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 June 30, 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
--- ---
Number of shares outstanding of each of the issuer's classes of common
stock at July 31, 1995:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 88,180,694
CMS Energy Class G Common Stock, no par value 7,000,000
Consumers Power Company, $10 par value,
privately held by CMS Energy 84,108,789
2
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended June 30, 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. . . . . . . . . . . . . . . 22
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . . 36
Consolidated Statements of Income . . . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 38
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 39
Consolidated Statements of Common Stockholder's Equity. . . . . . 41
Condensed Notes to Consolidated Financial Statements. . . . . . . 42
Management's Discussion and Analysis. . . . . . . . . . . . . . . 50
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 60
Item 4. Submission of Matters to a Vote of Security Holders. . . 62
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 63
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
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
Attorney General. . . . . . . . . The Michigan Attorney General
bcf . . . . . . . . . . . . . . . Billion cubic feet
Board of Directors. . . . . . . . Board of Directors of CMS Energy
Class G Common Stock. . . . . . . One of two classes of common stock of
CMS Energy, no par value, which
reflects the separate performance of
the Consumers Gas Group
Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas 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
Credit Facility . . . . . . . . . $400 million unsecured revolving
credit and letter of credit facility
dated as of July 29, 1994
Detroit Edison. . . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . . Michigan Department of Natural
Resources
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
MichCon . . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Natural Resources
and Environmental Protection
Act. . . . . . . . . . . . . . . Michigan Natural Resources and
Environmental Protection Act Part 201
Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
MMcf/d. . . . . . . . . . . . . . Million cubic feet per day
MMCG. . . . . . . . . . . . . . . Michigan Municipal Cooperative Group
MPSC. . . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . . Megawatts
NEIL. . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NML . . . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . . . Notice of proposed rulemaking
NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . . . Other operation and maintenance
expense
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
Restated Articles of
Incorporation. . . . . . . . . . CMS Energy's restated Articles of
Incorporation as filed with the
Michigan Department of Commerce June
6, 1995 authorizing the Class G Common
Stock and increasing the authorized
capital stock
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
SGP Partnership . . . . . . . . . A specialty gas processors limited
partnership composed of CMS Gas
Transmission and Nitrotec Helium
Corporation
SFAS. . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production company
located in Traverse City, Michigan
TGN . . . . . . . . . . . . . . . CMS Gas Transmission's 25 percent
ownership in Argentina's
Transportadora de Gas del Norte
pipeline
Walter. . . . . . . . . . . . . . Walter International, Inc., a Texas
corporation
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
June 30, 1995 and 1994, and the related consolidated statements of income,
common stockholders' equity and cash flows for the three-month, six-month
and twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of CMS Energy Corporation and
subsidiaries as of December 31, 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
June 9, 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,
August 9, 1995.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1995 1994 1995 1994 1995 1994
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 543 $ 549 $1,083 $1,094 $2,179 $2,193
Gas utility 197 183 679 711 1,119 1,184
Oil and gas exploration and production 26 20 60 38 107 76
Independent power production 23 9 46 17 75 28
Natural gas transmission, storage and marketing 43 36 81 78 147 147
Other 5 - 7 1 10 4
----------------------------------------------------------
Total operating revenue 837 797 1,956 1,939 3,637 3,632
----------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 70 134 150 290 302
Purchased power - related parties 121 118 245 240 487 486
Purchased and interchange power 47 55 83 97 148 192
Cost of gas sold 135 123 443 495 733 815
Other 164 154 326 298 653 610
----------------------------------------------------------
Total operation 534 520 1,231 1,280 2,311 2,405
Maintenance 45 49 91 92 191 199
Depreciation, depletion and amortization 92 84 206 187 398 372
General taxes 42 36 98 97 184 184
----------------------------------------------------------
Total operating expenses 713 689 1,626 1,656 3,084 3,160
----------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 83 86 170 174 330 326
Gas utility 17 18 108 102 142 155
Oil and gas exploration and production 7 2 22 4 26 (1)
Independent power production 13 3 26 5 42 6
Natural gas transmission, storage and marketing 3 3 6 6 10 9
Other 1 (4) (2) (8) 3 (23)
----------------------------------------------------------
Total pretax operating income 124 108 330 283 553 472
INCOME TAXES 25 24 79 71 112 98
----------------------------------------------------------
NET OPERATING INCOME 99 84 251 212 441 374
----------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Income from contractual arrangements (MCV Bonds) - - - - - 16
Accretion income 3 4 6 7 12 13
Accretion expense (Note 2) (8) (9) (16) (18) (32) (36)
Other income taxes, net 3 5 5 7 9 10
Other, net 3 1 7 6 17 14
----------------------------------------------------------
Total other income 1 1 2 2 6 17
----------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 57 47 113 93 212 196
Other interest 4 3 9 6 22 19
Capitalized interest (1) (2) (2) (3) (5) (6)
Preferred dividends 7 7 14 10 28 15
----------------------------------------------------------
Net fixed charges 67 55 134 106 257 224
----------------------------------------------------------
NET INCOME $ 33 $ 30 $ 119 $ 108 $ 190 $ 167
==========================================================
AVERAGE COMMON SHARES OUTSTANDING 88 86 87 86 87 84
==========================================================
EARNINGS PER AVERAGE COMMON SHARE $ .37 $ .35 $ 1.36 $ 1.27 $ 2.19 $ 1.99
==========================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .21 $ .18 $ .42 $ .36 $ .84 $ .72
==========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
/TABLE
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1995 1994 1995 1994
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119 $ 108 $ 190 $ 167
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $24,
$49 and $48, respectively) 206 187 398 372
Capital lease and other amortization 19 14 42 28
Debt discount amortization 16 19 34 38
Deferred income taxes and investment tax credit 57 50 63 54
Accretion expense 16 18 32 36
Accretion income - abandoned Midland project (6) (7) (12) (13)
MCV power purchases - settlement (Note 2) (70) (45) (112) (82)
Other (23) (7) (38) (11)
Changes in other assets and liabilities 47 107 (48) (56)
------ ------ ------ ------
Net cash provided by operating activities 381 444 549 533
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (436) (268) (743) (584)
Investments in nuclear decommissioning trust funds (24) (24) (49) (48)
Investments in partnerships and unconsolidated subsidiaries (20) (24) (49) (108)
Cost to retire property, net (19) (14) (43) (33)
Deferred demand-side management costs (4) (4) (9) (28)
Proceeds from sale of property 1 1 20 2
Proceeds from MCV Bonds - - - 322
Sale of subsidiary - - - (14)
Other (6) (3) (8) (6)
------ ------ ------ ------
Net cash used in investing activities (508) (336) (881) (497)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 162 122 741 718
Issuance of common stock 39 17 52 149
Issuance of preferred stock - 193 - 193
Payment of common stock dividends (37) (31) (73) (61)
Increase (decrease) in notes payable, net (30) (130) 180 (112)
Payment of capital lease obligations (19) (12) (42) (24)
Retirement of bonds and other long-term debt (13) (147) (145) (740)
Repayment of bank loans (9) (102) (380) (203)
Retirement of common stock - (1) (1) (4)
------ ------ ------ ------
Net cash provided by (used in) financing activities 93 (91) 332 (84)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (34) 17 - (48)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 79 28 45 93
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 45 $ 45 $ 45 $ 45
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
June 30 June 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $5,899 $5,771 $5,598
Gas 2,146 2,102 2,025
Oil and gas properties (full-cost method) 992 934 899
Other 56 61 70
-----------------------------------
9,093 8,868 8,592
Less accumulated depreciation, depletion and amortization 4,493 4,299 4,171
-----------------------------------
4,600 4,569 4,421
Construction work-in-progress 264 245 266
-----------------------------------
4,864 4,814 4,687
-----------------------------------
INVESTMENTS
Independent power production 286 152 121
First Midland Limited Partnership (Note 2) 221 218 215
Midland Cogeneration Venture Limited Partnership (Note 2) 90 74 67
Other 59 56 44
-----------------------------------
656 500 447
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 45 79 45
Accounts receivable and accrued revenue, less
allowances of $4, $5 and $4, respectively (Note 7) 169 156 160
Inventories at average cost
Gas in underground storage 155 235 160
Materials and supplies 79 75 78
Generating plant fuel stock 34 37 26
Trunkline settlement 30 30 30
Deferred income taxes 27 34 19
Prepayments and other 111 186 124
-----------------------------------
650 832 642
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 475 484 499
Nuclear decommissioning trust funds 262 213 191
Abandoned Midland project (Note 3) 139 147 155
Trunkline settlement 40 55 70
Other 402 339 318
-----------------------------------
1,318 1,238 1,233
-----------------------------------
TOTAL ASSETS $7,488 $7,384 $7,009
===================================
10
June 30 June 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,229 $1,107 $1,058
Preferred stock of subsidiary 356 356 356
Long-term debt 2,748 2,709 2,407
Non-current portion of capital leases 109 108 124
-----------------------------------
4,442 4,280 3,945
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 181 64 262
Notes payable 309 339 129
Accounts payable 197 194 175
Accrued taxes 147 216 141
MCV power purchases - settlement (Note 2) 95 95 82
Accounts payable - related parties 50 50 39
Accrued interest 40 40 38
Accrued refunds 30 25 41
Other 166 198 188
-----------------------------------
1,215 1,221 1,095
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 621 582 556
Postretirement benefits 553 550 560
MCV power purchases - settlement (Note 2) 269 324 363
Deferred investment tax credits 176 181 186
Trunkline settlement 40 55 70
Regulatory liabilities for income taxes, net 33 16 16
Other 139 175 218
-----------------------------------
1,831 1,883 1,969
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,488 $7,384 $7,009
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1995 1994 1995 1994 1995 1994
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
-------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 1,734 1,684 1,701 1,672 1,688 1,543
Common Stock reacquired - - - (1) (1) (4)
Common Stock issued 6 4 39 17 52 149
Common Stock reissued - - - - 1 -
-------------------------------------------------------------------
At end of period 1,740 1,688 1,740 1,688 1,740 1,688
-------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 1 1 - - (1) -
SFAS 115 - unrealized loss,
net of tax - (2) 1 (1) 2 (1)
-------------------------------------------------------------------
At end of period 1 (1) 1 (1) 1 (1)
-------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (527) (644) (595) (707) (630) (736)
Net income (loss) 33 30 119 108 190 167
Common stock dividends declared (19) (16) (37) (31) (73) (61)
-------------------------------------------------------------------
At end of period (513) (630) (513) (630) (513) (630)
-------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,229 $1,058 $1,229 $1,058 $1,229 $1,058
===================================================================
<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
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
income. For the three, six and twelve month periods ended June 30, 1995,
equity earnings were $14 million, $28 million and $52 million,
respectively and $4 million, $10 million and $18 million for the three,
six and twelve month periods ended June 30, 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 June 30, 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' annual 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 $46 million
for the six months ended June 30, 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 $72 $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 June 30, 1995 and December 31, 1994, the after-tax present value of the
Settlement Order liability totaled $236 million and $272 million,
respectively. The reduction in the liability reflects after-tax cash
underrecoveries of $46 million, partially offset by after-tax accretion
expense of $10 million. The undiscounted after-tax amount associated with
the liability totaled $638 million at June 30, 1995.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
1995, Consumers paid $15 million to terminate a power purchase agreement
with a proposed 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 the plan case. Although recovery of the
costs relating to the substitution was 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.
Consumers has filed exceptions to the ALJ's recommendation. If the MPSC
adopts the ALJ's recommendation, the regulatory asset may be required to
be reduced.
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 confirmed the
recovery of certain MCV-related costs 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.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC allocated a portion of the costs related to
purchases from the MCV to non-jurisdictional customers, reducing the
amount allowed for recovery from PSCR customers. Consumers believes this
is inconsistent with the terms of the Settlement Order and has appealed
the February 23 order on this issue.
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 further 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
subsidization of residential rates in a two-step adjustment, eliminate all
DSM expenditures after April 1995 (see Electric DSM) 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, the 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. 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 has filed a petition for rehearing of this order with the
MPSC.
In June 1995, briefs and reply briefs were filed by all parties in this
case. Consumers presented one of its previously filed positions, which
assumes retaining certain customers subject to competition and serving
these customers from jurisdictional sources, as well as from the
uncommitted MCV capacity. If this position is adopted, Consumers' retail
electric base rates would increase by $93 million, with a corresponding
increase in PSCR revenues of $52 million. The MPSC staff recommended a
$43 million increase in Consumers' base rates. This position reflects a
different sales forecast than Consumers', as well as a 12- percent return
on equity and a lower equity ratio than that included in Consumers'
proposed capital structure. The MPSC staff also recommends the
elimination of all rate subsidization by primary customers, which include
industrial and large commercial customers. In August 1995, the ALJ issued
a proposal for decision in this case that recommends a $46 million rate
increase. The ALJ generally adopted the MPSC staff's position with
adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ
also recommended the elimination of rate subsidization.
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. 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. 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 June 30, 1995. During
1994, Consumers recognized $11 million in incentive revenue related to an
earlier DSM program approved by the MPSC. In June 1995, the MPSC
authorized Consumers to collect the $11 million incentive for past program
performance. As part of the same order, the MPSC authorized Consumers to
discontinue future DSM program expenditures and ceased all new program
funding.
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. In June 1995, the MPSC staff filed its position in
this case, recommending an $11 million rate decrease. The MPSC staff's
recommendation included a lower rate base, a lower return on common
equity, a revised capital structure and a lower operating cost forecast
than Consumers had projected. 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) of the previously accrued loss, which represented the portion in
excess of the disallowed amount. In June 1995, the Court of Appeals
affirmed the MPSC's prior decision. The producers have filed a motion for
rehearing with the Court of Appeals.
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 filed 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 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 believes the producers' position is
without merit and intends to vigorously oppose any claims they may raise
but 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. 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 for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and such liability is expected to be less than $9
million. At June 30, 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur investigation and remedial action costs at a
number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or
no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites 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, since there is limited
knowledge of manufactured gas plant contamination at these sites at this
time. 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 June 30, 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 similar Michigan utilities relative to
investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. 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 investment in unconsolidated subsidiaries and new lease
commitments, of $1,054 million for 1995, $754 million for 1996 and $644
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 June 30,
1995, Consumers had 70 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. In June 1995, the U.S. Supreme Court
refused to hear an appeal of this decision as requested by the Attorney
General and other parties. As of June 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 confirmed 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 Consumers stores low-level waste
at its nuclear plant sites. Recently, a site in South Carolina announced
that it would be available for accepting low-level waste. Consumers plans
to begin shipping its low-level waste to this site in the third quarter of
1995.
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 of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict 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 June 30 were:
In Millions
Six Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $100 $ 77 $185 $170
Income taxes paid
(net of refunds) 19 20 35 16
Non-cash transactions
Nuclear fuel placed
under capital lease $ 23 $ 3 $ 42 $ 8
Other assets placed
under capital leases 2 7 10 16
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, designated Class G Common Stock which reflects 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 continues 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.
Prior to the approval of the amendment to the Articles of Incorporation on
March 21, 1995, CMS Energy was permitted 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. The filing of the Restated Articles of
Incorporation with the Michigan Department of Commerce increased the
number of authorized shares of capital stock 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.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing Common Stock of CMS Energy (including Class G Common Stock),
Preferred Stock of CMS Energy or a special purpose affiliate of
CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually
evaluates the capital markets and may offer such securities from time to
time, at terms to be determined at or prior to the time of the sale. In
July 1995, under such shelf registration statement, CMS Energy received
net proceeds of approximately $116 million from the issuance of 7 million
shares of Class G Common Stock at a price to the public of $17.75 per
share representing 21.875% of the common stockholder's equity value
attributed to the Consumers Gas Group. All of the proceeds will be
invested in the businesses and used for general corporate purposes of
CMS Energy. Initially, such proceeds were used to repay a portion of
CMS Energy's indebtedness under the Credit Facility, none of which is
attributable to the Consumers Gas Group. On August 9, 1995 CMS Energy
received notification that underwriters intend to exercise their option
and purchase an additional 520,000 shares of CMS Energy Class G Common
Stock at a price to the public of $17.75 per share for the purpose of
covering overallotments related to the July 1995 initial public offering.
This issuance of the additional shares will increase the common
stockholder's equity value attributed to the Consumers Gas Group
represented by the outstanding shares of Class G Common Stock to 23.5%.
Earnings (Loss) attributable to CMS Energy Class G Common Stock on a per
share basis will be determined based on 23.5% of the earnings of the
Consumers Gas Group, which reflects the intent of the Board of Directors
that the earnings and financial condition of the Consumers Gas Group be
the primary basis for determining dividends to be paid on the Class G
Common Stock. Stockholders of Class G Common Stock have no direct rights
in the equity or assets of the Consumers Gas Group, but rather have rights
in the equity and assets of CMS Energy as a whole.
In the sole discretion of its Board of Directors, dividends will be paid
exclusively to the holders of Class G Common Stock, exclusively to the
holders of CMS Energy Common Stock, or to the holders of both classes in
equal or unequal amounts. Dividends on the Class G Common Stock are paid
at the discretion of the Board of Directors based primarily upon the
earnings and financial condition of the Consumers Gas Group, and to a
lessor extent, CMS Energy as a whole. It is the Board of Directors'
current intention that the declaration or payment of dividends with
respect to the Class G Common Stock will not be reduced, suspended or
eliminated as a result of factors arising out or relating to the electric
utility business or the non-utility businesses of CMS Energy unless such
factors also require, in the Board of Directors' sole discretion, the
omission of the declaration or reduction in payment of dividends on both
the CMS Energy Common Stock and the Class G Common Stock.
In July 1995, the Board of Directors declared a quarterly dividend of 28
cents per share ($1.12 per share on an annual basis) on Class G Common
Stock.
Consumers Power
Debt
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. At June 30, 1995, Consumers
had an unsecured $470 million facility and unsecured, committed lines of
credit aggregating $185 million that are used to finance seasonal working
capital requirements. At June 30, 1995 and 1994, Consumers had a total of
$309 million and $129 million outstanding under these facilities,
respectively. In July 1995, Consumers signed a new four-year, unsecured
working capital facility in an aggregate amount of $425 million replacing
the $470 million facility which expired by its own terms.
Other
Consumers has an established $500-million trade receivables purchase and
sale program. At June 30, 1995, receivables sold under the agreement
totaled $190 million compared with $205 million at June 30, 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 delivered $24 million of CMS Energy common stock and assumed
$12 million of project financing debt.
CMS NOMECO's existing revolving bank credit line, which converts to term
loans from November 1996 through November 1999, was increased from $110
million at December 31, 1994 to $130 million at June 30, 1995. $82
million of revolving credit debt was outstanding at a weighted average
interest rate of 7.36 percent at June 30, 1995.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.4 percent, are outstanding from a private placement.
On July 6, 1995 CMS NOMECO notified the senior serial note-holders that it
intends to prepay entirely the note balances. The notes will be retired
with available proceeds from the bank credit line.
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. Also in connection with
the acquisition of HYDRA-CO, CMS Generation, is guaranteeing a letter of
credit reimbursement obligation of $48 million.
22
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, designated Class G Common Stock which reflects 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 continues 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.
Prior to the approval of the amendment to the Articles of Incorporation on
March 21, 1995, CMS Energy was permitted 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. The filing of the Restated Articles of
Incorporation with the Michigan Department of Commerce increased the
number of authorized shares of capital stock 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.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing Common Stock of CMS Energy (including Class G Common Stock),
Preferred Stock of CMS Energy or a special purpose affiliate of
CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually
evaluates the capital markets and may offer such securities from time to
time, at terms to be determined at or prior to the time of the sale. In
July 1995, under such shelf registration statement, CMS Energy received
net proceeds of approximately $116 million from the issuance of 7 million
shares of Class G Common Stock at a price to the public of $17.75 per
share representing 21.875% of the common stockholder's equity value
attributed to the Consumers Gas Group. All of the proceeds will be
invested in the businesses and used for general corporate purposes of
CMS Energy. Initially, such proceeds were used to repay a portion of
CMS Energy's indebtedness under the Credit Facility, none of which is
attributable to the Consumers Gas Group. On August 9, 1995 CMS Energy
received notification that underwriters intend to exercise their option
and purchase an additional 520,000 shares of CMS Energy Class G Common
Stock at a price to the public of $17.75 per share for the purpose of
covering overallotments related to the July 1995 initial public offering.
This issuance of the additional shares will increase the common
stockholder's equity value attributed to the Consumers Gas Group
represented by the outstanding shares of Class G Common Stock to 23.5%.
Consolidated earnings for the quarters ended June 30, 1995 and 1994
Consolidated net income totaled $33 million or $.37 per share for the
second quarter of 1995, compared to $30 million or $.35 per share for the
second quarter of 1994. The increase in net income reflects the growth of
the non-utility businesses, an increase in electric utility sales and gas
utility deliveries, additional earnings reflecting improved operating
results, and increased revenue from the May 1994 electric rate increase.
This increase was offset, however, by the 1994 recognition of DSM
incentive revenue, and higher depreciation and general tax expenses during
1995.
Consolidated earnings for the 6 months ended June 30, 1995 and 1994
Consolidated net income totaled $119 million or $1.36 per share for the
six months ended June 30, 1995, compared to $108 million or $1.27 per
share for the six months ended June 30, 1994. The increase in net income
reflects increased electric utility sales, increased revenue from the May
1994 electric rate increase, reversal of a loss previously recorded for a
gas contract contingency (see Note 3), and additional earnings reflecting
growth and improved operating results of the nonutility businesses.
Partially offsetting these increases were a decrease in gas utility
deliveries, higher operating costs and the recognition of DSM incentive
revenue in the second quarter of 1994.
Consolidated earnings for the 12 months ended June 30, 1995 and 1994
Consolidated net income totaled $190 million or $2.19 per share for the 12
months ended June 30, 1995, compared to $167 million or $1.99 per share
for the 12 months ended June 30, 1994. The increase in net income
reflects the growth of the non-utility businesses, the impact of the May
1994 electric rate increase, higher electric utility kWh sales and the
reversal of losses previously recorded for gas contingencies, partially
offset by lower gas utility deliveries, the recognition of DSM incentive
revenue in the 1994 period, and higher 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 primarily
reflect 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 six months of 1995 primarily reflects Consumers' increased electric
sales and increased electric rates which were approved by the MPSC in mid-
1994, offset by 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 investment in
unconsolidated subsidiaries totaled $485 million for the first six months
of 1995 compared with $306 million for the first six months 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
second quarter of 1995 for its utility and non-utility businesses were
$204 million and $281 million, respectively.
In January 1995, CMS Energy paid $18 million in cash dividends to
CMS Energy shareholders. An $19 million dividend was also paid to
CMS Energy shareholders in May 1995. In the second quarter of 1995,
Consumers declared and paid a $70 million common dividend to CMS Energy
from its first quarter earnings.
In July 1995 CMS Energy issued 7 million shares of Class G Common Stock.
The net proceeds of $116 million will be invested in the businesses and
used for the general corporate purposes of CMS Energy. Initially, such
proceeds were be used to repay a portion of CMS Energy's indebtedness
under the Credit Facility, which at July 31, 1995 had $174 million
principal amount outstanding with an annual interest rate of 7.7 percent.
In July 1995, the Board of Directors declared a quarterly dividend of 28
cents per share ($1.12 cents per share on an annual basis) on Class G
Common Stock and a quarterly dividend of 24 cents per share ($.96 on an
annual basis) on CMS Energy Common Stock.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including new lease commitments, will total approximately
$2.5 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 $330 $297 $250
Gas utility 129 119 101
Oil and gas exploration and production (a) 188 120 135
Independent power production (b) 222 151 85
Natural gas pipeline, storage and marketing 185 67 73
---- ---- ----
$1,054 $754 $644
====== ==== ====
(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.
At June 30, 1995, Consumers had several available sources of credit
including unsecured, committed lines of credit totaling $185 million and a
$470 million unsecured working capital facility. In July 1995, Consumers
signed a new four-year, unsecured working capital facility in an aggregate
amount of $425 million replacing the $470 million facility, which expired
by its own terms. Consumers also 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.
Consumers is continuing efforts toward its goal of increasing the equity
portion of its capital structure. In the current gas rate case, the MPSC
staff has suggested that Consumers temporarily suspend paying cash
dividends to CMS Energy in lieu of CMS Energy making a direct
equity infusion of cash into Consumers. Accordingly, CMS Energy is
considering using this method to accomplish a planned equity investment
in 1995. Any reduction in cash dividends from Consumers as a
result of this action will be offset by a reduction in the cash outflows
for potential equity infusions from CMS Energy to Consumers.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended June 30, 1995 and
1994: During the second quarter of 1995, electric pretax operating income
decreased $3 million from the 1994 level. This reduction resulted
primarily from the 1994 recognition of DSM incentive revenue and
increases in depreciation and general tax expenses during the 1995 period.
Partially offsetting the net decrease was higher electric kWh sales (see
Electric Sales section), a decrease in other operating expenses, and the
positive impact of the May 1994 electric rate increase.
Electric Pretax Operating Income for the six months ended June 30, 1995
and 1994: Electric pretax operating income for the six months ended June
30, 1995 decreased $4 million from the comparable 1994 period. This
decrease primarily reflects the 1994 recognition of DSM incentive revenue,
and higher operating expenses, depreciation and general taxes during 1995.
The decrease was partially offset by increased electric kWh sales (see
Electric Sales section) and the impact of the May 1994 electric rate
increase, which included the recovery of higher postretirement benefit
costs.
Electric Pretax Operating Income for the 12 months ended June 30, 1995 and
1994: The $4 million improvement in electric pretax operating income for
the 12 months ended June 30, 1995 compared with the corresponding 1994
level is primarily the result of the impact of the May 1994 electric rate
increase, which included the recovery of the higher postretirement benefit
costs, and increased electric kWh sales (see Electric Sales section),
which contributed $38 million and $17 million, respectively. These
increases were partially offset by higher operating costs and
depreciation, along with the impact of the 1994 recognition of DSM
incentive revenue.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Sales $ 8 $ 9 $17
Rate increases and
other regulatory issues (6) 5 24
O&M, general taxes
and depreciation (a) (5) (18) (37)
------- ------- ------
Total change $(3) $(4) $ 4
======= ======= ======
(a) Includes $11 million and $29 million of increased postretirement
benefit costs for the six month and 12 month comparative periods,
respectively.
Electric Sales: Electric sales during the second quarter of 1995 totaled
8.5 billion kWh, a 2.6 percent increase from 1994 levels. The increase
occurred in all customer classes. Consumers' electric sales have
benefited from improved employment and other economic conditions.
Electric sales during the six months ended June 30, 1995 totaled 17.2
billion kWh, a 2.0 percent increase from 1994 levels. This increase
reflects continued strength in the industrial and commercial sectors,
somewhat offset by weather impacts. During the six months ended 1995
period, commercial and industrial sales increased 3.3 percent and 4.2
percent respectively, while residential sales showed a slight decrease.
Electric sales during the 12 months ended June 30, 1995 totaled 34.8
billion kWh, a 3.4 percent increase from 1994 levels. During the 12
months ended 1995 period, commercial and industrial sales increased 2.7
percent and 5.2 percent respectively, while residential sales showed a
slight decrease from 1994 levels. 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 ended June 30, 1995
totaled $235 million, an $8 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 six month period ended June 30, 1995 totaled $462 million, a $25
million decrease from the corresponding 1994 period. Power costs for the
12 month period ended June 30, 1995 totaled $925 million, a $55 million
decrease from the corresponding 1994 period.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual 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 $46
million for the first six 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 $72 $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 engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a proposed 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 the plan case. Although
recovery of the costs relating to the substitution was 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. Consumers has filed exceptions to the ALJ's
recommendation. 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 further increase its retail electric rates.
As part of this case, in May 1995, the MPSC 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. In
August 1995, the ALJ recommended a final annual rate increase of $46
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. A final
order is expected in late 1995.
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. In
June 1995, Consumers filed a petition for rehearing of this decision with
the MPSC.
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 June 1995, the
MPSC issued an order that authorized Consumers to collect the full $11
million incentive. The MPSC also authorized Consumers to discontinue
future DSM program expenditures and ceased all new program funding. 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 $330 million for 1995, $297
million for 1996 and $250 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur costs at a number of sites. Consumers believes
costs incurred for both investigation and required remedial actions will
be recovered in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position 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 June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers has sought rehearing regarding a number of issues included in
the order. 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 of electric energy, and the utilities would be allowed the
opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations).
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. The
Systematic Assessment of Licensee Performance report issued by the NRC in
June 1995 recognized some improvement in Palisades' performance.
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. In June 1995, the U.S. Supreme Court refused to
hear an appeal of this decision as requested by the Attorney General and
other parties.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict 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 June 30,
1995, Consumers had 70 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.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income for the quarters ended June 30, 1995 and 1994:
During the second quarter of 1995, gas pretax operating income decreased
$1 million from the 1994 level. The decreased pretax operating income
reflects higher operating costs, depreciation and general taxes.
Partially offsetting this decrease was a 12.9 percent increase in gas
deliveries (see Gas Deliveries section).
Gas Pretax Operating Income for the six months ended June 30, 1995 and
1994: The $6 million increase in gas pretax operating income for the six
months ended June 30, 1995 compared with the same 1994 period reflects the
reversal of a loss previously recorded for a gas contract contingency (see
Note 3), partially offset by lower gas deliveries (see Gas Deliveries
section), higher gas operating costs and depreciation.
Gas Pretax Operating Income for the 12 months ended June 30, 1995 and
1994: The $13 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries (see Gas Deliveries
section) and higher operating costs, depreciation, and general taxes,
partially offset by the reversal of losses previously recorded for gas
contingencies. Increased operating costs included $14 million of
postretirement benefit costs (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 June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Deliveries $ 5 $(14) $(31)
Recovery of gas costs and
other regulatory issues - 26 35
O&M, general taxes
and depreciation (6) (6) (17)
----- ----- -----
Total change $ (1) $ 6 $(13)
===== ===== =====
Gas Deliveries: During the second quarter of 1995, gas sales and gas
transported, excluding transport to the MCV and off-system transportation,
totaled 55.2 bcf, a 12.9 percent increase from the corresponding 1994
level. Gas sales and gas transported increased 4.0 bcf and 2.3 bcf,
respectively, with the majority of the change attributable to increased
usage. For the six months ended June 30, 1995, gas sales and gas
transported for all customer classes totaled 223.8 bcf, a 9.7 percent
decrease from the corresponding 1994 level. Gas sales decreased 9.7 bcf
while transport deliveries increased 2.5 bcf. The decrease in firm sales
occurred primarily due to warmer temperatures. For the 12 months ended
June 30, 1995, gas sales and gas transported for all customer classes
totaled 385.1 bcf, a 9.4 percent decrease from the corresponding 1994
level, reflecting record cold winter weather during the 12 months ended
June 30, 1994 and a return to more normal weather during the 12 months
ended June 30, 1995.
Cost of Gas Sold: The utility cost of gas sold for the second quarter of
1995 increased $9 million from the 1994 level. The utility cost of gas
sold for the six months ended June 30, 1995 decreased $44 million from the
1994 level as a result of reduced deliveries and the reversal of gas
contract loss contingency. The utility cost of gas sold for the 12 months
ended June 30, 1995 decreased $70 million from the corresponding 1994
level which was also the result of reduced gas deliveries and the gas
contract loss contingency reversal.
Consumers Gas Group 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. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. 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 believes the
producers' position is without merit and intends to vigorously oppose any
claims they may raise but 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 $129 million for 1995, $119 million for 1996 and $101
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: The Michigan Natural Resources and
Environmental Protection Act (formerly the Environmental Response Act) was
substantially amended in June 1995. The Michigan law bears similarities
to the federal Superfund law. The purpose of the 1995 amendments was
generally to encourage development of industrial sites and to remove
liability from some parties who were not responsible for activities
causing contamination. 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
June 30, 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. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. 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.
Consumers Gas Group 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.
Low Income Energy Assistance Program funding currently provides
approximately $71 million in heating assistance to approximately 400,000
Michigan households, with approximately 18 percent of funds going to
Consumers' customers. However, recent actions by the U. S. House of
Representatives Committee on Appropriations has put restoration of funding
for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to
maintain this funding.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended June 30, 1995 increased $5 million from the same period in 1994,
reflecting higher oil and gas sales volumes, partially offset by lower
average market prices for oil and gas. Pretax operating income for the
six and twelve months ended June 30, 1995 increased $18 million and $27
million, respectively over the comparable 1994 periods 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 added net production of 5,500
barrels per day in 1995 and proven reserves of approximately 20 million
barrels of oil.
In June 1995, CMS NOMECO signed a letter of intent to purchase Terra
Energy Ltd. for $54 million plus working capital. The acquisition will
add about 81 billion cubic feet of proven gas reserves. A merger
agreement is expected to be signed and closing to occur in the third
quarter of 1995.
Other capital expenditures for the six months ended June 30, 1995
approximated $32 million, primarily for development of existing oil and
gas reserves. These expenditures were made both domestically ($11
million) and internationally ($21 million), including $10 million in
Ecuador development drilling and facilities construction.
CMS Energy currently plans to invest $443 million, including the Walter
and Terra acquisitions, from 1995 to 1997 relating to its oil and gas
exploration and production operations. These capital expenditures will be
concentrated in North and South America and Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three months
ended June 30, 1995 increased $10 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 $21
million and $36 million for the six and twelve months ended June 30, 1995,
respectively as compared to the comparable 1994 periods, 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
one year $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 the transfer of possession and the right to operate
two 330 MW generating units which are nearing completion, and the
construction and operation of another two 330 MW units. The output of the
plants will be sold to the Moroccan national utility. The total cost of
the initial concession to operate the facilities and construct the two
additional units will be in excess of $1.4 billion.
In April 1995, CMS Generation signed a letter of intent to divest its
interest in the Argentine thermal electric generation plant, Centrales
Termicas San Nicolas. The divestiture was completed early in the third
quarter 1995, under which CMS Generation received securities, which
contain an option to put, exercisable in fifteen years and was repaid for
funds CMS Generation previously loaned to the plant.
CMS Energy currently plans to invest $458 million (including the HYDRA-CO
acquisition) relating to its independent power production operations over
the next three years. CMS Generation will pursue acquisitions and
development of electric generating plants in the United States, Latin
America, southern Asia and the Pacific Rim region.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three and six
months ended June 30, 1995 remained unchanged and for the twelve months
ended June 30, 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 its existing 190 MMcf/d treating complex to
accommodate new Antrim production. An additional $9 million facility 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 July 1995, CMS Gas Transmission was the successful bidder in acquiring
a 25 percent ownership interest in TGN pipeline, for $142 million. TGN,
which has current annual revenues of about $150 million, owns and operates
2600 miles of pipelines that provide natural gas transmission service to
the northern and central parts of Argentina, with almost one billion cubic
feet per day of existing pipeline capacity.
Also in July 1995, CMS Gas Transmission received final 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.
Construction, which will commence in August 1995, is expected to be
completed by November 1995. The pipeline will provide significantly
increased gas supply flexibilities in the U.S. and Canada.
CMS Gas Transmission, through its 50 percent ownership in the SGP
Partnership, currently has three helium recovery plants under construction
and scheduled to be in service by year-end. The total estimated capital
cost for these three plants, located in Colorado and Kansas, is $12.5
million.
CMS Energy currently plans to invest $325 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 ended June 30, 1995
decreased $11 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.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) a repeal of PUHCA, without condition; or
3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff
stated that PUHCA was restrictive in many regards and may prevent
companies from responding effectively to the changes now occurring in the
utility industry. The SEC staff supported option 1 because it would
achieve the benefits of unconditional repeal, while preserving the ability
of states to protect consumers.
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 does not expect the application of this
statement to have a material impact on its financial position or results
of operations.
36
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS
Energy Corporation) and subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of income, common stockholder's equity and
cash flows for the three-month, six-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1994, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended (not presented herein), and, in our report dated January
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,
August 9, 1995.
37
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1995 1994 1995 1994 1995 1994
In Millions
OPERATING REVENUE
Electric $ 543 $ 549 $1,083 $1,094 $2,179 $2,193
Gas 197 183 679 711 1,119 1,184
Other 10 2 21 3 33 6
---------------------------------------------------------
Total operating revenue 750 734 1,783 1,808 3,331 3,383
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 67 70 134 150 290 302
Purchased power - related parties 121 118 245 240 487 486
Purchased and interchange power 47 55 83 97 148 192
Cost of gas sold 102 93 383 427 617 687
Other 139 137 276 262 574 533
---------------------------------------------------------
Total operation 476 473 1,121 1,176 2,116 2,200
Maintenance 45 48 89 91 187 196
Depreciation, depletion and amortization 79 74 181 169 347 324
General taxes 41 34 95 94 179 179
---------------------------------------------------------
Total operating expenses 641 629 1,486 1,530 2,829 2,899
---------------------------------------------------------
PRETAX OPERATING INCOME
Electric 83 86 170 174 330 326
Gas 17 18 108 102 142 155
Other 9 1 19 2 30 3
---------------------------------------------------------
Total pretax operating income 109 105 297 278 502 484
INCOME TAXES 28 26 85 79 125 126
---------------------------------------------------------
NET OPERATING INCOME 81 79 212 199 377 358
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
MCV Bond income - - - - - 16
Dividends from affiliates 4 4 8 8 17 16
Accretion income 3 4 6 7 12 13
Accretion expense (Note 2) (8) (9) (16) (18) (32) (36)
Other income taxes, net 3 3 6 7 11 15
Other, net 1 - 3 - 9 4
---------------------------------------------------------
Total other income 3 2 7 4 17 28
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 36 33 71 67 139 145
Other interest 4 2 9 5 21 17
Capitalized interest (1) - (1) - (1) (1)
---------------------------------------------------------
Net interest charges 39 35 79 72 159 161
---------------------------------------------------------
Net Income 45 46 140 131 235 225
Preferred Stock Dividends 7 7 14 10 28 15
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 38 $ 39 $ 126 $ 121 $ 207 $ 210
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1995 1994 1995 1994
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 140 $ 131 $ 235 $ 225
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $24, $24,
$49 and $48, respectively) 181 169 347 324
Capital lease and other amortization 19 12 42 26
Deferred income taxes and investment tax credit 42 46 52 54
Accretion expense 16 18 32 36
Accretion income - abandoned Midland project (6) (7) (12) (13)
MCV power purchases - settlement (Note 2) (70) (45) (112) (82)
Other (16) (2) (27) (3)
Changes in other assets and liabilities 38 48 15 (120)
------ ------ ------ ------
Net cash provided by operating activities 344 370 572 447
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (175) (194) (427) (451)
Investments in nuclear decommissioning trust funds (24) (24) (49) (48)
Cost to retire property, net (19) (14) (43) (33)
Deferred demand-side management costs (4) (4) (9) (28)
Proceeds from sale of property 1 1 12 2
Other (5) 2 (5) 1
Proceeds from Midland-related assets - - - 322
Sale of subsidiary - - - (14)
------ ------ ------ ------
Net cash used in investing activities (226) (233) (521) (249)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (70) (82) (164) (158)
Increase (decrease) in notes payable, net (30) (130) 180 (112)
Payment of capital lease obligations (18) (11) (41) (23)
Payment of preferred stock dividends (14) (6) (28) (11)
Retirement of bonds and other long-term debt (1) (107) (26) (702)
Repayment of bank loans - (94) (375) (125)
Proceeds from preferred stock - 193 - 193
Contribution from stockholder - 100 - 100
Proceeds from bonds and bank loans - - 400 586
------ ------ ------ ------
Net cash used in financing activities (133) (137) (54) (252)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (15) - (3) (54)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 13 13 67
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 10 $ 13 $ 10 $ 13
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39
Consumers Power Company
Consolidated Balance Sheets
June 30 June 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $5,899 $5,771 $5,598
Gas 2,097 2,064 1,988
Other 30 30 26
-----------------------------------
8,026 7,865 7,612
Less accumulated depreciation, depletion and amortization 3,968 3,794 3,687
-----------------------------------
4,058 4,071 3,925
Construction work-in-progress 263 241 265
-----------------------------------
4,321 4,312 4,190
-----------------------------------
INVESTMENTS
Stock of affiliates 321 317 310
First Midland Limited Partnership (Note 2) 221 218 215
Midland Cogeneration Venture Limited Partnership (Note 2) 90 74 67
Other 8 8 7
-----------------------------------
640 617 599
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 10 25 13
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 83 100 121
Accounts receivable - related parties 49 12 67
Inventories at average cost
Gas in underground storage 155 235 160
Materials and supplies 75 75 78
Generating plant fuel stock 34 37 26
Trunkline settlement 30 30 30
Deferred income taxes 28 35 20
Postretirement benefits 25 25 25
Prepayments and other 72 143 82
-----------------------------------
561 717 622
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 469 478 493
Nuclear decommissioning trust funds 262 213 191
Abandoned Midland Project (Note 3) 139 147 155
Trunkline settlement 40 55 70
Other 275 270 273
-----------------------------------
1,185 1,163 1,182
-----------------------------------
TOTAL ASSETS $6,707 $6,809 $6,593
===================================
40
June 30 June 30
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 491 491 491
Revaluation capital 19 15 12
Retained earnings since December 31, 1992 136 80 93
-----------------------------------
1,487 1,427 1,437
Preferred stock 356 356 356
Long-term debt 1,955 1,953 1,746
Non-current portion of capital leases 109 108 116
-----------------------------------
3,907 3,844 3,655
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 49 45 249
Notes payable 309 339 129
Accrued taxes 130 173 116
Accounts payable 158 165 153
MCV power purchases - settlement (Note 2) 95 95 82
Accounts payable - related parties 53 51 42
Accrued interest 34 37 35
Accrued refunds 30 25 41
Other 156 187 180
-----------------------------------
1,014 1,117 1,027
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 594 568 536
Postretirement benefits 534 532 543
MCV power purchases - settlement (Note 2) 269 324 363
Deferred investment tax credit 174 179 184
Trunkline settlement 40 55 70
Regulatory liabilities for income taxes, net 33 16 16
Other (Note 4) 142 174 199
-----------------------------------
1,786 1,848 1,911
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,707 $6,809 $6,593
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
41
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1995 1994 1995 1994 1995 1994
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 391 491 391 491 391
Stockholder's contribution - 100 - 100 - 100
---------------------------------------------------------
At end of period 491 491 491 491 491 491
---------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 17 15 15 - 12 -
Implementation of SFAS 115 - January 1, 1994 - - - 20 - 20
Change in unrealized loss, net of tax 2 (3) 4 (8) 7 (8)
---------------------------------------------------------
At end of period 19 12 19 12 19 12
---------------------------------------------------------
RETAINED EARNINGS
At beginning of period 168 120 80 54 93 41
Net income 45 46 140 131 235 225
Common stock dividends declared (70) (66) (70) (82) (164) (158)
Preferred stock dividends declared (7) (7) (14) (10) (28) (15)
---------------------------------------------------------
At end of period 136 93 136 93 136 93
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,487 $1,437 $1,487 $1,437 $1,487 $1,437
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
42
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 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 June 30, 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' annual 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 $46 million
for the six months ended June 30, 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 $72 $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 June 30, 1995 and December 31, 1994, the after-tax present value of the
Settlement Order liability totaled $236 million and $272 million,
respectively. The reduction in the liability reflects after-tax cash
underrecoveries of $46 million, partially offset by after-tax accretion
expense of $10 million. The undiscounted after-tax amount associated with
the liability totaled $638 million at June 30, 1995.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
1995, Consumers paid $15 million to terminate a power purchase agreement
with a proposed 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 the plan case. Although recovery of the
costs relating to the substitution was 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.
Consumers has filed exceptions to the ALJ's recommendation. If the MPSC
adopts the ALJ's recommendation, the regulatory asset may be required to
be reduced.
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 confirmed the
recovery of certain MCV-related costs 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.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC allocated a portion of the costs related to
purchases from the MCV to non-jurisdictional customers, reducing the
amount allowed for recovery from PSCR customers. Consumers believes this
is inconsistent with the terms of the Settlement Order and has appealed
the February 23 order on this issue.
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 further 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
subsidization of residential rates in a two-step adjustment, eliminate all
DSM expenditures after April 1995 (see Electric DSM) 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, the 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. 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 has filed a petition for rehearing of this order with the
MPSC.
In June 1995, briefs and reply briefs were filed by all parties in this
case. Consumers presented one of its previously filed positions, which
assumes retaining certain customers subject to competition and serving
these customers from jurisdictional sources, as well as from the
uncommitted MCV capacity. If this position is adopted, Consumers' retail
electric base rates would increase by $93 million, with a corresponding
increase in PSCR revenues of $52 million. The MPSC staff recommended a
$43 million increase in Consumers' base rates. This position reflects a
different sales forecast than Consumers', as well as a 12- percent return
on equity and a lower equity ratio than that included in Consumers'
proposed capital structure. The MPSC staff also recommends the
elimination of all rate subsidization by primary customers, which include
industrial and large commercial customers. In August 1995, the ALJ issued
a proposal for decision in this case that recommends a $46 million rate
increase. The ALJ generally adopted the MPSC staff's position with
adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ
also recommended the elimination of rate subsidization.
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. 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. 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 June 30, 1995. During
1994, Consumers recognized $11 million in incentive revenue related to an
earlier DSM program approved by the MPSC. In June 1995, the MPSC
authorized Consumers to collect the $11 million incentive for past program
performance. As part of the same order, the MPSC authorized Consumers to
discontinue future DSM program expenditures and ceased all new program
funding.
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. In June 1995, the MPSC staff filed its position in
this case, recommending an $11 million rate decrease. The MPSC staff's
recommendation included a lower rate base, a lower return on common
equity, a revised capital structure and a lower operating cost forecast
than Consumers had projected. 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) of the previously accrued loss, which represented the portion in
excess of the disallowed amount. In June 1995, the Court of Appeals
affirmed the MPSC's prior decision. The producers have filed a motion for
rehearing with the Court of Appeals.
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 filed 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 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 believes the producers' position is
without merit and intends to vigorously oppose any claims they may raise
but 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. 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 for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and such liability is expected to be less than $9
million. At June 30, 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur investigation and remedial action costs at a
number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or
no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites 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, since there is limited
knowledge of manufactured gas plant contamination at these sites at this
time. 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 June 30, 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 similar Michigan utilities relative to
investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. 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
new lease commitments, of $459 million for 1995, $416 million for 1996 and
$351 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 June 30,
1995, Consumers had 70 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. In June 1995, the U.S. Supreme Court
refused to hear an appeal of this decision as requested by the Attorney
General and other parties. As of June 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 confirmed 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 Consumers stores low-level waste
at its nuclear plant sites. Recently, a site in South Carolina announced
that it would be available for accepting low-level waste. Consumers plans
to begin shipping its low-level waste to this site in the third quarter of
1995.
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 of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict 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 June 30 were:
In Millions
Six Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $ 77 $ 73 $151 $159
Income taxes paid
(net of refunds) 46 55 25 53
Non-cash transactions
Nuclear fuel placed
under capital lease $ 23 $ 3 $ 42 $ 8
Other assets placed
under capital leases 2 7 10 16
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. At June 30, 1995, Consumers
had an unsecured $470 million facility and unsecured, committed lines of
credit aggregating $185 million that are used to finance seasonal working
capital requirements. At June 30, 1995 and 1994, Consumers had a total of
$309 million and $129 million outstanding under these facilities,
respectively. In July 1995, Consumers signed a new four-year, unsecured
working capital facility in an aggregate amount of $425 million replacing
the $470 million facility which expired by its own terms.
Consumers has an established $500-million trade receivables purchase and
sale program. At June 30, 1995, receivables sold under the agreement
totaled $190 million compared with $205 million at June 30, 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.
50
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 June 30, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $38
million for the second quarter of 1995 and $39 million for the second
quarter of 1994. This small net income decrease reflects the 1994
recognition of DSM incentive revenue, and higher depreciation and general
tax expenses during 1995. Partially offsetting this decrease, however,
were higher electric sales and gas deliveries, improved operating results
from Consumers' interest in the MCV Facility and increased revenue from
the May 1994 electric rate increase, which benefited the entire 1995
quarter.
Consolidated earnings for the six months ended June 30, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $126
million for the six months ended June 30, 1995, compared with $121 million
for the six months ended June 30, 1994. The increase in net income
reflects increased electric sales, increased revenue from the May 1994
electric rate increase, reversal of a loss previously recorded for a gas
contract contingency (see Note 3), and improved operating results from
Consumers' interest in the MCV Facility. Partially offsetting these
increases were a decrease in gas deliveries, higher operating costs and
the recognition of DSM incentive revenue in the second quarter of 1994.
Consolidated earnings for the 12 months ended June 30, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $207
million for the 12 months ended June 30, 1995, compared with $210 million
for the 12 months ended June 30, 1994. The decrease in net income
reflects lower gas deliveries, the recognition of DSM incentive revenue in
the 1994 period, and higher operating costs and depreciation, partially
offset by the impact of the May 1994 electric rate increase, higher
electric kWh sales and the reversal of losses previously recorded for gas
contingencies.
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 six
months of 1995 reflects increased electric sales and increased electric
rates which were approved by the MPSC in mid-1994, offset by 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 $204
million for the first six months of 1995 compared with $208 million for
the first six months of 1994. These amounts primarily represent capital
investments in Consumers' electric and gas utility business units.
In the second quarter of 1995, Consumers declared and paid a $70 million
common dividend from its first quarter earnings.
Financing and Investing Outlook: Consumers estimates that capital
expenditures, including 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 $418 $373 $343
Nuclear fuel lease 28 39 4
Capital leases other than nuclear fuel 10 2 2
Michigan Gas Storage 3 2 2
---- ---- ----
$459 $416 $351
==== ==== ====
At June 30, 1995, Consumers had several available sources of credit
including unsecured, committed lines of credit totaling $185 million and a
$470 million unsecured working capital facility. In July 1995, Consumers
signed a new four-year, unsecured working capital facility in an aggregate
amount of $425 million replacing the $470 million facility, which expired
by its own terms. Consumers also 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 June 30, 1995, receivables
sold under the agreement totaled $190 million.
Consumers is continuing efforts toward its goal of increasing the equity
portion of its capital structure. In the current gas rate case, the MPSC
staff has suggested that Consumers temporarily suspend paying dividends to
CMS Energy in lieu of CMS Energy making a direct equity infusion of cash into
Consumers. Accordingly, CMS Energy is considering using this method to
accomplish a planned equity investment in 1995. Any increases in Consumers'
retained earnings as a result of this action will be offset by a reduction in
potential equity infusions from CMS Energy.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended June 30, 1995 and
1994: During the second quarter of 1995, electric pretax operating income
decreased $3 million from the 1994 level. This reduction resulted
primarily from the 1994 recognition of DSM incentive revenue and
increases in depreciation and general tax expenses during the 1995 period.
Partially offsetting the net decrease was higher electric kWh sales (see
Electric Sales section), a decrease in other operating expenses, and the
positive impact of the May 1994 electric rate increase.
Electric Pretax Operating Income for the six months ended June 30, 1995
and 1994: Electric pretax operating income for the six months ended June
30, 1995 decreased $4 million from the comparable 1994 period. This
decrease primarily reflects the 1994 recognition of DSM incentive revenue,
and higher operating expenses, depreciation and general taxes during 1995.
The decrease was partially offset by increased electric kWh sales (see
Electric Sales section) and the impact of the May 1994 electric rate
increase, which included the recovery of higher postretirement benefit
costs.
Electric Pretax Operating Income for the 12 months ended June 30, 1995 and
1994: The $4 million improvement in electric pretax operating income for
the 12 months ended June 30, 1995 compared with the corresponding 1994
level is primarily the result of the impact of the May 1994 electric rate
increase, which included the recovery of the higher postretirement benefit
costs, and increased electric kWh sales (see Electric Sales section),
which contributed $38 million and $17 million, respectively. These
increases were partially offset by higher operating costs and
depreciation, along with the impact of the 1994 recognition of DSM
incentive revenue.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Sales $ 8 $ 9 $17
Rate increases and
other regulatory issues (6) 5 24
O&M, general taxes
and depreciation (a) (5) (18) (37)
------- ------- ------
Total change $(3) $(4) $ 4
======= ======= ======
(a) Includes $11 million and $29 million of increased postretirement
benefit costs for the six month and 12 month comparative periods,
respectively.
Electric Sales: Electric sales during the second quarter of 1995 totaled
8.5 billion kWh, a 2.6 percent increase from 1994 levels. The increase
occurred in all customer classes. Consumers' electric sales have
benefited from improved employment and other economic conditions.
Electric sales during the six months ended June 30, 1995 totaled 17.2
billion kWh, a 2.0 percent increase from 1994 levels. This increase
reflects continued strength in the industrial and commercial sectors,
somewhat offset by weather impacts. During the six months ended 1995
period, commercial and industrial sales increased 3.3 percent and 4.2
percent respectively, while residential sales showed a slight decrease.
Electric sales during the 12 months ended June 30, 1995 totaled 34.8
billion kWh, a 3.4 percent increase from 1994 levels. During the 12
months ended 1995 period, commercial and industrial sales increased 2.7
percent and 5.2 percent respectively, while residential sales showed a
slight decrease from 1994 levels. 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 ended June 30, 1995
totaled $235 million, an $8 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 six month period ended June 30, 1995 totaled $462 million, a $25
million decrease from the corresponding 1994 period. Power costs for the
12 month period ended June 30, 1995 totaled $925 million, a $55 million
decrease from the corresponding 1994 period.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual 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 $46
million for the first six 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 $72 $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 engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a proposed 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 the plan case. Although
recovery of the costs relating to the substitution was 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. Consumers has filed exceptions to the ALJ's
recommendation. 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 further increase its retail electric rates.
As part of this case, in May 1995, the MPSC 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. In
August 1995, the ALJ recommended a final annual rate increase of $46
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. A final
order is expected in late 1995.
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. In
June 1995, Consumers filed a petition for rehearing of this decision with
the MPSC.
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 June 1995, the
MPSC issued an order that authorized Consumers to collect the full $11
million incentive. The MPSC also authorized Consumers to discontinue
future DSM program expenditures and ceased all new program funding. 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 $330 million for 1995, $297 million for
1996 and $250 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur costs at a number of sites. Consumers believes
costs incurred for both investigation and required remedial actions will
be recovered in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position 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 June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers has sought rehearing regarding a number of issues included in
the order. 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 of electric energy, and the utilities would be allowed the
opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations).
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. The
Systematic Assessment of Licensee Performance report issued by the NRC in
June 1995 recognized some improvement in Palisades' performance.
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. In June 1995, the U.S. Supreme Court refused to
hear an appeal of this decision as requested by the Attorney General and
other parties.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict 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 June 30,
1995, Consumers had 70 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 June 30, 1995 and 1994:
During the second quarter of 1995, gas pretax operating income decreased
$1 million from the 1994 level. The decreased pretax operating income
reflects higher operating costs, depreciation and general taxes.
Partially offsetting this decrease was a 12.9 percent increase in gas
deliveries (see Gas Deliveries section).
Gas Pretax Operating Income for the six months ended June 30, 1995 and
1994: The $6 million increase in gas pretax operating income for the six
months ended June 30, 1995 compared with the same 1994 period reflects the
reversal of a loss previously recorded for a gas contract contingency (see
Note 3), partially offset by lower gas deliveries (see Gas Deliveries
section), higher gas operating costs and depreciation.
Gas Pretax Operating Income for the 12 months ended June 30, 1995 and
1994: The $13 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries (see Gas Deliveries
section) and higher operating costs, depreciation, and general taxes,
partially offset by the reversal of losses previously recorded for gas
contingencies. Increased operating costs included $14 million of
postretirement benefit costs (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 June 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Six months ended 12 months ended
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Deliveries $ 5 $(14) $(31)
Recovery of gas costs and
other regulatory issues - 26 35
O&M, general taxes
and depreciation (6) (6) (17)
----- ----- -----
Total change $ (1) $ 6 $(13)
===== ===== =====
Gas Deliveries: During the second quarter of 1995, gas sales and gas
transported, excluding transport to the MCV and off-system transportation,
totaled 55.2 bcf, a 12.9 percent increase from the corresponding 1994
level. Gas sales and gas transported increased 4.0 bcf and 2.3 bcf,
respectively, with the majority of the change attributable to increased
usage. For the six months ended June 30, 1995, gas sales and gas
transported for all customer classes totaled 223.8 bcf, a 9.7 percent
decrease from the corresponding 1994 level. Gas sales decreased 9.7 bcf
while transport deliveries increased 2.5 bcf. The decrease in firm sales
occurred primarily due to warmer temperatures. For the 12 months ended
June 30, 1995, gas sales and gas transported for all customer classes
totaled 385.1 bcf, a 9.4 percent decrease from the corresponding 1994
level, reflecting record cold winter weather during the 12 months ended
June 30, 1994 and a return to more normal weather during the 12 months
ended June 30, 1995.
Cost of Gas Sold: The cost of gas sold for the second quarter of 1995
increased $9 million from the 1994 level. The cost of gas sold for the
six months ended June 30, 1995 decreased $44 million from the 1994 level
as a result of reduced deliveries and the reversal of gas contract loss
contingency. The cost of gas sold for the 12 months ended June 30, 1995
decreased $70 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. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. 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 believes the
producers' position is without merit and intends to vigorously oppose any
claims they may raise but cannot predict the outcome of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$129 million for 1995, $119 million for 1996 and $101 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: The Michigan Natural Resources and
Environmental Protection Act (formerly the Environmental Response Act) was
substantially amended in June 1995. The Michigan law bears similarities
to the federal Superfund law. The purpose of the 1995 amendments was
generally to encourage development of industrial sites and to remove
liability from some parties who were not responsible for activities
causing contamination. 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
June 30, 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. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. 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.
Low Income Energy Assistance Program funding currently provides
approximately $71 million in heating assistance to approximately 400,000
Michigan households, with approximately 18 percent of funds going to
Consumers' customers. However, recent actions by the U. S. House of
Representatives Committee on Appropriations has put restoration of funding
for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to
maintain this funding.
Other
Other Income: Other income for the 12 months ending June 30, 1995
decreased $11 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.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) a repeal of PUHCA, without condition; or
3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff
stated that PUHCA was restrictive in many regards and may prevent
companies from responding effectively to the changes now occurring in the
utility industry. The SEC staff supported option 1 because it would
achieve the benefits of unconditional repeal, while preserving the ability
of states to protect consumers.
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 does not expect the application of this
statement to have a material impact on its financial position or results
of operations.
60
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
for the year ended December 31, 1994 and Forms 10-Q for the quarter ended
March 31, 1995. 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 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. Upon appeal by several parties,
including the Attorney General, the Court of Appeals affirmed the MPSC
determinations in Step 3A in an order issued in April 1995. In May 1995,
ABATE filed an application for leave to appeal this decision with the
Michigan Supreme Court.
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.
Briefs and reply briefs have been filed in this case. Consumers' position
on brief assumed retaining certain customers subject to competition and
serving those customers from jurisdictional sources as well as from the
uncommitted MCV capacity. Consumers' position, if adopted, would increase
Consumers' retail electric base rates by $93 million. In its brief, the
MPSC staff recommended a rate increase in the annual amount of $43
million. This recommendation reflects a different sales forecast than
Consumers, an authorized return on equity of 12% (versus Consumers'
requested 13%) and a lower equity ratio than that included in Consumers'
proposed capital structure. In August 1995, the ALJ issued a proposal for
decision in this case recommending the MPSC authorize a $46 million rate
increase. The ALJ generally adopted the MPSC staff's position with
adjustments to the MPSC staff's sales forecast and equity ratios.
The ALJ also recommended the elimination of cross subsidies among
residential, commercial and industrial rate classes.
As a part of its testimony in this case, the MPSC staff recommended that
the MPSC permit varying levels of cost recovery for some of the MCV
contract capacity above 915 MW. The ALJ struck this testimony on the
grounds that the multiple positions of the staff were confusing. The MPSC
upheld the ALJ's action, stating that the remaining 325 MW of MCV capacity
will be considered only as part of a competitive solicitation. On June 8,
1995, Consumers filed a petition for rehearing with the MPSC of this
ruling.
1994 Gas Rate Case Filing
In June 1995, the MPSC staff filed its position in this case recommending
an $11 million rate decrease. The MPSC staff's recommendation included a
lower rate base, a lower return on common equity, a revised capital
structure and a lower expense sales forecast than Consumers had projected.
Under MPSC rate case scheduling policies, a final order in this case is
expected in early 1996.
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 June 1995, the U.S. Supreme Court denied the opposing
parties' petition for a Writ of Certiorari to seek further review of the
Sixth Circuit decision against their positions As of June 30, 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 June 30, 1995,
Consumers had 70 separate stray voltage cases pending.
MPSC Case No. U-10029 - Intrastate Gas Supply
On February 8, 1993, the MPSC issued an order granting Consumers' request
to lower the price to be paid to one of its intrastate gas suppliers,
North Michigan, under its contract for which North Michigan filed an
appeal with the Court of Appeals. In June 1995, the Court of Appeals
affirmed the MPSC's decision. The producers have filed a motion for
reconsideration with the Court of Appeals. Collateral suits claiming
relief based on a theory of breach of contract, among other things, were
filed by the producers in the Grand Traverse County Circuit Court and in
the Clinton County Circuit Court, which was subsequently transferred to
Jackson County Circuit Court. The Grand Traverse County Circuit Court
suit was dismissed June 12, 1995, and Consumers' motion to dismiss the
Jackson County Circuit Court suit will be argued August 11, 1995.
Request for Approval of a Competitive Tariff for Certain Industrial
Customers
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 additional 325 MW of MCV contract capacity
to serve these customers. In June 1995, Consumers filed a petition for
rehearing of this decision with the MPSC. Hearings are expected to be
completed in August 1995 with briefs filed in September 1995.
MCV - Related Proceedings
On May 5, 1994, the MCV Partnership notified Consumers of its desire to
commence a second arbitration proceeding, this one regarding the
methodology for calculation of the energy charge payable under the PPA.
In August 1995, an arbitrator ruled that Consumers correctly calculated
the energy charges and that the MCV Partnership is not entitled to
recovery of additional amounts.
Retail Wheeling Proceedings
In June 1995, the MPSC issued an order that set rates and charges for
retail delivery service under the experiment. Consumers and ABATE filed a
petition for rehearing regarding a number of issues included in the order.
Detroit Edison has filed a claim of appeal of the MPSC order with the
Court of Appeals.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 26, 1995, the
shareholders ratified the appointment of Arthur Andersen LLP as
independent auditors of CMS Energy and Consumers for the year ended
December 31, 1995. The vote at CMS Energy was 74,357,609 in favor, and
439,478 against, with 504,146 abstaining. The vote at Consumers was
85,193,425 in favor, and 7,665 against, with 20,004 abstaining. At the
same meeting for CMS Energy, the shareholders approved an amendment to the
CMS Energy Performance Incentive Stock Plan to provide that shares awarded
or subject to options may not be more than 3% of the outstanding shares of
each class of common stock of CMS Energy on January 1 of any year less the
number of shares awarded or subject to options granted under the plan
during the previous four years. The vote was 49,949,915 in favor, and
15,649,673 against, with 1,479,234 abstaining.
At the same meeting, shareholders elected all twelve nominees for the
office of director for both CMS Energy and Consumers. The total number of
votes cast at CMS Energy was 75,301,242. The votes for individual
nominees were as follows:
CMS ENERGY CORPORATION
Number of Votes
For Withheld Total
William T. McCormick, Jr. 74,135,763 1,165,479 75,301,242
James J. Duderstadt 74,220,612 1,080,630 75,301,242
Kathleen R. Flaherty 74,195,508 1,105,734 75,301,242
Victor J. Fryling 74,207,069 1,094,173 75,301,242
Earl D. Holton 74,264,967 1,036,275 75,301,242
Lois A. Lund 74,193,451 1,107,791 75,301,242
Frank K. Merlotti 74,250,133 1,051,109 75,301,242
William U. Parfet 74,258,097 1,043,145 75,301,242
Percy A. Pierre 74,243,096 1,058,146 75,301,242
S. Kinnie Smith, Jr. 74,227,510 1,073,732 75,301,242
Kenneth Whipple 74,257,813 1,043,429 75,301,242
John B. Yasinsky 74,256,036 1,045,206 75,301,242
The total number of votes cast at Consumers was 85,221,094. The votes for
individual nominees were as follows:
CONSUMERS POWER COMPANY
Number of Votes
For Withheld Total
William T. McCormick, Jr. 85,193,609 27,485 85,221,094
James J. Duderstadt 85,190,369 30,725 85,221,094
Kathleen R. Flaherty 85,189,806 31,288 85,221,094
Victor J. Fryling 85,195,080 26,014 85,221,094
Earl D. Holton 85,195,260 25,834 85,221,094
Lois A. Lund 85,195,883 28,211 85,221,094
Frank K. Merlotti 85,193,713 27,381 85,221,094
William U. Parfet 85,195,047 26,047 85,221,094
Percy A. Pierre 85,193,028 28,066 85,221,094
S. Kinnie Smith, Jr. 85,195,025 26,069 85,221,094
Kenneth Whipple 85,195,415 25,679 85,221,094
John B. Yasinsky 85,195,245 25,849 85,221,094
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(10) - Consumers: Credit Agreement dated as of July 14, 1995 among
Consumers Power Company, the Banks named therein and the
First National Bank of Chicago, as Administrative Agent.
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) - CMS Energy: Letter of independent public accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
There have been no Current Reports on Form 8-K filed since the filing of
CMS Energy Corporation's and Consumers Power Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: August 11, 1995 By A M Wright
-------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: August 11, 1995 By A M Wright
-------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer