ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Power Company ("Consumers") and
its wholly-owned subsidiary, Michigan Gas Storage Company) as of March 31,
1996 and 1995, and the related 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 balance sheet of Consumers Gas Group as of December 31,
1995, and the related statements of income, common stockholders' equity
and cash flows for the year then ended (not presented herein), and, in our
report dated January 26, 1996, we expressed an unqualified opinion on
those statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1995, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 10, 1996.
2
Consumers Gas Group
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 $ 546 $ 482 $1,259 $1,105
------- ------- ------- -------
OPERATING EXPENSES
Operation
Cost of gas sold 345 281 735 608
Other 43 46 194 188
------- ------- ------- -------
Total operation 388 327 929 796
Maintenance 9 10 38 38
Depreciation, depletion and amortization 37 33 87 78
General taxes 21 21 54 50
------- ------- ------- -------
Total operating expenses 455 391 1,108 962
------- ------- ------- -------
PRETAX OPERATING INCOME 91 91 151 143
INCOME TAXES 32 31 49 44
------- ------- ------- -------
NET OPERATING INCOME 59 60 102 99
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Other income taxes, net - (1) 1 -
Other, net (1) - (1) (2)
------- ------- ------- -------
Total other income (deductions) (1) (1) - (2)
------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 8 8 30 30
Other interest 1 1 6 5
Capitalized interest - - (1) (1)
Preferred dividends 1 1 6 6
------- ------- ------- -------
Net fixed charges 10 10 41 40
------- ------- ------- -------
NET INCOME $ 48 $ 49 $ 61 $ 57
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS
THROUGH RETAINED INTEREST $ 36 $ 49 $ 46 $ 57
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 12 $ - $ 15 $ -
======= ======= ======= =======
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 - 8 -
======= ======= ======= =======
EARNINGS PER AVERAGE CLASS G COMMON SHARE $ 1.50 $ - $ 1.90 $ -
======= ======= ======= =======
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .84 $ -
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
Consumers Gas Group
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 $ 48 $ 49 $ 61 $ 57
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 37 33 87 78
Capital lease and other amortization 1 1 5 4
Deferred income taxes and investment tax credit 6 16 3 16
Changes in other assets and liabilities 6 17 5 (9)
Other - - 1 1
------ ------ ------ ------
Net cash provided by operating activities 98 116 162 147
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (24) (21) (127) (130)
Cost to retire property, net (2) (2) (10) (9)
Other 1 (1) 4 2
------ ------ ------ ------
Net cash used in investing activities (25) (24) (133) (137)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (90) (89) 5 10
Payment of common stock dividends (9) - (67) (38)
Payment of capital lease obligations (1) (1) (5) (4)
Proceeds from long-term note 22 - 22 -
Contribution from CMS Energy stockholders 3 - 21 22
Repayment of bank loans and other long-term debt - (2) (6) (103)
Proceeds from bank loans and other long-term debt - - - 89
------ ------ ------ ------
Net cash used in financing activities (75) (92) (30) (24)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS (2) - (1) (14)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 4 18
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 3 $ 4 $ 3 $ 4
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
Consumers Gas Group
Balance Sheets
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Plant $2,207 $2,169 $2,078
Less accumulated depreciation, depletion and amortization 1,216 1,179 1,145
------ ------ ------
991 990 933
Construction work-in-progress 48 55 50
------ ------ ------
1,039 1,045 983
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 3 5 4
Accounts receivable and accrued revenue, less
allowances of $1, $2 and $2, respectively (Note 6) 254 99 170
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 10 10 10
Trunkline settlement 30 30 30
Deferred income taxes 8 9 8
Prepayments and other 39 49 35
------ ------ ------
383 386 337
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 162 161 157
Trunkline settlement 17 25 48
Deferred income taxes 14 14 -
Other 59 59 71
------ ------ ------
252 259 276
------ ------ ------
TOTAL ASSETS $1,674 $1,690 $1,596
====== ====== ======
5
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 381 $ 339 $ 366
Preferred stock 78 78 78
Long-term debt 433 411 425
Non-current portion of capital leases 20 20 18
------ ------ ------
912 848 887
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 23 23 12
Notes payable 15 105 10
Accounts payable 84 79 59
Accrued taxes 70 66 53
Trunkline settlement 30 30 30
Accrued refunds 25 20 25
Accrued interest 6 7 6
Other 46 52 43
------ ------ ------
299 382 238
------ ------ ------
NON-CURRENT LIABILITIES
Postretirement benefits 178 175 175
Regulatory liabilities for income taxes, net 167 162 148
Deferred investment tax credit 28 28 29
Trunkline settlement 18 25 48
Deferred income taxes - - 1
Other 72 70 70
------ ------ ------
463 460 471
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,674 $1,690 $1,596
====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 125 107 107 85
CMS Energy stockholders' contribution 3 - 21 22
------- ------- ------- -------
At end of period 128 107 128 107
------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 30 26 75 56
Net income 48 49 61 57
Common stock dividends declared (9) - (67) (38)
------- ------- ------- -------
At end of period 69 75 69 75
------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 381 $ 366 $ 381 $ 366
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
Consumers Gas Group
Notes to Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the business of CMS Energy, see the
Notes to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
In 1995, CMS Energy issued a total of 7.62 million shares of Class G
Common Stock. This new class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). For further information regarding the Class G Common Stock,
see Note 8 to the Consolidated Financial Statements of CMS Energy included
and incorporated by reference herein.
These financial statements and their related notes should be read along
with the financial statements and notes contained in the 1995 Form 10-K of
CMS Energy that includes the Report of Independent Public Accountants,
included and incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings per share, for the twelve month period ended March 31, 1996,
reflect the performance of the Consumers Gas Group since the initial
issuance of the Class G Common Stock during the third quarter of 1995.
The Class G Common Stock participates in earnings and dividends from the
issue date. The earnings (loss) attributable to such common stock and the
related amounts per share are computed by considering the weighted average
number of common shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to the Consumers Gas Group's 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
earnings of the Consumers Gas Group.
Earnings per share are omitted from the statements of income, for the
periods ended March 31, 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.
In Millions, Except Per Share Amounts
-------------------------------------
Actual Pro Forma Pro Forma
Three Months EndedThree Months Ended Year Ended
March 31 March 31 December 31
1996 1995 1995
------------- ------------- -----------
Consumers Gas Group
Net Income $ 48 $ 49 $ 62
Net Income attributable to
CMS Energy Common Stock
through Retained Interest $ 36 $ 37 $ 47
Net Income attributable to
outstanding Class G
Common Stock $ 12 $ 12 $ 15
Average shares outstanding
of Class G Common Stock 7.627 7.520 7.536
Earnings per share
attributable to outstanding
Class G Common Stock $1.50 $1.55 $1.93
The portion of Consumers' common dividends attributed to the Consumers Gas
Group, for periods prior to the July 1995 issuance of the Class G Common
Stock, have been reflected in the financial statements. These dividend
amounts were allocated based on the ratio of the Consumers Gas Group's net
income to Consumers' consolidated net income after dividends on preferred
stock. This ratio was then applied to Consumers' total dividend payments
for these periods. Dividends declared on the Class G Common Stock
following the issuance are also reflected in the financial statements. In
July and October 1995, and January and April 1996, the Board of Directors
declared quarterly dividends of $.28 per share on Class G Common Stock.
3: Rate Matters
For information regarding rate matters directly affecting the Consumers
Gas Group, see the "Gas Rates" and "GCR Matters" discussions in Note 3 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
4: Commitments and Contingencies
Capital Expenditures: The Consumers Gas Group estimates capital
expenditures, including new lease commitments, will be $130 million for
1996, $110 million for 1997 and $105 million for 1998. These estimates
include an attributed portion of Consumers' anticipated capital
expenditures for common plant and equipment.
For further information regarding commitments and contingencies directly
affecting the Consumers Gas Group (including those involving former
manufactured gas plant sites), see the "Environmental Matters," and
"Other" discussions in Note 4 to the Consolidated Financial Statements of
CMS Energy included and incorporated by reference herein.
5: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Consumers Gas Group's 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) $ 9 $ 10 $ 34 $ 32
Income taxes paid
(net of refunds) 2 - 27 31
Non-cash transactions
Assets placed under
capital lease $ - $ 1 $ 1 $ 5
Capital leases refinanced - - 9 -
6: Short-Term and Long-Term Financings
Consumers' short-term and long-term financings are discussed in Note 7 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to the
Consumers Gas Group at March 31, 1996 and 1995, is estimated by management
to be $141 million and $135 million, respectively. Accounts receivable
and accrued revenue in the balance sheets have been reduced to reflect
receivables sold. The portions of short-term debt and receivables sold
attributed to Consumers Gas Group reflect the high utilization of
short-term borrowing to finance the purchase of gas for storage in the
summer and fall periods. Management believes these allocations to be
reasonable.
10
Consumers Gas Group
Management's Discussion and Analysis
In 1995, CMS Energy issued a total of 7.62 million shares of Class G
Common Stock. This new class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). Accordingly, this MD&A should be read along with the MD&A in
the 1995 Form 10-K of CMS Energy.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. Consumers, a combination electric and gas utility company
serving the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. For further information regarding the businesses of
CMS Energy, including the nature and issuance of the Class G Common Stock,
see the MD&A of CMS Energy included and incorporated by reference herein.
Earnings for the quarters ended March 31, 1996 and 1995
For the first quarter of 1996, net income for the Consumers Gas Group was
$48 million, compared to $49 million for the comparable 1995 period. The
decrease in net income is affected by the reversal, during the three
months ended March 1995 period, of a gas contract contingency which
benefited the 1995 period (see Note 3 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein).
Additionally, during the first quarter of 1996, there were higher gas
deliveries resulting from customer additions and load conversions to
natural gas from alternative fuels and colder weather than experienced in
the first quarter of 1995.
Earnings for the 12 months ended March 31, 1996 and 1995
Net income for the Consumers Gas Group for the 12 months ended March 31,
1996 totaled $61 million compared to $57 million for the 12 months ended
March 31, 1995. The increase in 1996 net income reflects higher gas
deliveries and higher operating expenses during the 12-months ended March
1996 period compared to the 12 months ended March 1995 period. Also
affecting the comparison of net income for the 12 months ended March 31,
1996 and 1995 periods was the reversal, during the 12 months ended March
1995 period, of previously recorded gas contingencies (see Note 3 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein).
Cash Position, Financing and Investing
Consumers Gas Group's cash requirements are met by its operating and
financing activities. Consumers Gas Group's cash from operations is
derived mainly from Consumers' sale and transportation of natural gas.
Cash from operations for the first quarters of 1996 and 1995 totaled $98
million and $116 million, respectively. The $18 million decrease
primarily reflects the timing of cash payments related to Consumers'
operations. Consumers Gas Group primarily uses its operating cash to
maintain and expand its gas utility transmission and distribution systems
and to retire portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities in the first
quarters of 1996 and 1995 totaled $75 million and $92 million,
respectively. The $17 million decrease reflects increased cash, primarily
resulting from the sale of Trust Originated Preferred Securities,
partially offset by increased cash used to pay common stock dividends.
Investing Activities: Net cash used in financing activities totaled $25
million and $24 million for the first quarters of 1996 and 1995,
respectively. Increased cash used for capital expenditures was
principally offset by reduced costs to retire property.
Financing and Investing Outlook: Consumers has an agreement permitting
the sales of certain accounts receivable for up to $500 million. At March
31, 1996, receivables sold totaled $280 million. Consumers Gas Group's
attributed portion of such receivables sold totaled $141 million.
For further information, see CMS Energy's MD&A included and incorporated
by reference herein.
Results of Operations
For Consumers Gas Group's results of operations, see "Consumers Gas Group
Results of Operations" in CMS Energy's MD&A included and incorporated by
reference herein.
Gas Issues
For Consumers Gas Group's discussion of Gas Rate Proceedings, GCR Matters
and Environmental Matters, see "Consumers Gas Group Issues" in
CMS Energy's MD&A included and incorporated by reference herein.
Forward-Looking Information
Capital Expenditures: CMS Energy estimates that capital expenditures for
the Consumers Gas Group, including new lease commitments, will total $345
million over the next three years.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Gas Utility (a) $121 $107 $102
Michigan Gas Storage 9 3 3
---- ---- ----
$130 $110 $105
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
Consumers' gas and electric utility businesses.
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. Consumers Gas Group expects that cash from
operations and the ability to access debt markets will provide necessary
working capital and liquidity to fund future capital expenditures,
required debt payments and other cash needs in the foreseeable future.
For further information regarding Consumers Gas Group's forward looking
information, see the "Gas Outlook, Competition and Deliveries" and "Other
Forward Looking Information" discussions in CMS Energy's MD&A included and
incorporated by reference herein.