FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
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 ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue,
Jackson, Michigan 49201
(517)788-0550
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Exchange on
Registrant Title of Class Which Registered
- ------------------ ----------------------------------- ----------------
CMS Energy
Corporation Common Stock, $.01 par value New York
Stock Exchange
Class G Common Stock, no par value New York
Stock Exchange
Consumers Energy
Company First Mortgage Bonds:
6-7/8% Series due 1998; New York
6-5/8% Series due 1998 Stock Exchange
Cumulative Preferred Stock, No par value:
$2.08 Series New York
Stock Exchange
Preferred Stocks, $100 par value:
$4.16 Series, $4.50 Series New York
Stock Exchange
Consumers Power
Company Financing I 8.36% Trust Originated
Preferred Securities New York
Stock Exchange
Consumers Energy
Company Financing II 8.20% Trust Originated
Preferred Securities New York
Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of CMS Energy voting and non-voting common
equity held by non-affiliates was $4,655,322,789 for the 100,949,992
CMS Energy Common Stock shares and the 8,276,292 Class G Common Stock
shares outstanding on February 28, 1998.
On February 28, 1998, CMS Energy held all voting and non-voting common
equity of Consumers.
Documents incorporated by reference: The Registrants' proxy statements
relating to the 1998 annual meeting of shareholders to be held May 22,
1998, are incorporated by reference in Part III, except for the
organization and compensation committee report contained therein.
CMS Energy Corporation
and
Consumers Energy Company
Annual Reports on Form 10-K to the Securities and Exchange Commission
for the Year Ended December 31, 1997
This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Energy Company makes
no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 31
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 34
PART II
Item 5. Market for CMS Energy's and Consumers' Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . 35
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 35
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . 36
Item 8. Financial Statements and Supplementary Data. . . . . . . . . 36
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 146
PART III
Item 10. Directors and Executive Officers of CMS Energy
and Consumers. . . . . . . . . . . . . . . . . . . . . . 146
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 146
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 146
Item 13. Certain Relationships and Related Transactions . . . . . . . 146
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 146
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ALJ . . . . . . . . . . . . . Administrative Law Judge
Ames. . . . . . . . . . . . . Crescent and Ames gas gathering systems and
processing plant in Oklahoma
AMT . . . . . . . . . . . . . Alternative minimum tax
Articles. . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . Big Rock Point nuclear power plant, owned by
Consumers
Board of Directors. . . . . . Board of Directors of CMS Energy
Btu . . . . . . . . . . . . . British thermal unit
CFLCL . . . . . . . . . . . . Companhia Forcia e Luz Cataguazes-
Leopoldina, a Brazilian utility
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
CMS Electric and Gas. . . . . CMS Electric and Gas 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 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 MST . . . . . . . . . . . CMS Marketing, Services and Trading Company,
a subsidiary of Enterprises
CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . Consumers Energy Company, a subsidiary of
CMS Energy
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
DOE . . . . . . . . . . . . . U.S. Department of Energy
Dow . . . . . . . . . . . . . The Dow Chemical Company
DSM . . . . . . . . . . . . . Demand-side management
Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
EPA . . . . . . . . . . . . . Environmental Protection Agency
EPS . . . . . . . . . . . . . Earning per share
FASB. . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . Gas cost recovery
Grand Lacs partnership. . . . Grand Lacs Limited Partnership, a marketing
center for natural gas
GTNs. . . . . . . . . . . . . CMS Energy General Term Notes, $250 million
Series A, $125 million Series B, $150
million Series C and $200 million Series D
Huron . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary of
Consumers
IRC . . . . . . . . . . . . . Internal Revenue Code
ITC . . . . . . . . . . . . . Investment tax credit
Jorf Lasfar . . . . . . . . . A 1,320 MW coal-fueled power plant in
Morocco, Africa, jointly owned by
CMS Generation and ABB Energy Venture, Inc.
kWh . . . . . . . . . . . . . Kilowatt-hour
Loy Yang. . . . . . . . . . . A 2,000 MW brown coal fueled Loy Yang A
power plant and an associated coal mine in
Victoria, Australia, in which CMS Generation
holds a 50 percent ownership interest
Ludington . . . . . . . . . . Ludington pumped storage plant, jointly
owned by Consumers and Detroit Edison
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 in which Consumers has a 49
percent interest through CMS Midland
MD&A. . . . . . . . . . . . . Management's Discussion and Analysis
MichCon . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
Mbbls . . . . . . . . . . . . Thousand barrels
MMbbls. . . . . . . . . . . . Million barrels
MMBtu . . . . . . . . . . . . Million British thermal unit
MMcf. . . . . . . . . . . . . Million cubic feet
Moss Bluff. . . . . . . . . . Moss Bluff Gas Storage Systems, a
partnership that owns a gas storage facility
MPSC. . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . Megawatts
Natural Gas Act . . . . . . . Federal Natural Gas Act
NEIL. . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NRC . . . . . . . . . . . . . Nuclear Regulatory Commission
Order 888 and Order 889 . . . FERC final rules issued on April 24, 1996
Outstanding Shares. . . . . . Outstanding shares of Class G Common Stock
Palisades . . . . . . . . . . Palisades nuclear power plant, owned by
Consumers
PCBs. . . . . . . . . . . . . Poly chlorinated biphenyls
Pension Plan. . . . . . . . . The trusteed, non-contributory, defined
benefit pension plan of Consumers and
CMS Energy
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a 35-
year term commencing in March 1990
ppm . . . . . . . . . . . . . Parts per million
PSCR. . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935
Qualifying Facility . . . . . A facility that produces electricity or
steam and electricity and meets the
ownership and technical requirements of
PURPA
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
Securitization. . . . . . . . A financing authorized by statute in which
the statutorily assured flow of revenues
from a portion of the rates charged by
utilities to their customers is set aside
and pledged as security for the repayment of
rate reduction bonds issued by a special
purpose vehicle affiliated with such
utilities
SERP. . . . . . . . . . . . . Supplemental Executive Retirement Plan
Senior Credit Facilities. . . $1.125 billion senior credit facilities
consisting of a $400 million 364-day
revolving credit facility, a $600 million
three-year revolving credit facility and a
five-year $125 million term loan facility
SFAS. . . . . . . . . . . . . Statement of Financial Accounting Standards
Superfund . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
TGN . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
Transition Costs. . . . . . . Costs incurred by utilities in order to
serve their customers in a regulated
monopoly environment, but which may not be
recoverable in a competitive environment
because of customers leaving their systems
and ceasing to pay for their costs. These
costs could include owned and purchased
generation, regulatory assets, and costs
incurred in the transition to competition.
Trust Preferred
Securities . . . . . . . . . Undivided beneficial interest in the assets
of statutory business trusts, these
interests have a preference with respect to
certain trust distributions over the
interests of either CMS Energy or Consumers,
as applicable, as owner of the common
beneficial interests of the trusts
Union . . . . . . . . . . . . Utility Workers of America, AFL-CIO
UST . . . . . . . . . . . . . Underground storage tanks
Voluntary Employee
Beneficiary
Association. . . . . . . . . A legal entity, established under guidelines
of the Internal Revenue Code, through which
the company can provide certain benefits for
its employees or retirees
7
PART I
ITEM 1. BUSINESS.
GENERAL
CMS ENERGY
CMS Energy, incorporated in Michigan in 1987, is the parent holding
company of Consumers and Enterprises. Consumers, a combination electric
and gas utility company serving in all 68 counties of Michigan's Lower
Peninsula, is the largest subsidiary of CMS Energy. Enterprises is engaged
in several domestic and international energy-related businesses including:
oil and gas exploration and production; acquisition, development and
operation of independent power production facilities; storage,
transmission and processing of natural gas; energy marketing, services and
trading; and international energy distribution. CMS Energy is exempt from
registration under PUHCA, as described in Item 3. Legal Proceedings.
CMS Energy had consolidated operating revenue in 1997 of $4.8 billion. It
derived 53 percent from the electric utility operations, 25 percent from
the gas utility operations, 14 percent from marketing, services and
trading activities, 4 percent from independent power production and other
non-utility activities, 2 percent from gas transmission, storage and
processing activities, and 2 percent from oil and gas exploration and
production activities. Consumers' consolidated operations in the electric
and gas utility businesses account for the majority of CMS Energy's total
assets, revenue and income. CMS Energy's unconsolidated share of non-
utility independent power production, gas transmission and storage,
marketing services and trading, and international energy distribution
revenue for 1997 was $913 million.
CONSUMERS
Consumers, incorporated in Michigan in 1968, is the successor to a
corporation organized in Maine in 1910 that did business in Michigan from
1915 to 1968. Consumers was named Consumers Power Company from 1910 to the
first quarter of 1997, when Consumers changed its name to Consumers Energy
Company to reflect its increasing focus on providing customers with total
energy solutions.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Consumers is a public utility serving gas or
electricity to almost 6 million of Michigan's 9.5 million residents in all
Lower Peninsula counties. Consumers' service area includes automotive,
metal, chemical, food and wood products industries and a diversified group
of other industries.
Consumers had consolidated operating revenue in 1997 of $3.8 billion that
was derived 67 percent from its electric business, 32 percent from its gas
business and 1 percent from its non-utility business. Consumers' rates
and certain other aspects of its business are subject to the jurisdiction
of the MPSC and FERC, as described in CMS Energy and Consumers Regulation
later in this Item.
BUSINESS SEGMENTS
CMS ENERGY AND CONSUMERS FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's
business segments and international and domestic operations, see Item 8.
Financial Statements and Supplementary Data - Selected Financial
Information and CMS Energy's Consolidated Financial Statements and Notes
to Consolidated Financial Statements.
For information with respect to the operating revenue, net operating
income, identifiable assets and liabilities attributable only to
Consumers' business segments, see Item 8. Financial Statements and
Supplementary Data - Selected Financial Information and Consumers'
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
CMS ENERGY AND CONSUMERS PRINCIPAL OPERATIONS
CMS Energy conducts its principal operations through the following six
business segments: electric utility operations; gas utility operations;
oil and gas exploration and production operations; independent power
production; energy marketing, services and trading; and storage,
transmission and processing of natural gas. Consumers conducts
CMS Energy's domestic electric and gas utility operations.
CMS Energy's international operations are subject to the risks inherent in
conducting business abroad, including possible nationalization or
expropriation, local market price and restrictions. Changes in the
relative value of currencies occur from time to time and their effects may
be favorable or unfavorable on results of operations. In addition, there
are exchange control restrictions in certain countries which may effect
repatriation of earnings.
CMS Energy and Consumers believe that they and their subsidiaries are
adequately insured for the various risk exposures, including political
risk, incidental to their respective businesses.
CONSUMERS ELECTRIC UTILITY OPERATIONS
Consumers generates, purchases, transmits, or distributes electricity in
61 of Michigan's 68 Lower Peninsula counties. Principal cities served
include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland,
Muskegon and Saginaw. Consumers' electric utility customer base includes a
mix of residential, commercial, and diversified industrial customers, the
largest segment of which is the automotive industry. Consumers' electric
operations are not dependent upon a single customer, or even a few
customers, and the loss of any one or even a few of such customers would
not have a material adverse effect on its financial condition. Consumers
had 1.6 million electric customers at December 31, 1997.
Consumers' electric operations are seasonal. The summer months increase
demand for energy, thereby, affecting revenues. Total electric sales in
1997 were a record 38 billion Kwh, a 2.3 percent increase from the 1996
levels including a 1.2 percent increase in system sales to Consumers'
ultimate customers. Electric operating revenue in 1997 was $2.5 billion,
an increase of 2.8 percent from 1996.
Consumers achieved a peak demand of 7,315 MW in July 1997, exceeding the
1996 peak by 2.1 percent (or 148 MW). Peak demands for 1997 were 5,811 MW
in the winter and 7,315 MW in the summer. Based on actual peaks,
Consumers' reserve margin was 10.4 percent in 1997 compared to 12.7
percent in 1996. Based on weather-adjusted peaks, Consumers' reserve
margin was 10.4 percent in 1997 compared to 13.3 percent in 1996.
Consumers owned and operated 28 electric generating plants for the
majority of 1997 with an aggregate net demonstrated capacity of 6,255 MW
available under summer conditions in 1997 (including Big Rock which was
retired at the end of August). In 1997, Consumers purchased 1,648 MW of
net capacity, which amounted to 34.3 percent of Consumers' total system
requirements, from independent power producers, the largest being the MCV
Partnership. For additional information on Consumers' electric
properties, see Item 2. Properties - Consumers Electric Utility
Properties.
A transmission system interconnects Consumers' electric generating plants
at many locations with transmission facilities of unaffiliated systems,
including those of other utilities in Michigan and Indiana. The
interconnections permit a sharing of the reserve capacity of the connected
systems. This allows mutual assistance during emergencies and
substantially reduces investment in utility plant facilities.
FUEL: Consumers has five generating plants that use coal as a fuel source
and that constitute 77 percent of its baseload capacity. These plants
combined to produce a total of 16,427 million Kwhs in 1997 and required
7.2 million tons of coal. At December 31, 1997, Consumers had long-term
contracts covering 60 to 70 percent of its anticipated coal requirements
for 1998. Consumers will acquire the remaining coal requirement through
short-term agreements or spot purchases. Consumers' coal inventory on
December 31, 1997 amounted to approximately 43 days' supply.
Consumers owned and operated two nuclear power plants for the majority of
1997, Palisades, near South Haven, Michigan, and Big Rock, near
Charlevoix, Michigan. Big Rock closed permanently on August 29, 1997.
During 1997, the combined net generation of these plants was 5,970 million
Kwhs, constituting 26 percent of Consumers' baseload generation. As of
December 31, 1997, Palisades constituted 25 percent of Consumers' baseload
generation with a net generation of 5,776 million Kwhs in 1997. Consumers
currently has one contract for uranium concentrate sufficient to cover
approximately 10 percent of its requirements. Consumers intends to
purchase the balance of its 1998 concentrate and conversion requirements
in the spot market. Consumers has contracts for nuclear fuel services,
including enrichment of uranium hexafluoride and fabrication of nuclear
fuel assemblies. The enrichment contract covers 70 percent of Consumers'
requirements until the year 2000. Consumers renegotiated the fabrication
contract in 1995 for Palisades. The contract remains in effect for the
next six Palisades reloads with options to extend for an additional two
reloads. These contracts are with major private industrial suppliers of
nuclear fuel and related services and with the United States Government.
For further information on the Big Rock closing, see Item 8. Financial
Statements and Supplementary Data - Note 7 of Consumers Notes to
Consolidated Financial Statements.
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
POWER GENERATED MILLIONS OF Kwhs
__________________________________________________________________________
1997 1996 1995 1994 1993
__________________________________________________________________________
Coal 16,427 16,928 15,956 17,401 16,520
Nuclear 5,970 5,653 5,353 4,904 3,938
Oil 258 364 318 322 238
Gas 80 74 238 91 110
Hydro 467 473 420 481 489
Net pumped storage (a) (477) (419) (373) (414) (394)
__________________________________________________________________________
Total net generation 22,725 23,073 21,912 22,785 20,901
__________________________________________________________________________
__________________________________________________________________________
(a) Represents Consumers' share of net generation from Ludington. This
facility pumps water into a storage pond using electricity generated
during off-peak hours to generate electricity later during peak demand
hours.
The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.
FUEL CONSUMED COST PER MILLION Btu
__________________________________________________________________________
1997 1996 1995 1994 1993
__________________________________________________________________________
Coal $1.53 $1.50 $1.51 $1.57 $1.60
Oil 2.97 2.67 2.64 2.96 2.90
Gas 3.36 3.60 2.18 2.81 3.13
Nuclear .57 .50 .49 .46 .40
All Fuels (a) 1.29 1.27 1.27 1.34 1.39
__________________________________________________________________________
__________________________________________________________________________
(a) Weighted average fuel costs.
Under the Nuclear Waste Policy Act of 1982, the federal government is
responsible for the permanent disposal of spent nuclear fuel and high-
level radioactive waste beginning in 1998. To date, the DOE has been
unable to arrange for storage facilities to meet this obligation and it
does not anticipate being able to accept spent nuclear fuel for storage in
1998. For a discussion of pending litigation and legislative action
relating to the DOE's obligations in this regard, see Item 3. Legal
Proceedings and Item 8. Financial Statements and Supplementary Data - Note
2 of Consumers' Notes to Consolidated Financial Statements. Big Rock has
the capacity to accommodate normal spent fuel discharge. Consumers' on-
site storage pool at Palisades is at capacity and Consumers is currently
storing spent nuclear fuel in on-site dry casks. For a discussion
relating to the NRC approval of dry storage casks and Consumers' use of
the casks, see Item 8. Financial Statements and Supplementary Data -
Note 7 of Consumers' Notes to Consolidated Financial Statements.
INSURANCE: Consumers maintains $500 million of primary nuclear property
damage insurance from NEIL at Big Rock and Palisades, covering all risks
of physical loss, subject to certain exclusions and deductibles.
Consumers also maintains at Palisades NEIL excess property damage
insurance in the amount of $2 billion. These nuclear property insurance
policies cover decontamination, debris removal and direct property loss.
The NEIL excess property damage policy for Palisades also covers a portion
of the cost arising from an accidental premature decommissioning which is
not already funded by the decommissioning trust funds and part of the
remaining book value of the plant. For any loss more than $100 million,
stabilization and decontamination expenses must be satisfied before
Consumers receives other claims proceeds from NEIL. Under all these
policies, Consumers retains the risk of loss to the extent the loss is
within the policy deductibles ($1 million for Palisades and $250,000 for
Big Rock) or policy exclusions, or if the loss exceeds the combined
property damage policy limits ($2.5 billion for Palisades and $500 million
for Big Rock) at either location. Because NEIL is a mutual insurance
company, Consumers could be subject to assessments under the NEIL primary
and excess property damage policies of up to $17.2 million in any one
policy year if covered losses occurred at its own or any other member's
nuclear facility. Consumers has also procured NEIL I coverage that would
partially cover the cost of replacement power during certain prolonged
accidental outages at Palisades. Insurance would not cover such costs
during the first 17 weeks of any outage, but insurance would cover most of
such costs during the next 58 weeks of the outage, followed by a reduced
level of coverage for a period up to two additional years. Consumers
could be subject to a maximum assessment under the replacement power
insurance of $2.2 million in any one policy year if covered losses
occurred at its own or any other member's nuclear facility.
Consumers maintains nuclear liability insurance and other forms of
financial protection (including an agreement of government indemnity under
the Price-Anderson Act, applicable to Big Rock) for injuries and off-site
property damage due to the nuclear hazard at such facilities. Such
insurance and financial protection covers Consumers up to the total limits
of liability established by the Price-Anderson Act, which are presently
$544 million for Big Rock and approximately $8.9 billion for Palisades.
Part of such financial protection consists of a mandatory industry-wide
program under which owners of nuclear generating facilities could be
assessed if a nuclear incident occurred at any of such facilities.
Consumers could be subject to a maximum assessment of $79 million per
occurrence if a nuclear incident occurred at certain nuclear facilities,
limited to a maximum installment payment of $10 million per occurrence in
any year. Consumers also maintains insurance under a master worker
program that covers tort claims for bodily injury to workers caused by
nuclear hazards. The policy contains a $200 million nuclear industry
aggregate limit. Under a previous insurance program providing coverage
for claims brought by workers, Consumers remains responsible for a maximum
assessment of up to $6.3 million.
Consumers has not obtained insurance for flood and earthquake property
damage at its nuclear plants because it believes that the protective
systems built into these plants and the low probability of an event of
this type at the locations of these plants makes such insurance
unnecessary.
Insurance policy terms, limits and conditions are subject to change during
the year as policies are renewed.
CONSUMERS GAS UTILITY OPERATIONS
Consumers purchases, transports, stores and distributes gas. It renders
gas service to 1.5 million customers and is authorized to serve in 54 of
the 68 counties in Michigan's Lower Peninsula. Principal cities served
include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw,
as well as the suburban Detroit area. It owns gas transmission and
distribution mains and other gas lines, compressor stations and
facilities, storage rights, wells and gathering facilities in several
storage fields in Michigan. See Item 2. Properties - Consumers Gas
Utility Properties. Consumers and Michigan Gas Storage inject gas into
storage during the summer months of the year for use during the winter
months when demand is higher. Consumers' gas operations are not dependent
upon a single customer, or even a few customers, and the loss of any one
or even a few of such customers would not have a material adverse effect
on its financial condition.
Consumers' gas operations are seasonal to the extent that peak demand
occurs in winter due to colder temperatures. Consumers' consolidated gas
operating revenue was $1.2 billion in 1997, a decrease of 6.1 percent from
1996. The all-time record 24 hour send-out of natural gas for Consumers
on January 19, 1994 was 3.1 bcf. Consumers considers the peak-day
transportation and distribution capacity of the system to be 3.6 bcf.
Deliveries of gas sold by Consumers, and from other sellers over
Consumers' pipeline and distribution network to ultimate customers,
including the MCV Partnership, totaled 420 bcf in 1997.
CONSUMERS GAS SUPPLY: In 1997, Consumers contracted to purchase
80 percent of its required gas supply under long-term contracts. The
contract supply included 38 percent from United States producers outside
Michigan, 24 percent from Canadian producers and 18 percent from Michigan
producers. Purchases on the spot market met the remaining 20 percent of
Consumers' 1997 gas supply requirements.
Consumers' firm transportation agreements are with Trunkline Gas Company,
Panhandle Eastern Pipeline Company, ANR Pipeline Company and Great Lakes
Gas Transmission, L.P. Consumers uses these agreements to deliver gas to
Michigan for ultimate deliveries to market. In total, Consumers' firm
transportation arrangements will carry over 90 percent of Consumers' total
gas supply requirements. Consumers' portfolio of firm transportation from
pipelines to Michigan is as follows:
VOLUME (dekatherms/day) EXPIRATION
__________________________________________________________________________
Trunkline Gas Company 336,375 October 2002
Panhandle Eastern Pipeline
Company 40,000 March 2000
25,000 March 2000
ANR Pipeline Company 20,000 October 1999
40,000 October 1999
10,000 December 2001
6,000 December 2002
83,790 October 2003
Great Lakes Gas
Transmission, L.P. 85,092 March 2004
__________________________________________________________________________
__________________________________________________________________________
Consumers transports the balance of its required gas supply under
interruptible contracts. The amount of interruptible capacity and the use
of it primarily varies with the price for such service and the
availability and price of the spot supplies to be purchased and
transported. Consumers' use of interruptible transportation is generally
in off-peak summer months and after Consumers has fully subscribed its
firm capacity.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION
CMS NOMECO is an oil and natural gas producer. It has projects in
Michigan and 8 other states, the Gulf of Mexico, Colombia, The Republic of
Congo, Ecuador, Equatorial Guinea, Tunisia and Venezuela. In 1997,
CMS NOMECO produced 6.9 Mmbbls of oil, condensate and plant products and
27.2 bcf of gas, compared with 5.2 Mmbbls and 29.4 bcf in 1996.
During 1997, CMS NOMECO participated with a working interest in drilling
wells as follows:
Number of
Number of Wells Successful Wells Success Ratio
Type of Well Gross Net Gross Net Gross Net
__________________________________________________________________________
Exploratory 8 2.60 5 1.88 62.5% 72.3%
Development 26 9.24 24 8.74 92.3% 94.6%
___________ _____________
Total 34 11.84 29 10.62 85.3% 89.7%
__________________________________________________________________________
__________________________________________________________________________
The previous table does not include CMS NOMECO's participation in Devonian
Shale gas wells in Michigan and Indiana, where CMS NOMECO drilled 129
wells (27.94 net) during 1997 with a 96.7 percent success rate.
For additional information, see Item 2. Properties - CMS Energy Oil and
Gas Exploration and Production Properties and Item 7. CMS Energy
Management's Discussion and Analysis - Oil and Gas Exploration and
Production Results of Operations.
CMS ENERGY INDEPENDENT POWER PRODUCTION
CMS Generation, formed in 1986, invests in, develops, constructs and
operates non-utility power generation projects both in the United States
and internationally. As of January 1998, CMS Generation had ownership
interests in 5,982 MW (gross) capacity in 33 operating power plants
throughout the United States and in Argentina, Australia, India, Jamaica,
Morocco and the Philippines. Natural gas, wood, coal, oil, water, scrap
tires, naphtha and wind power these plants.
In early 1997, a consortium of CMS Generation and others, bid for and won
the privatization of Loy Yang A in the Australian state of Victoria. Loy
Yang A is Victoria's largest electric coal-fueled generating plant with a
total capacity of 2,000 MW. The purchase also included associated coal
mines. CMS Generation holds a 50 percent ownership interest in the
acquired assets.
In late 1997, a joint venture of affiliates of CMS Generation and ABB
completed the acquisition of the Jorf Lasfar coal-fueled power plant, the
largest independent power facility in Morocco. The two existing
generating units total 660 MW of capacity. CMS Generation and ABB are
constructing two new generating units at Jorf Lasfar with a total capacity
of 696 MW. These units will be completed by the year 2000.
For additional information, see Item 2. Properties - CMS Energy Other
Properties and Item 7. CMS Energy Management's Discussion and Analysis -
Capital Resources and Liquidity - Capital Expenditures.
CMS ENERGY NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas transmission, processing and storage
projects. In late 1997, CMS Gas Transmission, through its affiliates and
local consortium partners, commenced construction of a 940 kilometer
pipeline that will transport natural gas across the Andes Mountains from
northern Argentina to markets in northern Chile. A 710 MW gas-fueled,
combined-cycle generating plant is under construction and will be built in
two stages at the end of the pipeline in Chile by the consortium. Plant
operations are expected in 1999.
In mid 1997, CMS Gas Transmission acquired a 100 percent ownership
interest in Western Australia Natural Gas, a 260 mile pipeline in
Australia. The pipeline can transport up to 120 million cubic feet per day
of natural gas. Included in the acquisition were 30 billion cubic feet of
proved natural gas reserves and an associated gas storage facility.
In the third quarter of 1997, CMS Gas Transmission and Westcoast Energy
Inc. initiated plans to construct the Tri State Pipeline, a natural gas
pipeline with a maximum capacity of one billion cubic feet per day. If
built, the pipeline will provide service from Illinois to Consumers'
natural gas system in Michigan, to Ontario, Canada and through connecting
pipelines to eastern United States markets.
For additional information, see Item 7. CMS Energy Management's Discussion
and Analysis - Natural Gas Transmission, Storage and Processing Results of
Operations.
CMS ENERGY MARKETING, SERVICES AND TRADING
CMS MST, formed in 1996, provides gas, oil, coal and electric marketing,
risk management and energy management services to industrial, commercial,
utility and municipal energy users throughout the United States and
internationally. For additional information, see Item 7. CMS Energy
Management's Discussion and Analysis - Marketing, Services and Trading
Results of Operations.
SALES BETWEEN BUSINESS SEGMENTS
CMS Energy's sales between business segments for the years ended December
31 were as follows.
In Millions
__________________________________________________________________________
Years Ended December 31 1997 1996 1995
__________________________________________________________________________
Oil and Gas Exploration and Production $75 $23 $19
Natural Gas Transmission, Storage and Processing 4 3 2
Marketing, Services and Trading 16 9 3
__________________________________________________________________________
__________________________________________________________________________
CMS ENERGY AND CONSUMERS REGULATION
CMS Energy, Consumers and their subsidiaries are subject to regulation by
various federal, state, local and foreign governmental agencies, including
those specifically described below.
MICHIGAN PUBLIC SERVICE COMMISSION
Consumers is subject to the jurisdiction of the MPSC, which regulates
public utilities in Michigan with respect to retail utility rates,
accounting, services, certain facilities and various other matters. The
MPSC also has, or will have, rate jurisdiction over several limited
partnerships in which CMS Gas Transmission has ownership interests. These
partnerships own, or will own, and operate intrastate gas transmission
pipelines.
The Attorney General, ABATE and the MPSC staff typically intervene in MPSC
electric and/or gas related proceedings concerning Consumers. Unless
otherwise noted herein, these parties have intervened in such proceedings.
For many years, various parties have appealed almost every significant
MPSC order affecting Consumers. Appeals from such MPSC orders are pending
in the Court of Appeals and the Michigan Supreme Court. Consumers is
vigorously pursuing these matters. Under Michigan civil procedure,
parties may file a claim of appeal with the Court of Appeals that serves
as a notice of appeal of an MPSC order. The grounds on which they are
making the appeal are not finally set forth until a later date when the
parties file their briefs.
RATE PROCEEDINGS: In February 1996, the MPSC issued an order granting a
$46 million annual increase in electric retail rates and authorizing a
12.25 percent return on common equity. The following month the MPSC
issued a final order decreasing gas rates by $12 million annually and
authorizing an 11.6 percent return on common equity.
MPSC REGULATORY CHANGES: In January 1996, the Governor of the State of
Michigan requested that the MPSC review the existing statutory and
regulatory framework governing Michigan electric utilities in light of
increasing competition in the utility industry. Since that time, as a part
of ongoing proceedings relating to the restructuring of the electric
utility industry in Michigan, the MPSC issued various orders: 1)
providing that beginning in 1998 and phasing in until 2002, Consumers
would have to transmit and distribute energy on behalf of competing power
suppliers to serve retail customers; 2) allowing Consumers to recover
Transition Costs (estimated for Consumers at $1.755 billion) through a
charge to direct-access customers until the end of the transition period
in 2007; 3) allowing, subject to a prudency review, a separate charge to
recover costs of implementing a direct-access program, estimated by
Consumers at an additional $200 million; 4) allowing utilities to "true
up" Transition Cost charges for changes in sales and market prices of
power to the extent they are different from estimates used for calculating
Transition Costs; 5) suspending the PSCR clause and freezing PSCR charges;
and 6) confirming the MPSC's belief that Securitization may be a
beneficial mechanism for recovery of Transition Costs while recognizing
that Securitization requires state legislation to occur. By January 1,
2002, all customers would be free to choose (that is, have direct-access
to) their own power suppliers. A February 1998 MPSC order in these
ongoing proceedings suspended the PSCR as proposed by Consumers,
terminated the 1998 PSCR plan case, and established a permanent PSCR/base
rate freeze charge in the 1997 PSCR reconciliation proceeding. Several
MPSC orders related to restructuring are subject to claims of appeal filed
with the Court of Appeals which question whether the MPSC has the
statutory authority to mandate restructuring on an involuntary basis. For
additional information concerning the electric industry restructuring, see
Item 7. Consumers Management's Discussion and Analysis - Outlook -
Electric Business Outlook and Item 8. Financial Statements and
Supplementary Data - Note 4 to Consumers' Notes to Consolidated Financial
Statements.
In late 1996, the MPSC approved a pilot program allowing choice to 40,000
retail gas customers in Bay County, Michigan. After the termination of
the first solicitation in March 1997, one percent of the eligible
customers chose an alternative supplier for the next year. In December
1997, the MPSC approved Consumers' application to supersede the limited
pilot program with a statewide experimental gas transportation pilot
program. Over the three-year period of the program, eventually 300,000
residential, commercial and industrial retail gas sales customers will be
eligible to choose their gas supplier. The program is voluntary for
natural gas customers. Customers choosing to remain as sales customers of
Consumers will not see a rate change in their natural gas rates. This
experimental program will allow competing gas suppliers, including
marketers and brokers to market natural gas to these retail customers in
direct competition with Consumers. The Attorney General, ABATE and other
parties filed claims of appeal regarding the program with the Court of
Appeals. For additional information concerning the MPSC order, see
Item 8. Financial Statements and Supplementary Data - Note 4 to Consumers'
Notes to Consolidated Financial Statements.
RETAIL WHEELING PROCEEDINGS: In April 1994, the MPSC issued an opinion
and interim order that approved the framework for a five-year experimental
retail direct-access program for "wheeling" of electric power purchased by
customers from other suppliers over the transmission systems of Consumers
and Detroit Edison, and remanded the case to the ALJ to decide appropriate
rates and charges. The MPSC stated that the purpose of the experiment is
to gather and evaluate information regarding whether retail wheeling is in
the public interest and should occur on a permanent basis. The
experimental program will commence with each utility's next solicitation
of additional supply side resources. In June 1995, the MPSC issued an
order that set rates and charges for retail delivery service under the
experiment. After the MPSC denied Consumers' and ABATE's petitions for a
rehearing of that order, Consumers, ABATE and Dow filed claims of appeal
of the MPSC's orders with the Court of Appeals, joining Detroit Edison and
the Attorney General who had previously appealed. In January 1998, the
Court of Appeals found that the MPSC has authority to authorize an
experimental wheeling program. That decision is now subject to
applications for leave to appeal filed with the Michigan Supreme Court by
Consumers and Detroit Edison.
INTRASTATE GAS SUPPLIER CONTRACT PRICING DISPUTE: In October 1995, the
MPSC issued an opinion and order in a proceeding that Consumers had
initiated regarding a gas contract pricing dispute under three gas supply
contracts. The MPSC found that the pricing mechanism at issue, which
operates within definite ceiling and floor prices, is a definite pricing
provision within the meaning of the state statutes and was properly
implemented by Consumers to reduce gas prices without the prior approval
of the MPSC. The producers subsequently filed a claim of appeal of the
MPSC order with the Court of Appeals. The Court of Appeals affirmed the
MPSC order. The producers subsequently filed for leave to appeal with the
Michigan Supreme Court that is still pending.
Before the issuance of the MPSC's order, the intrastate gas producers
involved in this MPSC proceeding filed a complaint against Consumers in
Kent County Circuit Court alleging breach of contract. On Consumers'
motion, the court dismissed the lawsuit. The gas suppliers subsequently
filed a petition for rehearing with the court where the matter is still
pending.
FEDERAL ENERGY REGULATORY COMMISSION
FERC has limited rate jurisdiction over several independent power projects
in which CMS Generation has an ownership interest. These power projects
are Qualifying Facilities. FERC also has more comprehensive jurisdiction
over Michigan Gas Storage as a natural gas company within the meaning of
the Natural Gas Act. FERC jurisdiction relates, among other things, to
the acquisition, operation and disposal of assets and facilities and to
service provided and rates charged by Michigan Gas Storage. Under certain
circumstances, FERC also has the power to modify gas tariffs of interstate
pipeline companies. Some of Consumers' gas business is also subject to
regulation by FERC, including a blanket transportation tariff pursuant to
which Consumers can transport gas in interstate commerce.
Certain aspects of Consumers' electric operations are also subject to
regulation by FERC, including compliance with FERC's accounting rules and
other regulations applicable to "public utilities" and "licensees," the
transmission of electric energy in interstate commerce and the rates and
charges for the sale of electric energy at wholesale, the consummation of
certain mergers, the sale of certain facilities, the construction,
operation and maintenance of hydroelectric projects and the issuance of
securities, as provided by the Federal Power Act.
FERC Regulatory Changes: FERC Orders 888 and 889, as amended on
rehearing, require utilities to file conforming direct-access tariffs and
functionally unbundle transmission and wholesale sales activities.
Consumers complied with several requirements contained in these orders.
For additional information on Orders 888 and 889, see Item 7. Consumers
Management's Discussion and Analysis - Outlook - Electric Business
Outlook.
NUCLEAR REGULATORY COMMISSION
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of
the NRC with respect to the design, construction and operation of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with
respect to certain other uses of nuclear material. These and other
matters concerning Consumers' nuclear plants are more fully discussed in
Item 8. Financial Statements and Supplementary Data - Notes 2 and 7 to
Consumers' Consolidated Financial Statements.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE
CMS Energy and Consumers and their subsidiaries are subject to regulation
for environmental quality, including air and water quality, waste
management, zoning and other matters, by various federal, state and local
authorities. Management believes that the responsible administration of
CMS Energy's and Consumers' energy resources includes reasonable programs
for the protection and enhancement of the environment. For additional
information concerning environmental matters, see Item 8. Financial
Statements and Supplementary Data - Note 6 of Consumers' Notes to
Consolidated Financial Statements.
Consumers installed modern stack emission control and monitoring systems
at its electric generating plants and converted electric generating units
to burn cleaner fuels. It has worked with others to use bottom ash as
final cover for ash disposal areas in place of topsoil and compacted clay
and to use fly ash as a filler for asphalt in road shoulders. It has also
worked with local, state and national organizations on waste minimization
and pollution prevention initiatives and enhanced certain of Consumers'
lands for the benefit of wildlife, as well as provided recreational access
to its lands. Finally, it has worked with universities and other
institutions on projects to protect and, in some instances, propagate
threatened or endangered species, and made financial contributions to a
variety of environmental enhancement projects. Capital expenditures by
Consumers for environmental protection additions were $21 million in 1997
and are estimated to be $23 million in 1998.
Federal and state laws require air permits for certain of Consumers' and
CMS Generation's affiliates' sources of air emissions. These laws require
that certain affected facilities control their sources' air emissions.
The appropriate agency or department for environmental protection in the
state in which each facility is located has issued permits for Consumers'
and CMS Generation's affiliates affected steam electric generating
facilities and other affected sources of air emissions. Consumers and
CMS Generation believe that these facilities are in substantial compliance
with all air permits.
Consumers has engaged in an aggressive testing and removal program for
USTs. Since 1985, Consumers and its subsidiaries have reduced the number
of regulated UST systems from 256 to 25. At 118 of the sites from which
Consumers or its subsidiaries removed UST systems, hydrocarbon releases
occurred, either from tank system leaks or from spillage on the surface
during transfer of contents to or from the tanks. Consumers' response
activities have resulted in Department of Natural Resources/Department of
Environmental Quality concurrence in closure of 106 of those releases.
The remaining releases are at various stages of cleanup completion.
Like most electric utilities, Consumers has PCB in some of its electrical
equipment. Although it has been unlawful to manufacture or sell PCB or
PCB contaminated equipment since the 1970's, its continued use in
preexisting electrical equipment is lawful. Consumers has engaged in a
number of programs to reduce the risk of exposure to the environment from
possible PCB spills. These include such actions as a contingency program
of removing PCB capacitors outside of substations and replacing them with
non-PCB capacitors, draining large transformers and refilling them with
non-PCB mineral oil, removing PCB equipment that was found to pose a risk
to food supplies or animal feed, and other such programs. Consumers still
has a few PCB capacitors in substations. It has nearly 500,000
distribution transformers, many of which have not been tested for PCB. By
regulation, unless the PCB level is known, transformers are presumed to be
PCB-contaminated. Other types of electrical equipment may also contain
PCB. Based upon results of sampling in 1981, about 1 percent of the pole-
top transformers had more than 500 ppm of PCB, and about 12 percent had
from 50 to 500 ppm. Those percentages should decline over time with the
retirement of older equipment and the replacement with non-PCB equipment.
From time to time accidental releases occur from such equipment.
Consumers typically spends less than $1 million per year for the clean up
and disposal of debris and equipment from PCB releases.
National Pollutant Discharge Elimination System and equivalent State
Pollutant Discharge Elimination System permits, as well as state ground
water discharge permits, authorize the discharge of certain waste waters
from Consumers' facilities and pipeline construction projects and certain
CMS Generation affiliates' facilities pursuant to state water quality
standards and federal effluent limitation guidelines. The appropriate
agency or department for environmental protection issued authorizations
for discharges from all of Consumers' and CMS Generation affiliates' major
operating steam electric generating facilities and for certain discharges
from Consumers' other facilities, including hydroelectric projects and
pipeline construction projects. Consumers and CMS Generation affiliates
believe that these facilities are in substantial compliance with National
or State Pollutant Discharge Elimination System and groundwater
discharge/exemption permits.
Consumers' current insurance coverages do not extend to certain
environmental clean-up costs, such as claims for air pollution, some past
PCB contamination and for some long-term storage or disposal of
pollutants.
CMS ENERGY AND CONSUMERS COMPETITION
ELECTRIC COMPETITION
Consumers' electric utility business experiences competition and potential
competition from a number of sources, both in the wholesale and retail
markets, and in electric generation, electric delivery, and retail
services.
In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly due to FERC Order 888. In 1996,
Consumers filed wholesale power agreements with FERC to supply power to
six municipal and two electric cooperatives that had preexisting contracts
with Consumers. The new contracts have a term of five years. Because
wholesale transactions by Consumers generated less than two percent of
Consumers' 1997 revenues from electric operations, Consumers does not
believe future loss of wholesale sales to be significant, and in most
instances the customers will continue to be transmission customers.
A significant increase in retail electric competition is likely to occur
with the introduction of retail direct access in Michigan. In its January
14, 1998 order, the MPSC ordered retail direct access in Michigan. Some
parties, including Consumers, are challenging the orders in the courts.
Legislation, if passed, could reinforce or modify the MPSC order. The
MPSC order, as discussed above in "CMS ENERGY AND CONSUMERS REGULATION -
Michigan Public Service Commission - MPSC Regulatory Changes," calls for
Consumers to open up its electric load to competition on a gradual basis
from 1998 through 2001. The MPSC order gives all customers the right to
choose their own electric supplier by 2002. Consumers' financial exposure
to competition in a retail direct-access environment is limited due to:
1) the expectation of recovery of related Transition Costs attributable to
retail direct-access; 2) customer inertia that will likely aid in
retaining a majority of residential and small business customers; 3)
Consumers' opportunity to secure sales in other service territories; and
4) fact that Consumers will still be the deliverer of electricity.
Absent comprehensive deregulation in the retail electric commodity
markets, Consumers has competition or potential competition from the
following sources: 1) from the threat of customers relocating outside of
Consumers' service territory; 2) from the threat of municipalization; 3)
from customer co-generation and self-generation; 4) from adjacent
municipal utilities who extend lines to customers along service territory
boundaries; and 5) from marketers and brokers for customers on the
Consumers' direct-access program, which is currently limited to 100 MW.
Consumers addressed this competition primarily through the offering of
rate discounts and additional services. In the event of municipalization,
Consumers believes it would be entitled to recovery of appropriate
Transition Costs, thus mitigating the potential negative financial impact.
Consumers is beginning to offer non-commodity retail services to electric
customers, and faces competition from numerous sources including energy
management services companies, other utilities, contractors, and retail
merchandisers.
CMS Energy's non-regulated electric subsidiaries primarily face
competition from other marketers, brokers, financial management firms,
energy management firms, and other utilities through the marketing
services and trading business segment; and from other generators,
marketers, brokers, and price of power on the wholesale market through the
independent power production business segment.
For additional information concerning electric competition, see Item 7.
CMS Energy's Management's Discussion and Analysis - Outlook - Electric
Business Outlook and Consumers Management's Discussion and Analysis -
Outlook - Electric Business Outlook.
GAS COMPETITION
Competition has existed for several years for Consumers' gas operations
and comes primarily from alternate energy sources such as electricity and
alternate fuel sources. In the industrial market segment, customers have
traditionally used alternate fuels such as coal, oil and propane. In the
residential market segment, some customers use propane, fuel oil or
electricity for space heating and water heating. In Consumers' gas
territory, natural gas maintains 97 percent market share for residential
space heating and 88 percent for residential water heating. The Natural
Gas Policy Act of 1978 resulted in the deregulation of wellhead gas
prices, substituting supply and demand effects of the gas production
marketplace for regulation. This effectively eliminated artificially-
induced curtailments of gas supply experienced earlier in the decade. Gas
competition among various wellhead suppliers subsequently increased.
Order 636 effectively unbundled the transportation of natural gas from the
sale of natural gas by interstate pipelines thereby requiring pipelines to
become common carriers. Consequently, pipelines must compete for shippers
in search of low-priced capacity. Consumers offers unbundled services
(transportation and some storage) to its larger end-use customers who
choose to acquire gas supplies from alternate sources. Traditionally,
Consumers' earnings for its gas operations are not dependent on gas
purchased and resold to its customer base. However, in a proactive move
by Consumers to prepare for an unbundled market where gas supply is
separated from gas distribution, Consumers filed, and the MPSC approved on
December 19, 1997 Consumers' expanded gas customer choice program. See
the discussion of the MPSC's order authorizing the expanded experimental
gas pilot program above in CMS Energy and Consumers Regulation - MPSC
Regulatory Changes.
CMS Energy's non-utility gas subsidiaries face significant competition
from other gas pipeline companies, gas producers, gas storage companies,
and brokers/marketers.
For additional information concerning gas competition, see Item 7.
CMS ENERGY'S MANAGEMENT DISCUSSION AND ANALYSIS - OUTLOOK AND CONSUMERS
MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK.
EMPLOYEES
CMS ENERGY
As of February 28, 1998, CMS Energy and its subsidiaries had 9,659 full-
time equivalent employees of which 9,540 are full-time employees; the rest
equate to 119 full-time equivalent employees associated with the part-time
work force.
CONSUMERS
As of February 28, 1998, Consumers and its subsidiaries had 8,657 full-
time equivalent employees of which 8,545 are full-time employees; the rest
equate to 112 full-time equivalent employees associated with the part-time
work force. Included in the total are 3,852 full-time operating,
maintenance and construction employees of Consumers whom the Union
represents. Consumers and the Union negotiated a collective bargaining
agreement that became effective as of June 1, 1995. By its terms, it will
continue in full force and effect until June 1, 2000.
21
CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS
As of February 28, 1998
NAME AGE POSITION PERIOD
William T. McCormick, Jr. 53 Chairman of the Board and
Chief Executive Officer
of CMS Energy 1987-Present
Chairman of the Board
of Consumers 1985-Present
Chairman of the Board of
Enterprises 1987-Present
Chairman of the Board and
Chief Executive Officer
of Enterprises 1987-1995
Victor J. Fryling 50 President and Chief
Operating Officer
of CMS Energy 1996-Present
President of Consumers 1997-Present
President and Chief
Executive Officer
of Enterprises 1995-Present
President of CMS
Energy 1992-1995
President of Enterprises 1993-1995
President and Chief
Financial Officer of
Enterprises 1992-1993
Alan M. Wright 52 Senior Vice President
and Chief Financial
Officer of CMS Energy 1998-Present
Senior Vice President
and Chief Financial
Officer of Consumers 1993-Present
Senior Vice President,
Chief Financial Officer
and Treasurer of
Enterprises 1994-Present
Senior Vice President,
Chief Financial Officer
and Treasurer of CMS
Energy 1994-1998
Senior Vice President
and Chief Financial
Officer of CMS Energy 1992-1994
Senior Vice President
and Chief Financial
Officer of Enterprises 1993-1994
Senior Vice President,
Chief Financial Officer
and Treasurer of Consumers 1992-1993
Rodger A. Kershner 49 Senior Vice President
and General Counsel
of CMS Energy 1996-Present
Senior Vice President
and General Counsel of
Enterprises 1996-Present
Vice President and General
Counsel of Enterprises 1989-1996
Deputy General Counsel
and Assistant Secretary
of CMS Energy 1994-1995
Assistant General Counsel
and Assistant Secretary
of CMS Energy 1989-1994
John W. Clark 53 Senior Vice President
of CMS Energy 1987-Present
Senior Vice President
of Consumers 1985-Present
James W. Cook 57 Senior Vice President
of CMS Energy 1995-Present
Senior Vice President
of Enterprises 1994-Present
Executive Vice President
of Enterprises 1989-1994
President and Chief
Executive Officer of
CMS Generation 1989-1995
NAME AGE POSITION PERIOD
Preston D. Hopper 47 Senior Vice President,
Controller and Chief
Accounting Officer of
CMS Energy 1996-Present
Senior Vice President
and Chief Accounting
Officer of Enterprises 1997-Present
Vice President, Controller
and Chief Accounting
Officer of CMS Energy 1992-1996
Senior Vice President
and Controller of
Enterprises 1996-1997
Vice President and
Controller of Enterprises 1992-1996
Rodney E. Boulanger 57 Senior Vice President of
Enterprises 1996-Present
President and Chief
Executive Officer of
CMS Generation 1995-Present
William J. Haener 56 President and Chief
Executive Officer of
CMS Gas Transmission 1994-Present
Gordon L. Wright 55 President and Chief
Executive Officer of
CMS NOMECO 1995-Present
Executive Vice President
and Chief Operating
Officer of CMS NOMECO 1993-1995
Vice President of
Operations of CMS NOMECO 1981-1993
Paul A. Elbert 48 Executive Vice President
of Consumers and President
and Chief Executive Officer
- Gas Business Unit 1997-Present
Executive Vice President
of Consumers and Chief
Operating Officer - Gas
Business Unit 1994-1997
Senior Vice President of
Consumers 1991-1994
David W. Joos 44 Executive Vice President
of Consumers and President
and Chief Executive Officer
- Electric Business Unit 1997-Present
Executive Vice President
of Consumers and Chief
Operating Officer -
Electric Business Unit 1994-1997
Senior Vice President
of Consumers 1994-1994
Vice President of
Consumers 1990-1994
David A. Mikelonis 49 Senior Vice President
and General Counsel of
Consumers 1988-Present
Robert A. Fenech 50 Senior Vice President
of Consumers 1997-Present
Vice President of
Consumers 1994-1997
Dennis DaPra* 55 Vice President and
Controller of Consumers 1991-Present
*Mr. DaPra is an executive officer of Consumers but not of CMS Energy.
All other individuals are executive officers of both CMS Energy and
Consumers.
The present term of office of each of the executive officers extends to
the first meeting of the Board of Directors after the next annual election
of Directors of each of CMS Energy and Consumers (scheduled to be held May
22, 1998).
There are no family relationships among executive officers and directors
of CMS Energy and Consumers.
24
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy, Consumers and their subsidiaries
are owned in fee, except that most electric lines and gas mains are
located, pursuant to easements and other rights, in public roads or on
land owned by others. The statements under this item as to ownership of
properties are made without regard to tax and assessment liens, judgments,
easements, rights of way, contracts, reservations, exceptions, conditions,
immaterial liens and encumbrances, and other outstanding rights. None of
these outstanding rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its
First Mortgage Bond Indenture. Substantially all properties of the
subsidiaries of CMS Generation that own interests in operating plants are
subject to liens of creditors of the respective subsidiaries. Properties
of certain Consumers, CMS Gas Transmission and CMS NOMECO subsidiaries are
also subject to liens of creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
At December 31, 1997, Consumers' electric generating system consists of
five fossil-fueled plants, one nuclear plant, one pumped storage
hydroelectric facility, seven gas combustion turbine plants and 13
hydroelectric plants. During 1997, Consumers retired Big Rock. For
further information on the Big Rock closing, see Item 8. Financial
Statements and Supplementary Data - Note 7 of Consumers Notes to
Consolidated Financial Statements.
1997 Summer Net 1997 Net
Demonstrated Generation
Size and Year Capability (Thousands
Name and Location (Michigan) Entering Service (Kilowatts) of kWhs)
Coal Generation
J H Campbell - West Olive 3 Units, 1962-1980 1,346,100(a) 8,153,697
D E Karn - Essexville 2 Units, 1959-1961 515,000 3,004,398
B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,590,996
J R Whiting - Erie 3 Units, 1952-1953 310,000 1,898,773
J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,778,698
--------- ----------
Total coal generation 2,777,100 16,426,562
--------- ----------
Oil/Gas Generation
D E Karn - Essexville 2 Units, 1975-1977 1,276,000 314,635
--------- ----------
Ludington Pumped Storage 6 Units, 1973 954,700(b) (476,535)(c)
--------- ----------
Nuclear Generation
Palisades - South Haven 1 Unit, 1971 762,000 5,776,398
Big Rock Point - Charlevoix (d) 1 Unit, 1962 67,000 193,708
--------- ----------
Total nuclear generation 829,000 5,970,106
--------- ----------
Gas/Oil Combustion Turbine
Generation 7 Plants, 1966-1971 345,000 23,231
--------- ----------
Hydro Generation 13 Plants, 1907-1949 73,500 466,991
--------- ----------
Total owned generation 6,255,300 22,724,990
==========
Purchased and Interchange Power Capacity 1,820,600(e)
---------
Total 8,075,900
=========
(a) Represents Consumers' share of the capacity of the Campbell Plant Unit
3, net of 6.69 percent (ownership interests of the Michigan Public Power
Agency and Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers
and Detroit Edison have 51 percent and 49 percent undivided ownership,
respectively, in the plant, and the capacity of the plant is shared
accordingly.
(c) Represents Consumers' share of net pumped storage generation. This
facility electrically pumps water during off-peak hours for storage to
later generate electricity during peak-demand hours.
(d) Consumers retired Big Rock on August 29, 1997.
(e) Includes 1,240 MW of purchased contract capacity from the MCV
Facility.Consumers' owns 8,620 miles of electric transmission lines
operating at up to 345 kilovolts, owns 58,555 miles of electric
distribution lines and owns substations having an aggregate transformer
capacity of 38,287,140 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of
22,825 miles of distribution mains and 1,057 miles of transmission lines
throughout the Lower Peninsula of Michigan. Consumers owns and operates
six compressor stations with a total of 133,560 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate storage
capacity of 221.3 bcf.
Storage
Field Name Location Capacity (bcf)
Overisel Allegan and Ottawa Counties 62.0
Salem Allegan and Ottawa Counties 35.0
Ira St Clair County 6.8
Lenox Macomb County 3.5
Ray Macomb County 64.5
Northville Oakland, Washtenaw
and Wayne Counties 12.1
Puttygut St Clair County 14.6
Four Corners St Clair County 3.8
Swan Creek St Clair County .6
Hessen St Clair County 17.0
Lyon - 34 Oakland County 1.4
Michigan Gas Storage owns and operates two compressor stations with a
total of 43,400 installed horsepower. Its transmission system consists of
530 miles of pipelines within the Lower Peninsula of Michigan.
Michigan Gas Storage's gas storage fields, listed below, have an aggregate
certified storage capacity of 109.5 bcf.
Total Certified
Field Name Location Storage Capacity (bcf)
Winterfield Osceola and Clare Counties 72.3
Cranberry Lake Clare and Missaukee Counties 28.2
Riverside Missaukee County 9.0
Consumers' gas properties also include the Marysville Gas Reforming Plant,
located in Marysville, Michigan. Huron and PanCanadian Petroleum Company
are partners in a partnership to use the expanded capacity of the
underground caverns at the Marysville plant for commercial storage of
liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum
Company are partners in a partnership to use certain hydrocarbon
fractionation facilities at the plant. There is a pending sale of the
Marysville Gas Reforming Plant, including substantially all of Consumers'
and Huron's partnership interests, to CMS Gas Transmission or a subsidiary
thereof.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS NOMECO for the years 1995 through 1997
is shown in the following table.
1997 1996 1995
Oil and condensate (Mbbls) (a)(c) 6,564 4,921 4,383
Natural gas (MMcf) (a) 27,157 29,371 26,348
Plant products (Mbbls) (a) 321 240 226
Average daily production (b)
Oil (Mbbls) 20.5 16.7 16.1
Gas (MMcf) 89.1 97.9 84.9
Reserves to annual production ratio
Oil (MMbbls) (c) 14.3 16.2 17.5
Gas (bcf) 11.9 11.0 10.8
(a) Revenue interest to CMS NOMECO
(b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties)
(c) Oil volumes have been restated to reflect new reporting method for
Venezuela
The following table shows CMS NOMECO's undeveloped net acres of oil and
gas leasehold interests.
December 31 1997 1996
Michigan 138,903 131,502
Indiana 28,839 10,986
Ohio 9,671 6,104
Texas (Including offshore acreage) 9,557 7,005
Louisiana (Including offshore acreage) 4,424 8,088
North Dakota 2,587 13,840
Other states 55 4,930
--------- ---------
Total domestic 194,036 182,455
--------- ---------
Venezuela 339,521 230,175
Colombia 294,330 294,330
Cameroon 187,636 -
Equatorial Guinea 113,806 113,947
Tunisia 67,193 67,193
Ecuador 66,430 66,430
Congo 17,364 17,981
Yemen - 27,610
--------- ---------
Total international 1,086,280 817,666
--------- ---------
Total net acres 1,280,316 1,000,121
========= =========
The following table shows CMS NOMECO's estimated proved reserves of oil
and gas for the years 1995 through 1997.
Total Worldwide United States International
Oil Gas Oil Gas Oil Gas
(MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf)
Proved Developed and
Undeveloped Reserves
December 31, 1994 66.6 231.2 2.7 224.5 63.9 6.7
Revisions and other changes (5.2) (23.8) 0.1 (22.9) (5.3) (0.9)
Extensions and discoveries - 13.3 - 2.6 - 10.7
Acquisitions of reserves 20.0 96.2 - 96.2 20.0 -
Sales of reserves (2.4) (6.7) - (1.0) (2.4) (5.7)
Production (4.6) (26.3) (0.9) (26.2) (3.7) (0.1)
----- ----- ----- ----- ----- -----
December 31, 1995 74.4 283.9 1.9 273.2 72.5 10.7
Revisions and other changes 2.7 6.8 1.5 - 1.2 6.8
Extensions and discoveries 4.9 64.6 - 32.6 4.9 32.0
Acquisitions of reserves 0.2 1.0 - 1.0 0.2 -
Sales of reserves (0.6) (3.7) (0.6) (3.7) - -
Production (5.2) (29.4) (1.0) (29.4) (4.2) -
----- ----- ----- ----- ----- -----
December 31, 1996 76.4 323.2 1.8 273.7 74.6 49.5
Revisions and other changes 10.6 6.4 0.2 (7.2) 10.4 13.6
Extensions and discoveries 9.9 26.3 0.3 14.6 9.6 11.7
Acquisitions of reserves 8.3 - - - 8.3 -
Sales of reserves - (6.5) - (6.5) - -
Production (6.9) (27.2) (0.7) (26.5) (6.2) (0.7)
----- ----- ----- ----- ----- -----
December 31, 1997 98.3 322.2 1.6 248.1 96.7 74.1
===== ===== ===== ===== ===== =====
Estimated Proved Developed Reserves (a)
December 31, 1994 44.8 211.7 2.5 205.9 42.3 5.8
December 31, 1995 37.5 254.2 1.8 254.2 35.7 -
December 31, 1996 39.2 270.0 1.8 270.0 37.4 -
December 31, 1997 45.3 267.8 1.7 238.2 43.6 29.6
Equity Interest in Estimated
Proved Reserves of Comeco
Petroleum, Inc. (Yemen)
December 31, 1994 2.9 - - - 2.9 -
December 31, 1995 2.8 - - - 2.8 -
December 31, 1996 3.2 - - - 3.2 -
December 31, 1997 - - - - - -
(a) The governing license in Venezuela is an oil service contract whereas
CMS NOMECO is paid a fee per barrel for oil discovered, lifted, and
delivered to Corpoven S.A., a subsidiary of Petroleos de Venezuela S.A..
Additionally, CMS NOMECO receives a fee for reimbursement of certain
capital expenditures. The volumes presented represent actual production
with respect to which CMS NOMECO is paid a per barrel fee.
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership which was
formed to construct and operate the MCV Facility. The MCV Facility was
sold to five owner trusts and leased back to the MCV Partnership.
CMS Holdings is a limited partner in the FMLP, which is a beneficiary of
one of these trusts. CMS Holdings' indirect beneficial interest in the
MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township
of Midland, Midland County, Michigan, occupied by the MCV Facility. The
land is leased to the owners of the MCV Facility by five separate leases,
each leasing an undivided interest and in the aggregate totaling 100
percent, for an initial term ending December 31, 2035 with possible
renewal terms to June 15, 2090.
Consumers owns or leases three principal general office buildings in
Jackson, Michigan and 53 field offices at various locations in Michigan's
Lower Peninsula. Of these, two general office buildings and 15 field
offices are leased. Also owned are miscellaneous parcels of real estate
not now used in utility operations.
For information on capital expenditures, see Item 7. Consumers
Management's Discussion and Analysis - Outlook and Item 8. Financial
Statements and Supplementary Data - Note 15 of Consumers' Notes to
Consolidated Financial Statements.
CMS ENERGY OTHER PROPERTIES
CMS Generation has ownership interests in certain facilities such as Loy
Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee,
but are subject to the security interests of its creditors. The Jorf
Lasfar facility is held pursuant to a right of possession agreement with
the Moroccan state owned Office National de l'Electricite. The El Chocon
facility is held pursuant to a 30 year possession agreement.
CMS Gas Transmission has ownership interests in 367 miles of pipelines in
the state of Michigan. Additionally, CMS Gas Transmission owns a 25
percent general partnership interest in TGN, which owns and operates 3,048
miles of pipeline that provides natural gas transmission service to the
northern and central parts of Argentina.
In June 1997, CMS Gas Transmission acquired a 260 mile pipeline in western
Australia. The acquisition included 30 bcf of proved natural gas reserves
with two gas production licenses and an associated gas storage facility in
pre-operational testing.
CMS Gas Transmission also has ownership interests in other facilities,
including a proprietary gas processing company which has patents for its
helium removal and nitrogen rejection processes, gas gathering systems and
processing plants, and an enhanced oil recovery project which involves
flooding depleted oil reservoirs with carbon dioxide.
CMS Energy, through certain subsidiaries; owns a 50 percent interest in
Bay Harbor Company, L.L.C., a development in Emmet County Michigan, owns
6,000 acres of undeveloped land in Benzie and Manistee Counties Michigan;
and owns 53 acres of undeveloped land in Muskegon County Michigan.
The following table shows interests in independent power plants at
December 31, 1997.
Ownership Gross
Location Interest (%) Capacity (MW)
CMS Generation
Wood Fueled
Domestic 35.0 - 50.0 234
Fossil Fueled
Domestic 8.8 - 50.0 410
International
Andhra Pradesh, India 25.3 235
Mendoza Province, Argentina 80.6 506
Port of Jorf Lasfar, Morocco 50.0 660
State of Victoria, Australia 49.6 2,000
Other 25.3 - 47.5 386
Scrap Tire Fueled
Domestic 50.0 31
Hydro Generation
Domestic 1.0 - 55.5 98
International
Limay River, Argentina 17.2 1,320
Wind Generation
Domestic 8.5 - 22.7 102
CMS Midland
Fossil Fueled
Midland, Michigan 49.0(a) 1,370
(a) See the previous section - Consumers Other Properties - for more
information.
For information on capital expenditures, see Item 7. CMS Energy
Management's Discussion and Analysis - Capital Resources and Liquidity and
Item 8. Financial Statements and Supplementary Data - Note 19 of
CMS Energy's Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
CMS Energy, Consumers and some of their subsidiaries and affiliates are
parties to certain routine lawsuits and administrative proceedings
incidental to their businesses involving, for example, claims for personal
injury and property damage, contractual matters, various taxes, and rates
and licensing. Reference is made to the combined Item 1. Business -
CMS Energy and Consumers Regulation, as well as to each of CMS Energy's
and Consumers' item 7. Management's Discussion and Analysis and Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements included herein for additional information regarding
various pending administrative and judicial proceedings involving
regulatory, operating and environmental matters.
CMS ENERGY
EXEMPTION UNDER PUHCA: CMS Energy is exempt from registration under
PUHCA. In December 1991, the Attorney General and the Michigan Municipal
Cooperative Group filed a request with the SEC for the revocation of
CMS Energy's exemption. In January 1992, CMS Energy responded to the
revocation request affirming its position that it is entitled to the
exemption. In April 1992, the MPSC filed a statement with the SEC that
recommended that the SEC impose certain conditions on CMS Energy's
exemption. CMS Energy vigorously contested the revocation request and
believes it will maintain the exemption. There has been no action taken
by the SEC on this matter.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) repeal PUHCA, without condition; or 3)
amend PUHCA to give the SEC broader exemptive authority. The SEC staff
supported option 1 because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect consumers.
Several bills were introduced during 1997 in the United States House of
Representatives and the United States Senate that would repeal PUHCA. In
April 1997, a bill was introduced in the United States Senate that would
repeal PUCHA without at the same time deregulating the electric industry.
This bill was referred to the Senate Banking Housing and Urban Affairs
Committee, the chairman of which is a cosponsor of the bill, and amended
by that Committee in June 1997 with a recommendation that the bill pass as
amended.
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 now pending in the United States District Court for
the District of Colorado, in connection with a project to be developed in
Bantangas, Philippines by Luzon Power Associates, Inc. in which
CMS Generation owned 50 percent. 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
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. Most issues raised in the suit are
subject to mandatory arbitration, presently scheduled for May 1998. The
trial date has been postponed until the fall of 1998. 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.
CONSUMERS
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. Claimants contend that stray voltage affects farm animal behavior,
reducing the productivity of their livestock operations. Investigation by
Consumers of prior stray voltage complaints disclosed that many factors,
including improper wiring and malfunctioning of on-farm equipment, can
lead to the stray voltage phenomenon. 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 configuration of the customer's hook-up to Consumers' system. In
October 1993, a complaint seeking certification as a class action suit was
filed against Consumers in a Michigan circuit court. The complaint
alleged that in excess of a billion dollars of damages, primarily related
to lost production by certain livestock owned by the purported class, were
being incurred as a result of stray voltage from electricity being
supplied by Consumers. In March 1994, the Court decided to deny class
certification for this complaint, concluded that the claims of over 200
named plaintiffs had been improperly joined in a single action and
dismissed, subject to re-filing as separate suits, the October lawsuit
with respect to all but one of the named plaintiffs. Of the original
plaintiffs, only 49 re-filed separate cases. All of those 49 cases have
been resolved. In April 1994, the plaintiffs appealed the Court's denial
of class certification in this matter to the Court of Appeals. The Court
of Appeals dismissed the case. In December 1997, the Michigan Supreme
Court remanded for further proceedings the March 1994 trial court
decision. The Michigan Supreme Court did not disturb the trial court's
ruling with respect to denial of class certification, nor did it reverse
the trial court determination that the plaintiffs had been improperly
joined in a single action, but questioned the trial court's decision
requiring each of the improperly joined lawsuits to re-file new lawsuits
on an individual basis. Consumers filed a motion for reconsideration with
the Michigan Supreme Court, which was denied. At December 31, 1997,
Consumers had 12 individual cases, unrelated to the cases discussed above,
pending for trial, down from 22 pending at year end 1996.
HIGHLAND TOWNSHIP FRANCHISE PROCEEDING: MichCon obtained a revocable
franchise in 1956 to provide natural gas service to Highland Township,
Michigan. In 1962, Consumers secured an irrevocable 30 year franchise to
provide natural gas service to Highland Township. Neither franchise was
exclusive. Although MichCon's franchise for service in Highland Township
expired in 1986 and was not renewed, MichCon continued service to
customers in Highland Township. Consumers secured a revocable renewal
franchise for Highland Township in 1992. Thereafter in 1992, Consumers
filed suit to enjoin MichCon from expanding its gas service to new
customers in Highland Township. The Circuit Court of Oakland County,
Michigan denied MichCon's motion for summary disposition and granted
Consumers' petition for an injunction. MichCon subsequently transferred
its remaining rights and interest in Highland Township to Consumers,
ceased doing business there and appealed the Circuit Court decision with
the Court of Appeals. In August 1995, the Court of Appeals refused to
decide the issue addressed by the Circuit Court (namely whether MichCon,
as a holdover utility without any franchise, could continue to lawfully do
business in a township) because the Court of Appeals concluded that
Consumers' 1992 revocable renewal franchise was invalid since it was not
confirmed by a vote of the Highland Township electorate as the Court
determined was required by the Michigan Public Utility Franchise Act.
Prior to this decision, the commonly held interpretation of the Michigan
Public Utility Franchise Act was that a vote of the electorate was only
required for irrevocable franchises, not revocable franchises such as that
held by Consumers in this case. The Court of Appeals reversed the Circuit
Court decision and remanded the case to the Circuit Court for entry of
summary disposition in MichCon's favor -- even though the only franchise
MichCon had ever possessed was revocable and thus, under the Court of
Appeals' decision, invalid. Consumers application with the Michigan
Supreme Court for leave to appeal was granted in April 1997.
Subsequently, the Supreme Court dismissed this proceeding citing the June
1996 passage of Michigan Legislation amending the Michigan Public Utility
Franchise Act to provide that revocable franchises may be granted by a
township without a vote of the electorate. That statute resolved the
issue in this case. This proceeding is now closed.
CONSUMERS' JOINT LAWSUIT AGAINST DOE: Under the Nuclear Waste Policy Act
of 1982, the DOE was required to begin accepting deliveries of spent
nuclear fuel from commercial operators by January 31, 1998 for disposal,
even if a permanent storage repository was not then operational. The
unconditional nature of the DOE's obligation was confirmed by the United
States Court of Appeals for the District of Columbia Circuit in 1996.
Utilities, including Consumers, and their customers have been prepaying
the costs of DOE transport and disposal through fees based on electric
generation by their nuclear plants. In January 1997, in response to the
DOE's declaration in December 1996 that it would not begin to accept spent
nuclear fuel deliveries in 1998, Consumers and other utilities filed suit
in the United States Court of Appeals for the District of Columbia
Circuit. The utilities sought a declaration that they are relieved of
their obligation to remit their quarterly fee payments to the DOE and are
authorized to escrow any related fees collected from their customers,
unless and until the DOE begins to accept spent nuclear fuel. The suit
also sought an order requiring the DOE to develop a program to begin
acceptance of spent nuclear fuel by January 31, 1998. In November 1997,
the United States Court of Appeals decided that the contract between the
DOE and the utilities provided a potentially adequate remedy if the DOE
failed to fulfill its obligations by January 31, 1998. The Court of
Appeals issued a written opinion precluding the DOE from excusing its own
delay on the grounds that it did not have a permanent repository or
interim storage facility. Also in 1997, federal legislation was
reintroduced to clarify the timing of the DOE's obligation to accept spent
nuclear fuel and to direct the DOE to establish an integrated spent fuel
management system that includes designing and constructing an interim
storage facility in Nevada. Further litigation before the courts or
administrative proceedings before the DOE on this subject is likely as the
utilities and their state regulatory agencies strive to secure the
benefits of the Nuclear Waste Policy Act.
CMS ENERGY AND CONSUMERS
ANTITRUST LITIGATION: In October 1997, Indeck Energy Services, Inc. and
Indeck Saginaw Limited Partnership, independent power producers, filed a
lawsuit against CMS Energy and Consumers in the United States District
Court for the Eastern District of Michigan. The suit alleges antitrust
violations relating to contracts that Consumers entered into with some of
its customers as well as claims relating to independent power production
projects. The plaintiffs claim damages of $100 million (which can be
trebled in antitrust cases as provided by law). The transactions of which
plaintiffs complain have been regulated by and are subject to the
jurisdiction of the MPSC. On November 21, 1997, Consumers and CMS Energy
filed a motion for summary judgement and/or dismissal of the complaint.
The motion will be decided in early 1998 before the lawsuit is allowed to
proceed. CMS Energy and Consumers presently believe the lawsuit is
entirely without merit and will vigorously defend against it, but cannot
predict the outcome of this matter.
ENVIRONMENTAL MATTERS: CMS Energy, Consumers and their subsidiaries and
affiliates are subject to various federal, state and local laws and
regulations relating to the environment. Several of these companies have
been named parties to various actions involving environmental issues.
However, based on their present knowledge and subject to future legal and
factual developments, CMS Energy and Consumers believe that it is unlikely
that these actions, individually or in total, will have a material adverse
effect on their financial condition, see Item 1. Business - CMS Energy and
Consumers Environmental Compliance, Item 7. Management's Discussion and
Analysis and Item 8. Financial Statements and Supplementary Data - Note 6
of Consumers' Notes to Consolidated Financial Statements.
34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
CMS ENERGY
None in the fourth quarter of 1997 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1997 for Consumers.
35
PART II
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
CMS Energy
Market prices for CMS Energy's Common Stock and related security holder
matters are contained in Item 8. Financial Statements and Supplementary
Data - CMS Energy's Quarterly Financial and Common Stock Information,
which is incorporated by reference herein. At February 25, 1998, the
number of registered shareholders totaled 67,278 for CMS Energy Common
Stock and 4,466 for Class G Common Stock.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In May, August, November and
December 1997, Consumers paid $70 million, $43 million, $57 million and
$48 million in cash dividends, respectively, on its common stock. In May,
August, November and December 1996, Consumers paid $75 million, $40
million, $48 million and $37 million in cash dividends, respectively, on
its common stock.
ITEM 6. SELECTED FINANCIAL DATA.
CMS Energy
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - CMS Energy's Selected Financial
Information which is incorporated by reference herein.
Consumers
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - Consumers' Selected Financial
Information which is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS Energy
Management's discussion and analysis of financial condition and results of
operations is contained in Item 8. Financial Statements and Supplementary
Data - CMS Energy's Management's Discussion and Analysis which is
incorporated by reference herein.
Consumers
Management's discussion and analysis of financial condition and results of
operations is contained in Item 8. Financial Statements and Supplementary
Data - Consumers' Management's Discussion and Analysis which is
incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS Energy
Quantitative and Qualitative Disclosures About Market Risk is contained in
Item 8. Financial Statements and Supplementary Data - CMS Energy's
Management's Discussion and Analysis - Results of Operations - Market Risk
Information which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information. . . . . . . . . . . . . . . . 38
Management's Discussion and Analysis. . . . . . . . . . . . . 41
Consolidated Statements of Income . . . . . . . . . . . . . . 57
Consolidated Statements of Cash Flows . . . . . . . . . . . . 58
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 59
Consolidated Statements of Preferred Stock. . . . . . . . . . 61
Consolidated Statements of Common Stockholders' Equity. . . . 62
Notes to Consolidated Financial Statements. . . . . . . . . . 63
Report of Independent Public Accountants. . . . . . . . . . . 97
Quarterly Financial and Common Stock Information. . . . . . . 98
Consumers Page
Selected Financial Information. . . . . . . . . . . . . . . . 101
Management's Discussion and Analysis. . . . . . . . . . . . . 102
Consolidated Statements of Income . . . . . . . . . . . . . . 113
Consolidated Statements of Cash Flows . . . . . . . . . . . . 114
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 115
Consolidated Statements of Long-Term Debt . . . . . . . . . . 117
Consolidated Statements of Preferred Stock. . . . . . . . . . 118
Consolidated Statements of Common Stockholder's Equity. . . . 119
Notes to Consolidated Financial Statements. . . . . . . . . . 120
Report of Independent Public Accountants. . . . . . . . . . . 144
Quarterly Financial Information . . . . . . . . . . . . . . . 145
1997 Financial Statements
38
Selected Financial Information CMS Energy Corporation
1997 1996 1995 1994 1993
Operating revenue (in millions) ($) 4,787 4,333 3,890 3,614 3,476
Consolidated net income (in millions) ($) 268 240 204 179 155
Average common shares outstanding
(in thousands)
CMS Energy 96,144 92,462 88,810 85,888 81,251
Class G 8,015 7,727 7,511 - -
Earnings per average common share
CMS Energy - Basic ($) 2.63 2.45 2.27 2.09 1.90
- Diluted ($) 2.61 2.44 2.26 2.08 1.90
Class G - Basic and Diluted ($) 1.84 1.82 .38 - -
Cash from operations (in millions) ($) 657 661 682 612 484
Capital expenditures, excludes capital
lease additions and DSM (in millions) ($) 711 659 535 575 550
Total assets (in millions) ($) 9,793 8,615 8,143 7,378 6,958
Long-term debt, excluding current
maturities (in millions) ($) 3,272 2,842 2,906 2,709 2,405
Non-current portion of capital
leases (in millions) ($) 75 103 106 108 115
Total preferred stock (in millions) ($) 238 356 356 356 163
Total Trust Preferred Securities (in millions) ($) 393 100 - - -
Cash dividends declared per common share
CMS Energy ($) 1.14 1.02 .90 .78 .60
Class G ($) 1.21 1.15 .56 - -
Market price of common stock at year-end
CMS Energy ($) 44-1/16 33-5/8 29-7/8 22-7/8 25-1/8
Class G ($) 27-1/8 18-3/8 18-7/8 - -
Book value per common share at year-end (a)
CMS Energy ($) 18.73 17.00 15.15 12.78 11.33
Class G ($) 10.91 11.38 10.60 - -
Return on average common equity (%) 14.6 15.2 15.9 17.3 18.3
Return on assets (a) (%) 5.7 5.4 5.2 4.9 4.6
Number of employees at year-end
(full-time equivalents) 9,682 9,712 10,105 9,972 10,013
39
Selected Financial Information (Continued) CMS Energy Corporation
1997 1996 1995 1994 1993
Electric Utility Statistics
Sales (billions of kWh) 37.9 37.1 35.5 34.5 32.8
Customers (in thousands) 1,617 1,594 1,570 1,547 1,526
Average sales rate per kWh (cents) 6.57 6.55 6.36 6.29 6.28
Gas Utility Statistics
Sales and transportation deliveries (bcf) 420 448 404 409 411
Customers (in thousands) (b) 1,533 1,504 1,476 1,448 1,423
Average sales rate per mcf ($) 4.44 4.45 4.42 4.48 4.46
Electric and Gas Non-Utility Statistics
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 621 493 497 385 334
Independent power production
sales (millions of kWh) 13,126 7,823 7,422 6,216 5,019
CMS Energy's share of unconsolidated
natural gas transmission, storage and
processing revenue (in millions) ($) 51 42 26 7 3
CMS Energy's share of unconsolidated
marketing, services and trading
revenue ($) 202 - - - -
Gas marketed for end-users (bcf) 243 108 101 66 60
Exploration and Production Statistics
Sales (net equiv. MMbbls) (a) 11.4 10.1 9.0 5.6 5.0
Proved reserves (net equiv. MMbbls) (a) 152.0 133.5 124.5 108.0 69.8
Proved reserves added
(net equiv. MMbbls) (a) 29.8 18.7 25.6 29.0 3.9
Finding cost per net equiv. barrel ($) 2.38 2.94 5.06 5.92 4.97
<FN>
(a) Certain prior year amounts were restated for comparative purposes.
(b) Excludes off-system transportation customers.
40
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41
CMS Energy Corporation
Management's Discussion and Analysis
This Annual Report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995, that include, without
limitation, discussions as to expectations, beliefs, plans, objectives and
future financial performance, or assumptions underlying or concerning
matters discussed in this report. Refer to the Forward-Looking
Information section of this MD&A for 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 is a combination electric and gas utility company serving the
Lower Peninsula of Michigan and 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: acquisition,
development and operation of independent power production facilities; oil
and gas exploration and production; storage, transmission and processing
of natural gas; energy marketing, services and trading; and international
energy distribution.
RESULTS OF OPERATIONS
CMS Energy Consolidated Earnings
In Millions, Except Per Share Amounts
Years Ended December 31 1997 1996 Change
- --------------------------------------------------------------
Consolidated Net Income $ 268 $ 240 $ 28
Net Income Attributable
to Common Stocks:
CMS Energy 253 226 27
Class G 15 14 1
Earnings Per Average
Common Share:
CMS Energy
Basic 2.63 2.45 .18
Diluted 2.61 2.44 .17
Class G
Basic and Diluted 1.84 1.82 .02
==============================================================
CMS Energy experienced earnings growth for the fifth consecutive year.
This historical growth reflects changes in regulation allowing CMS Energy
to invest in other states and countries, and to offer a full range of
services and fuels. The increased earnings for 1997 resulted from (i) a
February 1996 electric rate increase received by Consumers that benefitted
all of 1997, (ii) increased electric sales by Consumers, (iii) improved
earnings from the MCV Partnership, (iv) increased revenues from the
transmission of electricity for others, (v) increased income from
international independent power production, and (vi) increased income from
international gas transmission, storage and processing. Partially
offsetting these increases, however, were (i) decreased gas deliveries by
Consumers due to warmer winter month temperatures in 1997 and the loss of
an extra day for the 1996 leap year, (ii) marketing losses due to lower
gas margins, and (iii) lower gas production and lower oil and gas prices
in the oil and gas exploration and production business. Earnings for 1997
also included recognition of a gain on the sale of CMS NOMECO's entire
interest in oil and gas properties in Yemen, an industry expertise service
fee in connection with the Loy Yang A acquisition, a gain on the sale of
the Ames gas gathering system, and Consumers' adjustment of prior years'
income taxes associated with non-taxable earnings on nuclear
decommissioning trust funds. Comparatively, the 1996 results included a
gain on the sale of a power purchase agreement by a partnership in which
CMS Generation owns a 50 percent interest, a gain on the sale of a
partnership interest and a refund received by the MCV Partnership.
The increase in consolidated net income for 1996 over 1995 primarily
reflects the favorable impact of an electric rate increase and an
operating income increase from a refund received by the MCV Partnership
that provided a $6 million earnings benefit for CMS Energy. Earnings in
1996 also reflect increased electric sales, gas deliveries and revenues
from gas loaning activities. Consolidated net income was also affected by
increased earnings from CMS Gas Transmission's 25 percent ownership
interest in TGN and increased equity earnings resulting from the sale of a
power purchase agreement. CMS Gas Transmission and CMS Generation are
subsidiaries of Enterprises.
For further information, see the individual results of operations for each
CMS Energy business segment in this MD&A.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions
Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
- --------------------------------------------------------------------------
Sales (including
special contract discounts) $ 5 $ 1
Rate increases and other regulatory issues 11 50
Operation and maintenance 24 2
General taxes, depreciation and other (19) (14)
---- ----
Total increase/(decrease)
in pretax operating income $ 21 $ 39
==== ====
Electric Sales: Total electric sales in 1997 were 38 billion kWh, an
increase of 2.3 percent over 1996 sales. The increase reflects continued
economic growth in Michigan and a 1.2 percent increase in sales to
ultimate customers, primarily within the industrial class. Total electric
sales in 1996 were 37 billion kWh, an increase of 4.4 percent over the
1995 level. The increase in 1996 is primarily attributable to an increase
in intersystem sales and a 1.7 percent increase in sales to ultimate
customers. This increase also reflects continued economic growth in
Consumers' territory.
Power Costs: Cost increases in both 1997 and 1996 over the prior periods
reflect greater power purchases from outside sources to meet increased
sales demand. The following table quantifies the changes in electric
power costs:
In Millions
Years Ended December 31 1997 1996 Change 1996 1995 Change
- -----------------------------------------------------------------------
$1,139 $1,087 $52 $1,087 $970 $117
=======================================================================
Electric Utility Operating Issues:
Power Purchases from the MCV Partnership: In 1992, Consumers recognized a
loss for the present value of the estimated future underrecoveries of
power purchases from the MCV Partnership. The after-tax cash
underrecoveries are currently based on the assumption that the MCV
Facility will be available to generate electricity 91.5 percent of the
time over its expected life. For 1997, the MCV Facility was available 99
percent of the time, resulting in after-tax cash underrecoveries of $41
million. Consumers believes it will continue to experience after-tax cash
underrecoveries associated with the PPA in amounts as those shown below.
For further information, see Power Purchases from the MCV Partnership in
Note 3.
In Millions
1998 1999 2000 2001 2002
- -----------------------------------------------------------------------
Estimated cash
underrecoveries, net of tax $23 $22 $21 $20 $19
========================================================================
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility. If the MCV
Facility operates at levels above management's estimate over the remainder
of the PPA, Consumers will need to recognize losses for future
underrecoveries larger than amounts previously recorded. Therefore,
Consumers would experience larger amounts of cash underrecoveries than
originally anticipated. Management will continue to evaluate the adequacy
of the accrued liability considering actual MCV Facility operations.
Electric Rate Proceedings: In 1996, the MPSC issued a final order
authorizing Consumers to recover costs associated with the purchase of an
additional 325 MW of MCV Facility capacity and to accelerate recovery of
its nuclear plant investment. To implement the accelerated recovery, the
order required an increase in annual nuclear plant depreciation expense by
$18 million with a corresponding decrease in fossil-fueled generating
plant depreciation expense. The order also established an experimental
direct-access program. For further information on these issues, see the
Electric Business Outlook section of this MD&A and Notes 3 and 4.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for the Palisades. The report
rated all areas as good, unchanged from the previous assessment.
The NRC requires Consumers to make certain calculations and report to it
on the continuing ability of the Palisades reactor vessel to withstand
postulated pressurized thermal shock. In 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor
vessel can be safely operated through 2003. Consumers believes that with
a change in fuel management designed to minimize embrittlement, Palisades
can be operated to the end of its license life in the year 2007.
Palisades' temporary on-site storage pool for spent nuclear fuel is at
capacity. Consequently, Consumers is using NRC-approved steel and
concrete vaults, commonly known as "dry casks," for temporary on-site
storage.
Big Rock closed permanently on August 29, 1997 because management
determined that the plant would be uneconomical to operate in an
increasingly competitive environment. Consumers originally scheduled the
plant to close May 31, 2000, at the end of the plant's operating license.
Plant decommissioning began in September 1997 and may take five to ten
years to return the site to its original condition. The earlier than
planned closure of the plant and the reopening of the South Carolina
Barnwell facility to receive low level radioactive waste have changed the
method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated
decommissioning cost which is required to be updated in a filing with the
MPSC by March 31, 1998. For further information on nuclear matters, see
Note 11.
Electric Environmental Matters: The Clean Air Act contains significant
environmental provisions specific to utilities. During the past few
years, Consumers incurred $46 million in capital expenditures. Consumers
believes it may incur an additional $30 million in capital expenditures by
the year 2000 to comply with the current sulfur dioxide and nitrogen oxide
emission limits established by the EPA.
Consumers currently operates within all Clean Air Act requirements and
meets current ozone and particulate emission limits. The EPA recently
revised the national air quality standards, which may further limit small
particulate and ozone related emissions, and proposed that the State of
Michigan impose additional nitrogen oxide limits on fossil-fueled
emitters, such as Consumers' generating units. It is unlikely that the
State of Michigan will establish Consumers' emissions reduction target
until mid-to-late 1999. Until this state-mandated target is known, the
estimated cost of compliance is subject to significant revision. The
preliminary estimate of capital costs to reduce nitrogen oxide related
emissions for Consumers' fossil-fueled generating units is approximately
$175 million, plus an additional amount totaling $10 million per year for
the next 20 years for operation and maintenance costs. Consumers may need
an equivalent amount to comply with the new small particulate standards.
The State of Michigan objected to the extent of the proposed EPA emission
reductions. If the State of Michigan's position were to be adopted by the
EPA, costs could be less than the current estimated amounts. Consumers
supports the bipartisan effort in the U.S. Congress to delay
implementation of the revised standards until the relationship between the
new standards and health improvements is established scientifically.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites. Nevertheless, it believes that these
costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Many other creditworthy,
potentially responsible parties, with substantial assets also cooperate
with respect to the individual sites. Based on current information,
management believes it is unlikely that the liability at any of the known
Superfund sites, individually or in total, will have a material adverse
effect on CMS Energy's financial position, liquidity or results of
operations.
While decommissioning Big Rock, Consumers found that some areas of the
plant have coatings that contain both metals and polychlorinated
biphenyls. Consumers does not believe that any facility in the United
States currently accepts the radioactive portion of that waste. The cost
of removal and disposal is currently unknown. These costs would
constitute part of the cost to decommission the plant, and will be paid
from the decommissioning fund. Consumers is studying the extent of the
contamination and reviewing options. For further information regarding
these and other environmental matters, see Electric Environmental Matters
in Note 10 and Nuclear Plant Decommissioning in Note 2.
Stray Voltage: Various parties have sued Consumers relating to the effect
of so-called stray voltage on certain livestock. In December 1997, the
Michigan Supreme Court remanded for further proceedings a 1994 Michigan
trial court decision that refused to allow the claims of over 200 named
plaintiffs to be joined in a single action. The trial court dismissed all
of the plaintiffs except the first-named plaintiff, allowing the others to
re-file separate actions. Of the original plaintiffs, only 49 re-filed
separate cases. All of those 49 cases have been resolved. The Michigan
Supreme Court remanded the matter, finding that the proper remedy for
misjoinder was not dismissal, but to automatically allow each case to go
forward separately. Consumers filed a motion for reconsideration with the
Michigan Supreme Court, which was denied. Consumers intends to vigorously
defend these cases, but is unable to predict the outcome. As of December
31, 1997, Consumers had 12 individual stray voltage lawsuits, unrelated to
the cases above, awaiting trial court action, down from 22 lawsuits as
reported at year end 1996.
Other: In October 1997, two independent power producers sued Consumers
and CMS Energy in a federal court alleging antitrust violations and
economic losses due to special electric contracts signed by Consumers with
large customers. The plaintiffs claim damages of $100 million (which a
court can treble in antitrust cases as provided by law). The transactions
of which plaintiffs complain have been regulated by, and are subject to,
the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy
filed a motion for summary judgement and/or for dismissal of the complaint
filed by the plaintiffs. Consumers and CMS Energy believe the lawsuit is
without merit and will vigorously defend against it, but cannot predict
the outcome of this matter.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income:
In Millions
Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
- -----------------------------------------------------------------
Sales $(13) $ 3
Gas wholesale and retail
services activities (9) 7
Operations and maintenance 24 (4)
General taxes, depreciation
and other (7) (4)
---- ----
Total increase/(decrease)
in pretax operating income $ (5) $ 2
==== ====
Gas Deliveries: System deliveries in 1997, including miscellaneous
transportation, totaled 420 bcf, a decrease of 28 bcf or 6.1 percent
compared to 1996. The decreased deliveries for 1997 compared to 1996
reflect warmer temperatures in 1997 and loss of an extra day for the 1996
leap year. Comparable system deliveries for 1996 totaled 448 bcf, an
increase of 44 bcf or 10.8 percent compared to 1995. The increased
deliveries for 1996 compared to 1995 reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels,
continued strength in the Michigan economy and the benefit from the added
leap year day in 1996.
Cost of Gas Sold: The cost decrease for 1997 was the result of decreased
sales and lower gas prices. The cost increase for 1996 was the result of
increased sales.
In Millions
Years Ended December 31 1997 1996 Change 1996 1995 Change
___________________________________________________________________
$694 $750 $(56) $750 $674 $76
===================================================================
Consumers Gas Group Operating Issues:
Gas Rate Proceedings: Consumers entered into a special natural gas
transportation contract in response to a customer's proposal to bypass
Consumers' system in favor of a competitive alternative. In 1995, the
MPSC approved the contract. The MPSC stated, however, that Consumers'
shareholders must bear the revenue shortfall created by the difference
between the contract's discounted rate and the floor price of an MPSC-
authorized gas transportation rate. In 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. In October 1997, the Court of Appeals issued an opinion
affirming the MPSC's order. Consumers has sought a rehearing of the Court
of Appeals opinion. For further information on Gas Proceedings, see the
Consumers Gas Group Business Outlook section of this MD&A and Note 4.
Gas Cost Recovery Matters: In 1995, the MPSC issued an order favorable to
Consumers' position in a $44 million contract pricing dispute (excluding
interest) between Consumers and certain gas producers. The Court of
Appeals upheld the MPSC order. The gas producers have now appealed to the
Michigan Supreme Court. Consumers believes the MPSC order correctly
concludes that the producers' theories are without merit. Consumers will
vigorously oppose any claims the producers may raise, but cannot predict
the outcome of this issue.
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.
Consumers estimates its costs related to investigation and remedial action
at $48 million to $98 million. This estimate is based on undiscounted
1998 costs. Any significant change in assumptions, such as remediation
technique, nature and extent of contamination and regulatory requirements,
could affect the estimate of investigation and remedial action costs for
the sites. For further information regarding environmental matters, see
Note 10 .
Independent Power Production Results of Operations
Pretax Operating Income: The improved earnings in the independent power
production business demonstrates the successful strategy to search for
global opportunities. Pretax operating income for 1997 increased $28
million (43 percent) from 1996. This increase primarily reflects
increased operating income resulting from increased international
earnings, higher electricity sales by the MCV Facility, the industry
expertise service fee income earned in connection with the Loy Yang
transaction in 1997, and increased earnings attributable to the Loy Yang
and Jorf Lasfar projects. These increases were offset by the absence of
certain 1996 nonrecurring gains, including the gain on the sale of a power
purchase agreement by a partnership in which CMS Generation owns a 50
percent interest. Pretax operating income for 1996 increased $22 million
from 1995, primarily reflecting nonrecurring gains and increased operating
income from a refund received by the MCV Partnership. See the Capital
Resources and Liquidity - Capital Expenditures, and Outlook -
International Operations Outlook sections of this MD&A for further
discussion of Loy Yang and Jorf Lasfar.
Independent Power Production Operating Issues
Contracts to sell 11 percent of Loy Yang's capacity will expire during
1998. Although Loy Yang will make attempts to replace these contracts at
comparable prices, there is no assurance that the new contracts will be at
the same price. CMS Generation does not currently expect to incur
significant capital costs, if any, at its power facilities to comply with
current environmental regulatory standards.
Oil and Gas Exploration and Production Results of Operations
Pretax Operating Income: The oil and gas exploration and production
segment of CMS Energy experienced continued growth in 1997. Pretax
operating income for 1997 increased $11 million (28 percent) over 1996.
This increase is the result of a gain on the sale of CMS NOMECO's entire
interest in oil and gas properties in Yemen and 33 percent higher oil
production. The increase is offset by lower oil and gas prices and gas
production and higher operating expenses. Pretax operating income for
1996 increased $9 million from 1995, primarily due to higher oil and gas
prices and volumes, partially offset by the recognition of a $10 million
gain from assignment and novation of a gas supply contract recorded in the
first quarter of 1995.
Natural Gas Transmission, Storage and Processing Results of Operations
Pretax Operating Income: Similar to the independent power production
business, CMS Energy's natural gas transmission, storage and processing
business earnings reflect the ability to acquire and develop major
pipelines worldwide. Pretax operating income for 1997 increased $7
million (26 percent). The increase primarily reflects income attributable
to the Australian pipeline acquired in 1997, income attributable to
domestic and international operations and a gain on the sale of a portion
of the Ames gas gathering system. These increases were partially offset by
the 1996 gain resulting from the dissolution of the Moss Bluff and Grand
Lacs partnerships. Pretax operating income for 1996 increased $14 million
from 1995, reflecting new pipeline and storage investments, primarily TGN,
the continued growth of existing projects, and a gain relating to the Moss
Bluff and Grand Lacs partnerships.
Marketing, Services and Trading Results of Operations
Pretax Operating Income: CMS MST provides energy commodity marketing,
risk management and energy management services to commercial and
industrial customers throughout the United States and plans to expand
operations worldwide. Pretax operating income for 1997 decreased $7
million from the 1996 period. The decrease is a result of substantially
higher than expected natural gas prices that severely impacted CMS MST's
ability to achieve positive margins on fixed price sales, and higher than
expected start up costs. Despite the decreased earnings, CMS MST will
continue to position itself for future growth in the new energy world.
Gas marketed for end users totaled 243 bcf and 108 bcf for 1997 and 1996,
respectively. Wholesale electric trading, a new marketing activity for
CMS MST in 1997, totaled 900,000 MW. CMS MST completed over 300 energy
management services projects resulting in $6 million in revenues.
Market Risk Information
CMS Energy is exposed to market risk including, but not limited to,
changes in interest rates, currency exchange rates, and certain commodity
and equity prices. Derivative instruments including, but not limited to,
futures contracts, swaps, options and forward contracts may be used to
manage these exposures. Derivatives are principally used as hedges and
not for trading purposes. During 1997, trading activities were immaterial.
In the case of hedges, management believes that any losses incurred on
derivative instruments used as a hedge would be offset by the opposite
movement of the underlying hedged item.
Management uses commodity futures contracts, options and swaps (which
require a net cash payment for the difference between a fixed and variable
price) and oil swaps to manage commodity price risk. They also use
forward exchange contracts to hedge certain receivables, payables and
long-term debt relating to foreign investments. Management also uses
equity investments in which CMS Energy or its subsidiaries hold less than
a 20 percent interest. These commodity, financial and equity instruments
do not expose CMS Energy to material market risk.
Interest Rate Risk: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps
and rate locks may be used to adjust exposure when deemed appropriate,
based upon market conditions. These strategies attempt to provide and
maintain the lowest cost of capital. The carrying amount of long-term
debt was $ 3.3 billion at December 31, 1997 with a fair value of $3.3
billion. The fair value of CMS Energy's financial derivative instruments
at December 31, 1997, with a notional amount of $1.1 billion, was $13
million, representing the amount that CMS Energy would have paid to
terminate these agreements on December 31, 1997. For purposes of the new
SEC disclosure requirements, CMS Energy performed a sensitivity analysis.
The analysis assesses the potential loss in fair value, cash flows and
earnings based upon hypothetical increases and decreases in market
interest rates. A hypothetical 10 percent adverse shift in market rates
in the near term would not have a material impact on CMS Energy's
consolidated financial position, results of operations or cash flows as of
December 31, 1997.
Limitations of the Sensitivity Model: Management does not believe that a
sensitivity analysis alone provides an accurate or reliable method for
monitoring and controlling risk. Therefore, CMS Energy and its
subsidiaries rely on the experience and judgement of senior management and
traders to revise strategies and adjust positions as they deem necessary.
Losses in excess of the amounts determined could occur if market rates or
prices exceed the 10 percent shift used for the analysis. The model
assumes that the maximum exposure associated with purchased options is
limited to premiums paid. The model does not take into consideration that
the Trust Preferred Securities are convertible into CMS Energy Common
Stock. The model assumes that conversion does not take place. If the
conversion occurred, the $173 million of Trust Preferred Securities would
be discharged through the issuance of 4.2 million shares of CMS Energy
Common Stock. The model also does not quantify short-term exposure to
hypothetically adverse price fluctuations in inventories.
For a discussion of accounting policies related to derivative
transactions, see Note 9.
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from
subsidiaries. In 1997, Consumers paid $218 million in common dividends.
In October 1997, Consumers returned $50 million of paid-in capital to
CMS Energy. During 1997, Enterprises paid common dividends and other
distributions of $173 million to CMS Energy. CMS Energy's consolidated
operating cash requirements are further met by its operating and financing
activities.
Operating Activities: CMS Energy's consolidated net cash provided by
operating activities is derived mainly from the sale and transportation of
natural gas by Consumers; the generation, transmission, and sale of
electricity by Consumers; the sale of oil and natural gas; the
transportation and storage of natural gas by CMS Gas Transmission; and the
production and sale of electricity by other affiliates. Consolidated cash
from operations totaled $657 million and $661 million for 1997 and 1996,
respectively. The $4 million decrease resulted from changes in working
capital and timing differences related to cash payments, cash receipts and
the recognition of revenues for routine operations, which offset an
increase in net income. CMS Energy uses its operating cash primarily to
expand its international businesses, to maintain and expand electric and
gas systems of Consumers, to retire portions of its long-term debt and to
pay dividends.
Investing Activities: CMS Energy's consolidated net cash used in investing
activities totaled $1.584 billion and $841 million for 1997 and 1996,
respectively. The increase of $743 million primarily reflects increases
in capital expenditures and investments in partnerships and unconsolidated
subsidiaries during 1997. CMS Energy's 1997 expenditures for its utility
and international businesses were $371 million and $1.181 billion,
respectively, compared to $447 million and $432 million, respectively,
during 1996.
Financing Activities: CMS Energy's net cash provided by financing
activities totaled $938 million and $180 million for 1997 and 1996,
respectively. The increase of $758 million in net cash provided by
financing activities resulted from issuing the securities listed in the
table below, an increase in notes payable and the reduction in the
repayment of bank loans. The retirement of bonds and other long-term debt
and the retirement of preferred stock partially offset the 1997 increase.
In Millions
Distribution/ Principal Use of
Month IssuedMaturity Interest Rate Amount Proceeds
- -----------------------------------------------------------------
CMS Energy
Senior Notes May 2002 8.125% $ 350 Fund Loy Yang
Senior Notes September 2004 7.625% 180 Discharge debt
Senior Notes November 2000 7.375% 300 Pay down Senior
Credit Facilities
GTNs
Series C (2) (2) 7.7% (2) 150 General corporate
purposes
Series D (2) (2) 7.3% (2) 78 General corporate
purposes
Trust Preferred
Securities (1) June 2027 7.75% (4) 173 General corporate
purposes
Common Stock November N/A 4.142 shares 152 General corporate
purposes
------
1,383
Consumers
Trust Preferred
Securities(3) September 2027 8.20%(4) 120 Redeem preferred
stock
------
Total $1,503
======
(1)For additional information regarding the sale of these securities see
Note 7 and note (b) on the Consolidated Balance Sheets.
(2)GTNs are issued from time to time with various maturities. The rate
shown herein is a weighted average interest rate.
(3)For additional information regarding the sale of these securities see
Note 7 and note (a) on the Consolidated Balance Sheets.
(4)Distributions are tax deductible.
In 1997, CMS Energy paid $109 million in cash dividends to holders of
CMS Energy Common Stock and $10 million in cash dividends to holders of
Class G Common Stock. In January 1998, the Board of Directors declared a
quarterly dividend of $.30 per share on CMS Energy Common Stock and $.31
per share on Class G Common Stock, payable in February 1998.
In July 1997, the Board of Directors declared quarterly dividends of $.30
per share on CMS Energy Common Stock and $.31 per share on Class G Common
Stock. CMS Energy paid these dividends in August 1997, representing an
increase in the annualized dividend on CMS Energy Common Stock to $1.20
per share from the previous amount of $1.08 per share (an 11 percent
increase) and an increase in the annualized dividend on Class G Common
Stock to $1.24 per share from the previous dividend of $1.18 per share (a
5 percent increase).
Other Investing and Financing Matters: At December 31, 1997, the book
value per share of CMS Energy Common Stock and Class G Common Stock was
$18.73 and $10.91, respectively.
As of December 31, 1997, CMS Energy could issue $241 million in deferred
coupon notes, GTNs, CMS Energy Common Stock, subordinated debentures,
stock purchase contracts, stock purchase units and Trust Preferred
Securities under various outstanding shelf registration statements on file
with the SEC.
In July 1997, CMS Energy refinanced a $450 million unsecured revolving
credit facility and a $125 million term loan with the $1.125 billion
Senior Credit Facilities. The Senior Credit Facilities consist of a $400
million 364-day revolving credit facility, a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $155 million. These credit facilities
are available to finance working capital requirements and to pay for
capital expenditures between long-term financings. At December 31, 1997,
the total amount utilized under the Senior Credit Facilities was $365
million, including $60 million of contingent obligations, and under the
unsecured lines of credit and letters of credit was $21 million.
CMS Energy has a bank commitment through March 1998 to enter into a $580
million credit agreement to fund investments in power projects.
In January 1998, a Delaware statutory business trust established by
CMS Energy sold $180 million of certificates due January 15, 2005 in a
public offering. In exchange for those proceeds, CMS Energy sold to the
trust $180 million aggregate principal amount of 7 percent Extendible
Tenor Rate Adjusted Securities due January 15, 2005. Net proceeds to
CMS Energy from the sale totaled $176 million.
In January 1998, CMS Energy announced the commencement of an offer to
exchange up to $300 million of its privately placed 7.375 percent Senior
Unsecured Notes due 2000, Series A for 7.375 percent Senior Unsecured
Notes due 2000, Series B that have been registered with the SEC. Other
than their registration, the terms of the Series B Notes are substantially
identical to the Series A (except that the Series B will not have transfer
restrictions). The offer was completed in February 1998.
At December 31, 1997, Consumers had FERC authorization to: (i) issue or
guarantee up to $900 million of short-term securities through 1998; (ii)
issue, through November 1998, $376 million of long-term securities with
maturities up to 30 years, for refinancing or refunding purposes; and
(iii) guarantee, through 1999, up to $25 million in loans made by others,
to residents of Michigan for the purpose of making energy-related home
improvements. In January 1998, Consumers requested authorization to
issue, through November 1998, an additional $500 million of long-term
securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured
lines of credit aggregating $120 million. These facilities are available
to finance seasonal working capital requirements and to pay for capital
expenditures between long-term financings. At December 31, 1997, the
total available amount remaining under these facilities was $168 million.
Consumers also has in place a $500 million trade receivables sale program.
At December 31, 1997, $165 million in receivables remained available for
sale under the program. For further information, see Note 5.
CMS Energy and its subsidiaries must redeem or retire $1.7 billion of
long-term debt over the three-year period ending December 2000. In
addition, at December 31, 1997, Consumers had a recorded liability to the
DOE of $111 million, which Consumers must pay upon the first delivery of
spent nuclear fuel to the DOE. Current federal law originally scheduled
delivery of the fuel to occur in 1998 (see Note 2). Consumers plans to
refinance $850 million of its long-term debt during 1998 and will continue
to evaluate capital markets as a source of financing further debt
retirements. In early 1998, Consumers called for the March 1998
redemption of $57 million aggregate principal amount of its 7.5 percent
First Mortgage Bonds due 2001 and $62 million aggregate principal amount
of its 7.5 percent First Mortgage Bonds due 2002.
In early 1998, Consumers issued $250 million of senior notes due February
1, 2008, at an interest rate of 6.375 percent. The senior notes are
secured by a series of Consumers' First Mortgage Bonds, issued
contemporaneously in a similar amount. Proceeds from the sale were added
to the general funds of Consumers and applied to the payment, at maturity,
of $248 million aggregate principal amount of Consumers' 8.75 percent
First Mortgage Bonds due February 15, 1998.
The following discussions in Capital Expenditures and Outlook contain
forward-looking statements. See the Forward-Looking Information section
of this MD&A for some important factors that could cause actual results or
outcomes to differ materially from those discussed herein.
Capital Expenditures
In September 1997, a joint venture of affiliates of CMS Generation and ABB
Energy Ventures, Inc. collectively invested $395 million for their equity
contribution in the Jorf Lasfar project company. Equity bridge loans from
private banks provided the funds for their equity investment. CMS Energy
guaranteed CMS Generation's 50 percent share of the $395 million borrowing
that funded the equity contribution. A consortium of governmental,
multilateral and private financial institutions provided an estimated
additional $920 million of non-recourse debt financing. Jorf Lasfar is a
$1.5 billion privatization and expansion project. CMS Energy anticipates
that reinvested cash from operations, estimated at $191 million, will
provide the balance of the financing needed for Jorf Lasfar.
In the second quarter of 1997, a consortium comprising subsidiaries of
CMS Generation, among others, financed, through a consortium of banks,
seventy-seven percent of the consortium's $3.7 billion payment to the
Australian State of Victoria government for the Loy Yang acquisition.
This financing occurred on a non-recourse basis to CMS Energy and
CMS Generation. CMS Generation holds a 50 percent interest in the Loy
Yang consortium.
In December 1997, the State of Sergipe, Brazil selected a group consisting
of CMS Energy affiliates and CFLCL, to acquire, in a privatization, an 86
percent interest in the Energipe electric distribution utility. By prior
agreement, CMS Electric & Gas acquired 39 percent of the equity securities
of CFLCL for $180 million, which funded CFLCL's investment in Energipe.
CMS Electric & Gas may increase its ownership interest in CFLCL during the
first half of 1998.
Looking forward, CMS Energy estimates that capital expenditures, including
new lease commitments and investments in partnerships and unconsolidated
subsidiaries, will total $3.7 billion over the next three years. Cash
generated by operations is expected to satisfy a substantial portion of
these capital expenditures. Nevertheless, CMS Energy will continue to
evaluate capital markets in 1998 as a potential source of financing its
subsidiaries' investing activities. CMS Energy estimates capital
expenditures by business segment over the next three years as follows:
In Millions
Years Ended December 31 1998 1999 2000
- ------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 320 $ 265 $ 255
Consumers gas operations (a) 115 115 115
Independent power production 368 469 400
Oil and gas exploration and production 110 160 175
Natural gas transmission and storage 210 61 100
International energy distribution 142 125 100
Marketing, services and trading 70 25 30
------ ------ ------
$1,335 $1,220 $1,175
====== ====== ======
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
(b) These amounts do not include preliminary estimates for capital
expenditures possibly required to comply with recently revised national
air quality standards under the Clean Air Act. For further information
see Electric Utility Operating Issues - Electric Environmental Matters
above and Note 10.
CMS Energy currently plans investments from 1998 to 2000: (i) for oil and
gas exploration and production operations, primarily in North and South
America, offshore West Africa and North Africa; (ii) for independent power
production operations to pursue acquisitions and development of electric
generating plants in the United States, Latin America, Asia, Australia,
the Pacific Rim region, North Africa and the Middle East; (iii) to
continue development of non-utility natural gas storage, gathering and
pipeline operations of CMS Gas Transmission, both domestic and
international; (iv) to acquire, develop and expand international energy
distribution businesses; and (v) to provide gas, electric, oil and coal
marketing, risk management and energy management services throughout the
United States and eventually worldwide.
These estimates are prepared for planning purposes and are subject to
revision.
OUTLOOK
As the deregulation and privatization of the energy industry takes place
in the United States and internationally, CMS Energy has positioned itself
to be a leading international energy infrastructure company developing and
operating energy facilities and providing energy services in all major
world growth markets. CMS Energy provides a complete range of
international energy expertise from well-head to burner-tip. Beyond 1997
it will continue to grow its businesses by finding opportunities to invest
in additional energy infrastructures and to capitalize on being a major,
full-service energy company. CMS Energy will increase its involvement in
energy projects by pursuing opportunities in oil and gas exploration and
development projects, natural gas pipelines and storage facilities, power
generation, and electric and gas distribution systems around the world.
In addition, CMS Energy will focus more on marketing energy services and
trading to take advantage of continued growth opportunities in both the
domestic and international markets.
International Operations Outlook
CMS Energy will continue to grow internationally by investing in multiple
projects in each country as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated
projects will create more opportunities and greater value than individual
investments. Also, CMS Energy will achieve this growth through strategic
partnering where appropriate.
To improve the efficiency and focus of its international energy
businesses, CMS Energy will separate its development efforts from the
operations of its assets. CMS Energy plans to conduct its development
efforts from offices in four regions of the world: Dearborn, Michigan for
The Americas - Northern Hemisphere; Buenos Aires for The Americas -
Southern Hemisphere; London for Africa, Europe and the Middle East; and
Singapore for Southeast Asia and Australia.
CMS Energy's development efforts will focus on countries where there are
multiple investment opportunities across its businesses, high energy
growth expectations, defined legal and regulatory structures, and economic
policies that support private investment. CMS Energy will continue to
create value by using the extensive knowledge and experience it has gained
in the United States over the past century, to gain competitive positions
in these countries.
CMS Energy structures its investments to minimize operational and
financial risks. These risks are mitigated when operating internationally
by working with local partners, utilizing multi-lateral financing
institutions, procuring political risk insurance and hedging foreign
currency exposure where appropriate.
Electric Business Outlook
Growth: Consumers expects average annual growth of two and one-half
percent per year in electric system deliveries over the next five years,
based on the present industry and regulatory configuration in Michigan.
Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales in
future periods.
Restructuring: Consumers' electric retail service is affected by
competition. To meet the challenge of competition, Consumers entered into
multi-year contracts with some of its largest industrial customers to
serve certain facilities. The MPSC has approved these contracts as part
of its phased introduction to competition. Certain customers have the
option to terminate their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct
access to the interstate transmission grid for wholesale transactions.
Consumers and Detroit Edison disagree on the effect of the orders on the
Michigan Electric Power Coordination Center pool. Consumers proposes to
maintain the benefits of the pool, while Detroit Edison has given notice
of early termination. Consumers expects FERC to rule on this issue in
1998.
In June 1997 the MPSC issued an order proposing that beginning January 1,
1998 Consumers would have to transmit and distribute energy on behalf of
competing power suppliers to serve retail customers. The order states
that by January 1, 2002, all customers would be free to choose (that is,
have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover
prudently incurred Transition Costs through a charge to all direct-access
customers until the end of the transition period in 2007.
Subsequent to the June 1997 order, the MPSC issued orders in October 1997
and early in 1998. Ultimately, the MPSC allowed Consumers: (i) to
recover Transition Costs of $1.755 billion through a charge to all direct-
access customers until the end of the transition period in 2007, subject
to an adjustment through a true-up mechanism; (ii) to commence the phase-
in of direct access in March 1998; and (iii) to suspend the power supply
cost recovery clause. The orders also confirm the MPSC's belief that
Securitization may be a beneficial mechanism for recovery of Transition
Costs while recognizing that Securitization requires state legislation to
occur. Consumers believes that the Transition Cost surcharge will apply
to all customers beginning in 2002. A separate charge to direct-access
customers after MPSC review and verification would also recover prudent
costs of implementing a direct-access program estimated at an additional
$200 million. Nuclear decommissioning costs will also continue to be
collected through a separate surcharge to all customers. Consumers
expects Michigan legislative consideration of the entire subject of
electric industry restructuring in 1998. To be acceptable to Consumers,
the legislation would have to provide for full recovery of Transition
Costs. Consumers expects the legislature to review all of the policy
choices made by the MPSC during the restructuring proceedings to assure
that they are in accord with those that the legislature believes should be
paramount. For further information regarding restructuring, see Note 4.
Application of SFAS 71: Consumers applies the utility accounting
standard, SFAS 71, that recognizes the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities related
to the generation, transmission and distribution operations of its
business in its financial statements. Consumers believes that the
generation segment of its business is still subject to rate regulation
based upon its present obligation to continue providing generation service
to its customers, and the lack of definitive deregulation orders. If rate
recovery of generation-related costs becomes unlikely or uncertain,
whether due to competition or regulatory action, this accounting standard
may no longer apply to the generation segment of Consumers' business.
Such a change could result in either full recovery of generation-related
regulatory assets (net of related regulatory liabilities) or a loss,
depending on whether Consumers' regulators adopt a transition mechanism
for the recovery of all or a portion of these net regulatory assets.
According to recently published Emerging Issues Task Force Issue 97-4,
Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statements No. 71 and 101, Consumers can continue to
carry its generation-related regulatory assets or liabilities for the part
of the business being deregulated if deregulatory legislation or an MPSC
rate order allows the collection of cash flows from its regulated
transmission and distribution customers to recover these specific costs or
settle obligations. Consumers believes that even if it was to discontinue
application of SFAS 71 for the generation segment of its business, its
regulatory assets, including those related to generation, are probable of
future recovery from the regulated portion of the business. At
December 31, 1997, Consumers had $277 million of generation-related net
regulatory assets recorded on its balance sheet, and a net investment in
generation facilities of $1.4 billion included in electric plant and
property. For further information regarding this issue, see Electric
Business Outlook - Restructuring, above.
Consumers Gas Group Business Outlook
Growth: Consumers currently anticipates gas deliveries (excluding
transportation to the MCV Facility and off-system deliveries) to grow at
an average annual rate of between one and two percent over the next five
years based primarily on a steadily growing customer base. Abnormal
weather, alternative energy prices, changes in competitive conditions, and
the level of natural gas consumption may affect actual gas deliveries in
future periods. Consumers is also offering a variety of energy-related
services to its customers focused upon appliance maintenance, home safety,
and home security.
Restructuring In December 1997, the MPSC approved Consumers' application
to implement a statewide, three-year experimental gas transportation pilot
program, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier. The
program is voluntary for natural gas customers. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. To minimize the risk of exposure to higher gas costs,
Consumers currently has contracts in place at known prices covering a
portion of its requirements through the year 2000. ABATE, the Attorney
General and other parties filed claims of appeal of the MPSC's order with
the Court of Appeals. For further information, see Note 4 .
Application of SFAS 71: Based on a regulated utility accounting standard,
SFAS 71, Consumers may 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 MATTERS
New Accounting Standards
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information. Each of these standards requires expanded disclosures
effective for 1998. Also in 1997, the Emerging Issues Task Force
published Issue 97-4, Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statements No. 71 and 101, and Issue
97-13, Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation. The consensus
reached in Issue 97-4 allows a company to maintain regulatory assets and
liabilities for part of a business that is being deregulated if
deregulatory legislation or a commission rate order allows the collection
of regulated cash flows to recover costs or settle obligations. The
regulated portion of a business maintains these regulatory assets and
liabilities until they are collected or settled, they are impaired, or
until the regulated portion of the business becomes deregulated. The
consensus reached in Issue 97-13 requires a company to expense the cost of
business process reengineering activities as incurred, and requires a
company to write off previously capitalized costs as a cumulative effect
adjustment in 1997. CMS Energy was not affected by the requirements of
this consensus. In addition, CMS Energy does not expect the application
of the other statements to materially affect its financial position,
liquidity or results of operations.
Computer Modifications for Year 2000
CMS Energy and its subsidiaries use software and related technologies
throughout its businesses that the year 2000 date change will affect and,
if uncorrected, could cause CMS Energy, among other things, to issue
inaccurate bills, report inaccurate data, or incur plant outages. In
1995, CMS Energy began modification of its computer software systems by
dividing programs requiring modification between critical and noncritical
programs. All necessary program modifications are expected to be
completed by the year 2000. CMS Energy devoted significant internal and
external resources to these modifications. It will expense anticipated
spending for these modifications as incurred, while capitalizing and
amortizing the costs for new software over the software's useful life.
CMS Energy does not expect that the cost of these modifications will
materially affect its financial position, liquidity or results of
operations.
Foreign Currency Translation:
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in
foreign countries. As of December 31, 1997 the foreign currency
translation adjustment was $96 million relating primarily to the U.S. and
Australian Dollar exchange rate fluctuations related to Loy Yang.
CMS Energy currently believes that the Australian economy is stable and
does not expect currency exchange rate fluctuations over the long term to
materially adversely affect CMS Energy's financial position, liquidity or
results of operations.
FORWARD-LOOKING INFORMATION
Forward-looking information is included throughout this report. This
report also describes material contingencies in the Notes to Consolidated
Financial Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward-looking statements
include prevailing domestic and foreign governmental policies and
regulatory actions (including those of FERC and the MPSC) with respect to
rates, proposed electric and natural gas industries restructuring, change
in industry and rate structure, operation of a nuclear power facility,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, operation and construction of natural
gas pipeline and storage facilities, recovery of the cost of purchased
power or natural gas, decommissioning costs, and present or prospective
wholesale and retail competition, among other important factors. The
business and profitability of CMS Energy are 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 environmental laws
and policies, weather conditions, competition for retail and wholesale
customers, pricing and transportation of commodities, market demand for
energy, inflation or deflation, capital market conditions, unanticipated
development project delays or changes in project costs, and the ability to
secure agreement in pending negotiations, among other important factors.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of
CMS Energy.
57
Consolidated Statements of Income CMS Energy Corporation
In Millions, Except Per Share Amounts
Years Ended December 31 1997 1996 1995
Operating Revenue Electric utility $2,515 $2,446 $2,277
Gas utility 1,204 1,282 1,195
Independent power production 168 140 96
Oil and gas exploration and production 93 130 108
Natural gas transmission, storage and processing 102 62 25
Marketing, services and trading 692 258 171
Other 13 15 18
------ ------ ------
4,787 4,333 3,890
------ ------ ------
Operating Expenses Operation
Fuel for electric generation 297 296 283
Purchased power - related parties 599 589 491
Purchased and interchange power 243 202 196
Cost of gas sold 1,311 997 824
Other 729 737 679
------ ------ ------
3,179 2,821 2,473
Maintenance 174 178 186
Depreciation, depletion and amortization 477 441 416
General taxes 211 202 196
------ ------ ------
4,041 3,642 3,271
------ ------ ------
Pretax Operating Electric utility 432 411 372
Income (Loss) Gas utility 153 158 156
Independent power production 96 68 46
Oil and gas exploration and production 50 39 30
Natural gas transmission, storage and processing 33 26 12
Marketing, services and trading (5) 2 2
Other (13) (13) 1
------ ------ ------
746 691 619
------ ------ ------
Other Income Accretion income (Note 2) 8 10 11
(Deductions) Accretion expense (Note 2) (17) (22) (31)
Other, net (3) 1 9
------ ------ ------
(12) (11) (11)
------ ------ ------
Fixed Charges Interest on long-term debt 273 230 224
Other interest 49 43 42
Capitalized interest (16) (8) (8)
Preferred dividends 25 28 28
Trust Preferred Securities distributions (Note 7) 18 8 -
------ ------ ------
349 301 286
------ ------ ------
Income Before Income Taxes 385 379 322
Income Taxes 117 139 118
------ ------ ------
Consolidated Net Income $ 268 $ 240 $ 204
====== ====== ======
Net Income Attributable to Common Stocks CMS Energy $ 253 $ 226 $ 201
Class G $ 15 $ 14 $ 3
====== ====== ======
Basic Earnings Per Average Common Share CMS Energy $ 2.63 $ 2.45 $ 2.27
(Note 8) Class G $ 1.84 $ 1.82 $ .38
====== ====== ======
Diluted Earnings Per Average Common Share CMS Energy $ 2.61 $ 2.44 $ 2.26
(Note 8) Class G $ 1.84 $ 1.82 $ .38
====== ====== ======
Dividends Declared Per Common Share CMS Energy $ 1.14 $ 1.02 $ .90
Class G $ 1.21 $ 1.15 $ .56
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
58
Consolidated Statements of Cash Flows CMS Energy Corporation
In Millions
Years Ended December 31 1997 1996 1995
Cash Flows From Consolidated net income $ 268 $ 240 $ 204
Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $50, $49 and $51,
respectively) 477 441 416
Capital lease and debt discount amortization 44 41 61
Deferred income taxes and investment tax credit 33 46 75
Accretion expense (Note 2) 17 22 31
Accretion income - abandoned Midland project (Note 2) (8) (10) (11)
Undistributed earnings of related parties (64) (64) (53)
Power purchases (Note 3) (62) (63) (137)
Other (13) 20 7
Changes in other assets and liabilities (Note 12) (35) (12) 89
------- ------- -------
Net cash provided by operating activities 657 661 682
------- ------- -------
Cash Flows From Capital expenditures (excludes capital lease additions of
Investing $11, $31 and $31, respectively and DSM) (Note 12) (711) (659) (535)
Activities Investments in partnerships and unconsolidated
subsidiaries (830) (163) (242)
Investments in nuclear decommissioning trust funds (50) (49) (51)
Cost to retire property, net (28) (31) (41)
Other (14) 8 (14)
Acquisition of companies, net of cash acquired - (20) (146)
Deferred demand-side management costs - (6) (9)
Proceeds from sale of property 49 79 22
------- ------- -------
Net cash used in investing activities (1,584) (841) (1,016)
------- ------- -------
Cash Flows From Proceeds from bank loans, notes and bonds 1,214 433 333
Financing Proceeds from Trust Preferred Securities 286 97 -
Activities Issuance of Common Stock 224 95 160
Increase (decrease) in notes payable, net 49 (8) 2
Retirement of bonds and other long-term debt (521) (37) (44)
Retirement of preferred stock (120) - -
Payment of Common Stock dividends (119) (103) (84)
Payment of capital lease obligations (44) (40) (37)
Repayment of bank loans (29) (256) (18)
Retirement of Common Stock (2) (1) (1)
------- ------- -------
Net cash provided by financing activities 938 180 311
------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash Investments 11 - (23)
Cash and temporary cash investments
Beginning of year 56 56 79
------- ------- -------
End of year $ 67 $ 56 $ 56
======= ======= =======
<FN>
The accompanying notes are an integral part of these statements.
59
Consolidated Balance Sheets CMS Energy Corporation
ASSETS In Millions
December 31 1997 1996
Plant and Property Electric $ 6,491 $ 6,333
(At Cost) Gas 2,528 2,337
Oil and gas properties (full-cost method) 1,257 1,140
Other 168 94
------- -------
10,444 9,904
Less accumulated depreciation, depletion
and amortization (Note 2) 5,270 4,867
------- -------
5,174 5,037
Construction work-in-progress 261 243
------- -------
5,435 5,280
------- -------
Investments Independent power production 790 317
Natural gas transmission, storage and processing 256 233
International energy distribution 255 64
First Midland Limited Partnership (Notes 3 and 22) 242 232
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 22) 171 134
Other 48 22
------- -------
1,762 1,002
------- -------
Current Assets Cash and temporary cash investments at cost, which
approximates market 67 56
Accounts receivable and accrued revenue, less allowances
of $7 in 1997 and $10 in 1996 (Note 5) 476 374
Inventories at average cost
Gas in underground storage 197 186
Materials and supplies 85 86
Generating plant fuel stock 35 30
Deferred income taxes (Note 13) 38 48
Prepayments and other 240 235
------- -------
1,138 1,015
------- -------
Non-current Assets Nuclear decommissioning trust funds (Note 2) 486 386
Postretirement benefits (Note 16) 404 435
Abandoned Midland project 93 113
Other 475 384
------- -------
1,458 1,318
------- -------
Total Assets $ 9,793 $ 8,615
======= =======
/TABLE
60
CMS Energy Corporation
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1997 1996
Capitalization Common stockholders' equity $ 1,977 $ 1,702
Preferred stock of subsidiary 238 356
Company-obligated mandatorily redeemable
Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100
Consumers Energy Company Financing II (a) 120 -
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 -
Long-term debt (Note 6) 3,272 2,842
Non-current portion of capital leases (Note 17) 75 103
------- -------
5,955 5,103
------- -------
Current Liabilities Current portion of long-term debt and capital leases 643 409
Notes payable 382 333
Accounts payable 398 348
Accrued taxes 272 262
Accounts payable - related parties 80 63
Accrued interest 51 47
Power purchases (Note 3) 47 47
Accrued refunds 12 8
Other 190 206
------- -------
2,075 1,723
------- -------
Non-current Deferred income taxes (Note 13) 743 698
Liabilities Postretirement benefits (Note 16) 514 521
Deferred investment tax credit 151 161
Power purchases (Note 3) 133 178
Regulatory liabilities for income taxes,
net (Notes 13 and 20) 54 66
Other 168 165
------- -------
1,763 1,789
------- -------
Commitments and Contingencies (Notes 2, 3, 4, 10, 11 and 17)
Total Stockholders' Investment and Liabilities $ 9,793 $ 8,615
======= =======
<FN>
(a) The primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36 percent
subordinated deferrable interest notes due 2015 from Consumers. The primary asset of Consumers Energy Company
Financing II is $124 million principal amount of 8.20 percent subordinated deferrable interest notes due 2027 from
Consumers. For further discussion, see Note 7 to the Consolidated Financial Statements.
(b) As described in Note 7, the primary asset of CMS Energy Trust I is $178 million principal amount of 7.75 percent
convertible subordinated debentures due 2027 from CMS Energy.
The accompanying notes are an integral part of these statements.
61
Consolidated Statements of Preferred Stock CMS Energy Corporation
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1997 1996 1997 1996
Consumers' Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 - 379,549 - 38
7.68 101.00 - 207,565 - 20
7.72 101.00 - 289,642 - 29
7.76 102.21 - 308,072 - 31
Consumers' Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption (a) 2.08 25.00 8,000,000 8,000,000 194 194
----- -----
Total Preferred Stock $ 238 $ 356
===== =====
<FN>
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
62
Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
Number of Shares, In Thousands In Millions
Years Ended December 31 1997 1996 1995 1997 1996 1995
Common Stock
At beginning and end of period $ 1 $ 1 $ 1
------ ------ ------
Other Paid-in Capital -
CMS Energy
At beginning of period 94,813 91,594 86,535 1,916 1,827 1,701
Common Stock reacquired (54) (32) (21) (2) (1) (1)
Common Stock issued 6,031 3,248 5,039 217 90 126
Common Stock reissued 2 3 41 - - 1
------- ------ ------ ------ ------ ------
At end of period 100,792 94,813 91,594 2,131 1,916 1,827
------- ------ ------ ------ ------ ------
Other Paid-in Capital -
Class G
At beginning of period 7,877 7,619 - 129 124 -
Common Stock reacquired (1) - - - - -
Common Stock issued 343 258 7,619 7 5 124
------- ------ ------ ------ ------ ------
At end of period 8,219 7,877 7,619 136 129 124
------- ------ ------ ------ ------ ------
Revaluation Capital
At beginning of period (6) (8) -
Change in unrealized
investment-gain (loss) - 2 (8)
------ ------ ------
At end of period (6) (6) (8)
------ ------ ------
Foreign Currency Translation
At beginning of period - - -
Change in foreign currency
translation (96) - -
------ ------ ------
At end of period (96) - -
------ ------ ------
Retained Earnings (Deficit)
At beginning of period (338) (475) (595)
Consolidated net income 268 240 204
Common Stock dividends
declared:
CMS Energy (109) (94) (80)
Class G (10) (9) (4)
------ ------ ------
At end of period (189) (338) (475)
------ ------ ------
Total Common Stockholders' Equity $1,977 $1,702 $1,469
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
63
CMS Energy Corporation
Notes to Consolidated 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.
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: acquisition,
development and operation of independent power production facilities; oil
and gas exploration and production; storage, transmission and processing
of natural gas; energy marketing, services and trading; and international
energy distribution.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
CMS Energy, Consumers and Enterprises and their majority owned
subsidiaries. The financial statements are prepared in conformity with
generally accepted accounting principles and use management's estimates
where appropriate. 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 years ended December 31, 1997, 1996
and 1995, undistributed equity earnings were $64 million, $64 million and
$53 million, respectively.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, Consumers adjusts the
unrecovered asset to its present value. It reflects this adjustment as
accretion income. Conversely, Consumers recorded a loss in 1992 for the
present value of its estimated future underrecoveries of power costs
resulting from purchases from the MCV Partnership (see Note 3). It now
recognizes accretion expense annually to reflect the time value of money
on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. It records cushion gas, which is gas
stored to maintain reservoir pressure for recovery of working gas, in the
appropriate gas utility plant account. Consumers stores gas inventory in
its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers charges property
repairs and minor property replacements to maintenance expense.
Depreciable property retired or sold, plus cost of removal (net of salvage
credits), is charged to accumulated depreciation. Consumers bases
depreciation provisions for utility plant on straight-line and
units-of-production rates approved by the MPSC. The composite
depreciation rate for electric utility property was 3.6 percent for 1997
and 3.5 percent for 1996 and 1995. The composite rate for gas utility
plant was 4.1 percent for 1997, 4.2 percent for 1996 and 4.3 percent for
1995. The composite rate for other plant and property was 8.2 percent for
1997, 5.5 percent for 1996 and 4.9 percent for 1995.
CMS NOMECO follows the full-cost method of accounting and, accordingly,
capitalizes its exploration and development costs, including the cost of
non-productive drilling and surrendered acreage, on a country-by-country
basis. It is amortizing the capitalized costs in each cost center on an
overall units-of-production method based on total estimated proved oil and
gas reserves.
Other non-utility depreciable property is amortized over its estimated
useful life; gains and losses are recognized at the time of sale.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under current federal
law, as confirmed by court decision, the DOE must begin accepting
deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if
a permanent repository is not then operational. Utilities and their
customers have been prepaying the costs of DOE transport and disposal
through fees based on electric generation by their nuclear plants. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear
fuel expense, recovers them through electric rates and remits to the DOE
quarterly. Consumers elected to defer payment for disposal of spent
nuclear fuel burned before April 7, 1983 until it delivers the first of
its spent fuel to the DOE. At December 31, 1997, Consumers had a recorded
liability to the DOE of $111 million, including interest, which is payable
upon the first delivery of spent nuclear fuel to the DOE. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest. In January 1997, in response to the DOE's
declaration in December 1996 that it would not begin to accept spent
nuclear fuel deliveries in 1998, Consumers and other utilities filed suit
in federal court. The utilities sought a declaration relieving them of
their obligation to remit their quarterly fee payments to the DOE and
authorizing them to escrow any related fees collected from their
customers, unless and until the DOE begins to accept spent nuclear fuel.
The utilities also sought an order requiring the DOE to develop a program
to begin acceptance of spent nuclear fuel by January 31, 1998. A decision
was issued by the court in late 1997 affirming the DOE's duty to take
delivery of spent fuel, but was not specific as to the relief available
for failure of the DOE to comply. Consumers is considering its options.
Also in 1997, federal legislation was reintroduced to clarify the timing
of the DOE's obligation to accept spent nuclear fuel and to direct the DOE
to establish an integrated spent fuel management system that includes
designing and constructing an interim storage facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $50 million in 1997
from its electric customers for the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC that estimated decommissioning costs for Big Rock and
Palisades to be $330 million and $573 million (in 1997 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. The April 1996 MPSC Order also requires
Consumers to file updated site-specific decommissioning cost estimates for
Big Rock and Palisades by March 31, 1998. The Big Rock estimate will
reflect the early shut-down and the switch from the safe storage option to
immediate dismantlement because of the reopening of the South Carolina
Barnwell radioactive waste disposal facility. After retirement of
Palisades, Consumers plans to maintain the facility in protective storage
if radioactive waste disposal facilities are not available. As a result,
Consumers will incur most of the Palisades decommissioning costs after the
plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have
accumulated $686 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have
provided $2.1 billion, including trust earnings, over this decommissioning
period. Consumers will determine if the current decommissioning surcharge
will be sufficient to provide for decommissioning of its nuclear plants
during the first quarter of 1998, after the revised decommissioning cost
estimates are computed for Palisades and Big Rock. At December 31, 1997,
Consumers had an investment in nuclear decommissioning trust funds of $486
million, spent $23 million for the decommissioning of Big Rock and
withdrew $17 million from the Big Rock nuclear decommissioning trust fund.
While decommissioning Big Rock, Consumers found that some areas of the
plant have coatings that contain both metals and polychlorinated
biphenyls. Consumers does not believe that any facility in the United
States currently accepts the radioactive portion of that waste. The cost
of removal and disposal is currently unknown. These costs would
constitute part of the cost to decommission the plant, and will be paid
from the decommissioning fund. Consumers is studying the extent of the
contamination and reviewing options.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect
consolidated net income for the years presented. Additionally, CMS Energy
has restated all prior year earnings per share amounts to reflect the
adoption of SFAS 128, Earnings Per Share, for comparative purposes.
Related-Party Transactions: In 1997, 1996 and 1995, Consumers purchased
$51 million, $50 million and $53 million, respectively, of electric
generating capacity and energy from affiliates of Enterprises. Affiliates
of CMS Energy sold, stored and transported natural gas and provided other
services to the MCV Partnership totaling $21 million, $17 million and $26
million for 1997, 1996 and 1995, respectively. For additional discussion
of related-party transactions with the MCV Partnership and the FMLP, see
Notes 3 and 22. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard (SFAS 71). As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see Electric Business Outlook and
Consumers Gas Group Business Outlook - Application of SFAS 71, in the MD&A
and Note 20.
Other: For significant accounting policies regarding cash equivalents,
see Note 12; for income taxes, see Note 13; for executive incentive
compensation, see Note 15; and for pensions and other postretirement
benefits, see Note 16.
3: 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 two wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: (i) CMS Midland
owns a 49 percent general partnership interest in the MCV Partnership; and
(ii) CMS Holdings holds, through FMLP, a 35 percent lessor interest in the
MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
(unaudited):
In Millions
Years Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------
Pretax operating income $46 $40 $35
Income taxes and other 14 11 10
--- --- ---
Net income $32 $29 $25
=== === ===
Power Purchases from the MCV Partnership: After September 2007, pursuant
to the terms of the PPA and related undertakings, Consumers will only be
required to pay the MCV Partnership the capacity charge and energy charge
amounts authorized for recovery from electric customers by the MPSC.
Prior to then, pursuant to MPSC orders issued to date, Consumers recovered
in 1997 approximately 90 percent of the total capacity charge and energy
charge amounts being billed by the MCV Partnership and paid to the MCV
Partnership by Consumers. Currently, Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. 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 based
primarily on Consumers' average cost of coal consumed. Consumers is
recovering 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. Beginning January 1, 1996, the MPSC also permitted
Consumers to recover an average capacity charge of 2.86 cents per kWh for
the remaining 325 MW of MCV Facility capacity. The approved average
capacity charge increased to 3.62 cents per kWh for 109 MW by January 1,
1997. The recoverable portion of the capacity charge for the last 216 MW
of the 325 MW increases each year until it reaches 3.62 cents per kWh in
2004. It remains at this ceiling rate through the end of the PPA term.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA. At December 31, 1997
and 1996, the after-tax present value of the PPA liability totaled $117
million and $147 million, respectively. The reduction in the liability
since December 31, 1996 reflects after-tax cash underrecoveries of $41
million, partially offset by after-tax accretion expense of $11 million.
The undiscounted after-tax amount associated with the liability totaled
$188 million at December 31, 1997. The after-tax cash underrecoveries are
currently based on the assumption that the MCV Facility will be available
to generate electricity 91.5 percent of the time over its expected life.
For 1997 the MCV Facility was available 99 percent of the time, resulting
in $13 million over anticipated after-tax cash underrecoveries. Consumers
believes it will continue to experience after-tax cash underrecoveries
associated with the PPA in amounts as those shown below.
In Millions
1998 1999 2000 2001 2002
- -----------------------------------------------------------------
Estimated cash under-
recoveries, net of tax $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility. If the MCV
Facility operates at levels above management's estimate over the remainder
of the PPA, Consumers will need to recognize losses for future
underrecoveries larger than amounts previously recorded. Therefore,
Consumers would experience larger amounts of cash underrecoveries than
originally anticipated. Management will continue to evaluate the adequacy
of the accrued liability considering actual MCV Facility operations.
In early 1998, the MCV Partnership filed a claim of appeal from the
January 1998 MPSC order in the electric utility industry restructuring.
On the same day, the MCV Partnership filed suit in the U.S. District Court
seeking a declaration that the MPSC's failure to provide Consumers and the
MCV Partnership a certain source of recovery of capacity payments after
2007 deprived the MCV Partnership of its rights under the Public Utilities
Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of a 1995 decision in the 1993 PSCR reconciliation case, 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 believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court which was
denied in January 1998.
4: Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order that
authorized Consumers to recover costs associated with the purchase of the
additional 325 MW of MCV Facility capacity (see Note 3) and to accelerate
recovery of its nuclear plant investment by increasing prospective annual
nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a
maximum demand of at least 2 MW are eligible to purchase generation
services directly from any eligible third-party power supplier and
Consumers would transmit the power for a fee. The program is limited to
650 MW of load, of which existing special contracts represent 410 MW. New
special contracts or direct-access load may fill 140 MW of the 650 MW
block. The remaining 100 MW will be available solely to direct-access
customers for at least 18 months. In April 1997, a lottery was held to
select the customers to purchase 100 MW by direct access. Direct access
for a portion of this 100 MW began during the fourth quarter of 1997.
In May 1997, the MPSC authorized Consumers to collect $17 million from
electric customers through a one-time surcharge pertaining to the 1994
PSCR reconciliation. In September 1997, the MPSC further authorized
Consumers to collect $13 million from electric customers through a one-
time surcharge pertaining to the 1995 PSCR reconciliation.
In January 1998, the Court of Appeals ruled that the MPSC has statutory
authority to authorize an experimental electric retail wheeling program.
By its terms, no retail wheeling has yet occurred pursuant to that
program. Consumers filed with the Michigan Supreme Court seeking leave to
appeal that ruling.
For information on other orders, see the Electric Restructuring section
below.
Electric Restructuring: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, in June 1997
the MPSC issued an order proposing that beginning January 1, 1998
Consumers would have to transmit and distribute energy on behalf of
competing power suppliers to serve retail customers. The order states
that by January 1, 2002, all customers would be free to choose (that is,
have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover
prudently incurred Transition Costs through a charge to all direct-access
customers until the end of the transition period in 2007. Further
proceedings, as ordered by the MPSC, took place to address other features
of the direct-access programs being considered, including proposals to
"true up" Transition Cost charges for changes in sales and market prices
of power purchase capacity to the extent they are different from estimates
used for calculating Transition Costs. The June order is subject to a
claim of appeal filed with the Court of Appeals which questions whether
the MPSC has the statutory authority to mandate restructuring on an
involuntary basis. In October 1997, the MPSC issued a series of
additional orders relating to its electric industry restructuring
proceedings. The orders primarily addressed issues involving the design
of retail direct-access tariffs, the true-up mechanism in connection with
the recovery of Transition Costs, suspension of the power supply cost
recovery clause and freezing of power supply costs, and performance-based
rate-making.
In January 1998 the MPSC clarified the October 1997 orders on a basis
generally consistent with the June 1997 order. The January 1998 order:
i) defers the commencement of the phase-in of direct access to begin in
March 1998; ii) attempts to clarify the true-up mechanism to be used in
connection with the recovery of Transition Costs; iii) confirms
implementation of a suspension of the power supply cost recovery clause;
and iv) confirms the MPSC's belief that Securitization may be a beneficial
mechanism for recovery of Transition Costs while recognizing that
Securitization requires state legislation to occur. Consumers expects
Michigan legislative consideration of the entire subject of electric
industry restructuring in 1998. To be acceptable to Consumers, the
legislation would have to provide for full recovery of Transition Costs.
Consumers expects the legislature to review all of the policy choices made
by the MPSC during the restructuring proceedings to assure that they are
in accord with those that the legislature believes should be paramount.
The January 1998 order further estimated a Transition Cost for Consumers
at $1.755 billion which is generally consistent with the amount proposed
by Consumers. Consumers will recover this cost through a surcharge to
direct-access customers through 2007. Consumers believes that this
surcharge will apply to all customers beginning in 2002. The surcharge is
subject to adjustment through a true-up mechanism to assure that
Transition Costs actually incurred are collected. A separate charge to
direct-access customers after MPSC review and verification would also
recover prudent costs of implementing a direct-access program estimated at
an additional $200 million. Nuclear decommissioning costs will also
continue to be collected through a separate surcharge to all customers.
Subsequent to the January order, the MPSC issued an order addressing
Consumers', among others, motions for clarification of the January order.
This order results in: i) a suspension of the PSCR in a manner proposed
by Consumers; ii) a termination of the 1998 PSCR plan case; and iii) the
establishing of a permanent PSCR/base rate freeze charge in the 1997 PSCR
reconciliation proceeding. For further information see Electric Business
Outlook - Application of SFAS 71 in the MD&A.
Gas Restructuring: In December 1997, the MPSC approved Consumers'
application to implement a statewide experimental gas transportation pilot
program. Consumers' expanded experimental program will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier. The
program is voluntary for natural gas customers. Participating customers
will be selected on a first-come, first-served basis, up to a limit of
100,000 customers on April 1, 1998. Up to 100,000 more customers will be
added on April 1 of each of the next two years. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. The order allowing the implementation of this program:
(i) suspends Consumers' gas cost recovery clause, effective April 1, 1998
for a three-year period, establishing a gas commodity cost at a fixed rate
of $2.84 per mcf; (ii) establishes an earnings sharing mechanism that will
provide for refunds to customers if Consumers' earnings during the three
year term of the program exceed certain pre-determined levels; and (iii)
establishes a gas transportation code of conduct that addresses concerns
about the relationship between Consumers and marketers, including its
affiliated marketers. This experimental program will allow competing gas
suppliers, including marketers and brokers, to market natural gas to a
large number of retail customers in direct competition with Consumers. In
1998, the Attorney General, ABATE and other parties filed claims of appeal
regarding the program with the Court of Appeals. To minimize the risk of
exposure to higher gas costs, Consumers currently has contracts in place
at known prices covering 50 percent of its 1998 requirements, 25 percent
of its 1999 requirements and 15 percent of its 2000 requirements.
Additional forward coverage is currently under review and will be firmed
up during the next few months. For further information see Consumers Gas
Group Business Outlook - Application of SFAS 71 in the MD&A.
Gas Proceedings: In 1995, the MPSC issued an order regarding a $44
million (excluding interest) gas supply contract pricing dispute between
Consumers and certain gas producers. The order stated that Consumers was
not obligated to seek prior approval of market-based pricing changes that
Consumers implemented under the contracts in question. The Court of
Appeals upheld the MPSC order. The producers sought leave to appeal with
the Michigan Supreme Court. Their request is still pending. Consumers
believes the MPSC order correctly concludes that the producers' theories
are without merit and will 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
materially affect CMS Energy's financial position, liquidity or results of
operations.
5: Short-Term Financings
At December 31, 1997, Consumers had FERC authorization to: (i) issue or
guarantee up to $900 million of short-term securities through 1998; (ii)
issue, through November 1998, $376 million of long-term securities with
maturities up to 30 years, for refinancing or refunding purposes; and
(iii) guarantee, through 1999, up to $25 million in loans made by others,
to residents of Michigan for the purpose of making energy-related home
improvements. In January 1998, Consumers requested authorization to
issue, through November 1998, an additional $500 million of long-term
securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured
lines of credit aggregating $120 million. These facilities are available
to finance seasonal working capital requirements and to pay for capital
expenditures between long-term financings. At December 31, 1997, a total
of $377 million was outstanding at a weighted average interest rate of 6.5
percent, compared with $333 million outstanding at December 31, 1996, at a
weighted average interest rate of 6.3 percent.
Consumers also has in place a $500 million trade receivables sale program.
At December 31, 1997 and 1996, receivables sold under the program totaled
$335 million and $318 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to
reflect receivables sold.
6: Long-Term Debt
Long-term debt consists of the following:
In Millions
December 31 Maturing/Expiring Interest Rate 1997 1996
First Mortgage Bonds 1997 to 2023 6.0% to 8.875% $1,255 $1,305
Long-Term Bank Debt 1999 6.4%(a) 400 400
Senior Unsecured Notes 2000 to 2004 7.75%(a) 830 -
Senior Deferred
Coupon Notes 1997 9.5% and 9.875% - 347
Senior Credit
Facilities 1998 to 2002 7.2%(a) 305 -
General Term Notes
Series A to D 1998 to 2004 7.7%(a) 509 353
Pollution Control
Revenue Bonds 2000 to 2018 5.1%(a) 131 131
Term Loan Agreement:
CMS Energy 2002 7.2%(a) - 125
CMS Generation 2001 7.4%(a) 91 107
Revolving Line of Credit 2003 6.5%(a) 124 122
Unsecured Revolving
Credit Facility 1997 6.8%(a) - 120
Nuclear Fuel Disposal (b) 5.1% 111 106
Bank Loans and Other 1997 to 2009 8.7%(a) 134 105
Principal Amount Outstanding 3,890 3,221
Current Amounts (609) (370)
Net Unamortized Discount (9) (9)
------ ------
Total Long-Term Debt $3,272 $2,842
====== ======
(a) Represents the weighted average interest rate at December 31, 1997.
(b) Due date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund
obligations are as follows: $609 million in 1998, $466 million in 1999,
$662 million in 2000, $192 million in 2001 and $759 million in 2002.
CMS Energy
In July 1997, CMS Energy refinanced a $450 million unsecured revolving
credit facility and a $125 million term loan with the $1.125 billion
Senior Credit Facilities. The Senior Credit Facilities consist of a $400
million 364-day revolving credit facility, a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $155 million. At December 31, 1997, the
total amount utilized under the Senior Credit Facilities was $365 million,
including $60 million of contingent obligations, and under the unsecured
lines of credit and letters of credit was $21 million.
In January 1998, a Delaware statutory business trust established by CMS
Energy sold $180 million of certificates due January 15, 2005 in a public
offering. In exchange for those proceeds, CMS Energy sold to the trust
$180 million aggregate principal amount of 7 percent Extendible Tenor Rate
Adjusted Securities due January 15, 2005. Net proceeds to CMS Energy from
the sale totaled $176 million.
In January 1998, CMS Energy announced the commencement of an offer to
exchange up to $300 million of its 7.375 percent Senior Unsecured Notes
due 2000, Series A for 7.375 percent Senior Unsecured Notes due 2000,
Series B that have been registered with the SEC. Other than their
registration, the terms of the Series B Notes are substantially similar to
the Series A(except that the Series B will not have transfer
restrictions). The offer was completed in early 1998.
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles of Incorporation and
the need for regulatory approvals to meet appropriate federal law.
In early 1998, Consumers called for the March 1998 redemption of $57
million aggregate principal amount of its 7.5 percent First Mortgage Bonds
due in 2001 and $62 million aggregate principal amount of its 7.5 percent
First Mortgage Bonds due in 2002.
In early 1998, Consumers issued $250 million of senior notes due February
1, 2008, at an interest rate of 6.375 percent. The senior notes are
secured by a series of Consumers' First Mortgage Bonds, issued
contemporaneously in a similar amount. Proceeds from the sale were added
to the general funds of Consumers and applied to the payment, at maturity,
of $248 million aggregate principal amount of Consumers' 8.75 percent
First Mortgage Bonds due February 15, 1998.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan.
In January 1998, two agreements to guarantee interest rates for the
issuance of future long-term debt were executed. The first anticipatory
debt agreement is for $250 million at 5.5 percent which expires
February 10, 1998, and the second agreement is for $200 million at 5.8
percent with an expiration of March 16, 1998.
Other: Consumers' long-term pollution control revenue bonds are secured
by irrevocable letters of credit or First Mortgage Bonds.
CMS NOMECO
CMS NOMECO has a $225 million revolving credit facility that converts to
term loans maturing from March 1999 through March 2003.
CMS Generation
In January 1998, CMS Generation refinanced a $110 million, five-year term
loan with a loan provided by CMS Capital Corp., a subsidiary of
Enterprises.
7: Capitalization
CMS Energy
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares of Class G Common Stock, and
10 million shares of CMS Energy Preferred Stock.
In 1996, CMS Energy received net proceeds of $95 million from the issuance
of CMS Energy and Class G Common Stock. The issuance of 2.1 million of
those shares completed the amount remaining on a February 15, 1995 shelf-
registration filing with the SEC that covered the issuance of up to $200
million of securities. CMS Energy used the proceeds from the sale for
general corporate purposes.
In May 1997, CMS Energy and affiliated business trusts filed a shelf-
registration statement with the SEC to issue and sell up to $300 million
of CMS Energy Common Stock, subordinated debentures, stock purchase
contracts, stock purchase units and preferred securities. In June 1997,
3.45 million units of 7.75 percent tax deductible Trust Preferred
Securities were issued and sold through CMS Energy Trust I, a wholly owned
business trust consolidated with CMS Energy. Net proceeds from the sale
totaled $170 million. CMS Energy formed the trust for the sole purpose of
issuing tax deductible Trust Preferred Securities. Its primary asset is
approximately $178 million principal amount of 7.75 percent subordinated
debentures issued by CMS Energy, which mature in 2027. These tax
deductible Trust Preferred Securities are convertible into CMS Energy
Common Stock at a rate equivalent to a conversion price of $40.80 per
share of CMS Energy Common Stock. CMS Energy used proceeds of the
subordinated debentures for general corporate purposes including repayment
of debt, capital expenditures, investment in subsidiaries and working
capital. CMS Energy's obligations under the subordinated debentures, the
indenture through which CMS Energy issued the subordinated debentures, the
declaration of trust and the CMS Energy guarantee provide, in the
aggregate, a full irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the Trust Preferred Securities.
For additional information, see note (b) on the Consolidated Balance
Sheets.
In November 1997, CMS Energy received net proceeds of $152 million from
the issuance of 4.142 million shares of CMS Energy Common Stock. The
issuance of those shares completed the amount remaining on the May 1997
shelf-registration with the SEC. Proceeds from the sale were used for
general corporate purposes.
Other: Under its most restrictive borrowing arrangement at December 31,
1997, none of CMS Energy's consolidated net income was restricted for
payment of common dividends. CMS Energy could pay $354 million in common
dividends under its most restrictive debt covenant.
Consumers
In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were
issued and sold through Consumers Power Company Financing I, a wholly
owned business trust consolidated with Consumers. Net proceeds from the
sale totaled $97 million. In September 1997, 4.8 million shares of 8.20
percent Trust Preferred Securities were issued and sold through Consumers
Energy Company Financing II, a wholly owned business trust consolidated
with Consumers. Net proceeds from the sale totaled $116 million.
Consumers formed both trusts for the sole purpose of issuing the tax
deductible Trust Preferred Securities. Consumers' obligations with
respect to the Trust Preferred Securities under the notes, under the
indenture through which Consumers issued the notes, under Consumers'
guarantee of the Trust Preferred Securities, and under the declaration by
the trusts, taken together, constitute a full and unconditional guarantee
by Consumers of the trusts' obligations under the Trust Preferred
Securities. For additional information, see Note (a) on the Consolidated
Balance Sheets.
In September 1997, the proceeds from the 8.20 percent Trust Preferred
Securities were used by Consumers to redeem all outstanding shares of its
$7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million.
Under the provisions of its Articles of Incorporation at December 31,
1997, Consumers had $280 million of unrestricted retained earnings
available to pay common dividends. In October 1997, Consumers returned
$50 million of paid-in capital to CMS Energy.
8: Earnings Per Share and Dividends
EPS attributable to Common Stock for 1997 and 1996 reflect the performance
of the Consumers Gas Group. Earnings per share attributable to Common
Stock for the year ended December 31, 1995 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 has participated in
earnings and dividends from its original issue date in July 1995. The
allocation of earnings 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 attributable to the Outstanding Shares are equal to Consumers Gas
Group net income 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, shares not held by the holders of the Outstanding Shares, during
the period. The earnings attributable to Class G Common Stock on a per
share basis for 1997 and 1996 are based on 24.50 percent and 23.79
percent, respectively, of the income of Consumers Gas Group. The earnings
attributable to Class G Common Stock on a per share basis, for the year
ended December 31, 1995, are based on 23.45 percent of the income of the
Consumers Gas Group since the initial issuance.
Computation of Earnings Per Share:
In Millions, Except Per Share Amounts
Actual Actual Actual Pro Forma
Years Ended December 31 1997 1996 1995 1995
- -------------------------------------------------------------------------
Net Income Applicable to
Basic and Diluted EPS:
Consolidated Net Income $268 $240 $204 $204
==== ==== ==== ====
Net Income Attributable
to Common Stocks:
CMS Energy - Basic EPS $253 $226 $201 $189
Add conversion of 7.75%
Trust Preferred
Securities (net
of tax) 5 - - -
---- ---- ---- ----
CMS Energy - Diluted EPS $258 $226 $201 $189
==== ==== ==== ====
Class G:
Basic and Diluted EPS $ 15 $ 14 $ 3 $ 15
==== ==== ==== ====
Average Common Shares Outstanding
Applicable to Basic
and Diluted EPS:
CMS Energy:
Average Shares - Basic 96.1 92.5 88.8 88.8
Add conversion of 7.75%
Trust Preferred
Securities 2.3 - - -
Options-Treasury Shares 0.3 0.2 0.2 0.2
---- ---- ---- ----
Average Shares - Diluted 98.7 92.7 89.0 89.0
==== ==== ==== ====
Class G:
Average Shares
Basic and Diluted 8.0 7.7 7.5 7.5
==== ==== ==== ====
Earnings Per Average Common Share
CMS Energy:
Basic $2.63 $2.45 $2.27 $2.14
Diluted $2.61 $2.44 $2.26 $2.13
Class G:
Basic and Diluted $1.84 $1.82 $ .38 $1.93
==== ==== ==== ====
Pro forma data for the year ended December 31, 1995 gives 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) as if it occurred on January 1, 1995.
Holders of Class G Common Stock have no direct rights in the equity or
assets of Consumers Gas Group, but rather have rights in the equity and
assets of CMS Energy as a whole. In the sole discretion of the Board of
Directors, CMS Energy may pay dividends exclusively to the holders of
Class G Common Stock, exclusively to the holders of CMS Energy Common
Stock, or to the holders of both classes in equal or unequal amounts. The
Board of Directors has stated its intention to declare and pay dividends
on the CMS Energy Common Stock based primarily on the earnings and
financial condition of CMS Energy. Dividends on Class G Common Stock are
paid at the discretion of the Board of Directors based primarily upon the
earnings and financial condition of Consumers Gas Group, and to a lesser
extent, CMS Energy as a whole.
In February and May 1997, CMS Energy paid dividends of $.27 per share on
CMS Energy Common Stock and $.295 per share on Class G Common Stock. In
August and November 1997, CMS Energy paid dividends of $.30 per share on
CMS Energy Common Stock and $.31 per share on Class G Common Stock. In
January 1998, the Board of Directors declared a quarterly dividend of $.30
per share on Energy Common Stock and $.31 per share on Class G Common
Stock, which were paid in February 1998.
9: Risk Management Activities and Derivatives Transactions
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, to manage exposure to fluctuations in commodity prices,
interest rates and foreign exchange rates. To qualify for hedge
accounting, derivatives must meet the following criteria: (i) the item to
be hedged exposes the enterprise to price, interest or exchange rate risk;
and (ii) the derivative reduces that exposure and is designated as a
hedge.
Derivative instruments contain credit risk if the counterparties,
including financial institutions and energy marketers, fail to perform
under the agreements. CMS Energy minimizes such risk by performing
financial credit reviews using, among other things, publicly available
credit ratings of such counterparties. The risk of nonperformance by the
counterparties is considered remote.
Commodity Price Hedges: CMS Energy accounts for its commodity price
derivatives as hedges, as defined above, and as such, defers any changes
in market value and gains and losses resulting from settlements until the
hedged transaction is complete. If there was a loss of correlation
between the changes in (i) the market value of the commodity price
contracts and (ii) the market price ultimately received for the hedged
item, and the impact was material, the open commodity price contracts
would be marked to market and gains and losses would be recognized in the
income statement currently.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil
and natural gas. As of December 31, 1996, CMS NOMECO had 1997 commodity
price contracts on 13.8 bcf of gas at prices ranging from $1.92 to $2.80
per MMBtu and on 2 million barrels of oil at prices ranging from $19.50 to
$22.90 per barrel. During 1997, CMS NOMECO made net payments of $6
million for settlement of 1997 contracts on 14.1 bcf of gas and 2 million
barrels of oil.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 through 2006 by
purchasing the economic equivalent of 10,000 MMBtu per day at a fixed
price, escalating at 8 percent per year thereafter, starting at $2.82 per
MMBtu in 2001. The settlement periods are each a one-year period ending
December 31, 2001 through 2006 on 3.65 million MMBtu. If the floating
price, essentially the then-current Gulf Coast spot price, for a period is
higher than the fixed price, the seller pays CMS NOMECO the difference,
and vice versa. If a party's exposure at any time exceeds $5 million,
that party is required to obtain a letter of credit in favor of the other
party for the excess over $5 million and up to $10 million. Accordingly,
at December 31, 1997, a letter of credit was not required by either party
to the agreement. As of December 31, 1997, the fair value of this
contract reflected a payment due from CMS NOMECO of $13 million.
CMS MST uses natural gas futures contracts, options and swaps (which
require a net cash payment for the difference between a fixed and variable
price).
Interest Rates Hedges: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying
notional amounts. These agreements convert variable rate debt to fixed
rate debt to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to
measure interest to be paid or received and do not represent the exposure
to credit loss. The notional amount of CMS Energy's and its subsidiaries'
interest rate swaps was $1.1 billion at December 31, 1997. The difference
between the amounts paid and received under the swaps is accrued and
recorded as an adjustment to interest expense over the life of the hedged
agreement.
Foreign Exchange Hedges: CMS Energy uses forward exchange contracts to
hedge certain receivables, payables, and long-term debt relating to
foreign investments. The purpose of CMS Energy's foreign currency hedging
activities is to protect the company from the risk that U.S. dollar net
cash flows resulting from sales to foreign customers and purchases from
foreign suppliers and the repayment of non-U.S. dollar borrowings may be
adversely affected by changes in exchange rates. These contracts do not
subject CMS Energy to risk from exchange rate movements because gains and
losses on such contracts offset losses and gains, respectively, on assets
and liabilities being hedged. The notional amount of the outstanding
foreign exchange contracts was $50 million at December 31, 1997.
10: Commitments, Contingencies and Other
Electric Environmental Matters: The Clean Air Act limits emissions of
sulfur dioxide and nitrogen oxides and requires emissions monitoring.
Consumers' coal-fueled electric generating units burn low-sulfur coal and
are currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. During the past few years, in order
to comply with the Act, Consumers incurred capital expenditures totaling
$46 million to install equipment at certain generating units. Consumers
estimates capital expenditures for in-process and proposed modifications
at other coal-fueled units to be an additional $30 million by the year
2000. Management believes that these expenditures will not materially
affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and
meets current ozone and particulate emission limits. The Act requires the
EPA to review, periodically, the effectiveness of the national air quality
standards in preventing adverse health affects. The EPA recently revised
these standards. The revisions may further limit small particulate and
ozone related emissions. Consumers supports the bipartisan effort in the
U.S. Congress to delay implementation of the revised standards until the
relationship between the new standards and health improvements is
established scientifically.
In October 1997, pursuant to recommendations from the Ozone Transport
Assessment Group and the requests of several Northeastern states, the EPA
proposed that the State of Michigan impose additional nitrogen oxide
limits on fossil-fueled emitters, such as Consumers' generating units.
The limits are an effort to reduce statewide nitrogen oxide emissions by
32 percent, as early as 2002. The State of Michigan will have one year to
review and challenge the proposed recommendations, and one year after that
to implement final requirements. It is unlikely that the State of
Michigan will establish Consumers' nitrogen oxide emissions reduction
target until mid-to-late 1999. Until this state-mandated target is known,
the estimated cost of compliance is subject to significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide related
emissions for Consumers' fossil-fueled generating units is approximately
$175 million, plus an additional amount totaling $10 million per year for
20 years for operation and maintenance costs. Consumers may need an
equivalent amount to comply with the new small particulate standards. The
State of Michigan objected to the extent of the proposed EPA emission
reductions. If the State of Michigan's position were to be adopted by the
EPA, costs could be less than the current estimated amounts.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites. Nevertheless, it believes that these
costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Superfund liability is
joint and several; along with Consumers, many other creditworthy,
potentially responsible parties with substantial assets cooperate with
respect to the individual sites. Based upon past negotiations, Consumers
estimates that its share of the total liability for the known Superfund
sites will be between $3 million and $9 million. At December 31, 1997,
Consumers has accrued $3 million for its estimated Superfund liability.
Gas Environmental Matters: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some 23 sites that formerly housed manufactured gas plant
facilities, even those in which it has a partial or no current ownership
interest. In 1998 Consumers plans to study indoor air issues at
residences on some sites and ground water impacts or surface soil impacts
at other sites. On sites where the company has received site-wide study
plan approvals, it will continue to implement these plans. It will also
work toward closure of environmental issues at sites as studies are
completed. 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 1998 costs. At December 31,
1997, 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 affect the
estimate of remedial action costs for the sites. According to an MPSC
rate order issued in 1996, Consumers will defer and amortize, over a
period of ten years, environmental clean-up costs above the amount
currently being recovered in rates. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate
case. 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 that it may incur for
these sites.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $1.335 billion for 1998, $1.220 billion for 1999 and
$1.175 billion for 2000. For further information regarding capital
expenditures, see Capital Resources and Liquidity - Capital Expenditures
in the MD&A.
Commitments for Coal and Gas Supplies: Consumers entered into coal supply
contracts with various suppliers for its coal-fired generating stations.
These contracts have expiration dates that range from 1998 to 2004.
Consumers contracts for 50 - 75 percent of its annual coal requirements
totaling $250 million in 1997 (56 percent was under long-term contracts).
Consumers supplements its long-term contracts with spot-market purchases
to fulfill its coal needs.
Consumers entered into gas supply contracts and transportation contracts
with various suppliers for its natural gas business. These contracts have
expiration dates that range from 1998 to 2003. Consumers' 1997 gas
requirements totaled 250 bcf at a cost of $694 million, 80 percent of
which was under long-term contracts for one year or more. As of the end
of 1997, Consumers had 50 percent of its 1998 gas requirements under such
long-term contracts, and will supplement them with additional long-term
contracts and spot-market purchases.
Other: As of December 31, 1997, CMS Energy and Enterprises have
guaranteed up to $543 million in contingent obligations of unconsolidated
affiliates and unrelated parties.
Various parties have sued Consumers relating to the effect of so-called
stray voltage on certain livestock. Claimants contend that stray voltage
results when low-level 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. It also has an ongoing
mitigation program to modify the service of all customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to allow the
claims of over 200 named plaintiffs to be joined in a single action. The
trial court dismissed all of the plaintiffs except the first-named
plaintiff, allowing the others to re-file separate actions. Of the
original plaintiffs, only 49 re-filed separate cases. All of those 49
cases have been resolved. The Michigan Supreme Court remanded the matter,
finding that the proper remedy for misjoinder was not dismissal, but to
automatically allow each case to go forward separately. Consumers filed a
motion for reconsideration with the Michigan Supreme Court, which was
denied. Consumers intends to vigorously defend these cases, but is unable
to predict the outcome. As of December 31, 1997, Consumers had 12
individual stray voltage lawsuits, unrelated to the cases above, awaiting
trial court action, down from 22 lawsuits as reported at year end 1996.
In October 1997, two independent power producers sued Consumers and
CMS Energy in a federal court. The suit alleges antitrust violations
relating to contracts which Consumers entered into with some of its
customers and claims relating to power facilities. The plaintiffs claim
damages of $100 million (which a court can treble in antitrust cases as
provided by law). The transactions of which plaintiffs complain have been
regulated by, and are subject to, the jurisdiction of the MPSC. In
November 1997, Consumers and CMS Energy filed a motion for summary
judgement and/or for dismissal of the complaint filed by the plaintiffs.
Consumers and CMS Energy believe the lawsuit is without merit and will
vigorously defend against it, but cannot predict the outcome of this
matter.
Under agreements relating to CMS NOMECO's 1995 acquisition of Walter
International, Inc. and its Congo operations, CMS Energy and CMS NOMECO
could become jointly and severally liable for the recapture of "dual
consolidated losses" under Section 1503(d) of the IRC if a "triggering
event" were to occur. Potential triggering events include certain asset
or stock dispositions to unrelated parties, certain tax deconsolidations,
certain usage of the losses on a foreign tax return, and certain failures
to comply with Internal Revenue Service regulations. CMS Energy and CMS
NOMECO have no plans to effect any transaction that would be a triggering
event. The amount of the potential tax liability could be up to $67
million plus interest. In connection with the same acquisition, a
subsidiary of CMS NOMECO could also be jointly and severally liable with
an unrelated party for up to $50 million of tax plus interest. In that
event, CMS NOMECO has certain indemnity rights against that unrelated
party. Additionally, CMS NOMECO and its domestic subsidiaries have
incurred losses in certain foreign countries that could be recaptured if a
triggering event were to occur. The additional tax liability could be up
to $10 million plus interest.
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. These lawsuits and
proceedings may involve personal injury, 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 adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
11: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
that 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
Consumers to file a report on the adequacy of the surcharge revenues with
the MPSC at three-year intervals beginning in 1998. Consumers filed a
revision to its Post Shutdown Activities Report (formerly decommissioning
report) with the NRC to reflect the shutdown of Big Rock.
Big Rock closed permanently on August 29, 1997 because management
determined that the plant would be uneconomical to operate in an
increasingly competitive environment. Consumers originally scheduled the
plant to close May 31, 2000, at the end of the plant's operating license.
Plant decommissioning began in September 1997 and may take five to ten
years to return the site to its original condition. The earlier than
planned closure of the plant and the reopening of the South Carolina
Barnwell facility to receive low level radioactive waste have changed the
method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated
decommissioning cost which is required to be updated in a filing with the
MPSC by March 31, 1998. For further information on nuclear matters, see
Note 2.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. Consumers plans to load five additional casks at Palisades in
1999 pending approval by the NRC. In June 1997, the NRC approved
Consumers' process for unloading spent fuel from a cask at Palisades
previously discovered to have minor weld flaws. Consumers intends to
transfer the spent fuel to a new transportable cask when one is available.
Westinghouse Corporation has been contracted to design and fabricate
transportable casks for both Palisades and Big Rock. These casks will
support the off-load of the cask with minor flaws, continued operation of
Palisades and the decommissioning of Big Rock.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. Consumers also maintains coverage for
replacement power costs during prolonged accidental outages at Palisades.
Insurance would not cover such costs during the first 17 weeks of any
outage, but would cover most of such costs during the next 58 weeks of the
outage, followed by reduced coverage to 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 $19 million in any one year to Nuclear Electric Insurance Ltd; $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 if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report to it
on the continuing ability of the Palisades reactor vessel to withstand
postulated pressurized thermal shock events during its remaining license
life, considering the embrittlement of reactor vessel materials over time
due to operation in a radioactive environment. Based on continuing
analysis of data in December 1996 Consumers received an interim Safety
Evaluation Report from the NRC indicating that the reactor vessel can be
safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management
designed to minimize embrittlement, it can operate Palisades to the end of
its license life in the year 2007 without annealing the reactor vessel.
Nevertheless, Consumers will continue to monitor the matter.
12: Supplemental Cash Flow Information
For purposes of the Consolidated Statements 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 were:
In Millions
Years Ended December 31 1997 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $293 $240 $207
Income taxes paid (net of refunds) 67 82 34
Non-cash transactions
Nuclear fuel placed under
capital leases $ 4 $ 28 $ 26
Other assets placed under
capital leases 7 3 5
Common Stock issued to
acquire companies - - 90
Assumption of debt - - 20
Capital leases refinanced - - 21
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows are described below:
In Millions
Years Ended December 31 1997 1996 1995
Sale of receivables, net $ 17 $ 23 $ 20
Accounts receivable (160) (28) (80)
Accrued revenue 64 (82) (24)
Inventories (15) - 43
Accounts payable 67 55 112
Accrued refunds 4 (13) (3)
Other current assets and
liabilities, net (6) 23 30
Non-current deferred amounts, net (6) 10 (9)
------ ------ ------
$ (35) $ (12) $ 89
====== ====== ======
13: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on
each company's separate taxable income. CMS Energy and Consumers practice
full deferred tax accounting for temporary differences, but federal income
taxes have not been recorded on the undistributed earnings of
international subsidiaries where CMS Energy intends to permanently
reinvest those earnings. Upon distribution, those earnings may be subject
to both U.S. income taxes (adjusted for foreign tax credits or
deductions) and withholding taxes payable to various foreign countries.
It is not practical to estimate the amount of unrecognized deferred income
taxes or withholding taxes on undistributed earnings.
CMS Energy used ITC to reduce current income taxes payable, and amortizes
ITC over the life of the related property. Any AMT paid generally becomes
a tax credit that CMS Energy can carry forward indefinitely to reduce
regular tax liabilities in future periods when regular taxes paid exceed
the tax calculated for AMT. The significant components of income tax
expense (benefit) consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Current income taxes
Federal and other $ 79 $ 90 $ 43
Foreign 5 3 -
----- ----- -----
84 93 43
Deferred income taxes
Federal 50 56 85
Foreign (7) - -
----- ----- -----
43 56 85
Deferred ITC, net (10) (10) (10)
----- ----- -----
$117 $139 $118
===== ===== =====
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1997 1996
Property $ (647) $ (621)
Unconsolidated investments (263) (259)
Postretirement benefits (Note 16) (156) (165)
Abandoned Midland project (33) (40)
Employee benefit obligations
(includes postretirement benefits
of $155 and $167) (Note 16) 195 201
AMT carryforward 147 172
Power purchases (Note 3) 66 82
Other (14) (20)
------- -------
$ (705) $ (650)
======= =======
Gross deferred tax liabilities $(1,758) $(1,715)
Gross deferred tax assets 1,053 1,065
------- -------
$ (705) $ (650)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1997 1996 1995
Consolidated net income before
preferred dividends
Domestic $229 $237 $219
Foreign 64 31 13
---- ---- ----
293 268 232
Income tax expense 117 139 118
---- ---- ----
410 407 350
Statutory federal income tax rate x 35% x 35% x 35%
---- ---- ----
Expected income tax expense 143 142 123
Increase (decrease) in taxes from:
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 8 6 6
Impact of foreign taxes, tax rates and credits 1 8 3
Undistributed earnings of
international subsidiaries (10) (2) -
ITC amortization (10) (10) (10)
Section 29 Fuel Tax Credits (13) (13) (13)
Other, net (7) 3 4
---- ---- ----
$117 $139 $118
==== ==== ====
14: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments in financial instruments
approximate fair value.
The carrying amount of long-term debt was $3.3 billion at December 31,
1997 and $2.8 billion at December 31, 1996, and the fair values were $3.3
billion and $2.9 billion, respectively. Although the current fair value
of the long-term debt may differ from the current carrying amount,
settlement of the reported debt is generally not expected until maturity.
The carrying amount of preferred stock and Trust Preferred Securities was
$631 million at December 31, 1997 and $456 million at December 31, 1996,
and the fair value was $632 million and $439 million, respectively.
The fair values of CMS Energy's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments.
At December 31, 1997, the fair value of CMS Energy's interest rate swap
agreements, with a notional amount of $1.1 billion, was $13 million,
representing the amount that CMS Energy would have to pay to terminate the
agreements. The settlement of the interest rate swap agreements in 1997
did not materially affect interest expense. At December 31, 1996,
CMS Energy would have paid $10 million to terminate the agreements. Also
refer to Note 9 for a discussion of CMS NOMECO's price hedging
arrangements and their fair values. Guarantees were $543 million and $102
million at December 31, 1997 and 1996, respectively.
The amortized cost of CMS Energy's nuclear decommissioning investments,
which are considered available-for-sale securities in accordance with SFAS
115, Accounting For Certain Investments in Debt and Equity Securities, was
$405 million and $351 million as of December 31, 1997 and 1996,
respectively. The unrealized gain, which is classified in accumulated
depreciation, was $81 million and $35 million as of December 31, 1997 and
1996, respectively.
15: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
Common Stock of CMS Energy, stock options and stock appreciation rights
may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under
the plan may consist of any class of Common Stock of CMS Energy. Certain
plan awards are subject to performance-based business criteria. The plan
reserves for award not more than three percent of CMS Energy's Common
Stock outstanding on January 1 each year, less (i) the number of shares of
restricted Common Stock awarded and (ii) Common Stock subject to options
granted under the plan during the immediately preceding four calendar
years. Any forfeitures of shares previously awarded increase the number
available to be awarded under the plan. At December 31, 1997, awards of
up to 749,889 shares of CMS Energy Common Stock and 192,387 shares of
Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years. The restricted shares are subject to
achievement of specified levels of total shareholder return and are
subject to forfeiture if employment terminates before vesting. If
performance objectives are exceeded, the plan provides additional awards.
Restricted shares vest fully if control of CMS Energy changes, as defined
by the plan. At December 31, 1997, 562,711 of the 748,211 shares of
restricted CMS Energy Common Stock outstanding are subject to performance
objectives. At December 31, 1997 all of the 19,791 restricted shares of
Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights are granted
with an exercise price equal to the closing market price on each grant
date. Options are exercisable upon grant and expire up to ten years and
one month from date of grant. The status of the restricted stock granted
to CMS Energy's key employees under the Performance Incentive Stock Plan
and options granted under both plans follows.
Restricted
Stock Options
- -------------------------------------------------------------------------
Number Number Weighted-Average
of Shares of Shares Exercise Price
- -------------------------------------------------------------------------
CMS Energy Common Stock:
Outstanding at January 1, 1995 330,356 1,490,666 $ 23.50
Granted 253,337 304,000 $ 25.08
Exercised or Issued (43,939) (147,666) $ 14.52
Forfeited (22,307) - -
Expired - (55,000) $ 27.46
-------- -------- --------
Outstanding at December 31, 1995 517,447 1,592,000 $ 24.50
Granted 222,000 368,176 $ 30.55
Exercised or Issued (92,533) (231,550) $ 20.79
Forfeited (46,076) - -
Expired - (12,000) $ 32.88
-------- -------- --------
Outstanding at December 31, 1996 600,838 1,716,626 $ 26.24
Granted 366,360 431,500 $ 35.91
Exercised or Issued (159,405) (479,422) $ 26.54
Forfeited (59,582) - -
Expired - (2,987) $ 30.13
-------- --------- --------
Outstanding at December 31, 1997 748,211 1,665,717 $ 28.65
======== ========= ========
Class G Common Stock:
Outstanding at December 31, 1995 6,924 10,000 $ 17.88
Granted 9,423 11,000 $ 17.88
----- ------ ------
Outstanding at December 31, 1996 16,347 21,000 $ 17.88
Granted 8,784 12,000 $ 20.24
Exercised or Issued (1,385) (5,000) $ 17.88
Forfeited (3,955) - -
------- ------- -------
Outstanding at December 31, 1997 19,791 28,000 $18.89
======= ======= =======
The following table summarizes information about stock options outstanding
at December 31, 1997:
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
$17.13- $24.75 594,000 4.82 years $21.82
$25.13- $33.88 668,217 5.30 years $30.32
$34.25- $38.00 403,500 9.51 years $35.92
--------------- ---------- ---------- -------
$17.13- $38.00 1,665,717 6.15 years $28.65
=============== ========== ========== =======
The range of exercise prices for Class G Common Stock options is $17.88 to
$23.31; the weighted average remaining life is 8.8 years.
The weighted average fair value of options granted for CMS Energy Common
Stock was $6.38 in 1997, $6.94 in 1996, and $5.37 in 1995. The weighted
average fair value of options granted for Class G Common Stock was $1.87
in 1997, $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using
the Black-Scholes model, a mathematical formula used to value options
traded on securities exchanges, with the following assumptions:
Years Ended December 31 1997 1996 1995
CMS Energy Common Stock Options
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock-price volatility 17.43% 24.08% 27.12%
Expected dividend rate $ .30 $ .27 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock-price volatility 18.05% 16.19% 16.19%
Expected dividend rate $ .31 $ .295 $ .295
Expected option life 5 years 5 years 5 years
CMS Energy applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. The
compensation cost charged against income for restricted stock was $6
million in 1997, $2 million in 1996, and $3 million in 1995. If
compensation cost for stock options had been determined in accordance with
SFAS 123, Accounting for Stock-Based Compensation, CMS Energy's
consolidated net income and earnings per share would have been as follows:
In Millions, Except Per Share Amounts
Pro Forma As Reported
Years Ended December 31 1997 1996 1997 1996
Consolidated Net Income $266 $239 $268 $240
Net Income Attributable
to Common Stocks
CMS Energy 251 225 253 226
Class G 15 14 15 14
Earnings Per Average Common Share
CMS Energy
Basic 2.61 2.43 2.63 2.45
Diluted 2.59 2.42 2.61 2.44
Class G
Basic and Diluted 1.81 1.78 1.84 1.82
16: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its
subsidiaries provide certain health care and life insurance benefits for
retired employees and their eligible dependents. Substantially all
employees may become eligible for such benefits if they attain retirement
status while working for CMS Energy or its subsidiaries. CMS Energy and
its subsidiaries adopted SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, effective as of the beginning
of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 20). CMS Energy's
international subsidiaries expensed their accumulated transition
obligation liability. The amount of such transition obligation is not
material to the presentation of the consolidated financial statements or
significant to CMS Energy's total transition obligation. The MPSC
authorized recovery of the electric utility portion of these costs in 1994
over 18 years and the gas utility portion in 1996 over 16 years. During
1995, the FERC granted Consumers a waiver of a three-year filing
requirement for cost recovery with respect to its wholesale electric
business. At December 31, 1997, Consumers had recorded a regulatory asset
and liability of $7 million. By early 1997, the FERC had authorized
recovery of these costs. CMS Energy funds the benefits using external
Voluntary Employee Beneficiary Associations, a legal entity established
under guidelines of the IRC, through which the company can provide certain
benefits for its employees or retirees. Funding of the benefits coincides
with Consumers' recovery in rates.
Retiree health care costs at December 31, 1997 are based on the assumption
that costs would increase 6.5 percent in 1998, then decrease gradually to
5.5 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1997 by $83 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1997 by $9 million.
Years Ended December 31 1997 1996 1995
Weighted average discount rate 7.50% 7.75% 7.50%
Expected long-term rate of
return on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Service cost $ 10 $ 13 $ 11
Interest cost 41 42 40
Actual return on assets (38) (14) (4)
Net amortization and deferral 25 8 1
---- ---- ----
Net postretirement benefit costs $ 38 $ 49 $ 48
==== ==== ====
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1997 1996
Actuarial present value of estimated benefits
Retirees $ 325 $ 330
Eligible for retirement 68 66
Active (upon retirement) 189 190
----- -----
Accumulated postretirement benefit obligation 582 586
Plan assets (primarily stocks, bonds and money
market investments) at fair value 224 138
----- -----
Accumulated postretirement benefit obligation
less than (in excess of) plan assets (358) (448)
Unrecognized net (gain) loss from
experience different than assumed (83) (36)
Unrecognized prior service cost - 7
----- -----
Recorded liability $(441) $(477)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $565 million and $570 million at December 31, 1997 and 1996,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established in 1988. Because the SERP is not a qualified
plan under the IRC, earnings of the trust are taxable and trust assets are
included in consolidated assets. At December 31, 1997 and 1996, trust
assets were $44 million and $31 million, respectively, and were classified
as other non-current assets.
Defined Benefit Pension Plan: A trusted, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan was fully funded, no contributions were made in 1997 and
1996. A contribution of $9 million was made in 1995.
Years Ended December 31 1997 1996 1995
Discount rate 7.50% 7.75% 7.50%
Rate of compensation increase 3.75% 4.00% 4.50%
Expected long-term rate of return on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Service cost $ 26 $ 26 $ 23
Interest cost 61 58 56
Actual return on plan assets (163) (63) (168)
Net amortization and deferral 93 (6) 103
----- ----- -----
Net periodic pension cost $ 17 $ 15 $ 14
===== ===== =====
The funded status of the Pension Plan and SERP reconciled to the liability
recorded at December 31 was:
In Millions
Pension Plan SERP
1997 1996 1997 1996
Actuarial present value of
estimated benefits
Vested $ 548 $ 504 $ 24 $ 21
Non-vested 79 72 1 1
----- ----- ----- -----
Accumulated benefit obligation 627 576 25 22
Provision for future pay increases 165 158 16 15
----- ----- ----- -----
Projected benefit obligation 792 734 41 37
Plan assets (primarily stocks
and bonds, including $153 in 1997
and $117 in 1996 in common stock
of CMS Energy) at fair value 882 779 - -
----- ----- ----- -----
Projected benefit obligation
less than (in excess of)
plan assets 90 45 (41) (37)
Unrecognized net (gain) loss
from experience different
than assumed (157) (99 5) 5
Unrecognized prior service cost 35 39 2 2
Unrecognized net transition (asset) (22) (27) - -
----- ----- ----- -----
Recorded liability $ (54) $ (42) $ (34) $ (30)
===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
Defined Contribution Plan: CMS Energy provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. CMS Energy will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
approximately $20 million in 1997, $18 million in 1996 and $17 million in
1995.
17: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment,
nuclear fuel and buildings. Consumers' nuclear fuel capital leasing
arrangement expires in November 1999, yet provides for additional one-year
extensions upon mutual agreement by the parties. Upon termination of the
lease, the lessor would be entitled to a cash payment equal to its
remaining investment, which was $47 million as of December 31, 1997.
Consumers is responsible for payment of taxes, maintenance, operating
costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 1997, were:
In Millions
Capital Operating
Leases Leases
1998 $ 42 $ 11
1999 44 11
2000 14 11
2001 12 8
2002 9 8
2003 and thereafter 7 20
----- -----
Total minimum lease payments 128 $ 69
Less imputed interest 19 =====
-----
Present value of net minimum lease payments 109
Less current portion 34
-----
Non-current portion $ 75
=====
Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
for the years ended December 31, 1997, 1996 and 1995, were $10 million, $8
million and $11 million, respectively.
Capital lease expenses for the years ended December 31, 1997, 1996 and
1995 were $43 million, $46 million and $46 million, respectively.
Included in these amounts for the years ended 1997, 1996 and 1995 are
nuclear fuel lease expenses of $25 million for each year.
18: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The direct expenses of the joint plants are
included in Consumers' operating expenses. The following table indicates
the extent of Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1997 1996
Net investment
Ludington - 51 percent $112 $116
Campbell Unit 3 - 93.3 percent 314 329
Transmission lines - various 34 35
Accumulated depreciation
Ludington $ 88 $ 84
Campbell Unit 3 265 252
Transmission lines 14 14
19: Reportable Segments
CMS Energy operates principally in the following business segments:
electric utility; gas utility; oil and gas exploration and production;
independent power production; natural gas transmission, storage and
processing; and energy marketing, services and trading.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other business and geographic
segment information follows:
Business Segments
In Millions
Years Ended December 31 1997 1996 1995
Depreciation, depletion and amortization
Electric utility $ 296 $ 282 $ 272
Gas utility 93 87 83
Independent power production 13 8 4
Oil and gas exploration and production 58 55 52
Natural gas transmission, storage
and processing 14 7 3
Marketing, services and trading 1 - -
Other 2 2 2
------ ------ ------
$ 477 $ 441 $ 416
====== ====== ======
Identifiable assets
Electric utility (a) $4,472 $4,505 $4,522
Gas utility (a) 1,644 1,709 1,690
Independent power production 1,699 1,053 840
Oil and gas exploration and production 726 719 660
Natural gas transmission, storage
and processing 536 397 272
Marketing, services and trading 191 52 31
Other 525 180 128
------ ------ ------
$9,793 $8,615 $8,143
====== ====== ======
Capital expenditures (b)
Electric utility $ 255 $ 310 $ 328
Gas utility 116 137 126
Independent power production 704 142 239
Oil and gas exploration and
production (c) 132 88 168
Natural gas transmission, storage
and processing 115 136 178
Marketing, services and trading 28 - -
Other 202 66 14
------ ------ ------
$ 1,552 $ 879 $ 1,053
====== ====== ======
Investments in Equity Method Investees
Independent power production $1,203 $ 683 $ 603
Natural gas transmission, storage
and processing 256 234 193
Marketing, services and trading 26 - -
Other 277 85 22
------ ------ ------
$1,762 $1,002 $ 818
====== ====== ======
Earnings from Equity Method Investees(d)
Independent power production $ 89 $ 91 $ 58
Natural gas transmission, storage
and processing 10 12 9
Marketing, services and trading 2 - -
Other 8 8 11
------ ------ ------
$ 109 $ 111 $ 78
====== ====== ======
Geographic Areas
Investments Earnings
Pretax in Equity from Equity
Operating Operating Identifiable Method Method
Revenue Income Assets Investees Investees(d)
1997
United States $4,582 $ 670 $7,991 $ 765 $ 81
International 205 76 1,802 997 28
1996
United States $4,220 $ 653 $7,802 $ 689 $ 98
International 113 38 813 313 13
1995
United States $3,831 $ 601 $7,611 $ 586 $ 75
International 59 18 532 232 3
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and
electric DSM costs (see Consolidated Statements of Cash Flows).
Amounts also include an attributed portion of Consumers' capital
expenditures for plant and equipment common to both the electric and
gas utility businesses.
(c) Includes common stock issued for acquisitions in 1995.
(d) These amounts are included in operating revenue in the Consolidated
Statements of Income.
20: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process. These costs are being recovered through rates over
periods of up to 15 years.
An accounting standard, effective 1996, requires impairment losses on
long-lived assets to be recognized when an asset's book value exceeds its
expected future cash flows (undiscounted). The standard also imposes
stricter criteria for retention of regulatory-created assets by requiring
that such assets be probable of future recovery at each balance sheet
date. There was no impact on financial position or results of operations
upon adoption because management believes these assets will be recovered.
For further discussion, see Outlook - Application of SFAS 71 in the MD&A.
In Millions
December 31 1997 1996
Postretirement benefits (Note 16) $ 429 $ 460
Income taxes (Note 13) 172 158
Abandoned Midland project 93 113
Manufactured gas plant sites (Note 10) 47 47
DSM - deferred costs 46 60
Uranium enrichment facility 22 23
Ludington Fish Settlement 12 14
Other 16 43
----- -----
Total regulatory assets $ 837 $ 918
===== =====
Income taxes (Note 13) $(226) $(224)
DSM - deferred revenue (24) (25)
----- -----
Total regulatory liabilities $(250) $(249)
===== =====
21: Equity Method Investments
Certain of CMS Energy's subsidiaries invest in companies, partnerships and
joint ventures as part of a strategy for growth through international
diversification. The ownership interests for these investments vary from
20 percent to 50 percent and are all accounted for using the equity method
of accounting. Following is summarized combined financial information for
all equity method investments, except for the MCV Partnership, which is
disclosed separately in Note 22 and Loy Yang, which is disclosed
separately in this note. For information relating to the geographic
location of investees and CMS Energy's and its subsidiaries' equity
earnings from and investment in investees refer to Note 19.
Income Statement Data (unaudited)
In Millions
Years Ended December 31 1997 1996 1995
Operating revenue $1,267 $ 674 $ 587
Operating expenses 808 399 299
------ ------ ------
Operating income 459 275 288
Other expense, net 175 97 114
------ ------ ------
Net income $ 284 $ 178 $ 174
====== ====== ======
Balance Sheet Data (unaudited)
In Millions
December 31 1997 1996
Assets
Current assets $ 439 $ 341
Property, plant and equipment, net 3,335 2,794
Other assets 1,976 164
------- -------
$ 5,750 $ 3,299
======= =======
Liabilities and Equity
Current liabilities $ 696 $ 293
Long-term debt and other
non-current liabilities 3,262 1,351
Equity 1,792 1,655
------- -------
$ 5,750 $ 3,299
======= =======
In the second quarter of 1997, a consortium comprising subsidiaries of CMS
Generation, among others, financed, through a consortium of banks,
seventy-seven percent of the consortium's $3.7 billion payment to the
Australian State of Victoria government for the Loy Yang acquisition.
This financing occurred on a non-recourse basis to CMS Energy and CMS
Generation.
Summarized financial information of Loy Yang:
Income Statement Data (unaudited)
In Millions
Year Ended December 31 1997
Operating revenue $229
Operating expenses 112
----
Operating income 117
Other expense, net 114
----
Net income $ 3
====
Balance Sheet Data (unaudited)
In Millions
December 31 1997
Assets
Current assets $ 144
Property, plant and equipment, net 3,159
Other assets 4
------
$3,307
======
Liabilities and Equity
Current liabilities $ 46
Long-term debt and other non-current liabilities 2,352
Equity 909
------
$3,307
======
22: Summarized Financial Information of Significant
Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1997 obligation to purchase electric capacity from the MCV Partnership was
15 percent of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership:
Statements of Income (unaudited)
In Millions
Years Ended December 31 1997 1996 1995
Operating revenue (a) $ 652 $ 645 $ 618
Operating expenses 435 417 386
----- ----- -----
Operating income 217 228 232
Other expense, net 154 162 171
----- ----- -----
Net income before cumulative
effect of accounting change 63 66 61
Cumulative effect of change in method
of accounting for property tax 15 - -
----- ----- -----
Net income $ 78 $ 66 $ 61
===== ===== =====
Balance Sheets (unaudited)
In Millions
December 31 1997 1996
Assets
Current assets (b) $ 362 $ 316
Property, plant and equipment, net 1,820 1,889
Other assets 169 159
------ ------
$2,351 $2,364
====== ======
Liabilities and Partners' Equity
Current liabilities $ 285 $ 235
Long-term debt and other
non-current liabilities (c) 1,789 1,930
Partners' equity (d) 277 199
----- -----
$2,351 $2,364
====== ======
(a) Revenue from Consumers totaled $609 million, $598 million and $571
million for 1997, 1996, and 1995, respectively.
(b) Receivables from Consumers totaled $54 million and $52 million, at
December 31, 1997 and 1996, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in
a long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1997 and 1996, lease obligations of $1.52 billion and
$1.58 billion, respectively, were owed to the owner trust.
CMS Holdings' share of the interest and principal portion for the
1997 lease payments was $62 million and $28 million, respectively,
and for the 1996 lease payments was $64 million and $25 million,
respectively. The lease payments service $1.0 billion and $1.1
billion in non-recourse debt outstanding as of December 31, 1997 and
1996, respectively, of the owner-trust. FMLP's debt is secured by
the MCV Partnership's lease obligations, assets, and operating
revenues. For 1997 and 1996, the owner-trust made debt payments
(including interest) of $192 million. FMLP's earnings for 1997,
1996, and 1995 were $20 million, $17 million, and $14 million,
respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the
life of its investment in the MCV Partnership. Covenants contained
in financing agreements prohibit the MCV Partnership from paying
distributions until certain financial test requirements are met.
Consumers does not anticipate receiving a cash distribution in the
near future.
99
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a
Michigan corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CMS Energy Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1998.
98
Quarterly Financial and Common Stock Information CMS Energy Corporation
In Millions, Except Per Share Amounts
1997 (Unaudited) 1996 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue (a) $1,295 $1,024 $1,032 $1,436 $1,283 $938 $929 $1,183
Pretax operating income (b) $213 $167 $185 $181 $219 $159 $169 $144
Consolidated net income $84 $54 $66 $64 $88 $50 $58 $44
Basic earnings (loss) per
average common
share (c):
CMS Energy $.79 $.55 $.70 $.59 $.83 $.54 $.65 $.43
Class G $1.18 $.16 $(.21) $.70 $1.50 $.16 $(.28) $.44
Diluted earnings (loss) per
average common
share (c):
CMS Energy $.78 $.55 $.69 $.59 $.83 $.53 $.65 $.43
Class G $1.18 $.16 $(.21) $.70 $1.50 $.16 $(.28) $.44
Dividends declared per
common share:
CMS Energy $.27 $.27 $.30 $.30 $.24 $.24 $.27 $.27
Class G $.295 $.295 $.31 $.31 $.28 $.28 $.295 $.295
Common stock prices (d)
CMS Energy:
High $34-1/2 $35-5/8 $38-1/16 $44-1/16 $31-7/8 $31-1/4 $31-5/8 $33-3/4
Low $31-1/2 $31-1/8 $34-7/8 $35-11/16 $27-13/16 $28 $29 $30-1/8
Class G:
High $19-7/8 $19-7/8 $22 $27-1/8 $20 $19-3/8 $18-7/8 $19-1/4
Low $17-7/8 $17-5/8 $19 $20-5/8 $17-7/8 $17-1/2 $16-5/8 $17-3/8
<FN>
(a) Amounts in 1997 were restated for comparative purposes.
(b) Amounts in 1996 were restated for comparative purposes.
(c) The sum of the quarters may not equal the annual earnings per share due to changes in shares outstanding.
(d) Based on New York Stock Exchange - Composite transactions.
99
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1997 Financial Statements
101
Selected Financial Information Consumers Energy Company
1997 1996 1995 1994 1993
Operating revenue (in millions) ($) 3,769 3,770 3,511 3,356 3,243
Net income (in millions) ($) 321 296 255 226 198
Net income available to common
stockholder (in millions) ($) 284 260 227 202 187
Cash from operations (in millions) ($) 758 672 642 598 403
Capital expenditures, excluding capital
lease additions and DSM (in millions) ($) 360 410 414 447 451
Total assets (in millions) ($) 6,949 7,025 6,954 6,809 6,551
Long-term debt, excluding current
maturities (in millions) ($) 1,369 1,900 1,922 1,953 1,839
Non-current portion of capital
leases (in millions) ($) 74 100 104 108 106
Total preferred stock (in millions) ($) 238 356 356 356 163
Total preferred securities (in millions) ($) 220 100 - - -
Number of preferred shareholders at year-end 6,178 9,540 10,084 10,599 7,037
Book value per common share at year-end ($) 20.38 19.96 19.00 16.96 15.28
Return on average common equity (%) 16.8 15.9 15.0 14.9 14.8
Return on assets (%) 6.2 5.7 5.3 4.9 4.7
Number of full-time equivalent
employees at year-end
Consumers 8,640 8,938 9,262 9,409 9,495
Michigan Gas Storage 66 67 70 73 72
Electric statistics
Sales (billions of kWh) 37.9 37.1 35.5 34.5 32.8
Customers (in thousands) 1,617 1,594 1,570 1,547 1,526
Average sales rate per kWh (cents) 6.57 6.55 6.36 6.29 6.28
Gas statistics
Sales and transportation deliveries (bcf) 420 448 404 409 411
Customers (in thousands) (a) 1,533 1,504 1,476 1,448 1,423
Average sales rate per mcf ($) 4.44 4.45 4.42 4.48 4.46
<FN>
(a) Excludes off-system transportation customers.
102
Consumers Energy Company
Management's Discussion and Analysis
This Annual Report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995, that include without
limitation, discussions as to expectations, beliefs, plans, objectives and
future financial performance, or assumptions underlying or concerning
matters discussed in this report. Refer to the Forward-Looking Information
section of this MD&A for 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,
a holding company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
RESULTS OF OPERATIONS
In Millions
Years Ended December 31 1997 1996 Change 1996 1995Change
Net income available
to common stockholder $284 $260 $24 $260 $227 $33
Consumers experienced earnings growth for the fifth consecutive year. This
continued growth is the reflection of changes in regulation and Consumers'
strategy to target increased deliveries to industrial and commercial
customers. The improved net income for 1997 reflects the favorable impact
for all of 1997 of an electric rate increase received in February 1996,
increased electric sales, the one-time recognition of interest income for
$7 million from a related-party property sale, increased revenues from the
transmission of electricity for others, and improved earnings from the MCV
Partnership. In addition, the improved net income for 1997 reflects an
adjustment of prior years' income taxes associated with non-taxable
earnings on nuclear decommissioning trust funds of $9 million. The
improved net income for 1996 over the 1995 level reflects the favorable
impact of an electric rate increase received in February 1996, increased
electric sales and gas deliveries, and revenues from gas loaning
activities. In addition, other operating income increased during 1996 due
to a FERC-ordered refund received by the MCV Partnership from a gas
pipeline supplier. For further information, see the Electric and Gas
Utility Results of Operations sections of this MD&A and Note 4.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions
Years Ended December 31 1997 1996 Change 1996 1995 Change
$432 $411 $21 $411 $372 $39
Electric pretax operating income in 1997 benefitted from increased
electric sales, the full effect of the February 1996 electric rate
increase and extensive control of operation and maintenance costs.
Partially offsetting these benefits were lower revenue due to increases in
special contract discounts negotiated with large commercial and industrial
customers and higher depreciation and general taxes expenses. The
increase in electric pretax operating income in 1996 reflects the
favorable impact of the February 1996 electric rate increase and the
benefit of increased kWh sales and lower maintenance expenses. The
increase was partially offset by a decrease in revenues due to increases
in special contract discounts negotiated with large industrial customers
and increased depreciation, general taxes and operation expenses. The
following table quantifies these impacts on pretax operating income:
In Millions
Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
Sales (including special contract discounts) $ 5 $ 1
Rate increases and other regulatory issues 11 50
Operation and maintenance 24 2
General taxes, depreciation and other (19) (14)
---- ----
Total increase/(decrease) in pretax
operating income $21 $39
==== ====
Electric Sales: Total electric sales in 1997 were 38 billion kWh, an
increase of 2.3 percent over 1996 sales. The increase reflects continued
economic growth in Michigan and a 1.2 percent increase in sales to
ultimate customers, primarily within the industrial class. Total electric
sales in 1996 were 37 billion kWh, an increase of 4.4 percent over the
1995 level. The increase in 1996 is primarily attributable to an increase
in intersystem sales and a 1.7 percent increase in sales to ultimate
customers. This increase also reflects continued economic growth in
Consumers' territory.
Power Costs: Cost increases in both 1997 and 1996 over the prior periods
reflect greater power purchases from outside sources to meet increased
sales demand. The following table quantifies the changes in electric
power costs:
In Millions
Years Ended December 31 1997 1996Change 1996 1995 Change
$1,139 $1,087 $52 $1,087 $970 $117
Electric Utility Operating Issues:
Power Purchases from the MCV Partnership - In 1992, Consumers recognized a
loss for the present value of the estimated future underrecoveries of
power purchases from the MCV Partnership. The after-tax cash
underrecoveries are currently based on the assumption that the MCV
Facility will be available to generate electricity 91.5 percent of the
time over its expected life. For 1997, the MCV Facility was available 99
percent of the time, resulting in after-tax cash underrecoveries of $41
million. Consumers believes it will continue to experience after-tax cash
underrecoveries associated with the PPA in amounts as those shown below.
For further information, see Power Purchases from the MCV Partnership in
Note 3.
In Millions
1998 1999 2000 2001 2002
Estimated cash underrecoveries,
net of tax $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility. If the MCV
Facility operates at levels above management's estimate over the remainder
of the PPA, Consumers will need to recognize losses for future
underrecoveries larger than amounts previously recorded. Therefore,
Consumers would experience larger amounts of cash underrecoveries than
originally anticipated. Management will continue to evaluate the adequacy
of the accrued liability considering actual MCV Facility operations.
Electric Rate Proceedings - In 1996, the MPSC issued a final order
authorizing Consumers to recover costs associated with the purchase of an
additional 325 MW of MCV Facility capacity and to accelerate recovery of
its nuclear plant investment. To implement the accelerated recovery, the
order requires an increase in annual nuclear plant depreciation expense by
$18 million with a corresponding decrease in fossil-fueled generating
plant depreciation expense. The order also established an experimental
direct-access program. For further information on these issues, see the
Electric Business Outlook section of this MD&A and Notes 3 and 4.
Nuclear Matters - In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
The NRC requires Consumers to make certain calculations and report to it
on the continuing ability of the Palisades reactor vessel to withstand
postulated pressurized thermal shock. In 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor
vessel can be safely operated through 2003. Consumers believes that with
a change in fuel management designed to minimize embrittlement, Palisades
can be operated to the end of its license life in the year 2007.
Palisades' temporary on-site storage pool for spent nuclear fuel is at
capacity. Consequently, Consumers is using NRC-approved steel and
concrete vaults, commonly known as "dry casks", for temporary on-site
storage.
Big Rock closed permanently on August 29, 1997 because management
determined that the plant would be uneconomical to operate in an
increasingly competitive environment. Consumers originally scheduled the
plant to close May 31, 2000, at the end of the plant's operating license.
Plant decommissioning began in September 1997 and may take five to ten
years to return the site to its original condition. The earlier than
planned closure of the plant and the reopening of the South Carolina
Barnwell facility to receive low level radioactive waste have changed the
method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated
decommissioning cost which is required to be updated in a filing with the
MPSC by March 31, 1998. For further information on nuclear matters, see
Note 7.
Electric Environmental Matters - The Clean Air Act contains significant
environmental provisions specific to utilities. During the past few
years, Consumers incurred $46 million in capital expenditures. Consumers
believes it may incur an additional $30 million in capital expenditures by
the year 2000 to comply with the current sulfur dioxide and nitrogen oxide
emission limits established by the EPA.
Consumers currently operates within all Clean Air Act requirements and
meets current ozone and particulate emission limits. The EPA recently
revised the national air quality standards, which may further limit small
particulate and ozone related emissions, and proposed that the State of
Michigan impose additional nitrogen oxide limits on fossil-fueled
emitters, such as Consumers' generating units. It is unlikely that the
State of Michigan will establish Consumers' emissions reduction target
until mid-to-late 1999. Until this state-mandated target is known, the
estimated cost of compliance is subject to significant revision. The
preliminary estimate of capital costs to reduce nitrogen oxide related
emissions for Consumers' fossil-fueled generating units is approximately
$175 million, plus an additional amount totaling $10 million per year for
the next 20 years for operation and maintenance costs. Consumers may need
an equivalent amount to comply with the new small particulate standards.
The State of Michigan objected to the extent of the proposed EPA emission
reductions. If the State of Michigan's position were to be adopted by the
EPA, costs could be less than the current estimated amounts. Consumers
supports the bipartisan effort in the U.S. Congress to delay
implementation of the revised standards until the relationship between the
new standards and health improvements is established scientifically.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites. Nevertheless, it believes that these
costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Many other creditworthy,
potentially responsible parties, with substantial assets also cooperate
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.
While decommissioning Big Rock, Consumers found that some areas of the
plant have coatings that contain both metals and PCBs. Consumers does not
believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and disposal is
currently unknown. These costs would constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing
options. For further information regarding these and other environmental
matters, see Electric Environmental Matters in Note 6.
Stray Voltage - Various parties have sued Consumers relating to the
effect of so-called stray voltage on certain livestock. In December 1997,
the Michigan Supreme Court remanded for further proceedings a 1994
Michigan trial court decision that refused to allow the claims of over 200
named plaintiffs to be joined in a single action. The trial court
dismissed all of the plaintiffs except the first-named plaintiff, allowing
the others to re-file separate actions. Of the original plaintiffs, only
49 re-filed separate cases. All of those 49 cases have been resolved.
The Michigan Supreme Court remanded the matter, finding that the proper
remedy for misjoinder was not dismissal, but to automatically allow each
case to go forward separately. Consumers filed a motion for
reconsideration with the Michigan Supreme Court, which was denied.
Consumers intends to vigorously defend these cases, but is unable to
predict the outcome. As of December 31, 1997, Consumers had 12 individual
stray voltage lawsuits, unrelated to the cases above, awaiting trial court
action, down from 22 lawsuits as reported at year end 1996.
Other - In October 1997, two independent power producers sued Consumers
and CMS Energy in a federal court alleging antitrust violations and
economic losses due to special electric contracts signed by Consumers with
large customers. The plaintiffs claim damages of $100 million (which a
court can treble in antitrust cases as provided by law). The transactions
of which plaintiffs complain have been regulated by, and are subject to,
the jurisdiction of the MPSC. In November 1997, Consumers and CMS Energy
filed a motion for summary judgement and/or for dismissal of the complaint
filed by the plaintiffs. Consumers believes the lawsuit is without merit
and will vigorously defend against it, but cannot predict the outcome of
this matter.
Gas Utility Results of Operations
Gas Pretax Operating Income:
In Millions
Years Ended December 31 1997 1996 Change 1996 1995 Change
$153 $158 $(5) $158 $156 $2
Gas pretax operating income decreased in 1997 compared to 1996. The
decrease results from reduced gas deliveries due to warmer winter month
temperatures in 1997 and the loss of an extra day for the 1996 leap year.
Revenues were also down in 1997 due to the elimination of surcharges
related to past conservation programs and reduced gas loaning activities.
In addition, depreciation costs and general taxes were higher in 1997 from
increased investments to serve new customers. Offsetting these decreases
to pretax operating income were lower operations and maintenance expenses
that resulted from extensive cost controls. Gas pretax operating income
increased in 1996 compared to 1995. The increase results from increased
gas deliveries and revenues from value-added services and gas loaning
activities. Partially offsetting these increases were higher operating,
depreciation and general tax expenses. The following table quantifies
these impacts on pretax operating income:
In Millions
Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
Sales $(13) $ 3
Gas wholesale and retail services
activities (9) 7
Operations and maintenance 24 (4)
General taxes, depreciation and other (7) (4)
---- ----
Total increase/(decrease) in pretax
operating income $ (5) $ 2
==== ====
Gas Deliveries: System deliveries in 1997, including miscellaneous
transportation, totaled 420 bcf, a decrease of 28 bcf or 6.1 percent
compared to 1996. The decreased deliveries for 1997 compared to 1996
reflect warmer temperatures in 1997 and the loss of an extra day for the
1996 leap year. Comparable system deliveries for 1996 totaled 448 bcf, an
increase of 44 bcf or 10.8 percent compared to 1995. The increased
deliveries for 1996 compared to 1995 reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels,
continued strength in the Michigan economy and the benefit from the added
leap year day in 1996.
Cost of Gas Sold: The cost decrease for 1997 was the result of decreased
sales and lower gas prices. The cost increase for 1996 was the result of
increased sales.
In Millions
Years Ended December 31 1997 1996 Change 1996 1995 Change
$694 $750 $(56) $750 $674 $76
Gas Utility Operating Issues:
Gas Rate Proceedings - Consumers entered into a special natural gas
transportation contract in response to a customer's proposal to bypass
Consumers' system in favor of a competitive alternative. In 1995, the
MPSC approved the contract. The MPSC stated, however, that Consumers'
shareholders must bear the revenue shortfall created by the difference
between the contract's discounted rate and the floor price of an MPSC-
authorized gas transportation rate. In 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. In October 1997, the Court of Appeals issued an opinion
affirming the MPSC's order. Consumers has sought a rehearing of the Court
of Appeals opinion. For further information on Gas Proceedings, see the
Gas Business Outlook section of this MD&A and Note 4.
GCR Matters - In 1995, the MPSC issued an order favorable to Consumers'
position in a $44 million contract pricing dispute (excluding interest)
between Consumers and certain gas producers. The Court of Appeals upheld
the MPSC order. The gas producers have now appealed to the Michigan
Supreme Court. Consumers believes the MPSC order correctly concludes that
the producers' theories are without merit. Consumers will vigorously
oppose any claims the producers may raise, but cannot predict the outcome
of this issue.
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.
Consumers estimates its costs related to investigation and remedial action
at $48 million to $98 million. This estimate is based on undiscounted
1998 costs. Any significant change in assumptions, such as remediation
technique, nature and extent of contamination and regulatory requirements,
could affect the estimate of investigation and remedial action costs for
the sites. For further information regarding environmental matters, see
Note 6 .
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
Operating Activities: Consumers derives cash from operations from the
sale and transportation of natural gas and the generation, transmission
and sale of electricity. Cash from operations totaled $758 million and
$672 million for 1997 and 1996, respectively. The $86 million increase
resulted from an increase in net income due to extensive control of
operation and maintenance costs and a change in working capital. Consumers
uses operating cash primarily to maintain and expand electric and gas
systems, to retire portions of long-term debt, and to pay dividends.
Investing Activities: Cash used by Consumers in investing activities
totaled $392 million and $494 million for 1997 and 1996, respectively.
The $102 million decrease resulted from a decrease in capital expenditures
and receipt of $50 million related to CMS Enterprises' repurchase of two
shares of its preferred stock. Consumers uses cash primarily for capital
expenditures.
Financing Activities: Cash used by Consumers in financing activities
totaled $363 million and $188 million for 1997 and 1996, respectively.
The increase of $175 million in cash used reflects the redemption of $120
million of preferred stock and a return of equity to Consumers' common
stockholder totaling $50 million.
Other Investing and Financing Matters: At December 31, 1997, Consumers
had FERC authorization to: 1) issue or guarantee up to $900 million of
short-term securities through 1998; 2) issue, through November 1998, $376
million of long-term securities with maturities up to 30 years, for
refinancing or refunding purposes; and 3) guarantee, through 1999, up to
$25 million in loans made by others, to residents of Michigan for the
purpose of making energy-related home improvements. In January 1998,
Consumers requested authorization to issue, through November 1998, an
additional $500 million of long-term securities for refinancing or
refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured
lines of credit aggregating $120 million. These facilities are available
to finance seasonal working capital requirements and to pay for capital
expenditures between long-term financings. At December 31, 1997, the
total available amount remaining under these facilities was $168 million.
Consumers also has in place a $500 million trade receivables sale program.
At December 31, 1997, $165 million in receivables remained available for
sale under the program. For further information, see Note 5.
Consumers must redeem or retire $1 billion of long-term debt over the
three-year period ending December 2000. In addition, at December 31,
1997, Consumers had a recorded liability to the DOE of $111 million, which
Consumers must pay upon the first delivery of spent nuclear fuel to the
DOE. Current federal law originally scheduled delivery of the fuel to
occur in 1998 (see Note 2). Consumers plans to refinance $850 million of
its long-term debt during 1998 and will continue to evaluate capital
markets as a source of financing further debt retirements. In early 1998,
Consumers called for the March 1998 redemption of $57 million aggregate
principal amount of its 7.5 percent First Mortgage Bonds due 2002 and $62
million aggregate principal amount of its 7.5 percent First Mortgage Bonds
due 2002.
In early 1998, Consumers issued $250 million of senior notes due February
1, 2008, at an interest rate of 6.375 percent. The senior notes are
secured by a series of Consumers' First Mortgage Bonds, issued
contemporaneously in a similar amount. Proceeds from the sale were added
to the general funds of Consumers and applied to the payment, at maturity,
of $248 million aggregate principal amount of Consumers' 8.75 percent
First Mortgage Bonds due February 15, 1998.
At December 31, 1997, Consumers' capital structure consisted of 38 percent
common equity, 10 percent preferred equity (including preferred stock and
preferred securities), and 52 percent long- and short-term debt (including
capital leases and notes payable).
OUTLOOK
The following discussions contain forward-looking statements. See the
Forward-Looking Information section of this MD&A for some important
factors that could cause actual results or outcomes to differ materially
from those discussed herein.
Capital Expenditures Outlook
Consumers estimates the following capital expenditures, including new
lease commitments, by company and by business segment over the next three
years. These estimates are prepared for planning purposes and are subject
to revision.
In Millions
Years Ended December 31 1998 1999 2000
Consumers
Construction $367 $358 $350
Nuclear fuel lease 54 - 1
Capital leases other than nuclear fuel 11 19 16
Michigan Gas Storage 3 3 3
---- ---- ----
$435 $380 $370
==== ==== ====
Electric utility operations (a) (b) $320 $265 $255
Gas utility operations (a) 115 115 115
---- ---- ----
$435 $380 $370
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
(b) These amounts do not include preliminary estimates for capital
expenditures possibly required to comply with recently revised national
air quality standards under the Clean Air Act. For further information
see Electric Utility Operating Issues-Electric Environmental Matters above
and Note 6.
Electric Business Outlook
Growth: Consumers expects average annual growth of two and one-half
percent per year in electric system deliveries over the next five years,
based on the present industry and regulatory configuration in Michigan.
Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales in
future periods.
Restructuring: Consumers' electric retail service is affected by
competition. To meet the challenge of competition, Consumers entered into
multi-year contracts with some of its largest industrial customers to
serve certain facilities. The MPSC has approved these contracts as part
of its phased introduction to competition. Certain customers have the
option to terminate their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct
access to the interstate transmission grid for wholesale transactions.
Consumers and Detroit Edison disagree on the effect of the orders on the
Michigan Electric Power Coordination Center pool. Consumers proposes to
maintain the benefits of the pool, while Detroit Edison has given notice
of early termination. Consumers expects FERC to rule on this issue in
1998.
In June 1997 the MPSC issued an order proposing that beginning January 1,
1998 Consumers would have to transmit and distribute energy on behalf of
competing power suppliers to serve retail customers. The order states
that by January 1, 2002, all customers would be free to choose (that is,
have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover
prudently incurred Transition Costs through a charge to all direct-access
customers until the end of the transition period in 2007. Subsequent to
the June 1997 order, the MPSC issued orders in October 1997 and early in
1998. Ultimately, the MPSC allowed Consumers: 1) to recover Transition
Costs of $1.755 billion through a charge to all direct-access customers
until the end of the transition period in 2007, subject to an adjustment
through a true-up mechanism; 2) to commence the phase-in of direct access
in March 1998; and 3) to suspend the power supply cost recovery clause.
The orders also confirm the MPSC's belief that Securitization may be a
beneficial mechanism for recovery of Transition Costs while recognizing
that Securitization requires state legislation to occur. Consumers
believes that the Transition Cost surcharge will apply to all customers
beginning in 2002. A separate charge to direct-access customers after
MPSC review and verification would also recover prudent costs of
implementing a direct-access program estimated at an additional $200
million. Nuclear decommissioning costs will also continue to be collected
through a separate surcharge to all customers. Consumers expects Michigan
legislative consideration of the entire subject of electric industry
restructuring in 1998. To be acceptable to Consumers, the legislation
would have to provide for full recovery of Transition Costs. Consumers
expects the legislature to review all of the policy choices made by the
MPSC during the restructuring proceedings to assure that they are in
accord with those that the legislature believes should be paramount. For
further information regarding restructuring, see Note 4.
Application of SFAS 71: Consumers applies the utility accounting
standard, SFAS 71, that recognizes the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities related
to the generation, transmission and distribution operations of its
business in its financial statements. Consumers believes that the
generation segment of its business is still subject to rate regulation
based upon its present obligation to continue providing generation service
to its customers, and the lack of definitive deregulation orders. If rate
recovery of generation-related costs becomes unlikely or uncertain,
whether due to competition or regulatory action, this accounting standard
may no longer apply to the generation segment of Consumers' business.
Such a change could result in either full recovery of generation-related
regulatory assets (net of related regulatory liabilities) or a loss,
depending on whether Consumers' regulators adopt a transition mechanism
for the recovery of all or a portion of these net regulatory assets.
According to recently published Emerging Issues Task Force Issue 97-4,
Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statements No. 71 and 101, Consumers can continue to
carry its generation-related regulatory assets or liabilities for the part
of the business being deregulated if deregulatory legislation or an MPSC
rate order allows the collection of cash flows from its regulated
transmission and distribution customers to recover these specific costs or
settle obligations. Consumers believes that even if it was to discontinue
application of SFAS 71 for the generation segment of its business, its
regulatory assets, including those related to generation, are probable of
future recovery from the regulated portion of the business. At
December 31, 1997, Consumers had $277 million of generation-related net
regulatory assets recorded on its balance sheet, and a net investment in
generation facilities of $1.4 billion included in electric plant and
property. For further information regarding this issue, see the Electric
Business Outlook - Restructuring, above.
Gas Business Outlook
Growth: Consumers currently anticipates gas deliveries (excluding
transportation to the MCV Facility and off-system deliveries) to grow at
an average annual rate of between one and two percent over the next five
years based primarily on a steadily growing customer base. Abnormal
weather, alternative energy prices, changes in competitive conditions, and
the level of natural gas consumption may affect actual gas deliveries in
future periods. Consumers is also offering a variety of energy related
services to its customers focused upon appliance maintenance, home safety
and home security.
Restructuring: In December 1997, the MPSC approved Consumers' application
to implement a statewide three-year experimental gas transportation pilot
program, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier. The
program is voluntary for natural gas customers. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. To minimize the risk of exposure to higher gas costs,
Consumers currently has contracts in place at known prices covering a
portion of its requirements through the year 2000. ABATE, the Attorney
General and other parties filed claims of appeal of the MPSC's order with
the Court of Appeals. For further information, see Note 4 .
Application of SFAS 71: Based on a regulated utility accounting standard,
SFAS 71, Consumers may 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 MATTERS
New Accounting Standards
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information. Each of these standards requires expanded disclosures
effective for 1998. Also in 1997, the Emerging Issues Task Force
published Issue 97-4, Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statements No. 71 and 101, and Issue
97-13, Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation. The consensus
reached in Issue 97-4 allows a company to maintain regulatory assets and
liabilities for part of a business that is being deregulated if
deregulatory legislation or a commission rate order allows the collection
of regulated cash flows to recover costs or settle obligations. The
regulated portion of a business maintains these regulatory assets and
liabilities until they are collected or settled, they are impaired, or
until the regulated portion of the business becomes deregulated. The
consensus reached in Issue 97-13 requires a company to expense the cost of
business process reengineering activities as incurred, and requires a
company to write off previously capitalized costs as a cumulative effect
adjustment in 1997. Consumers was not affected by the requirements of
this consensus. In addition, Consumers does not expect the application of
the other statements to materially affect its financial position,
liquidity or results of operations.
Computer Modifications for Year 2000
Consumers uses software and related technologies throughout its businesses
that the year 2000 date change will affect and, if uncorrected, could
cause Consumers to, among other things, issue inaccurate bills, report
inaccurate data, or incur plant outages. In 1995, Consumers began
modification of its computer software systems by dividing programs
requiring modification between critical and noncritical programs. All
necessary program modifications are expected to be completed by the year
2000. Consumers devoted significant internal and external resources to
these modifications. It will expense anticipated spending for these
modifications as incurred, while capitalizing and amortizing the costs for
new software over the software's useful life. Consumers does not expect
that the cost of these modifications will materially affect its financial
position, liquidity or results of operations.
Derivatives and Hedges
Consumers is exposed to market risk associated with changes in interest
rates. Management uses a combination of fixed-rate and variable-rate debt
to reduce interest rate exposure. Interest rate swaps may be used to
adjust exposure when deemed appropriate, based upon market conditions.
Derivatives are principally used as hedges and not for trading purposes.
During 1997, trading activities were immaterial. In the case of hedges,
management believes that any losses incurred on derivative instruments
used as a hedge would be offset by the opposite movement of the underlying
hedged item. These strategies attempt to provide and maintain the lowest
cost of capital. The fair value of Consumers' financial derivative
instruments at December 31, 1997 was immaterial. Additionally, exposure
to market risk in the near term would not have a material impact on
Consumers consolidated financial position, results of operations or cash
flows as of December 31, 1997.
For a discussion of accounting policies related to derivative
transactions, see Note 5.
FORWARD-LOOKING INFORMATION
Forward-looking information is included throughout this report. This
report also describes material contingencies in the Notes to the
Consolidated Financial Statements and should be read accordingly.
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 FERC and the MPSC) with respect to rates, proposed electric and
natural gas industries restructuring, change in industry and rate
structure, operation of a nuclear power facility, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
operation and construction of natural gas pipeline and storage facilities,
recovery of the cost of purchased power or natural gas, decommissioning
costs, and present or prospective wholesale and retail competition, among
other important factors. The business and profitability of Consumers are
also influenced by economic and geographic factors, including political
and economic risks, changes in environmental laws and policies, weather
conditions, competition for retail and wholesale customers, pricing and
transportation of commodities, market demand for energy, inflation or
deflation, capital market conditions, and the ability to secure agreement
in pending negotiations, among other important factors. All such factors
are difficult to predict, contain uncertainties that may materially affect
actual results, and may be beyond the control of Consumers.
113
Consolidated Statements of Income Consumers Energy Company
In Millions
Years Ended December 31 1997 1996 1995
Operating Revenue Electric $2,515 $2,446 $2,277
Gas 1,204 1,282 1,195
Other 50 42 39
------ ------ ------
3,769 3,770 3,511
------ ------ ------
Operating Expenses Operation
Fuel for electric generation 297 296 283
Purchased power - related parties 599 589 491
Purchased and interchange power 243 202 196
Cost of gas sold 694 750 674
Other 542 586 574
------ ------ ------
2,375 2,423 2,218
Maintenance 170 174 183
Depreciation, depletion and amortization 391 371 357
General taxes 200 191 189
------ ------ ------
3,136 3,159 2,947
------ ------ ------
Pretax Operating Electric 432 411 372
Income Gas 153 158 156
Other 48 42 36
------ ------ ------
633 611 564
------ ------ ------
Other Income Dividends and interest from affiliates (Note 2) 24 17 17
(Deductions) Accretion income (Note 2) 8 10 11
Accretion expense (Note 2) (17) (22) (31)
Other, net (2) (4) 5
------ ------ ------
13 1 2
------ ------ ------
Interest Charges Interest on long-term debt 138 139 141
Other interest 36 29 39
Capitalized interest (1) (2) (2)
------ ------ ------
173 166 178
------ ------ ------
Net Income Before Income Taxes 473 446 388
Income Taxes 152 150 133
------ ------ ------
Net Income 321 296 255
Preferred Stock Dividends 25 28 28
Preferred Securities Distributions (Note 5) 12 8 -
------ ------ ------
Net Income Available to Common Stockholder $ 284 $ 260 $ 227
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
114
Consolidated Statements of Cash Flows Consumers Energy Company
In Millions
Years Ended December 31 1997 1996 1995
Cash Flows From Net income $ 321 $ 296 $ 255
Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities
Depreciation, depletion and amortization
(includes nuclear decommissioning of
$50, $49 and $51, respectively) 391 371 357
Capital lease and other amortization 44 40 38
Deferred income taxes and investment tax credit 13 48 57
Accretion expense (Note 2) 17 22 31
Accretion income - abandoned Midland project (Note 2) (8) (10) (11)
Undistributed earnings of related parties (47) (40) (36)
Power purchases (Note 3) (62) (63) (137)
Other 5 5 4
Changes in other assets and liabilities (Note 8) 84 3 84
----- ----- -----
Net cash provided by operating activities 758 672 642
----- ----- -----
Cash Flows From Capital expenditures (excludes capital lease additions of
Investing Activities $11, $31and $31 respectively and DSM) (Note 8) (360) (410) (414)
Investments in nuclear decommissioning trust funds (50) (49) (51)
Cost to retire property, net (28) (31) (41)
Investment from preferred stock - Affiliate 50 - -
Proceeds from sale of property 1 - 1
Deferred demand-side management costs - (6) (9)
Other (5) 2 (5)
----- ----- -----
Net cash used in investing activities (392) (494) (519)
----- ----- -----
Cash Flows From Payment of common stock dividends (218) (200) (70)
Financing Activities Retirement of Preferred Stock (120) - -
Retirement of bonds and other long-term debt (50) (37) (1)
Contribution from (return of equity to) stockholder (50) 13 -
Payment of capital lease obligations (44) (40) (37)
Payment of preferred stock dividends (29) (28) (28)
Preferred securities distributions (12) (8) -
Increase (decrease) in notes payable, net 44 (8) 2
Proceeds from preferred securities 116 97 -
Proceeds from bank loans - 23 -
----- ----- -----
Net cash used in financing activities (363) (188) (134)
----- ----- -----
Net Increase (Decrease) in Cash and Temporary Cash Investment 3 (10) (11)
Cash and temporary cash investments
Beginning of year 4 14 25
----- ----- -----
End of year $ 7 $ 4 $ 14
===== ===== =====
<FN>
The accompanying notes are an integral part of these statements.
115
Consolidated Balance Sheets Consumers Energy Company
ASSETS In Millions
December 31 1997 1996
Plant Electric $6,491 $6,333
(At original cost) Gas 2,322 2,203
Other 24 26
------ ------
8,837 8,562
Less accumulated depreciation, depletion
and amortization (Note 2) 4,603 4,269
------ ------
4,234 4,293
Construction work-in-progress 145 158
------ ------
4,379 4,451
------ ------
Investments Stock of affiliates (Note 2) 278 298
First Midland Limited Partnership (Notes 3 and 17) 242 232
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 17) 171 134
Other 7 8
------ ------
698 672
------ ------
Current Assets Cash and temporary cash investments at cost, which
approximates market 7 4
Accounts receivable and accrued revenue, less allowances
of $6 in 1997 and $10 in 1996 (Note 5) 82 148
Accounts receivable - related parties (Note 2) 62 63
Inventories at average cost
Gas in underground storage 197 186
Materials and supplies 63 68
Generating plant fuel stock 35 30
Postretirement benefits (Note 12) 25 25
Deferred income taxes (Note 9) 22 27
Prepayments and other 161 183
------ ------
654 734
------ ------
Non-current Assets Nuclear decommissioning trust funds (Note 2) 486 386
Postretirement benefits (Note 12) 404 435
Abandoned Midland project 93 113
Other 235 234
------ ------
1,218 1,168
------ ------
Total Assets $6,949 $7,025
====== ======
/TABLE
116
Consumers Energy Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1997 1996
Capitalization Common stockholder's equity
(Note 5) Common stock $ 841 $ 841
Paid-in capital 452 504
Revaluation capital 58 37
Retained earnings since December 31, 1992 363 297
------ ------
1,714 1,679
Preferred stock 238 356
Company-obligated mandatorily redeemable
Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100
Consumers Energy Company Financing II (a) 120 -
Long-term debt 1,369 1,900
Non-current portion of capital leases 74 100
------ ------
3,615 4,135
------ ------
Current Liabilities Current portion of long-term debt and capital leases 579 98
Notes payable 377 333
Accrued taxes 244 211
Accounts payable 171 212
Accounts payable - related parties 79 68
Power purchases (Note 3) 47 47
Accrued interest 32 33
Accrued refunds 12 8
Other 136 176
------ ------
1,677 1,186
------ ------
Non-current Deferred income taxes (Note 9) 688 646
Liabilities Postretirement benefits (Note 12) 489 500
Deferred investment tax credit 149 159
Power purchases (Note 3) 133 178
Regulatory liabilities for income taxes,
net (Notes 9 and 16) 54 66
Other 144 155
------ ------
1,657 1,704
------ ------
Commitments and Contingencies (Notes 2, 3, 4, 6, 7 and 13)
Total Stockholders' Investment and Liabilities $6,949 $7,025
====== ======
<FN>
(a) The primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated
deferrable interest notes due 2015 from Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due 2027 from Consumers. For further
discussion, see Note 5.
The accompanying notes are an integral part of these statements.
117
Consolidated Statements of Long-Term Debt Consumers Energy Company
In Millions
December 31 1997 1996
First Mortgage Bonds Series (%) Due
6 1997 $ - $ 50
8-3/4 1998 248 248
6-5/8 1998 45 45
6-7/8 1998 43 43
8-7/8 1999 200 200
7-1/2 2001 57 57
7-1/2 2002 62 62
6-3/8 2003 300 300
7-3/8 2023 300 300
------ ------
1,255 1,305
Long-Term Bank Debt 400 400
Pollution Control Revenue Bonds 131 131
Nuclear Fuel Disposal (a) 111 106
Other 25 26
------ ------
Principal Amount Outstanding 1,922 1,968
Current Amounts (545) (59)
Net Unamortized Discount (8) (9)
------ ------
Total Long-Term Debt $1,369 $1,900
====== ======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Mortgage Improvement Long-Term
Bonds Fund Bank Debt Other Total
1998 $336 $7 $200 $ 2 $545
1999 200 3 200 5 408
2000 - 1 - 105 106
2001 57 1 - 4 62
2002 62 1 - 5 68
<FN>
(a) Due date uncertain (see Note 2)
The accompanying notes are an integral part of these statements.
118
Consolidated Statements of Preferred Stock Consumers Energy Company
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 - 379,549 - 38
7.68 101.00 - 207,565 - 20
7.72 101.00 - 289,642 - 29
7.76 102.21 - 308,072 - 31
Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 194 194
---- ----
Total Preferred Stock $238 $356
=================================================================================================================
<FN>
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
119
Consolidated Statements of Common Stockholder's Equity Consumers Energy Company
In Millions
Years Ended December 31 1997 1996 1995
Common Stock At beginning and end of period (a) $ 841 $ 841 $ 841
------- ------- -------
Other Paid-in Capital At beginning of period 504 491 491
Preferred stock reacquired (2) - -
Stockholder's contribution - 13 -
Return of stockholder's contribution (50) - -
------- ------- -------
At end of period 452 504 491
------- ------- -------
Revaluation Capital At beginning of period 37 29 15
Change in unrealized investment - gain 21 8 14
------- ------- -------
At end of period 58 37 29
------- ------- -------
Retained Earnings At beginning of period 297 237 80
Net income 321 296 255
Cash dividends declared
Common Stock (218) (200) (70)
Preferred Stock (25) (28) (28)
Preferred securities distributions (12) (8) -
------- ------- -------
At end of period 363 297 237
------- ------- -------
Total Common Stockholder's Equity $ 1,714 $ 1,679 $ 1,598
======= ======= =======
<FN>
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
The accompanying notes are an integral part of these statements.
120
Consumers Energy Company
Notes to Consolidated Financial Statements
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,
a 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: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and
include the use of management's estimates. Consumers uses the equity
method of accounting for investments in its 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.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, Consumers adjusts the
unrecovered asset to its present value. It reflects this adjustment as
accretion income. Conversely, Consumers recorded a loss in 1992 for the
present value of its estimated future underrecoveries of power costs
resulting from purchases from the MCV Partnership (see Note 3). It now
recognizes accretion expense annually to reflect the time value of money
on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. It records cushion gas, which is gas
stored to maintain reservoir pressure for recovery of working gas, in the
appropriate gas utility plant account. Consumers stores gas inventory in
its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers charges property
repairs and minor property replacements to maintenance expense.
Depreciable property retired or sold, plus cost of removal (net of salvage
credits), is charged to accumulated depreciation. Consumers bases
depreciation provisions for utility plant on straight-line and
units-of-production rates approved by the MPSC. The composite
depreciation rate for electric utility property was 3.6 percent for 1997
and 3.5 percent for 1996 and 1995. The composite rate for gas utility
plant was 4.1 percent for 1997, 4.2 percent for 1996 and 4.3 percent for
1995. The composite rate for other plant and property was 8.2 percent for
1997, 5.5 percent for 1996 and 4.9 percent for 1995.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under current federal
law, as confirmed by court decision, the DOE must begin accepting
deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if
a permanent repository is not then operational. Utilities and their
customers have been prepaying the costs of DOE transport and disposal
through fees based on electric generation by their nuclear plants. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear
fuel expense, recovers them through electric rates and remits to the DOE
quarterly. Consumers elected to defer payment for disposal of spent
nuclear fuel burned before April 7, 1983 until it delivers the first of
its spent fuel to the DOE. At December 31, 1997, Consumers had a recorded
liability to the DOE of $111 million, including interest, which is payable
upon the first delivery of spent nuclear fuel to the DOE. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest. In January 1997, in response to the DOE's
declaration in December 1996 that it would not begin to accept spent
nuclear fuel deliveries in 1998, Consumers and other utilities filed suit
in federal court. The utilities sought a declaration relieving them of
their obligation to remit their quarterly fee payments to the DOE and
authorizing them to escrow any related fees collected from their
customers, unless and until the DOE begins to accept spent nuclear fuel.
The utilities also sought an order requiring the DOE to develop a program
to begin acceptance of spent nuclear fuel by January 31, 1998. A decision
was issued by the court in late 1997 affirming the DOE's duty to take
delivery of spent fuel, but was not specific as to the relief available
for failure of the DOE to comply. Consumers is considering its options.
Also in 1997, federal legislation was reintroduced to clarify the timing
of the DOE's obligation to accept spent nuclear fuel and to direct the DOE
to establish an integrated spent fuel management system that includes
designing and constructing an interim storage facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $50 million in 1997
from its electric customers for the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC that estimated decommissioning costs for Big Rock and
Palisades to be $330 million and $573 million (in 1997 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. The April 1996 MPSC Order also requires
Consumers to file updated site-specific decommissioning cost estimates for
Big Rock and Palisades by March 31, 1998. The Big Rock estimate will
reflect the early shut-down and the switch from the safe storage option to
immediate dismantlement because of the reopening of the South Carolina
Barnwell radioactive waste disposal facility. After retirement of
Palisades, Consumers plans to maintain the facility in protective storage
if radioactive waste disposal facilities are not available. As a result,
Consumers will incur most of the Palisades decommissioning costs after the
plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have
accumulated $686 million. Consumers estimates that at the time Palisades
is fully decommissioned in the year 2046, the trust funds will have
provided $2.1 billion, including trust earnings, over this decommissioning
period. Consumers will determine if the current decommissioning surcharge
will be sufficient to provide for decommissioning of its nuclear plants
during the first quarter of 1998, after the revised decommissioning cost
estimates are computed for Palisades and Big Rock. At December 31, 1997,
Consumers had an investment in nuclear decommissioning trust funds of $486
million, spent $23 million for the decommissioning of Big Rock and
withdrew $17 million from the Big Rock nuclear decommissioning trust fund.
While decommissioning Big Rock, Consumers found that some areas of the
plant have coatings that contain both metals and PCBs. Consumers does not
believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and disposal is
currently unknown. These costs would constitute part of the cost to
decommission the plant, and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing
options.
Reclassifications: Consumers has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect
consolidated net income for the years presented.
Related-Party Transactions: Consumers investment in Enterprises'
preferred stock was $200 million in eight shares at December 31, 1997 and
$250 million in ten shares at December 31, 1996. Beginning in 1997,
Enterprises commenced a five-year redemption program of $50 million per
year. In addition, Consumers has an investment in three million shares of
CMS Energy Common Stock with a fair value totaling $129 million at
December 31, 1997 (see Note 10). From these two investments, Consumers
received dividends on affiliates' common and preferred stock totaling $17
million, each year, in 1997, 1996 and 1995. In addition, Consumers
recovered $7 million of interest income in 1997 related to the sale of
land to an affiliate.
Consumers purchases a portion of its gas from CMS NOMECO. The purchases
for the years ended 1997, 1996 and 1995 were $25 million, $24 million and
$19 million, respectively. In 1997, 1996 and 1995, Consumers purchased
$51 million, $50 million and $53 million, respectively, of electric
generating capacity and energy from affiliates of Enterprises. Consumers
and its subsidiaries sold, stored and transported natural gas and provided
other services to the MCV Partnership totaling $13 million, each year, for
1997, 1996 and 1995. For additional discussion of related-party
transactions with the MCV Partnership and the FMLP, see Notes 3 and 17.
Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard (SFAS 71). As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see Electric Business Outlook and Gas
Business Outlook-Application of SFAS 71 in the MD&A, Note 4 and Note 16.
Other: For significant accounting policies regarding cash equivalents,
see Note 8; for income taxes, see Note 9; for executive incentive
compensation, see Note 11; and for pensions and other postretirement
benefits, see Note 12.
3: 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 Dow. Consumers, through
two wholly owned 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 FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
(unaudited):
In Millions
Years Ended December 31 1997 1996 1995
Pretax operating income $46 $40 $35
Income taxes and other 14 11 10
____ ____ ____
Net income $32 $29 $25
==== ==== ====
Power Purchases from the MCV Partnership: After September 2007, pursuant
to the terms of the PPA and related undertakings, Consumers will only be
required to pay the MCV Partnership the capacity charge and energy charge
amounts authorized for recovery from electric customers by the MPSC.
Prior to then, pursuant to MPSC orders issued to date, Consumers recovered
in 1997 approximately 90 percent of the total capacity charge and energy
charge amounts being billed by the MCV Partnership and paid to the MCV
Partnership by Consumers. Currently, Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. 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 based
primarily on Consumers' average cost of coal consumed. Consumers is
recovering 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. Beginning January 1, 1996, the MPSC also permitted
Consumers to recover an average capacity charge of 2.86 cents per kWh for
the remaining 325 MW of MCV Facility capacity. The approved average
capacity charge increased to 3.62 cents per kWh for 109 MW by January 1,
1997. The recoverable portion of the capacity charge for the last 216 MW
of the 325 MW increases each year until it reaches 3.62 cents per kWh in
2004. It remains at this ceiling rate through the end of the PPA term.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA. At December 31, 1997
and 1996, the after-tax present value of the PPA liability totaled $117
million and $147 million, respectively. The reduction in the liability
since December 31, 1996 reflects after-tax cash underrecoveries of $41
million, partially offset by after-tax accretion expense of $11 million.
The undiscounted after-tax amount associated with the liability totaled
$188 million at December 31, 1997. The after-tax cash underrecoveries are
currently based on the assumption that the MCV Facility will be available
to generate electricity 91.5 percent of the time over its expected life.
For 1997 the MCV Facility was available 99 percent of the time, resulting
in $13 million over anticipated after-tax cash underrecoveries. Consumers
believes it will continue to experience after-tax cash underrecoveries
associated with the PPA in amounts as those shown below.
In Millions
1998 1999 2000 2001 2002
Estimated cash underrecoveries, $23 $22 $21 $20 $19
Consumers bases the above estimated underrecoveries, in part, on an
estimate of the future availability of the MCV Facility. If the MCV
Facility operates at levels above management's estimate over the remainder
of the PPA, Consumers will need to recognize losses for future
underrecoveries larger than amounts previously recorded. Therefore,
Consumers would experience larger amounts of cash underrecoveries than
originally anticipated. Management will continue to evaluate the adequacy
of the accrued liability considering actual MCV Facility operations.
In early 1998, the MCV Partnership filed a claim of appeal from the
January 1998 MPSC order in the electric utility industry restructuring.
On the same day, the MCV Partnership filed suit in the U.S. District Court
seeking a declaration that the MPSC's failure to provide Consumers and the
MCV Partnership a certain source of recovery of capacity payments after
2007 deprived the MCV Partnership of its rights under the Public Utilities
Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of a 1995 decision in the 1993 PSCR reconciliation case, 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 believed this was contrary to the terms of an
earlier 1993 settlement order and appealed. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court which was
denied in January 1998.
4: Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order that
authorized Consumers to recover costs associated with the purchase of the
additional 325 MW of MCV Facility capacity (see Note 3) and to accelerate
recovery of its nuclear plant investment by increasing prospective annual
nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a
maximum demand of at least 2 MW are eligible to purchase generation
services directly from any eligible third-party power supplier and
Consumers would transmit the power for a fee. The program is limited to
650 MW of load, of which existing special contracts represent 410 MW.
New special contracts or direct-access load may fill 140 MW of the 650 MW
block. The remaining 100 MW will be available solely to direct-access
customers for at least 18 months. In April 1997, a lottery was held to
select the customers to purchase 100 MW by direct access. Direct access
for a portion of this 100 MW began during the fourth quarter of 1997.
In May 1997, the MPSC authorized Consumers to collect $17 million from
electric customers through a one-time surcharge pertaining to the 1994
PSCR reconciliation. In September 1997, the MPSC further authorized
Consumers to collect $13 million from electric customers through a one-
time surcharge pertaining to the 1995 PSCR reconciliation.
In January 1998, the Court of Appeals ruled that the MPSC has statutory
authority to authorize an experimental electric retail wheeling program.
By its terms, no retail wheeling has yet occurred pursuant to that
program. Consumers filed with the Michigan Supreme Court seeking leave to
appeal that ruling.
For information on other orders, see the Electric Restructuring section
below.
Electric Restructuring: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, in June 1997
the MPSC issued an order proposing that beginning January 1, 1998
Consumers would have to transmit and distribute energy on behalf of
competing power suppliers to serve retail customers. The order states
that by January 1, 2002, all customers would be free to choose (that is,
have direct access to) their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover
prudently incurred Transition Costs through a charge to all direct-access
customers until the end of the transition period in 2007. Further
proceedings, as ordered by the MPSC, took place to address other features
of the direct-access programs being considered, including proposals to
"true up" Transition Cost charges for changes in sales and market prices
of power purchase capacity to the extent they are different from estimates
used for calculating Transition Costs. The June order is subject to a
claim of appeal filed with the Court of Appeals which questions whether
the MPSC has the statutory authority to mandate restructuring on an
involuntary basis. In October 1997, the MPSC issued a series of
additional orders relating to its electric industry restructuring
proceedings. The orders primarily addressed issues involving the design
of retail direct-access tariffs, the true-up mechanism in connection with
the recovery of Transition Costs, suspension of the power supply cost
recovery clause and freezing of power supply costs, and performance-based
rate-making.
In January 1998, the MPSC clarified the October 1997 orders on a basis
generally consistent with the June 1997 order. The January 1998 order:
1) defers the commencement of the phase-in of direct access to begin in
March 1998; 2) attempts to clarify the true-up mechanism to be used in
connection with the recovery of Transition Costs; 3) confirms
implementation of a suspension of the power supply cost recovery clause;
and 4) confirms the MPSC's belief that Securitization may be a beneficial
mechanism for recovery of Transition Costs while recognizing that
Securitization requires state legislation to occur. Consumers expects
Michigan legislative consideration of the entire subject of electric
industry restructuring in 1998. To be acceptable to Consumers, the
legislation would have to provide for full recovery of Transition Costs.
Consumers expects the legislature to review all of the policy choices made
by the MPSC during the restructuring proceedings to assure that they are
in accord with those that the legislature believes should be paramount.
The January 1998 order further estimated a Transition Cost for Consumers
at $1.755 billion which is generally consistent with the amount proposed
by Consumers. Consumers will recover this cost through a surcharge to
direct-access customers through 2007. Consumers believes that this
surcharge will apply to all customers beginning in 2002. The surcharge is
subject to adjustment through a true-up mechanism to assure that
Transition Costs actually incurred are collected. A separate charge to
direct-access customers after MPSC review and verification would also
recover prudent costs of implementing a direct-access program estimated at
an additional $200 million. Nuclear decommissioning costs will also
continue to be collected through a separate surcharge to all customers.
Subsequent to the January order, the MPSC issued an order addressing
Consumers', among others, motions for clarification of the January order.
This order results in: 1) a suspension of the PSCR in a manner proposed
by Consumers; 2) a termination of the 1998 PSCR plan case; and 3) the
establishing of a permanent PSCR/base rate freeze charge in the 1997 PSCR
reconciliation proceeding. For further information see Electric Business
Outlook - Application of SFAS 71 in the MD&A.
Gas Restructuring: In December 1997, the MPSC approved Consumers'
application to implement a statewide experimental gas transportation pilot
program. Consumers' expanded experimental program will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier. The
program is voluntary for natural gas customers. Participating customers
will be selected on a first-come, first-served basis, up to a limit of
100,000 customers on April 1, 1998. Up to 100,000 more customers will be
added on April 1 of each of the next two years. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. The order allowing the implementation of this program:
1) suspends Consumers' gas cost recovery clause, effective April 1, 1998
for a three-year period, establishing a gas commodity cost at a fixed rate
of $2.84 per mcf; 2) establishes an earnings sharing mechanism that will
provide for refunds to customers if Consumers' earnings during the three
year term of the program exceed certain pre-determined levels; and 3)
establishes a gas transportation code of conduct that addresses concerns
about the relationship between Consumers and marketers, including its
affiliated marketers. This experimental program will allow competing gas
suppliers, including marketers and brokers, to market natural gas to a
large number of retail customers in direct competition with Consumers. In
1998, the Attorney General, ABATE and other parties filed claims of appeal
regarding the program with the Court of Appeals. To minimize the risk of
exposure to higher gas costs, Consumers currently has contracts in place
at known prices covering 50 percent of its 1998 requirements, 25 percent
of its 1999 requirements and 15 percent of its 2000 requirements.
Additional forward coverage is currently under review and will be firmed
up during the next few months. For further information see Gas Business
Outlook - Application of SFAS 71 in the MD&A.
Gas Proceedings: In 1995, the MPSC issued an order regarding a $44
million (excluding interest) gas supply contract pricing dispute between
Consumers and certain gas producers. The order stated that Consumers was
not obligated to seek prior approval of market-based pricing changes that
Consumers implemented under the contracts in question. The Court of
Appeals upheld the MPSC order. The producers sought leave to appeal with
the Michigan Supreme Court. Their request is still pending. Consumers
believes the MPSC order correctly concludes that the producers' theories
are without merit and will 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
materially affect Consumers' financial position, liquidity or results of
operations.
5: Short-Term Financings and Capitalization
Authorization: At December 31, 1997, Consumers had FERC authorization to:
1) issue or guarantee up to $900 million of short-term securities through
1998; 2) issue, through November 1998, $376 million of long-term
securities with maturities up to 30 years, for refinancing or refunding
purposes; and 3) guarantee, through 1999, up to $25 million in loans made
by others, to residents of Michigan for the purpose of making energy-
related home improvements. In January 1998, Consumers requested
authorization to issue, through November 1998, an additional $500 million
of long-term securities for refinancing or refunding purposes.
Short-Term Financings: Consumers has an unsecured $425 million credit
facility and unsecured lines of credit aggregating $120 million. These
facilities are available to finance seasonal working capital requirements
and to pay for capital expenditures between long-term financings. At
December 31, 1997, a total of $377 million was outstanding at a weighted
average interest rate of 6.5 percent, compared with $333 million
outstanding at December 31, 1996, at a weighted average interest rate of
6.3 percent.
Consumers also has in place a $500 million trade receivables sale program.
At December 31, 1997 and 1996, receivables sold under the program totaled
$335 million and $318 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to
reflect receivables sold.
Derivatives: Consumers has entered interest rate swap agreements
(derivatives) to exchange variable rate interest payment obligations for
fixed rate obligations. These swaps attempt to reduce the impact of
interest rate fluctuations. To qualify for hedge accounting, derivatives
must meet the following criteria initially: 1) the item to be hedged
exposes the enterprise to interest rate risk; and 2) the derivative
reduces that exposure and is designated as a hedge. The hedged amounts
are used to measure interest to be paid or received and do not represent
the exposure to principal loss. The difference between the amounts paid
and received under the swaps is accrued and recorded as an adjustment to
interest expense over the life of the hedged agreement.
Derivative instruments contain credit risk if the counterparties,
including financial institutions, fail to perform under the agreements.
Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. The risk of nonperformance by the counterparties is
considered remote.
Capital Stock: In 1996, 4 million shares of 8.36 percent Trust Preferred
Securities were issued and sold through Consumers Power Company Financing
I, a wholly owned business trust consolidated with Consumers. Net
proceeds from the sale totaled $97 million. In September 1997, 4.8
million shares of 8.2 percent Trust Preferred Securities were issued and
sold through Consumers Energy Company Financing II, a wholly owned
business trust consolidated with Consumers. Net proceeds from the sale
totaled $116 million. Consumers formed both trusts for the sole purpose
of issuing the tax deductible Trust Preferred Securities. Consumers'
obligations with respect to the Trust Preferred Securities under the
notes, under the indenture through which Consumers issued the notes, under
Consumers' guarantee of the Trust Preferred Securities, and under the
declaration by the trusts, taken together, constitute a full and
unconditional guarantee by Consumers of the trusts' obligations under the
Trust Preferred Securities. For additional information, see footnote (a)
on the Consolidated Balance Sheets.
In September 1997, the proceeds from Consumers' 8.2 percent Trust
Preferred Securities were used to redeemed all outstanding shares of its
$7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles of Incorporation and
the need for regulatory approvals to meet appropriate federal law.
In early 1998, Consumers called for the March 1998 redemption of $57
million aggregate principal amount of its 7.5 percent First Mortgage Bonds
due in 2001 and $62 million aggregate principal amount of its 7.5 percent
First Mortgage Bonds due in 2002.
In early 1998, Consumers issued $250 million of senior notes due February
1, 2008, at an interest rate of 6.375 percent. The senior notes are
secured by a series of Consumers' First Mortgage Bonds, issued
contemporaneously in a similar amount. Proceeds from the sale were added
to the general funds of Consumers and applied to the payment, at maturity,
of $248 million aggregate principal amount of Consumers' 8.75 percent
First Mortgage Bonds due February 15, 1998.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan. At December 31, 1997 and 1996 the loan carried a
weighted average interest rate of 6.4 percent and 6 percent, respectively.
In 1996, an existing interest rate swap ended and Consumers entered into a
new $125 million interest rate swap agreement, again exchanging variable-
rate interest for fixed-rate interest to hedge a portion of its long-term
debt. This swap agreement terminated in November 1997. In December 1997,
Consumers entered into interest rate swaps of $400 million. After taking
into account the effect of the swaps, the weighted average interest rate
on the long-term loan for the years ended December 31, 1997 and 1996 was
6.2 percent and 6.1 percent, respectively.
In January 1998, two agreements to guarantee interest rates for the
issuance of future long-term debt were executed. The first anticipatory
debt agreement is for $250 million at 5.5 percent which expires
February 10, 1998, and the second agreement is for $200 million at 5.8
percent with an expiration of March 16, 1998.
In 1996, Michigan Gas Storage entered into a $23 million secured, variable
rate, seven-year term loan. At December 31, 1997 and 1996 the loan had a
weighted average interest rate of 6.3 percent and 6 percent, respectively.
In October 1997 Michigan Gas Storage entered into a $15 million interest
rate swap agreement at 6.2 percent which terminates on September 30, 2003.
After taking into account the effect of the swap, the weighted average
interest rate on the long-term loan for the year ended December 31, 1997
was 6.4 percent.
Other: Consumers has a total of $131 million of long-term pollution
control revenue bonds outstanding, secured by irrevocable letters of
credit or first mortgage bonds. These bonds had a weighted average
interest rate of 5.1 percent at December 31, 1997.
Under the provisions of its Articles of Incorporation at December 31,
1997, Consumers had $280 million of unrestricted retained earnings
available to pay common dividends. In January 1998, Consumers declared a
$80 million common dividend payable in February 1998.
In October 1997, Consumers returned $50 million of paid-in capital to
CMS Energy.
6: Commitments and Contingencies
Electric Environmental Matters: The Clean Air Act limits emissions of
sulfur dioxide and nitrogen oxides and requires emissions monitoring.
Consumers' coal-fueled electric generating units burn low-sulfur coal and
are currently operating at or near the sulfur dioxide emission limits that
will be effective in the year 2000. During the past few years, in order
to comply with the Act, Consumers incurred capital expenditures totaling
$46 million to install equipment at certain generating units. Consumers
estimates capital expenditures for in-process and proposed modifications
at other coal-fueled units to be an additional $30 million by the year
2000. Management believes that these expenditures will not materially
affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and
meets current ozone and particulate emission limits. The Act requires
the EPA to review, periodically, the effectiveness of the national air
quality standards in preventing adverse health affects. The EPA recently
revised these standards. The revisions may further limit small particulate
and ozone related emissions. Consumers supports the bipartisan effort in
the U.S. Congress to delay implementation of the revised standards until
the relationship between the new standards and health improvements is
established scientifically.
In October 1997, pursuant to recommendations from the Ozone Transport
Assessment Group and the requests of several Northeastern states, the EPA
proposed that the State of Michigan impose additional nitrogen oxide
limits on fossil-fueled emitters, such as Consumers' generating units.
The limits are an effort to reduce statewide nitrogen oxide emissions by
32 percent, as early as 2002. The State of Michigan will have one year to
review and challenge the proposed recommendations, and one year after that
to implement final requirements. It is unlikely that the State of
Michigan will establish Consumers' nitrogen oxide emissions reduction
target until mid-to-late 1999. Until this state-mandated target is known,
the estimated cost of compliance is subject to significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide related
emissions for Consumers' fossil-fueled generating units is approximately
$175 million, plus an additional amount totaling $10 million per year for
20 years for operation and maintenance costs. Consumers may need an
equivalent amount to comply with the new small particulate standards. The
State of Michigan objected to the extent of the proposed EPA emission
reductions. If the State of Michigan's position were to be adopted by the
EPA, costs could be less than the current estimated amounts.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites. Nevertheless, it believes that these
costs are properly recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Superfund liability is
joint and several; along with Consumers, many other creditworthy,
potentially responsible parties with substantial assets cooperate with
respect to the individual sites. Based upon past negotiations, Consumers
estimates that its share of the total liability for the known Superfund
sites will be between $3 million and $9 million. At December 31, 1997,
Consumers has accrued $3 million for its estimated Superfund liability.
Gas Environmental Matters: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some 23 sites that formerly housed manufactured gas plant
facilities, even those in which it has a partial or no current ownership
interest. In 1998 Consumers plans to study indoor air issues at
residences on some sites and ground water impacts or surface soil impacts
at other sites. On sites where the company has received site-wide study
plan approvals, it will continue to implement these plans. It will also
work toward closure of environmental issues at sites as studies are
completed. 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 1998 costs. At December 31,
1997, 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 affect the
estimate of remedial action costs for the sites. According to an MPSC
rate order issued in 1996, Consumers will defer and amortize, over a
period of ten years, environmental clean-up costs above the amount
currently being recovered in rates. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate
case. 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 that it may incur for
these sites.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $435 million for 1998, $380 million for 1999,
and $370 million for 2000. For further information, see the Capital
Expenditures Outlook section in the MD&A.
Commitments for Coal and Gas Supplies: Consumers entered into coal supply
contracts with various suppliers for its coal-fired generating stations.
These contracts have expiration dates that range from 1998 to 2004.
Consumers contracts for 50 - 75 percent of its annual coal requirements,
totaling $250 million, in 1997 (56 percent was under long-term contracts).
Consumers supplements its long-term contracts with spot-market purchases
to fulfill its coal needs.
Consumers entered into gas supply contracts and transportation contracts
with various suppliers for its natural gas business. These contracts have
expiration dates that range from 1998 to 2003. Consumers' 1997 gas
requirements totaled 250 bcf at a cost of $694 million, 80 percent of
which was under long-term contracts for one year or more. As of the end
of 1997, Consumers had 50 percent of its 1998 gas requirements under such
long-term contracts, and will supplement them with additional long-term
contracts and spot-market purchases.
Other: Various parties have sued Consumers relating to the effect of
so-called stray voltage on certain livestock. Claimants contend that
stray voltage results when low-level 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. It
also has an ongoing mitigation program to modify the service of all
customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to allow the
claims of over 200 named plaintiffs to be joined in a single action. The
trial court dismissed all of the plaintiffs except the first-named
plaintiff, allowing the others to re-file separate actions. Of the
original plaintiffs, only 49 re-filed separate cases. All of those 49
cases have been resolved. The Michigan Supreme Court remanded the matter,
finding that the proper remedy for misjoinder was not dismissal, but to
automatically allow each case to go forward separately. Consumers filed a
motion for reconsideration with the Michigan Supreme Court, which was
denied. Consumers intends to vigorously defend these cases, but is unable
to predict the outcome. As of December 31, 1997, Consumers had 12
individual stray voltage lawsuits, unrelated to the cases above, awaiting
trial court action, down from 22 lawsuits as reported at year end 1996.
In October 1997, two independent power producers sued Consumers and
CMS Energy in a federal court. The suit alleges antitrust violations
relating to contracts which Consumers entered into with some of its
customers and claims relating to power facilities. The plaintiffs claim
damages of $100 million (which a court can treble in antitrust cases as
provided by law). The transactions of which plaintiffs complain have been
regulated by, and are subject to, the jurisdiction of the MPSC. In
November 1997, Consumers and CMS Energy filed a motion for summary
judgement and/or for dismissal of the complaint filed by the plaintiffs.
Consumers believes the lawsuit is without merit and will vigorously defend
against it, but cannot predict the outcome of this matter.
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. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters,
environmental issues, federal and state taxes, rates, licensing and other
matters.
Consumers has accrued estimated losses for certain contingencies discussed
in this Note. Resolution of these contingencies is not expected to have a
material adverse impact on Consumers' financial position, liquidity, or
results of operations.
7: Nuclear Matters
Consumers filed updated decommissioning information with the MPSC in 1995
that 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
Consumers to file a report on the adequacy of the surcharge revenues with
the MPSC at three-year intervals beginning in 1998. Consumers filed a
revision to its Post Shutdown Activities Report (formerly decommissioning
report) with the NRC to reflect the shutdown of Big Rock.
Big Rock closed permanently on August 29, 1997 because management
determined that the plant would be uneconomical to operate in an
increasingly competitive environment. Consumers originally scheduled the
plant to close May 31, 2000, at the end of the plant's operating license.
Plant decommissioning began in September 1997 and may take five to ten
years to return the site to its original condition. The earlier than
planned closure of the plant and the reopening of the South Carolina
Barnwell facility to receive low level radioactive waste have changed the
method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated
decommissioning cost which is required to be updated in a filing with the
MPSC by March 31, 1998. For further information on nuclear matters, see
Note 2.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. Consumers plans to load five additional casks at Palisades in
1999 pending approval by the NRC. In June 1997, the NRC approved
Consumers' process for unloading spent fuel from a cask at Palisades
previously discovered to have minor weld flaws. Consumers intends to
transfer the spent fuel to a new transportable cask when one is available.
Westinghouse Corporation has been contracted to design and fabricate
transportable casks for both Palisades and Big Rock. These casks will
support the off-load of the cask with minor flaws, continued operation of
Palisades and the decommissioning of Big Rock.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. Consumers also maintains coverage for
replacement power costs during prolonged accidental outages at Palisades.
Insurance would not cover such costs during the first 17 weeks of any
outage, but would cover most of such costs during the next 58 weeks of the
outage, followed by reduced coverage to 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 $19 million in any one year to Nuclear Electric Insurance Ltd; $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 if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report to it
on the continuing ability of the Palisades reactor vessel to withstand
postulated pressurized thermal shock events during its remaining license
life, considering the embrittlement of reactor vessel materials over time
due to operation in a radioactive environment. Based on continuing
analysis of data in December 1996 Consumers received an interim Safety
Evaluation Report from the NRC indicating that the reactor vessel can be
safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management
designed to minimize embrittlement, it can operate Palisades to the end of
its license life in the year 2007 without annealing the reactor vessel.
Nevertheless, Consumers will continue to monitor the matter.
8: Supplemental Cash Flow Information
For purposes of the Consolidated Statements 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 were:
In Millions
Years Ended December 31 1997 1996 1995
Cash transactions
Interest paid (net of amounts capitalized) $166 $143 $158
Income taxes paid (net of refunds) 116 119 43
Non-cash transactions
Nuclear fuel placed under capital lease $ 4 $ 28 $ 26
Other assets placed under capital leases 7 3 5
Capital leases refinanced - - 21
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows are described below:
In Millions
Years Ended December 31 1997 1996 1995
Sale of receivables, net $ 17 $ 23 $ 20
Accounts receivable 31 12 (55)
Accrued revenue 20 (49) 1
Inventories (10) 8 54
Accounts payable (30) 17 48
Accrued refunds 4 (14) (4)
Other current assets and liabilities, net 17 (14) 28
Non-current deferred amounts, net 35 20 (8)
---- ---- ----
$ 84 $ 3 $ 84
==== ==== ====
9: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on
each company's separate taxable income. Consumers practices full deferred
tax accounting for temporary differences as authorized by the MPSC.
Consumers used ITC to reduce current income taxes payable, and defers and
amortizes ITC over the life of the related property. Any AMT paid
generally becomes a tax credit that Consumers can carry forward
indefinitely to reduce regular tax liabilities in future periods when
regular taxes paid exceed the tax calculated for AMT. The significant
components of income tax expense (benefit) consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Current federal income taxes $139 $102 $ 76
Deferred income taxes 23 58 67
Deferred ITC, net (10) (10) (10)
---- ---- ----
$152 $150 $133
==== ==== ====
Operating $160 $162 $145
Other (8) (12) (12)
---- ---- ----
$152 $150 $133
==== ==== ====
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1997 1996
Property $ (563) $ (556)
Unconsolidated investments (246) (239)
Postretirement benefits (Note 12) (156) (165)
Abandoned Midland project (33) (40)
Employee benefit obligations (includes post-
retirement benefits of $153 and $165) (Note 12) 184 195
Power purchases (Note 3) 66 82
AMT carryforward 74 93
Other 8 11
-------- --------
$ (666) $ (619)
======== ========
Gross deferred tax liabilities $ (1,372) $ (1,375)
Gross deferred tax assets 706 756
-------- --------
$ (666) $ (619)
======== ========
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1997 1996 1995
Net income $ 321 $ 296 $ 255
Income tax expense 152 150 133
Preferred securities distributions (12) (8) -
----- ----- -----
Pretax income 461 438 388
Statutory federal income tax rate x 35% x 35% x 35%
----- ----- -----
Expected income tax expense 161 153 136
Increase (decrease) in taxes from
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 8 6 6
ITC amortization (10) (10) (10)
Affiliated companies' dividends (6) (6) (6)
Other, net (6) 2 2
----- ----- -----
Actual income tax expense $ 152 $ 150 $ 133
===== ===== =====
Effective tax rate 32.9% 34.2% 34.3%
===== ===== =====
10: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments, except as shown below,
approximate fair value.
In Millions
December 31 1997 1996
Available-for-sale Amortized Fair Unrealized Amortized Fair Unrealized
securities Cost Value Gain Cost Value Gain
- ------------------ --------- ----- ---------- --------- ----- ----------
Common stock of CMS $ 43 $ 129 $ 86 $ 43 $ 99 $ 56
Energy
Nuclear decommissioning
investments (a) 405 486 81 351 386 35
===== ===== ===== ===== ===== =====
(a) Consumers classifies its unrealized gains and losses on nuclear
decommissioning investments in accumulated depreciation.
The carrying amount of long-term debt was $1.4 billion at December 31,
1997 and $1.9 billion at December 31, 1996, and the fair values were $1.4
billion and $1.9 billion, respectively. For held-to-maturity securities
and related-party financial instruments, see Note 2.
11: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, stock
options and stock appreciation rights may be granted to key employees
based on their contributions to the successful management of CMS Energy
and its subsidiaries. Awards under the plan may consist of any class of
Common Stock of CMS Energy. Certain plan awards are subject to
performance-based business criteria. The plan reserves for award not more
than three percent of CMS Energy's Common Stock outstanding on January 1
each year, less (1) the number of shares of restricted Common Stock
awarded and (2) Common Stock subject to options granted under the plan
during the immediately preceding four calendar years. Any forfeitures of
shares previously awarded increase the number of shares available for
grant. At December 31, 1997, awards of up to 749,889 shares of CMS Energy
Common Stock and 192,387 shares of Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years. The restricted shares are subject to
achievement of specified levels of total shareholder return and are
subject to forfeiture if employment terminates before vesting. If
performance objectives are exceeded, the plan provides additional awards.
Restricted shares vest fully if control of CMS Energy changes, as defined
by the plan. At December 31, 1997, 229,601 of the 310,351 shares of
restricted CMS Energy Common Stock outstanding are subject to performance
objectives. At December 31, 1997 all of the 19,791 restricted shares of
Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights are granted
with an exercise price equal to the closing market price on each grant
date. Options are exercisable upon grant and expire up to ten years and
one month from date of grant. The status of the restricted stock and
options granted to Consumers' key employees under the Performance
Incentive Stock Plan follows.
Restricted Options
Stock -------
----------
Weighted
Average
Number Number Exercise
CMS Energy Common Stock of Shares of Shares Price
--------- --------- --------
Outstanding at January 1, 1995 189,778 802,883 $ 23.90
Granted 123,615 147,200 $ 25.53
Exercised or Issued (27,533) (93,333) $ 15.64
Forfeited (16,807) -
Expired - (51,000) $ 27.56
-------- -------- -------
Outstanding at December 31, 1995 269,053 805,750 $ 24.93
Granted 84,760 138,520 $ 30.63
Exercised or Issued (50,925) (169,525) $ 21.72
Forfeited (25,522) -
Expired - (12,000) $ 32.88
-------- -------- -------
Outstanding at December 31, 1996 277,366 762,745 $ 26.55
Granted 165,942 152,352 $ 35.97
Exercised or Issued (73,375) (377,317) $ 27.21
Forfeited (59,582) -
-------- -------- -------
Outstanding at December 31, 1997 310,351 537,780 $ 28.28
======== ======== =======
Restricted
Stock Options
---------- -------
Weighted
Average
Number Number Exercise
Class G Common Stock of Shares of Shares Price
--------- --------- --------
Outstanding at January 1, 1995 - -
Granted 6,924 10,000 $ 17.88
-------- -------- -------
Outstanding at December 31, 1995 6,924 10,000 $ 17.88
Granted 9,423 11,000 $ 17.88
-------- -------- -------
Outstanding at December 31, 1996 16,347 21,000 $ 17.88
Granted 8,784 12,000 $ 20.24
Exercised or Issued (1,385) (5,000) $ 17.88
Forfeited (3,955) -
-------- -------- -------
Outstanding at December 31, 1997 19,791 28,000 $ 18.89
======== ======== =======
The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 1997:
Number Weighted Weighted
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
CMS Energy Common Stock
$17.13 - $24.75 192,800 2.62 years $20.59
$26.25 - $33.88 220,680 5.16 years $30.67
$35.94 - $38.00 124,300 9.65 years $35.98
------- ---------- ------
$17.13 - $38.00 537,780 5.29 years $28.28
======= ========== ======
The range of exercise prices for Class G Common Stock options is $17.88 to
$23.31; the weighted average remaining life is 8.8 years.
The weighted average fair value of options granted for CMS Energy Common
Stock was $6.38 in 1997, $6.94 in 1996, and $5.37 in 1995. The weighted
average fair value of options granted for Class G Common Stock was $1.87
in 1997, $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using
the Black-Scholes model, a mathematical formula used to value options
traded on securities exchanges, with the following assumptions:
Years Ended December 31 1997 1996 1995
CMS Energy Common Stock Options
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock price volatility 17.43% 24.08% 27.12%
Expected dividend rate $ .30 $ .27 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock price volatility 18.05% 16.19% 16.19%
Expected dividend rate $ .31 $ .295 $ .295
Expected option life 5 years 5 years 5 years
Consumers applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. If compensation
cost for stock options had been determined in accordance with SFAS 123,
Accounting for Stock-Based Compensation, Consumers' net income would have
decreased by less than $1 million for 1997, 1996 and 1995. The
compensation cost charged against income for restricted stock was $2
million in 1997, $1 million in 1996, and $2 million in 1995.
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers provides
certain health care and life insurance benefits for retired employees and
their eligible dependents. Substantially all employees may become
eligible for such benefits if they attain retirement status while working
for Consumers or its subsidiaries. Consumers adopted the required
accounting for these benefits effective in 1992 and recorded a liability
of $466 million for the accumulated transition obligation and a
corresponding regulatory asset for anticipated recovery in utility rates
(see Note 16). The MPSC authorized recovery of the electric utility
portion of these costs in 1994 over 18 years and the gas utility portion
in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver
of a three-year filing requirement for cost recovery with respect to its
wholesale electric business. At December 31, 1997, Consumers had recorded
a regulatory asset and liability of $7 million. By early 1997, the FERC
had authorized recovery of these costs. Consumers funds the benefits
using external Voluntary Employee Beneficiary Associations. Funding of
the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1997 are based on the assumption
that costs would increase 6.5 percent in 1998, then decrease gradually to
5.5 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1997 by $81 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1997 by $8 million.
Years Ended December 31 1997 1996 1995
Weighted average discount rate 7.50% 7.75% 7.50%
Expected long-term rate of return
on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Service cost $ 9 $ 12 $ 11
Interest cost 40 41 39
Actual return on assets (37) (14) (4)
Net amortization and deferral 25 8 1
---- ---- ----
Net postretirement benefit costs $ 37 $ 47 $ 47
==== ==== ====
The funded status of the postretirement benefit plans for the health care
benefits and life insurance benefits is reconciled with the liability
recorded at December 31 as follows:
In Millions
1997 1996
Actuarial present value of estimated benefits
Retirees $ 321 $ 327
Eligible for retirement 67 65
Active (upon retirement) 182 183
----- -----
Accumulated postretirement benefit obligation 570 575
Plan assets (primarily stocks, bonds and money
market investments) at fair value 219 134
----- -----
Accumulated postretirement benefit obligation less
than (in excess of) plan assets (351) (441)
Unrecognized prior service cost (1) 6
Unrecognized net gain from experience different
than assumed (84) (37)
----- -----
Recorded liability $(436) $(472)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $554 million and $560 million at December 31, 1997 and 1996,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established in 1988. Because the SERP is not a qualified
plan under the Internal Revenue Code, earnings of the trust are taxable
and trust assets are included in consolidated assets. At December 31,
1997 and 1996, trust assets were $24 million and $18 million,
respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan was fully funded, no contributions were made in 1997 and
1996. A contribution of $9 million was made in 1995. Amounts presented
below for the Pension Plan include amounts for employees of CMS Energy and
non-utility affiliates which were not distinguishable from the plan's
total assets.
Years Ended December 31 1997 1996 1995
Discount rate 7.50% 7.75% 7.50%
Rate of compensation increase 3.75% 4.00% 4.50%
Expected long-term rate of return
on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1997 1996 1995
Service cost $ 25 $ 25 $ 22
Interest cost 60 57 54
Actual return on plan assets (164) (63) (168)
Net amortization and deferral 93 (6) 103
----- ----- -----
Net periodic pension cost $ 14 $ 13 $ 11
===== ===== =====
The funded status of the CMS Energy Pension Plan and Consumers SERP
reconciled to the pension liability recorded at December 31 was:
In Millions
Pension Plan SERP
1997 1996 1997 1996
Actuarial present value of estimated
benefits
Vested $ 548 $ 504 $ 12 $ 13
Non-vested 79 72 - -
----- ----- ----- -----
Accumulated benefit obligation 627 576 12 13
Provision for future pay increases 165 158 6 8
----- ----- ----- -----
Projected benefit obligation 792 734 18 21
Plan assets (primarily stocks and bonds,
including $153 in 1997 and $117 in
1996 of CMS Energy Common Stock)
at fair value 882 779 - -
----- ----- ----- -----
Projected benefit obligation less than
(in excess of) plan assets 90 45 (18) (21)
Unrecognized net (gain) loss from
experience different than assumed (157) (99) 3 1
Unrecognized prior service cost 35 39 1 1
Unrecognized net transition (asset)
obligation (22) (27) - -
----- ----- ----- -----
Recorded liability $ (54) $ (42) $ (14) $ (19)
===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
Defined Contribution Plan: Consumers provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. Consumers will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
$18 million in 1997, $17 million in 1996 and $16 million in 1995.
13: Leases
Consumers leases various assets, including vehicles, rail cars, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings.
Consumers' nuclear fuel capital leasing arrangement expires in November
1999, yet provides for additional one-year extensions upon mutual
agreement by the parties. Upon termination of the lease, the lessor would
be entitled to a cash payment equal to its remaining investment, which was
$47 million as of December 31, 1997. Consumers generally is responsible
for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 1997, were:
In Millions
Capital Operating
Leases Leases
1998 $ 42 $ 4
1999 44 3
2000 13 3
2001 12 3
2002 9 2
2003 and thereafter 7 15
---- ----
Total minimum lease payments 127 $ 30
Less imputed interest 19 ====
----
Present value of net minimum lease payments 108
Less current portion 34
----
Non-current portion $ 74
====
Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
for the years ended December 31, 1997, 1996 and 1995, were $3 million, $3
million and $7 million, respectively.
Capital lease expenses for the years ended December 31, 1997, 1996 and
1995 were $43 million, $45 million and $45 million, respectively.
Included in these amounts for the years ended 1997, 1996 and 1995, are
nuclear fuel lease expenses of $25 million for each year.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The direct expenses of the joint plants are
included in Consumers' operating expenses. The following table indicates
the extent of Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1997 1996
Net investment
Ludington - 51 percent $112 $116
Campbell Unit 3 - 93.3 percent 314 329
Transmission lines - various 34 35
Accumulated depreciation
Ludington $ 88 $ 84
Campbell Unit 3 265 252
Transmission lines 14 14
15: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax
operating income by segments. These amounts include earnings from
investments accounted for by the equity method of $49 million, $42 million
and $39 million for 1997, 1996 and 1995, respectively. Other segment
information follows:
In Millions
Years Ended December 31 1997 1996 1995
Depreciation, depletion and
amortization
Electric $ 296 $ 282 $ 272
Gas 93 87 83
Other 2 2 2
------- ------- -------
$ 391 $ 371 $ 357
======= ======= =======
Identifiable assets
Electric (a) $ 4,472 $ 4,505 $ 4,522
Gas (a) 1,644 1,709 1,690
Other 833 811 742
------- ------- -------
$ 6,949 $ 7,025 $ 6,954
======= ======= =======
Capital expenditures (b)
Electric $ 255 $ 310 $ 328
Gas 116 137 126
------- ------- -------
$ 371 $ 447 $ 454
======= ======= =======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Consolidated Statements of Cash Flows). Amounts also
include an attributed portion of Consumers' capital expenditures for plant
and equipment common to both the electric and gas utility businesses.
16: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process. These costs are being recovered through rates over
periods of up to 15 years.
An accounting standard, effective 1996, requires impairment losses on
long-lived assets to be recognized when an asset's book value exceeds its
expected future cash flows (undiscounted). The standard also imposes
stricter criteria for retention of regulatory-created assets by requiring
that such assets be probable of future recovery at each balance sheet
date. There was no impact on financial position or results of operations
upon adoption because management believes these assets will be recovered.
For further discussion, see Outlook - Application of SFAS 71 in the MD&A.
In Millions
December 31 1997 1996
Postretirement benefits (Note 12) $ 429 $ 460
Income taxes (Note 9) 172 158
Abandoned Midland project 93 113
Manufactured gas plant sites (Note 6) 47 47
DSM - deferred costs 46 60
Uranium enrichment facility 22 23
Ludington Fish Settlement 12 14
Other 16 43
----- -----
Total regulatory assets $ 837 $ 918
===== =====
Income taxes (Note 9) $(226) $(224)
DSM - deferred revenue (24) (25)
----- -----
Total regulatory liabilities $(250) $(249)
===== =====
17: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1997 obligation to purchase electric capacity from the MCV Partnership was
15 percent of Consumers' owned and contracted capacity. Summarized
financial information of the MCV Partnership follows:
Statements of Income (unaudited)
In Millions
Years Ended December 31 1997 1996 1995
Operating revenue (a) $ 652 $ 645 $ 618
Operating expenses 435 417 386
----- ----- -----
Operating income 217 228 232
Other expense, net 154 162 171
----- ----- -----
Net income before cumulative
effect of accounting change 63 66 61
Cumulative effect of change in
method of accounting for
property tax 15 - -
----- ----- -----
Net income $ 78 $ 66 $ 61
===== ===== =====
Balance Sheets (unaudited)
In Millions
December 31 1997 1996
Assets
Current assets (b) $ 362 $ 316
Property, plant and equipment, net 1,820 1,889
Other assets 169 159
------ ------
$2,351 $2,364
====== ======
Liabilities and Partners' Equity
Current liabilities $ 285 $ 235
Long-term debt and other
non-current liabilities (c) 1,789 1,930
Partners' equity (d) 277 199
------ ------
$2,351 $2,364
====== ======
(a) Revenue from Consumers totaled $609 million, $598 million and $571
million for 1997, 1996, and 1995, respectively.
(b) Receivables from Consumers totaled $54 million and $52 million, at
December 31, 1997 and 1996, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1997 and 1996, lease obligations of $1.52 billion and $1.58
billion, respectively, were owed to the owner trust. CMS Holdings' share
of the interest and principal portion for the 1997 lease payments was $62
million and $28 million, respectively, and for the 1996 lease payments was
$64 million and $25 million, respectively. The lease payments service
$1.0 billion and $1.1 billion in non-recourse debt outstanding as of
December 31, 1997 and 1996, respectively, of the owner-trust. FMLP's debt
is secured by the MCV Partnership's lease obligations, assets, and
operating revenues. For 1997 and 1996, the owner-trust made debt payments
(including interest) of $192 million. FMLP's earnings for 1997, 1996, and
1995 were $20 million, $17 million, and $14 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership. Covenants contained in financing
agreements prohibit the MCV Partnership from paying distributions until
certain financial test requirements are met. Consumers does not
anticipate receiving a cash distribution in the near future.
144
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, common stockholder's
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Energy
Company and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1998.
145
Quarterly Financial Information Consumers Energy Company
In Millions
1997 (Unaudited) 1996 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating revenue (a) $1,127 $829 $799 $1,014 $1,143 $799 $798 $1,030
Pretax operating
income (a) $193 $137 $149 $154 $202 $130 $147 $132
Net income $97 $63 $80 $81 $102 $58 $69 $67
Preferred stock dividends $7 $7 $6 $5 $7 $7 $7 $7
Preferred securities
distributions $2 $2 $3 $5 $1 $2 $2 $3
Net income available to
common stockholder $88 $54 $71 $71 $94 $49 $60 $57
<FN>
(a) Amounts in 1996 were restated for comparative purposes.
146
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS Energy
None for CMS Energy.
Consumers
None for Consumers.
PART III
(ITEMS 10., 11., 12. and 13.)
CMS Energy
CMS Energy's definitive proxy statement, except for the organization and
compensation committee report contained therein, is incorporated by
reference herein. See also Item 1. Business for information pursuant to
Item 10.
Consumers
Consumers' definitive proxy statement, except for the organization and
compensation committee report contained therein, is incorporated by
reference herein. See also Item 1. Business for information pursuant to
Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants
for CMS Energy and Consumers are listed in Item 8. Financial
Statements and Supplementary Data and are incorporated by reference
herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants for CMS Energy and Consumers are listed after the
Exhibits in the Index to Financial Statement Schedules, and are
incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c)
below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Report dated December 23, 1997 covering matters reported
pursuant to Item 5. Other Events.
Consumers
Current Report dated December 23, 1997 covering matters reported
pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
CMS ENERGY AND CONSUMERS EXHIBITS
PREVIOUSLY FILED
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of
CMS Energy.
(3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form
10-K)
(3)(c) 1-5611 (3)(c) - Certificate of Amendment to the
Articles of Incorporation dated March
10, 1997 and Restated Articles of
Incorporation dated March 25, 1994.
(1996 Form 10-K)
(3)(d) 1-5611 (3)(d) - By-Laws of Consumers. (1996 Form 10-
K)
(4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1,
1945, between Consumers and Chemical
Bank (successor to Manufacturers
Hanover Trust Company), as Trustee,
including therein indentures
supplemental thereto through the
Forty-third Supplemental Indenture
dated as of May 1, 1979.
- Indentures Supplemental thereto:
33-31866 (4)(d) - 67th 11/15/89
33-41126 (4)(c) - 68th 06/15/93
1-5611 (4) - 69th 09/15/93 (Form 8-K dated
Sep. 21, 1993)
- 70th 02/01/98
- 71st 03/06/98
(4)(b) 1-5611 (4)(b) - Indenture dated as of January 1, 1996
between Consumers and The Bank of New
York, as Trustee. (1995 Form 10-K)
- Indentures Supplemental thereto:
1-5611 (4)(b) - 1st 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) - 2nd 09/04/97 (3rd qtr 1997 Form 10-
Q)
(4)(c) - Indenture dated as of February 1,
1998 between Consumers and The Chase
Manhattan Bank, as Trustee.
(4)(d) 33-47629 (4)(a) - Indenture dated as of September 15,
1992 between CMS Energy and NBD Bank,
as Trustee.
- Indentures Supplemental thereto:
1-9513 (4) - 3rd 05/06/97 (1st qtr 1997 Form 10-
Q)
333-37241 (4)(a) - 4th 09/26/97
1-9513 (4)(b) - 5th 11/04/97 (3rd qtr 1997 Form 10-
Q)
- 6th 01/13/98
(4)(e) 1-9513 (4a) - Indenture between CMS Energy and The
Chase Manhattan Bank, as Trustee,
dated as of January 15, 1994. (Form
8-K dated March 29, 1994)
- Indentures Supplemental thereto:
1-9513 (4b) - 1st 01/20/94 (Form 8-K dated
March 29, 1994)
1-9513 (4) - 2nd 03/19/96 (1st qtr 1996 Form 10-
Q)
1-9513 (4)(a)(iv) - 3rd 03/17/97 (Form 8-K dated May 1,
1997)
333-36115 (4)(d) - 4th 09/17/97
(4)(f) 1-9513 (4a) - Indenture dated as of June 1, 1997,
between CMS Energy and The Bank of
New York, as trustee. (Form 8-K dated
July 1, 1997)
- Indentures Supplemental thereto:
1-9513 (4b) - 1st 06/20/97 (Form 8-K dated July 1,
1997)
(10)(a) 1-9513 (4) - Credit Agreement dated as of July 2,
1997, among CMS Energy, the
Administrative Agent, Collateral
Agent, Documentation Agent,
Syndication Agent, Co-Agents and Lead
Manager, all as defined therein, and
the Exhibits and Schedules thereto.
(2nd qtr 1997 Form 10-Q)
(10)(b) 1-5611 (10) - Credit Agreement dated as of July 14,
1995 among Consumers, the Banks named
therein and the First National Bank
of Chicago, as Administrative Agent.
(10)(c) 1-9513 (10)(c) - Employment Agreement dated as of
August 1, 1990 among Consumers,
CMS Energy and William T.
McCormick, Jr. (1990 Form 10-K)
(10)(d) 1-5611 (10)(i) - Employment Agreement effective as of
June 15, 1988 among Consumers,
CMS Energy and Victor J. Fryling.
(1988 Form 10-K)
(10)(e) 1-5611 (10)(f) - Employment Agreement dated May 26,
1989 between Consumers and Michael G.
Morris. (1990 Form 10-K)
(10)(f) 1-5611 (10)(h) - Employment Agreement dated May 26,
1989 between Consumers and David A.
Mikelonis. (1991 10-K)
(10)(g) 1-9513 (10)(f) - Employment Agreement dated May 26,
1989 among Consumers, CMS Energy and
John W. Clark. (1990 Form 10-K)
(10)(h) 1-5611 (10)(j) - Employment Agreement dated March 25,
1992 between Consumers, CMS Energy
and Alan M. Wright. (1992 Form 10-K)
(10)(i) 1-5611 (10)(k) - Employment Agreement dated March 25,
1992 between Consumers and Paul A.
Elbert. (1992 10-K)
(10)(j) 1-9513 (10) - Employment Agreement dated January
12, 1996 between CMS Energy and
Rodger A. Kershner. (1995 Form 10-K)
(10)(k) 1-9513 (10)(m) - Employment Agreement dated April 2,
1996 between CMS Energy and William
J. Haener. (1996 Form 10-K)
(10)(l) 1-9513 (10)(n) - Employment Agreement dated April 4,
1996 between CMS Energy,
CMS Enterprises and James W. Cook.
(1996 Form 10-K)
(10)(m) 1-5611 (10)(o) - Employment Agreement dated March 19,
1996 between Consumers and David W.
Joos. (1996 Form 10-K)
(10)(n) - Employment Agreement dated December
4, 1997 between Consumers and Robert
A. Fenech.
(10)(o) 1-5611 (10)(g) - Consumers' Executive Stock Option and
Stock Appreciation Rights Plan
effective December 1, 1989. (1990
Form 10-K)
(10)(p) 33-61595 (4)(d) - CMS Energy's Performance Incentive
Stock Plan effective as of
December 1, 1989.
(10)(q) 1-9513 (10)(m) - CMS Deferred Salary Savings Plan
effective January 1, 1994. (1993
Form 10-K)
(10)(r) 1-5611 (10)(n) - CMS Energy and Consumers Annual
Executive Incentive Compensation Plan
effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(s) 1-5611 (10)(o) - Consumers' Supplemental Executive
Retirement Plan effective November 1,
1990. (1993 Form 10-K)
(10)(t) 33-37977 4.1 - Senior Trust Indenture, Leasehold
Mortgage and Security Agreement dated
as of June 1, 1990 between The
Connecticut National Bank and United
States Trust Company of New York.
(MCV Partnership)
Indenture Supplemental thereto:
33-37977 4.2 - Supplement No. 1 dated as of June 1,
1990. (MCV Partnership)
(10)(u) 1-9513 (28)(b) - Collateral Trust Indenture dated as
of June 1, 1990 among Midland Funding
Corporation I, MCV Partnership and
United States Trust Company of New
York, Trustee. (3rd qtr 1990 Form
10-Q)
Indenture Supplemental thereto:
33-37977 4.4 - Supplement No. 1 dated as of June 1,
1990. (MCV Partnership)
(10)(v) 1-9513 (10)(v) - Amended and Restated Investor Partner
Tax Indemnification Agreement dated
as of June 1, 1990 among Investor
Partners, CMS Midland as Indemnitor
and CMS Energy as Guarantor. (1990
Form 10-K)
(10)(w) 1-9513 (19)(d)** - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy to
The Connecticut National Bank and
Others. (1990 Form 10-K)
(10)(x) 1-9513 (10)(z)** - Indemnity Agreement dated as of
June 1, 1990 made by CMS Energy to
Midland Cogeneration Venture Limited
Partnership. (1990 Form 10-K)
(10)(y) 1-9513 (10)(aa)** - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy to
United States Trust Company of New
York, Meridian Trust Company, each
Subordinated Collateral Trust Trustee
and Holders from time to time of
Senior Bonds and Subordinated Bonds
and Participants from time to time in
Senior Bonds and Subordinated Bonds.
(1990 Form 10-K)
(10)(z) 33-37977 10.4 - Amended and Restated Participation
Agreement dated as of June 1, 1990
among MCV Partnership, Owner
Participant, The Connecticut National
Bank, United States Trust Company,
Meridian Trust Company, Midland
Funding Corporation I, Midland
Funding Corporation II, MEC
Development Corporation and
Institutional Senior Bond Purchasers.
(MCV Partnership)
1-5611 (10)(w) - Amendment No. 1 dated as of July 1,
1991. (1991 Form 10-K)
(10)(aa) 33-37977 10.4 - Power Purchase Agreement dated as of
July 17, 1986 between MCV Partnership
and Consumers. (MCV Partnership)
Amendments thereto:
33-37977 10.5 - Amendment No. 1 dated September 10,
1987. (MCV Partnership)
33-37977 10.6 - Amendment No. 2 dated March 18, 1988.
(MCV Partnership)
33-37977 10.7 - Amendment No. 3 dated August 28,
1989. (MCV Partnership)
33-37977 10.8 - Amendment No. 4A dated May 25, 1989.
(MCV Partnership)
(10)(bb) 1-5611 (10)(y) - Unwind Agreement dated as of
December 10, 1991 by and among
CMS Energy, Midland Group, Ltd.,
Consumers, CMS Midland, Inc., MEC
Development Corp. and CMS Midland
Holdings Company. (1991 Form 10-K)
(10)(cc) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment
Agreement dated as of June 1, 1990,
among CMS Energy, Consumers and The
Dow Chemical Company. (1991 Form 10-
K)
(10)(dd) 1-5611 (10)(aa)** - Parent Guaranty dated as of June 14,
1990 from CMS Energy to MCV, each of
the Owner Trustees, the Indenture
Trustees, the Owner Participants and
the Initial Purchasers of Senior
Bonds in the MCV Sale Leaseback
transaction, and MEC Development.
(1991 Form 10-K)
(12) - Statements regarding computation of
CMS Energy's Ratio of Earnings to
Fixed Charges
(21)(a) - Subsidiaries of CMS Energy.
(21)(b) - Subsidiaries of Consumers.
(23) - Consents of experts for CMS Energy.
(24)(a) - Power of Attorney for CMS Energy.
(24)(b) - Power of Attorney for Consumers.
(27)(a) - Financial Data Schedule UT for
CMS Energy .
(27)(b) - Restated Financial Data Schedule UT
for CMS Energy.
(27)(c) - Financial Data Schedule UT for
Consumers.
(99) - CMS Energy: Consumers Gas Group
Financials.
** Obligations of only CMS Holdings and CMS Midland, second tier
subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the
Commission, and which were designated as noted above, are hereby
incorporated herein by reference and made a part hereof with the same
effect as if filed herewith.
151
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves
1997, 1996 and 1995:
CMS Energy Corporation . . . . . . . . . . . . 152
Consumers Power Company. . . . . . . . . . . . 152
Report of Independent Public Accountants
CMS Energy Corporation . . . . . . . . . . . . 153
Consumers Power Company. . . . . . . . . . . . 153
Schedules other than those listed above are omitted because they are
either not required, not applicable or the required information is shown
in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
152
CMS ENERGY CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1997, 1996 and 1995
(In Millions)
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for uncollectible
accounts (substantially all
Consumers Energy Company):
1997 $10 $8 $1 $12(a) $7
1996 $4 $21 - $15(a) $10
1995 $5 $10 - $11(a) $4
<FN>
(a) Accounts receivable written off including net uncollectible amounts of $11 in 1997, $13 in 1996 and $10 in
1995 charged directly to operating expense and credited to accounts receivable.
CONSUMERS ENERGY COMPANY
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1997, 1996 and 1995
(In Millions)
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for
uncollectible accounts:
1997 $10 $8 - $12(a) $6
1996 $3 $21 - $14(a) $10
1995 $4 $10 - $11(a) $3
<FN>
(a) Accounts receivable written off including net uncollectible amounts of $11 in 1997, $13 in 1996 and $10 in
1995 charged directly to operating expense and credited to accounts receivable.
153
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in CMS Energy Corporation's
1997 Annual Report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated January 26, 1998. Our
audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1998.
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Consumers Energy
Company's 1997 Annual Report to shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 26, 1998.
Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1998.
154
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 24th day of March 1998.
CMS ENERGY CORPORATION
By William T. McCormick, Jr.
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
CMS Energy Corporation and in the capacities and on the 24th day of March
1998.
Signature Title
(i) Principal executive officer:
Chairman of the Board,
Chief Executive Officer
William T. McCormick, Jr. and Director
William T. McCormick, Jr.
(ii) Principal financial officer:
Senior Vice President,
and Chief Financial Officer
A. M. Wright
Alan M. Wright
(iii)Controller or principal accounting officer:
Senior Vice President,
Controller
P. D. Hopper and Chief Accounting Officer
Preston D. Hopper
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
John M. Deutch
Signature Title
James J. Duderstadt* Director
James J. Duderstadt
K R Flaherty* Director
Kathleen R. Flaherty
Victor J. Fryling* Director
Victor J. Fryling
Earl D. Holton* Director
Earl D. Holton
W. U. Parfet* Director
William U. Parfet
Percy A. Pierre* Director
Percy A. Pierre
K. Whipple* Director
Kenneth Whipple
John B. Yasinsky* Director
John B. Yasinsky
* By Thomas A. McNish
Thomas A. McNish, Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 24th day of March 1998.
CONSUMERS ENERGY COMPANY
By William T. McMormick Jr.
William T. McCormick, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Consumers Energy Company and in the capacities and on the 24th day of
March 1998.
Signature Title
(i) Principal executive officer:
Vice Chairman of the Board,
President and Director
Victor J. Fryling
Victor J.Fryling
(ii) Principal financial officer:
Senior Vice President and
A. M. Wright Chief Financial Officer
Alan M. Wright
(iii)Controller or principal accounting officer:
Vice President and
Dennis DaPra Controller
Dennis DaPra
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
John M. Deutch SignatureTitle
James J. Duderstadt* Director
James J. Duderstadt
K R Flaherty* Director
Kathleen R. Flaherty
Earl D. Holton* Director
Earl D. Holton
William T. McCormick, Jr.* Director
William T. McCormick, Jr.
W. U. Parfet* Director
William U. Parfet
Percy A. Pierre* Director
Percy A. Pierre
K. Whipple* Director
Kenneth Whipple
John B. Yasinsky* Director
John B. Yasinsky
*By Thomas A. McNish
Thomas A. McNish, Attorney-in-Fact