2
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes X
No
Number of shares outstanding of each of the issuer's classes of common
stock at April 30, 1998:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 101,337,341
CMS Energy Class G Common Stock, no par value 8,315,547
Consumers Energy Company, $10 par value, privately held by CMS Energy84,108,789
CMS Energy Corporation
and
Consumers Energy Company
Quarterly reports on Form 10-Q to the Securities and Exchange Commission
for the Quarter Ended March 31, 1998
This combined Form 10-Q 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
Glossary .............................................................. 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis ..........................6
Consolidated Statements of Income ............................23
Consolidated Balance Sheets ..................................25
Consolidated Statements of Cash Flows ........................27
Consolidated Statements of Common Stockholders' Equity .......28
Condensed Notes to Consolidated Financial Statements .........29
Report of Independent Public Accountants .....................44
Consumers Energy Company
Management's Discussion and Analysis .........................45
Consolidated Statements of Income ............................57
Consolidated Statements of Cash Flows ........................58
Consolidated Balance Sheets ..................................59
Consolidated Statements of Common Stockholder's Equity .......61
Condensed Notes to Consolidated Financial Statements .........62
Report of Independent Public Accountants .....................72
Quantitative and Qualitative Disclosures about Market Risk....73
PART II:
Item 1. Legal Proceedings .................................73
Item 6. Exhibits and Reports on Form 8-K ..................74
Signatures .............................................................75
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
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
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
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
6
CMS Energy Corporation
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A and other
parts of CMS Energy's 1997 Form 10-K. This MD&A also refers to, and in
some sections specifically incorporates by reference from, CMS Energy's
Condensed Notes to Consolidated Financial Statements and should be read in
conjunction with such Statements and Notes. This 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
March 31 1998 1997 Change
- --------------------------------------------------------------
(a)
Three months ended
Consolidated Net Income $ 83 $ 84 $ (1)
Net Income Attributable to
Common Stocks:
CMS Energy 74 75 (1)
Class G 9 9 -
Earnings Per Average Common Share:
CMS Energy
Basic .73 .79 (.06)
Diluted .72 .78 (.06)
Class G
Basic and Diluted 1.09 1.18 (.09)
(a) Includes the cumulative effect of an accounting change which increased
net income attributable to CMS Energy Common Stock $43 million ($.40 per
share - basic and diluted) and Class G Common Stock $12 million ($.36 per
share - basic and diluted). Refer to the discussion below for further
information.
Twelve months ended
Consolidated Net Income $ 267 $ 236 $ 31
Net Income Attributable to
Common Stocks:
CMS Energy 252 225 27
Class G 15 11 4
Earnings Per Average
Common Share:
CMS Energy
Basic 2.57 2.41 .16
Diluted 2.55 2.39 .16
Class G
Basic and Diluted 1.76 1.53 .23
===============================================================
CMS Energy's earnings for the first quarter of 1998 decreased from the
comparable period in 1997 as a result of (1) Consumers' decreased gas
deliveries due to record warm 1998 temperatures, (2) lower gas production,
lower oil prices and a write down of the value of Colombia oil reserves in
the oil and gas exploration and production business, (3) an increased
provision for underrecoveries under the PPA of $37 million ($24 million
after-tax) due to higher than expected plant availability and (4)
increased interest on long-term debt due to higher amounts of debt
outstanding. For further information on past and future underrecoveries,
see Power Purchases from the MCV Partnership in Note 2. Partially
offsetting these decreases, were (1) Consumers' one-time change in
accounting for the recognition of property tax expense from a calendar
year basis to a fiscal year basis which resulted in a benefit of $66
million ($43 million after-tax), (2) Consumers' increased electric sales
along with reduced purchased power costs, (3) a gain on the sale of Petal
Gas Storage Company by the gas transmission, storage and processing
business, and (4) increased income from the international independent
power production business and improved earnings from the MCV Partnership,.
The increase in consolidated net income for the twelve months ended 1998
compared to the 1997 period reflects (1) Consumers' change in accounting
for property taxes as discussed above, (2) increased revenues from
Consumers' transmission of electricity for others, (3) increased income
from the international power production business, (4) increased income
from the international gas transmission, storage and processing business,
and (5) improved earnings from the MCV Partnership. In addition, the
improved net income for the twelve months ended 1998 reflects the (6)
recognition of a gain on the sale of CMS NOMECO's entire interest in oil
and gas properties in Yemen, (7) an industry expertise service fee in
connection with the Loy Yang A acquisition, and (8) an adjustment of
Consumers' prior years' income taxes associated with non-taxable earnings
on nuclear decommissioning trust funds of $9 million. Partially
offsetting these increases were the (1) recognition of Consumers' after-
tax loss associated with the underrecovery of power costs under the PPA as
discussed above, (2) Consumers' decreased electric revenues because of
special contract discounts negotiated with large industrial customers, (3)
Consumers' decreased gas deliveries due to warmer weather during the first
quarter of 1998 and (4) lower gas production and lower oil and gas prices
and a write down of the value of Colombia oil reserves in the oil and gas
exploration and production business.
For further information, see the individual results of operations for each
CMS Energy business segment in this MD&A.
Consumers' Electric Business Unit Results of Operations
Electric Pretax Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997
- --------------------------------------------------------------------------
Sales (including special
contract discounts) $ 6 $ 14
Rate increases and other
regulatory issues (2) (1)
Operations and maintenance 9 36
General taxes and depreciation (-) (17)
----- -----
Total change $ 13 $ 32
==========================================================================
Electric Deliveries:
Total electric deliveries increased 6.5 percent for three months ended
March 31, 1998 over the same period in 1997. Deliveries to ultimate
customers increased 1.2 percent. Reduced sales to residential and
commercial customers were more than offset by increased sales and
deliveries to industrial customers. For twelve months ended, total
electric deliveries increased 3.8 percent over the comparable 1997 period.
The increase is primarily attributable to an increase in intersystem sales
and a 1.3 percent increase in sales and deliveries to ultimate customers,
primarily within the industrial class.
Power Costs:
In Millions
March 31 1998 1997 Change
- -----------------------------------------------------------------------
Three months ended $ 270 $ 282 $(12)
Twelve months ended 1,128 1,110 18
========================================================================
Although sales increased for the three months ended March 31, 1998
compared to the same period in 1997, power costs for the period decreased.
This decrease results from increased internal generation and reduced power
purchases from outside sources. Power costs increased for the twelve
months ended 1998 compared to 1997. Both internal generation and power
purchases from outside sources increased during this period to meet the
increased sales demand.
Consumers' Electric Business Unit 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 the first three months of 1998, the MCV
Facility was available 99 percent of the time, resulting in after-tax cash
underrecoveries of $11 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 2.
In Millions
1998 1999 2000 2001 2002
- --------------------------------------------------------------------------
Estimated cash under-
recoveries, net of tax $28 $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 Note 2.
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.
On April 24, 1998 a planned refueling and maintenance outage of forty to
fifty days began at Palisades. Consumers will replace a total of sixty
nuclear fuel assemblies in the plant's reactor during the outage.
Big Rock is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it would be uneconomical to
operate in an increasingly competitive environment. See the Electric
Environmental Matters section of this MD&A for further information on
decommissioning Big Rock and Note 8 on nuclear matters.
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 to meet the
Clean Air Act's requirements. Consumers believes it may incur an
additional $26 million in capital expenditures by the year 2000 to comply
with sulfur dioxide and nitrogen oxide emission limits established by the
EPA under the Clean Air Act's Acid Rain Program.
Consumers currently operates within all Clean Air Act requirements and
meets current emission limits. The EPA, however, 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 target is established, 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 $210 million, plus an additional
amount totaling $10 million per year for operation and maintenance costs.
Consumers may need an equivalent amount to comply with the new small
particulate standards. The State of Michigan has 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 to 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 CMS Energy's 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 7.
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 Michigan Supreme Court
allowed each case that was not previously refiled to go forward
separately. Consumers filed a motion for reconsideration with the
Michigan Supreme Court, which was denied. As a result, 21 individual
plaintiffs have re-filed their claims with the trial court. Consumers
intends to vigorously defend these cases, but is unable to predict the
outcome. As of March 31, 1998, Consumers had 6 individual stray voltage
lawsuits, unrelated to the cases above, awaiting trial court action, down
from 12 lawsuits as reported at year end 1997. For further information
regarding Stray Voltage, see the Other section in Note 7.
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 parties are
awaiting the court's decision on Consumers' and CMS Energy's motion for
summary judgment and/or dismissal of the complaint. CMS Energy believes
the lawsuit is without merit and will vigorously defend against it, but
cannot predict the outcome of this matter. For further information
regarding this antitrust litigation, see Item 3, Legal Proceedings.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997
- -----------------------------------------------------------------
Sales $ (13) $ (13)
Gas wholesale and retail
service activities (3) (11)
Operations and maintenance (8) 11
----- -----
Total change $(24) $ (13)
===== =====
Gas Deliveries: System deliveries for the three month period ended March
31, 1998, including miscellaneous transportation, totaled 146 bcf, a
decrease of 22 bcf or 13 percent compared to the three month period ended
March 31, 1997. Deliveries for the twelve month period ended March 31,
1998, including miscellaneous transportation, totaled 399 bcf, a decrease
of 32 bcf or 7 percent compared to the twelve month period ended March 31,
1997. The decreased deliveries for three month and twelve month periods
ended reflect warmer temperatures primarily for the first quarter of 1998.
Cost of Gas Sold:
In Millions
March 31 1998 1997 Change
- -----------------------------------------------------------------------
Three months ended $264 $314 $(50)
Twelve months ended 645 718 (73)
========================================================================
The cost decreases for the three month and twelve month periods ended
March 31, 1998 were the result of decreased sales reflecting warmer
temperatures during the winter heating seasons.
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. The Court of Appeals denied Consumers'
subsequent request for a rehearing of that opinion. In March 1998,
Consumers filed an application for leave to appeal with the Michigan
Supreme Court. For further information on Gas Proceedings, see the Gas
Business Outlook section of this MD&A and Note 3.
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. As of
May 8, 1998, more than 7,500 customers chose alternative gas suppliers,
representing approximately 10 bcf of gas load. Of these alternative gas
suppliers, one was a CMS Energy affiliate. 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 significant 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 3.
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 7.
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 the three months ended
March 31, 1998 increased $6 million (55 percent) over the comparable
period in 1997. This increase primarily reflects increased operating
income from international earnings and operating fees and lower net
operating expenses. Pretax operating income for the twelve months ended
March 31, 1998 increased $30 million (43 percent) from the comparable
period in 1997, primarily reflecting increased operating income resulting
from increased international earnings, higher electricity sales by the MCV
Facility, and the industry expertise service fee income earned in
connection with the Loy Yang transaction in 1997.
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: Pretax operating income for the three months
ended March 31, 1998 decreased $17 million from the comparable period in
1997. This decrease is the result of sharply lower oil prices and a write
down of the value of Columbia oil reserves partially offset by higher oil
production. Pretax operating income for the twelve months ended March 31,
1998 decreased $6 million from the comparable period in 1997, primarily
due to lower oil and gas prices and gas production, a write down of the
value of Colombia oil reserves and higher operating expenses partially
offset by a gain on the sale of CMS NOMECO's entire interest in oil and
gas properties in Yemen.
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
projects worldwide. Pretax operating income for the three months ended
March 31, 1998 increased $4 million (45 percent) over the comparable
period in 1997. The increase primarily reflects a gain on the sale of
Petal Gas Storage Company, partially offset by a gain in the first quarter
of 1997 on the sale of a portion of the Ames gas gathering system.
Pretax operating income for the twelve months ended March 31, 1998
increased $8 million (26 percent) over the comparable period in 1997,
reflecting a gain on the sale of Petal Gas Storage Company, income
attributable to the Australian pipeline acquired in 1997, and income
attributable to domestic and other international operations.
Marketing, Services and Trading Results of Operations
Pretax Operating Income: CMS MST sells natural gas, electricity and
energy management services to commercial and industrial customers in the
United States and Canada and plans to expand operations worldwide. CMS
MST also markets oil and natural gas liquids through a partnership.
Pretax operating income for the three months ended March 31, 1998
decreased $2 million from the comparable period in 1997. The decrease is
a result of natural gas prices that impacted CMS MST's ability to achieve
positive margins on fixed price sales and the expected costs of
positioning CMS MST for future growth, partially offset by higher gas and
electric volumes. Pretax operating income for the twelve months ended
March 31, 1998 decreased $7 million from the comparable period in 1997,
reflecting lower gas margins. Despite the decreased earnings, CMS MST
continues to position itself for future growth in the new energy world.
Gas marketed for end users totaled 91 bcf and 33 bcf for the three months
ended March 31, 1998 and 1997, respectively. Wholesale electric
marketing, a new marketing activity for CMS MST in the first quarter of
1998, totaled 1,349,000 MW. CMS MST completed over 169 energy management
services projects resulting in $1.3 million in revenues in the first
quarter of 1998.
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 the first quarter of 1998, 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 $ 3.8 billion at March 31, 1998 with a fair value of $3.8
billion. The fair value of CMS Energy's financial derivative instruments
at March 31, 1998, with a notional amount of $795 million, was $4 million,
representing the amount that CMS Energy would have paid to terminate these
agreements on March 31, 1998. In accordance with 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 March 31, 1998.
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 6.
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from
subsidiaries. In April 1998, Consumers declared a $50 million common
dividend to be paid to CMS Energy in May 1998. In the first quarter of
1998, Enterprises paid common dividends and other distributions of $34
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 by CMS NOMECO;
the transportation, storage and processing of natural gas by CMS Gas
Transmission; and the production and sale of electricity by other
affiliates. Consolidated cash from operations totaled $249 million and
$379 million for the first three months of 1998 and 1997, respectively.
The $130 million decrease resulted primarily from a decrease of $75
million in Consumers' sale of accounts receivable and a $29 million net
decrease reflecting the cumulative effect of an accounting change and the
loss on power purchases under the PPA, both of which are noncash items.
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 $246 million and $157 million for the first three
months of 1998 and 1997, respectively. The increase of $89 million
primarily reflects increased investments in international projects.
CMS Energy's 1998 expenditures for its utility and international
businesses were $81 million and $166 million, respectively, compared to
$82 million and $67 million, respectively, during 1997.
Financing Activities: CMS Energy's net cash provided by (used in )
financing activities totaled $2 million and ($221) million for the first
three months of 1998 and 1997, respectively. The increase of $223 million
in net cash provided by financing activities resulted from the issuance of
$719 million of new securities (see table below) and a $108 million
decrease in the reduction of notes payable, offset by the retirement of
$369 million of bonds and other long-term debt and a $295 million increase
in the repayment of bank loans.
In Millions
Distribution/ Principal Use of
Month Issued Maturity Interest Rate Amount Proceeds
- -----------------------------------------------------------------------
CMS Energy
GTNs
Series D (1) (1) 6.8% (1) $ 64 General
corporate
purposes
Extendible Tenor
Rate Adjusted
Securities January 2005 7.0% 180 Pay down
borrowings
-----
$244
Consumers
Senior
Notes (2) February 2008 6.375% $250 Pay down
First Mortgage
Bonds
Senior
Notes (2) March 2018 6.875% 225 Pay down
First Mortgage
Bonds
------
Total through March 31, 1998 $719
Senior
Notes (2) May 2008 6.2% $250 Pay down
First Mortgage
Bonds and
Long-Term
Bank Debt
Long-Term
Bank Debt May2001-2003 6.05%(3) 225 Pay down
Long-Term
Bank Debt
-----
Total through May 31, 1998 $1,194
==========================================================================
(1)GTNs are issued from time to time with various maturities. The rate
shown herein is a weighted average interest rate.
(2) The Senior Notes are secured by Consumers' First Mortgage Bonds issued
contemporaneously in asimilar amount.
(3) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
As of March 31, 1998, CMS Energy had an aggregate $163 million in
securities registered for future issuance and sale. For further
information on the filing of registration statements for security
offerings see Note 4.
In the first quarter of 1998, CMS Energy declared and paid $30 million in
cash dividends to holders of CMS Energy Common Stock and $3 million in
cash dividends to holders of Class G Common Stock. In April 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 May 1998.
Other Investing and Financing Matters: At March 31, 1998, the book value
per share of CMS Energy Common Stock and Class G Common Stock was $19.34
and $11.24, respectively.
CMS Energy's $1.125 billion 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 $161 million. These credit facilities
are available to finance working capital requirements and to pay for
capital expenditures between long-term financings. At March 31, 1998, the
total amount utilized under the Senior Credit Facilities was $222 million,
including $52 million of contingent obligations, and under the unsecured
lines of credit and letters of credit was $107 million.
CMS Energy has a bank commitment through June 1998 to enter into a $580
million credit agreement to fund investments in power projects.
During the first quarter of 1998, CMS Energy initiated and completed 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.
For further information on the exchange offer see Note 4.
At April 15, 1998, Consumers had remaining FERC authorization to: 1)
issue or guarantee up to $900 million of short-term securities,
outstanding at any one time, through 1998; 2) guarantee, through 1999, up
to $25 million in loans made by others, to residents of Michigan for
making energy-related home improvements; and 3) issue long-term securities
with maturities up to 30 years, through November 1998, up to $401 million
and $300 million for refinancing purposes and for general corporate
purposes, respectively. In May 1998, Consumers used $475 million of FERC
authorization by issuing the following long-term debt: 1) $250 million in
senior notes; and 2) $225 million for a long-term bank loan.
Additionally, in May 1998, Consumers requested authorization to issue from
July 1998 through June 2000, up to $950 million of long-term securities
for refinancing or refunding purposes and $200 million for general
corporate purposes. This authorization would replace and supersede any
remaining authorization previously granted to issue long-term securities,
except for the $25 million in loan guarantees discussed above.
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 March 31, 1998, the total
available amount remaining under these facilities was $300 million.
Consumers also has in place a $500 million trade receivables sale program.
At March 31, 1998, $160 million in receivables remained available for sale
under the program.
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
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 7.
CMS Energy currently plans investments from 1998 to 2000: (1) for oil and
gas exploration and production operations, primarily in North and South
America, offshore West Africa and North Africa; (2) 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; (3) to continue
development of non-utility natural gas storage, gathering and pipeline
operations of CMS Gas Transmission, both domestic and international; (4)
to acquire, develop and expand international energy distribution
businesses; and (5) 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 wellhead to burner tip. Beyond 1998
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, storage and processing
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 several countries
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 has separated its development efforts from the
operations of its assets. CMS Energy conducts 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 and the Middle East; and Singapore for Asia.
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.
Consumers' 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,
absent the impact of restructuring on the industry and its regulation 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. Among Consumers' alternatives in the event of the pool being
terminated would be joining an independent system operator. FERC has
indicated this preference for structuring the operations of the electric
transmission grid.
In June 1997 the MPSC issued an order proposing that beginning January 1,
1998 Consumers transmit and distribute energy on behalf of competing power
suppliers to serve retail customers. Subsequent to the June 1997 order,
the MPSC issued orders in October 1997 and in January and February 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; 3) to suspend the power supply cost recovery clause; and 4) the MPSC
order allows all customers to be free to choose power suppliers on January
1, 2002. See Note 2 for further information regarding the effect of the
PSCR suspension on the recovery of MCV Facility capacity charges. 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. The recovery of prudent costs of implementing a
direct-access program, estimated at an additional $200 million, would be
reviewed for prudence in the annual true-up proceeding and stranded cost
adjusted appropriately. 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.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison. Consumers believes that the MPSC lacks statutory authority to
mandate industry restructuring, and its appeal is limited to this
jurisdictional issue. Consumers has filed an application for leave to
appeal with the Michigan Supreme Court, which, if granted, would bypass
the Court of Appeals, and thereby achieve an earlier resolution of the
matter.
As directed in the MPSC's February 1998 order, Consumers submitted to the
MPSC its draft plan in April 1998 for implementing retail open access.
The primary issues addressed in the proposed plan are: 1) the
implementation schedule; 2) the retail open access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain retail open access service; and 4) the
roles and responsibilities for Consumers, customers and suppliers. Under
the proposed schedule in the draft plan, Consumers will allocate 750 MW of
electric capacity for retail open access to customers. In 1998, 300 MW of
retail open access for bidding will be open, and an additional 150 MW will
open for each year from 1999 to 2001. This plan supports the previous
order regarding the phase-in process. Due to the time required to provide
an opportunity for interested parties and the MPSC to review the plan,
Consumers does not believe retail open access will commence prior to the
fourth quarter of 1998. For further information regarding restructuring,
see Note 3.
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.
According to 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. Because the February 1998 MPSC order allows Consumers to
fully recover its transition costs, 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 March 31, 1998, Consumers had $268 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.
Consumers Gas Group Outlook
Growth: Consumers currently anticipates gas deliveries, including gas
customer choice 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.
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 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. This standard requires expanded
disclosure effective for 1998. Also in 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,
and will be effective for 1999. CMS Energy does not expect the
application of these standards 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 to, among other things, 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 March 31, 1998 the foreign currency translation
adjustment was $94 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 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 CMS Energy 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 CMS Energy.
23
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions, Except Per Share Amounts
Operating Revenue
Electric utility $ 612 $ 620 $2,507 $2,474
Gas utility 429 498 1,135 1,231
Independent power production 44 29 183 143
Oil and gas exploration and production 12 17 88 116
Natural gas transmission, storage and processing 27 26 103 76
Marketing, services and trading 247 99 840 286
Other 3 6 10 19
------ ------ ------ ------
1,374 1,295 4,866 4,345
------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 71 69 300 292
Purchased power - related parties 145 151 594 600
Purchased and interchange power 54 62 234 218
Cost of gas sold 463 398 1,375 984
Other 215 169 775 735
------ ------ ------ ------
948 849 3,278 2,829
Maintenance 37 41 170 179
Depreciation, depletion and amortization 143 131 489 448
General taxes 59 61 209 204
------ ------ ------ ------
1,187 1,082 4,146 3,660
------ ------ ------ ------
Pretax Operating Income (Loss)
Electric utility 119 106 444 412
Gas utility 54 78 130 143
Independent power production 16 10 102 72
Oil and gas exploration and production (8) 9 33 39
Natural gas transmission, storage and processing 13 9 37 29
Marketing, services and trading (1) 1 (7) -
Other (6) - (19) (10)
------ ------ ------ ------
187 213 720 685
------ ------ ------ ------
Other Income (Deductions)
Loss on MCV power purchases (37) - (37) -
Accretion income 2 2 7 9
Accretion expense (4) (5) (17) (19)
Other, net 3 1 1 (1)
------ ------ ------ ------
(36) (2) (46) (11)
------ ------ ------ ------
Fixed Charges
Interest on long-term debt 76 60 289 233
Other interest 12 11 51 43
Capitalized interest (5) (3) (19) (9)
Preferred dividends 5 7 23 28
Preferred securities distributions 8 2 24 8
------ ------ ------ ------
96 77 368 303
------ ------ ------ ------
Income Before Income Taxes 55 134 306 371
Income Taxes 15 50 82 135
------ ------ ------ ------
Consolidated Net Income before cumulative effect of change
in accounting principle 40 84 224 236
Cumulative effect of change in accounting for property taxes,
net of $23 tax (Note 1) 43 - 43 -
------ ------ ------ ------
Consolidated Net Income $ 83 $ 84 $ 267 $ 236
====== ====== ====== ======
24
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions, Except Per Share Amounts
Net Income Attributable to Common Stocks CMS Energy $ 74 $ 75 $ 252 $ 225
Class G $ 9 $ 9 $ 15 $ 11
------ ------ ------ ------
Average Common Shares Outstanding CMS Energy 101 95 98 93
Class G 8 8 8 8
------ ------ ------ ------
Basic Earnings Per Average Common Share CMS Energy $ .33 $ .79 $ 2.17 $ 2.41
Before Change in Accounting Principle Class G $ .73 $ 1.18 $ 1.40 $ 1.53
------ ------ ------ ------
Cumulative Effect of Change in Accounting
Principle, Net of Tax, Per Average CMS Energy $ .40 $ - $ .40 $ -
Common Share Class G $ .36 $ - $ .36 $ -
------ ------ ------ ------
Basic Earnings Per Average Common Share CMS Energy $ .73 $ .79 $ 2.57 $ 2.41
Class G $ 1.09 $ 1.18 $ 1.76 $ 1.53
------ ------ ------ ------
Diluted Earnings Per Average Common Share CMS Energy $ .72 $ .78 $ 2.55 $ 2.39
Class G $ 1.09 $ 1.18 $ 1.76 $ 1.53
------ ------ ------ ------
Dividends Declared Per Common Share CMS Energy $ .30 $ .27 $ 1.14 $ 1.05
Class G $ .31 $ .295 $1.225 $ 1.165
------ ------ ------ ------
<FN>
The accompanying condensed notes are an integral part of these statements.
25
CMS Energy Corporation
Consolidated Balance Sheets
ASSETS March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Plant and Property (At Cost)
Electric $ 6,547 $ 6,491 $ 6,412
Gas 2,531 2,528 2,374
Oil and gas properties (full-cost method) 1,274 1,257 1,154
Other 171 168 95
------- ------- -------
10,523 10,444 10,035
Less accumulated depreciation, depletion and amortization 5,416 5,270 4,991
------- ------- -------
5,107 5,174 5,044
Construction work-in-progress 272 261 235
------- ------- -------
5,379 5,435 5,279
------- ------- -------
Investments
Independent power production 884 791 325
Natural gas transmission, storage and processing 279 256 235
International energy distribution 266 255 65
First Midland Limited Partnership (Note 2) 244 242 235
Midland Cogeneration Venture Limited Partnership (Note 2) 179 171 140
Other 42 48 23
------- ------- -------
1,894 1,763 1,023
------- ------- -------
Current Assets
Cash and temporary cash investments at cost, which approximates market 72 67 57
Accounts receivable and accrued revenue, less allowances
of $7, $7 and $9, respectively (Note 4) 472 476 300
Inventories at average cost
Gas in underground storage 79 197 51
Materials and supplies 90 85 89
Generating plant fuel stock 39 35 44
Deferred income taxes 28 38 42
Prepayments and other 248 240 185
------- ------- -------
1,028 1,138 768
------- ------- -------
Non-current Assets
Nuclear decommissioning trust funds 518 486 401
Postretirement benefits 396 404 427
Abandoned Midland Project 88 93 108
Other 478 474 396
------- ------- -------
1,480 1,457 1,332
------- ------- -------
Total Assets $ 9,781 $ 9,793 $ 8,402
======= ======= =======
26
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Capitalization
Common stockholders' equity $ 2,052 $ 1,977 $ 1,775
Preferred stock of subsidiary 238 238 356
Company-obligated mandatorily redeemable
Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 -
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173 -
Long-term debt 3,755 3,272 2,629
Non-current portion of capital leases 74 75 99
------- ------- -------
6,512 5,955 4,959
------- ------- -------
Current Liabilities
Current portion of long-term debt and capital leases 318 643 668
Notes payable 245 382 88
Accounts payable 330 398 322
Accrued taxes 235 272 228
Accounts payable - related parties 82 80 65
Accrued interest 56 51 49
Power purchases (Note 2) 47 47 47
Accrued refunds 11 12 6
Other 182 190 189
------- ------- -------
1,506 2,075 1,662
------- ------- -------
Non-current Liabilities
Deferred income taxes 717 743 689
Postretirement benefits 510 514 529
Power purchases (Note 2) 157 133 167
Deferred investment tax credit 148 151 158
Regulatory liabilities for income taxes, net 61 54 75
Other 170 168 163
------- ------- -------
1,763 1,763 1,781
------- ------- -------
Commitments and Contingencies (Notes 2, 3, 7 and 8)
Total Stockholders' Investment and Liabilities $ 9,781 $ 9,793 $ 8,402
======= ======= =======
<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 4 to the Consolidated Financial Statements.
(b) As described in Note 4, 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 condensed notes are an integral part of these statements.
27
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Cash Flows from Operating Activities
Consolidated net income $ 83 $ 84 $ 267 $ 236
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $13, $13, $50 and $48,
respectively) 143 131 489 448
Loss on MCV power purchases 37 - 37 -
Capital lease and debt discount amortization 11 8 47 40
Accretion expense 4 5 17 19
Accretion income - abandoned Midland project (2) (2) (7) (9)
Cumulative effect of accounting change (66) - (66) -
MCV power purchases (17) (15) (65) (66)
Undistributed earnings of related parties (17) (13) (68) (56)
Deferred income taxes and investment tax credit (12) 3 18 43
Other (8) (6) (16) 8
Changes in other assets and liabilities 93 184 (126) 28
------ ------ ------ ------
Net cash provided by operating activities 249 379 527 691
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (128) (132) (707) (681)
Investments in partnerships and unconsolidated
subsidiaries (112) (12) (930) (104)
Cost to retire property, net (17) (4) (41) (28)
Investments in nuclear decommissioning trust funds (13) (13) (50) (48)
Other (4) (9) (9) -
Deferred demand-side management costs - - - (4)
Proceeds from sale of property 28 13 64 92
------ ------ ------ ------
Net cash used in investing activities (246) (157) (1,673) (773)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from bank loans, notes and bonds 850 70 1,994 164
Issuance of common stock 20 17 227 104
Retirement of bonds and other long-term debt (369) - (890) (37)
Repayment of bank loans (322) (27) (324) (38)
Increase (decrease) in notes payable, net (137) (245) 157 50
Payment of common stock dividends (33) (28) (124) (107)
Payment of capital lease obligations (7) (8) (43) (38)
Retirement of preferred stock - - (120) -
Retirement of common stock - - (2) (1)
Proceeds from preferred securities - - 286 -
------ ------ ------ ------
Net cash provided by (used in) financing activities 2 (221) 1,161 97
------ ------ ------ ------
Net Increase in Cash and Temporary Cash Investments 5 1 15 15
Cash and Temporary Cash Investments, Beginning of Period 67 56 57 42
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 72 $ 57 $ 72 $ 57
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
28
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Common Stock
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------ ------ ------ ------
Other Paid-in Capital
At beginning of period 2,267 2,045 2,062 1,959
Common stock reacquired - - (2) (1)
Common stock issued:
CMS Energy 18 16 219 99
Class G 2 1 8 5
------ ------ ------ ------
At end of period 2,287 2,062 2,287 2,062
------ ------ ------ ------
Revaluation Capital
At beginning of period (6) (6) (6) (8)
Change in unrealized investment-gain (a) 3 - 3 2
------ ------ ------ ------
At end of period (3) (6) (3) (6)
------ ------ ------ ------
Foreign Currency Translation
At beginning of period (96) - - -
Change in foreign currency translation (a) 2 - (94) -
------ ------ ------ ------
At end of period (94) - (94) -
------ ------ ------ ------
Retained Earnings (Deficit)
At beginning of period (189) (338) (282) (411)
Consolidated net income (a) 83 84 267 236
Common stock dividends declared:
CMS Energy (30) (26) (113) (98)
Class G (3) (2) (11) (9)
------ ------ ------ ------
At end of period (139) (282) (139) (282)
------ ------ ------ ------
Total Common Stockholders' Equity $2,052 $1,775 $2,052 $1,775
====== ====== ====== ======
(a) Disclosure of Comprehensive Income:
Revaluation capital
Unrealized investment-gain, net of tax of
$(1), $-, $(2) and $-, respectively $ 3 $ - $ 3 $ 2
Foreign currency translation 2 - (94) -
Consolidated net income 83 84 267 236
----- ----- ----- -----
Total Consolidated Comprehensive Income $ 88 $ 84 $ 176 $ 238
===== ===== ===== =====
<FN>
The accompanying condensed notes are an integral part of these statements.
29
CMS Energy Corporation
Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed Notes
should be read along with the Consolidated Financial Statements and Notes
contained in the 1997 Form 10-K of CMS Energy Corporation which includes
the Report of Independent Public Accountants. Certain prior year amounts
have been reclassified to conform with the presentation in the current
year. In the opinion of management, the unaudited information herein
reflects all adjustments necessary to assure the fair presentation of
financial position, results of operations and cash flows for the periods
presented.
1: Corporate Structure, basis of presentation And Change of Significant
Accounting Policies
Corporate Structure and Basis of Presentation
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; transmission, storage, and processing
of natural gas; energy marketing, services and trading; and international
energy distribution.
CMS Energy uses the equity method of accounting for investments in
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
income. For the three and twelve month periods ended March 31, 1998,
undistributed equity earnings were $17 million and $68 million,
respectively and $13 million and $56 million for the three and twelve
month periods ended March 31, 1997.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. As of March 31, 1998 the foreign currency
translation adjustment was $94 million relating primarily to the U.S. and
Australian dollar exchange rate fluctuations related to Loy Yang.
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. This
statement, which is effective for 1998 financial statement reporting,
establishes standards for reporting and display of comprehensive income
and its components. Equity adjustments related to unrealized investment
gains and losses (net of tax) and foreign currency translation, along with
consolidated net income, comprise comprehensive income.
Change in Method of Accounting for Property Taxes
During the first quarter of 1998, Consumers implemented a change in the
method of accounting for property taxes so that such taxes are recognized
during the fiscal period of the taxing authority for which the taxes are
levied. This change provides a better matching of property tax expense
with the services provided by the taxing authorities, and is considered
the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time
change in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million or $.40 per share. The pro forma effect on
prior years' consolidated net income of retroactively recording property
taxes as if the new method of accounting had been in effect for all
periods presented is not material.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to 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:
In Millions
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
- ----------------------------------------------------------------------
Pretax operating income $10 $ 8 $47 $46
Income taxes and other 3 2 14 14
---- ---- ---- ----
Net income $ 7 $ 6 $33 $32
==== ==== ==== ====
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.
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. The MPSC has, since January 1, 1993, permitted
Consumers to recover capacity charges averaging 3.62 cents per kWh for 915
MW, plus a substantial portion of the fixed and variable energy charges.
Beginning January 1, 1996, the MPSC has also permitted Consumers to
recover capacity charges for the remaining 325 MW of MCV Facility
contract capacity. The order approving such recovery indicated that the
recoverable capacity charge for the 325 MW would gradually increase from
an initial average charge of 2.86 cents per kWh to an average charge of
3.62 cents per kWh over the 1996-2004 time period. Because the MPSC
allowed Consumers to suspend the PSCR process as part of the electric
industry restructuring order (see Note 3), Consumers expects to recover a
portion of the future increases in approved capacity charges through an
adjustment to the frozen PSCR charge.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA. At March 31, 1998
and December 31,1997, the after-tax present value of the PPA liability
totaled $133 million and $117 million, respectively. The increase in the
liability since December 31, 1997 reflects an additional $37 million
accrual ($24 million after-tax) for higher than anticipated MCV Facility
availability levels experienced in prior periods and an after-tax
accretion expense of $3 million, partially offset by after-tax cash
underrecoveries of $11 million. The undiscounted after-tax amount
associated with the liability totaled $182 million at March 31, 1998. 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 the first three months of 1998 the
MCV Facility was available 99 percent of the time, resulting in $5 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 $28 $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 February 1998, the MCV Partnership filed a claim of appeal from the
January 1998 and February 1998 MPSC orders 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. This matter is now closed.
3: 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 2) 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 100 MW is available solely to direct-access
customers for at least 18 months. The Commissions' order allowed existing
special contracts to fill 410 MW of the load. The remaining 140 MW of the
650 MW load could be filled by either special contracts or direct access
loads. The load was filled by new special contracts signed subsequent to
the order. According to the MPSC order, Consumers held a lottery in April
1997 to select the customers to purchase 100 MW by direct access. Direct
access for a portion of this 100 MW began in late 1997. Consumers expects
the remaining amount of direct access to begin in 1998.
In January 1998, the Court of Appeals affirmed an MPSC conclusion 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 transmit and distribute energy on behalf of competing power
suppliers to serve retail customers.
Subsequent to the June 1997 order, the MPSC issued orders in October 1997
and in January and February 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; 3) to suspend the power supply
cost recovery clause; and 4) the MPSC order allows all customers to be
free to choose power suppliers on January 1, 2002. See Note 2 for further
information regarding the effect of the PSCR suspension on the recovery of
MCV Facility capacity charges. 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. The recovery of
prudent costs of implementing a direct-access program, estimated at an
additional $200 million, would be reviewed for prudence in the annual
true-up proceeding and stranded cost adjusted appropriately. 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.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison. Consumers believes that the MPSC lacks statutory authority to
mandate industry restructuring, and its appeal is limited to this
jurisdictional issue. Consumers has filed an application for leave to
appeal with the Michigan Supreme Court, which, if granted, would bypass
the Court of Appeals, and thereby achieve an earlier resolution of the
matter.
As directed in the MPSC's February 1998 order, Consumers submitted to the
MPSC its draft plan in April 1998 for implementing retail open access.
The primary issues addressed in the proposed plan are: 1) the
implementation schedule; 2) the retail open access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain retail open access service; and 4) the
roles and responsibilities for Consumers, customers and suppliers. Under
the proposed schedule in the draft plan, Consumers will allocate 750 MW of
electric capacity for retail open access to customers. In 1998, 300 MW of
retail open access for bidding will be open, and an additional 150 MW will
open for each year from 1999 to 2001. This plan supports the previous
order regarding the phase-in process. Due to the time required to provide
an opportunity for interested parties and the MPSC to review the plan,
Consumers does not believe retail open access will commence prior to the
fourth quarter of 1998. 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. As of May 8, 1998 approximately 7,500
customers chose alternative gas suppliers, representing approximately 10
bcf of gas load. Of these alternative gas suppliers, one was a CMS Energy
affiliate. 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 January 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 75 percent of its 1998 requirements, 35 percent
of its 1999 requirements and 25 percent of its 2000 requirements.
Additional forward coverage is currently under review.
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.
4: Short-Term and Long-Term Financings, and Capitalization
CMS Energy: CMS Energy's $1.125 billion 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 $161 million. At March 31,
1998, the total amount utilized under the Senior Credit Facilities was
$222 million, including $52 million of contingent obligations, and under
the unsecured lines of credit and letters of credit was $107 million.
At March 31, 1998 CMS Energy has $138 million of Series A GTNs, $125
million of Series B GTNs, $150 million of Series C GTNs, and $142 million
of Series D GTNs issued and outstanding with weighted average interest
rates of 7.7 percent, 7.9 percent, 7.7 percent, and 7.1 percent,
respectively.
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 do not have transfer restrictions).
CMS Energy completed the exchange in February 1998.
In March 1998, CMS Energy and an affiliated business trust filed a shelf
registration statement with the SEC pursuant to Rule 415 of the Securities
Act, for the issuance and the sale of an additional $200 million of CMS
Energy Common Stock, Class G Common Stock, subordinated debentures, stock
purchase contracts, stock purchase units, and Trust Preferred Securities.
Consumers: At April 15, 1998, Consumers had remaining FERC
authorization to: 1) issue or guarantee up to $900 million of short-term
securities, outstanding at any one time, through 1998; 2) guarantee,
through 1999, up to $25 million in loans made by others, to residents of
Michigan for making energy-related home improvements; and 3) issue long-
term securities with maturities up to 30 years, through November 1998, up
to $401 million and $300 million for refinancing purposes and for general
corporate purposes, respectively. In May 1998, Consumers used $475
million of FERC authorization by issuing the following long-term debt: 1)
$250 million in senior notes; and 2) $225 million for a long-term bank
loan.
Additionally, in May 1998, Consumers requested authorization to issue from
July 1998 through June 2000, up to $950 million of long-term securities
for refinancing or refunding purposes and $200 million for general
corporate purposes. This authorization would replace and supersede any
remaining authorization previously granted to issue long-term securities,
except for the $25 million in loan guarantees discussed above.
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 March 31, 1998, a total of
$245 million was outstanding at a weighted average interest rate of 6.2
percent, compared with $88 million outstanding at March 31, 1997, at a
weighted average interest rate of 6.8 percent. In January 1998, Consumers
entered into interest rate swaps totaling $300 million. These swap
arrangements have had an immaterial effect on interest expense.
Consumers also has in place a $500 million trade receivables sale program.
At March 31, 1998 and 1997, receivables sold under the program totaled
$340 million and $398 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to
reflect receivables sold.
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 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.
The following table describes the new issuances of long-term financings
which have occurred during 1998 through early May 1998.
In Millions
Month Interest Principal Use of
Issued Maturity Rate (%) Amount Proceeds
- ----------------------------------------------------------------------
Senior
Notes (a) February 2008 6.375 $250 Pay down
First Mortgage
Bonds
Senior
Notes (a) March 2018 6.875 225 Pay down
First Mortgage
Bonds
Senior
Notes (a) May 2008 6.2 250 Pay down
First Mortgage
Bonds and
Long-Term
Bank Debt
Long-Term
Bank Debt May2001-2003 6.05 (b) 225 Pay down
Long-Term
Bank Debt
and general
corporate
purposes
-----
Total $950
=====
(a) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount.
(b) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
The following table describes the retirements of long-term financings
which have occurred during 1998 through early May 1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
- ----------------------------------------------------------------------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998-1999 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
-----
Total $453
=====
(a) The interest rate was variable; weighted average interest rate at
December 31, 1997 was 6.4 percent.
Consumers had an unsecured, variable rate long-term bank loan with an
outstanding balance at March 31, 1998 and 1997 of $350 million and $400
million, respectively. At March 31, 1998 and 1997 the loan carried a
weighted average interest rate of 6.3 percent and 6.0 percent,
respectively. In May 1998, Consumers refinanced this term loan with a new
$225 million unsecured long-term loan, and issued $250 million of senior
notes due 2008, at an interest rate of 6.2 percent to cover the remaining
$125 million refinancing. The balance of the new senior notes, $125
million, is to be used to retire first mortgage bonds and for general
corporate purposes.
Under the provisions of its Articles of Incorporation at March 31, 1998,
Consumers had $302 million of unrestricted retained earnings available to
pay common dividends. In January 1998, Consumers declared an $80 million
common dividend paid in February 1998.
5: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock for the three and twelve
month periods ended March 31, 1998 reflect the performance of the
Consumers Gas Group. 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 during the period. The earnings attributable to Class G Common
Stock on a per share basis for the three months ended March 31, 1998 and
1997 are based on 25.16 percent and 24.29 percent, respectively, of the
income of Consumers Gas Group.
Computation of Earnings Per Share:
In Millions, Except Per Share Amounts
Three Months Ended Twelve Months Ended
1998 1997 1998 1997
- ---------------------------------------------------------------------
(a) (a)
Net Income Applicable to
Basic and Diluted EPS
Consolidated Net Income $ 83 $ 84 $267 $236
Net Income Attributable
to Common Stocks:
CMS Energy - Basic EPS $ 74 $ 75 $252 $225
Add conversion of
7.75% Trust Preferred
Securities (net of tax) 2 - 7 -
---- ---- ---- ----
CMS Energy - Diluted EPS $ 76 $ 75 $259 $225
===== ===== ===== =====
Class G:
Basic and Diluted EPS $ 9 $ 9 $ 15 $ 11
===== ===== ===== =====
Average Common Shares
Outstanding Applicable
to Basic and Diluted EPS
CMS Energy:
Average
Shares - Basic 100.9 94.9 97.6 93.3
Add conversion of
7.75% Trust
Preferred Securities 4.2 - 3.3 -
Options-Treasury
Shares .6 .3 .4 .3
----- ----- ----- -----
Average
Shares - Diluted 105.7 95.2 101.3 93.6
===== ===== ===== =====
Class G:
Average Shares
Basic and Diluted 8.2 7.9 8.1 7.8
===== ===== ===== =====
Earnings Per Average
Common Share
CMS Energy:
Basic $ .73 $ .79 $ 2.58 $ 2.41
Diluted $ .72 $ .78 $ 2.56 $ 2.40
Class G:
Basic and Diluted $ 1.09 $ 1.18 $ 1.76 $ 1.53
=======================================================================
(a) Includes the cumulative effect of an accounting change which increased
net income attributible to CMS Energy Common Stock $43 million ($.40 per
share - basic and diluted) and Class G Common Stock $12 million ($.36 per
share - basic and diluted).
In February 1998, CMS Energy declared and paid dividends of $.30 per share
on CMS Energy Common Stock and $.31 per share on Class G Common Stock. In
April 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 to be paid in May 1998.
6: 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: (1) the item to
be hedged exposes the enterprise to price, interest or exchange rate risk;
and (2) 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 (1) the market value of the commodity price
contracts and (2) 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 has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas to the MCV 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.
At March 31, 1998, a letter of credit was not posted by either party to
the agreement. As of March 31, 1998, the fair value of this contract
reflected payment due from CMS NOMECO of $11 million.
CMS MST uses natural gas and oil 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 $795 million at March 31, 1998. 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 $220 million at March 31, 1998.
7: 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 $26 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 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 target is established, 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
$210 million, plus an additional amount totaling $10 million per year for
operation and maintenance costs. Consumers may need an equivalent amount
to comply with the new small particulate standards. The State of Michigan
has 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 March 31, 1998,
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. As of March 31,
1998, 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, or has initiated a lawsuit
against, 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 million for 2000. For further information, see the Capital
Resources and Liquidity - Capital Expenditures in the MD&A.
Other: As of March 31, 1998, CMS Energy and Enterprises have guaranteed up
to $469 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. As a result, 21 individual plaintiffs have re-filed their claims
with the trial court. Consumers intends to vigorously defend these cases,
but is unable to predict the outcome. As of March 31, 1998, Consumers had
6 individual stray voltage lawsuits, unrelated to the cases above,
awaiting trial court action, down from 12 lawsuits as reported at year end
1997.
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 parties are awaiting the court's decision on
Consumers' and CMS Energy's motion for summary judgment and/or dismissal
of the complaint. Consumers believes 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 as of March 31, 1998,
was estimated to 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, as of March 31, 1998, 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 as of March 31, 1998, 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.
CMS Energy 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 CMS Energy's financial position,
liquidity, or results of operations.
8: 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. On March 31, 1998,
Consumers filed with the MPSC a new decommissioning cost estimate for Big
Rock and Palisades of $294 million and $518 million (in 1997 dollars)
respectively. The estimated decommissioning costs decreased from previous
estimates primarily due to a decrease in offsite burial costs. Consumers
recommended a reallocation of its existing surcharge between the two
plants on January 1, 1999 to provide additional funds to decommission Big
Rock. 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 is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it 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.
As of March 31, 1998 Consumers 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.
A forty to fifty day planned outage at Palisades commenced on April 24,
1998 for refueling and maintenance. Consumers will replace a total of
sixty nuclear fuel assemblies in the plant's reactor during the outage.
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.
9: 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
Three Months Ended Twelve Months Ended
1998 1997 1998 1997
- ----------------------------------------------------------------
Cash transactions
Interest paid (net of
amounts capitalized) $ 75 $ 63 $305 $257
Income taxes
paid (net of refunds) 19 - 86 80
Non-cash transactions
Nuclear fuel placed
under capital leases $ 5 $ 3 $ 6 $ 31
Other assets placed
under capital leases 2 2 7 4
======================================================================
44
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of
CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December
31, 1997, and the related consolidated statements of income, common
stockholders' equity and cash flows for the year then ended (not presented
herein), and, in our report dated January 26, 1998, we expressed an
unqualified opinion on those statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 11, 1998.
45
Consumers Energy Company
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A and other
parts of Consumers' 1997 Form 10-K. This MD&A also refers to, and in
some sections specifically incorporates by reference from, Consumers'
Condensed Notes to Consolidated Financial Statements and should be read in
conjunction with such Statements and Notes. This 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
March 31 1998 1997 Change
---- ---- ------
Three months ended $102 $ 88 $14
Twelve months ended 299 254 45
Net income available to common stockholders after the cumulative effect of
a change in accounting for property taxes was $102 million for the first
quarter of 1998 compared to $88 million for the same 1997 period. The
increase in earnings for the first quarter reflects revised accounting to
recognize property tax expense on the fiscal year basis of the taxing
units instead of on a calendar year basis. This one-time change in
accounting for property taxes resulted in a benefit of $66 million ($43
million after-tax). Earnings for the first quarter of 1998 also reflect
the recognition of a $37 million dollar loss ($24 million after tax) for
the underrecovery of power costs under the PPA. Earnings for the first
quarter of 1998 also reflect decreased gas deliveries due to warmer 1998
temperatures and increased electric sales along with reduced purchased
power costs. For further information on past and future MCV
underrecoveries, see Power Purchases from the MCV Partnership in Note 2.
The increase in earnings for the twelve months ended 1998 compared to the
1997 period reflects the change in accounting for property taxes
implemented during March 1998 as discussed above and the one-time
recognition of interest income of $7 million ($5 million after-tax) from a
related party property sale. In addition, the improved net income for the
twelve months ended 1998 reflects an adjustment of prior years' income
taxes associated with non-taxable earnings on nuclear decommissioning
trust funds of $9 million. Partially offsetting these increases were the
recognition, in March 1998, of the loss associated with the underrecovery
of power costs under the PPA as discussed above, and decreased gas
deliveries due to warmer weather during the first quarter of 1998. For
further information, see the Electric and Gas Utility Results of
Operations sections and Note 3.
Electric Utility Results of Operations
Electric Pretax Operating Income:
In Millions
March 31 1998 1997 Change
---- ---- -----
Three months ended $ 119 $ 106 $13
Twelve months ended 444 412 32
Electric pretax operating income for the three months ended March 31, 1998
benefitted from increased sales and control of operation and maintenance
costs compared to the same period in 1997. The twelve months ended 1998
also benefitted from increased sales and control of operation and
maintenance costs when compared to the 1997 period. These increases were
partly offset by increased general taxes and depreciation. The following
table quantifies these impacts on Pretax Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997
------------- -------------
Sales (including special
contract discounts) $ 6 $ 14
Rate increases and other
regulatory issues (2) (1)
Operations and maintenance 9 36
General taxes and depreciation - (17)
---- ----
Total change $ 13 $ 32
==== ====
Electric Deliveries:
Total electric deliveries increased 6.5 percent for three months ended
March 31, 1998 over the same period in 1997. Deliveries to ultimate
customers increased 1.2 percent. Reduced sales to residential and
commercial customers were more than offset by increased sales and
deliveries to industrial customers. For twelve months ended, total
electric deliveries increased 3.8 percent over the comparable 1997 period.
The increase is primarily attributable to an increase in intersystem sales
and a 1.3 percent increase in sales and deliveries to ultimate customers,
primarily within the industrial class.
Power Costs:
In Millions
March 31 1998 1997 Change
------ ------ ------
Three months ended $ 270 $ 282 $(12)
Twelve months ended 1,128 1,110 18
Although sales increased for the three months ended March 31, 1998
compared to the same period in 1997, power costs for the period decreased.
This decrease results from increased internal generation and reduced power
purchases from outside sources. Power costs increased for the twelve
months ended 1998 compared to 1997. Both internal generation and power
purchases from outside sources increased during this period to meet the
increased sales demand.
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 the first three months of 1998, the MCV
Facility was available 99 percent of the time, resulting in after-tax cash
underrecoveries of $11 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 2.
In Millions
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Estimated cash
underrecoveries,
net of tax $28 $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 Note 2.
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.
On April 24, 1998 a planned refueling and maintenance outage of forty to
fifty days began at Palisades. Consumers will replace a total of sixty
nuclear fuel assemblies in the plant's reactor during the outage.
Big Rock is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it would be uneconomical to
operate in an increasingly competitive environment. See the Electric
Environmental Matters section of this MD&A for further information on
decommissioning Big Rock and Note 6 on nuclear matters.
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 to meet the
Clean Air Act's requirements. Consumers believes it may incur an
additional $26 million in capital expenditures by the year 2000 to comply
with sulfur dioxide and nitrogen oxide emission limits established by the
EPA under the Clean Air Act's Acid Rain Program.
Consumers currently operates within all Clean Air Act requirements and
meets current emission limits. The EPA, however, 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 target is established, 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 $210 million, plus an additional
amount totaling $10 million per year for operation and maintenance costs.
Consumers may need an equivalent amount to comply with the new small
particulate standards. The State of Michigan has 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 to 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 5.
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 Michigan Supreme Court
allowed each case that was not previously refiled to go forward
separately. Consumers filed a motion for reconsideration with the
Michigan Supreme Court, which was denied. As a result, 21 individual
plaintiffs have re-filed their claims with the trial court. Consumers
intends to vigorously defend these cases, but is unable to predict the
outcome. As of March 31, 1998, Consumers had 6 individual stray voltage
lawsuits, unrelated to the cases above, awaiting trial court action, down
from 12 lawsuits as reported at year end 1997. For further information
regarding Stray Voltage, see the Other section in Note 5.
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 parties are
awaiting the court's decision on Consumers' and CMS Energy's motion for
summary judgment and/or dismissal of the complaint. Consumers believes
the lawsuit is without merit and will vigorously defend against it, but
cannot predict the outcome of this matter. For further information
regarding this antitrust litigation, see Item 3, Legal Proceedings.
Gas Utility Results of Operations
Gas Pretax Operating Income:
In Millions
March 31 1998 1997 Change
---- ---- ------
Three months ended $ 54 $ 78 $(24)
Twelve months ended 130 143 (13)
Gas pretax operating income decreased in both the three month and twelve
month periods ended March 31, 1998, as a result of decreased gas
deliveries and wholesale services due to warmer temperatures during the
winter heating seasons. Revenues and wholesale services were also down
for the three month and twelve month periods ended March 31, 1998 due to
the elimination of surcharges related to past conservation programs. The
decreased gas pretax operating income for the three months ended March 31,
1998 reflects higher operations expense related to growth in retail
services programs and the absence of 1997 non-recurring expense reductions
for uncollectible accounts and injuries and damages reserves. Gas pretax
operating income for the twelve month period ended March 31, 1998
benefited from lower operations and maintenance expenses that resulted
from cost controls. The following table quantifies these impacts on
Pretax Operating Income:
In Millions
Three Months Twelve Months
Ended March 31 Ended March 31
Change Compared to
Prior Year 1998 vs 1997 1998 vs 1997
------------ ------------
Sales $ (13) $ (13)
Gas wholesale and
retail service activities (3) (11)
Operations and maintenance (8) 11
------------ ------------
Total change $(24) $ (13)
============ ============
Gas Deliveries: System deliveries for the three month period ended March
31, 1998, including miscellaneous transportation, totaled 146 bcf, a
decrease of 22 bcf or 13 percent compared to the three month period ended
March 31, 1997. Deliveries for the twelve month period ended March 31,
1998, including miscellaneous transportation, totaled 399 bcf, a decrease
of 32 bcf or 7 percent compared to the twelve month period ended March 31,
1997. The decreased deliveries for three month and twelve month periods
ended reflect warmer temperatures primarily for the first quarter of 1998.
Cost of Gas Sold:
In Millions
March 31 1998 1997 Change
---- ---- -----
Three months ended $264 $314 $(50)
Twelve months ended 645 718 (73)
The cost decreases for the three month and twelve month periods ended
March 31, 1998 were the result of decreased sales reflecting warmer
temperatures during the winter heating seasons.
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. The Court of Appeals denied Consumers'
subsequent request for a rehearing of that opinion. In March 1998,
Consumers filed an application for leave to appeal with the Michigan
Supreme Court. For further information on Gas Proceedings, see the Gas
Business Outlook section of this MD&A and Note 3.
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. As of
May 8, 1998, more than 7,500 customers chose alternative gas suppliers,
representing approximately 10 bcf of gas load. Of these alternative gas
suppliers, one was a CMS Energy affiliate. 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 significant 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 3.
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 5.
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 $287 million and
$368 million for the first three months of 1998 and 1997, respectively.
The $81 million decrease resulted primarily from a decrease of $75 million
in the sale of accounts receivable. Other items included in the income
statement but which had no effect on cash flow were a one-time change in
accounting for property taxes resulting in a $66 million ($43 million
after-tax) gain and the recognition of a $37 million loss ($24 million
after-tax) for the underrecovery of power costs under the PPA. 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 in investing activities totaled $100
million and $98 million for the first three months of 1998 and 1997,
respectively. Consumers used the cash primarily for capital expenditures.
Financing Activities: Cash used in financing activities totaled $178
million and $262 million for the first three months of 1998 and 1997,
respectively. The decrease of $84 million is primarily the result of the
retirement of $418 million in bonds and other long term debt and the
payment of $80 million in common stock dividend offset by a $113 million
decrease in the reduction of notes payable and the issuance of $475
million in senior notes.
Other Investing and Financing Matters: At April 15, 1998, Consumers had
remaining FERC authorization to: 1) issue or guarantee up to $900 million
of short-term securities, outstanding at any one time, through 1998; 2)
guarantee, through 1999, up to $25 million in loans made by others, to
residents of Michigan for making energy-related home improvements; and 3)
issue long-term securities with maturities up to 30 years, through
November 1998, up to $401 million and $300 million for refinancing
purposes and for general corporate purposes, respectively. In May 1998,
Consumers used $475 million of FERC authorization by issuing the following
long-term debt: 1) $250 million in senior notes; and 2) $225 million for
a long-term bank loan.
Additionally, in May 1998, Consumers requested authorization to issue from
July 1998 through June 2000, up to $950 million of long-term securities
for refinancing or refunding purposes and $200 million for general
corporate purposes. This authorization would replace and supersede any
remaining authorization previously granted to issue long-term securities,
except for the $25 million in loan guarantees discussed above.
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 March 31, 1998, the total
available amount remaining under these facilities was $300 million.
Consumers also has in place a $500 million trade receivables sale program.
At March 31, 1998, $160 million in receivables remained available for sale
under the program.
The following table describes the new issuances of long-term financings
which have occurred during 1998 through early May 1998.
In Millions
Month Interest Principal
Issued Maturity Rate (%) Amount Use of Proceeds
------- -------- -------- ----- --------------
Senior Notes (a) February 2008 6.375 $250 Pay down First
Mortgage Bonds
Senior Notes (a) March 2018 6.875 225 Pay down First
Mortgage Bonds
Senior Notes (a) May 2008 6.2 250 Pay down First
Mortgage Bonds
and Long-Term
Bank Debt
Long-Term
Bank Debt May 2001-2003 6.05 (b) 225 Pay down Long-
Term Bank Debt
and general
corporate
purposes
-----
Total $950
=====
(a) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount.
(b) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
The following table describes the retirements of long-term financings
which have occurred during 1998 through early May 1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
-------- -------- ----- -----------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998-1999 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
-----
Total $453
=====
(a) The interest rate was variable; weighted average interest rate at
December 31, 1997 was 6.4 percent.
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 5.
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,
absent the impact of restructuring on the industry and its regulation 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. Among Consumers' alternatives in the event of the pool being
terminated would be joining an independent system operator. FERC has
indicated this preference for structuring the operations of the electric
transmission grid.
In June 1997 the MPSC issued an order proposing that beginning January 1,
1998 Consumers transmit and distribute energy on behalf of competing power
suppliers to serve retail customers. Subsequent to the June 1997 order,
the MPSC issued orders in October 1997 and in January and February 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; 3) to suspend the power supply cost recovery clause; and 4) the MPSC
order allows all customers to be free to choose power suppliers on January
1, 2002. See Note 2 for further information regarding the effect of the
PSCR suspension on the recovery of MCV Facility capacity charges. 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. The recovery of prudent costs of implementing a
direct-access program, estimated at an additional $200 million, would be
reviewed for prudence in the annual true-up proceeding and stranded cost
adjusted appropriately. 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.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison. Consumers believes that the MPSC lacks statutory authority to
mandate industry restructuring, and its appeal is limited to this
jurisdictional issue. Consumers has filed an application for leave to
appeal with the Michigan Supreme Court, which, if granted, would bypass
the Court of Appeals, and thereby achieve an earlier resolution of the
matter.
As directed in the MPSC's February 1998 order, Consumers submitted to the
MPSC its draft plan in April 1998 for implementing retail open access.
The primary issues addressed in the proposed plan are: 1) the
implementation schedule; 2) the retail open access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain retail open access service; and 4) the
roles and responsibilities for Consumers, customers and suppliers. Under
the proposed schedule in the draft plan, Consumers will allocate 750 MW of
electric capacity for retail open access to customers. In 1998, 300 MW of
retail open access for bidding will be open, and an additional 150 MW will
open for each year from 1999 to 2001. This plan supports the previous
order regarding the phase-in process. Due to the time required to provide
an opportunity for interested parties and the MPSC to review the plan,
Consumers does not believe retail open access will commence prior to the
fourth quarter of 1998. For further information regarding restructuring,
see Note 3.
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.
According to 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. Because the February 1998 MPSC order allows Consumers to
fully recover its transition costs, 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 March 31, 1998, Consumers had $268 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, including gas
customer choice 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.
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 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. This standard requires expanded
disclosure effective for 1998. Also in 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,
and will be effective for 1999. Consumers does not expect the application
of these standards 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 the first quarter of 1998, 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 March 31, 1998 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 March 31, 1998.
For a discussion of accounting policies related to derivative
transactions, see Note 4.
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.
57
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Operating Revenue
Electric $ 612 $ 620 $2,507 $2,474
Gas 429 498 1,135 1,231
Other 11 9 51 49
------ ------ ------ ------
1,052 1,127 3,693 3,754
------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 71 69 300 292
Purchased power - related parties 145 151 594 600
Purchased and interchange power 54 62 234 218
Cost of gas sold 264 314 645 718
Other 133 130 544 583
------ ------ ------ ------
667 726 2,317 2,411
Maintenance 37 40 166 174
Depreciation, depletion and amortization 110 111 389 374
General taxes 55 57 198 192
------ ------ ------ ------
869 934 3,070 3,151
------ ------ ------ ------
Pretax Operating Income
Electric 119 106 444 412
Gas 54 78 130 143
Other 10 9 49 48
------ ------ ------ ------
183 193 623 603
------ ------ ------ ------
Other Income (Deductions)
Loss on MCV power purchases (37) - (37) -
Dividends and interest from affiliates 4 4 23 17
Accretion income 2 2 7 9
Accretion expense (4) (5) (17) (19)
Other, net 1 1 1 (4)
------ ------ ------ ------
(34) 2 (23) 3
------ ------ ------ ------
Interest Charges
Interest on long-term debt 34 35 137 138
Other interest 10 8 38 31
Capitalized interest - - (1) (1)
------ ------ ------ ------
44 43 174 168
------ ------ ------ ------
Net Income Before Income Taxes 105 152 426 438
Income Taxes 36 55 133 148
------ ------ ------ ------
Net Income before cumulative effect of change in
accounting principle 69 97 293 290
Cumulative effect of change in accounting for
property taxes, net of $23 tax (Note 1) 43 - 43 -
------ ------ ------ ------
Net Income 112 97 336 290
Preferred Stock Dividends 5 7 23 28
Preferred Securities Distributions 5 2 14 8
------ ------ ------ ------
Net Income Available to Common Stockholder $ 102 $ 88 $ 299 $ 254
====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
58
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Cash Flows from Operating Activities
Net income $ 112 $ 97 $ 336 $ 290
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $13, $13, $50 and $48, respectively) 110 111 389 374
Loss on MCV power purchases 37 - 37 -
Capital lease and other amortization 8 8 43 39
Accretion expense 4 5 17 19
Accretion income - abandoned Midland project (2) (2) (7) (9)
Deferred income taxes and investment tax credit (10) - 3 46
Undistributed earnings of related parties (11) (9) (48)) (46)
Cumulative effect of accounting change (66) - (66) -
MCV power purchases (17) (15) (65) (66)
Other 2 1 5 3
Changes in other assets and liabilities 120 172 34 80
Net cash provided by operating activities 287 368 678 730
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease) (74) (77) (357) (404)
Cost to retire property, net (17) (4) (41) (28)
Investments in nuclear decommissioning trust funds (13) (13) (50) (48)
Other 4 (4) 54 (4)
Deferred demand-side management costs - - - (4)
Net cash used in investing activities (100) (98) (394) (488)
Cash Flows from Financing Activities
Proceeds from senior notes 469 - 469 -
Retirement of bonds and other long-term debt (418) - (470) (37)
Increase (decrease) in notes payable, net (132) (245) 157 50
Payment of common stock dividends (80) - (298) (200)
Payment of capital lease obligations (7) (8) (43) (38)
Payment of preferred stock dividends (5) (7) (27) (28)
Preferred securities distributions (5) (2) (14) (8)
Retirement of preferred stock - - (120) -
Proceeds from preferred securities - - 116 -
Contribution from (return of equity to) stockholder - - (50) -
Proceeds from bank loans - - - 23
Net cash used in financing activities (178) (262) (280) (238)
Net Increase (Decrease) in Cash and Temporary Cash Investments 9 8 4 4
Cash and Temporary Cash Investments, Beginning of Period 7 4 12 8
Cash and Temporary Cash Investments, End of Period $ 16 $ 12 $ 16 $ 12
<FN>
The accompanying condensed notes are an integral part of these statements.
59
Consumers Energy Company
Consolidated Balance Sheets
ASSETS March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Plant (At original cost)
Electric $6,547 $6,491 $6,412
Gas 2,346 2,322 2,242
Other 24 24 26
------ ------ ------
8,917 8,837 8,680
Less accumulated depreciation, depletion and amortization 4,722 4,603 4,378
------ ------ ------
4,195 4,234 4,302
Construction work-in-progress 144 145 114
------ ------ ------
4,339 4,379 4,416
------ ------ ------
Investments
Stock of affiliates 287 278 295
First Midland Limited Partnership (Note 2) 244 242 235
Midland Cogeneration Venture Limited Partnership (Note 2) 179 171 140
Other 7 7 9
------ ------ ------
717 698 679
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market 16 7 12
Accounts receivable and accrued revenue, less allowances
of $6, $6 and $8, respectively (Note 4) 52 82 61
Accounts receivable - related parties 71 62 62
Inventories at average cost
Gas in underground storage 79 197 51
Materials and supplies 64 63 72
Generating plant fuel stock 39 35 44
Postretirement benefits 25 25 25
Deferred income taxes 13 22 21
Prepayments and other 182 161 132
------ ------ ------
541 654 480
------ ------ ------
Non-current Assets
Nuclear decommissioning trust funds 518 486 401
Postretirement benefits 395 404 427
Abandoned Midland Project 88 93 108
Other 235 235 239
------ ------ ------
1,236 1,218 1,175
------ ------ ------
Total Assets $6,833 $6,949 $6,750
====== ====== ======
/TABLE
60
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
Capitalization
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 452 452 504
Revaluation capital 65 58 36
Retained earnings since December 31, 1992 385 363 385
------ ------ ------
1,743 1,714 1,766
Preferred stock 238 238 356
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 -
Long-term debt 1,722 1,369 1,652
Non-current portion of capital leases 73 74 97
------ ------ ------
3,996 3,615 3,971
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 284 579 348
Notes payable 245 377 88
Accrued taxes 232 244 190
Accounts payable 128 171 164
Accounts payable - related parties 82 79 70
Power purchases (Note 2) 47 47 47
Accrued interest 20 32 25
Accrued refunds 11 12 6
Other 132 136 147
------ ------ ------
1,181 1,677 1,085
------ ------ ------
Non-current Liabilities
Deferred income taxes 668 688 633
Postretirement benefits 480 489 508
Power purchases (Note 2) 157 133 167
Deferred investment tax credit 147 149 157
Regulatory liabilities for income taxes, net 61 54 75
Other 143 144 154
------ ------ ------
1,656 1,657 1,694
------ ------ ------
Commitments and Contingencies (Notes 2, 3, 5 and 6)
Total Stockholders' Investment and Liabilities $6,833 $6,949 $6,750
====== ====== ======
<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 4.
The accompanying condensed notes are an integral part of these statements.
61
Consumers Energy Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
In Millions
Common Stock
At beginning and end of period $ 841 $ 841 $ 841 $ 841
------ ------ ------ ------
Other Paid-in Capital
At beginning of period 452 504 504 504
Preferred stock required - - (2) -
Return of stockholder's contribution - - (50) -
------ ------ ------ ------
At end of period 452 504 452 504
------ ------ ------ ------
Revaluation Capital
At beginning of period 58 37 36 29
Change in unrealized investment-gain (loss) (a) 7 (1) 29 7
------ ------ ------ ------
At end of period 65 36 65 36
------ ------ ------ ------
Retained Earnings
At beginning of period 363 297 385 331
Net income (a) 112 97 336 290
Common stock dividends declared (80) - (299) (200)
Preferred stock dividends declared (5) (7) (23) (28)
Preferred securities distributions (5) (2) (14) (8)
------ ------ ------ ------
At end of period 385 385 385 385
------ ------ ------ ------
Total Common Stockholder's Equity $1,743 $1,766 $1,743 $1,766
====== ====== ====== ======
(a) Disclosure of Comprehensive Income:
Revaluation capital
Unrealized investment-gain (loss), net of tax of
$4, $(1), $16 and $4, respectively $ 7 $ (1) $ 29 $ 7
Net income 112 97 336 290
---- ---- ---- ----
Total Comprehensive Income $119 $ 96 $365 $297
==== ==== ==== ====
<FN>
The accompanying condensed notes are an integral part of these statements.
62
Consumers Energy Company
Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed Notes
should be read along with the Consolidated Financial Statements and Notes
contained in the Consumers 1997 10-K that includes the Report of
Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure And Change of Significant Accounting Policies
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.
Implementation of New Accounting Standard
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. This statement, which is effective
for 1998 financial statement reporting, establishes standards for
reporting and display of comprehensive income and its components. Equity
adjustments related to unrealized investment gains and losses (net of
tax), along with consolidated net income, comprise comprehensive income.
Change in Method of Accounting for Property Taxes
During the first quarter of 1998, Consumers implemented a change in the
method of accounting for property taxes so that such taxes are recognized
during the fiscal period of the taxing authority for which the taxes are
levied. This change provides a better matching of property tax expense
with the services provided by the taxing authorities, and is considered
the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time
change in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million. The pro forma effect on prior years'
consolidated net income of retroactively recording property taxes as if
the new method of accounting had been in effect for all periods presented
is not material.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to 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:
In
Millions
Three Months Ended Twelve Months Ended
March 31
1998 1997 1998 1997
----- ----- ----- -----
Pretax operating income $10 $ 8 $47 $46
Income taxes and other 3 2 14 14
Net income $ 7 $ 6 $33 $32
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.
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. The MPSC has, since January 1, 1993, permitted
Consumers to recover capacity charges averaging 3.62 cents per kWh for 915
MW, plus a substantial portion of the fixed and variable energy charges.
Beginning January 1, 1996, the MPSC has also permitted Consumers to
recover capacity charges for the remaining 325 MW of MCV Facility
contract capacity. The order approving such recovery indicated that the
recoverable capacity charge for the 325 MW would gradually increase from
an initial average charge of 2.86 cents per kWh to an average charge of
3.62 cents per kWh over the 1996-2004 time period. Because the MPSC
allowed Consumers to suspend the PSCR process as part of the electric
industry restructuring order (see Note 3), Consumers expects to recover a
portion of the future increases in approved capacity charges through an
adjustment to the frozen PSCR charge.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA. At March 31, 1998
and December 31,1997, the after-tax present value of the PPA liability
totaled $133 million and $117 million, respectively. The increase in the
liability since December 31, 1997 reflects an additional $37 million
accrual ($24 million after-tax) for higher than anticipated MCV Facility
availability levels experienced in prior periods and an after-tax
accretion expense of $3 million, partially offset by after-tax cash
underrecoveries of $11 million. The undiscounted after-tax amount
associated with the liability totaled $182 million at March 31, 1998. 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 the first three months of 1998 the
MCV Facility was available 99 percent of the time, resulting in $5 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, net of tax $28 $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 February 1998, the MCV Partnership filed a claim of appeal from the
January 1998 and February 1998 MPSC orders 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. This matter is now closed.
3: 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 2) 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 100 MW is available solely to direct-access
customers for at least 18 months. The Commissions' order allowed existing
special contracts to fill 410 MW of the load. The remaining 140 MW of the
650 MW load could be filled by either special contracts or direct access
loads. The load was filled by new special contracts signed subsequent to
the order. According to the MPSC order, Consumers held a lottery in April
1997 to select the customers to purchase 100 MW by direct access. Direct
access for a portion of this 100 MW began in late 1997. Consumers expects
the remaining amount of direct access to begin in 1998.
In January 1998, the Court of Appeals affirmed an MPSC conclusion 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 transmit and distribute energy on behalf of competing power
suppliers to serve retail customers.
Subsequent to the June 1997 order, the MPSC issued orders in October 1997
and in January and February 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; 3) to suspend the power supply
cost recovery clause; and 4) the MPSC order allows all customers to be
free to choose power suppliers on January 1, 2002. See Note 2 for further
information regarding the effect of the PSCR suspension on the recovery of
MCV Facility capacity charges. 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. The recovery of
prudent costs of implementing a direct-access program, estimated at an
additional $200 million, would be reviewed for prudence in the annual
true-up proceeding and stranded cost adjusted appropriately. 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.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers and Detroit
Edison. Consumers believes that the MPSC lacks statutory authority to
mandate industry restructuring, and its appeal is limited to this
jurisdictional issue. Consumers has filed an application for leave to
appeal with the Michigan Supreme Court, which, if granted, would bypass
the Court of Appeals, and thereby achieve an earlier resolution of the
matter.
As directed in the MPSC's February 1998 order, Consumers submitted to the
MPSC its draft plan in April 1998 for implementing retail open access.
The primary issues addressed in the proposed plan are: 1) the
implementation schedule; 2) the retail open access service options
available to customers and suppliers; 3) the process and requirements for
customers and others to obtain retail open access service; and 4) the
roles and responsibilities for Consumers, customers and suppliers. Under
the proposed schedule in the draft plan, Consumers will allocate 750 MW of
electric capacity for retail open access to customers. In 1998, 300 MW of
retail open access for bidding will be open, and an additional 150 MW will
open for each year from 1999 to 2001. This plan supports the previous
order regarding the phase-in process. Due to the time required to provide
an opportunity for interested parties and the MPSC to review the plan,
Consumers does not believe retail open access will commence prior to the
fourth quarter of 1998. 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. As of May 8, 1998 approximately 7,500
customers chose alternative gas suppliers, representing approximately 10
bcf of gas load. Of these alternative gas suppliers, one was a CMS Energy
affiliate. 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 January 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 75 percent of its 1998 requirements, 35 percent
of its 1999 requirements and 25 percent of its 2000 requirements.
Additional forward coverage is currently under review.
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.
4: Short-Term Financings and Capitalization
Authorization: At April 15, 1998, Consumers had remaining FERC
authorization to: 1) issue or guarantee up to $900 million of short-term
securities, outstanding at any one time, through 1998; 2) guarantee,
through 1999, up to $25 million in loans made by others, to residents of
Michigan for making energy-related home improvements; and 3) issue long-
term securities with maturities up to 30 years, through November 1998, up
to $401 million and $300 million for refinancing purposes and for general
corporate purposes, respectively. In May 1998, Consumers used $475
million of FERC authorization by issuing the following long-term debt: 1)
$250 million in senior notes; and 2) $225 million for a long-term bank
loan.
Additionally, in May 1998, Consumers requested authorization to issue from
July 1998 through June 2000, up to $950 million of long-term securities
for refinancing or refunding purposes and $200 million for general
corporate purposes. This authorization would replace and supersede any
remaining authorization previously granted to issue long-term securities,
except for the $25 million in loan guarantees discussed above.
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
March 31, 1998, a total of $245 million was outstanding at a weighted
average interest rate of 6.2 percent, compared with $88 million
outstanding at March 31, 1997, at a weighted average interest rate of 6.8
percent. In January 1998, Consumers entered into interest rate swaps
totaling $300 million. These swap arrangements have had an immaterial
effect on interest expense.
Consumers also has in place a $500 million trade receivables sale program.
At March 31, 1998 and 1997, receivables sold under the program totaled
$340 million and $398 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to
reflect receivables sold.
Derivatives: Consumers entered into 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. Consumers accrues the difference between
the amounts paid and received under the swaps and records it 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 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.
Long-Term Financings: The following table describes the new issuances of
long-term financings which have occurred during 1998 through early May
1998.
In Millions
Month Interest Principal
Issued Maturity Rate (%) Amount Use of Proceeds
-------- -------- -------- -------- ---------------
Senior Notes (a) February 2008 6.375 $250 Pay down First
Mortgage Bonds
Senior Notes (a) March 2018 6.875 225 Pay down First
Mortgage Bonds
Senior Notes (a) May 2008 6.2 250 Pay down First
Mortgage Bonds and
Long-Term Bank Debt
Long-Term
Bank Debt May 2001-2003 6.05 (b) 225 Pay down Long-Term
Bank Debt and
general corporate
purposes
-----
Total $950
=====
(a) The Senior Notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in a similar amount.
(b) The interest rate is variable; weighted average interest rate upon
original issuance was 6.05 percent.
The following table describes the retirements of long-term financings
which have occurred during 1998 through early May 1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
-------- --------- -------- -----------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998-1999 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
-----
Total $453
=====
(a) The interest rate was variable; weighted average interest rate at
December 31, 1997 was 6.4 percent.
Consumers had an unsecured, variable rate long-term bank loan with an
outstanding balance at March 31, 1998 and 1997 of $350 million and $400
million, respectively. At March 31, 1998 and 1997 the loan carried a
weighted average interest rate of 6.3 percent and 6.0 percent,
respectively. In May 1998, Consumers refinanced this term loan with a new
$225 million unsecured long-term loan, and issued $250 million of senior
notes due 2008, at an interest rate of 6.2 percent to cover the remaining
$125 million refinancing. The balance of the new senior notes, $125
million, is to be used to retire first mortgage bonds and for general
corporate purposes.
Under the provisions of its Articles of Incorporation at March 31, 1998,
Consumers had $302 million of unrestricted retained earnings available to
pay common dividends. In January 1998, Consumers declared an $80 million
common dividend paid in February 1998.
5: 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 $26 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 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 target is established, 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
$210 million, plus an additional amount totaling $10 million per year for
operation and maintenance costs. Consumers may need an equivalent amount
to comply with the new small particulate standards. The State of Michigan
has 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 March 31, 1998,
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. As of March 31,
1998, 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, or has initiated a lawsuit
against, 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.
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. As a result, 21 individual plaintiffs have re-filed their claims
with the trial court. Consumers intends to vigorously defend these cases,
but is unable to predict the outcome. As of March 31, 1998, Consumers had
6 individual stray voltage lawsuits, unrelated to the cases above,
awaiting trial court action, down from 12 lawsuits as reported at year end
1997.
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 parties are awaiting the court's decision on
Consumers' and CMS Energy's motion for summary judgment and/or dismissal
of the complaint. 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.
6: 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. On March 31, 1998,
Consumers filed with the MPSC a new decommissioning cost estimate for Big
Rock and Palisades of $294 million and $518 million (in 1997 dollars)
respectively. The estimated decommissioning costs decreased from previous
estimates primarily due to a decrease in offsite burial costs. Consumers
recommended a reallocation of its existing surcharge between the two
plants on January 1, 1999 to provide additional funds to decommission Big
Rock. 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 is being decommissioned. It was closed permanently on August 29,
1997 because management determined that it 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.
As of March 31, 1998 Consumers 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.
A forty to fifty day planned outage at Palisades commenced on April 24,
1998 for refueling and maintenance. Consumers will replace a total of
sixty nuclear fuel assemblies in the plant's reactor during the outage.
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.
7: 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
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
----- ----- ----- -----
Cash transactions
Interest paid (net of
amounts capitalized) $ 53 $ 48 $170 $160
Income taxes paid
(net of refunds) 3 1 119 115
Non-cash transactions
Nuclear fuel placed
under capital lease $ 5 $ 3 $ 6 $ 31
Other assets placed
under capital leases 2 2 7 4
72
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of
CMS Energy Corporation) and subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and
subsidiaries as of December 31, 1997, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended (not presented herein), and, in our report dated January
26, 1998, we expressed an unqualified opinion on those statements. In our
opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 11, 1998.
73
Quantitative and Qualitative
Disclosures About Market Risk
CMS Energy
Quantitative and Qualitative Disclosures About Market Risk is contained in
PART I: CMS ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in CMS Energy's and Consumers' Form 10-K for the
year ended December 31, 1997. Reference is made to the Notes to the
Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial
proceedings involving rate, operating and environmental matters.
Consumers Stray Voltage Litigation
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. Pursuant to a December 1997
Michigan Supreme Court order that remanded for further proceedings the
March 1994 trial court decision, 165 plaintiffs were permitted to refile
individual lawsuits. Of the 165 potential plaintiffs, only 21 refiled
their claims prior to the court ordered deadline. Consumers presently
intends vigorously to defend against these lawsuits, but is unable to
predict the outcome. As of March 31, 1998, Consumers had 6 individual
stray voltage lawsuits, unrelated to the cases above, awaiting trial court
action, down from approximately 12 lawsuits at year end 1997.
CMS Energy and Consumers Antitrust Litigation
In October 1997, Indeck Energy Services, Inc., and an affiliate, 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 large
customers as well as allegations that Consumers used its monopoly power to
interfere with plaintiffs access to power facilities and business
opportunities. The plaintiffs claim damages of $100 million (which can be
trebled in antitrust cases as provided by law). The parties are presently
awaiting the court's written opinion on CMS Energy's and Consumers'
motions for summary judgment and or dismissal of the complaint. CMS Energy
and Consumers believe the lawsuit is entirely without merit and will
vigorously defend against it, but cannot predict the outcome of this
matter.
Consumers' Joint Lawsuit Against DOE:
Under the Nuclear Waste Policy Act of 1982, by January 31, 1998 the DOE
was required to begin accepting deliveries of spent nuclear fuel for
disposal, even if a permanent storage repository was not then operational.
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 response to the DOE's declaration
in December 1996 that it would not begin to accept spent nuclear fuel
deliveries in 1998, Consumers, other utilities and states filed suit. The
parties sought, among other relief, 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 DOE
could not engage in a contract interpretation that violated the act and
that the contract between the DOE and the utilities provided a potentially
adequate remedy if the DOE failed to fulfill its obligations. In February
1998, utilities and state regulatory parties to the lawsuits filed various
motions designed to persuade the appellate court to grant further relief
against DOE. In May 1998, the court issued an order granting the motion
to consolidate the various lawsuits and denied all other motions. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(4)(a) - Consumers: First Supplemental Indenture
dated as of May 1, 1998, between
Consumers and The Chase Manhattan
Bank, as Trustee
(4)(b) - Consumers: Seventy-second Supplemental
Indenture dated as of May 1,
1998, between Consumers and The
Chase Manhattan Bank, as Trustee
(12) - CMS Energy: Statements regarding computation
of Ratio of Earnings to Fixed
Charges
(15) - CMS Energy: Letter of Independent Public
Accountant
(18) - Consumers: Letter re change in accounting
principles
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
There have been no Current Reports on Form 8-K since the filing of
CMS Energy Corporation's and Consumers Energy Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
75
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Dated: May 15, 1998 By A. M. Wright____________________
Alan M. Wright
Senior Vice President,
Chief Financial Officer
and Treasurer
CONSUMERS ENERGY COMPANY
(Registrant)
Dated: May 15, 1998 By A. M. Wright ____________________
Alan M. Wright
Senior Vice President and
Chief Financial Officer