1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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)436-9200
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-0550
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 April 30, 1996:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 91,999,879
CMS Energy Class G Common Stock, no par value 7,700,919
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 March 31, 1996
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers Power Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Power Company makes no
representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I:
CMS Energy Corporation
Report of Independent Public Accountants. . . . . . . . . . . . . . . 6
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 8
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Common Stockholders' Equity. . . . . . . . 11
Condensed Notes to Consolidated Financial Statements. . . . . . . . . 12
Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 21
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . . . . 34
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Common Stockholder's Equity. . . . . . . . 39
Condensed Notes to Consolidated Financial Statements. . . . . . . . . 40
Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 47
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 57
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 59
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
ABB . . . . . . . . . . . . . . Asea Brown Boveri Energy Ventures
ALJ . . . . . . . . . . . . . . Administrative Law Judge
Attorney General. . . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . Big Rock Point nuclear plant, owned by
Consumers
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 Electric Marketing. . . . . CMS Electric Marketing Company, a
subsidiary of Enterprises
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 and Electric. . . . . . CMS Gas and Electric Company, a subsidiary
of Enterprises
CMS Gas Marketing . . . . . . . CMS Gas Marketing Company, a subsidiary of
Enterprises
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. . . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . . Consumers Power Company, a subsidiary of
CMS Energy
Consumers Power Company
Financing I . . . . . . . . . A wholly-owned Delaware business trust of
Consumers
Consumers Gas Group . . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan Gas
Storage
Court of Appeals. . . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . . Demand-side management
EDEER S. A. . . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., an electric distribution
utility in northeastern Argentina
Enterprises . . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
FERC. . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . Gas cost recovery
General Motors. . . . . . . . . General Motors Corporation
GTNs. . . . . . . . . . . . . . CMS Energy General Term Notes, $250
million Series A and $125 million Series B
HYDRA-CO. . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary
of CMS Generation
kWh . . . . . . . . . . . . . . Kilowatt-hour
mcf . . . . . . . . . . . . . . Thousand cubic feet
MCV Facility. . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . . Management's Discussion and Analysis
Michigan Gas Storage. . . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
Michigan Natural Resources
and Environmental Protection
Act. . . . . . . . . . . . . . Michigan Natural Resources and
Environmental Protection Act Part 201
MHP . . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.
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
Outstanding Shares. . . . . . . Outstanding shares of Class G Common Stock
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
PSCR. . . . . . . . . . . . . . Power supply cost recovery
Retained Interest . . . . . . . The interest in the common stockholders'
equity of the Consumers Gas Group that is
retained by CMS Energy
Retained Interest Shares. . . . Authorized but unissued shares of Class G
Common Stock not held by holders of the
Outstanding Shares and attributable to the
Retained Interest
SEC . . . . . . . . . . . . . . Securities and Exchange Commission
Settlement Order. . . . . . . . MPSC Order issued March 31, 1993 in MPSC
Case Nos. U-10127, U-8871 and others, and
the rehearing order issued May 26, 1993
SFAS. . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production company located
in Traverse City, Michigan
TGN . . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
Walter. . . . . . . . . . . . . Walter International, Inc., an oil and gas
exploration and production company located
in Houston, Texas
6
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of
CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
March 31, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of
December 31, 1995, 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 26, 1996, 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, 1995, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 10, 1996.
7
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 591 $ 540 $2,328 $2,185
Gas utility 546 482 1,259 1,105
Oil and gas exploration and production 31 32 107 94
Independent power production 21 23 94 60
Natural gas transmission, storage and marketing 83 38 241 140
Other 3 2 19 6
------- ------- ------- -------
Total operating revenue 1,275 1,117 4,048 3,590
------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 73 67 289 294
Purchased power - related parties 140 124 507 484
Purchased and interchange power 47 36 207 156
Cost of gas sold 410 308 923 721
Other 168 160 706 638
------- ------- ------- -------
Total operation 838 695 2,632 2,293
Maintenance 40 46 180 194
Depreciation, depletion and amortization 124 114 426 390
General taxes 59 56 199 178
------- ------- ------- -------
Total operating expenses 1,061 911 3,437 3,055
------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 103 87 378 331
Gas utility 91 91 151 143
Oil and gas exploration and production 9 15 24 22
Independent power production 6 13 39 31
Natural gas transmission, storage and marketing 8 3 19 9
Other (3) (3) - (1)
------- ------- ------- -------
Total pretax operating income 214 206 611 535
------- ------- ------- -------
INCOME TAXES 57 54 133 111
------- ------- ------- -------
NET OPERATING INCOME 157 152 478 424
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 3 3 11 12
Accretion expense (7) (8) (30) (34)
Other income taxes, net 3 1 14 11
Other, net 2 5 7 19
------- ------- ------- -------
Total other income 1 1 2 8
------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 57 56 225 203
Other interest 7 5 29 20
Capitalized interest (2) (1) (9) (6)
Preferred stock dividends 7 7 28 28
Preferred securities distributions 1 - 1 -
------- ------- ------- -------
Net fixed charges 70 67 274 245
------- ------- ------- -------
NET INCOME $ 88 $ 86 $ 206 $ 187
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 76 $ 86 $ 191 $ 187
======= ======= ======= =======
Class G $ 12 $ - $ 15 $ -
======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 87 90 86
======= ======= ======= =======
Class G 8 - 8 -
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy $ .83 $ .99 $ 2.12 $ 2.17
======= ======= ======= =======
Class G $ 1.50 $ - $ 1.90 $ -
======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .24 $ .21 $ .93 $ .81
======= ======= ======= =======
Class G $ .28 $ - $ .84 $ -
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 88 $ 86 $ 206 $ 187
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,
$51 and $49, respectively) 124 114 426 390
Capital lease amortization 9 10 36 30
Debt discount amortization - 8 16 36
Deferred income taxes and investment tax credit 6 29 52 68
Accretion expense 7 8 30 34
Accretion income - abandoned Midland project (3) (3) (11) (12)
Undistributed earnings of related parties (21) (12) (62) (33)
MCV power purchases - settlement (Note 2) (12) (37) (112) (102)
Other 7 - 14 4
Changes in other assets and liabilities 144 127 106 (45)
------ ------ ------ ------
Net cash provided by operating activities 349 330 701 557
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (110) (131) (514) (592)
Investments in partnerships and unconsolidated subsidiaries (71) (11) (301) (41)
Acquisition of companies, net of cash acquired (20) (156) (10) (156)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)
Deferred demand-side management costs (2) (2) (10) (11)
Other (3) (4) (12) (9)
Proceeds from sale of property - - 22 20
------ ------ ------ ------
Net cash used in investing activities (225) (326) (915) (879)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 339 208 464 869
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 8 9 159 26
Increase (decrease) in notes payable, net (303) (204) (97) 135
Repayment of bank loans (246) (9) (255) (427)
Payment of common stock dividends (24) (18) (90) (70)
Payment of capital lease obligations (9) (10) (36) (29)
Retirement of bonds and other long-term debt - (11) (33) (181)
Retirement of common stock - - (1) (1)
------ ------ ------ ------
Net cash provided by (used in) financing activities (138) (35) 208 322
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (14) (31) (6) -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 48 48
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 42 $ 48 $ 42 $ 48
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
CMS Energy Corporation
Consolidated Balance Sheets
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT AND PROPERTY (At Cost)
Electric $6,130 $6,103 $5,826
Gas 2,287 2,218 2,115
Oil and gas properties (full-cost method) 1,096 1,074 978
Other 86 105 55
------ ------ ------
9,599 9,500 8,974
Less accumulated depreciation, depletion and amortization 4,747 4,627 4,405
------ ------ ------
4,852 4,873 4,569
Construction work-in-progress 200 201 257
------ ------ ------
5,052 5,074 4,826
------ ------ ------
INVESTMENTS
Independent power production 297 275 262
Natural gas transmission, storage and marketing 231 193 41
First Midland Limited Partnership (Note 2) 226 225 219
Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83
Other 25 22 16
------ ------ ------
883 818 621
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 42 56 48
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 356 296 149
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 85 83 79
Generating plant fuel stock 16 37 27
Deferred income taxes 22 24 37
Prepayments and other 190 230 178
------ ------ ------
750 910 598
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 458 462 473
Nuclear decommissioning trust funds 323 304 236
Abandoned Midland project 126 131 143
Other 451 444 441
------ ------ ------
1,358 1,341 1,293
------ ------ ------
TOTAL ASSETS $8,043 $8,143 $7,338
====== ====== ======
10
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (Note 7)
Common stockholders' equity $1,541 $1,469 $1,209
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 3,110 2,906 2,787
Non-current portion of capital leases 108 106 103
------ ------ ------
5,215 4,837 4,455
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 97 207 180
Notes payable 38 341 135
Accounts payable 267 304 160
Accrued taxes 223 256 172
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 60 53 54
Accrued interest 49 45 30
Accrued refunds 28 22 35
Other 187 192 166
------ ------ ------
1,039 1,510 1,027
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 638 640 604
Postretirement benefits 539 533 549
Power purchases - settlement (Note 2) 215 221 295
Deferred investment tax credits 168 171 178
Regulatory liabilities for income taxes, net 53 44 29
Other 176 187 201
------ ------ ------
1,789 1,796 1,856
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,043 $8,143 $7,338
====== ====== ======
<FN>
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company
Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,951 1,701 1,734 1,684
Common stock reacquired - - (1) (1)
Common stock issued:
CMS Energy 7 33 100 50
Class G 1 - 125 -
Common stock reissued - - 1 1
------- ------- ------- -------
At end of period 1,959 1,734 1,959 1,734
------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) - 1 1
Change in unrealized investment-gain (loss) - 1 (9) -
------- ------- ------- -------
At end of period (8) 1 (8) 1
------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (475) (595) (527) (644)
Net income 88 86 206 187
Common stock dividends declared:
CMS Energy (22) (18) (84) (70)
Class G (2) - (6) -
------- ------- ------- -------
At end of period (411) (527) (411) (527)
------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,541 $1,209 $1,541 $1,209
======= ======= ======= =======
<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 1995 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 segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and 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 and twelve month periods ended March 31, 1996,
undistributed equity earnings were $21 million and $62 million,
respectively and $12 million and $33 million for the three and twelve
month periods ended March 31, 1995.
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.
Consumers, through its subsidiaries, holds the following assets related to
the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
to purchase contract capacity from the MCV Partnership is 1,240 MW for
1996 and for each subsequent year through the end of the PPA. 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.
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, the fixed energy charge 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 energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been 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. If Consumers is unable to sell any capacity above the
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
- --------------------------------------------------------------------------
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
==========================================================================
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and in March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding this proposed settlement, see Note 3.
At March 31, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $198 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8 million, partially offset by
after-tax accretion expense of $4 million. The undiscounted after-tax
amount associated with the liability totaled $593 million at March 31,
1996.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 3), Consumers is seeking to utilize less-expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Cost recovery for this
contract capacity would start in 1996. Even if Consumers is not allowed
to substitute MCV Facility capacity for the capacity to be provided under
the terminated agreements, Consumers believes that the MPSC would still
approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 23 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
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. For further information
regarding these requests, see the Electric Rate Proceedings and Special
Rates discussions in the Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting,
among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme
Court for review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
Resolution of the issues discussed in this note is not expected to have a
material impact on CMS Energy's or Consumers' financial position or
results of operations.
4: Commitments, Contingencies and Other
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and 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 March 31, 1996, Consumers has accrued a liability for its
estimated losses.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in June 1995. This Michigan law bears some
similarities to the federal Superfund law. 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. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31, 1996, 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 legal and
regulatory requirements, could effect the estimate of remedial action
costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. The order authorizes current
recovery of $1 million annually. Consumers is continuing 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 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.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $965 million for 1996, $770 million for 1997 and $745
million for 1998.
Other: As of March 31, 1996, CMS Energy or its subsidiaries have
guaranteed up to $71 million in contingent obligations of unconsolidated
affiliates and other parties.
In August 1995 CMS Generation was served a complaint, which was filed in
the U.S. District Court in Denver, alleging multiple claims relating to a
business project in the Philippines. Plaintiffs have claimed
approximately $85 million in direct damages, indirect damages in a like
amount, plus punitive damages, interest, and attorney's fees. CMS
Generation is vigorously contesting this action.
Consumers has experienced a number of lawsuits filed against it relating
to so-called stray voltage. Claimants contend that stray voltage results
when small electrical currents present in grounded electrical systems are
diverted from their intended path. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying
the grounding of the customer's service. At March 31, 1996, Consumers had
33 separate stray voltage lawsuits awaiting trial court action.
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
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costs
with the MPSC in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. 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. As of March 31, 1996, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, 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 the cask continues to safely store
spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
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: $30 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 whether the studies being conducted as part of the
development plans will support a future decision to anneal.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
- -------------------------------------------------------------------------
Cash transactions
Interest paid (net
of amounts capitalized) $ 56 $ 60 $ 203 $ 170
Income taxes paid
(net of refunds) 2 - 36 39
Non-cash transactions
Nuclear fuel placed under
capital lease $ - $ 7 $ 20 $ 25
Other assets placed under
capital leases 1 2 4 15
Common Stock issued to
acquire companies - 24 66 24
Assumption of debt - 16 4 16
Capital leases refinanced - - 21 -
==========================================================================
7: Short-Term And Long-Term Financings, Capitalization and Other
CMS Energy
In the first quarter of 1996, CMS Energy filed a shelf-registration with
the SEC for the issuance and sale of up to $125 million of GTNs, Series B,
with net proceeds to be used for general corporate purposes. As of April
30, 1996, CMS Energy had issued and outstanding approximately $250 million
of Series A and $30 million of Series B GTNs with a weighted-average
interest rates of 7.7 and 8.0 percent, respectively.
Consumers
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital
requirements. At March 31, 1996, a total of $38 million was outstanding
at a weighted-average interest rate of 6.2 percent, compared with $133
million outstanding at March 31, 1995, at a weighted-average interest rate
of 7.0 percent. Consumers has an established $500 million trade
receivables purchase and sale program. At March 31, 1996 and 1995,
receivables sold under the agreement totaled $280 million and $300
million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
In January 1996, 4 million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securities and the primary asset of the
trust is $103 million of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers. The obligations of Consumers with
respect to the preferred securities under the notes that mature in 2015,
the indenture under which the notes are issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
CMS NOMECO
In March 1996, CMS NOMECO refinanced its $140 million revolving credit
agreement with a $225 million revolving credit agreement. As of March 31,
1996, $120 million remains outstanding, under the new agreement, with a
weighted-average interest rate of 6.0 percent.
CMS Generation
In January 1996, CMS Generation refinanced a one year $118 million bridge
credit facility for the HYDRA-CO acquisition with a $110 million, five-
year term loan. As of March 31, 1996, $107 million remains outstanding
with a weighted-average interest rate of 7.5 percent.
8: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the twelve month
period ended March 31, 1996 reflect the performance of the Consumers Gas
Group since initial issuance of 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 each
class of common stock and the related amounts per share are computed by
considering the weighted-average number of shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to the Consumers Gas Group net income (loss) multiplied by a fraction, the
numerator is the weighted-average number of Outstanding Shares during the
period and the denominator represents the weighted-average number of
Outstanding Shares and Retained Interest Shares during the period.
The earnings attributable to Class G Common Stock on a per share basis,
for the three months ended March 31, 1996, are based on 23.72 percent of
the income of the Consumers Gas Group. Earnings per share for Class G
Common Stock are omitted from the statements of income for the periods
reported prior to the periods ended September 30, 1995, since the Class G
Common Stock was not part of the equity structure of CMS Energy. For
purpose of analysis, following are pro forma data for the three months
ended March 31, 1995 and the year ended December 31, 1995 which give
effect to the issuance and sale of 7.52 million shares of Class G Common
Stock (representing 23.50 percent of the equity attributable to the
Consumers Gas Group) on January 1, 1994, and actual data for the three
months ended March 31, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Three Months Ended Three Months Ended Year Ended
------------------ ------------------ ----------
March 31 March 31 December 31
1996 1995 1995
- --------------------------------------------------------------------------
Net Income $ 88 $ 86 $ 204
Net Income attributable to
CMS Energy Common Stock $ 76 $ 74 $ 189
Net Income attributable to
outstanding Class G
Common Stock $ 12 $ 12 $ 15
Average shares outstanding:
CMS Energy Common Stock 91.664 86.918 88.810
Class G Common Stock 7.627 7.520 7.536
Earnings per share attributable
to CMS Energy Common Stock $ 0.83 $ 0.86 $ 2.14
Earnings per share attributable
to outstanding Class G
Common Stock $ 1.50 $ 1.55 $ 1.93
==========================================================================
In April 1996, the Board of Directors declared quarterly dividends of $.24
per share on CMS Energy Common Stock and $.28 per share on Class G Common
Stock.
21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
CMS Energy. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates,
assumptions and uncertainties which could cause actual results or outcomes
to differ materially from those expressed in the forward-looking
information. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Form 10-Q,
the Forward-Looking Information section of this MD&A indicates some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.
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 segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and storage and transmission of natural gas.
Consolidated earnings for the quarters ended March 31, 1996 and 1995
Consolidated net income totaled $88 million or $.83 per CMS Energy Common
share for the first quarter of 1996, compared to net income of $86 million
or $.99 per CMS Energy Common share for the first quarter of 1995. The $2
million increase reflects increased electric utility sales resulting from
Michigan's continuing economic growth, the impact of a 1996 electric
utility rate increase and higher gas utility deliveries due to increased
growth and colder weather experienced in the first quarter of 1996.
Partially offsetting this increase in net income was the reversal of a gas
contract contingency which benefited the 1995 period (see Note 3). The
decrease in earnings per share attributable to CMS Energy Common Stock for
the first quarter of 1996 compared to the first quarter of 1995, primarily
reflects comparatively lower net income (reflecting the above 1995 non-
recurring item) and the net income attributable to Class G Common stock.
Class G Common stock was issued in the third quarter of 1995.
Consolidated earnings for the 12 months ended March 31, 1996 and 1995
Consolidated net income totaled $206 million or $2.12 per CMS Energy
Common share for the 12 months ended March 31, 1996, compared to $187
million or $2.17 per CMS Energy Common share for the 12 months ended March
31, 1995. The $19 million increase reflects both higher electric utility
sales and gas utility deliveries and the impact of increased electric
utility rates which became effective in early 1996. Partially offsetting
this increase was the recognition of DSM incentive revenue and the
reversal of previously recorded gas contingencies (see Note 3) in the 1995
period, and increased operating expenses in the 1996 period. The decrease
in CMS Energy Common Stock earnings per share for the 12 months ended
March 31, 1996, compared to the corresponding period in the prior year,
primarily reflects comparatively lower net income (reflecting the above
1995 non-recurring items) and the net income attributable to Class G
Common stock. Class G Common stock was issued in the third quarter of
1995.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. CMS Energy's consolidated operating cash requirements
are met by its operating and financing activities. CMS Energy's
consolidated cash from operations is derived mainly from Consumers' sale
and transportation of natural gas, its generation, transmission, and sale
of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated
cash from operations totaled $349 million and $330 million for the first
quarters of 1996 and 1995, respectively. Increased cash resulting from
higher sales of utility electricity, improved gas utility deliveries,
lower cash losses associated with the PPA, and CMS NOMECO's increased sale
of oil and natural gas was partially offset by the timing of cash payments
related to Consumers' operations. CMS Energy primarily uses its operating
cash to expand its international businesses, maintain and expand its
electric and gas utility systems, retire portions of its long-term debt
and pay dividends.
Financing Activities: Net cash used in financing activities totaled $138
million and $35 million for the first quarters of 1996 and 1995,
respectively. The increase of $103 million reflects a decrease in notes
payable and refinancing of bank loans offset by increased cash of $97
million from the sale of Trust Originated Preferred Securities through
Consumers Power Company Financing I (see Note 7).
In October 1995, CMS NOMECO filed a registration statement with the SEC
for an initial public offering of not more than 20 percent of CMS NOMECO
common stock. CMS Energy will continue to evaluate market conditions for
a possible offering of CMS NOMECO common stock.
In the first quarter of 1996, CMS Energy filed a shelf-registration
statement with the SEC for the issuance and sale of up to $125 million of
GTNs, Series B, with net proceeds to be used for general corporate
purposes. As of April 30, 1996, CMS Energy had issued and outstanding
approximately $250 million of GTNs, Series A and $30 million of GTNs,
Series B with weighted-average interest rates of 7.7 percent and 8.0
percent, respectively.
In the first quarter of 1996, CMS Generation refinanced its $118 million
bridge credit facility for the acquisition of HYDRA-CO with a $110
million, five-year term loan. As of March 31, 1996, $107 million remains
outstanding with a weighted-average interest rate of 7.5 percent.
In the first quarter of 1996, CMS NOMECO refinanced its $140 million
revolving credit agreement with a $225 million revolving credit agreement.
As of March 31, 1996, $120 million remains outstanding, under the new
agreement, with a weighted-average interest rate of 6.0 percent.
In February 1996, CMS Energy paid $22 million in cash dividends to holders
of CMS Energy Common Stock and $2 million in cash dividends to holders of
Class G Common Stock. In April 1996, the Board of Directors declared
quarterly dividends $.24 per share on CMS Energy Common Stock and $.28 per
share on Class G Common Stock.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
Investing Activities: Net cash used in investing activities totaled $225
million and $326 million for the first quarters of 1996 and 1995,
respectively. The decrease of $101 million primarily reflects the
acquisition of HYDRA-CO in the first quarter of 1995 partially offset by
an increase in 1996 in investments in partnerships and unconsolidated
subsidiaries. CMS Energy's expenditures for its utility and international
businesses were $86 million and $117 million, respectively.
Financing and Investing Outlook: CMS Energy has available, unsecured,
committed lines of credit totaling $105 million and a $450 million credit
facility. At March 31, 1996, CMS Energy has utilized a total of $242
million under these facilities. CMS Energy will continue to evaluate the
capital markets in 1996 as a source of financing its subsidiaries'
investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit
totaling $145 million and a $425 million working capital facility. At
March 31, 1996, Consumers had a total of $38 million outstanding under
these facilities. Consumers has FERC authorization to issue or guarantee
up to $900 million in short-term debt through December 31, 1996.
Consumers uses short-term borrowings to finance working capital and gas in
storage, and to pay for capital expenditures between long-term financings.
Consumers has an agreement permitting the sales of certain accounts
receivable for up to $500 million. At March 31, 1996 and 1995,
receivables sold totaled $280 million and $300 million, respectively.
Electric Utility Results of Operations
In Millions
Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
Sales $ 9 $ 66
Rate increases and
other regulatory issues 9 8
Operations and maintenance 4 2
General taxes and depreciation (6) (29)
------- -------
Total change $16 $ 47
======= =======
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercial sales increased 7.3 percent and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31, 1996 were 35.9
billion kWh, a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
During the period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.
Power Costs: Power costs totaled $260 million and $227 million for the
three-month periods ending March 31, 1996 and 1995, respectively. The $33
million increase primarily reflects greater power purchases from outside
sources to meet increased sales demand. Power costs totaled $1,003
million and $934 million during the 12-month periods ending March 31, 1996
and 1995, respectively. The $69 million increase primarily reflects
greater power purchases from outside sources to meet increased sales
demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals and in March 1996, the Court of
Appeals affirmed the Settlement Order. 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. As
anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax
cash underrecoveries totaled $8 million for the first three months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the electric rate case (discussed
below) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding the settlement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996. For more information regarding the
electric rate order and the settlement, see Note 3.
In 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 to the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The ALJ
issued a proposal for decision in this case that recommended the MPSC
reject Consumers' position regarding the reallocation of Consumers'
depreciation reserve and plant investment. This case is currently part of
the proposed settlement. In the settlement proposal, Consumers requested
that depreciation of certain plants (including nuclear plants) be
accelerated while holding overall depreciation rates level.
Special Rates: Consumers currently has a request before the MPSC that,
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: In April 1996, a seven company consortium
in which CMS Gas and Electric holds a 40 percent interest, acquired a 90
percent ownership interest in EDSEER S.A., an electric distribution
utility serving northeastern Argentina's Entre Rios Province for $161
million. EDEER S.A., with 1995 revenue of $105 million and electric sales
of 1.1 billion kWh, serves over 200,000 customers, primarily residential
and commercial, in a 55,000 square kilometer area. CMS Gas and Electric,
as lead operator, anticipates taking over operation of the utility in May
1996.
CMS Energy and Consumers estimate capital expenditures, including new
lease commitments, related to electric utility operations of $380 million
for 1996, $285 million for 1997 and $290 million for 1998. These amounts
include an attributed portion of Consumers' anticipated capital
expenditures for plant and equipment common to both the electric and gas
utility businesses and CMS Energy's capital expenditures relating to its
international energy distribution operations.
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. Final acid rain
program nitrogen oxide regulations are expected to be issued in 1996.
Management believes that Consumers' annual operating costs will not be
materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law. Consumers expects that it will ultimately incur costs at a
number of sites. Consumers believes costs incurred for both investigation
and required remedial actions are properly recoverable 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, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 7.
Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report recognized improved
performance at the plant, specifically in the areas of Engineering and
Plant Operations. In the report, the NRC noted areas which continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address
previously identified weak areas. The report noted that performance in
the areas of Maintenance and Plant Support was good and remained
unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 8.
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 whether the studies being conducted
as a part of the development plans will support a future decision to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action. CMS Energy believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations.
Consumers Gas Group Results of Operations
In Millions
Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
Sales $ 22 $ 53
Reversal of gas contingencies (23) (34)
Recovery of gas costs and
other regulatory issues 2 6
Operations and maintenance 3 (6)
General taxes and depreciation (4) (11)
----- -----
Total change $ - $ 8
===== =====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and total system
deliveries, excluding transport to the MCV Facility, increased 14.8
percent from 1995 levels. On a weather-adjusted basis, total system
deliveries increased 8.5 percent, reflecting significant growth resulting
from customer additions and conversions to natural gas from alternative
fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf,
a 19.0 percent increase from the corresponding period ended March 31,
1995, and total system deliveries, excluding transport to the MCV
Facility, increased 17.8 percent.
Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million
for the first quarters of 1996 and 1995, respectively. The increase of
$64 million was the result of increased sales. The increased costs also
reflect the reversal of a $23 million gas supplier contingency during the
first quarter of 1995. The cost of gas sold totaled $735 million and $608
million for the 12 months ended March 31, 1996 and 1995, respectively.
The increase of $127 million was also the result of increased sales offset
by the reversal of the gas supplier contingency of $23 million in the 1995
period.
Consumers Gas Group Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC,
requesting, among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.
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 Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are 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
$130 million for 1996, $110 million for 1997 and $105 million for 1998.
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: 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 $98 million. These estimates are based on undiscounted 1996 costs.
At March 31, 1996, 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 effect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring
environmental clean-up costs and amortizing these costs over 10 years.
The order authorizes current recovery of $1 million annually. Consumers
is continuing 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 7.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1996 decreased $6 million from the same period in 1995,
primarily due to recognition of a gain from assignment and novation of a
gas supply contract recorded in the first quarter of 1995 partially offset
by higher oil and gas prices and volumes in the first quarter of 1996.
Pretax operating income for the 12 months ended March 31, 1996 increased
$2 million from the 12 months ended March 31, 1995, primarily due to
higher sales volumes and oil prices partially offset by lower average
market prices for gas and the gains from the assignment and novation of a
gas supply contracts in 1995.
Capital Expenditures: Capital expenditures for the three months ended
March 31, 1996 totaled $27 million, primarily for development of existing
oil and gas reserves.
CMS Energy currently plans to invest $405 million from 1996 to 1998 in its
oil and gas exploration and production operations. These capital
expenditures will be concentrated in North and South America and offshore
west Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1996 decreased $7 million from 1995 levels, primarily
reflecting lower capacity sales by the MCV Partnership. Pretax operating
income for the 12 months ended March 31, 1996 increased $8 million from
the 12 months ended March 31, 1995, primarily reflecting additional
generating capacity and improved equity earnings.
Capital Expenditures and Other: In April 1996, CMS Generation and ABB
signed agreements with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the Jorf
Lasfar coal-fueled power plant located southwest of Casablanca. The
agreements cover purchase and operation of two existing 330 MW units and
construction and operation of another two 330 MW units by CMS Generation
and ABB. CMS Energy posted a $30 million conditional letter of credit to
ensure performance under the agreements. CMS Generation and ABB each will
hold 50 percent interest in the transaction. Financial closing is
expected by year end, with construction of the second two units to begin
shortly thereafter.
In the first quarter of 1996, CMS Generation increased its ownership
interest from 51 percent to 78 percent in its Centrales Termicas Mendoza
electric generating plant in western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million in the Mendoza plant
to refurbish and repower the facility resulting in an increase in its
capacity from 260 MW to over 400 MW.
Capital expenditures for the three months ended March 31, 1996 totaled $15
million related to expanding ownership in existing facilities.
CMS Energy currently plans to invest $515 million relating to its
independent power production operations from 1996 to 1998. CMS Generation
will pursue acquisitions and development of electric generating plants in
the United States, Latin America, southern Asia, the Pacific Rim region
and North Africa.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three and 12
months ended March 31, 1996 increased $5 million and $10 million,
respectively, over the same periods ended March 31, 1995, primarily
reflecting earnings from new pipeline investments and the continued growth
of existing projects and gas marketed to end-users.
Capital Expenditures and Other: In April 1996, CMS Gas Transmission
signed a purchase agreement to sell its 50 percent ownership interest in
Moss Bluff Gas Storage Systems, a partnership that owns a gas storage
facility, to its partner, MHP, and MHP will sell its 50 percent ownership
interest to CMS Gas Transmission in the Grands Lacs Limited Partnership, a
marketing center for natural gas. CMS Gas Transmission will receive a net
cash payment of approximately $26 million. The transaction is anticipated
to close no later than June 30, 1996.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of 10-day
storage service and has the capability of being refilled in 20 days.
In February 1996, CMS Gas Transmission acquired an ownership interest in
Nitrotec Corporation, a proprietary gas technology company. Nitrotec
specializes in the development and commercialization of advanced carbon-
based adsorption gas separation technologies. Nitrotec recently received
approval of patent applications covering its helium removal process and
nitrogen rejection process.
Capital expenditures for the three months ended March 31, 1996 totaled $76
million for acquisitions, expansion of existing facilities and
construction of new facilities.
CMS Energy currently plans to invest $260 million from 1996 to 1998
relating to its non-utility gas operations, and will continue to pursue
development of natural gas storage, gathering and pipeline operations both
domestically and internationally. CMS Energy also plans to work toward
the development of U.S. regional "market centers" for natural gas through
strategic alliances and asset acquisition and development.
Forward-Looking Information
Capital Expenditures: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total approximately $2.5 billion over
the next three years. Cash generated by operations is expected to satisfy
a substantial portion of capital expenditures. Additionally, CMS Energy
will continue to evaluate capital markets in 1996 as a potential source of
financing its subsidiaries' investing activities.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Electric utility $380 $285 $290
Gas utility 130 110 105
Oil and gas exploration and production 120 135 150
Independent power production 190 175 150
Natural gas transmission, storage and marketing 145 65 50
---- ---- ----
$965 $770 $745
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital
expenditures see the individual capital expenditures sections within this
MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions or the
developing competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including: 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. Consumers continues to work toward retaining
its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for
competitively discounted electric rates. Certain facilities will have the
option of taking retail wheeling service (if available) after the first
three years of the contract. The MPSC approved this contract in 1995.
This MPSC order and other MPSC orders approving special long-term sales
contracts have been appealed by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
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, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those previously filed by Detroit Edison
and the Attorney General. Consumers does not expect this short-term
experiment to have a material impact on its financial position, liquidity
or results of operations.
In April 1996, the FERC issued two orders which require utilities to
provide open access to the interstate transmission grid. The first order
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The order also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second order
requires utilities to establish electronic systems to share information
about available transmission capacity and to separate their wholesale
power marketing and transmission operations functions by implementing
standards of conduct. These orders will become effective in July 1996.
In addition, the FERC issued a NOPR on April 24, 1996, which proposes for
consideration a new system for utilities to use in reserving capacity on
their own and others' transmission lines. This would replace certain
tariffs included in the first order with a capacity reservation tariff in
which participants would reserve firm rights to transfer power between
designated receipt and delivery points. Consumers is evaluating these
developments and has not determined the impact of the FERC's Orders on its
financial position, liquidity or results of operations.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry. The
MPSC has directed Consumers (and Detroit Edison) to file applications by
May 15, 1996, addressing the recommendation of the Michigan Jobs
Commission to allow a choice of power suppliers for new industrial and
commercial electric load. The Michigan Jobs Commission's recommendations
also include related matters, such as the full recovery of utility
stranded costs. No new legislation has been introduced. However,
Consumers anticipates additional MPSC orders during 1996 which will
further define a new electric and gas utility regulatory framework for
Michigan.
SFAS 71 allows the deferral of certain costs and the recording of
regulatory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Consumers Gas Group Outlook, Competition and Deliveries: Consumers
currently anticipates gas deliveries to grow approximately 2 percent per
year (excluding transportation to the MCV Facility and off-system
deliveries) over the next five years, assuming 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. The
emerging use of natural gas vehicles also provides 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. Consumers also plans additional capital expenditures to construct
new gas mains that are expected to expand Consumers' system. Actual gas
deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions and the level
of natural gas consumption.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are
regulated by the MPSC as parties to this proceeding. Consumers has filed
its comments with the MPSC, indicating that the MPSC should only direct
local distribution companies to file pilot programs designed to test the
feasibility of expanded transportation service. Consumers also expressed
its position that it is premature to expand transportation service to
residential customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions both domestically and internationally (including
those of the FERC and the MPSC) with respect to rates, industry and rate
structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
natural gas pipeline and storage facilities, recovery of purchased power,
decommissioning costs, and present or prospective wholesale and retail
competition, among others. The business and profitability of CMS Energy
is also influenced by economic and geographic factors including political
and economic risks(particularly those associated with international
development and operations, including currency fluctuation), changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, unanticipated development project
delays or changes in project costs, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of CMS Energy.
Forward-looking information is included throughout this Form 10-Q.
CMS Energy's material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
(This page intentionally left blank)
34
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of March 31, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1995, 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 26, 1996, 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, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 10, 1996.
35
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
OPERATING REVENUE
Electric $ 591 $ 540 $2,328 $2,185
Gas 546 482 1,259 1,105
Other 4 10 33 25
----------------------------------------------
Total operating revenue 1,141 1,032 3,620 3,315
----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 73 67 289 294
Purchased power - related parties 140 124 507 484
Purchased and interchange power 47 36 207 156
Cost of gas sold 345 281 735 608
Other 136 137 591 573
----------------------------------------------
Total operation 741 645 2,329 2,115
Maintenance 39 45 178 190
Depreciation, depletion and amortization 108 101 364 342
General taxes 56 54 191 172
----------------------------------------------
Total operating expenses 944 845 3,062 2,819
----------------------------------------------
PRETAX OPERATING INCOME
Electric 103 87 378 331
Gas 91 91 151 143
Other 3 9 29 22
----------------------------------------------
Total pretax operating income 197 187 558 496
INCOME TAXES 61 56 150 124
----------------------------------------------
NET OPERATING INCOME 136 131 408 372
----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 16 17
Accretion income 3 3 11 12
Accretion expense (7) (8) (30) (34)
Other income taxes, net 3 2 13 11
Other, net - 2 4 12
----------------------------------------------
Total other income 3 3 14 18
----------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 35 140 137
Other interest 3 5 22 19
Capitalized interest (1) - (3) (1)
----------------------------------------------
Net interest charges 37 40 159 155
----------------------------------------------
Net Income 102 94 263 235
Preferred Stock Dividends 7 7 28 28
Preferred Securities Distributions 1 - 1 -
----------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 94 $ 87 $ 234 $ 207
==============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 102 $ 94 $ 263 $ 235
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,
$51 and $49, respectively) 108 101 364 342
Capital lease and other amortization 9 11 36 29
Deferred income taxes and investment tax credit 3 23 37 65
Accretion expense 7 8 30 34
Accretion income - abandoned Midland project (3) (3) (11) (12)
Undistributed earnings of related parties (4) (10) (30) (24)
MCV power purchases - settlement (Note 2) (12) (37) (112) (102)
Other 3 2 6 2
Changes in other assets and liabilities 95 120 58 (34)
------ ------ ------ ------
Net cash provided by operating activities 308 309 641 535
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (83) (74) (422) (438)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)
Deferred demand-side management costs (2) (2) (10) (11)
Other 1 (4) 1 (4)
Proceeds from sale of property - - 1 13
------ ------ ------ ------
Net cash used in investing activities (103) (102) (520) (530)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (303) (204) (97) 135
Payment of capital lease obligations (9) (10) (36) (28)
Payment of preferred stock dividends (7) (7) (28) (21)
Retirement of bonds and other long-term debt (1) (1) (1) (27)
Preferred securities distributions (1) - (1) -
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 100
Payment of common stock dividends - - (70) (160)
Repayment of bank loans - - - (422)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash used in financing activities (211) (222) (123) (23)
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (15) (2) (18)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 28
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 8 $ 10 $ 8 $ 10
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
Consumers Power Company
Consolidated Balance Sheets
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Electric $6,130 $6,103 $5,826
Gas 2,207 2,169 2,078
Other 26 30 30
-----------------------------------
8,363 8,302 7,934
Less accumulated depreciation, depletion and amortization 4,195 4,090 3,893
-----------------------------------
4,168 4,212 4,041
Construction work-in-progress 199 190 249
-----------------------------------
4,367 4,402 4,290
-----------------------------------
INVESTMENTS
Stock of affiliates 336 337 318
First Midland Limited Partnership (Note 2) 226 225 219
Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83
Other 9 7 8
-----------------------------------
675 672 628
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 8 14 10
Accounts receivable and accrued revenue, less
allowances of $3, $3 and $4, respectively (Note 7) 173 137 63
Accounts receivable - related parties 12 10 11
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 74 72 76
Generating plant fuel stock 16 37 27
Postretirement benefits 25 25 25
Deferred income taxes 23 26 39
Prepayments and other 143 181 133
-----------------------------------
513 686 464
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 458 462 473
Nuclear decommissioning trust funds 323 304 236
Abandoned Midland Project 126 131 143
Other 309 297 322
-----------------------------------
1,216 1,194 1,174
-----------------------------------
TOTAL ASSETS $6,771 $6,954 $6,556
===================================
38
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 504 491 491
Revaluation capital 29 29 17
Retained earnings since December 31, 1992 331 237 167
-----------------------------------
1,705 1,598 1,516
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,923 1,922 1,954
Non-current portion of capital leases 96 104 103
-----------------------------------
4,180 3,980 3,929
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 89 90 48
Notes payable 38 341 135
Accrued taxes 201 225 134
Accounts payable 165 207 125
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 64 56 56
Accrued refunds 28 22 35
Accrued interest 26 32 25
Other 166 178 153
-----------------------------------
867 1,241 806
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 599 605 585
Postretirement benefits 520 517 537
Power purchases - settlement (Note 2) 215 221 295
Deferred investment tax credit 166 169 177
Regulatory liabilities for income taxes, net 53 44 29
Other (Note 4) 171 177 198
-----------------------------------
1,724 1,733 1,821
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,771 $6,954 $6,556
===================================
<FN>
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers
Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due
2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
---------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 491 491 391
Stockholder's contribution 13 - 13 100
---------------------------------------------------
At end of period 504 491 504 491
---------------------------------------------------
REVALUATION CAPITAL
At beginning of period 29 15 17 15
Change in unrealized investment-gain - 2 12 2
---------------------------------------------------
At end of period 29 17 29 17
---------------------------------------------------
RETAINED EARNINGS
At beginning of period 237 80 167 120
Net income 102 94 263 235
Common stock dividends declared - - (70) (160)
Preferred stock dividends declared (7) (7) (28) (28)
Preferred securities distributions (1) - (1) -
---------------------------------------------------
At end of period 331 167 331 167
---------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,705 $1,516 $1,705 $1,516
===================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
40
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 1995 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 segment 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.
Consumers, through its subsidiaries, holds the following assets related to
the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
to purchase contract capacity from the MCV Partnership is 1,240 MW for
1996 and for each subsequent year through the end of the PPA. 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.
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, the fixed energy charge 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 energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been 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. If Consumers is unable to sell any capacity above the
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and in March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding this proposed settlement, see Note 3.
At March 31, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $198 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8 million, partially offset by
after-tax accretion expense of $4 million. The undiscounted after-tax
amount associated with the liability totaled $593 million at March 31,
1996.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 3), Consumers is seeking to utilize less-expensive
contract capacity from the MCV Facility which Consumers is currently not
authorized to recover from retail customers. Cost recovery for this
contract capacity would start in 1996. Even if Consumers is not allowed
to substitute MCV Facility capacity for the capacity to be provided under
the terminated agreements, Consumers believes that the MPSC would still
approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 23 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
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. For further information
regarding these requests, see the Electric Rate Proceedings and Special
Rates discussions in the Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting,
among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme
Court for review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and 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 March 31, 1996, Consumers has accrued a liability for its
estimated losses.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in June 1995. This Michigan law bears some
similarities to the federal Superfund law. 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. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31, 1996, 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 legal and
regulatory requirements, could effect the estimate of remedial action
costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. The order authorizes current
recovery of $1 million annually. Consumers is continuing 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 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.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $445 million for 1996, $395 million for 1997 and
$395 million for 1998.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At March
31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action.
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
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costs
with the MPSC in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. 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. As of March 31, 1996, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, 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 the cask continues to safely store
spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
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: $30 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 whether the studies being conducted as part of the
development plans will support a future decision to anneal.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
---- ---- ---- -----
Cash transactions
Interest paid (net of
amounts capitalized) $ 41 $ 50 $149 $147
Income taxes paid
(net of refunds) 5 - 48 31
Non-cash transactions
Nuclear fuel placed
under capital lease $ - $ 7 $ 20 $ 25
Other assets placed
under capital leases 1 2 4 15
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital
requirements. At March 31, 1996, a total of $38 million was outstanding
at a weighted-average interest rate of 6.2 percent, compared with $133
million outstanding at March 31, 1995, at a weighted-average interest rate
of 7.0 percent. Consumers has an established $500 million trade
receivables purchase and sale program. At March 31, 1996 and 1995,
receivables sold under the agreement totaled $280 million and $300
million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
In January 1996, 4 million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securities and the primary asset of the
trust is $103 million of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers. The obligations of Consumers with
respect to the preferred securities under the notes that mature in 2015,
the indenture under which the notes are issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996.
47
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
Consumers. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates,
assumptions and uncertainties which could cause actual results or outcomes
to differ materially from those expressed in the forward-looking
information. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Form 10-Q,
the Forward-Looking Information section of this MD&A indicates some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.
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 segment of which is the automotive industry.
Consolidated earnings for the quarters ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $94 million and $87 million for the first quarters of
1996 and 1995, respectively. The $7 million increase reflects increased
electric sales resulting from Michigan's continuing economic growth, the
impact of a 1996 electric rate increase and higher gas deliveries due to
increased growth and colder weather experienced in the first quarter of
1996. Partially offsetting this increase in net income was the reversal
of a gas contract contingency which benefited the 1995 period (see Note
3).
Consolidated earnings for the 12 months ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $234 million and $207 million for the 12 months ended
March 31, 1996 and March 31, 1995, respectively. The $27 million increase
reflects both higher electric sales and gas deliveries and the impact of
increased electric rates which became effective in early 1996. Partially
offsetting this increase was the recognition of DSM incentive revenue and
the reversal of previously recorded gas contingencies (see Note 3) in the
1995 period, and increased operating expenses in the 1996 period.
Cash Position, Financing and Investing
Cash from operations is derived from the sale and transportation of
natural gas and the generation, transmission, and sale of electricity.
Cash from operations totaled $308 million and $309 million for the first
quarters of 1996 and 1995, respectively. Increased cash resulting from
higher sales of electricity, improved gas deliveries and lower cash losses
associated with the PPA, was essentially offset by the timing of cash
payments related to Consumers' operations. Consumers primarily uses its
operating cash to maintain and expand its electric and gas systems, retire
portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities totaled $211
million and $222 million for the first quarters of 1996 and 1995,
respectively. The decrease of $11 million reflects increased cash from a
$13 million equity investment from CMS Energy and $97 million from the
sale of Trust Originated Preferred Securities (see Note 7). During the
first quarter of 1996, cash was used to reduce short-term borrowings by an
additional $99 million, as compared to the 1995 period.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
Investing Activities: Net cash used in investing activities totaled $103
million and $102 million for the first quarters of 1996 and 1995,
respectively. Cash used for increased capital expenditures was
principally offset by the reduced costs to retire property.
Financing and Investing Outlook: Consumers has several available,
unsecured, committed lines of credit totaling $145 million and a $425
million working capital facility. At March 31, 1996, Consumers had a
total of $38 million outstanding under these facilities. Consumers has
FERC authorization to issue or guarantee up to $900 million in short-term
debt through December 31, 1996. Consumers uses short-term borrowings to
finance working capital and gas in storage, and to pay for capital
expenditures between long-term financings. Consumers has an agreement
permitting the sales of certain accounts receivable for up to $500
million. At March 31, 1996 and 1995, receivables sold totaled $280
million and $300 million, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1996 and
1995: Electric pretax operating income totaled $103 million and $87
million for the first quarters of 1996 and 1995, respectively. The $16
million increase primarily resulted from increased electric sales, an
increase in electric rates in early 1996, and lower operation and
maintenance costs during the first quarter of 1996. Partially offsetting
this increase were decreased revenue from special contract discounts given
to large industrial customers and higher depreciation and general taxes in
1996.
Electric Pretax Operating Income for the 12 months ended March 31, 1996
and 1995: Electric pretax operating income totaled $378 million and $331
million for the 12 months ended March 31, 1996 and 1995, respectively.
The $47 million increase is primarily the result of increased electric
sales and an increase in electric rates effective in early 1996. These
increases were partially offset by higher electric depreciation and
property tax expenses in the 1996 period, decreased revenue from special
contract discounts given to large industrial customers, and the impact of
recognizing DSM incentive revenue in the 1995 period.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
--------- ---------
Sales $ 9 $ 66
Rate increases and other regulatory issues 9 8
Operations and maintenance 4 2
General taxes and depreciation (6) (29)
---- ----
Total change $16 $ 47
==== ====
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercial sales increased 7.3 percent and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31, 1996 were 35.9
billion kWh, a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
During the period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.
Power Costs: Power costs totaled $260 million and $227 million for the
three-month periods ending March 31, 1996 and 1995, respectively. The $33
million increase primarily reflects greater power purchases from outside
sources to meet increased sales demand. Power costs totaled $1,003
million and $934 million during the 12-month periods ending March 31, 1996
and 1995, respectively. The $69 million increase primarily reflects
greater power purchases from outside sources to meet increased sales
demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals and in March 1996, the Court of
Appeals affirmed the Settlement Order. 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. As
anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax
cash underrecoveries totaled $8 million for the first three months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the electric rate case (discussed
below) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding the settlement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996. For more information regarding the
electric rate order and the settlement, see Note 3.
In 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 to the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The ALJ
issued a proposal for decision in this case that recommended the MPSC
reject Consumers' position regarding the reallocation of Consumers'
depreciation reserve and plant investment. This case is currently part of
the proposed settlement. In the settlement proposal, Consumers requested
that depreciation of certain plants (including nuclear plants) be
accelerated while holding overall depreciation rates level.
Special Rates: Consumers currently has a request before the MPSC that,
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its electric utility
operations of $315 million for 1996, $285 million for 1997 and $290
million for 1998. 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. Final acid rain
program nitrogen oxide regulations are expected to be issued in 1996.
Management believes that Consumers' annual operating costs will not be
materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law. Consumers expects that it will ultimately incur costs at a
number of sites. Consumers believes costs incurred for both investigation
and required remedial actions are properly recoverable 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, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report recognized improved
performance at the plant, specifically in the areas of Engineering and
Plant Operations. In the report, the NRC noted areas which continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address
previously identified weak areas. The report noted that performance in
the areas of Maintenance and Plant Support was good and remained
unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 5.
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 whether the studies being conducted
as a part of the development plans will support a future decision to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action. Consumers believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations.
Gas Utility Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1996 and
1995: Gas pretax operating income totaled $91 million for both the first
quarters of 1996 and 1995. Pretax operating income reflected a 15 percent
increase in gas deliveries resulting from customer additions and load
conversions to natural gas from alternative fuels and colder temperatures
during the first quarter of 1996. However, when compared to 1995, the
strong increases were offset by the benefit achieved in 1995 with the
reversal of a previously recorded gas contract contingency (see Note 3)
and higher depreciation and general taxes.
Gas Pretax Operating Income for the 12 months ended March 31, 1996 and
1995: Gas pretax operating income totaled $151 million and $143 million
for the 12 months ended March 31, 1996 and 1995, respectively. The $8
million increase reflects higher gas deliveries and higher operating
expenses. However, the increase was partially offset by the reversal in
the 1995 period, of previously recorded gas contingencies.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
--------- ---------
Sales $ 22 $ 53
Reversal of gas contingencies (23) (34)
Recovery of gas costs and
other regulatory issues 2 6
Operations and maintenance 3 (6)
General taxes and depreciation (4) (11)
----- -----
Total change $ - $ 8
===== =====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and total system
deliveries, excluding transport to the MCV Facility, increased 14.8
percent from 1995 levels. On a weather-adjusted basis, total system
deliveries increased 8.5 percent, reflecting significant growth resulting
from customer additions and conversions to natural gas from alternative
fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf,
a 19.0 percent increase from the corresponding period ended March 31,
1995, and total system deliveries, excluding transport to the MCV
Facility, increased 17.8 percent.
Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million
for the first quarters of 1996 and 1995, respectively. The increase of
$64 million was the result of increased sales. The increased costs also
reflect the reversal of a $23 million gas supplier contingency during the
first quarter of 1995. The cost of gas sold totaled $735 million and $608
million for the 12 months ended March 31, 1996 and 1995, respectively.
The increase of $127 million was also the result of increased sales offset
by the reversal of the gas supplier contingency of $23 million in the 1995
period.
Gas Utility Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC,
requesting, among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.
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 Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are 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
$130 million for 1996, $110 million for 1997 and $105 million for 1998.
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: 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 $98 million. These estimates are based on undiscounted 1996 costs.
At March 31, 1996, 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 effect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring
environmental clean-up costs and amortizing these costs over 10 years.
The order authorizes current recovery of $1 million annually. Consumers
is continuing 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.
Forward-Looking Information
Capital Expenditures: 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.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Consumers
Construction $396 $368 $335
Nuclear fuel lease 34 5 41
Capital leases other than nuclear fuel 6 19 16
Michigan Gas Storage 9 3 3
---- ---- ----
$445 $395 $395
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital
expenditures by electric and gas utility, see the Electric Capital
Expenditures and Gas Capital Expenditures sections within this MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions or the
developing competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including: 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. Consumers continues to work toward retaining
its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for
competitively discounted electric rates. Certain facilities will have the
option of taking retail wheeling service (if available) after the first
three years of the contract. The MPSC approved this contract in 1995.
This MPSC order and other MPSC orders approving special long-term sales
contracts have been appealed by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
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, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those previously filed by Detroit Edison
and the Attorney General. Consumers does not expect this short-term
experiment to have a material impact on its financial position, liquidity
or results of operations.
In April 1996, the FERC issued two orders which require utilities to
provide open access to the interstate transmission grid. The first order
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The order also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second order
requires utilities to establish electronic systems to share information
about available transmission capacity and to separate their wholesale
power marketing and transmission operations functions by implementing
standards of conduct. These orders will become effective in July 1996.
In addition, the FERC issued a NOPR on April 24, 1996, which proposes for
consideration a new system for utilities to use in reserving capacity on
their own and others' transmission lines. This would replace certain
tariffs included in the first order with a capacity reservation tariff in
which participants would reserve firm rights to transfer power between
designated receipt and delivery points. Consumers is evaluating these
developments and has not determined the impact of the FERC's Orders on its
financial position, liquidity or results of operations.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry. The
MPSC has directed Consumers (and Detroit Edison) to file applications by
May 15, 1996, addressing the recommendation of the Michigan Jobs
Commission to allow a choice of power suppliers for new industrial and
commercial electric load. The Michigan Jobs Commission's recommendations
also include related matters, such as the full recovery of utility
stranded costs. No new legislation has been introduced. However,
Consumers anticipates additional MPSC orders during 1996 which will
further define a new electric and gas utility regulatory framework for
Michigan.
SFAS 71 allows the deferral of certain costs and the recording of
regulatory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Gas Outlook, Competition and Deliveries: Consumers currently anticipates
gas deliveries to grow approximately 2 percent per year (excluding
transportation to the MCV Facility and off-system deliveries) over the
next five years, assuming 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. The emerging use of natural gas
vehicles also provides 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. Consumers also
plans additional capital expenditures to construct new gas mains that are
expected to expand Consumers' system. Actual gas deliveries in future
periods may be affected by abnormal weather, alternative energy prices,
changes in competitive conditions and the level of natural gas
consumption.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are
regulated by the MPSC as parties to this proceeding. Consumers has filed
its comments with the MPSC, indicating that the MPSC should only direct
local distribution companies to file pilot programs designed to test the
feasibility of expanded transportation service. Consumers also expressed
its position that it is premature to expand transportation service to
residential customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions (including those of the FERC and the MPSC) with
respect to rates, industry and rate structure, operation of nuclear power
facilities, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, natural gas pipeline and storage
facilities, recovery of purchased power, decommissioning costs, and
present or prospective wholesale and retail competition, among others.
The business and profitability of Consumers is also influenced by economic
and geographic factors including political and economic risks, changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of Consumers.
Forward-looking information is included throughout this Form 10-Q.
Consumers' material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
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' 1995 Forms 10-K
for the year ended December 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 proceedings before the MPSC docketed as Case No. U-7830, Step 3A, the
MPSC reviewed Consumers' compliance with the financial stabilization order
conditions. In 1991, the MPSC issued an order 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, which was denied by that
court in March 1996. This proceeding is now closed.
1994 Gas Rate Case Filing
Consumers filed a general gas rate case in December 1994. Consumers'
final position in this case requested an increase in its gas rates of $6.7
million annually and a 12.25 percent return on equity. The MPSC issued a
final order in this case in March 1996. In this order, the MPSC reduced
Consumers' general gas rates by $11.7 million annually based on a return
on common equity of 11.6 percent. In April 1996, Consumers filed a
petition for rehearing of this order with the MPSC. The Company cannot
predict the outcome of this matter.
MCV - RELATED PROCEEDINGS
In March 1993, the MPSC approved, with modifications, a contested
settlement agreement among Consumers, the MPSC staff and 10 independent
cogenerators which resolved certain regulatory issues and allowed
Consumers to recover from electric customers a substantial portion of the
cost of 915 MW of contract capacity from the MCV Facility. After their
requests for rehearing were denied by the MPSC, ABATE and the Attorney
General appealed the orders approving the settlement to the Court of
Appeals. In March 1996, the Court of Appeals affirmed the March 1993 MPSC
order settling the electric rate issues involving Consumers and the MCV
Facility, and rejected claims by ABATE and the Attorney General which
contested the rates being charged electric customers since January 1993
for 915 MW of capacity and related energy being provided by the MCV
Facility. This proceeding is now closed.
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. Several recent lawsuits
allege personal injury as well as damage to livestock. Consumers believes
these claims to be without merit and intends to vigorously oppose all
claims the plaintiffs may raise but cannot predict the outcome of this
matter. At March 31, 1996, Consumers had 33 separate stray voltage cases
awaiting action at the trial court level.
INDEPENDENT POWER PRODUCTION PROJECT LITIGATION
In August 1995, William R. Williams and two of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.) filed a lawsuit against CMS Generation in the Denver County District
Court, State of Colorado, in connection with a project to be developed in
Bantangas, Philippines by Luzon Power Associates, Inc. in which
CMS Generation purchased a 50% ownership interest. Luzon Power
Associates, Inc. has an agreement to supply power to the Manila Electric
Company. The complaint alleges, breach of a confidentiality agreement,
breach of fiduciary duty, intentional interference with a contract, breach
of implied covenant of good faith and fair dealing, and unfair
competition. The claims primarily relate to a confidentiality agreement
between the parties, and CMS Generation's alleged pursuit of another
project to sell power directly to the Manila Electric Company, known as
the Magellan project, in alleged violation of a restrictive covenant in
the confidentiality agreement. The plaintiffs claim direct damages of
approximately $85 million and indirect damages in a like amount from loss
of future business, plus punitive damages, interest, and attorney's fees.
CMS Generation removed the case to the United States District Court for
the District of Colorado in September 1995, and in January 1996, that
court denied CMS Generation's motion to dismiss the suit or to transfer
the case based on improper venue. A trial date of July 1997 has been set
by the court. CMS Generation believes the plaintiff's position is without
merit and intends to vigorously oppose any claims they may raise but
cannot predict the outcome of this matter.
59
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(4) CMS Energy: Second Supplemental Indenture dated as of
March 19, 1996 between CMS Energy Corporation
and The Chase Manhattan Bank (National
Association), as Trustee
(10) CMS Energy: Employment Agreement dated March 20, 1996
between CMS Energy Corporation and Preston D.
Hopper
(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
Current Reports on Form 8-K dated January 18, 1996 (Consumers), February
23, 1996 (CMS Energy) and April 23, 1996 (CMS Energy and Consumers)
covering matters pursuant to "Item 5. Other Events."
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: May 15, 1996 By A M Wright
------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: May 15, 1996 By A M Wright
------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer