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FORM 8-K
CURRENT REPORT
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 30, 1998
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313) 436-9261
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ITEM 5. OTHER EVENTS
Reference is made to CMS Energy Corporation's Form 8-K filed on June 23, 1998
which announced that its oil and gas exploration and production subsidiary, CMS
NOMECO Oil & Gas Company, had elected to change from full cost accounting to the
successful efforts method, effective January 1, 1998. Nitrotec Corporation, in
which another of CMS Energy's subsidiaries, CMS Gas Transmission and Storage
Company, has an equity investment, also elected to convert from the full cost
method of accounting to the successful efforts method of accounting, effective
January 1, 1998. Accordingly, CMS Energy's prior year financial statements have
been restated to conform with successful efforts accounting. The effect, after
tax, of the change in accounting method as of December 31, 1997, was a reduction
to retained earnings of $175 million for CMS NOMECO and $15 million for CMS Gas
Transmission. These reductions were primarily attributable to a decrease in net
plant and property and deferred tax liability of $270 million and $95 million,
respectively, for CMS NOMECO and a $15 million decrease in CMS Gas
Transmission's equity investment in Nitrotec. The combined effects of the
changes in accounting method resulted in decreases to CMS Energy's net income of
$24 million ($.24 per share), $16 million ($.18 per share) and $9 million ($.11
per share) for the years ended December 31, 1997, 1996 and 1995, respectively.
CMS Energy's restated financial statements and related data are included as part
of or filed as exhibits to this Form 8-K.
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TABLE OF CONTENTS
Selected Financial Data (As Restated)................................. 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations (As Restated)............................. 10
Financial Statements and Supplementary Data (As Restated)............. 27
Report of Independent Public Accountants.............................. 71
Quarterly Financial and Common Stock Information (As Restated)........ 72
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE............................. Association of Businesses Advocating Tariff Equity
ALJ............................... Administrative Law Judge
Ames.............................. Crescent and Ames gas gathering systems and processing plant
in Oklahoma
AMT............................... Alternative minimum tax
Articles.......................... Articles of Incorporation
Attorney General.................. Michigan Attorney General
bcf............................... Billion cubic feet
Big Rock.......................... Big Rock Point nuclear power plant, owned by Consumers
Board of Directors................ Board of Directors of CMS Energy
Btu............................... British thermal unit
CFLCL............................. Companhia Forcia e Luz Cataguazes-Leopoldina, a Brazilian
utility
Class G Common Stock.............. One of two classes of common stock of CMS Energy, no par
value, which reflects the separate performance of the Consumers
Gas Group
Clean Air Act..................... Federal Clean Air Act, as amended
CMS Electric and Gas.............. CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy........................ CMS Energy Corporation
CMS Energy Common Stock........... One of two classes of common stock of CMS Energy, par value
$.01 per share
CMS Gas Marketing................. CMS Gas Marketing Company, a subsidiary of Enterprises
CMS Gas Transmission.............. CMS Gas Transmission and Storage Company, a subsidiary of
Enterprises
CMS Generation.................... CMS Generation Co., a subsidiary of Enterprises
CMS Holdings...................... CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland....................... CMS Midland Inc., a subsidiary of Consumers
CMS MST........................... CMS Marketing, Services and Trading Company, a subsidiary
of Enterprises
CMS NOMECO........................ CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises
Common Stock...................... CMS Energy Common Stock and Class G Common Stock
Consumers......................... Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group............... The gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage
Court of Appeals.................. Michigan Court of Appeals
Detroit Edison.................... The Detroit Edison Company
DOE............................... U.S. Department of Energy
Dow............................... The Dow Chemical Company
DSM............................... Demand-side management
Enterprises....................... CMS Enterprises Company, a subsidiary of CMS Energy
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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(R), $250 million Series A, $125
million Series B, $150 million Series C and $200 million Series
D
Huron ............................ Huron Hydrocarbons, Inc., a subsidiary of Consumers
IRC............................... Internal Revenue Code
ITC............................... Investment tax credit
Jorf Lasfar....................... A 1,320 MW coal-fueled power plant in Morocco, Africa,
jointly owned by CMS Generation and ABB Energy Venture,
Inc.
kWh............................... Kilowatt-hour
Loy Yang.......................... A 2,000 MW brown coal fueled Loy Yang A power plant and an
associated coal mine in Victoria, Australia, in which CMS
Generation holds a 50 percent ownership interest
Ludington......................... Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
mcf............................... Thousand cubic feet
MCV Facility...................... A natural gas-fueled, combined-cycle cogeneration facility
operated by the MCV Partnership
MCV Partnership................... Midland Cogeneration Venture Limited Partnership in which
Consumers has a 49 percent interest through CMS Midland
MD&A.............................. Management's Discussion and Analysis
MichCon........................... Michigan Consolidated Gas Company
Michigan Gas Storage.............. Michigan Gas Storage Company, a subsidiary of Consumers
Mbbls............................. Thousand barrels
MMbbls............................ Million barrels
MMBtu............................. Million British thermal unit
MMcf.............................. Million cubic feet
Moss Bluff........................ Moss Bluff Gas Storage Systems, a partnership that owns a gas
storage facility
MPSC.............................. Michigan Public Service Commission
MW................................ Megawatts
Natural Gas Act................... Federal Natural Gas Act
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NEIL.............................. Nuclear Electric Insurance Ltd.
Nitrotec.......................... Nitrotec Corporation, a propriety gas technology company in
which CMS Gas Transmission owns an equity interest
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 $125 million term
loan facility
SFAS.............................. Statement of Financial Accounting Standards
Superfund......................... Comprehensive Environmental Response, Compensation and
Liability Act
TGN............................... Transportadora de Gas del Norte S. A., a natural gas pipeline
located in Argentina
Transition Costs.................. Costs incurred by utilities in order to serve their customers in a
regulated monopoly environment, but which may not be
recoverable in a competitive environment because of customers
leaving their systems and ceasing to pay for their costs. These
costs could include owned and purchased generation, regulatory
assets, and costs incurred in the transition to competition.
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Trust Preferred Securities........ Undivided beneficial interest in the assets of statutory business
trusts, these interests have a preference with respect to certain
trust distributions over the interests of either CMS Energy or
Consumers, as applicable, as owner of the common beneficial
interests of the trusts
Union............................. Utility Workers of America, AFL-CIO
UST............................... Underground storage tanks
Voluntary Employee Beneficiary
Association..................... A legal entity, established under guidelines of the Internal
Revenue Code, through which the company can provide certain
benefits for its employees or retirees
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SELECTED FINANCIAL INFORMATION (AS RESTATED) CMS ENERGY CORPORATION
1997 1996 1995 1994 1993
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Operating revenue (in millions)* ($) 4,781 4,324 3,890 3,614 3,476
Consolidated net income (in millions)* ($) 244 224 195 177 130
Average common shares outstanding
(in thousands)
CMS Energy 96,144 92,462 88,810 85,888 81,251
Class G 8,015 7,727 7,511 - -
Earnings per average common share
CMS Energy - Basic* ($) 2.39 2.27 2.16 2.07 1.61
- Diluted* ($) 2.37 2.26 2.16 2.06 1.60
Class G - Basic and Diluted ($) 1.84 1.82 .38 - -
Cash from operations (in millions)* ($) 624 647 640 603 464
Capital expenditures, excludes capital
lease additions and DSM (in millions) ($) 711 659 535 575 550
Total assets (in millions)* ($) 9,508 8,363 7,909 7,159 6,742
Long-term debt, excluding current
maturities (in millions) ($) 3,272 2,842 2,906 2,709 2,405
Non-current portion of capital
leases (in millions) ($) 75 103 106 108 115
Total preferred stock (in millions) ($) 238 356 356 356 163
Total Trust Preferred Securities (in millions) ($) 393 100 - - -
Cash dividends declared per common share
CMS Energy ($) 1.14 1.02 .90 .78 .60
Class G ($) 1.21 1.15 .56 - -
Market price of common stock at year-end
CMS Energy ($) 44-1/16 33-5/8 29-7/8 22-7/8 25-1/8
Class G ($) 27-1/8 18-3/8 18-7/8 - -
Book value per common share at year-end (a)
CMS Energy* ($) 16.84 15.24 13.51 11.16 9.59
Class G ($) 10.91 11.38 10.60 - -
Return on average common equity* (%) 14.7 15.7 17.1 19.8 18.1
Return on assets (a)* (%) 5.6 5.4 5.2 5.0 4.3
Number of employees at year-end
(full-time equivalents) 9,682 9,712 10,105 9,972 10,013
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*RESTATED, SEE NOTE 2.
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SELECTED FINANCIAL INFORMATION (AS RESTATED) CMS ENERGY CORPORATION
(CONTINUED)
1997 1996 1995 1994 1993
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ELECTRIC UTILITY STATISTICS
Sales (billions of kWh) 37.9 37.1 35.5 34.5 32.8
Customers (in thousands) 1,617 1,594 1,570 1,547 1,526
Average sales rate per kWh (cent) 6.57 6.55 6.36 6.29 6.28
GAS UTILITY STATISTICS
Sales and transportation deliveries (bcf) 420 448 404 409 411
Customers (in thousands) (b) 1,533 1,504 1,476 1,448 1,423
Average sales rate per mcf ($) 4.44 4.45 4.42 4.48 4.46
ELECTRIC AND GAS NON-UTILITY STATISTICS
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 621 493 497 385 334
Independent power production
sales (millions of kWh) 13,126 7,823 7,422 6,216 5,019
CMS Energy's share of unconsolidated
natural gas transmission, storage and
processing revenue (in millions) ($) 51 42 26 7 3
CMS Energy's share of unconsolidated
marketing, services and trading
revenue ($) 202 - - - -
Gas marketed for end-users (bcf) 243 108 101 66 60
EXPLORATION AND PRODUCTION STATISTICS
Sales (net equiv. MMbbls) (a) 11.4 10.1 9.0 5.6 5.0
Proved reserves (net equiv. MMbbls) (a) 152.0 133.5 124.5 108.0 69.8
Proved reserves added (net equiv. MMbbls) (a) 29.8 18.7 25.6 29.0 3.9
Finding cost per net equiv. barrel ($) 2.38 2.94 5.06 5.92 4.97
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(a) Certain prior year amounts were restated for comparative purposes.
(b) Excludes off-system transportation customers.
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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
(AS RESTATED)
This Annual Report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995, that include, without
limitation, discussions as to expectations, beliefs, plans, objectives and
future financial performance, or assumptions underlying or concerning matters
discussed in this report. Refer to the Forward-Looking Information section of
this MD&A for some important factors that could cause actual results or outcomes
to differ materially from those addressed in the forward-looking discussions.
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan and is the principal subsidiary of CMS Energy. Consumers' customer base
includes a mix of residential, commercial and diversified industrial customers,
the largest segment of which is the automotive industry. Enterprises is engaged
in several domestic and international energy-related businesses including:
acquisition, development and operation of independent power production
facilities; oil and gas exploration and production; storage, transmission and
processing of natural gas; energy marketing, services and trading; and
international energy distribution.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In Millions, Except Per Share Amounts
Years Ended December 31 1997* 1996* Change
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Consolidated Net Income $ 244 $ 224 $ 20
Net Income Attributable to Common Stocks:
CMS Energy 229 210 19
Class G 15 14 1
Earnings Per Average Common Share:
CMS Energy
Basic 2.39 2.27 .12
Diluted 2.37 2.26 .11
Class G
Basic and Diluted 1.84 1.82 .02
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* Restated as a result of change in method of accounting for investments in oil
and gas properties. Refer to the discussion below and Note 2 for further
information.
The combined effects of the changes in accounting for oil and gas investments
resulted in decreases to net income of $24 million ($.24 per share), $16 million
($.18 per share) and $9 million ($.11 per share) for the years ended December
31, 1997, 1996 and 1995, respectively. The following discussion of earnings
variations compare the restated results of operations for the periods 1997, 1996
and 1995.
CMS Energy experienced earnings growth for the fifth consecutive year. This
historical growth reflects changes in regulation allowing CMS Energy to invest
in other states and countries, and to offer a full range
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of services and fuels. The increased earnings for 1997 resulted from (i) a
February 1996 electric rate increase received by Consumers that benefitted all
of 1997, (ii) increased electric sales by Consumers, (iii) improved earnings
from the MCV Partnership, (iv) increased revenues from the transmission of
electricity for others, (v) increased income from international independent
power production, and (vi) increased income from international gas transmission,
storage and processing. Partially offsetting these increases, however, were (i)
decreased gas deliveries by Consumers due to warmer winter month temperatures in
1997 and the loss of an extra day for the 1996 leap year, (ii) marketing losses
due to lower gas margins, and (iii) lower gas production, lower oil and gas
prices and higher operating expenses in the oil and gas exploration and
production business. Earnings for 1997 also included recognition of a gain on
the sale of CMS NOMECO's entire interest in oil and gas properties in Yemen, an
industry expertise service fee in connection with the Loy Yang A acquisition, a
gain on the sale of the Ames gas gathering system, and Consumers' adjustment of
prior years' income taxes associated with non-taxable earnings on nuclear
decommissioning trust funds. Comparatively, the 1996 results included a gain on
the sale of a power purchase agreement by a partnership in which CMS Generation
owns a 50 percent interest, a gain on the sale of a partnership interest and a
refund received by the MCV Partnership.
The increase in consolidated net income for 1996 over 1995 primarily reflects
the favorable impact of an electric rate increase and an operating income
increase from a refund received by the MCV Partnership that provided a $6
million earnings benefit for CMS Energy. Earnings in 1996 also reflect increased
electric sales, gas deliveries and revenues from gas loaning activities.
Consolidated net income was also affected by increased earnings from CMS Gas
Transmission's 25 percent ownership interest in TGN and increased equity
earnings resulting from the sale of a power purchase agreement. CMS Gas
Transmission and CMS Generation are subsidiaries of Enterprises.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
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Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
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Sales (including special contract discounts) $ 5 $ 1
Rate increases and other regulatory issues 11 50
Operation and maintenance 24 2
General taxes, depreciation and other (19) (14)
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Total increase/(decrease) in pretax operating income $ 21 $ 39
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ELECTRIC SALES: Total electric sales in 1997 were 38 billion kWh, an increase of
2.3 percent over 1996 sales. The increase reflects continued economic growth in
Michigan and a 1.2 percent increase in sales to ultimate customers, primarily
within the industrial class. Total electric sales in 1996 were 37 billion kWh,
an increase of 4.4 percent over the 1995 level. The increase in 1996 is
primarily attributable to an increase in intersystem sales and a 1.7 percent
increase in sales to ultimate customers. This increase also reflects continued
economic growth in Consumers' territory.
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POWER COSTS: Cost increases in both 1997 and 1996 over the prior periods reflect
greater power purchases from outside sources to meet increased sales demand. The
following table quantifies the changes in electric power costs:
In Millions
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Years Ended December 31 1997 1996 Change 1996 1995 Change
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$1,139 $1,087 $52 $1,087 $970 $117
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ELECTRIC UTILITY OPERATING ISSUES:
POWER PURCHASES FROM THE MCV PARTNERSHIP: In 1992, Consumers recognized a loss
for the present value of the estimated future underrecoveries of power purchases
from the MCV Partnership. The after-tax cash underrecoveries are currently based
on the assumption that the MCV Facility will be available to generate
electricity 91.5 percent of the time over its expected life. For 1997, the MCV
Facility was available 99 percent of the time, resulting in after-tax cash
underrecoveries of $41 million. Consumers believes it will continue to
experience after-tax cash underrecoveries associated with the PPA in amounts as
those shown below. For further information, see Power Purchases from the MCV
Partnership in Note 3.
In Millions
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1998 1999 2000 2001 2002
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Estimated cash underrecoveries, net of tax $23 $22 $21 $20 $19
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Consumers bases the above estimated underrecoveries, in part, on an estimate of
the future availability of the MCV Facility. If the MCV Facility operates at
levels above management's estimate over the remainder of the PPA, Consumers will
need to recognize losses for future underrecoveries larger than amounts
previously recorded. Therefore, Consumers would experience larger amounts of
cash underrecoveries than originally anticipated. Management will continue to
evaluate the adequacy of the accrued liability considering actual MCV Facility
operations.
ELECTRIC RATE PROCEEDINGS: In 1996, the MPSC issued a final order authorizing
Consumers to recover costs associated with the purchase of an additional 325 MW
of MCV Facility capacity and to accelerate recovery of its nuclear plant
investment. To implement the accelerated recovery, the order required an
increase in annual nuclear plant depreciation expense by $18 million with a
corresponding decrease in fossil-fueled generating plant depreciation expense.
The order also established an experimental direct- access program. For further
information on these issues, see the Electric Business Outlook section of this
MD&A and Notes 3 and 4.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for the Palisades. The report rated all areas as
good, unchanged from the previous assessment.
The NRC requires Consumers to make certain calculations and report to it on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock. In 1996, Consumers received an interim Safety
Evaluation Report from the NRC indicating that the reactor vessel can be safely
operated through 2003. Consumers believes that with a change in fuel management
designed to minimize embrittlement, Palisades can be operated to the end of its
license life in the year 2007.
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Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks," for temporary on-site storage.
Big Rock closed permanently on August 29, 1997 because management determined
that the plant would be uneconomical to operate in an increasingly competitive
environment. Consumers originally scheduled the plant to close May 31, 2000, at
the end of the plant's operating license. Plant decommissioning began in
September 1997 and may take five to ten years to return the site to its original
condition. The earlier than planned closure of the plant and the reopening of
the South Carolina Barnwell facility to receive low level radioactive waste have
changed the method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated decommissioning
cost which is required to be updated in a filing with the MPSC by March 31,
1998. For further information on nuclear matters, see Note 11.
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act contains significant
environmental provisions specific to utilities. During the past few years,
Consumers incurred $46 million in capital expenditures. Consumers believes it
may incur an additional $30 million in capital expenditures by the year 2000 to
comply with the current sulfur dioxide and nitrogen oxide emission limits
established by the EPA.
Consumers currently operates within all Clean Air Act requirements and meets
current ozone and particulate emission limits. The EPA recently revised the
national air quality standards, which may further limit small particulate and
ozone related emissions, and proposed that the State of Michigan impose
additional nitrogen oxide limits on fossil-fueled emitters, such as Consumers'
generating units. It is unlikely that the State of Michigan will establish
Consumers' emissions reduction target until mid-to-late 1999. Until this
state-mandated target is known, the estimated cost of compliance is subject to
significant revision. The preliminary estimate of capital costs to reduce
nitrogen oxide related emissions for Consumers' fossil-fueled generating units
is approximately $175 million, plus an additional amount totaling $10 million
per year for the next 20 years for operation and maintenance costs. Consumers
may need an equivalent amount to comply with the new small particulate
standards. The State of Michigan objected to the extent of the proposed EPA
emission reductions. If the State of Michigan's position were to be adopted by
the EPA, costs could be less than the current estimated amounts. Consumers
supports the bipartisan effort in the U.S. Congress to delay implementation of
the revised standards until the relationship between the new standards and
health improvements is established scientifically.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Many other creditworthy, potentially
responsible parties, with substantial assets also cooperate with respect to the
individual sites. Based on current information, management believes it is
unlikely that the liability at any of the known Superfund sites, individually or
in total, will have a material adverse effect on CMS Energy's financial
position, liquidity or results of operations.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and polychlorinated biphenyls. Consumers
does not believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and disposal is currently
unknown. These costs would constitute part of the cost to decommission the
plant, and will be paid from the decommissioning fund. Consumers is studying the
extent of the contamination and reviewing options.
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For further information regarding these and other environmental matters, see
Electric Environmental Matters in Note 10 and Nuclear Plant Decommissioning in
Note 2.
STRAY VOLTAGE: Various parties have sued Consumers relating to the effect of
so-called stray voltage on certain livestock. In December 1997, the Michigan
Supreme Court remanded for further proceedings a 1994 Michigan trial court
decision that refused to allow the claims of over 200 named plaintiffs to be
joined in a single action. The trial court dismissed all of the plaintiffs
except the first-named plaintiff, allowing the others to re-file separate
actions. Of the original plaintiffs, only 49 re-filed separate cases. All of
those 49 cases have been resolved. The Michigan Supreme Court remanded the
matter, finding that the proper remedy for misjoinder was not dismissal, but to
automatically allow each case to go forward separately. Consumers filed a motion
for reconsideration with the Michigan Supreme Court, which was denied. Consumers
intends to vigorously defend these cases, but is unable to predict the outcome.
As of December 31, 1997, Consumers had 12 individual stray voltage lawsuits,
unrelated to the cases above, awaiting trial court action, down from 22 lawsuits
as reported at year end 1996.
OTHER: In October 1997, two independent power producers sued Consumers and CMS
Energy in a federal court alleging antitrust violations and economic losses due
to special electric contracts signed by Consumers with large customers. The
plaintiffs claim damages of $100 million (which a court can treble in antitrust
cases as provided by law). The transactions of which plaintiffs complain have
been regulated by, and are subject to, the jurisdiction of the MPSC. In November
1997, Consumers and CMS Energy filed a motion for summary judgement and/or for
dismissal of the complaint filed by the plaintiffs. Consumers and CMS Energy
believe the lawsuit is without merit and will vigorously defend against it, but
cannot predict the outcome of this matter.
CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
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Change Compared to Prior Year 1997 vs 1996 1996 vs 1995
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Sales $(13) $ 3
Gas wholesale and retail services activities (9) 7
Operations and maintenance 24 (4)
General taxes, depreciation and other (7) (4)
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Total increase/(decrease) in pretax operating income $ (5) $ 2
================================================================================================================
GAS DELIVERIES: System deliveries in 1997, including miscellaneous
transportation, totaled 420 bcf, a decrease of 28 bcf or 6.1 percent compared to
1996. The decreased deliveries for 1997 compared to 1996 reflect warmer
temperatures in 1997 and loss of an extra day for the 1996 leap year. Comparable
system deliveries for 1996 totaled 448 bcf, an increase of 44 bcf or 10.8
percent compared to 1995. The increased deliveries for 1996 compared to 1995
reflect growth resulting from customer additions, conversions to natural gas
from alternative fuels, continued strength in the Michigan economy and the
benefit from the added leap year day in 1996.
COST OF GAS SOLD: The cost decrease for 1997 was the result of decreased sales
and lower gas prices. The cost increase for 1996 was the result of increased
sales.
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In Millions
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Years Ended December 31 1997 1996 Change 1996 1995 Change
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$694 $750 $(56) $750 $674 $76
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CONSUMERS GAS GROUP OPERATING ISSUES:
GAS RATE PROCEEDINGS: Consumers entered into a special natural gas
transportation contract in response to a customer's proposal to bypass
Consumers' system in favor of a competitive alternative. In 1995, the MPSC
approved the contract. The MPSC stated, however, that Consumers' shareholders
must bear the revenue shortfall created by the difference between the contract's
discounted rate and the floor price of an MPSC-authorized gas transportation
rate. In 1995, Consumers filed an appeal with the Court of Appeals claiming that
the MPSC decision denies Consumers the opportunity to earn its authorized rate
of return and is therefore unconstitutional. In October 1997, the Court of
Appeals issued an opinion affirming the MPSC's order. Consumers has sought a
rehearing of the Court of Appeals opinion. For further information on Gas
Proceedings, see the Consumers Gas Group Business Outlook section of this MD&A
and Note 4.
GAS COST RECOVERY MATTERS: In 1995, the MPSC issued an order favorable to
Consumers' position in a $44 million contract pricing dispute (excluding
interest) between Consumers and certain gas producers. The Court of Appeals
upheld the MPSC order. The gas producers have now appealed to the Michigan
Supreme Court. Consumers believes the MPSC order correctly concludes that the
producers' theories are without merit. Consumers will vigorously oppose any
claims the producers may raise, but cannot predict the outcome of this issue.
GAS ENVIRONMENTAL MATTERS: Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some
that formerly housed manufactured gas plant facilities. Consumers estimates its
costs related to investigation and remedial action at $48 million to $98
million. This estimate is based on undiscounted 1998 costs. Any significant
change in assumptions, such as remediation technique, nature and extent of
contamination and regulatory requirements, could affect the estimate of
investigation and remedial action costs for the sites. For further information
regarding environmental matters, see Note 10 .
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: The improved earnings in the independent power
production business demonstrates the successful strategy to search for global
opportunities. Pretax operating income for 1997 increased $28 million (43
percent) from 1996. This increase primarily reflects increased operating income
resulting from increased international earnings, higher electricity sales by the
MCV Facility, the industry expertise service fee income earned in connection
with the Loy Yang transaction in 1997, and increased earnings attributable to
the Loy Yang and Jorf Lasfar projects. These increases were offset by the
absence of certain 1996 nonrecurring gains, including the gain on the sale of a
power purchase agreement by a partnership in which CMS Generation owns a 50
percent interest. Pretax operating income for 1996 increased $22 million from
1995, primarily reflecting nonrecurring gains and increased operating income
from a refund received by the MCV Partnership. See the Capital Resources and
Liquidity - Capital Expenditures, and Outlook - International Operations Outlook
sections of this MD&A for further discussion of Loy Yang and Jorf Lasfar.
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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 1997 decreased $7 million
(21 percent) from 1996. This decrease is the result of lower oil and gas prices
and gas production and higher operating expenses. The decrease is partially
offset by a gain on the sale of CMS NOMECO's entire interest in oil and gas
properties in Yemen and 33 percent higher oil production. Pretax operating
income for 1996 increased $14 million from 1995, primarily due to higher oil and
gas prices and volumes, partially offset by the recognition of a $10 million
gain from assignment and novation of a gas supply contract recorded in the first
quarter of 1995.
CMS NOMECO changed its method of accounting effective January 1, 1998 for oil
and gas operations from the full cost method to the successful efforts method.
CMS NOMECO believes that the successful efforts method will minimize asset
write-offs caused by periodic price swings, which may not be representative of
overall or long-term markets, and will allow its results of operations to be
more easily compared to other oil and gas companies. Nitrotec Corporation, in
which CMS Gas Transmission has an equity investment, also elected January 1,
1998 to convert from the full cost method of accounting to the successful
efforts method of accounting. All prior year financial statements have been
restated to conform with successful efforts accounting. The effect, after tax,
of the change in accounting method as of December 31, 1997, was a reduction to
retained earnings of $175 million for CMS NOMECO and $15 million for CMS Gas
Transmission, primarily attributable to a decrease in net plant and property and
deferred tax liability of $270 million and $95 million, respectively, for CMS
NOMECO and a $15 million decrease in CMS Gas Transmission's equity investment in
Nitrotec Corporation. The combined effects of the changes in accounting method
resulted in a decrease in net income of $24 million ($.24 per share), $16
million ($.18 per share), and $9 million ($.11 per share) for the years ended
December 31, 1997, 1996 and 1995, respectively.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Similar to the independent power production business,
CMS Energy's natural gas transmission, storage and processing business earnings
reflect the ability to acquire and develop major pipelines worldwide. Pretax
operating income for 1997 increased $10 million (59 percent). The increase
primarily reflects income attributable to the Australian pipeline acquired in
1997, income attributable to domestic and international operations, an increase
in the restated Nitrotec income because 1996 decreased more than 1997, and a
gain on the sale of a portion of the Ames gas gathering system. These increases
were partially offset by the 1996 gain resulting from the dissolution of the
Moss Bluff and Grand Lacs partnerships. Pretax operating income for 1996
increased $5 million from 1995, reflecting new pipeline and storage investments,
primarily TGN, the continued growth of existing projects, lower Nitrotec
earnings due to the restatement, which did not effect 1995, and a gain relating
to the Moss Bluff and Grand Lacs partnerships.
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MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: CMS MST provides energy commodity marketing, risk
management and energy management services to commercial and industrial customers
throughout the United States and plans to expand operations worldwide. Pretax
operating income for 1997 decreased $7 million from the 1996 period. The
decrease is a result of substantially higher than expected natural gas prices
that severely impacted CMS MST's ability to achieve positive margins on fixed
price sales, and higher than expected start up costs. Despite the decreased
earnings, CMS MST will continue to position itself for future growth in the new
energy world. Gas marketed for end users totaled 243 bcf and 108 bcf for 1997
and 1996, respectively. Wholesale electric trading, a new marketing activity
for CMS MST in 1997, totaled 900,000 MW. CMS MST completed over 300 energy
management services projects resulting in $6 million in revenues.
MARKET RISK INFORMATION
CMS Energy is exposed to market risk including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
prices. Derivative instruments including, but not limited to, futures contracts,
swaps, options and forward contracts may be used to manage these exposures.
Derivatives are principally used as hedges and not for trading purposes. During
1997, trading activities were immaterial. In the case of hedges, management
believes that any losses incurred on derivative instruments used as a hedge
would be offset by the opposite movement of the underlying hedged item.
Management uses commodity futures contracts, options and swaps (which require a
net cash payment for the difference between a fixed and variable price) and oil
swaps to manage commodity price risk. They also use forward exchange contracts
to hedge certain receivables, payables and long-term debt relating to foreign
investments. Management also uses equity investments in which CMS Energy or its
subsidiaries hold less than a 20 percent interest. These commodity, financial
and equity instruments do not expose CMS Energy to material market risk.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $ 3.3 billion at
December 31, 1997 with a fair value of $3.3 billion. The fair value of CMS
Energy's financial derivative instruments at December 31, 1997, with a notional
amount of $1.1 billion, was $13 million, representing the amount that CMS Energy
would have paid to terminate these agreements on December 31, 1997. For purposes
of the new SEC disclosure requirements, CMS Energy performed a sensitivity
analysis. The analysis assesses the potential loss in fair value, cash flows and
earnings based upon hypothetical increases and decreases in market interest
rates. A hypothetical 10 percent adverse shift in market rates in the near term
would not have a material impact on CMS Energy's consolidated financial
position, results of operations or cash flows as of December 31, 1997.
LIMITATIONS OF THE SENSITIVITY MODEL: Management does not believe that a
sensitivity analysis alone provides an accurate or reliable method for
monitoring and controlling risk. Therefore, CMS Energy and its subsidiaries rely
on the experience and judgement of senior management and traders to revise
strategies and adjust positions as they deem necessary. Losses in excess of the
amounts determined could occur if market rates or prices exceed the 10 percent
shift used for the analysis. The model assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The model does
not take into consideration that the Trust Preferred Securities are convertible
into CMS Energy Common Stock. The model assumes that conversion does not take
place. If the conversion occurred, the $173 million of Trust Preferred
Securities would be discharged through the issuance of 4.2 million shares of CMS
Energy Common Stock. The model also does not quantify short-term exposure to
hypothetically adverse price fluctuations in inventories.
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For a discussion of accounting policies related to derivative transactions, see
Note 9.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of operating cash is dividends from
subsidiaries. In 1997, Consumers paid $218 million in common dividends. In
October 1997, Consumers returned $50 million of paid-in capital to CMS Energy.
During 1997, Enterprises paid common dividends and other distributions of $173
million to CMS Energy. CMS Energy's consolidated operating cash requirements are
further met by its operating and financing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the sale and transportation of natural gas by
Consumers; the generation, transmission, and sale of electricity by Consumers;
the sale of oil and natural gas; the transportation and storage of natural gas
by CMS Gas Transmission; and the production and sale of electricity by other
affiliates. Consolidated cash from operations totaled $624 million and $647
million for 1997 and 1996, respectively. The $23 million decrease resulted from
changes in working capital and timing differences related to cash payments, cash
receipts and the recognition of revenues for routine operations, which offset an
increase in net income. CMS Energy uses its operating cash primarily to expand
its international businesses, to maintain and expand electric and gas systems of
Consumers, to retire portions of its long-term debt and to pay dividends.
INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $1.551 billion and $825 million for 1997 and 1996,
respectively. The increase of $726 million primarily reflects increases in
capital expenditures and investments in partnerships and unconsolidated
subsidiaries during 1997. CMS Energy's 1997 expenditures for its utility and
international businesses were $371 million and $1.148 billion, respectively,
compared to $447 million and $416 million, respectively, during 1996.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $938 million and $180 million for 1997 and 1996, respectively. The
increase of $758 million in net cash provided by financing activities resulted
from issuing the securities listed in the table below, an increase in notes
payable and the reduction in the repayment of bank loans. The retirement of
bonds and other long-term debt and the retirement of preferred stock partially
offset the 1997 increase.
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In Millions
- -----------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- -----------------------------------------------------------------------------------------------------------------
CMS ENERGY
Senior Notes May 2002 8.125% $ 350 Fund Loy Yang
Senior Notes September 2004 7.625% 180 Discharge debt
Senior Notes November 2000 7.375% 300 Pay down Senior Credit
Facilities
GTNs
Series C (2) (2) 7.7% (2) 150 General corporate
purposes
Series D (2) (2) 7.3% (2) 78 General corporate
purposes
Trust Preferred
Securities (1) June 2027 7.75% (4) 173 General corporate
purposes
Common Stock November N/A 4.142 shares 152 General corporate
------- purposes
1,383
CONSUMERS
Trust Preferred
Securities (3) September 2027 8.20%(4) 120 Redeem preferred stock
-------
Total $1,503
=================================================================================================================
(1) For additional information regarding the sale of these securities see Note 7
and note (b) on the Consolidated Balance Sheets.
(2) GTNs(R)are issued from time to time with various maturities. The rate shown
herein is a weighted average interest rate.
(3) For additional information regarding the sale of these securities see Note 7
and note (a) on the Consolidated Balance Sheets.
(4) Distributions are tax deductible.
In 1997, CMS Energy paid $109 million in cash dividends to holders of CMS Energy
Common Stock and $10 million in cash dividends to holders of Class G Common
Stock. In January 1998, the Board of Directors declared a quarterly dividend of
$.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common
Stock, payable in February 1998.
In July 1997, the Board of Directors declared quarterly dividends of $.30 per
share on CMS Energy Common Stock and $.31 per share on Class G Common Stock. CMS
Energy paid these dividends in August 1997, representing an increase in the
annualized dividend on CMS Energy Common Stock to $1.20 per share from the
previous amount of $1.08 per share (an 11 percent increase) and an increase in
the annualized dividend on Class G Common Stock to $1.24 per share from the
previous dividend of $1.18 per share (a 5 percent increase).
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OTHER INVESTING AND FINANCING MATTERS: At December 31, 1997, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $16.84 and $10.91,
respectively.
As of December 31, 1997, CMS Energy could issue $241 million in deferred coupon
notes, GTNs, CMS Energy Common Stock, subordinated debentures, stock purchase
contracts, stock purchase units and Trust Preferred Securities under various
outstanding shelf registration statements on file with the SEC.
In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit
facility and a $125 million term loan with the $1.125 billion Senior Credit
Facilities. The Senior Credit Facilities consist of a $400 million 364-day
revolving credit facility, a $600 million three-year revolving credit facility
and a five-year $125 million term loan facility. Additionally, CMS Energy has
unsecured lines of credit and letters of credit in an aggregate amount of $155
million. These credit facilities are available to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At December 31, 1997, the total amount utilized under the Senior Credit
Facilities was $365 million, including $60 million of contingent obligations,
and under the unsecured lines of credit and letters of credit was $21 million.
CMS Energy has a bank commitment through March 1998 to enter into a $580 million
credit agreement to fund investments in power projects.
In January 1998, a Delaware statutory business trust established by CMS Energy
sold $180 million of certificates due January 15, 2005 in a public offering. In
exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate
principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due
January 15, 2005. Net proceeds to CMS Energy from the sale totaled $176 million.
In January 1998, CMS Energy announced the commencement of an offer to exchange
up to $300 million of its privately placed 7.375 percent Senior Unsecured Notes
due 2000, Series A for 7.375 percent Senior Unsecured Notes due 2000, Series B
that have been registered with the SEC. Other than their registration, the terms
of the Series B Notes are substantially identical to the Series A (except that
the Series B will not have transfer restrictions). The offer was completed in
February 1998.
At December 31, 1997, Consumers had FERC authorization to: (i) issue or
guarantee up to $900 million of short-term securities through 1998; (ii) issue,
through November 1998, $376 million of long-term securities with maturities up
to 30 years, for refinancing or refunding purposes; and (iii) guarantee, through
1999, up to $25 million in loans made by others, to residents of Michigan for
the purpose of making energy-related home improvements. In January 1998,
Consumers requested authorization to issue, through November 1998, an additional
$500 million of long-term securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured lines of
credit aggregating $120 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At December 31, 1997, the total available amount
remaining under these facilities was $168 million.
Consumers also has in place a $500 million trade receivables sale program. At
December 31, 1997, $165 million in receivables remained available for sale under
the program. For further information, see Note 5.
CMS Energy and its subsidiaries must redeem or retire $1.7 billion of long-term
debt over the three-year period ending December 2000. In addition, at December
31, 1997, Consumers had a recorded liability
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to the DOE of $111 million, which Consumers must pay upon the first delivery of
spent nuclear fuel to the DOE. Current federal law originally scheduled delivery
of the fuel to occur in 1998 (see Note 2). Consumers plans to refinance $850
million of its long-term debt during 1998 and will continue to evaluate capital
markets as a source of financing further debt retirements. In early 1998,
Consumers called for the March 1998 redemption of $57 million aggregate
principal amount of its 7.5 percent First Mortgage Bonds due 2001 and $62
million aggregate principal amount of its 7.5 percent First Mortgage Bonds due
2002.
In early 1998, Consumers issued $250 million of senior notes due February 1,
2008, at an interest rate of 6.375 percent. The senior notes are secured by a
series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar
amount. Proceeds from the sale were added to the general funds of Consumers and
applied to the payment, at maturity, of $248 million aggregate principal amount
of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
The following discussions in Capital Expenditures and Outlook contain
forward-looking statements. See the Forward-Looking Information section of this
MD&A for some important factors that could cause actual results or outcomes to
differ materially from those discussed herein.
CAPITAL EXPENDITURES
In September 1997, a joint venture of affiliates of CMS Generation and ABB
Energy Ventures, Inc. collectively invested $395 million for their equity
contribution in the Jorf Lasfar project company. Equity bridge loans from
private banks provided the funds for their equity investment. CMS Energy
guaranteed CMS Generation's 50 percent share of the $395 million borrowing that
funded the equity contribution. A consortium of governmental, multilateral and
private financial institutions provided an estimated additional $920 million of
non-recourse debt financing. Jorf Lasfar is a $1.5 billion privatization and
expansion project. CMS Energy anticipates that reinvested cash from operations,
estimated at $191 million, will provide the balance of the financing needed for
Jorf Lasfar.
In the second quarter of 1997, a consortium comprising subsidiaries of CMS
Generation, among others, financed, through a consortium of banks, seventy-seven
percent of the consortium's $3.7 billion payment to the Australian State of
Victoria government for the Loy Yang acquisition. This financing occurred on a
non-recourse basis to CMS Energy and CMS Generation. CMS Generation holds a 50
percent interest in the Loy Yang consortium.
In December 1997, the State of Sergipe, Brazil selected a group consisting of
CMS Energy affiliates and CFLCL, to acquire, in a privatization, an 86 percent
interest in the Energipe electric distribution utility. By prior agreement, CMS
Electric & Gas acquired 39 percent of the equity securities of CFLCL for $180
million, which funded CFLCL's investment in Energipe. CMS Electric & Gas may
increase its ownership interest in CFLCL during the first half of 1998.
Looking forward, CMS Energy estimates that capital expenditures, including new
lease commitments and investments in partnerships and unconsolidated
subsidiaries, will total $3.7 billion over the next three years. Cash generated
by operations is expected to satisfy a substantial portion of these capital
expenditures. Nevertheless, CMS Energy will continue to evaluate capital markets
in 1998 as a potential source of financing its subsidiaries' investing
activities. CMS Energy estimates capital expenditures by business segment over
the next three years as follows:
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In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) (b) $ 320 $ 265 $ 255
Consumers gas operations (a) 115 115 115
Independent power production 368 469 400
Oil and gas exploration and production 110 160 175
Natural gas transmission and storage 210 61 100
International energy distribution 142 125 100
Marketing, services and trading 70 25 30
---------------------------------------------
$1,335 $1,220 $1,175
===================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts do not include preliminary estimates for capital expenditures
possibly required to comply with recently revised national air quality standards
under the Clean Air Act. For further information see Electric Utility Operating
Issues - Electric Environmental Matters above and Note 10.
CMS Energy currently plans investments from 1998 to 2000: (i) for oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; (ii) for independent power production
operations to pursue acquisitions and development of electric generating plants
in the United States, Latin America, Asia, Australia, the Pacific Rim region,
North Africa and the Middle East; (iii) to continue development of non-utility
natural gas storage, gathering and pipeline operations of CMS Gas Transmission,
both domestic and international; (iv) to acquire, develop and expand
international energy distribution businesses; and (v) to provide gas, electric,
oil and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
These estimates are prepared for planning purposes and are subject to revision.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and internationally, CMS Energy has positioned itself to be a
leading international energy infrastructure company developing and operating
energy facilities and providing energy services in all major world growth
markets. CMS Energy provides a complete range of international energy expertise
from well-head to burner-tip. Beyond 1997 it will continue to grow its
businesses by finding opportunities to invest in additional energy
infrastructures and to capitalize on being a major, full-service energy company.
CMS Energy will increase its involvement in energy projects by pursuing
opportunities in oil and gas exploration and development projects, natural gas
pipelines and storage facilities, power generation, and electric and gas
distribution systems around the world. In addition, CMS Energy will focus more
on marketing energy services and trading to take advantage of continued growth
opportunities in both the domestic and international markets.
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INTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in each country as well as by developing synergistic projects across
its lines of business. CMS Energy believes these integrated projects will create
more opportunities and greater value than individual investments. Also, CMS
Energy will achieve this growth through strategic partnering where appropriate.
To improve the efficiency and focus of its international energy businesses, CMS
Energy will separate its development efforts from the operations of its assets.
CMS Energy plans to conduct its development efforts from offices in four regions
of the world: Dearborn, Michigan for The Americas - Northern Hemisphere; Buenos
Aires for The Americas - Southern Hemisphere; London for Africa, Europe and the
Middle East; and Singapore for Southeast Asia and Australia.
CMS Energy's development efforts will focus on countries where there are
multiple investment opportunities across its businesses, high energy growth
expectations, defined legal and regulatory structures, and economic policies
that support private investment. CMS Energy will continue to create value by
using the extensive knowledge and experience it has gained in the United States
over the past century, to gain competitive positions in these countries.
CMS Energy structures its investments to minimize operational and financial
risks. These risks are mitigated when operating internationally by working with
local partners, utilizing multi-lateral financing institutions, procuring
political risk insurance and hedging foreign currency exposure where
appropriate.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of two and one-half percent per
year in electric system deliveries over the next five years, based on the
present industry and regulatory configuration in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' electric retail service is affected by competition. To
meet the challenge of competition, Consumers entered into multi-year contracts
with some of its largest industrial customers to serve certain facilities. The
MPSC has approved these contracts as part of its phased introduction to
competition. Certain customers have the option to terminate their contracts
early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool, while Detroit Edison has given notice of early termination. Consumers
expects FERC to rule on this issue in 1998.
In June 1997 the MPSC issued an order proposing that beginning January 1, 1998
Consumers would have to transmit and distribute energy on behalf of competing
power suppliers to serve retail customers. The order states that by January 1,
2002, all customers would be free to choose (that is, have direct access to)
their own power suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently
incurred Transition Costs through a charge to all direct-access customers until
the end of the transition period in 2007.
Subsequent to the June 1997 order, the MPSC issued orders in October 1997 and
early in 1998. Ultimately, the MPSC allowed Consumers: (i) to recover Transition
Costs of $1.755 billion through a
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charge to all direct-access customers until the end of the transition period in
2007, subject to an adjustment through a true-up mechanism; (ii) to commence the
phase-in of direct access in March 1998; and (iii) to suspend the power supply
cost recovery clause. The orders also confirm the MPSC's belief that
Securitization may be a beneficial mechanism for recovery of Transition Costs
while recognizing that Securitization requires state legislation to occur.
Consumers believes that the Transition Cost surcharge will apply to all
customers beginning in 2002. A separate charge to direct-access customers after
MPSC review and verification would also recover prudent costs of implementing a
direct-access program estimated at an additional $200 million. Nuclear
decommissioning costs will also continue to be collected through a separate
surcharge to all customers. Consumers expects Michigan legislative consideration
of the entire subject of electric industry restructuring in 1998. To be
acceptable to Consumers, the legislation would have to provide for full recovery
of Transition Costs. Consumers expects the legislature to review all of the
policy choices made by the MPSC during the restructuring proceedings to assure
that they are in accord with those that the legislature believes should be
paramount. For further information regarding restructuring, see Note 4.
APPLICATION OF SFAS 71: Consumers applies the utility accounting standard, SFAS
71, that recognizes the economic effects of rate regulation and, accordingly,
has recorded regulatory assets and liabilities related to the generation,
transmission and distribution operations of its business in its financial
statements. Consumers believes that the generation segment of its business is
still subject to rate regulation based upon its present obligation to continue
providing generation service to its customers, and the lack of definitive
deregulation orders. If rate recovery of generation-related costs becomes
unlikely or uncertain, whether due to competition or regulatory action, this
accounting standard may no longer apply to the generation segment of Consumers'
business. Such a change could result in either full recovery of
generation-related regulatory assets (net of related regulatory liabilities) or
a loss, depending on whether Consumers' regulators adopt a transition mechanism
for the recovery of all or a portion of these net regulatory assets. According
to recently published Emerging Issues Task Force Issue 97-4, Deregulation of the
Pricing of Electricity - Issues Related to the Application of FASB Statements
No. 71 and 101, Consumers can continue to carry its generation-related
regulatory assets or liabilities for the part of the business being deregulated
if deregulatory legislation or an MPSC rate order allows the collection of cash
flows from its regulated transmission and distribution customers to recover
these specific costs or settle obligations. Consumers believes that even if it
was to discontinue application of SFAS 71 for the generation segment of its
business, its regulatory assets, including those related to generation, are
probable of future recovery from the regulated portion of the business. At
December 31, 1997, Consumers had $277 million of generation- related net
regulatory assets recorded on its balance sheet, and a net investment in
generation facilities of $1.4 billion included in electric plant and property.
For further information regarding this issue, see Electric Business Outlook
Restructuring, above.
CONSUMERS GAS GROUP BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries (excluding transportation
to the MCV Facility and off-system deliveries) to grow at an average annual rate
of between one and two percent over the next five years based primarily on a
steadily growing customer base. Abnormal weather, alternative energy prices,
changes in competitive conditions, and the level of natural gas consumption may
affect actual gas deliveries in future periods. Consumers is also offering a
variety of energy-related services to its customers focused upon appliance
maintenance, home safety, and home security.
RESTRUCTURING In December 1997, the MPSC approved Consumers' application to
implement a statewide, three-year experimental gas transportation pilot program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. The program is
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voluntary for natural gas customers. Customers choosing to remain as sales
customers of Consumers will not see a rate change in their natural gas rates.
To minimize the risk of exposure to higher gas costs, Consumers currently has
contracts in place at known prices covering a portion of its requirements
through the year 2000. ABATE, the Attorney General and other parties filed
claims of appeal of the MPSC's order with the Court of Appeals. For further
information, see Note 4 .
APPLICATION OF SFAS 71: Based on a regulated utility accounting standard, SFAS
71, Consumers may defer certain costs to the future and record regulatory
assets, based on the recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas business, and
believes that sufficient regulatory assurance exists to provide for the recovery
of these deferred costs.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. Each of
these standards requires expanded disclosures effective for 1998. Also in 1997,
the Emerging Issues Task Force published Issue 97-4, Deregulation of the Pricing
of Electricity - Issues Related to the Application of FASB Statements No. 71 and
101, and Issue 97-13, Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation. The consensus reached
in Issue 97-4 allows a company to maintain regulatory assets and liabilities for
part of a business that is being deregulated if deregulatory legislation or a
commission rate order allows the collection of regulated cash flows to recover
costs or settle obligations. The regulated portion of a business maintains these
regulatory assets and liabilities until they are collected or settled, they are
impaired, or until the regulated portion of the business becomes deregulated.
The consensus reached in Issue 97-13 requires a company to expense the cost of
business process reengineering activities as incurred, and requires a company to
write off previously capitalized costs as a cumulative effect adjustment in
1997. CMS Energy was not affected by the requirements of this consensus. In
addition, CMS Energy does not expect the application of the other statements to
materially affect its financial position, liquidity or results of operations.
COMPUTER MODIFICATIONS FOR YEAR 2000
CMS Energy and its subsidiaries use software and related technologies throughout
its businesses that the year 2000 date change will affect and, if uncorrected,
could cause CMS Energy, among other things, to issue inaccurate bills, report
inaccurate data, or incur plant outages. In 1995, CMS Energy began modification
of its computer software systems by dividing programs requiring modification
between critical and noncritical programs. All necessary program modifications
are expected to be completed by the year 2000. CMS Energy devoted significant
internal and external resources to these modifications. It will expense
anticipated spending for these modifications as incurred, while capitalizing and
amortizing the costs for new software over the software's useful life. CMS
Energy does not expect that the cost of these modifications will materially
affect its financial position, liquidity or results of operations.
FOREIGN CURRENCY TRANSLATION:
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. As of December 31, 1997 the foreign
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currency translation adjustment was $96 million relating primarily to the U.S.
and Australian Dollar exchange rate fluctuations related to Loy Yang. CMS Energy
currently believes that the Australian economy is stable and does not expect
currency exchange rate fluctuations over the long term to materially adversely
affect CMS Energy's financial position, liquidity or results of operations.
FORWARD-LOOKING INFORMATION
Forward-looking information is included throughout this report. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and should be read accordingly.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include
prevailing domestic and foreign governmental policies and regulatory actions
(including those of FERC and the MPSC) with respect to rates, proposed electric
and natural gas industries restructuring, change in industry and rate structure,
operation of a nuclear power facility, acquisition and disposal of assets and
facilities, operation and construction of plant facilities, operation and
construction of natural gas pipeline and storage facilities, recovery of the
cost of purchased power or natural gas, decommissioning costs, and present or
prospective wholesale and retail competition, among other important factors. The
business and profitability of CMS Energy are also influenced by economic and
geographic factors, including political and economic risks (particularly those
associated with international development and operations, including currency
fluctuation), changes in environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation of
commodities, market demand for energy, inflation or deflation, capital market
conditions, unanticipated development project delays or changes in project
costs, and the ability to secure agreement in pending negotiations, among other
important factors. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond the
control of CMS Energy.
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CONSOLIDATED STATEMENTS OF INCOME CMS ENERGY CORPORATION
In Millions, Except Per Share Amounts
Years Ended December 31 1997* 1996* 1995*
- -----------------------------------------------------------------------------------------------------------------
OPERATING REVENUE Electric utility $ 2,515 $2,446 $2,277
Gas utility 1,204 1,282 1,195
Independent power production 168 140 96
Oil and gas exploration and production 93 130 108
Natural gas transmission, storage and processing 96 53 25
Marketing, services and trading 692 258 171
Other 13 15 18
---------------------------------
4,781 4,324 3,890
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Operation
Fuel for electric generation 319 312 285
Purchased power - related parties 599 589 491
Purchased and interchange power 243 202 196
Cost of gas sold 1,311 997 824
Other 741 742 705
---------------------------------
3,213 2,842 2,501
Maintenance 174 178 186
Depreciation, depletion and amortization 467 427 400
General taxes 211 201 195
---------------------------------
4,065 3,648 3,282
- -----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING Electric utility 432 411 372
INCOME (LOSS) Gas utility 153 158 156
Independent power production 96 68 46
Oil and gas exploration and production 26 33 19
Natural gas transmission, storage and processing 27 17 12
Marketing, services and trading (5) 2 2
Other (13) (13) 1
---------------------------------
716 676 608
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME Accretion income (Note 2) 8 10 11
(DEDUCTIONS) Accretion expense (Note 2) (17) (22) (31)
Other, net (3) 1 10
---------------------------------
(12) (11) (10)
- -----------------------------------------------------------------------------------------------------------------
FIXED CHARGES Interest on long-term debt 273 230 224
Other interest 49 43 42
Capitalized interest (13) (5) (4)
Preferred dividends 25 28 28
Trust Preferred Securities distributions (Note 7) 18 8 -
---------------------------------
352 304 290
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 352 361 308
INCOME TAXES 108 137 113
---------------------------------
CONSOLIDATED NET INCOME $ 244 $ 224 $ 195
=================================================================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 229 $ 210 $ 192
CLASS G $ 15 $ 14 $ 3
=================================================================================================================
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ 2.39 $ 2.27 $ 2.16
(NOTE 8) CLASS G $ 1.84 $ 1.82 $ .38
=================================================================================================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ 2.37 $ 2.26 $ 2.16
(NOTE 8) CLASS G $ 1.84 $ 1.82 $ .38
=================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ 1.14 $ 1.02 $ .90
CLASS G $ 1.21 $ 1.15 $ .56
=================================================================================================================
*RESTATED, SEE NOTE 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
27
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CONSOLIDATED STATEMENTS OF CASH FLOWS CMS ENERGY CORPORATION
In Millions
Years Ended December 31 1997* 1996* 1995*
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Consolidated net income $ 244 $ 224 $ 195
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $50, $49 and $51, respectively) 467 427 400
Capital lease and debt discount amortization 44 41 61
Deferred income taxes and investment tax credit 24 45 70
Accretion expense (Note 2) 17 22 31
Accretion income - abandoned Midland project (Note 2) (8) (10) (11)
Undistributed earnings of related parties (58) (55) (53)
Power purchases (Note 3) (62) 63 137
Other (9) 27 2
Changes in other assets and liabilities (Note 12) (35) (11) 82
--------------------------------------
Net cash provided by operating activities 624 647 640
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Capital expenditures (excludes capital lease additions of
INVESTING ACTIVITIES $11, $31 and $31, respectively and DSM) (Note 12) (678) 643 508
Investments in partnerships and unconsolidated subsidiaries (830) (163) (242)
Investments in nuclear decommissioning trust funds (50) (49) (51)
Cost to retire property, net (28) (31) (41)
Other (14) 8 (14)
Acquisition of companies, net of cash acquired - (20) (146)
Deferred demand-side management costs - (6) (9)
Proceeds from sale of property 49 79 22
--------------------------------------
Net cash used in investing activities (1,551) (825) (989)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Proceeds from bank loans, notes and bonds 1,214 433 348
FINANCING ACTIVITIES Proceeds from Trust Preferred Securities 286 97 -
Issuance of Common Stock 224 95 160
Increase (decrease) in notes payable, net 49 (8) 2
Retirement of bonds and other long-term debt (521) (37) (44)
Retirement of preferred stock (120) - -
Payment of Common Stock dividends (119) (103) (84)
Payment of capital lease obligations (44) (40) (37)
Repayment of bank loans (29) (256) (18)
Retirement of Common Stock (2) (1) (1)
--------------------------------------
Net cash provided by financing activities 938 180 326
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 11 2 (23)
Cash and temporary cash investments
Beginning of year 58 56 79
--------------------------------------
End of year $ 69 $ 58 $ 56
======================================================================================================================
*RESTATED, SEE NOTE 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED BALANCE SHEETS CMS ENERGY CORPORATION
ASSETS In Millions
December 31 1997* 1996*
- ------------------------------------------------------------------------------------------------------------------
PLANT AND PROPERTY Electric $ 6,491 $ 6,333
(AT COST) Gas 2,528 2,337
Oil and gas properties (successful efforts method) 1,237 1,133
Other 168 94
----------------------------------
10,424 9,897
Less accumulated depreciation, depletion
and amortization (Note 2) 5,541 5,111
----------------------------------
4,883 4,786
Construction work-in-progress 261 243
----------------------------------
5,144 5,029
- ------------------------------------------------------------------------------------------------------------------
INVESTMENTS Independent power production 792 317
Natural gas transmission, storage and processing 241 225
International energy distribution 255 64
First Midland Limited Partnership (Notes 3 and 22) 242 232
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 22) 171 134
Other 45 21
----------------------------------
1,746 993
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and temporary cash investments at cost, which
approximates market 69 58
Accounts receivable and accrued revenue, less allowances
of $7 in 1997 and $10 in 1996 (Note 5) 495 380
Inventories at average cost
Gas in underground storage 197 186
Materials and supplies 87 88
Generating plant fuel stock 35 30
Deferred income taxes (Note 13) 38 48
Prepayments and other 235 230
----------------------------------
1,156 1,020
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS Nuclear decommissioning trust funds (Note 2) 486 386
Postretirement benefits (Note 16) 404 435
Abandoned Midland project 93 113
Other 479 387
----------------------------------
1,462 1,321
----------------------------------
TOTAL ASSETS $ 9,508 $ 8,363
==================================================================================================================
*RESTATED, SEE NOTE 2.
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CMS ENERGY CORPORATION
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1997* 1996*
- ------------------------------------------------------------------------------------------------------------------
CAPITALIZATION Common stockholders' equity $ 1,787 $ 1,536
Preferred stock of subsidiary 238 356
Company-obligated mandatorily redeemable
Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100
Consumers Energy Company Financing II (a) 120 -
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 -
Long-term debt (Note 6) 3,272 2,842
Non-current portion of capital leases (Note 17) 75 103
----------------------------------
5,765 4,937
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Current portion of long-term debt and capital leases 643 409
Notes payable 382 333
Accounts payable 398 348
Accrued taxes 272 262
Accounts payable - related parties 80 63
Accrued interest 51 47
Power purchases (Note 3) 47 47
Accrued refunds 12 8
Other 190 206
----------------------------------
2,075 1,723
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES Deferred income taxes (Note 13) 648 612
Postretirement benefits (Note 16) 514 521
Deferred investment tax credit 151 161
Power purchases (Note 3) 133 178
Regulatory liabilities for income taxes,
net (Notes 13 and 20) 54 66
Other 168 165
----------------------------------
1,668 1,703
----------------------------------
Commitments and Contingencies (Notes 2, 3, 4, 10, 11 and 17)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 9,508 $ 8,363
==================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. For further discussion, see Note 7 to the
Consolidated Financial Statements.
(b) As described in Note 7, the primary asset of CMS Energy Trust I is $178
million principal amount of 7.75 percent convertible subordinated debentures due
2027 from CMS Energy.
*RESTATED, SEE NOTE 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED STATEMENTS OF PREFERRED STOCK CMS ENERGY CORPORATION
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
CONSUMERS' PREFERRED STOCK
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 - 379,549 - 38
7.68 101.00 - 207,565 - 20
7.72 101.00 - 289,642 - 29
7.76 102.21 - 308,072 - 31
CONSUMERS' CLASS A PREFERRED STOCK
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption (a) 2.08 25.00 8,000,000 8,000,000 194 194
--------------
TOTAL PREFERRED STOCK $ 238 $ 356
==================================================================================================================
(a) Redeemable beginning April 1, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
31
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CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY CMS ENERGY CORPORATION
Number of Shares, In Thousands In Millions
Years Ended December 31 1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1
- -----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL - CMS ENERGY
At beginning of period 94,813 91,594 86,535 1,916 1,827 1,701
Common Stock reacquired (54) (32) (21) (2) (1) (1)
Common Stock issued 6,031 3,248 5,039 217 90 126
Common Stock reissued 2 3 41 - - 1
--------------------------------------------------------------------------
At end of period 100,792 94,813 91,594 2,131 1,916 1,827
- -----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL - CLASS G
At beginning of period 7,877 7,619 - 129 124 -
Common Stock reacquired (1) - - - - -
Common Stock issued 343 258 7,619 7 5 124
--------------------------------------------------------------------------
At end of period 8,219 7,877 7,619 136 129 124
- -----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period (6) (8) -
Change in unrealized investment-
gain (loss) - 2 (8)
---------------------------------
At end of period (6) (6) (8)
- -----------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period - - -
Change in foreign currency translation (96) - -
---------------------------------
At end of period (96) - -
- -----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period* (504) (625) (736)
Consolidated net income* 244 224 195
Common Stock dividends declared:
CMS Energy (109) (94) (80)
Class G (10) (9) (4)
---------------------------------
At end of period* (379) (504) (625)
---------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY* $ 1,787 $ 1,536 $1,319
=================================================================================================================
*RESTATED, SEE NOTE 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AS RESTATED)
1: CORPORATE STRUCTURE
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers'
customer base includes a mix of residential, commercial and diversified
industrial customers, the largest segment of which is the automotive industry.
Enterprises is engaged in several domestic and international energy-related
businesses including: acquisition, development and operation of independent
power production facilities; oil and gas exploration and production; storage,
transmission and processing of natural gas; energy marketing, services and
trading; and international energy distribution.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION: The consolidated financial statements include CMS Energy,
Consumers and Enterprises and their majority owned subsidiaries. The financial
statements are prepared in conformity with generally accepted accounting
principles and use management's estimates where appropriate. CMS Energy uses the
equity method of accounting for investments in companies and partnerships where
it has more than a 20 percent but less than a majority ownership interest and
includes these results in operating income. For the years ended December 31,
1997, 1996 and 1995, undistributed equity earnings were $58 million, $55 million
and $53 million, respectively.
ACCRETION INCOME AND EXPENSE: In 1991, the MPSC ordered that Consumers could
recover a portion of its abandoned Midland investment over a 10-year period, but
did not allow Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries. During the
recovery period, Consumers adjusts the unrecovered asset to its present value.
It reflects this adjustment as accretion income. Conversely, Consumers recorded
a loss in 1992 for the present value of its estimated future underrecoveries of
power costs resulting from purchases from the MCV Partnership (see Note 3). It
now recognizes accretion expense annually to reflect the time value of money on
the recorded loss.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas inventory. It records cushion gas, which is gas stored to maintain
reservoir pressure for recovery of working gas, in the appropriate gas utility
plant account. Consumers stores gas inventory in its underground storage
facilities.
CHANGE IN METHOD OF ACCOUNTING FOR INVESTMENTS IN OIL AND GAS PROPERTIES: CMS
NOMECO elected effective January 1, 1998 to convert from the full cost method to
the successful efforts method of accounting for its investments in oil and gas
properties. CMS NOMECO believes this accounting change will more accurately
present the results of its exploration and development activities and minimize
asset write-offs caused by periodic price swings which may not be representative
of overall or long-term markets. In addition, the Financial Accounting Standards
Board has stated a preference for the use of successful efforts accounting.
Nitrotec Corporation, in which CMS Gas Transmission has an equity investment,
also elected effective January 1, 1998 to convert from the full cost method of
accounting to
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34
the successful efforts method of accounting. Accordingly, all prior year
financial statements have been restated to conform with successful efforts
accounting. The effect, after tax, of the change in accounting method as of
December 31, 1997, was a reduction to retained earnings of $175 million for CMS
NOMECO and $15 million for CMS Gas Transmission, primarily attributable to a
decrease in net plant and property and deferred tax liability of $270 million
and $95 million, respectively, for CMS NOMECO and a $15 million decrease in CMS
Gas Transmission's equity investment in Nitrotec Corporation. The combined
effects of the changes in accounting method resulted in decreases to net income
of $24 million ($.24 per share), $16 million ($.18 per share) and $9 million
($.11 per share) for the years ended December 31, 1997, 1996 and 1995,
respectively.
MAINTENANCE, DEPRECIATION AND DEPLETION: Consumers charges property repairs and
minor property replacements to maintenance expense. Depreciable property retired
or sold, plus cost of removal (net of salvage credits), is charged to
accumulated depreciation. Consumers bases depreciation provisions for utility
plant on straight-line and units-of-production rates approved by the MPSC. The
composite depreciation rate for electric utility property was 3.6 percent for
1997 and 3.5 percent for 1996 and 1995. The composite rate for gas utility plant
was 4.1 percent for 1997, 4.2 percent for 1996 and 4.3 percent for 1995. The
composite rate for other plant and property was 8.2 percent for 1997, 5.5
percent for 1996 and 4.9 percent for 1995.
CMS NOMECO follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS NOMECO capitalizes the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS NOMECO also
charges to expense production costs, overhead, and all exploration costs other
than exploratory drilling as incurred. Depreciation, depletion and amortization
of proved oil and gas properties is determined on a field-by-field basis using
the unit-of-production method over the life of the remaining proved reserves.
Other non-utility depreciable property is amortized over its estimated useful
life; gains and losses are recognized at the time of sale.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Interest on leased
nuclear fuel is expensed as incurred. Under current federal law, as confirmed by
court decision, the DOE must begin accepting deliveries of spent nuclear fuel by
January 31, 1998 for disposal, even if a permanent repository is not then
operational. Utilities and their customers have been prepaying the costs of DOE
transport and disposal through fees based on electric generation by their
nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal
costs to nuclear fuel expense, recovers them through electric rates and remits
to the DOE quarterly. Consumers elected to defer payment for disposal of spent
nuclear fuel burned before April 7, 1983 until it delivers the first of its
spent fuel to the DOE. At December 31, 1997, Consumers had a recorded liability
to the DOE of $111 million, including interest, which is payable upon the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through electric
rates the amount of this liability, excluding a portion of interest. In January
1997, in response to the DOE's declaration in December 1996 that it would not
begin to accept spent nuclear fuel deliveries in 1998, Consumers and other
utilities filed suit in federal court. The utilities sought a declaration
relieving them of their obligation to remit their quarterly fee payments to the
DOE and authorizing them to escrow any related fees collected from their
customers, unless and until the DOE begins to accept spent nuclear fuel. The
utilities also sought an order requiring the DOE to develop a program to begin
acceptance of spent nuclear fuel by January 31, 1998. A decision was issued by
the court in late 1997 affirming the DOE's duty to take delivery of spent fuel,
but was not specific as to the relief available for failure of the DOE to
comply. Consumers is considering its options.
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35
Also in 1997, federal legislation was reintroduced to clarify the timing of the
DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish
an integrated spent fuel management system that includes designing and
constructing an interim storage facility in Nevada.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $50 million in 1997 from its
electric customers for the future decommissioning of its two nuclear plants. In
April 1996, Consumers received a decommissioning order from the MPSC that
estimated decommissioning costs for Big Rock and Palisades to be $330 million
and $573 million (in 1997 dollars), respectively. The estimated decommissioning
costs increased from previous estimates principally due to the unavailability of
low- and high-level radioactive waste disposal facilities. Amounts collected
from electric retail customers and deposited in trusts (including trust
earnings) are credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost estimates
for Big Rock and Palisades, assuming that each plant site will eventually be
restored to conform with the adjacent landscape, and that all contaminated
equipment will be disassembled and disposed of in a licensed burial facility.
The April 1996 MPSC Order also requires Consumers to file updated site-specific
decommissioning cost estimates for Big Rock and Palisades by March 31, 1998. The
Big Rock estimate will reflect the early shut-down and the switch from the safe
storage option to immediate dismantlement because of the reopening of the South
Carolina Barnwell radioactive waste disposal facility. After retirement of
Palisades, Consumers plans to maintain the facility in protective storage if
radioactive waste disposal facilities are not available. As a result, Consumers
will incur most of the Palisades decommissioning costs after the plant's NRC
operating license expires. When the Palisades' NRC license expires in 2007, the
trust funds are currently estimated to have accumulated $686 million. Consumers
estimates that at the time Palisades is fully decommissioned in the year 2046,
the trust funds will have provided $2.1 billion, including trust earnings, over
this decommissioning period. Consumers will determine if the current
decommissioning surcharge will be sufficient to provide for decommissioning of
its nuclear plants during the first quarter of 1998, after the revised
decommissioning cost estimates are computed for Palisades and Big Rock. At
December 31, 1997, Consumers had an investment in nuclear decommissioning trust
funds of $486 million, spent $23 million for the decommissioning of Big Rock and
withdrew $17 million from the Big Rock nuclear decommissioning trust fund.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and polychlorinated biphenyls. Consumers
does not believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and disposal is currently
unknown. These costs would constitute part of the cost to decommission the
plant, and will be paid from the decommissioning fund. Consumers is studying the
extent of the contamination and reviewing options.
RECLASSIFICATIONS: CMS Energy has reclassified certain prior year amounts for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented. Additionally, CMS Energy has restated all prior
year earnings per share amounts to reflect the adoption of SFAS 128, Earnings
Per Share, for comparative purposes.
RELATED-PARTY TRANSACTIONS: In 1997, 1996 and 1995, Consumers purchased $51
million, $50 million and $53 million, respectively, of electric generating
capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy
sold, stored and transported natural gas and provided other services to the MCV
Partnership totaling $21 million, $17 million and $26 million for 1997, 1996 and
1995, respectively. For additional discussion of related-party transactions with
the MCV Partnership and the FMLP, see Notes 3 and 22. Other related-party
transactions are immaterial.
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36
REVENUE AND FUEL COSTS: Consumers accrues revenue for electricity and gas used
by its customers but not billed at the end of an accounting period. Consumers
accrues or reduces revenue for any underrecovery or overrecovery of electric
power supply costs and natural gas costs by establishing a corresponding asset
or liability until it bills or refunds these differences to customers following
an MPSC order.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when revenues, expenses, assets and liabilities are
recognized. If all or a separable portion of Consumers' operations becomes no
longer subject to the provisions of utility regulation, a write-off of related
regulatory assets and liabilities would be required, unless some form of
transition cost recovery continues through rates established and collected for
Consumers' remaining operations. In addition, Consumers would be required to
determine any impairment to the carrying costs of deregulated plant and
inventory assets. For further discussion, see Electric Business Outlook and
Consumers Gas Group Business Outlook - Application of SFAS 71, in the MD&A and
Note 20.
OTHER: For significant accounting policies regarding cash equivalents, see Note
12; for income taxes, see Note 13; for executive incentive compensation, see
Note 15; and for pensions and other postretirement benefits, see Note 16.
3: THE MIDLAND COGENERATION VENTURE
The MCV Partnership, which leases and operates the MCV Facility, contracted to
sell electricity to Consumers for a 35-year period beginning in 1990 and to
supply electricity and steam to The Dow Chemical Company. Consumers, through two
wholly owned subsidiaries, holds the following assets related to the MCV
Partnership and MCV Facility: (i) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and (ii) CMS Holdings holds,
through FMLP, a 35 percent lessor interest in the MCV Facility.
SUMMARIZED STATEMENTS OF INCOME FOR CMS MIDLAND AND CMS HOLDINGS (UNAUDITED):
In Millions
- -------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------
Pretax operating income $46 $40 $35
Income taxes and other 14 11 10
- -------------------------------------------------------------
Net income $32 $29 $25
=============================================================
POWER PURCHASES FROM THE MCV PARTNERSHIP: After September 2007, pursuant to the
terms of the PPA and related undertakings, Consumers will only be required to
pay the MCV Partnership the capacity charge and energy charge amounts authorized
for recovery from electric customers by the MPSC. Prior to then, pursuant to
MPSC orders issued to date, Consumers recovered in 1997 approximately 90 percent
of the total capacity charge and energy charge amounts being billed by the MCV
Partnership and paid to the MCV Partnership by Consumers. Currently, Consumers'
annual obligation to purchase capacity from the MCV Partnership is 1,240 MW
through the termination of the PPA in 2025. The PPA provides that Consumers is
to pay the MCV Partnership a minimum levelized average capacity charge of 3.77
cents per kWh, a fixed energy charge, and a variable energy charge based
primarily on Consumers' average cost
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of coal consumed. Consumers is recovering capacity charges averaging 3.62 cents
per kWh for 915 MW of capacity, the fixed energy charge, and the prescribed
energy charges associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. Beginning January 1, 1996, the MPSC also permitted Consumers to
recover an average capacity charge of 2.86 cents per kWh for the remaining 325
MW of MCV Facility capacity. The approved average capacity charge increased to
3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the
capacity charge for the last 216 MW of the 325 MW increases each year until it
reaches 3.62 cents per kWh in 2004. It remains at this ceiling rate through the
end of the PPA term.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA. At December 31, 1997 and
1996, the after-tax present value of the PPA liability totaled $117 million and
$147 million, respectively. The reduction in the liability since December 31,
1996 reflects after-tax cash underrecoveries of $41 million, partially offset by
after-tax accretion expense of $11 million. The undiscounted after-tax amount
associated with the liability totaled $188 million at December 31, 1997. The
after-tax cash underrecoveries are currently based on the assumption that the
MCV Facility will be available to generate electricity 91.5 percent of the time
over its expected life. For 1997 the MCV Facility was available 99 percent of
the time, resulting in $13 million over anticipated after-tax cash
underrecoveries. Consumers believes it will continue to experience after-tax
cash underrecoveries associated with the PPA in amounts as those shown below.
In Millions
- ---------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- ---------------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $ 23 $ 22 $ 21 $ 20 $ 19
===============================================================================================================
Consumers bases the above estimated underrecoveries, in part, on an estimate of
the future availability of the MCV Facility. If the MCV Facility operates at
levels above management's estimate over the remainder of the PPA, Consumers will
need to recognize losses for future underrecoveries larger than amounts
previously recorded. Therefore, Consumers would experience larger amounts of
cash underrecoveries than originally anticipated. Management will continue to
evaluate the adequacy of the accrued liability considering actual MCV Facility
operations.
In early 1998, the MCV Partnership filed a claim of appeal from the January 1998
MPSC order in the electric utility industry restructuring. On the same day, the
MCV Partnership filed suit in the U.S. District Court seeking a declaration that
the MPSC's failure to provide Consumers and the MCV Partnership a certain source
of recovery of capacity payments after 2007 deprived the MCV Partnership of its
rights under the Public Utilities Regulatory Policies Act of 1978. The MCV
Partnership is seeking to prohibit the MPSC from implementing portions of the
order.
PSCR MATTERS RELATED TO POWER PURCHASES FROM THE MCV PARTNERSHIP: As part of a
1995 decision in the 1993 PSCR reconciliation case, the MPSC disallowed a
portion of the costs related to purchases from the MCV Partnership and instead
assumed recovery of those costs from wholesale customers. Consumers believed
this was contrary to the terms of an earlier 1993 settlement order and appealed.
The MCV Partnership and ABATE also filed separate appeals of this order. In
November 1996, the Court of Appeals affirmed the MPSC's 1995 decision. The MCV
Partnership filed an application for leave to appeal with the Michigan Supreme
Court which was denied in January 1998.
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4: RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see Note 3) and to accelerate recovery of its nuclear
plant investment by increasing prospective annual nuclear plant depreciation
expense by $18 million, with a corresponding decrease in fossil-fueled
generating plant depreciation expense. It also established an experimental
direct-access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-party
power supplier and Consumers would transmit the power for a fee. The program is
limited to 650 MW of load, of which existing special contracts represent 410 MW.
New special contracts or direct- access load may fill 140 MW of the 650 MW
block. The remaining 100 MW will be available solely to direct-access customers
for at least 18 months. In April 1997, a lottery was held to select the
customers to purchase 100 MW by direct access. Direct access for a portion of
this 100 MW began during the fourth quarter of 1997.
In May 1997, the MPSC authorized Consumers to collect $17 million from electric
customers through a one-time surcharge pertaining to the 1994 PSCR
reconciliation. In September 1997, the MPSC further authorized Consumers to
collect $13 million from electric customers through a one-time surcharge
pertaining to the 1995 PSCR reconciliation.
In January 1998, the Court of Appeals ruled that the MPSC has statutory
authority to authorize an experimental electric retail wheeling program. By its
terms, no retail wheeling has yet occurred pursuant to that program. Consumers
filed with the Michigan Supreme Court seeking leave to appeal that ruling.
For information on other orders, see the Electric Restructuring section below.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, in June 1997 the
MPSC issued an order proposing that beginning January 1, 1998 Consumers would
have to transmit and distribute energy on behalf of competing power suppliers to
serve retail customers. The order states that by January 1, 2002, all customers
would be free to choose (that is, have direct access to) their own power
suppliers.
Under the June 1997 order, the MPSC would allow utilities to recover prudently
incurred Transition Costs through a charge to all direct-access customers until
the end of the transition period in 2007. Further proceedings, as ordered by the
MPSC, took place to address other features of the direct-access programs being
considered, including proposals to "true up" Transition Cost charges for changes
in sales and market prices of power purchase capacity to the extent they are
different from estimates used for calculating Transition Costs. The June order
is subject to a claim of appeal filed with the Court of Appeals which questions
whether the MPSC has the statutory authority to mandate restructuring on an
involuntary basis. In October 1997, the MPSC issued a series of additional
orders relating to its electric industry restructuring proceedings. The orders
primarily addressed issues involving the design of retail direct-access tariffs,
the true-up mechanism in connection with the recovery of Transition Costs,
suspension of the power supply cost recovery clause and freezing of power supply
costs, and performance-based rate-making.
In January 1998 the MPSC clarified the October 1997 orders on a basis generally
consistent with the June 1997 order. The January 1998 order: i) defers the
commencement of the phase-in of direct access to begin in March 1998; ii)
attempts to clarify the true-up mechanism to be used in connection with the
recovery of Transition Costs; iii) confirms implementation of a suspension of
the power supply cost
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recovery clause; and iv) confirms the MPSC's belief that Securitization may be a
beneficial mechanism for recovery of Transition Costs while recognizing that
Securitization requires state legislation to occur. Consumers expects Michigan
legislative consideration of the entire subject of electric industry
restructuring in 1998. To be acceptable to Consumers, the legislation would have
to provide for full recovery of Transition Costs. Consumers expects the
legislature to review all of the policy choices made by the MPSC during the
restructuring proceedings to assure that they are in accord with those that the
legislature believes should be paramount.
The January 1998 order further estimated a Transition Cost for Consumers at
$1.755 billion which is generally consistent with the amount proposed by
Consumers. Consumers will recover this cost through a surcharge to direct-access
customers through 2007. Consumers believes that this surcharge will apply to all
customers beginning in 2002. The surcharge is subject to adjustment through a
true-up mechanism to assure that Transition Costs actually incurred are
collected. A separate charge to direct-access customers after MPSC review and
verification would also recover prudent costs of implementing a direct-access
program estimated at an additional $200 million. Nuclear decommissioning costs
will also continue to be collected through a separate surcharge to all
customers.
Subsequent to the January order, the MPSC issued an order addressing Consumers',
among others, motions for clarification of the January order. This order results
in: i) a suspension of the PSCR in a manner proposed by Consumers; ii) a
termination of the 1998 PSCR plan case; and iii) the establishing of a permanent
PSCR/base rate freeze charge in the 1997 PSCR reconciliation proceeding. For
further information see Electric Business Outlook - Application of SFAS 71 in
the MD&A.
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide experimental gas transportation pilot program. Consumers'
expanded experimental program will extend over a three-year period, eventually
allowing 300,000 residential, commercial and industrial retail gas sales
customers to choose their gas supplier. The program is voluntary for natural gas
customers. Participating customers will be selected on a first-come,
first-served basis, up to a limit of 100,000 customers on April 1, 1998. Up to
100,000 more customers will be added on April 1 of each of the next two years.
Customers choosing to remain as sales customers of Consumers will not see a rate
change in their natural gas rates. The order allowing the implementation of this
program: (i) suspends Consumers' gas cost recovery clause, effective April 1,
1998 for a three-year period, establishing a gas commodity cost at a fixed rate
of $2.84 per mcf; (ii) establishes an earnings sharing mechanism that will
provide for refunds to customers if Consumers' earnings during the three year
term of the program exceed certain pre-determined levels; and (iii) establishes
a gas transportation code of conduct that addresses concerns about the
relationship between Consumers and marketers, including its affiliated
marketers. This experimental program will allow competing gas suppliers,
including marketers and brokers, to market natural gas to a large number of
retail customers in direct competition with Consumers. In 1998, the Attorney
General, ABATE and other parties filed claims of appeal regarding the program
with the Court of Appeals. To minimize the risk of exposure to higher gas costs,
Consumers currently has contracts in place at known prices covering 50 percent
of its 1998 requirements, 25 percent of its 1999 requirements and 15 percent of
its 2000 requirements. Additional forward coverage is currently under review and
will be firmed up during the next few months. For further information see
Consumers Gas Group Business Outlook Application of SFAS 71 in the MD&A.
GAS PROCEEDINGS: In 1995, the MPSC issued an order regarding a $44 million
(excluding interest) gas supply contract pricing dispute between Consumers and
certain gas producers. The order stated that Consumers was not obligated to seek
prior approval of market-based pricing changes that Consumers implemented under
the contracts in question. The Court of Appeals upheld the MPSC order. The
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producers sought leave to appeal with the Michigan Supreme Court. Their request
is still pending. Consumers believes the MPSC order correctly concludes that the
producers' theories are without merit and will vigorously oppose any claims they
may raise, but cannot predict the outcome of this issue.
Resolution of the issues discussed in this Note is not expected to materially
affect CMS Energy's financial position, liquidity or results of operations.
5: SHORT-TERM FINANCINGS
At December 31, 1997, Consumers had FERC authorization to: (i) issue or
guarantee up to $900 million of short-term securities through 1998; (ii) issue,
through November 1998, $376 million of long-term securities with maturities up
to 30 years, for refinancing or refunding purposes; and (iii) guarantee, through
1999, up to $25 million in loans made by others, to residents of Michigan for
the purpose of making energy-related home improvements. In January 1998,
Consumers requested authorization to issue, through November 1998, an additional
$500 million of long-term securities for refinancing or refunding purposes.
Consumers has an unsecured $425 million credit facility and unsecured lines of
credit aggregating $120 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At December 31, 1997, a total of $377 million was
outstanding at a weighted average interest rate of 6.5 percent, compared with
$333 million outstanding at December 31, 1996, at a weighted average interest
rate of 6.3 percent.
Consumers also has in place a $500 million trade receivables sale program. At
December 31, 1997 and 1996, receivables sold under the program totaled $335
million and $318 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
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6: LONG-TERM DEBT
Long-term debt consists of the following:
In Millions
- -----------------------------------------------------------------------------------------------------------------
December 31 Maturing/Expiring Interest Rate 1997 1996
- -----------------------------------------------------------------------------------------------------------------
First Mortgage Bonds 1997 to 2023 6.0% to 8.875% $1,255 $1,305
Long-Term Bank Debt 1999 6.4%(a) 400 400
Senior Unsecured Notes 2000 to 2004 7.75%(a) 830 -
Senior Deferred Coupon Notes 1997 9.5% and 9.875% - 347
Senior Credit Facilities 1998 to 2002 7.2%(a) 305 -
General Term Notes(TM)
Series A to D 1998 to 2004 7.7%(a) 509 353
Pollution Control Revenue Bonds 2000 to 2018 5.1%(a) 131 131
Term Loan Agreement:
CMS Energy 2002 7.2%(a) - 125
CMS Generation 2001 7.4%(a) 91 107
Revolving Line of Credit 2003 6.5%(a) 124 122
Unsecured Revolving Credit Facility 1997 6.8%(a) - 120
Nuclear Fuel Disposal (b) 5.1% 111 106
Bank Loans and Other 1997 to 2009 8.7%(a) 134 105
-------------------
Principal Amount Outstanding 3,890 3,221
Current Amounts (609) (370)
Net Unamortized Discount (9) (9)
-------------------
Total Long-Term Debt $3,272 $2,842
=================================================================================================================
(a) Represents the weighted average interest rate at December 31, 1997.
(b) Due date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund obligations are
as follows: $609 million in 1998, $466 million in 1999, $662 million in 2000,
$192 million in 2001 and $759 million in 2002.
CMS ENERGY
In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit
facility and a $125 million term loan with the $1.125 billion Senior Credit
Facilities. The Senior Credit Facilities consist of a $400 million 364-day
revolving credit facility, a $600 million three-year revolving credit facility
and a five-year $125 million term loan facility. Additionally, CMS Energy has
unsecured lines of credit and letters of credit in an aggregate amount of $155
million. At December 31, 1997, the total amount utilized under the Senior Credit
Facilities was $365 million, including $60 million of contingent obligations,
and under the unsecured lines of credit and letters of credit was $21 million.
In January 1998, a Delaware statutory business trust established by CMS Energy
sold $180 million of certificates due January 15, 2005 in a public offering. In
exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate
principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due
January 15, 2005. Net proceeds to CMS Energy from the sale totaled $176 million.
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In January 1998, CMS Energy announced the commencement of an offer to exchange
up to $300 million of its 7.375 percent Senior Unsecured Notes due 2000, Series
A for 7.375 percent Senior Unsecured Notes due 2000, Series B that have been
registered with the SEC. Other than their registration, the terms of the Series
B Notes are substantially similar to the Series A(except that the Series B will
not have transfer restrictions). The offer was completed in early 1998.
CONSUMERS
FIRST MORTGAGE BONDS: Consumers secures its first mortgage bonds by a mortgage
and lien on substantially all of its property. Consumers' ability to issue and
sell securities is restricted by certain provisions in its First Mortgage Bond
Indenture, its Articles of Incorporation and the need for regulatory approvals
to meet appropriate federal law.
In early 1998, Consumers called for the March 1998 redemption of $57 million
aggregate principal amount of its 7.5 percent First Mortgage Bonds due in 2001
and $62 million aggregate principal amount of its 7.5 percent First Mortgage
Bonds due in 2002.
In early 1998, Consumers issued $250 million of senior notes due February 1,
2008, at an interest rate of 6.375 percent. The senior notes are secured by a
series of Consumers' First Mortgage Bonds, issued contemporaneously in a similar
amount. Proceeds from the sale were added to the general funds of Consumers and
applied to the payment, at maturity, of $248 million aggregate principal amount
of Consumers' 8.75 percent First Mortgage Bonds due February 15, 1998.
LONG-TERM BANK DEBT: Consumers has a $400 million unsecured, variable rate,
long-term loan.
In January 1998, two agreements to guarantee interest rates for the issuance of
future long-term debt were executed. The first anticipatory debt agreement is
for $250 million at 5.5 percent which expires February 10, 1998, and the second
agreement is for $200 million at 5.8 percent with an expiration of March 16,
1998.
OTHER: Consumers' long-term pollution control revenue bonds are secured by
irrevocable letters of credit or First Mortgage Bonds.
CMS NOMECO
CMS NOMECO has a $225 million revolving credit facility that converts to term
loans maturing from March 1999 through March 2003.
CMS GENERATION
In January 1998, CMS Generation refinanced a $110 million, five-year term loan
with a loan provided by CMS Capital Corp., a subsidiary of Enterprises.
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7: CAPITALIZATION
CMS ENERGY
The authorized capital stock of CMS Energy consists of 250 million shares of CMS
Energy Common Stock, 60 million shares of Class G Common Stock, and 10 million
shares of CMS Energy Preferred Stock.
In 1996, CMS Energy received net proceeds of $95 million from the issuance of
CMS Energy and Class G Common Stock. The issuance of 2.1 million of those shares
completed the amount remaining on a February 15, 1995 shelf-registration filing
with the SEC that covered the issuance of up to $200 million of securities. CMS
Energy used the proceeds from the sale for general corporate purposes.
In May 1997, CMS Energy and affiliated business trusts filed a
shelf-registration statement with the SEC to issue and sell up to $300 million
of CMS Energy Common Stock, subordinated debentures, stock purchase contracts,
stock purchase units and preferred securities. In June 1997, 3.45 million units
of 7.75 percent tax deductible Trust Preferred Securities were issued and sold
through CMS Energy Trust I, a wholly owned business trust consolidated with CMS
Energy. Net proceeds from the sale totaled $170 million. CMS Energy formed the
trust for the sole purpose of issuing tax deductible Trust Preferred Securities.
Its primary asset is approximately $178 million principal amount of 7.75 percent
subordinated debentures issued by CMS Energy, which mature in 2027. These tax
deductible Trust Preferred Securities are convertible into CMS Energy Common
Stock at a rate equivalent to a conversion price of $40.80 per share of CMS
Energy Common Stock. CMS Energy used proceeds of the subordinated debentures for
general corporate purposes including repayment of debt, capital expenditures,
investment in subsidiaries and working capital. CMS Energy's obligations under
the subordinated debentures, the indenture through which CMS Energy issued the
subordinated debentures, the declaration of trust and the CMS Energy guarantee
provide, in the aggregate, a full irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the Trust Preferred
Securities. For additional information, see note (b) on the Consolidated Balance
Sheets.
In November 1997, CMS Energy received net proceeds of $152 million from the
issuance of 4.142 million shares of CMS Energy Common Stock. The issuance of
those shares completed the amount remaining on the May 1997 shelf-registration
with the SEC. Proceeds from the sale were used for general corporate purposes.
OTHER: Under its most restrictive borrowing arrangement at December 31, 1997,
none of CMS Energy's consolidated net income was restricted for payment of
common dividends. CMS Energy could pay $339 million in common dividends under
its most restrictive debt covenant.
CONSUMERS
In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were issued
and sold through Consumers Power Company Financing I, a wholly owned business
trust consolidated with Consumers. Net proceeds from the sale totaled $97
million. In September 1997, 4.8 million shares of 8.20 percent Trust Preferred
Securities were issued and sold through Consumers Energy Company Financing II, a
wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled $116 million. Consumers formed both trusts for the sole purpose of
issuing the tax deductible Trust Preferred Securities. Consumers' obligations
with respect to the Trust Preferred Securities under the notes, under the
indenture through which Consumers issued the notes, under Consumers' guarantee
of the Trust
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Preferred Securities, and under the declaration by the trusts, taken together,
constitute a full and unconditional guarantee by Consumers of the trusts'
obligations under the Trust Preferred Securities. For additional information,
see Note (a) on the Consolidated Balance Sheets.
In September 1997, the proceeds from the 8.20 percent Trust Preferred Securities
were used by Consumers to redeem all outstanding shares of its $7.45, $7.68,
$7.72 and $7.76 preferred stock for $120 million.
Under the provisions of its Articles of Incorporation at December 31, 1997,
Consumers had $280 million of unrestricted retained earnings available to pay
common dividends. In October 1997, Consumers returned $50 million of paid-in
capital to CMS Energy.
8: EARNINGS PER SHARE AND DIVIDENDS
EPS attributable to Common Stock for 1997 and 1996 reflect the performance of
the Consumers Gas Group. Earnings per share attributable to Common Stock for the
year ended December 31, 1995 reflect the performance of the Consumers Gas Group
since initial issuance of Class G Common Stock during the third quarter of 1995.
The Class G Common Stock has participated in earnings and dividends from its
original issue date in July 1995. The allocation of earnings attributable to
each class of common stock and the related amounts per share are computed by
considering the weighted average number of shares outstanding.
Earnings attributable to the Outstanding Shares are equal to Consumers Gas Group
net income multiplied by a fraction; the numerator is the weighted average
number of Outstanding Shares during the period and the denominator is the
weighted average number of Outstanding Shares and retained interest shares,
shares not held by the holders of the Outstanding Shares, during the period. The
earnings attributable to Class G Common Stock on a per share basis for 1997 and
1996 are based on 24.50 percent and 23.79 percent, respectively, of the income
of Consumers Gas Group. The earnings attributable to Class G Common Stock on a
per share basis, for the year ended December 31, 1995, are based on 23.45
percent of the income of the Consumers Gas Group since the initial issuance.
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COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
Actual Actual Actual Pro Forma
Years Ended December 31 1997* 1996* 1995* 1995*
- -------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $ 244 $ 224 $ 195 $ 195
================================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 229 $ 210 $ 192 $ 180
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 5 - - -
------------------------------------------------
CMS Energy - Diluted EPS $ 234 $ 210 $ 192 $ 180
================================================
Class G:
Basic and Diluted EPS $ 15 $ 14 $ 3 $ 15
================================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 96.1 92.5 88.8 88.8
Add conversion of 7.75% Trust
Preferred Securities 2.3 - - -
Options-Treasury Shares 0.3 0.2 0.2 0.2
------------------------------------------------
Average Shares - Diluted 98.7 92.7 89.0 89.0
================================================
Class G:
Average Shares
Basic and Diluted 8.0 7.7 7.5 7.5
================================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $2.39 $2.27 $2.16 $2.03
Diluted $2.37 $2.26 $2.16 $2.03
Class G:
Basic and Diluted $1.84 $1.82 $ .38 $1.93
===================================================================================================================
* Restated, see Note 2.
Pro forma data for the year ended December 31, 1995 gives effect to the issuance
and sale of 7.52 million shares of Class G Common Stock (representing 23.50
percent of the equity attributable to Consumers Gas Group) as if it occurred on
January 1, 1995.
Holders of Class G Common Stock have no direct rights in the equity or assets of
Consumers Gas Group, but rather have rights in the equity and assets of CMS
Energy as a whole. In the sole discretion of the Board of Directors, CMS Energy
may pay dividends exclusively to the holders of Class G Common Stock,
exclusively to the holders of CMS Energy Common Stock, or to the holders of both
classes in equal or unequal amounts. The Board of Directors has stated its
intention to declare and pay dividends on the CMS Energy Common Stock based
primarily on the earnings and financial condition of CMS Energy.
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Dividends on Class G Common Stock are paid at the discretion of the Board of
Directors based primarily upon the earnings and financial condition of Consumers
Gas Group, and to a lesser extent, CMS Energy as a whole.
In February and May 1997, CMS Energy paid dividends of $.27 per share on CMS
Energy Common Stock and $.295 per share on Class G Common Stock. In August and
November 1997, CMS Energy paid dividends of $.30 per share on CMS Energy Common
Stock and $.31 per share on Class G Common Stock. In January 1998, the Board of
Directors declared a quarterly dividend of $.30 per share on Energy Common Stock
and $.31 per share on Class G Common Stock, which were paid in February 1998.
9: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, to manage exposure to fluctuations in commodity prices, interest
rates and foreign exchange rates. To qualify for hedge accounting, derivatives
must meet the following criteria: (i) the item to be hedged exposes the
enterprise to price, interest or exchange rate risk; and (ii) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counterparties. The risk of nonperformance by the counterparties is
considered remote.
COMMODITY PRICE HEDGES: CMS Energy accounts for its commodity price derivatives
as hedges, as defined above, and as such, defers any changes in market value and
gains and losses resulting from settlements until the hedged transaction is
complete. If there was a loss of correlation between the changes in (i) the
market value of the commodity price contracts and (ii) the market price
ultimately received for the hedged item, and the impact was material, the open
commodity price contracts would be marked to market and gains and losses would
be recognized in the income statement currently.
CMS NOMECO periodically enters into oil and gas price hedging arrangements to
mitigate its exposure to price fluctuations on the sale of crude oil and natural
gas. As of December 31, 1996, CMS NOMECO had 1997 commodity price contracts on
13.8 bcf of gas at prices ranging from $1.92 to $2.80 per MMBtu and on 2 million
barrels of oil at prices ranging from $19.50 to $22.90 per barrel. During 1997,
CMS NOMECO made net payments of $6 million for settlement of 1997 contracts on
14.1 bcf of gas and 2 million barrels of oil.
CMS NOMECO also has one arrangement which is used to fix the prices that CMS
NOMECO will pay to supply gas for the years 2001 through 2006 by purchasing the
economic equivalent of 10,000 MMBtu per day at a fixed price, escalating at 8
percent per year thereafter, starting at $2.82 per MMBtu in 2001. The settlement
periods are each a one-year period ending December 31, 2001 through 2006 on 3.65
million MMBtu. If the floating price, essentially the then-current Gulf Coast
spot price, for a period is higher than the fixed price, the seller pays CMS
NOMECO the difference, and vice versa. If a party's exposure at any time exceeds
$5 million, that party is required to obtain a letter of credit in favor of the
other party for the excess over $5 million and up to $10 million. Accordingly,
at December 31, 1997, a letter of credit was not required by either party to the
agreement. As of December 31, 1997, the fair value of this contract reflected a
payment due from CMS NOMECO of $13 million.
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CMS MST uses natural gas futures contracts, options and swaps (which require a
net cash payment for the difference between a fixed and variable price).
INTEREST RATES HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $1.1 billion at
December 31, 1997. The difference between the amounts paid and received under
the swaps is accrued and recorded as an adjustment to interest expense over the
life of the hedged agreement.
FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts to hedge
certain receivables, payables, and long-term debt relating to foreign
investments. The purpose of CMS Energy's foreign currency hedging activities is
to protect the company from the risk that U.S. dollar net cash flows resulting
from sales to foreign customers and purchases from foreign suppliers and the
repayment of non-U.S. dollar borrowings may be adversely affected by changes in
exchange rates. These contracts do not subject CMS Energy to risk from exchange
rate movements because gains and losses on such contracts offset losses and
gains, respectively, on assets and liabilities being hedged. The notional amount
of the outstanding foreign exchange contracts was $50 million at December 31,
1997.
10: COMMITMENTS, CONTINGENCIES AND OTHER
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions monitoring. Consumers'
coal-fueled electric generating units burn low-sulfur coal and are currently
operating at or near the sulfur dioxide emission limits that will be effective
in the year 2000. During the past few years, in order to comply with the Act,
Consumers incurred capital expenditures totaling $46 million to install
equipment at certain generating units. Consumers estimates capital expenditures
for in-process and proposed modifications at other coal-fueled units to be an
additional $30 million by the year 2000. Management believes that these
expenditures will not materially affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements and meets
current ozone and particulate emission limits. The Act requires the EPA to
review, periodically, the effectiveness of the national air quality standards in
preventing adverse health affects. The EPA recently revised these standards. The
revisions may further limit small particulate and ozone related emissions.
Consumers supports the bipartisan effort in the U.S. Congress to delay
implementation of the revised standards until the relationship between the new
standards and health improvements is established scientifically.
In October 1997, pursuant to recommendations from the Ozone Transport Assessment
Group and the requests of several Northeastern states, the EPA proposed that the
State of Michigan impose additional nitrogen oxide limits on fossil-fueled
emitters, such as Consumers' generating units. The limits are an effort to
reduce statewide nitrogen oxide emissions by 32 percent, as early as 2002. The
State of Michigan will have one year to review and challenge the proposed
recommendations, and one year after that to implement final requirements. It is
unlikely that the State of Michigan will establish Consumers' nitrogen oxide
emissions reduction target until mid-to-late 1999. Until this state-mandated
target is known, the estimated cost of compliance is subject to significant
revision.
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The preliminary estimate of capital costs to reduce nitrogen oxide related
emissions for Consumers' fossil- fueled generating units is approximately $175
million, plus an additional amount totaling $10 million per year for 20 years
for operation and maintenance costs. Consumers may need an equivalent amount to
comply with the new small particulate standards. The State of Michigan objected
to the extent of the proposed EPA emission reductions. If the State of
Michigan's position were to be adopted by the EPA, costs could be less than the
current estimated amounts.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $3 million and $9
million. At December 31, 1997, Consumers has accrued $3 million for its
estimated Superfund liability.
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. In 1998 Consumers plans
to study indoor air issues at residences on some sites and ground water impacts
or surface soil impacts at other sites. On sites where the company has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Data available to Consumers and its continued internal review have
resulted in an estimate for all costs related to investigation and remedial
action for all 23 sites of between $48 million and $98 million. These estimates
are based on undiscounted 1998 costs. At December 31, 1997, Consumers has
accrued a liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions, such as
remediation technique, nature and extent of contamination, and legal and
regulatory requirements, could affect the estimate of remedial action costs for
the sites. According to an MPSC rate order issued in 1996, Consumers will defer
and amortize, over a period of ten years, environmental clean-up costs above the
amount currently being recovered in rates. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate case. The
order authorizes current recovery of $1 million annually. Consumers is
continuing discussions with certain insurance companies regarding coverage for
some or all of the costs that it may incur for these sites.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.335
billion for 1998, $1.220 billion for 1999 and $1.175 billion for 2000. For
further information regarding capital expenditures, see Capital Resources and
Liquidity - Capital Expenditures in the MD&A.
COMMITMENTS FOR COAL AND GAS SUPPLIES: Consumers entered into coal supply
contracts with various suppliers for its coal-fired generating stations. These
contracts have expiration dates that range from 1998 to 2004. Consumers
contracts for 50 - 75 percent of its annual coal requirements totaling $250
million in 1997 (56 percent was under long-term contracts). Consumers
supplements its long-term contracts with spot-market purchases to fulfill its
coal needs.
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49
Consumers entered into gas supply contracts and transportation contracts with
various suppliers for its natural gas business. These contracts have expiration
dates that range from 1998 to 2003. Consumers' 1997 gas requirements totaled 250
bcf at a cost of $694 million, 80 percent of which was under long-term contracts
for one year or more. As of the end of 1997, Consumers had 50 percent of its
1998 gas requirements under such long-term contracts, and will supplement them
with additional long-term contracts and spot-market purchases.
OTHER: As of December 31, 1997, CMS Energy and Enterprises have guaranteed up to
$543 million in contingent obligations of unconsolidated affiliates and
unrelated parties.
Various parties have sued Consumers relating to the effect of so-called stray
voltage on certain livestock. Claimants contend that stray voltage results when
low-level electrical currents present in grounded electrical systems are
diverted from their intended path. Consumers maintains a policy of investigating
all customer calls regarding stray voltage and working with customers to address
their concerns. It also has an ongoing mitigation program to modify the service
of all customers with livestock.
In December 1997, the Michigan Supreme Court remanded for further proceedings a
1994 Michigan trial court decision that refused to allow the claims of over 200
named plaintiffs to be joined in a single action. The trial court dismissed all
of the plaintiffs except the first-named plaintiff, allowing the others to
re-file separate actions. Of the original plaintiffs, only 49 re-filed separate
cases. All of those 49 cases have been resolved. The Michigan Supreme Court
remanded the matter, finding that the proper remedy for misjoinder was not
dismissal, but to automatically allow each case to go forward separately.
Consumers filed a motion for reconsideration with the Michigan Supreme Court,
which was denied. Consumers intends to vigorously defend these cases, but is
unable to predict the outcome. As of December 31, 1997, Consumers had 12
individual stray voltage lawsuits, unrelated to the cases above, awaiting trial
court action, down from 22 lawsuits as reported at year end 1996.
In October 1997, two independent power producers sued Consumers and CMS Energy
in a federal court. The suit alleges antitrust violations relating to contracts
which Consumers entered into with some of its customers and claims relating to
power facilities. The plaintiffs claim damages of $100 million (which a court
can treble in antitrust cases as provided by law). The transactions of which
plaintiffs complain have been regulated by, and are subject to, the jurisdiction
of the MPSC. In November 1997, Consumers and CMS Energy filed a motion for
summary judgement and/or for dismissal of the complaint filed by the plaintiffs.
Consumers and CMS Energy believe the lawsuit is without merit and will
vigorously defend against it, but cannot predict the outcome of this matter.
Under agreements relating to CMS NOMECO's 1995 acquisition of Walter
International, Inc. and its Congo operations, CMS Energy and CMS NOMECO could
become jointly and severally liable for the recapture of "dual consolidated
losses" under Section 1503(d) of the IRC if a "triggering event" were to occur.
Potential triggering events include certain asset or stock dispositions to
unrelated parties, certain tax deconsolidations, certain usage of the losses on
a foreign tax return, and certain failures to comply with Internal Revenue
Service regulations. CMS Energy and CMS NOMECO have no plans to effect any
transaction that would be a triggering event. The amount of the potential tax
liability could be up to $67 million plus interest. In connection with the same
acquisition, a subsidiary of CMS NOMECO could also be jointly and severally
liable with an unrelated party for up to $50 million of tax plus interest. In
that event, CMS NOMECO has certain indemnity rights against that unrelated
party. Additionally, CMS NOMECO and its domestic subsidiaries have incurred
losses in certain foreign countries that could be recaptured if a triggering
event were to occur. The additional tax liability could be up to $10 million
plus interest.
49
50
In addition to the matters disclosed in these Notes, Consumers and certain other
subsidiaries of CMS Energy are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies arising from the
ordinary course of business. These lawsuits and proceedings may involve personal
injury, property damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this Note have been
accrued. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
11: NUCLEAR MATTERS
Consumers filed updated decommissioning information with the MPSC in 1995 that
estimated decommissioning costs for Big Rock and Palisades. In April 1996, the
MPSC issued an order in Consumers' nuclear decommissioning case, which fully
supported Consumers' request and did not change the overall surcharge revenues
collected from retail customers. The MPSC ordered Consumers to file a report on
the adequacy of the surcharge revenues with the MPSC at three-year intervals
beginning in 1998. Consumers filed a revision to its Post Shutdown Activities
Report (formerly decommissioning report) with the NRC to reflect the shutdown of
Big Rock.
Big Rock closed permanently on August 29, 1997 because management determined
that the plant would be uneconomical to operate in an increasingly competitive
environment. Consumers originally scheduled the plant to close May 31, 2000, at
the end of the plant's operating license. Plant decommissioning began in
September 1997 and may take five to ten years to return the site to its original
condition. The earlier than planned closure of the plant and the reopening of
the South Carolina Barnwell facility to receive low level radioactive waste have
changed the method of decommissioning from the safe storage option to immediate
dismantlement. This change could have an impact on the estimated decommissioning
cost which is required to be updated in a filing with the MPSC by March 31,
1998. For further information on nuclear matters, see Note 2.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades.
Consumers plans to load five additional casks at Palisades in 1999 pending
approval by the NRC. In June 1997, the NRC approved Consumers' process for
unloading spent fuel from a cask at Palisades previously discovered to have
minor weld flaws. Consumers intends to transfer the spent fuel to a new
transportable cask when one is available. Westinghouse Corporation has been
contracted to design and fabricate transportable casks for both Palisades and
Big Rock. These casks will support the off-load of the cask with minor flaws,
continued operation of Palisades and the decommissioning of Big Rock.
Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for replacement power
costs during prolonged accidental outages at Palisades. Insurance would not
cover such costs during the first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks of the outage, followed by reduced
coverage to 80 percent for two additional years. If certain loss events occur at
its own or other nuclear plants similarly insured, Consumers could be required
to pay maximum assessments of $19 million in any one year to Nuclear Electric
Insurance Ltd; $79 million per event under the nuclear liability secondary
financial protection program, limited to $10 million per event in any one year;
and $6 million if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
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The NRC requires Consumers to make certain calculations and report to it on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor vessel materials over time due to operation in a
radioactive environment. Based on continuing analysis of data in December 1996
Consumers received an interim Safety Evaluation Report from the NRC indicating
that the reactor vessel can be safely operated through 2003 before reaching the
NRC's screening criteria for reactor embrittlement. Consumers believes that with
fuel management designed to minimize embrittlement, it can operate Palisades to
the end of its license life in the year 2007 without annealing the reactor
vessel. Nevertheless, Consumers will continue to monitor the matter.
12: SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the Consolidated Statements of Cash Flows, all highly liquid
investments with an original maturity of three months or less are considered
cash equivalents. Other cash flow activities and non-cash investing and
financing activities were:
In Millions
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $293 $240 $207
Income taxes paid (net of refunds) 67 82 34
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital leases $ 4 $ 28 $ 26
Other assets placed under capital leases 7 3 5
Common Stock issued to acquire companies - - 90
Assumption of debt - - 20
Capital leases refinanced - - 21
==================================================================================================================
Changes in other assets and liabilities as shown on the Consolidated Statements
of Cash Flows are described below:
In Millions
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1997* 1996* 1995*
- ------------------------------------------------------------------------------------------------------------------
Sale of receivables, net $ 17 $ 23 $ 20
Accounts receivable (160) (28) (117)
Accrued revenue 64 (82) (24)
Inventories (15) - 38
Accounts payable 67 55 143
Accrued refunds 4 (13) (3)
Other current assets and liabilities, net (6) 24 34
Non-current deferred amounts, net (6) 10 (9)
--------------------------------------------
$ (35) $ (11) $ 82
==================================================================================================================
* Restated, see Note 2.
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13: INCOME TAXES
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on each
company's separate taxable income. CMS Energy and Consumers practice full
deferred tax accounting for temporary differences, but federal income taxes have
not been recorded on the undistributed earnings of international subsidiaries
where CMS Energy intends to permanently reinvest those earnings. Upon
distribution, those earnings may be subject to both U.S. income taxes (adjusted
for foreign tax credits or deductions) and withholding taxes payable to various
foreign countries. It is not practical to estimate the amount of unrecognized
deferred income taxes or withholding taxes on undistributed earnings.
CMS Energy used ITC to reduce current income taxes payable, and amortizes ITC
over the life of the related property. Any AMT paid generally becomes a tax
credit that CMS Energy can carry forward indefinitely to reduce regular tax
liabilities in future periods when regular taxes paid exceed the tax calculated
for AMT. The significant components of income tax expense (benefit) consisted
of:
In Millions
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31 1997* 1996* 1995*
- ---------------------------------------------------------------------------------------------------------------
Current income taxes
Federal and other $ 79 $ 89 $ 43
Foreign 5 3 -
------------------------------------------
84 92 43
Deferred income taxes
Federal 41 55 80
Foreign (7) - -
------------------------------------------
34 55 80
Deferred ITC, net (10) (10) (10)
------------------------------------------
$108 $137 $113
===============================================================================================================
* Restated, see Note 2.
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The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
- ----------------------------------------------------------------------------------------------------------------
December 31 1997* 1996*
- ----------------------------------------------------------------------------------------------------------------
Property $ (552) $ (535)
Unconsolidated investments (263) (259)
Postretirement benefits (Note 16) (156) (165)
Abandoned Midland project (33) (40)
Employee benefit obligations (includes postretirement benefits
of $155 and $167) (Note 16) 195 201
AMT carryforward 147 172
Power purchases (Note 3) 66 82
Other (14) (20)
----------------------------
$ (610) $ (564)
================================================================================================================
Gross deferred tax liabilities $ (1,758) $(1,715)
Gross deferred tax assets 1,148 1,151
----------------------------
$ (610) $ (564)
================================================================================================================
* Restated, see Note 2.
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The actual income tax expense differs from the amount computed by applying the
statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1997* 1996* 1995*
- ----------------------------------------------------------------------------------------------------------------
Consolidated net income before
preferred dividends
Domestic $ 222 $230 $ 223
Foreign 47 22 -
---------------------------------------------
269 252 223
Income tax expense 108 138 113
---------------------------------------------
377 390 336
Statutory federal income tax rate x 35% x 35% x 35%
---------------------------------------------
Expected income tax expense 132 137 118
Increase (decrease) in taxes from:
Capitalized overheads previously flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 8 6 6
Impact of foreign taxes, tax rates and credits 1 8 3
Undistributed earnings of international subsidiaries (10) (2) -
ITC amortization (10) (10) (10)
Section 29 Fuel Tax Credits (13) (13) (13)
Other, net (5) 6 4
---------------------------------------------
$ 108 $137 $ 113
================================================================================================================
* Restated, see Note 2.
14: FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term investments and current liabilities
approximate their fair values due to their short-term nature. The estimated fair
values of long-term investments are based on quoted market prices or, in the
absence of specific market prices, on quoted market prices of similar
investments or other valuation techniques. The carrying amounts of all long-term
investments in financial instruments approximate fair value.
The carrying amount of long-term debt was $3.3 billion at December 31, 1997 and
$2.8 billion at December 31, 1996, and the fair values were $3.3 billion and
$2.9 billion, respectively. Although the current fair value of the long-term
debt may differ from the current carrying amount, settlement of the reported
debt is generally not expected until maturity. The carrying amount of preferred
stock and Trust Preferred Securities was $631 million at December 31, 1997 and
$456 million at December 31, 1996, and the fair value was $632 million and $439
million, respectively.
The fair values of CMS Energy's off-balance-sheet financial instruments are
based on the amounts estimated to terminate or settle the instruments. At
December 31, 1997, the fair value of CMS Energy's interest rate swap agreements,
with a notional amount of $1.1 billion, was $13 million, representing the
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55
amount that CMS Energy would have to pay to terminate the agreements. The
settlement of the interest rate swap agreements in 1997 did not materially
affect interest expense. At December 31, 1996, CMS Energy would have paid $10
million to terminate the agreements. Also refer to Note 9 for a discussion of
CMS NOMECO's price hedging arrangements and their fair values. Guarantees were
$543 million and $102 million at December 31, 1997 and 1996, respectively.
The amortized cost of CMS Energy's nuclear decommissioning investments, which
are considered available-for-sale securities in accordance with SFAS 115,
Accounting For Certain Investments in Debt and Equity Securities, was $405
million and $351 million as of December 31, 1997 and 1996, respectively. The
unrealized gain, which is classified in accumulated depreciation, was $81
million and $35 million as of December 31, 1997 and 1996, respectively.
15: EXECUTIVE INCENTIVE COMPENSATION
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of Common
Stock of CMS Energy, stock options and stock appreciation rights may be granted
to key employees based on their contributions to the successful management of
CMS Energy and its subsidiaries. Awards under the plan may consist of any class
of Common Stock of CMS Energy. Certain plan awards are subject to
performance-based business criteria. The plan reserves for award not more than
three percent of CMS Energy's Common Stock outstanding on January 1 each year,
less (i) the number of shares of restricted Common Stock awarded and (ii) Common
Stock subject to options granted under the plan during the immediately preceding
four calendar years. Any forfeitures of shares previously awarded increase the
number available to be awarded under the plan. At December 31, 1997, awards of
up to 749,889 shares of CMS Energy Common Stock and 192,387 shares of Class G
Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting and
dividend rights. These awards vest over five years at the rate of 25 percent per
year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 1997, 562,711 of the
748,211 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives. At December 31, 1997 all of the 19,791 restricted shares
of Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights are granted with an
exercise price equal to the closing market price on each grant date. Options are
exercisable upon grant and expire up to ten years and one month from date of
grant. The status of the restricted stock granted to CMS Energy's key employees
under the Performance Incentive Stock Plan and options granted under both plans
follows.
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Restricted
Stock Options
---------------------------------------------------------
Number Number Weighted-Average
of Shares of Shares Exercise Price
CMS Energy Common Stock:
Outstanding at January 1, 1995 330,356 1,490,666 $ 23.50
Granted 253,337 304,000 $ 25.08
Exercised or Issued (43,939) (147,666) $ 14.52
Forfeited (22,307) - -
Expired - (55,000) $ 27.46
---------------------------------------------------------
Outstanding at December 31, 1995 517,447 1,592,000 $ 24.50
Granted 222,000 368,176 $ 30.55
Exercised or Issued (92,533) (231,550) $ 20.79
Forfeited (46,076) - -
Expired - (12,000) $ 32.88
---------------------------------------------------------
Outstanding at December 31, 1996 600,838 1,716,626 $ 26.24
Granted 366,360 431,500 $ 35.91
Exercised or Issued (159,405) (479,422) $ 26.54
Forfeited (59,582) - -
Expired - (2,987) $ 30.13
---------------------------------------------------------
Outstanding at December 31, 1997 748,211 1,665,717 $ 28.65
===============================================================================================================
Class G Common Stock:
Outstanding at December 31, 1995 6,924 10,000 $ 17.88
Granted 9,423 11,000 $ 17.88
---------------------------------------------------------
Outstanding at December 31, 1996 16,347 21,000 $ 17.88
Granted 8,784 12,000 $ 20.24
Exercised or Issued (1,385) (5,000) $ 17.88
Forfeited (3,955) - -
---------------------------------------------------------
Outstanding at December 31, 1997 19,791 28,000 $ 18.89
===============================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1997:
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
$17.13--$24.75 594,000 4.82 years $ 21.82
$25.13--$33.88 668,217 5.30 years $ 30.32
$34.25--$38.00 403,500 9.51 years $ 35.92
- -------------------------------------------------------------------------------------------------------------------
$17.13--$38.00 1,665,717 6.15 years $ 28.65
===================================================================================================================
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The range of exercise prices for Class G Common Stock options is $17.88 to
$23.31; the weighted average remaining life is 8.8 years.
The weighted average fair value of options granted for CMS Energy Common Stock
was $6.38 in 1997, $6.94 in 1996, and $5.37 in 1995. The weighted average fair
value of options granted for Class G Common Stock was $1.87 in 1997, $1.59 in
1996 and $1.57 in 1995. Fair value is estimated using the Black-Scholes model, a
mathematical formula used to value options traded on securities exchanges, with
the following assumptions:
Years Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock-price volatility 17.43% 24.08% 27.12%
Expected dividend rate $ .30 $ .27 $ .24
Expected option life 5 years 5 years 5 years
CLASS G COMMON STOCK OPTIONS
Risk-free interest rate 6.06% 6.63% 6.17%
Expected stock-price volatility 18.05% 16.19% 16.19%
Expected dividend rate $ .31 $ .295 $ .295
Expected option life 5 years 5 years 5 years
================================================================================================================
CMS Energy applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan. Since
stock options are granted at market price, no compensation cost has been
recognized for stock options granted under the plan. The compensation cost
charged against income for restricted stock was $6 million in 1997, $2 million
in 1996, and $3 million in 1995. If compensation cost for stock options had been
determined in accordance with SFAS 123, Accounting for Stock-Based Compensation,
CMS Energy's consolidated net income and earnings per share would have been as
follows:
In Millions, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------------------------
Pro Forma As Reported
Years Ended December 31 1997* 1996* 1997* 1996*
- ----------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 242 $ 222 $244 $224
Net Income Attributable to Common Stocks
CMS Energy 228 208 229 210
Class G 14 14 15 14
Earnings Per Average Common Share
CMS Energy
Basic 2.37 2.25 2.39 2.27
Diluted 2.35 2.25 2.37 2.26
Class G
Basic and Diluted 1.81 1.78 1.84 1.82
================================================================================================================
* Restated, see Note 2.
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16: RETIREMENT BENEFITS
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: CMS Energy and its
subsidiaries provide certain health care and life insurance benefits for retired
employees and their eligible dependents. Substantially all employees may become
eligible for such benefits if they attain retirement status while working for
CMS Energy or its subsidiaries. CMS Energy and its subsidiaries adopted SFAS
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
effective as of the beginning of 1992 and Consumers recorded a liability of $466
million for the accumulated transition obligation and a corresponding regulatory
asset for anticipated recovery in utility rates (see Note 20). CMS Energy's
international subsidiaries expensed their accumulated transition obligation
liability. The amount of such transition obligation is not material to the
presentation of the consolidated financial statements or significant to CMS
Energy's total transition obligation. The MPSC authorized recovery of the
electric utility portion of these costs in 1994 over 18 years and the gas
utility portion in 1996 over 16 years. During 1995, the FERC granted Consumers a
waiver of a three-year filing requirement for cost recovery with respect to its
wholesale electric business. At December 31, 1997, Consumers had recorded a
regulatory asset and liability of $7 million. By early 1997, the FERC had
authorized recovery of these costs. CMS Energy funds the benefits using external
Voluntary Employee Beneficiary Associations, a legal entity established under
guidelines of the IRC, through which the company can provide certain benefits
for its employees or retirees. Funding of the benefits coincides with Consumers'
recovery in rates.
Retiree health care costs at December 31, 1997 are based on the assumption that
costs would increase 6.5 percent in 1998, then decrease gradually to 5.5 percent
in 2004 and thereafter. The health care cost trend rate assumption significantly
affects the amounts reported. For example, a one percentage point increase in
each year's estimated health care cost assumption would increase the accumulated
postretirement benefit obligation at December 31, 1997 by $83 million and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for 1997 by $9 million.
Years Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Weighted average discount rate 7.50% 7.75% 7.50%
Expected long-term rate of return on plan assets 7.00% 7.00% 7.00%
================================================================================================================
Net postretirement benefit costs for the health care benefits and life insurance
benefits consisted of:
In Millions
Years Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Service cost $ 10 $ 13 $ 11
Interest cost 41 42 40
Actual return on assets (38) (14) (4)
Net amortization and deferral 25 8 1
-------------------------------------------
Net postretirement benefit costs $ 38 $ 49 $ 48
================================================================================================================
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The funded status of the postretirement benefit plans is reconciled with the
liability recorded at December 31 as follows:
In Millions
- ----------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
Actuarial present value of estimated benefits
Retirees $ 325 $ 330
Eligible for retirement 68 66
Active (upon retirement) 189 190
-------------------------
Accumulated postretirement benefit obligation 582 586
Plan assets (primarily stocks, bonds and money
market investments) at fair value 224 138
-------------------------
Accumulated postretirement benefit obligation less than
(in excess of) plan assets (358) (448)
Unrecognized net (gain) loss from experience different than assumed (83) (36)
Unrecognized prior service cost - 7
---------------------------
Recorded liability $(441) (477)
================================================================================================================
The health care portion of the accumulated postretirement benefit obligation is
$565 million and $570 million at December 31, 1997 and 1996, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN: Certain management employees qualify to
participate in the SERP. SERP benefits, which are based on an employee's years
of service and earnings as defined in the SERP, are paid from a trust
established in 1988. Because the SERP is not a qualified plan under the IRC,
earnings of the trust are taxable and trust assets are included in consolidated
assets. At December 31, 1997 and 1996, trust assets were $44 million and $31
million, respectively, and were classified as other non-current assets.
DEFINED BENEFIT PENSION PLAN: A trusted, non-contributory, defined benefit
Pension Plan covers substantially all employees. The benefits are based on an
employee's years of accredited service and earnings, as defined in the plan,
during an employee's five highest years of earnings. Because the plan was fully
funded, no contributions were made in 1997 and 1996. A contribution of $9
million was made in 1995.
Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 7.50%
Rate of compensation increase 3.75% 4.00% 4.50%
Expected long-term rate of return on assets 9.25% 9.25% 9.25%
============================================================================================
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Net Pension Plan and SERP costs consisted of:
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Service cost $ 26 $ 26 $ 23
Interest cost 61 58 56
Actual return on plan assets (163) (63) (168)
Net amortization and deferral 93 (6) 103
---------------------------------------------
Net periodic pension cost $ 17 $ 15 $ 14
================================================================================================================
The funded status of the Pension Plan and SERP reconciled to the liability
recorded at December 31 was:
In Millions
- ----------------------------------------------------------------------------------------------------------------
Pension Plan SERP
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Actuarial present value of estimated benefits
Vested $ 548 $ 504 $ 24 $ 21
Non-vested 79 72 1 1
-------------------------------------------
Accumulated benefit obligation 627 576 25 22
Provision for future pay increases 165 158 16 15
-------------------------------------------
Projected benefit obligation 792 734 41 37
Plan assets (primarily stocks and bonds, including
$153 in 1997 and $117 in 1996 in common stock
of CMS Energy) at fair value 882 779 - -
-------------------------------------------
Projected benefit obligation less than
(in excess of) plan assets 90 45 (41) (37)
Unrecognized net (gain) loss from experience
different than assumed (157) (99) 5 5
Unrecognized prior service cost 35 39 2 2
Unrecognized net transition (asset) (22) (27) - -
--------------------------------------------
Recorded liability $ (54) (42) (34) (30)
================================================================================================================
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized on a
straight-line basis over the average remaining service period of active
employees.
DEFINED CONTRIBUTION PLAN: CMS Energy provides a defined contribution 401(k)
plan to all U.S. employees of CMS Energy and its subsidiaries which are at least
80 percent owned and have adopted the plan. CMS Energy will match at least
one-half of the amount contributed by employees up to 3 percent of their salary.
These contributions to the plan are invested in CMS Energy Common Stock. Amounts
charged to expense for this plan were approximately $20 million in 1997, $18
million in 1996 and $17 million in 1995.
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17: LEASES
CMS Energy, Consumers, and Enterprises lease various assets, including vehicles,
rail cars, aircraft, construction equipment, computer equipment, nuclear fuel
and buildings. Consumers' nuclear fuel capital leasing arrangement expires in
November 1999, yet provides for additional one-year extensions upon mutual
agreement by the parties. Upon termination of the lease, the lessor would be
entitled to a cash payment equal to its remaining investment, which was $47
million as of December 31, 1997. Consumers is responsible for payment of taxes,
maintenance, operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at December
31, 1997, were:
In Millions
- -------------------------------------------------------------------------------
Capital Operating
Leases Leases
- -------------------------------------------------------------------------------
1998 $ 42 $ 11
1999 44 11
2000 14 11
2001 12 8
2002 9 8
2003 and thereafter 7 20
-------------------------
Total minimum lease payments 128 $ 69
Less imputed interest 19 =====
------
Present value of net minimum lease payments 109
Less current portion 34
------
Non-current portion $ 75
================================================================================
Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. Operating lease
charges, including charges to clearing and other accounts for the years ended
December 31, 1997, 1996 and 1995, were $10 million, $8 million and $11 million,
respectively.
Capital lease expenses for the years ended December 31, 1997, 1996 and 1995 were
$43 million, $46 million and $46 million, respectively. Included in these
amounts for the years ended 1997, 1996 and 1995 are nuclear fuel lease expenses
of $25 million for each year.
18: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the jointly
owned facilities. The direct expenses of the joint plants are included in
Consumers' operating expenses. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
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In Millions
- --------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------
NET INVESTMENT
Ludington - 51 percent $112 $116
Campbell Unit 3 - 93.3 percent 314 329
Transmission lines - various 34 35
ACCUMULATED DEPRECIATION
Ludington $ 88 $ 84
Campbell Unit 3 265 252
Transmission lines 14 14
======================================================================================
19: REPORTABLE SEGMENTS
CMS Energy operates principally in the following business segments: electric
utility; gas utility; oil and gas exploration and production; independent power
production; natural gas transmission, storage and processing; and energy
marketing, services and trading.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other business and geographic segment
information follows:
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Business Segments
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1997* 1996* 1995*
- ----------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization
Electric utility $ 296 $ 282 $ 272
Gas utility 93 87 83
Independent power production 13 8 4
Oil and gas exploration and production 48 42 38
Natural gas transmission, storage and processing 14 7 3
Marketing, services and trading 1 - -
Other 2 1 -
-----------------------------------------------
$ 467 $ 427 $ 400
================================================================================================================
Identifiable assets
Electric utility (a) $ 4,472 $ 4,505 $ 4,522
Gas utility (a) 1,644 1,709 1,690
Independent power production 1,699 1,053 840
Oil and gas exploration and production 456 476 426
Natural gas transmission, storage and processing 521 388 272
Marketing, services and trading 191 52 31
Other 525 180 128
---------------------------------------------
$ 9,508 $ 8,363 $ 7,909
================================================================================================================
Capital expenditures (b)
Electric utility $ 255 $ 310 $ 328
Gas utility 116 137 126
Independent power production 704 142 239
Oil and gas exploration and production (c) 99 72 141
Natural gas transmission, storage and processing 115 136 178
Marketing, services and trading 28 - -
Other 202 66 14
----------------------------------------------
$ 1,519 $ 863 $ 1,026
================================================================================================================
Investments in Equity Method Investees
Independent power production $1,205 $ 683 $ 603
Natural gas transmission, storage and processing 241 225 193
Marketing, services and trading 26 - -
Other 274 85 22
--------------------------------------------
$1,746 $ 993 $ 818
================================================================================================================
* Restated, see Note 2.
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Earnings from Equity Method Investees(d)
Independent power production $ 89 $ 91 $ 58
Natural gas transmission, storage and processing 4 3 9
Marketing, services and trading 2 - -
Other 8 8 11
--------------------------------------------
$ 103 $ 102 $ 78
================================================================================================================
Geographic Areas
Pretax Investments in Earnings from
Operating Operating Identifiable Equity Method Equity Method
Revenue Income/(Loss) Assets Investees Investees (d)
1997*
United States $4,576 $ 674 $7,856 $ 749 $ 75
International 205 42 1,652 997 28
1996*
United States $4,211 $ 658 $7,668 $ 680 $ 89
International 113 18 695 313 13
1995*
United States $3,831 $ 617 $7,476 $ 586 $ 75
International 59 (9) 433 232 3
================================================================================================================
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric DSM
costs (see Consolidated Statements of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions in 1995.
(d) These amounts are included in operating revenue in the Consolidated
Statements of Income.
* Restated, see Note 2.
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20: EFFECTS OF THE RATEMAKING PROCESS
The following regulatory assets (liabilities), which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets. These
assets represent probable future revenue to Consumers associated with certain
incurred costs as these costs are recovered through the ratemaking process.
These costs are being recovered through rates over periods of up to 15 years.
An accounting standard, effective 1996, requires impairment losses on long-lived
assets to be recognized when an asset's book value exceeds its expected future
cash flows (undiscounted). The standard also imposes stricter criteria for
retention of regulatory-created assets by requiring that such assets be probable
of future recovery at each balance sheet date. There was no impact on financial
position or results of operations upon adoption because management believes
these assets will be recovered. For further discussion, see Outlook -
Application of SFAS 71 in the MD&A.
In Millions
- ----------------------------------------------------------------------------------------------
December 31 1997 1996
- ----------------------------------------------------------------------------------------------
Postretirement benefits (Note 16) $ 429 $ 460
Income taxes (Note 13) 172 158
Abandoned Midland project 93 113
Manufactured gas plant sites (Note 10) 47 47
DSM - deferred costs 46 60
Uranium enrichment facility 22 23
Ludington Fish Settlement 12 14
Other 16 43
-------------------------
Total regulatory assets $ 837 $ 918
==============================================================================================
Income taxes (Note 13) $(226) (224)
DSM - deferred revenue (24) (25)
------------------------
Total regulatory liabilities $(250) (249)
==============================================================================================
21: EQUITY METHOD INVESTMENTS
Certain of CMS Energy's subsidiaries invest in companies, partnerships and joint
ventures as part of a strategy for growth through international diversification.
The ownership interests for these investments vary from 20 percent to 50 percent
and are all accounted for using the equity method of accounting. Following is
summarized combined financial information for all equity method investments,
except for the MCV Partnership, which is disclosed separately in Note 22 and Loy
Yang, which is disclosed separately in this note. For information relating to
the geographic location of investees and CMS Energy's and its subsidiaries'
equity earnings from and investment in investees refer to Note 19.
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INCOME STATEMENT DATA (UNAUDITED)
In Millions
- ------------------------------------------------------------------------------------------------------
Years Ended December 31 1997* 1996* 1995
- ------------------------------------------------------------------------------------------------------
Operating revenue $1,267 $ 674 $ 587
Operating expenses 826 426 299
---------------------------------------
Operating income 441 248 288
Other expense, net 175 97 114
---------------------------------------
Net income $ 266 $ 151 $ 174
======================================================================================================
BALANCE SHEET DATA (UNAUDITED)
In Millions
December 31 1997* 1996*
- ------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 439 $ 341
Property, plant and equipment, net 3,290 2,767
Other assets 1,976 164
--------------------------
$ 5,705 $3,272
======================================================================================================
LIABILITIES AND EQUITY
Current liabilities $ 696 $ 293
Long-term debt and other non-current liabilities 3,262 1,351
Equity 1,747 1,628
--------------------------
$ 5,705 $3,272
======================================================================================================
* Restated, see Note 2.
In the second quarter of 1997, a consortium comprising subsidiaries of CMS
Generation, among others, financed, through a consortium of banks, seventy-seven
percent of the consortium's $3.7 billion payment to the Australian State of
Victoria government for the Loy Yang acquisition. This financing occurred on a
non-recourse basis to CMS Energy and CMS Generation.
Summarized financial information of Loy Yang:
INCOME STATEMENT DATA (UNAUDITED)
In Millions
- -------------------------------------------------------------------------------
Year Ended December 31 1997
- -------------------------------------------------------------------------------
Operating revenue $229
Operating expenses 112
----
Operating income 117
Other expense, net 114
----
Net income $ 3
===============================================================================
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BALANCE SHEET DATA (UNAUDITED)
In Millions
- --------------------------------------------------------------------------------
December 31 1997
- --------------------------------------------------------------------------------
ASSETS
Current assets $ 144
Property, plant and equipment, net 3,159
Other assets 4
--------
$ 3,307
================================================================================
LIABILITIES AND EQUITY
Current liabilities $ 46
Long-term debt and other non-current liabilities 2,352
Equity 909
--------
$ 3,307
================================================================================
22: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT
RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1997
obligation to purchase electric capacity from the MCV Partnership was 15 percent
of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership:
STATEMENTS OF INCOME (UNAUDITED)
In Millions
- -------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------
Operating revenue (a) $ 652 $ 645 $ 618
Operating expenses 435 417 386
--------------------------------------
Operating income 217 228 232
Other expense, net 154 162 171
--------------------------------------
Net income before cumulative
effect of accounting change 63 66 61
Cumulative effect of change in method
of accounting for property tax 15 - -
--------------------------------------
Net income $ 78 $ 66 $ 61
===========================================================================================
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BALANCE SHEETS (UNAUDITED)
In Millions
December 31 1997 1996
- ------------------------------------------------------------------------
ASSETS
Current assets (b) $ 362 $ 316
Property, plant and equipment, net 1,820 1,889
Other assets 169 159
---------------
$2,351 $2,364
========================================================================
LIABILITIES AND PARTNERS' EQUITY
Current liabilities $ 285 $ 235
Long-term debt and other non-current liabilities (c) 1,789 1,930
Partners' equity (d) 277 199
---------------
$2,351 $2,364
========================================================================
(a) Revenue from Consumers totaled $609 million, $598 million and $571 million
for 1997, 1996, and 1995, respectively.
(b) Receivables from Consumers totaled $54 million and $52 million, at December
31, 1997 and 1996, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS
Holdings holds a 46.4 percent ownership interest in FMLP. At December 31,
1997 and 1996, lease obligations of $1.52 billion and $1.58 billion,
respectively, were owed to the owner trust. CMS Holdings' share of the
interest and principal portion for the 1997 lease payments was $62 million
and $28 million, respectively, and for the 1996 lease payments was $64
million and $25 million, respectively. The lease payments service $1.0
billion and $1.1 billion in non- recourse debt outstanding as of December
31, 1997 and 1996, respectively, of the owner-trust. FMLP's debt is secured
by the MCV Partnership's lease obligations, assets, and operating revenues.
For 1997 and 1996, the owner-trust made debt payments (including interest)
of $192 million. FMLP's earnings for 1997, 1996, and 1995 were $20 million,
$17 million, and $14 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership. Covenants contained in financing
agreements prohibit the MCV Partnership from paying distributions until
certain financial test requirements are met. Consumers does not anticipate
receiving a cash distribution in the near future.
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23: RESTATED FINANCIAL STATEMENTS - FIRST QUARTER 1998 (UNAUDITED)
As a result of the change in the method of accounting for investments in oil and
gas properties as discussed in Note 2, certain financial information from the
three and twelve months ended March 31, 1998 and 1997 has been restated as
detailed below.
INCOME STATEMENT DATA (UNAUDITED)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
As As As As
Reported Restated Reported Restated Reported Restated Reported Restated
Operating Revenue $ 1,374 $1,374 $ 1,295 $ 1,295 $ 4,866 $ 4,860 $ 4,345 $ 4,339
Operating Expenses 1,187 1,177 1,082 1,091 4,146 4,151 3,660 3,675
------------------------------------------------------------------------------------------------
Pretax Operating
Income 187 197 213 204 720 709 685 664
Other Income
(Deductions) (36) (36) (2) (2) (46) (46) (11) (11)
Fixed Charges 96 97 77 77 368 372 303 306
Income Taxes 15 19 50 47 82 80 135 129
------------------------------------------------------------------------------------------------
Consolidated Net Income
before cumulative effect
of change in accounting
principle 40 45 84 78 224 211 236 218
Consolidated Net
Income $ 83 88 $ 84 78 $ 267 $ 254 $ 236 $ 218
Basic Earnings Per
Average Common Share
CMS Energy $ .73 $ .79 $ .79 $ .73 $ 2.57 $ 2.45 $2.41 $ 2.21
Class G $ 1.09 $ 1.09 $ 1.18 $ 1.18 $ 1.76 $ 1.76 $1.53 $ 1.53
Diluted Earnings Per
Average Common Share
CMS Energy $ .72 $ .77 $ .78 $ .72 $ 2.55 $ 2.44 $2.39 $2.21
Class G $ 1.09 $ 1.09 $ 1.18 $ 1.18 $ 1.76 $ 1.76 $1.53 $1.53
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BALANCE SHEET DATA (UNAUDITED)
March 31 1998 1997
- -------------------------------------------------------------------------------------
As As
Reported Restated Reported Restated
ASSETS
Current Assets $ 1,028 $ 1,023 $ 768 $ 770
Plant and Property,net 5,379 5,114 5,279 5,022
Investments 1,894 1,879 1,023 1,013
Non-current Asset 1,480 1,489 1,332 1,335
---------------------------------------------------
Total Assets $ 9,781 $ 9,505 $ 8,402 $ 8,140
===================================================
LIABILITIES AND EQUITY
Current Liabilities $ 1,506 $ 1,506 $ 1,662 $ 1,662
Non-current Liabilities 1,763 1,672 1,781 1,692
Capitalization 6,512 6,327 4,959 4,786
---------------------------------------------------
Total Liabilities and
Equity $ 9,781 $ 9,505 $ 8,402 $ 8,140
===================================================
24: SUBSEQUENT EVENT - 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.
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Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
statements of preferred stock of CMS ENERGY CORPORATION (a Michigan corporation)
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, common stockholders' equity, cash flows for each of the
three years in the period ended December 31, 1997 (as restated, see Note 2 of
the Notes to the Consolidated Financial Statements). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMS Energy Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
July 27, 1998
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QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION CMS ENERGY CORPORATION
(AS RESTATED)
In Millions, Except Per Share Amounts
1997 (Unaudited) 1996 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
Operating revenue (a)* $ 1,295 $ 1,022 $ 1,030 $ 1,434 $ 1,280 $ 936 $ 928 $ 1,180
Pretax operating income (b)* $ 204 $ 158 $ 178 $ 176 $ 216 $ 157 $ 167 $ 136
Consolidated net income* $ 78 $ 47 $ 60 $ 59 $ 84 $ 47 $ 55 $ 38
Basic earnings (loss) per
average common
share (c):
CMS Energy* $ .73 $ .48 $ .64 $ .54 $ .79 $ .50 $ .62 $ .37
Class G $ 1.18 $ .16 $ (.21) $ .70 $ 1.50 $ .16 $ (.28) $ .44
Diluted earnings (loss) per
average common
share (c):
CMS Energy* $ .72 $ .48 $ .63 $ .54 $ .78 $ .50 $ .62 $ .37
Class G $ 1.18 $ .16 $ (.21) $ .70 $ 1.50 $ .16 $ (.28) $ .44
Dividends declared per
common share:
CMS Energy $ .27 $ .27 $ .30 $ .30 $ .24 $ .24 $ .27 $ .27
Class G $ .295 $ .295 $ .31 $ .31 $ .28 $ .28 $ .295 $ .295
Common stock prices (d)
CMS Energy:
High $34-1/2 $35-5/8 $38-1/16 $ 44-1/16 $ 31-7/8 $31-1/4 $ 31-5/8 $33-3/4
Low $31-1/2 $31-1/8 $ 34-7/8 $35-11/16 $27-13/16 $ 28 $ 29 $30-1/8
Class G:
High $19-7/8 $19-7/8 $ 22 $ 27-1/8 $ 20 $19-3/8 $ 18-7/8 $19-1/4
Low $17-7/8 $17-5/8 $ 19 $ 20-5/8 $ 17-7/8 $17-1/2 $ 16-5/8 $17-3/8
- ------------------------------------------------------------------------------------------------------------------
(a) Amounts in 1997 were restated for comparative purposes.
(b) Amounts in 1996 were restated for comparative purposes.
(c) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.
(d) Based on New York Stock Exchange - Composite transactions.
*RESTATED, SEE NOTE 2.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C) EXHIBITS
(12) Statements regarding computation of Ratio of Earnings to Fixed
Charges (1993-1997, As Restated)
(23) Consent of Arthur Andersen LLP
(27.1) Restated Financial Data Schedule (1998 - First Quarter, As Restated)
(27.2) Restated Financial Data Schedule (1997 - Quarterly, As Restated)
(27.3) Restated Financial Data Schedule (1996 - Quarterly, As Restated)
(27.4) Restated Financial Data Schedule (1995, As Restated)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CMS ENERGY CORPORATION
Dated: July 30, 1998 By: /s/ A. M. Wright
----------------------------------
Alan M. Wright
Senior Vice President and Chief
Financial Officer
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75
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
(12) - Statements regarding computation of Ratio of Earnings to Fixed
Charges (1993-1997, As Restated)
(23) - Consent of Arthur Andersen LLP
(27.1) - Restated Financial Data Schedule (1998 - First Quarter, As Restated)
(27.2) - Restated Financial Data Schedule (1997 - Quarterly, As Restated)
(27.3) - Restated Financial Data Schedule (1996 - Quarterly, As Restated)
(27.4) - Restated Financial Data Schedule (1995, As Restated)