1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9261
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-1030
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CMS Energy Corporation, $.01 par value, shares outstanding
at July 31, 1994 - 86,072,098
Consumers Power Company, $10 par value, shares outstanding and privately
held by CMS Energy Corporation at July 31, 1994 - 84,108,789
2
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended June 30, 1994
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers Power Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Power Company makes no
representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I:
CMS Energy Corporation
Report of Independent Public Accountants. . . . . . . . . . . . 6
Consolidated Statements of Income . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 8
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Common Stockholders' Equity. . . . . 11
Condensed Notes to Consolidated Financial Statements. . . . . . 12
Management's Discussion and Analysis. . . . . . . . . . . . . . 27
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . 42
Consolidated Statements of Income . . . . . . . . . . . . . . . 43
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 44
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 45
Consolidated Statements of Common Stockholder's Equity. . . . . 47
Condensed Notes to Consolidated Financial Statements. . . . . . 48
Management's Discussion and Analysis. . . . . . . . . . . . . . 61
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 72
Item 4. Submission of Matters to a Vote of Security Holders. . 75
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 76
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
Articles. . . . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . . Big Rock Point nuclear plant, owned by
Consumers
Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . . . CMS Energy Corporation
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 MGL
CMS Midland . . . . . . . . . . . CMS Midland, Inc., a subsidiary of MGL
Consumers . . . . . . . . . . . . Consumers Power Company
Court of Appeals. . . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . . Michigan Department of Natural
Resources
DOE . . . . . . . . . . . . . . . U. S. Department of Energy
DSM . . . . . . . . . . . . . . . Demand-side management
Enterprises . . . . . . . . . . . CMS Enterprises Company, a subsidiary
of CMS Energy
EPA . . . . . . . . . . . . . . . Environmental Protection Agency
FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . . Gas cost recovery
GPSLP . . . . . . . . . . . . . . Genesee Power Station Limited
Partnership
GTN . . . . . . . . . . . . . . . $250 million CMS Energy General Term
Notes, Series A
kWh . . . . . . . . . . . . . . . Kilowatt-hour
mcf . . . . . . . . . . . . . . . Thousand cubic feet
MCV . . . . . . . . . . . . . . . Midland Cogeneration Venture
MCV Bonds . . . . . . . . . . . . Collectively, senior secured lease
obligation bonds and subordinated
secured lease obligation bonds issued
in connection with the leveraged-lease
financing of the MCV Facility, and
tax-exempt PCRBs
MCV Facility. . . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the
MCV Partnership
MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MichCon . . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
MMBtu . . . . . . . . . . . . . . Million British thermal unit
MMCG. . . . . . . . . . . . . . . Michigan Municipal Cooperative Group
MOAPA . . . . . . . . . . . . . . MOAPA Energy Limited Partnership, a
wholly owned affiliate of CMS
Generation
MPSC. . . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . . Megawatts
NOMECO. . . . . . . . . . . . . . NOMECO Oil & Gas Co., a wholly owned
subsidiary of Enterprises
Notes . . . . . . . . . . . . . . Collectively,
Series A . . . . . . . . . . . . Series A Senior Deferred Coupon Notes
of CMS Energy due October 1, 1997
Series B . . . . . . . . . . . . Series B Senior Deferred Coupon Notes
of CMS Energy due October 1, 1999
NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . . . Other operation and maintenance
expense
Order 636 . . . . . . . . . . . . Orders affecting interstate gas
pipelines, including Order 636A and
636B issued by the FERC in 1992, known
also as the Restructuring Rule
Palisades . . . . . . . . . . . . Palisades nuclear plant, owned by
Consumers
PCRB. . . . . . . . . . . . . . . Pollution control revenue bond
PPA . . . . . . . . . . . . . . . Power Purchase Agreement between
Consumers and the MCV Partnership with
a 35-year term commencing in March
1990
PSCR. . . . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . . . Public Utility Holding Company Act of
1935
PURPA . . . . . . . . . . . . . . Public Utility Regulatory Policies Act
of 1978
Revised Settlement Proposal . . . Request for approval of a settlement
proposal to resolve MCV cost recovery
issues, PURPA issues and court remand
as filed with the MPSC on July 7, 1992
and amended on September 8, 1992
SEC . . . . . . . . . . . . . . . Securities and Exchange Commission
Secured Credit Facility . . . . . $220 million secured Revolving Credit
Facility dated November 30, 1992
SERP. . . . . . . . . . . . . . . Supplemental Executive Retirement Plan
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
Trunkline . . . . . . . . . . . . Trunkline Gas Company
Unsecured Credit Facility . . . . $400 million unsecured Revolving Credit
and Letter of Credit Facility dated as
of July 29, 1994
5
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ARTHUR ANDERSEN & CO.
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
June 30, 1994 and 1993, and the related consolidated statements of income,
common stockholders' equity and cash flows for the three-month, six-month
and twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of CMS Energy Corporation and
subsidiaries as of December 31, 1993, 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 28, 1994, 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, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen & Co.
Detroit, Michigan,
August 8, 1994.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 549 $ 488 $1,094 $ 978 $2,193 $1,907
Gas utility 183 192 711 687 1,184 1,155
Oil and gas exploration and production 20 20 38 39 76 78
Independent power production 8 4 16 9 28 7
Natural gas pipeline, storage and marketing 36 37 78 73 147 128
Other - 1 1 2 4 5
---------------------------------------------------------
Total operating revenue 796 742 1,938 1,788 3,632 3,280
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 70 71 150 141 302 288
Purchased power - related parties 118 113 240 220 486 460
Purchased and interchange power 55 28 97 53 192 112
Cost of gas sold 123 132 495 481 815 797
Other 153 136 297 259 610 565
---------------------------------------------------------
Total operation 519 480 1,279 1,154 2,405 2,222
Maintenance 49 54 92 99 199 202
Depreciation, depletion and amortization 84 80 187 180 372 353
General taxes 36 46 97 106 184 192
---------------------------------------------------------
Total operating expenses 688 660 1,655 1,539 3,160 2,969
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 86 53 174 134 326 191
Gas utility 18 21 102 94 155 123
Oil and gas exploration and production 2 4 4 8 (1) 12
Independent power production 3 1 5 4 6 (5)
Natural gas pipeline, storage and marketing 3 2 6 4 9 7
Other (4) 1 (8) 5 (23) (17)
---------------------------------------------------------
Total pretax operating income 108 82 283 249 472 311
---------------------------------------------------------
INCOME TAXES 23 14 71 57 106 48
---------------------------------------------------------
NET OPERATING INCOME 85 68 212 192 366 263
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Income from contractual arrangements (MCV Bonds) - 8 - 16 16 33
Accretion income 4 3 7 7 13 15
Accretion expense (Note 2) (9) (9) (18) (18) (36) (18)
Loss on MCV power purchases - settlement - - - - - (520)
Other income taxes, net 4 1 7 6 18 174
Other, net 1 10 6 8 14 17
---------------------------------------------------------
Total other income (deductions) - 13 2 19 25 (299)
---------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 47 50 93 101 196 191
Other interest 3 5 6 10 19 32
Capitalized interest (2) (1) (3) (2) (6) (4)
Preferred dividends 7 3 10 6 15 11
---------------------------------------------------------
Net fixed charges 55 57 106 115 224 230
---------------------------------------------------------
NET INCOME (LOSS) $ 30 $ 24 $ 108 $ 96 $ 167 $ (266)
=========================================================
AVERAGE COMMON SHARES OUTSTANDING 86 80 86 80 84 80
=========================================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE $ .35 $ .30 $ 1.27 $ 1.20 $ 1.99 $(3.33)
=========================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .18 $ .12 $ .36 $ .24 $ .48 $ .48
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1994 1993 1994 1993
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 108 $ 96 $ 167 $(266)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $23,
$48 and $46, respectively) 187 180 372 353
Debt discount amortization 19 18 38 28
Capital lease amortization 14 16 28 38
Deferred income taxes and investment tax credit 49 52 53 (160)
Accretion expense (Note 2) 18 18 36 18
Accretion income - abandoned Midland project (7) (7) (13) (15)
MCV power purchases - settlement (Note 2) (45) (47) (82) (47)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (6) (6) (9) (1)
Changes in other assets and liabilities 107 74 (59) 15
--------------------------------------------
Net cash provided by operating activities 444 394 531 483
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (268) (230) (584) (524)
Investments in partnerships and unconsolidated subsidiaries (24) (25) (108) (37)
Investments in nuclear decommissioning trust funds (24) (23) (48) (46)
Cost to retire property, net (14) (13) (33) (18)
Deferred demand-side management costs (4) (28) (28) (47)
Proceeds from sale of property 1 - 2 11
Sale of subsidiary - - (14) -
Reduction of investments in MCV Bonds - - 322 10
Proceeds from Bechtel settlement - - - 46
Other (3) - (4) -
--------------------------------------------
Net cash used in investing activities (336) (319) (495) (605)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock 193 - 193 -
Proceeds from bank loans, notes and bonds 122 78 718 601
Issuance of common stock 17 - 149 -
Retirement of bonds (Note 8) (147) (51) (740) (55)
Increase (decrease) in notes payable, net (130) 26 (112) (297)
Repayment of bank loans (102) (91) (203) (92)
Payment of common stock dividends (31) (19) (61) (38)
Payment of capital lease obligations (12) (14) (24) (33)
Retirement of common stock (1) - (4) -
--------------------------------------------
Net cash provided by (used in) financing activities (91) (71) (84) 86
--------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 17 4 (48) (36)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 28 89 93 129
--------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 45 $ 93 $ 45 $ 93
============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
June 30 June 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $5,457 $5,347 $5,148
Gas 1,910 1,862 1,775
Oil and gas properties (full-cost method) 899 845 804
Other 326 294 249
----------------------------------
8,592 8,348 7,976
Less accumulated depreciation, depletion and amortization 4,173 4,022 3,910
----------------------------------
4,419 4,326 4,066
Construction work-in-progress 266 257 345
----------------------------------
4,685 4,583 4,411
----------------------------------
INVESTMENTS
First Midland Limited Partnership (Note 2) 215 213 210
Independent power production 121 115 55
Midland Cogeneration Venture Limited Partnership (Note 2) 67 67 68
Other 44 26 26
----------------------------------
447 421 359
----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 45 28 93
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 8) 160 149 91
Inventories at average cost
Gas in underground storage 160 228 151
Materials and supplies 78 74 77
Generating plant fuel stock 26 41 27
Trunkline settlement (Note 3) 30 31 32
Deferred income taxes 19 17 -
Investment in MCV Bonds - - 322
Prepayments and other 124 195 118
----------------------------------
642 763 911
----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 499 491 478
Nuclear decommissioning trust funds (Note 4) 191 165 137
Abandoned Midland project (Note 3) 155 162 169
Trunkline settlement (Note 3) 70 86 101
Other 318 293 202
----------------------------------
1,233 1,197 1,087
----------------------------------
TOTAL ASSETS $7,007 $6,964 $6,768
==================================
10
June 30 June 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 8)
Common stockholders' equity $1,058 $ 966 $ 808
Preferred stock of subsidiary 356 163 163
Long-term debt 2,407 2,405 2,568
Non-current portion of capital leases 124 115 114
----------------------------------
3,945 3,649 3,653
----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 262 368 237
Accounts payable 174 171 182
Accounts payable - related parties 39 46 51
Accrued taxes 141 233 160
Notes payable 129 259 241
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 41 28 64
Accrued interest 38 40 42
Deferred income taxes - - 35
Other 188 189 161
----------------------------------
1,094 1,416 1,254
----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 560 540 525
Deferred income taxes 555 509 383
MCV power purchases - settlement (Note 2) 363 391 411
Deferred investment tax credits 186 191 196
Trunkline settlement (Note 3) 70 86 101
Regulatory liabilities for income taxes, net 16 6 71
Other (Note 4) 218 176 174
----------------------------------
1,968 1,899 1,861
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,007 $6,964 $6,768
==================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
-------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 1,684 1,539 1,672 1,539 1,543 1,537
Common Stock reacquired - - (1) - (4) -
Common Stock issued 4 - 17 - 149 -
Common Stock reissued - 4 - 4 - 6
-------------------------------------------------------------------
At end of period 1,688 1,543 1,688 1,543 1,688 1,543
-------------------------------------------------------------------
REVALUATION CAPITAL (Note 6)
At beginning of period 1 - - - - -
SFAS 115 - unrealized loss,
net of tax (2) - (1) - (1) -
-------------------------------------------------------------------
At end of period (1) - (1) - (1) -
-------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (644) (751) (707) (813) (736) (432)
Net income (loss) 30 24 108 96 167 (266)
Common stock dividends declared (16) (9) (31) (19) (61) (38)
-------------------------------------------------------------------
At end of period (630) (736) (630) (736) (630) (736)
-------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,058 $ 808 $1,058 $ 808 $1,058 $ 808
===================================================================
<FN>
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 1993 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 most of
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 of which is
the automotive industry. Enterprises is engaged in several non-utility
energy-related businesses including: 1) oil and gas exploration and
production, 2) development and operation of independent power production
facilities, 3) gas marketing services to utility, commercial and
industrial customers, and 4) transmission and storage of natural gas.
CMS Energy uses the equity method of accounting for investments in its
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
revenue. For the three, six and 12 month periods ended June 30, 1994,
equity earnings were $5 million, $11 million and $19 million, respectively
and $3 million, $9 million and $7 million for the three, six and 12 month
periods ended June 30, 1993.
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
for 15- and 20-year periods, respectively. At June 30, 1994, Consumers,
through its subsidiaries, held the following assets related to the MCV:
1) CMS Midland owned a 49 percent general partnership interest in the MCV
Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor
interest in the MCV Facility.
Power Purchases from the MCV Partnership
Consumers' obligation to purchase contract capacity from the MCV
Partnership under the PPA follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC only allowed Consumers to recover costs of power
purchased from the MCV Partnership based on delivered energy for up to 840
MW at rates less than Consumers paid. In March 1993, the MPSC approved,
with modifications, the Revised Settlement Proposal which had been co-
sponsored by Consumers, the MPSC staff and 10 small power and cogeneration
developers. These parties accepted the Settlement Order and the MCV
Partnership confirmed that it did not object to the modifications. ABATE
and the Attorney General have filed claims of appeal of the Settlement
Order with the Court of Appeals.
The Settlement Order determined the cost of power purchased from the MCV
Partnership that Consumers can recover from its electric retail customers
and significantly reduced the amount of future underrecoveries for these
power costs. Effective January 1993, the Settlement Order allowed
Consumers to recover substantially all of the payments for its ongoing
purchase of 915 MW of contract capacity from the MCV Partnership.
Capacity and energy purchases from the MCV Partnership above the 915 MW
level can be competitively bid into Consumers' next solicitation for power
or, if necessary, utilized for current power needs with a prudency review
and a cost recovery determination in annual PSCR cases. In either
instance, the MPSC would determine the levels of recovery from customers
for the power purchased. The Settlement Order also provides Consumers the
right to remarket to third parties the remaining contract capacity, the
cost of which Consumers is currently not authorized to recover from retail
customers.
The PPA requires Consumers to pay to 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 scheduling deliveries of energy from
the MCV Partnership whenever it has energy available up to hourly
availability limits, or "caps," for the 915 MW of capacity authorized for
recovery in the Settlement Order. Consumers can recover an average 3.62
cents per kWh capacity charge and the prescribed energy charges associated
with the scheduled deliveries within the caps, whether or not those
deliveries are scheduled on an economic basis. Through December 1997,
there is no cap applied during on-peak hours to Consumers' recovery for
the purchase of capacity made available within the 915 MW authorized.
Recovery for purchases during off-peak hours is capped at 82 percent in
1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in
1998 and thereafter at which time the 88.7 percent cap is applicable
during all hours. For all economic energy deliveries above the caps to
915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment
in addition to the corresponding energy charge.
In December 1992, Consumers recognized an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power costs
under the PPA as a result of the Settlement Order. This loss included
management's best estimates regarding 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. Except for adjustments to the above
loss to reflect the after-tax time value of money through accretion
expense, no additional losses are expected unless actual future experience
materially differs from management's estimates. Because the calculation
of the 1992 loss depended in part upon estimates of future unregulated
sales of energy to third parties, a more conservative or risk-free
investment rate of 7 percent was used to calculate $188 million of the
total $343 million after-tax loss. The remaining portion of the loss was
calculated using an 8.5 percent discount rate reflecting Consumers'
incremental borrowing rate as required by SFAS 90, Regulated Enterprises-
Accounting for Abandonments and Disallowances of Plant Costs. The after-
tax expense for the time value of money for the loss is estimated to be
$24 million in 1994, and various lower levels thereafter, including $22
million in 1995 and $20 million in 1996. Although the settlement loss was
recorded in 1992, Consumers' continues to experience cash underrecoveries
associated with the Settlement Order. These after-tax cash
underrecoveries, including fixed energy charges, totaled $33 million for
the first six months of 1994. Consumers believes there is and will be a
market for the resale of capacity purchases from the MCV Partnership above
the MPSC-authorized level. However, if Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries could be incurred.
Consumers' estimates of its 1994 and future after-tax cash underrecoveries
and possible additional losses for the next five years if none of the
additional capacity is sold are as follows:
After-tax, In Millions
1994 1995 1996 1997 1998
- ---------------------------------------------------------------------
Expected cash underrecoveries $56 $65 $62 $61 $ 8
Possible additional
underrecoveries and losses (a) $14 $20 $20 $22 $72
=====================================================================
(a) If unable to sell any capacity above the MPSC's authorized level
At December 31, 1993, and June 30, 1994, the after-tax, present value of
the Settlement Order liability totaled $307 million and $289 million,
respectively. The reduction in the Settlement Order liability reflects
after-tax cash underrecoveries related to capacity totaling $30 million,
partially offset by after-tax accretion expense of $12 million.
The PPA, while requiring payment of a fixed energy charge, contains a
"regulatory out" provision which permits Consumers to reduce the fixed
energy charges payable to the MCV Partnership throughout the entire
contract term if Consumers is not able to recover these amounts from its
customers. In connection with the MPSC's approval of the Revised
Settlement Proposal, Consumers and the MCV Partnership are engaged in
arbitration proceedings under the PPA to determine whether Consumers is
entitled to exercise its regulatory out regarding fixed energy charges on
the portion of available MCV capacity above the current MPSC-authorized
levels. An arbitrator acceptable to both parties has been selected. If
the arbitrator determines that Consumers cannot exercise its regulatory
out, Consumers would be required to make these fixed energy payments to
the MCV Partnership even though Consumers may not be recovering these
costs. The arbitration proceedings will also determine who is entitled to
the fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to settlement. Although Consumers
believes its position on arbitration is sound and intends to aggressively
pursue its right to exercise the regulatory out, management cannot predict
the outcome of the arbitration proceedings or any possible settlement of
the matter. Accordingly, losses were recorded prior to 1993 for all fixed
energy amounts at issue in the arbitration. At June 30, 1994, $23 million
has been escrowed by Consumers and is included as a non-current asset in
Consumers' financial statements. In December 1993, Consumers made an
irrevocable offer to pay through September 15, 2007, fixed energy charges
to the MCV Partnership on all kWh delivered by the MCV Partnership to
Consumers from the contract capacity in excess of 915 MW, which represents
a portion of the fixed energy charges in dispute. Consumers made the
offer in connection with the sale of its remaining $309 million investment
in the MCV Bonds which was completed in 1993.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings. It
alleges breach of contract, breach of fiduciary duty and negligent or
fraudulent misrepresentation relating to the MCV Partnership's failure to
object to the Settlement Order in light of Consumers' interpretation of
the Settlement Order, which is the subject of the arbitration between the
MCV Partnership and Consumers discussed above. The action alleges damages
in excess of $1 billion and seeks injunctive relief relative to Consumers'
payments of the fixed energy charges. CMS Energy and Consumers believe
that at all times they and CMS Holdings have conducted themselves properly
and that the action is without merit. It appears from the face of the
complaint that a significant portion of the alleged damages represent
fixed energy charges in dispute in the arbitration. CMS Energy and
Consumers have requested that the lawsuit be dismissed for lack of
jurisdiction and have commenced a lawsuit in Midland, Michigan, to address
these issues. While management believes that the possibility of the
alleged damages being awarded is remote, CMS Energy and Consumers are
unable to predict the outcome of this issue. In addition, CMS Holdings
has filed a lawsuit in the circuit court of Jackson, Michigan, seeking
reimbursement of $7 million of certain tax indemnification payments made
to its partners in the FMLP and owed to CMS Holdings. Consumers is unable
to predict the outcome of this issue.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings.
In July 1994, Consumers agreed to pay $30 million to terminate a separate
power purchase agreement with a 65 MW coal-fired cogeneration facility.
Consumers is seeking MPSC approval to substitute 65 MW of less expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Consumers believes the
termination agreement and the proposed substitution of capacity represents
significant savings to its customers and will record a regulatory asset
for $30 million, which it believes will ultimately be recoverable in
rates.
PSCR Matters: Consistent with the terms of the 1993 Settlement Order,
Consumers withdrew its appeals of various MPSC orders issued in connection
with several PSCR cases. Consumers also agreed not to appeal any MCV-
related issues raised in future orders for these plan cases and related
reconciliations to the extent those issues are resolved by the Settlement
Order. In March 1994, the MPSC issued an order in the PSCR reconciliation
case for 1992 confirming Consumers' recovery for the purchase of 840 MW
from the MCV in accordance with the MPSC plan case order and allowing
recovery for the purchase of power above 840 MW based on replacement power
costs. In March 1994, the MPSC further confirmed, as part of a 1993 PSCR
plan case order, the recovery of MCV-related costs consistent with the
Settlement Order.
3: Rate Matters
Electric Rate Case
On May 10, 1994, the MPSC issued an order, granting Consumers a $58
million annual increase in its retail electric rates effective May 11,
1994. The order provides Consumers with higher revenues associated with
increased expenditures primarily related to capital additions, operation
and maintenance, higher depreciation and postretirement benefits computed
under SFAS 106, Employers' Accounting for Postretirement Benefits Other
than Pensions, and the continuation of certain demand-side management
programs at reduced levels. The MPSC order generally supported Consumers'
rate design proposal and reduced the level of subsidization of residential
customers by commercial and industrial customers. Residential customers
were assigned $40 million, which was 70 percent of the rate increase.
As finally revised, Consumers requested an electric rate increase for 1994
totaling $118 million and included an incremental increase request of $27
million in 1995. The MPSC's order did not provide Consumers with an
additional rate increase in 1995, but does allow Consumers to file a
separate rate-increase request for 1995. The order also differed from
Consumers' requested increase as it included a lower return on common
equity, a lower level of working capital, provided for a lower equity
ratio for Consumers' projected capital structure and reflected a $15
million decrease for lower property taxes due to a recent reduction in
state tax rates and a $9 million decrease for reduced demand-side
management program expenditures and miscellaneous costs which will not be
incurred. On June 9, 1994, Consumers filed a petition for rehearing and
clarification of this MPSC order. The petition requests reconsideration
of certain issues which include an incremental revenue requirement of $26
million for 1995, the level of rate cross-subsidization, the level of
future DSM expenditures and the calculation of DSM-related incentives and
penalties.
Special Rates: In June 1994, Consumers also filed a request with the MPSC,
seeking approval of a plan to offer competitive, special rates to certain
large qualifying customers. Consumers proposes to offer the new rates to
customers using high amounts of electricity that have expressed an
intention to or are capable of terminating purchases of electricity from
Consumers and have the ability to acquire energy from alternative sources.
To serve these customers, Consumers would use power purchases from the MCV
Partnership which exceed the 915 MW currently recoverable from electric
retail customers. The MPSC has granted an expedited hearing schedule on
this proposal that calls for final briefs to be filed in November 1994. A
final order is expected near the end of 1994.
Abandoned Midland Project: In 1984, Consumers abandoned construction of
its unfinished nuclear power plant located in Midland, Michigan, and
subsequently took a series of write-downs. In 1991, the MPSC issued
orders permitting recovery of a portion of the plant and Consumers began
collecting $35 million pretax annually for the next 10 years. Several
parties, including the Attorney General, have filed claims of appeal with
the Court of Appeals regarding MPSC orders issued in 1991 that specified
the recovery of abandoned investment. Thus far, the Court of Appeals has
not taken any action regarding these appeals.
Electric Demand-side Management: As a result of settlement discussions
regarding demand-side management and an MPSC order in 1991, Consumers
agreed to spend $65 million over two years on demand-side management
programs. Based on the MPSC's determination of Consumers' effectiveness
in implementing these programs, Consumers' future rate of return on common
equity may be adjusted either upward by up to 1 percent or downward by up
to 2 percent. This adjustment, if implemented, would be applied to
Consumers' retail electric tariff rates and be in effect for one year
following reconciliation hearings with the MPSC. The estimated revenue
effects of the potential adjustment range from an $11 million increase to
a $22 million decrease. The proceedings before the MPSC have started and
based on the criteria set out in the demand-side management settlement
agreement approved by the MPSC in 1992, Consumers has achieved all the
agreed-upon objectives. Consumers believes that the MPSC will ultimately
order a 1 percent increase on its return on common equity to be in effect
for one year. Accordingly, during the second quarter of 1994, Consumers
recognized $11 million in revenue, related to its demand-side management
program. A final order from the MPSC is expected by mid-1995.
In October 1993, Consumers completed the customer participation portion of
these DSM programs. In May 1994, as part of Consumers' electric rate
case, the MPSC issued an order that allowed Consumers to recover demand-
side management expenditures which exceeded $65 million. The order also
authorized Consumers to continue certain programs in 1994 through 1996.
Consumers is deferring program costs and amortizing the costs over the
period these costs are being recovered from its customers in accordance
with an accounting order issued by the MPSC in September 1992. The
unamortized balance of deferred costs at June 30, 1994 was $72 million.
PSCR Issues
Consumers began a planned refueling and maintenance outage at Palisades in
June 1993. Following several required, unanticipated repairs that
extended the outage, the plant returned to service in early November. In
addition, from mid-February through mid-June 1994, Palisades was
temporarily taken out of service to repair valve-leakage and conduct other
needed inspections and repairs. Recovery of replacement power costs
incurred by Consumers during these outages will be reviewed by the MPSC
during the 1993 and 1994 PSCR reconciliations of actual costs and revenues
to determine the prudency of actions taken during the outages. Any
finding of delay due to imprudence could result in disallowances of a
portion of replacement power costs. Net replacement power costs during
the outages were approximately $180,000 per day above the cost of fuel
incurred when the plant is operating. Consumers has conceded that one day
of the 1993 outage was inappropriate, while the MPSC staff has recommended
a 20-day disallowance totaling $3.7 million. See Note 4 for information
regarding the NRC's review of Palisades' performance.
Gas Rates
In July, 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
GCR Issues
The MPSC, in a February 1993 order, provided that the price payable to
certain intrastate gas producers by Consumers be reduced prospectively.
In a related case, Consumers was not allowed to recover $13 million of gas
supply costs incurred prior to February 8, 1993. Consumers previously had
accrued a loss sufficient for this issue. Future disallowances are not
anticipated, unless the remaining appeals filed by the intrastate
producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. As part of the settlement, Consumers will not incur any
transition costs from Trunkline as a result of FERC Order 636. In 1992,
Consumers had recorded a liability and regulatory asset for the principal
amount of payments to Trunkline over a five-year period. In May 1993, the
MPSC approved a separate settlement agreement that provides Consumers with
full recovery of these costs over a five-year period. At June 30, 1994,
Consumers' remaining liability and regulatory asset were $100 million.
Other
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been recently resolved. The dispute revolved
around whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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.
4: Commitments and Contingencies
Ludington Pumped Storage Plant Litigation
In 1986, the Attorney General filed a lawsuit on behalf of the State of
Michigan in the Circuit Court of Ingham County, seeking damages from
Consumers and Detroit Edison for alleged injuries to fishery resources
because of the operation of the Ludington Pumped Storage Plant. The state
sought $148 million (including $16 million of interest) for past injuries
and $89,000 per day for future injuries, with the latter amount to be
adjusted upon installation of "adequate" fish barriers and other changed
conditions.
In 1987, the Attorney General filed a second lawsuit alleging that
Consumers and Detroit Edison have breached a bottomlands lease agreement
with the state and asked that the lease be declared void. This complaint
was consolidated with the suit described in the preceding paragraph. In
1990, both of the lawsuits were dismissed on the basis of federal
preemption. In 1993, the Court of Appeals overturned the dismissal, as to
damages, effectively allowing the state to pursue its damages lawsuit
against Consumers and Detroit Edison, but generally affirmed the lower
court's ruling as to the breach of lease claim. The Court of Appeals'
ruling also limited any potential damages to those occurring no earlier
than 1983. The Michigan Supreme Court has granted Consumers', Detroit
Edison's and the Attorney General's requests for leave to appeal the Court
of Appeals' ruling, and a decision is expected in late 1995. Consumers
and Detroit Edison are seeking to have the trial court's dismissal of the
damages claim affirmed. The Attorney General is seeking to have the
dismissal of his lease claim overturned. Consumers is unable to predict
the outcome of these appeals or any liability that could be incurred
should the Supreme Court decide that the suit for damages may be pursued.
Each year since 1989, Consumers and Detroit Edison have complied with FERC
orders by installing a seasonal barrier net from April to October at the
Ludington plant site. The FERC is now considering whether the barrier net
(along with other actions by Consumers, including contributions to state
fish-stocking programs) would be a satisfactory permanent solution.
Environmental Matters
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
information currently known by management, Consumers believes that it is
unlikely that its liability at any of the known Superfund sites,
individually or in total, will have a material adverse effect on its
financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these manufactured gas plant sites to define the
nature and extent of contamination at these sites and to determine which
of several possible remedial action alternatives, including no action, may
be required under the Environmental Response Act. The DNR has approved
two of three plans for remedial investigation/feasibility studies
submitted by Consumers and is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study indicate that the expenditures for remedial action at this site are
likely to be minimal. However, Consumers did not believe that a single
site was representative of all of the sites. Data available to Consumers
and its continued internal studies have resulted in an estimate of
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At June 30, 1994,
Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial costs for
the sites.
Consumers believes that remedial costs are recoverable in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part of a gas rate
case. In that proceeding, the MPSC determined that prudent investigation
and remedial costs could be deferred and amortized over 10-year periods.
In order to be recovered in rates, prudent costs must be approved in a
rate case. Any costs amortized in years prior to filing a rate case may
not be recoverable. The MPSC stated that the length of the period may be
reviewed from time to time, but any revisions would be prospective. The
order further provided that the prudency review would include a review of
the utility's attempts to obtain reimbursement from others. The MPSC has
also approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs. Consumers has initiated discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
Included in the 1990 amendments to the federal Clean Air Act are
provisions that limit emissions of sulfur dioxide and nitrogen oxides and
require enhanced emissions monitoring. All of Consumers' coal-fueled
electric generating units burn low-sulfur coal and are presently operating
at or near the sulfur dioxide emission limits which will be effective in
2000. Beginning in 1995, certain coal-fueled generating units will
receive emissions allowances (all of Consumers' coal units will receive
allowances beginning in 2000). Based on projected emissions from these
units, Consumers expects to have excess allowances which may be sold or
saved for future use.
The Clean Air Act's provisions require Consumers to make capital
expenditures estimated to total $74 million through 1999 for completed,
in-process and possible modifications at coal-fired units based on current
regulations. Management believes that Consumers' annual operating costs
will not be materially affected.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's petition, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any additional costs will be incurred as a result
of this agreement.
In 1993, Consumers experienced increases in complaints relating to so-
called stray voltage. Claimants contend that stray voltage results when
small electrical currents present in grounded electric systems are
diverted from their intended path. Investigation by Consumers of prior
stray voltage complaints disclosed that many factors, including improper
wiring and malfunctioning of farm equipment, can lead to the stray voltage
phenomenon. 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 configuration of the
customer's hook-up to Consumers. A complaint seeking certification as a
class action suit was filed against Consumers in a local county circuit
court in 1993. The complaint alleged the existence of a purported class
that incurred damages in excess of $1 billion, primarily to certain
livestock owned by the purported class, as a result of stray voltage from
electricity being supplied by Consumers. Consumers believes the
allegations to be without merit and in March 1994, the circuit judge
hearing the complaint refused to grant class action status to the suit.
In April 1994, the plaintiffs in this action appealed the matter to the
Court of Appeals. Consumers believes that the various claims are
different enough to warrant separate trials, and that the circuit court's
denial of class-action status will be upheld. A number of individuals who
would have been part of the class action have refiled their claims as
separate lawsuits. At August 10, 1994, Consumers had 91 separate stray
voltage lawsuits pending.
Palisades Plant
In April 1993, the NRC approved the design of the dry spent fuel storage
casks now being used by Consumers at Palisades. In May 1993, the Attorney
General and certain other parties commenced litigation to block Consumers'
use of the storage casks, alleging that the NRC had failed to comply
adequately with the National Environmental Policy Act. The courts have
declined to prevent such use and have refused to issue temporary
restraining orders or stays. Several appeals relating to this matter are
now pending at the U.S. Sixth Circuit Court of Appeals. As of July 31,
1994, Consumers had loaded four dry storage casks with spent nuclear fuel
and expects to load nine additional casks in 1994 prior to Palisades' 1995
refueling. If Consumers is unable to continue to use the casks as
planned, significant costs could be incurred, including replacement power
costs during any resulting plant shutdown and costs related to removal of
the dry cask system. In March 1994, Consumers agreed to a request from
the NRC to complete certain tests and analysis regarding Consumers' cask
storage site at Palisades, including the effects of an earthquake on the
surrounding soil and the support pad on which the casks are placed. These
tests and analysis have been completed and conclude that the storage
system meets safety standards. The results were reviewed by the NRC
staff, and in May 1994, the NRC issued a preliminary report confirming the
safety of Consumers' dry cask storage system.
On August 2, 1994, Consumers announced that it would unload and replace
one of the four dry fuel storage casks at Palisades that contains spent
nuclear fuel. In examining radiographs during a review of the cask
manufacturer's quality assurance program, Consumers detected indications
of minor flaws in welds in the steel liner of the most recently loaded
cask. Although testing following cask loading did not disclose any
leakage from the cask, Consumers has nevertheless decided to remove the
spent fuel from this cask and insert it in another cask. Consumers has
examined the radiographs for all of the casks fabricated for it to date,
including the other three casks containing spent fuel, and have found all
other welds to be acceptable.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 3). The results of an NRC review of
Consumers' performance at Palisades published shortly thereafter showed a
decline in performance ratings for the plant. In order to provide NRC
senior management with a more in-depth assessment of plant performance,
the NRC conducted a diagnostic evaluation inspection at Palisades. The
inspection evaluated all aspects of nuclear plant operation and
management. The inspection, completed in June 1994, found performance,
operational and management deficiencies at Palisades. The NRC
acknowledged that the new Palisades senior management team, in place since
early 1994, had recognized and begun to address the problems at Palisades.
The NRC did not place Palisades on either of the NRC's "Troubled" or
"Declining Performance" lists. Consumers is required to file a response
to the NRC's diagnostic evaluation report by August 18, 1994, and is
currently finalizing a performance improvement plan which will form the
basis for that response. Attaining and maintaining acceptable performance
at Palisades will require continuing performance improvements and
additional expenditures at the plant, which have been included in
Consumers' total planned levels of expenditures.
Nuclear Decommissioning
Consumers collects estimated costs to decommission (decontamination and
dismantlement) its two nuclear plants through a monthly surcharge to
electric customers which currently totals $45 million annually. Consumers
currently estimates decommissioning costs of $208 million and $399
million, in 1993 dollars, for the Big Rock and Palisades nuclear plants,
respectively. Amounts collected from electric retail customers and
deposited in trusts, and earnings on the trusts, which are credited to
accumulated depreciation, are estimated to accumulate $425 million and
$1.2 billion for decommissioning Big Rock and Palisades, respectively.
The trust funds, which are estimated to earn 7.1 percent, will be used for
decommissioning Big Rock and Palisades at the end of their respective
license periods in 2000 and 2007. Consumers believes the amounts being
collected are adequate to meet its currently estimated decommissioning
costs and current NRC requirements. In order to meet those requirements,
Consumers prepared site-specific decommissioning cost estimates for Big
Rock and Palisades. In developing the estimates, Consumers assumed that
each plant site will be restored to conform with the adjacent landscape,
and that all contaminated equipment will be disassembled and disposed of
in a licensed burial facility. Consumers expects to file updated
decommissioning estimates with the MPSC on or before March 31, 1995. At
June 30, 1994, Consumers had an investment in a nuclear decommissioning
trust fund of $191 million for future decommissioning.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed: annual
provisions for decommissioning could increase; estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation and; trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Commitments for Coal and Gas Supplies
Consumers has entered into coal supply contracts with various suppliers
for its coal-fired generating stations. These contracts have expiration
dates that range from 1994 to 2004. Generally, Consumers contracts for
approximately 70% of its annual coal requirements which in 1993 totalled
approximately $260 million. Consumers supplements its long-term contracts
with spot market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1994 to 1999. Generally, Consumers contracts for approximately
75% of its annual gas requirements which in 1993 totalled approximately
$680 million. Consumers supplements its long-term contracts with spot-
market purchases to fulfill its gas needs.
Capital Expenditures
CMS Energy's estimated capital expenditures, including demand-side
management and new lease commitments, are $736 million for 1994, $741
million for 1995 and $633 million for 1996.
Public Utility Holding Company Act Exemption
CMS Energy is exempt from registration under PUHCA. However, the Attorney
General and the MMCG have asked the SEC to revoke CMS Energy's exemption
from registration under PUHCA. In 1992, the MPSC filed a statement with
the SEC recommending that CMS Energy's current exemption be revoked and a
new exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
Other
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 involving personal
injury and property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. The ultimate effect of the proceedings discussed in this
note is not expected to have a material impact on CMS Energy's financial
position or results of operations.
5: Effects of the Ratemaking Process
Consumers is subject to the provisions of SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Regulatory assets represent
probable future revenue to Consumers associated with certain incurred
costs as these costs are recovered through the ratemaking process. The
following regulatory assets (liabilities) which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets:
In Millions
June 30, 1994 Dec. 31, 1993 June 30, 1993
- ---------------------------------------------------------------------
Postretirement benefits $ 518 $ 510 $ 497
Income taxes 183 192 130
Abandoned Midland project 155 162 169
Trunkline settlement 100 117 133
Demand-side management -
deferred costs 72 71 51
Environmental clean-up 40 - -
DOE - decommissioning uranium
enrichment facility 32 33 36
Other 35 36 22
--------------------------------------
Total regulatory assets $1,135 $1,121 $1,038
=====================================================================
Income taxes $ (199) $ (195) $ (202)
Demand-side management -
deferred revenue (17) (17) (17)
--------------------------------------
Total regulatory liabilities $ (216) $ (212) $ (219)
=====================================================================
Consumers has MPSC orders to recover virtually all of its regulatory
assets through future rates and anticipates MPSC approval for recovery of
the remaining amounts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with original maturities of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended June 30 were:
In Millions
Six Months Ended Twelve Months Ended
- ---------------------------------------------------------------------
1994 1993 1994 1993
---- ---- ---- ----
Cash transactions
- -----------------
Interest paid (net of
amounts capitalized) $ 86 $ 100 $ 178 $ 208
Income taxes paid
(net of refunds) $ 23 $ 37 $ 18 $ 43
Non-cash transactions
- ---------------------
Nuclear fuel placed
under capital lease $ 3 $ 23 $ 8 $ 28
Other assets placed
under capital leases 7 21 16 48
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
=====================================================================
7: Financial Instruments
On January 1, 1994, CMS Energy adopted SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, requiring accounting for
investments in debt securities to be held to maturity at amortized cost;
otherwise debt and marketable equity securities are recorded at fair
value, with any unrealized gains or losses included in earnings if the
securities are for trading purposes or as a separate component of
stockholders' equity if the security is available for sale. CMS Energy
has nuclear decommissioning and SERP trusts classified as available for
sale securities with an amortized cost of $212 million and a fair market
value of $211 million. An unrealized loss on available for sale
securities of $2 million, $1 million and $1 million, net of taxes, is
included in common stockholders' equity for three, six and 12 months ended
June 30, 1994. CMS Energy also has certain equity investments classified
as trading securities with a carrying cost of $12 million and a fair
market value of $15 million. An unrealized gain (loss) on trading
securities of $(1) million, $2 million and $2 million, net of taxes, is
included in other income for three, six and 12 months ended June 30, 1994.
8: Capitalization and Other
CMS Energy
In January 1994, CMS Energy filed a registration statement with the SEC
permitting the issuance and sale of up to $250 million of GTNs. The net
proceeds are being used to reduce the amount of Notes outstanding and for
general corporate purposes. As of July 31, 1994, CMS Energy had committed
to issue approximately $40 million of GTNs with interest rates ranging
from 6.75 to 7.50 percent and to reduce the principle amount of Notes
outstanding by $55 million.
On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a
new $400 million Unsecured Credit Facility and extended the termination
date to June 30, 1997. At July 31, 1994, $129 million was outstanding at
a weighted average interest rate of 7.25 percent.
Consumers Power
Debt
Consumers has authorization from the FERC to issue or guarantee up to $900
million of short-term debt through December 31, 1994. Consumers has a
$470 million facility to finance seasonal working capital requirements and
unsecured, committed lines of credit aggregating $165 million. At June
30, 1994, Consumers had $100 million and $29 million, respectively,
outstanding under these facilities.
Consumers secures its first mortgage bonds by a mortgage and lien on
substantially all of its property. Consumers' ability to issue and sell
securities is restricted by certain provisions in its First Mortgage Bond
Indenture, Articles and the need for regulatory approvals in compliance
with appropriate state and federal law. In the first quarter of 1994,
Consumers redeemed first mortgage bonds totaling $100 million. These
redemptions completed Consumers' commitment to the MPSC, under the 1993
authorization to issue first mortgage bonds, to refinance certain long-
term debt.
In January 1993, Consumers entered into an interest rate swap agreement,
exchanging variable-rate interest for a fixed-rate interest of 5.2 percent
on the latest maturing $250 million of the then remaining $500 million
obligation under its long-term credit agreement. The swap arrangement has
the same term as the debt agreement and had the effect of increasing the
weighted average interest rate to 4.8 percent from 3.9 percent for the 12-
month period ended December 31, 1993. Under this credit agreement at
December 31, 1993, Consumers was required to make 10 remaining quarterly
principal payments of approximately $47 million. As of December 31, 1993,
the outstanding balance under this credit agreement totaled $469 million
with a weighted average interest rate of 4.0 percent.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. At June 30, 1994, receivables sold under the agreement
totaled $205 million as compared to $285 million at December 31, 1993.
In March 1994, Consumers issued and sold 8 million shares of Consumers'
$2.08 Class A Preferred Stock (cumulative, without par value) with a
stated annual dividend rate of 8.32 percent. Net proceeds to Consumers
were $193 million. The stock is redeemable at the option of Consumers, on
or after April 1, 1999, at a redemption price of $25 per share plus
accrued dividends.
In May 1994, Consumers received a $100 million equity investment from CMS
Energy. The investment was consistent with CMS Energy's plan to improve
Consumers' capital structure and was recognized and included in the
capitalization structure employed by the MPSC as part of Consumers' most
recent electric rate order.
At December 31, 1992, Consumers effected a quasi-reorganization, an
elective accounting procedure in which Consumers' accumulated deficit of
$574 million was eliminated against other paid-in capital. This action
had no effect on CMS Energy's consolidated financial statements. As a
result of the quasi-reorganization and subsequent accumulated earnings,
Consumers resumed paying common stock dividends during 1993. Consumers
has continued paying common stock dividends in 1994, including $16 million
attributable to 1993 earnings, and $66 million, attributable to current
year earnings. Additionally, in July 1994, Consumers declared a $31
million common stock dividend which is payable in August 1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock and further increased the maximum amount of
nuclear fuel that could be leased to $80 million. At June 30, 1994, $66
million was under lease.
In November 1992, the FASB issued SFAS 112, Employers' Accounting for
Postemployment Benefits, which Consumers adopted January 1, 1994.
Consumers pays for several postemployment benefits, the most significant
being workers' compensation. Because Consumers' postemployment benefit
plans do not vest or accumulate, the standard did not materially impact
Consumers' financial position or results of operations.
NOMECO
In November 1993, NOMECO amended the terms of its revolving credit
agreement and increased the amount to $110 million. At June 30, 1994, $83
million of revolving credit debt was outstanding at a weighted average
interest rate of 5.7 percent.
NOMECO has hedging arrangements which are used to reduce the risk of price
fluctuations for its gas purchases and its sale of oil and gas. These
arrangements limit potential gains/losses from any future
decrease/increase in the spot prices.
NOMECO has one gas supply hedge arrangement which is used to fix the price
that NOMECO will pay for gas to supply 100 percent of one gas sale
contract 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 NOMECO the difference, and vice
versa. If a party's exposure at any time exceeds $2 million, that party
is required to obtain a letter of credit in favor of the other party for
the excess over $2 million and up to $10 million, which is the maximum
exposure under this hedge arrangement. At December 31, 1993, the seller
had arranged a letter of credit in NOMECO's favor for $10 million.
NOMECO also 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, 1993, NOMECO was party to
gas price collar contracts on 7.3 bcf of gas for the delivery months of
January through December 1994 at prices ranging from $2.05 to $2.30 per
MMBtu. These hedging arrangements are accounted for as hedges;
accordingly, any gains or losses are deferred and recognized on the
settlement dates. As of December 31, 1993 and June 30, 1994, the fair
value of these hedge arrangements was not materially different than the
book value.
Enterprises
In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt
bonds. The bonds had been included in current maturities on the balance
sheet and the funds held in a trust account had been included as other
current assets. The bonds were issued in 1990 for the purpose of
providing partial funding for the development of a proposed tires-to-
energy solid waste disposal and resource recovery facility. The bonds
were redeemed due to the Nevada Public Service Commission's rejection of a
signed power purchase agreement for the facility.
27
CMS Energy Corporation
Management's Discussion and Analysis (MD&A)
This MD&A should be read along with the MD&A in the 1993 Form 10-K of CMS
Energy.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving most of
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 of which is
the automotive industry. Enterprises is engaged in several non-utility
energy-related businesses including: 1) oil and gas exploration and
production, 2) development and operation of independent power production
facilities, 3) gas marketing services to utility, commercial and
industrial customers, and 4) storage and transmission of natural gas.
Consolidated earnings for the quarters ended June 30, 1994 and 1993
Consolidated net income totaled $30 million or 35 cents per share for the
second quarter of 1994, compared to $24 million or 30 cents per share for
the corresponding second quarter of 1993. The increased net income
reflects increased electric utility sales resulting from Michigan's
continuing economic growth and warmer temperatures. Net income also
benefited from a mid-May 1994 electric rate increase and the lowering of
property taxes in Michigan.
Consolidated earnings for the six months ended June 30, 1994 and 1993
Consolidated net income totaled $108 million or $1.27 per share for the
six months ended June 30, 1994, compared to $96 million or $1.20 per share
for the six months ended June 30, 1993. The increased net income reflects
increased electric utility sales and gas utility deliveries resulting from
increased motor vehicle production, increased levels of employment and the
overall strong economic expansion in Consumers' service territory. In
addition, net income benefited from a mid-May 1994 electric rate increase.
Consolidated earnings for the 12 months ended June 30, 1994 and 1993
Consolidated net income totaled $167 million or $1.99 per share for the 12
months ended June 30, 1994, compared to a net loss of $266 million or
$3.33 per share for the 12 months ended June 30, 1993. The increased net
income reflects the impact of the Settlement Order related to the cost
recovery for power purchases from the MCV Partnership, the benefit of
increased electric utility sales and gas utility deliveries, and the
impact of a mid-May 1994 electric rate increase.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its principal subsidiaries. CMS Energy's consolidated operating cash
requirements are met by its operating and financing activities. CMS
Energy's consolidated cash from operations was derived mainly from
Consumers' sale and transportation of natural gas and its sale and
transmission of electricity and from NOMECO's sale of oil and natural gas.
Consolidated cash from operations for the first six months of 1994
primarily reflects the benefits of Consumers' record-setting electric
sales and significantly higher gas deliveries.
Financing Activities
As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed
Notes to Consolidated Financial Statements), and subsequent accumulated
earnings, Consumers resumed paying common stock dividends during 1993.
Consumers has continued paying common stock dividends in 1994, including
$16 million attributable to 1993 earnings, and $66 million attributable to
current year earnings. Additionally, in July 1994, Consumers declared a
$31 million common stock dividend, payable in August 1994.
In January 1994, CMS Energy filed a shelf registration statement with the
SEC permitting the issuance and sale of up to $250 million of GTNs. The
net proceeds are being used to reduce the amount of Notes outstanding and
for general corporate purposes. As of July 31, 1994, CMS Energy had
committed to issue approximately $40 million of GTNs with interest rates
ranging from 6.75 to 7.50 percent and to reduce the principle amount of
Notes outstanding by $55 million.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring $100 million of high-cost first mortgage
bonds. Also, in March 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with a stated
annual dividend rate of 8.32 percent. Net proceeds of $193 million from
the sale are targeted for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a
new $400 million Unsecured Credit Facility and extended the termination
date to June 30, 1997. At July 31, 1994, $129 million was outstanding at
a weighted average interest rate of 7.25 percent.
Investing Activities
Capital expenditures (excluding assets placed under capital lease),
deferred demand-side management costs and investments in unconsolidated
subsidiaries totaled $296 million for the first six months of 1994 as
compared to $283 million for the first six months of 1993. These amounts
primarily represent capital investments in CMS Energy's electric and gas
utility segments, and the continued expansion of the non-utility business
segments. CMS Energy's expenditures for the first six months of 1994 for
its utility and non-utility businesses were $198 million and $98 million,
respectively.
Outlook
CMS Energy estimates that capital expenditures, including demand-side
management and new lease commitments, will total approximately $2.1
billion for the years 1994 through 1996. Cash generated by operations is
expected to satisfy a substantial portion of capital expenditures.
Additionally, CMS Energy will continue to evaluate capital markets in 1994
as a potential source of financing its subsidiaries' investing activities.
In Millions
Years Ended December 31 1994 1995 1996
- --------------------------------------------------------------------------
Electric utility $ 354 $ 388 $ 308
Gas utility 131 122 111
Oil and gas exploration and production 161 100 100
Independent power production 62 101 99
Natural gas pipeline, storage and marketing 28 30 15
------------------------
$ 736 $ 741 $ 633
============================================================================
Consumers' short-term sources of credit include a $470 million working
capital facility and unsecured, committed lines of credit totaling $165
million. At June 30, 1994, Consumers had $100 million and $29 million,
respectively, outstanding under these facilities. Consumers has FERC
authorization to issue or guarantee up to $900 million in short-term debt
through December 31, 1994. Consumers uses short-term borrowings to
finance working capital, seasonal fuel inventory 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 June 30, 1994, receivables sold totaled $205 million as
compared to $285 million at December 31, 1993.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended June 30, 1994 and
1993: During the second quarter of 1994, electric pretax operating income
increased $33 million from the 1993 level. This increase reflects higher
electric system sales from both economic growth and the impact of warmer
weather on customer use of air conditioning equipment. Increased pretax
operating income also reflects the benefit of an electric rate increase
which went into effect during mid-May 1994 and the impact of lower
property taxes in Michigan. Also, during the second quarter of 1994,
Consumers recognized $11 million in revenue, related to DSM, based on
having achieved all objectives agreed-upon with the MPSC (see Note 3).
The increased sales growth is supported by Michigan's improvement in
employment and economic conditions. Several hourly, daily and monthly
records of electric use were also set during June 1994.
Electric Pretax Operating Income for the six months ended June 30, 1994
and 1993: The $40 million improvement in 1994 electric pretax operating
income compared to 1993 primarily is the result of increased electric
system sales and the May 1994 electric rate increase. Consumers Power
customers used more electricity during the first half of 1994 than in the
first half of any year in Consumers' history due in large part to
Michigan's increased levels of employment and overall economic expansion,
as well as record-setting warm temperatures in June.
Electric Pretax Operating Income for the 12 months ended June 30, 1994 and
1993: The $135 million improvement in 1994 electric pretax operating
income compared to 1993 primarily is the result of an increase of $75
million relating to the resolution of the recoverability of MCV power
purchase costs under the PPA, increased electric system sales of $58
million and the May 1994 electric rate increase, partially offset by
higher costs related to system reliability improvements.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:
In Millions
Quarter ended Six months ended 12 months ended
1994 Over 1994 Over 1994 Over
(Under) 1993 (Under) 1993 (Under) 1993
- ------------------------------------------------------------------------
Sales growth $10 $20 $45
Weather 2 5 13
Resolution of MCV
power cost issues - - 75
Rate increases and other
regulatory issues 17 18 29
O&M, general taxes and
depreciation (a) 4 (3) (27)
----------------------------------------
Total change $33 $40 $135
========================================================================
(a) The 12 months ended variance was largely caused by Consumers' system
reliability improvement program.
Electric Sales: Electric system sales during the second quarter of 1994
totaled 8.0 billion kWh, a 6.2 percent increase from 1993 levels. During
the three month 1994 period, residential and commercial sales increased
3.8 percent and 5.7 percent, respectively, while industrial sales
increased 8.1 percent, in each case over the corresponding period in 1993.
Consumers' electric sales have benefited from improved employment and
economic conditions, including General Motors Corporation's decisions to
expand truck and car production in Michigan assembly plants. Electric
system sales during the six months ended June 30, 1994 totaled 16.3
billion kWh, a 5.8 percent increase from 1993 levels. During the six
month 1994 period, residential and commercial sales increased 4.2 percent
and 3.8 percent respectively, while industrial sales increased 7.4
percent. Electric system sales during the 12 months ended June 30, 1994
totaled 32.6 billion kWh, a 5.6 percent increase from 1993 levels. During
the 12 month ended 1994 period, residential and commercial sales increased
5.1 percent and 4.6 percent respectively, while industrial sales increased
7.3 percent. Growth in the industrial sales was the strongest in the
automotive and chemical sectors.
The following table quantifies electric sales by customer type for the
periods ended June 30:
Electric Sales Millions of kWh
Quarter ended Six months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 2,318 2,234 5,157 4,947 10,276 9,782
Commercial 2,235 2,114 4,433 4,269 9,073 8,676
Industrial 3,139 2,905 6,001 5,589 11,953 11,143
Sales for resale 279 256 660 553 1,249 1,217
--------------------------------------------------
System sales (a) 7,971 7,509 16,251 15,358 32,551 30,818
==========================================================================
(a) Excludes intersystem exchanges of power with other utilities through
joint dispatching for the economic benefit of customers.
Power Costs: Power costs for the three-month period ending June 30, 1994
totaled $243 million, a $31 million increase from the corresponding 1993
period. This increase primarily reflects greater power purchases from
outside sources to meet increased sales demand and to supplement decreased
generation at Palisades due to an outage. Power costs for the six-month
period ending June 30, 1994 totaled $487 million, a $73 million increase
from the corresponding 1993 period essentially for the same reasons as the
quarter-over-quarter variance. Power costs for the 12-month period ending
June 30, 1994 totaled $980 million, an $120 million increase from the
corresponding 1993 period essentially for the same reasons as the quarter-
over-quarter and the six-month ended variances.
Electric Utility Rates
Power Purchases from the MCV Partnership: Consumers is obligated to
purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract
capacity from the MCV Partnership. In 1993, the MPSC issued the
Settlement Order that allows Consumers to recover substantially all
payments for 915 MW of contract capacity purchased from the MCV
Partnership. The market for the remaining 325 MW of contract capacity was
assessed at the end of 1992. This assessment, along with certain
estimates by Consumers, and other factors required by the Settlement
Order, resulted in Consumers recognizing an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power
purchases from the MCV Partnership. Except for adjustments to reflect the
time value of money through accretion expense, no additional losses are
expected unless actual future experience materially differs from
management's estimates. ABATE and the Attorney General have filed claims
of appeal of the Settlement Order with the Court of Appeals. Although the
settlement loss was recorded in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $33 million for the first six months of
1994. Consumers estimates that its after-tax cash underrecoveries will
total $56 million in 1994, increasing slightly for 1995 through 1997, and
then decreasing to $8 million in 1998. Possible additional losses for the
next five years if Consumers is unable to sell any capacity above the
MPSC's authorized level are estimated to be $14 million in 1994,
increasing slightly for 1995 through 1997, and then increasing to $72
million in 1998.
The PPA contains a "regulatory out" provision, permitting Consumers to
reduce the fixed energy charges payable to the MCV Partnership if
Consumers is not able to recover these amounts from its customers.
Consumers and the MCV Partnership are currently engaged in arbitration to
determine whether Consumers is entitled to exercise its rights under the
regulatory out provision. Consumers is escrowing the fixed energy amounts
in dispute until resolution of the arbitration is achieved.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings, alleging
breach of contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order. The action alleges damages in excess of $1 billion and
seeks injunctive relief relative to Consumers' payments of the fixed
energy charges. CMS Energy and Consumers believe that at all times they
and CMS Holdings have conducted themselves properly and that the action is
without merit. It appears from the face of the complaint that a
significant portion of the alleged damages represent fixed energy charges
in dispute in the arbitration. CMS Energy and Consumers have requested
that the lawsuit be dismissed for lack of jurisdiction and have commenced
a lawsuit in Midland, Michigan, to address these issues. While management
believes that the possibility of the alleged damages being awarded is
remote, CMS Energy and Consumers are unable to predict the outcome of this
issue. In addition, CMS Holdings has filed a lawsuit in a local circuit
court seeking reimbursement of $7 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings.
Consumers is unable to predict the outcome of this issue.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings. For further
information regarding power purchases from the MCV Partnership, see Note
2.
In July 1994, Consumers agreed to pay $30 million to terminate a separate
power purchase agreement with a 65 MW coal-fired cogeneration facility.
Consumers is seeking MPSC approval to substitute 65 MW of less expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Consumers believes the
termination agreement and the proposed substitution of capacity represents
significant savings to its customers and will record a regulatory asset
for $30 million, which it believes will ultimately be recoverable in
rates.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 1994,
Palisades was temporarily taken out of service to repair valve-leakage and
conduct other needed inspections and repairs. Recovery of replacement
power costs and the prudency of actions taken during the outages will be
reviewed by the MPSC during the 1993 and 1994 PSCR reconciliations of
actual costs and revenues. For more information on the potential impact
of the outages, see Note 3.
Electric Rate Case: On May 10, 1994, the MPSC issued an order, granting
Consumers a $58 million annual increase in its retail electric rates
effective May 11, 1994. The order provides Consumers with higher revenues
associated with increased expenditures primarily related to capital
additions, operation and maintenance, higher depreciation and
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, and the continuation of
certain demand-side management programs at reduced levels. The MPSC order
generally supported Consumers' rate design proposal and reduced the level
of subsidization of residential customers by commercial and industrial
customers. On June 9, 1994, Consumers filed a petition for rehearing and
clarification of this MPSC order. The petition requests reconsideration
of certain issues, which include an incremental revenue requirement of $26
million for 1995, the level of rate cross-subsidization, the level of
future DSM expenditures and the calculation of DSM-related incentives and
penalties.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. The MPSC has granted an expedited hearing
schedule that calls for final briefs to be filed in November 1994. A
final order is expected near the end of 1994. For further information,
see Note 3.
Electric Conservation Efforts
In 1993, Consumers completed the customer participation portion of several
demand-side management programs designed to encourage the efficient use of
energy. Based on the MPSC's determination of Consumers' effectiveness in
implementing these programs, Consumers' future rate of return on electric
common equity may be adjusted for one year either upward by up to 1
percent or downward by up to 2 percent. The proceedings before the MPSC
have started and based on the criteria set out in the demand-side
management settlement agreement approved by the MPSC in 1992, Consumers
has achieved all the agreed-upon objectives. Consumers believes that the
MPSC will ultimately order a 1 percent increase on its return on common
equity to be in effect for one year. Accordingly, during the second
quarter of 1994, Consumers recognized $11 million in revenue, related to
its demand-side management program. A final order from the MPSC is
expected by mid-1995. In May 1994, as part of Consumers' electric rate
case, the MPSC issued an order that authorized Consumers to continue
certain demand-side management programs at reduced levels. For further
information, see Note 3.
Electric Capital Expenditures
CMS Energy estimates capital expenditures, including deferred demand-side
management costs and new lease commitments, related to its electric
utility operations of $354 million for 1994, $388 million for 1995 and
$308 million for 1996. These amounts include an attributed portion of
anticipated capital expenditures for common plant and equipment.
Electric Environmental Matters
The 1990 amendment of the federal Clean Air Act significantly increased
the environmental constraints that utilities will operate under in the
future. While the Clean Air Act's provisions will require Consumers to
make certain capital expenditures in order to comply with the amendments
for nitrogen oxide reductions, Consumers' generating units are presently
operating at or near the sulfur dioxide emission limits which will be
effective in the year 2000. Therefore, management believes that
Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates or from others.
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 or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
A recent NRC review of Consumers' performance at Palisades showed a
decline in performance. Management believes that an increased emphasis on
internal assessments will improve performance at Palisades. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. The inspection, completed in June 1994, found
performance, operational and management deficiencies at Palisades. The
NRC acknowledged that the new Palisades senior management team, in place
since early 1994, had recognized and begun to address the problems at
Palisades. The NRC did not place Palisades on either of the NRC's
"Troubled" or "Declining Performance" lists. Consumers is required to
file a response to the NRC's diagnostic evaluation report by August 18,
1994, and is currently finalizing a performance improvement plan which
will form the basis for that response. Attaining and maintaining
acceptable performance at Palisades will require continuing performance
improvements and additional expenditures at the plant, which have been
included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks and Consumers' use
of the casks are now pending at the U.S. Sixth Circuit Court of Appeals.
If Consumers is unable to continue to use the casks as planned,
significant costs could be incurred, including replacement power costs
during any resulting plant shutdown and costs related to removal of the
dry cask system. In March 1994, Consumers agreed to a request from the
NRC to complete certain tests and analysis regarding Consumers' cask
storage site, including the effects of an earthquake on the surrounding
soil and the support pad on which the casks are placed. These tests and
analysis have been completed and conclude that the storage system is
adequate. The results were reviewed by the NRC staff, and in May 1994,
the NRC issued a preliminary report confirming the safety of Consumers'
dry cask storage system. For further information on Consumers' dry cask
storage, see Note 4.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. For further information
on nuclear decommissioning, see Note 4.
Consumers has experienced recent increases in complaints relating
primarily to the effect of so-called stray voltage on certain livestock.
A complaint seeking certification as a class action suit was filed in 1993
against Consumers alleging significant damages, primarily related to
certain livestock. Consumers believes the allegations to be without merit
and in March 1994, the circuit judge hearing the complaint refused to
grant class action status to the suit. This decision is being appealed by
the plaintiffs and a number of individuals who would have been part of the
class action have refiled their claims as separate lawsuits. At August
10, 1994, Consumers had 91 separate stray voltage lawsuits pending (see
Note 4).
Some of Consumers' larger industrial customers are exploring the
possibility of constructing and operating their own on-site generating
facilities. Consumers is actively working with these customers to develop
rate and service alternatives designed to compete with self-generation
options. Although Consumers' electric rates are competitive with other
regional utilities, Consumers has on file with the FERC two open access
interconnection tariffs which could have the effect of increasing
competition for wholesale customers. As part of its most recent electric
rate case, the MPSC reduced the level of rate subsidization of residential
customers by commercial and industrial customers so as to further improve
rate competitiveness for its largest customers. Consumers has also
requested MPSC authorization to offer special contract rates to attract
industrial and commercial customers into its service territory and to
retain certain customers using high amounts of electricity that have
expressed an intention and have the ability to acquire energy from other
sources (see Note 3).
In April 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. Rates to be used for the experiment have yet
to be determined and a final MPSC order on the program is not expected
until mid-1995. Consumers does not expect this experiment to have a
material impact on its financial position or results of operations.
On July 15, 1994, the FERC approved new 40-year licenses for 11 of
Consumers' hydroelectric plants, confirming planned environmental
expenditures. In issuing the licenses, the FERC approved, with
modifications, a settlement agreement signed by Consumers, the Attorney
General, the DNR and other state and federal officials. The parties to
the original settlement agreement have 30 days to approve the settlement
agreement as modified. The agreement requires Consumers to make payments
and investments which could total $30 million over the license periods for
such things as environmental safeguards and fishery habitat improvements.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended June 30, 1994 and 1993:
During the second quarter of 1994 gas pretax operating income decreased
$3 million from the 1993 level. This decrease reflects lower gas
deliveries (both sales and transportation volumes), and higher costs
related to system reliability improvements.
Gas Pretax Operating Income for the six months ended June 30, 1994 and
1993: The $8 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs, partially offset by higher costs related to system reliability
improvements.
Gas Pretax Operating Income for the 12 months ended June 30, 1994 and
1993: The $32 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended June 30:
In Millions
Quarter ended Six months ended 12 months ended
1994 Over 1994 Over 1994 Over
(Under) 1993 (Under) 1993 (Under) 1993
- ------------------------------------------------------------------------
Deliveries $(4) $ 13 $21
Regulatory recovery
of gas cost 2 1 8
O&M, general taxes
and depreciation (1) (6) 3
-----------------------------------------
$(3) $ 8 $32
========================================================================
Gas Deliveries: Gas sales and gas transported during the second quarter
of 1994 totaled 71.7 bcf, a 3.7 percent decrease from the corresponding
1993 level. For the six months ended June 30, 1994 gas sales and gas
transported totaled 247.7 bcf, a 7.5 percent increase from the
corresponding 1993 level. For the 12 months ended June 30, 1994 gas sales
and gas transported totaled 425.1 bcf, a 6.5 percent increase from the
corresponding 1993 level.
The following table quantifies gas deliveries by customer type for the
periods ended June 30:
Gas Sales Thousands of Mcf
Quarter ended Six months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 25,366 27,616 111,678 104,662 181,873 172,053
Commercial 7,404 8,347 36,237 33,810 58,306 55,025
Industrial 1,876 2,119 9,069 8,332 14,656 13,638
Other 135 24 241 109 362 190
---------------------------------------------------
Gas sales 34,781 38,106 157,225 146,913 255,197 240,906
Transportation
deliveries 14,064 14,551 39,387 37,530 72,333 68,413
Transportation for MCV 19,020 17,844 39,326 35,544 77,186 65,607
Off-system trans-
portation service 3,854 3,996 11,801 10,454 20,420 24,377
---------------------------------------------------
Total deliveries 71,719 74,497 247,739 230,441 425,136 399,303
==========================================================================
Cost of Gas Sold: The utility cost of gas sold for the second quarter of
1994 decreased $7 million from the 1993 level. The utility cost of gas
sold for the six months ended and 12 months ended June 30 increased $10
million and $2 million, respectively, from the corresponding 1993 levels.
These increases reflect higher deliveries partially offset by lower costs
per mcf. The lower costs per mcf are due to more favorable gas contracts
with interstate suppliers, resulting from the impact of FERC Order 636,
and the termination and expiration of high-cost contracts with certain
Michigan gas producers.
Gas Utility Rates
In July, 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been recently resolved. The dispute revolved
around whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
In July 1993, Michigan Gas Storage submitted a notice of rate change with
the FERC to revise its operation and maintenance expenses for 1993 and
update plant costs to reflect the addition of $27 million of new plant
additions in 1993 and began collecting the revised rates subject to refund
and a hearing in February 1994. In June 1994, the FERC approved a
stipulation and agreement in full settlement of the rate proceeding, which
provides Michigan Gas Storage with estimated annual revenues of $20
million. For further information regarding gas utility rates, see Note 3.
Gas Capital Expenditures
CMS Energy estimates capital expenditures, including new lease
commitments, related to its gas utility operations of $131 million for
1994, $122 million for 1995 and $111 million for 1996. These amounts
include an attributed portion of anticipated capital expenditures for
common plant and equipment.
Gas Environmental Matters
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these manufactured gas plant sites to define the
nature and extent of contamination at these sites and to determine which
of several possible remedial action alternatives, including no action, may
be required under the Environmental Response Act. The DNR has approved
two of three plans for remedial investigation/feasibility studies
submitted by Consumers and is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study indicate that the expenditures for remedial action at this site are
likely to be minimal. However, Consumers did not believe that a single
site was representative of all of the sites. Data available to Consumers
and its continued internal studies have resulted in an estimate of
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At June 30, 1994,
Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial costs for
the sites.
Consumers believes that remedial costs are recoverable in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part a gas rate case.
In that proceeding, the MPSC determined that prudent investigation and
remedial costs could be deferred and amortized over 10-year periods. In
order to be recovered in rates, prudent costs must be approved in a rate
case. Any costs amortized in years prior to filing a rate case may not be
recoverable. The MPSC stated that the length of the period may be
reviewed from time to time, but any revisions would be prospective. The
order further provided that the prudency review would include a review of
the utility's attempts to obtain reimbursement from others. The MPSC has
also approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs. Consumers has initiated discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
Oil and Gas Exploration and Production
Pretax Operating Income
Pretax operating income for the three months ended June 30, 1994 decreased
$2 million from the same period in 1993 primarily reflecting lower average
market prices for oil and gas partially offset by higher gas sales
volumes. Pretax operating income for the six months ended June 30, 1994
decreased $4 million from June 30, 1993 primarily for the same reasons
stated above. The twelve months ended June 30, 1994 pretax operating
income decrease of $13 million from the comparable period in 1993 reflects
lower average market prices for oil and gas and $10 million of
international write-offs for the 1994 period compared to $4 million in
1993.
Capital Expenditures
In June 1994, NOMECO acquired for $22.5 million a working interest in the
Espinal block in Colombia, South America, from Sun Company, Inc. The
block is operated by LASMO (Columbia Limited). The other interest holder
is Empresa Colombiana de Pelroleos (Ecopetrol), the Colombian State Oil
Company. The block which includes 250,000 acres is currently producing
5,000 barrels of oil per day and is expected to exceed 8,500 barrels per
day later this year. NOMECO estimates the block to contain at least 75
million barrels of proven oil reserves of which NOMECO's share is nine
million barrels, a 12.4 percent interest.
1994 capital expenditures also reflect pipeline and road construction and
development drilling in Ecuador. CMS Energy currently plans to invest
$361 million for the years 1994 through 1996 in its oil and gas
exploration and production operations. These anticipated capital
expenditures primarily reflect continued development of Ecuador and
Colombia oil, Michigan Antrim gas and further reserve acquisition.
Independent Power Production
Pretax Operating Income
Pretax operating income for the three months ended June 30, 1994 increased
$2 million from the 1993 period primarily reflecting additional equity
earnings by the CMS Generation subsidiaries due to the addition of new
electric generating capacity. Pretax operating income increased $1
million and $11 million for the six and twelve months ended June 30, 1994,
respectively over the comparable 1993 periods. These increases reflect
increases in subsidiary earnings and the addition of new electric
generating capacity.
Capital Expenditures
CMS Energy continued expansion of its independent power production segment
during the first six months of 1994. In January, CMS Generation announced
that S.T./CMS Electric Co. has a definitive agreement with the Tamil Nadu
State Electric Board in India to supply 250 MW of electric capacity and
energy from a lignite-fired plant to be built in Neyveli, India.
Construction of the $470 million plant is scheduled to begin in late 1994
or early 1995 with commercial operation scheduled in 1997. CMS Generation
will be the project manager and plant operator and will hold a 40 percent
ownership interest.
In March 1994, GPSLP, an unconsolidated affiliate of CMS Generation,
obtained financing for the Genesee Power Station principally with the
issuance and sale of $72 million of Michigan Strategic Fund Solid Waste
Disposal Revenue Refunding Bonds (Genesee Power Station Project) Series
1994. CMS Generation has a 50 percent ownership interest in GPSLP. In
April 1994, construction began on the 35 MW waste wood-fueled power plant
near Flint, Michigan. Completion of the project is scheduled for Spring
1996 with an estimated cost of $94 million.
In May 1994, CMS Generation announced it had acquired a 25 percent
ownership interest in a 235 MW mixed fuel independent power generation
project to be built in Jegurupadu, Andhra Pradesh, India. CMS Generation
will provide project management services and will be the operator of the
plant. The Andhra Pradesh State Electric Board has signed a 30 year
contract for the purchase of the plant's entire electric output.
Construction of the natural gas and naptha-fueled combined-cycle project
is expected to begin in late 1994, with completion scheduled by the end of
1996. The project is estimated to cost $300 million.
Also in May 1994, CMS Generation announced it had acquired a 25 percent
ownership interest in Magellan Utility Development Corporation, which is
developing a 300 MW coal-fired power project at Pinamucan in Batangas
Province, the Philippines. CMS Generation will be the project manager and
plant operator. Magellan Utility Development Corporation has signed a 25-
year power purchase agreement with the Manila Electric Company, the
largest private electric utility in the Philippines, for the plant's
entire electric output. Construction of the project is scheduled to begin
later this year. The plant is scheduled to be completed by year-end 1997
at a cost of $300 million. The project has the potential to be expanded
to 600 MW.
In June 1994, CMS Generation announced it had acquired a 41 percent
ownership interest in the Lujan de Cuyo electric generating plant in
western Argentina's Mendoza Province. CMS Generation is the lead
developer and will become the plant operator. This facility has the
potential to produce 412 MW of generating capacity from oil and natural
gas and currently sells 135 MW of capacity on the Argentine wholesale
electric market.
CMS Generation is in process of acquiring a 32.5 percent ownership
interest in two operating power plants totaling 135 MW of generating
capacity located on the island of Cebu in the Philippines. CMS Generation
is the managing partner of a consortium which purchased the plants, and
will also be the operator of the 93 MW coal- and oil-fueled Sangi station
and the 42 MW oil-fired Carmen station.
CMS Energy currently plans to invest $262 million relating to its
independent power production operations for the years 1994 through 1996,
primarily in domestic and international subsidiaries and partnerships.
Natural Gas Pipeline Storage and Marketing
Pretax Operating Income
Pretax operating income increased $1 million, $2 million and $2 million
for the three, six and twelve months ended June 30, 1994 compared to the
comparable 1993 periods, reflecting earnings growth from gas pipeline and
storage projects and gas marketed to end-users.
Capital Expenditures
CMS Energy continued its expansion of its natural gas pipeline, storage
and marketing segment during 1994. In the first quarter of 1994 CMS Gas
Transmission acquired a 50 percent ownership interest in Moss Bluff Gas
Storage Systems, an existing 5 bcf high deliverability salt cavern storage
facility on the Gulf Coast of Texas for $18 million. CMS Gas Transmission
has also agreed to develop an additional 4 bcf salt cavern at Moss Bluff
which is expected to be in service by the beginning of the winter of 1995-
1996.
In April 1994, CMS Gas Transmission entered into an agreement in principle
to develop a North American natural gas market center in southeastern
Michigan. The Grands Lacs Market Center will provide a major exchange and
storage point for natural gas buyers and sellers throughout the midwest
and northeast United States and Canada.
In June 1994, CMS Gas Transmission announced it had reached an agreement
with MichCon to jointly own proposed new natural gas pipeline facilities
in northern Michigan. The agreement, subject to approval by the MPSC,
will allow construction of an estimated $170 million of new natural gas
facilities to serve the growing Antrim gas production. Facilities to be
constructed under the agreement include a 25-mile pipeline in which CMS
Gas Transmission and MichCon will each hold a 50 percent ownership
interest and up to four jointly-owned gas treatment plants to remove
naturally occurring carbon dioxide from Antrim gas to meet pipeline
quality specifications. The new pipeline facilities will allow increased
gas production in Michigan's Antrim shale formation to be accessible to
the natural gas transmission systems of Consumers Power, Great Lakes Gas
Transmission, MichCon and ANR Pipeline Co. Depending on MPSC approval,
construction of the facilities could begin by late 1994.
CMS Energy currently plans to invest $73 million for the years 1994
through 1996 relating to its non-utility gas operations, continuing to
pursue development of natural gas storage, gas gathering and pipeline
operations both domestically and internationally.
Other
Other Income: Other income decreased $13 million and $17 million for the
second quarter of 1994 and the first half of 1994, respectively, when
compared to the corresponding 1993 periods, reflecting the impact of the
sale of the remaining MCV Bonds. The $324 million improvement in Other
Income when comparing the 12 months ended June 30, 1994 to the
corresponding 1993 period reflects the impact of the March, 1993
Settlement Order related to power purchases from the MCV Partnership. The
12 months ended June 30, 1993 included an after-tax $343 million charge
related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS
Energy were to lose its current exemption, it would become more heavily
regulated by the SEC; Consumers could ultimately be forced to divest
either its electric or gas utility business; and CMS Energy would be
restricted from conducting businesses that are not functionally related to
the conduct of its utility business as determined by the SEC. CMS Energy
is opposing this request and believes it will maintain its current
exemption from registration under PUHCA.
(This page intentionally left blank)
42
ARTHUR ANDERSEN & CO.
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of June 30, 1994 and 1993, and
the related consolidated statements of income, common stockholder's equity
and cash flows for the three-month, six-month and twelve-month periods
then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
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, 1993, 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 28, 1994, 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, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen & Co.
Detroit, Michigan,
August 8, 1994.
43
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
In Millions
OPERATING REVENUE
Electric $ 549 $ 488 $1,094 $ 978 $2,193 $1,907
Gas 183 192 711 687 1,184 1,155
Other 2 1 3 3 6 (1)
---------------------------------------------------------
Total operating revenue 734 681 1,808 1,668 3,383 3,061
---------------------------------------------------------
OPERATING EXPENSES AND TAXES
Operation
Fuel for electric generation 70 71 150 141 302 288
Purchased power - related parties 118 113 240 220 486 460
Purchased and interchange power 55 28 97 53 192 112
Cost of gas sold 93 100 427 417 687 685
Other 137 126 262 245 533 507
---------------------------------------------------------
Total operation 473 438 1,176 1,076 2,200 2,052
Maintenance 48 54 91 98 196 200
Depreciation, depletion and amortization 74 70 169 161 324 312
General taxes 34 45 94 103 179 187
---------------------------------------------------------
Total operating expenses 629 607 1,530 1,438 2,899 2,751
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 86 53 174 134 326 191
Gas 18 21 102 94 155 122
Other 1 - 2 2 3 (3)
---------------------------------------------------------
Total pretax operating income 105 74 278 230 484 310
INCOME TAXES 25 17 79 62 133 74
---------------------------------------------------------
NET OPERATING INCOME 80 57 199 168 351 236
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
MCV Bond income - 8 - 16 16 33
Dividends from affiliates 4 4 8 8 16 16
Accretion income 4 3 7 7 13 15
Accretion expense (Note 2) (9) (9) (18) (18) (36) (18)
Loss on MCV power purchases - settlement - - - - - (520)
Other income taxes, net 2 4 7 10 22 188
Other, net - - - (3) 4 (4)
---------------------------------------------------------
Total other income (deductions) 1 10 4 20 35 (290)
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 33 37 67 75 145 149
Other interest 2 4 5 10 17 23
Capitalized interest - - - (1) (1) (1)
---------------------------------------------------------
Net interest charges 35 41 72 84 161 171
---------------------------------------------------------
Net Income (Loss) 46 26 131 104 225 (225)
Preferred Stock Dividends 7 3 10 6 15 11
---------------------------------------------------------
NET INCOME (LOSS) AFTER DIVIDENDS ON PREFERRED STOCK $ 39 $ 23 $ 121 $ 98 $ 210 $ (236)
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
44
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1994 1993 1994 1993
------ ------ ------ ------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 131 $ 104 $ 225 $(225)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $23,
$48 and $46, respectively) 169 161 324 312
Capital lease and other amortization 12 16 26 38
Deferred income taxes and investment tax credit 46 41 54 (164)
Accretion expense (Note 2) 18 18 36 18
Accretion income - abandoned Midland project (7) (7) (13) (15)
MCV power purchases - settlement (Note 2) (45) (47) (82) (47)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (2) (3) (3) (6)
Changes in other assets and liabilities 48 44 (120) 47
------ ------ ------ ------
Net cash provided by operating activities 370 327 447 478
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (194) (194) (451) (448)
Investments in nuclear decommissioning trust funds (24) (23) (48) (46)
Deferred demand-side management costs (4) (28) (28) (47)
Cost to retire property, net (14) (13) (33) (18)
Sale of subsidiary - - (14) -
Other 2 (1) 1 (2)
Proceeds from sale of property 1 1 2 11
Proceeds from Midland-related assets - - 322 10
Proceeds from loan to affiliate - - - 50
Proceeds from Bechtel settlement - - - 46
------ ------ ------ ------
Net cash used in investing activities (233) (258) (249) (444)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (130) 26 (112) 113
Retirement of bonds (Note 8) (100) (46) (694) (50)
Repayment of bank loans (94) - (125) -
Payment of common stock dividends (82) (57) (158) (57)
Payment of capital lease obligations (11) (13) (23) (32)
Retirement of other long-term debt (7) - (8) -
Payment of preferred stock dividends (6) (6) (11) (11)
Proceeds from preferred stock 193 - 193 -
Contribution from stockholder 100 - 100 -
Proceeds from bonds - 58 586 58
------ ------ ------ ------
Net cash provided by (used in) financing activities (137) (38) (252) 21
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS - 31 (54) 55
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 13 36 67 12
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 13 $ 67 $ 13 $ 67
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
45
Consumers Power Company
Consolidated Balance Sheets
June 30 June 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $5,457 $5,347 $5,148
Gas 1,873 1,837 1,754
Other 282 253 220
-----------------------------------
7,612 7,437 7,122
Less accumulated depreciation, depletion and amortization 3,689 3,550 3,465
-----------------------------------
3,923 3,887 3,657
Construction work-in-progress 265 248 345
-----------------------------------
4,188 4,135 4,002
-----------------------------------
INVESTMENTS
Stock of affiliates (Note 7) 310 291 290
First Midland Limited Partnership (Note 2) 215 213 210
Midland Cogeneration Venture Limited Partnership (Note 2) 67 67 68
Other 7 6 7
-----------------------------------
599 577 575
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 13 13 67
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 8) 121 110 39
Accounts receivable - related parties 67 12 50
Inventories at average cost
Gas in underground storage 160 228 151
Materials and supplies 78 73 77
Generating plant fuel stock 26 41 27
Trunkline settlement (Note 3) 30 31 32
Postretirement benefits 25 25 25
Deferred income taxes 20 17 -
Investment in MCV Bonds - - 322
Prepayments and other 82 156 80
-----------------------------------
622 706 870
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 493 485 472
Nuclear decommissioning trust funds (Note 4) 191 165 137
Abandoned Midland project (Note 3) 155 162 169
Trunkline settlement (Note 3) 70 86 101
Other 273 235 196
-----------------------------------
1,182 1,133 1,075
-----------------------------------
TOTAL ASSETS $6,591 $6,551 $6,522
===================================
46
June 30 June 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital (Note 8) 491 391 391
Revaluation capital (Note 7) 11 - -
Retained earnings since December 31, 1992 93 54 41
-----------------------------------
1,436 1,286 1,273
Preferred stock (Note 8) 356 163 163
Long-term debt 1,746 1,839 1,985
Non-current portion of capital leases 116 106 105
-----------------------------------
3,654 3,394 3,526
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 249 355 224
Accounts payable 153 148 169
Accounts payable - related parties 42 49 52
Notes payable 129 259 241
Accrued taxes 116 171 114
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 41 28 64
Accrued interest 35 39 39
Deferred income taxes - - 35
Other 180 183 159
-----------------------------------
1,027 1,314 1,178
-----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 543 527 514
Deferred income taxes 535 485 355
MCV power purchases - settlement (Note 2) 363 391 411
Deferred investment tax credit 184 190 194
Trunkline settlement (Note 3) 70 86 101
Regulatory liabilities for income taxes, net 16 6 71
Other (Note 4) 199 158 172
-----------------------------------
1,910 1,843 1,818
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,591 $6,551 $6,522
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
47
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 391 391 391 391 391 965
Quasi-reorganization (Note 8) - - - - - (574)
Stockholder's contribution (Note 8) 100 - 100 - 100 -
---------------------------------------------------------
At end of period 491 391 491 391 491 391
---------------------------------------------------------
REVALUATION CAPITAL (NOTE 7)
At beginning of period 15 - - - - -
Implementation of SFAS 115 - January 1, 1994 - - 20 - 20 -
Change in unrealized loss, net of tax (4) - (9) - (9) -
---------------------------------------------------------
At end of period 11 - 11 - 11 -
---------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period 120 75 54 - 41 (240)
Net income (loss) 46 26 131 104 225 (225)
Common stock dividends declared (66) (57) (82) (57) (158) (57)
Preferred stock dividends declared (7) (3) (10) (6) (15) (11)
Quasi-reorganization (Note 8) - - - - - 574
---------------------------------------------------------
At end of period 93 41 93 41 93 41
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,436 $1,273 $1,436 $1,273 $1,436 $1,273
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
48
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 1993 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 most
of 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 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
for 15- and 20-year periods, respectively. At June 30, 1994, Consumers,
through its subsidiaries, held the following assets related to the MCV:
1) CMS Midland owned a 49 percent general partnership interest in the MCV
Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor
interest in the MCV Facility.
Power Purchases from the MCV Partnership
Consumers' obligation to purchase contract capacity from the MCV
Partnership under the PPA follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC only allowed Consumers to recover costs of power
purchased from the MCV Partnership based on delivered energy for up to 840
MW at rates less than Consumers paid. In March 1993, the MPSC approved,
with modifications, the Revised Settlement Proposal which had been co-
sponsored by Consumers, the MPSC staff and 10 small power and cogeneration
developers. These parties accepted the Settlement Order and the MCV
Partnership confirmed that it did not object to the modifications. ABATE
and the Attorney General have filed claims of appeal of the Settlement
Order with the Court of Appeals.
The Settlement Order determined the cost of power purchased from the MCV
Partnership that Consumers can recover from its electric retail customers
and significantly reduced the amount of future underrecoveries for these
power costs. Effective January 1993, the Settlement Order allowed
Consumers to recover substantially all of the payments for its ongoing
purchase of 915 MW of contract capacity from the MCV Partnership.
Capacity and energy purchases from the MCV Partnership above the 915 MW
level can be competitively bid into Consumers' next solicitation for power
or, if necessary, utilized for current power needs with a prudency review
and a cost recovery determination in annual PSCR cases. In either
instance, the MPSC would determine the levels of recovery from customers
for the power purchased. The Settlement Order also provides Consumers the
right to remarket to third parties the remaining contract capacity, the
cost of which Consumers is currently not authorized to recover from retail
customers.
The PPA requires Consumers to pay to 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 scheduling deliveries of energy from
the MCV Partnership whenever it has energy available up to hourly
availability limits, or "caps," for the 915 MW of capacity authorized for
recovery in the Settlement Order. Consumers can recover an average 3.62
cents per kWh capacity charge and the prescribed energy charges associated
with the scheduled deliveries within the caps, whether or not those
deliveries are scheduled on an economic basis. Through December 1997,
there is no cap applied during on-peak hours to Consumers' recovery for
the purchase of capacity made available within the 915 MW authorized.
Recovery for purchases during off-peak hours is capped at 82 percent in
1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in
1998 and thereafter at which time the 88.7 percent cap is applicable
during all hours. For all economic energy deliveries above the caps to
915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment
in addition to the corresponding energy charge.
In December 1992, Consumers recognized an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power costs
under the PPA as a result of the Settlement Order. This loss included
management's best estimates regarding 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. Except for adjustments to the above
loss to reflect the after-tax time value of money through accretion
expense, no additional losses are expected unless actual future experience
materially differs from management's estimates. Because the calculation
of the 1992 loss depended in part upon estimates of future unregulated
sales of energy to third parties, a more conservative or risk-free
investment rate of 7 percent was used to calculate $188 million of the
total $343 million after-tax loss. The remaining portion of the loss was
calculated using an 8.5 percent discount rate reflecting Consumers'
incremental borrowing rate as required by SFAS 90, Regulated Enterprises-
Accounting for Abandonments and Disallowances of Plant Costs. The after-
tax expense for the time value of money for the loss is estimated to be
$24 million in 1994, and various lower levels thereafter, including $22
million in 1995 and $20 million in 1996. Although the settlement loss was
recorded in 1992, Consumers' continues to experience cash underrecoveries
associated with the Settlement Order. These after-tax cash
underrecoveries, including fixed energy charges, totaled $33 million for
the first six months of 1994. Consumers believes there is and will be a
market for the resale of capacity purchases from the MCV Partnership above
the MPSC-authorized level. However, if Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries could be incurred.
Consumers' estimates of its 1994 and future after-tax cash underrecoveries
and possible additional losses for the next five years if none of the
additional capacity is sold are as follows:
After-tax, In Millions
1994 1995 1996 1997 1998
- ---------------------------------------------------------------------
Expected cash underrecoveries $56 $65 $62 $61 $ 8
Possible additional
underrecoveries and losses (a) $14 $20 $20 $22 $72
=====================================================================
(a) If unable to sell any capacity above the MPSC's authorized level
At December 31, 1993, and June 30, 1994, the after-tax, present value of
the Settlement Order liability totaled $307 million and $289 million,
respectively. The reduction in the Settlement Order liability reflects
after-tax cash underrecoveries related to capacity totaling $30 million,
partially offset by after-tax accretion expense of $12 million.
The PPA, while requiring payment of a fixed energy charge, contains a
"regulatory out" provision which permits Consumers to reduce the fixed
energy charges payable to the MCV Partnership throughout the entire
contract term if Consumers is not able to recover these amounts from its
customers. In connection with the MPSC's approval of the Revised
Settlement Proposal, Consumers and the MCV Partnership are engaged in
arbitration proceedings under the PPA to determine whether Consumers is
entitled to exercise its regulatory out regarding fixed energy charges on
the portion of available MCV capacity above the current MPSC-authorized
levels. An arbitrator acceptable to both parties has been selected. If
the arbitrator determines that Consumers cannot exercise its regulatory
out, Consumers would be required to make these fixed energy payments to
the MCV Partnership even though Consumers may not be recovering these
costs. The arbitration proceedings will also determine who is entitled to
the fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to settlement. Although Consumers
believes its position on arbitration is sound and intends to aggressively
pursue its right to exercise the regulatory out, management cannot predict
the outcome of the arbitration proceedings or any possible settlement of
the matter. Accordingly, losses were recorded prior to 1993 for all fixed
energy amounts at issue in the arbitration. At June 30, 1994, $23 million
has been escrowed by Consumers and is included as a non-current asset in
Consumers' financial statements. In December 1993, Consumers made an
irrevocable offer to pay through September 15, 2007, fixed energy charges
to the MCV Partnership on all kWh delivered by the MCV Partnership to
Consumers from the contract capacity in excess of 915 MW, which represents
a portion of the fixed energy charges in dispute. Consumers made the
offer in connection with the sale of its remaining $309 million investment
in the MCV Bonds which was completed in 1993.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings. It
alleges breach of contract, breach of fiduciary duty and negligent or
fraudulent misrepresentation relating to the MCV Partnership's failure to
object to the Settlement Order in light of Consumers' interpretation of
the Settlement Order, which is the subject of the arbitration between the
MCV Partnership and Consumers discussed above. The action alleges damages
in excess of $1 billion and seeks injunctive relief relative to Consumers'
payments of the fixed energy charges. CMS Energy and Consumers believe
that at all times they and CMS Holdings have conducted themselves properly
and that the action is without merit. It appears from the face of the
complaint that a significant portion of the alleged damages represent
fixed energy charges in dispute in the arbitration. CMS Energy and
Consumers have requested that the lawsuit be dismissed for lack of
jurisdiction and have commenced a lawsuit in Midland, Michigan, to address
these issues. While management believes that the possibility of the
alleged damages being awarded is remote, CMS Energy and Consumers are
unable to predict the outcome of this issue. In addition, CMS Holdings
has filed a lawsuit in the circuit court of Jackson, Michigan, seeking
reimbursement of $7 million of certain tax indemnification payments made
to its partners in the FMLP and owed to CMS Holdings. Consumers is unable
to predict the outcome of this issue.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings.
In July 1994, Consumers agreed to pay $30 million to terminate a separate
power purchase agreement with a 65 MW coal-fired cogeneration facility.
Consumers is seeking MPSC approval to substitute 65 MW of less expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Consumers believes the
termination agreement and the proposed substitution of capacity represents
significant savings to its customers and will record a regulatory asset
for $30 million, which it believes will ultimately be recoverable in
rates.
PSCR Matters: Consistent with the terms of the 1993 Settlement Order,
Consumers withdrew its appeals of various MPSC orders issued in connection
with several PSCR cases. Consumers also agreed not to appeal any MCV-
related issues raised in future orders for these plan cases and related
reconciliations to the extent those issues are resolved by the Settlement
Order. In March 1994, the MPSC issued an order in the PSCR reconciliation
case for 1992 confirming Consumers' recovery for the purchase of 840 MW
from the MCV in accordance with the MPSC plan case order and allowing
recovery for the purchase of power above 840 MW based on replacement power
costs. In March 1994, the MPSC further confirmed, as part of a 1993 PSCR
plan case order, the recovery of MCV-related costs consistent with the
Settlement Order.
3: Rate Matters
Electric Rate Case
On May 10, 1994, the MPSC issued an order, granting Consumers a $58
million annual increase in its retail electric rates effective May 11,
1994. The order provides Consumers with higher revenues associated with
increased expenditures primarily related to capital additions, operation
and maintenance, higher depreciation and postretirement benefits computed
under SFAS 106, Employers' Accounting for Postretirement Benefits Other
than Pensions, and the continuation of certain demand-side management
programs at reduced levels. The MPSC order generally supported Consumers'
rate design proposal and reduced the level of subsidization of residential
customers by commercial and industrial customers. Residential customers
were assigned $40 million, which was 70 percent of the rate increase.
As finally revised, Consumers requested an electric rate increase for 1994
totaling $118 million and included an incremental increase request of $27
million in 1995. The MPSC's order did not provide Consumers with an
additional rate increase in 1995, but does allow Consumers to file a
separate rate-increase request for 1995. The order also differed from
Consumers' requested increase as it included a lower return on common
equity, a lower level of working capital, provided for a lower equity
ratio for Consumers' projected capital structure and reflected a $15
million decrease for lower property taxes due to a recent reduction in
state tax rates and a $9 million decrease for reduced demand-side
management program expenditures and miscellaneous costs which will not be
incurred. On June 9, 1994, Consumers filed a petition for rehearing and
clarification of this MPSC order. The petition requests reconsideration
of certain issues which include an incremental revenue requirement of $26
million for 1995, the level of rate cross-subsidization, the level of
future DSM expenditures and the calculation of DSM-related incentives and
penalties.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. The MPSC has granted an expedited hearing
schedule on this proposal that calls for final briefs to be filed in
November 1994. A final order is expected near the end of 1994.
Abandoned Midland Project: In 1984, Consumers abandoned construction of
its unfinished nuclear power plant located in Midland, Michigan, and
subsequently took a series of write-downs. In 1991, the MPSC issued
orders permitting recovery of a portion of the plant and Consumers began
collecting $35 million pretax annually for the next 10 years. Several
parties, including the Attorney General, have filed claims of appeal with
the Court of Appeals regarding MPSC orders issued in 1991 that specified
the recovery of abandoned investment. Thus far, the Court of Appeals has
not taken any action regarding these appeals.
Electric Demand-side Management: As a result of settlement discussions
regarding demand-side management and an MPSC order in 1991, Consumers
agreed to spend $65 million over two years on demand-side management
programs. Based on the MPSC's determination of Consumers' effectiveness
in implementing these programs, Consumers' future rate of return on common
equity may be adjusted either upward by up to 1 percent or downward by up
to 2 percent. This adjustment, if implemented, would be applied to
Consumers' retail electric tariff rates and be in effect for one year
following reconciliation hearings with the MPSC. The estimated revenue
effects of the potential adjustment range from an $11 million increase to
a $22 million decrease. The proceedings before the MPSC have started and
based on the criteria set out in the demand-side management settlement
agreement approved by the MPSC in 1992, Consumers has achieved all the
agreed-upon objectives. Consumers believes that the MPSC will ultimately
order a 1 percent increase on its return on common equity to be in effect
for one year. Accordingly, during the second quarter of 1994, Consumers
recognized $11 million in revenue, related to its demand-side management
program. A final order from the MPSC is expected by mid-1995.
In October 1993, Consumers completed the customer participation portion of
these DSM programs. In May 1994, as part of Consumers' electric rate
case, the MPSC issued an order that allowed Consumers to recover demand-
side management expenditures which exceeded $65 million. The order also
authorized Consumers to continue certain programs in 1994 through 1996.
Consumers is deferring program costs and amortizing the costs over the
period these costs are being recovered from its customers in accordance
with an accounting order issued by the MPSC in September 1992. The
unamortized balance of deferred costs at June 30, 1994 was $72 million.
PSCR Issues
Consumers began a planned refueling and maintenance outage at Palisades in
June 1993. Following several required, unanticipated repairs that
extended the outage, the plant returned to service in early November. In
addition, from mid-February through mid-June 1994, Palisades was
temporarily taken out of service to repair valve-leakage and conduct other
needed inspections and repairs. Recovery of replacement power costs
incurred by Consumers during these outages will be reviewed by the MPSC
during the 1993 and 1994 PSCR reconciliations of actual costs and revenues
to determine the prudency of actions taken during the outages. Any
finding of delay due to imprudence could result in disallowances of a
portion of replacement power costs. Net replacement power costs during
the outages were approximately $180,000 per day above the cost of fuel
incurred when the plant is operating. Consumers has conceded that one day
of the 1993 outage was inappropriate, while the MPSC staff has recommended
a 20-day disallowance totaling $3.7 million. See Note 4 for information
regarding the NRC's review of Palisades' performance.
Gas Rates
In July, 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
GCR Issues
The MPSC, in a February 1993 order, provided that the price payable to
certain intrastate gas producers by Consumers be reduced prospectively.
In a related case, Consumers was not allowed to recover $13 million of gas
supply costs incurred prior to February 8, 1993. Consumers previously had
accrued a loss sufficient for this issue. Future disallowances are not
anticipated, unless the remaining appeals filed by the intrastate
producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. As part of the settlement, Consumers will not incur any
transition costs from Trunkline as a result of FERC Order 636. In 1992,
Consumers had recorded a liability and regulatory asset for the principal
amount of payments to Trunkline over a five-year period. In May 1993, the
MPSC approved a separate settlement agreement that provides Consumers with
full recovery of these costs over a five-year period. At June 30, 1994,
Consumers' remaining liability and regulatory asset were $100 million.
Other
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been recently resolved. The dispute revolved
around whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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.
4: Commitments and Contingencies
Ludington Pumped Storage Plant Litigation
In 1986, the Attorney General filed a lawsuit on behalf of the State of
Michigan in the Circuit Court of Ingham County, seeking damages from
Consumers and Detroit Edison for alleged injuries to fishery resources
because of the operation of the Ludington Pumped Storage Plant. The state
sought $148 million (including $16 million of interest) for past injuries
and $89,000 per day for future injuries, with the latter amount to be
adjusted upon installation of "adequate" fish barriers and other changed
conditions.
In 1987, the Attorney General filed a second lawsuit alleging that
Consumers and Detroit Edison have breached a bottomlands lease agreement
with the state and asked that the lease be declared void. This complaint
was consolidated with the suit described in the preceding paragraph. In
1990, both of the lawsuits were dismissed on the basis of federal
preemption. In 1993, the Court of Appeals overturned the dismissal, as to
damages, effectively allowing the state to pursue its damages lawsuit
against Consumers and Detroit Edison, but generally affirmed the lower
court's ruling as to the breach of lease claim. The Court of Appeals'
ruling also limited any potential damages to those occurring no earlier
than 1983. The Michigan Supreme Court has granted Consumers', Detroit
Edison's and the Attorney General's requests for leave to appeal the Court
of Appeals' ruling, and a decision is expected in late 1995. Consumers
and Detroit Edison are seeking to have the trial court's dismissal of the
damages claim affirmed. The Attorney General is seeking to have the
dismissal of his lease claim overturned. Consumers is unable to predict
the outcome of these appeals or any liability that could be incurred
should the Supreme Court decide that the suit for damages may be pursued.
Each year since 1989, Consumers and Detroit Edison have complied with FERC
orders by installing a seasonal barrier net from April to October at the
Ludington plant site. The FERC is now considering whether the barrier net
(along with other actions by Consumers, including contributions to state
fish-stocking programs) would be a satisfactory permanent solution.
Environmental Matters
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
information currently known by management, Consumers believes that it is
unlikely that its liability at any of the known Superfund sites,
individually or in total, will have a material adverse effect on its
financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these manufactured gas plant sites to define the
nature and extent of contamination at these sites and to determine which
of several possible remedial action alternatives, including no action, may
be required under the Environmental Response Act. The DNR has approved
two of three plans for remedial investigation/feasibility studies
submitted by Consumers and is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study indicate that the expenditures for remedial action at this site are
likely to be minimal. However, Consumers did not believe that a single
site was representative of all of the sites. Data available to Consumers
and its continued internal studies have resulted in an estimate of
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At June 30, 1994,
Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial costs for
the sites.
Consumers believes that remedial costs are recoverable in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part of a gas rate
case. In that proceeding, the MPSC determined that prudent investigation
and remedial costs could be deferred and amortized over 10-year periods.
In order to be recovered in rates, prudent costs must be approved in a
rate case. Any costs amortized in years prior to filing a rate case may
not be recoverable. The MPSC stated that the length of the period may be
reviewed from time to time, but any revisions would be prospective. The
order further provided that the prudency review would include a review of
the utility's attempts to obtain reimbursement from others. The MPSC has
also approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs. Consumers has initiated discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
Included in the 1990 amendments to the federal Clean Air Act are
provisions that limit emissions of sulfur dioxide and nitrogen oxides and
require enhanced emissions monitoring. All of Consumers' coal-fueled
electric generating units burn low-sulfur coal and are presently operating
at or near the sulfur dioxide emission limits which will be effective in
2000. Beginning in 1995, certain coal-fueled generating units will
receive emissions allowances (all of Consumers' coal units will receive
allowances beginning in 2000). Based on projected emissions from these
units, Consumers expects to have excess allowances which may be sold or
saved for future use.
The Clean Air Act's provisions require Consumers to make capital
expenditures estimated to total $74 million through 1999 for completed,
in-process and possible modifications at coal-fired units based on current
regulations. Management believes that Consumers' annual operating costs
will not be materially affected.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's petition, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any additional costs will be incurred as a result
of this agreement.
In 1993, Consumers experienced increases in complaints relating to so-
called stray voltage. Claimants contend that stray voltage results when
small electrical currents present in grounded electric systems are
diverted from their intended path. Investigation by Consumers of prior
stray voltage complaints disclosed that many factors, including improper
wiring and malfunctioning of farm equipment, can lead to the stray voltage
phenomenon. 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 configuration of the
customer's hook-up to Consumers. A complaint seeking certification as a
class action suit was filed against Consumers in a local county circuit
court in 1993. The complaint alleged the existence of a purported class
that incurred damages in excess of $1 billion, primarily to certain
livestock owned by the purported class, as a result of stray voltage from
electricity being supplied by Consumers. Consumers believes the
allegations to be without merit and in March 1994, the circuit judge
hearing the complaint refused to grant class action status to the suit.
In April 1994, the plaintiffs in this action appealed the matter to the
Court of Appeals. Consumers believes that the various claims are
different enough to warrant separate trials, and that the circuit court's
denial of class-action status will be upheld. A number of individuals who
would have been part of the class action have refiled their claims as
separate lawsuits. At August 10, 1994, Consumers had 91 separate stray
voltage lawsuits pending.
Palisades Plant
In April 1993, the NRC approved the design of the dry spent fuel storage
casks now being used by Consumers at Palisades. In May 1993, the Attorney
General and certain other parties commenced litigation to block Consumers'
use of the storage casks, alleging that the NRC had failed to comply
adequately with the National Environmental Policy Act. The courts have
declined to prevent such use and have refused to issue temporary
restraining orders or stays. Several appeals relating to this matter are
now pending at the U.S. Sixth Circuit Court of Appeals. As of July 31,
1994, Consumers had loaded four dry storage casks with spent nuclear fuel
and expects to load nine additional casks in 1994 prior to Palisades' 1995
refueling. If Consumers is unable to continue to use the casks as
planned, significant costs could be incurred, including replacement power
costs during any resulting plant shutdown and costs related to removal of
the dry cask system. In March 1994, Consumers agreed to a request from
the NRC to complete certain tests and analysis regarding Consumers' cask
storage site at Palisades, including the effects of an earthquake on the
surrounding soil and the support pad on which the casks are placed. These
tests and analysis have been completed and conclude that the storage
system meets safety standards. The results were reviewed by the NRC
staff, and in May 1994, the NRC issued a preliminary report confirming the
safety of Consumers' dry cask storage system.
On August 2, 1994, Consumers announced that it would unload and replace
one of the four dry fuel storage casks at Palisades that contains spent
nuclear fuel. In examining radiographs during a review of the cask
manufacturer's quality assurance program, Consumers detected indications
of minor flaws in welds in the steel liner of the most recently loaded
cask. Although testing following cask loading did not disclose any
leakage from the cask, Consumers has nevertheless decided to remove the
spent fuel from this cask and insert it in another cask. Consumers has
examined the radiographs for all of the casks fabricated for it to date,
including the other three casks containing spent fuel, and have found all
other welds to be acceptable.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 3). The results of an NRC review of
Consumers' performance at Palisades published shortly thereafter showed a
decline in performance ratings for the plant. In order to provide NRC
senior management with a more in-depth assessment of plant performance,
the NRC conducted a diagnostic evaluation inspection at Palisades. The
inspection evaluated all aspects of nuclear plant operation and
management. The inspection, completed in June 1994, found performance,
operational and management deficiencies at Palisades. The NRC
acknowledged that the new Palisades senior management team, in place since
early 1994, had recognized and begun to address the problems at Palisades.
The NRC did not place Palisades on either of the NRC's "Troubled" or
"Declining Performance" lists. Consumers is required to file a response
to the NRC's diagnostic evaluation report by August 18, 1994, and is
currently finalizing a performance improvement plan which will form the
basis for that response. Attaining and maintaining acceptable performance
at Palisades will require continuing performance improvements and
additional expenditures at the plant, which have been included in
Consumers' total planned levels of expenditures.
Nuclear Decommissioning
Consumers collects estimated costs to decommission (decontamination and
dismantlement) its two nuclear plants through a monthly surcharge to
electric customers which currently totals $45 million annually. Consumers
currently estimates decommissioning costs of $208 million and $399
million, in 1993 dollars, for the Big Rock and Palisades nuclear plants,
respectively. Amounts collected from electric retail customers and
deposited in trusts, and earnings on the trusts, which are credited to
accumulated depreciation, are estimated to accumulate $425 million and
$1.2 billion for decommissioning Big Rock and Palisades, respectively.
The trust funds, which are estimated to earn 7.1 percent, will be used for
decommissioning Big Rock and Palisades at the end of their respective
license periods in 2000 and 2007. Consumers believes the amounts being
collected are adequate to meet its currently estimated decommissioning
costs and current NRC requirements. In order to meet those requirements,
Consumers prepared site-specific decommissioning cost estimates for Big
Rock and Palisades. In developing the estimates, Consumers assumed that
each plant site will be restored to conform with the adjacent landscape,
and that all contaminated equipment will be disassembled and disposed of
in a licensed burial facility. Consumers expects to file updated
decommissioning estimates with the MPSC on or before March 31, 1995. At
June 30, 1994, Consumers had an investment in a nuclear decommissioning
trust fund of $191 million for future decommissioning.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed: annual
provisions for decommissioning could increase; estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation and; trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Commitments for Coal and Gas Supplies
Consumers has entered into coal supply contracts with various suppliers
for its coal-fired generating stations. These contracts have expiration
dates that range from 1994 to 2004. Generally, Consumers contracts for
approximately 70% of its annual coal requirements which in 1993 totalled
approximately $260 million. Consumers supplements its long-term contracts
with spot market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1994 to 1999. Generally, Consumers contracts for approximately
75% of its annual gas requirements which in 1993 totalled approximately
$680 million. Consumers supplements its long-term contracts with spot-
market purchases to fulfill its gas needs.
Capital Expenditures
Consumers estimates capital expenditures, including demand-side management
and new lease commitments, of $485 million for 1994, $510 million for 1995
and $419 million for 1996.
Public Utility Holding Company Act Exemption
CMS Energy is exempt from registration under PUHCA. However, the Attorney
General and the MMCG have asked the SEC to revoke CMS Energy's exemption
from registration under PUHCA. In 1992, the MPSC filed a statement with
the SEC recommending that CMS Energy's current exemption be revoked and a
new exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
Other
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies, arising from
the ordinary course of business involving personal injury and property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. The ultimate effect of the proceedings discussed in this
note is not expected to have a material impact on Consumers' financial
position or results of operations.
5: Effects of the Ratemaking Process
Consumers is subject to the provisions of SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Regulatory assets represent
probable future revenue to Consumers associated with certain incurred
costs as these costs are recovered through the ratemaking process. The
following regulatory assets (liabilities) which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets:
In Millions
June 30, 1994 Dec. 31, 1993 June 30, 1993
- ---------------------------------------------------------------------
Postretirement benefits $ 518 $ 510 $ 497
Income taxes 183 192 130
Abandoned Midland project 155 162 169
Trunkline settlement 100 117 133
Demand-side management -
deferred costs 72 71 51
Environmental clean-up 40 - -
DOE - decommissioning uranium
enrichment facility 32 33 36
Other 35 36 22
--------------------------------------
Total regulatory assets $1,135 $1,121 $1,038
=====================================================================
Income taxes $ (199) $ (195) $ (202)
Demand-side management -
deferred revenue (17) (17) (17)
--------------------------------------
Total regulatory liabilities $ (216) $ (212) $ (219)
=====================================================================
Consumers has MPSC orders to recover virtually all of its regulatory
assets through future rates and anticipates MPSC approval for recovery of
the remaining amounts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with original maturities of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended June 30 were:
In Millions
Six Months Ended Twelve Months Ended
- ---------------------------------------------------------------------
1994 1993 1994 1993
---- ---- ---- ----
Cash transactions
- -----------------
Interest paid (net of
amounts capitalized) $ 73 $ 91 $159 $187
Income taxes paid
(net of refunds) 55 93 53 30
Non-cash transactions
- ---------------------
Nuclear fuel placed
under capital lease $ 3 $ 23 $ 8 $ 28
Other assets placed
under capital leases 7 21 16 48
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
=====================================================================
7: Financial Instruments
On January 1, 1994, Consumers adopted SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, requiring accounting for
investments in debt securities to be held to maturity at amortized cost;
otherwise debt and marketable equity securities are recorded at fair
value, with any unrealized gains or losses included in earnings if the
securities are for trading purposes or as a separate component of
stockholders' equity if the securities are available for sale. The
implementation resulted in an increase in assets of $30 million with a
corresponding increase in stockholders' equity of $20 million, net of tax.
The amortized costs, fair values and gross unrealized gains (losses) for
available-for-sale securities at June 30, 1994, are as follows:
In Millions
Gross
Amortized Fair Unrealized
Available-for-sale securities Cost Value Gain (Loss)
- ---------------------------------------------------------------------
Common stock of CMS Energy $ 42 $ 61 $ 19
Nuclear decommissioning
and SERP trusts 206 204 (2)
=====================================================================
In addition, Consumers has an investment of $250 million in 10 shares of
Enterprises' preferred stock classified as held-to-maturity. Beginning in
1997, two shares of these securities are required to be redeemed each year
at a redemption price of $25 million per share.
8: Capitalization and Other
Debt
Consumers has authorization from the FERC to issue or guarantee up to $900
million of short-term debt through December 31, 1994. Consumers has a
$470 million facility to finance seasonal working capital requirements and
unsecured, committed lines of credit aggregating $165 million. At June
30, 1994, Consumers had $100 million and $29 million, respectively,
outstanding under these facilities.
Consumers secures its first mortgage bonds by a mortgage and lien on
substantially all of its property. Consumers' ability to issue and sell
securities is restricted by certain provisions in its First Mortgage Bond
Indenture, Articles and the need for regulatory approvals in compliance
with appropriate state and federal law. In the first quarter of 1994,
Consumers redeemed first mortgage bonds totaling $100 million. These
redemptions completed Consumers' commitment to the MPSC, under the 1993
authorization to issue first mortgage bonds, to refinance certain long-
term debt.
In January 1993, Consumers entered into an interest rate swap agreement,
exchanging variable-rate interest for a fixed-rate interest of 5.2 percent
on the latest maturing $250 million of the then remaining $500 million
obligation under its long-term credit agreement. The swap arrangement has
the same term as the debt agreement and had the effect of increasing the
weighted average interest rate to 4.8 percent from 3.9 percent for the 12-
month period ended December 31, 1993. Under this credit agreement at
December 31, 1993, Consumers was required to make 10 remaining quarterly
principal payments of approximately $47 million. As of December 31, 1993,
the outstanding balance under this credit agreement totaled $469 million
with a weighted average interest rate of 4.0 percent.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. At June 30, 1994, receivables sold under the agreement
totaled $205 million as compared to $285 million at December 31, 1993.
In March 1994, Consumers issued and sold 8 million shares of Consumers'
$2.08 Class A Preferred Stock (cumulative, without par value) with a
stated annual dividend rate of 8.32 percent. Net proceeds to Consumers
were $193 million. The stock is redeemable at the option of Consumers, on
or after April 1, 1999, at a redemption price of $25 per share plus
accrued dividends.
In May 1994, Consumers received a $100 million equity investment from CMS
Energy. The investment was consistent with CMS Energy's plan to improve
Consumers' capital structure and was recognized and included in the
capitalization structure employed by the MPSC as part of Consumers' most
recent electric rate order.
At December 31, 1992, Consumers effected a quasi-reorganization, an
elective accounting procedure in which Consumers' accumulated deficit of
$574 million was eliminated against other paid-in capital. The fair
values of Consumers' assets and liabilities at the date of the quasi-
reorganization were determined by management to approximate their carrying
values and no material adjustments to the historical bases were made.
This action was approved by Consumers' Board of Directors and did not
require shareholder approval. As a result of the quasi-reorganization and
subsequent accumulated earnings, Consumers resumed paying common stock
dividends during 1993. Consumers has continued paying common stock
dividends in 1994, including $16 million attributable to 1993 earnings,
and $66 million, attributable to current year earnings. Additionally, in
July 1994, Consumers declared a $31 million common stock dividend which is
payable in August 1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock and further increased the maximum amount of
nuclear fuel that could be leased to $80 million. At June 30, 1994, $66
million was under lease.
In November 1992, the FASB issued SFAS 112, Employers' Accounting for
Postemployment Benefits, which Consumers adopted January 1, 1994.
Consumers pays for several postemployment benefits, the most significant
being workers' compensation. Because Consumers' postemployment benefit
plans do not vest or accumulate, the standard did not materially impact
Consumers' financial position or results of operations.
61
Consumers Power Company
Management's Discussion and Analysis (MD&A)
This MD&A should be read along with the MD&A in the 1993 Form 10-K of
Consumers.
Consumers is a combination electric and gas utility company serving most
of 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 of which is the automotive industry.
Consolidated earnings for the quarters ended June 30, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $39
million for the second quarter of 1994, compared to $23 million for the
corresponding second quarter of 1993. The increased net income reflects
increased electric sales resulting from Michigan's continuing economic
growth and warmer temperatures. Net income also benefited from a mid-May
1994 electric rate increase and the lowering of property taxes in
Michigan.
Consolidated earnings for the six months ended June 30, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $121
million for the six months ended June 30, 1994, compared to $98 million
for the six months ended June 30, 1993. The increased net income reflects
increased electric sales and gas deliveries resulting from increased motor
vehicle production, increased levels of employment and the overall strong
economic expansion in Consumers' service territory. In addition, net
income benefited from a mid-May 1994 electric rate increase.
Consolidated earnings for the 12 months ended June 30, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $210
million for the 12 months ended June 30, 1994, compared to a net loss of
$236 million for the 12 months ended June 30, 1993. The increased net
income reflects the impact of the Settlement Order related to the cost
recovery for power purchases from the MCV Partnership, the benefit of
increased electric sales and gas deliveries, and the impact of a mid-May
1994 electric rate increase.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and
financing activities. Consumers' cash from operations mainly resulted
from its sale and transportation of natural gas and its sale and
transmission of electricity. Cash from operations for the first six
months of 1994 reflects the benefits of record-setting electric sales and
significantly higher gas deliveries.
Financing Activities
As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed
Notes to Consolidated Financial Statements), and subsequent accumulated
earnings, Consumers resumed paying common stock dividends during 1993.
Consumers has continued paying common stock dividends in 1994, including
$16 million attributable to 1993 earnings, and $66 million attributable to
current year earnings. Additionally, in July 1994, Consumers declared a
$31 million common stock dividend, payable in August 1994.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring $100 million of high-cost first mortgage
bonds. Also, in March 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with a stated
annual dividend rate of 8.32 percent. Net proceeds of $193 million from
the sale are targeted for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
Investing Activities
Capital expenditures (excluding assets placed under capital lease) and
deferred demand-side management costs totaled $198 million for the first
six months of 1994 as compared to $222 million for the first six months of
1993. These amounts primarily represent capital investments in Consumers'
electric and gas utility segments.
Outlook
Consumers estimates that capital expenditures, including demand-side
management and new lease commitments, related to its electric and gas
utility operations will total $1.4 billion over the next three years.
Cash generated by operations is expected to satisfy a substantial portion
of these capital expenditures.
In Millions
Years Ended December 31 1994 1995 1996
- --------------------------------------------------------------------------
Consumers
Construction (including DSM) $448 $438 $347
Nuclear fuel lease 4 40 37
Capital leases other than nuclear fuel 27 27 28
Michigan Gas Storage 6 5 7
------------------------
$485 $510 $419
============================================================================
Consumers' short-term sources of credit include a $470 million working
capital facility and unsecured, committed lines of credit totaling $165
million. At June 30, 1994, Consumers had $100 million and $29 million,
respectively, outstanding under these facilities. Consumers has FERC
authorization to issue or guarantee up to $900 million in short-term debt
through December 31, 1994. Consumers uses short-term borrowings to
finance working capital, seasonal fuel inventory 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 June 30, 1994, receivables sold totaled $205 million as
compared to $285 million at December 31, 1993.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended June 30, 1994 and
1993: During the second quarter of 1994, electric pretax operating income
increased $33 million from the 1993 level. This increase reflects higher
electric system sales from both economic growth and the impact of warmer
weather on customer use of air conditioning equipment. Increased pretax
operating income also reflects the benefit of an electric rate increase
which went into effect during mid-May 1994 and the impact of lower
property taxes in Michigan. Also, during the second quarter of 1994,
Consumers recognized $11 million in revenue, related to DSM, based on
having achieved all objectives agreed-upon with the MPSC (see Note 3).
The increased sales growth is supported by Michigan's improvement in
employment and economic conditions. Several hourly, daily and monthly
records of electric use were also set during June 1994.
Electric Pretax Operating Income for the six months ended June 30, 1994
and 1993: The $40 million improvement in 1994 electric pretax operating
income compared to 1993 primarily is the result of increased electric
system sales and the May 1994 electric rate increase. Consumers Power
customers used more electricity during the first half of 1994 than in the
first half of any year in Consumers' history due in large part to
Michigan's increased levels of employment and overall economic expansion,
as well as record-setting warm temperatures in June.
Electric Pretax Operating Income for the 12 months ended June 30, 1994 and
1993: The $135 million improvement in 1994 electric pretax operating
income compared to 1993 primarily is the result of an increase of $75
million relating to the resolution of the recoverability of MCV power
purchase costs under the PPA, increased electric system sales of $58
million and the May 1994 electric rate increase, partially offset by
higher costs related to system reliability improvements.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:
In Millions
Quarter ended Six months ended 12 months ended
1994 Over 1994 Over 1994 Over
(Under) 1993 (Under) 1993 (Under) 1993
- ------------------------------------------------------------------------
Sales growth $10 $20 $45
Weather 2 5 13
Resolution of MCV
power cost issues - - 75
Rate increases and other
regulatory issues 17 18 29
O&M, general taxes and
depreciation (a) 4 (3) (27)
----------------------------------------
Total change $33 $40 $135
========================================================================
(a) The 12 months ended variance was largely caused by Consumers' system
reliability improvement program.
Electric Sales: Electric system sales during the second quarter of 1994
totaled 8.0 billion kWh, a 6.2 percent increase from 1993 levels. During
the three month 1994 period, residential and commercial sales increased
3.8 percent and 5.7 percent, respectively, while industrial sales
increased 8.1 percent, in each case over the corresponding period in 1993.
Consumers' electric sales have benefited from improved employment and
economic conditions, including General Motors Corporation's decisions to
expand truck and car production in Michigan assembly plants. Electric
system sales during the six months ended June 30, 1994 totaled 16.3
billion kWh, a 5.8 percent increase from 1993 levels. During the six
month 1994 period, residential and commercial sales increased 4.2 percent
and 3.8 percent respectively, while industrial sales increased 7.4
percent. Electric system sales during the 12 months ended June 30, 1994
totaled 32.6 billion kWh, a 5.6 percent increase from 1993 levels. During
the 12 month ended 1994 period, residential and commercial sales increased
5.1 percent and 4.6 percent respectively, while industrial sales increased
7.3 percent. Growth in the industrial sales was the strongest in the
automotive and chemical sectors.
The following table quantifies electric sales by customer type for the
periods ended June 30:
Electric Sales Millions of kWh
Quarter ended Six months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 2,318 2,234 5,157 4,947 10,276 9,782
Commercial 2,235 2,114 4,433 4,269 9,073 8,676
Industrial 3,139 2,905 6,001 5,589 11,953 11,143
Sales for resale 279 256 660 553 1,249 1,217
--------------------------------------------------
System sales (a) 7,971 7,509 16,251 15,358 32,551 30,818
==========================================================================
(a) Excludes intersystem exchanges of power with other utilities through
joint dispatching for the economic benefit of customers.
Power Costs: Power costs for the three-month period ending June 30, 1994
totaled $243 million, a $31 million increase from the corresponding 1993
period. This increase primarily reflects greater power purchases from
outside sources to meet increased sales demand and to supplement decreased
generation at Palisades due to an outage. Power costs for the six-month
period ending June 30, 1994 totaled $487 million, a $73 million increase
from the corresponding 1993 period essentially for the same reasons as the
quarter-over-quarter variance. Power costs for the 12-month period ending
June 30, 1994 totaled $980 million, an $120 million increase from the
corresponding 1993 period essentially for the same reasons as the quarter-
over-quarter and the six-month ended variances.
Electric Utility Rates
Power Purchases from the MCV Partnership: Consumers is obligated to
purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract
capacity from the MCV Partnership. In 1993, the MPSC issued the
Settlement Order that allows Consumers to recover substantially all
payments for 915 MW of contract capacity purchased from the MCV
Partnership. The market for the remaining 325 MW of contract capacity was
assessed at the end of 1992. This assessment, along with certain
estimates by Consumers, and other factors required by the Settlement
Order, resulted in Consumers recognizing an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power
purchases from the MCV Partnership. Except for adjustments to reflect the
time value of money through accretion expense, no additional losses are
expected unless actual future experience materially differs from
management's estimates. ABATE and the Attorney General have filed claims
of appeal of the Settlement Order with the Court of Appeals. Although the
settlement loss was recorded in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $33 million for the first six months of
1994. Consumers estimates that its after-tax cash underrecoveries will
total $56 million in 1994, increasing slightly for 1995 through 1997, and
then decreasing to $8 million in 1998. Possible additional losses for the
next five years if Consumers is unable to sell any capacity above the
MPSC's authorized level are estimated to be $14 million in 1994,
increasing slightly for 1995 through 1997, and then increasing to $72
million in 1998.
The PPA contains a "regulatory out" provision, permitting Consumers to
reduce the fixed energy charges payable to the MCV Partnership if
Consumers is not able to recover these amounts from its customers.
Consumers and the MCV Partnership are currently engaged in arbitration to
determine whether Consumers is entitled to exercise its rights under the
regulatory out provision. Consumers is escrowing the fixed energy amounts
in dispute until resolution of the arbitration is achieved.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings, alleging
breach of contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order. The action alleges damages in excess of $1 billion and
seeks injunctive relief relative to Consumers' payments of the fixed
energy charges. CMS Energy and Consumers believe that at all times they
and CMS Holdings have conducted themselves properly and that the action is
without merit. It appears from the face of the complaint that a
significant portion of the alleged damages represent fixed energy charges
in dispute in the arbitration. CMS Energy and Consumers have requested
that the lawsuit be dismissed for lack of jurisdiction and have commenced
a lawsuit in Midland, Michigan, to address these issues. While management
believes that the possibility of the alleged damages being awarded is
remote, CMS Energy and Consumers are unable to predict the outcome of this
issue. In addition, CMS Holdings has filed a lawsuit in a local circuit
court seeking reimbursement of $7 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings.
Consumers is unable to predict the outcome of this issue.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings. For further
information regarding power purchases from the MCV Partnership, see Note
2.
In July 1994, Consumers agreed to pay $30 million to terminate a separate
power purchase agreement with a 65 MW coal-fired cogeneration facility.
Consumers is seeking MPSC approval to substitute 65 MW of less expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Consumers believes the
termination agreement and the proposed substitution of capacity represents
significant savings to its customers and will record a regulatory asset
for $30 million, which it believes will ultimately be recoverable in
rates.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 1994,
Palisades was temporarily taken out of service to repair valve-leakage and
conduct other needed inspections and repairs. Recovery of replacement
power costs and the prudency of actions taken during the outages will be
reviewed by the MPSC during the 1993 and 1994 PSCR reconciliations of
actual costs and revenues. For more information on the potential impact
of the outages, see Note 3.
Electric Rate Case: On May 10, 1994, the MPSC issued an order, granting
Consumers a $58 million annual increase in its retail electric rates
effective May 11, 1994. The order provides Consumers with higher revenues
associated with increased expenditures primarily related to capital
additions, operation and maintenance, higher depreciation and
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, and the continuation of
certain demand-side management programs at reduced levels. The MPSC order
generally supported Consumers' rate design proposal and reduced the level
of subsidization of residential customers by commercial and industrial
customers. On June 9, 1994, Consumers filed a petition for rehearing and
clarification of this MPSC order. The petition requests reconsideration
of certain issues, which include an incremental revenue requirement of $26
million for 1995, the level of rate cross-subsidization, the level of
future DSM expenditures and the calculation of DSM-related incentives and
penalties.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. The MPSC has granted an expedited hearing
schedule that calls for final briefs to be filed in November 1994. A
final order is expected near the end of 1994. For further information,
see Note 3.
Electric Conservation Efforts
In 1993, Consumers completed the customer participation portion of several
demand-side management programs designed to encourage the efficient use of
energy. Based on the MPSC's determination of Consumers' effectiveness in
implementing these programs, Consumers' future rate of return on electric
common equity may be adjusted for one year either upward by up to 1
percent or downward by up to 2 percent. The proceedings before the MPSC
have started and based on the criteria set out in the demand-side
management settlement agreement approved by the MPSC in 1992, Consumers
has achieved all the agreed-upon objectives. Consumers believes that the
MPSC will ultimately order a 1 percent increase on its return on common
equity to be in effect for one year. Accordingly, during the second
quarter of 1994, Consumers recognized $11 million in revenue, related to
its demand-side management program. A final order from the MPSC is
expected by mid-1995. In May 1994, as part of Consumers' electric rate
case, the MPSC issued an order that authorized Consumers to continue
certain demand-side management programs at reduced levels. For further
information, see Note 3.
Electric Capital Expenditures
Consumers estimates capital expenditures, including deferred demand-side
management costs and new lease commitments, related to its electric
utility operations of $354 million for 1994, $388 million for 1995 and
$308 million for 1996. These amounts include an attributed portion of
Consumers' anticipated capital expenditures for common plant and
equipment.
Electric Environmental Matters
The 1990 amendment of the federal Clean Air Act significantly increased
the environmental constraints that utilities will operate under in the
future. While the Clean Air Act's provisions will require Consumers to
make certain capital expenditures in order to comply with the amendments
for nitrogen oxide reductions, Consumers' generating units are presently
operating at or near the sulfur dioxide emission limits which will be
effective in the year 2000. Therefore, management believes that
Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates or from others.
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 or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
A recent NRC review of Consumers' performance at Palisades showed a
decline in performance. Management believes that an increased emphasis on
internal assessments will improve performance at Palisades. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. The inspection, completed in June 1994, found
performance, operational and management deficiencies at Palisades. The
NRC acknowledged that the new Palisades senior management team, in place
since early 1994, had recognized and begun to address the problems at
Palisades. The NRC did not place Palisades on either of the NRC's
"Troubled" or "Declining Performance" lists. Consumers is required to
file a response to the NRC's diagnostic evaluation report by August 18,
1994, and is currently finalizing a performance improvement plan which
will form the basis for that response. Attaining and maintaining
acceptable performance at Palisades will require continuing performance
improvements and additional expenditures at the plant, which have been
included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks and Consumers' use
of the casks are now pending at the U.S. Sixth Circuit Court of Appeals.
If Consumers is unable to continue to use the casks as planned,
significant costs could be incurred, including replacement power costs
during any resulting plant shutdown and costs related to removal of the
dry cask system. In March 1994, Consumers agreed to a request from the
NRC to complete certain tests and analysis regarding Consumers' cask
storage site, including the effects of an earthquake on the surrounding
soil and the support pad on which the casks are placed. These tests and
analysis have been completed and conclude that the storage system is
adequate. The results were reviewed by the NRC staff, and in May 1994,
the NRC issued a preliminary report confirming the safety of Consumers'
dry cask storage system. For further information on Consumers' dry cask
storage, see Note 4.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. For further information
on nuclear decommissioning, see Note 4.
Consumers has experienced recent increases in complaints relating
primarily to the effect of so-called stray voltage on certain livestock.
A complaint seeking certification as a class action suit was filed in 1993
against Consumers alleging significant damages, primarily related to
certain livestock. Consumers believes the allegations to be without merit
and in March 1994, the circuit judge hearing the complaint refused to
grant class action status to the suit. This decision is being appealed by
the plaintiffs and a number of individuals who would have been part of the
class action have refiled their claims as separate lawsuits. At August
10, 1994, Consumers had 91 separate stray voltage lawsuits pending (see
Note 4).
Some of Consumers' larger industrial customers are exploring the
possibility of constructing and operating their own on-site generating
facilities. Consumers is actively working with these customers to develop
rate and service alternatives designed to compete with self-generation
options. Although Consumers' electric rates are competitive with other
regional utilities, Consumers has on file with the FERC two open access
interconnection tariffs which could have the effect of increasing
competition for wholesale customers. As part of its most recent electric
rate case, the MPSC reduced the level of rate subsidization of residential
customers by commercial and industrial customers so as to further improve
rate competitiveness for its largest customers. Consumers has also
requested MPSC authorization to offer special rates to attract industrial
and commercial customers into its service territory and to retain certain
customers using high amounts of electricity that have expressed an
intention and have the ability to acquire energy from other sources (see
Note 3).
In April 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. Rates to be used for the experiment have yet
to be determined and a final MPSC order on the program is not expected
until mid-1995. Consumers does not expect this experiment to have a
material impact on its financial position or results of operations.
On July 15, 1994, the FERC approved new 40-year licenses for 11 of
Consumers' hydroelectric plants, confirming planned environmental
expenditures. In issuing the licenses, the FERC approved, with
modifications, a settlement agreement signed by Consumers, the Attorney
General, the DNR and other state and federal officials. The parties to
the original settlement agreement have 30 days to approve the settlement
agreement as modified. The agreement requires Consumers to make payments
and investments which could total $30 million over the license periods for
such things as environmental safeguards and fishery habitat improvements.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended June 30, 1994 and 1993:
During the second quarter of 1994 gas pretax operating income decreased
$3 million from the 1993 level. This decrease reflects lower gas
deliveries (both sales and transportation volumes), and higher costs
related to system reliability improvements.
Gas Pretax Operating Income for the six months ended June 30, 1994 and
1993: The $8 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs, partially offset by higher costs related to system reliability
improvements.
Gas Pretax Operating Income for the 12 months ended June 30, 1994 and
1993: The $33 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended June 30:
In Millions
Quarter ended Six months ended 12 months ended
1994 Over 1994 Over 1994 Over
(Under) 1993 (Under) 1993 (Under) 1993
- ------------------------------------------------------------------------
Deliveries $(4) $ 13 $21
Regulatory recovery
of gas cost 2 1 8
O&M, general taxes
and depreciation (1) (6) 4
-----------------------------------------
$(3) $ 8 $33
========================================================================
Gas Deliveries: Gas sales and gas transported during the second quarter
of 1994 totaled 71.7 bcf, a 3.7 percent decrease from the corresponding
1993 level. For the six months ended June 30, 1994 gas sales and gas
transported totaled 247.7 bcf, a 7.5 percent increase from the
corresponding 1993 level. For the 12 months ended June 30, 1994 gas sales
and gas transported totaled 425.1 bcf, a 6.5 percent increase from the
corresponding 1993 level.
The following table quantifies gas deliveries by customer type for the
periods ended June 30:
Gas Sales Thousands of Mcf
Quarter ended Six months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 25,366 27,616 111,678 104,662 181,873 172,053
Commercial 7,404 8,347 36,237 33,810 58,306 55,025
Industrial 1,876 2,119 9,069 8,332 14,656 13,638
Other 135 24 241 109 362 190
---------------------------------------------------
Gas sales 34,781 38,106 157,225 146,913 255,197 240,906
Transportation
deliveries 14,064 14,551 39,387 37,530 72,333 68,413
Transportation for MCV 19,020 17,844 39,326 35,544 77,186 65,607
Off-system trans-
portation service 3,854 3,996 11,801 10,454 20,420 24,377
---------------------------------------------------
Total deliveries 71,719 74,497 247,739 230,441 425,136 399,303
==========================================================================
Cost of Gas Sold: The cost of gas sold for the second quarter of 1994
decreased $7 million from the 1993 level. The cost of gas sold for the
six months ended and 12 months ended June 30 increased $10 million and $2
million, respectively, from the corresponding 1993 levels. These
increases reflect higher deliveries partially offset by lower costs per
mcf. The lower costs per mcf are due to more favorable gas contracts with
interstate suppliers, resulting from the impact of FERC Order 636, and the
termination and expiration of high-cost contracts with certain Michigan
gas producers.
Gas Utility Rates
In July, 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been recently resolved. The dispute revolved
around whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
In July 1993, Michigan Gas Storage submitted a notice of rate change with
the FERC to revise its operation and maintenance expenses for 1993 and
update plant costs to reflect the addition of $27 million of new plant
additions in 1993 and began collecting the revised rates subject to refund
and a hearing in February 1994. In June 1994, the FERC approved a
stipulation and agreement in full settlement of the rate proceeding, which
provides Michigan Gas Storage with estimated annual revenues of $20
million. For further information regarding gas utility rates, see Note 3.
Gas Capital Expenditures
Consumers estimates capital expenditures, including new lease commitments,
related to its gas utility operations of $131 million for 1994, $122
million for 1995 and $111 million for 1996. These amounts include an
attributed portion of Consumers' anticipated capital expenditures for
common plant and equipment.
Gas Environmental Matters
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these manufactured gas plant sites to define the
nature and extent of contamination at these sites and to determine which
of several possible remedial action alternatives, including no action, may
be required under the Environmental Response Act. The DNR has approved
two of three plans for remedial investigation/feasibility studies
submitted by Consumers and is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study indicate that the expenditures for remedial action at this site are
likely to be minimal. However, Consumers did not believe that a single
site was representative of all of the sites. Data available to Consumers
and its continued internal studies have resulted in an estimate of
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At June 30, 1994,
Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial costs for
the sites.
Consumers believes that remedial costs are recoverable in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part a gas rate case.
In that proceeding, the MPSC determined that prudent investigation and
remedial costs could be deferred and amortized over 10-year periods. In
order to be recovered in rates, prudent costs must be approved in a rate
case. Any costs amortized in years prior to filing a rate case may not be
recoverable. The MPSC stated that the length of the period may be
reviewed from time to time, but any revisions would be prospective. The
order further provided that the prudency review would include a review of
the utility's attempts to obtain reimbursement from others. The MPSC has
also approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs. Consumers has initiated discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
Other
Other Income: Other income decreased $9 million and $16 million for the
second quarter of 1994 and the first half of 1994, respectively, when
compared to the corresponding 1993 periods, reflecting the impact of the
sale of the remaining MCV Bonds. The $325 million improvement in Other
Income when comparing the 12 months ended June 30, 1994 to the
corresponding 1993 period reflects the impact of the March, 1993
Settlement Order related to power purchases from the MCV Partnership. The
12 months ended June 30, 1993 included an after-tax $343 million charge
related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If
CMS Energy were to lose its current exemption, it would become more
heavily regulated by the SEC; Consumers could ultimately be forced to
divest either its electric or gas utility business; and CMS Energy would
be restricted from conducting businesses that are not functionally related
to the conduct of its utility business as determined by the SEC.
CMS Energy is opposing this request and believes it will maintain its
current exemption from registration under PUHCA.
72
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' 1993 Forms 10-K
and in the Forms 10-Q for the quarter ended March 31, 1994. 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.
(a) 1993 Electric Rate Case. On May 10, 1994, the MPSC issued a final
order in this case which increased annual electric revenues by $58
million, or about 2.8 percent, and approved an allowed rate of return on
common equity of 11.75%. The rate increase is effective for service
rendered on and after May 11, 1994. On June 9, 1994, Consumers filed a
petition for rehearing and clarification of this order. The petition
requests reconsideration of certain issues which include an incremental
revenue requirement of $26 million for 1995, the level of rate cross-
subsidization, the level of future DSM expenditures and the calculation of
DSM-related incentives and penalties. The Attorney General has also filed
a petition for rehearing raising certain issues regarding the mechanics of
SFAS 106 Employers' Accounting For Postretirement Benefits Other Than
Pensions cost recovery and other procedural matters. The MPSC has not
taken any action on these petitions at this time.
(b) Arbitration Proceedings between Consumers and the MCV Partnership. A
dispute has arisen between the MCV Partnership and Consumers relating to
the impact of the Settlement Order on the fixed energy charge payment
called for in the PPA and Consumers' ability to exercise its rights under
the regulatory out provision based on the issuance of the Settlement
Order. In accordance with the dispute resolution provisions set out in
the PPA, an arbitrator acceptable to both parties has been selected and
the arbitration of this dispute has commenced (the "MCV Fixed Energy
Charge Arbitration"). Document discovery and depositions were
substantially completed in early June. The schedule calls for depositions
of each party's designated experts in August and hearings before the
arbitrator in September and October. Consumers is unable to predict the
outcome of such arbitration proceedings or of any possible settlement of
the issues underlying this dispute.
On May 5, 1994, the MCV notified Consumers of its desire to commence a
second arbitration proceeding, this one regarding the meaning of Exhibit C
to the PPA. That exhibit sets forth the methodology for calculation of
the energy charge payable under the PPA. This same exhibit is included in
many of Consumers' power purchase agreements with qualifying facilities
and has been consistently applied to all agreements. The MCV Partnership
maintains that Consumers has misapplied or misinterpreted Exhibit C since
commercial operation in March 1990 and has estimated that beginning in
1995 it should receive an increase in energy charge revenues of at least
$8 million on an annual basis. Consumers believes that the PPA is clear
on the manner in which energy charges are to be calculated and that
Consumers has followed the specified procedure correctly throughout the
term of the PPA. The parties are in the process of selecting an
arbitrator and establishing a schedule. Consumers cannot predict the
timing or outcome of this arbitration.
(c) Lawsuit Filed by the Lessors of the MCV Facility. The lessors of the
MCV Facility have filed a lawsuit in federal district court in New York
against CMS Energy, Consumers and CMS Holdings. It alleges breach of
contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order, which is the subject of an arbitration between the MCV
Partnership and Consumers. The action alleges damages in excess of $1
billion and seeks injunctive relief relative to Consumers' payments of the
fixed energy charge. CMS Energy and Consumers believe that at all times
they and CMS Holdings have conducted themselves properly and that the
action is without merit. They also believe that a significant portion of
the alleged damages represent fixed energy charges in dispute in the
arbitration. On March 28, 1994, Consumers commenced a lawsuit in State
Circuit Court in Midland County, Michigan seeking declaratory and
injunctive relief with respect to interpretation of the PPA. On July 26,
1994, at the request of the parties, the federal district court in New York
transferred the case to the suspense docket pending completion of the MCV
Fixed Energy Charge Arbitration. While management believes the
possibility of the alleged damages being awarded in this suit is remote,
CMS Energy and Consumers are unable to predict the outcome of this action.
In addition, on March 23, 1994, CMS Holdings filed suit in Circuit Court
in Jackson County, Michigan to obtain a refund of tax indemnity payments
owed to CMS Holdings by the other partners in First Midland Limited
Partnership pursuant to a partnership tax indemnification agreement. In
the suit CMS Holdings is claiming breach of contract, breach of covenant
of good faith and fair dealing and that no setoff may be claimed by the
other First Midland Partners. One of the partners in First Midland
Limited Partnership has paid approximately $1 million of the $8
million originally in dispute, but the remaining partners have
failed to pay their proportional parts of the refund and are claiming
that retention of the payment is justified as a setoff against
the larger amounts claimed by the lessor-plaintiffs in the New York
federal court action. Consumers is unable to predict the outcome of this
action.
(d) Retail Wheeling Proceedings. On April 11, 1994, the MPSC issued an
Opinion and Interim Order which approved the framework for a five year
experimental retail wheeling program for Consumers and Detroit Edison, and
remanded the case to the Administrative Law Judge to determine appropriate
rates and charges. The MPSC stated that the purpose of the experiment is
to gather and evaluate information regarding whether retail wheeling is in
the public interest and should occur on a permanent basis. The
experimental program will commence with each utility's next solicitation
of additional supply side resources.
The MPSC stated that the experimental program (i) would be limited to 60
MW for Consumers and 90 MW for Detroit Edison, (ii) would limit amounts
wheeled by individual participating customers to between 2 and 10 MW,
(iii) would be limited to customers served at transmission or
subtransmission voltage, (iv) would require retail wheeling customers to
assume responsibility to procure power from third party providers, and
(v) would allow participating customers to return to firm service at the
end of the experiment. The MPSC further stated that contracts between
suppliers and end-users using retail wheeling would be subject to prior
MPSC review and approval and that suppliers must have or obtain suitable
franchises to serve in the end-users location as well as obtain a
certificate of public convenience and necessity from the MPSC to provide
the electric service.
Under the schedule currently set for proceedings on the appropriate retail
wheeling rates, the utilities will file their direct cases in August 1994
with cross examination to begin in November 1994. Under this schedule, a
proposal for decision would not be issued before early 1995.
The Detroit Edison Company and the Attorney General filed claims of appeal
of this order. On June 15, 1994, the Court of Appeals issued an order
dismissing these appeals on the grounds that the order was not final and
therefore not appealable.
(e) Stray Voltage Lawsuit. Consumers experienced an increase in
complaints during 1993 relating to so-called stray voltage. Claimants
contend that stray voltage results when small electrical currents present
in grounded electric systems are diverted from their intended path.
Investigation by Consumers of prior stray voltage complaints disclosed
that many factors, including improper wiring and malfunctioning of on-farm
equipment can lead to the stray voltage phenomenon. 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 configuration of the customer's hook-up to
Consumers. On October 27, 1993, a complaint seeking certification as a
class action suit was filed against Consumers in a local circuit court.
The complaint alleged that in excess of a billion dollars of damages,
primarily related to production by certain livestock owned by the
purported class, were being incurred as a result of stray voltage from
electricity being supplied by Consumers. Consumers believes the
allegations to be without merit and vigorously opposed the certification
of the class and this suit. On March 11, 1994, the court decided to deny
class certification for this complaint and to dismiss, subject to refiling
as separate suits, the October lawsuit with respect to all but one of the
named plaintiffs. On April 4, 1994, the plaintiffs appealed the court's
denial of class certification in this matter to the Court of Appeals.
Subsequent to the filing of this appeal and the submission of the
plaintiffs brief on this issue, the Court of Appeals on its own motion
issued an order which decided that since the lead case in the class action
suit had not been dismissed, the trial court's decision to deny class
certification was an interlocutory order and therefore not ripe for
appeal. The Court of Appeals Order also found that the trial court's
decision that the other named plaintiffs had been misjoined was final and
ripe for appeal. This issue had not been raised in the plaintiffs appeal
or brief. Consumers has addressed both issues in its brief filed with the
Court of Appeals on July 14, 1994 in support of the trial court's
decision. A number of individuals who would have been part of the class
action have refiled their claims as separate lawsuits. In total,
Consumers currently has 91 separate stray voltage cases pending.
(f) Gas Case Settlement. On June 13, 1994, Consumers filed an
application with the MPSC seeking approval of a settlement agreement
entered into between Consumers and the MPSC Staff concerning retail gas
rates. In summary, the settlement provides for the expensing of certain
SFAS 106-related retiree health care costs ($10 million in 1994 and $4.3
million in 1995) which otherwise would have been deferred for recovery
from customers in the future. This settlement alleviates the MPSC Staff's
concerns about the level of Consumers' earnings in the gas business and
was intended to avoid a rate reduction related to the property tax expense
reduction which will be experienced as a result of the recent legislation
and ballot initiative. On June 15, 1994, the Attorney General filed a
complaint with the MPSC seeking a gas rate reduction based upon the
reduction in property tax expense. The Attorney General also filed
objections to the proposed settlement. Subsequently, the Attorney General
filed a document indicating that he would withdraw his objections and
complaint if the MPSC ordered Consumers to file a general gas rate case by
the end of 1994. Consumers filed a statement indicating that it would
file such a case. On July 18, 1994, the MPSC issued an order approving
the settlement, dismissing the Attorney General's complaint and accepting
Consumers' commitment to file a general gas rate case by the end of 1994.
(g) Request for Approval of a Competitive "Rate K" Tariff. On June 15,
1994, Consumers filed an application with the MPSC seeking approval of a
competitive contract service tariff. This tariff would allow Consumers to
negotiate special rates with certain large customers who would otherwise
be likely to terminate or reduce their purchases of electricity from
Consumers in favor of some alternative source of power. The tariff would
also allow Consumers to sell all or some portion of the 325 MW block of
capacity Consumers is obligated to purchase from the MCV Partnership in
excess of the 915 MW for which the MPSC has allowed cost recovery.
Consumers requested in its application that the sale of the 325 MW block
be treated for accounting and ratemaking purposes on a non-jurisdictional
basis. On June 30, 1994, the MPSC issued an order which established a
hearing schedule for the Rate K request. In accordance therewith,
Consumers filed its direct case on July 21, 1994. The schedule would
allow for a final order by the end of 1994.
(h) Palisades Plant - Spent Nuclear Fuel Storage. In April 1993, the NRC
amended its regulations, effective May 7, 1993, to approve the design of
the dry spent fuel storage casks to be used by Consumers at Palisades. In
May 1993, the Attorney General and certain other parties commenced
litigation to block Consumers' use of the storage casks, alleging that the
NRC had failed to comply adequately with the National Environmental Policy
Act. As of July 31, 1994, the courts have declined to prevent such use
and have refused to issue temporary restraining orders or stays. Several
appeals related to this matter are now pending at the U.S. Sixth Circuit
Court of Appeals with oral arguments scheduled for October 11, 1994. As
of July 31, 1994, Consumers had loaded four dry storage casks with spent
nuclear fuel and expects to load additional casks prior to Palisades' 1995
refueling outage. On August 2, 1994 Consumers announced that it will
unload and replace one of the four dry storage casks previously loaded
because of minor flaws detected in the welds in the liner of the most
recently loaded cask. Although testing following cask loading did not
disclose any leakage from the cask, Consumers decided to remove the spent
fuel from the cask and insert it in another cask. Consumers has examined
the radiographs for all of the casks fabricated for it to date, including
the other three containing spent fuel, and has found all other welds
acceptable.
(j) Gas Supplier Dispute. Consumers has been involved in a dispute with
eight of its direct gas suppliers regarding the price to be paid for gas
supplied under the contracts. Lawsuits were pending in which the
suppliers were seeking open pricing and/or renegotiation of the pricing
provisions of their contracts. Certain of the suppliers also alleged that
absent such renegotiation they would have the right to terminate their
supply contracts with Consumers. Consumers disputed those claims.
Subsequently, Consumers and seven of the suppliers have agreed to enter
into new contracts at negotiated rates, with initial terms ranging from
one to three years. Consumers and the remaining supplier have agreed to
terminate their existing contract. Pursuant to these agreements the claims
made by the suppliers will be dismissed with prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 27, 1994, the
shareholders ratified the appointment of Arthur Andersen & Co. as
independent auditors of CMS Energy and Consumers for the year ended
December 31, 1994. The vote at CMS Energy was 73,780,207 in favor, and
381,429 against, with 545,383 abstaining. The vote at Consumers was
85,066,955 in favor, and 6,675 against, with 14,473 abstaining.
At the same meeting, shareholders elected all twelve nominees for the
office of director for both CMS Energy and Consumers. The total number of
votes cast at CMS Energy was 74,707,019. The votes for individual
nominees were as follows:
CMS ENERGY CORPORATION
Number of Votes
---------------
For Withheld Total
William T. McCormick, Jr. 73,659,297 1,047,722 74,707,019
James J. Duderstadt 73,737,474 969,545 74,707,019
Victor J. Fryling 73,732,910 974,109 74,707,019
Earl D. Holton 73,794,923 912,096 74,707,019
Lois A. Lund 73,694,306 1,012,713 74,707,019
Frank K. Merlotti 73,776,729 930,290 74,707,019
Willaim U. Parfet 73,794,440 912,579 74,707,019
Percy A. Pierre 73,773,196 933,823 74,707,019
S. Kinnie Smith, Jr. 73,733,450 973,569 74,707,019
Robert D. Tuttle 73,772,378 934,641 74,707,019
Kenneth Whipple 73,780,188 926,831 74,707,019
John B. Yasinsky 73,787,462 919,557 74,707,019
The total number of votes cast at Consumers was 85,088,103. The votes for
individual nominees were as follows:
CONSUMERS POWER COMPANY
Number of Votes
---------------
For Withheld Total
William T. McCormick, Jr. 85,071,463 16,640 85,088,103
James J. Duderstadt 85,071,786 16,317 85,088,103
Victor J. Fryling 85,072,155 15,948 85,088,103
Earl D. Holton 85,072,477 15,626 85,088,103
Lois A. Lund 85,071,724 16,379 85,088,103
Frank K. Merlotti 85,071,485 16,618 85,088,103
Willaim U. Parfet 85,072,377 15,726 85,088,103
Percy A. Pierre 85,072,229 15,874 85,088,103
S. Kinnie Smith, Jr. 85,072,005 16,098 85,088,103
Robert D. Tuttle 85,071,905 16,198 85,088,103
Kenneth Whipple 85,072,876 15,227 85,088,103
John B. Yasinsky 85,072,736 15,367 85,088,103
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(4) - CMS Energy: Credit Agreement dated as of July 29, 1994
among CMS Energy Corporation, the Banks, the Co-Agents, the
Documentation Agent and the Operational Agent, all as
defined therein, and the Exhibits thereto
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of independent public accountant
(15)(b) - Consumers: Letter of independent public accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(b) Reports on Form 8-K
There have been no Current Reports on Form 8-K filed since the filing
of CMS Energy Corporation's and Consumers Power Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
77
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
-------------------------
(Registrant)
Date: August 10, 1994 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS POWER COMPANY
-------------------------
(Registrant)
Date: August 10, 1994 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer