ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Power Company ("Consumers")
and its wholly-owned subsidiary, Michigan Gas Storage Company) as of June
30, 1996 and 1995, and the related statements of income, common
stockholders' equity and cash flows for the three-month, six-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31,
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,
August 9, 1996.
2
Consumers Gas Group
Statements of Income
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
OPERATING REVENUE $ 207 $ 197 $ 753 $ 679 $1,269 $1,119
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Cost of gas sold 106 102 451 383 739 617
Other 46 46 89 92 194 190
------- ------- ------- ------- ------- -------
Total operation 152 148 540 475 933 807
Maintenance 9 9 18 19 38 37
Depreciation, depletion and amortization 14 14 51 47 87 80
General taxes 10 9 31 30 55 53
------- ------- ------- ------- ------- -------
Total operating expenses 185 180 640 571 1,113 977
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME 22 17 113 108 156 142
INCOME TAXES 6 5 38 36 50 45
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 16 12 75 72 106 97
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Other income taxes, net - 1 - - - -
Other, net (1) - (2) - (2) (1)
------- ------- ------- ------- ------- -------
Total other income (deductions) (1) 1 (2) - (2) (1)
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 7 7 15 15 30 30
Other interest 1 1 2 2 6 5
Capitalized interest - - - - (1) (1)
Preferred dividends 2 2 3 3 6 6
------- ------- ------- ------- ------- -------
Net fixed charges 10 10 20 20 41 40
------- ------- ------- ------- ------- -------
NET INCOME $ 5 $ 3 $ 53 $ 52 $ 63 $ 56
======= ======= ======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS THROUGH RETAINED INTEREST $ 4 $ - $ 40 $ - $ 47 $ -
======= ======= ======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 1 $ - $ 13 $ - $ 16 $ -
======= ======= ======= ======= ======= =======
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 - 8 - 8 -
======= ======= ======= ======= ======= =======
EARNINGS PER AVERAGE CLASS G COMMON SHARE $ .16 $ - $ 1.66 $ - $ 2.05 $ -
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .56 $ - $ 1.12 $ -
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
Six Months Ended Twelve Months Ended
June 30 June 30
1996 1995 1996 1995
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 53 $ 52 $ 63 $ 56
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 51 47 87 80
Capital lease and other amortization 3 3 5 5
Deferred income taxes and investment tax credit 8 15 6 16
Other - - 1 1
Changes in other assets and liabilities 36 51 1 57
------ ------ ------ ------
Net cash provided by operating activities 151 168 163 215
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (53) (47) (130) (128)
Cost to retire property, net (4) (4) (10) (9)
Other 1 (1) 4 (2)
------ ------ ------ ------
Net cash used in investing activities (56) (52) (136) (139)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable, net (82) (72) (4) (14)
Payment of common stock dividends (18) (40) (36) (53)
Payment of capital lease obligations (3) (2) (6) (5)
Proceeds from long-term note 22 - 22 -
Contribution from CMS Energy stockholders 3 - 21 -
Retirement of bonds and other long-term debt - (2) (6) (8)
Repayment of bank loans - - - (85)
Proceeds from bank loans - - - 88
------ ------ ------ ------
Net cash used in financing activities (78) (116) (9) (77)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 17 - 18 (1)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 4 5
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 22 $ 4 $ 22 $ 4
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
Consumers Gas Group
Balance Sheets
June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
PLANT (At original cost)
Plant $2,229 $2,169 $2,097
Less accumulated depreciation, depletion and amortization 1,227 1,179 1,156
------ ------ ------
1,002 990 941
Construction work-in-progress 53 55 56
------ ------ ------
1,055 1,045 997
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 22 5 4
Accounts receivable and accrued revenue, less
allowances of $1, $2 and $2, respectively (Note 6) 131 99 66
Inventories at average cost
Gas in underground storage 109 184 155
Materials and supplies 9 10 10
Trunkline settlement 30 30 30
Deferred income taxes 9 9 4
Prepayments and other 30 49 27
------ ------ ------
340 386 296
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 158 161 158
Deferred income taxes 13 14 5
Trunkline settlement 10 25 40
Other 58 59 69
------ ------ ------
239 259 272
------ ------ ------
TOTAL ASSETS $1,634 $1,690 $1,565
====== ====== ======
5
June 30 June 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 377 $ 339 $ 329
Preferred stock 78 78 78
Long-term debt 434 411 425
Non-current portion of capital leases 19 20 17
------ ------ ------
908 848 849
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 21 23 13
Notes payable 23 105 27
Accounts payable 82 79 69
Accrued taxes 44 66 39
Trunkline settlement 30 30 30
Accrued refunds 24 20 28
Accrued interest 8 7 8
Other 44 52 38
------ ------ ------
276 382 252
------ ------ ------
NON-CURRENT LIABILITIES
Postretirement benefits 176 175 175
Regulatory liabilities for income taxes, net 169 162 150
Deferred investment tax credit 27 28 29
Trunkline settlement 10 25 40
Other 68 70 70
------ ------ ------
450 460 464
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,634 $1,690 $1,565
====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1996 1995 1996 1995 1996 1995
In Millions
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 128 107 125 107 107 107
Stockholder's contribution - - 3 - 21 -
------- ------- ------- ------- ------- -------
At end of period 128 107 128 107 128 107
------- ------- ------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 69 75 30 26 38 35
Net income 5 3 53 52 63 56
Common stock dividends declared (9) (40) (18) (40) (36) (53)
------- ------- ------- ------- ------- -------
At end of period 65 38 65 38 65 38
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 377 $ 329 $ 377 $ 329 $ 377 $ 329
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
Consumers Gas Group
Condensed 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 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 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 months ended June 30, 1996 reflect the
performance of Consumers Gas Group since the initial issuance of Class G
Common Stock in the third quarter of 1995. Class G Common Stock
participates in earnings and dividends from the issue date. The earnings
(loss) attributable to Class G Common Stock and the related amounts per
share are computed by considering the weighted-average number of shares of
Class G Common Stock outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to 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 is 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 six
months ended June 30, 1996 are based on 23.72 percent of the earnings of
Consumers Gas Group.
Earnings per share are omitted from the statements of income for the
periods ended June 30, 1995 since Class G Common Stock was not then part
of the equity structure of CMS Energy. For purpose of analysis, following
are pro forma data for the six months ended June 30, 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 Consumers Gas Group) on January 1, 1994.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Six Months Ended Six Months Ended Year Ended
June 30 June 30 December 31
1996 1995 1995
Consumers Gas Group net income $ 53 $ 52 $ 62
Net income attributable to
CMS Energy Common Stock
through Retained Interest $ 40 $ 40 $ 47
Net income attributable to
outstanding Class G
Common Stock $ 13 $ 12 $ 15
Average shares outstanding
of Class G Common Stock 7.662 7.520 7.536
Earnings per share attributable
to outstanding Class G
Common Stock $1.66 $1.63 $1.93
The portion of Consumers' common dividends attributed to Consumers Gas
Group, for periods prior to the July 1995 issuance of Class G Common
Stock, have been reflected in the financial statements. These dividend
amounts were allocated based on the ratio of 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 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. In July
1996, the Board of Directors declared a quarterly dividend of $.295 per
share on Class G Common Stock.
3: Rate Matters
For information regarding rate matters directly affecting 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: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $130 million for 1996, $120 million
for 1997, and $110 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 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 June 30
were:
In Millions
Six Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid
(net of amounts capitalized) $ 15 $ 16 $ 34 $ 33
Income taxes paid
(net of refunds) 30 18 37 33
Non-cash transactions
Assets placed under
capital lease $ - $ 1 $ 1 $ 4
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
Consumers Gas Group at June 30, 1996 and 1995 is estimated by management
to be $56 million and $38 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 are
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 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 Class G Common Stock, see
the MD&A of CMS Energy included and incorporated by reference herein.
Earnings for the Quarters Ended June 30, 1996 and 1995
For the second quarter of 1996, net income for Consumers Gas Group was $5
million, compared with $3 million for the second quarter of 1995. The $2
million increase reflects additional gas revenues from storage facility
operations and higher gas deliveries in 1996.
Earnings for the Six Months Ended June 30, 1996 and 1995
Net income for Consumers Gas Group totaled $53 million and $52 million for
the six months ended June 30, 1996 and 1995, respectively. The $1 million
increase reflects the same benefits as described for the quarter-ended
period. Partially offsetting these benefits was the reversal of a
previously recorded gas contract contingency in 1995.
Earnings for the 12 Months Ended June 30, 1996 and 1995
Net income for Consumers Gas Group for the 12 months ended June 30, 1996
totaled $63 million, compared with $56 million for the 12 months ended
June 30, 1995. The $7 million increase reflects additional gas revenues
from storage facility operations and higher gas deliveries, partially
offset by higher operating expenses, during the 12 months ended June 30,
1996. Also affecting the comparison of net income for the periods was the
reversal, during the 12 months ended June 30, 1995, of previously recorded
gas contingencies (see Note 3 to the Consolidated Financial Statements of
CMS Energy included and incorporated by reference herein).
Cash Position, Investing and Financing
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 six months of 1996 and 1995 totaled
$151 million and $168 million, respectively. The $17 million decrease
primarily reflects changes in the timing of cash payments related to
Consumers Gas Group's operations. Consumers Gas Group uses its operating
cash mainly to maintain and expand its gas utility transmission and
distribution systems and to retire portions of its long-term debt and pay
dividends.
Investing Activities: Net cash used in investing activities totaled $56
million and $52 million for the first six months of 1996 and 1995,
respectively. The $4 million increase resulted from higher capital
expenditures.
Financing Activities: Net cash used in financing activities in the first
six months of 1996 and 1995 totaled $78 million and $116 million,
respectively. The $38 million decrease reflects cash from the sale of
Trust Originated Preferred Securities and a reduction in cash used to pay
common stock dividends.
In July 1996, Consumers redeemed $36 million of maturing first mortgage
bonds. Consumers Gas Group's attributed portion of these matured bonds
totaled $8 million.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At June 30, 1996, receivables sold totaled $200 million. Consumers Gas
Group's attributed portion of these receivables sold totaled $56 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
For cautionary statements relating to Consumers Gas Group's forward-
looking information, see "Forward-Looking Information" in CMS Energy's
MD&A included and incorporated by reference herein.
Capital Expenditures: CMS Energy estimates that capital expenditures for
Consumers Gas Group, including new lease commitments, will total $360
million over the next three years.
In Millions
Years Ended December 31 1996 1997 1998
Gas Utility (a) $121 $117 $107
Michigan Gas Storage 9 3 3
---- ---- ----
$130 $120 $110
==== ==== ====
(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
"Forward-Looking Information" discussions in CMS Energy's MD&A included
and incorporated by reference herein.