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 September
30, 1995 and 1994, and the related statements of income, common
stockholders' equity and cash flows for the three-month, nine-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the 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,
November 9, 1995
2
Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1995 1994 1995 1994 1995 1994
In Millions
OPERATING REVENUE $ 122 $ 126 $ 801 $ 837 $1,116 $1,188
---------------------------------------------------------
OPERATING EXPENSES
Operation
Cost of gas sold 53 48 435 475 622 680
Other 42 50 135 137 183 183
---------------------------------------------------------
Total operation 95 98 570 612 805 863
Maintenance 9 9 27 30 37 42
Depreciation, depletion and amortization 10 8 57 51 82 75
General taxes 6 7 37 38 53 52
---------------------------------------------------------
Total operating expenses 120 122 691 731 977 1,032
---------------------------------------------------------
PRETAX OPERATING INCOME 2 4 110 106 139 156
INCOME TAXES (1) (1) 35 32 44 44
---------------------------------------------------------
NET OPERATING INCOME 3 5 75 74 95 112
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS) - - - (1) (1) (1)
---------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 8 8 23 22 31 32
Other interest 2 1 4 3 6 5
Capitalized interest - - (1) - (1) -
Preferred dividends 1 1 5 3 6 4
---------------------------------------------------------
Net fixed charges 11 10 31 28 42 41
---------------------------------------------------------
NET INCOME (LOSS) $ (8) $ (5) $ 44 $ 45 $ 52 $ 70
=========================================================
NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS THROUGH RETAINED INTEREST $ (7) $ (5) $ 45 $ 45 $ 53 $ 70
=========================================================
NET LOSS ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ (1) $ - $ (1) $ - $ (1) $ -
=========================================================
AVERAGE CLASS G COMMON SHARES OUTSTANDING 7 - 7 - 7 -
=========================================================
LOSS PER AVERAGE CLASS G COMMON SHARE $ (.17) $ - $ (.17) $ - $ (.17) $ -
=========================================================
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .28 $ - $ .28 $ -
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Nine Months Ended Twelve Months Ended
September 30 September 30
1995 1994 1995 1994
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 44 $ 45 $ 52 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 57 51 82 75
Capital lease and other amortization 3 3 4 6
Deferred income taxes and investment tax credit 19 6 17 10
Other 1 1 1 3
Changes in other assets and liabilities (59) 11 (53) 36
------ ------ ------ ------
Net cash provided by operating activities 65 117 103 200
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (77) (82) (124) (128)
Other (5) (5) (7) (6)
------ ------ ------ ------
Net cash used in investing activities (82) (87) (131) (134)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net 68 (2) 86 (37)
Payment of common stock dividends (49) (30) (65) (55)
Payment of capital lease obligations (2) (3) (3) (5)
Retirement of bonds and other long-term debt (1) (29) (3) (152)
Repayment of bank loans (1) (31) (76) (31)
Proceeds from bank loans - - 88 1
Proceeds from preferred stock - 42 - 42
Contribution from stockholder - 22 - 22
Proceeds from bonds and other long-term debt - - - 149
------ ------ ------ ------
Net cash provided by (used in) financing activities 15 (31) 27 (66)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (1) (1) -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 4 3 3
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 2 $ 3 $ 2 $ 3
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
Consumers Gas Group
Balance Sheets
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Plant $2,132 $2,064 $2,014
Less accumulated depreciation, depletion and amortization 1,164 1,117 1,103
----------------------------------
968 947 911
Construction work-in-progress 48 47 57
----------------------------------
1,016 994 968
----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 2 4 3
Accounts receivable and accrued revenue, less
allowances of $2, $2 and $2, respectively (Note 6) 49 51 23
Inventories at average cost
Gas in underground storage 263 235 271
Materials and supplies 10 9 10
Trunkline settlement 30 30 30
Deferred income taxes 1 16 11
Prepayments and other 22 48 23
----------------------------------
377 393 371
----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 160 158 158
Trunkline settlement 33 55 63
Deferred income taxes 7 3 -
Other 65 70 65
----------------------------------
265 286 286
----------------------------------
TOTAL ASSETS $1,658 $1,673 $1,625
==================================
5
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 312 $ 317 $ 325
Preferred stock 78 78 78
Long-term debt 417 426 372
Non-current portion of capital leases 16 18 18
----------------------------------
823 839 793
----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 21 13 53
Notes payable 167 99 81
Accounts payable 56 68 69
Trunkline settlement 30 30 30
Accrued refunds 30 20 31
Accrued taxes 22 55 25
Accrued interest 7 8 7
Other 40 68 63
----------------------------------
373 361 359
----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 177 172 176
Regulatory liabilities for income taxes, net 153 144 137
Trunkline settlement 33 55 63
Deferred investment tax credit 29 30 31
Other 70 72 66
----------------------------------
462 473 473
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,658 $1,673 $1,625
==================================
<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 Nine Months Ended Twelve Months Ended
September 30 September 30 September 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 107 107 107 85 107 85
Stockholder's contribution - - - 22 - 22
------- ------- ------- ------- ------- -------
At end of period 107 107 107 107 107 107
------- ------- ------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 38 35 26 19 34 19
Net income (loss) (8) (5) 44 45 52 70
Common stock dividends
declared (Note 2) (9) 4 (49) (30) (65) (55)
------- ------- ------- ------- ------- -------
At end of period 21 34 21 34 21 34
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 312 $ 325 $ 312 $ 325 $ 312 $ 325
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
Consumers Gas Group
Condensed Notes to Financial Statements
In July and August 1995, CMS Energy issued a total of 7,520,000 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.
For further information regarding the business of CMS Energy, see Note 1
to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
In March 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. For further information regarding
the nature and issuance of the Class G Common Stock, see Note 7 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
2: Earnings (Loss) Per Share and Dividends
The loss per share, for the three, nine and twelve month periods ended
September 30, 1995, reflects the performance of the Consumers Gas Group
since the initial issuance of the Class G Common Stock during the third
quarter of 1995. The Class G Common Stock participates in earnings and
dividends from the issue date. The earnings (loss) attributable to such
common stock and the related amounts per share is computed by considering
the weighted average number of common shares outstanding.
The earnings (loss) attributable to outstanding Class G Common Stock is
equal to Consumers Gas Group's net income (loss) multiplied by a fraction,
the numerator of which is the weighted average number of shares of Class G
Common Stock outstanding during the period and the denominator which
represents the weighted average number of Outstanding Shares and Retained
Interest Shares during the period. The loss attributable to Class G
Common Stock on a per share basis, for the periods ended September 30,
1995, is based on 23.17 percent of the loss of the Consumers Gas Group
since the initial issuance.
Earnings (loss) per share are omitted from the statements of income, for
the periods ended September 30, 1994, since the Class G Common Stock was
not part of the equity structure of CMS Energy. For purpose of analysis,
the pro forma data provided below for the nine months ended September 30,
1995 and 1994 and the year ended December 31, 1994 gives effect to the
original issuance and sale of 7.52 million shares of Class G Common Stock
(representing 23.5 percent of the equity attributable to the Consumers Gas
Group) as if the sale occurred on January 1, 1994.
In Millions, Except Per Share Amounts
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30 December 31
1995 1994 1994
----- ----- -----
Consumers Gas Group Net Income $ 44 $ 45 $ 53
Net Income attributable to CMS Energy
Common Stock through Retained Interest $ 34 $ 34 $ 41
Net Income attributable to outstanding
Class G Common Stock $ 10 $ 11 $ 12
Average shares outstanding
of Class G Common Stock 7.521 7.520 7.520
Earnings per share attributable to
outstanding Class G Common Stock $1.38 $1.41 $1.66
Holders 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 may 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 of 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.
The portion of Consumers' common dividends attributed to the Consumers Gas
Group, for periods prior to the July 1995 issuance of the Class G Common
Stock, have been reflected in the financial statements. These dividend
amounts were allocated based on the ratio of the Consumers Gas Group's net
income (loss) to Consumers' consolidated net income after dividends on
preferred stock. This ratio was then applied to Consumers' total dividend
payments for these periods. Dividends declared on the Class G Common
Stock following the issuance are also reflected on the financial
statements. In July and October 1995, the Board of Directors declared
quarterly dividends 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 $128 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 $23 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 September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $ 26 $ 26 $ 33 $ 35
Income taxes paid (net of
refunds) 31 30 40 27
Non-cash transactions
Assets placed under
capital leases $ 1 $ 3 $ 3 $ 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 September 30, 1995,
Consumers had an unsecured $425 million facility and unsecured, committed
lines of credit aggregating $135 million that are used to finance seasonal
working capital requirements. At September 30, 1995 and 1994, Consumers
had a total of $474 million and $401 million outstanding under these
facilities, respectively.
Consumers has an established $500-million trade receivables purchase and
sale program. At September 30, 1995 and 1994, receivables sold under the
agreement totaled $210 million. Consumers generally manages its
short-term financings on a centralized consolidated basis. The portion of
receivables sold attributable to the Consumers Gas Group at September 30,
1995 and 1994 is estimated by management to be $29 million and $32
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. In November 1995,
Consumers filed a registration statement with the SEC for the possible
future sale of $100 million of Trust Originated Preferred Securities
through a business trust affiliated with Consumers. The trust was formed
for the sole purpose of issuing certain securities and investing the
proceeds in an equivalent principal amount of subordinated notes. The
subordinated notes will be unsecured obligations of Consumers. A portion
of any future issuance of debt or securities may be attributed to the
Consumers Gas Group.
11
Consumers Gas Group
Management's Discussion and Analysis
In July and August 1995, CMS Energy issued a total of 7,520,000 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.
For further information regarding the businesses of CMS Energy, including
the nature and issuance of the Class G Common Stock, see the MD&A of
CMS Energy included and incorporated by reference herein.
Earnings for the quarters ended September 30, 1995 and 1994
For the third quarter of 1995 the Consumers Gas Group experienced a net
loss of $8 million compared to a $5 million net loss for the third quarter
of 1994. Losses during the third quarter are not unexpected given the
seasonality (approximately 75 percent of gas revenues are generated in the
first and fourth quarters) of Consumers Gas Group's business. The
additional $3 million loss for the current period reflects a cumulative
revenue adjustment recorded in 1994 which increased revenue for that year.
Partially offsetting this loss was an 11.4 percent increase in gas
deliveries, and lower operation and general tax expenses during 1995.
Earnings for the nine months ended September 30, 1995 and 1994
Net income for the Consumers Gas Group for the nine months ended September
30, 1995 totaled $44 million, compared with $45 million for the nine
months ended September 30, 1994. Earnings in 1995 recognize the benefit
of reversing losses previously recorded for gas contingencies and lower
general tax and gas operation expenses, offset by lower gas deliveries,
higher depreciation expense, and increased preferred dividend cost.
Earnings for the 12 months ended September 30, 1995 and 1994
Net income for the Consumers Gas Group for the 12 months ended September
30, 1995 totaled $52 million, compared with $70 million for the 12 months
ended September 30, 1994. The decrease in 1995 net income reflects lower
gas deliveries and higher depreciation and general tax expenses, somewhat
offset by the reversal of losses previously recorded for gas contingencies
and lower operation and maintenance expenses during the 1995 period.
Cash Position, Financing and Investing
Consumers Gas Group's cash requirements are met by cash from operations
and financing activities. In the first nine 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
$78 million for the first nine months of 1995 compared with $85 million
for the first nine 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 $348 million over the next three years.
In Millions
Years Ended December 31 1995 1996 1997
Gas Utility (a) $125 $117 $ 99
Michigan Gas Storage 3 2 2
---- ---- ----
$128 $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. In November 1995, Consumers
filed a registration statement with the SEC for the possible future sale
of $100 million of Trust Originated Preferred Securities. For further
information, see Note 6 to the Financial Statements of Consumers Gas
Group.
Consumers generally manages its short-term financings on a centralized,
consolidated basis. At September 30, 1995, Consumers' available sources
of credit included unsecured, committed lines of credit totaling $135
million and a $425 million working capital facility. 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 September 30, 1995, receivables
sold totaled $210 million. Consumers Gas Group's attributed portion of
such receivables sold totaled $29 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.