1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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 April 30, 1995 - 87,972,540
Consumers Power Company, $10 par value, shares outstanding and
privately held by CMS Energy Corporation at April 30, 1995 - 84,108,789
2
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended March 31, 1995
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. . . . . . . . . . . . . . 21
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . 32
Consolidated Statements of Income . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 34
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Common Stockholder's Equity. . . . . 37
Condensed Notes to Consolidated Financial Statements. . . . . . 38
Management's Discussion and Analysis. . . . . . . . . . . . . . 46
PART II:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 55
Item 4. Submission of Matters to a Vote of Security Holders . 57
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 57
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
ALJ . . . . . . . . . . . . . . . Administrative Law Judge
Antrim. . . . . . . . . . . . . . Antrim Limited Partnership
Articles. . . . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . . . The Michigan Attorney General
bcf . . . . . . . . . . . . . . . Billion cubic feet
Class G Common Stock. . . . . . . One of two classes of common stock of
CMS Energy
Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . . . One of two classes of common stock of
CMS Energy
CMS Gas Transmission. . . . . . . CMS Gas Transmission and Storage
Company, a subsidiary of Enterprises
CMS Generation. . . . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . . . CMS Midland Holdings Company, a
subsidiary of Consumers
CMS Midland . . . . . . . . . . . CMS Midland Inc., a subsidiary of
Consumers
CMS NOMECO. . . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary
of Enterprises
Common Stock. . . . . . . . . . . Common Stock of CMS Energy, including
CMS Energy Common Stock and Class G
Common Stock
Consumers . . . . . . . . . . . . Consumers Power Company, a subsidiary
of CMS Energy
Consumers Gas Group . . . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan
Gas Storage
Court of Appeals. . . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . . Michigan Department of Natural
Resources
DOE . . . . . . . . . . . . . . . U. S. Department of Energy
DSM . . . . . . . . . . . . . . . Demand-side management
Enterprises . . . . . . . . . . . CMS Enterprises Company, a subsidiary
of CMS Energy
Environmental Response Act. . . . Michigan Environmental Response Act
FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . . Gas cost recovery
HYDRA-CO. . . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a
subsidiary of CMS Generation and
former independent power production
subsidiary of Niagara Mohawk Power
Corporation
kWh . . . . . . . . . . . . . . . Kilowatt-hour
Ludington . . . . . . . . . . . . Ludington pumped storage plant,
jointly owned by Consumers and Detroit
Edison
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 pollution control revenue
bonds
MCV Facility. . . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the
MCV Partnership
MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . . . Management's Discussion and Analysis
Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
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
NEPA. . . . . . . . . . . . . . . National Environmental Response Act
NOPR. . . . . . . . . . . . . . . Notice of proposed rulemaking
NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . . . Other operation and maintenance
expense
Owner Participants. . . . . . . . Lessors of the MCV Facility
Palisades . . . . . . . . . . . . Palisades nuclear plant, owned by
Consumers
PPA . . . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with
a 35-year term commencing in March
1990
Preferred Stock . . . . . . . . . CMS Energy preferred stock
PSCR. . . . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . . . Public Utility Holding Company Act of
1935
SEC . . . . . . . . . . . . . . . Securities and Exchange Commission
Settlement Order. . . . . . . . . MPSC Order issued March 31, 1993 in
MPSC Case Nos. U-10127, U-8871 and
others, and the rehearing order issued
May 26, 1993
SFAS. . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Walter. . . . . . . . . . . . . . Walter International, Inc., a Texas
corporation
(This page intentionally left blank)
6
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of
CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
March 31, 1995 and 1994, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of CMS Energy Corporation and
subsidiaries as of December 31, 1994, 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 31, 1995 (except with respect to certain matters discussed in
Notes 2, 3, 7 and 13 to the consolidated financial statements as to which
the date is March 1, 1995), 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, 1994, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 8, 1995.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 540 $ 545 $2,185 $2,132
Gas utility 482 528 1,105 1,194
Oil and gas exploration and production 34 18 101 76
Independent power production 23 8 60 24
Natural gas transmission, storage and marketing 38 42 140 148
Other 2 1 6 4
-----------------------------------------------
Total operating revenue 1,119 1,142 3,597 3,578
-----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 79 294 303
Purchased power - related parties 124 122 484 481
Purchased and interchange power 36 42 156 165
Cost of gas sold 308 372 721 824
Other 162 144 643 591
-----------------------------------------------
Total operation 697 759 2,298 2,364
Maintenance 46 43 194 205
Depreciation, depletion and amortization 114 103 390 368
General taxes 56 62 178 195
-----------------------------------------------
Total operating expenses 913 967 3,060 3,132
-----------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 87 88 333 293
Gas utility 91 84 143 158
Oil and gas exploration and production 15 2 22 1
Independent power production 13 2 31 5
Natural gas transmission, storage and marketing 3 3 9 8
Other (3) (4) (1) (19)
-----------------------------------------------
Total pretax operating income 206 175 537 446
-----------------------------------------------
INCOME TAXES 54 47 111 86
-----------------------------------------------
NET OPERATING INCOME 152 128 426 360
-----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 3 3 12 14
Accretion expense (8) (9) (34) (37)
Other income taxes, net 1 2 11 4
MCV Bond income - - - 24
Other, net 5 5 17 22
-----------------------------------------------
Total other income 1 1 6 27
-----------------------------------------------
FIXED CHARGES
Interest on long-term debt 56 46 203 199
Other interest 5 3 20 21
Capitalized interest (1) (1) (6) (5)
Preferred dividends 7 3 28 11
-----------------------------------------------
Net fixed charges 67 51 245 226
-----------------------------------------------
NET INCOME $ 86 $ 78 $ 187 $ 161
===============================================
AVERAGE COMMON SHARES OUTSTANDING 87 85 86 83
===============================================
EARNINGS PER AVERAGE COMMON SHARE $ .99 $ .92 $ 2.17 $ 1.95
===============================================
DIVIDENDS DECLARED PER COMMON SHARE $ .21 $ .18 $ .81 $ .66
===============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
/TABLE
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86 $ 78 $ 187 $ 161
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $12,
$49 and $47, respectively) 114 103 390 368
Capital lease and other amortization 10 17 30 38
Debt discount amortization 8 9 36 36
Deferred income taxes and investment tax credit 29 17 68 52
Accretion expense 8 9 34 37
Accretion income - abandoned Midland project (3) (3) (12) (14)
MCV power purchases - settlement (Note 2) (37) (22) (102) (78)
Other (12) (7) (29) (11)
Changes in other assets and liabilities 103 184 (69) (72)
------ ------ ------ ------
Net cash provided by operating activities 306 385 533 517
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (287) (114) (748) (564)
Investments in nuclear decommissioning trust funds (13) (12) (49) (47)
Investments in partnerships and unconsolidated subsidiaries (11) (23) (41) (131)
Cost to retire property, net (9) (7) (41) (33)
Deferred demand-side management costs (2) - (11) (39)
Proceeds from sale of property - - 20 1
Proceeds from MCV Bonds - - - 322
Sale of subsidiary - - - (14)
Other (4) - (9) (5)
------ ------ ------ ------
Net cash used in investing activities (326) (156) (879) (510)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 208 39 869 662
Issuance of common stock 33 13 50 145
Issuance of preferred stock - 193 - 193
Increase (decrease) in notes payable, net (204) (259) 135 (21)
Payment of common stock dividends (18) (15) (70) (54)
Retirement of bonds and other long-term debt (11) (109) (181) (703)
Payment of capital lease obligations (10) (16) (29) (34)
Repayment of bank loans (9) (54) (427) (246)
Retirement of common stock - (1) (1) (4)
------ ------ ------ ------
Net cash provided by (used in) financing activities (11) (209) 346 (62)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (31) 20 - (55)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 79 28 48 103
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 48 $ 48 $ 48 $ 48
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
March 31 March 31
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $5,826 $5,771 $5,539
Gas 2,115 2,102 1,992
Oil and gas properties (full-cost method) 978 934 858
Other 55 61 70
-----------------------------------
8,974 8,868 8,459
Less accumulated depreciation, depletion and amortization 4,405 4,299 4,105
-----------------------------------
4,569 4,569 4,354
Construction work-in-progress 257 245 248
-----------------------------------
4,826 4,814 4,602
-----------------------------------
INVESTMENTS
Independent power production 262 152 118
First Midland Limited Partnership (Note 2) 219 218 214
Midland Cogeneration Venture Limited Partnership (Note 2) 83 74 67
Other 57 56 43
-----------------------------------
621 500 442
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 48 79 48
Accounts receivable and accrued revenue, less
allowances of $4, $5 and $4, respectively (Note 7) 149 156 129
Inventories at average cost
Gas in underground storage 80 235 62
Materials and supplies 79 75 78
Generating plant fuel stock 27 37 22
Deferred income taxes 37 34 13
Trunkline settlement 30 30 30
Prepayments and other 148 186 169
-----------------------------------
598 832 551
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 479 484 498
Nuclear decommissioning trust funds 236 213 179
Abandoned Midland project (Note 3) 143 147 158
Trunkline settlement 48 55 78
Other 393 339 317
-----------------------------------
1,299 1,238 1,230
-----------------------------------
TOTAL ASSETS $7,344 $7,384 $6,825
===================================
10
March 31 March 31
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,209 $1,107 $1,042
Preferred stock of subsidiary 356 356 356
Long-term debt 2,787 2,709 2,376
Non-current portion of capital leases 103 108 122
-----------------------------------
4,455 4,280 3,896
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 180 64 284
Accrued taxes 172 216 182
Accounts payable 160 194 153
Notes payable 135 339 -
MCV power purchases - settlement (Note 2) 95 95 82
Accounts payable - related parties 54 50 49
Accrued refunds 35 25 33
Accrued interest 30 40 26
Other 166 198 172
-----------------------------------
1,027 1,221 981
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 604 582 518
Postretirement benefits 555 550 557
MCV power purchases - settlement (Note 2) 295 324 378
Deferred investment tax credits 178 181 188
Trunkline settlement 48 55 78
Regulatory liabilities for income taxes, net 29 16 13
Other 153 175 216
-----------------------------------
1,862 1,883 1,948
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,344 $7,384 $6,825
===================================
<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 Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,701 1,672 1,684 1,539
Common stock reacquired - (1) (1) (4)
Common stock issued 33 13 50 145
Common stock reissued - - 1 4
------- ------- ------- -------
At end of period 1,734 1,684 1,734 1,684
------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period - - 1 -
SFAS 115 - unrealized gain, net of tax 1 1 - 1
------- ------- ------- -------
At end of period 1 1 1 1
------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (595) (707) (644) (751)
Net income 86 78 187 161
Common stock dividends declared (18) (15) (70) (54)
------- ------- ------- -------
At end of period (527) (644) (527) (644)
------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,209 $1,042 $1,209 $1,042
======= ======= ======= =======
<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 1994 Form 10-K of CMS Energy Corporation that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure and Basis of Presentation
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest of which is the automotive
industry. Enterprises is engaged in several domestic and international
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.
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
income. For the 3 and 12 month periods ended March 31, 1995, equity
earnings were $14 million and $42 million, respectively and $6 million
and $17 million for the three and 12 month periods ended March 31, 1994.
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.
At March 31, 1995, 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 for
purchase of contract capacity from the MCV Partnership under the PPA
increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC
issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity. Capacity and energy purchases from the MCV Partnership
above the 915 MW level can be utilized to satisfy customers' power needs
but the MPSC would determine the levels of recovery from retail customers
at a later date. The Settlement Order also provides Consumers the right
to remarket to third parties the remaining contract capacity. At the
request of the MPSC, the MCV Partnership confirmed that it did not object
to the Settlement Order. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries were $24 million
for the three months ended March 31, 1995. If Consumers is unable to sell
any capacity above the current MPSC-authorized level, future additional
after-tax losses and after-tax cash underrecoveries would be incurred.
Consumers' estimates of its future after-tax cash underrecoveries, and
possible losses for 1995 and the next four years if none of the additional
capacity is sold, are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At March 31, 1995 and December 31, 1994, the after-tax present value of
the Settlement Order liability totaled $253 million and $272 million,
respectively. The reduction in the liability reflects after-tax cash
underrecoveries of $24 million, partially offset by after-tax accretion
expense of $5 million. The undiscounted after-tax amount associated with
the liability totaled $653 million at March 31, 1995.
In 1994, Consumers was notified by the MCV Partnership that it was
initiating arbitration proceedings under the PPA to determine whether the
energy charge paid to the MCV Partnership is being properly calculated.
The amount in dispute, which relates to the period beginning in 1990 and
continuing through the term of the PPA, has been estimated by the MCV
Partnership to total $6 million annually. An arbitrator has been
selected, arbitration hearings have commenced and a ruling is expected in
the third quarter of 1995. Consumers believes that its calculation of the
energy charge is correct but cannot predict the outcome of this
arbitration.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
February 1995, Consumers agreed to pay $15 million to terminate a power
purchase agreement with a 44 MW wood and chipped-tire facility. Consumers
plans to seek MPSC approval to substitute less expensive contract capacity
from the MCV Facility which Consumers is currently not authorized to
recover from retail customers. This proposed substitution of capacity
would start in late 1996, the year the coal-fired cogeneration facility
was scheduled to begin operations. The capacity substitution represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for similar facilities. As a result, Consumers has recorded a
regulatory asset of $45 million, which it believes will ultimately be
recoverable in rates. In April 1995, an ALJ issued a proposal for
decision related to the 1995 PSCR case that agreed with objections, raised
by certain parties, as to the inclusion of the 65 MW of capacity
substitution as part of the five year forecast included in plan cases.
Although recovery of the costs relating to the substitution is not being
requested in this case, the ALJ concluded that additional capacity should
be competitively bid and recommended that the MPSC state in its order that
cost recovery for substituting capacity absent a competitive bid is
unlikely to be approved.
MCV-related 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. The MPSC also confirmed the
recovery of MCV-related costs consistent with the Settlement Order as part
of the 1993 and 1994 plan case orders. ABATE or the Attorney General has
appealed these plan case orders to the Court of Appeals.
3: Rate Matters
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. In late 1994, Consumers
filed a request with the MPSC which could increase its retail electric
rates in a range from $104 million to $140 million, depending upon the
ratemaking treatment afforded sales losses to competition and the
treatment of the MCV contract capacity above 915 MW. The request includes
a proposed increase in Consumers' authorized rate of return on equity to
13 percent from the current 11.75 percent, recognition of increased
expenditures related to continuing construction activities and capital
additions aimed at maintaining and improving system reliability and
increases in financing costs. Consumers requested that the MPSC eliminate
the remaining subsidization of residential rates in a two-step adjustment,
eliminate all DSM expenditures after April 1995 and allow recovery of all
jurisdictional costs associated with the proposed settlement of the
proceedings concerning the operation of Ludington (see Note 4).
In response to Consumers' requested rate increase, the MPSC staff
initially recommended a final annual increase of $45 million to Consumers'
base rates, as well as suggested several options for cost recovery of 325
MW of MCV capacity. However, on motions filed by ABATE and the Attorney
General, an ALJ struck portions of the MPSC staff's testimony relating to
the cost of this capacity and the MPSC staff subsequently withdrew several
other portions of its testimony. As a result, the MPSC staff's
recommendations do not currently include a rate design. The MPSC staff
recommendations remaining in the case proposed a different sales forecast
than Consumers, as well as a 12 percent return on common equity and a
lower equity ratio than that included in Consumers' proposed capital
structure. In May 1995, the MPSC affirmed the ALJ's decision to strike
the MPSC staff's testimony and stated that the remaining 325 MW of MCV
capacity will be considered only as part of a competitive capacity
solicitation, and not as part of the electric rate case.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers (see Special Rates
discussion in the MD&A).
In January 1995, Consumers filed a request with the MPSC, seeking to
adjust its depreciation rates and to reallocate certain portions of its
electric production plant to transmission accounts, which if approved
would result in a net decrease in depreciation expense of $7 million for
ratemaking purposes. In April 1995, the MPSC staff filed its testimony in
this proceeding. For further information, see Electric Rate Case
discussion in the MD&A.
Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of
the abandoned Midland project and Consumers began collecting $35 million
pretax annually for the next 10 years. In December 1994, the Court of
Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. Consumers, ABATE and the Attorney General have filed
applications for leave to appeal this decision with the Michigan Supreme
Court, where the matter is pending. Management cannot predict the outcome
of this issue.
Electric DSM: In 1994, as part of Consumers' electric rate case, the MPSC
authorized Consumers to continue certain DSM programs ($30 million
annually) in 1994 through 1996. Consumers is deferring program costs and
amortizing the costs over the period these costs are being recovered from
customers in accordance with an MPSC accounting order. The unamortized
balance of deferred costs totaled $70 million at March 31, 1995. During
1994, Consumers recognized $11 million in incentive revenue related to an
earlier DSM program approved by the MPSC. In April 1995, a proposal for
decision issued by the ALJ conducting the proceedings recommended that
Consumers be awarded the full $11 million incentive and that Consumers'
current DSM programs continue through 1996. A final order, authorizing
Consumers to collect the $11 million incentive, is expected by mid-1995.
PSCR Issues: In February 1995, the MPSC issued a final order in the 1993
PSCR reconciliation proceeding that addressed the extended refueling and
maintenance outage at Palisades in 1993. The order disallowed $4 million
of replacement power costs. Consumers accrued a loss for this issue in
1994.
Gas Rates: In 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The agreement was reached
in response to a claim that gas utility business earnings for 1993 were
excessive. This charge against earnings partially offsets savings related
to reduced state property taxes. The agreement also provides for an
additional $4 million of postretirement benefit costs to be charged
against 1995 earnings instead of being deferred. As part of the
agreement, Consumers filed a gas rate case in December 1994. Consumers
requested an increase in its gas rates of $21 million annually. The
request, among other things, incorporates cost increases, including costs
for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. Consumers expects an MPSC decision in early 1996.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers
was not allowed to recover $13 million of costs. Consumers accrued a loss
prior to 1993 in excess of the disallowed amount. In March 1995,
management concluded that the intrastate producers' pending appeals of the
MPSC order would not be successful and accordingly reversed $23 million
(pretax), which represented the portion of the loss in excess of the
disallowed amount.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a gas supply contract pricing
dispute with certain intrastate producers. The ALJ agreed with Consumers
that certain market based pricing provisions should, on a prospective
basis, limit the price paid by Consumers under the three agreements at
issue. The ALJ also found that the market based pricing provision
required specific MPSC approval before Consumers could apply those prices
to purchases under the agreements and found that such approval had not
previously been given. Consumers does not agree with the ALJ's findings
and conclusions on this point and will file exceptions to the proposal for
decision for the MPSC's consideration. If the MPSC issues an order
adopting the recommendations of the ALJ, the market based provisions upon
which Consumers had paid for gas purchased under these agreements will not
be effective prior to such an MPSC order. If the producers pursue a court
action for amounts owed for previously purchased gas, Consumers could be
liable for as much as $44 million (excluding any interest) under the
producers' theories. Consumers cannot predict the outcome of this issue.
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: In 1994, Consumers, Detroit Edison, the
Attorney General, the DNR and certain other parties signed an agreement in
principle designed to resolve all legal issues associated with fish
mortality at Ludington. The proposed settlement allows for continued
operation of the plant through the end of its FERC license. Upon approval
of the settlement agreement, Consumers will transfer land (with an
original cost of $9 million and a fair market value in excess of $20
million) to the state of Michigan and the Great Lakes Fishery Trust, make
an initial payment of approximately $3 million and incur approximately $1
million of expenditures related to recreational improvements. Future
annual payments of approximately $1 million are also anticipated over the
next 24 years and are intended to enhance the fishery resources of the
Great Lakes. The definitive settlement documents have been completed and
were filed with the appropriate Michigan courts and state and federal
agencies. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions.
Each year, a barrier net would continue to be installed at Ludington from
April to October. In the other lawsuit, the Attorney General sought to
have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability will average less
than 4 percent of the estimated total site remediation costs, and such
liability is expected to be less than $9 million. At March 31, 1995,
Consumers has accrued a liability for its estimated losses. Consumers and
CMS Energy believe 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 investigation and remedial action costs at a number
of sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations
and remedial actions. There is limited knowledge of manufactured gas
plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility
studies for several sites and the DNR has approved three of four plans
submitted by Consumers. The findings for the first remedial investigation
indicate that the expenditures for remedial action at this site are likely
to be minimal. However, Consumers does not believe that a single site is
representative of all of the sites. Data available to Consumers and its
continued internal review have resulted in an estimate for all costs
related to investigation and remedial action for all 23 sites of between
$48 million and $112 million. These estimates are based on undiscounted
1994 costs. At March 31, 1995, Consumers has accrued a liability of $48
million and has established a regulatory asset for approximately the same
amount. Any significant change in assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers and
CMS Energy believe that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recoverable 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 has approved similar deferred
accounting requests by several other Michigan utilities relative to
investigation and remedial action 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.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require enhanced emissions
monitoring. Consumers' coal-fueled electric generating units burn low-
sulfur coal and are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. The Clean Air
Act's provisions required Consumers to make capital expenditures totaling
$25 million to install equipment at certain generating units. Consumers
estimates capital expenditures for in-process and possible modifications
at other coal-fired units to be an additional $50 million by the year
2000. Final acid rain program nitrogen oxide regulations specifying the
controls to be installed at the other coal-fired units are not expected
earlier than 1996. Management believes that Consumers' annual operating
costs will not be materially affected.
Capital Expenditures: CMS Energy estimated capital expenditures,
including investments in unconsolidated subsidiaries, DSM and new lease
commitments, of $932 million for 1995, $623 million for 1996 and $578
million for 1997. Capital expenditures for 1995 include approximately $201
million for acquisitions which commenced in 1994 but did not close until
1995.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At
March 31, 1995, Consumers had 73 separate stray voltage lawsuits pending.
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. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
5: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney
General and certain other parties attempted to block Consumers' use of the
storage casks, alleging that the NRC had failed to comply adequately with
the procedural requirements of the Atomic Energy Act and the National
Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court
of Appeals rejected these allegations and upheld the NRC's rulemaking
action. The court found that the NRC's environmental assessment satisfied
National Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. The Attorney General and other
parties have asked the U.S. Supreme Court for leave to appeal this
decision. As of April 30, 1995, Consumers had loaded 13 dry storage casks
with spent nuclear fuel at Palisades.
In the latter part of 1995, Consumers plans to unload and replace one of
the loaded casks. In a review of the cask manufacturer's quality
assurance program, Consumers detected indications of minor flaws in welds
in the steel liner of one of the loaded casks. Although testing has not
disclosed any leakage, Consumers has nevertheless decided to remove the
spent fuel and insert it in another cask. Consumers has examined
radiographs for all of its casks and has found all other welds acceptable.
In order to address concerns raised subsequent to the initial cask
loading, Consumers and the NRC each analyzed the effects of seismic and
other natural hazards on the support pad on which the casks are placed,
and validated that the pad location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan, and no other states' repositories
are available to Michigan generators of such waste. Consumers stores low-
level waste at its nuclear plant sites and plans to continue to do so
following final shutdown of the plants, if necessary, until a permanent
storage site is provided. Consumers currently estimates that a permanent
low-level radioactive waste disposal site will be available by the year
2027.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21 week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $33 million in any one
year to NML and NEIL; $79 million per event under the nuclear liability
secondary financial protection program, limited to $10 million per event
in any one year; and $6 million in the event of nuclear workers claiming
bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal in 1996 of an
action plan to provide for operation of the plant beyond 1999. Consumers
is continuing to analyze alternative means to permit continued operation
of Palisades to the end of its license life in the year 2007. It is
currently estimated that expenditures for corrective action related to
this issue could total $20 million to $30 million. Consumers cannot
predict the outcome of these efforts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $ 60 $ 52 $170 $181
Income taxes paid
(net of refunds) - - 39 14
Non-cash transactions
Nuclear fuel placed under
capital lease $ 7 $ 2 $ 25 $ 30
Other assets placed
under capital leases 2 1 15 19
Assumption of debt 12 - - -
7: Capitalization and Other
CMS Energy
On March 21, 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of
CMS Energy. This new class of Common Stock, designated Class G Common
Stock, is intended to reflect the separate performance of the gas
distribution, storage and transportation businesses currently conducted by
Consumers and Michigan Gas Storage (such businesses, collectively, will be
attributed to the "Consumers Gas Group"). The existing CMS Energy Common
Stock will continue to be outstanding and is intended to reflect the
performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest
in the Consumers Gas Group attributable to the outstanding shares of the
Class G Common Stock.
The Articles of Incorporation currently permit CMS Energy to issue up to
250 million shares of common stock at $.01 par value and up to 5 million
shares of preferred stock at $.01 par value. If the Certificate of
Amendment approved on March 21, 1995 is filed, the number of authorized
shares of capital stock would increase from 255 million shares to 320
million shares consisting of 250 million shares of CMS Energy Common
Stock, par value $.01 per share, 60 million shares of Class G Common
Stock, no par value, and 10 million shares of Preferred Stock, par value
$.01 per share. This amendment will not become effective until a
Certificate of Amendment is filed with the Michigan Department of
Commerce. Such certificate will be filed immediately prior to the first
issuance of shares of Class G Common Stock, or issuance of more than 5
million shares of Preferred Stock.
CMS Energy also filed a shelf-registration statement with the SEC on
February 15, 1995 covering the issuance of up to $200 million of
securities. Such securities could encompass Common Stock of CMS Energy
(including Class G), Preferred Stock of CMS Energy or a special purpose
affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy
will continually evaluate the capital markets and may offer such
instruments from time to time, at terms to be determined at or prior to
the time of the sale.
Consumers Power
Debt
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$470 million facility and unsecured, committed lines of credit aggregating
$185 million that are used to finance seasonal working capital
requirements. At March 31, 1995, Consumers had a total of $133 million
outstanding under these facilities.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. At March 31, 1995, receivables sold under the agreement
totaled $300 million compared with $275 million at December 31, 1994.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100
million of preferred stock or subordinate debentures.
CMS NOMECO
In February 1995, CMS Energy acquired Walter International, Inc., a
Houston-based independent oil company, for approximately $46 million
subject to post-closing adjustments. Walter was merged with a wholly-
owned subsidiary of CMS NOMECO. In connection with the acquisition,
CMS NOMECO remitted $24 million of CMS Energy common stock and assumed $12
million of project financing debt.
CMS NOMECO's existing credit line was increased from $110 million at
December 31, 1994 to $130 million at March 31, 1995. $82 million of
revolving credit debt was outstanding at a weighted average interest rate
of 7.38 percent at March 31, 1995.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.4 percent, are outstanding from a private placement.
CMS Generation
In January 1995, CMS Generation entered into a one-year $118 million
bridge credit facility, for the acquisition of HYDRA-CO. CMS Energy is
currently evaluating permanent financing options.
21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1994 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 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 domestic and international 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.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, while not affecting Consumers' or CMS Energy's consolidated
financial statements or corporate legal form, is designed to sharpen
management focus, improve efficiency and accountability in both business
segments and better position Consumers for growth in the gas market and to
meet increased competition in the electric power market. Management
believes that the strategic business unit structure will allow each unit
to focus more on its own profitability and growth potential, and will, in
the long term, allow Consumers to be more competitive.
On March 21, 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of
CMS Energy. This new class of Common Stock, designated Class G Common
Stock, is intended to reflect the separate performance of the gas
distribution, storage and transportation businesses currently conducted by
Consumers and Michigan Gas Storage (such businesses, collectively, will be
attributed to the "Consumers Gas Group"). The existing CMS Energy Common
Stock will continue to be outstanding and is intended to reflect the
performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest
in the Consumers Gas Group attributable to the outstanding shares of the
Class G Common Stock.
CMS Energy also filed a shelf-registration statement with the SEC on
February 15, 1995 covering the issuance of up to $200 million of
securities. Such securities could encompass Common Stock of CMS Energy
(including Class G), Preferred Stock of CMS Energy or a special purpose
affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy
will continually evaluate the capital markets and may offer such
instruments from time to time, at terms to be determined at or prior to
the time of the sale.
Consolidated earnings for the quarters ended March 31, 1995 and 1994
Consolidated net income totaled $86 million or $.99 per share for the
first quarter of 1995, compared to $78 million or $.92 per share for the
first quarter of 1994. The increase in net income reflects increased
electric utility sales resulting from Michigan's continuing economic
growth, increased revenue from the May 1994 electric rate increase,
recognition of the resolution of a previously recorded gas contract loss
contingency, and additional earnings reflecting improved operating results
and growth of the non-utility businesses. Partially offsetting this
increase was a 12.6 percent decrease in gas utility deliveries due to
significantly warmer temperatures experienced in the first quarter of 1995
compared with the corresponding period last year.
Consolidated earnings for the 12 months ended March 31, 1995 and 1994
Consolidated net income totaled $187 million or $2.17 per share for the 12
months ended March 31, 1995, compared to $161 million or $1.95 per share
for the 12 months ended March 31, 1994. The increase in net income
reflects the impact of the May 1994 electric rate increase, higher
electric utility kWh sales, the recognition of the resolution of a
previously recorded gas contract loss contingency, the recognition of DSM
revenue, and additional earnings from the growth of the non-utility
businesses. Partially offsetting these increases were reduced gas utility
deliveries and increased operating costs and depreciation.
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 continues to reflect
primarily Consumers' sale and transportation of natural gas and the
generation, sale and transmission of electricity and from CMS NOMECO's
sale of oil and natural gas. Consolidated cash from operations for the
first three months of 1995 primarily reflects Consumers' increased
electric sales and increased electric rates which were approved by the
MPSC in mid-1994. Cash from operations also reflects Consumers' greater
underrecoveries of power costs associated with purchases from the MCV.
Financing and Investing Activities: Capital expenditures, including
assets placed under capital lease, deferred DSM costs and investments in
unconsolidated subsidiaries totaled $309 million for the first quarter of
1995 compared with $140 million for the first quarter of 1994. These
amounts primarily represent CMS Energy's continued expansion of the non-
utility business segments, and capital investments in the electric and gas
utility business units. Capital expenditures for 1995 include
requirements of $201 million for acquisitions which commenced in 1994 but
did not close until 1995. CMS Energy's expenditures for the first quarter
of 1995 for its utility and non-utility businesses were $86 million and
$224 million, respectively.
In January 1995, CMS Energy paid $18 million in cash dividends to common
shareholders. As a continuation of Consumers' dividend policy of paying
dividends on its common stock equal to approximately 80 percent of its
consolidated income, in April 1995, Consumers declared a $70 million
common dividend from its first quarter earnings to be paid in May 1995.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including DSM and new lease commitments, will total
approximately $2.1 billion for the years 1995 through 1997. Cash
generated by operations is expected to satisfy a substantial portion of
capital expenditures. Additionally, CMS Energy will continue to evaluate
capital markets in 1995 as a potential source of financing its
subsidiaries' investing activities.
In Millions
Years Ended December 31 1995 1996 1997
---- ---- ----
Electric utility $318 $255 $269
Gas utility 130 119 111
Oil and gas exploration and production (a) 129 100 110
Independent power production (b) 255 120 68
Natural gas pipeline, storage and marketing 100 29 20
---- ---- ----
$932 $623 $578
==== ==== ====
(a)(b) 1995 capital expenditures include requirements of approximately
(a)$46 million and (b)$155 million for acquisitions which commenced in
1994 but did not close until 1995.
Consumers has several available sources of credit including unsecured,
committed lines of credit totaling $185 million and a $470 million
unsecured working capital facility. Consumers has FERC authorization to
issue or guarantee up to $900 million in short-term debt through
December 31, 1996. Consumers uses short-term borrowings to finance
working capital, 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 March 31, 1995, receivables sold under the agreement totaled
$300 million.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1995 and
1994: During the first quarter of 1995, electric pretax operating income
reflects a decrease of $1 million from the 1994 level. This small
reduction primarily resulted from increases in operation, maintenance, and
depreciation expenses partially offset by increased electric kWh sales and
the positive impact of the May 1994 electric rate increase.
Electric Pretax Operating Income for the 12 months ended March 31, 1995
and 1994: The $40 million improvement in the 12 months ended March 1995
electric pretax operating income compared with the corresponding 1994
level is primarily the result of the impact of the May 1994 electric rate
increase and the recognition of DSM incentive revenue (see Note 3) which
contributed $39 million and $11 million, respectively. Also contributing
to the 1995 increased electric pretax operating income was an increase in
electric kWh sales. These increases were partially offset by higher
electric operating costs and depreciation.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1995 compared 1995 compared
with 1994 with 1994
--------------- --------------
Sales $ 1 $ 20
Rate increases and other
regulatory issues 11 48
O&M, general taxes and depreciation (13) (28)
----- -----
Total change $(1) $ 40
===== =====
Electric Sales: Electric sales during the first quarter of 1995 totaled
8.7 billion kWh, a 1.5 percent increase from 1994 levels. Residential
sales decreased 3.1 percent, commercial sales increased 3.0 percent, and
industrial sales increased 5.5 percent, compared with the corresponding
period in 1994. Consumers' electric sales have benefited from improved
employment and other economic conditions. Electric sales during the 12
months ended March 31, 1995 totaled 34.6 billion kWh, a 4.3 percent
increase from 1994 levels. During the 12 months ended 1995 period,
commercial and industrial sales increased 3.2 percent and 6.5 percent
respectively, while residential sales decreased less than 1.0 percent.
The industrial segments of chemicals and transportation equipment
accounted for the largest share of the growth in industrial kWh sales.
Power Costs: Power costs for the three-month period ending March 31, 1995
totaled $227 million, a $16 million decrease from the corresponding 1994
period. This decrease primarily reflects increased generation at
Consumers' nuclear power plants and a corresponding reduction in
generation at the more costly oil and coal fired plants. Power costs for
the 12-month period ending March 31, 1995 totaled $934 million, a $15
million decrease from the corresponding 1994 period.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to
purchase contract capacity from the MCV Partnership increased to 1,240 MW
in 1995. In 1993, the MPSC issued the Settlement Order that has allowed
Consumers to recover substantially all payments for 915 MW of contract
capacity purchased from the MCV Partnership. The market for the remaining
325 MW of contract capacity was assessed at the end of 1992. This
assessment, along with the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $24
million for the first three months of 1995. Estimated future after-tax
cash underrecoveries, and possible losses for 1995 and the next four years
if none of the additional capacity is sold, are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership are engaged in arbitration proceedings
under the PPA to determine whether the energy charge paid to the MCV
Partnership is being properly calculated. The MCV Partnership is seeking
additional payments from Consumers which the MCV has estimated at $6
million annually for an alleged breach of the PPA. Consumers believes
that its calculation of the energy charge is correct, but cannot predict
the outcome of this arbitration.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood
and chipped-tire plant. Consumers plans to seek MPSC approval to
substitute 109 MW of less expensive contract capacity from the MCV
Facility which Consumers is currently not authorized to recover from
retail customers. In April 1995, an ALJ issued a proposal for decision
related to the 1995 PSCR case that agreed with objections, raised by
certain parties, as to the inclusion of the 65 MW of capacity substitution
as part of the five year forecast included in plan cases. Although
recovery of the costs relating to the substitution is not being requested
in this case, the ALJ concluded that additional capacity should be
competitively bid and recommended that the MPSC state in its order that
cost recovery for substituting capacity absent a competitive bid is
unlikely to be approved. For further information, see Note 2.
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. Consumers filed a request
with the MPSC in late 1994, to increase its retail electric rates. In
March 1995, the MPSC staff recommended a final annual rate increase of $45
million. For further information regarding Consumers' request and the
staff's recommendation, see Note 3.
Additionally, in January 1995, Consumers filed a request with the MPSC,
seeking approval to increase its traditional depreciation expense by $21
million and reallocate certain portions of its utility plant from
production to transmission, resulting in a $28 million decrease. If both
aspects of the request are approved, the net result would be a decrease in
electric depreciation expense of $7 million for ratemaking purposes. In
April 1995, the MPSC staff's filing did not support Consumers' requested
increase in depreciation expense, but instead proposed a decrease of $24
million. In addition, the MPSC staff also did not support the
reallocation of plant investment as proposed by Consumers but suggested
several alternatives which could partially address this issue. Consumers
is studying the MPSC staff's position.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed 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 that have the ability to acquire energy
from alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options. In May 1995, the MPSC issued an order stating
that it has legal authority to approve a range of rates under which
Consumers could negotiate prices with customers that have competitive
energy alternatives. However, the MPSC dismissed from consideration, in
this proceeding, the issues related to Consumers' proposed use of the
additional 325 MW of MCV contract capacity to serve these customers.
PSCR Matters: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. In February 1995, the MPSC issued a
final order in the 1993 PSCR reconciliation, disallowing $4 million of
replacement power costs related to the 1993 outage. Consumers accrued a
loss for this issue in 1994.
Electric Conservation Efforts: Over the past few years, Consumers has
participated in several MPSC-authorized DSM programs designed to encourage
the efficient use of energy. During 1994, Consumers recognized $11
million in incentive revenue, related to Consumers' achievement of certain
DSM program objectives approved by the MPSC in 1992. In April 1995, an
ALJ issued a proposal for decision, recommending that Consumers be allowed
to recover the full $11 million incentive. A final order, authorizing
Consumers to collect the $11 million incentive, is expected from the MPSC
by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC
authorized Consumers to continue certain DSM programs. As part of its
current electric rate case, Consumers requested that the MPSC eliminate
all DSM expenditures after April 1995. The proposal for decision
discussed above recommended that Consumers continue its current DSM
programs through 1996. For further information, see Note 3.
Electric Capital Expenditures: CMS Energy estimates capital expenditures,
including deferred DSM costs and new lease commitments, related to
Consumers' electric utility operations of $318 million for 1995, $255
million for 1996 and $269 million for 1997. These amounts include an
attributed portion of anticipated capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean
Air Act significantly increased the environmental constraints that
utilities will operate under in the future. While the Clean Air Act's
provisions require Consumers to make certain capital expenditures in order
to comply with the amendments for nitrogen oxide reductions, Consumers'
generating units are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. 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
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing increased competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. As part of its current electric rate
case, Consumers has requested that the MPSC eliminate the rate
subsidization of residential customers. If approved, commercial and
industrial customers' electric costs would decrease by a total of
approximately $80 million, or approximately 6 percent, per year.
Consumers is committed to holding operation and maintenance costs level
and continuing to improve customer service. Consumers is also working
with large customers to identify ways to improve the efficiency with which
energy is used.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and Detroit Edison. Under the experiment,
up to 60 MW of Consumers' additional load requirements could be met by
retail wheeling. The program becomes effective upon Consumers' next
solicitation for capacity. In February 1995, an ALJ issued a proposal for
decision that addressed the methodology for pricing transmission rates to
be used for the experiment. An MPSC order is expected by mid-1995.
Consumers does not expect this short-term experiment to have a material
impact on its financial position or results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose
changes in the wholesale electric industry. Among the most significant
proposals, is a requirement that utilities provide open access to the
domestic interstate transmission grid. Under the FERC's proposal, all
utilities would be required to use these tariffs for their own wholesale
sales and purchases of electric energy; and the utilities would be allowed
the opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations). Consumers is reviewing the
FERC proposal to determine its potential affect, if any on its financial
position and results of operations.
Nuclear Matters: In 1994, Consumers filed a report with the NRC that
included short- and long-term enhancements designed to improve performance
at Palisades. The report was filed in response to an NRC-conducted
diagnostic evaluation inspection that found certain deficiencies at the
plant. Acceptable performance at Palisades will require continuing
performance improvements and additional expenditures, which have been
included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. 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 had been
pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued
a decision, effectively allowing Consumers to continue using dry cask
storage at Palisades. The Attorney General and other parties have asked
the U.S. Supreme Court for leave to appeal this decision.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is continuing to analyze alternative means to permit
continued operation of Palisades to the end of its license life in the
year 2007. Consumers cannot predict the outcome of these efforts. For
further information regarding Palisades, see Note 5.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1995, Consumers had 73 separate stray voltage lawsuits pending. Consumers
believes that the resolution of these lawsuits will not have a material
impact on its financial position or results of operations. For further
information, see Note 4.
Gas Utility Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1995 and
1994: During the first quarter of 1995 gas pretax operating income
increased $7 million from the 1994 level. The increased pretax operating
income reflects the recognition of the resolution of a previously recorded
gas contract loss contingency. Partially offsetting this increase was a
12.6 percent decrease in gas deliveries due to significantly warmer
weather during the first quarter of 1995 compared with the corresponding
1994 period. The average temperature for the first quarter of 1995
increased 25 percent to 27.5 degrees from 21.9 degrees during the first
quarter of 1994.
Gas Pretax Operating Income for the 12 months ended March 31, 1995 and
1994: The $15 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries and higher operating
expenses, partially offset by the recognition of the resolution of a
previously recorded gas contract loss contingency. Increased operating
costs included $2 million of postretirement benefit costs related to the
gas settlement with the MPSC (see Note 3).
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1995 compared 1995 compared
with 1994 with 1994
--------------- ---------------
Deliveries $(19) $(40)
Recovery of gas costs and other
regulatory issues 26 38
O&M, general taxes and depreciation - (13)
----- -----
Total change $ 7 $(15)
===== =====
Gas Deliveries: Gas sales and gas transported during the first quarter of
1995 totaled 153.8 bcf, a 12.6 percent decrease from the corresponding
1994 level. For the 12 months ended March 31, 1995, gas sales and gas
transported totaled 386.8 bcf, a 9.6 percent decrease from the
corresponding 1994 level, reflecting record cold winter weather during the
12 months ended March 31, 1994 and a return to more normal weather during
the 12 months ended March 31, 1995.
Cost of Gas Sold: The utility cost of gas sold for the first quarter of
1995 decreased $53 million from the 1994 level as a result of reduced
deliveries and the reversal of a gas contract loss contingency. The
utility cost of gas sold for the 12 months ended March 31, 1995 decreased
$87 million from the corresponding 1994 level which was also the result of
reduced gas deliveries and the gas contract loss contingency reversal.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. A final order from the MPSC is expected in early 1996. For
further information regarding Consumers' current gas rate case, see Note
3.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a gas supply
contract pricing dispute with certain intrastate producers. The ALJ
agreed with Consumers that certain market based pricing provisions should,
on a prospective basis, limit the price paid by Consumers under the three
agreements at issue. The ALJ also found that the market based pricing
provision required specific MPSC approval before Consumers could apply
those prices to purchases under the agreements and found that such
approval had not previously been given. Consumers does not agree with the
ALJ's findings and conclusions on this point and will file exceptions to
the proposal for decision for the MPSC's consideration. If the MPSC
issues an order adopting the recommendations of the ALJ, the market based
provisions upon which Consumers had paid for gas purchased under these
agreements will not be effective prior to such an MPSC order. If the
producers pursue a court action for amounts owed for previously purchased
gas, Consumers could be liable for as much as $44 million (excluding any
interest) under the producers' theories. Consumers cannot predict the
outcome of this issue.
Gas Capital Expenditures: CMS Energy estimates capital expenditures,
including new lease commitments, related to Consumers' gas utility
operations of $130 million for 1995, $119 million for 1996 and $111
million for 1997. These amounts include an attributed portion of
anticipated capital expenditures for plant and equipment common to both
the electric and gas utility businesses.
Gas Environmental Matters: Under Michigan's Environmental Response Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some that formerly housed
manufactured gas plant facilities. Data available to Consumers and its
continued internal review of these former manufactured gas plant sites
have resulted in an estimate for all costs related to investigation and
remedial action of between $48 million and $112 million. These estimates
are based on undiscounted 1994 costs. At March 31, 1995, Consumers has
accrued a liability for $48 million and has established a regulatory asset
for approximately the same amount. Any significant change in assumptions
such as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial action
costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by several other Michigan utilities relative to
investigation and remedial action 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. For further
information, see Note 4.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increased efforts to promote natural gas to both current and potential
customers that are using other fuels for space and water heating.
Consumers plans additional capital expenditures to construct new gas mains
that are expected to expand Consumers' system.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles, also provide Consumers with sales growth
opportunities. In addition, as air quality standards continue to become
more stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1995 increased $13 million from the same period in 1994,
reflecting the gain from assignment and novation of a gas supply contract
as well as higher sales volumes and average market prices for oil,
partially offset by lower average market prices for gas. Pretax operating
income for the 12 months ended March 31, 1995 increased $21 million from
the 12 months ended March 31, 1994, primarily due to gains from the
assignment of gas supply contracts and higher sales volumes, partially
offset by lower average market prices for oil and gas.
Capital Expenditures: In February 1995, CMS NOMECO closed on the
acquisition of Walter for approximately $46 million, consisting of
approximately $24 million of CMS Energy common stock and $22 million in
both cash and assumed debt. Post-closing adjustments may result in the
issuance of approximately $3 million of additional CMS Energy common
stock. CMS NOMECO's acquisition of Walter will add net production of
5,500 barrels per day in 1995 and proven reserves of approximately 20
million barrels of oil.
Other capital expenditures for the three months ended March 31, 1995
approximated $14 million, primarily for development of existing oil and
gas reserves. These expenditures were made both domestically ($5 million)
and internationally ($9 million), primarily in Ecuador ($5 million).
CMS Energy currently plans to invest $339 million from 1995 to 1997 in its
oil and gas exploration and production operations. These capital
expenditures, which reflect the acquisition of Walter, will be
concentrated in North and South America and Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1995 increased $11 million, primarily reflecting higher
capacity sales from the MCV partnership, as well as additional equity
earnings by CMS Generation subsidiaries primarily due to additional
electric generating capacity. Pretax operating income increased $26
million for the 12 months ended March 31, 1995 as compared to the 12
months ended March 31, 1994, primarily reflecting additional electric
generating capacity and improved equity earnings and operating
efficiencies.
Capital Expenditures: In January 1995, CMS Generation completed its
acquisition of HYDRA-CO. CMS Generation purchased 100 percent of HYDRA-
CO's stock for $207 million, including approximately $52 million of
current assets. CMS Generation partially financed the acquisition with a
$118 million bridge credit facility supplied by a consortium of four banks
led by Union Bank of California. CMS Energy is currently evaluating
permanent financing options. With the acquisition, CMS Generation assumed
ownership in 735 MW of gross capacity and 224 MW of net ownership.
CMS Generation will manage and operate eight plants previously managed by
HYDRA-CO and will also assume construction management responsibility for a
60 MW diesel-fueled plant which has begun in Jamaica. The plant is
scheduled to go into service in the third quarter of 1996.
The Moroccan government has selected a consortium of CMS Generation and
Asea Brown Boveri Energy Ventures to exclusively negotiate a definitive
agreement for the privatization and expansion of a Moroccan power plant.
The privatization of the coal-fired Jorf Lasfar plant, Southwest of
Casablanca, includes ownership and operation of two 330 MW generating
units which are nearing completion, and the construction of another two
330 MW units. The output of the plants will be sold to the Moroccan
national utility. The cost of the facilities will be in excess of $1
billion.
CMS Energy currently plans to invest $443 million relating to its
independent power production operations over the next three years,
primarily in domestic and international subsidiaries and partnerships
which includes the acquisition of HYDRA-CO. CMS Generation will pursue
acquisitions of operating electric generating plants in Latin America,
southern Asia and the Pacific Rim region.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1995 was unchanged and for the twelve months ended March
31, 1995 increased $1 million, respectively over the same periods for
1994, reflecting earnings growth from existing and new gas pipeline and
storage projects and gas marketed to end-users.
Capital Expenditures: Effective January 1, 1995, CMS Gas Transmission
increased its ownership of The Antrim Limited Partnership to 100 percent
by acquiring its partner's remaining 40 percent interest. Under a new
agreement with MichCon, CMS Gas Transmission will provide a gas treating
service for up to 260 MMcf/d of Antrim gas. CMS Gas Transmission
currently plans to expand this existing 120 MMcf/d treating complex to
accommodate new Antrim production. This $22 million expansion will treat
gas connected to a number of gathering lines including CMS Gas
Transmission's South Chester gathering system and deliver gas to MichCon's
Northern Michigan pipeline network.
In March 1995, CMS Gas Transmission received initial regulatory approval
to construct, at a cost of $3 million, a 3.1 mile pipeline from its
natural gas transmission system to an interconnection with an existing
pipeline at the St. Clair River, south of Port Huron, Michigan. The
pipeline, targeted to be in service by November 1995, will provide
significantly increased gas supply flexibilities in the U.S. and Canada.
CMS Energy currently plans to invest $149 million over the next three
years relating to its non-utility gas operations, continuing to pursue
development of natural gas storage and gathering and pipeline operations
both domestically and internationally. CMS Energy also plans to work
toward the development of a Midwest "market center" for natural gas
through strategic alliances and asset acquisition and development.
Other
Other Income: Other income for the 12 months ending March 31, 1995
decreased $21 million when compared with the corresponding 1994 period,
reflecting the sale of the remaining MCV Bonds in December 1993 which
eliminated the bond interest income.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this
request and believes it will maintain its current exemption from
registration under PUHCA. The SEC has not taken action on this matter.
For further information, see Note 4.
New Accounting Standard: In March 1995, the FASB issued SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that a loss be recognized
whenever a regulator excludes a portion of an asset's cost from a
company's rate base. CMS Energy is continuing to study SFAS 121, but does
not expect the application of this statement to have a material impact on
its financial position or results of operations.
32
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of March 31, 1995 and 1994,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1994, 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 31, 1995 (except with respect to certain matters discussed in
Notes 2, 3, 7 and 13 to the consolidated financial statements as to which
the date is March 1, 1995), 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, 1994, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 8, 1995.
33
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions
OPERATING REVENUE
Electric $ 540 $ 545 $2,185 $2,132
Gas 482 528 1,105 1,194
Other 10 1 25 4
----------------------------------------------
Total operating revenue 1,032 1,074 3,315 3,330
----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 79 294 303
Purchased power - related parties 124 122 484 481
Purchased and interchange power 36 42 156 165
Cost of gas sold 281 334 608 695
Other 137 127 571 523
----------------------------------------------
Total operation 645 704 2,113 2,167
Maintenance 45 43 190 202
Depreciation, depletion and amortization 101 95 342 320
General taxes 54 60 172 189
----------------------------------------------
Total operating expenses 845 902 2,817 2,878
----------------------------------------------
PRETAX OPERATING INCOME
Electric 87 88 333 293
Gas 91 84 143 158
Other 9 - 22 1
----------------------------------------------
Total pretax operating income 187 172 498 452
INCOME TAXES 56 52 124 114
----------------------------------------------
NET OPERATING INCOME 131 120 374 338
----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 16 16
Accretion income 3 3 12 14
Accretion expense (8) (9) (34) (37)
Other income taxes, net 2 4 11 14
MCV Bond income - - - 24
Other, net 2 - 11 3
----------------------------------------------
Total other income 3 2 16 34
----------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 34 137 149
Other interest 5 3 19 20
Capitalized interest - - (1) (2)
----------------------------------------------
Net interest charges 40 37 155 167
----------------------------------------------
Net Income 94 85 235 205
Preferred Stock Dividends 7 3 28 11
----------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 87 $ 82 $ 207 $ 194
==============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 94 $ 85 $ 235 $ 205
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $12,
$49 and $47, respectively) 101 95 342 320
Capital lease and other amortization 11 15 29 37
Deferred income taxes and investment tax credit 23 15 65 49
Accretion expense 8 9 34 37
Accretion income - abandoned Midland project (3) (3) (12) (14)
MCV power purchases - settlement (Note 2) (37) (22) (102) (78)
Other (8) (1) (22) (2)
Changes in other assets and liabilities 120 179 (34) (118)
------ ------ ------ ------
Net cash provided by operating activities 309 372 535 436
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (74) (83) (438) (453)
Investments in nuclear decommissioning trust funds (13) (12) (49) (47)
Cost to retire property, net (9) (7) (41) (33)
Other (4) 2 (4) 1
Deferred demand-side management costs (2) - (11) (39)
Proceeds from sale of property - - 13 1
Proceeds from Midland-related assets - - - 322
Sale of subsidiary - - - (14)
------ ------ ------ ------
Net cash used in investing activities (102) (100) (530) (262)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (204) (259) 135 (20)
Payment of capital lease obligations (10) (15) (28) (32)
Payment of preferred stock dividends (7) (6) (21) (14)
Retirement of bonds and other long-term debt (1) (107) (27) (702)
Repayment of bank loans - (47) (422) (78)
Payment of common stock dividends - (16) (160) (149)
Proceeds from preferred stock - 193 - 193
Proceeds from bank loans - - 400 -
Contribution from stockholder - - 100 -
Proceeds from bonds and bank loans - - - 644
------ ------ ------ ------
Net cash used in financing activities (222) (257) (23) (158)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (15) 15 (18) 16
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 13 28 12
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 10 $ 28 $ 10 $ 28
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
Consumers Power Company
Consolidated Balance Sheets
March 31 March 31
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $5,826 $5,771 $5,539
Gas 2,078 2,064 1,956
Other 30 30 26
-----------------------------------
7,934 7,865 7,521
Less accumulated depreciation, depletion and amortization 3,893 3,794 3,631
-----------------------------------
4,041 4,071 3,890
Construction work-in-progress 249 241 248
-----------------------------------
4,290 4,312 4,138
-----------------------------------
INVESTMENTS
Stock of affiliates 318 317 314
First Midland Limited Partnership (Note 2) 219 218 214
Midland Cogeneration Venture Limited Partnership (Note 2) 83 74 67
Other 8 8 7
-----------------------------------
628 617 602
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 10 25 28
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 7) 63 100 87
Accounts receivable - related parties 11 12 9
Inventories at average cost
Gas in underground storage 80 235 62
Materials and supplies 76 75 77
Generating plant fuel stock 27 37 22
Deferred income taxes 39 35 15
Trunkline settlement 30 30 30
Postretirement benefits 25 25 25
Prepayments and other 103 143 104
-----------------------------------
464 717 459
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 473 478 492
Nuclear decommissioning trust funds 236 213 179
Abandoned Midland Project (Note 3) 143 147 158
Trunkline settlement 48 55 78
Other 274 270 274
-----------------------------------
1,174 1,163 1,181
-----------------------------------
TOTAL ASSETS $6,556 $6,809 $6,380
===================================
36
March 31 March 31
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 491 491 391
Revaluation capital 17 15 15
Retained earnings since December 31, 1992 167 80 120
-----------------------------------
1,516 1,427 1,367
Preferred stock 356 356 356
Long-term debt 1,954 1,953 1,793
Non-current portion of capital leases 103 108 114
-----------------------------------
3,929 3,844 3,630
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 48 45 249
Notes payable 135 339 -
Accrued taxes 134 173 125
Accounts payable 125 165 128
MCV power purchases - settlement (Note 2) 95 95 82
Accounts payable - related parties 56 51 51
Accrued refunds 35 25 33
Accrued interest 25 37 25
Other 153 187 163
-----------------------------------
806 1,117 856
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 585 568 501
Postretirement benefits 537 532 540
MCV power purchases - settlement (Note 2) 295 324 378
Deferred investment tax credit 177 179 187
Trunkline settlement 48 55 78
Regulatory liabilities for income taxes, net 29 16 13
Other (Note 4) 150 174 197
-----------------------------------
1,821 1,848 1,894
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,556 $6,809 $6,380
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1995 1994 1995 1994
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
---------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 391 391 391
Stockholder's contribution - - 100 -
---------------------------------------------------
At end of period 491 391 491 391
---------------------------------------------------
REVALUATION CAPITAL
At beginning of period 15 - 15 -
Implementation of SFAS 115 - January 1, 1994 - 20 - 20
Change in unrealized loss, net of tax 2 (5) 2 (5)
---------------------------------------------------
At end of period 17 15 17 15
---------------------------------------------------
RETAINED EARNINGS
At beginning of period 80 54 120 75
Net income 94 85 235 205
Common stock dividends declared - (16) (160) (149)
Preferred stock dividends declared (7) (3) (28) (11)
---------------------------------------------------
At end of period 167 120 167 120
---------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,516 $1,367 $1,516 $1,367
===================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38
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 1994 Form 10-K of Consumers Power Company that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest 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.
At March 31, 1995, 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 for
purchase of contract capacity from the MCV Partnership under the PPA
increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC
issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity. Capacity and energy purchases from the MCV Partnership
above the 915 MW level can be utilized to satisfy customers' power needs
but the MPSC would determine the levels of recovery from retail customers
at a later date. The Settlement Order also provides Consumers the right
to remarket to third parties the remaining contract capacity. At the
request of the MPSC, the MCV Partnership confirmed that it did not object
to the Settlement Order. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries were $24 million
for the three months ended March 31, 1995. If Consumers is unable to sell
any capacity above the current MPSC-authorized level, future additional
after-tax losses and after-tax cash underrecoveries would be incurred.
Consumers' estimates of its future after-tax cash underrecoveries, and
possible losses for 1995 and the next four years if none of the additional
capacity is sold, are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At March 31, 1995 and December 31, 1994, the after-tax present value of
the Settlement Order liability totaled $253 million and $272 million,
respectively. The reduction in the liability reflects after-tax cash
underrecoveries of $24 million, partially offset by after-tax accretion
expense of $5 million. The undiscounted after-tax amount associated with
the liability totaled $653 million at March 31, 1995.
In 1994, Consumers was notified by the MCV Partnership that it was
initiating arbitration proceedings under the PPA to determine whether the
energy charge paid to the MCV Partnership is being properly calculated.
The amount in dispute, which relates to the period beginning in 1990 and
continuing through the term of the PPA, has been estimated by the MCV
Partnership to total $6 million annually. An arbitrator has been
selected, arbitration hearings have commenced and a ruling is expected in
the third quarter of 1995. Consumers believes that its calculation of the
energy charge is correct but cannot predict the outcome of this
arbitration.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
February 1995, Consumers agreed to pay $15 million to terminate a power
purchase agreement with a 44 MW wood and chipped-tire facility. Consumers
plans to seek MPSC approval to substitute less expensive contract capacity
from the MCV Facility which Consumers is currently not authorized to
recover from retail customers. This proposed substitution of capacity
would start in late 1996, the year the coal-fired cogeneration facility
was scheduled to begin operations. The capacity substitution represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for similar facilities. As a result, Consumers has recorded a
regulatory asset of $45 million, which it believes will ultimately be
recoverable in rates. In April 1995, an ALJ issued a proposal for
decision related to the 1995 PSCR case that agreed with objections, raised
by certain parties, as to the inclusion of the 65 MW of capacity
substitution as part of the five year forecast included in plan cases.
Although recovery of the costs relating to the substitution is not being
requested in this case, the ALJ concluded that additional capacity should
be competitively bid and recommended that the MPSC state in its order that
cost recovery for substituting capacity absent a competitive bid is
unlikely to be approved.
MCV-related 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. The MPSC also confirmed the
recovery of MCV-related costs consistent with the Settlement Order as part
of the 1993 and 1994 plan case orders. ABATE or the Attorney General has
appealed these plan case orders to the Court of Appeals.
3: Rate Matters
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. In late 1994, Consumers
filed a request with the MPSC which could increase its retail electric
rates in a range from $104 million to $140 million, depending upon the
ratemaking treatment afforded sales losses to competition and the
treatment of the MCV contract capacity above 915 MW. The request includes
a proposed increase in Consumers' authorized rate of return on equity to
13 percent from the current 11.75 percent, recognition of increased
expenditures related to continuing construction activities and capital
additions aimed at maintaining and improving system reliability and
increases in financing costs. Consumers requested that the MPSC eliminate
the remaining subsidization of residential rates in a two-step adjustment,
eliminate all DSM expenditures after April 1995 and allow recovery of all
jurisdictional costs associated with the proposed settlement of the
proceedings concerning the operation of Ludington (see Note 4).
In response to Consumers' requested rate increase, the MPSC staff
initially recommended a final annual increase of $45 million to Consumers'
base rates, as well as suggested several options for cost recovery of 325
MW of MCV capacity. However, on motions filed by ABATE and the Attorney
General, an ALJ struck portions of the MPSC staff's testimony relating to
the cost of this capacity and the MPSC staff subsequently withdrew several
other portions of its testimony. As a result, the MPSC staff's
recommendations do not currently include a rate design. The MPSC staff
recommendations remaining in the case proposed a different sales forecast
than Consumers, as well as a 12 percent return on common equity and a
lower equity ratio than that included in Consumers' proposed capital
structure. In May 1995, the MPSC affirmed the ALJ's decision to strike
the MPSC staff's testimony and stated that the remaining 325 MW of MCV
capacity will be considered only as part of a competitive capacity
solicitation, and not as part of the electric rate case.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers (see Special Rates
discussion in the MD&A).
In January 1995, Consumers filed a request with the MPSC, seeking to
adjust its depreciation rates and to reallocate certain portions of its
electric production plant to transmission accounts, which if approved
would result in a net decrease in depreciation expense of $7 million for
ratemaking purposes. In April 1995, the MPSC staff filed its testimony in
this proceeding. For further information, see Electric Rate Case
discussion in the MD&A.
Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of
the abandoned Midland project and Consumers began collecting $35 million
pretax annually for the next 10 years. In December 1994, the Court of
Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. Consumers, ABATE and the Attorney General have filed
applications for leave to appeal this decision with the Michigan Supreme
Court, where the matter is pending. Management cannot predict the outcome
of this issue.
Electric DSM: In 1994, as part of Consumers' electric rate case, the MPSC
authorized Consumers to continue certain DSM programs ($30 million
annually) in 1994 through 1996. Consumers is deferring program costs and
amortizing the costs over the period these costs are being recovered from
customers in accordance with an MPSC accounting order. The unamortized
balance of deferred costs totaled $70 million at March 31, 1995. During
1994, Consumers recognized $11 million in incentive revenue related to an
earlier DSM program approved by the MPSC. In April 1995, a proposal for
decision issued by the ALJ conducting the proceedings recommended that
Consumers be awarded the full $11 million incentive and that Consumers'
current DSM programs continue through 1996. A final order, authorizing
Consumers to collect the $11 million incentive, is expected by mid-1995.
PSCR Issues: In February 1995, the MPSC issued a final order in the 1993
PSCR reconciliation proceeding that addressed the extended refueling and
maintenance outage at Palisades in 1993. The order disallowed $4 million
of replacement power costs. Consumers accrued a loss for this issue in
1994.
Gas Rates: In 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The agreement was reached
in response to a claim that gas utility business earnings for 1993 were
excessive. This charge against earnings partially offsets savings related
to reduced state property taxes. The agreement also provides for an
additional $4 million of postretirement benefit costs to be charged
against 1995 earnings instead of being deferred. As part of the
agreement, Consumers filed a gas rate case in December 1994. Consumers
requested an increase in its gas rates of $21 million annually. The
request, among other things, incorporates cost increases, including costs
for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. Consumers expects an MPSC decision in early 1996.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers
was not allowed to recover $13 million of costs. Consumers accrued a loss
prior to 1993 in excess of the disallowed amount. In March 1995,
management concluded that the intrastate producers' pending appeals of the
MPSC order would not be successful and accordingly reversed $23 million
(pretax), which represented the portion of the loss in excess of the
disallowed amount.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a gas supply contract pricing
dispute with certain intrastate producers. The ALJ agreed with Consumers
that certain market based pricing provisions should, on a prospective
basis, limit the price paid by Consumers under the three agreements at
issue. The ALJ also found that the market based pricing provision
required specific MPSC approval before Consumers could apply those prices
to purchases under the agreements and found that such approval had not
previously been given. Consumers does not agree with the ALJ's findings
and conclusions on this point and will file exceptions to the proposal for
decision for the MPSC's consideration. If the MPSC issues an order
adopting the recommendations of the ALJ, the market based provisions upon
which Consumers had paid for gas purchased under these agreements will not
be effective prior to such an MPSC order. If the producers pursue a court
action for amounts owed for previously purchased gas, Consumers could be
liable for as much as $44 million (excluding any interest) under the
producers' theories. Consumers cannot predict the outcome of this issue.
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: In 1994, Consumers, Detroit Edison, the
Attorney General, the DNR and certain other parties signed an agreement in
principle designed to resolve all legal issues associated with fish
mortality at Ludington. The proposed settlement allows for continued
operation of the plant through the end of its FERC license. Upon approval
of the settlement agreement, Consumers will transfer land (with an
original cost of $9 million and a fair market value in excess of $20
million) to the state of Michigan and the Great Lakes Fishery Trust, make
an initial payment of approximately $3 million and incur approximately $1
million of expenditures related to recreational improvements. Future
annual payments of approximately $1 million are also anticipated over the
next 24 years and are intended to enhance the fishery resources of the
Great Lakes. The definitive settlement documents have been completed and
were filed with the appropriate Michigan courts and state and federal
agencies. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions.
Each year, a barrier net would continue to be installed at Ludington from
April to October. In the other lawsuit, the Attorney General sought to
have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability will average less
than 4 percent of the estimated total site remediation costs, and such
liability is expected to be less than $9 million. At March 31, 1995,
Consumers has accrued a liability for its estimated losses. 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 investigation and remedial action costs at a number
of sites, including some of the 23 sites that formerly housed manufactured
gas plant facilities, even those in which it has a partial or no current
ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations
and remedial actions. There is limited knowledge of manufactured gas
plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility
studies for several sites and the DNR has approved three of four plans
submitted by Consumers. The findings for the first remedial investigation
indicate that the expenditures for remedial action at this site are likely
to be minimal. However, Consumers does not believe that a single site is
representative of all of the sites. Data available to Consumers and its
continued internal review have resulted in an estimate for all costs
related to investigation and remedial action for all 23 sites of between
$48 million and $112 million. These estimates are based on undiscounted
1994 costs. At March 31, 1995, Consumers has accrued a liability of $48
million and has established a regulatory asset for approximately the same
amount. Any significant change in assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers
believes that remedial action costs are recoverable in rates as the MPSC
in 1993 addressed the question of recovery of investigation and remedial
action costs for another Michigan gas utility as part of a gas rate case.
In order to be recoverable 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 has approved similar deferred accounting
requests by several other Michigan utilities relative to investigation and
remedial action 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.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require enhanced emissions
monitoring. Consumers' coal-fueled electric generating units burn low-
sulfur coal and are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. The Clean Air
Act's provisions required Consumers to make capital expenditures totaling
$25 million to install equipment at certain generating units. Consumers
estimates capital expenditures for in-process and possible modifications
at other coal-fired units to be an additional $50 million by the year
2000. Final acid rain program nitrogen oxide regulations specifying the
controls to be installed at the other coal-fired units are not expected
earlier than 1996. Management believes that Consumers' annual operating
costs will not be materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
DSM and new lease commitments, of $448 million for 1995, $374 million for
1996 and $380 million for 1997.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At
March 31, 1995, Consumers had 73 separate stray voltage lawsuits pending.
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies, arising from
the ordinary course of business involving personal injury and property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney
General and certain other parties attempted to block Consumers' use of the
storage casks, alleging that the NRC had failed to comply adequately with
the procedural requirements of the Atomic Energy Act and the National
Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court
of Appeals rejected these allegations and upheld the NRC's rulemaking
action. The court found that the NRC's environmental assessment satisfied
National Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. The Attorney General and other
parties have asked the U.S. Supreme Court for leave to appeal this
decision. As of April 30, 1995, Consumers had loaded 13 dry storage casks
with spent nuclear fuel at Palisades.
In the latter part of 1995, Consumers plans to unload and replace one of
the loaded casks. In a review of the cask manufacturer's quality
assurance program, Consumers detected indications of minor flaws in welds
in the steel liner of one of the loaded casks. Although testing has not
disclosed any leakage, Consumers has nevertheless decided to remove the
spent fuel and insert it in another cask. Consumers has examined
radiographs for all of its casks and has found all other welds acceptable.
In order to address concerns raised subsequent to the initial cask
loading, Consumers and the NRC each analyzed the effects of seismic and
other natural hazards on the support pad on which the casks are placed,
and validated that the pad location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan, and no other states' repositories
are available to Michigan generators of such waste. Consumers stores low-
level waste at its nuclear plant sites and plans to continue to do so
following final shutdown of the plants, if necessary, until a permanent
storage site is provided. Consumers currently estimates that a permanent
low-level radioactive waste disposal site will be available by the year
2027.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21 week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $33 million in any one
year to NML and NEIL; $79 million per event under the nuclear liability
secondary financial protection program, limited to $10 million per event
in any one year; and $6 million in the event of nuclear workers claiming
bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal in 1996 of an
action plan to provide for operation of the plant beyond 1999. Consumers
is continuing to analyze alternative means to permit continued operation
of Palisades to the end of its license life in the year 2007. It is
currently estimated that expenditures for corrective action related to
this issue could total $20 million to $30 million. Consumers cannot
predict the outcome of these efforts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $ 50 $ 49 $147 $192
Income taxes paid
(net of refunds) - 3 31 63
Non-cash transactions
Nuclear fuel placed under
capital lease $ 7 $ 2 $ 25 $ 30
Other assets placed
under capital leases 2 1 15 19
7: Short-term and Long-term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$470 million facility and unsecured, committed lines of credit aggregating
$185 million that are used to finance seasonal working capital
requirements. At March 31, 1995, Consumers had a total of $133 million
outstanding under these facilities.
Consumers has an established $500 million trade receivables purchase and
sale program. At March 31, 1995, receivables sold under the agreement
totaled $300 million compared with $275 million at December 31, 1994.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100
million of preferred stock or subordinate debentures.
46
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1994 Form 10-K of
Consumers.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, while not affecting Consumers' consolidated financial
statements or corporate legal form, is designed to sharpen management
focus, improve efficiency and accountability in both business segments and
better position Consumers for growth in the gas market and to meet
increased competition in the electric power market. Management believes
that the strategic business unit structure will allow each unit to focus
more on its own profitability and growth potential, and will, in the long
term, allow Consumers to be more competitive.
Consolidated earnings for the quarters ended March 31, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $87
million for the first quarter of 1995, compared to $82 million for the
first quarter of 1994. The increase in net income reflects increased
electric sales resulting from Michigan's continuing economic growth,
increased revenue from the May 1994 electric rate increase, recognition of
the resolution of a previously recorded gas contract loss contingency, and
improved operating results from Consumer's interest in the MCV Facility.
Partially offsetting this increase was a 12.6 percent decrease in gas
deliveries due to significantly warmer temperatures experienced in the
first quarter of 1995 compared with the corresponding period last year.
Consolidated earnings for the 12 months ended March 31, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $207
million for the 12 months ended March 31, 1995, compared to $194 million
for the 12 months ended March 31, 1994. The increase in net income
reflects the impact of the May 1994 electric rate increase, higher
electric kWh sales, the recognition of the resolution of a previously
recorded gas contract loss contingency, and the recognition of DSM
revenue. Partially offsetting these increases were reduced gas deliveries
and increased operating costs and depreciation.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and
financing activities. Cash from operations continues to reflect
Consumers' sale and transportation of natural gas and the generation, sale
and transmission of electricity. Cash from operations for the first three
months of 1995 reflects increased electric sales and increased electric
rates which were approved by the MPSC in mid-1994. Cash from operations
also reflects greater underrecoveries of power costs associated with
purchases from the MCV.
Financing and Investing Activities: Capital expenditures, including
assets placed under capital lease and deferred DSM costs, totaled $85
million for the first three months of 1995 compared with $86 million for
the first three months of 1994. These amounts primarily represent capital
investments in Consumers' electric and gas utility business units.
As a continuation of Consumers' dividend policy of paying dividends on its
common stock equal to approximately 80 percent of its consolidated income,
in April 1995, Consumers declared a $70 million common dividend from its
first quarter earnings to be paid in May 1995.
Financing and Investing Outlook: Consumers estimates that capital
expenditures, including DSM and new lease commitments, related to its
electric and gas utility operations will total approximately $1.2 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 1995 1996 1997
---- ---- ----
Consumers
Construction (including DSM) $399 $347 $319
Nuclear fuel lease 32 4 38
Capital leases other than nuclear fuel 12 15 17
Michigan Gas Storage 5 8 6
---- ---- ----
$448 $374 $380
==== ==== ====
Consumers has several available sources of credit including unsecured,
committed lines of credit totaling $185 million and a $470 million
unsecured working capital facility. Consumers has FERC authorization to
issue or guarantee up to $900 million in short-term debt through
December 31, 1996. Consumers uses short-term borrowings to finance
working capital, 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 March 31, 1995, receivables sold under the agreement totaled
$300 million.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1995 and
1994: During the first quarter of 1995, electric pretax operating income
reflects a decrease of $1 million from the 1994 level. This small
reduction primarily resulted from increases in operation, maintenance, and
depreciation expenses partially offset by increased electric kWh sales and
the positive impact of the May 1994 electric rate increase.
Electric Pretax Operating Income for the 12 months ended March 31, 1995
and 1994: The $40 million improvement in the 12 months ended March 1995
electric pretax operating income compared with the corresponding 1994
level is primarily the result of the impact of the May 1994 electric rate
increase and the recognition of DSM incentive revenue (see Note 3) which
contributed $39 million and $11 million, respectively. Also contributing
to the 1995 increased electric pretax operating income was an increase in
electric kWh sales. These increases were partially offset by higher
electric operating costs and depreciation.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1995 compared 1995 compared
with 1994 with 1994
--------------- --------------
Sales $ 1 $ 20
Rate increases and other
regulatory issues 11 48
O&M, general taxes and depreciation (13) (28)
----- -----
Total change $(1) $ 40
===== =====
Electric Sales: Electric sales during the first quarter of 1995 totaled
8.7 billion kWh, a 1.5 percent increase from 1994 levels. Residential
sales decreased 3.1 percent, commercial sales increased 3.0 percent, and
industrial sales increased 5.5 percent, compared with the corresponding
period in 1994. Consumers' electric sales have benefited from improved
employment and other economic conditions. Electric sales during the 12
months ended March 31, 1995 totaled 34.6 billion kWh, a 4.3 percent
increase from 1994 levels. During the 12 months ended 1995 period,
commercial and industrial sales increased 3.2 percent and 6.5 percent
respectively, while residential sales decreased less than 1.0 percent.
The industrial segments of chemicals and transportation equipment
accounted for the largest share of the growth in industrial kWh sales.
Power Costs: Power costs for the three-month period ending March 31, 1995
totaled $227 million, a $16 million decrease from the corresponding 1994
period. This decrease primarily reflects increased generation at
Consumers' nuclear power plants and a corresponding reduction in
generation at the more costly oil and coal fired plants. Power costs for
the 12-month period ending March 31, 1995 totaled $934 million, a $15
million decrease from the corresponding 1994 period.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to
purchase contract capacity from the MCV Partnership increased to 1,240 MW
in 1995. In 1993, the MPSC issued the Settlement Order that has allowed
Consumers to recover substantially all payments for 915 MW of contract
capacity purchased from the MCV Partnership. The market for the remaining
325 MW of contract capacity was assessed at the end of 1992. This
assessment, along with the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $24
million for the first three months of 1995. Estimated future after-tax
cash underrecoveries, and possible losses for 1995 and the next four years
if none of the additional capacity is sold, are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership are engaged in arbitration proceedings
under the PPA to determine whether the energy charge paid to the MCV
Partnership is being properly calculated. The MCV Partnership is seeking
additional payments from Consumers which the MCV has estimated at $6
million annually for an alleged breach of the PPA. Consumers believes
that its calculation of the energy charge is correct, but cannot predict
the outcome of this arbitration.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood
and chipped-tire plant. Consumers plans to seek MPSC approval to
substitute 109 MW of less expensive contract capacity from the MCV
Facility which Consumers is currently not authorized to recover from
retail customers. In April 1995, an ALJ issued a proposal for decision
related to the 1995 PSCR case that agreed with objections, raised by
certain parties, as to the inclusion of the 65 MW of capacity substitution
as part of the five year forecast included in plan cases. Although
recovery of the costs relating to the substitution is not being requested
in this case, the ALJ concluded that additional capacity should be
competitively bid and recommended that the MPSC state in its order that
cost recovery for substituting capacity absent a competitive bid is
unlikely to be approved. For further information, see Note 2.
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. Consumers filed a request
with the MPSC in late 1994, to increase its retail electric rates. In
March 1995, the MPSC staff recommended a final annual rate increase of $45
million. For further information regarding Consumers' request and the
staff's recommendation, see Note 3.
Additionally, in January 1995, Consumers filed a request with the MPSC,
seeking approval to increase its traditional depreciation expense by $21
million and reallocate certain portions of its utility plant from
production to transmission, resulting in a $28 million decrease. If both
aspects of the request are approved, the net result would be a decrease in
electric depreciation expense of $7 million for ratemaking purposes. In
April 1995, the MPSC staff's filing did not support Consumers' requested
increase in depreciation expense, but instead proposed a decrease of $24
million. In addition, the MPSC staff also did not support the
reallocation of plant investment as proposed by Consumers but suggested
several alternatives which could partially address this issue. Consumers
is studying the MPSC staff's position.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed 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 that have the ability to acquire energy
from alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options. In May 1995, the MPSC issued an order stating
that it has legal authority to approve a range of rates under which
Consumers could negotiate prices with customers that have competitive
energy alternatives. However, the MPSC dismissed from consideration, in
this proceeding, the issues related to Consumers' proposed use of the
additional 325 MW of MCV contract capacity to serve these customers.
PSCR Matters: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. In February 1995, the MPSC issued a
final order in the 1993 PSCR reconciliation, disallowing $4 million of
replacement power costs related to the 1993 outage. Consumers accrued a
loss for this issue in 1994.
Electric Conservation Efforts: Over the past few years, Consumers has
participated in several MPSC-authorized DSM programs designed to encourage
the efficient use of energy. During 1994, Consumers recognized $11
million in incentive revenue, related to Consumers' achievement of certain
DSM program objectives approved by the MPSC in 1992. In April 1995, an
ALJ issued a proposal for decision, recommending that Consumers be allowed
to recover the full $11 million incentive. A final order, authorizing
Consumers to collect the $11 million incentive, is expected from the MPSC
by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC
authorized Consumers to continue certain DSM programs. As part of its
current electric rate case, Consumers requested that the MPSC eliminate
all DSM expenditures after April 1995. The proposal for decision
discussed above recommended that Consumers continue its current DSM
programs through 1996. For further information, see Note 3.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including deferred DSM costs and new lease commitments, related to its
electric utility operations of $318 million for 1995, $255 million for
1996 and $269 million for 1997. These amounts include an attributed
portion of Consumers' anticipated capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean
Air Act significantly increased the environmental constraints that
utilities will operate under in the future. While the Clean Air Act's
provisions require Consumers to make certain capital expenditures in order
to comply with the amendments for nitrogen oxide reductions, Consumers'
generating units are presently operating at or near the sulfur dioxide
emission limits which will be effective in the year 2000. 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
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing increased competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. As part of its current electric rate
case, Consumers has requested that the MPSC eliminate the rate
subsidization of residential customers. If approved, commercial and
industrial customers' electric costs would decrease by a total of
approximately $80 million, or approximately 6 percent, per year.
Consumers is committed to holding operation and maintenance costs level
and continuing to improve customer service. Consumers is also working
with large customers to identify ways to improve the efficiency with which
energy is used.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and Detroit Edison. Under the experiment,
up to 60 MW of Consumers' additional load requirements could be met by
retail wheeling. The program becomes effective upon Consumers' next
solicitation for capacity. In February 1995, an ALJ issued a proposal for
decision that addressed the methodology for pricing transmission rates to
be used for the experiment. An MPSC order is expected by mid-1995.
Consumers does not expect this short-term experiment to have a material
impact on its financial position or results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose
changes in the wholesale electric industry. Among the most significant
proposals, is a requirement that utilities provide open access to the
domestic interstate transmission grid. Under the FERC's proposal, all
utilities would be required to use these tariffs for their own wholesale
sales and purchases of electric energy; and the utilities would be allowed
the opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations). Consumers is reviewing the
FERC proposal to determine its potential affect, if any on its financial
position and results of operations.
Nuclear Matters: In 1994, Consumers filed a report with the NRC that
included short- and long-term enhancements designed to improve performance
at Palisades. The report was filed in response to an NRC-conducted
diagnostic evaluation inspection that found certain deficiencies at the
plant. Acceptable performance at Palisades will require continuing
performance improvements and additional expenditures, which have been
included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. 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 had been
pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued
a decision, effectively allowing Consumers to continue using dry cask
storage at Palisades. The Attorney General and other parties have asked
the U.S. Supreme Court for leave to appeal this decision.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is continuing to analyze alternative means to permit
continued operation of Palisades to the end of its license life in the
year 2007. Consumers cannot predict the outcome of these efforts. For
further information regarding Palisades, see Note 5.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1995, Consumers had 73 separate stray voltage lawsuits pending. Consumers
believes that the resolution of these lawsuits will not have a material
impact on its financial position or results of operations. For further
information, see Note 4.
Gas Utility Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1995 and
1994: During the first quarter of 1995 gas pretax operating income
increased $7 million from the 1994 level. The increased pretax operating
income reflects the recognition of the resolution of a previously recorded
gas contract loss contingency. Partially offsetting this increase was a
12.6 percent decrease in gas deliveries due to significantly warmer
weather during the first quarter of 1995 compared with the corresponding
1994 period. The average temperature for the first quarter of 1995
increased 25 percent to 27.5 degrees from 21.9 degrees during the first
quarter of 1994.
Gas Pretax Operating Income for the 12 months ended March 31, 1995 and
1994: The $15 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries and higher operating
expenses, partially offset by the recognition of the resolution of a
previously recorded gas contract loss contingency. Increased operating
costs included $2 million of postretirement benefit costs related to the
gas settlement with the MPSC (see Note 3).
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1995 compared 1995 compared
with 1994 with 1994
--------------- ---------------
Deliveries $(19) $(40)
Recovery of gas costs and other
regulatory issues 26 38
O&M, general taxes and depreciation - (13)
----- -----
Total change $ 7 $(15)
===== =====
Gas Deliveries: Gas sales and gas transported during the first quarter of
1995 totaled 153.8 bcf, a 12.6 percent decrease from the corresponding
1994 level. For the 12 months ended March 31, 1995, gas sales and gas
transported totaled 386.8 bcf, a 9.6 percent decrease from the
corresponding 1994 level, reflecting record cold winter weather during the
12 months ended March 31, 1994 and a return to more normal weather during
the 12 months ended March 31, 1995.
Cost of Gas Sold: The cost of gas sold for the first quarter of 1995
decreased $53 million from the 1994 level as a result of reduced
deliveries and the reversal of a gas contract loss contingency. The cost
of gas sold for the 12 months ended March 31, 1995 decreased $87 million
from the corresponding 1994 level which was also the result of reduced gas
deliveries and the gas contract loss contingency reversal.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. A final order from the MPSC is expected in early 1996. For
further information regarding Consumers' current gas rate case, see Note
3.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a gas supply
contract pricing dispute with certain intrastate producers. The ALJ
agreed with Consumers that certain market based pricing provisions should,
on a prospective basis, limit the price paid by Consumers under the three
agreements at issue. The ALJ also found that the market based pricing
provision required specific MPSC approval before Consumers could apply
those prices to purchases under the agreements and found that such
approval had not previously been given. Consumers does not agree with the
ALJ's findings and conclusions on this point and will file exceptions to
the proposal for decision for the MPSC's consideration. If the MPSC
issues an order adopting the recommendations of the ALJ, the market based
provisions upon which Consumers had paid for gas purchased under these
agreements will not be effective prior to such an MPSC order. If the
producers pursue a court action for amounts owed for previously purchased
gas, Consumers could be liable for as much as $44 million (excluding any
interest) under the producers' theories. Consumers cannot predict the
outcome of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$130 million for 1995, $119 million for 1996 and $111 million for 1997.
These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
Gas Environmental Matters: Under Michigan's Environmental Response Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, including some that formerly housed
manufactured gas plant facilities. Data available to Consumers and its
continued internal review of these former manufactured gas plant sites
have resulted in an estimate for all costs related to investigation and
remedial action of between $48 million and $112 million. These estimates
are based on undiscounted 1994 costs. At March 31, 1995, Consumers has
accrued a liability for $48 million and has established a regulatory asset
for approximately the same amount. Any significant change in assumptions
such as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial action
costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by several other Michigan utilities relative to
investigation and remedial action 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. For further
information, see Note 4.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increased efforts to promote natural gas to both current and potential
customers that are using other fuels for space and water heating.
Consumers plans additional capital expenditures to construct new gas mains
that are expected to expand Consumers' system.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles, also provide Consumers with sales growth
opportunities. In addition, as air quality standards continue to become
more stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Other
Other Income: Other income for the 12 months ending March 31, 1995
decreased $18 million when compared with the corresponding 1994 period,
reflecting the sale of the remaining MCV Bonds in December 1993 which
eliminated the bond interest income.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this
request and believes it will maintain its current exemption from
registration under PUHCA. The SEC has not taken action on this matter.
For further information, see Note 4.
New Accounting Standard: In March 1995, the FASB issued SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that a loss be recognized
whenever a regulator excludes a portion of an asset's cost from a
company's rate base. Consumers is continuing to study SFAS 121, but does
not expect the application of this statement to have a material impact on
its financial position or results of operations.
55
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' 1994 Forms 10-K.
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.
Rate Case Proceedings
Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant
Investment
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 an order in the Midland-related
proceeding designated as Step 3A finding that Consumers was not in
compliance with certain financial stabilization orders. Several parties,
including the Attorney General, filed claims of appeal with the Court of
Appeals regarding this order. The Court of Appeals affirmed the MPSC
determinations in Step 3A in an order issued in April 1995.
1994 Electric Rate Case Filing
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104 million to $140
million, depending upon the ratemaking treatment afforded sales losses to
competition and the treatment of the MCV contract capacity above 915 MW.
Based upon the Attorney General's and ABATE's argument on a Motion to
Strike, the ALJ struck all of the Staff's testimony on the treatment of
the 325 MW of MCV capacity, and the Staff further withdrew a portion of
its testimony concerning the rate design. Consumers and the Staff filed
an interlocutory appeal of the ALJ's ruling requesting, among other
things, that the stricken testimony be allowed into the record. On May 9,
1995 the MPSC issued an order affirming the ALJ's decision to strike the
testimony and stated that any change in the treatment of costs associated
with any portion of the remaining 325 MW of MCV capacity will only be
considered in the context of a competitive bid solicitation.
Palisades Plant -- Spent Nuclear Fuel Storage
In May 1993, the Attorney General and certain other parties commenced
litigation to block Consumers' use of dry spent fuel storage casks at
Palisades. In January 1995, the U.S. Sixth Circuit Court of Appeals
rejected the claims of the Attorney General and certain other parties and
upheld the NRC's rulemaking action permitting such usage. The opposing
parties filed a petition with the U.S. Supreme Court for a Writ of
Certiorari to seek further review of the Sixth Circuit decision against
their positions on the questions of whether the Sixth Circuit properly
rejected as untimely a challenge to an NRC rule, and whether the Nuclear
Waste Policy Act permits the NRC to license the storage casks without
public hearing or site-specific environmental studies. As of May 1, 1995,
Consumers had loaded 13 dry storage casks with spent nuclear fuel.
Stray Voltage Lawsuits
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. At March 31, 1995,
Consumers had 73 separate stray voltage cases pending.
Interstate Gas Supplier Contract Pricing Dispute
On April 18, 1995, the ALJ issued a proposal for decision in a proceeding
that had been initiated by Consumers regarding a gas supply contract
pricing dispute. In the proposal for decision the ALJ agreed with
Consumers that certain market based pricing provisions should, on a
prospective basis, limit the price paid by Consumers under the three gas
purchase agreements at issue. The ALJ also found that the market based
pricing provisions required specific MPSC approval before Consumers could
apply those prices to purchases under the agreements and found that such
approval had not previously been given. Consumers does not agree with the
ALJ's findings and conclusions on this point and will file exceptions and
replies to the proposal for decision by May 23, 1995 for the MPSC's
consideration. The MPSC will issue its decision sometime thereafter. If
the MPSC issues an order adopting the recommendations of the ALJ, the
market based provisions upon which Consumers had paid for gas purchases
under these agreements will not be effective prior to such an MPSC order
and Consumers may be liable for additional payments for gas previously
purchased.
Prior to the issuance of the ALJ's proposal for decision, the intrastate
gas producers involved in this MPSC proceeding filed a complaint against
Consumers in a local circuit alleging breach of contract. On Consumers'
motion, the court dismissed the lawsuit. The gas suppliers subsequently
filed a petition for rehearing with the court where the matter is pending.
Under the producers' theories Consumers' liability for gas previously
purchased could be as much as $44 million (excluding any interest).
Consumers cannot predict the outcome of this matter.
Item 4. Submission of Matters to a Vote of Security Holders
At CMS Energy's Special Meeting of Shareholders held on March 21, 1995,
the shareholders approved an amendment to the Articles of Incorporation to
establish a new class of common stock and increase the authorized
preferred stock from 5 million shares to 10 million shares ("Proposal 1");
plan amendments to allow awards to relate to any class of common stock
("Proposal 2"); plan amendments to add performance based business criteria
and individual limit on plan awards to preserve federal tax deduction
("Proposal 3"). The vote on these proposals was as follows:
For Against Abstain Total
---------- ---------- ---------- -------
Proposal 1 57,376,722 12,010,850 1,147,084 70,534,656
Proposal 2 61,609,030 9,438,014 1,830,592 72,877,636
Proposal 3 63,679,695 3,374,263 1,241,806 68,295,764
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) - CMS Energy: Letter of independent public accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(b) Reports on Form 8-K
Current Reports on Form 8-K dated January 10, 1995 and February 2, 1995
(CMS Energy and Consumers) covering matters pursuant to "Item 5. Other
Events".
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: May 15, 1995 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer
and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: May 15, 1995 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer