1
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Power Company ("Consumers") and
its wholly-owned subsidiary, Michigan Gas Storage Company) as of June 30,
1995 and 1994, and the related 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 balance sheet of Consumers Gas Group as of December 31,
1994, and the related 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 and 6 to the 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
balance sheet as of December 31, 1994, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
August 9, 1995.
2
Consumers Gas Group
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 $ 197 $ 183 $ 679 $ 711 $1,119 $1,184
----------------------------------------------------------
OPERATING EXPENSES
Operation
Cost of gas sold 102 93 383 427 617 687
Other 46 43 92 87 190 174
----------------------------------------------------------
Total operation 148 136 475 514 807 861
Maintenance 9 10 19 21 37 42
Depreciation, depletion and amortization 14 12 47 43 80 74
General taxes 9 7 30 31 53 52
----------------------------------------------------------
Total operating expenses 180 165 571 609 977 1,029
----------------------------------------------------------
PRETAX OPERATING INCOME 17 18 108 102 142 155
INCOME TAXES 5 4 36 33 45 44
----------------------------------------------------------
NET OPERATING INCOME 12 14 72 69 97 111
----------------------------------------------------------
OTHER INCOME (DEDUCTIONS) 1 (1) - (1) (1) (1)
----------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 7 7 15 14 30 32
Other interest 1 1 2 2 5 6
Capitalized interest - - - - (1) -
Preferred dividends 2 1 3 2 6 3
----------------------------------------------------------
Net fixed charges 10 9 20 18 40 41
----------------------------------------------------------
NET INCOME $ 3 $ 4 $ 52 $ 50 $ 56 $ 69
==========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
Consumers Gas Group
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 $ 52 $ 50 $ 56 $ 69
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 47 43 80 74
Capital lease and other amortization 3 2 5 5
Deferred income taxes and investment tax credit 15 3 16 4
Changes in other assets and liabilities 51 11 57 5
Other - - 1 2
------ ------ ------ ------
Net cash provided by operating activities 168 109 215 159
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (47) (48) (128) (146)
Other (5) (2) (11) (5)
------ ------ ------ ------
Net cash used in investing activities (52) (50) (139) (151)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable, net (72) (42) (14) (13)
Payment of common stock dividends (40) (34) (53) (54)
Retirement of bonds and other long-term debt (2) (23) (8) (137)
Payment of capital lease obligations (2) (2) (5) (5)
Repayment of bank loans - (21) (85) (21)
Proceeds from bank loans - - 88 2
Proceeds from preferred stock - 42 - 42
Contribution from stockholder - 22 - 22
Proceeds from bonds and other long-term debt - - - 158
------ ------ ------ ------
Net cash used in financing activities (116) (58) (77) (6)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS - 1 (1) 2
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 4 5 3
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 4 $ 5 $ 4 $ 5
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
Consumers Gas Group
Balance Sheets
June 30 June 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Plant $2,097 $2,064 $1,988
Less accumulated depreciation, depletion and amortization 1,156 1,117 1,098
-----------------------------------
941 947 890
Construction work-in-progress 56 47 49
-----------------------------------
997 994 939
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 4 4 5
Accounts receivable and accrued revenue, less
allowances of $2, $2 and $2, respectively (Note 6) 66 51 162
Inventories at average cost
Gas in underground storage 155 235 160
Materials and supplies 10 9 10
Trunkline settlement 30 30 30
Deferred income taxes 4 16 11
Prepayments and other 27 48 30
-----------------------------------
296 393 408
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 158 158 163
Trunkline settlement 40 55 70
Deferred income taxes 5 3 3
Other 69 70 67
-----------------------------------
272 286 303
-----------------------------------
TOTAL ASSETS $1,565 $1,673 $1,650
===================================
5
June 30 June 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 329 $ 317 $ 326
Preferred stock 78 78 78
Long-term debt 425 426 382
Non-current portion of capital leases 17 18 19
-----------------------------------
849 839 805
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 13 13 59
Accounts payable 69 68 79
Accrued taxes 39 55 39
Trunkline settlement 30 30 30
Accrued refunds 28 20 35
Notes payable 27 99 41
Accrued interest 8 8 9
Other 38 68 64
-----------------------------------
252 361 356
-----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 175 172 177
Regulatory liabilities for income taxes, net 150 144 137
Trunkline settlement 40 55 70
Deferred investment tax credits 29 30 31
Other 70 72 74
-----------------------------------
464 473 489
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,565 $1,673 $1,650
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
Consumers Gas Group
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 $ 184 $ 184 $ 184 $ 184 $ 184 $ 184
-------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 107 85 107 85 107 85
Stockholder's contribution - 22 - 22 - 22
-------------------------------------------------------------------
At end of period 107 107 107 107 107 107
-------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period (1) - - - - -
SFAS 115 - unrealized loss,
net of tax 1 - - - - -
-------------------------------------------------------------------
At end of period - - - - - -
-------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 75 56 26 19 35 20
Net income 3 4 52 50 56 69
Common stock dividends declared (40) (25) (40) (34) (53) (54)
-------------------------------------------------------------------
At end of period 38 35 38 35 38 35
-------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 329 $ 326 $ 329 $ 326 $ 329 $ 326
===================================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
Consumers Gas Group
Condensed Notes to Financial Statements
In July 1995, CMS Energy issued 7 million shares of Class G Common Stock.
This new class of Common Stock is intended to reflect the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). Accordingly, these financial statements and their related
condensed notes should be read along with the financial statements and
notes contained in the 1994 Form 10-K of CMS Energy Corporation that
includes the Report of Independent Public Accountants, and the financial
statements and notes of CMS Energy and Consumers Gas Group in CMS Energy's
Registration Statement on Form S-3 (Nos. 33-57719 and 33-57719-01)
relating to the Class G Common Stock. 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
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 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 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 Consumers Gas Group. The existing CMS Energy Common
Stock continues to be outstanding and reflects 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.
In July 1995, CMS Energy issued 7 million shares of Class G Common Stock
at a price to the public of $17.75 per share, representing 21.875 percent
of the common stockholders' equity value attributed 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 over-allotments 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 percent.
2: Earnings Per Share and Dividends
Earnings (Loss) attributable to CMS Energy Class G Common Stock on a per
share basis will be determined based on 23.5 percent 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
lesser 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.
3: Rate Matters
For information regarding rate matters directly affecting the Consumers
Gas Group, see the "Gas Rates" and "GCR Issues," discussions in Note 3 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
4: Commitments and Contingencies
Capital Expenditures: The Consumers Gas Group estimates capital
expenditures, including new lease commitments, will be $129 million for
1995, $119 million for 1996 and $101 million for 1997. These estimates
include an attributed portion of Consumers' anticipated capital
expenditures for common plant and equipment of $24 million, $18 million
and $15 million for 1995, 1996 and 1997, respectively.
For further information regarding commitments and contingencies directly
affecting the Consumers Gas Group (including those involving former
manufactured gas plant sites), see the "Environmental Matters," "Public
Utility Holding Company Act Exemption" and "Other" discussions in Note 4
to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
5: 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) $ 16 $ 16 $ 33 $ 37
Income taxes paid
(net of refunds) 21 26 33 39
Non-cash transactions
Assets placed under
capital leases $ 1 $ 2 $ 4 $ 4
6: 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.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to the
Consumers Gas Group at June 30, 1995 and 1994 is estimated by management
to be $38 million and $42 million, respectively. Accounts receivable and
accrued revenue in the balance sheets have been reduced to reflect
receivables sold. The portions of short-term debt and receivables sold
attributed to Consumers Gas Group reflect the high utilization of
short-term borrowings to finance the purchase of gas for storage in the
summer and fall periods.
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. A portion of any
future issuance of debt or securities may be attributed to the Consumers
Gas Group.
10
Consumers Gas Group
Management's Discussion and Analysis
In July 1995, CMS Energy issued 7 million shares of Class G Common Stock.
This new class of Common Stock is intended to reflect the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). Accordingly, this MD&A should be read along with the MD&A in
the 1994 Form 10-K of CMS Energy and the MD&As of CMS Energy and Consumers
Gas Group in CMS Energy's Registration Statement on Form S-3 (Nos. 33-
57719 and 33-57719-01) relating to the Class G Common Stock.
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 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 Consumers Gas Group. The existing CMS Energy Common
Stock continues to be outstanding and reflects 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.
In July 1995, CMS Energy issued 7 million shares of Class G Common Stock
at a price to the public of $17.75 per share, representing 21.875 percent
of the common stockholders' equity value attributed 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 over-allotments 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 Class G Common
Stock, to 23.5 percent.
Earnings for the quarters ended June 30, 1995 and 1994
Net income for the Consumers Gas Group for the second quarter of 1995
totaled $3 million, compared with $4 million for the second quarter of
1994. The $1 million decrease in 1995 net income compared with 1994
reflects higher gas deliveries, more than offset by higher gas operating
expenses which include depreciation and general taxes. Net income in the
second quarters of 1995 and 1994 reflect the seasonality of Consumers Gas
Group's business in that approximately 74 percent of its revenues are
generated in the first and fourth quarters of each year.
Earnings for the six months ended June 30, 1995 and 1994
Net income for the Consumers Gas Group for the six months ended June 30,
1995 totaled $52 million, compared with $50 million for the six months
ended June 1994. Earnings in 1995 recognize the reversal of a loss
previously recorded for a gas contract contingency partly offset by a
decrease in gas deliveries and higher gas operating expenses which include
depreciation.
Earnings for the 12 months ended June 30, 1995 and 1994
Net income for the Consumers Gas Group for the 12 months ended June 30,
1995 totaled $56 million, compared with $69 million for the 12 months
ended June 30, 1994. The decrease in 1995 net income reflects lower gas
deliveries and higher gas operating expenses which include depreciation
and general taxes, partly offset by the reversal of losses previously
recorded for gas contingencies. Increased operating costs included $14
million of postretirement benefit costs.
Cash Position, Financing and Investing
Consumers Gas Group's cash requirements are met by cash from operations
and financing activities. In the first six months of 1995 and 1994,
Consumers Gas Group's cash inflow from operations was derived mainly from
Consumers' sale and transportation of natural gas. Consumers Gas Group's
primary use of cash continues to reflect its gas utility construction
expenditures and improvements in the reliability of its gas utility
transmission and distribution systems. It also has used its cash to
retire portions of long-term securities and to pay common and preferred
dividends.
Financing and Investing Activities: Capital expenditures for the
Consumers Gas Group (including assets placed under capital lease) totaled
$48 million for the first six months of 1995 compared with $50 million for
the first six months of 1994.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures for the Consumers Gas Group, including new lease commitments,
will total approximately $359 million over the next three years.
In Millions
Years Ended December 31 1995 1996 1997
Gas Utility (a) $126 $117 $ 99
Michigan Gas Storage 3 2 2
---- ---- ----
$129 $119 $101
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to both
utility businesses.
The Consumers Gas Group expects that cash from operations and the ability
to access debt markets will provide necessary working capital and
liquidity to fund future capital expenditures, required debt payments and
other cash needs in the foreseeable future.
Consumers generally manages its short-term financings on a centralized,
consolidated basis. At June 30, 1995, Consumers' available sources of
credit included unsecured, committed lines of credit totaling $185 million
and a $470 million 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
totaled $190 million. Consumers Gas Group's attributed portion of such
receivables sold totaled $38 million.
Results of Operations
For Consumers Gas Group's results of operations, see "Consumers Gas Group
Results of Operations" in CMS Energy's MD&A included and incorporated by
reference herein.
Gas Issues
For Consumers Gas Group's discussion of Gas Rates, GCR Issues and
Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's
MD&A included and incorporated by reference herein.
Outlook
For Consumers Gas Group's outlook discussion, see "Consumers Gas Group
Outlook" in CMS Energy's MD&A included and incorporated by reference
herein.
Other
For information regarding CMS Energy's exemption from registration under
PUHCA and the effect of New Accounting Standards, see "Other" in
CMS Energy's MD&A included and incorporated by reference herein.