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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996March 31, 1997
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.
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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 POWERENERGY 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 October 31, 1996:April 30, 1997:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 92,529,49895,337,648
CMS Energy Class G Common Stock, no par value 7,809,3807,965,981
Consumers PowerEnergy Company, $10 par value, privately held
by CMS Energy 84,108,789
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2
CMS Energy Corporation
and
Consumers PowerEnergy Company
Quarterly reports on Form 10-Q to the Securities and Exchange Commission
for the Quarter Ended September 30, 1996March 31, 1997
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers PowerEnergy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers PowerEnergy 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.Management's Discussion and Analysis . . . . . . . . . . . . . . . . 6
Consolidated Statements of IncomeIncome. . . . . . . . . . . . . . . . . 7. 19
Consolidated Statements of Cash FlowsFlows. . . . . . . . . . . . . . . 8. 20
Consolidated Balance SheetsSheets. . . . . . . . . . . . . . . . . . . . 9. 21
Consolidated Statements of Common Stockholders' Equity. . . . . . 11
Condensed Notes to Consolidated Financial Statements.Equity . . . . . . 12
Management's Discussion and Analysis.. 23
Condensed Notes to Consolidated Financial Statements . . . . . . . . 24
Report of Independent Public Accountants . . . . . . . . . . . . . . 2131
Consumers PowerEnergy Company
Report of Independent Public Accountants. . . . . . . . . . . . . 36
Consolidated Statements of IncomeManagement's Discussion and Analysis . . . . . . . . . . . . . . . . 3732
Consolidated Statements of Cash FlowsIncome. . . . . . . . . . . . . . . 38. . . 43
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 44
Consolidated Balance SheetsSheets. . . . . . . . . . . . . . . . . . . . 39. 45
Consolidated Statements of Common Stockholder's Equity. . . . . . 41
Condensed Notes to Consolidated Financial Statements.Equity . . . . . . 42
Management's Discussion and Analysis.. 47
Condensed Notes to Consolidated Financial Statements . . . . . . . . 48
Report of Independent Public Accountants . . . . . . . . . . . . . . 5053
PART II:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 61. 54
Item 4. Submission of Matters to a Vote of Security Holders . . . . 54
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 62. 55
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63. . 56
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
Btu . . . . . . . . . . . . . British thermal unit
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 MST . . . . . . . . . . . CMS Marketing, Services and Trading Company,
a subsidiary of Enterprises
CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . Consumers PowerEnergy 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
CTM . . . . . . . . . . . . . Centrales Termicas Mendoza, an indirect
subsidiary of CMS Generation
Detroit Edison. . . . . . . . The Detroit Edison Company
DEQDow . . . . . . . . . . . . . Michigan Department of Environmental
Quality
DNR . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . Demand-side managementThe Dow Chemical Company
EDEER . . .S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., anthe electric distribution
utility in northeasternEntre Rios Province, Argentina
EDEVA .ENDESA. . . . . . . . . . . . Empresa Nacional de Energia y Vapor S. A.Electricidad S.A.,
a
consortium of Argentine investorsChile's largest electric generation and
transmission company
Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
EPS . . . . . . . . . . . . . Earnings per share
FASB. . . . . . . . . . . . . Financial Accounting Standards Board
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,Notes(Registered
Trademark), $250 million Series A, and $125
million Series B HYDRA-CO.and $150 million Series C
GVK . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary. . . GVK Industries, the developer of CMS Generation
kWhan
independent power project in Jegurupadu,
Andhra Pradesh, India
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 cyclecombined-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
MHPMMBtu . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.Million British thermal unit
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 power plant, owned by
Consumers
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a 35-year35-
year term that commencedcommencing in March 1990
PSCR. . . . . . . . . . . . . Power supply cost recovery
RCRA.PUHCA . . . . . . . . . . . . Resource Conservation RecoveryPublic Utility Holding Company Act of 19761935
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
September 30, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month,
nine-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,
November 11, 1996.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 655 $ 640 $1,827 $1,723 $2,381 $2,246
Gas utility 123 122 880 801 1,274 1,116
Oil and gas exploration and production 32 26 94 82 120 101
Independent power production 44 25 108 71 133 87
Natural gas transmission, storage and marketing 71 52 231 133 294 171
Other 4 4 10 11 17 13
------- ------- ------- ------- ------- -------
Total operating revenue 929 869 3,150 2,821 4,219 3,734
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 76 74 219 208 294 284
Purchased power - related parties 150 124 436 369 558 492
Purchased and interchange power 56 72 147 154 189 182
Cost of gas sold 106 93 682 536 967 755
Other 189 168 539 491 746 656
------- ------- ------- ------- ------- -------
Total operation 577 531 2,023 1,758 2,754 2,369
Maintenance 42 48 120 139 167 192
Depreciation, depletion and amortization 99 96 322 302 436 410
General taxes 45 45 149 143 202 189
------- ------- ------- ------- ------- -------
Total operating expenses 763 720 2,614 2,342 3,559 3,160
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 126 125 323 295 390 346
Gas utility (1) 2 112 110 153 139
Oil and gas exploration and production 10 5 28 27 31 24
Independent power production 29 13 62 40 68 48
Natural gas transmission, storage and marketing 5 4 21 9 26 10
Other (3) - (10) (2) (8) 7
------- ------- ------- ------- ------- -------
Total pretax operating income 166 149 536 479 660 574
------- ------- ------- ------- ------- -------
INCOME TAXES 34 32 125 111 143 118
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 132 117 411 368 517 456
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 2 3 7 9 10 12
Accretion expense (7) (7) (21) (23) (28) (32)
Other income taxes, net 3 3 9 8 12 10
Other, net 1 (1) 5 6 7 17
------- ------- ------- ------- ------- -------
Total other income (deductions) (1) (2) - - 1 7
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 58 55 174 168 230 218
Other interest 7 8 19 17 29 25
Capitalized interest (1) (2) (5) (4) (9) (5)
Preferred dividends 7 7 21 21 28 28
Preferred securities distributions 2 - 6 - 6 -
------- ------- ------- ------- ------- -------
Net fixed charges 73 68 215 202 284 266
------- ------- ------- ------- ------- -------
NET INCOME $ 58 $ 47 $ 196 $ 166 $ 234 $ 197
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 61 $ 48 $ 186 $ 167 $ 220 $ 198
======= ======= ======= ======= ======= =======
Class G $ (3) $ (1) $ 10 $ (1) $ 14 $ (1)
======= ======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 89 92 88 92 88
======= ======= ======= ======= ======= =======
Class G 8 7 8 7 8 7
======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
CMS Energy $ .65 $ .54 $ 2.02 $ 1.90 $ 2.39 $ 2.26
======= ======= ======= ======= ======= =======
Class G $ (.28) $ (.17) $ 1.38 $ (.17) $ 1.92 $ (.17)
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .27 $ .24 $ .75 $ .66 $ .99 $ .87
======= ======= ======= ======= ======= =======
Class G $ .295 $ .28 $ .855 $ .28 $ 1.135 $ .28
======= ======= ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 September 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 196 $ 166 $ 234 $ 197
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $38,
$49 and $51, respectively) 322 302 436 410
Capital lease and other amortization 33 50 44 70
Deferred income taxes and investment tax credit 25 65 35 60
Accretion expense 21 23 28 32
Accretion income - abandoned Midland project (7) (9) (10) (12)
Undistributed earnings of related parties (54) (47) (60) (58)
MCV power purchases - settlement (Note 2) (43) (102) (78) (118)
Other 11 12 6 (30)
Changes in other assets and liabilities 16 (71) 178 26
------ ------ ------ ------
Net cash provided by operating activities 520 389 813 577
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (430) (380) (585) (540)
Investments in partnerships and unconsolidated subsidiaries (147) (174) (215) (187)
Investments in nuclear decommissioning trust funds (37) (38) (49) (51)
Acquisition of companies, net of cash acquired (20) (147) (19) (147)
Cost to retire property, net (20) (28) (34) (41)
Deferred demand-side management costs (6) (7) (8) (11)
Proceeds from sale of property 34 1 55 11
Other 4 (7) (3) (6)
------ ------ ------ ------
Net cash used in investing activities (622) (780) (858) (972)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans and notes 385 211 507 733
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 29 148 41 154
Increase (decrease) in notes payable, net - 135 (133) 74
Repayment of bank loans (264) (14) (268) (344)
Payment of common stock dividends (75) (60) (99) (78)
Retirement of bonds and other long-term debt (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 financing activities 101 349 63 406
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (1) (42) 18 11
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 37 26
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 55 $ 37 $ 55 $ 37
====== ====== ====== ======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $6,286 $6,103 $6,007
Gas 2,363 2,218 2,180
Oil and gas properties (full-cost method) 1,126 1,074 1,074
Other 87 105 56
------ ------ ------
9,862 9,500 9,317
Less accumulated depreciation, depletion and amortization 4,936 4,627 4,578
------ ------ ------
4,926 4,873 4,739
Construction work-in-progress 251 201 222
------ ------ ------
5,177 5,074 4,961
------ ------ ------
INVESTMENTS
Independent power production 305 275 277
Natural gas transmission, storage and marketing 241 193 186
First Midland Limited Partnership (Note 2) 230 225 222
Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98
Other 89 22 21
------ ------ ------
992 818 804
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 55 56 37
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 219 296 202
Inventories at average cost
Gas in underground storage 250 184 263
Materials and supplies 82 83 77
Generating plant fuel stock 28 37 28
Deferred income taxes 19 24 18
Prepayments and other 132 230 117
------ ------ ------
785 910 742
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 442 462 466
Nuclear decommissioning trust funds 360 304 283
Abandoned Midland project 117 131 135
Other 418 444 459
------ ------ ------
1,337 1,341 1,343
------ ------ ------
TOTAL ASSETS $8,291 $8,143 $7,850
====== ====== ======
10
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,619 $1,469 $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 2,996 2,906 2,763
Non-current portion of capital leases 92 106 101
------ ------ ------
5,163 4,837 4,659
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 198 207 207
Notes payable 341 341 474
Accounts payable 260 306 214
Accrued taxes 147 254 106
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 59 53 49
Accrued interest 51 45 32
Accrued refunds 23 22 31
Other 196 192 172
------ ------ ------
1,365 1,510 1,380
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 651 640 628
Postretirement benefits 528 533 547
Power purchases - settlement (Note 2) 197 221 244
Deferred investment tax credits 163 171 173
Regulatory liabilities for income taxes, net 61 44 38
Other 163 187 181
------ ------ ------
1,763 1,796 1,811
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,291 $8,143 $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 Nine Months Ended Twelve Months Ended
September 30 September 30 September 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 1,967 1,740 1,951 1,701 1,935 1,694
Common stock reacquired (1) (1) (1) (1) (1) (1)
Common stock issued:
CMS Energy 12 72 26 111 41 117
Class G 1 123 3 123 4 123
Common stock reissued - 1 - 1 - 2
------- ------- ------- ------- ------- -------
At end of period 1,979 1,935 1,979 1,935 1,979 1,935
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) 1 (8) - (8) -
Change in unrealized investment-
gain (loss) 1 (9) 1 (8) 1 (8)
------- ------- ------- ------- ------- -------
At end of period (7) (8) (7) (8) (7) (8)
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (385) (513) (475) (595) (489) (608)
Net income 58 47 196 166 234 197
Common stock dividends declared:
CMS Energy (25) (21) (69) (58) (91) (76)
Class G (2) (2) (6) (2) (8) (2)
------- ------- ------- ------- ------- -------
At end of period (354) (489) (354) (489) (354) (489)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $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 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, nine and twelve month periods ended September 30,
1996, undistributed equity earnings were $13 million, $54 million and $60
million, respectively and $22 million, $47 million and $58 million for the
three, nine and twelve month periods ended September 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-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 September 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $186 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $28 million, partially offset by
after-tax accretion expense of $12 million. The undiscounted after-tax
amount associated with the liability totaled $564 million at September 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 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 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
CMS 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 during the fourth 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.
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 outcome of 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, and the Michigan Supreme Court later denied the producers' petition
for review. In September 1996, the producers filed a petition 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 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 be between $1 million and $9 million. At
September 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 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 September 30,
1996, Consumers has accrued a liability of $48 million and has established a
regulatory asset for approximately the same amount. Any significant change
in assumptions, such as remediation technique, nature and extent of
contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. In accordance with an MPSC
rate order issued in early 1996, Consumers is deferring environmental clean-
up costs incurred at these sites and amortizing these costs over ten years.
Rate recognition of amortization expense will not begin until after a
prudence review in a general rate case. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the costs
that may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur dioxide
and nitrogen oxides and require emissions monitoring. Consumers' coal-
fueled electric generating units burn low-sulfur coal and are 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 $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 $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
$940 million for 1996, $925 million for 1997 and $900 million for 1998. For
further information regarding capital expenditures, see Forward-Looking
Information in CMS Energy's MD&A.
Other: As of September 30, 1996, CMS Energy or its subsidiaries have
guaranteed up to $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.
A number of lawsuits have been filed against Consumers relating to so-called
stray voltage. Claimants contend that stray voltage results when low-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 September 30, 1996, Consumers had 31 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. 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; however, 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 has 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. 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.
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 twelve
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
The Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less. Other cash
flow activities and non-cash investing and financing activities for the
periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $ 176 $ 159 $ 224 $ 195
Income taxes paid (net
of refunds) 61 25 70 37
Non-cash transactions
Nuclear fuel placed under
capital lease $ 8 $ 24 $ 10 $ 27
Other assets placed under
capital leases 2 3 4 7
Common Stock issued to
acquire companies - 86 4 86
Assumption of debt - 16 - 16
Capital leases refinanced - - 21 -
7: Short-Term And Long-Term Financings, Capitalization and Other
CMS Energy
In the first quarter of 1996, CMS Energy filed a shelf registration with the
SEC for the issuance and sale of up to $125 million of Series B GTNs, with
net proceeds to be used for general corporate purposes. As of September 30,
1996, CMS Energy had issued and outstanding approximately $250 million of
Series A and $82 million of Series B GTNs with weighted-average interest
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 received FERC authorization to issue up to $900
million of short-term securities through 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 requirements.
At September 30, 1996, a total of $340 million was outstanding at a
weighted-average interest rate of 6.0 percent, compared with $474 million
outstanding at September 30, 1995, at a weighted-average interest rate of
6.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At September 30, 1996 and 1995, receivables sold
under the agreement totaled $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 Preferred
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 Preferred
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 September
30, 1996, $102 million was outstanding under the new agreement, with a
weighted-average interest rate of 6.3 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-year
term loan. As of September 30, 1996, $107 million was outstanding with a
weighted-average interest rate of 7.3 percent.
8: Earnings Per Share and Dividends
Earnings (loss) per share attributable to Common Stock, for the periods
ended September 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; 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 nine months ended September 30, 1996, are based on 23.67 percent of the
income of the Consumers Gas Group. The seasonal loss attributable to Class
G Common Stock on a per share basis, for the periods ended September 30,
1995, is based on 23.17 percent of the loss of the Consumers Gas Group. For
purpose of analysis, following are pro forma data for the nine months ended
September 30, 1995 and the year ended December 31, 1995 which give effect to
the issuance and sale of 7.52 million shares of Class G Common Stock
(representing 23.50 percent of the equity attributable to the Consumers Gas
Group) on January 1, 1994, and actual data for the nine months ended
September 30, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Nine Months Ended Nine Months Ended Year Ended
September 30 September 30 December 31
1996 1995 1995
Net Income $ 196 $ 166 $ 204
Net Income attributable
to CMS Energy Common Stock $ 186 $ 156 $ 189
Net Income attributable
to outstanding Class G
Common Stock $ 10 $ 10 $ 15
Average shares outstanding:
CMS Energy Common Stock 92.001 88.021 88.810
Class G Common Stock 7.695 7.521 7.536
Earnings per share attributable
to CMS Energy Common Stock $ 2.02 $ 1.76 $ 2.14
Earnings per share attributable
to outstanding Class G
Common Stock $ 1.38 $ 1.38 $ 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
August 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 November 1996.
21
CMS Energy Corporation
Management's Discussion and Analysis
ThisThe MD&A of this Form 10-Q should be read along with the MD&A in
CMS Energy's 19951996 Form 10-
K.10-K. This Form 10-Qreport contains "forward-looking statements"forward-looking
statements as defined by the Private Securities Litigation Reform Act of
1995, including (without limitation) discussions as to expectations,
beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed in this document.
These discussions, and any other discussions contained in this Form 10-Q
that are not historical facts, are forward-looking and, accordingly,
involve estimates, assumptions and uncertainties 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 cautionary statements) discussed elsewhere, in this Form 10-Q, the
Forward-Looking Information section of this MD&A indicates some important
factors that could cause actual results or outcomes to differ materially
from those addressed in the forward-looking discussions.
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 includingincluding: oil and gas
exploration and production,production; acquisition, development and operation of
independent power production facilities, electricfacilities; energy marketing, risk management
and gas marketingenergy management services to utilities, commerciallarge customers; storage, transmission
and industrial customers, storage and transmissionprocessing of natural gas,gas; and electricinternational energy distribution.
Consolidated Earnings for the Periods Ended September 30, 1996 and 1995
In Millions, Except Per Share Amounts
Consolidated Earnings at September 30March 31 1997 1996 1995 Change
Quarter:Three months ended
Consolidated Net Income $ 5884 $ 4788 $ 11(4)
Net Income (Loss) Attributable to
Common Stock:Stocks: CMS Energy 61 48 1375 76 (1)
Class G 9 12 (3)
(1) (2))
Earnings (Loss) Per Average
Common Share: CMS Energy .65 .54 .11.79 .83 (.04)
Class G (.28) (.17) (a) (.11)
Nine months:1.18 1.50 (.32)
Twelve months ended
Consolidated Net Income $ 196236 $ 166206 $ 30
Net Income (Loss) Attributable to
Common Stock:Stocks: CMS Energy 186 167 19225 191 34
Class G 10 (1) 11 15 (4)
Earnings (Loss) Per Average
Common Share: CMS Energy 2.02 1.90 .122.41 2.12 .29
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) 2.091.53 1.90(a) (.37)
(a) Class G Sharesshares were issued on July 21, 1995. Pro-formaProforma earnings
(loss) per
share, assuming Class G shares were outstanding during the entire twelve
month period ended March 31, 1996, would be $1.88.
The decrease in consolidated net income for the 1997 first quarter
nine monthcompared to 1996 reflects decreased Consumers' gas deliveries due to
warmer 1997 first quarter temperatures, decreased Consumers' gas wholesale
services revenues in 1997, and twelve month
periods ended September 30, 1995, would be $ (.25), $ 1.38decreased Consumers' electric revenues from
special contract discounts negotiated with large industrial customers.
Partially offsetting these decreases were the favorable impact of
Consumers' electric rate increase received in February 1996 which
benefited the entire first quarter of 1997 and $ 1.63
respectively.improved operating results
from the MCV Facility in which Consumers has a 49 percent interest. The
increase in consolidated net income for eachthe twelve months ended March 1997
compared to the 1996 period in 1996 primarily reflects the favorable impact of anConsumers'
electric rate increase received in February 1996, revenues from value-
added services and increasedConsumers' wholesale services activities, and improved
operating results from the MCV Facility. In addition, other operating
income resulting fromincreased during the twelve months ended March 1997 due to a FERC-
ordered refund received by the MCV Partnership.
AsPartnership from 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.gas pipeline
supplier. Consolidated net income was also effectedaffected by increased earnings
from CMS Gas Transmission's 25 percent ownership interest in TGN. The nine-monthTGN and
twelve-month
periods in 1996 reflect increased electric sales, gas deliveries and
revenues from 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 involvingfrom a partnership in which CMS Generation owns a 50 percent
ownership interest. Partially offsetting these increases were decreased
Consumers' electric revenues because of special contract discounts
negotiated with large industrial customers and decreased Consumers' gas
deliveries due to warmer temperatures during the first quarter of 1997.
For further information, see the individual results of operations sections
of this MD&A.
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. In April 1997, Consumers declared a $70 million common
dividend to be paid to CMS Energy in May 1997. Consumers had temporarily
suspended its common dividends from mid-1995 until early 1996 to improve
its capital structure. In the first quarter of 1997, Enterprises paid
common dividends and other distributions of $21 million to CMS Energy.
Operating Activities: CMS Energy's consolidated operating cash
requirements are met by its operating and financing activities.
CMS Energy's consolidated cash from operations is derived mainly from
Consumers' sale and transportation of natural gas, Consumers' generation,
transmission, and sale of electricity and CMS NOMECO's sale of oil and
natural gas. Consolidated cash from operations totaled $520$379 million and
$389$349 million for the first ninethree months of 19961997 and 1995,1996, respectively.
The $131$30 million increase resulted from increased electricity sales and gas
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
receipts and payments related to Consumers' operations.operations, offset by reduced
cash from Consumers' gas sales. CMS Energy uses its operating cash
primarily to expand its international businesses, maintain and expand
itsConsumers' electric and gas utility systems, retire portions of its long-term debt
and pay dividends.
Investing Activities: Net cash used in investing activities totaled $622$157
million and $780$225 million for the first ninethree months of 19961997 and 1995,1996,
respectively. The decrease of $158$68 million primarily reflects the
acquisition of HYDRA-COa decrease
in the first quarter of 1995investments in partnerships and an increase in
proceeds from the sale of property during 1996. These changes wereunconsolidated subsidiaries, partially
offset by an increase in capital expenditures.expenditures during 1997. CMS Energy's
1997 expenditures for its utility and international businesses were $314$82
million and $299$62 million, respectively.
Financing Activities: Net cash provided byused in financing activities totaled $101$221
million and $349$138 million for the first ninethree months of 19961997 and 1995,1996,
respectively. The net decreaseincrease of $248$83 million in cash outflows primarily
reflects an
increase in cash used to repay bank loans partially offset by increased
proceeds due to refinancing bank loans and issuing notes, a decrease in
the saleissuance of Common Stock, and a net decrease in cash received from short
term-borrowings, compared with 1995. These changes were partially offset
by proceeds from the sale of Trust Originated Preferred Securities (see
Note 7)preferred securities 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
statementshelf registration statements with the SEC for
the issuance and sale of up to $125 million of Series B GTNs and $150
million Series C GTNs, with net proceeds to be used for general corporate
purposes. AsDuring the first quarter of September 30, 1996,1997 CMS Energy had issued $22 million
of Series B and outstanding
approximately$11 million of Series C GTNs. At March 31, 1997,
CMS Energy had $250 million of Series A GTNs, and $82$125 million of Series B
GTNs and $11 million of Series C GTNs issued and outstanding with
weighted-average interest rates of 7.7 percent, 7.9 percent and 8.07.9
percent, respectively.
In the first quarter of 1996, CMS Generation refinancedEnergy filed a shelf registration statement with the $118SEC for
the issuance and the sale of up to $500 million bridge credit facility obtainedof senior and subordinated
debt securities. In May 1997, CMS Energy issued $350 million of senior
unsecured notes due May 15, 2002, at an interest rate of 8.125 percent.
Proceeds were used in part to pay down debt with the remainder to fund
CMS Energy's equity commitment in connection with the acquisition of HYDRA-CO with a $110 million, five-year term loan. As50
percent interest in the 2,000 MW Loy Yang A electric generating plant and
associated mine facilities in the State of September 30,
1996, $107 million was outstanding with a weighted-average interest rate
of 7.3 percent.Victoria, Australia.
In the first quarter of 1996, CMS NOMECO replaced its $140 million
revolving credit agreement with a $225 million revolving credit agreement.
As of September 30, 1996, $102 million was outstanding under the new
agreement with a weighted-average interest rate of 6.3 percent.
Through September 30, 1996,1997, CMS Energy declared and paid $69$26 million in
cash dividends to holders of CMS Energy Common Stock and $6$2 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,April 1997, 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 the
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 November 1996. Consumers had
temporarily suspended its common dividends from mid-1995 until early 1996
to improve its capital structure.
In the second quarter of 1996, CMS Enterprises declared and paid a common
dividend of $42 million to CMS Energy. In the third quarter of 1996,
CMS Enterprises declared and paid a $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 used for general corporate purposes of
CMS Energy.May 1997.
Other Investing and Financing Matters: CMS Energy has available
unsecured, committed lines of credit totaling $105$155 million and a $450
million unsecured revolving credit facility. At September 30,March 31, 1997 and 1996,
the total amount utilized under these facilities was $216 million and $242
million, respectively. In addition, CMS Energy had utilizedcurrently has an unsecured
$125 million term loan. CMS Energy is negotiating with a totalgroup of $179banks
to replace the unsecured revolving credit facility and the term loan with
a credit facility or facilities consisting of a combination of unsecured
revolving credit and term loan tranches. CMS Energy expects that the
aggregate borrowing capacity under the new facility or facilities may
range from $725 million under these facilities.to $1.125 billion. CMS Energy expects to enter
into such new credit facility or facilities in the second quarter of 1997.
CMS Energy would also continue to have available the unsecured, committed
lines of credit totaling $155 million. CMS Energy will continue to
evaluate the capital markets in 19961997 as a source of financing its
subsidiaries' investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit totaling $145$120
million and a $425 million working capital facility. At
September 30, 1996, Consumers had a total of $340 million outstanding
under these facilities. In October 1996, Consumers received FERC
authorizationfacility available to issue up to $900 million ofmeet
short-term securities through
1998. This is the same amount of short-term securities authorized through
1996. Consumers uses short-term borrowingsborrowing requirements to finance working capital and gas in
storage, and to pay for capital expenditures between long-term financings.
At March 31, 1997 and 1996, the total outstanding under these facilities
was $88 million and $38 million, respectively. Consumers has anFERC
authorization to issue or guarantee up to $900 million of short-term
securities through 1998 and to issue $500 million of long-term securities
through November 1998 for refinancing or refunding purposes. An agreement
is also in place permitting the sales of certain accounts receivable for
up to $500 million. At September 30,March 31, 1997 and 1996, and
1995, receivables sold totaled
$210 million. In October 1996, Consumers
requested FERC authorization to issue $500$398 million of long-term securities
for refunding purposes. Also in October 1996, Michigan Gas Storage
entered into a $23and $280 million, secured, variable rate, seven-year term loan.respectively.
At September 30, 1996March 31,1997, the book value per share forof CMS Energy Common Stock and
Class G Common Stock was $16.57$17.62 and $11.07,$12.06, respectively.
Consumers' Electric UtilityBusiness Unit Results of Operations
Electric Pretax Operating Income for the Periods Ended September 30, 1996
and 1995:Income:
In Millions
Pretax Operating Income
Quarter ended Nine months ended 12 months endedThree Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1997 vs 1996 compared1997 vs 1996
compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of(including special contract discounts) $(3) $(12) $ (3) $11
Rate increases and other regulatory issues 13 32 329 51
Operations and maintenance - 8 12(3) (4)
General taxes and depreciation (1) (12) (19)
Other 1 3 8
----- --- ---(3) (11)
---- ----
Total change $ 1 $28 $44
===== === ===- $ 24
==== ====
Electric Sales: Total electric sales increasedremained unchanged for the first
quarter ended (2.7
percent), nine months ended (3.7 percent), andwhile showing a 3.4 percent increase for the twelve months ended
September 30, 1996 (3.4 percent)March 31, 1997 over the comparable 1995 periods.1996 period. 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 Sept. 30 Nine months ended Sept. 30 12 months ended Sept. 30
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7 - 7.5 7.3 0.2 9.8 9.5 0.3
Industrial 3.4 3.2 0.2 9.5 9.5 - 12.7 12.6 0.1
Other 0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === ===both periods:
In Billions of kWh
Three Months Ended Twelve Months Ended
March 31 1997 1996 Change 1997 1996 Change
Residential 2.9 3.0 (0.1) 10.9 10.9 -
Commercial 2.4 2.4 - 10.0 9.8 0.2
Industrial 3.0 2.9 0.1 13.0 12.6 0.4
Other 0.7 0.7 - 3.2 2.6 0.6
---- ---- ---- ---- ---- ----
Total sales 9.0 9.0 - 37.1 35.9 1.2
==== ==== ==== ==== ==== ==== === ==== ==== ===
Power Costs:
In Millions
Power Costs at September 30March 31 1997 1996 1995 Change
QuarterThree months ended $ 282 $270 $ 12
Nine months 802 731 71260 $ 22
Twelve months 1,041 958 83ended 1,110 1,003 107
The cost increases in each period resulted primarily fromfor the three month and twelve month periods ended
March 31, 1997 reflect greater power purchases from outside sources to
meet increased sales demand.
Consumers' Electric UtilityBusiness Unit 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, theThe MPSC issued the Settlement Order that has allowedcurrently allows 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 OrderBeginning January 1, 1996, Consumers was also
permitted to the Courtrecover an average capacity charge of Appeals. In March 1996, the Court of
Appeals affirmed the Settlement Order. The market2.86 cents per kWh for
the remaining 325 MW of contractMCV Facility capacity. The approved average
capacity was assessedcharge increased to 3.62 cents per kWh for 109 MW by January 1,
1997. The recoverable portion of the capacity charge for the last 216 MW
of the 325 MW increases each year until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of 1992. This assessment,
along with the Settlement Order, resulted inPPA term.
In 1992, Consumers recognizingrecognized 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,Partnership and that estimate remains unchanged.
Consumers continuesanticipates it will continue to experience cash underrecoveries
associated with the Settlement Order.PPA as shown below. These after-tax cash
underrecoveries totaled $28$10 million for the first ninethree 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,1997.
For further information, see Note 2.
In Millions
1996
1997 1998 1999 2000 2001
Estimated cash under-
recoveries, net of tax $28 $23 $22 $21 $20
The amount of underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additionalof power costs continues to be based, in
part, on management's best assessment of the future availability of the
MCV Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded and Consumers would
experience greater amounts of cash underrecoveries and losses (a) 20 22 72 72 74
(a) If unablethan originally
anticipated. Management will continue to sell any capacity aboveevaluate the MPSC's 1993 authorized level.adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In September 1995, Consumers and1996, the MPSC staff reachedissued a proposed
settlement agreement that would potentially resolve several issues in three
pending proceedings, includingfinal order which
authorized Consumers to recover the electric rate case (discussed below) and
cost recovery forcosts associated with the entirepurchase of
the additional 325 MW of MCV Facility capacity above the
MPSC's currently authorized 915 MW level. The total estimated cash
underrecoveries are not expectedand 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.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developersaccelerate recovery
of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MWits nuclear plant investment by charging $18 million 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 relatedsteam
production plant depreciation expense to the 325 MW of MCV Facility contract
capacity above 915 MW. The MPSC stated that this matter would be addressed
in connection with its consideration of the proposed settlement agreement
discussed below.
In September 1995, Consumers and the MPSC staff reachednuclear production
depreciation reserve. It also established a proposed
settlement agreement that, if approveddirect access program.
Rehearing petitions have been ruled upon by the MPSC would resolve several
outstanding regulatory issues. One ofand resulted in no
material changes to the relief granted Consumers. For further discussion
on these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciationsee Notes 2 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 during the fourth 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 reallocate
certain portions of its utility plant from production to transmission,
resulting in a $28 million decrease in depreciation expense associated with
this transfer. If the MPSC approves both aspects of the 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 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 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.
Part 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,January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report recognized improved
performance atrated
all areas as good, unchanged from 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 previously
identified weak areas. The report noted that performance in the areas of
maintenance and plant support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. Consumers
does not plan to load or unload any casks before the end of 1996, including
a cask in which a minor flaw has been detected. For further information,
see Note 5.previous assessment.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurizedpressurized thermal shock"shock events during its remaining license
life. Analysislife, in light of the embrittlement of reactor vessel materials over time
due to operation in a radioactive environment. Based on continuing
analysis of data from testing of similar materials, indicatedin 1996, Consumers
received an interim Safety Evaluation Report from the NRC indicating that
the
Palisades reactor vessel can be safely operated through late 1999; however,
an analysis2003, before reaching
the NRC's screening criteria for reactor embrittlement. Consumers
believes that Consumers submittedwith a change in fuel management designed to the NRC for review in April 1996
suggests that the reactor vessel couldminimize
embrittlement, Palisades might 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 without annealing of the reactor vessel, but will
continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 7.
Electric Environmental Matters: The Clean Air Act contains significant
environmental constraints under which utilities will operate in the
future. While the Act's provisions will require that certain capital
expenditures be made to comply with nitrogen oxide emission limits,
generating units are currently operating at or beyond.near the sulfur dioxide
emission limits that will be effective in the year 2000. Management does
not believe that these expenditures will have a material effect on annual
operating costs.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers cannot predict whetherexpects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, there are numerous
credit worthy, potentially responsible parties with substantial assets
cooperating with respect to the NRCindividual sites. Based on current
information, management believes it is unlikely that the liability at any
of the known Superfund sites, individually or in total, will concur with the April 1996 analysishave a
material adverse effect on CMS Energy's financial position, liquidity or
if the NRC does concur, whether these analyses will result in a future
decision to adopt or postpone annealing.results of operations. For further information regarding electric
environmental matters, see Note 6.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
At
SeptemberAs of April 30, 1996, Consumers had 311997, 18 separate stray voltage lawsuits were awaiting
trial court action.action, down from 22 lawsuits at year end 1996. CMS Energy
believes that the resolution of thesethe remaining lawsuits will not have a
material impact on its financial position, liquidity or results of
operations.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income:
In Millions
Pretax Operating Income
Quarter ended Nine months ended 12 months endedThree Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1997 vs 1996 compared1997 vs 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $24 $50
Reversal of gas contingencies - (23) (23)(17) $(19)
Recovery of gas costs and other issues 2 3 3- 4
Gas loaningwholesale services activities - 7 7(1) 5
Operations and maintenance (6) (5) (16)4 (3)
General taxes, depreciation and depreciationother (1) -
(4) (7)
--- --- ------- ----
Total change $(3) $ 2 $14
=== === ===$(15) $(13)
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, decreased 7.8 percent and
4.2 percent for the quarter ended (5.1 percent), but increased for
the nineand twelve months ended (8.9 percent), and twelve-months ended September 30,
1996 (14.2 percent) when compared with the corresponding 1995 periods.March 31, 1997,
respectively. The increaseddecreased deliveries for both periods reflect growth resulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the nine months ended and twelve-months ended
September 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.warmer
temperatures during 1997. The table below indicates total system deliveries and
the impact of weather:weather.
In Bcf
Gas Deliveries
Nine months ended 12 months ended
Sept. 30 Sept. 30bcf
Three Months Ended Twelve Months Ended
March 31 1997 1996 1995 Var.Change 1997 1996 1995 Var.Change
Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth) 146 145 1 335 332 3
Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9
----- -----and leap year (4) 9 (13) 5 23 (18)
---- ----- --------- ---- ---- ---- ----
System deliveries excluding
transport to MCV 241.1 221.4 19.7 354.5 310.5 44.0Partnership 142 154 (12) 340 355 (15)
Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2
----- -----Partnership 17 17 - 66 56 10
Other Transportation 9 14 (5) 24 24 -
---- ----- --------- ---- ---- ---- ----
Total system deliveries 289.7 261.3 28.4 416.9 368.7 48.2
===== =====168 185 (17) 430 435 (5)
==== ========= ==== ==== ===== ====
Cost of Gas Sold:
In Millions
Cost of Gas Sold at September 30March 31 1997 1996 1995 Change
Quarter $ 51 53 $ (2)
NineThree months 504 435 69ended $314 $346 $(32)
Twelve months 740 622 118ended 718 739 (21)
The increasesdecreases for the nine-monththree month and twelve-monthtwelve month periods ended March 31,
1997 were the result of increaseddecreased sales reflecting warmer temperatures and
the reversal of a $23 million gas contract contingency
during the first quarter of 1995.an extra day for leap year in 1996.
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, requesting
reconsideration of certain issues. This petition was denied in June 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'an MPSC-authorized gas
transportation ratesrate must be borne by Consumers' shareholders. In March 1995,
Consumers filed an appeal with the Court of Appeals, which is still
pending, 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 positioncorrectly concludes 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 loaning activities are new transactionsIn the GCR reconciliation proceeding for Consumers. In that regard,the period April 1995 through
March 1996, an issue has arisen aboutquestioning whether revenue from these activitiesgas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be transferredrefunded to
customers. As of March 31, 1997, $7 million would be subject to refund if
the MPSC adopts the ALJ position. Consumers strongly disagrees withwill continue to oppose this
suggestion
but is unable to predictview before the outcome of any regulatory proceeding where this
issue has arisen.MPSC.
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 19961997 costs. At September 30,
1996,March 31, 1997,
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 environmental
clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continuing
discussions with certain insurance companies regarding coverage for some or
all of the costs that may be incurred for these sites. For further information regarding
environmental matters, see Note 4.6.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended September 30, 1996 increased $5 million overMarch 31, 1997 was the same as the comparable period in 1995,
primarily reflecting1996, as a
result of higher oil production volumes offset by lower oil and gas prices
and gas volumes, and higher gas volumes.
Pretax operating income for the nine months ended September 30, 1996
increased $1 million from the same 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.expenses. Pretax operating income
for the twelve months ended September 30, 1996March 31, 1997 increased $7$15 million fromover the
12twelve months ended September 30, 1995,March 31, 1996, primarily due to higher sales volumes
and oil sales prices partially offset byand income attributable to the gain from the assignment and novationacquisition of a gas
supply contract.Terra.
Capital Expenditures: Capital expenditures during 1996for the three months ended
March 31, 1997 relate primarily to the development of existing oil and gas
reserves.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three ninemonths
ended March 31, 1997 increased $4 million from the same period in 1996,
primarily reflecting higher electricity sales by the Midland Cogeneration
Venture, additional generating capacity and improved equity earnings.
These increases were partially offset because the first quarter 1996
included a gain resulting from a lawsuit settlement. Pretax operating
income for the twelve months ended September 30,March 31, 1997 increased $33 million
from the same period in 1996, increased $16 million, $22 million
and $20 million, respectively, over the comparable periods in 1995, primarily reflecting a gain on the sale of a
power purchase agreement by a partnership in which CMS Generation owns a
50 percent interest, a gain on the sale of a partnership interest in 1996
and increased operating income resulting from higher electricity sales by
the MCV and a refund received by the MCV Partnership.
Capital Expenditures and Other: In the second quarter of 1996, CMS Generation, through a
subsidiary, commenced construction of the La Plata Cogeneration Plant, a
128 MW natural gas fueled, combined cyclegas-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 completed by the fall
of 1997. In
JulyAlso in 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, through a subsidiary, and an affiliate of ABB
signed agreementsan agreement with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the 1,320
MW Jorf Lasfar coal-fueled power plant located southwest of Casablanca.
The agreements coveragreement covers the purchase and operation of two existing 330 MW
electric generating units and construction and operation 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.plant.
CMS Energy posted a $30 million conditional letter of credit to ensure
performanceclosing under the agreements. Financial closingagreement, which is targeted for year end 1996, with constructionthe third quarter of
1997 and includes over $1 billion in debt financing. Construction of the
second two units towill 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 Generationthrough a subsidiary, increased its ownership
interest in the plantCTM to 81 percent. The companyIn 1996, CTM began a project to repower
its electric generating plant in Western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million to refurbish and
repower the facility resulting in an increase in its generating capacitythe plant's available net
output from 242243 MW to 506 MW. Capital markets financing of $85 million is
targeted for earlythe first half of 1997.
During August 1996, CMS Generation'sIn the first quarter of 1997, the plant built by GVK Industries independent power
project in Jegurupadu, Andhra Pradesh, India began generating
electricity from the plant's first gas-fueled turbine.all three of its combustion turbines. CMS Generation
holds a 25.25 percent interest in GVK and operates the 235 MW plant.
Construction is continuing on two additional gas turbines and onethe steam turbine unit of the combined cyclecombined-cycle
facility withwhich has an estimated total cost of $260 million. The
projectGVK has
received a Government of India counter-guarantee of performance of certain
obligations under the power purchase agreement by the Andhra Pradesh State
Electricity Board and expectshas completed financing in April 1997.
As of January 1, 1997, Jamaica Private Power Company achieved commercial
operation of the two diesel generators at its 60 MW diesel-fired
independent power project in Kingston, Jamaica. CMS Generation, through a
subsidiary, holds a 44 percent interest in Jamaica Private Power Company
and a 60 percent interest in Private Power Operators Limited, which will
operate the plant. Construction on the balance of the plant, including
the 4 MW waste heat steam turbine, will be complete in the first half of
1997.
In the first quarter of 1997, CMS Generation, through a subsidiary,
acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in
Cavite, on the island of Luzon in the Philippines. CMS Generation also
negotiated the purchase of a further interest which could take its
ultimate interest to complete international financing during late 1996 or early44 percent, and has plans to increase the plant's
generating capacity to 63 MW in 1998.
In March 1997, CMS Generation formed a joint venture with the Thailand-
based EGCO Engineering & Services Company Limited, an affiliate of
Electric Generating Authority of Thailand, the country's national electric
utility, to operate and maintain private power plants in Thailand. The
joint venture, known as CMESCO, signed a contract with Thailand's Amata-
EGCO Power Limited, to operate and maintain a 170 MW gas-fired
cogeneration plant in July 1997. The combined-cycle power plant is now
under construction, with completion scheduled in 1998.
In May 1997, a consortium comprised of subsidiaries of CMS Generation and
NRG Energy, Inc. as well as Horizon Energy Australia Investments acquired
the Loy Yang A power facility in a privatization by the Australian State
of Victoria. Loy Yang A is Victoria's largest electric generating plant
and Australia's lowest-cost electric generating facility. The consortium
purchased the 2,000 MW, brown coal-fueled Loy Yang A plant and an
associated coal mine supplying both the Loy Yang A and B plants at a
purchase price of $3.7 billion. Seventy seven percent of this acquisition
cost was project financed by a consortium of banks with the remaining
twenty three percent of the payment to the government comprised of partner
equity. CMS Generation holds a fifty percent ownership interest and NRG
Energy and Horizon Energy Australia Investments each hold twenty five
percent. Certain operating and management services for Loy Yang A will be
provided by the CMS Generation and NRG Energy subsidiaries and their
affiliates.
Natural Gas Transmission, Storage and MarketingProcessing
Pretax Operating Income: Pretax operating income for the three ninemonths
ended March 31, 1997 increased $3 million from the same period in 1996,
primarily reflecting new pipeline, storage and processing investments,
continued growth of existing projects and a gain on the sale of a portion
of the Ames gas gathering system. Pretax operating income for the twelve
months ended September 30,March 31, 1997 increased $13 million from the twelve months
ended March 31, 1996, increased $1 million, $12 million and
$16 million respectively over the comparable periods in 1995, reflecting
earnings from new pipeline, storage and storageprocessing
investments, primarily TGN, the continued growth of existing projects, gas marketed to end-users and
the gain resulting from the dissolutionexchange of ownership interests in the Moss Bluff and Grands Lacs
partnerships (see below).partnerships.
Capital Expenditures and Other: In June 1996,the first quarter of 1997, CMS Gas
Transmission sold its
50 percent ownership interestand ENDESA, Chile's largest electricity generation and
transmission company, signed an agreement to develop an integrated $820
million project to construct a 930 kilometer pipeline that will transport
natural gas across the Andes Mountains from northern Argentina to markets
in Moss Bluffnorthern Chile. A 720 MW gas-fueled, combined-cycle generating plant
is planned to be built in two stages at the end of the pipeline in Chile
by a consortium including Enterprises. Construction is scheduled to
begin in 1997, with gas transportation and plant operations expected in
1999.
In the first quarter of 1997, CMS Gas Storage Systems,Transmission with Columbia Gas
System, Inc., MCN Energy Group and Westcoast Energy announced a partnership that ownsproposed
$600 million pipeline project to carry up to 650 million cubic feet per
day of natural gas to New York and other eastern markets. The Millennium
Pipeline would provide a new, 380-mile link through a connection with the
Great Lakes and TransCanada pipeline systems, flowing western Canadian and
U.S. gas to northeastern markets. Construction is scheduled to begin mid-
1999, and gas deliveries are planned to begin in time for the 1999 winter
heating season.
In May 1997, CMS Gas Transmission announced it will acquire the 420-
kilometer (260-mile) Western Australia Natural Gas (WANG) Pipeline near
Perth, Australia. CMS Gas Transmission agreed to purchase the West
Australian Petroleum-operated assets from Chevron, Texaco, Mobil and
Shell. Included in the acquisition are 30 bcf of proven natural gas
reserves with two gas production licenses and an associated gas storage
facility in pre-operational testing. Terms of the purchase were not
disclosed.
Marketing, Services and Trading
CMS MST was formed as part of CMS Energy's expansion and reorganization of
its energy marketing business. This restructuring is expected to
its partner, MHP, and
purchased the remaining 50 percent ownership interestsignificantly improve CMS Energy's competitive position in the Grands Lacs
Limited Partnership, aenergy
marketplace throughout the U.S. and abroad. CMS MST will provide gas,
electric, oil and coal marketing, centerrisk management and energy management
services throughout the United States and eventually worldwide. Gas
marketed for natural gas, from MHP. This
transaction resulted in CMS Gas Transmission receiving approximately $26
million.
In Januaryend users was 33 bcf and 29 bcf for the first quarter of
1997 and 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.respectively.
International ElectricEnergy 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 S.A. 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,S.A. 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 S.A. to the consortium.
Forward-Looking Information
Forward-looking information is included throughout this Form 10-Q.
CMS Energy's materialMaterial 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 domestic and foreign 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 thatthe following capital
expenditures, including new lease commitments and investments in
partnerships and unconsolidated subsidiaries, will total approximately $2.8$3.2 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 19961997 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:years as
follows:
In Millions
Years Ended December 31 1996 1997 1998 Electric utility1999
Consumers electric operations (a) $315 $260 $275
Gas utility$ 270 $ 277 $ 257
Consumers gas operations (a) 135 110 100115 103 103
Oil and gas exploration and production 120 135 150 165
Independent power production 164 162 162(b) 698 173 117
Natural gas transmission and storage 110 100 75
International energy distribution 120 100 100
Marketing, services and marketing 140 58 113
International electric distribution 66 200 100
---- ---- ----
$940 $925 $900
==== ==== ====trading 17 7 3
------ ------ ------
$1,465 $ 910 $ 820
====== ====== ======
(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.
(b) The 1997 amount includes approximately $500 million for the
acquisition of a 50 percent ownership interest in the privatization of the
Loy Yang A electric generating plant in Australia.
CMS Energy currently plans to invest $405$450 million from 19961997 to 19981999 in its
oil and gas exploration and production operations, which will be concentratedprimarily in North and
South America, offshore West Africa and offshore westNorth Africa. CMS Energy also
plans to invest $488$988 million relating toin its independent power production
operations from 19961997 to 19981999 to pursue acquisitions and development of
electric generating plants in the United States, Latin America, southernSouthern
Asia, Australia, the Pacific Rim region and North Africa. An investment of $311Investments
totaling $285 million from 19961997 to 1998,1999, relating to non-utility gas
operations, isare planned to continue development of natural gas storage,
gathering and pipeline operations both domestically and internationally.
CMS Energy also plans to work towardinvest $320 million from 1997 to 1999 in its
international energy distribution operations related to international
expansion. CMS MST plans to invest $27 million from 1997 to 1999 to
provide gas, electric, oil and coal marketing, risk management and energy
management services throughout the development of U.S. regional "market centers" for natural
gas through strategic alliancesUnited States and asset acquisition and development.eventually worldwide.
These estimates are prepared for planning purposes and are subject to
revision.
Consumers Electric Outlook, Sales and Competition: The Governor of the State of
Michigan has requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities in light of increasing
competition in the utility industry. In April 1996, the MPSC directedOutlook: Consumers Detroit Edison, and other electric utilities to file applications
addressing the recommendation of the Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and commercial electric load.
Consumers filed a proposed plan for open access transmission services, under
which Consumers could meet new demand in its service area by delivering
electricity from any supplier capable of providing power to Consumers'
electric system, provided certain reciprocity and other conditions were met.
Among the other conditions was a requirement that stranded costs would be
fully recovered from existing customers. The Michigan Jobs Commission's
recommendations also include related matters, such as the full recovery of
utility stranded costs.
No new legislation has been introduced. However, Consumers, Detroit Edison,
and the Jobs 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 time
for realization of 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.
Consumers currently expects approximately 2 percent average annual growth of
two to three percent per year in electric system sales over the next five
years.years, based on the current industry configuration in Michigan. Actual
electric sales in future periods may be affected by abnormal weather,
changing economic conditions, or the developing competitive market for
electricity as
discussed below.electricity. Consumers continues to work toward retaining its current
retail service customers by offering electric rates that are competitive
with those of other energy providers, and by improving reliability and
customer communications. Consumers is also planning for a future
environment in which open access is the predominant means by which retail
service customers obtain their power requirements.
Consumers' electric retail service is affected by competition in several
areas, including the potential installation of cogeneration or other self-generationself-
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 neighboringother 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 earlyareas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
caused by regulatory decisions and new state or federal legislation.
In 1996, the MPSC significantly reduced the rate subsidization of residential customers
by large industrial and large commercial customers. In addition, in an effort
to meet the challenge of competition, Consumers has signed long-term sales contractscontracted with some of
its largest industrial customers including its largest customer, General Motors
Corporation. Under the General Motors contract, Consumers willto serve certain facilities at least fivea number of
years and other facilities at least 10
years in exchange for discounted electric rates. Certain facilities will
haveinto 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 salesfuture. These contracts with other major customers
representing a substantial percentage of Consumers' industrial load deemed
to have viable cogeneration alternatives. These orders have been appealed
byapproved or are under
review at the Attorney General.
In additionMPSC. FERC issued Orders 888 and 889, as amended on
rehearing, requiring utilities 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 whichprovide open access isto the predominant meansinterstate
transmission grid for wholesale transactions. Several FERC requirements
have been implemented. However, one unresolved issue concerns the
Michigan Electric Power Coordination Center Pool, currently operated
jointly 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. UnderConsumers proposes to maintain
the experiment, upbenefits of the pool, while Detroit Edison seeks to 60 MWterminate the
power pool agreement. The FERC is expected to rule on this issue in 1997.
In 1996, the MPSC staff recommended: 1) a program of Consumers' additional load requirements could be metdirect access to
alternative sources of energy supply by retail wheeling. The program becomes effective upon Consumers' next solicitation
for capacity. In June 1995,electric customers starting
in 1997 and phasing in all customers through 2004; and 2) that Consumers
recover its transition costs through either a transition charge over a
ten-year period ending 2007 only to customers electing direct access or,
if the MPSC issued an order that set rates and
charges for retailutility has been enabled to issue rate reduction bonds, through a
securitization charge to all customers over the term of the bonds.
Consumers would continue to provide delivery service under the experiment.to direct access
customers. In March 1997, Consumers ABATE
and The Dow Chemical Company filed claims of appeal of the MPSC's retail
wheeling orders. The Court of Appeals subsequently consolidated these
appeals with those previously filed by Detroit Edison and the Attorney
General. Consumers does not expect this short-term experiment to have a
material impact on its financial position, liquidity or results of
operations.
In July 1996, an electric marketer filed applicationsdata with the MPSC for
approval to sell electricity generated outside of Michigan to certainwhich
estimated that the portion of Consumers' industrialtransition costs which would be
recovered in the transition charge to direct access customers through 2007
would be $1.8 billion. Direct access implementation costs aggregating an
additional $200 million would also be recovered by a separate charge to
direct access customers. TheseAlternatively, if the securitization approach is
pursued, the resulting securitization charge would be paid by all
Consumers customers purchase approximately 100
MW annually from Consumers. There is currently no MPSC-approved programto service $4 billion of retail accessrate reduction bonds. The $4
billion in rate reduction bonds includes the $1.8 billion of costs that
would allowotherwise have been recovered in the transactions requested by this electric
marketertransition charge to take place. Consumers intendsdirect
access customers, as well as the costs that would otherwise have been
recovered from customers on bundled rates prior to vigorously opposegetting choice.
Consumers' data indicate that the creation
of any such program beforesecuritization approach results in more
than a $200 million annual savings to customers compared to the rates they
would pay under the MPSC andstaff program in the courts; however,absence of securitization
because the assumed 15-year repayment period of the bonds allows the cost
reimbursement by the customer to be spread out over a longer period than
without securitization and because securitization allows securitized costs
to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost
recovery, securitization of rate reduction bonds and generation
deregulation. Consumers currently expects that electric utility
restructuring will occur in a manner consistent with the MPSC staff
report, but cannot predict with certainty the ultimate outcometiming of this matter.actual
implementation, the extent of customer choice, or resultant financial
impacts. Refer to the Consumers 1996 Form 10-K for further details.
Consumers currently applies the utility accounting standard, SFAS 71, allowsthat
recognizes the deferraleconomic effects of certainrate regulation and, accordingly,
Consumers recorded regulatory assets and liabilities related to its
generation, transmission and distribution operations in its financial
statements. If rate recovery of generation-related costs andbecomes unlikely
or uncertain, whether due to competition or regulatory action, this
accounting standard may no longer apply to Consumers' generation segment.
Such a change could result in either full recovery of generation-related
regulatory assets (net of related regulatory liabilities) or a loss,
depending on whether Consumers' regulators adopt a transition mechanism
for the recordingrecovery of all or a portion of these net regulatory assets.
Management has evaluated Consumers'Based on a current regulatory positionevaluation of the various factors and conditions that
are expected to affect future cost recovery, Consumers believes even if it
continueswas to support the recognition of Consumers' electric-
related regulatory assets. If changes in the industry were to lead to
Consumers discontinuing thediscontinue application of SFAS 71 for all or partthe generation segment of
its business, that its regulatory assets, including those related to
generation, are probable of future recovery.
Consumers might be required to write off the portion of any
regulatory asset for which no regulatory assurance of recovery continued to
exist. Consumers does not believe that there is any current evidence that
supports the write-off of any of its electric-related regulatory assets.
Gas Outlook, Competition and Deliveries:Group Outlook: Consumers currently anticipates gas
deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off-system
deliveries) to grow on an average annual basis between one and two percent
over the next five years assumingbased primarily on a steadily growing customer
base. Additionally,
Consumers has several strategies that will support increasedto increase load requirements in the future.requirements.
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 1996, the Low Income Home Energy Assistance Program provided $58 million
in heating assistanceConsumers is also offering a variety of
energy-related services to Michigan households, with approximately 19 percent
of funds going to Consumers' customers. Federal legislative approval
provided Michigan residents with $55 million of funding for 1997. Consumers
therefore does not anticipate a significant change in its revenues from this
program in 1997.customers focused upon appliance
maintenance, home safety, and home security.
In October 1996 the MPSC issued an order requesting Consumers and other local gas
distribution companies, whose rates are regulated by the MPSC, to develop
pilot programs that would allow any customers to purchase gas directly from
other suppliers and have the gas transported through local pipelines.
These pilot programs which are to be implemented in the second quarter of 1997,last for two years and are intended to help
the MPSC determine whether it is appropriate to allowextend this option to all
retail customers. In December 1996, the MPSC approved Consumers' pilot
program for 40,000 customers access toin Bay County. The first customer
solicitation ended in March 1997 and resulted in one percent of the
competitive gas transportation market.
Undercustomers choosing an alternative supplier for the next year. Another
solicitation period will begin in late 1997 for the period April 1998 -
March 1999; expected customer interest is unknown at this time.
Based on a regulated utility accounting standard, SFAS 71, Consumers is
allowed to defer certain costs to the future and record regulatory assets,
based on the recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas business,
and believes that sufficient regulatory assurance exists to provide for
the recovery of these deferred costs.
Other
New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per
Share, which is effective for year end 1997 financial statements. The
Earnings per Share statement requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Basic EPS
excludes such dilution. The company is in the process of quantifying the
effect of applying the statement.
36
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 September 30, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month, nine-month and twelve-month
periods then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1995, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended (not presented herein), and, in our report dated January
26, 1996, we expressed an unqualified opinion on those statements. In our
opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
November 11, 1996.
3719
Consumers Power CompanyCMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30March 31 1997 1996 19951997 1996
1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUEOperating Revenue
Electric utility $ 655620 $ 640 $1,827 $1,723 $2,381 $2,246591 $2,474 $2,328
Gas 123 122 880 801 1,274 1,116utility 498 548 1,231 1,261
Oil and gas exploration and production 35 31 134 107
Independent power production 29 27 143 100
Natural gas transmission, storage and processing 26 12 76 32
Marketing, services and trading 99 71 286 209
Other 20 10 33 30 41 36
---------------------------------------------------------
Total operating revenue 798 772 2,740 2,554 3,696 3,398
---------------------------------------------------------
OPERATING EXPENSES6 3 19 19
------ ------ ------ ------
1,313 1,283 4,363 4,056
------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 76 74 219 208 294 28469 73 292 289
Purchased power - related parties 150 124 436 369 558 492151 140 600 507
Purchased and interchange power 56 72 147 154 189 18262 47 218 207
Cost of gas sold 51 53 504 435 740 622416 411 1,002 927
Other 154 142 435 419 607 573
---------------------------------------------------------
Total operation 487 465 1,741 1,585 2,388 2,153169 170 735 695
------ ------ ------ ------
867 841 2,847 2,625
Maintenance 41 47 117 136 164 18840 179 180
Depreciation, depletion and amortization 83 81 273 262 369 354131 124 448 426
General taxes 43 43 141 138 192 183
---------------------------------------------------------
Total operating expenses 654 636 2,272 2,121 3,113 2,878
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)61 59 204 199
------ ------ ------ ------
1,100 1,064 3,678 3,430
------ ------ ------ ------
Pretax Operating Income (Loss)
Electric 126 125 323 295 390 346utility 106 106 412 388
Gas (1)utility 78 93 143 156
Oil and gas exploration and production 9 9 39 24
Independent power production 10 6 72 39
Natural gas transmission, storage and processing 9 6 29 16
Marketing, services and trading 1 2 112 110 153 1391 3
Other 19 9 33 28 40 35
---------------------------------------------------------
Total pretax operating income 144 136 468 433 583 520
INCOME TAXES 38 36 134 121 158 132
---------------------------------------------------------
NET OPERATING INCOME 106 100 334 312 425 388
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 13 13 17 17- (3) (11) -
------ ------ ------ ------
213 219 685 626
------ ------ ------ ------
Other Income (Deductions)
Accretion income 2 3 7 9 10 1211
Accretion expense (5) (7) (7) (21) (23) (28) (32)
Other income taxes, net 3 3 9 9 13 11(19) (30)
Other, net - 1 1 2 1 11
---------------------------------------------------------
Total other income 2 4 9 10 13 19
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 35 104 106 139 140
Other interest 5 7 11 16 19 24
Capitalized interest - (1) (2) (2) (3) (2)
---------------------------------------------------------
Net interest charges 39 41 113 120 155 162
---------------------------------------------------------
Net Income 69 63 230 202 283 245
Preferred Stock Dividends 7 7 21 21 28 28
Preferred Securities Distribution 2 - 6 - 6 -
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 60 $ 56 $ 203 $ 181 $ 249 $ 217
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 September 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 230 $ 202 $ 283 $ 245
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $38,
$49 and $51, respectively) 273 262 369 354
Capital lease and other amortization 32 27 44 38
Deferred income taxes and investment tax credit 27 52 32 52
Accretion expense 21 23 28 32
Accretion income - abandoned Midland project (7) (9) (10) (12)
Undistributed earnings of related parties (30) (28) (39) (35)
MCV power purchases - settlement (Note 2) (43) (102) (78) (118)
Other 4 4 5 4
Changes in other assets and liabilities (49) (113) 148 6
------ ------ ------ ------
Net cash provided by operating activities 458 318 782 566(2) (2) (11) (13)
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (298) (278) (434) (411)
Investments in nuclear decommissioning trust funds (37) (38) (49) (51)
Cost to retire property, net (20) (28) (34) (41)
Deferred demand-side management costs (6) (7) (8) (11)
Proceeds from sale of property -Fixed Charges
Interest on long-term debt 60 57 233 225
Other interest 11 12 43 43
Capitalized interest (3) (2) (9) (9)
Preferred dividends 7 7 28 28
Preferred securities distributions 2 1 8 1 4
Other 2 (5) 1 (5)
------ ------ ------ ------
Net cash used in investing activities (359) (355) (523) (515)77 75 303 288
------ ------ ------ ------
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 (1)Income Before Income Taxes 134 142 371 325
Income Taxes 50 54 135 (134) 74
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 -
Repayment of bank loans - - - (328)
Proceeds from bank loans - - - 400119
------ ------ ------ ------
Consolidated Net cash provided by (used in) financing activities (101) 17 (252) (53)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (20) 7 (2)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 5 7
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIODIncome $ 1284 $ 588 $ 12236 $ 5206
====== ====== ====== ======
Net Income Attributable to Common Stocks CMS Energy $ 75 $ 76 $ 225 $ 191
Class G $ 9 $ 12 $ 11 $ 15
------ ----- ------ -----
Average Common Shares Outstanding CMS Energy 95 92 93 90
Class G 8 8 8 8
------ ----- ------ -----
Earnings Per Average Common Share CMS Energy $ .79 $ .83 $ 2.41 $ 2.12
Class G $ 1.18 $ 1.50 $ 1.53 $ 1.90
------ ----- ------ -----
Dividends Declared Per Common Share CMS Energy $ .27 $ .24 $ 1.05 $ .93
Class G $ .295 $ .28 $1.165 $ .84
====== ===== ====== =====
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.The accompanying condensed notes are an integral part of these statements.
/TABLE
20
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Cash Flows from Operating Activities
Consolidated net income $ 84 $ 88 $ 236 $ 206
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $13, $13, $48
and $51, respectively) 131 124 448 426
Capital lease and debt discount amortization 8 9 40 52
Deferred income taxes and investment tax credit 3 6 43 52
Accretion expense 5 7 19 30
Accretion income - abandoned Midland project (2) (3) (9) (11)
Power purchases (15) (12) (66) (112)
Undistributed earnings of related parties (13) (21) (56) (62)
Other (6) 7 8 14
Changes in other assets and liabilities 184 144 28 106
------ ------ ------ ------
Net cash provided by operating activities 379 349 691 701
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (132) (110) (681) (514)
Investments in nuclear decommissioning trust funds (13) (13) (48) (51)
Investments in partnerships and unconsolidated subsidiaries (12) (71) (104) (301)
Cost to retire property, net (4) (6) (28) (39)
Acquisition of companies, net of cash acquired - (20) - (10)
Deferred demand-side management costs - (2) (4) (10)
Other (9) (3) - (12)
Proceeds from sale of property 13 - 92 22
------ ------ ------ ------
Net cash used in investing activities (157) (225) (773) (915)
------ ------ ------ ------
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net (245) (303) 50 (97)
Payment of common stock dividends (28) (24) (107) (90)
Repayment of bank loans (27) (246) (38) (255)
Payment of capital lease obligations (8) (9) (38) (36)
Retirement of bonds and other long-term debt - - (37) (33)
Retirement of common stock - - (1) (1)
Proceeds from bank loans, notes and bonds 70 339 164 464
Issuance of common stock 17 8 104 159
Proceeds from preferred securities - 97 - 97
------ ------ ------ ------
Net cash provided by (used in) financing activities (221) (138) 97 208
------ ------ ------ ------
Net Increase (Decrease) in Cash and Temporary Cash Investments 1 (14) 15 (6)
Cash and Temporary Cash Investments, Beginning of Period 56 56 42 48
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 57 $ 42 $ 57 $ 42
====== ====== ====== ======
The accompanying condensed notes are an integral part of these statements.
21
CMS Energy Corporation
Consolidated Balance Sheets
ASSETS March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Plant and Property (At Cost)
Electric $ 6,412 $ 6,333 $ 6,130
Gas 2,374 2,337 2,287
Oil and gas properties (full-cost method) 1,154 1,140 1,096
Other 95 94 86
-------- -------- --------
10,035 9,904 9,599
Less accumulated depreciation, depletion and amortization 4,991 4,867 4,747
-------- -------- --------
5,044 5,037 4,852
Construction work-in-progress 235 243 200
-------- -------- --------
5,279 5,280 5,052
-------- -------- --------
Investments
Independent power production 325 318 297
Natural gas transmission, storage and processing 235 233 235
First Midland Limited Partnership (Note 2) 235 232 226
Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104
Other 88 86 25
-------- -------- --------
1,023 1,003 887
-------- -------- --------
Current Assets
Cash and temporary cash investments at cost, which approximates market 57 56 42
Accounts receivable and accrued revenue, less allowances
of $9, $10 and $3, respectively (Note 4) 301 373 356
Inventories at average cost
Gas in underground storage 51 186 39
Consumers Power Company
Consolidated Balance Sheets
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $6,286 $6,103 $6,007
Gas 2,268 2,169 2,132
Other 25 30 30
-----------------------------------
8,579 8,302 8,169
Less accumulated depreciation, depletion and amortization 4,354 4,090 4,041
-----------------------------------
4,225 4,212 4,128
Construction work-in-progress 194 190 217
-----------------------------------
4,419 4,402 4,345
-----------------------------------
INVESTMENTS
Stock of affiliates 338 337 326
First Midland Limited Partnership (Note 2) 230 225 222
Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98
Other 8 7 8
-----------------------------------
703 672 654
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 12 14 5
Accounts receivable and accrued revenue, less
allowances of $2, $3 and $3, respectively (Note 7) 64 137 78
Accounts receivable - related parties 27 10 49
Inventories at average cost
Gas in underground storage 250 184 263
Materials and supplies 71 72 73
Generating plant fuel stock 28 37 28
Postretirement benefits 25 25 25
Deferred income taxes 21 26 20
Prepayments and other 81 181 77
-----------------------------------
579 686 618
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 442 462 466
Nuclear decommissioning trust funds 360 304 283
Abandoned Midland Project 117 131 135
Other 278 297 316
-----------------------------------
1,197 1,194 1,200
-----------------------------------
TOTAL ASSETS $6,898 $6,954 $6,817
===================================Materials and supplies 89 86 85
Generating plant fuel stock 44 30 16
Deferred income taxes 42 48 22
Prepayments and other 185 235 186
-------- -------- --------
769 1,014 746
-------- -------- --------
Non-current Assets
Postretirement benefits 427 435 458
Nuclear decommissioning trust funds 401 386 323
Abandoned Midland Project 108 113 126
Other 396 384 441
-------- -------- --------
1,332 1,318 1,348
-------- -------- --------
Total Assets $ 8,403 $ 8,615 $ 8,033
======== ======== ========
40
September 30 September 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 30 29 22
Retained earnings since December 31, 1992 326 237 191
-----------------------------------
1,701 1,598 1,545
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,876 1,922 1,921
Non-current portion of capital leases 89 104 101
-----------------------------------
4,122 3,980 3,923
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 97 90 88
Notes payable 340 341 474
Accounts payable 161 207 133
Accrued taxes 96 225 73
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 65 56 53
Accrued interest 28 32 26
Accrued refunds 23 22 31
Other 173 178 161
-----------------------------------
1,073 1,241 1,134
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 618 605 593
Postretirement benefits 509 517 534
Power purchases - settlement (Note 2) 197 221 244
Deferred investment tax credit 162 169 172
Regulatory liabilities for income taxes, net 61 44 38
Other (Note 4) 156 177 179
-----------------------------------
1,703 1,733 1,760
-----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 1,775 $ 1,702 $ 1,541
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred securities
of Consumers Power Company Financing I (a) 100 100 100
Long-term debt 2,629 2,842 3,094
Non-current portion of capital leases 99 103 98
-------- -------- --------
4,959 5,103 5,189
-------- -------- --------
Current Liabilities
Current portion of long-term debt and capital leases 668 409 113
Notes payable 88 333 38
Accounts payable 323 348 267
Accrued taxes 228 262 223
Accounts payable - related parties 65 63 60
Accrued interest 49 47 49
Power purchases (Note 2) 47 47 90
Accrued refunds 6 8 28
Other 189 206 187
-------- -------- --------
1,663 1,723 1,055
-------- -------- --------
Non-current Liabilities
Deferred income taxes 689 698 638
Postretirement benefits 529 521 539
Power purchases (Note 2) 167 178 215
Deferred investment tax credit 158 161 168
Regulatory liabilities for income taxes, net 75 66 53
Other 163 165 176
-------- -------- --------
1,781 1,789 1,789
-------- -------- --------
Commitments and Contingencies (Notes 2, 3, 6 and 7)
Total Stockholders' Investment and Liabilities $ 8,403 $ 8,615 $ 8,033
======== ======== ========
(a) As described in Note 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,898 $6,954 $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.
23
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Common Stock
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------ ------ ------ ------
Other Paid-in Capital
At beginning of period 2,045 1,951 1,959 1,734
Common stock reacquired - - (1) (1)
Common stock issued:
CMS Energy 16 7 99 100
Class G 1 1 5 125
Common stock reissued - - - 1
------ ------ ------ ------
At end of period 2,062 1,959 2,062 1,959
------ ------ ------ ------
Revaluation Capital
At beginning of period (6) (8) (8) 1
Change in unrealized investment-gain (loss) - - 2 (9)
------ ------ ------ ------
At end of period (6) (8) (6) (8)
------ ------ ------ ------
Retained Earnings (Deficit)
At beginning of period (338) (475) (411) (527)
Consolidated net income 84 88 236 206
Common stock dividends declared:
CMS Energy (26) (22) (98) (84)
Class G (2) (2) (9) (6)
------ ------ ------ ------
At end of period (282) (411) (282) (411)
------ ------ ------ ------
Total Common Stockholders' Equity $1,775 $1,541 $1,775 $1,541
====== ====== ====== ======
The accompanying condensed notes are an integral part of these statements.
24
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 1996 Form 10-K of CMS Energy Corporation that includes the Report
of Independent Public Accountants. Certain prior year amounts have been
reclassified to conform with the presentation in the current year. 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; acquisition, development and operation of
independent power production facilities; energy marketing, risk management
and energy management services to large customers; storage, transmission
and processing of natural gas; and international energy 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 and twelve month periods ended March 31, 1997,
undistributed equity earnings were $13 million and $56 million,
respectively, and $21 million and $62 million for the three and twelve
months periods ended March 31, 1996.
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 Dow. 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.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
Pretax operating income $8 $2 $46 $27
Income taxes and other 2 - 14 7
--- --- --- ---
Net income $6 $2 $32 $20
=== === === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. 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. Consumers is
recovering 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. Beginning January 1, 1996, Consumers was also permitted
to recover an average capacity charge of 2.86 cents per kWh for the
remaining 325 MW of MCV Facility capacity. The approved average capacity
charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The
recoverable portion of the capacity charge for the last 216 MW of the 325
MW increases each year until it reaches 3.62 cents per kWh in 2004, and
remains at this ceiling rate through the end of the PPA term.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA.
Consumers believes that the original loss recorded remains adequate. At
March 31, 1997 and December 31, 1996, the after-tax present value of the
PPA liability totaled $140 million and $147 million, respectively. The
reduction in the liability since December 31, 1996 reflects after-tax cash
underrecoveries of $10 million partially offset by after-tax accretion
expense of $3 million. The undiscounted after-tax amount associated with
the liability totaled $535 million at March 31, 1997. Consumers
anticipates it will continue to experience cash underrecoveries associated
with the PPA as shown below.
In Millions
1997 1998 1999 2000 2001
Estimated cash under-
recoveries, net of tax $28 $23 $22 $21 $20
=== === === === ===
The amount of underrecoveries of power costs continues to be based, in
part, on management's best assessment of the future availability of the
MCV Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded and Consumers would
experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of a 1995 decision in the PSCR reconciliation case for 1993, 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 believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership
filed petitions for rehearing of the Court of Appeals opinion, which were
denied in January 1997.
3: Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order which
authorized Consumers to recover costs associated with the purchase of the
additional 325 MW of MCV Facility capacity (see Note 2) and to accelerate
recovery of its nuclear plant investment by charging $18 million of annual
steam production plant depreciation expense to the nuclear production
depreciation reserve. It also established a direct access program.
Customers having a maximum demand of at least 2 MW are eligible to
purchase generation services directly from any eligible third-party power
supplier. The program is limited to 650 MW of sales, of which 410 MW has
already been filled by existing contracts. An additional 140 MW may be
filled by new special contracts which Consumers has signed and submitted
to the MPSC for approval or direct access customers and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. In April 1997, a lottery was held to select the customers to
purchase 100 MW by direct access.
Gas Proceedings: In the GCR reconciliation proceeding for the period April
1995 through March 1996, an issue has arisen questioning whether revenue
from gas loaning (which was a new business activity for Consumers) should,
in whole or in part, be immediately passed through to customers. The ALJ
issued a proposal for decision in January 1997 that agreed with the MPSC
staff's position that the gas loaning program uses storage assets of
Consumers and therefore recommended that 90 percent of the revenue should
be refunded to customers. As of March 31, 1997, $7 million would be
subject to refund if the MPSC adopts the ALJ position. Consumers will
continue to oppose this view before the MPSC.
In 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program in Bay County, Michigan. The pilot program will
provide residential and small commercial customers the opportunity to
purchase gas from suppliers other than Consumers for a two-year period
beginning April 1997. Out of the 40,000 eligible customers, fewer than
500 volunteered to participate in the program. Consumers will retain its
role as transporter and distributor of this gas.
In 1995, the MPSC issued an order regarding a $44 million (excluding
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 changes 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 correctly concludes 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 effect on CMS Energy's financial position or results of
operations.
4: Short-Term and Long-Term Financings, and Capitalization
CMS Energy
CMS Energy has available unsecured, committed lines of credit totaling
$155 million and a $450 million unsecured revolving credit facility. At
March 31, 1997 and 1996, the total amount utilized under these facilities
was $216 million and $242 million, respectively. In addition, CMS Energy
currently has an unsecured $125 million term loan. CMS Energy is
negotiating with a group of banks to replace the unsecured revolving
credit facility and the term loan with a credit facility or facilities
consisting of a combination of unsecured revolving credit and term loan
tranches. CMS Energy expects that the aggregate borrowing capacity under
the new facility or facilities may range from $725 million to $1.125
billion. CMS Energy expects to enter into such new credit facility or
facilities in the second quarter of 1997. CMS Energy would also continue
to have available the unsecured, committed lines of credit totaling $155
million.
During the first quarter of 1997 CMS Energy issued $22 million of Series B
and $11 million of Series C GTNs. At March 31, 1997, CMS Energy had
issued and outstanding $250 million of Series A GTNs, $125 million of
Series B GTNs and $11 million of Series C GTNs with weighted-average
interest rates of 7.7 percent, 7.9 percent and 7.9 percent, respectively.
In May 1997, CMS Energy issued $350 million of senior unsecured notes due
May 15, 2002, at an interest rate of 8.125 percent. Proceeds were used in
part to pay down debt with the remainder to fund CMS Energy's equity
commitment in connection with the acquisition of a 50 percent interest in
the 2,000 MW Loy Yang A electric generating plant and associated mine
facilities in the State of Victoria, Australia..
Consumers
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility, and unsecured committed lines of credit aggregating $120 million
that are used to finance seasonal working capital requirements. At
March 31, 1997, a total of $88 million was outstanding at a weighted
average interest rate of 6.8 percent, compared with $38 million
outstanding at March 31, 1996, at a weighted average interest rate of 6.2
percent.
Consumers has also in place a $500 million trade receivables purchase and
sale program. At March 31, 1997 and 1996, receivables sold under the
agreement totaled $398 million and $280 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
In 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. Consumers Power Company Financing I was formed for
the sole purpose of issuing the Trust Originated Preferred Securities.
Its primary asset is $103 million principal amount of 8.36%8.36 percent
unsecured subordinated deferrable interest notes issued by Consumers which
mature in 2015. Consumers' obligations with respect to the Trust
Originated Preferred Securities under the notes, under the indenture under
which the notes have been issued, under Consumers' guarantee of the Trust
Originated Preferred Securities, and under the declaration by the trust,
taken together, constitute a full and unconditional guarantee by Consumers
of the trust's obligations under the Trust Originated Preferred
Securities.
Under the provisions of its Articles of Incorporation at March 31, 1997,
Consumers had $343 million of unrestricted retained earnings available to
pay common dividends. In April 1997, Consumers declared a $70 million
common dividend to be paid in May 1997.
5: Earnings Per Share and Dividends
In April 1997, Consumers declared a $70 million common dividend to be paid
to CMS Energy in May 1997. In the first quarter of 1997, Enterprises paid
common dividends and other distributions of $21 million to CMS Energy.
Earnings per share attributable to Common Stock, for the three and twelve
month periods ended March 31, 1997 and the three months ended March 31,
1996 reflect the performance of the Consumers Gas Group. Earnings per
share attributable to Common Stock, for the twelve months ended March 31,
1996 reflect the performance of the Consumers Gas Group since initial
issuance of Class G Common Stock during the third quarter of 1995. The
Class G Common Stock has participated in earnings and dividends from its
issue date. The allocation of 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 Shares are equal to Consumers
Gas Group net income (loss) multiplied by a fraction; the numerator is the
weighted average number of Outstanding Shares during the period and the
denominator represents the weighted average number of Outstanding Shares
and Retained Interest Shares during the period. The earnings attributable
to Class G Common Stock on a per share basis, for the three months ended
March 31, 1997 and 1996, are based on 24.29 percent of the income of the
Consumers Gas Group and 23.72 percent of the income of the Consumers Gas
Group since the initial issuance, respectively.
In January and April 1997, 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, payable in February and May 1997, respectively.
6: Commitments and Contingencies
Environmental Matters: Consumers is a so-called potentially responsible
party at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates that its share of the total liability
for the known sites will be between $2 million and $9 million. At March
31, 1997, Consumers has accrued $2 million for its estimated losses.
Under the Michigan Natural Resources and Environmental Protection Act,
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. Four of the five plans submitted by Consumers have been approved
by the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. 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 1997 costs. At March 31, 1997, 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 1996, environmental clean-up costs above the amount currently being
recovered in rates will be deferred and amortized over ten years. Rate
recognition of amortization expense will not begin until after a prudence
review in a general rate case. The order authorizes current recovery of
$1 million annually. Consumers is continuing discussions with certain
insurance companies regarding coverage for some or all of the costs that
may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur
dioxide and nitrogen oxides and require emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. The Act's provisions required
Consumers to make capital expenditures totaling $40 million to install
equipment at certain generating units. Consumers estimates capital
expenditures for in-process and proposed modifications at other coal-fired
units to be an additional $35 million by the year 2000. Management
believes that Consumers' annual operating costs will not be materially
affected as a result of these expenditures.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $1,465 million for 1997, $910 million for 1998 and $820
million for 1999. For further information regarding capital expenditures,
see Forward-Looking Information in the MD&A.
Other: As of March 31, 1997, CMS Energy and Enterprises have guaranteed
up to $102 million in contingent obligations of unconsolidated affiliates
and unrelated parties.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil
and natural gas. As of December 31, 1996, CMS NOMECO had contracts on
13.8 bcf of gas for the delivery months of January though December 1997 at
prices ranging from $1.92 to $2.80 per MMBtu and on 2.0 million barrels of
oil at prices ranging from $19.50 to $22.90 per barrel. CMS NOMECO had
made net payments of $4.0 million for settlement of January, February, and
March 1997 contracts on 4.0 bcf of gas and 810,000 bbls of oil. As of
March 31, 1997, the fair value of the remaining 1997 gas and oil contracts
reflected a net payment due 2015to CMS NOMECO of $1.6 million. These
arrangements are accounted for as hedges; accordingly, gains or losses are
deferred and recognized at such time as the hedged transaction is
completed. If there was a loss of correlation between the changes in (1)
the market value of the commodity price contracts and (2) the market price
ultimately received for the hedged item, and the impact was material, the
open commodity price contracts would be marked to market and gains and
losses would be recognized in the income statement currently.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing
the economic equivalent of 10,000 MMBtu per day at a fixed, escalated
price starting at $2.82 per MMBtu in 2001. The settlement periods are
each a one-year period ending December 31, 2001 through 2006 on 3.65
MMBtu. If the floating price, essentially the then current Gulf Coast
spot price, for a period is higher than the fixed price, the seller pays
CMS NOMECO the difference, and vice versa. If a party's exposure at any
time exceeds $5 million, that party is required to obtain a letter of
credit in favor of the other party for the excess over $5 million and up
to $10 million. At March 31, 1997, neither party was required to post a
letter of credit. As of March 31, 1997, the fair value of this contract
reflected [$13] million due to the seller, representing the amount
CMS NOMECO would have to pay to terminate the agreement.
A number of lawsuits have been filed against Consumers relating to the
effect of so-called stray voltage on certain livestock. Claimants contend
that stray voltage results when low-level electrical currents present in
grounded electrical systems are diverted from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
41
their intended path.
Consumers Power Company
Consolidated Statementsmaintains a policy of Common Stockholder's Equity
(Unaudited)
investigating all customer calls regarding
stray voltage and working with customers to address their concerns and has
an ongoing mitigation program to modify the service of all customers with
livestock. As of April 30, 1997, Consumers had 18 separate stray voltage
lawsuits awaiting trial court action, down from 22 lawsuits at year end
1996.
In addition to the matters disclosed in these notes, CMS Energy and
Consumers and certain of their 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 CMS Energy's financial position or results of
operations.
7: Nuclear Matters
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask.
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. Based on continuing
analysis of data from testing of similar materials, in 1996, Consumers
received an interim Safety Evaluation Report from the NRC indicating that
the reactor vessel can be safely operated through 2003 before reaching the
NRC's screening criteria for reactor embrittlement. Consumers believes
that with fuel management designed to minimize embrittlement, Palisades
might be operated to the end of its license life in the year 2007 without
annealing of the reactor vessel, but will continue to monitor the matter.
8: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 301997 1996 1997 1996
Cash transactions
Interest paid (net of amounts
capitalized) $ 63 $ 60 $257 $215
Income taxes paid (net of refunds) - 2 80 36
Non-cash transactions
Nuclear fuel placed
under capital lease $ 3 $ - $ 31 $ 20
Other assets placed
under capital leases 2 1 4 4
Common Stock issued to
acquire companies - - - 66
Assumption of debt - - - 4
Capital leases refinanced - - - 21
31
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of
CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
March 31, 1997 and 1996, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December
31, 1996, 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 24, 1997, 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, 1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 9, 1997.
32
Consumers Energy Company
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A in
Consumers' 1996 Form 10-K. This report contains forward-looking
statements as defined by the Private Securities Litigation Reform Act of
1995, 1996 1995 1996 1995including (without limitation) discussions as to expectations,
beliefs, plans, objectives and future financial performance, or
assumptions underlying or concerning matters discussed in this document.
These discussions, and any other discussions contained in this Form 10-Q
that are not historical facts, are forward-looking and, accordingly,
involve estimates, assumptions and uncertainties 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 cautionary statements) discussed elsewhere, 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, a 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
In Millions
COMMON STOCKMarch 31 1997 1996 Change
Three months ended $ 88 $ 94 $ (6)
Twelve months ended 254 234 20
The decrease in earnings for the first quarter of 1997 compared to the
same 1996 period reflects decreased gas deliveries due to warmer 1997
temperatures, decreased gas wholesale services revenues in 1997 and
decreased electric revenues because of special contract discounts
negotiated with large industrial customers. Partially offsetting these
decreases were the favorable impact of an electric rate increase received
in February 1996 which benefited the entire first quarter of 1997 and
improved operating results from the MCV Facility in which Consumers has a
49 percent interest. The increase in earnings for the twelve months ended
1997 compared to the 1996 period reflects the favorable impact of an
electric rate increase received in February 1996, revenues from value-
added services and gas wholesale services activities, and improved
operating results from the MCV Facility. In addition, other operating
income increased during the twelve months ended 1997 due to a FERC-ordered
refund received by the MCV Partnership from a gas pipeline supplier.
Partially offsetting these increases were decreased electric revenues
because of special contract discounts negotiated with large industrial
customers and decreased gas deliveries due to warmer temperatures during
the first quarter of 1997. For further information, see the Electric and
Gas Utility Results of Operations sections and Note 3.
Cash Position, Investing and Financing
Operating Activities: 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 $368 million and $308
million for the first three months of 1997 and 1996, respectively. The
$60 million increase resulted from changes in the timing of cash receipts
and payments related to Consumers' operations, offset by reduced cash from
gas sales. Operating cash is used primarily to maintain and expand
electric and gas systems, retire portions of long-term debt, and pay
dividends.
Investing Activities: Cash used in investing activities totaled $98
million and $103 million for the first three months of 1997 and 1996,
respectively. The cash was used primarily for capital expenditures.
Financing Activities: Cash used in financing activities totaled $262
million and $211 million for the first three months of 1997 and 1996,
respectively. The increase of $51 million in cash used reflects the 1997
absence of proceeds from preferred securities sold in 1996 offset by a
reduction in the decrease of notes payable.
Other Investing and Financing Matters: Several unsecured, committed lines
of credit totaling $120 million and a $425 million working capital
facility are available to meet short-term borrowing requirements to
finance working capital and gas in storage, and to pay for capital
expenditures between long-term financings. At beginningMarch 31, 1997 and 1996,
the total outstanding under these facilities was $88 million and $38
million, respectively. Consumers has FERC authorization to issue or
guarantee up to $900 million of short-term securities through 1998 and to
issue $500 million of long-term securities through November 1998 for
refinancing or refunding purposes. An agreement is also in place
permitting the sales of certain accounts receivable for up to $500
million. At March 31, 1997 and 1996, receivables sold totaled $398
million and $280 million, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions
March 31 1997 1996 Change
Three months ended $ 106 $ 106 $ -
Twelve months ended 412 388 24
Electric pretax operating income for all periods ending March 31, 1997
benefited from the favorable impact of an electric rate increase received
in February 1996. The first quarter of 1997 reflects three months of rate
increase compared to two months for the comparable quarter in 1996. The
twelve months ended 1997 reflects a full twelve months of rate increase
compared to only two months for the comparable period in 1996. The twelve
months ended 1997 also benefited from increased electric sales and lower
maintenance expenses when compared to the 1996 period. The increases in
both periods were partly offset by decreased revenues because of special
contract discounts negotiated with large industrial customers. The first
quarter of 1997 also reflects higher operating expenses than the
comparable 1996 period. During the twelve months ended 1997 there were
higher operation, depreciation and general tax expenses than in the
comparable prior period. The following table quantifies these impacts on
Pretax Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1997 vs 1996 1997 vs 1996
Sales (including special
contract discounts) $(3) $(12)
Rate increases and other
regulatory issues 9 51
Operations and maintenance (3) (4)
General taxes and depreciation (3) (11)
---- ----
Total change $ - $ 24
==== ====
Electric Sales: Total electric sales remained unchanged for the first
quarter while showing a 3.4 percent increase for the twelve months ended
March 31, 1997 over the comparable 1996 period. The table below reflects
electric kWh sales by class of customer for both periods:
In Billions of kWh
Three Months Ended Twelve Months Ended
March 31 1997 1996 Change 1997 1996 Change
Residential 2.9 3.0 (0.1) 10.9 10.9 -
Commercial 2.4 2.4 - 10.0 9.8 0.2
Industrial 3.0 2.9 0.1 13.0 12.6 0.4
Other 0.7 0.7 - 3.2 2.6 0.6
---- ---- ---- ---- ---- ----
Total sales 9.0 9.0 - 37.1 35.9 1.2
==== ==== ==== ==== ==== ====
Power Costs:
In Millions
March 31 1997 1996 Change
Three months ended $ 282 $ 260 $ 22
Twelve months ended 1,110 1,003 107
The cost increases for the three month and twelve month periods ended
March 31, 1997 reflect greater power purchases from outside sources to
meet sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. The MPSC currently allows Consumers to
recover substantially all payments for 915 MW of capacity purchased from
the MCV Partnership. Beginning January 1, 1996, Consumers was also
permitted to recover an average capacity charge of 2.86 cents per kWh for
the remaining 325 MW of MCV Facility capacity. The approved average
capacity charge increased to 3.62 cents per kWh for 109 MW by January 1,
1997. The recoverable portion of the capacity charge for the last 216 MW
of the 325 MW increases each year until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginningthe PPA term.
In 1992, Consumers recognized a loss for the present value of period 504 491 491 491 491 491
Stockholder's contribution - - 13 - 13 -
---------------------------------------------------------
Atthe
estimated future underrecoveries of power purchases from the MCV
Partnership and that estimate remains unchanged.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below. These after-tax cash
underrecoveries totaled $10 million for the first three months of 1997.
For further information, see Note 2.
In Millions
1997 1998 1999 2000 2001
Estimated cash under-
recoveries, net of tax $28 $23 $22 $21 $20
The amount of underrecoveries of power costs continues to be based, in
part, on management's best assessment of the future availability of the
MCV Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded and Consumers would
experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In 1996, the MPSC issued a final order which
authorized Consumers to recover the costs associated with the purchase of
the additional 325 MW of MCV Facility capacity and to accelerate recovery
of its nuclear plant investment by charging $18 million of annual steam
production plant depreciation expense to the nuclear production
depreciation reserve. It also established a direct access program.
Rehearing petitions have been ruled upon by the MPSC and resulted in no
material changes to the relief granted Consumers. For further discussion
on these issues, see Notes 2 and 3.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
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. Based on continuing
analysis of data from testing of similar materials, in 1996, Consumers
received an interim Safety Evaluation Report from the NRC indicating that
the reactor vessel can be safely operated through 2003, before reaching
the NRC's screening criteria for reactor embrittlement. Consumers
believes that with a change in fuel management designed to minimize
embrittlement, Palisades might be operated to the end of period 504 491 504 491 504 491
---------------------------------------------------------
REVALUATION CAPITAL
At beginningits license life
in the year 2007 without annealing of period 31 19 29 15the reactor vessel, but will
continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 6.
Electric Environmental Matters: The Clean Air Act contains significant
environmental constraints under which utilities will operate in the
future. While the Act's provisions will require that certain capital
expenditures be made to comply with nitrogen oxide emission limits,
generating units are currently operating at or near the sulfur dioxide
emission limits that will be effective in the year 2000. Management does
not believe that these expenditures will have a material effect on annual
operating costs.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, 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 the 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 5.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
As of April 30, 1997, 18 separate stray voltage lawsuits were awaiting
trial court action, down from 22 14
Change in unrealized investment-gain (loss) (1) 3 1 7 8 8
---------------------------------------------------------
Atlawsuits at year end 1996. Consumers
believes that the resolution of period 30 22 30 22 30 22
---------------------------------------------------------
RETAINED EARNINGS
At beginningthe remaining lawsuits will not have a
material impact on its financial position, liquidity or results of
period 305 135 237 80 191 107
Net income 69 63 230 202 283 245
Common stock dividends declared (39) - (114) (70) (114) (133)
Preferred stock dividends declared (7) (7) (21) (21) (28) (28)
Preferred securities distributions (2) - (6) - (6) -
---------------------------------------------------------
At end of period 326 191 326 191 326 191
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,701 $1,545 $1,701 $1,545 $1,701 $1,545
=========================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
42
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1995 Form 10-K of Consumers Power Company that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
Consumers, through 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.operations.
Gas Utility Results of Operations
Gas Pretax Operating Income:
In Millions
March 31 1997 1996 Change
Three months ended $ 78 $ 93 $(15)
Twelve months ended 143 156 (13)
Gas pretax operating income decreased in both the three month and twelve
month periods ended March 31, 1997, as a result of decreased gas
deliveries due to warmer temperatures during the first quarter of 1997 and
an extra day for leap year in 1996. The first quarter of 1997 also
reflects higher depreciation and general tax expenses, partially offset by
lower operation and maintenance expenses. The decrease in gas pretax
operating income for the twelve months ended March 31, 1997 also reflects
higher operation, depreciation and general tax expenses, partially offset
by lower maintenance expenses and benefits from gas wholesale services
activities. The following table quantifies these impacts on Pretax
Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1997 vs 1996 1997 vs 1996
Sales $(17) $(19)
Recovery of gas costs and other issues - 4
Gas wholesale services activities (1) 5
Operations and maintenance 4 (3)
General taxes, depreciation and other (1) -
---- ----
Total change $(15) $(13)
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, decreased 7.8 percent and
4.2 percent for the quarter and twelve months ended March 31, 1997,
respectively. The decreased deliveries for both periods reflect warmer
temperatures during 1997. The table below indicates total deliveries and
the impact of weather.
In bcf
Three Months Ended Twelve Months Ended
March 31 1997 1996 Change 1997 1996 Change
Weather-adjusted deliveries
(variance reflects growth) 146 145 1 335 332 3
Impact of weather and leap year (4) 9 (13) 5 23 (18)
--- --- --- --- --- ---
System deliveries excluding
transport to MCV Partnership 142 154 (12) 340 355 (15)
Transport to MCV Partnership 17 17 - 66 56 10
Other Transportation 9 14 (5) 24 24 -
--- --- --- --- --- ---
Total deliveries 168 185 (17) 430 435 (5)
=== === === === === ===
Cost of Gas Sold:
In Millions
March 31 1997 1996 Change
Three months ended $314 $346 $(32)
Twelve months ended 718 739 (21)
The decreases for the three month and twelve month periods ended March 31,
1997 were the result of decreased sales reflecting warmer temperatures and
an extra day for leap year in 1996.
Gas Utility Issues
Gas Rate Proceedings: 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 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 an MPSC-authorized gas
transportation rate must be borne by Consumers' shareholders. In 1995,
Consumers filed an appeal with the Court of Appeals, which is still
pending, claiming that the MPSC decision denies Consumers the opportunity
to earn its authorized rate of return and is therefore unconstitutional.
GCR Matters: In 1995, the MPSC issued an order regarding a $44 million
(excluding 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 correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be refunded to
customers. As of March 31, 1997, $7 million would be subject to refund if
the MPSC adopts the ALJ position. Consumers will continue to oppose this
view before the MPSC.
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, and 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 1997 costs. At March 31, 1997,
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. For further information regarding
environmental matters, see Note 5.
Forward-Looking Information
Forward-looking information is included throughout this report. Material
contingencies are also described in the 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,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy, inflation, capital market
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 the following capital
expenditures, including new lease commitments, by company and by business
segment over the next three years. These estimates are prepared for
planning purposes and are subject to revision.
In Millions
Years Ended December 31 1997 1998 1999
Consumers
Construction $356 $334 $330
Nuclear fuel lease 14 27 13
Capital leases other than nuclear fuel 12 16 14
Michigan Gas Storage 3 3 3
---- ---- ----
$385 $380 $360
==== ==== ====
Electric utility operations (a) $270 $277 $257
Gas utility operations (a) 115 103 103
---- ---- ----
$385 $380 $360
==== ==== ====
(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.
Electric Outlook: Consumers expects average annual growth of two to three
percent per year in electric system sales over the next five years, based
on the current industry configuration in Michigan. Actual electric sales
in future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity.
Consumers continues to work toward retaining its current retail service
customers by offering electric rates that are competitive with those of
other energy providers, and by improving reliability and customer
communications. Consumers is also planning for a future environment in
which open access is the predominant means by which retail service
customers obtain their power requirements.
Consumers' electric retail service is affected by competition in several
areas, including the potential installation of cogeneration or other self-
generation facilities by larger industrial customers; the formation of
municipal utilities that would displace retail service to an entire
community; competition from other utilities that offer flexible rate
arrangements designed to encourage movement of facilities or production to
their service areas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
caused by regulatory decisions and new state or federal legislation.
In 1996, the MPSC reduced the rate subsidization of residential customers
by large industrial and commercial customers. In addition, in an effort
to meet the challenge of competition, Consumers contracted with some of
its largest industrial customers to serve certain facilities a number of
years into the future. These contracts have been approved or are under
review at the MPSC. FERC issued Orders 888 and 889, as amended on
rehearing, requiring utilities to provide open access to the interstate
transmission grid for wholesale transactions. Several FERC requirements
have been implemented. However, one unresolved issue concerns the
Michigan Electric Power Coordination Center Pool, currently operated
jointly by Consumers and Detroit Edison. Consumers proposes to maintain
the benefits of the pool, while Detroit Edison seeks to terminate the
power pool agreement. The FERC is expected to rule on this issue in 1997.
In 1996, the MPSC staff recommended: 1) a program of direct access to
alternative sources of energy supply by retail electric customers starting
in 1997 and phasing in all customers through 2004; and 2) that Consumers
recover its transition costs through either a transition charge over a
ten-year period ending 2007 only to customers electing direct access or,
if the utility has been enabled to issue rate reduction bonds, through a
securitization charge to all customers over the term of the bonds.
Consumers would continue to provide delivery service to direct access
customers. In March 1997, Consumers filed data with the MPSC which
estimated that the portion of Consumers' transition costs which would be
recovered in the transition charge to direct access customers through 2007
would be $1.8 billion. Direct access implementation costs aggregating an
additional $200 million would also be recovered by a separate charge to
direct access customers. Alternatively, if the securitization approach is
pursued, the resulting securitization charge would be paid by all
Consumers customers to service $4 billion of rate reduction bonds. The $4
billion in rate reduction bonds includes the $1.8 billion of costs that
would otherwise have been recovered in the transition charge to direct
access customers, as well as the costs that would otherwise have been
recovered from customers on bundled rates prior to getting choice.
Consumers' data indicate that the securitization approach results in more
than a $200 million annual savings to customers compared to the rates they
would pay under the MPSC staff program in the absence of securitization
because the assumed 15-year repayment period of the bonds allows the cost
reimbursement by the customer to be spread out over a longer period than
without securitization and because securitization allows securitized costs
to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost
recovery, securitization of rate reduction bonds and generation
deregulation. Consumers currently expects that electric utility
restructuring will occur in a manner consistent with the MPSC staff
report, but cannot predict with certainty the timing of actual
implementation, the extent of customer choice, or resultant financial
impacts. Refer to the Consumers 1996 Form 10-K for further details.
Consumers currently applies the utility accounting standard, SFAS 71, that
recognizes the economic effects of rate regulation and, accordingly,
Consumers recorded regulatory assets and liabilities related to its
generation, transmission and distribution operations in its financial
statements. If rate recovery of generation-related costs becomes unlikely
or uncertain, whether due to competition or regulatory action, this
accounting standard may no longer apply to Consumers' generation segment.
Such a change could result in either full recovery of generation-related
regulatory assets (net of related regulatory liabilities) or a loss,
depending on whether Consumers' regulators adopt a transition mechanism
for the recovery of all or a portion of these net regulatory assets.
Based on a current evaluation of the various factors and conditions that
are expected to affect future cost recovery, Consumers believes even if it
was to discontinue application of SFAS 71 for the generation segment of
its business, that its regulatory assets, including those related to
generation, are probable of future recovery.
Gas Outlook: Consumers currently anticipates gas deliveries (excluding
transportation to the MCV Facility and off-system deliveries) to grow on
an average annual basis between one and two percent over the next five
years based primarily on a steadily growing customer base. Consumers has
several strategies to increase load requirements. 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. Consumers is also offering a variety of
energy-related services to its customers focused upon appliance
maintenance, home safety, and home security.
In 1996 the MPSC issued an order requesting Consumers and other local gas
distribution companies, whose rates are regulated by the MPSC, to develop
pilot programs that would allow customers to purchase gas directly from
other suppliers and have the gas transported through local pipelines.
These pilot programs are to last for two years and are intended to help
the MPSC determine whether it is appropriate to extend this option to all
retail customers. In December 1996, the MPSC approved Consumers' pilot
program for 40,000 customers in Bay County. The first customer
solicitation ended in March 1997 and resulted in one percent of the
customers choosing an alternative supplier for the next year. Another
solicitation period will begin in late 1997 for the period April 1998 -
March 1999; expected customer interest is unknown at this time.
Based on a regulated utility accounting standard, SFAS 71, Consumers is
allowed to defer certain costs to the future and record regulatory assets,
based on the recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas business,
and believes that sufficient regulatory assurance exists to provide for
the recovery of these deferred costs.
Other
New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per
Share and SFAS 129, Disclosure of Information about Capital Structure,
which are effective for year end 1997 financial statements. Consumers
does not expect the application of these statements to have a material
effect on its financial position, liquidity or results of operations.
42
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43
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Operating Revenue
Electric $ 620 $ 591 $2,474 $2,328
Gas 498 548 1,231 1,261
Other 9 4 49 33
------ ------ ------ ------
1,127 1,143 3,754 3,622
------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 69 73 292 289
Purchased power - related parties 151 140 600 507
Purchased and interchange power 62 47 218 207
Cost of gas sold 314 346 718 739
Other 130 132 583 574
------ ------ ------ ------
726 738 2,411 2,316
Maintenance 40 39 174 178
Depreciation, depletion and amortization 111 108 374 364
General taxes 57 56 192 191
------ ------ ------ ------
934 941 3,151 3,049
------ ------ ------ ------
Pretax Operating Income
Electric 106 106 412 388
Gas 78 93 143 156
Other 9 3 48 29
------ ------ ------ ------
193 202 603 573
------ ------ ------ ------
Other Income (Deductions)
Dividends from affiliates 4 4 17 16
Accretion income 2 3 9 11
Accretion expense (5) (7) (19) (30)
Other, net 1 - (4) 4
------ ------ ------ ------
2 - 3 1
------ ------ ------ ------
Interest Charges
Interest on long-term debt 35 35 138 140
Other interest 8 8 31 37
Capitalized interest - (1) (1) (3)
------ ------ ------ ------
43 42 168 174
------ ------ ------ ------
Net Income Before Income Taxes 152 160 438 400
Income Taxes 55 58 148 137
------ ------ ------ ------
Net Income 97 102 290 263
Preferred Stock Dividends 7 7 28 28
Preferred Securities Distributions 2 1 8 1
------ ------ ------ ------
Net Income Available to Common Stockholder $ 88 $ 94 $ 254 $ 234
====== ====== ====== ======
The accompanying condensed notes are an integral part of these statements.
44
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Million
Cash Flows from Operating Activities
Net income $ 97 $ 102 $ 290 $ 263
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $13, $13, $48 and $51, respectively) 111 108 374 364
Capital lease and other amortization 8 9 39 36
Deferred income taxes and investment tax credit - 3 46 37
Accretion expense 5 7 19 30
Accretion income - abandoned Midland project (2) (3) (9) (11)
Undistributed earnings of related parties (9) (4) (46) (30)
Power purchases (15) (12) (66) (112)
Other 1 3 3 6
Changes in other assets and liabilities 172 95 80 58
----- ----- ----- -----
Net cash provided by operating activities 368 308 730 641
----- ----- ----- -----
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease) (77) (83) (404) (422)
Investments in nuclear decommissioning trust funds (13) (13) (48) (51)
Cost to retire property, net (4) (6) (28) (39)
Other (4) 1 (4) 2
Deferred demand-side management costs - (2) (4) (10)
----- ----- ----- -----
Net cash used in investing activities (98) (103) (488) (520)
----- ----- ----- -----
Cash Flows from Financing Activities
Increase (decrease) in notes payable, net (245) (303) 50 (97)
Payment of capital lease obligations (8) (9) (38) (36)
Payment of preferred stock dividends (7) (7) (28) (28)
Preferred securities distributions (2) (1) (8) (1)
Retirement of bonds and other long-term debt - (1) (37) (1)
Proceeds from preferred securities - 97 - 97
Contribution from stockholder - 13 - 13
Payment of common stock dividends - - (200) (70)
Proceeds from bank loans - - 23 -
----- ----- ----- -----
Net cash used in financing activities (262) (211) (238) (123)
----- ----- ----- -----
Net Increase (Decrease) in Cash and Temporary Cash Investments 8 (6) 4 (2)
Cash and Temporary Cash Investments, Beginning of Period 4 14 8 10
----- ----- ----- -----
Cash and Temporary Cash Investments, End of Period $ 12 $ 8 $ 12 $ 8
===== ===== ===== =====
The accompanying condensed notes are an integral part of these statements.
45
Consumers Energy Company
Consolidated Balance Sheets
ASSETS March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Plant (At original cost)
Electric $6,412 $6,333 $6,130
Gas 2,242 2,203 2,207
Other 26 26 26
------ ------ ------
8,680 8,562 8,363
Less accumulated depreciation, depletion and amortization 4,378 4,269 4,195
------ ------ ------
4,302 4,293 4,168
Construction work-in-progress 114 158 199
------ ------ ------
4,416 4,451 4,367
------ ------ ------
Investments
Stock of affiliates 295 298 336
First Midland Limited Partnership (Note 2) 235 232 226
Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104
Other 9 8 9
------ ------ ------
679 672 675
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 12 4 8
Accounts receivable and accrued revenue, less allowances
of $8, $10 and $3, respectively (Note 4) 61 148 173
Accounts receivable - related parties 62 63 12
Inventories at average cost
Gas in underground storage 51 186 39
Materials and supplies 72 68 74
Generating plant fuel stock 44 30 16
Postretirement benefits 25 25 25
Deferred income taxes 21 27 23
Prepayments and other 132 183 143
------ ------ ------
480 734 513
------ ------ ------
Non-current Assets
Postretirement benefits 427 435 458
Nuclear decommissioning trust funds 401 386 323
Abandoned Midland Project 108 113 126
Other 239 234 309
------ ------ ------
1,175 1,168 1,216
------ ------ ------
Total Assets $6,750 $7,025 $6,771
====== ====== ======
46
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1997 December 31 1996
(Unaudited) 1996 (Unaudited)
In Millions
Capitalization
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 504 504 504
Revaluation capital 36 37 29
Retained earnings since December 31, 1992 385 297 331
------ ------ ------
1,766 1,679 1,705
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred securities
of Consumers Power Company Financing I (a) 100 100 100
Long-term debt 1,652 1,900 1,923
Non-current portion of capital leases 97 100 96
------ ------ ------
3,971 4,135 4,180
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 348 98 89
Accrued taxes 190 211 201
Accounts payable 164 212 165
Notes payable 88 333 38
Accounts payable - related parties 70 68 64
Power purchases (Note 2) 47 47 90
Accrued interest 25 33 26
Accrued refunds 6 8 28
Other 147 176 166
------ ------ ------
1,085 1,186 867
------ ------ ------
Non-current Liabilities
Deferred income taxes 633 646 599
Postretirement benefits 508 500 520
Power purchases (Note 2) 167 178 215
Deferred investment tax credit 157 159 166
Regulatory liabilities for income taxes, net 75 66 53
Other 154 155 171
------ ------ ------
1,694 1,704 1,724
------ ------ ------
Commitments and Contingencies (Notes 2, 3, 5 and 6)
Total Stockholders' Investment and Liabilities $6,750 $7,025 $6,771
====== ====== ======
(a) As described in Note 4 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.
47
Consumers Energy Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1997 1996 1997 1996
In Millions
Common Stock
At beginning and end of period $ 841 $ 841 $ 841 $ 841
------- ------- ------- -------
Other Paid-in Capital
At beginning of period 504 491 504 491
Stockholder's contribution - 13 - 13
------- ------- ------- -------
At end of period 504 504 504 504
------- ------- ------- -------
Revaluation Capital
At beginning of period 37 29 29 17
Change in unrealized investment-gain (loss) (1) - 7 12
------- ------- ------- -------
At end of period 36 29 36 29
------- ------- ------- -------
Retained Earnings
At beginning of period 297 237 331 167
Net income 97 102 290 263
Common stock dividends declared - - (200) (70)
Preferred stock dividends declared (7) (7) (28) (28)
Preferred securities distributions (2) (1) (8) (1)
------- ------- ------- -------
At end of period 385 331 385 331
------- ------- ------- -------
Total Common Stockholder's Equity $ 1,766 $ 1,705 $ 1,766 $ 1,705
======= ======= ======= =======
The accompanying condensed notes are an integral part of these statements.
48
Consumers Energy 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 Consumers 1996 Form 10-K 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, a holding company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to Dow. 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.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Summarized Statements of Income
Quarter Nine months 12 months
PeriodsThree Months Ended September 30Twelve Months Ended
March 31 1997 1996 19951997 1996 1995 1996 1995
Pretax operating income $19 $9 $31 $28 $38 $33$8 $2 $46 $27
Income taxes and other 6 3 9 8 112 - 14 7
--- --
--- --- --- ---
Net income $13 $6 $22$2 $32 $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.Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. 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 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. Consumers is
recovering 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. Beginning January 1, 1996, Consumers was also permitted
to recover an average capacity charge of 2.86 cents per kWh for the
remaining 325 MW of MCV Facility capacity. The approved average capacity
charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The
recoverable portion of the capacity charge for the last 216 MW of the 325
MW increases each year until it reaches 3.62 cents per kWh in 2004, and
remains at this ceiling rate through the end of the PPA term.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA.
Consumers believes that the original loss recorded remains adequate. At
March 31, 1997 and December 31, 1996, the after-tax present value of the
PPA liability totaled $140 million and $147 million, respectively. The
reduction in the liability since December 31, 1996 reflects after-tax cash
underrecoveries of $10 million partially offset by after-tax accretion
expense of $3 million. The undiscounted after-tax amount associated with
the liability totaled $535 million at March 31, 1997. Consumers
anticipates it will continue to experience cash underrecoveries associated
with the PPA as a result of the
Settlement Order. This loss was based, in part, on management's assessment
of the future availability of the MCV Facility and the effect of the future
power market on the amount, timing and price at which various increments of
the capacity, above the MPSC-authorized level, could be resold. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. If Consumers is
unable to sell any capacity above the 1993 MPSC-authorized level, future
additional after-tax losses and after-tax cash underrecoveries would be
incurred. Consumers' estimates of its after-tax cash underrecoveries and
possible losses for 1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will determine the levels of recovery from retail
customers at a later date. The Settlement Order also provides Consumers the
right to remarket to third parties the remaining contract capacity. The MCV
Partnership did not object to the Settlement Order. ABATE and the Attorney
General had appealed the Settlement Order to the Court of Appeals. 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 September 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $186 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $28 million, partially offset by
after-tax accretion expense of $12 million. The undiscounted after-tax
amount associated with the liability totaled $564 million at September 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 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 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
Consumers' 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 during the fourth 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.
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 outcome of 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, and the Michigan Supreme Court later denied the producers' petition
for review. In September 1996, the producers filed a petition 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 Consumers' financial position or results of operations.
4: Commitments and Contingencies
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are numerous
credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates that its share of the total liability for
the significant sites will be between $1 million and $9 million. At
September 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 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 September 30,
1996, Consumers has accrued a liability of $48 million and has established a
regulatory asset for approximately the same amount. Any significant change
in assumptions, such as remediation technique, nature and extent of
contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. In accordance with an MPSC
rate order issued in early 1996, Consumers is deferring environmental clean-
up costs incurred at these sites and amortizing these costs over ten years.
Rate recognition of amortization expense will not begin until after a
prudence review in a general rate case. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the costs
that may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur dioxide
and nitrogen oxides and require emissions monitoring. Consumers' coal-
fueled electric generating units burn low-sulfur coal and are 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 $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 $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 $450 million for 1996, $370 million for 1997, and
$375 million for 1998. For further information regarding capital
expenditures, see Forward-Looking Information in Consumers' MD&A.
Other: A number of lawsuits have been filed against Consumers relating to
so-called stray voltage. Claimants contend that stray voltage results when
low-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 September 30, 1996, Consumers had
31 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. 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; however, 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 has 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. 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.
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 twelve
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
The Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less. Other cash
flow activities and non-cash investing and financing activities for the
periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $111 $125 $145 $155
Income taxes paid (net
of refunds) 105 72 76 41
Non-cash transactions
Nuclear fuel placed under
capital lease $ 8 $ 24 $ 10 $ 27
Other assets placed under
capital leases 2 3 4 7
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
In October 1996, Consumers received FERC authorization to issue up to $900
million of short-term securities through 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 requirements.
At September 30, 1996, a total of $340 million was outstanding at a
weighted-average interest rate of 6.0 percent, compared with $474 million
outstanding at September 30, 1995, at a weighted-average interest rate of
6.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At September 30, 1996 and 1995, receivables sold
under the agreement totaled $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 Preferred
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 Preferred
Securities.
In September 1996, Consumers extended its nuclear fuel lease an additional
year to November 1998.
In October 1996, Consumers declared a $48 million common dividend to be paid
in November 1996.
50
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in Consumers' 1995 Form 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, assumptions 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 cautionary
statements) discussed elsewhere in this Form 10-Q, the Forward-Looking
Information section of this MD&A indicates some important factors that
could cause actual results or outcomes to differ materially from those
addressed in the forward-looking discussions.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
Consolidated Earnings for the Periods Ended September 30, 1996 and 1995
In Millions
Consolidated Earnings 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 favorable impact of an
electric rate increase received in February 1996. The nine-month and
twelve-month periods in 1996 reflect increased electric sales, gas
deliveries, and revenues from gas 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
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 $458 million and $318 million for the first
nine months of 1996 and 1995, respectively. The $140 million increase
resulted from increased electricity sales and 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 $359
million and $355 million for the first nine 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 $101
million for the first nine months of 1996, compared with $17 million
provided by financing activities for the corresponding period in 1995.
The net increase of $118 million in cash used in 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 October 1996, Consumers declared a $48 million common dividend to be
paid in November 1996. Consumers temporarily suspended its common
dividends from mid-1995 until early 1996 to improve its capital structure.
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 September 30, 1996, Consumers had a
total of $340 million outstanding under these facilities. In October
1996, Consumers received FERC authorization to issue up to $900 million of
short-term securities through 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
expenditures between long-term financings. Consumers has an agreement
permitting the sales of certain accounts receivable for up to $500
million. At September 30, 1996 and 1995, receivables sold totaled $210
million. In October 1996, Consumers requested FERC authorization to issue
$500 million of long-term securities for refunding purposes. Also in
October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
Electric Utility Results of Operations
Electric Pretax Operating Income for the Periods Ended September 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 in each period in 1996 reflects the
favorable impact of an electric rate increase received in February 1996.
The nine-month and twelve-month periods also reflect the benefit of
increased sales and lower maintenance expenses. The increases in each
period were partly offset by decreased revenues due to special contract
discounts negotiated with large industrial customers and increased
depreciation and operation expenses, and, for the nine-month and twelve-
month periods, higher general taxes. The following table quantifies these
impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $(12) $ (3) $11
Rate increases and other
regulatory issues 13 32 32
Operations and maintenance - 8 12
General taxes and
depreciation (1) (12) (19)
Other 1 3 8
----- --- ---
Total change $ 1 $28 $44
===== === ===
Electric Sales: Total electric sales increased for the quarter ended (2.7
percent), nine months ended (3.7 percent), and twelve months ended
September 30, 1996 (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 BillionsMillions
1997 1998 1999 2000 2001
Estimated cash under-
recoveries, net of kWhtax $28 $23 $22 $21 $20
The amount of underrecoveries of power costs continues to be based, in
part, on management's best assessment of the future availability of the
MCV Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded and Consumers would
experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of a 1995 decision in the PSCR reconciliation case for 1993, 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 believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership
filed petitions for rehearing of the Court of Appeals opinion, which were
denied in January 1997.
3: Rate Matters
Electric Sales
QuarterProceedings: In 1996, the MPSC issued a final order which
authorized Consumers to recover costs associated with the purchase of the
additional 325 MW of MCV Facility capacity (see Note 2) and to accelerate
recovery of its nuclear plant investment by charging $18 million of annual
steam production plant depreciation expense to the nuclear production
depreciation reserve. It also established a direct access program.
Customers having a maximum demand of at least 2 MW are eligible to
purchase generation services directly from any eligible third-party power
supplier. The program is limited to 650 MW of sales, of which 410 MW has
already been filled by existing contracts. An additional 140 MW may be
filled by new special contracts which Consumers has signed and submitted
to the MPSC for approval or direct access customers and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. In April 1997, a lottery was held to select the customers to
purchase 100 MW by direct access.
Gas Proceedings: In the GCR reconciliation proceeding for the period April
1995 through March 1996, an issue has arisen questioning whether revenue
from gas loaning (which was a new business activity for Consumers) should,
in whole or in part, be immediately passed through to customers. The ALJ
issued a proposal for decision in January 1997 that agreed with the MPSC
staff's position that the gas loaning program uses storage assets of
Consumers and therefore recommended that 90 percent of the revenue should
be refunded to customers. As of March 31, 1997, $7 million would be
subject to refund if the MPSC adopts the ALJ position. Consumers will
continue to oppose this view before the MPSC.
In 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program in Bay County, Michigan. The pilot program will
provide residential and small commercial customers the opportunity to
purchase gas from suppliers other than Consumers for a two-year period
beginning April 1997. Out of the 40,000 eligible customers, fewer than
500 volunteered to participate in the program. Consumers will retain its
role as transporter and distributor of this gas.
In 1995, the MPSC issued an order regarding a $44 million (excluding
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 changes 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 correctly concludes 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 effect on Consumers' financial position or results of operations.
4: Short-Term Financings and Capitalization
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility, and unsecured committed lines of credit aggregating $120 million
that are used to finance seasonal working capital requirements. At
March 31, 1997, a total of $88 million was outstanding at a weighted
average interest rate of 6.8 percent, compared with $38 million
outstanding at March 31, 1996, at a weighted average interest rate of 6.2
percent.
Consumers has also in place a $500 million trade receivables purchase and
sale program. At March 31, 1997 and 1996, receivables sold under the
agreement totaled $398 million and $280 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold.
In 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. Consumers Power Company Financing I was formed for
the sole purpose of issuing the Trust Originated Preferred Securities.
Its primary asset is $103 million principal amount of 8.36 percent
unsecured subordinated deferrable interest notes issued by Consumers which
mature in 2015. Consumers' obligations with respect to the Trust
Originated Preferred Securities under the notes, under the indenture under
which the notes have been issued, under Consumers' guarantee of the Trust
Originated Preferred Securities, and under the declaration by the trust,
taken together, constitute a full and unconditional guarantee by Consumers
of the trust's obligations under the Trust Originated Preferred
Securities.
Under the provisions of its Articles of Incorporation at March 31, 1997,
Consumers had $343 million of unrestricted retained earnings available to
pay common dividends. In April 1997, Consumers declared a $70 million
common dividend to be paid in May 1997.
5: Commitments and Contingencies
Environmental Matters: Consumers is a so-called potentially responsible
party at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates that its share of the total liability
for the known sites will be between $2 million and $9 million. At March
31, 1997, Consumers has accrued $2 million for its estimated losses.
Under the Michigan Natural Resources and Environmental Protection Act,
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. Four of the five plans submitted by Consumers have been approved
by the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. 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 1997 costs. At March 31, 1997, 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 1996, environmental clean-up costs above the amount currently being
recovered in rates will be deferred and amortized over ten years. Rate
recognition of amortization expense will not begin until after a prudence
review in a general rate case. The order authorizes current recovery of
$1 million annually. Consumers is continuing discussions with certain
insurance companies regarding coverage for some or all of the costs that
may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur
dioxide and nitrogen oxides and require emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. The Act's provisions required
Consumers to make capital expenditures totaling $40 million to install
equipment at certain generating units. Consumers estimates capital
expenditures for in-process and proposed modifications at other coal-fired
units to be an additional $35 million by the year 2000. Management
believes that Consumers' annual operating costs will not be materially
affected as a result of these expenditures.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $385 million for 1997, $380 million for 1998 and
$360 million for 1999. For further information regarding capital
expenditures, see Forward-Looking Information in the MD&A.
Other: A number of lawsuits have been filed against Consumers relating to
the effect of so-called stray voltage on certain livestock. Claimants
contend that stray voltage results when low-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 and has an ongoing mitigation program to modify the service of
all customers with livestock. As of April 30, 1997, Consumers had 18
separate stray voltage lawsuits awaiting trial court action, down from 22
lawsuits at year end 1996.
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.
6: Nuclear Matters
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask.
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. Based on continuing
analysis of data from testing of similar materials, in 1996, Consumers
received an interim Safety Evaluation Report from the NRC indicating that
the reactor vessel can be safely operated through 2003 before reaching the
NRC's screening criteria for reactor embrittlement. Consumers believes
that with fuel management designed to minimize embrittlement, Palisades
might be operated to the end of its license life in the year 2007 without
annealing of the reactor vessel, but will continue to monitor the matter.
7: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities were:
In Millions
Three Months Twelve Months
Ended Ended
March 31 1997 1996 1997 1996
Cash transactions
Interest paid (net of amounts
capitalized) $ 48 $ 45 $160 $164
Income taxes paid (net of refunds) 1 5 115 48
Non-cash transactions
Nuclear fuel placed under capital lease $ 3 $ - $ 31 $ 20
Other assets placed under capital leases 2 1 4 4
Capital leases refinanced - - - 21
53
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of March 31, 1997 and 1996,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and
subsidiaries as of December 31, 1996, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended Sept.(not presented herein), and, in our report dated January
24, 1997, 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, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 9, 1997.
54
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in CMS Energy's and Consumers' Forms 10-K for the
year ended December 31, 1996. Reference is made to the Condensed Notes to
the Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial
proceedings involving rate, operating and environmental matters.
CMS ENERGY EXEMPTION UNDER PUHCA
CMS Energy is exempt from registration under PUHCA. In addition to a
specific challenge to CMS Energy's exemption, there have been various
generic administrative and legislative proposals to repeal or revise PUHCA
in recent years. In April 1997, a bill was introduced in the United
States Senate which would repeal PUHCA without at the same time
deregulating the electric industry. The bill was referred to the Senate
Banking, Housing and Urban Affairs Committee, the chairman of which is a
co-sponsor of the bill.
CONSUMERS STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. At April 30, Nine months ended Sept. 30 12 months ended Sept. 301997,
Consumers had 18 separate stray voltage cases awaiting action at the trial
court level.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Consumers' Special Meeting of Shareholders held on March 10, 1997, the
shareholders approved an amendment to Consumers' Articles of Incorporation
changing the name from Consumers Power Company to Consumers Energy
Company. The vote was 84,108,789 shares in favor of the amendment, with
no shares voted against or abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(4) - CMS Energy: Third Supplemental Indenture dated as of May
6, 1997 between CMS Energy and NBD Bank, as
Trustee
(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) - CMS Energy: Restated 1996 Financial Data Schedules
(27)(c) - CMS Energy: Restated 1995 Var.Financial Data Schedules
(27)(d) - CMS Energy: Restated 1994 Financial Data Schedules
(27)(e) - Consumers: Financial Data Schedule
(27)(f) - Consumers: Restated 1996 Financial Data Schedules
(27)(g) - Consumers: Restated 1995 Var. 1996 1995 Var.
Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7Financial Data Schedules
(27)(h) - 7.5 7.3 0.2 9.8 9.5 0.3
Industrial 3.4 3.2 0.2 9.5 9.5Consumers: Restated 1994 Financial Data Schedules
(99) - 12.7 12.6 0.1CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
A Current Report on Form 8-K dated March 7, 1997 was filed by each of
CMS Energy and Consumers covering matters pursuant to "Item 5. Other
0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === === ==== ==== === ==== ==== ===
Power Costs:
In Millions
Power Costs at September 30 1996 1995 Change
Quarter $ 282 $270 $ 12
Nine months 802 731 71
Twelve months 1,041 958 83
The increases in each period resulted primarily from greater power purchases
from outside sources to meet increased sales demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and
for each subsequent year through the termination of the PPA in 2025. In
1993, the MPSC issued the Settlement Order that has allowed Consumers to
recover substantially all payments for 915 MW of contract capacity purchased
from the MCV Partnership. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals. In March 1996, the Court of
Appeals affirmed the Settlement Order. The market for the remaining 325 MW
of contract capacity was assessed at the end of 1992. This assessment,
along with the Settlement Order, resulted in Consumers recognizing a loss
for the present value of the estimated future underrecoveries of power
purchases from the MCV Partnership. Additional losses may occur if actual
future experience materially differs from the 1992 estimates. As
anticipated in 1992, Consumers continues to experience cash underrecoveries
associated with the Settlement Order. These after-tax cash underrecoveries
totaled $28 million for the first nine months of 1996. Estimated after-tax
cash underrecoveries and possible losses for 1996 and the next four years
are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in three
pending proceedings, including the electric rate case (discussed below) and
cost recovery for the entire 325 MW of MCV Facility capacity above the
MPSC's currently authorized 915 MW level. 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.
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 addressed
in connection with its consideration of the proposed settlement agreement
discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation and
special competitive service cases (discussed below) and cost recovery of the
entire 325 MW of uncommitted MCV Facility capacity. Consumers expects a
final order during the fourth 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 reallocate
certain portions of its utility plant from production to transmission,
resulting in a $28 million decrease in depreciation expense associated with
this transfer. If the MPSC approves both aspects of the 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 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 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.
Part 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 previously
identified weak areas. The report noted that performance in the areas of
maintenance and plant support was good and remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. Consumers
does not plan to load or unload any casks before the end of 1996, including
a cask in which a minor flaw has been detected. For further 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: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock. At
September 30, 1996, Consumers had 31 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 Periods Ended September 30, 1996 and
1995:
In Millions
Gas Pretax Operating Income (Loss)
at September 30 1996 1995 Change
Quarter $ (1) $ 2 $ (3)
Nine months 112 110 2
Twelve months 153 139 14
The quarter ended September 30, 1996 reflects lower deliveries and higher
operating costs. The nine-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 comparable periods in
1995, a previously recorded gas contract contingency (see Note 3) was
reversed, and operation, depreciation and general tax expenses were lower.
The following table quantifies these impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $24 $50
Reversal of gas contingencies - (23) (23)
Recovery of gas costs and
other issues 2 3 3
Gas loaning activities - 7 7
Operations and maintenance (6) (5) (16)
General taxes and depreciation - (4) (7)
--- --- ----
Total change $(3) $ 2 $14
=== === ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, decreased for the quarter ended (5.1 percent), but increased for
the nine months ended (8.9 percent), and twelve-months ended September 30,
1996 (14.2 percent) when compared with the corresponding 1995 periods. The
increased deliveries reflect growth resulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the nine months ended and twelve-months ended
September 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:
In Bcf
Gas Deliveries
Nine months ended 12 months ended
Sept. 30 Sept. 30
1996 1995 Var. 1996 1995 Var.
Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth)
Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9
----- ----- ---- ----- ------ ----
System deliveries
excluding transport
to MCV 241.1 221.4 19.7 354.5 310.5 44.0
Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2
----- ----- ---- ----- ----- ----
Total system deliveries 289.7 261.3 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 increases for the nine-month and twelve-month periods were the result of
increased sales and the reversal of a $23 million gas contract contingency
during the first quarter of 1995.
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, requesting
reconsideration of certain issues. This petition was denied in June 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 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 outcome of 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 September 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 environmental
clean-up costs and amortizing these costs over 10 years. The order
authorizes current recovery of $1 million annually. Consumers is continuing
discussions with certain insurance companies regarding coverage for some or
all of the costs 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, competition for retail
and wholesale customers, pricing and transportation of commodities, market
demand for energy, inflation, capital market 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 the following capital
expenditures, including new lease commitments, by company and by business
segment over the next three years:
In Millions
Years Ended December 31 1996 1997 1998
Consumers
Construction $403 $344 $334
Nuclear fuel lease 34 4 27
Capital leases other than
nuclear fuel 4 19 11
Michigan Gas Storage 9 3 3
---- ---- ----
$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 prepared for planning purposes and are subject to
revision.
Electric Outlook, Sales and Competition: The Governor of the State of
Michigan has requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities in light of increasing
competition in the utility industry. In April 1996, the MPSC directed
Consumers, Detroit Edison, and other electric utilities to file applications
addressing the recommendation of the Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and commercial electric load.
Consumers filed a proposed plan for open access transmission services, under
which Consumers could meet new demand in its service area by delivering
electricity from any supplier capable of providing power to Consumers'
electric system, provided certain reciprocity and other conditions were met.
Among the other conditions was a requirement that stranded costs would be
fully recovered from existing customers. The Michigan Jobs Commission's
recommendations also include related matters, such as the full recovery of
utility stranded costs.
No new legislation has been introduced. However, Consumers, Detroit Edison,
and the Jobs 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 time
for realization of 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.
Consumers currently expects approximately 2 percent average annual growth in
electric system sales over the next five years. Actual electric sales in
future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity as
discussed below.
Consumers' retail service is affected by competition in several areas,
including the installation of cogeneration or other self-generation
facilities by Consumers' larger industrial customers; the formation of
municipal utilities 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 significantly 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 the Attorney
General. Consumers does not expect this short-term experiment to have a
material impact on its financial position, liquidity or results of
operations.
In 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. Consumers intends to vigorously oppose the creation
of any such program before the MPSC and in the courts; however, Consumers
cannot predict the ultimate outcome of this matter.
SFAS 71 allows the deferral of certain costs and the recording of regulatory
assets. Management has evaluated Consumers' current regulatory position and
believes it continues to support the recognition of Consumers' electric-
related regulatory assets. If changes in the industry were to lead to
Consumers discontinuing the application of SFAS 71, for all or part of its
business, Consumers might be required to write off the portion of any
regulatory asset for which no regulatory assurance of recovery continued to
exist. Consumers does not believe that there is any current evidence that
supports the write-off of any of its electric-related regulatory assets.
Gas Outlook, Competition and Deliveries: Consumers currently anticipates
gas deliveries to grow approximately 2 percent per year (excluding
transportation to the MCV Facility and off-system deliveries) over the next
five years, assuming a steadily growing customer base. Additionally,
Consumers has several strategies 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 1996, the Low Income Home Energy Assistance Program provided $58 million
in heating assistance to Michigan households, with approximately 19 percent
of funds going to Consumers' customers. Federal legislative approval
provided Michigan residents with $55 million of funding for 1997. Consumers
therefore does not anticipate a significant change in its revenues from this
program in 1997.
In October 1996, the MPSC issued an 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 implemented in the second quarter of 1997,
are intended to help the MPSC determine whether it is appropriate to allow
all customers access to the competitive gas transportation 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 regulatory assurance
exists to provide for the recovery of these deferred costs.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in CMS Energy's and Consumers' Form 10-K for the
year ended December 31, 1995, and in Forms 10-Q for the quarters ended
March 31, 1996 and June 30, 1996. Reference is made to the Notes to the
Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial
proceedings involving rate, operating and environmental matters.
MCV - 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 and 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 separate appeals of this order. In
November 1996, the Court of Appeals affirmed the MPSC's order in all
respects. This proceeding is now closed.
STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when low level electrical currents present in grounded
electric systems are diverted from their intended path. At September 30,
1996, Consumers had 31 separate stray voltage cases awaiting action at the
trial court level and 10 cases on appeal or involved in the post-trial
process.
MPSC CASE NO. U-10029 - INTRASTATE GAS SUPPLY
In February 1993, the MPSC issued an order granting Consumers' request to
lower the price to be paid an intrastate gas supplier, North Michigan, who
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. The Michigan Supreme Court denied North Michigan's
application for leave to appeal the Court of Appeals' decision. In
September 1996, North Michigan filed a petition for a writ of certiorari
with the U.S. Supreme Court to review the Michigan Supreme Court'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 its constitutional rights to due process of law. Collateral
suits are still pending in the Court of Appeals.
ENVIRONMENTAL MATTERS
INDEPENDENT POWER PRODUCTION PROJECT
In June 1996, CMS Generation Operating Company, a CMS Generation
subsidiary, was informed by the U.S. Attorney's Office and the EPA of a
criminal investigation involving alleged violations of RCRA and
Superfund. These officials were investigating allegedly improper ash
disposal that may have occurred during 1993 at a plant in California
operated by CMS Generation Operating Company during the period in
question. In October 1996, CMS Generation Operating Company and the
officials investigating the matter signed a pretrial diversion agreement
under which CMS Generation Operating Company agrees to pay 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 matters alleged.
Payment of restitution under the pretrial diversion agreement will not
have a material adverse effect on the financial condition of CMS Energy.
This matter is now closed as it relates to CMS Energy and its
subsidiaries.
ITEM 6. EXHIBITS 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 June 30, 1996.
63
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: November 12, 1996 By A M Wright
AlanEvents."
56
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)
Dated: May 14, 1997 By A. M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: November 12, 1996 By A M Wright
------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS ENERGY COMPANY
------------------------------------
(Registrant)
Dated: May 14, 1997 By A. M. Wright
-----------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer