumers had a
total of $108$340 million outstanding under these facilities. In October
1996, Consumers hasreceived FERC authorization to issue or guarantee up to $900 million inof
short-term debtsecurities through December 31,1998. This is the same amount of short-term
securities authorized through 1996. Consumers uses short-term borrowings
to finance working capital and gas in storage, and to pay for capital
expen-
dituresexpenditures between long-term financings. Consumers has an agreement
permit-
tingpermitting the sales of certain accounts receivable for up to $500
million. At JuneSeptember 30, 1996 and 1995, receivables sold totaled $200$210
million. In October 1996, Consumers requested FERC authorization to issue
$500 million and $190of long-term securities for refunding purposes. Also in
October 1996, Michigan Gas Storage entered into a $23 million respectively.secured,
variable rate, seven-year term loan.
Electric Utility Results of Operations
Electric Pretax Operating Income for the QuartersPeriods Ended JuneSeptember 30, 1996
and 1995:
In Millions
Electric Pretax Operating
Income at September 30 1996 1995 Change
Quarter $ 126 $ 125 $ 1
Nine months 323 295 28
Twelve months 390 346 44
Electric pretax operating income totaled $94 millionin each period in 1996 reflects the
favorable impact of an electric rate increase received in February 1996.
The nine-month and $83 million
fortwelve-month periods also reflect the second quartersbenefit of
1996 and 1995, respectively. The $11 million
increase resulted primarily from an increase in electric rates in early
1996, higher electricincreased sales and lower operation and maintenance costs
during the second quarter of 1996. Partially offsetting these benefitsexpenses. The increases in each
period were partly offset by decreased revenues due to special contract
discounts given tonegotiated with large industrial customers and higherincreased
depreciation and general taxes in 1996.
Electric Pretax Operating Incomeoperation expenses, and, for the Six Months Ended June 30, 1996nine-month 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 oftwelve-
month periods, 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.taxes. The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:these
impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended SixNine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $(12) $ - $ 9 $ 64(3) $11
Rate increases and other
regulatory issues 11 18 1813 32 32
Operations and maintenance 5- 8 412
General taxes and
depreciation (5) (10) (27)(1) (12) (19)
Other - 2 21 3 8
----- --- ---
----
Total change $11 $27 $ 611 $28 $44
===== === === ====
Electric Sales: Total electric sales increased for the quarter ended (4.6(2.7
percent), sixnine months ended (4.3(3.7 percent), and 12twelve months ended
JuneSeptember 30, 1996 (4.1(3.4 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 SixSept. 30 Nine months ended JuneSept. 30 12 months ended JuneSept. 30
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
Residential 2.4 2.42.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7 - 5.4 5.1 0.3 11.0 10.2 0.8
Commercial 2.4 2.3 0.1 4.8 4.67.5 7.3 0.2 9.8 9.3 0.59.5 0.3
Industrial 3.4 3.2 3.20.2 9.5 9.5 - 6.1 6.3 (0.2) 12.512.7 12.6 (0.1)0.1
Other 0.9 0.6 0.3 1.6 1.2 0.4 2.9 2.7 0.22.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 8.9 8.5 0.4 17.9 17.2 0.7 36.2 34.8 1.49.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === === ==== ==== === ==== ==== ===
Power Costs:
In Millions
Power costs totaled $260 million and $235 million for the
quarters ended JuneCosts at September 30 1996 and 1995 respectively.Change
Quarter $ 282 $270 $ 12
Nine months 802 731 71
Twelve months 1,041 958 83
The $25 million
increaseincreases in each period resulted 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-
taxafter-tax cash underrecoveries
totaled $18$28 million for the first sixnine 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-
mentsettlement 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-
tioninformation
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-
dressedaddressed
in connection with its consideration of the proposed settlement agreement
discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settle-
mentsettlement 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 induring the thirdfourth 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-
catereallocate
certain portions of its utility plant from production to transmis-
sion,transmission,
resulting in a $28 million decrease in depreciation expense associ-
atedassociated with
this transfer. If the MPSC approves both aspects of the re-
quest,request, 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 late 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
ThePart 201 of 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-
ouslypreviously
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-
ingincluding
a cask in which a minor flaw has been detected. For further informa-
tion,information,
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 adopt or postpone annealing.
Stray Voltage: Consumers has experienced aA number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock. At
JuneSeptember 30, 1996, Consumers had 3431 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 QuartersPeriods Ended JuneSeptember 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.In Millions
Gas Pretax Operating Income for the Six Months Ended June(Loss)
at September 30 1996 and
1995: Gas pretax operating income totaled $113 million and $108 million
for the six1995 Change
Quarter $ (1) $ 2 $ (3)
Nine months 112 110 2
Twelve months 153 139 14
The quarter ended JuneSeptember 30, 1996 reflects lower deliveries and 1995, respectively.higher
operating costs. The $5
million increase reflectsnine-month and twelve-month periods ended in 1996
benefited from increased gas deliveries due to growth and colder weather,
and revenues from gas loaning activities. During the same benefits as described for the quarter-
ended period. These benefits were partially offset by the benefitcomparable periods in
1995,
resulting from the reversal of a previously recorded gas contract contin-
gencycontingency (see Note 3) was
reversed, and higheroperation, 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.lower.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended June 30:these impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended SixNine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $ 23 $ 51$24 $50
Reversal of gas contingencies - (23) (34)(23)
Recovery of gas costs and
other regulatory issues 2 3 1 3
Gas storage facility
operations 4loaning activities - 7 7
Operations and maintenance (2) 2(6) (5) (16)
General taxes and depreciation (1) (5) (8)- (4) (7)
--- ------- ----
Total change $(3) $ 5 $ 5 $ 142 $14
=== ======= ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, increaseddecreased for the quarter ended (2.8(5.1 percent), sixbut increased for
the nine months ended (11.3(8.9 percent), and 12 monthstwelve-months ended JuneSeptember 30,
1996 (15.9(14.2 percent) overwhen compared with the comparablecorresponding 1995 periods. The
increased deliveries reflect growth result-
ingresulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the sixnine months ended and 12 monthstwelve-months ended
JuneSeptember 30, 1996, colder temperatures. Although the industrial sector,
for the nine months ended September 30, 1996, accounted for approximately
20% of total deliveries, it contributed almost 40% of the weather-adjusted
growth. The table below indicates total system deliveries and the impact of
weather on the
sixweather:
In Bcf
Gas Deliveries
Nine months ended and 12 months ended
JuneSept. 30 1996 and 1995.
In bcf
Gas Deliveries
Six months ended June 12 months ended JuneSept. 30
1996 1995 Var. 1996 1995 Var.
Weather-adjusted deliveries 204.0 192.1 11.9 337.9 319.4 18.5234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth)
Impact of weather 6.8 (2.7) 9.5 18.2 (12.1) 30.36.6 (2.1) 8.7 17.4 (10.5) 27.9
----- ----- ---- ----- ----------- ----
System deliveries
excluding transport
to MCV 210.8 189.4 21.4 356.1 307.3 48.8241.1 221.4 19.7 354.5 310.5 44.0
Transport to MCV 33.0 26.4 6.6 60.3 63.4 (3.1)48.6 39.9 8.7 62.4 58.2 4.2
----- ----- ---- ----- ----- ----
Total system deliveries 243.8 215.8 28.0 416.4 370.7 45.7289.7 261.3 28.4 416.9 368.7 48.2
===== ===== ==== ===== ===== ====
Cost of Gas Sold:
In Millions
Cost of Gas Sold at September 30 1996 1995 Change
Quarter $ 51 53 $ (2)
Nine months 504 435 69
Twelve months 740 622 118
The cost of gas sold totaled $106 million and $102
millionincreases for the second quarters of 1996nine-month and 1995, respectively. The
increase of $4 million wastwelve-month periods were 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-
ingrequesting
reconsideration of certain issues. This petition was denied in June 1996.1996
and the matter is now closed.
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:loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers estimates capital expenditures,
including new lease commitments, relatedstrongly disagrees with this suggestion
but is unable to its gas utility operationspredict the outcome 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.any regulatory proceeding where this
issue has arisen.
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 JuneSeptember 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-
talenvironmental
clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continu-
ingcontinuing
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-
tioncompetition for retail
and wholesale customers, pricing and transportation of commodities, market
demand for energy, inflation, capital market condi-
tions,conditions, 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 thatthe following capital
expenditures, including new lease commitments, related to its electricby company and gas utility
operations will total approximately $1.3 billionby business
segment over the next three years.years:
In Millions
Years Ended December 31 1996 1997 1998
Consumers
Construction $396 $392 $357$403 $344 $334
Nuclear fuel lease 34 5 414 27
Capital leases other than
nuclear fuel 6 20 144 19 11
Michigan Gas Storage 9 3 3
---- ---- ----
$445 $420 $415$450 $370 $375
==== ==== ====
Electric utility operations (a) $315 $260 $275
Gas utility operations (a) 135 110 100
---- ---- ----
$450 $370 $375
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and
gas utility businesses.
These estimates 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 growthThe Governor of the State of
Michigan has requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities 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 bylight of increasing
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.utility industry. 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 earlyApril 1996, the MPSC significantly reduceddirected
Consumers, Detroit Edison, and other electric utilities to file applications
addressing the rate subsidizationrecommendation of residential customers bythe Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and large
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. In addition to offering electric rates that are
competitive with other energy providers,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, 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 expectJobs Commission have continued to meet for the purpose of confirming
the principles, such as full recovery of stranded costs in the event of
expanded choice by retail customers, upon which a new regulatory and
statutory framework for the electric utility business in Michigan would be
based. Once established, those principles could in turn form the basis for
definitive agreements, filings with the MPSC, and revised statutes. These
parties are hopeful that the principles and definitive agreements would
receive the support of other interested parties such as the MPSC staff.
There can be no assurance that the necessary agreements will be reached,
that regulatory approvals will be granted, and that necessary legislation
will be passed, nor can a definitive timetable be established at this short-term
experiment to have a material impact on its financial position, liquidity
or resultstime
for realization of operations.these events.
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 ofConsumers currently expects approximately 2 percent average annual growth in
electric system sales over the State of Michigan has requested thatnext five years. Actual electric sales in
future periods may be affected by abnormal weather, changing economic
conditions, or the MPSC review
the existing statutory and regulatory framework governing Michigan utili-
ties in light of increasingdeveloping competitive market for electricity as
discussed below.
Consumers' retail service is affected by competition in several areas,
including the utility industry. In Aprilinstallation 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 of facilities or
production to their service areas. Consumers continues to work toward
retaining its current retail service customers.
As part of an order issued in early 1996, the MPSC directedsignificantly reduced the
rate subsidization of residential customers by industrial and large
commercial customers. In addition, 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 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.
In addition to offering electric rates that are competitive with those of
other energy providers, Consumers is pursuing numerous other strategies to
retain its other large customers. These strategies include improving
reliability, power quality and customer communications, and providing
consulting services to help customers use energy efficiently. Consumers is
also taking steps to prepare for a future environment in which open access
is the predominant means by which large industrial and commercial customers
provide for their power requirements.
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 otherthe 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 July 1996, an electric utilitiesmarketer filed applications with the MPSC for
approval to file applications addressingsell 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 recommendationtransactions requested by this electric
marketer to take place. Consumers intends to vigorously oppose the creation
of any such program before the Michigan Jobs Commission to allow a choiceMPSC and in the courts; however, Consumers
cannot predict the ultimate outcome 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.this matter.
SFAS 71 allows the deferral of certain costs and the recording of regula-
toryregulatory
assets. Management has evaluated Consumers' current regulatory position and
believes it continues to support the recognition of Consumers' electric-relatedelectric-
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 maymight 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-
relatedelectric-related regulatory assets.
Gas Outlook, Competition and Deliveries: Consumers currently anticipates
gas deliveries to grow approximately 2 percent per year (excluding
trans-
portationtransportation to the MCV Facility and off-system deliveries) over the next
five years, assuming a steadily growing customer base. Additionally,
Consumers has several strategies that will support increased load
require-
mentsrequirements 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 affect-
edaffected
by abnormal weather, alternative energy prices, changes in competitive
conditions, and the level of natural gas consumption.
In 1995,1996, the Low Income Home Energy Assistance Program provided approxi-
mately $71$58 million
in heating assistance to about 400,000 Michigan house-
holds,households, with approximately 1819 percent
of funds going to Consumers' custom-
ers. In late 1995, federalcustomers. Federal legislative approval
provided Michigan resi-
dentsresidents with approximately $60$55 million of funding for 1996.1997. Consumers
cannot predict what level of funding will be approved fortherefore does not anticipate a significant change in its revenues from this
program in 1997.
In JanuaryOctober 1996, the MPSC issued a notice of legislative-type hearingsan order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines. These
pilot programs, which are to be heldimplemented in 1996,the second quarter of 1997,
are intended to assesshelp the MPSC determine whether it is appropriate to allow
all natural
gas customers access to the competitive 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.market.
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-
ryregulatory assurance
exists to provide for the recovery of these deferred costs.
58
PART II. OTHER INFORMATION
ItemITEM 1. Legal ProceedingsLEGAL 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' Form 10-K for the
year ended December 31, 1995, and Formin Forms 10-Q for the quarterquarters ended
March 31, 1996 and June 30, 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 ProceedingsMCV - RELATED PROCEEDINGS
In March 1993, the MPSC approved, with modifications, a contested
settlement agreement among Consumers, 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
requests for rehearing were denied by the MPSC, ABATE and the Attorney
General appealed the orders approving the settlement to the Court of
Appeals, which upheld the Commission's orders. In the meantime, the MPSC
has been implementing the settlement in reconciliation cases for 1993,
1994 Gas Rate Case Filingand subsequent years. As part of its decision in the 1993 PSCR
reconciliation case issued in February 1995, the MPSC disallowed
approximately 2.5% of the costs related to purchases from the MCV
Partnership, and instead assumed recovery of those costs from wholesale
customers. Consumers believed this was contrary to the terms of the
Settlement Order and appealed the February 1995 order on this issue. The
MCV Partnership and ABATE filed a general gas rate case in December 1994. Consumers'
final position inseparate appeals of this case requested an increase in its gas ratesorder. In
November 1996, the Court of $6.7
million annually and a 12.25 percent return on common equity. The MPSC
issued a finalAppeals affirmed the MPSC's 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. On June 5, 1996, the
petition for rehearing was denied.all
respects. This proceeding is now closed.
1993 Electric Rate Case
In May 1994, the MPSC issued a 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 denied petitions for rehearing filed by Consumers and the
Attorney General. The Attorney General appealed the MPSC order to the
Court of Appeals. The Attorney General later filed a motion to withdraw
its appeal, which was granted by the Court of Appeals 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 smalllow level electrical currents present in grounded
electric systems are diverted from their intended path. At JuneSeptember 30,
1996, Consumers had 3431 separate stray voltage cases awaiting action at the
trial court level and six10 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.CASE NO. U-10029 - Intrastate Gas SupplyINTRASTATE GAS SUPPLY
In February 1993, the MPSC issued an order granting Consumers' request to
lower the price to be paid to one of itsan intrastate gas suppliers,supplier, North Michigan, whichwho
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 theThe Michigan Supreme Court denied North Michigan's
application for leave to appeal the Court of Appeals' decision. On June 28,In
September 1996, North Michigan filed a petition for a writ of certiorari
with the U.S. Supreme Court to review the Michigan Supreme CourtCourt's
decision. The petition alleges that the procedures under Public Act 9 of
the Michigan statutes, and Act 9 as applied and on its face, denied North
Michigan's application.Michigan its constitutional rights to due process of law. 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, the Court of Appeals refused to decide the issue addressed by the
Circuit Court (namely whether MichCon, as a holdover utility without any
franchise, could continue to lawfully do business in a township) because
the Court of Appeals concluded that Consumers' 1992 revocable renewal
franchise was invalid since it was not confirmed by a vote of the Highland
Township electorate as the Court determined was required by the Public
Utility Franchise Act. The Court of Appeals reversed the Circuit Court
decision and remanded the case to the Circuit Court for entry of summary
disposition in MichCon's favor. Consumers' motion for reconsideration and
for a stay of the Court of Appeals' decision was denied. In December
1995, Consumers 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 revocable franchises may be granted by a
township without a vote of the electorate.
Environmental Matters
Independent Power Production ProjectENVIRONMENTAL MATTERS
INDEPENDENT POWER PRODUCTION PROJECT
In June 1996, CMS Generation Operating Company, a CMS Generation
subsid-
iary,subsidiary, was informed by the U.S. Attorney's Office and the EPA of an EPAa
criminal investigation involving alleged violations of RCRA and
Superfund. These officials arewere investigating certain allegedly improper ash
disposal whichthat may have occurred during 1993 at a plant in California.California
operated by 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.In October 1996, CMS Generation Operating Company and its counsel are
continuingthe
officials investigating the matter signed a pretrial diversion agreement
under which CMS Generation Operating Company agrees to meetpay an amount
toward cleanup costs to the entity conducting the cleanup at the plant,
and the U.S. Attorney's Office agrees that there will be no prosecution of
CMS Generation Operating Company with respect to the persons responsible formatters alleged.
Payment of restitution under the investigation to
discuss the basis of the allegations and possible resolution that may be
acceptable to all parties. Resolution of these matters ispretrial diversion agreement will not expected to
have a material adverse effect on the financial condition of CMS Energy.
If an actionThis matter is filed against CMS Generation Operating Company,
CMS Generation Operating Company will vigorously defend any claims raised,
but cannot predict the outcome of this matter.
Item 4. Submission of Mattersnow closed as it relates 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
Itemits
subsidiaries.
ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(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 filed since the filing of
CMS Energy Corporation's and Consumers Power Company's Quarterly Report on
Form 10-Q for the quarter ended March 31,June 30, 1996.
6263
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: August 14,November 12, 1996 By A M Wright
-----------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: August 14,November 12, 1996 By A M Wright
-----------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer